Vertex Pharmaceuticals (NASDAQ:VRTX) was a top performing stock last year, thanks to growing demand for its revolutionary cystic fibrosis drugs, and on Wednesday, the company's management reported fourth-quarter 2017 financials that exceeded industry watchers' estimates. Management also outlined plans for its future that include advancing two new drugs into clinical trials. Can Vertex Pharmaceuticals' success continue?

Redefining an indication

A life-shortening disease with few treatment options, cystic fibrosis puts 75,000 people worldwide at risk of death before they reach their 30s.

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There's no cure for cystic fibrosis, but Vertex Pharmaceuticals is making significant headway treating it. It launched its first cystic fibrosis drug, Kalydeco, in 2012, and since then, Kalydeco's use has expanded from patients harboring only one mutation to patients with 10 mutations. Vertex Pharmaceuticals added Orkambi to its lineup in 2015, opening up its products to even more patients, and currently, Kalydeco and Orkambi can be used to help about 29,000 patients. 

An expanding addressable market has fueled a massive increase in sales that's finally got the company turning a consistent profit. In the fourth quarter, product revenue grew 37% year over year to $621 million, bringing full-year sales to $2.165 billion, up 29% from 2016. For perspective, Vertex Pharmaceuticals forecast sales of just $1.8 billion early in 2017. On the bottom line, Vertex Pharmaceuticals reported fourth-quarter EPS of $0.61, up 74% from one year ago, and full year EPS of $1.95 -- a 129% improvement from 2016.

What's in store for the future

Vertex Pharmaceuticals' goal is to treat everyone with cystic fibrosis, and while achieving that goal may take a while, the company's well on its way to helping more people with this devastating disease.

Last year, the company filed for FDA approval of a doublet combination of Kalydeco and a new drug, tezacaftor, that could expand its addressable market by 1,500 people this year. The FDA is expected to issue a decision on the doublet on Feb. 28, and if it's approved, then this doublet could serve as the foundation for triplet therapies that could eventually be used to treat as many as 68,000 patients.

Vertex Pharmaceuticals plans to advance two next-generation correctors, VX-659 and VX-445, into Phase 3 trials as part of its triplet combinations this year. A phase 3 program evaluating VX-659 in combination with tezacaftor and ivacaftor will begin in the first half of 2018 and a trial evaluating VX-445 in combination with tezacaftor and VX-561 could begin as soon as mid-2018, depending on data that's expected early this year.

Outside of cystic fibrosis, the company has opportunities to grow as well. Johnson & Johnson (NYSE:JNJ) recently paid it a $25 million milestone after it initiated a pivotal phase 3 clinical trial of pimodivir (JNJ-63623872) in patients at high-risk of influenza-related complications. Vertex licensed that drug to J&J in 2014, and if pivotal trials pan out, then Vertex will receive additional milestones, plus royalties on sales ranging up to the mid-teen percentages.

Vertex Pharmaceuticals' also expects to have data in hand soon from a phase 2 trial that's studying its pain medication, VX-150, as a treatment for acute pain following bunionectomy. 

What's on tap in 2018

I expect that a growing addressable market, plus increasing demand in the U.S. and internationally, will drive sales higher in 2018. However, management has decided to hold off on issuing a full year sales outlook until the FDA weighs in with a decision on its doublet next month. 

While it's staying mum about its sales outlook right now, it did say that it expects its combined GAAP R&D and SG&A expenses will be between $1.80 billion and $1.95 billion and its combined non-GAAP R&D and SG&A expense will be in the range of $1.50 billion to $1.55 billion in 2018. That's an increase in spending from 2017, but I don't think it will take too big of a toll on the company's bottom line, especially if the FDA cooperates. Currently, industry watchers think Vertex Pharmaceuticals can deliver EPS of $3.02 in 2018, and if they're right, then I think the rally in Vertex Pharmaceuticals' shares isn't anywhere near over.


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