Vertex Pharmaceuticals (VRTX 1.43%) achieved something in 2017 that few stocks did: It more than doubled. At the beginning of this year, I picked Vertex as one of the top big biotech stocks to buy. That pick has looked good so far. Vertex is off to a great start in 2018, with a year-to-date gain of more than 15%.
But is it too late to buy this hot biotech stock now? I don't think so, especially after listening to Jeff Leiden, Vertex's CEO, speak on Wednesday at the Cowen healthcare conference. Here are seven things Leiden said that just might make you want to buy the stock.
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1. Completing the journey in cystic fibrosis is only a matter of execution
Vertex enjoys a monopoly in the cystic fibrosis (CF) market with three drugs -- Kalydeco, Orkambi, and recently approved Symdeko. The company's goal over the next couple of years or so is to provide effective treatments for 90% of CF patients. Leiden used the phrase "complete the journey in CF" to describe this goal. And he said that it's "now a matter of execution and is no longer a matter of science, biology, or medicine."
Is that view overly confident? Not really. Vertex announced great results from phase 2 clinical studies of several triple-drug combinations in treating CF. The biotech has already initiated a couple of late-stage studies of one of those triple-drug combos and plans to start a late-stage study of another combo by mid-year.
Two of the components of the triple-drug combos are tezecaftor and ivacaftor. Kalydeco (ivacaftor) and Symdeko (tezecaftor/ivacaftor and ivacaftor) are on the market and have been proven to work in the real world. The earlier studies show pretty convincing evidence that the addition of Vertex's selected third components -- VX-659 and VX-445 -- were safe and effective in a clinical setting. What that means for investors is that the risks for the late-stage studies is lower than that of many clinical studies. That doesn't mean there's no risk of failure, but -- as Leiden said -- it primarily comes down to execution.
2. Vertex's first-mover advantage is huge
Vertex isn't the only drugmaker in the CF space. Galapagos (GLPG -0.03%) and AbbVie (ABBV 0.89%) are developing a triple-drug combo as well. However, Vertex has a clear head start over its rivals.
When asked about how big Vertex's competitive advantage might be if it is successful in launching a triple-drug combo by the end of 2018, Leiden mentioned three things. First, he said that Vertex already knows where all the CF patients are as a result of its previous efforts. Second, he pointed to the rapid adoption of Orkambi, a powerful new therapy. Third, he noted that the company encountered challenges getting patients in clinical trials to switch from Kalydeco to add tezecaftor.
Put Leiden's responses together, and you have a scenario where Vertex will be able to quickly line up CF patients once its triple-drug combos launch. But with CF patients resistant to switching from a therapy that works for them, a similar triple-drug combo from Galapagos and AbbVie could have a hard time gaining market traction following Vertex's launch.
3. Intellectual property protection is simple -- and solid
What about patents expiring? Leiden stated that Vertex's intellectual property (IP) is "pretty simple." The biotech's IP protection is also pretty solid.
With products that consist of multiple components, the product is protected through the last expiration of any of its component drugs. Leiden said this means Vertex's next-generation correctors for CF will enjoy IP protection through the 2030s.
4. Newer CF drugs should be more profitable
Vertex is generating profits from its current drugs, but its newer drugs should be even more profitable. Why? The company pays tiered royalties for Kalydeco, Orkambi, and Symdeko in the high single digits to low teens to Cystic Fibrosis Foundation Therapeutics Incorporated (CFFT). However, Leiden mentioned that Vertex renegotiated its agreement with CFFT for triple-drug combos. The company will pay royalties in the low- to mid-single digits on these new drugs.
5. It's only a question of when, not if, remaining reimbursement deals in Europe will be finalized
Vertex has already won approval for Orkambi in Europe. But actually being able to market a new drug in Europe requires negotiating reimbursement deals country by country. Vertex made significant progress last year with reimbursement deals in Ireland and Italy, but discussions with a couple of big countries -- France and the U.K. -- are still in progress.
Leiden said that he's confident that the deals will be finalized, but that it's just a question of timing. Vertex already has around 1,000 patients in France using Orkambi, although the biotech hasn't recognized any revenue yet. As for the U.K., Leiden said that the company hopes to secure a portfolio agreement that provides for reimbursement for any new CF drug, not just Orkambi. The bottom line is that Vertex should have a couple of significant markets open up in the not-too-distant future.
6. Only one or two pipeline programs need to be successful
What's in store for Vertex beyond treating CF? Leiden said that the company intends to develop and market transformative medicines for serious diseases that "smell and look a lot like CF." He specifically pointed to three opportunities -- sickle cell disease, pain, and alpha-1 antitrypsin (AAT) deficiency -- but stated the company has around 10 different indications that it was targeting in addition to CF.
Vertex is working with CRISPR Therapeutics to use the CRISPR-Cas9 gene-editing approach in treating sickle cell disease. Leiden said that he's "excited about sickle cell" and thinks there could potentially be a cure for the disease.
Here's the great thing about Vertex's pipeline outside of CF: Any program would be a multi-billion-dollar franchise by itself. Leiden stated that "all of them don't have to work, half of them don't have to work." All it takes for Vertex to generate tremendous growth is for one or two of its pipeline programs to be successful.
7. A nice problem to have
Leiden noted that Vertex now "has a nice problem of accumulating cash very rapidly." At the end of 2017, that nice problem translated to over $2 billion in cash, cash equivalents, and marketable securities.
Vertex plans to use its cash to supplement its internal innovation efforts. However, Leiden said the company would also look to make business development deals. The biotech is most likely, according to Leiden, to target "something that really moves the needle" in CF, new technology platforms (especially gene therapy), and deals to supplement its early-stage pipeline.
Any real problems?
Are there any real problems aside from the fake one of making a lot of cash? Probably the least attractive thing about Vertex is that the stock is expensive. Shares currently trade at 38 times expected earnings.
However, remember that those expected earnings only look out to the year ahead. Vertex's triple-drug combos won't hit the market until after then (assuming all goes well). Its pipeline efforts beyond CF are also further in the future. Any business development deals probably wouldn't generate a return until years from now as well.
Jeff Leiden is definitely looking at the long term. That's what you want from a CEO. And that's what you want to do as an investor. Over the long run, I think this biotech stock will continue to be a big winner.
