Right now, Vertex Pharmaceuticals (NASDAQ:VRTX) is a victim of its own success with a difficult decision to make. The company has two potential new blockbusters ready for an FDA review, but they're aimed at the same small group of patients.
It's hard to get one new drug this far, and two at the same time just never happens. Is the company's research and development engine incredibly effective, or just plain lucky? Here's what you need to know about Vertex's latest success and its road ahead.
Check out the latest earnings call transcript for Vertex Pharmaceuticals.
A tough row to hoe
Around 75,000 people in the U.S., EU, and Australia have a hard time breathing because they inherited cystic fibrosis transmembrane conductance regulator (CFTR) mutations from both parents. The CFTR protein helps cells that line the lungs regulate the consistency of mucus, which is a lot more important than it sounds. Some patients don't reach adulthood and among those who do, the average life span is just 37 years.
Cystic fibrosis severity varies from patient to patient depending on which mutations they inherit and there are hundreds of possibilities. Some mutations prevent CFTR from reaching the cell surface, and others make it impossible to do its job once it gets there. Since CFTR's a big complex protein that could be misfolded in hundreds of different places, developing new cystic fibrosis treatments is a dangerous endeavor most drugmakers back away from. That's why Vertex's closest potential competitors are in midstage testing, and they're not going anywhere fast.
Vertex's first cystic fibrosis treatment, Kalydeco (ivacaftor) helps mutated CFTR do its job at the cell surface, but 90% of patients have at least one F508del mutation that prevents CFTR from reaching the surface. Vertex's next treatment, Orkambi combined lumacaftor with ivacaftor to help patients with two copies of the F508del mutation.
In 2018 Vertex added Symdeko, a combination of tezacaftor and ivacaftor, that treats the same patients as Orkambi plus enough additional possibilities to expand the company's reach to around 44,000 cystic fibrosis patients.
This never happens
The company's developing a pair of triple combinations intended to expand its reach to everyone with at least one F508del mutation, and they both work so well that it's hard to pick a winner. It's highly unusual for a company to begin clinical trials with two similar candidates aimed at the exact same patient group at the same time. You never see them perform equally well all the way through pivotal trials.
During a study for patients with one F508del mutation, those treated with Symdeko plus experimental VX-659 could force 14% more air from their lungs after four weeks compared with the placebo group. Recently we learned that similar patients treated with Symdeko and the other new candidate, VX-445 could force 13.8% more air from their lungs.
Vertex also ran studies with CF patients that have two F508del mutations and the results were equally great. Last November, we learned that forced expiratory volume was 10% higher among patients that added VX-659 to Symdeko than patients given Symdeko on its own. More recently, we saw VX-445 added to Symdeko produce a 10% improvement.
The four-week results are good enough to file applications for both drugs, but that would be ridiculous. Instead, Vertex has decided to wait until 24-week data for VX-445, and VX-659 becomes available in the second quarter.
That means the company will have to delay filing a new drug application in the U.S. until the third quarter and an EU filing should go out in the fourth quarter. Investors were expecting the first filings to go out by mid-year, but they gratefully accepted the best excuse a biopharmaceutical company has ever used to explain a timeline miscalculation.
What makes Vertex the best
Vertex's ability to come up with new molecules small enough to pass the stomach lining, and capable of interacting with a giant misshapen protein to get it working is amazing. More than a few biotechs have plodded along for decades without a single phase 3 success, but this company churns out new drugs that that perform seemingly impossible tasks like it's easy.
Few companies were even willing to tackle cystic fibrosis a decade ago, but Vertex's founders were convinced a better understanding of CFTR's three-dimensional structure would allow them to get it done. Repeated success tells us they aren't just getting lucky, which means the company probably won't stop with cystic fibrosis.
On top of a first-rate discovery team, Vertex also has an uncanny ability to advance drugs through development stages at an unbelievable pace. The company created VX-659 in a lab in January of 2016, and within three years the candidate was ready to be submitted to the FDA. Most of Vertex's potential competitors have been in clinical-stage testing longer than that, and there aren't any threats in late-stage trials.
Growing fast enough
At the moment, Vertex doesn't look cheap at 39.1 times trailing free cash flow that reached $1.2 billion in 2018. That's a high multiple, but trailing sales have grown 385% to $3 billion since Orkambi earned approval in 2015. Over the same time frame, the company raised its substantial research and development budget just 70% to $1.4 billion.
With at least one new treatment on the way and a drug discovery team that's second to none, Vertex's bottom line will probably grow fast enough to provide a market-thumping gain over the long run.