If you're familiar with Vertex Pharmaceuticals (NASDAQ:VRTX), probably the first thing that comes to mind when you think about the big biotech is cystic fibrosis (CF). That's understandable, considering Vertex's tremendous success so far has been due to its CF franchise.

However, Vertex is also working to expand its horizons well beyond CF. The company's pipeline programs are targeting several other rare genetic diseases as well as pain. Perhaps the most intriguing area of focus now, though, is Vertex's type 1 diabetes program. Vertex has made a $950 million bet that it can actually cure type 1 diabetes. And that's a bet that could pay off big-time for investors.

Man in white coat with stethoscope around his neck holding out his palm with an image of the words "Diabetes Type 1" appearing above his hand

Image source: Getty Images.

The path to a cure

Vertex announced in September 2019 that it was acquiring privately held Semma Therapeutics for $950 million in cash. Semma was cofounded in 2014 by Harvard University professor Douglas Melton, who had conducted research that demonstrated the potential for pluripotent stem cells to be converted into pancreatic beta cells that produce insulin.

This approach seemed to be ideal for type 1 diabetes (T1D). With T1D, the body's immune system attacks pancreatic beta cells. As a result, the body doesn't produce enough insulin, a hormone that regulates blood sugar levels. 

Semma's scientific team knew that pluripotent stem cells have the capability of developing into any cell type. They came up with a process based on Melton's initial research to produce islets (cells that release hormones) from pluripotent stem cells. Semma's stem cell islets work like the natural islets in a human pancreas, monitoring blood sugar levels and releasing insulin in precise amounts needed to keep the levels in check. The ultimate goal of this approach is to effectively cure T1D.

At first, Semma ran into problems with making enough beta cells. However, the company's researchers figured out a way to move past those issues and can now make what Semma refers to as "near limitless numbers of high-quality stem cell-derived islets." Semma's team hasn't just been successful with this process in a lab; they've used bioreactors to achieve large-scale production.

Preclinical testing has been very promising. Semma's stem cell-derived islets have been transplanted to animals, including nonhuman primates and pigs, and have safely controlled blood sugar levels.

Vertex CEO Jeff Leiden stated in his company's Q3 conference call that Vertex has been watching companies over the last two or three years that were making advances in addressing some of the biggest problems related to islet transplantation for treating T1D. He said Vertex believes that Semma has solved these problems and viewed the small biotech as "a perfect fit" to acquire.

A huge opportunity

Over 1.5 million people in the U.S. have T1D. The number of new patients diagnosed with T1D across the world has risen in recent decades. These patients currently must receive insulin and constantly monitor their blood sugar levels. Failure to do so can lead to serious health complications and even death.

The costs for insulin in the U.S. have skyrocketed over the last few years with an average monthly price tag around $450 per patient. Over $8 billion is spent annually in the U.S. for insulin for T1D patients. 

Insulin isn't as expensive outside the United States. However, there are many more T1D patients in all of the other countries in the world combined than there are in the United States. All of this adds up to a huge opportunity for Vertex if it's successful in developing a cure for T1D. 

No guarantees

There's no guarantee, though, that success is on the way. Vertex hasn't even begun clinical testing of Semma's experimental T1D therapy yet. Assuming it does advance the therapy to clinical studies in humans, the chances that a drug targeting an endocrine disease will win FDA approval is only around 13% based on historical results compiled by the Biotechnology Innovation Organization.

But investing in biotech stocks is all about taking a risk that an unproven drug will be safe and effective enough to make a lot of money. Vertex didn't shell out nearly $1 billion to buy Semma on a whim. If the company's optimism about Semma's approach to cure T1D pans out, investors who buy Vertex now will enjoy a massive payoff down the road.