Cystic fibrosis is a deadly lung disease that causes patients to fight for every breath. Hope for a cure appeared on the horizon more than 30 years ago when researchers first isolated the genetic variant causing the disorder. Vertex Pharmaceuticals (VRTX -0.49%) delivered on that hope with therapies showing remarkable improvements in lung capacity -- changing the lives of and bringing relief to people with the condition.
In 2019, Vertex introduced Trikafta, a highly effective triple combination of therapies. Total sales for all Vertex products have since grown from $1.7 billion in 2017 to $6.2 billion in 2020. The company finished last year with $6.7 billion in cash, and generated more than $3 billion in free cash flow. With patents that run through 2037, Vertex has set the foundation for an incredibly durable franchise.
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Despite its awe-inspiring production of cash, Vertex's stock is down 35% from its 52-week high. Vertex may be a victim of its own success, with some investors worrying the cystic fibrosis market is tapped out.
The drop was also driven by the company's decision to discontinue the clinical program for two new treatments targeting the rare genetic disorder alpha-1 antitrypsin deficiency (AATD). These failures cast a shadow over the internal development pipeline, leading some to wonder if Vertex can repeat its success.
The big question is "Where does Vertex go from here?" Despite the concerns, few biotech companies have as much of a cash cushion or as many options for future growth. Vertex will report quarterly earnings in a few weeks, and investors should keep an eye on three areas for signs that management is executing on its long-term potential.
1. Continued growth in the core cystic fibrosis market
The market for cystic fibrosis treatment is currently thought to be 83,000 people across the U.S., Canada, Europe, and Australia. Roughly 20,000 of these potential patients are in countries where Vertex is still working on approvals and reimbursement. Another 10,000 are children under 12. Vertex received U.S. regulatory approval in June for 6-to-11-year-olds with one mutation. Regulatory submission for this younger population in Europe is expected in 2021 as well.
Another positive development is the potential for a new therapy combining tezacaftor with VX-121 (a "next generation corrector") and VX-561 (a new potentiator) to restore the function of the defective protein causing cystic fibrosis. The new combination therapy is also expected to cut the royalties Vertex pays other companies for patents, perhaps by as much as half. The advancements would have the added benefit of extending Vertex's patent protection even further into the future. Phase 3 trials are expected later this year.
All of these developments bode well for continued long-term top- and bottom-line growth. Investors should look for progress in regulatory approvals and reimbursements for additional countries, age groups, and therapies.
2. Progress with new CRISPR therapy
Vertex and collaboration partner CRISPR Therapeutics (CRSP 0.95%) announced impressive results for CTX001, the CRISPR/Cas9-based gene-editing therapy used to treat severe sickle cell disease (SCD) and transfusion-dependent beta-thalassemia (TDT).
CTX001 represents a multibillion-dollar commercial opportunity. There are approximately 32,000 patients in the U.S. and Europe who would initially be eligible for CTX001, with 170,000 total patients eligible under a gentler conditioning regimen. Though potential approval is at least a couple of years away, Vertex could be first to market and will take home 60% of any eventual profits.
Investors should look for regulatory submissions in the next 18 to 24 months and the start of pre-commercialization activities.
3. Funding more partnerships and bigger acquisitions
The CRISPR collaboration is a proof point for Vertex's external business development strategy. In 2020, Vertex signed collaboration agreements with Affinia Therapeutics, Moderna, and Skyhawk Therapeutics. These are companies with the tools or technologies to target the diseases Vertex wants to pursue.
On the acquisition front, in 2019 Vertex paid $950 million to buy stem-cell therapy company Semma Therapeutics to focus on difficult-to-treat type 1 diabetes. In the first quarter of this year, Vertex received fast-track designation from the U.S. Food and Drug Administration and initiated a phase 1/2 study. As cash continues to pile up, Vertex will be able to purchase even larger companies with later-stage pipelines.
Investors should look for more discussion from management on acquisitions to accelerate growth.
Can lightning strike the same place twice?
Despite the common misperception, lightning does in fact strike the same place twice. In some places, it happens quite often when the conditions are right. Vertex could be one of those places, with a blockbuster franchise set to generate cash for decades and fund solid new prospects. For patient, long-term buy-and-hold investors, Vertex could very well add a little lightning to your portfolio.
