Few industries have more surprises and high impact catalysts than biotech. It seems that every other week there are events that cause stocks to rocket higher or plummet to earth, usually from drugs that have positive or negative clinical trial results or from surprise FDA approvals or rejections. In the world of biotech, nothing is certain. At the beginning of each year, I like to take stock from these surprises and try to learn from them as best as I can, and ultimately use past history to help in making future predictions. In January, I made a few predictions on where I thought those surprises may be. With a whirlwind of activity in the sector in January, I thought it would be a good time to review each prediction and provide updates throughout the year. I will discuss each one in a separate article, but let's get the overview out of the way. My prediction list for 2014 was as follows:

  1. Vertex (NASDAQ:VRTX) is going significantly higher and will be a top mid-cap performer
  2. Bristol-Myers Squibb will once again be the top performer in the large cap space
  3. Sarepta runs then tanks again on a delayed filing for eteplirsen
  4. Innate Pharma would be a big under-the-radar gainer.

What will Vertex do this year?
Let's start with biotech company Vertex. This story hasn't changed all that much since the beginning of the year. Its stock price in 2014 will primarily depend on the outcomes of the two late stage studies for patients with Cystic Fibrosis. To briefly recap, Vertex has undergone a major restructuring of its focus from hepatitis C to cystic fibrosis over the last two years. The Vertex drug Incivek (for hepatitis c) launched in the second quarter of 2011 and quickly became one of the best launches of any drug in history based on quarter over quarter revenue growth. In just its third quarter on the market, it generated $457 million in revenues. However, its stay as top dog in the hepatitis C space proved to be ephemeral as Gilead's Sovaldi (sovosbuvir) began emerging with even more impressive data. Sovaldi was just approved in December and did nearly twice the revenue in just a month that Incivek did in its first full quarter. Incivek sold just $19m last quarter as many patients were holding out treatment in favor Sovaldi.

Vertex has also been developing treatments for Cystic Fibrosis.  It already has one drug approved in Kalydeco for a small subset of patients with the G551Delta mutation, which affects about 2,500 patients in the US, EU, Canada and Australia. Because Cystic Fibrosis is a rare disease, and there are no truly effective treatments, Vertex can charge an enormous sum for the drug. Currently it costs $300,000+ per year for Kalydeco, which is expected to bring in $470-$500m in revenues this year. Vertex is also developing drugs to be used in combination with Kalydeco and hopes that the combination will significantly increase the patient population it can sell to. The company is currently running two phase 3 trials, called TRAFFIC and TRANSPORT, in which it is testing Kalydeco in combination with a drug called lumacaftor, or VX-809, in patients who are Homozygous for the F508del-CFTR Mutation. Vertex will be able to significantly expand its patient population if these trials prove successful as nearly 28,000 patients worldwide have this mutation. It could ultimately mean a 10 fold increase in revenues, to $5bn or more per year, which is why a positive outcome in these trials is critical to the near term and long term outlook for the stock.

Year to date, the stock is up a more modest 5.6%. Even so, Vertex still represents a compelling high risk/high reward opportunity. Vertex has basically written off its hepatitis C franchise with the emergence of Sovaldi and is now primarily focused on Cystic Fibrosis. If the TRAFFIC and TRANSPORT studies are positive, Vertex very likely will rocket higher. As we eagerly anticipate the phase 3 results mid-year, I will also be watching to see how the development of VX-661 turns out. The FDA granted VX-661 combined with Kalydeco its coveted Breakthrough Designation, which should ultimately speed its development (VX-809 combined with Kalydeco also has Breakthrough Designation). VX-661 is a similar drug to VX-809 in that they are both CFTR correctors and early data suggest that VX- 661 may be even more potent, even though VX-809 is further along in development. VX-661 is currently in phase 2 trials and should have data later this year as well. Management addressed VX-661 on its earnings call last week and suggested that if the TRAFFIC and TRANSPORT trials fail, VX-661 will be a nice backup. That comment, while seemingly innocuous, could suggest that management has some doubts about the success of the combo studies. It could also mean that they recognize that success in Phase 2 does not always equal success in Phase 3 trials as we have seen many times in the biotech space before. Needless to say, I thought the phase 2 combo data of VX-809 and Kalydeco was strong and ultimately I like the chances for success in the phase 3 studies. 

I'll be reviewing my other predictions in future articles, so be sure to check back next week.

Chris Ahlstrand owns shares of Vertex Pharmaceuticals, Bristol-Myers Squibb, Gilead Sciences, and Innate. The Motley Fool recommends Gilead Sciences and Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.