It became apparent that Vertex Pharmaceuticals (NASDAQ:VRTX) is ready to grab a lot more market share in cystic fibrosis (CF) after the company recently released overwhelmingly positive clinical trial data from two huge phase 3 trials meant to establish the efficacy of a new drug combination designed for CF patients who are homozygous for the f508del mutation. Those positive data were a big reason why the stock is up 32% year-to-date. 

These trials-nicknamed "TRAFFIC" and "TRANSPORT" enrolled a total of 1,100 patients across 200 research centers. Patients in the treatment arm received an established CF drug called ivacaftor (VX-770), as well as an experimental lumacaftor (VX-809). Placebo patients received lookalike versions of this drug combination.

After 24 weeks, the phenomenal performance of patients who took the ivacaftor/lumacaftor made it clear that Vertex had another blockbuster product in CF. Across both trials, treated patients had 30-39% reductions in pulmonary exacerbations relative to placebo patients (p ≤ 0.0014) and saw a mean 4.3% to 6.7% improvement in FEV1 by the end of the trial. Basically, this means that cystic fibrosis patients on ivacaftor/lumacaftor improved their ability to breathe, and they reduced sudden "worsenings" of their breathing function relative to placebo-treated patients.

However, there was major drawback to this drug that should also be considered. 4.2% of patients receiving ivacaftor/lumacaftor dropped out of the trial due to adverse events (e.g. infective pulmonary exacerbation, cough, headache, etc.), while only 1.6% of placebo-treated patients dropped out due to adverse events.

Although this is something that the FDA would rather not see, I still agree with Vertex bulls that ivacaftor/lumacaftor has a very high likelihood of being approved based on these results.

Because Vertex plans to submit the New Drug Application to the FDA (and a few other regulatory agencies) later this year, we should expect an advisory committee meeting and a final decision in 2015. 

What about commercialization?
With the pivotal trial out of the way, and an FDA approval looking likely, VRTX followers are now trying to determine the commercial potential of this new combined therapy and the future impact on Vertex's bottom line.

Given that ivacaftor alone costs $294,000 per insured patient each year, it won't take all 28,000 f508del CF patients to reach analysts' peak annual sales estimates of >$3 billion for this new drug combination if the ivacaftor/lumacaftor combination is priced similarly (or higher). However, this is still quite optimistic as it doesn't factor in Vertex's co-payment programs and free treatment programs.

Optimism can be dangerous!
The problem is that the market added an optimistic $6 billion to the valuation of Vertex based solely on the phase 3 results, and it doesn't seem like there's enough upside left to justify the risk of a subpar launch of ivacaftor/lumacaftor. Even if the new combined drug product meets the optimistic sales expectations that are being thrown out there now, the market will have little reason to push VRTX higher.

If the new drug combination reaches $3 billion after 5 years on the market – say in year 2020 – we will have already seen loss of exclusivity for Vertex's ivacaftor (Kalydeco) monotherapy too, which is currently the company's best seller. The recent sale of Incivek also prevents Vertex from seeing much growth in the hepatitis c space throughout the next few years.

That puts way too much pressure on the success of ivacaftor/lumacaftor going forward, and gives ammunition to a growing pool of short sellers who question the valuation metrics supporting Vertex's $23 billion market cap.

So while Vertex is set to make an absolute killing on this new ivacaftor/lumacaftor product, I think that shares of the company are nearly priced to perfection. There might be more upside when Vertex gets close to phase 3 trials in heterozygous f508del (another large CF patient subpopulation), but until then I will only be following Vertex as a spectator.