Vertex Pharmaceuticals' (VRTX -0.05%) FDA approval of cystic fibrosis drug Orkambi was widely expected after the FDA's advisory panel recommended approving the drug 12-1 -- as you can tell from the quite minor stock price increase after approval -- but investors can still breathe a sigh of relief after the agency's stamp of approval.

That includes biotech investors who don't even own Vertex. With the biotech industry flying high, any deviation from what's expected will likely have a negative effect on the entire industry. Fortunately that didn't happen today.

Orkambi isn't Vertex's first cystic fibrosis drug, but it's arguably more important to Vertex than Kalydeco. Orkambi, which is a combination of Kalydeco and another drug, is approved to treat patients aged 12 and older with two copies of the F508del mutation, which occurs in about 8,500 people in the U.S.; Kalydeco, despite being approved for 10 different mutations, is only approved to treat about 3,400 people worldwide.

In addition to those 8,500 people in the U.S., Orkambi is up for review in the EU, with a decision expected later this year that could add another 12,000 patients with the F508del in Europe. And the rest of North America and Australia could add another 1,500. All told, that's 22,000 patients, increasing Vertex's potential reach more than 7-fold.

Now the fun begins
Gaining approval is an important and necessary step in launching a drug, but it doesn't guarantee sales these days: You still have to get insurers to pay for it.

Given the fairly low number of patients, Orkambi is considered an orphan drug, a drug group that usually has relatively high price tags. Most of the time, there isn't much of a pushback from payers because orphan drugs are usually highly effective, and the relatively low number of patients means the cost isn't a major hit to the insurers.

Kalydeco, for example, costs about $311,000 per year. There's been a little bit of pushback -- Arkansas' Medicaid program, for example, put restrictions on who could receive the drugs, but patients sued and got the restrictions reversed. For the most part though, payers have just put up with the price.

But unlike Kalydeco's effect on patients with the G551D mutation, Orkambi doesn't help patients with the F508del mutation nearly as much. Consider this slide from the FDA advisory committee meeting measuring lung function (absolute change in ppFEV1 vs placebo) for different clinical trials that measured lung functions after treatment for different amounts of time.

Source: FDA. LUM/IVA = Orkambi (lumacaftor/ivacaftor), IVA = Kalydeco (ivacaftor).

The green diamond (Kalydeco in G551D patients) in the upper right corner looks a lot more impressive than the two phase 3 trials for Orkambi in the red circle, labeled LUM/IVA 809-103 and LUM/IVA 809-104. Even if you want to argue that efficacy should be closer to what was seen in the short Orkambi phase 2 trial (809-102), it's still not as impressive as what Kalydeco can do in the patient populations the drug can treat.

The increased number of patients eligible to take Orkambi and the lower efficacy are likely the reason tat Vertex priced Orkambi at $259,000 per year, a sizable discount to Kalydeco.

Meanwhile, those prices are wholesale prices, which no one actually pays. Insurers will negotiate discounts, and Medicaid gets automatic discounts on the price. The number of patients with the F508del mutation that have Medicaid coverage is higher than those who are eligible to receive Kalydeco, so the gross-to-net discount for Orkambi will be higher than it is for Kalydeco even if insurers aren't negotiating higher discounts.

How big the discounts ultimately end up being will eventually determine the peak sales for Orkambi. Until we get a few quarters into the launch, the gross-to-net discount may hang over Vertex like a black swan.