Vertex Pharmaceuticals (NASDAQ:VRTX) has had a tough time convincing the market of its potential this year. Despite boosting revenue 35% from the third quarter of 2015 to the fourth, its shares have given up more than 30% of their value this year.
While the stock's pullback is largely part of an industrywide sell-off, it could face headwinds even if overall sentiment improves. Let's look at three things that could hold back the cystic fibrosis trailblazer.
1. Application denied
On Feb. 5 Vertex announced the FDA had denied an application to expand cystic fibrosis drug Kalydeco's label. The drug is currently available for patients age 2 years and older with 10 specific mutations. The expansion would have made the drug available to about 1,500 additional patients with 23 residual function mutations. At a list price of more than $300,000 per year, even this small number of patients would have significantly added to the company's total revenues, which just passed the $1 billion mark last year.
The denial isn't too surprising, considering the hodgepodge of data the application was based on. Vertex submitted clinical data from an exploratory phase 2a study in which eight of the 23 mutations were present in 19 patients. The company hoped Kalydeco's established clinical profile and some preclinical data would bolster the application. Obviously, it wasn't enough for regulators.
All is not lost. The FDA issued a complete response letter -- its way of telling a company what it wants to see on the next attempt. Management is not required to disclose the contents of such letters, and Vertex wasn't too chatty about the details. Odds are regulators want a phase 3 trial with at least a handful of patients expressing each of the 23 mutations in the application.
Clinical trials are terribly expensive, and Vertex already spends enough on R&D to keep investors jittery. Although the company increased annual revenue 78% last year to just over $1 billion, it spent a whopping $996 million on research and development. When the company reported fourth-quarter results last month, management was expecting to spend between $850 million and $880 million on R&D this year. If running another trial to satisfy the FDA raises that figure, it could sour market sentiment even further.
2. Potential failure
Vertex had relatively little invested in the recently-denied supplemental application, but the stock fell hard following the news. Failure of a larger cystic fibrosis study involving experimental VX-661 in combination with Kalydeco's active ingredient ivacaftor, could be catastrophic in comparison.
The combination is currently in a broad phase 3 program with four genetically defined populations. At least one F580del mutation in the CFTR protein is present in the vast majority of cystic fibrosis patients, and one of the trials involves patients with two copies. In a smaller phase 2 trial, the combination significantly improved lung function in this group, which suggests at least one of the four trials has a solid chance of success.
The other three trials involve patients with just one copy of F580del and a second mutation that results in either residual CFTR function, a gating defect in the CFTR protein, or minimal CFTR function. The combination's effects in these three populations is far less understood, which heightens the possibility of at least one failure.
Not only are the usual costs of running this trial expensive, Vertex isn't receiving any Kalydeco revenue from an estimated 200 participants that it would have otherwise. The effects of this lost revenue are significant enough that full year Kalydeco sales estimates of about $680 million are lower than the drug's annualized fourth quarter run rate of $723 million.
If all goes well, potential approvals could expand availability of at least one of Vertex's therapies to the vast majority of cystic fibrosis patients. On the other hand, with such a large amount invested in the late stage study, failure in any one of the four trials would probably result in heavy losses.
3. Political posturing
Tough talk advocating prescription drug price controls occur as regularly as the FIFA World Cup. By my estimates the odds of significant pricing reforms are equal to Team USA's chances of winning the trophy. Both are certainly within the realm of possibility, but anyone with a keen understanding of politics or international soccer would be absolutely stunned if either occurred.
Despite the long odds, talk is enough to send biotech stocks plummeting. When Hillary Clinton expressed her anger over "price gouging" in the specialty drug market, the reforms she suggested were eerily similar to those she promoted as first lady more than twenty years earlier. Last September, during the week following Clinton's "tweet heard round the industry" the iShares Nasdaq Biotechnology index and Vertex stock had fallen about 15%, and 17% respectively.
More recent exposure of questionable pricing practices from Turing Pharmaceuticals and Valeant Pharmaceuticals, coupled with a broad market pullback, have led to more significant losses. The important takeaway is that increased drug pricing rhetoric going into November could cause Vertex stock to lose even more ground.
Vertex is essentially peerless in the cystic fibrosis field, and I firmly believe investors braced for the long haul will come out ahead, eventually. In the near term however, there's plenty to be nervous about.