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After reaching new highs earlier in the year, shares of Vertex Pharmaceuticals (NASDAQ: VRTX) struggled to hold on to their gains and have recently entered a very bearish reversal, signaling that the market is beginning to change its perspective on the $9.14 billion company.
Bullishness on VRTX stock reached its height back in May of this year when interim data from a phase II trial for their developing drug VX-809 showed significant efficacy when paired with already FDA-approved and marketed KALYDECO in the treatment of cystic fibrosis patients with the common F508del mutation. KALYDECO (also called ivacaftor and VX-770) was approved by the FDA on January 31, 2012 and is still the only approved drug for the treatment of the underlying causes of cystic fibrosis.

The big limitation to the drug and its potential is that it is only approved for patients that have at least one copy of the G551D mutation in the cystic fibrosis transmembrane conductance regulator (CFTR) gene, which represents a smaller portion of the aggregate pool of cystic fibrosis patients. Investors are excited about their other cystic fibrosis drug VX-809 because it targets a wider population of cystic fibrosis patients, specifically those who have two copies of a particular mutation that is referenced as "F508del."

In the Phase II trials that studied VX-809 and KALYDECO/ivacaftor in a combination study with F508del patients, it was interesting to note that VX-809 did in fact perform better in combination with KALYDECO/ivacaftor and showed very weak results when used alone. It's not clear why VX-809 did not perform when used alone, but it's clear that the mixed results from the recent phase II trial caused some uncertainty in the market. Since October 12, 2012 when the detailed results of the ivacaftor and VX-809 combination study were released, Vertex stock dropped almost 26%!

Other factors have also been dragging down Vertex in recent trading, including a mediocre Q3 2012 earnings release from November 1st that showed weaker-than expected revenue (bringing up growth concerns from the analysts), and unexpectedly high increases in company expenses, especially in R&D which had a generous quarterly budget of $200.16 million.

This enormous R&D budget is going towards a number of clinical trials that are related to the late-stage development of VX-809 (which may be combined with ivacaftor based on the results we saw in F508del patients), but there are also trials that are attempting to bring ivacaftor to cystic fibrosis patients with mutations other than G551D. For instance, the company is funding a phase III study for ivacaftor in the treatment of cystic fibrosis patients that have at least one copy of the R117H mutation, which represents ~3% of the US cystic fibrosis patient population. Another phase III trial is mentioned in company files for ivacaftor in the treatment of ~1% of the cystic fibrosis population with at least one "non-G551D CFTR gating mutation." The takeaway is that increases in Vertex R&D expenses can have some very positive long-term effects on the company's revenue, which will benefit from the increasing potential of ivacaftor and the upcoming VX-809 for a variety of cystic fibrosis subpopulations.

Investors who are interested in the long-term potential for Vertex in the cystic fibrosis drug market can find some comfort in the expected growth of ivacaftor, which only brought $49 million in the last quarter but is expected to gain considerable momentum upon approval for other portions of the cystic fibrosis patient population. There is also VX-809, which we mentioned as a potential combination therapy to ivacaftor for the common f508del patient population (a much larger target than currently targeted by ivacaftor in terms of potential revenue.)

VRTX stock is currently in a downtrend that isn't seeing an increasing number of short positions (implying that there is a significantly amount of profit-taking from long-term investors). Since there are no major events in the near future there is no reason for interested buyers to rush into a long position, although Vertex becomes more favorable in fundamental value as market pessimism rises. A downgrade from Credit Suisse yesterday (November 14th) to "Neutral", and a reduced price target on the stock from $56/share to $48/share suggests that bearishness might be getting too extreme.

Source: Pessimism On Vertex Pharmaceuticals Increases, Erasing Previous Gains