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Finally, some Vertex (NASDAQ:VRTX) news unrelated to Hepatitis C. Health Canada, the Canadian medicinal regulatory body, approved Vertex's Kalydeco (ivacaftor) on Monday for the treatment of cystic fibrosis (NYSE:CF) patients with at least one copy of the G551D mutation. The news, however, has had a negative impact on Vertex's shares, as the treatable population for this subsegment of CF patients amounts to roughly 100 Canadians; a minimal impact on the bottom line. Since FDA approval and subsequent launch at the end of January, Kalydeco has generated $113M in sales, 11% of the $1B net revenue that the company reported for the first nine months of the year. And while Canadian approval is ultimately a boon to Vertex, adding incremental revenue, this subset of cystic fibrosis patients represents only a fraction of the market for a more broadly prescribed treatment option. Vertex is well-aware, and is preparing a more adoptable treatment regimen with the development of VX-809.

Investor focus shifting. As Vertex's Incivek sales have slipped and analysts question the longevity of the product in the market, investors are turning to Vertex's pipeline of CF treatments for future growth. Worldwide, there are roughly 70,000 people living with Cystic Fibrosis, 30,000 of which are in the U.S. The genetic disorder causes an overabundance of thick, sticky mucus in the lungs, and can affect the GI tract similarly. Kalydeco is, in fact, the first treatment to address the underlying causes of CF, and on Monday Cystic Fibrosis Clinic Director at Montreal Children's Hospital, Dr. Larry Lands, said, "Kalydeco is an incredible leap forward in CF therapy. Even though Kalydeco as a stand-alone treatment will only help a limited segment of affected patients, it shows promise as a combination therapy for other patients with cystic fibrosis."

With such a small patient population for Kalydeco under its current labeling, analysts are particularly interested in Vertex's broader CF pipeline, namely a combination with the Phase II candidate VX-809, which may expand the addressable population multifold. Kalydeco is currently approved only for patients with the G551D mutation in the cystic fibrosis transmembrane conductance regulator (CFTR) gene. The rare mutation affects 4% of cystic fibrosis patients, just over 1000 patients in the U.S. and a fraction of that in Canada. VX-809, however, is in trials in combination with Kalydeco as a potential treatment for CF patients with the F508del mutation; these patients make up two/thirds of the global CF population and 90% of the American population. If VX-809, or more likely a combination with Kalydeco, proves efficacious, the drug will be entering a substantial, largely untapped market.

Ongoing, upcoming trials to support VX-809 and Kalydeco combo. Vertex plans to initiate a pivotal Phase III study in early 2013 evaluating a combination of VX-809 and Kalydeco in patients with two copies of the F508del mutation. A similar Phase II program evaluated the combination's efficacy and safety earlier this year, for which the company presented data in October at the North American Cystic Fibrosis Conference. While VX-809 demonstrated mixed results as a monotherapy, the combination with Kalydeco did generate statistically significant improvements, but investors and analysts have been hesitant to place overt confidence in the drugs. Since October 11, when the top-line results were reported, two analysts have cited the CF program as reasons for downgrading VRTX, and the stock has declined 30%. While the drugs certainly demonstrate a clinical benefit, improving overall lung function (FEV-1), they oddly did not produce an improvement in sweat chloride response, a biomarker of CF. Researchers, however, are not concerned, specifically because the biomarker does little for clinical meaningfulness. Limitations of the Phase II trial (length, population) may have attributed to the confounding data, and the company plans to move forward with a Phase III trial in the next few months in hopes of supporting the positive findings. The Phase III trial should be more revealing of VX-809 and Kalydeco's capabilities, but trial protocol details have yet to surface and timelines are unclear.

Despite CF business potential, pressure remains on VRTX. While the major development news for Vertex centers around CF treatments for the time being, the company faces significant headwinds following its latest earnings release. Vertex reported declining Incivek sales yet again in the third quarter, attributable primarily to the many up-and-coming interferon-free HCV treatments, although the company maintained previous guidance for $1.1B-$1.25B in sales (lowered with 2Q financials). While Vertex's cystic fibrosis franchise holds significant long-term potential, its HCV business isn't expected to be a major growth driver in the near-term, even considering its all-oral treatment options; competitors like Gilead (NASDAQ:GILD) and Abbot (NYSE:ABT) are well-ahead in the race for an all-oral regimen. Although sales are still ramping up, Kalydeco probably won't replace Incivek's falling sales right away, and consensus estimates call for a slight earnings loss next year on continued declining revenue. Although VRTX's fall over the last two months have brought it back into a more fair valuation range, we're not yet sure its found bottom. With no growth-drivers in the near-term, outside of minor development catalysts, any position in VRTX should be considered a long-term investment, based primarily on the potential of its cystic fibrosis program.

Source: Kalydeco Approval In Canada More Important To Patients Than To Vertex

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