Vertex Pharmaceuticals: Telaprevir a Likely Lock for Approval

by: Kinetic Investments

On 04/07/11, Vertex Pharmaceuticals (NASDAQ:VRTX) made headlines when it announced that one of its long time collaborators, Cystic Fibrosis Foundation Therapeutics, agreed to provide up to $75M over the next five years to support research and development for some of Vertex's early stage product candidates in exchange for entitlement to royalties on future sales.

More importantly, the company has a Food and Drug Administration [FDA] Advisory Committee [AdCom] meeting scheduled for 04/28/11, where votes will be cast for or against recommending FDA approval for Vertex's potential blockbuster Hepatitis C product candidate, Telaprevir. The FDA plans to release its determination to the company by 05/23/11.

After reviewing some of the stock's key data it became clear that Wall Street has all but approved Telaprevir itself and that Vertex, along with its strong handed shareholders, are just waiting for the FDA to go through the motions of making it official.

Though the company currently has negative earnings, it sports a hefty market cap of 9.84B and its shares trade near $48. Of the 204.41M shares outstanding, over 95% of them are held by institutional investors and the short interest stands at a paltry 9.54M shares.

While there are many reasons to believe that the FDA will elect to approve Telaprevir in May, one should not expect that the agency will act in congruence with popular opinion. It is not difficult to find examples which demonstrate the unpredictability of AdCom meeting outcomes and/or the FDA's ultimate decisions.

In March of 2007, an AdCom convincingly voted in favor of recommending approval for Dendreon's (NASDAQ:DNDN) prostate cancer treatment, Provenge. Two months later the FDA unexpectedly issued the company a complete response letter [CRL]. This marked the first time that the FDA had acted against an AdCom recommendation for the approval of a treatment intended for patients with advanced stage cancer.

In December of 2010, Orexigen Therapuetics (NASDAQ:OREX) surprised many traders by becoming the first company in several years to receive a favorable AdCom vote for an obesity drug with its Contrave product candidate. In February of this year, traders were again taken by surprise when the company received a CRL from the FDA, citing safety concerns.

The FDA has also chosen to approve product candidates against an AdCom's recommendation, as it did on 03/01/11 when it granted approval for Forest Laboratory's (NYSE:FRX) chronic obstructive pulmonary disease [COPD] product, Daliresp, after an AdCom voted 10-5 against recommending its approval in April of 2010.

The only parallel intended to be drawn between any of the aforementioned companies is that, to some degree, their respective fates either were or are in the arguably fickle hands of the FDA.

While it would be foolish to suggest that any outcome concerning Vertex's Telaprevir is imminent, I have been unable to find anything that resembles a substantive argument against FDA approval. In the event that this highly anticipated approval comes to fruition I plan to sell most, if not all, of my position on the news and hope to take advantage of any overdone post-approval-sell-off as an opportunity to average back in for a much longer term hold.

Disclosure: I am long VRTX.