Aided by strong first full quarter sales of its recently launched hepatitis C drug INCIVEK™ (telepravir), Vertex Pharmaceuticals (VRTX) reported blockbuster out-of-the-ballpark results for the September quarter. It reported revenues of $659 million (versus $343 million estimate), a strong sequential improvement over the $114 million reported for the June quarter; and non-GAAP earnings of 70c (versus 17c estimate), a strong sequential improvement over the 67c loss reported in the June quarter.
The $659 million in revenues included $200 million it earned as a milestone payment from its collaboration partner, Janssen Pharmaceutica, a division of major pharmaceutical and medical products company, Johnson & Johnson (JNJ); however, it is not included in the calculation of non-GAAP earnings. Also, it is important to note that telepravir was acquired by VRTX from Eli Lilly (LLY) in 2002, which still retains some ownership and will realize some royalties from the sales of INCIVEK™.
INCIVEK™ was approved by the FDA in May 2011 for the treatment of HCV just days apart from the approval of another similar and competing drug VICTRELIS (Boceprevir) from Merck & Co. (MRK). Subsequent to U.S. FDA approval, INCEVIK™ was also approved in Europe by the EMA (formerly known as the EMEA) in September, and it is currently being marketed in the U.S., Canada, U.K. Germany, France, Sweden and Japan. Both INCIVEK™ and VICTRELIS work by blocking an enzyme that helps the virus reproduce, and are significantly more effective than prior treatments for hepatitis C. As a result, the market for HCV drugs is expected to grow from $3 billion to $12 billion.
INCIVEK™ sales were predicted by analysts to exceed $3 billion annually by 2013, with an associated price target of $59 tied to that projection by RBC Capital Markets. However, based on the current ramp with sales in the first full quarter alone running at over a $1.8 billion annual run rate, it is easy to see that INCIVEK™ sales may well exceed that by a wide margin. At its closing price of $42.58 on Thursday, VRTX trades at only 10 times forward P/E based on analyst projections of $4.23 in earnings for FY 2012 that were published prior to the reporting of the September quarter results.
It is reasonable to assume based on the strong beat that analyst revenue and earnings projections may have to be significantly raised to account for the strong ramp-up, giving it perhaps a forward P/E in the 8-9 range once analysts update their projections.
VRTX is a large-cap biotech company, and besides marketing INCIVEK™, it also has submitted to the FDA a New Drug Application for KALYDECO (VX-770) for the treatment of Cystic Fibrosis in people six years of age and older who have at least one copy of the G551D mutation in the CFTR gene. Furthermore, it has six other potential medicines in various stages of clinical development clinical development targeting hepatitis C, cystic fibrosis, rheumatoid arthritis, epilepsy, and influenza.
We believe that based on the strong performance of INCIVEK™ in the September quarter, VRTX is a steal at current prices, trading at a forward P/E in the high double digits while earnings are projected to rocket up from here.
MRK is expected to report its September quarter before the open tomorrow, and it will be interesting to see if strong INCIVEK™ sales have come at the expense of a slower ramp-up in VICTRELIS sales, or if both drugs are outperforming expectations.
Other companies besides VRTX, JNJ and MRK that have drugs under development for treatment of hepatitis C include:
Sciclone Pharmaceuticals (SCLN), developing therapies to treat life-threatening diseases such as cancer and infectious diseases. It markets and sells ZADAXIN for the treatment of hepatitis C, hepatitis B and as a cancer adjuvant in approximately 30 countries, including China, the Pacific Rim, Latin America, Eastern Europe, and the Middle East. Furthermore, ZADAXIN is in phase 3 trials in Europe for the treatment of chronic hepatitis C.
Pharmasset Inc. (VRUS) develops pharmaceuticals for the treatment of chronic hepatitis C infection and HIV. Its hepatitis drug PSI-7977 is currently in phase two development.
Bristol-Myers Squibb Co. (BMY) develops branded pharmaceuticals for the treatment of cardiovascular, virological and other infectious diseases. It acquired hepatitis C assets when it acquired biotech company Zymogenetics in 2010.
Hepatitis C is a leading cause of chronic liver disease and liver transplants. The WHO estimates that nearly 180 million people worldwide, 3% of the world’s population, are infected with HVC. The U.S. alone is estimated to have four million people infected with HIV, with an additional fifteen million in Europe and Japan.
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