Vertex Pharmaceutical's Hepatitis Drug Proves Effective, But Path To Market Unclear

On April 14th, Vertex Pharmaceuticals (VRTX) released highly anticipated Phase II clinical trial (PROVE1) results of its Hepatitis-C treatment Telaprivir. The results of the interim analysis are shown in the table below. The full press release with additional information can be found here.

The results look impressive as they show a rapid response in Telaprivir treated patients vs. placebo in the first 4 weeks. However, the interpretation of results at 12 weeks becomes questionable due to lack of statistical significance. Analysts were focusing on a small subset of 20 patients who were to receive the Vertex drug for just 12 weeks and then be checked 20 weeks later for signs of relapse. Here is the quoted text from the press release regarding those 20 patients:

Analysis of PROVE 1 Patients who Finished All Treatment at 12 Weeks: Seventeen of 175 patients received at least one dose of telaprevir in “Arm D” of the PROVE 1 study (telaprevir + peg-IFN + RBV). According to the study protocol, patients in Arm D were eligible to stop all treatment at week 12 if they met on-treatment criteria, including the achievement of RVR (<10 IU/mL at week 4) and maintenance of this viral response (<10 IU/mL) at week 10 of treatment. Nine of 17 patients met these criteria and stopped therapy at 12 weeks, and 6 of these patients continued to have undetectable HCV RNA at week 20 of post-treatment follow-up. Of the remaining 8 patients enrolled in Arm D, 4 discontinued due to adverse events prior to week 12, and 4 did not achieve RVR.

The one obvious conclusion that can be made from looking at this data is that the number of patients is too low to make any extrapolation on percent responders. The other conclusion is that 12 week therapy may not be sufficient to reach undetectable levels in a significant portion of the patients. However, the fact that more patients respond to longer periods of treatment with standard of care ( SOC is Interferon + Rivbavirin) suggests that patients on SOC + TVR may also benefit from this increase.

The company has already started Phase II (Prove 2 and 3) trials with larger number of patients with regimens of at least 24 weeks. This means longer clinical trials, higher costs of trials and lower chance of a quick approval and launch in 2009. This would explain lack of an upward stock movement after the release of the results.

The other issue of higher incidence of dropouts should not be a significant issue. Since this was a trial, most patients and physicians are careful with side effects. In practice and after approval, it is safe to assume more patients will be encouraged to withstand the side effects (severe rash which exists in SOC and can be treated).

VRTX has also released its quarterly financial report and as expected it spent a significant amount of money on materials for phase III clinical trials which are expected to begin in Q4. Even after paying down some long term debt, VRTX still has a hefty $655 million in cash and short term securities which should be enough to fund the launch of Telaprivir.

Since the release of earnings and clinical trial results the stock has been trading between $30 and $32. I waited a few weeks before writing this post to see the reaction of the market to the data. The reaction of investors since then has been of cautious optimism. The stock seems to have found support at $30, but if there is a large sell-off in the market, VRTX will see more volatility than stocks with earnings.

The data has clearly shown that Telaprivir is safe and is an improvement to existing therapy, giving it a high probability of becoming a blockbuster. The rest of Phase II data, which are scheduled to be released in November, will determine the inevitable path to market. The stock should end the year higher than these levels and has a minor probability of a significant downside given the size and unmet need of HepC market.