Vertex: The Best Of The Companies Investing In Cystic Fibrosis

| About: Vertex Pharmaceuticals (VRTX)

Imagine assembling a child's first bike. After hours of diligently following the instructions, you send your little one off, excited to try it out. Unbeknownst to you, the instructions contained an error and the bike was not assembled correctly. You watch your little one take a tumble off the malfunctioning bike, thankful for helmets, knee pads and band-aids, and vow to fix the problem. Conventional wisdom says one should find the instructions, notify the company to fix their instructions for good and rebuild the bike. For some reason, however, that is not possible at this time.

In the healthcare sector, Cystic Fibrosis (CF) is that child's bike. Unfortunately, the best approach to fix a malfunctioning protein as in the case of CF, (in the medical world known as gene therapy), is simple in theory but has not shown much follow through in actuality. The viable angles being taken by current pharmaceutical companies are focused on attacking other routes than fixing the instructions for good.

Cystic Fibrosis has offered a mix of frustration and excitement in the pharmaceutical sector since the root cause of the disease was discovered. In 1989, researchers identified the mistake in the genetic instructions which leads to Cystic Fibrosis. In theory, the problem for CF patients is simple: basically, a "misspelling" in a gene, (for which a variety exists), causes the protein gate governing ion flow in the lining of the lungs and digestive tract to be made incorrectly. This is similar to an error in written directions causing an end product to malfunction. The symptoms include reduced lung function, increased mucous secretion and frequent bacterial infections. A decreased lifespan can result.

The following companies are offering realistic science to attack the disease today, staking their claim in the estimated $2 billion Cystic Fibrosis treatment market.

Gilead (NASDAQ:GILD) and Novartis (NYSE:NVS): Treating the Results of CF

Gilead Sciences Inc.'s drug Cayston operates on the backend of the disease, treating a common bacterial infection more prevalent in CF patients due to the disease's symptoms. The antibiotic nature of Cayston treats the bacterium Pseudomonas aeruginosa. Taking a band-aide approach, Cayston is not as much novel as it is affective for what has been an age old problem associated with CF. Offering competition to Cayston is Novartis' TOBI, which treats the same bacterial infection as the Gilead product and has been on the market longer. Gilead's CF division however is a drop in the bucket compared to its focus on antivirals for HIV and Hepatitis C. Recent news on GILD has some investors considering taking a position on its dip. Gilead dropped 14% on Friday as results from its Hepatitis C drug GS-7797 showed patients had relapses after a 12 week clinical trial.

PTC Therapeutics/Genzyme/Sanofi-Aventis (NYSE:SNY): Targeting Protein Manufacture

PTC Therapeutics drug, Ataluren, made in partnership with Genzyme/Sanofi-Aventis, offers an interesting approach to treatment of the non-sense mutation cause of some CF cases. In this version of CF, a mutation causes the CFTR protein to stop being manufactured at the ribosome prematurely, causing its malfunction. Ataluren works by allowing the ribosome, or protein manufacturer, to ignore the incorrect stop instruction.

With 10% of CF suffers possessing this type of mutation, the market for Ataluren is even larger than the excitement for other recent treatments. Further, the utility of this type of technology allows this drug to also work to target other non-sense mutation diseases such as muscular dystrophy. PTC Therapeutics could provide an interesting boon to its larger partner and other Big Pharma partners in the future.

Vertex Pharmaceuticals (NASDAQ:VRTX): Improving Function of the Malformed

The current leader in tackling the physical root cause of CF is Vertex Pharmaceuticals. The proactive drug, Kalydeco, was approved in January 31st in one of the fastest FDA approvals in history. The drug treats the G551D mutation which affects some 4% of CF suffers by increasing the function of the CF transmembrane protein. The drug works to improve the function of the malformed CFTR protein in the cell membrane.

What's even more exciting is what else is in Vertex's CF pipeline. VX-809 is a fast track drug in phase II clinical trials which has been given orphan status by the FDA. The drug is designed to work in concert with Kalydeco to widen the patient range treatable to those with the F508del CF mutation. Over 87% of those with CF have at least one copy of the F508del mutation, opening the market to the nearly 30,000 patients in the United States with the condition.

Why a Vertex Investment May be a Better Play

Gilead's approach will bring in some revenue to the company, but the lack of resources to focus solely on the treatment and the generic slant make it a pass on this play. Investment and innovations aren't always on the same page, otherwise the treatment approach of PTC Therapeutics concept would have caught more fire. One may want to invest in GILD, especially on the recent dips, but for reasons other than its CF innovations.

Scientifically speaking, Ataluren's drug technology may be most enticing, and PTC's partnership with Big Pharma will offer financial and marking stability but the pipeline for further treatments with this technology seems a bit dry at current. Look for future partnerships out of this company.

When considering novel science, investor excitement is only as good as the financial support for the expenses R&D, clinical trials and marketing. An antithesis to Gilead's recent financial setbacks in the Hepatitis C game is Vertex's 2011 gains from its own Hepatitis C treatment Incivek. The newly approved drug helped the company bring in $1.4 billion in 2011 up over its $143.4 million 2010 revenue. VRTX's CEO Matthew Emmens purports that his company is "positioned for significant growth, earnings and cashflow in 2012".

Investing in Vertex may mean investing in a drug producer that may pay off. Vertex's targeting of CF with multiple drugs in its pipeline makes it a potentially more lucrative play on a smaller market cap with increasing cashflow and a history of fast FDA approval. Vertex is a company to keep an eye on for its solid science and solid financials.

A majority of analysts list VRTX as a buy or strong buy as it is set to cross its 200 day moving average. Adding to its strength is the company's Hepatitis C pipeline and its HIV market. Vertrex is a smaller cap that could offer investors bigger gains with a target set over $46 from its current position at just above $39.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.