Vertex's Cystic Fibrosis Pipeline Offers Sales Upside

| About: Vertex Pharmaceuticals (VRTX)

I've written a number of articles about Vertex (VRTX), including most recently in May where I discussed interim data from Vertex's Phase II trial for Cystic Fibrosis ("CF") drug Kalydeco, used alongside Vertex's in-development drug VX-809.

Vertex recently updated drug results. And, they just reported earnings. So, there's plenty new to discuss.

Kalydeco is used to treat a subset of CF patients, roughly 4% of the 30k patients here in the States. The study hopes to significantly broaden the drugs use across the patient pool. At a price of $294k, the incentive for Vertex to get this right is big.

In Q2, the company reported Kalydeco sales of $46 million, a nearly $250 million annual run rate for the new drug. The EU approved the drug last week, essentially doubling the existing market. Any expansion to include the broader patient pool likely means the difference between an addressable market of $300 million and blockbuster status.

The study would grow the addressable CF market to roughly half of the patient pool. So, some 15,000 people likely possess the gene make-up targeted by the combo therapy. Given most CF patients don't survive much beyond their 30's, the demand for new treatment options is very high.

Final results from the study were issued in June. The mean absolute improvement in lung function increased 8.6% against placebo. Importantly, side affects were mild to moderate and in line with those experienced by the placebo group. 55% of patients saw improvement of more than 5%, versus 9.5% of patients taking the placebo. On the heels of the results, Vertex plans to advance the combination therapy into further trials next year.

The potential in Kalydeco adds handsomely to the success of Incivek, which will be one of the fastest drugs in history to reach blockbuster status thanks to strong demand for Hep C treatment and a $50k price tag.

At quarter end the company reported 70-75% market share of newly treated patients, resulting in Incivek sales of $328 million. However, the growth has tapered off as pent up demand works off.

While Vertex called out all oral treatments working their way through clinic as a reason doctor's are delaying treatment in milder cases, it was also quick to highlight its efforts to protect its Hep C franchise from competitors like Gilead (GILD), who acquired Pharmasset earlier this year.

The company just released results for its oral Hep C drug, ALS-2200. The positive results, which included no serious adverse events and a 50% rate of patients showing no quantifiable levels of the disease after treatment, position the drug to enter Phase II trials later this year.

Beyond CF and Hep C, the company also has a Phase IIb trial underway for its VX-509, used to treat moderate to severe cases of rheumatoid arthritis. This is a hot area for development given its potential global market could reach $15 billion by mid decade. VX-509 will compete with programs at both Pfizer (PFE) and Astra Zeneca (AZN), who has partnered with Rigel (RIGL) on development of its RA drug. Additionally, the company has VX-787 in Phase II for influenza.

Given a robust pipeline for Kalydeco label expansion and its progressing oral Hep C program, it's likely we'll continue to see significant sales growth over the coming year, which suggests buying on pullbacks for upside back toward $60.

Disclosure: I am long RIGL.