Biotech Bloodletting: CV Therapeutics and Vertex Pharmaceuticals (CVTX, VRTX)

It's very odd to see the market react so angrily to earnings reports from two companies that we have always known are a long way from having actual positive earnings. With early stage biotechs like many of those in my portfolio, we're buying the hope of future drug performance or approvals .. not the current earnings.

CV Therapeutics (CVTX) and Vertex Pharmaceuticals are getting absolutely pummeled today after releasing their earnings updates last night. Since there was no significant news on either company's pipeline with those earnings releases, it's hard to see good reasons for these drops in share price ... but these are also two very different cases.

In the case of Vertex (VRTX), the company has been trading on the possible approval of it's Hepatitis C drug VX-950, which is still uncertain and is several years away. The market probably overreacted to the potential of this drug when the early clinical results were so spectacular last year, and I'm not surprised to see it dip 10% today ... with so many investors jumping on the momentum train and expecting miraculous announcements every time the company opens the PR gates, there was bound to be some disappointment as soon as it became clear to momentum investors that patience is necessary even with potential blockbuster drugs.

As I wrote a couple months ago when I lightened up my VRTX position, I was worried that the market had bit up the shares to a valuation level that really assumed we would see both of their most promising drugs become blockbusters in the next few years. I still think that's a possible outcome and am holding the majority of my shares, but it's far from certain. I'm not buying any more even though we're seeing some significant drops here, but I've seen no bad news on their pipeline and still expect this one to do very well in the long term.

CV Therapeutics is a very different story, one that's playing out painfully and slowly. Their valuation should be based on their lead drug Ranexa, which is the first new treatment in decades for angina, a huge market. They're also dropping nearly 10% today, and the shares have been weak for months.

It seems that investors are having trouble assessing the performance of Ranexa and Aceon, the drug that CVTX is copromiting with Solvay. We have to wait for results of the Merlin trial for label expansion for Ranexa -- expected at the end of the year (with possible preliminary results earlier) -- to see if the hope for Ranexa becoming a blockbuster-size drug will come through. So all that we have to work with now is the very slow rampup of Ranexa and Aceon sales ... I'm willing to be quite patient with this one, since I am not surprised to see that these two drugs that are new to US cardiologists are taking some time to get traction. I do see a significant amount of risk if the Merlin trial is not enough to convince the FDA that an expansion to treat first-line angina sufferers is in order, but given the lack of other alternative treatments and the lack of efficacy of some treatments for a large number of angina sufferers I'm fairly optimistic.

Ranexa is by no means the kind of blockbuster candidate that VX-950 is for Vertex -- the good performance relative to existing treatments is clear and the drug definitely has a place, but so far we've not seen that it's shockingly good or dramatically better than existing treatments.

So I'm still thinking of taking another nibble at CVTX if the market continues to beat up the shares and build in pessimism about Ranexa's performance ... as I wrote about three weeks ago when most of my biotechs were taking a beating, this might be a solid buying opportunity ... though I've never been able to pluck a falling knife at just the right point.

I'm happy to see that CV has ramped up Aceon to the level that they're finally getting royalty payments, which is a positive sign for the salesforce's presence in cardiologists' offices, and I think the shipments of Ranexa in the second quarter should show some significant improvement as the sales team continues to get some traction -- especially if preliminary results on Merlin continue to trickle in with positive news. Hopefully, the market's pessimism will really set in on Ranexa and bargains will appear ... we're getting close now, but I haven't yet bought more.