Vertex Pharaceuticals' Deal with J&J Makes Good Sense (VRTX)

Includes: JNJ, SGP, VRTX
by: Travis Johnson

I've held Vertex Pharmaceuticals (NASDAQ:VRTX) for more than a year now, and after sellling about a third of my position in the beginning of the year to recoup my entire initial investment I'm enjoying watching the shares recover nicely now -- there's nothing quite like playing with the house's money.

VRTX has had its huge 200%+ run in the past year or so because of the shockingly good results of early stage trials for its VX-950, a protease inhibitor for Hepatitis C that appears to have the most promise among the new crop of HCV drugs that are fighting for approval right now.

Hepatitis C is a global problem without a good drug treatment, and the market is potentially $10 billion in the US alone -- even the lowest estimates are for at least $2 billion in sales of any effective new HCV treatment, but those low estimates probably don't adequately take into account the huge numbers of people who don't currently seek treatment because of the ineffectiveness and unpleasantness of current treatment options.

VX-950 so far looks like it can just about completely eradicate the virus in a very short treatment cycle. 12 weeks is the most recent test they've run and all accounts were that it was quite effective.

But given the very cautious nature of the FDA, Vertex has also significantly expanded its Phase II testing and will be testing more people and taking more time to establish a stronger safety profile before entering Phase III.

Every clinical trial adds significant expense, and even for a relatively big "small biotech" like Vertex that's in good financial shape, the risk increases. That's why I like the news that I heard on Friday.

Vertex has essentially sold global non-North American rights to Johnson and Johnson (NYSE:JNJ) for VX-950, and in exchange they've gotten a big upfront payment and promises of significant milestone payments and royalties as the drug moves forward, as well as help with the development of the drug. VRTX retains exclusive North American rights.

By doing this Vertex gets two things: They get money, which will help them to advance the trials as quickly as possible and keep up with Schering Plough's (SGP) HCV protease inhibitor that's also in Phase II; and they get the expertise of a huge pharmaceutical company to help them advance the trials globally and continue the clinical research. And all without giving up the crown jewel of drug markets, the US.

Still no guarantees, of course, and it's certainly possible that this or their other high profile drug, VX-702 for rheumatoid arthritis, will have a surprising failure and make the stock crater (that's why I sold a portion a while back -- back around $40 the stock seemed priced for way too much optimism). It looks good, though, and the fact that Johnson and Johnson is willing to put nearly a half billion dollars into VX-950 is a huge endorsement.

VRTX 1-yr chart: