Vertex: An Opportunity For Activist Investors

| About: Vertex Pharmaceuticals (VRTX)


Sweat chloride levels, not FEV1 improvement, are the best measure of efficacy for Vertex's cystic fibrosis combination therapy of ivacaftor/lumacaftor.

Improved chloride transport with ivacaftor/lumacaftor is a certainty in delta-F508 homozygotes. FEV1 increases in Phase III studies will most likely be 2.8-3.5%.

Without prodding, the FDA may delay or obstruct approval of ivacaftor/lumacaftor in delta-F508 homozygotes, heterozygotes, or both.

Institutional investors and hedge fund managers who own Vertex stock can improve the value of their holdings through social and political action.

Vertex (NASDAQ:VRTX) is on the cusp of a major breakthrough in the treatment of cystic fibrosis, a systemic disease caused by mutations in a chloride channel known as the cystic fibrosis transmembrane conductance regulator, or CFTR. When the CFTR is mutated, inadequate chloride secretion into various bodily fluids results in sticky, inspissated secretions, leading to damage in the lungs, liver, pancreas, and other organs. Over 1900 different mutations have been described, with each mutation having slightly different biology and prognosis. Very broadly, mutations in the CFTR affect whether the protein is trafficked to the cell membrane properly and how well the CFTR transmits chloride if reaches the cell membrane. Vertex's ivacaftor, approved for G551D mutants whose CFTR channels traffic properly but which transmit chloride poorly, results in complete restoration of normal physiology in G551D mutant channels. However, the G551D mutation is present in only 4% of cystic fibrosis patients. The most common mutation, delta-F508, accounts for 69% of the mutant alleles. 48% of cystic fibrosis patients are delta-F508 homozygotes who have two copies of the delta-F508 mutant CFTR, and 43% of cystic fibrosis patients are delta-F508 heterozygotes who have only one copy of the delta-F508 mutation.

The lives of patients with delta-F508 mutations are short and brutal. Even with maximal conventional therapy, by adolescence, most of these children will be making frequent trips to the hospital during life-threatening cystic fibrosis "exacerbations" usually precipitated by superinfection of their damaged lungs. Their growth is stunted due to pancreatic insufficiency and the massive metabolic burden of difficult breathing. Many develop cirrhosis due to obstruction of the bile ducts. Liver, lung, and pancreas transplants can sometimes purchase a little time, but usually, these children die of asphyxiation, pneumonia, bleeding, liver failure, heart failure, or hospital mishaps in the 3rd decade. It is a horrible death, with years of torture before the terminal event.

This article discusses expectations for the Vertex's Phase III clinical trials about to report, and how investors can defeat the negative forces at the FDA through direct democratic action. Readers who wish for a more in-depth discussion of Vertex valuation models should refer to the superb article by Small Pharma Analyst. I provide a discussion of cystic fibrosis epidemiology, drug adoption rates in cystic fibrosis, and prospective pricing here. A commentary of secondary value can be found here. The research note on Vertex by Terence Flynn and colleagues at Goldman Sachs dated 5/2/14 contains a fair amount of useful information, although it is noncommittal (TRAFFIC and TRANSPORT success probability estimated at 50%) and completely wrong in some important details.

Expectations for TRAFFIC and TRANSPORT

Vertex's pivotal Phase III trials on ivacaftor/lumacaftor combination therapy in delta-F508 homozygotes have already concluded, and are in the data analysis phase. Vertex expects topline results "in mid-2014" (page 7 of this presentation). The company is currently seeking FDA approval in delta-F508 homozygotes only, who amount to roughly 28,000 patients.

The primary endpoint of the trials (TRAFFIC, TRANSPORT) is increase in FEV1, a measure of lung function. Secondary endpoints include weight gain, quality of life, and frequency of cystic fibrosis exacerbations. By analyzing all available clinical trial results involving CFTR potentiators and correctors, I generated a family of models for the expected FEV1 improvement in TRAFFIC and TRANSPORT. Based on these models, possible FEV1 absolute improvement could range from 2.3%-3.5%. With the longer duration of TRAFFIC and TRANSPORT compared to prior studies and a consistently observed nonlinear response curve, I expect that FEV1 improvement will fall in the higher end of the range, somewhere between 2.8% and 3.5%. (I will not be able to release the details of my model construction to the public.)

TRAFFIC and TRANSPORT have a 90% power for detecting an improvement in FEV1 of 3%. I stand by my previous prediction that there is a roughly 90% likelihood that TRAFFIC and TRANSPORT will have statistically significant FEV1 improvements: that is the statistical power of the trials at an FEV1 improvement that is indistinguishable from the predicted value. It's no accident that these numbers coincide - I suspect that my calculations approximately replicate Vertex's internal estimates used to plan the trials. Based on public information, it is not currently possible to predict how ivacaftor/lumacaftor combination therapy will impact weight gain, rate of CF exacerbations, or measured quality of life improvements with any degree of quantitative accuracy.

An FEV1 improvement of 3% is highly clinically significant. In cystic fibrosis patients, FEV1 declines by about 1% per year. Moreover, the absolute change in FEV1 during the trial significantly underestimates the benefit patients receive, because the real value of ivacaftor/lumacaftor therapy is that the combination will slow the progression of disease; pre-existing damage to the lungs, liver, and pancreas cannot be reversed. Physiologic measurements may improve, but lung alveoli that have been destroyed and replaced by bronchiectasis and abscess cavities will not regrow in patients older than about 7 years. The liver has regenerative capacity, but intrahepatic biliary strictures and fibrosis are unlikely to reverse. Pancreatic islets and exocrine tissue do not regenerate, and are lost forever. Some reversal of organ dysfunction after ivacaftor/lumacaftor therapy could be attributed to better function of existing cells as secretions become less tenacious, but the dead/destroyed portions of the organs are gone forever. Modest FEV1 improvements will translate into a significantly longer and better life for cystic fibrosis patients.

It is possible that FEV1 changes will not achieve statistical significance. FEV1 measurements are notoriously noisy. Sweat chloride is a better measure of physiologic response to therapy than FEV1, and based on Vertex's most recent discussion of VX-661, it appears that the company will be pushing sweat chloride levels as a primary endpoint in the future. FEV1 is dependent on a large number of factors: patient motivation, pre-existing lung damage, nutritional status (often impaired in cystic fibrosis patients), muscle reserve, oxygenation status, recent infections and/or cystic fibrosis exacerbations, character of lung secretions (modified by medications such as DNase and n-acetylcysteine) at the moment of the exam, and patient size, age, and thoracic shape. On the other hand, sweat chloride levels are affected by the amount of CFTR trafficked to the membrane and the frequency of chloride pore opening. When patients have little to no CFTR activity, sweat chloride levels are around 95-100 mM, equivalent to serum chloride levels. In a rare G551D homozygote, treatment with ivacaftor decreased sweat chloride levels to normal levels of 15-20 mM. However, because of pre-existing underlying lung damage, her FEV1 values improved but never normalized. (Publicly available source and wonderful short read found here).

FDA: The Black Knight

Unfortunately, the FDA is not on the side of patients. It is not physically possible to run randomized double-blind, placebo-controlled trials for all 1900+ mutations in cystic fibrosis. There simply are not enough patients with all of the rare mutations to support statistically meaningful clinical trials. Incredibly, the FDA has adopted a stance of requiring mutation-by-mutation approvals, instead of giving blanket approval to all rare mutations of a known class. For example:

Based on data from four patients with the G970R mutation enrolled in the study, the efficacy of KALYDECO in patients with the G970R mutation could not be established to support approval in the U.S. Vertex estimates that approximately 10 people with CF have the G970R mutation worldwide, including two people in the United States.

For a study this small (10 people worldwide and a clinical trial including 4 of them), the numbers are meaningless. The right thing to do is to offer Vertex's therapies to all of these patients, and allow them and their doctors assess the risks and potential benefits individually. The CFTR potentiators and corrects are quite safe; the main hazard is to the wallet.

There is a risk that the FDA will demand a higher level of proof of efficacy than any FEV1 improvement that meets p < 0.05. The FDA could insist on a reduction in CF exacerbations; it could require a minimum FEV1 improvement; or it could make some other arbitrary demand. If the sweat chloride decreases by any statistically significant amount, that alone is an indication of physiologic improvement.

The FDA will not extend approval to delta-F508 heterozygotes on the basis of the TRAFFIC and TRANSPORT trials, even if statistically significant improvements are identified in multiple measures for the delta-F508 homozygotes. While I can rationalize restriction of approval to delta-F508 homozygotes on a bureaucratic basis, it makes no sense from a physiologic basis. Patients care about whether their physiology is improved. If ivacaftor/lumacaftor improves chloride transport in patients where 100% of the CFTR proteins are delta-F508, then the combination will also improve chloride transport in patients where 50% of the CFTR proteins have the delta-F508 mutation. It may not be possible to run a trial with a large enough sample size to measure the FEV1 improvement in delta-F508 heterozygotes, but only a heartless, childless FDA official would believe that no effect would be present. If our objective is to minimize organ damage in delta-F508 heterozygotes until third- and fourth-generation therapies arrive, the right thing to do for children would be to approve ivacaftor/lumacaftor combination therapy for delta-F508 homozygotes and heterozygotes on the basis of measured chloride conductance alone.

Activists: Battle Plan Against the FDA

Activist investing is not just for the supremely wealthy and powerful. It is also for ordinary investors who bend the levers of democratic power to increase the value of their investments while simultaneously doing right by children. Activist investors of Seeking Alpha, I call on you to ally with cystic fibrosis parents, bring these life-changing medications to the children who desperately need them, and engage the White House, your Congressional representatives, and your peers. Through direct action, children will live longer. Maybe the value of your investment in Vertex will appreciate as well. The power of Seeking Alpha is incredible: I estimate that 10-15% of America's investable net worth considers Seeking Alpha in its decisions.

The Duchenne muscular dystrophy community lobbied the White House via petition for Accelerated Approval of eteplirsen, attaining 106,000 signatures, mandating a response. Lobbying the White House for Accelerated Approval of ivacaftor/lumacaftor in delta-F508 heterozygotes, as well as homozygotes would be the best, most humane option for children. Accelerated Approval would enable approval of these drugs for the full population on the basis of surrogate endpoints, which in this case, would be sweat chloride levels, chloride channel activity in human bronchial epithelial cell culture, or nasal chloride potentials. Subsequent confirmatory studies would be necessary, but in the meantime, the fundamental pathophysiology would be improved.

I have generated a White House petition to advance the cause of VX-809 and VX-661:


Urge the FDA to grant Accelerated Approval to critical new treatments for cystic fibrosis.

70,000 children and young adults suffer from cystic fibrosis, an invariably fatal genetic disease. Every day that passes while they have no treatment results in permanent damage to the lungs, liver, pancreas, and other organs.

The FDA should offer Accelerated Approval for Lumacaftor and VX-661 in cystic fibrosis children with one or two copies of the delta-F508 mutation so that damage to their organs can be minimized while confirmatory trials are ongoing. These drugs are known to be effective in reversing the genetic defect and have been safely used in multiple clinical trials.

Our children are permanently injured by every day of delay. They cannot wait.

Investors who believe in Vertex, primarily for the sake of children with cystic fibrosis, but also for the sake of their investments, should consider the following action list:

  • Sign the White House petition.
  • Retweet, email, and Facebook this article and/or the petition to drive more petition signatures.
  • Contact all of your elected representatives.
  • Contact Margaret A. Hamburg, Commissioner of the FDA.
  • Target your philanthropic activities for the year appropriately.
  • If you are a major hedge fund or institutional investor in Vertex, take your case public. No need to leave the glory to Whitney Tilson, Bill Ackman, and Carl Icahn. With institutional ownership of Vertex at 96%, we know that influential potential shareholder activists have significant stakes in Vertex.


Analysis of all available clinical data generates models that predict an FEV1 improvement possibly as low as +2.3%, but more likely 2.8%-3.5%. Values in this range support a likelihood of statistical significance in TRAFFIC and TRANSPORT to be around 90%. The FDA has been criminally slow in helping Vertex's drugs advance. Activist shareholders and cystic fibrosis parents can and should take matters into their own hands, just as the breast cancer movement has advanced funding at the NIH, and the Duchenne muscular dystrophy community has pressured the FDA to support eteplirsen. An investment in Vertex demands more than just a brokerage account.

Disclosure: I am long VRTX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: If you find any material errors, please have the kindness to call them to my attention. Rely on your own due diligence for all of your investment decisions.

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