Vertex Makes Substantial Strides In Diversifying Its Pipeline

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About: Vertex Pharmaceuticals Incorporated (VRTX)
by: Terry Chrisomalis
Summary

Vertex pays $950 million in cash to acquire Semma Therapeutics, with the transaction expected to close in Q4 of 2019.

The acquisition of Semma by Vertex was to acquire SC-islet and device technology with the potential to change the scope of treatments for patients with type 1 diabetes.

The global type 1 diabetes market is expected to be worth $25.52 billion by 2024.

The uniqueness of SC-islets is the ability to detect current glucose levels in the patient and release the right amount of insulin when needed by the body.

Vertex Pharmaceuticals (NASDAQ:VRTX) has been seeing a major strategy shift the last few years and one in which I believe could end up paying off in a big way. Recently, Vertex purchased a biotech by the name of Semma Therapeutics. The reason why it acquired it was to get its hands on a potential game-changing treatment for type 1 diabetes (T1D). This is good news, because it is important that Vertex takes steps to branch away from its mainstay cystic fibrosis (CF) treatments.

Diabetes Product Deal That May End Up Changing The Landscape

Vertex announced that it would pay $950 million in cash to acquire Semma Therapeutics. It did so in order to get its hands on the biotech's technology to be able to possibly change the landscape in the T1D space. Why would Vertex dish out such an enormous amount of cash? It boils down to the type of technology that Semma Therapeutics has. Consider regenerative stem cell technology, coupled with an intriguing delivery technology, to generate insulin for T1D patients. That's right, the technology has a delivery mechanism that protects the stem cells from being degraded by the immune system. As an example, I can point to RNA Interference (RNAi) in which, despite how well it works, it requires a delivery vehicle to reach its intended target unscathed. The bottom line is that Vertex is a solid pharmaceutical company that looks to transform the way diseases are treated. It has done well with changing the landscape for CF, and I believe the latest acquisition of Semma Therapeutics will continue this transformative approach it has sought out to achieve.

Market Opportunity Is Massive, Changing Treatment Paradigm Would Beat Competition

T1D is a chronic disease in which the pancreas produces very little or no insulin. This is bad, because insulin is needed to convert sugar (glucose) from carbohydrates into energy. It even has the function of storing glucose for future use. The problem is that these patients' pancreatic islets, which contain beta cells, are not able to produce the hormone insulin. These beta cells are attacked by the body's own immune system rendering them dysfunctional. This creates a major problem because the body no longer has normal insulin levels. A large market opportunity is up for grabs here. It is estimated that the global type 1 diabetes market is expected to be worth $25.52 billion by 2024. Having said that, current treatment options remain limited in scope. Patients are given exogenous insulin, exogenous meaning given insulin through an injection or pump, whereas endogenous insulin is created by the pancreas itself. There are experimental treatments where pancreas or islet transplants are placed into the patient through surgery. While this method has worked for about 10 years after a patient is treated, there are major drawbacks. The first is that organ tissue donors are limited. That means only a few can achieve this type of treatment. The second problem is the concern about immunosuppression. Once the organ tissue is placed into the body, the patient has to be monitored for and treated for a harsh reaction by the body attacking itself (body rejecting the transplant placed inside). This is all great, but how exactly does Semma's treatment actually fit into all of this? Well, the science is the likely reason why Vertex chose to spend near $1 billion to acquire this transformative type of technology. Semma's stem-cell derived islets (SC-islets) have equivalent functionality to human pancreas cells. What does this mean? In essence, these SC-islets are able to detect current glucose levels in a person's body and in turn release the appropriate amount of insulin when necessary. Think of this method as incorporating an internal gateway or switch in which these cells are capable of keeping insulin levels constantly in the normal range. This is just the first part of this tech. As I highlighted above, a big issue with transplanted pancreatic islet cells is immunosuppression. Well, Semma even has garnered a solution for this issue as well. Its delivery tech allows the SC-islets to be transplanted without the necessity of immunosuppression monitoring. In other words, doctors won't have to worry about the SC-islets being rejected by the body. As you can see, this type of treatment, if successful in human studies, would be a major game-changer in the T1D space. The stem-cell and device combination has the potential to target a very large market opportunity. If proven in late-stage studies, Vertex would have major hold on another indication besides the Cystic Fibrosis space. The bottom line is that there are so many treatments that treat T1D, but nothing that acts like a curative therapy. In my opinion, it would be more ideal to generate a curative treatment that would resolve issues associated with T1D. Such problems patients with this disease go through are:

  • Diabetic macular edema
  • Diabetic retinopathy
  • Diabetic neuropathy
  • Heart attack
  • Stroke

Diabetic retinopathy and macular edema may lead to blindness, diabetic nephropathy may lead to kidney failure, diabetic neuropathy that may lead to loss of sensation or pain and puts patients at risk for unrecognized injuries, and vascular disease may lead to ulcerations, amputations, heart attack, and stroke.

Conclusion

The ability for Vertex to seek and obtain such a transformative type of therapy for T1D is ideal for its goal of curative therapies. Semma Therapeutics is a good match here, because Vertex has the funds necessary to quickly advance this program. I can see this fully, because the ability to get such a transformative type of therapy would be a game-changer in the T1D space. If all goes well, this acquisition is expected to close in Q4 of 2019. The SC-islets and the device used to stop immunosuppression for these patients are highly ideal. The risk is that this is still in the early stages of clinical testing. Semma recently announced positive preclinical proof-of-concept for its treatment in non-human primates and pigs. That means it is important to see if the same type of positive effect can be garnered when human testing has been completed. Based on the promise and early preclinical data, in my opinion, this will change the scope of T1D treatment. The ability to improve quality of life by limiting constant injections for these patients would be highly welcomed.

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