Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX): Get In While Markets Look The Other Way


Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) just picked up FDA approval for its supplemental new drug application (sNDA) for ORKAMBI. The company hasn’t really moved much from a market valuation perspective in response to the news, suggesting investors haven’t really grasped the implications of such an approval on Vertex’s potential in the space. Sentiment shifted to the downside recently, based on a report out of Vertex pointing towards a slow down in initially-hoped-for sales of the product this quarter, and it looks as though this sentiment shift has had some degree of rollover into the response to the latest announcement. Don’t expect this rollover to carry on indefinitely, however. We expect Vertex to pick up as markets digest the latest approval, and in turn, that sentiment will shift again.

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So, with this in mind, and ahead of any alternative response, here is a look at the drug in question, and a discussion of what the expansion means from a quantitative perspective going forward.

As mentioned, the drug is called ORKAMBI, and the FDA initially approved it back in July last year. The initial approval was for patients aged 12 and over who suffered from cystic fibrosis (CF) and who have what’s called the F508del mutation. This latter mentioned mutation, and specifically the phenomenon of having two copies of this mutation, is the leading cause of CF in all demographics.

Last year, Vertex generated $350 million in revenues from the drug, and heading into this year, the company put forward expectations of ORKAMBI reaching blockbuster status, with a target of between $1 billion and $1.1 billion for full year 2016.

This has now been revised down to between $950 million and $90 million for the full year this year; a revision that the company believes is rooted in something called patient compliance – that is, patients maintaining a two pill a day dosing regimen across a three-month period (or more accurately, not doing so).

So what does the latest approval mean for these numbers? Well, for full year 2016 guidance, it probably does not mean that much. Vertex will have published these numbers based on expectations of the approval (or alternatively, had two sets of numbers ready and released the one that fell in line with the FDA’s decision) and so we’re probably looking at the pre-stated figures this year, despite a boost during the fourth quarter based on the expanded patient population.

Early next year, however, is where we should start to really see the difference.

Adoption has not been as fast as the company would have liked, and chances are we will see a similar slow-off-the-mark situation with the pediatric administration. As such, the additional population isn’t really going to take effect before the end of first quarter, and we are not going to get anything related to this specifically until first-quarter results come out at some point heading towards the middle of next year. However, when this period does come around, we expect to see a large shift in prescriptions. The label expansion adds around 2,500 individuals (potential patients) to the company’s target market, which works out at around 10% additional prescriptions annually given current administration rates.  Assuming price points don’t change that much between the young pediatric and elderly pediatric/adult populations, which we don’t expect they will, this should add another circa $100 million onto potential full-year revenues at current rates.

There is, of course, another factor to be considered. Vertex has a third in its pipeline that could replace ORKAMBI and a large portion of its second drug, Kalydeco, if the FDA approves it. The drug in question is called VX-661, and trials to date seem to suggest it addresses one of the leading causes of the above-mentioned patient nonconformity, chest tightness.

This is all speculation at the moment, before the drug is submitted to the agency (second half next year, expected), we won’t have any concrete idea of its chances come PDUFA.

For now, we think the added impact of the 6-11-year-old administration target population is more than enough to warrant a high single digit percentage point gain in Vertex’s market capitalization, and while markets digest the information that just got released, we think there’s an opportunity for a discount entry ahead of this gain.

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