Will Kalydeco Push Vertex Higher?

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Vertex Pharmaceuticals (NASDAQ: VRTX) announced that Health Canada has approved Kalydeco (ivacaftor), the first medicine to treat the underlying cause of cystic fibrosis (CF), for people ages 6 and older who have at least one copy of the G551D mutation in the cystic fibrosis transmembrane conductance regulator (CFTR) gene. Cystic fibrosis is a rare genetic disease for which there is no cure and is caused by a defective or missing CFTR protein resulting from mutations in the CFTR gene. The most common serious adverse events included abdominal pain, increased liver enzymes, and low blood sugar that occurred in less than 1 percent of patients. It is a rare, life-shortening genetic disease which affects approximately 70,000 people worldwide, including 30,000 people in the United States, 35,000 in Europe, 4,000 in Canada and nearly 3,000 in Australia. Today, the median predicted age of survival for a person with CF is approximately 37 years in the United States.

For the third quarter, Vertex reported total revenues of approximately $336 million including net product revenues of approximately $254 million from Incivek (telaprevir) and approximately $49 million from Kalydeco (ivacaftor). Royalty revenues related to the sale of Incivo in Europe by its collaborator were approximately $20 million in the third quarter. Total revenues for the same quarter of the preceding year were $659.2 million which included one-time milestone revenue of $200 million from Janssen. The company reported a GAAP net loss of approximately $50 million, or $(0.27) per share, and non-GAAP net income of approximately $28 million, or $0.13 per diluted share. Cash and cash equivalents stood at $1.3 billion as of September 30.

The ongoing global launch of Kalydeco continues. The treatment is now approved in the U.S. and in all 27 EU countries for people with cystic fibrosis ages 6 and older who have at least one copy of the G551D mutation in the cystic fibrosis transmembrane conductance regulator (CFTR) gene. There are three phase 3 label expansion trials and one phase 2 proof-of-concept study underway for ivacaftor monotherapy. The company also announced that Vertex announced earlier today that it has entered into two separate, non-exclusive agreements with GlaxoSmithKline (GSK) and Janssen Pharmaceuticals (a division of Johnson & Johnson (JNJ) to evaluate multiple all-oral treatment regimens for people with genotype 1 hepatitis C.

Meanwhile, Vertex has been reiterated by TheStreet Ratings as a hold. The company's strengths are noticeable in many areas such as its financial position with reasonable debt levels and notable return on equity. However, there are also weaknesses such as unimpressive growth in net income and weak growth in the company's earnings per share.

The Food and Drug Administration approved Incivek in May 2011, making it one of the first new hepatitis C drugs to reach the market in a long time and many people expected annual sales of the pill to be in the billions of dollars. However revenue has not really taken off and is actually declining partly because research into hepatitis C drugs has moved forward so quickly that patients are waiting for newer products before they begin treatment.

Incivek is approved in combination with two standard drugs: ribavirin, which is a pill, and Interferon, which is given by injection. Several companies are studying hepatitis C regimens that don't include Interferon because it has side effects. The company is maintaining its guidance of around $1.2 billion in sales for 2012 but it is clear that this is not going to be a major growth driver. While the major long-term outlook for Vertex centers on CF treatments, that is going to be pressure on earnings in the short run. I would recommend that you wait and watch developments before buying.

Gilead Sciences (NASDAQ: GILD) released overwhelmingly positive results for an experimental hepatitis C drug that analysts say could be a best-in-class treatment. Over the weekend Gilead presented results from its combination of sofosbuvir and daclatasvir that cured between 98 and 100 percent of patients within 12 weeks. Over 3 million people in the United States have hepatitis C, a blood-borne disease linked to 12,000 U.S. deaths a year and traditional two-drug treatment for the virus cures only about 40 percent of people but unpleasant side effects Analyst said Gilead's single-pill treatment could be a game changer for patients and doctors alike. Most important, Gilead's treatment would not include ribavirin, an antiviral used in combination with current treatments. This will reduce the toxicity and offer a true once a day treatment.

Gilead Sciences' stock price has almost doubled in the last 52 weeks and the company has been successful in receiving FDA approval for Quad and Truvada (for HIV prevention), and is now focusing on the Sofobuvir cocktail for Hepatitis C treatment. Sofobuvir is expected to garner peak sales of almost $4 billion which makes Gilead a major growth story. At a price/earnings ratio of around 17 times, I believe that the stock is significantly undervalued and have no hesitation in recommending a buy

Deutsche Bank just gave Idenix (IDIX) a big buy recommendation, projecting a stock price of $7 per share when the share is currently trading at just over $5. Its drug IDX-184 is still in development and has been on clinical hold because of its similarities with a drug from Bristol-Myers Squibb (BMY) that had extremely poor results. However it's aimed at the hottest area in health care right now which is the treatment of hepatitis-C and Deutsche Bank obviously believes that it is significantly different from Bristol-Myers Squibb's drug. I wonder, however, if a small company with limited resources can compete with the likes of both Abbott Labs (ABT) and Gilead. I would recommend watching the stock but I believe that no investment should yet be made in the absence of other positive indicators.

Achillion (NASDAQ: ACHN) is another development stage biotech company that focuses on treating HCV by targeting NS5A and NS3 drug targets. It has multiple candidates in its HCV pipeline: sovaprevir (formerly ACH-1625), which is a NS3 protease inhibitor; ACH-2684, which is a pan-genotypic NS3 protease inhibitor; as well as ACH2928 and ACH3102, which are NS5A protein inhibitors. Sovaprevir is the company's lead candidate with a potential for once daily dosing and is equipotent against HCV genotypes. This small biotech has as many as four HCV candidates in the pipeline, two of which are being evaluated in phase 2 studies.

Achillion ended the third quarter with cash, cash equivalents, and marketable securities of approximately $90.6 million and is in the position to fund the ongoing development. However, with the presence of the big boys, I would not recommend an investment at this point in time. However, you should watch the stock because the unusually rich HCV pipeline could provide plenty of future catalysts for share price increases. I also believe that the company could be a prime takeover target.


jordobivona has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Gilead Sciences and Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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