Vertex Pharmaceuticals: Cystic Fibrosis Focus, Hepatitis Lead

Despite Vertex (VRTX) having the leading position in the hepatitis C virus (HCV) space, competitive threats from potential new all oral, interferon (IFN)-free combinations means Incivek’s (telaprevir) blockbuster status is likely to be short lived. Hence, investors have moved on to its cystic fibrosis (CF) therapies, particularly Kalydeco (ivacaftor), as it is the primary investment thesis and value driver. Nevertheless, Vertex reaffirmed its 2012 sales guidance for Incivek ($1.1-1.25bn) and entered collaborations with GSK and J&J to test drug combos with VX-135, putting it back in the game for developing a second-generation all-oral anti-HCV regimen.

CF is the main driver for now
Results from four ongoing (three pivotal) trials of Kalydeco monotherapy in four subgroups (R117H mutation, non-G551D gating mutation, children aged 2-5 years and pts with residual CTFR function) could expand use from 4% (G551D) currently to 14% of CF pts. The Kalydeco/VX-809 combo in del508 homozygous pts, could, if positive, add a further 50%. The second-generation corrector (VX-661 and others) plus Kalydeco and/or VX-809, aimed for del508 heterozygous pts, may reach another 25%. We believe Vertex can deliver multi-billion dollar sales from its CF franchise if these trials are positive. The CF business is highly profitable because of easy-to-target patients and small commercialisation infrastructure required.

HCV: New collaborations tested with VX-135
VX-135 (a nucleotide polymerase inhibitor) is the anchor drug in Vertex’s all-oral, IFN-free effort. Four 135 combo studies, one each with telaprevir, ribavirin, GSK 2336805 (a NS5A inhibitor) and J&J’s simeprivir (a protease inhibitor), could yield Phase II data by the end of 2013. The best combo(s) will enter pivotal trials in 2014.

Valuation: Fairly valued for the moment
Vertex saw a 10% share price fall after reporting below-consensus sales for Incivek and Kalydeco in Q3, but the valuation seems reasonable for now – the EV is $9.1bn including convertible shares and stock options. Data on VX-661 Phase II trial (H113), all oral anti-HCV combo (year-end 2013) and VX-809/Kalydeco combo (2014) are the catalysts for any significant re-rating.

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