It's not too often that you see a biotech company establish a truly differentiated product portfolio with multi-billion dollar potential and minimal competition, but Vertex (Nasdaq:VRTX) seems to be doing exactly that. This one-time specialist in virology is already well on the way to more than $5 billion in potential revenue, and could ultimately see nearly double that amount if clinical trials go the right way. This may ultimately put the company in the “nice problem to have” category of figuring out how to reinvest the proceeds and determining whether or not further investments in the hepatitis C program are worthwhile. Finally Delivering An Effective Therapy For Cystic FibrosisAlthough cystic fibrosis has long been used as an example of where gene therapy could eventually improve clinical outcomes, it turns out that more conventional chemistry can still play a meaningful role. Between Kalydeco and two clinical CTFR “correctors”, Vertex has made a major step forward in the treatment of a disease that while not as lethal as it once was (at least in the U.S. and EU), is still a very serious and difficult to manage chronic illness. The FDA approved Kalydeco in early 2012 on the basis of Phase III data that included a double-digit (10.6%) improvement in lung function, one of the primary clinical targets of CF drugs. That's the good news. The bad news is that Kalydeco was first tested and approved in patients with the G551D mutation, a group that includes about 2,000 patients or around 5% of the addressable potential market. Even so, with an annual cost of therapy of $250,000, Kalydeco already would hold roughly $500 million potential at full penetration. But there's a lot more to this story than Kalydeco's current approval. First, the company is conducting multiple follow-on Phase III studies of Kalydeco in other genetic variants and one of them (non-G551D) showed an 11% improvement in lung function. This only adds about 1% to the addressable market of Kalydeco, but similar success in R117H patients could more than triple the potential eligible patient group. On its own Kalydeco would be a noteworthy step forward, but additional clinical research has shown that the addition of “correctors” can enhance the activity by 50% to 80%. With that, Vertex has launched combination studies of Kalydeco with VX-661 and VX-809. While Phase II data from these combo studies in patients with the homozygous F508del variant haven't been quite as dramatic (with lung function improvements in the high single digits), a large percentage of patients (roughly two-thirds in some cases) have shown the 5% or greater improvement thought necessary for approval and clinical relevance. Assuming Phase III trials maintain these improvements, another 30,000 or so patients (roughly half of the target population) would have a treatment option. Last and not least, Vertex is also looking to try triple therapy (Kalydeco and two correctors) and/or next-generation correctors as a means of addressing heterozygous F508del patients. Were this to be successful (and I'd consider it to be more of a longshot at this point), another 20,000 patients would come into the mix and Vertex would find itself with a portfolio of drugs that could help as much as 90% of cystic fibrosis patient population in North America and Western Europe. Importantly, there are virtually no other treatment options outside of respiratory therapy, antibiotics, and supportive care. Even Biogen Idec (Nasdaq:BIIB) can't say that about the multiple sclerosis market, and Vertex's opportunity in CF is rarely seen outside of the smaller orphan drug opportunities pursued by companies like Alexion (Nasdaq:ALXN), BioMarin (Nasdaq:BMRN), Shire (Nasdaq:SPHG), and Sanofi's (NYSE:SNY) Genzyme unit. Is Hep C Worth The Trouble?While Vertex has had incredible success in cystic fibrosis (particularly relative to the absence of alternatives), the company's efforts in hepatitis C (HCV) haven't gone as well. While the company signed collaborations for its nucleotide analog inhibitor (“nuc”) VX-135 with Glaxo (NYSE:GSK) (later terminated), Johnson & Johnson (NYSE:JNJ), and Bristol-Myers (NYSE:BMY), a partial hold over liver toxicity concerns has clouded the drug's future. Investors will have multiple data read-outs on VX-135 over the next few months, including combo data with two different NS5A drugs, but Vertex is at least a year (if not two) behind Gilead (Nasdaq:GILD), and Gilead's nuc thus far has a much cleaner safety profile and an attractive efficacy profile. With sales of Incivek, an approved drug for HCV) already tapering off significantly, Vertex may well be facing a significant “stay or go” decision over the next six months with respect to its HCV efforts. The Bottom LineAll told, I believe Vertex's CF program is worth $90 per share today. I calculate that on the basis of approvals and Phase III data already in hand from Kalydeco, promising (but not certain) data in homozygous F508del, and much less certain information about prospects for heterozygous F508del. Should things go well, Vertex could ultimately be looking at a franchise that produces $10 billion in annual revenue. At present, I calculate only a relatively token value ($4 per share) to the company's HCV program and another $1 for the pipeline. A fair value of $95 isn't too bad for a company whose successes in cystic fibrosis have already attracted considerable attention. While there could be some downside risk to upcoming HCV trial data, Vertex still looks like a major biotech that is very much worth considering today. Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

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