2023-08-31 09:43:19 ET
Summary
- Vertex Pharmaceuticals has performed well since my previous update due to the continued strength of the commercial cystic fibrosis business.
- The focus will soon shift to late-stage pipeline assets, primarily gene editing candidate exa-cel and pain candidate VX-548.
- There are regulatory and commercial risks associated with exa-cel, and I have concerns about VX-548 considering the phase 2 data.
- Risk-reward looks balanced in the near term.
Vertex Pharmaceuticals ( VRTX ) has performed well since my previous update , considering the circumstances. The stock rose 10% while most of its biotech peers performed poorly, largely thanks to the continued outperformance of the company's cystic fibrosis ('CF') business. What I wrote in my previous article still stands - that further value creation needs to come outside of its CF business as we are fast approaching a period of low growth due to the fact that most CF patients in major geographies are already taking Vertex drugs.
The focus should soon turn to some of the late-stage pipeline assets, primarily exa-cel and VX-548, with regulatory decisions and phase 3 data, respectively, expected in the following quarters.
Regulatory and commercial risks for exa-cel not reflected in the current valuation
Exa-cel is Vertex's and CRISPR Therapeutics' ( CRSP ) gene editing candidate for the treatment of patients with sickle cell disease ('SCD') and transfusion-dependent beta-thalassemia ('TDT'). The PDUFA date for the SCD application is December 8 as the FDA has granted Priority Review for this indication while the review for TDT is standard and the PDUFA date is March 30, 2024.
As I covered previously, the results exa-cel generated in both patient populations are outstanding. The vast majority of patients remain transfusion-free, and the durability of response is so far holding up as data continue to mature. I am maintaining my view that exa-cel could be a $3 billion+ a year product and one of the more successful gene editing products this decade, if not the most successful.
Even so, at current levels, I believe more can go wrong than right, and I do not expect Vertex to receive significant additional investor appreciation until the regulatory and early commercial roadblocks are cleared. The FDA may have concerns about some parts of the preclinical or clinical data package which may be revealed at the Advisory Committee meeting, and there could be manufacturing and related technical or bureaucratic issues that may need to be resolved before approval can be granted to exa-cel.
The regulatory milestones in the two indications are by no means make-or-break moments for Vertex as a company, but any kind of setbacks or delays are likely to have a negative impact on the share price and I believe the upside potential is limited until we see evidence of strong commercial uptake because of the very modest results of all approved gene therapy products - the only notable exception is Zolgensma, which is a $1 billion+ a year product for Novartis ( NVS ).
VX-548 - Mixed phase 2 data provide little confidence ahead of the phase 3 readout in the fourth quarter
Management continues to sound bullish about VX-548, but my view is still very cautious. Phase 2 results were either mixed or unimpressive, and my concerns are both about the success in the phase 3 trial, which I think is a coin toss (50% probability of success) and commercial.
Specifically, in the phase 2 trial , only the high dose produced a statistically significant effect on the primary endpoint (SPID48 difference to placebo), the mid-and the low doses were worse than the active control arm (hydrocodone bitartrate/acetaminophen) in the bunionectomy trial and the mid-dose was worse than the placebo. The abdominoplasty trial data look better, but only the high dose reached statistical significance versus the placebo.
Safety was not that clean either, and the high dose produced relatively high rates of nausea (36% vs. 30% and 18% for the mid and low doses) and dizziness (18% vs. 11% and 8%).
On the commercial side, this is a product that will require significant investment and market/awareness building and while there is certainly an unmet need in the post-operative pain space, there are many options for patients that may offer similar or better benefits to what VX-548 delivered in the phase 2 trial.
I also believe that the potential of VX-548 is higher in diabetic peripheral neuropathy than post-operative pain, and if positive, the upcoming phase 2 results in late Q4 or early Q1 2024 could improve the long-term prospects for this candidate.
I am not sure whether my view is the prevailing one, but if that is the case, there is, perhaps, limited risk and a greater reward for the stock if VX-548 delivers robust phase 3 results in post-operative pain and positive phase 2 results in diabetic peripheral neuropathy.
Other considerations
We should see the phase 3 results of the new triple CF combo in the first quarter of 2024. Better results than Trikafta could drive the stock somewhat higher due to the lower royalty burden of this combo compared to Trikafta, but also due to this combo raising the bar for competitors. The CF business already has very high penetration rates in major markets, and it is unlikely that the new combo will increase total revenues for Vertex.
The results of the type 1 diabetes candidate VX-880 continue to look good but with the caveat of only a few patients being treated. There is a long road ahead for this program, but I like what the company is doing here and the multiple shots on goal it has, starting with the initial VX-880 program with edited cells plus immunosuppression, and followed by the same cells being encapsulated into a device designed to eliminate the need for immunosuppression and the final third program with edited hypoimmune cells that would eliminate the need for immunosuppressive drugs or the device in the second program.
Inaxaplin (previously VX-147) generated strong phase 2 data in FSGS patients, but it is still a long way from reaching the market. I have been following the rare disease renal space for quite some time, and it is hard for me to be bullish about inaxaplin, given the very limited commercial uptake of rare disease renal drugs to date in diseases that are very similar to what inaxaplin is being developed for, such as IgA nephropathy or lupus nephritis.
Finally, VX-864 remains in development for patients with alpha-1 antitrypsin deficiency, but previous data and failures make it hard to be bullish until proven otherwise. Phase 2 results are expected next year, and Vertex has already pushed a follow-on compound with better properties into a phase 1 trial.
Overall, Vertex's pipeline is very thin for a nearly $100 billion market cap company, and management has been very shy at putting the growing cash balance to work. Business development is easier said than done, so, I am not holding that against them at the moment, but there has been an apparent lack of risk appetite for several years now which makes M&A a less likely upside driver for Vertex in the next 2-3 years as even if the company makes a mid-sized or large acquisition, it usually takes time to see the results of such efforts.
Conclusion
My fair value range for Vertex goes up from $321-$353 to $332-$363, primarily as a result of the passage of time, and a higher cash balance, offset by a slight downward adjustment to the net sales estimate range for the CF franchise for 2024 from $11-$11.5 billion to $10.8-$11.2 billion.
Author's estimates
Vertex is now trading near the high end of the updated range and further upside will need to be driven by the outperformance of the CF business (less likely), approval and successful launch of exa-cel (possible but not as much upside), and considerable pipeline progress in the following quarters either internally or through business development. I have not included other pipeline projects in the valuation range and would need to see convincing data to give them credit.
I remain bullish on Vertex's long-term growth prospects, but believe the near- and medium-term risk-reward is not as great, and am currently neutral on the stock.
For further details see:
Vertex Pharmaceuticals: Critical Period For The Pipeline Is Approaching