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Bull of the Day: Vertex Pharmaceuticals (VRTX)

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Vertex Pharmaceuticals (VRTX - Free Report) is the $52 billion hero of tens of thousands of families facing the cruel childhood disease of cystic fibrosis.

Cystic fibrosis (CF) is an inherited disorder of the body's mucus glands that causes severe damage to the lungs, digestive system and other organs in the body. CF affects the cells that produce mucus, sweat and digestive juices.

These secreted fluids are normally thin and slippery, but CF causes these fluids to become thick and sticky. They then plug up tubes, ducts, and passageways, often causing repeated lung infections.

CF is a chronic, progressive, and frequently fatal genetic diseased caused when a child has inherited two copies of the defective CF gene, one copy from each parent. Both parents must have at least one copy of the defective gene. People with only one copy of the defective CF gene are called carriers, but they do not have the disease.

Diving Deeper to Understand the Genetic Roots

Before we learn more about Vertex and its treatments, I want to share more interesting background on the science surrounding CF.

I became more interested in the disease when I read about the work of scientists in Carl Zimmer's 2008 book Microcosm. Zimmer told the story of research into the capability of animal bodies to be their own natural pharmacy by creating antimicrobial peptides, which are part of the innate immune system including skin and the linings of our respiratory and digestive systems.

During the COVID-19 pandemic, we are all learning about the acquired, or adaptive, immune system as vaccines can teach our body's interior and circulatory cells to fight viral infection. But we take for granted the front-lines of defense in our respiratory and digestive linings, whose soldiers include mucus-generating cells to protect us with natural barriers that can trap bacteria and viruses.

CF patients can never take their innate immune system barriers for granted. In Zimmer's book, he hypothesized at the time that CF may be due in part to mutations that disable genes for antimicrobial peptides produced in the lungs. But what actually causes the lungs to become loaded with bacteria and swell with fluid?

Scientists now know that CF is caused by many possible mutations of the cystic fibrosis transmembrane conductance regulator (CFTR) gene. There are around 2,000 identified mutations in the gene, and 127 of these are currently known to cause CF.

If the CFTR gene has a defect, it can create CFTR proteins within cells that don’t open correctly or don’t get to the cell surface, where they are normally positioned, to let chloride ions flow freely into or out of the cells as they should. This leads to an imbalance of salt and water and this causes the thick, sticky mucus in the lungs.

You can think of the CFTR protein as a channel on the surface of a mucus cell that allows chloride ions to flow in and out. Scientists believe that gateways on either end of the protein channel don't open properly or stay open long enough to effectively let chloride ions have passage.

CF lung disease eventually worsens to the point where the person is disabled. Today, the average life span for people with CF who live to adulthood is about 44 years. Death is most often caused by lung complications and many can die in their 20s.

Vertex Leads with CF Treatment

While there is no cure yet for this genetic disease, Vertex has several drug treatments approved by the FDA for daily use that help the CFTR protein gates and channels to stay open longer and allow the passage of chloride ions. Since there are multiple CFTR mutations that cause CF, the company has developed a unique arsenal of treatments for a handful of them across different ages of patients and disease progression.

In 2012, Vertex gained FDA approval of the first drug, Kalydeco, to treat the underlying cause of cystic fibrosis rather than the symptoms, in patients 6 years or older who have the G551D gene mutation. Since then, the scientific innovation has been powerful for CF patients and their families.

The company’s lead marketed products are Trikafta, Symdeko/Symkevi, Orkambi and Kalydeco, which are collectively approved to treat around half of the 83,000 people with CF in North America, Europe and Australia. Trikafta, Vertex’s triple combination regimen, was approved by the FDA in October 2019 for the treatment of CF in people aged 12 years and older who have at least one F508del mutation.

Kaftrio (brand name of Trikafta in EU) was approved in the European Union in August 2020. Trikafta is also being evaluated in younger patients in the United States. With approval of Trikafta/Kaftrio, Vertex can address a significantly larger CF patient population -- almost 90% of patients with CF -- in the future.

While CF remains the main area of focus, Vertex is also developing treatments for sickle cell disease and beta-thalassemia with its partner CRISPR Therapeutics (CRSP - Free Report) .

Vertex is projected to grow revenues this year to $7.25 billion, representing a 17% advance. And next year's consensus among analysts is nearly $8 billion for a 10% rise.

After its July 29 quarterly report where the company offered an improved outlook for sales and profits, analysts have raised EPS estimates significantly, thus making Vertex a Zacks #1 Rank. In just the past week, this year's EPS consensus rose 9.5% $12.28, representing 19% profit growth.

Second Quarter Details

Vertex reported Q2 adjusted diluted EPS of $3.11, up from $2.61 a year ago, beating the Zacks consensus of $2.69 by 15.6%.

Revenues of $1.79 billion grew 17.8% from the year-ago quarter and also surpassed the Zacks Consensus Estimate of $1.71 billions, primarily driven by the rapid uptake of Trikafta in Europe (marketed as Kaftrio) and continued growth in the United States. Product revenues rose 4% year over year to $1.26 billion in the United States and surged 71% to $536 million outside the country.

The biopharmaceutical firm raised its full-year 2021 product revenue guidance to a range of $7.2 billion to $7.4 billion from $6.7 billion to $6.9 billion, versus the Street view of $6.99 billion.

CF Franchise Sales Performance

Vertex’s newest drug, Trikafta, a triple combination therapy, generated sales worth $1.26 billion, up 36.8% year over year, driven by high level of treatment penetration in the United States as well as strong launches in international markets.

In June 2021, the FDA approved Trikafta to treat CF in children aged six to 11 years who have at least one F508del mutation in the CFTR gene or a mutation in the CFTR gene that is responsive based on in vitro data.

Kaftrio was approved in Europe in August 2020. Following the nod, the drug saw substantial uptake across all European countries. The company has now secured reimbursement agreements in more than 15 countries, most importantly the large markets of Germany and the United Kingdom.

Symdeko/Symkevi registered sales of $134 million in the quarter, down 22.1% year over year.

Kalydeco recorded sales of $183 million in the quarter, reflecting a 9.8% decrease year over year. Orkambi generated sales of $221 million in the reported quarter, down 4.7%. Sales of Kalydeco, Symdeko/Symkevi and Orkambi were hurt by patients switching to Trikafta.

Analyst Reactions and Price Targets

Oppenheimer: After reviewing the company pipeline update and outlook, the analyst team noted that Vertex continues to demonstrate persistent strength in its CF business with high-teens growth in sales and earnings. They also admired the company's indicated timeline for phase 3 initiation of a follow-up triplet CF medication to Trikafta, that should occur in the second half of 2021. They believe that if the new combo has a better profile (safety and efficacy) than Trikafta, it could push CF competition into the next decade. Further, the company also plans pipeline updates to APOL-1 kidney disease in 2H21 and a host of catalysts in 2022. The Oppenheimer team said "We stay bullish" and they reiterated their $305 price target on the stock.

Piper Sandler: Analyst Edward Tenthoff raised the firm's price target on Vertex Pharmaceuticals to $323 from $261 and reiterated an Overweight rating on the shares. Tenthoff noted that "Trikafta beats again" in Q2 and the company maintained raised guidance. He's looking forward to multiple data readouts from the Vertex pipeline. Worth noting is that Tenthoff was the big bull on Moderna (MRNA - Free Report) for the past year and defeating all nay-sayers, the stock has launched from $200 to $400 in the past six weeks. While we made some good trades in MRNA, I sure wish I would have listened to Ed a little closer about the potential. He's a veteran biotech analyst who has followed and met with many complex companies over the years and I highly respect his research.

SVB Leerink: This respected lifesciences research firm remains bearish on VRTX, with an Underperform rating and $175 PT. They are concerned that the CF franchise will plateau soon and that promising new medicines from the pipeline may be further distant. The most important pipeline events are likely to be the proof-of-concept (POC) results in APOL-1-mediated kidney disease (2H21) and POC results in acute pain (early 2022). The Leerink team writes "We continue to believe that Vertex’s large CF franchise and substantial market cap will require more shots on goal than the current pipeline offers, and with substantial capital reserves, we expect increasing business development activity from the company to broaden the clinical development portfolio."

As I've learned more about Vertex and how they took on a disease, CF -- that few thought they could treat -- I am excited to be a shareholder at these levels for what might unfold if their scientists can create another winning family of treatments. The next 6-12 months could give you better opportunities to buy the stock under $200, but I see the reward-to-risk as skewed heavily in favor of the upside by a factor of 4-to-1.

Disclosure: I own shares of VRTX and CRSP for the Zacks Healthcare Innovators portfolio.

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