Vertex: Breakthough in Cystic Fibrosis?

08/01/2014 8:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

This recommendation is best known for Agenerase, an AIDS treatment, and Incivek, an anti-hepatitis C product; meanwhile the company is now focusing on becoming the world leader in cystic fibrosis treatment, observes Mike Cintolo, editor of Cabot Top Ten Trader.

Vertex Pharmaceuticals (VRTX) has developed Kalydeco, a twice daily tablet for cystic fibrosis, which has seen sales ramp up in recent quarters.

But the big news for the company arrived in late June, when a combination treatment that uses the active ingredient in Kalydeco, combined with anti-cystic fibrosis drug Lumacaftor, delivered positive Phase III trial results; Vertex expects to file for FDA and European approval later this year.

Additionally, the treatment has received a “Breakthrough” designation by the FDA, meaning that the new cystic fibrosis treatment could be on the market in the US in the third quarter of next year.

Currently, Vertex is estimating that if it can grow its Kalydeco treatment to 7,000 patients annually, it could rake in about $1.5 billion in revenue.

Meanwhile, the company believes that the Kalydeco-Lumacaftor treatment could have an addressable market of 28,000 or more, hinting at potential revenue of more than $5 billion annually if Vertex can maintain its current pricing power in the market.

VRTX has been volatile since about mid-2012. Shares have a habit of skyrocketing on positive drug trial data, having vaulted higher on May 11, 2012, April 19, 2013, and again on June 24 this year.

These spikes have been historically followed by periods of consolidation, with VRTX finding support before trekking higher once again. This time is a bit different, as the company is looking at potential revenue in excess of $5 billion from one treatment.

Because of this strong outlook, we believe that VRTX will turn higher once the post-announcement euphoria wears off. For now, we recommend buying dips.

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