Despite a slowdown in Orkambi refills, this narrow-moat drugmaker's burgeoning cystic fibrosis portfolio should create a dominant franchise in this lucrative rare disease market.
By Kelsey Tsai, CFA | 09-14-16 | 02:43 PM | Email Article

 Vertex’s stock has been trading down following management’s morning comments regarding a slowdown in Orkambi refills in July and August. We believe the news has a negligible impact to our $136 price target. While we expect the lag in refills will cause Orkambi sales to fall slightly under management’s 2016 guidance of $1 billion-$1.1 billion, we anticipate that the persistence rates of the drug will eventually reach 70%, which conservatively takes the lower end of management’s 70%-80% guidance.

Kelsey Tsai is an equity analyst for Morningstar.

Bronchoconstriction--the narrowing of lung airways prompting coughing, wheezing, and shortness of breath--during the initial stages of Orkambi treatment is suspected to be the main culprit for the slowdown in refills. Notably, management expressed that the number of drug initiations remains on track, and discontinuations have not increased, meaning patients are reinitiating or refilling their prescription at later-than-scheduled times. Over the next few years, we believe Orkambi compliance rates will reach 70% persistence rates thanks to a couple of factors. First, we believe patients will be convinced that the long-term drug benefits are worth the short-term side effects given the severity of cystic fibrosis progression and the compounded effect of slowing lung function decline over a patient’s life. Second, we anticipate VX-661 with Kalydeco will replace Orkmabi sales (expected launch second-half 2017) with similar or better efficacy in the homozygous F508del mutation patient population and without the bronchoconstriction side effects. Adjusting our 2016 Orkambi forecast to the lower end of guidance has no impact on our fair value estimate.

To a lesser extent, uptake of Orkambi in Germany has been slower than expected. We forecast minimal Orkambi ROW sales for 2016, but we expect successful launches in EU countries in 2017. Failure to reach reimbursement decisions in the EU by the end of 2017 would have a significant impact to our fair value estimate.

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Kelsey Tsai, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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