The market is underestimating Vertex's entrenched position in the cystic fibrosis market supported by a robust pipeline of next-generation products.
We are lowering our fair value estimate for Vertex
to $130 per share from $136 following the company’s announcement of lower-than-expected 2017 guidance for Kalydeco and Orkambi sales. We expect European reimbursement for Orkambi to remain slow-going, while the side effect profile of the drug tempers our outlook for a speedy sales ramp-up in the U.S. Management now expects Kalydeco sales in the range of $690 million-$710 million and Orkambi sales at $1.1 billion-$1.3 billion in the upcoming year. We project Kalydeco and Orkambi sales in the top range of the company’s guidance, which are roughly 5% and 25% haircuts to our original 2017 sales projections for the two drugs, respectively. Despite our lowered fair value estimate, Vertex shares look undervalued in our view. We believe the market is underestimating Vertex’s entrenched position in the cystic fibrosis market supported by a robust pipeline of next-generation products.
Kelsey Tsai is an equity analyst for Morningstar.
Orkambi headwinds are expected to weigh on the company’s near-term growth. However, we believe the successful launch of next-generation corrector tezacaftor (VX-661) in combination with potentiator drug Kalydeco would boost penetration into the patient population with two F508del mutations and provide an opportunity to serve patients with one F508del mutation and residual CFTR protein functionality in 2018. The company expects to submit an NDA in the second half of the year if phase III trials meet their endpoints (data expected 1H 2017). The tezacaftor combination is not expected to produce the bronchoconstriction seen in Orkambi, which is encouraging and could translate into lower discontinuation rates and higher uptake in the cystic fibrosis market.
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