Shares soared following favorable news from the narrow-moat drugmaker's pivotal trials, yet we see further upside.
By Kelsey Tsai, CFA | 03-29-17 | 09:00 AM | Email Article

 Vertex’s stock soared over 20% following positive results from the company’s pivotal trials. Phase 3 trials Evolve and Expand evaluated next-generation corrector drug tezacaftor in combination with its potentiator drug ivacaftor for cystic fibrosis, or CF, patients with two mutations of the F508del gene or one F508del mutation with residual CFTR function, the underlying protein responsible for the disease. Our valuation assumes a positive outcome for the tezacaftor/ivacaftor combination, and we do not plan on changing our $130 per share fair value estimate. The company plans on filing the combo-drug regimen in the two subsets of CF patients this year, and we still see nearly 20% upside in the stock at current trading levels.

Kelsey Tsai is an equity analyst for Morningstar.

The favorable news both derisks Vertex’s CF franchise and sets the foundation for the firm’s penetration into harder-to-treat CF populations with a triple combination regimen. Weaker-than-expected Orkambi revenue has tempered investor enthusiasm over the past year, given the regimen’s side-effect profile. The next-generation tezacaftor/ivacaftor regimen showed that it was just as effective as Orkambi, if not slightly better, without the debilitating side effects. Pending successful approval by the FDA, we expect the new double combo regimen will help Vertex capture patients that either discontinued Orkambi treatment or were deterred by the side-effect profile, strengthening the regimen’s position in the largest subset of CF patients. While the population with one F508del mutation and residual CFTR protein function is fairly small--just over 1000 people in North America, Europe, and Australia--we believe this will prove to be a modest tailwind. The next potential catalysts are the confirmation of the U.S. Food and Drug Administration's approval of tezacaftor/ivacaftor, and phase 2 results from Vertex’s triple combination therapy in the next wave of CF patients.

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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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