DJ This Biotech Can Get Back on Track -- Barron's

Vertex Pharmaceuticals' stock tumbled on a halted drug. Yet its cystic fibrosis franchise remains strong, and its pipeline looks promising.

By Josh Nathan-Kazis

For nearly a decade, Vertex Pharmaceuticals could do no wrong. Shares climbed by more than 800% from 2012 to the middle of 2020, lapping the S&P 500 index nearly four times over.

Then, in mid-October, the biotech company canceled development of a once-promising drug after trial results disappointed. Its stock is down 25% since then, to a recent $208.

The pullback has been overdone. There is an opportunity now for investors to get back in.

Despite the slide in the stock, little has actually changed for Vertex's business. Vertex (ticker: VRTX) is a powerhouse in cystic fibrosis treatment, selling $6.2 billion worth of such drugs in 2020. Its treatments now reach half of the roughly 90% of the cystic fibrosis patients who its drugs could potentially treat.

The company's pipeline beyond cystic fibrosis, meanwhile, is coming into focus.

"What we've done in [cystic fibrosis] is extraordinary," says the company's new CEO, Dr. Reshma Kewalramani. "We are aiming to do exactly what we did in [cystic fibrosis] again and again and again."

What frightened investors away from Vertex was the flop of a compound meant to treat a lung and liver disorder known as alpha-1 antitrypsin deficiency, or AATD.

"The question in biotech is always what's going to drive the next leg of growth, and [AATD] was looked on as being that driver for Vertex," says Phil Nadeau, an analyst at Cowen. "Its failure, even though it was an early-stage study, has a disproportionate impact on the stock price, far above the impact that it had on anyone's numbers."

Vertex now has a second crack at AATD on deck, with data on a Phase 2 trial of another drug targeting the disease expected sometime in the second quarter of this year. If the results on that trial are very good, says Liisa Bayko, an analyst at Evercore ISI, the stock should climb back at least to $300.

Bayko, who has a $260 price target on the stock, wrote last month that Vertex's AATD treatments could bring in $5.5 billion in revenue a year by 2030.

"The market opportunity is large," CEO Kewalramani says.

The company completed enrollment on the second AATD study in late February, suggesting that some of the safety issues that derailed the earlier program may not be a problem for this second drug.

And Vertex has a history of successful transitions. Until 2012, it was just one more midsize biotech, with a market value of about $7 billion. Enter the revolution in cystic fibrosis.

From 2012 to 2019, Vertex received four approvals for cystic fibrosis drugs from the Food and Drug Administration, transforming treatment of the disease. The company's market value climbed to $75.5 billion.

Vertex still has room to expand in cystic fibrosis. The company is seeking to expand the label of its most recently approved drug, called Trikafta, to allow it to treat younger patients.

At an investor presentation this past Tuesday, Kewalramani said that Vertex intended sometime this year to begin a Phase 3 trial of what she called a "next gen" cystic fibrosis drug, which could be more effective than its current products. Vertex would also pay a smaller royalty on it than it does on its current cystic fibrosis drugs.

"This is HUGE," Evercore's Bayko wrote in all caps in a note soon after.

Still, its cystic fibrosis leadership is already reflected in the stock price. For the shares to rally, Vertex needs to identify new sources of growth.

Other promising programs are in the works, including a collaboration with Crispr Therapeutics (CRSP) on a gene editing treatment for sickle cell disease and beta thalassemia, which is in human trials. There is also a program in a kidney disorder, one in Type 1 diabetes, and an experimental pain drug, among others.

Growth could also come from outside of the company.

Early in February, Kewalramani said that Vertex would look at acquiring mid- and late-stage assets. But that prospect has made some investors nervous.

"Investors' fear is that Vertex will get an interesting asset, but they'll have to pay a lot of money and that will be dilutive," says Cowen's Nadeau.

The Vertex CEO suggested there was a "misunderstanding" about the company's thinking on acquisitions, emphasizing that its "pipeline has never been stronger."

Some analysts, meanwhile, have said that Vertex itself might become an acquisition target.

"It's a monopoly type of business with exclusivity that is doing $7 billion worth of business per year, call it, and still growing," says Jared Holz, a healthcare trading desk analyst at Jefferies, of the company's cystic fibrosis franchise.

If Vertex were to be acquired, investors could expect a fat premium. AstraZeneca (AZN) is paying 44% over Alexion Pharmaceuticals' (ALXN) share price, while Bristol Myers Squibb (BMY) paid a 67% premium over Celgene's share price.

But Kewalramani played down that idea. "I see us creating far more value for patients and shareholders by continuing independently on the path that we've laid down than by combining with anyone else," she said.

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com

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March 05, 2021 21:30 ET (02:30 GMT)

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