EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Vertex's Sales Soar in 1Q; Symdeko Strengthens Its Moaty Cystic Fibrosis Franchise

Vertex's first-quarter results were slightly ahead of our expectations, with the company's strong portfolio of cystic fibrosis therapies continuing to support a narrow economic moat. Total product revenue of $857 million was up 34% from last year, driven by reimbursement and pricing agreements in Europe. We anticipated that Symdeko, which launched in the U.S. in 2018 and recently in Germany as Symkevi, would be a key driver this year, but the uptake in the first quarter was much better than we had expected. We are maintaining our fair value estimate of $187 per share for narrow-moat Vertex, and we would advise investors to wait for a wider margin of safety for this medium uncertainty name.

Kalydeco, which addresses a small portion of the cystic fibrosis population as a monotherapy, saw a slight decrease in sales (about 2%) from last year and contributed $244 million. Orkambi sales of $293 million were down about 17% from last year, but more than offset by growth in Symdeko, which covers a similar population but offers a more attractive safety profile. Symdeko contributed $320 million in sales, up significantly from $34 million last year and up about 9% sequentially. We are maintaining our estimate for 2019 product revenue of $3.54 billion, which is near the higher end of guidance. Operating expenses tracked our expectations, and we are maintaining our full-year estimate of about $2 billion in operating expenses, which is about at the midpoint of management's guidance.

Management maintained full-year guidance despite a good first quarter that beat consensus on both the top and bottom line, but the guidance does not take into account possible reimbursement agreements in major countries. We are still waiting to hear about agreements in England and France, where negotiations are ongoing, but we were pleased to hear about agreements for pediatric patients in Sweden and Germany.

We are also waiting to hear which triplet combination therapy Vertex will choose to file for regulatory approval. Approval in cystic fibrosis patients with heterozygous F508del mutations would significantly expand the addressable patient population from about 39,000 now to 68,000 (or about 90% of all cystic fibrosis patients) in 2020, if approved. On April 30, Vertex received its first approval for cystic fibrosis in infants for Kalydeco, expanding the addressable patient population Vertex can reach with its therapies. We expect additional label expansions this year into young age groups, which could increase the eligible population to 44,000 patients worldwide.

With the top-line phase 3 results from Vertex's triplet regimens released, all eyes are on Vertex's strategy to shift from development in cystic fibrosis to a new indication. In addition to a study in pain, the company has ongoing early research in alpha-1 antitrypsin deficiency, gene editing studies in sickle cell disease and beta thalassemia, and preclinical work in focal segmental glomerulosclerosis. We like the focus on lucrative rare diseases with high unmet need, but competitors further along in development are vying for the same indications. However, Vertex's research and development strategy has been historically successful, with the cystic fibrosis portfolio all developed in house. These early-stage pipeline candidates outside of cystic fibrosis do not materially contribute to our top-line projections in the medium term. The company completed the quarter with about $3.5 billion in cash and equivalents, which we expect will be reinvested in the pipeline and potential business development this year as Vertex looks for new market opportunities outside of cystic fibrosis.