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Vertex Pharmaceuticals Incorporated (VRTX) Stock Could Burn Investors

Giving credit where it’s due, Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is arguably the leading name in cystic fibrosis treatments. It’s the success of those drugs that pushed VRTX stock up more than 100% since the end of 2016.

Vertex Pharmaceuticals Incorporated (VRTX) Stock Could Burn Investors
Vertex Pharmaceuticals Incorporated (VRTX) Stock Could Burn Investors

Source: Shutterstock

Its CF drugs — Kalydeco and Orkambia — may not yet be approved to treat the full range of cystic fibrosis, still, considering the swath of CF sufferers for whom the drugs are approved, the two treatments command the six-figure prices that the market is willing to pay.

Still, as is the case with all biotech companies, the tide can turn in an instant, without any warning.

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Might that be possible, or even likely, for VRTX stock? Let’s just say it’s a little too likely given Vertex Pharmaceuticals’ mindset and business model.

A Mini Monopoly

Vertex is a bit of an oddball as far as biopharma companies go. Rather than aiming to develop a broad, diversified portfolio of drugs and then spend a ton of money on a sales force to sell them, this organization would rather save on salespeople and spend that money on R&D for its next blockbuster drug. If that happens as Vertex hopes, it will get its second blockbuster drug on the market within the next couple of years.

OK, Vertex owns Orkambi, so technically it’s got two drugs already. Kalydeco is largely displacing it though, as it is superior in most regards; however, Orkambi is approved for more patients.

Also, technically, the Phase 3 drug in question is actually a repackaged version of the aforementioned cystic fibrosis drug Kalydeco, in combination with VX-152 and tezecaftor. With a different target market and different name/formula, it will count as a different revenue-generating property, opening the door to the vast majority of the world’s CF sufferers. As it now stands, only about 6% of the 30,000 people with cystic fibrosis in the United States are candidates for Kalydeco.

All the same, with fewer than 100,000 cystic fibrosis patients worldwide, there’s not a lot of opportunity on the table. How did Vertex manage to generate more than $2 billion worth of revenue over the course of the past four reported quarters?

Answer: What it lacks in volume, it offsets with price. Orkambi costs $272,000 for a full-year’s treatment, while Kalydeco sells for $311,000.

In that there’s no cure for CF, as well as no real competition for its drugs, Vertex Pharmaceuticals is well positioned. Insurers, though most assuredly not happy with the sky-high cost, are willing to pay the bulk of that price largely because there are so few cystic fibrosis sufferers. Then, again, they have little choice.

Playing With Fire

While the concept of sky-high drug prices can work for a while, one doesn’t have to look to hard to recognize that nothing breeds competition like success. Case in point: Gilead Sciences, Inc. (NASDAQ:GILD).

When Gilead’s hepatitis C drug Sovaldi was approved and launched in 2014, the full treatment regimen sold for an outrageous $84,000. Even more outrageous is that, at least for a short while, insurers paid the dear price. Ditto for the hep-C therapy Harvoni (also from Gilead), which came along just months later.

 

That pricing power was never built to last though. With billions of dollars on the table, AbbVie Inc (NYSE:ABBV) and then Merck & Co., Inc. (NYSE:MRK) were both willing to start a hepatitis C price war that Gilead has been losing for some time now. Though nobody but the involved parties really know what negotiated price insurers and pharmacy benefits managers are now paying for Harvoni and Sovaldi, it’s certainly not the $80,000- plus initial price tag for a complete treatment.

And whatever competition can’t do soon to douse the fire that’s been lit under VRTX stock, political backlash might.

Though Hillary Clinton ended up not winning last year’s Presidential election and setting up shop in the White House, her now-infamous specialty drug price-gouging tweet started a wave of government-oversight questioning of frothy, extortion-like drug prices.

Federal government-led shaming and tough, public questioning have kept pressure on drugmakers to keep prices reasonable, mostly deflating the “the more money we make, the better drugs we can develop” counter-argument that Big Pharma has loved to wield as a weapon of justification for years now.

That’s one of Vertex’s favorite weapons as well.

Bottom Line for VRTX Stock

So far, Vertex Pharmaceuticals has sidestepped any significant government scrutiny, and would-be competitors have remain disinterested in a cystic fibrosis market that Vertex has won with an admittedly solid drug lineup. The pharmaceutical market is one built from the ground up to forever be in flux though; that flux is designed to help newcomers and new drugs keep the established companies honest and the established drugs fairly priced.

In other words, Vertex is playing with fire here. It may be years before it gets burned, but it’s a risk that’s going to be there as long as CF is the company’s only real focus and Kalydeco is the primary basis for its portfolio. Current and would-be VRTX stock owners would be wise to keep both threats on their radar.

As of this writing, James Brumley held a position in Gilead Sciences (GILD). You can follow him on Twitter.

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