Hot off the approval of its gene therapy for a pair of rare hereditary blood disorders, Vertex Pharmaceuticals (NASDAQ: VRTX) will soon have one other therapy up for approval, and the financial implications are massive. But they are usually not massive just because it stands to crank out billions in additional revenue. As an alternative, the plan is to shell out the equivalent of $100 million so that the potential latest drug can compete for the market share of one amongst its already commercialized medicines as soon as possible.
What is occurring on here? It’s time to dig in and figure it out so that investors can resolve what to do.
Is that this good news actually bad news for shareholders?
Per the outcomes of a phase 3 clinical trial reported Feb. 5, Vertex’s latest candidate for treating cystic fibrosis (CF), a rare and serious genetic disease of the lung, is each protected and effective. The drugs is currently called “vanza triple” because it combines the molecule vanzacaftor and two other drugs. One among the three compounds, tezacaftor, is already in one amongst the company’s medicines within the marketplace, though the others aren’t.
Throughout the clinical trial, the vanza triple combo performed as a minimum along with Trikafta, the biopharma’s best-selling product for CF. By one metric — how much the therapy reduced the extent of detectable chloride in patients’ sweat — the combo was superior, and its side effect burden comparable. That poses an interesting problem.
In 2023, Trikafta was answerable for roughly $9 billion in sales from a top line of roughly $10 billion. If the brand recent medicine gets approval from regulators on the Food and Drug Administration (FDA), which management plans to petition for by mid-2024, Vertex can have two products in direct competition with each other within the marketplace concurrently. There could also be likely not any opportunity for patients to take each therapies directly, and it’s unclear whether there could also be a likelihood that a giant group of patients will respond higher to the older combination than the brand recent one.
As a result of this fact, the probability of the vanza triple combination cannibalizing Trikafta’s market share could be very high. Investors may balk at any decision to proceed and go for the approval as they’d relatively proceed milking revenue from sales of Trikafta for years and years, transitioning to a modern product only when generic competitors begin to encroach.
They typically might balk even harder on the management-endorsed idea of expending an asset value throughout the ballpark of $100 million to begin out the cannibalization process even faster. The asset in query is what’s called a priority review voucher (PRV), which is a government-issued piece of paper that entitles the bearer to get (you guessed it) a privileged regulatory status throughout the review stages of the drug approval process, thereby cutting the time it takes to go from submitting the paperwork to getting a call on commercialization by a handful of months. In recent times, many biopharmas have traded PRVs to 1 one other, preferring to get money relatively than save time, and $100 million is the price of a typical sale.
Investors usually tend to wonder why management appears to be in such a rush to torpedo the company’s most successful product.
One critical detail explains all of the things
Vertex isn’t being impatient, neither is the alternative to utilize the PRV a poor one. In fact, the move was rigorously calculated and might likely prove for probably the most effective for patients and shareholders alike. Here’s why.
Per management, a smaller proportion of revenue from sales of the vanza triple drug could be siphoned off to pay out royalties to external parties than with its existing portfolio of CF medicines. So, by commercializing the vanza combination, the business will fatten its profit margin, even when it doesn’t dramatically increase its revenue, since it’ll pay fewer royalties.
Using the PRV thus implies that management sees the earnings benefit of getting the drug to market a bit faster as being larger than the sale price of the voucher. That perspective is the entire more credible when taking the royalty issue into account, since it significantly changes the economic benefit of every month the drugs spends within the marketplace.
Furthermore, it’s critical to acknowledge that this isn’t Vertex’s first rodeo within the case of gracefully replacing one amongst its older products with a shinier newer version that works a bit higher. If anything, the company is an authority at cannibalizing its CF market share over and over while still growing, having commercialized 4 different but overlapping drugs in succession over time. Just have a take a look at this chart:
As chances are you’ll see, the previous shakeups of its CF products didn’t leave shareholders throughout the poorhouse, and this time won’t either. If anything, this is usually a bullish setup for the stock. In any case, it’ll soon be raking in even additional cash by serving the an identical core market, and patients will improve treatment, too.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Vertex Pharmaceuticals. The Motley Idiot has a disclosure policy.
Vertex Pharmaceuticals Will Use $100 Million to Tank Its Own Market Share. Here’s Why That may be a Smart Move. was originally published by The Motley Idiot