Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX)’s weekly options are pricing in a move of +/- $10 with Implied VOL currently in the 28th percentile over the past 52-week’s. This exposes investor’s to significant risk should tomorrow’s AdCom not go precisely as expected by the market.

We suggest moving to the sidelines until after the event as Implied VOL is significantly undervaluing the risks and doesn’t present an attractive risk-defined setup. Bernstein’s suggestion for GILD to buy VRTX represents only a cosmetic solution that fails to address GILD’s chronic problem; No innovation engine or discovery platform.

The FDA’s briefing documents suggest skepticism on the clinical evidence supporting the combination of Ivacaftor (VX-770) and Lumacaftor (VX-809) FDC (Orkambi) in F508del Cystic Fibrosis patients who are > 12-years old is justified in our view.

We share their skeptical views on the clinical utility of the combination, and despite the option to address the potential benefit of Lumacaftor (VX-809) over Kalydeco alone through a post-marketing study; this would be an overhang on the stock and interject binary-risk.

Additionally, the benefit on secondary endpoints such as the change on BMI and the CFQ-R, a quality of life questionnaire that “failed to show substantial evidence of a treatment effect.” Additionally, the response rate and pulmonary exacerbations were not statistically significant despite a “trend” toward improvement.

The FDA has questioned the clinical meaningfulness of the 3% (statistically significant) improvement in FEV1, with higher incidence of dyspnea, and this may require further examination on the suitability of Orkambi for all homozygous F508del patients, thus potentially shrinking the overall market opportunity modeled by analysts.

But even if approved, we have doubts on what the justifiable reimbursement for Orkambi would be. The Sell-Side (as always models sky-high pricing), somewhat justifiably in this case given CF is already an orphan indication, but the most prevalent disease-causing CFTR mutation is the F508del segment that leads to a different functional defect than the G551D mutation that Ivacaftor (VX-770) is approved to treat.

In light of recent trends with drug pricing, as exemplified by ABBV/ESRX & GILD, payer’s appetite to reimburse extreme drug pricing is increasingly based on the clinical benefit and the total per patient treatment costs, and ignores the “long-term clinical benefit to prevent long-term costs.” The cost of a lung transplant is estimated to be ~$1M, if Orkambi pricing is >$350K per year, than payers will institute a lifetime treatment cap on costs, or high upfront payments followed by smaller residual payments over a patient’s lifetime.

VRTX’s pricing strategy for Orkambi could provide an opportunistic competitor to enter and steal most of VRTX’s market share, the clinical benefit of Orkambi provides a very low hurdle rate to overcome. Ivacaftor (Kalydeco) monotherapy in the F508del population was studied in a Phase 2 trial previously.

  • The safety profile of Ivacaftor was comparable to that of the placebo. The overall adverse event frequency was similar in the Ivacaftor (87.5%) and placebo (89.3%) groups through 16 weeks.
  • The difference in the change of FEV₁ % predicted from baseline throughweek 16 (primary end point) between the Ivacaftor and placebo groups was 1.7% (P = .15).
  • Sweat chloride, a biomarker of CFTR activity, showed a small reduction in the Ivacaftor vs. placebo groups of -2.9 mmol/L (P = .04) from baseline through week 16.
  • No new safety signals were identified. The changes in FEV₁ or sweatchloride in part A were not sustained with Ivacaftor treatment from week 16 to week 40.

VRTX’s combination delivered a placebo-adjusted improvement in FVC of only +2%. In the short term Vertex has dominance in the Cystic Fibrosis market, which has given them a market cap around $30B. Orkambi is designed to treat patients with F508d mutations, the largest population of CF (~8,500-15,000 homozygotes US, 20,000 WW), but still considered an orphan indication. It will likely gain FDA approval, but there is strong criticism on just how efficacious Orkambi is and the incremental improvement in clinical outcomes. We believe this exposes VRTX to long-term competitive threats & much lower long-term pricing power than what consensus believes.

Hence, the sell-side’s peak sales estimates seem high on 2 counts:

  1. Fails to address potential long-term competition, which we think will develop over the next 5-7 years.
  2. Fails to acknowledge the limited clinical benefit for Orkambi, and is premised on the tolerance of payer’s from times past, not today.