Vertex Pharmaceuticals Inc.
VRTX: Price: $130.85; Market Cap (MM): $31,936
Rating: Neutral; Price Target: $85.00
Andrew S. Fein
The Start of Truly Personalized CF Medicine?
Galapagos may be slowly becoming what Vertex professes to be. In our view, Vertex notched the first win in personalized CF medicine with the approval of Kalydeco in G551D. Last week, we believe we may have finally seen the next meaningful step towards truly personalized CF medicine, with applicability across the spectrum of genotypes: Galapagos (GLPG; not rated) licensed organoid technology from the HUB Foundation (for use in CF and IBD). We have previously highlighted this emerging technology and its potential in our industry reports: the in-vitro reproduction of human tissue with genetic and phenotypic disease characteristics creates not only more reliable testing models for novel CFTR modulators, but also serves as an ex-vivo diagnostic of drug response, thus personalizing treatment for each patient rather than for each genotype (see case of Kalydeco below). We applaud Galapagos for this move: it is precisely the type of investment in innovation that, in our view, Vertex should be making in order to stay competitive in a crowding CFTR field. Reinforcing the contrast between the two companies further, at the last ECFS meeting in Belgium, Galapagos and partner AbbVie (ABBV; not rated) also unveiled new in-house assays for the evaluation of CFTR correctors, focused on channel stability at the membrane, endocytosis and degradation. Meanwhile, in our view, Vertex compounds remain vulnerable on the channel stability count (both 809 and 661), which may or may not be an outcome of the preclinical models employed. Last but not least, beyond the preclinical, we also note that Galapagos and AbbVie might just beat Vertex to the first in-house triple combo for F508del. The Galapagos potentiator GLPG1837 is currently in Phase 1 and should move to Phase 2 before end-2015. Their corrector GLPG2222 should enter Phase 1 before end-2015, while their second corrector (third drug in their triple combo) should enter Phase 1 in 2Q16. We continue to believe that the Galapagos compounds have an edge on Kalydeco and VX-809 when it comes to preclinical potency. With these ongoing investments in precision/personalizing technology, in our view, the Galapagos pipeline is poised to quickly gain an edge both clinically and commercially.
Who is a Kalydeco responder? Ask their organoids. The Dutch are doing it. Our most interesting takeaway from the recent ECFS meeting were reports of pilot real-time application of organoid technology to personalize CF treatment. Investigators from UMC Utrecht (where the HUB technology now licensed to Galapagos originated) profiled drug response in organoids from two patients with G1249R/F508del, which to date remains an uncharacterized genotype with no functional data published. After in vitro organoid work showed that this genotype was responsive to Kalydeco at levels typical in gating mutations (while at the same time showing little response to VX-809), the university clinical team placed both patients on Kalydeco therapy. The first patient began treatment with a baseline ppFEV1 of 30% (very ill; airway too damaged to expect a quick bounce in FEV1), but nonetheless responded to Kalydeco with improvement in NPD, sweat chloride, and airway resistance. The second patient began treatment with a baseline ppFEV1 of 50% (still lower than the typical mean baseline FEV1 of ~60% in many studies) and improved to 64% after only 4 weeks of treatment. Beyond the Kalydeco pilot, the Utrecht team believes that it may be able to leverage organoids to differentiate high and low responders to VX-809/Orkambi (only 4 weeks needed to culture patient organoids and get an answer on personalized drug profile). Importantly, the Utrecht team also notes that VX-661 and VX-809 appear relatively equally potent in their organoid models. This is in line with preclinical results from UNC Chapel Hill and McGill published last year, and lends further support to our thesis that VX-661 is unlikely to provide a pipeline hedge for VX-809 whether in a dual or triple combo, as more potent competitors mature.
The implications of this organoid news, especially when viewed in the context of Galapagos’ recent in-licensing, are meaningful. In the near and medium term, organoids could allow Galapagos to identify and recruit ideal patients into clinical trials, bypassing the Vertex commercial pool (or by methodically poaching from it). Meanwhile, in the long term, the smart application of this technology could slice apart the Orkambi market in favor of newer and more potent agents, such as those currently in the clinic from Galapagos. Naturally, we identify Orkambi as a more likely target (rather than Kalydeco), given Orkambi’s mediocre FEV1 benefit across a population (some patients respond well, others not at all), and the absence of a test predictive of response in individual F508del patients. Such test, as well as alternative and more potent treatment options, may now be on their way, all courtesy of Galapagos.
Valuation and risks. Our Vertex price target of $85/share is based on an equally-weighted composite of: (a) $95/share, as a 35x multiple of taxed and diluted FY20 GAAP EPS of $7.06 discounted back to FY15 at 20%; and (b) an NPV of $75/share (discount rate 10.5%, terminal growth rate of 2.5%). Risks to our investment thesis and target price include: (1) the failure of Kalydeco, Orkambi, VX-661 in further clinical studies; (2) the failure of Kalydeco and Orkambi to achieve our peak sales revenue; and (3) product competition.