Vertex Scores Big With Hepatitis Drug

Vertex Pharmaceuticals (Nasdaq:VRTX) is turning what was touted as a two-horse race into a romp as the company’s new hepatitis C drug Incivek has left Merck’s (NYSE:MRK) and its competing Victrelis stuck in the starting gate.

Although both medications received FDA approval within days of each other, Incivek is outselling Victrelis by a 4-to-1 margin.

In its first five weeks on the market, industry followers thought Incivek sales would hit about $31 million. The company more than doubled that figure. But can it keep up the pace? The key will be what happens in the third quarter. If prescriptions don’t grow at all, sales would be about $345 million, while slow growth would lead to $410 million. If the current pace continues, quarterly sales should reach $458 million.

Sanford C. Bernstein analyst Geoffrey Porges says that if the drug continues its current growth rate, full-year sales could hit $1.2 billion. What’s even more impressive is that the blockbuster wasn’t even launched until May.  Canadian regulators recently approved Incivek for use in combination with other treatments in people who have the disease and a damaged but still-functioning liver.

Hepatitis C is an infectious disease that is spread through the blood. Vertex has said about 4 million people in the U.S. have the disease, and many people don’t know they are infected. Hepatitis C can cause liver damage, cirrhosis, liver failure or cancer.

Physicians and patients evidently like the advantages Incivek has over Victrelis, including data showing the Vertex drug had nearly an 80% cure rate and offers the possibility of even shorter treatment. In addition, Incivek is considered easier to use.

Vertex shares enjoyed a nice bump in the days after the Incivek launch, trading as high as $58 during the second week in May. During the early August market shakeup, however, the stock eased to $40 before recovering to just over $45.

Investors may have been turned off by the fact that the Cambridge, Mass.-based biopharmaceutical company has never made money. That unenviable record continued in the second quarter of 2011, reducing Vertex’s cash position to $593 million. However, much of the cash and resources were deployed in the Incivek launch, and that should pay boffo dividends in the long term. In fact, management has said that in 2010 Vertex will swing into the black and be “significantly earnings positive.”

Analysts project that Vertex will earn upward of $4 a share next year, a number that could be revised upwards if Incivek sales continue to grow rapidly. But even if that earnings estimate holds, it means the company is selling at a reasonably attractive price-to-earnings of about 10.

What’s more, Vertex appears close to adding another drug to its arsenal. It’s a treatment that will be aimed at a small part of the cystic fibrosis population. The company also has compounds in development to treat moderate to severe rheumatoid arthritis and influenza.

At the time of publication, Barry Cohen didn’t own any of the securities mentioned in this article.

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