Vertex Third Quarter Results: Accepting the Inevitable and Moving Ahead

The bad news finally came for Vertex Pharmaceuticals’ (VRTX) Hepatitis C drug, Incivek, and the company responded by cutting its workforce by 15%, or 370 jobs worldwide.

On Tuesday, Vertex reported total third quarter 2013 revenues of $222 million, including net product revenues of $101 million from Kalydeco, VRTX’s treatment for Cystic Fibrosis, and $86 million from Incivek. Incivek sales fell well short of Wall Street expectations for $124 million, and VRTX is down 4% as a result.

After peaking in 2011, Incivek sales have declined as physicians opt to warehouse patients until newer, oral therapies (like Gilead’s (GILD) sofosbuvir) are available commercially or through ongoing clinical trials. You can read more about Vertex, and why we’re bullish, in PropThink’s previous coverage. While Incivek has long been considered the gold standard in Hep-C treatment, it relies on interferon. Many patients find interferon difficult or impossible to tolerate, creating significant problems with patient compliance and causing patients to stop treatment prematurely. In contrast, sofosbuvir significantly reduces (or eliminates entirely) the levels of interferon required for treatment without impacting efficacy – even in complex Hep-C cases, meaning more patients will complete treatment.

While the drop in Incivek sales has been anticipated for some time, the 66% decline was greater than expected, prompting the company to reposition in 3Q13 in order to focus on the cystic fibrosis program. The 370 job cuts were focused in sales and support for Incivek and are expected to result in lowered operating costs of $150-200M in 2014 compared with 2013.

Vertex GAAP losses totaled $124.1M, or $0.54 per share, including stock-based compensation and restructuring charges.  Excluding these charges, VRTX’s net loss totaled $74.1M or $0.32 per share. These results were considerably worse than consensus estimates of  $276.4M in sales and earnings of $0.16 for the quarter, and were driven largely by the lower-than-expected sales.

As a result of the disappointing Incivek sales, VRTX reduced its 2013 revenue estimate to a range of $1-$1.05B from its previous estimate of $1.2B.

Regardless, investors continue to focus on the CF franchise. Vertex will have results from two phase 3 studies evaluating a combination of Kalydeco and lumacaftor in people with CF who have two copies of the F508del mutation. It’s this market expansion for Kalydeco and its CF counterparts that make Vertex an attractive holding, as outlined by Mr. Deryugin previously. At a 4% decline today, it seems the market has already factored the Incivek decline into expectations. We don’t expect a hard reset for the stock before trial results next year and continue to own VRTX. Buying on this weakness may make sense for those not already involved.

In connection with VRTX, PropThink has taken a long position.