Vertex Vexed by FDA Deal

Vertex Pharmaceuticals(VRTX Quote) said Wednesday that it received the OK from regulators to start phase III studies of its hepatitis C drug telaprevir.

The positive development couldn't stop the stock from falling, however, as many institutional investors now see a paucity of news flow from the telaprevir program for the next two years.

Vertex has also said that it plans to raise money, in part, to pay for the new clinical trials.

Vertex shares were down more than 10% in Wednesday trading to $20.

The agreement reached between Vertex and the Food and Drug Administration to move telaprevir ahead into late-stage studies is a positive milestone anxiously anticipated by investors. One of the reasons for Vertex's recent stock slide has been the concern that a significant delay in telaprevir might allow competing hepatitis C drugs that were further behind in development to catch up.

Vertex said Wednesday that it will conduct two phase III trials to satisfy FDA regulatory requirements. The first study, enrolling 1,050 patients with newly diagnosed hepatitis C, will evaluate two different telaprevir regimens, each totaling 24 weeks in length. These patients will be compared against an arm of patients treated with the current standard of care for 48 weeks.

The primary endpoint, or goal, of the study will be to show that 24-week treatment with telaprevir results in a higher sustained virologic response, or "cure rate," than current standard of care.

The second, smaller study will test a telaprevir-containing regimen that lasts 48 weeks, again compared to a 48-week standard of care. This study will enroll between 400 and 500 newly diagnosed hepatitis C patients.

Both studies will run concurrently, with enrollment forecast to be completed by the end of the year. Vertex said it expects results from both studies should be ready for release in the middle of 2010. If positive, Vertex could seek FDA approval of telaprevir by the end of 2010, with an approval decision likely in mid-2011.

The two-year wait for data from these pivotal telaprevir studies is a big reason for the decline in Vertex shares on Wednesday.

"The fact that Vertex got the signoff from the FDA to start the phase III trials removes an overhang that weighed on the stock, but now we have to wait two years for data and Vertex needs to raise money, so why do I want to own this stock now?" one hedge fund manager with no position in Vertex told me. (Other institutional investors echoed similar comments.)

But Vertex spokesman Michael Partridge takes issue with this shortsighted view. There will be new and important clinical data from a phase II study of telaprevir in patients with treatment-resistant hepatitis C out in the next few months, he says. The company and partner Johnson & Johnson(JNJ Quote) are also conducting telaprevir studies looking at a less frequent dosing schedule in patients with other forms of hepatitis C.

As to the financing issue, Partridge says Vertex will raise money, but the company is looking at various ways of doing so to avoid issuing all new equity at these price levels.

Cowen biotech analyst Rachel McMinn, in a research note to clients Wednesday morning, said the design of the telaprevir phase III trials was in line with her expectations, but at the same time, the two studies "leave open the question of whether telaprevir will ultimately be dosed in a 24 week or a 48 week regimen," she writes. McMinn had a neutral rating on Vertex and her firm has no banking ties to the company.

The big selling points of telaprevir are that the drug has the potential to significantly increase the number of hepatitis C patients who are cured, but also do so by cutting treatment times down to six months (24 weeks) compared to current regimens requiring 48 weeks.