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A Health Care Fortnight for the Record Books

Stocks in this article: PFE VRTX GILD HGSI ELN

Vertex's hepatitis C franchise remains on life support so the company desperately needs to expand the addressable CF opportunity to reignite investor excitement. (Kalydeco currently has FDA approval only for a small subset of patients.) These combination data make that goal very achievable.

Some Wall Street analysts expect Vertex to slash the cost of therapy for the combination -- Kalydeco alone currently costs $250,000-300,000 per year -- in recognition of this new, larger patient population. I doubt it. I've never believed the industry's patients-over-profit rhetoric. To be conservative, let's assume Vertex is feeling generous and use a combination price of $200,000 per year as a floor. That suggests a global market opportunity of $7 billion.

Given the lack of options in CF, I suspect most patients in the U.S. would want the new drugs; 65% market share seems achievable. Penetration rates outside of the U.S. will be lower, perhaps around 50%. Globally, that translates to sales of $4 billion among homozygous F508del patients, which makes Vertex' $13 billion market capitalization look somewhat low, but not outrageously so. (Some CF patients with one copy of the F508del mutation, referred to as heterozygotes, will likely receive the drug as well, which would modestly raise total sales.)

I'm a bit of a cheapskate when it comes to investing, but I think there could be upside to Vertex even from here. Nonetheless, the stock could sell off a bit over the next few months due to a combination of profit taking and reluctance to chase a nearly 70% move in one week. I would buy a little here -- Vertex' attractiveness as an M&A candidate just improved dramatically -- but wait until a dip into the mid-$50s per share to become more aggressive.

Take the Money and Run

In mid-April, GlaxoSmithKine (GSK) offered to buy partner Human Genome Sciences (HGSI) for $13 per share, 81% higher than the company's stock price at the time. Rather than blissfully accept salvation from the biotech doldrums, Human Genome demurred, presumably in the hopes of getting a few more shillings. Dumb move.

Last week, things got hostile and Glaxo went directly to shareholders with a tender offer. If I owned Human Genome shares, I would take the offer and mail Glaxo CEO Andrew Witty a thank you card. Don't forget the "Sir" -- he's got one of those fancy British appellations. Too often, biotech executives want to "build the next Gilead" -- read venture capitalist Bruce Booth's excellent recent blog post on this topic -- at the expense of shareholder value maximization. This seems like one of those cases.

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