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Mad About Missing Vertex Pharma's Big Move? Don't Be, The Stock Is Still Undervalued

BOSTON (TheStreet) -- Remember this slide? A little more than one year ago, I wrote a column about this slide, which came from a Vertex Pharmaceuticals (VRTX - Get Report) presentation at the European Cystic Fibrosis Society meeting. Last June, I said investors should pay attention to this slide because it helped explain how Vertex would dominate cystic fibrosis therapy and one day generate $10 billion in annual sales

I don't normally repost old stories but I'm making an exception because this slide and what it says about Vertex's cystic fibrosis franchise long term is even more relevant now following yesterday's big announcement about the success of lumacaftor-Kalydeco combination therapy in treating patients with homozygous 508del mutation

Vertex bulls and bears will argue now about the stock's valuation and whether or not it bakes in sales for the 22,000 cystic fibrosis patients with the homozygous 508del mutation. Fine, whatever. On the day after, I'm more interested in looking ahead to what's definitely NOT factored into Vertex's valuation -- the potential to develop triple-drug combination therapies for approximately 20,000 patients with heterozygous mutations. Tuesday's positive results bolster my confidence in Vertex's ability to reach this next big bucket of cystic fibrosis patients. The company's science is working.

Back to the slide above. Here's what I wrote last June:

The data on the left (with the orange bars) represents "heterozygous" cells with two different cystic fibrosis mutations -- F508del and G542X. Think of these cells as a proxy for about 20,000 "heterozygous" cystic fibrosis patients worldwide who are among the most difficult to treat.

Treatment with single Vertex drugs -- Kalydeco (ivacaftor) or VX-809 ( lumacaftor) -- has minimal activity in these heterozygous cells. Doublet therapy -- using Kalydeco and VX-809 together -- enhances activity a bit. But check out what happens when you add a third "corrector" drug into the mix: The orange bar gets really tall. A tall bar in this graph is good because it means cells are functioning properly. In cystic fibrosis patients, functioning cells translates into vastly improved lung function.

The take-home point here: Vertex is demonstrating that triple-drug combinations can significantly improve the activity of cells with the hardest-to-treat cystic fibrosis mutations. This is an experiment in cells not humans, so Vertex still has to run clinical trials in real heterozygous patients, but the data on the left side of slide are an encouraging proof of concept.

The data on the right hand side of the slide (the green bars) are pretty cool, too. These are "homozygous" cystic fibrosis cells, representing about 30,000 patients worldwide. Vertex is already running phase III studies in homozygous patients using a doublet combination of Kalydeco and VX-809. This doublet therapy is represented by the second green bar from the right -- pretty decent activity.

But again, check out what happens when a third corrector drug is adding to the therapy. The green "activity" bar shoots skyward -- more proof that combinations of multiple Vertex drugs are likely to demonstrate a significant benefit for cystic fibrosis patients.

The biggest negative from this slide is time. It's going to take a few years for Vertex to test triple-drug combinations, get them approved and reach the market. Nothing represented on this slide is going to happen overnight, which might disappoint short-term oriented traders.

Why should investors care about this slide today? Because it represents about 50,000 cystic fibrosis patients worldwide and billions of dollars in annual sales not baked into Vertex's current $18 billion market valuation.

Those tall green and orange bars say Vertex's stock price is going higher.

Here we are one year later and the data in cells depicted in the slide has translated to positive results in two phase III studies of homozygous 508del patients. We're one big step closer to also validating the triple-combination theory in cells. We already have data showing Vertex's next-generation "corrector" VX-661 is more potent than lumacaftor. Early next year, we'll get data from a 12-week study of VX-661 and Kalydeco in 508del mutation patients. By the end of the year, Vertex will move the first of several newer correctors into human clinical studies. This "new new" drug will be combined with VX-661 and Kalydeco to target heterozygous patients. Triple combination therapy may also improve outcomes for homozygous patients, or patients treated now with Kalydeco monotherapy. 

Mad about missing Vertex's big stock move yesterday? Don't be, because there's a lot of upside left in the company's cystic fibrosis business. 

Follow Adam Feuerstein on Twitter.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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