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Results of a clinical trial to be released before the end of the year will determine if Vertex Pharmaceuticals' (VRTX) - Get Report Kalydeco benefits another small group of cystic fibrosis patients. 

The clinical trial nearing completion, if positive, would extend Kalydeco use to approximately 1,100 cystic fibrosis patients with the so-called R117H mutation.

Kalydeco was approved in January 2012 and is already used to treat almost all of the 2,000 cystic fibrosis patients with the G551D mutation. Vertex has forecast Kalydeco sales of $360-365 million this year.

Looking ahead, Vertex believes Kalydeco as a standalone treatment could be used by approximately 7,000 cystic fibrosis patients and generate $1 billion to $1.5 billion in peak revenue. 

The company's bigger aim is to use combinations of drugs -- Kalydeco plus experimental drugs like VX-809, VX-661 and others -- to treat another 50,000 cystic fibrosis patients and generate $10 billion in sales. 

But baby steps first, which is why Vertex needs to win with Kalydeco in the R117H study.

Kalydeco is a really effective drug but investors are still nervous about the looming trial results because cystic fibrosis patients with the R117H mutation tend to have milder symptoms or delayed disease progression. This might make it more difficult for Kalydeco to demonstrate a significant clinical benefit, measured by improvement in lung function.

In the pivotal G551D studies, Kalydeco delivered a 10-12% absolute improvement in lung function and a 15-17% improvement relative to placebo. 

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The drug may find it hard to post similar lung function improvements in "less sick" R117H patients, particularly since placebo patients may not decline quickly. Vertex did limit enrollment in the study to R117H patients who had more compromised lung function at baseline as a way to compensate for the challenges of proving a benefit in this milder form of cystic fibrosis. 

Nonetheless, a few institutional investors told me they're steering clear of Vertex in front of the R117H results because the risk/reward wasn't ideal. If the study fails, the stock could take a big hit, but a win -- and the additional Kalydevo revenue that would come from R117H patients -- is (was) already baked into Vertex's valuation. 

Reluctance to get involved in Vertex ahead of the R117H trial results helps explain the steep sell off since October. [Note the ugly stock chart above.] The company's decision to retreat from hepatitis C and a signal downgrade of the stock by Bernstein analyst (and longtime Vertex bull) Geoff Porges contributed to the selling. 

If the R117H trial comes back positive, investors interested in Vertex will turn their attention to perhaps the biggest biotech catalyst of 2014: The results from two phase III studies investigating Kalydeco+VX-809 combination therapy in cystic fibrosis patients with F508del homozygous mutation. 

Results from these two studies -- dubbed TRAFFIC and TRANSPORT -- are expected in mid-2014 and have the potential to deliver $6 billion or so in new sales to the company. 

-- Reported by Adam Feuerstein in Boston.

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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;

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