Vertex's Cystic Fibrosis Franchise Supports Narrow Moat; Diverse Pipeline Continues To Develop

Equity Analyst

Rachel Elfman

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Vertex Pharmaceuticals was known for discovering blockbuster hepatitis C drug Incivek, which is now overshadowed by the company's robust cystic fibrosis franchise. Vertex's approved cystic fibrosis drugs—Kalydeco, Orkambi, Symdeko, and Trikafta—will make the firm eligible to treat about 90% of the CF population, assuming international and pediatric approvals. We expect Vertex to maintain its dominant position in CF, given the strong efficacy of its therapies, lengthy patents, and lack of competition, while developing pipeline candidates in other rare indications to spur growth.

CF is a rare indication characterized by a progressive and deadly decline in lung function, affecting approximately 83,000 people worldwide. Since its 2012 launch, Kalydeco has captured most of its target patient population (less than 10% of CF patients with specific genetic mutations) and has become the backbone of combination therapies including Orkambi, Symdeko, and Trikafta. Orkambi's launch in 2015 expanded the eligible patient population by adding CF patients with homozygous F508del mutations, but its uptake was slower because of its safety profile. Symdeko's 2018 launch didn’t come with any worries over safety and contributed over $700 million in revenue in its first year, targeting the same population as Orkambi plus some additional patients. Trikafta, a triple-combination therapy, has had a very strong launch since its U.S. approval in 2019 and significantly expanded the company's addressable patient population to heterozygous patients.

Vertex's comprehensive approach has already shaped the treatment of CF and earned it a dominant position worldwide. The chronic nature of therapy and limited competition on the horizon heighten the CF market's attractiveness. Given these positive market dynamics, we think Vertex’s CF program could grow to over $12 billion within our forecast period.

Vertex's pipeline spans several rare diseases, including exa-cel for beta thalassemia and sickle-cell disease, VX-147 for APOL1-mediated kidney disease, and small-molecule inhibitors for pain. We think the CF franchise will provide ample cash for the development of these candidates.

Business Strategy & Outlook

Vertex's portfolio of patent-protected cystic fibrosis drugs forms the basis of our narrow economic moat rating. The company is well supported by lengthy patent protections extending as far as 2037 and first-mover status in the lucrative cystic fibrosis market. Additionally, Vertex holds significant patient share as nearly 50% of patients worldwide are currently treated for cystic fibrosis using its medicines. More than 30,0000 additional patients worldwide who are currently untreated will be able to seek treatment using Vertex’s recently approved triple combination regimen, Trikafta/Kaftrio. Vertex's marketed drugs Kalydeco, Orkambi, Symdeko, and Trikafta/Kaftrio are the only disease-modifying cystic fibrosis drugs on the market that restore cystic fibrosis transmembrane conductance regulator, or CFTR. They restore proper function to the CFTR protein or correct its production process so that a normal protein is made. Vertex’s portfolio makes up the backbone of cystic fibrosis therapy and supports strong pricing power. 

Cystic fibrosis is a genetic disorder affecting roughly 88,000 people worldwide that causes a progressive and deadly decline in the function of the lungs and digestive system. While the number of patients is small, the six-figure pricing for Vertex's disease-modifying drugs creates megablockbuster sales. Vertex's cystic fibrosis portfolio has experienced a pretty welcoming commercial and regulatory environment due to the rarity of cystic fibrosis and the lack of disease-modifying treatments. The market’s attractiveness is heightened by the chronic nature of therapy and limited competition due to the complexity of developing efficient drugs to treat the disease.

Intangible assets are the key moat source for Vertex, as the company benefits from lengthy patent protections for each of its four cystic fibrosis therapies currently on the market. Vertex has been able to build upon its intellectual property, developing better drug combinations that increasingly capture a greater number of patients with various cystic fibrosis mutations. Kalydeco, approved in 2012 for patients with one copy of the G551D mutation, quickly picked up label expansions in additional mutations and age groups, which expanded the eligible patient population from about 1,000 patients in the U.S. when first approved to over 4,000 by 2015. Orkambi was approved in 2015 for patients with two copies of the common F508del mutation. Orkambi expanded the eligible patient population significantly, to over 30,000 globally by the end of 2016. Symdeko, approved in 2018, didn’t significantly expand the addressable population as it targets the same patient population as Orkambi, but it helped capture some additional patients due to its better efficacy. 

Trikafta was approved in the United States in 2019, and it was approved in the European Union in 2020 under the name Kaftrio. Trikafta/Kaftrio is a triple combination regimen that further expands the eligible patient population by an additional 30,000 patients worldwide. Just since the beginning of 2021, Trikafta/Kaftrio has been approved and reimbursed/accessible in 12 countries outside the U.S., including Denmark, Germany, Ireland, Israel, Switzerland, the United Kingdom, and Australia. Vertex is awaiting the potential approval of Trikafta in many other countries and in pediatric patients not yet approved for the drug, but we think the eligible patient population for Vertex’s four therapies will reach about 75,000 people, or roughly 90% of all cystic fibrosis patients. Only 10% of cystic fibrosis patients have a genetic mutation that is not currently able to be treated with any of Vertex’s four drugs on the market. 

Vertex's strategy has been to use its intangible assets and expertise to build upon its first cystic fibrosis drug, Kalydeco. Symdeko and Orkambi are doublet combinations that add a CFTR corrector to Kalydeco, a CFTR potentiator. Vertex’s most recent drugs to receive approval, Trikafta/Kaftrio, which are triple combination regimens, build on molecules in Symdeko and Kalydeco while layering in a new CFTR corrector, elexacaftor. The complexity and unique mechanism of these drugs results in a new, efficacious therapy that serves as a competitive advantage for Vertex. Many competitors study their own drug pipeline candidates in combination with one or more of Vertex's molecules, illustrating Vertex's position as the backbone of treatment options.

Vertex commands strong pricing power because cystic fibrosis is a rare, chronic condition and there are no alternative disease-modifying treatment options currently on the market. Many patients start treatment for cystic fibrosis in early childhood and continue throughout their lifetime. Trikafta’s U.S. list price at launch reached $311,000, exhibiting the company's strong pricing power. We estimate that Kalydeco, Orkambi, and Symdeko all command pricing upward of $230,000-$250,0000 a year for their therapies. With strong efficacy and pricing power, Vertex's cystic fibrosis portfolio has the potential to contribute over $12 billion in 2032 sales compared with just under $9 billion in 2022. 

We believe Vertex does not face significant competition in the cystic fibrosis market. Galapagos (in partnership with AbbVie) was previously its closest competitor, but in 2018 it reported lackluster phase 2 results for its lead candidates, illustrating the high bar of efficacy from Vertex's portfolio. AbbVie initially stepped away from further trials, but then it entered into an agreement to license a cystic fibrosis asset from the Cystic Fibrosis Foundation in October 2019. AbbVie is in the process of two phase 2 studies conducted with the Therapeutics Development Network. We don't see this as a viable threat to Vertex since phase 2 trials are still very early in the drug-development process and it would be years away from potentially reaching the market. 

We don't think Vertex's pipeline outside of cystic fibrosis contributes to its narrow moat, as many of its assets are in the early stages of development. However, with Vertex’s substantial cash flow, we think the company is well positioned to continue the research and development of drugs for several rare diseases over the next decade. Further, the pipeline's focus on rare indications with few or no approved treatment options will likely support pricing power. Therefore, we believe it is more likely than not that Vertex will be able to earn excess returns over the next 10 years and warrants a narrow economic moat rating.

Narrow

Economic Moat

Vertex Pharmaceuticals

Vertex Pharmaceuticals, Inc. is a global biotechnology company, which engages in the business of discovering, developing, manufacturing and commercializing small molecule drugs for patients with serious diseases. The firm focuses on development and commercializing therapies for the treatment of cystic fibrosis, infectious diseases including viral infections such as influenza and bacterial infections, autoimmune diseases such as rheumatoid arthritis, cancer, inflammatory bowel disease and neurological disorders including pain and multiple sclerosis. The company was founded by Joshua S. Boger in 1989 and is headquartered in Boston, MA.

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Vertex Pharmaceuticals, Inc. is a global biotechnology company, which engages in the business of discovering, developing, manufacturing, and commercializing small molecule drugs for patients with serious diseases. The firm focuses on development and commercializing therapies for the treatment of cystic fibrosis, infectious diseases including viral infections such as influenza and bacterial infections, autoimmune diseases such as rheumatoid arthritis, cancer, inflammatory bowel disease and neurological disorders including pain and multiple sclerosis. The company was founded by Joshua S. Boger in 1989 and is headquartered in Boston, MA.

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