After Vertex Pharmaceuticals’ (VRTX) third-quarter results showed robust uptake of cystic fibrosis drugs Orkambi and Kalydeco, we raised our fair value estimate to $175 per share from $170. Our updated 2017 sales estimates fall in line with management’s new outlook: $1.29 billion-$1.32 billion for full-year Orkambi sales (from $1.1 billion-$1.3 billion) and $810 million-$830 million for Kalydeco sales (from $770 million-$800 million). We think the company’s drug portfolio was significantly derisked following the earlier news of positive triple-combination drug data for harder-to-treat cystic fibrosis patients with heterozygous F508del mutations. We believe Vertex’s monopoly in the cystic fibrosis market merits a narrow economic moat rating, and we think the shares are currently undervalued.
Thanks to the approval of Kalydeco in children ages 2 and older in the United States with residual function mutations, the drug’s sales increased 12% quarter over quarter. Once these patients come on line, we believe Kalydeco sales will return to slow but steady growth. Phase 3 data evaluating next-generation corrector tezacaftor in combination with Kalydeco did not show an acute effect on the lung function Kalydeco patients. However, as these patients are already well served by Kalydeco, we don’t believe the finding bears any significance for our model estimates.
Kelsey Tsai, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.