The Market for This Drug Just Got 19% Bigger, but You Haven't Seen Anything Yet

On Monday, the Food and Drug Administration approved Vertex Pharmaceuticals' cystic fibrosis drug, Kalydeco, to treat patients with the R117H mutationin the cystic fibrosis transmembrane conductance regulator, or CFTR, gene.

This is the tenth mutation that Kalydeco is approved for. The expanded approval adds another 500 patients in the U.S. over age 5 -- it isn't approved for younger patients -- who could take the drug. All told, Kalydeco is now approved to treat more than 3,100 people ages 6 and older in North America, Europe, and Australia.

Source: Vertex Pharmaceuticals.

While 500 patients might not seem like much, Kalydeco costs more than $300,000 a year in the U.S., so the additional approval could add another $150 million in revenue. The run rate based on the third quarter and guidance for the fourth quarter puts annual sales around $500 million, so the additional patients will increase sales meaningfully.

Of course, not all the patients are going to take the drug and many will probably get a discount off the list price. There may also be some patients with the R117H mutationcurrently taking Kalydeco off-label, although that's probably a small percentage given the high price tag, which insurers probably weren't willing to pay until the drug was approved for these patients.

More to comeKalydeco is what's called a CFTR potentiator; it helps keep the CFTR protein at the cell surface open, which transports more salt and water across the cell membrane, clearing mucus in the airways that builds up in cystic fibrosis patients. The drug works well on mutations like R117H where the protein makes it to the cell surface, but can't function properly.

Vertex has another cystic fibrosis drug, lumacaftor, which is known as a CFTR corrector. This class of drugs helps the CFTR protein get to the cell surface in patients with mutations where there's a defect in the processing and trafficking of the protein to the cell surface.

Vertex has positive data from two clinical trials showing that patients with a mutation dubbed F508del benefited from taking lumacaftor with Kalydeco, which enhances the effect once lumacaftor moves the CFTR protein to the surface. In November, Vertex submitted an application to the FDA and European regulatory authorities requesting approval for lumacaftor in cystic fibrosis patients ages 12 and older who have two copies of the F508del mutation. The FDA will likely act first, potentially in July if the agency gives the drug a priority review. And given the unmet need, that seems highly likely.

Remember those 10 mutations that add up to 3,100 patients approved to take Kalydeco? They pale in comparison to the approximately 22,000 people ages 12 and older who have two copies of the F508del mutation in North America,Europe, andAustralia. Even if only half of those patients take the drug, we're looking at over $3 billion in sales if the lumacaftor-Kalydeco combination is priced at the same level Kalydeco costs right now.

There's also potential for Kalydeco to be used with VX-661, a next-generation CFTR corrector that Vertex is developing. By the code name, you can tell the drug is further back in the clinic, but VX-661 could expand the treatable population to include patients with one copy of F508del mutation and a different mutation in the second copy of the gene. Phase 3 trials for those patients are scheduled to start in the first half of 2015.

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Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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