Vertex Pharmaceuticals Incorporated: One Eye on Earnings, One on the Pipeline

Vertex Pharmaceuticals (NASDAQ: VRTX) reported solid third-quarter earnings, with sales of its cystic fibrosis drugs up 34% year over year. Nevertheless, investors rightfully have one eye on the company's pipeline, looking for the next drug that will drive future growth. Fortunately, Vertex has a combination under review by U.S. and EU regulators, and is preparing to test a pair of triple combinations that the company thinks will allow it to treat 90% of cystic fibrosis patients.

Vertex results: The raw numbers

What happened with Vertex this quarter?

Orkambi continues to drive product sales growth with revenue up 44%, as children ages 6 to 11 in the U.S. have started taking the medication.
Vertex's older medication, Kalydeco, is still going strong, with sales up 22% year over year thanks to recent Food and Drug Administration (FDA) approvals for patients with residual function mutations.
The GAAP earnings number includes a one-time upfront payment of $160 million related to the acquisition of VX-561 from Concert Pharmaceuticals, so adjusted earnings are the better way to measure the year-over-year earnings growth.
Vertex was able to grow adjusted earnings faster than product revenue growth because its spending isn't growing nearly as fast as revenue. Adjusted operating margins were 26% for the third quarter compared to 16% for the year-ago quarter.
In July, Vertex announced clinical trial results for three different triple combination regimens, suggesting the next-generation correctors VX-152, VX-440, and VX-659 are helping patients with different mutations.
In conjunction with the earnings, Vertex announced positive results from a phase 3 trial testing Orkambi in children 2 to 5 years of age with cystic fibrosis who have two copies of the F508del mutation. Vertex plans to apply for approval for use in children as young as 2 years old in the U.S. and Europe in the first quarter of next year.

What management had to say

The combination of tezacaftor and ivacaftor, which is pending approval in the U.S. and EU, is likely to cannibalize some of the sales of Orkambi and Kalydeco. Rather than trying to guess how many patients will switch and how quickly, Vertex's CEO Ian Smith said the company is going to just lump them all together for guidance purposes starting next year:

Next year, the triple combinations are going to increase R&D expenses, and Vertex plans to make investments in the supply chain in anticipation of positive phase 3 data. Investors, however, will continue to see the trend we saw this quarter with revenue growing even faster. Smith explained:

Looking forward

After a solid third quarter, management raised its 2017 guidance, and now expects product revenue of $2.10 billion to $2.15 billion, an increase from its previous range of $1.87 billion to $2.10 billion. Most of the increase in expectations comes from stronger-than-expected Orkambi sales, although the guidance for Kalydeco sales was also increased.

Looking further ahead, Vertex expects an FDA decision on the marketing application for tezacaftor/ivacaftor by Feb. 28 of next year. European regulators will take a little longer, with a potential approval in the second half of 2018.

Vertex is still waiting for some more phase 2 data for triple combinations. Once that data comes in, the company expects to pick the best two combinations to move into phase 3 development in the first half of 2018.

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Brian Orelli has no position in any of the stocks mentioned. The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.