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This pharma stock is up 111% and investors are wondering what's next

In this file photo, a Vertex Pharmaceuticals scientist oversees a machine that tests compounds used in cystic fibrosis research.


Vertex Pharmaceuticals Inc., on the brink of a breakthrough that could treat nearly all patients with cystic fibrosis, has done everything an investor could ask for in 2017, including double its market cap to almost $40-billion (U.S.).

For restless bulls hoping for more, the money gets a little harder to make from here.

News in July that an experimental three-drug cocktail worked better than expected for a stubborn form of the deadly lung disease has helped the stock rise 111 per cent in 2017 and made it the best performer in the S&P 500 for most of the year.

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It lost that crown in September because of its first down month since 2016.

Wall Street firms remain overwhelmingly bullish, with 22 buys and six holds. Part of the optimism may be tied to expectations the 26-year-old Boston drug maker will be taken over, though no deal has materialized.

At least one analyst, Y Katherine Xu of William Blair & Co., says investors got ahead of themselves in estimating the potential market size for Vertex's new therapy. One key element that's missing from some long-term models is the risk that other drug makers may introduce similar treatments, Ms. Xu said.

"If there's competition, the tail of that revenue stream could be cut in half or cut by a third," Ms. Xu said in a phone interview. For rivals, "it is indeed a tall order, because they have to achieve a lot in a very compressed timeline, but it's not impossible."

Potential competitors exist. Galapagos NV and partner AbbVie Inc., as well as Proteostasis Therapeutics Inc., are developing their own therapies for cystic fibrosis and may be as few as two to three years behind Vertex, according to Ms. Xu. She has a market-perform rating on Vertex shares and expects the stock to stay range-bound until competitors present data in the middle of next year.

The companies are chasing what's seen as the "holy grail" in the treatment of cystic fibrosis, a lung condition that affects more than 70,000 people worldwide. Vertex is already the leader in this market. Its top-selling drug, Orkambi, combines two types of treatments known as potentiators and correctors. The company is waiting for a regulatory decision on a better and safer version of the drug that is expected to drive near-term growth.

Three-drug cocktails could be revolutionary because there are still tens of thousands of patients with genetic mutations that aren't helped by the current treatments. Vertex will likely take two of its triple combinations into final-stage human tests next year and one of them could be on the market as soon as 2019, said Geoffrey Porges, an analyst at Leerink Partners LLC, in a note last month.

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Unlike any of its large biotech peers, Vertex is projected to post 24-per-cent annual growth on average for the next five years, according to BTIG LLC, which recently initiated coverage with a buy recommendation and a Street-high target price of $200, indicating 29-per-cent upside from the last closing price.

"They have the stronghold in CF," JMP Securities LLC analyst Liisa Bayko said in a phone interview, using an abbreviation for cystic fibrosis. They've raised "the bar very high, so it makes it hard for other potentiators and correctors to really compete, because they're one step ahead."

As it stands, analysts expect growth to moderate in 2022 as competing products arrive and there are fewer patients left to be treated.

For now, Vertex's leading market position looks secure, but as the drug maker's brief foray into hepatitis years ago demonstrated, barriers to competition don't always last.

The company's blockbuster drug, Incivek, exploded out of the gate in 2011, only to quickly fall behind newer treatments from companies such as Gilead Sciences Inc. With sales vanishing, Vertex cut 15 per cent of jobs and sped up development of its cystic fibrosis drugs.

"What do they have to show besides CF?" Ms. Xu said. "You have to continue to reinvent yourself and renew your business, so you don't run into a Gilead problem."

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