Vertex Posts Wider Loss

Vertex Pharmaceuticals Inc. (VRTX) posted first-quarter 2011 loss (including stock-based compensation expense) of $1.05 per share, in line with the Zacks Consensus Estimate, but wider than the year-ago loss of 80 cents.

Increased expenses related to the potential launch of hepatitis C virus (HCV) candidate, Incivek (proposed US trade name for telaprevir), led to the higher loss.

Revenues

Revenues for the reported quarter increased 229% to $73.7 million, exceeding the Zacks Consensus Estimate of $25 million. First quarter revenues included a $50 million milestone payment received from Johnson & Johnson (JNJ), on the acceptance of the Marketing Authorization Application (MAA) for Incivek in Europe.

Vertex Pharma’s first quarter revenues consisted of royalty revenues (down 5.4% to $6.1 million) and collaborative revenues (up 321.9% to $67.6 million).

The company receives royalty from GlaxoSmithKline plc (GSK) on sales of Lexiva, a HIV protease inhibitor.

Collaborative revenues consist of reimbursements received by Vertex Pharma under its agreements with Johnson & Johnson and Mitsubishi Tanabe.

Other Details

Adjusted research and development (R&D) expenses for the quarter increased 10.9% to $158.6 million, mainly due to continued investment in the pipeline.

First quarter adjusted selling, general and administrative (SG&A) expenses more than doubled to $71.5 million, as a result of an increase in head count and certain overheads related to the potential launch of Incivek.

Pipeline Update

During the first quarter of 2011, the US Food and Drug Administration’s (FDA) Antiviral Drugs Advisory Committee voted unanimously (18-0) in favor of approving Incivek as a treatment for HCV, in both treatment-naïve as well as treatment-failed patients.

The FDA’s decision on Incivek’s approval status is expected by May 23, 2011. The drug is also under regulatory review in the EU and Canada. Johnson & Johnson anticipates a response from the European regulatory body in the second half of 2011.

On the cystic fibrosis front, Vertex Pharma reported positive data on VX-770 from three studies (STRIVE, DISCOVER and ENVISION) during the first quarter.

Additional 48-week data from the ENVISION trial is expected in mid-2011. Based on clinical data from these studies, Vertex Pharma plans to make regulatory submissions in the US, Canada and the EU in the second half of 2011.

Our View

We currently have a Neutral recommendation on Vertex Pharma, supported by a Zacks #3 Rank (short-term Hold rating). Despite the losses incurred during 2010 and the first quarter of 2011, we are pleased to note that Vertex Pharma has secured priority review status for Incivek in the US, Canada and the EU.

However, with Vertex Pharma banking on Incivek for growth, any delay in the approval of the drug would weigh heavily on the stock. Moreover, we note that the HCV market is highly competitive, with several pharmaceutical companies developing candidates for the said indication.

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