Sunday, October 21, 2007

Vertex's sell off is a great buying opportunity

Vertex Pharmaceutical's stock (VRTX)dropped about $5 or 14% to $30 on the news release that Schering Plough's Protease inhibitor Boceprivir, which had performed poorly in previous trials, showed that about 79% of patients achieved early response. As soon as this news came out( with no trial result detail) , an analyst from Cowen and Co. downgraded Vertex due to concerns from competition.

First of all, the size of this market (up to $4 billion annual estimated sales) makes competition less of a factor. Second, being first to market increases the probability of success of any product but it does not guarantee it. Third, the details of the Schering trial will make us realize that Telaprevir is still argubly the best product with most clinical data. For example, in the Boceprivir trial, patients were primed with Peg-interferon and ribavirin before the start of triple drug therapy. Also, no long term sustainability of response rates are available beyond the original 12 week data mentioned in the abstract. Finally, the drop out rates due to side effects, the unknown methodology for calculation of percent responders as well the higher minimum detection limit of the PCR assay used to determine virus levels makes me question the strength of these results.

I still believe Telaprevir is the front runner to hit the market before any other new HCV medications and will capture a good percentage of the world wide market thanks to its partnership with J&J.

VRTX stock is a great buy at these levels as I believe a blockbuster product in a multi-billion dollar market should value the company between $6-10 billion market cap once Telaprevir is in Phase III. Days like these, I am glad that the efficient market theory, which is taught at every fiance school, is somewhat flawed for smaller companies and individual investors can take advantage of under-priced securities. As retail investors, we should recognize and plan for these events.

I had previously owned stocks and leaps in VRTX. Given this recent movement, I have added some medium term calls 2-6 months, to take advantage of a possible run after the earnings report and the release of more clinical trial results in November. However, given the difference of opinion by analysts and other shareholders who have sold their shares recently, I am holding on to some puts as a hedge.

Bottom Line: Buy VRTX at these levels and hold for a long term for a possible 2-5 times returns in the next few years.

Disclosure: The author owns shares and options in VRTX.