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Has Vertex Peaked?


Vertex scored a huge victory when a government panel backed its hepatitis C drug telaprevir Thursday. Do the shares have any more room to climb?

After rising almost 60% this year, has Vertex Pharmaceuticals' (VRTX) stock peaked?

The shares ran up all week as investors anticipated -- correctly -- that Vertex's experimental drug for hepatitis C would win the backing of a panel of government advisers considering whether the product should be approved. The Food and Drug Administration panel voted 18-0 Thursday in favor of approving the drug, telaprevir.

The FDA is expected to make its decision on whether to approve telaprevir by May 23. The agency isn't bound to follow the recommendations of its expert panels but a unanimous vote of confidence for a drug certainly helps a drug's chances.

If approved, telaprevir likely will have competition from Merck's (MRK) boceprevir, another experimental drug that won a unanimous FDA panel backing this week. But telaprevir is believed to be a superior drug compared with Merck's product, and analysts predict it will capture at least three-quarters of the multi-billion dollar market for new treatments. (See Moment of Truth for Vertex's Hepatitis C Treatment.)

The FDA may rule on Merck's drug application as soon as next week. Both companies are expected to substantially increase the market size for hepatitis C drugs to as much as $12 billion in annual sales from about $3 billion, according to a Goldman Sachs analysis.

Hepatitis C "is one of the hottest areas for drug development, given the significant opportunity to increase cure rate," Robert W. Baird analyst Thomas Russo says.

Hepatitis C is a liver-eroding virus that has infected an estimated 4 million people in the US and 180 million worldwide. Patients can be cured but the success rate has been low with older therapies. Vertex's telaprevir was tested in company studies in combination with two older drugs. The rate of cure among people new to treatment was almost 80% for patients taking the three drugs combined, compared with less than half for those people only taking the two older drugs, Vertex studies show. The drug also works far better in patients who don't respond to the older treatments and Vertex's drug cures faster than older treatments taken alone, according to company data.

Merck shares continue to rise, trading up 1% to $36.19 Friday morning. The excitement over telaprevir seems to have peaked, at least for the moment. Shares of Vertex fell 1% to $54.95 Friday morning, following yesterday's panel vote. Trading of Vertex's stock was halted Thursday.

Can a stock that's up almost 60% this year (for a money-losing company with a market cap north of $11 billion) continue to rise?

Russo thinks so. He recommends buying the shares and has a 12-month price target of $59.

"We see the potential for more than one new drug to achieve multi-billion dollar sales" for hepatitis C treatments, Russo says. And like other analysts, he sees Vertex's treatment outselling Merck's.

RBC Capital Markets analyst Jason Kantor also set a price target of $59 a share for Vertex. He predicts telaprevir will pass $3 billion in annual sales by 2013. Additional events that will drive Vertex shares: FDA approval, labeling guidelines, pricing of telaprevir and any delay of Merck's boceprevir, he says.

Vertex hired 175 sales people to launch telaprevir in the US. If the drug is approved outside the US, Johnson & Johnson (JNJ) and Mitsubishi Tanabe Pharma will sell the drug in other countries and will pay royalties to Vertex.
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