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The Wild Ride That Is the Vertex Trial Show: How to Play It


The outcome of a Vertex drug trial for cystic fibrosis treatment could have a drastic impact on share price; JPM says the stock could eventually trade anywhere between $32 and $134 per share.

The outcome of Vertex Pharma's (NASDAQ:VRTX) Ph. III TRAFFIC/TRANSPORT trials of VX-809 in conjunction with Kalydeco for the treatment of cystic fibrosis is looking more and more like the type of binary event usually reserved for single-product start-up biotechs. It's rare to see such two-way anxiety --  as reflected in the options market -- around clinical results of a company with already $500 million in revenues run rate, $1.3 billion in net cash, and a decent pipeline of Phase II trials.

I won't delve into the science of whether the T/T trial will be successful or not because much smarter and more science-educated types than me don't seem to be able to agree on it either. So I will stick to the message of the options market and what seems to me a fairly reasonable set of scenarios outlined by JPMorgan (NYSE:JPM).

The T/T results are anticipated by the end of the month or shortly thereafter, so I will look at the July 11 weekly option series. At 153% implied volatility, the at-the-money options currently suggest a post-event move of about 22% ($15) either way. That seems rather large, but it may actually be understated if the trial is an outright failure or if it prints at the high end of expectations. 

The measure of success or failure depends on whether the drugs meet the primary point of FEV-1 improvement, and the secondary points of improvements in pulmonary exacerbations and weight gain.

To guesstimate where the stock may trade depending on the results, JPM suggests the following:

  • The current Kalydeco revenue stream, other products in the clinic, and net cash on hand would put Vertex fair value at about $32/sh.  That's where the stock may trade if the T/T trial fails outright on the primary endpoint.
  • If the trial shows an FEV-1 improvement between 0-3% and no secondary benefits, based on the size of the addressable market, penetration and the price Vertex would be able to dictate, JPMorgan estimates that VX-809 would be worth about $31/sh. bringing the total share value to about where it trades today.
  • If the results are positive on both the primary and secondary endpoints, here's how much more VX-809 could add to VRTX stock depending on how strong the results are, and the corresponding greater penetration and pricing power:
FEV-1 improvement < 3% with positive secondary benefits: added value $47/sh
FEV-1 improvement between 3-4% with secondary benefits: added value $65/sh
FEV-1 improvement between 4-5% with secondary benefits: added value $88/sh
FEV-1 improvement > 5% with secondary benefits: added value $102/sh

As you can see, the scenarios offered by JPMorgan suggest that post-event, the stock may trade as low as $32 and as high $134, way outside the options pricing.

I tend to stay away from these situations but, aside from the near-term importance of the T/T trial results, the company's cystic fibrosis pipeline strikes me as being similar to Gilead's (NASDAQ:GILD) as it gradually came to own the HVC market. So I decided to take a small position into the big bad event and let it ride. Specifically, I am:

  • Long 1x stock;
  • Long 1.5x Aug at-the-money puts; and
  • Long 1x Aug 75 calls
This setup will work great if the stock trades down to the low $30s (after collecting on the puts, my shares will be roughly at break-even), or approximately above $85. Conversely, the two option positions will get zapped if the stock fails to move hard either way. Given the anxiety and mix of opinions out there, the latter scenario seems the outlier.

Twitter: @FZucchi
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Author holds positions in VRTX and GILD.
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