Vertex Pharmaceuticals Inc. VRTX posted a loss of 80 cents per share (including stock-based compensation expense) in the second quarter of 2015, wider than the year-ago loss of 79 cents and the Zacks Consensus Estimate of a loss of 76 cents. Excluding the impact of stock-based compensation expense, second-quarter 2015 loss was 54 cents per share as against the year-ago loss of 61 cents per share.

Vertex reported revenues of $159.9 million in the second quarter of 2015, beating the Zacks Consensus Estimate of $147 million and up 31.1% from the year-ago period.

Kalydeco Driving Revenues

Vertex’s second-quarter revenues consisted of sales from cystic fibrosis (CF) product Kalydeco ($154.9 million) and royalty revenues ($5 million).

The company reported a 37% increase in Kalydeco sales in the second quarter of 2015 from the year-ago period and a sequential improvement of 18%. Sales benefited from additional use in the U.S. as well as ex-U.S. markets. While U.S. sales were $93 million, ex-U.S. sales were $62 million. Rapid uptake in patients in Australia following the completion of reimbursement discussions in late 2014 as well as uptake among patients with the R117H mutation boosted Kalydeco’s performance.

During the reported quarter, Kalydeco gained reimbursement approval for non-G551D gating mutations in several European countries where these mutations are prevalent, including Italy, France, England and the Netherlands. The company said that more than 85% of eligible gating patients in Europe have access to Kalydeco now.

Vertex is currently seeking EU approval of Kalydeco for use in adults (18 years and above) with the R117H mutation and in children (ages 2 to 5) with one of nine gating mutations.

Meanwhile, the company is evaluating a combination of Kalydeco (ivacaftor) and VX-661 in four phase III studies in different groups of people with CF who have at least one copy of the F508del mutation.

Orkambi (lumacaftor/ivacaftor), which gained FDA approval on Jul 2, for the treatment of CF in people ages 12 and older with two copies of the F508del mutation, has been launched in the U.S. The company is working on making the drug accessible to the 8,500 eligible patients.

EU approval for Orkambi could come by year end. Orkambi is also being evaluated in phase III studies in children (6 - 11 years old) – positive results would allow the company to file for label expansion in the first half of 2016. Another study in this patient population is being conducted to support approval in the EU.

Adjusted (including stock-based compensation expense) research and development (R&D) expenses increased 8.1% to $223.5 million. Second-quarter 2015 adjusted (including stock-based compensation expense) selling, general and administrative (SG&A) expenses increased 28.2% to $93.6 million.

Ups Kalydeco Outlook

Vertex raised its 2015 guidance for Kalydeco revenues. The company now expects Kalydeco revenues of $575 - $590 million, up from the previous range of $560 - $580 million. Vertex noted that growth rate in patients on Kalydeco could be tempered by enrollment in the VX-661 program.

Operating expenses will go up in the second half of the year as the company invests in the Orkambi launch and a phase III program evaluating VX-661+Kalydeco. The company continues to expect operating expenses (excluding stock-based compensation expense) in the range of $1.05 billion to $1.10 billion.

Our Take

Although Vertex posted a wider loss in the second quarter, revenues were well above expectations. Importantly, Kalydeco improved on a sequential basis in addition to growing from the year-ago period. Vertex is working on expanding the product’s label. Orkambi’s approval is a major boost for the company and provides access to a huge number of eligible patients. However, we remain concerned about Vertex’s dependence on just the CF franchise for growth.

Vertex is a Zacks Rank #2 (Buy) stock. Some better-ranked stocks in the health care sector include Isis Pharmaceuticals, Inc. ISIS, AMAG Pharmaceuticals, Inc. AMAG and Ligand Pharmaceuticals Incorporated LGND are better-ranked stocks in the health care sector – all three hold a Zacks Rank #1 (Strong Buy).

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