Will Orkambi Help Vertex (VRTX) Post a Lower Loss in Q3?

Vertex’s track record has not been that great with the company posting a wider-than-expected loss in three of the last four quarters and reporting in-line results in the remaining quarter. The average earnings surprise over the last four quarters is -9.56%.

Orkambi in Focus

Vertex, which had a strong presence in the hepatitis C virus (HCV) market earlier, is now entirely focused on the cystic fibrosis (CF) market. The company’s flagship product, Kalydeco, a cystic fibrosis transmembrane conductance regulatory (CFTR) potentiator, is approved for the treatment of CF in patients (of certain age groups) who have specific genetic mutations in their CFTR gene.

Kalydeco sales, which increased 37% from the year-ago period in the second quarter of 2015 and 18% sequentially, should continue to benefit from additional use in the U.S. as well as ex-U.S. markets. Geographical as well as label expansion should boost Kalydeco sales, which are expected in the range of $575 - $590 million in 2015, though growth will be tempered by enrolment in the VX-661 pivotal program.

Meanwhile, 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. On the second quarter call, the company had reported that more than 85% of eligible gating patients in Europe have access to Kalydeco now.

Vertex is currently looking to get Kalydeco approved in the U.S. for us in CF patients (2 years and older) who have one of 23 residual function mutations. A response should be out by Feb 6.

However, while Kalydeco’s performance remains important, Vertex’s new CF drug, Orkambi (lumacaftor/ivacaftor), which gained FDA approval on Jul 2 for the treatment of CF in people (ages 12 and above) with two copies of the F508del mutation, will be a key area of focus. The company is working on making the drug accessible to the 8,500 eligible patients.

Vertex has been pretty clear that due to several factors Orkambi will take longer to reach peak penetration compared to Kalydeco (90% peak penetration in about six months). Uptake will be tempered by factors like the volume of patients as well as the time needed to educate and get them through the reimbursement approval process.

On the third quarter call, in addition to reporting net Orkambi revenues, the company will be providing details on access across the board and by different payor types and the number of patient initiations.

With the CHMP in favor of approving Orkambi, EU approval should come by year end.

Operating expenses should keep increasing as the company continues to invest in the Orkambi launch and the ongoing VX-661 development program.

What Our Model Indicates

Our proven model does not conclusively show that Vertex is likely to beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to be able to beat earnings. That is not the case here as you will see below.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00% since the Most Accurate estimate is in line with the Zacks Consensus Estimate of a loss of 60 cents per share.

Zacks Rank: Vertex carries a Zacks Rank #3. Vertex’s Zacks Rank #3 when combined with an ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are a few health care stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

The Earnings ESP for Sanofi SNY is +2.22% and it carries a Zacks Rank #3. The company is scheduled to release third-quarter results on Oct 29.

Keryx Biopharmaceuticals Inc. KERX, also reporting on Oct 29, has an Earnings ESP of +3.85% and carries a Zacks Rank #3.

Bayer AG BAYRY, also reporting on Oct 29, has an Earnings ESP of +1.82% and carries a Zacks Rank #2.

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