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Demand for Vertex Pharmaceuticals ' (NASDAQ: VRTX) cystic fibrosis drugs is growing rapidly, and that's fueling rapid bottom-line growth, yet Vertex Pharmaceuticals' shares are dropping. Is now a good time to add Vertex Pharmaceuticals to a portfolio?

In this clip from The Motley Fool's Industry Focus: Healthcare , analyst Kristine Harjes is joined by contributor Todd Campbell to discuss Vertex Pharmaceuticals' financials and key catalysts this year, and whether now is a good time to buy this company's shares.

A full transcript follows the video.

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This video was recorded on Feb. 6, 2018.

Kristinte Harjes: As promised, we want to next dive into Vertex Pharmaceuticals, which we talked about at the end of 2017, highlighting them as one of the best-performing healthcare stocks of that year. They ended up being up 103% over the course of 2017, bringing them to a market cap of around $40 billion today. They reported earnings about a week ago, on Jan. 31. Todd, what stood out to you?

Todd Campbell: If you're kicking yourself for not getting involved in this company last year, maybe you get an opportunity to get involved in it here in 2018. Shares are down about 10.7% since Feb. 1 close. That's a pretty solid decline for the company. Of course, nothing has changed to this story. They remain probably one of the most innovative companies out there, specifically within the area of cystic fibrosis, which, you may recall from prior shows, is a hereditary disorder that can cause the buildup of mucus in the lungs. Infections that occur can damage respiratory systems and unfortunately lead to a premature death. Sadly, there have not been a lot of treatment options available to cystic fibrosis patients in the past. But that's changed thanks in part to Vertex, and as a result, the company's sales and profitability, now, are growing really quickly.

Harjes: They've had cystic fibrosis drugs on the market for many years now, but they've been able to steadily expand the number of patients that these drugs, and hopefully, going forward, others, will be able to treat. And they're hoping that eventually, their drugs could help up to 90% of cystic fibrosis patients. But they do have a handful of catalysts coming up very soon that could meaningfully expand the number of people that they're currently able to help.

Campbell: Before I dive into those, I want to give a quick and dirty on what the final quarterly results were, the final full-year 2017 results were, for our listeners. Sales last year were $2.5 billion, or $2.49 billion. That was up 46%. Earnings per share were up $1.95, or 129%. There are two drugs that they have in the market right now: Kalydeco. sales of that drug increased 20% year over year to $845 million. And Orkambi. Sales of that drug increased 35% year over year to $1.32 billion. Now, what's interesting about this company is, at the end of this month, there's an FDA decision that's expected on a two-drug combination. If that two-drug combination of ivacaftor and tezacaftor, if that gets approved, that'll increase the addressable patient market by another 1,500 patients. Right now, Kalydeco and Orkambi can treat about 29,000 of the 75,000 or so cystic fibrosis patients that are out there. So increasing that by another 1,500 is a bullish thing, that's a very good thing. If they win approval for it, that two-drug combo can then act as a fundamental underpinning for these other combination studies that they're conducting to come up with a triplet therapy that could theoretically get us to that point that you were talking about previously, where we could get to 90% of the cystic fibrosis patient population.

Harjes: Yeah. So the way to think about this, Kalydeco and ivacaftor, that's the same thing, the duo that they're looking at with the Feb. 28 PDUFA date is a combination of Kalydeco and tezacaftor. They're also looking at adding a third one of these drugs into that mix, or in various other combinations, with a handful of phase 3s that are starting this year. So these are all incremental changes that can hopefully address more and more patients, because this disease takes a lot of different forms, so it's not like you can just have a drug approved for cystic fibrosis. It's always much more specifically, narrowly defined. But as I mentioned earlier, Vertex does think that its drugs could eventually help up to 90% of this entire patient population, which is pretty incredible.

They have three main categories of goals that they laid out at J.P. Morgan, and only one of them is cystic fibrosis related. The first goal is, achieve the company's vision in CF. But then, beyond that, it's, expand the pipeline outside of cystic fibrosis. And the third category of goals is, build financial strength. So this is a company that does clearly believe it's only just getting started. They've made a lot of progress in CF, and I'm looking forward to seeing what they do beyond that, as well.

​Campbell: These drugs, when they originally got approved, they were approved for older patients. And as additional study data has come out, the labels have been expanded to include younger and younger and younger patients. That's one of the reasons now that you see so many people that can be helped by these drugs. I think you look at this and you say, they're doing $2 billion in sales now, and that's only by treating for less than half of the addressable market. What could happen from there?

In 2018, they haven't said what their guidance for sales and earnings are yet. They're going to wait until the FDA weighs in with the decision on the two-drug combo at the end of the month, but it may be helpful for listeners to know that industry watchers are predicting $2.98 a share in earnings this year, and that's up from $2.85 90 days ago. So, yes, you have operating leverage here as these drugs are getting more and more widely used. That's translating into profits for this company that it can then use to reinvest into different projects in its R&D pipeline, including, they have one trial they're conducting alongside Johnson & Johnson  for a therapy for flu-related complications in people who are hospitalized. They also have a pain drug in mid-stage trials. And I'm sure we're going to hear, over the course of the next 12 to 18 months, a lot more about what their plans are to expand beyond cystic fibrosis.

Harjes: Absolutely. As we wrap up, better buy: Vertex or AbbVie ?

Campbell: I have to go with AbbVie. I think they just have more shots on goal right now than Vertex. The other thing that makes me a little nervous about Vertex, and investors should be paying attention to this, AbbVie is actually working with Galapagos , which is another company, on their own cystic fibrosis drugs, their own combination trials, and data should start coming out of that this year. So, theoretically, Vertex may not have this market all to itself come 2020.

Harjes: I'll also add to that that Vertex is partnered with CRISPR Therapeutics , which is a gene-editing company. They're looking at one-time cures for cystic fibrosis as opposed to, right now, treatment is chronic. So they could also be working themselves out of a market there, too. Which is, of course, a very good problem to have, but it's something to keep an eye on.

Kristine Harjes owns shares of Johnson & Johnson. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.

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