Vertex Pharmaceuticals and Telaprevir. A protease inhibitor for Hepatitis C.

In the absence of any major news today, I decided to take a look at Vertex Pharmaceuticals VRTX.

In summary,  whilst Vertex is not a binary event biotech company, it’s near term prospects will be guided by one drug, namely Telaprevir for Hepatitis C. This drug is a protease inhibitor, which is a new class of drug that competitors are also trying to develop. Vertex has submitted a New Drug Application for Telaprevir with the FDA.

Vertex Pipeline and Timeline

	Indication	Event	Date
VX 765	Epilepsy	Ph II Top-line data	2010
VX509	Rheumatoid Arthritis	Ph II clinical data	2011
VX 809	Cystic Fibrosis	Ph II with VX 770	2011
VX 770	Cystic Fibrosis	PhIII clinical data	H1 2011
VX 222	Hepatitis C	PhII clinical data	H1 2011
Telaprevir	Hepatitis C	FDA Approval	H1 2011

source: Vertex

By far the most important event is Telaprevir. They filed an NDA in November. Telaprevir is a protease inhibitor and is likely to face future competition from Merck’s Boceprevir (which hasn’t been filed yet). Telaprevir is seen as being more convenient due to it having a shorter treatment duration (12 weeks vs. 24weeks) and also has a high efficacy in treatment of non-responders. It is also possible that Telaprevir could be used as a twice daily regimen.

Whilst Vertex could have the first mover advantage, Boehringer Ingelheim, Bristol Myers Squibb and Roche all have drugs for HCV in development and they are aiming for a once a day regimen. Moreover, Medivir recently announced excellent results in Phase II with their protease inhibitor for HCV.

The good news is that Vertex will likely be a couple of years ahead and shows superiority over its nearest rival Boceprevir. The more circumspect news is that Vertex' NDA filing is the first for this class of drug and assuming quick FDA approval may lead to disappointment. Any delay will hurt Vertex as rivals are in clinical trials. In a sense, buying Vertex would be a 'bet' upon FDA approval and expecting them to maintain a lead against the potential competition.

VX222 is being developed with the last point in mind. It is a polymerase inhibitor that is intended to be used in combination with Telaprevir. As such, it could shorten treatment time and help with efficacy with non-responders.

VX765 is interesting as it the first drug to target epilepsy via anti-inflammation, in this way seizures are believed to be able to be reduced. The upcoming Phase II data will be interesting and provide some upside potential. I would not proscribe a high chance of success with novel drugs in general.

VX770 and VX809 are being trialled in combination for cystic fibrosis. Although the phase II results for VX809 were not great, Vertex feel that-according to their laboratory research-in combination they could be efficacious in cystic fibrosis.

I did not take a position as I suspect that much depends upon Telaprevir approval. Although clearly efficacious,it is the first class of drug and I also see downside when/if Merck decide to file with Boceprevir.



Source:

Medical News Today "Telaprevir May Be Viewed More Positively By Clinicians Than Boceprevir For Hepatitis C Virus Treatment Following Their Launches In 2011"
Bloomberg "Medivir Gains as Early Study Shows Drug Kills Hepatitis C Virus"

Morphosys A Profitable and Exciting Antibody Developer

German Biotech Company Morphosys gave a R & D presentation recently and I was very impressed by what they had to say. I hold a position. Morphosys is an attractive stock to research as it has a number of profit drivers, however all stem from their expertise in antibody technology. They are profitable and I think offer the potential for substantial upside from their proprietary programme, with having the downside limited by virtue of licensing out their technology to Novartis in partnered programmes, as well as profit contribution from their antibody delivery division.

Antibodies are one of the fastest growing segments within healthcare. They offer solutions that work with the pre-existing immune system of the body. As such, they tend to take less time to develop and have less safety issues. It is also a sector that has undergone a lot of consolidation. Astra Zeneca bought Cambridge Antibody Technology, Amgen bought Abgenix and Bristol Myers Squibb bought Medarex. The three acquired companies were all antibody discoverers.

Similarly, Morphosys signed a huge deal with Novartis in 2007, principally to access their antibody screening platform HuCal. This technology a ‘fully human’ antibody development program which end to have less efficacy and compatibility issues than ‘humanised’ or mouse. The Novartis deal is the cornerstone of their partnered development program.

Morphosys Profit Drivers

Morphosys has three profit drivers.

The first is the partnered program of which they have four programs in phase II and 66 in development in total. They recently announced that Roche has begun Gantenerumab –targeting amyloid beta for Alzheimer's-in phase II.

You can access their partnered program here

http://www.morphosys.com/therapeutic-antibodies/antibody-pipeline/partnered-programs

The second profit driver is through their own proprietary program. It is this which eats up their R & D budget, but I think they have some interesting things in clinical development. They announced that

“Disclosure of multiple sclerosis as the second indication for the Company's lead development program MOR103, a fully human HuCAL antibody targeting GM-CSF. The decision is based on a compelling scientific rationale and promising pre-clinical data. MorphoSys expects to start a phase 1b trial in multiple sclerosis with MOR103 in H2 2011.”

This is very interesting because it suggests that things are going well with their ongoing trial with MOR103 in Phase 1a/2b for Rheumatoid Arthritis. Morphosys hold a strong IP position here, having bought the rights to access GM-CSF technology against inflammatory diseases in the US. This is an exciting technology which could bring about new treatments for Rheumatoid Arthritis and for Multiple Sclerosis. It appears they think MOR103 could be a blockbuster. The rest of the proprietary program is outline here…

 http://www.morphosys.com/therapeutic-antibodies/antibody-pipeline/proprietary-product-portfolio

The last of the divisions is AbD Serotec which provides the research and diagnostics industry with antibodies developed out of HuCal. This division is profitable and provides support to their R & D program.

They also gave a presentation on ArYla which is a novel antibody optimization platform, that they feel will increase the probability of success of getting antibodies through pre-clinical in to early stage trials.

Although Morphosys are unlikely to have any compound in the market until 2015, they represent a good way to make a speculative investment in the biotech industry.

Source

Morphosys RNS release http://www.investegate.co.uk/Article.aspx?id=20101125063000H5353

Morphosys Website http://www.morphosys.com/

Nichols Plc. Vimto is a Good Play on Emerging Market Growth

I decided to take a look at a UK stock Nichols Plc. What makes Nichols interesting as an equity research stock is that they own Vimto, which is a very popular fruit soft drink during Ramadan. Furthermore, for the next ten years Ramadan is set to take place in summer and, this should lead to strong sales growth for Vimto. This year’s Ramadan began on August 10 and, roughly speaking, the date in next year is usually 10/11 days before the previous years.  Around 22% of soft drink sales (mainly Vimto) are international and this is mainly to the middle east.

All of the numbers below, are calculated using a 164m market cap and a share price of 450p

The story doesn’t just lie with Vimto internationally. In the UK, Nichols have expanded their product range to things like Cherry Vimto and the Diet range.

I’ll run some numbers

		2005	2006	2007	2008	2009
Turnover		51521	52296	55276	56221	72378
Gross Profit		33101	27532	27955	28701	36180
Gross Margin		64.25%	52.65%	50.57%	51.05%	49.99%
Operating Profit		7219	7385	8742	9804	12501
OP Margin		14.01%	14.12%	15.82%	17.44%	17.27%

So what we see here is an impressive growth strategy, particularly over the last year. Margins were trimmed slightly in 2009 but this was mainly due to promotional activity to add scale. Their trading history hasn't always been so rosy. In 2005 they bough the Panda and Sunkist brands, only to have a 5.7m goodwill impairment charge on Panda in 2008. Similarly, they have spent time refocusing soft drinks towards stills and sugar free options, as carbonated fizzy drinks are hardly the beverage de jour.

Looking at the divisional break up of sales

Soft Drinks			2005	2006	2007	2008	2009
	Rev		39.3	39.9	41.7	43.5	55.1
	Op Profit		7.1	7.4	8.3	9.6	11.5
	Margin		18.07%	18.55%	19.90%	22.07%	20.87%
Beverage Systems
	Rev		24.1	12.4	13.6	12.7	17.3
	Op Profit		0.7	0.3	0.4	0.9	1.7
	Margin		2.90%	2.42%	2.94%	7.09%	9.83%
International Soft
	Revenue			6.8	8.9	8.9	12
	% of Soft Drinks			17.04%	21.34%	20.46%	21.78%

You can see that international sales are rising as a share of total soft drink sales. There were some manufacturing difficulties in Yemen which held back the 2008 numbers.Growth has been good and they are turning around the beverage systems division having changed strategy. They are now number three in beverage dispense in the UK.  However, what is happening with the balance sheet?
                                          2005      2006         2007       2008        2009

Inventory		3972	2169	2509	2758	2694
Inventory/S	ales	0.08	0.04	0.05	0.05	0.04
Debtor		14592	12364	13177	13575	14730
Debtor Days		103	86	87	88	74
Creditors		17532	8964	8828	10137	11789
Creditor Days		347	132	118	134	119

Everything looks fine here. Debtor days are reducing and creditor days are not reducing. Their cash generative nature is demonstrated when you look at cash flow
                                         2005        2006        2007       2008        2009

Op Cash Flow		9704	5841	7178	9414	14102
conversion		134.42%	79.09%	82.11%	96.02%	112.81%
Capex		1697	837	336	220	202
Tax		2004	1654	1800	2595	3076
Interest		575	-84	-291	-288	-45
FCF		5428	3434	5333	6887	10869
FCF/Turnover		10.54%	6.57%	9.65%	12.25%	15.02%
FCFYield		3.31%	2.09%	3.25%	4.20%	6.63%

This analysis is based on a share price of 450p and a market cap of 164m. So, it looks like they are incrementally adding free cash flow margin as turnover and profitability goes up. I'm very impressed with the trend in cash flow conversion. This suggests that as long as they can continue to grow revenues, they can increase free cash flow.

Consensus forecasts are for revenues of 80.4 and 83.75m  revenues for 2010 and 2011 respectively.

The main downside risks are that they fail to continue to execute in the UK, bad weather (which affected 07 and 08) and a change of consumer tastes in the UK. There is also the general macro economic risk of falling UK carbonate and still sales.

The upside risk comes from continued strong growth in the Middle East and Africa. Furthermore, a potential purchaser spotting their positioning in the middle east and buying them out. Indeed, they were approached a couple of years ago. This was possibly AG Barr (Irn Bru etc) before they bought out Rubicon.

I think you could easily see them generating 9.6m in free cash flow in 2011 so a share price of 480p (a 5.5% FCFYield) is not unreasonable. However, at the current price I would probably want a dip first.

Disclaimer: I have no position. All figures are estimates, of which I take no responsibility for and, this doesn't constitute investment advice.