Existential Crisis in Europe: Through the Lens of Healthcare


“Like Hitler, like Stalin, the énarque believes that power will always prevail over economics.” ― Bernard Connolly, The Rotten Heart of Europe: Dirty War for Europe’s Money

“Everybody aspires to an affordable home, a secure job, better living standards, reliable healthcare and a decent pension. My generation took those things for granted, and so should future generations.” ― Jeremy Corbyn


Señor Mario Draghi pledged in 2012 to do “whatever it takes” to save Europe from the sovereign debt crisis that engulfed many members of the European Union. Those momentous words took the eurozone out of the throes of a crisis and put into motion an epic collapse in bonds yields in Europe first, the rest of the developed world second.


Mario Draghi’s resolve brought about an immediate shift in the market’s mood. Traders reacted with alarming speed, jumping into European sovereign bonds, reaping huge rewards as yields collapsed across the Eurozone. Mario Draghi understood well the importance of psychology on market participants when he stepped up to avert the EU’s existential crisis.


Today, the European Union faces a different kind of existential crisis. One brought on by healthcare systems in Italy, Spain and other parts of Europe bursting at the seams, unable to provide the necessary care to contain the suffering of those afflicted with the coronavirus.

The physical world is defined by constraints. Neither words nor policy can be used to conjure up more hospital beds, deliver vaccines or transform able citizens into frontline healthcare professionals. Yes, war time like measures can be taken to divert productive resources away from the expendable to the essential, even such measures, however, require time, energy and a requisite set of skills and resources.

Words are unlikely to suffice this time around.


Europe Divided


“Italy’s political leaders from Left to Right have erupted in fury over the EU’s minimalist, insulting, and cack-handed response to the Covid-19 pandemic, warning that lack of economic solidarity risks pushing the bloc’s festering divisions beyond the point of no return.” ― Ambrose Evans-Pritchard, EU project in ‘mortal danger’ if Italy and Spain are abandoned


Jean Monnet, one of the founding fathers of the European Union, famously argued that “Europe will be forged in crises, and will be the sum of the solutions adopted in those crises.”

The COVID-19 pandemic has revealed the fragility of the bond that holds the EU together. In a matter of weeks, the EU has gone from a single bloc to each member fending for themselves in a bid to contain the damage wrought by the pandemic.

France, Italy, Spain and six other members of the EU, in a joint letter to European Council president Charles Michel, have called for the issuance of ‘coronabonds’ — that is, joint European debt to finance the fight against coronavirus. Germany and the Netherlands, in response, have expressed reservations and are ruling out any such issuance.

The Europe Union has not put forth a solution to the current crises, will the consequence be a continent divided?


Currency Straitjacket


EU membership comes with many constraints. Particularly onerous are the budgetary limitations placed on those economies unable to live within their means or suffering from an economic slowdown. Further exacerbating the issue is the common currency, which has eliminated the flexibility to depreciate previously availed by the economic laggards remain competitive.

Take for instance, the ratio of the purchasing power parity (PPP) based exchange rates for Germany and Italy. (In the chart below, a downward sloping line implies a depreciation of Italy’s exchange rate relative to Germany’s exchange rate in PPP terms.)

PPP Germany Italy

During the 1990’s, the Italian lira almost consistently depreciated relative to the deutschemark. This process of continuous depreciation enabled the Italian economy to compete with the German economy, if not in terms of sophistication, most definitely in terms of price. Since the introduction of the euro, however, Italy has lost this flexibility and can improve upon the German offering neither in price nor in sophistication.

This lack of flexibility combined with the budgetary and fiscal constraints that come with EU membership, is unlikely to escape the scrutiny of the Italians and their Mediterranean neighbours. Especially as they come to weigh the costs of EU membership in shadow of the suffering of their citizenry during the COVID-19 pandemic. The evidence is particularly damning, when one considers how these constrictions have translated into systematic underinvestment in the healthcare systems of countries that have lagged behind economically.


Healthcare Expenditure


The chart below compares healthcare expenditure, as a share of total government expenditure for Germany, Italy and Spain.

Healthcare Exp pct

Healthcare spending, relative to other forms of government spending, in Germany has increased by almost 2 percentage points between 2010 and 2019. Whereas it has declined by 1 percentage point in Italy and remained about the same in Spain.

In both absolute and relative terms, this has translated into a significant increase in the amount Germany spends on healthcare. In 2010, Germany spent, in current euro terms, approximately €60 billion more than Italy on healthcare. In 2019, the difference in healthcare expenditure between the two nations amounted to more than €120 billion. In per capita terms, Germany spent 9.2 per cent more than Italy on healthcare in 2010; in 2019, the difference was 46.3 per cent.

Given its robust economic performance, Germany, within the confines of the EU’s rules, has been able to substantially increase its government expenditures. Whereas, Italy and Spain, in the aftermath of the sovereign debt crisis, have been unable to increase overall government expenditure. The unfortunate corollary of which is a stagnation of investment in their respective healthcare systems.

Healthcare Exp abs

The growing disparity in healthcare investment across the EU is even more stark when comparing the availability of hospital beds. In 1995, Italy had 6.3 beds per 1,000 people, Spain 3.9 and Germany 9.7. At the end of 2017, Italy was down to 3.2 beds per 1,000 people, Spain 3.0 and Germany 8.0.

hospital beds

Italian and Spanish hospital bed capacity per capita has declined by half and one third, respectively, even as their populations have aged and the need for healthcare services has increased not decreased.


A New Way Forward


Whether it is German conservatism, Mediterranean profligacy or a combination of both that has contributed to the woeful under investment in healthcare in Spain and Italy, we do not know for certain. We do, however, see the statistics as a powder keg that could bring about the end of EU in its current form.

For the populace may withstand economic hardship in pursuit of a lofty goal; there are few, however, that will accept the suffering or loss of loved ones. If they are not already, it is only a matter of time before Italians and Spaniards begin questioning why they given up sovereignty over their laws, their borders, their budget and their currency, when in their time of need their membership in the EU has hindered, not supported, them.

From Arundhati Roy in the Financial Times:


“Historically, pandemics have forced humans to break with the past and imagine their world anew. This one is no different. It is a portal, a gateway between one world and the next.

We can choose to walk through it, dragging the carcasses of our prejudice and hatred, our avarice, our data banks and dead ideas, our dead rivers and smoky skies behind us. Or we can walk through lightly, with little luggage, ready to imagine another world. And ready to fight for it.”


The European experiment, once these trying times pass, may ultimately hinge upon which nation chooses to walk into the future lightly. Will it be one of Italy, Spain or any one of the other member nations suffering under the weight of the euro, choosing to leave behind the currency? Or will Germany overcome the scars of her past and shed its fiscal conservatism?

Time will tell. For now, we believe the Europe of tomorrow, will be unlike the Europe of yesterday.


Stay safe.


This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Vertex Pharmaceuticals $VRTX


Investment Case


  • Vertex Pharmaceuticals is the only pharma company with the necessary regulatory approvals to market medicines for the treatment of cystic fibrosis, i.e. a sub-category monopoly.


  • Four approved medicines — TRIKAFTA SYMDEKO/SYMKEVI, ORKAMBI, and KALYDECO — with list prices ranging from $272,000 to $311,000 per annum


  • Across the US, Europe, Canada and Australia there are an estimated 75,000 patients with CF


  • Vertex’s medicines are presently being used to treat 60% of these patients; in the US, 90% of all CF patients are eligible for at least 1 out of Vertex’s 4 CF treatments


  • TRIKAFTA approved by the FDA for people 12 years or older and certain types of CF conditions in October 2019


  • Increasing the addressable market for Vertex’s medicines in the US by c. 6,000 patients.


  • Added $420m in additional revenue in 9 weeks since approval. TRIKAFTA is Vertex’s most successful launch and one of the most successful drug launches in the last 5 years.


  • Vertex has applied for marketing approval for the treatment in Europe.


  • Vertex reached deals with the Scottish government (September 2019) and NHS England (October 2019) to make ORKAMBI available.


  • Increasing the addressable market for the treatment by 5,350 patients. Minimal revenue in 2019 following the approvals. Management expects strong uptake in 2020.


  • In December 2019, the approval for KALYDECO in the European Union was expanded to include infants 6 to less than 12 months in age.


  • Strong revenue growth in 2020 driven by (1) TRIKAFTA in the US, (2) ORKAMBI in the UK and (3) the expanded approval for KALYDECO in the EU


  • TRIKAFTA contributed more than 10% of sales in 2019 despite only being available for 9 weeks and that too only in the US.


  • TRIKAFTA is expected to generate $1.3bn in sales in 2020. All else being equal, that would amount to year-over-year revenue growth of 21%.


  • For ORKAMBI assuming an up take by 60% of patients in England and Scotland at a discounted price of $125,000 per annum in 2020 would contribute top line growth of almost 10%.


  • Given the above, consensus estimate of 32.5% revenue growth in 2020 may prove to be low.


  • Upside risks arising from (1) approval of TRIKAFTA in Europe, Canada and Australia and (2) positive outcomes from clinical trials to expand the treatment’s approval to include patients ages 6 to 11.


  • Strong balance sheet — no debt, net cash position of $3.8bn; high levels of cash generation — average free cash flow generation of $1.1bn per annum over last three years


Key Risks


  • Sales of Vertex’s products depend, to a large degree, on the extent to which products will be covered by third-party payors, such as government health programs, commercial insurance and managed health care organizations.


  • Third-party payors are becoming stricter in the ways they evaluate medical products and services and the containment of health care costs has become a priority of federal and state governments, and the prices of drugs have been a focus in this effort.


  • The market for drugs that treat CF is currently a monopoly: Vertex owns the rights to the only medicines with marketing approval in the US, Europe, Canada and Australia that treat the rare condition.


  • In October 2019, Arrowhead Pharmaceuticals Inc. presented preclinical data at the 2019 North American Cystic Fibrosis Conference on ARO-ENaC, an inhaled RNAi therapeutic being developed as a potential treatment for cystic fibrosis.
    • Arrowhead is currently conducting IND/CTA-enabling studies to support regulatory filings in the first half of 2020 for first-in-human studies.
    • Further progress by Arrowhead, or any other competitor for that matter, in developing treatments for CF are likely to weigh on Vertex’s share price


  • In 2019, Vertex began a Phase 2 clinical trial evaluating VX-814 as a potential treatment for AAT deficiency and initiated a Phase 1 clinical trial evaluating VX-864 — a second investigational small molecule corrector for the treatment of AAT deficiency.


  • Arrowhead, with its lead drug ARO-AAT, is further ahead of Vertex in developing a treatment for AAT deficiency.Arrowhead’s stock was punished due to Vertex’s progress with VX-814. There could be a reversal of fortunes should Arrowhead’s drug moves further along the FDA’s approval process.


  • Given the crossover, rumours of Vertex acquiring Arrowhead have surfaced on several occasions.


  • Arrowhead’s market is only ~3.7bn versus Vertex’s ~63bn, the dilution for Vertex shareholder is likely to be limited. Nonetheless, in the event of an acquisition, it could prove to be a short-term headwind to Vertex’s share price.


  • Vertex has a partnership with CRISPR to develop treatments for DMD and DM1, which cost the company $175m upfront and potentially up $825m more


  • Vertex’s acquisition of Exonics required committing to a contingent liability of $755 million in milestone payments, i.e. if Exonics achieves certain milestones, Vertex will have to make further payments to the shareholders of Exonics at the time of acquisition


Company Overview


  • Vertex develops treatment regimens for patients with cystic fibrosis (CF).


  • CF is a hereditary disease that mainly affects the lungs and digestive system, but it can result in fatal complications such as liver disease and diabetes. The body produces thick and sticky mucus that can clog the lungs and obstruct the pancreas.


  • CF can be life-threatening, and people with the condition tend to have a shorter-than-normal life span. There is no cure for the condition, but good nutrition and taking steps to thin mucus and improve mucus expectoration are said to help.


  • Vertex obtained approval for TRIKAFTA — the first triple combination regimen for CF — in October 2019. The drug is approved by the FDA for people 12 years or older and certain types of CF conditions — the company estimates that the approval increases number of patients eligible for Vertex’s medicines in the US by c. 6,000.


  • The company is working to obtain approval for the drug in ex-US markets and has already submitted a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA).


  • List price for TRIKAFTA is $24,000 per 28-day pack (or $311,000 per annum).


  • From FDA’s approval on 21 October through year-end, Vertex recorded $420 million in revenue from the drug. Making it the best launch of Vertex’s CF treatments and one of strongest starts for a new drug in the US in the past five years.


  • As a result, 4Q2019 revenues came in at ~5x higher than consensus estimates.


  • Vertex’s marketed medicines, in addition to TRIKAFTA, are SYMDEKO/SYMKEVI, ORKAMBI, and KALYDECO.


  • Approximately 90% of all CF patients in the US are eligible for Vertex’s medicines. The company’s R&D efforts are focused on pursuing other therapeutic approaches to address the remaining 10% of CF patients.


  • The company’s four medicines are estimated to treat approximately 60% of the c. 75,000 CF patients in North America, Europe and Australia.


  • Vertex reached deals with the Scottish government (September 2019) and NHS England (October 2019) to make ORKAMBI available.


  • In Scotland, an estimated 350 patients are eligible for the drug, which has a list price of more than £100,000 per annum.


  • While in England, 5,000 children and young adults suffering from CF are now eligible for the drug. (The prices agreed between Vertex and the two parties have not been disclosed.)


  • According to the company’s chief commercial officer, during the 4Q2019 earnings call, the two deals did not materially impact revenues during 2019. The company, however, expects revenue from the European market to ramp up in 2020.


  • In June 2019, the FDA expanded the approval for SYMDEKO/SYMKEVI to include CF patients 6 to 11 years old.


  • The medicine was originally approved in February 2018 for CF patients 12 years old and older. This was Vertex’s third medication to be given marketing authorization.


  • An application was submitted to the EMA in 4Q2019 to expand the approval for Europe to include children 6 to 11 years of age.


  • The list price for the medicine is $292,000 per annum.


  • In April 2019, the FDA expanded the approval for KALYDECO to treat infants 6 to less than 12 months of age


  • KALYDECO is the first and only drug eligible for treating infants as early as 6 months of age.


  • In December 2019, the approval in the European Union was expanded to include infants 6 to less than 12 months in age.


  • The list price for the medicine is $311,000 per annum.


  • The company’s strategy includes actively seeking to acquire businesses and technologies needed to advance research in its areas of therapeutic interest as well as to access needed technologies.




  • Acquisition: Exonics Therapeutics $245m, Jun 2019


  • Exonics is engaged in the development of gene editing therapies to treat severe genetic neuromuscular diseases, including Duchenne muscular dystrophy (DMD)


  • Acquisition added gene editing intellectual property, technology and expertise to Vertex.


  • Up to $755 million in milestone payments to selling shareholders if future development and regulatory milestones are met for certain programmes.


  • Acquisition: Semma Therapeutics $950m, Sep 2019


  • All-cash deal


  • Semma Therapeutics focuses on using stem cell-derived human islets as a possible cure for type 1 diabetes.


Research & Development


  • In addition to continuing research to identify additional drug candidates for the treatment of CF, Vertex is also focusing its R&D efforts on developing products for the treatment of serious diseases including AAT deficiency, APOL1-mediated FSGS, pain, sickle cell disease, beta thalassemia, DMD, DM1 and type 1 diabetes.


  • Alpha-1 Antitrypsin (AAT) Deficiency


  • A condition in which the body does not make enough of AAT, a protein that protects the lungs and liver from damage. The condition can lead to chronic obstructive pulmonary disease (COPD) and liver disease.


  • In 2019, the company began a Phase 2 clinical trial evaluating VX-814 as a potential treatment for AAT deficiency and initiated a Phase 1 clinical trial evaluating VX-864 — a second investigational small molecule corrector for the treatment of AAT deficiency.


  • Arrowhead Pharmaceuticals, with its lead drug ARO-AAT, is further ahead of Vertex in developing a treatment for AAT deficiency.


  • APOL1-Mediated Kidney Diseases


  • Focal segmental glomerulosclerosis (FSGS) is a cause of nephrotic syndrome in children and adolescents, as well as a leading cause of kidney failure in adults.


  • Apolipoprotein L1 is a protein that in humans is encoded by the APOL1 gene.


  • Inherited mutations in the APOL1 gene play a causal role in the biology of FSGS as well as other kidney diseases.


  • APOL1 genetic variants account for much of the excess risk of chronic and end stage kidney disease, which results in a significant global health disparity for persons of African ancestry.


  • In 2019, Vertex completed a Phase 1 clinical trial for VX-147, its first investigational oral small molecule medicine for the treatment of FSGS and other serious kidney diseases.
    • Phase 2 clinical trial to evaluate VX-147 is expected to begin in 2020.


  • Patients with pain can suffer from acute pain (for example, following surgery or an injury), neuropathic pain (when there is damage to a nerve), and musculoskeletal pain.


  • Current treatments may not work well or cause significant side effects. In addition, there is the potential for addiction and the practice of over- and mis-utilization, as well as underutilization of current pain medicines.
  • Vertex has discovered multiple inhibitors of the sodium channel 1.8, or NaV1.8, as potential treatments for pain.
    • Obtained positive results from three separate Phase 2 clinical trials evaluating VX-150, a NaV1.8 inhibitor, in patients with three different pain conditions: acute, neuropathic and musculoskeletal pain.
    • Opted to hold off on starting a late-phase trial of VX-150, choosing instead to gather data on the drug’s siblings before deciding which molecule to advance.
    • In the first quarter of 2020, announced the discontinuation of Phase 1 development of VX-961; expected to begin clinical development of an additional molecule in the first half of 2020.


  • Sickle Cell Disease and Beta-Thalassemia


  • Sickle cell disease is a group of disorders that affects haemoglobin, the molecule in red blood cells that delivers oxygen to cells throughout the body. People with this disorder have atypical haemoglobin molecules called haemoglobin S, which can distort red blood cells into a sickle, or crescent, shape.
    • Characteristic features of this disorder include a low number of red blood cells (anaemia), repeated infections, and periodic episodes of pain. The severity of symptoms varies from person to person. Some people have mild symptoms, while others are frequently hospitalized for more serious complications.


  • Beta thalassemia is a blood disorder that reduces the production of haemoglobin
    • In people with beta thalassemia, low levels of haemoglobin lead to a lack of oxygen in many parts of the body. Affected individuals also have a shortage of red blood cells (anaemia), which can cause pale skin, weakness, fatigue, and more serious complications. People with beta thalassemia are at an increased risk of developing abnormal blood clots.


  • Vertex is co-developing CTX001, an investigational gene-editing treatment, for the treatment of hemoglobinopathies, with CRISPR. A CRISPR/Cas9-based therapy to treat both beta-thalassemia and sickle cell disease.
    • In November 2019, the company announced positive, interim data from the first two patients with severe haemoglobinopathies treated with the investigational CRISPR/Cas9 gene-editing therapy, CTX001, in ongoing Phase 1/2 clinical trials.


  • Type 1 Diabetes


  • Type 1 diabetes (T1D), once known as juvenile diabetes or insulin-dependent diabetes, is a chronic condition in which the pancreas produces little or no insulin. Insulin is a hormone needed to allow sugar (glucose) to enter cells to produce energy.
    • Despite active research, type 1 diabetes has no cure. Treatment focuses on managing blood sugar levels with insulin, diet and lifestyle to prevent complications.


  • In 2019, Vertex acquired a preclinical program to develop cell-based therapies for T1D through the acquisition of Semma. The company plans to advance this program into clinical development in T1D patients in late 2020 or early 2021.


  • Duchenne Muscular Dystrophy


  • Duchenne muscular dystrophy (DMD) is a progressive form of muscular dystrophy that occurs primarily in males, though in rare cases may affect females. DMD causes progressive weakness and loss (atrophy) of skeletal and heart muscles.


  • Early signs of DMD may include delayed ability to sit, stand, or walk and difficulties learning to speak. Muscle weakness is usually noticeable by 3 or 4 years of age and begins in the hips, pelvic area, upper legs, and shoulders. The calves may be enlarged. Children with DMD may have an unusual walk and difficulty running, climbing stairs, and getting up from the floor.


  • In 2019, Vertex acquired preclinical programs to develop genetic therapies for DMD and DM1 through the acquisition of Exonics and the expansion of its collaboration with CRISPR.


Appendix I: Product Portfolio

Vertext Products


Appendix II: FDA Approval Process


FDA Approval Process

  • Clinical trials


  • Phase 1 uses 20 to 80 healthy volunteers to establish a drug’s safety and profile (about 1 year).


  • Phase 2 employs 100 to 300 patient volunteers to assess the drug’s effectiveness (about 2 years).


  • Phase 3 involves 1000 to 3000 patients in clinics and hospitals who are monitored carefully to determine effectiveness and identify adverse reactions (about 3 years).


Appendix II: Financial Summary and Consensus Estimates

Vertex FS


Vertex Consensus


This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.