Vertex Pharmaceuticals (VRTX).  Since July 1, the whole biotech sector has been completely in bull market - house of pleasure - mode, and the Biotech HOLDRs Index (BBH) is up 17.7%.   Now, in that same period, VRTX... laggard as it has been... has actually fallen 16%.

The stock is almost the exact opposite of Genzyme Corp. (GENZ), recommended last night, which has been a great performer, with a host of seemingly terrific and terrifically-expensive drugs that are already on the market.

We know VRTX has underperformed, but I think it's been knocked down for the wrong reasons!...  VRTX is what I call a 57 varieties play...

It may be a bad house, but the worst house in a great neighborhood is better than the best house in the "out of favor" sections.

What do I think makes VRTX so special?... It managed to sink, even as nearly every other biotech stock was soaring... VRTX's biggest drug, Telaprevir, for the treatment of chronic hepatitis C virus - a huge market - a drug that's currently going through Phase III studies, the last hurdle before the FDA can approve it - got hit with what looked like some really bad news back on August 4th... news that knocked the stock down from $32.70, at the close of one trading day, to $28 at the open of the next...

What do I think happened?... Schering-Plough (SGP*), a charitable trust name that I have stuck by with, even though everyone else has deserted it... released Phase II data for its own hepatitis C drug... Now that's a drug that wasn't supposed to be a competitive threat to VRTX's Telaprevir... it supposedly showed SGP*'s drug was actually more effective at suppressing hepatitis C than VRTX's drug. In this study, SGP*'s drug had a sustained viralogical response rate of 74%, compared to 61% for VRTX's drug. That freaked everybody out and sent all the investors scrambling away from VRTX. They didn't ever want to hear it again, because Telaprevir is VRTX's big drug...

The problem here is epistemological... the Street thought this Schering-Plough study was a reason to sell the stock (of VRTX). It thought it was very bad news for VRTX. Now I think you take a closer look... I don't think that's really true. You can't do an apples-to-apples comparison of the Schering-Plough study with the studies that VRTX has done for Telaprevir, that showed it was the better drug. First of all, the number of patients in the Schering-Plough studies were relatively small. There were lower drop-out rates. That could have skewed the results. But I think the main reasons this comparison doesn't work are that the study designs were not parallel...

You know, you hear about these studies all the time, and you can't take everything at face value... that's cost a lot of our viewers a lot of money...

The viralogical response rates of the control arm just weren't the same. In addition, the main side effect of VRTX's drug were skin rash with mild anemia... SGP*'s drug demonstrated a greater increase in the rate of anemia...

Plus, here's a huge distinction...

VRTX's Telaprevir works for patients with treatment-resistant hepatitis C. The data Schering-Plough released showed that its drug doesn't do that. 300,000 people in the United States alone are treatment-resistant... plus VRTX's Telaprevir is in Phase III. Its launch is expected in 2011, much sooner than SGP*'s drug. That's still only in Phase II... that's a while away... that's not even in my numbers that I use for SGP*...

So what?... The Street still thinks VRTX is a stinker...

So what's going change people's minds?... Why am out here recommending it, if everyone hates it?...

First of all, I don't even know if their minds need to be changed. I think the prospect of a biotech stock, as cheap as VRTX with decent prospects and a good Cystic Fibrosis pipeline... remember, I told you, they don't only... it's not one of these binary plays... in addition to their hepatitis drug... It's going to have plenty of fund managers salivating down here.

But, if the big-money still need convincing, there are two sets of data on Telaprevir scheduled to come out at the American Association for the Study of Liver Disease conference, that goes from October 31st to November 4th... Mad Money will be all over that conference... We'll see interim data from Telaprevir bid dosing trials, as well as 2008 Prove-3 data, and Phase I and II data on competitive protease inhibitors. Plus, VRTX is starting two new studies on regular and treatment-resistant patients this quarter. That could act as catalysts for the stock...

In other words, you've got a break here that they moved it (i.e., the stock price) down, ahead of these conferences. Look, even if the competition is tougher than expected, I still expect Telaprevir becomes a blockbuster drug...

Peak sale estimates?... How about $1.2 billion? VRTX should get peak royalties from EU and Asian sales of about a billion bucks.

Look, this company is not a Genzyme Corp. (GENZ) that we profiled last night. It's probably even not as good as Onyx Pharmaceuticals Inc. (ONXX) that we profiled on Monday... But it's got a drug with blockbuster potential and a rich pipeline. In this environment, I believe even a lesser biotech like VRTX will work.

Remember, why are we doing Biotech/Shark Week?... Because biotech was the best-performing group in 1990, during the last bank crisis, and these companies are being acquired left and right... I think, once we get more data on VRTX's lead drug later this year, it's going to be a takeover candidate. It's just too darn cheap!...

While I'm at it, Shawn in Florida, who stumped me the other day with the Medarex Inc. (MEDX)... another underperforming biotech like VRTX... I've got to say, MEDX is too risky for me... No track record with the FDA, two of the main diseases it's developing drugs for, Melanoma and Prostate Cancer, are notoriously difficult to treat. It does have an interesting pipeline but, if you're going to own a laggard biotech, will you please reach for VRTX, not MEDX?...

Here's the bottom line...