Cystic fibrosis patients received welcome good news Monday, as Vertex Pharmaceuticals Inc. reported that its ongoing Phase II trial of VX-809 and Kalydeco (ivacaftor) showed significant lung function improvements in an interim analysis of patients homozygous for the F508del mutation.

The unexpected upside revealed by the data boosted Vertex stock (NASDAQ:VRTX) by 55.4 percent Monday. It closed at $58.12, for a gain of $20.71.

The company's previous guidance on the study had been conservative, advising analysts not to look for lung function benefit.

During a conference call Monday morning, Vertex Executive Vice President of Global Research and Development Peter Mueller said that the findings from the interim data analysis "Exceeded our expectations."

The planned interim analysis was carried out after about half of the study patients completed 56 days of treatment. Among those who received VX-809 and Kalydeco (250 mg every 12 hours), about 46 percent showed an improvement in lung function of 5 percent over baseline. About 30 percent of the VX809/Kalydeco group had an improvement of more than 10 percent. None of the patients in the placebo group improved by 5 percent or more.

Adverse events were comparable between the test and placebo groups, and were mild or moderate in severity.

Kalydeco was approved in February 2012 for cystic fibrosis patients older than 6 with the G551D mutation. That patient population numbers about 1,000 in the U.S.

Results from Vertex's ENVISION Phase III trial, reported in November 2011, showed improvements in lung function, weight gain and reduction in sweat chloride throughout the 48-week trial period compared to placebo. For children between 6 and 11, the improvement was 12.5 percent. Patients older than 12 showed a 10 percent improvement.

Those results, and the subsequent drug approval, were life changing for the small group of patients with the G551D mutation. For that group, the cystic fibrosis transmembrane regulator (CFTR) protein has a mutation – G551D – that prevents it from opening and closing to regulate the flow of salt and water in and out of the cell. The result is a very thick mucus in the lung that leads to repeated infection and poor lung function.

According to Vertex, Kalydeco repairs that transporter protein, restoring the flow of water and salt, and returns the mucus to a more normal consistency.

A majority of CF patients, however, do not have the G551D mutation. Instead, the most common mutation is F508del, accounting for 80 percent of the patient population. In patients with the F508del mutation, CFTR proteins do not reach the cell surface in normal amounts.

VX-809 is designed to correct that defect of CF transport. However, in a study of VX-809 monotherapy in patients with F508del, results were underwhelming. The drug showed reductions in sweat chloride, but Vertex sought to achieve better results by combining VX-809 with another drug.

Vertex's combination trial, then, was somewhat of a long shot. It combined the transport corrector VX-809 with function-correcting drug Kalydeco in the hope that the combination would produce some functional CFTR protein and provide an effective therapy for a large proportion of patients who suffer with CF.

Such a drug would have blockbuster potential, which explains why the company was extremely conservative in advising analysts not to count on lung function improvements from the trial.

"That's the last time I'm listening to you guys," quipped ISI Group analyst Mark Schoenebaum, who quickly set about revising estimates for EPS and stock price.

"The trial did show a statistically significant benefit in lung function in patients with two copies of the del508 gene," Schoenebaum wrote. "This is a major upside surprise and it means that if the Phase III trial in this population is complete, the eligible patient population could move from 4-8 percent today to 45 percent."

That would increase the eligible patient pool by as much as 10-fold. Potential sales depend on pricing and market penetration. Schoenebaum's models showed anywhere from $2.5 billion to $4 billion annually.

Edward Tenthoff, an analyst with Piper Jaffray, noted that with the new results, Vertex's prospects in CF suddenly dwarf its opportunity for Incivek in hepatitis C virus – a hotly competitive and potentially huge market in its own right.

"We see blockbuster opportunity from this combination of Kalydeco and VX-809," Tenthoff wrote.

The interim data did not show changes in sweat chloride, a fact that gave pause to some investors. Schoenebaum, however, noted that sweat chloride is only a surrogate marker, and not very meaningful in the context of significant improvements in lung function.

"CF patients don't care about their sweat. They care about their lungs. The impact on lungs in this trial appears dramatic to us. We would buy stock on confusion around this point," Schoenebaum noted.

Insmed Ready to Move Forward with Arikace

Cystic fibrosis patients received additional good news Monday. The FDA lifted a clinical hold on Arikace (liposomal amikacin for inhalation) for cystic fibrosis patients with Pseudomonas lung infections, giving the green light for Insmed Inc., of Monmouth Junction, N.J., to move forward with a Phase III trial following an agreement with the agency on a revised trial population.

That population will include adult patients with chronic Pseudomonas lung infections and FEV-1 percent predicted between 25 percent and 75 percent.

Insmed is in discussions with the FDA to nail down further details of the Phase III protocol, and is evaluating next steps for Arikace.

The company has begun dosing patients in a European and Canadian Phase III (CLEAR-108) trial of Arikace in cystic fibrosis patients, and is going forward with CLEAR-110, a follow-on study for patients completing CLEAR-108.

"Recall that previously the study had been designed to include children; however we note that data from INSM's Phase III trial in the EU will enroll patients 6 and older, potentially providing useful efficacy data in that patient population," wrote Gregory Wade, an analyst with Wedbush.

Wade estimated revenues of $300 million annually worldwide for the drug in cystic fibrosis patients with Pseudomonas infections, noting that by age 18, 85 percent of patients are infected, and that the current standard of care is inadequate due to increasing rates of drug resistance.

Like Vertex, Insmed stock (NASDAQ:INSM) enjoyed a generous boost, rising $1.40, or 52 percent, to close at $4. 10 Monday.