by Barry Werth
Neither of them felt they could stop now. “Raj actually begged to come back, on his severance, to work on the proof of concept of this model,” Kwong recalls. “There are two things that are astonishing about this. Number one, that he did this. He came in day and night. We had to kill ourselves that summer. This is not a two-hour-a-day thing. This was really exhausting. Second thing is, Vertex let him do that. What company would allow somebody who was laid off back in the lab to work day and night? Only one that knows that, whether you’re inside the company or outside, you’re consumed by the project and won’t be stopped.”
Kalkeri finished the work in September, and Vertex began feeding mice VX-950 and Boehringer Ingelheim’s protease inhibitor at a range of doses. He had made a version of the mouse in which the toxic enzyme was expressed only if the HCV protease was active, not if it was blocked. Facing the portfolio decision, Boger was enthralled by the data. “What we could do was administer compounds to the mouse and actually see the liver not get damaged, because we were blocking the production of this toxic enzyme,” he says. “We could do whole-animal PK and actually get livers to look better. We’re getting molecules down the mouse’s gullet, into the body, through all the ways in which molecules can get trapped, and the molecule had to get to the liver and shut down HCV protease in the mouse liver, and if it did that, it saved the liver.”
Impelled by slides that showed that VX-950 could not only stop the virus but also visibly repair sick livers in infected animals, Boger put to rest whatever remaining doubts he may have had from the ROVs. VX-950 worked. The rest was straightforward, or so it could be made to seem. “I went and talked to Peter; I showed him the data,” Kwong recalls. “He was blown away. He said, ‘We’ve got to do this and this and this and this.’ I said, ‘Peter, the guy who did this was laid off last May, and he worked all summer with me to get this data, but he’s laid off.’ Peter went straight from his office to HR and got him rehired.”
Millions of hearts across New England sank in unison at sixteen minutes after midnight on Friday morning, October 17, as the Red Sox, in the eleventh inning, lost the seventh and deciding game of the American League Championship Series, 6–5. The loss kept them from advancing to the World Series, which the team hadn’t won in eighty-five years. Boger was among the bereaved. After the game, Boston Manager Grady Little slipped immediately into lore, joining the team’s other scorned ghosts. Little had left on the mound his tired and battered pitching ace, Pedro Martinez, who, five outs away from victory, gave up three runs in the eighth, launching the game into extra innings “There is no reason to blame Grady,” Martinez said in a postgame interview. “Grady doesn’t play the game. If you want to point the finger, point the finger at me.”
Several hours later, before the stock markets opened for trading, a new Wall Street biotech analyst, Geoffrey Porges, initiated coverage on Vertex by issuing his first research report. Analysts handicap stocks, which makes them especially vital to “story” companies, with no sales and earnings. Boger was vocal about his frustrations with their trade. The previous year New York State Attorney General Eliot Spitzer, celebrated by Time as American capitalism’s “top cop,” persuaded the SEC to impose rules requiring that Wall Street research departments be kept at arm’s length from investment banking operations. Accordingly, most analysts now were paid by their firm’s trading desks, meaning that (a) they earned less than before, and (b) their fundamental interests were tied not to how well a company performed but to how much volume it generated for their employers. In Boger’s mind, the first change meant on average they were less talented; the second, that their self-interests were tied to promoting volatility.
Porges, forty-three, had joined Sanford C. Bernstein & Co., a premier research firm, the previous year. He was a lanky, probing Australian with a medical degree from the University of Sydney, three years of postgraduate training in internal medicine and pediatrics, and an MBA from Harvard Business School. A former vice president of worldwide marketing in Merck’s vaccine division who went on to operate a technology and investment firm in London, Porges knew the industry from all sides and had well-established contacts with—and spoke the language of—every subgroup, from doctors and nurses to sales reps to hedge fund managers, on four continents. He talked with them all, frequently. He titled his analysis “Vertex Pharmaceuticals: Still Floundering.”
Porges described Vertex as having “a relatively broad early stage product pipeline and excellent long term prospects but no immediate risk of profitability.” He didn’t think Lexiva, the successor to Agenerase, would do well in the marketplace, noted the company’s “relatively unattractive near-term pipeline, which does not meaningfully contribute to the company’s financial position,” and criticized its “lack of clarity and definition” about its long-term product portfolio. “We rate the stock underperform with a target price of $10.60,” he advised Bernstein’s clients. The stock price had closed the day before at just above $13.
Striding the halls that morning among the labs in Fort Washington II, Boger brimmed as usual about Vertex’s plans. Saying he was excited about the possibilities, he told the Harvard Business School group researching its portfolio process, “The portfolio is playing out exactly as we had hoped. We’ve got a stream of revenues from our partnered projects that will help fund our development costs. There are multiple paths for us to become profitable. We’re in a position to choose.”
Financial value and commercial potential were major criteria in choosing a molecule for clinical development, but these were the first compounds Vertex hoped to sell in North America under its own name, so issues of personal and corporate identity also surfaced. “I started out to make an important drug company, not just one that makes me financially comfortable,” Thomson said. Boger aspired not only to be successful but also to change the standard by which success in pharmaceuticals was measured, both within the industry and in society. He liked to invoke George Merck, who in the 1940s and 1950s transformed his family’s fine chemical company into a drug industry paragon by emphasizing science and virtue over commerce. In August 1952 Merck was pictured on the cover of Time. “We try to remember that medicine is for the patient,” he told the magazine. “We try to never forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they will never fail to appear. The better we have remembered that, the larger they have been.”
Pfizer, by comparison, had always displayed an opposite bias. John McKeen, its president during the same era as George Merck, told Forbes, “So far as is humanly possible, we aim to get a profit out of everything we do.” As Boger and Sato discussed the portfolio decision further with the executive team, it became progressively clearer that arguments favoring a quicker turnaround time to market or a larger disease population were no match for the Merckian logic that said that the way to be most successful in making drugs was to transform the lives of people with consuming medical needs. As Sato told the HBS researchers, “When choosing between going after the fifth beta-blocker or the first or second something else, what do you really want to do? Are you going to be more excited about making a drug for X or Y; X and Y being otherwise equal? Having medical impact is important when picking a candidate. ‘Dollars in’ is a legitimate proxy for medical need as well as an independent marker in its own right. However, you need to be careful when assessing medical need using commercial success. Did Lipitor, the fifth statin to reach the market, address significant medical need? Maybe, but maybe not as much as its sales suggest.”
The FDA announced approval the following Tuesday for Lexiva—VX-175. For Smith, the notion that Vertex would be able to fund the development and commercialization of its own drugs through royalties, milestones, and research collaborations, as it had done up to now, had passed. Porges was right. The only way to survive was to own everything: research, development, commercial. Costs rose exponentially the closer you got to product approval. Vertex’s crop of late-stage candidates,
fifteen years in, was anemic—“relatively unattractive.” Floundering was an alien concept to Boger, but when biotech investors looked five years into the future and couldn’t see a path to sustained profits, they blamed management. As long as the balance sheet remained weak, Smith was in no position to go to Wall Street to finance the company’s buildout. He had nothing to sell. He hoped Glaxo would at least do better in Europe than it had done with Agenerase.
The day before Halloween—five days before the earnings call—Vertex received discouraging news about pralnacasan, the anti-inflammatory ICE inhibitor. Late-stage animal studies revealed potential liver toxicities; its partner Aventis was suspending human testing until the issue could be sorted out. Not an outright discontinuation, the decision might as well have been final, since Vertex was relying on pralnacasan royalties to fund the development of its portfolio. Halloween was a Friday. Going into the weekend, the stock price nose-dived from $17 to $7, losing 60 percent of its value. That night, senior management huddled in a conference room long after almost everyone else had left.
They had the weekend to develop a strategy. Smith had scheduled a debt refinancing directly after the earnings call, hoping to benefit from the pipeline announcement, but now that was out of the question. On top of everything else, they had to rethink their entire budget.
As Boger had promised investors in January, Vertex planned to announce two candidates for late-stage development. It would hedge its risks by pursuing parallel projects. Throughout the weekend, senior management combed through the most recent clinical results from all the trials. The picture among the four favorites was clouded both by the pralnacasan data, which several members feared had dimmed the outlook for Vertex’s fast follow-on, and by disappointing news from a recently completed trial of its psoriasis drug, which was closest to market and the compound that analysts were focusing on to put the company in the black.
Not all the news was bad. Another IMPDH inhibitor, merimepodib, was showing unexpectedly strong results against hepatitis C. A dark horse in the portfolio race up to now, the compound didn’t attack the virus directly; instead, it boosted the effectiveness of the current standard of care. Six-month results from a midstage study showed promise for hard-to-treat patients who’d failed a previous course of treatment and thus had no other options. Strong safety data for the acute coronary syndrome drug and substantial gains in formulating VX-950 rounded out the latest updates.
“A key point in the weekend came when Josh reframed the decision,” John Alam recalled. “We had been focusing on which two to take forward. Josh stopped, and said, ‘Why are we stuck on choosing two? Why don’t we focus our resources on one and keep the others going?’ It was then just a matter of setting the priorities.”
There were many reasons, of course, not to focus on just one, risk chief among them. How could any company—or any investor—rationalize a decision to bet everything on a 30-to-1 shot? Boger crafted a strategy that he believed would enable Vertex to press ahead to market relatively soon—say, in 2007—while sustaining its most promising efforts, all the while diversifying most of the risk. The greatest risks for VX-950 were molecule and market. It remained uncertain if Vertex could formulate and manufacture the drug, and how many doctors and patients would rush out to use it; some analysts considered the disease a niche opportunity. Merimepodib, on the other hand, worked through a weak pathway—it had considerable mechanism risk—but Vertex already had identified a commercially scalable process for drug synthesis and could begin its first comparison study within a year. By combining two products into a single vision, Boger committed Vertex to a franchise and a new corporate direction: oral therapy for the treatment of hepatitis C.
“Very quickly,” he said, “we came to understand that merimepodib and VX-950 could give us a strategy. We could go into the market with the existing treatment. We could then follow with VX-950. And then we might have the possibility of using them in combination. No one was paying attention to merimepodib before because they didn’t see it as a combination treatment with VX-950.”
Wall Street analysts, expecting to hear about Vertex’s strategy for rescuing pralnacasan and developing its psoriasis candidate, were dumbfounded by his message during the conference call: the company would stop trials on the latter, continue development of four projects, and make merimepodib its top-priority program. “It was just awful,” Chief Commercial Officer Dr. Anthony Coles would recall. “There was a long silence on the other end of the telephone. It was as if a relative had died.”
Boger attempted to explain the company’s reasoning, but the analysts wanted to hear upbeat forecasts for the coming quarters, not speculation about the possible synergies of two molecules they’d scarcely heard of—much less one rejected by a partner. They, too, use ROV and other models to try to value companies, and it was simply impossible for them to do anything more than guess what Vertex was worth. Understandably, they were displeased, and it showed in their reports. “We have a very different model than most biotech companies,” Alam told the HBS interviewer. “Most emerging biotech companies focus on one project. They bet the company on that one project. Analysts like that model because they can value a one-product company much more easily. That’s not the strategy for Vertex. We think there is value in having multiple options in our portfolio. We can prioritize among the projects based on the best information we have available. But we don’t get credit for having a portfolio.”
As the annual Liver Meeting concluded at the Hynes Convention Center, Vertex began to reposition itself as a fully committed player in infectious liver diseases, no longer one that would just report research breakthroughs but one that aimed to become a dominant company: a rival to Schering, Roche, and Merck. Kwong couldn’t make the case that Vertex had a better compound than Boehringer Ingelheim, still the leader among those chasing protease inhibitors, but she presented compelling preclinical data, including experiments suggesting that VX-950 could knock down replication ten-thousand-fold in forty-eight hours and could clear the virus in less than two weeks. Ken Boger settled the company’s five-year-old patent troubles with Chiron, which dropped its lawsuit and granted Vertex (for an undisclosed sum) a nonexclusive license to develop VX-950. The company announced that it would be able to start testing the drug in people in early 2004.
In December Vertex held its annual investor day in New York. The occasion gave Boger, Sato, Alam, Smith, and others from the company their last forum before next year’s Morgan conference to make their case to Wall Street. Of the biotech analysts who attended, only Bernstein’s Porges reacted positively. The next morning in his note to investors, he wrote that although Vertex was among the worst-performing stocks in the sector in the two months since he’d started coverage, and was terminating three of its most advanced pipeline programs, “much of the portfolio and financial uncertainty we identified has now been resolved, and, we believe, in aggregate, that the company will benefit from more positive news flow going forward, as well as a more aggressive and realistic commercial strategy.”
Porges noted that the launch of Lexiva was ahead of expectations, already having surpassed three other drugs and Agenerase itself in prescriptions, and that it would be likely to generate significant income to pay for clinical trials. Smith, he wrote, had signaled clearly that the company was committed to changing strategy and lowering its burn rate while it actively sought more partners to out-license programs and bring in more cash. More crucially, Porges identified hepatitis C as a sizable commercial opportunity, suggesting that if Vertex won approval for merimepodib in 2007, the market potential for the compound could rise to $1 billion before newer agents arrived. Porges kept his $10.60 target price but, as the stock was trading 20 percent lower than that, upgraded his recommendation to “market perform.” He now thought the stock would do as well as the Standard & Poor’s 500 and other leading indicators.
In Porges’s estimation, Vertex had done much of what it needed to do to regain its footing. But his endorsement
also contained a disclaimer, saying, in effect, caveat emptor—buyer beware—as well as a blunt challenge to Boger, Sato, and the executive team. He wrote:
The risks to our thesis about Vertex are scientific, financial and operational. Scientifically any setback or delay on merimepodib would be disastrous for the company, given the singular focus they have now given the product. Financially, failure to achieve a meaningful reduction in expenses in 2004 and beyond would be a disappointment to investors and could compromise the company’s ability to secure additional financing. Operationally should the company fail to advance one or more meaningful product outlicensing/collaboration in the first half of 2004, the outlook would again turn negative. Each of these initiatives, and their associated risks, is essential to the financial survival of this company and deserves laser-like focus and complete commitment from management.
PART 2
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Game Worth the Candle
CHAPTER 6
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FEBRUARY 14, 2004
VX-950 had been revived—barely. It remained the darkest horse in the portfolio race: the molecule that Lilly had rejected, eclipsed by Boehringer’s compound, a distant follow-on to merimepodib in Vertex’s strategic arsenal. HVC research in general had crept steadily forward, a study in frustration. More than ten years after Deb Peattie flew to Saint Louis to enlist Charles Rice to help solve the structure of the protease, Rice, now a world leader in infectious liver disease at Rockefeller University, gave a grim accounting to virologists at a meeting in San Francisco. No one had yet been able to grow the virus, he said. As a work-around, scientists had devised a so-called replicon system in which pieces of the genome were used to produce particles of HCV, which served as a model for testing drug candidates. Boehringer’s pilot candidate, BILN-2061, had toxicology problems, and the company was going back to the drawing board. As ever with HCV, breakthroughs were halting and elusive.
