by Barry Werth
For those few renegades remaining from the early days, the scene vindicated their sacrifice and commitment, but also represented a mismatch in time. They had tried to do everything differently, better, more imaginatively; had tried to redeem the drug industry’s fallen, besmirched mantle; and had undeniably succeeded—for now. Yet here was a sea of strangers carrying forth their banner beneath a continuous slide show assembled from the day’s training sessions, dynamic action shots of Emmens and Mueller, the company’s new visionaries. Did the company still get the fullness of the challenge?
“I couldn’t believe Ian said he could never imagine this day,” Murcko said, struggling to be heard above the cloying reggae beat of San Diego rocker Jason Mraz, the opening act. “Of course we imagined it. Why did we leave Merck?” Murcko was seldom surly or resentful or bitter. He prided himself on his objectivity. But the day’s cheerleading and celebration seemed to him to lack a crucial bit of Vertex’s core memory: the sheer gleeful vengeance with which the founders resolved to upend pharma, a legacy of militant heterodoxy and willful self-exile.
Boger and the torchbearers had produced the successes that the company was toasting now, but Murcko thought in twenty- to thirty-year time frames, and for the past five years, he hadn’t seen the same magic coming out of the labs and into development. It troubled him more than he let on. Discovery remained the hardest part of making a drug, and Murcko thought that Vertex, like the rest of the industry, was coasting on old research triumphs while failing to produce and sustain newer ones. The company hoopla seemed forced; the great risk and commitment of doing leading-edge science—and therefore the compelling personal need and greater triumph—were somehow underappreciated. “You can’t go to parties and tell people you work for a pharmaceutical company,” he muttered. “You work eighty hours a week your whole damn career, and people look at you like you’re evil.”
After Mraz finished his set, Murcko and his wife, Kathy, a musician and teacher, got up to go. The throng was just hitting its stride, getting louder, beating together in the way of all giant parties. Singer-songwriter Lionel Richie, who came to fame as a vocalist and saxophone player with the Commodores in the mid-1970s—before many in the crowd were born—took the stage, launching into a string of old hits. Murcko recalled feeling similarly when he was at Merck, and the company had the talk-show host Dick Cavett entertain a launch party. Richie, backed up by an eight-piece band, swung into the Commodores’ 1977 single “Easy,” an R&B ballad with country and western roots expressing a man’s feelings about ending a troubled relationship:
That’s why I’m easy
I’m easy like Sunday morning
The Murckos took the long escalator to the glass-walled foyer, watching the sea of action from above, munching chocolate chip cookies from one of the dessert tables set out for the revelers as they left to hail a cab or find their cars. “It’s sad,” he said.
“Corporate,” Kathy whispered.
Smith expected October to be “a really interesting period” for VRTX. Propelled by IMS data showing a boffo launch, the share price had climbed back over $50. The “short short” thesis—that Vertex would price the drug too high or screw up reimbursements or otherwise disappoint and frighten investors, as Dendreon had—was succumbing to the mounting pickup rate in prescriptions. Most on Smith’s mind was the run-up to the Liver Meeting in early November, in San Franscico, shortly after the Q3 earnings call, a prime period of opportunity for those analysts who considered Vertex a one-drug business and were betting against its strategy for an all-oral regimen against hepatitis C.
“The ‘long/short’ now starts to play,” Smith said, “because they say, ‘Oh, Pharmasset has some wonderful data, and they’re gonna have their drug on the market by 2015.’ Frankly, they do have some good data. They do. They are our prime competition. And investors believe that as well. So we’re gonna go through October leading into our earnings call over the long-term/short-term debate, because Pharmasset may be coming to take our market away from us come 2014 and 2015. And yet people are gonna say, ‘What’s the revenue number that’s coming up in three weeks?’ ”
Despite its breakthroughs in CF and other diseases, Vertex remained what Smith called “an area under the curve company.” Analysts valued it based on an imagined rainbow-shaped graph of revenue projections over time, those revenues coming almost entirely from sales of Incivek. Now that income was ramping sharply, the concern on Wall Street had shifted at once to the out-years, fueling Smith’s argument with Emmens, the ET, and the board. “What we need to do is, instead of coming down at the back end, we need that line to continue,” he said. “I think we have enough credibility with Incivek and 222 that if you add a late-stage nuc and commit to a large Phase II study, people will believe that works. And all of a sudden, you have an offense against all the other all-oral regimens that are being created. At the moment we don’t have that.”
Boger, quasi-exiled like a deposed king who retains the right to wear his robe at state functions but is banned from the war room, complained that Vertex was failing to exploit a rich opportunity, concentrating more on playing the Street’s game than seizing its imagination. “Analysis will follow the excitement,” he said. “Someone will generate the analysis to support the excitement.” As ever, he believed you created value in biopharmaceuticals by painting a vision of the future, by enlarging possibilities and minting fresh hope, not by analyzing numbers to disprove someone else’s discounted cash flow model.
“This is a source of frustration for me,” Boger said. “I love Ian to death. But Ian does channel back the Street’s viewpoint into the company. So when I suggest things from my impotent director’s chair, like, ‘Ian, isn’t this fall a great time to have an R&D day, where we actually talk about all kinds of programs that they don’t care about right now, not because we think they’re gonna add earnings per share to their estimates but because we have to start building that story?’ he says. ‘No one will come. They’re not interested.’
“You know what, that’s not a good enough answer. They weren’t interested in our original story either. Of course they’re not gonna value it, because we never talk about it.”
Thomson, too, bridled at the trend within the organization to pull back and rely on traditional avenues to build the business. Though Mueller supported him, he worried that Emmens and the ET were hampering the company’s prospects in East Asia. Thomson’s forays had reached the point where he was ready to recruit Chinese partners to develop either a narrow-spectrum antibiotic or the company’s flu drug. The twentieth-century model for selling drugs in Asia was to partner with a Japanese firm for the entire region. But Vertex had come to grief over the licensing agreement with Mitsubishi for Incivek, and Thomson pressed senior management not to repeat the error.
“Japan has rights to telaprevir in Asia,” he recalled, “which tells us that molecule may never make a dime in the third of the world’s population that most desperately needs it. We’re stymied to a large degree with our current biggest asset. Now, how much we learned from that for the future is something different. My viewpoint is go and partner regionally—in China, in Malaysia, in India, wherever—individually. It’s more work. And it requires becoming familiar with the unfamiliar, which spooks the business development fabric of our organization.” He went on:
The Chinese pharma sector ranges from quaint, old-fashioned, prehistoric, scary, natural-product-oriented, provincial—all of those things—with elements of rapid growth. They’re fast learners. And the rate at which they’re evolving is dramatic. You go to Chinese companies and see this scruffy old set of facilities where there are questionable standards and equipment and capabilities, while over there is the new ten-story ultramodern research facility they’re building. So they’re absolutely in a state of transition; the good ones. The government is stimulating their getting into the modern fast lane of innovation. They don’t know how to do it. Very few of them have taken to market a novel drug. They have very
limited experience in developing new molecules, let alone a first-in-class or a first-in-humans, which is what we’re leading in there with.
While Thomson champed to light a fire in Asia, Wysenski and others moved to plant a small but significant flag in Europe. European regulators signaled they would review VX-770 for all CFTR gating mutations, increasing the potenial market, and more than half the sales force for cystic fibrosis was slated for the EU. Weet, Wright, Kauffman, and their teams, meanwhile, put the finishing touches on new drug applications both at the FDA and the European Medicines Agency. With fast-track review all but assured, Vertex expected to begin generating earnings on its second drug by the second quarter of 2012, launching another curve, this one most likely nondegradable. True to type, most analysts paid scant notice to anything but the unspooling IMS data for Incivek.
Coming off Milestone Day, Mueller plotted the next stage for generating future medicines. The weight of integrating the work of far-flung scientific operations, combined with a development flow chart resembling a New York subway map, required reorganizing the sites, the divisions, and the chain of command. On October 4, Mueller took three hundred researchers off-site to an upstairs ballroom at the Hynes Auditorium for Cambridge Science Day, an annual by-invitation meeting of the company’s scientific leaders. He spoke for an hour, outlining development plans, rhapsodizing about blue ocean projects, setting goals, and announcing that by the end of the year he believed Vertex would become the first Western company to develop a new drug in China. At lunch he sat with the site heads, Murcko, and a few others, further outlining his ambitions. “Stellar failure,” he told them, “is better than mediocre success.”
The more Vertex lunged ahead internally, the more Wall Street tried to yank it into place. The next Monday, IMS released sales estimates showing that total Incivek prescriptions for the week ending September 30 dipped almost 3 percent from the previous week, suggesting that sales were flattening and stoking uncertainties about whether demand for the drug would continue to rise. Coincidentally, Pharmasset said it would expand a midstage trial of one of its nucs, PSI-7977, adding two new arms: one monotherapy for twelve weeks, the other in combination with ribavirin.
Vertex knew the IMS figures were wrong. Managed-markets lead Jeff Henderson had the shipping documents showing how much of the drug had left the loading dock in Illinois, and they demonstrated continued week-to-week improvement up to the present. Partridge, pressed by Smith to investigate, had long experience with IMS’s methodology. Tracking sales of more than one million prescription products, the company samples daily from different channels, then conducts some statistical algorithms to generate an estimate of the amount of drug being sold. “If you add up the dailies, you don’t get the weekly figure, not even close to it,” Partridge says. Vertex contacted the company. It discovered that one of the major distributors, Caremark-CVS, had stopped reporting its prescription data for Incivek sometime in late September, zeroing out 12 percent of prescriptions.
It was a clear, warm, end-of-a-long-holiday-weekend morning across the region, Day 19 of the peaceful occupation of Zuccotti Park near Wall Street. With satellite demonstrations beginning to sprout in other cities, the depredations of the financial system, real and perceived, rumbled across the economy. New York mayor Michael Bloomberg told reporters at the start of the Columbus Day parade that he didn’t anticipate any effort by the city to remove the occupiers: “The bottom line is people want to express themselves, and as long as they obey the laws, we’ll allow them to,” he said. “Bloomberg said we can stay indefinitely! Big win!” @OccupyWallSt tweeted triumphantly—prematurely as it turned out.
VRTX started trading down sharply and Vertex pressed IMS to correct the problem. Partridge’s phone was jammed with anxious investors and analysts wanting to know whether the company’s sales and revenue projections could be relied on, but with the third-quarter earnings season bearing down, Reg FD barred him from commenting. Meantime, a panel of doctors at a Cowen investor conference in New York told the audience that they thought all-oral therapy would be available sooner rather than later, affirming, it appeared, the growing industry chatter. By late morning, VRTX tumbled. Normally, about 1 percent of the company’s two hundred million shares changed hands daily, with long-term investors disregarding the general noise, but now a steep slide took over. Three hundred thousand shares traded in a few minutes, driving the share price below $38, altogether erasing more than $2 billion in value in the time it took to decide on a strategy to stem the damage.
“IMS owned up to the last two weeks in September being a little bit off, but they weren’t acting with any urgency,” Partridge recalled. “So we said, ‘Look, this is creating a big disruption in our business. You guys are creating us all kinds of problems, so what can you do to clear it up for everybody? It has to be in a broad disclosure format because we can’t do selective disclosures. And, by the way, you’re creating this mess, so we’d appreciate your speaking on behalf of your own product, so we don’t have to issue a press release to say what we think is happening.’ ”
Here—with the question looming over where the next pool of patients for Incivek would come from just as Pharmasset upped the ante, not with data but confidence enough in PSI-7977 to try to leap ahead with two small, but provocative, Phase II studies—was an opening for the “long/short” thesis you could drive a freight train through. Based on three shreds of disconnected and questionable intelligence, it became immediately popular to think that doctors had already started holding back—warehousing—patients in anticipation of the next wave of treatments, that Incivek was fizzling, and that Pharmasset was the future.
Emmens, despite his irritation, conceded the allure for investors, the elegant either/or/but-certainly-one-of-them simplicity of the long/short play. “You make it us against Pharmasset, and you take one or the other. What a great trading opportunity that is. You think they’re gonna come and take our business in two years, so you say, ‘I can bet on that, and I can hedge a little with Vertex,’ since if Pharmasset blows up we’ll go up like crazy. If you’re in hep C, that’s what the bet is right now.”
VRTX plunged 9 percent by the end of trading, with five times the average volume. Pharmasset soared to an all-time high. After the stock markets closed, Bank of America–Merrill Lynch biotech analyst Rachel McMinn, usually bullish on Vertex, wrote a call note downgrading her target price. McMinn still recommended the stock as “a buy” but in cutting her target to $65 from $72 she took $3 billion out of her valuation, sparking a second round of selling when trading resumed on Tuesday. Throughout the morning Partridge took more urgent calls from longtime fund managers reporting that they couldn’t stop the portfolio executives around them from selling VRTX. Reg FD sealed his lips. His futility was self-evident.
“We couldn’t comment because our quarter was closed and we couldn’t preannounce earnings,” he recalled. “We told people, ‘We can only say what we said before—which we really believed in.’ We couldn’t tell them what was going on with IMS. We know IMS was looking into why their data might be inconsistent, but there was nothing more we could tell them.”
Smith hoped investors believed in the long-term value of the company. “You’re effectively playing the trust-me card,” he observed, “but you don’t know where the trust-me card kicks in.” He pressed Emmens to step in to protect the stock and Emmens phoned the CEOs of IMS and Caremark, urging them to act quickly to correct the numbers. The directors were arriving the next day for a regular all-day meeting, and though he already had urged them to filter out Wall Street’s heedless volatility, which in many ways was just as damaging as the dark-arts trades and destructive lending practices that aroused Occupy Wall Street and most of its supporters, Emmens worried that the board, too, needed to be reassured, if not about the actual figures, by an awareness that he and Smith were on top of the situation. He summed up the rising disconnect in his cover letter to the other directors:
What a great time in the histo
ry of Vertex. Execution by our team has been virtually flawless. With a blockbuster launch and another breakthrough medicine about to be submitted for approval, we are working on our future, with ten clinical projects encompassing eight different compounds, seven of which already have proof of concept. Beyond a great launch, everything else has been on time and nothing has failed in the clinic yet. This situation is unprecedented in our industry. As they say in the understated German way, “Not bad.”
The only frustrating part is that Wall Street is focused elsewhere. The markets are bearish, highly volatile, and as a result myopic. I think they will ultimately catch up to our breadth and true value.
It wasn’t until midday Wednesday, while the directors met in the fourth-floor boardroom in JB-II, that IMS notified the company that it would issue a bulletin regarding sales figures for the last two weeks in September. The after-hours announcement stated that the figures for the figures had been wrong (scrip estimates actually rose 5 percent for the week ending the twenty-third and 4 percent for the week ending the thirtieth) and that IMS was still missing sales data which might result in updated estimates. VRTX stabilized at a floor of about $40. Emmens, with an agenda that included several hours of discussion about finding a new CEO before his contract expired and a scheduled report from Vertex’s advisor on the company’s takeover risk, was not mollified by the correction. “This is crap,” he muttered, scanning his BlackBerry during a break. “This is not our business. This in not what we’re in business to do.”
