The Antidote: Inside the World of New Pharma

by Barry Werth

  In a way, Peter is very easy to manage if you let him do what jazzes him, which is in the best interest of the company right now. I want somebody who wants to watch what he does, understand it, put it in the bigger context, and help him do it. If you do that, you’ll keep Peter, you’ll keep him happy, you’ll keep him engaged. Peter likes to learn. He’s always learning. If he ever gets bored here he’ll leave. He’s an unusual character.

  After the markets closed late on Thursday afternoon, October 27, Emmens, Mueller, Smith, Wysenski, Kauffman, Pace, and Partridge took their usual seats for the Q3 earnings call. Their going-in strategy aimed to blunt the momentum of the shorts with blowout earnings figures and a convincing commercial vision to show that Incivek sales weren’t flattening five months after launch. “I think our tone should be giddy, not cocky,” Emmens instructed. “Very, very confident.”

  Representing the company’s operations in the first full quarter since the launch, the numbers conveyed multiple meanings. It was the first time in Vertex’s twenty-two-year history that it had generated a quarterly profit from its own product sales: a potent rebuke to the IMS confusion, which had resulted in the data firm releasing three separate product bulletins correcting for misleading scrip estimates; a gauntlet thrown down to the analysts; a powerful vindication for Emmens, Wysenski, and their strategy; and a crystal ball into the future, specifically the next fifteen months, since what the Street would look for would be a weekly run-rate from which to extrapolate earnings through 2012.

  “I’ll tell you one thing,” Mueller said, handicapping the call. “Tomorrow something will happen, and they’ll jump out the window again.”

  “There’s an optimist for you,” Kauffman said.

  “One of the guys did a study that R&D heads that are German, once they get their first drug approved, they’re not productive anymore,” Emmens told Mueller.

  “But they’re from Frankfurt.”

  As Partridge contacted the operator to start the call, Smith cut in. “These guys are never wrong,” he said. “Don’t rise to the bait.” After a decade of finessing a mounting burn rate by stoking ever-higher hopes for the business—and two weeks of grinding through the volatility over IMS—Smith gleefully disclosed the third-quarter results. Revenues for the quarter were $659 million, a twenty-five-fold increase from a year earlier. Net product sales of Incivek were $420 million, beating expectations handily. Vertex declared a profit of more than $1 per share, with income totaling $221 million. Smith, who had pushed hard for the release, revealed internal data showing that Incivek sales had reached $40 million to $45 million per week in September and October, a run rate implying fourth-quarter sales of $520 million to $585 million, far above the current consensus of $411 million.

  The September–October numbers were spectacular and unimpeachable, far higher than anyone had predicted, but indeed had leveled off, more or less as IMS had crudely, even erroneously, detected. Wysenski explained that the uptake among the highest prescribers had been so dramatic—seventeen thousand patients in all—that many had reached their capacity for putting new patients on the drug until the first wave came off. She said the company was focused on expanding the number of doctors using Incivek to reach the next wave of patients.

  During the Q&A, Bank of America’s Rachel McMinn seized on the apparent softening. “I guess I wanted to ask a little bit more about that one slide, the $40 million to $45 million in weekly sales,” she began. “How are we supposed to look at that? Is that a gross sales or net sales number? And then, I guess, as we think about that for Q4, I mean, are we talking about $560 million in revenues if we just kind of use that as a thirteen-week number? Do we think about $2.3 billion in 2012 sales?”

  Smith, ever alert to the need to inspire confidence while falling short of giving the analysts guidance about future performance, jumped in to clarify: “A lot of questions in there. First of all, let me give you the basis of the data in the chart, and then you can use the data as you wish. It is actually net revenues that we record . . . Now, as far as, should you then take the number that’s between forty million and forty-five million in September and October and translate that through to both November and December? I’ll leave that for you to do a forecast. It’s not intended as a forecast. The reason we put this slide up was to get people—to help people get an understanding of the high volume of patients that are actually being treated, the high volume of scrips that are being written by prescribers.

  “Our feeling,” Smith said, “has been that this has not always been tracked the way that we’re tracking it internally. And we believe that we have the most accurate internal metrics of how this launch is going, and we believe that because we monitor that on a daily basis. And so we wanted to put—give people an idea of where this launch currently stands. I think the best way to do that is on the revenues.”

  Wysenski, defending Vertex’s commercial strategy, stepped in. “In response to the chart, Rachel, I think you’re noticing that the rate of growth has changed. But I think that’s more a reflection of the exceptionally quick ramp early in the launch. There are further opportunities for penetration into this market. There are many more patients to treat, and we are going to continue to do everything we’re doing with a highly effective sales team to target those prescribers in that patient base.”

  Here, as Emmens had always worried, was the problem with trying to value Vertex by the area under the Incivek curve. In a more perfect world, you wouldn’t bet a company’s future on a disease where most of the patients didn’t know they were sick, had no symptoms, and didn’t need to be treated right away. Whether, how, and when the other three million Americans infected with the virus would show up for treatment remained anybody’s guess. Up to one hundred thousand patients had been warehoused awaiting the approval of Incivek and Victrelis, creating pent-up demand, but now, with the promise of all-oral therapy, maybe for as little as twelve weeks, suddenly more likely as soon as 2015, doctors evidently were starting to warehouse again—or so it could be made to appear by those long on Pharmasset and short on Vertex.

  VRTX climbed by 3 percent to $43.99 in Friday premarket trading while the analysts pounded out notes to clients. ISI Group’s Mark Schoenebaum, whom Smith dubbed “The Pollster” because his contacts within biotech were omnivorous and unrivaled and he positioned himself as an oracular figure, raved that the Incivek introduction appeared to be the fastest drug launch of all time. He anticipated that cumulative sales could exceed $1 billion—the standard for a blockbuster—as early as the current quarter. Merck also beat analysts’ earnings forecasts but announced anemic sales of Victrelis of just $31 million. Despite having Roche at its back and deeply discounting the drug with the VA and other government payers, the company had pushed its market share to 25 percent.

  “In the closely watched bout between two new hepatitis C drugs,” veteran biotech reporter Andrew Pollack wrote prominently in the Times, “it’s a knockout in the first round.” Yet by one o’clock, despite everything—despite leaping the threshold to profitabity and unheard-of sales numbers; despite crushing Merck—VRTX was trading at $41.15, a loss of $1.43 from the previous day, when none of these things were known to investors. The future gets repriced every day. Enough investors were worried that sales were flattening that the long-short thesis picked up steam even as Vertex produced quarterly results beyond anyone’s imagining.

  CHAPTER 14

  * * *

  NOVEMBER 2, 2011

  Brookside Capital’s Adam Koppel, who’d made a career bet investing in Vertex when the stock tumbled into the teens in 2007–2008 amid abrupt fears of Stevens-Johnson syndrome and the specter of Schering-Plough, joined McMinn and about a dozen other analysts and fund managers around a conference table crammed with laptops in the Aurora board room in San Diego. Not the R&D day proposed by Boger, the visit was arranged by Partridge’s group to showcase the company’s work in CF. McMinn that morning again pulled back her price forecast, leaving Porges as the lone inf
luential bull on the stock. By midafternoon, they would all board an executive coach to Anaheim, for the annual North American Cystic Fibrosis Association meeting at the Civic Center—for Vertex, as well as for most of them, a four-day nonstop whirl extending right into the Liver Meeting in San Francisco.

  “Were you totally disappointed in mono 809?” Koppel asked site head Paul Negulescu, who led the session.

  “I was totally excited,” Negulescu said. “We’re seeing what we expected to see.”

  Koppel asked several more questions aimed at nailing down the size of the market for VX-770, which Vertex recently announced it would sell under the trade name Kalydeco, and he was pleased to learn that in laboratory assays the scientists had established that the drug ought to be effective not only in people with other gating mutations, but in those with residual CFTR resulting in moderate ion-trafficking problems—up to another 10 percent of patients. “Why not run a study for all comers?” he suggested. “Give the drug for a month and measure sweat chloride.” Olson responded that payers and regulators would insist on more rigorous study designs.

  Touring the labs afterward, Koppel and most of the others were dazzled—by the robotically controlled HBE cell bank, a decade in the making, that allowed the company to continually test new compounds in new combinations; by the patch-clamp assays that allowed the analysts, after fiddling with their pipettes, to inject compounds into rows of plastic wells and observe within seconds the spike in chloride gating activity on their computer screens; by Van Goor’s movies. The tour only confirmed Koppel’s impression that Vertex had a “backbone”—a machinery for replicating success.

  He also was perplexed, riled by the shorts, reconsidering his faith in management, and rediscovering the limits both of his fiduciary obligations and his patience. In April, before Incivek was approved but after the AdComm, VRTX jumped within days from $48 to $55. Expectations for the second quarter on the market—Q3—were for $156 million, or negative 30 cents per share. Koppel had jumped in, buying another 1.9 million shares. Now the stock was trading at $36–$37, down every day since last week’s earnings call. He blamed BOA’s McMinn, Morgan’s Meacham, and Citibank’s Werber for driving the sell-off. Koppel knew them all and claimed to like and respect them. What irked him was that they had done the same thing once before, and in the long run their theses had proved wrong. Sitting the next morning on a bench amid the milling throng at the CF meeting, Koppel was restless, pent up.

  “They’re the three that created the uncertainly in ’07, when it was over rash and ‘Oh my God, there’s competition!’ ” he recounted. “With rash, there have been cases, but it was way overblown. And the competition in 2007 is not even the competition that matters today.

  “Why is the stock so weak right now?” Koppel asked. “It’s weak because of weekly scrips, which is ridiculous. The problem they’re running into is, investors invest in the future, they don’t invest in the current. The ET needs to solve 2015, and they haven’t done it. Because there is no 2015 and beyond, the market is hyperfocused on week to week. They brought that hyperfocus on themselves. If they can just show that they’re even gonna be in the game in 2015, 2016, that they can sustain a billion and a half, two billion in revenues, and be one of the potential all-oral players, I don’t see how the stock doesn’t—not in a day, not in a month—rebase within six months in the seventies.”

  Porges, too, was at the Anaheim meeting, buttonholing Partridge on an upstairs escalator festooned with Vertex banners, reporting his sense of mounting “investor fatigue” with VRTX. Partridge wore a brave face but he was grim. “It kills me,” he said, “that stockholders who’ve stayed with us are having to go through this.” Even if the standard two-part thesis on Vertex was proving correct—that it would be first or best to market with its drugs; that the scientists, portfolio strategy, and culture gave it a platform and a formula for repeated successes—Wall Street withheld any credit for the second part. That left the company exposed and vulnerable. In the end, fund managers are stewards of capital, and can’t be expected to retain their positions indefinitely, no matter how much, like Koppel, they consider themselves friends of a business or believe in its cause.

  Judging by the gloom surrounding Partridge, Porges, Koppel, Smith, and the beleaguered investor team, it was easy to miss that most of the three thousand attendees shared a growing born-again fervor, and that the chief cause for their extraordinary excitement was Kalydeco (VX-770). CFF’s Bob Beall was ebullient. He bounded onto the stage at a packed plenary session to James Brown’s “I Got You (I Feel Good).” He recounted with a sense of awe the story of a woman who knew her daughter was on 770 because her cat no longer licked her when she sat on the sofa. He called Vertex’s NDA filing “a day that was only equal to the announcement of the discovery of the gene.” In the face of nearly universal resistance, Beall and his team had moved heaven and earth to get to this day. That the CF Foundation also looked forward to hundreds of millions in royalties from Kalydeco affirmed his stewardship, adding perhaps to his enthusiasm, though it was expected that the organization would eventually sell them off in order to preserve its philanthropic neutrality.

  Smith roamed the meeting rooms and poster sessions with one eye on his BlackBerry, smiling inscrutably. The excitement in the hall and in the national media over Vertex’s clinical findings, coincidentally published that week in the New England Journal of Medicine and carried widely on network newscasts, confirmed what he already knew from talking with the scientists and the KOLs—that the possible initial market for Kalydeco was more than twice what Wall Street was calculating. If you included the other gating mutations and patients who had enough working CFTR not to need pancreatic enzymes but who could also benefit from improved ion-conductance, that was perhaps another four thousand patients. Based on study data, Kalydeco might generate $1.75 billion annually, as far as the eye could see.

  Koppel saw the same great prospects. What’s more, he said, unlike with hepatitis C, “you don’t have another fifty companies crawling up your ass.” Other drugmakers were looking at CFTR now as a hot target and other experimental approaches were advancing in the clinic. But Vertex owned its market as only companies with medicines for rare diseases can, succoring those concerned with how it would solve its 2015 problem even as they continued to worry about the area under the Incivek rainbow. “The take-home from San Diego,” Koppel said, “is 770 is a drug for twelve percent of patients.”

  And yet within the binary, seesawing long-short scenario that had overtaken Wall Street, Vertex and Pharmasset—which owned two promising nucs and little else—were now valued almost the same, their market capitalizations near $7 billion. Up the coast, Occupy Wall Street protesters in Oakland declared victory after peacefully shutting down nighttime operations at one of the nation’s busiest shipping ports, escalating their movement and adding to traders’ anxieties. Obama, plagued by low approval ratings and a paralyzed Congress, issued an executive order pressing the drug industry to resolve a growing number of shortages of vital lifesaving medicines, the latest scandal to rock the industry. In the churning uncertainty, worsening not just in pharmaceuticals but across the planet, Tom Wolfe’s space-age mantra seemed more and more apt. It can blow at any seam.

  Vertex’s commercial booth in the first-floor exhibition hall at Moscone West, two blocks south of Market Street, served as a showroom/encampment for the Incivek sales and marketing teams, as well as the HCV clinical group and the ET; only Emmens remained in Cambridge. Doctors and researchers, bombarded by competing video loops along the central alley, ambled in and out, navigating around tasteful low-slung white sofas and theatrically lit iPad stations. Like most of its competitors, Vertex drew passersby with lattes and flavored coffees served by attractive baristas. Market research manager Karolyn Cheng branded the ambiance “loungey”—stylish but informal.

  Sunday, early afternoon, Smith and Mueller stood talking at the edge of the action. Mueller was animated. The Pharmasset buzz had g
rown deafening in anticipation of a three o’clock presentation of new data from a small midstage trial with PS-7977, its lead nuc. Mueller believed Vertex had an effective, competitive all-oral regimen for hepatitis C with Incivek, VX-222, and ribavirin, but the source of his confidence, especially with Smith, remained purposefully obscured, a matter of body language. He tried to convey that Vertex had what it needed, especially after the addition of the Alios nucs, to remain competitive in the disease without disclosing specifically any new data or compromising Smith in his handling of Wall Street. Mueller dismissed “this nuc hype bullshit.”

  Smith countered that if Mueller was right, it was “all the more reason” to buy a late-stage nuc to ensure that the perception of Vertex’s 2015 drop-off was exterminated for good. As he saw it, the company faced a reckoning: buy a nuc for $1 billion and solve the problem, or save the money at the cost of continuing uncertainty.

  Cumbo, nearby, palmed his cell phone, scanning the other booths: Merck, Gilead, Roche. The consistent message from the field force was that Incivek, its historic launch aside, had like all other medicines problems that hadn’t shown up in the trials. Doctors reported less rash but more anemia and painful anal-rectal itching, forcing the company into action, working overtime to provide advisories and assurances to doctors and to the FDA that the side effects were being rigorously monitored and remained manageable. Cumbo had heard from his team that Merck’s reps were spreading rumors of a spike in adverse events, including deaths, with Incivek, and though many doctors were reporting that the Vertex salespeople were the most customer focused they had ever seen, the war over the drug’s reputation among the lower-prescribing physicians on whom it was relying for the next wave of patients had not yet been won. Sales were flattening.

  More than four hundred people, including Mueller and Smith, packed the overflow room to hear Dr. Edward Gane of the New Zealand Liver Transplant Unit in Auckland report the results of Pharmasset’s ELECTRON study on giant video monitors bookending an empty stage. A total of forty patients infected with HCV received a dual regimen of PSI-7977 plus ribavirin for twelve weeks. They also were randomly assigned to take Roche’s Pegasys for either four, eight, or twelve weeks, or not at all. According to Gane, all participants achieved viral response by the end of the study, no viral breakthroughs were noted, and the only serious adverse events were in the Pegasys arms, none in the dual arm. Gane put up a slide that caused many observers to gape: a comparative analysis of the various arms, 100 percent SVR rates in all of them. What Pharmasset was claiming conjured the ultimate hope in hepatitis C: not a quad or a three-drug combo, but a pan-genotypic two-drug cocktail, a one-size-fits-all superdrug. The blockbuster takeway: Pharmasset’s compound plus riba could cure hepatitis C in twelve weeks without interferon.