The Antidote: Inside the World of New Pharma (52 page)

Emmens, like a team owner watching his franchise build a solid first-quarter lead, relished Vertex’s position, but he was attuned to any disruption in the game plan. He, too, like the analysts, had to project ahead. The next step for the company was to think about connectivity, growth, and scalability worldwide. All three required costly investment. Yet no CEO can ignore for long Wall Street’s betting culture and relentless insistence on mounting returns. Now that Vertex was on a steep path to profitability, Emmens wanted to satisfy investors and analysts, but the
Street always had been—and would continue to be, especially through the launch—secondary, the touts setting the odds, the fans in the skyboxes caring more about the point-spread than the actual outcome of the game. The solution was to win big, crush the spread, leaving the team on the field to stick to its plan, running audibles when opportunities arose, immune to the pressures of speculative second-guessing and the fortunes at stake on the sidelines. Emmens:

What do you do with the money? Investors are biased toward “give it back to me.” We want to reinvest the money in the business. Here you get to this disconnect of timing. For the investment community five years is a millennium. And in the drug development business that’s probably a third of the time you need to develop a drug. You’re always going to have that tension. So we have to build the trust with these folks that their money staying with us is a good thing, and that we can make it work. That idea has been discounted by the lack of productivity of the big guys.

At Shire, we went out and bought an orphan drug company. The market went berserk. They hated it, because that’s not what you do. Exactly right, but strategically we needed to do other things. We needed to get into research, but we also needed to learn about that, so we bought a self-standing business. Strategically it was a way for us to have a research platform. The market didn’t get it. We lost fifteen percent. I was a piece of shit for, I don’t know, three months. Now it’s a third of the business and the top contributor to growth in a company that’s growing twenty-five percent on a billion-dollar quarterly base.

You have to outthink the market. You have to think strategically and opportunistically at the same time, which are often at odds.

It was early, of course. Any number of things could—and would—go wrong. A patient could die, then another, inviting the FDA to put a hold on the drug. The supply chain could falter. Government payers could run out of money. A day earlier, the Seattle biotech Dendreon, another company whose stock had soared along with expectations as it launched
a promising new drug, shocked investors by announcing that sales of its prostate cancer medicine, Provenge, were much slower than expected because doctors were worried about getting reimbursed. As Wysenski had predicted, any chink in the smooth connection between the user, the customer, and the payer—even a doubt or hesitation—could be catastrophic. Provenge cost $93,000 for a one-month course of treatment. Doctors unwilling or unable to shell out the money up front were concerned that insurers might not reimburse them on time, if at all. Shares of Dendreon plunged 62 percent—proving again Wall Street’s fear of any uncertainty arising from a drug launch. Noting the tendency for the industry to rove in financial lockstep, and for investors to become easily spooked, biotech columnist Adam Feuerstein of the website TheStreet predicted: “The ill-effects of the Dendreon debacle will unfortunately spread beyond the company’s stock price to infect the entire biotech sector.”

Then there was Merck, which during its earnings call the same hour as Vertex’s announced it would cut about thirteen thousand jobs by the end of 2015, adding to the twenty thousand it had shed since acquiring Schering. “The pharma industry is starting to look a lot like the auto industry,” a commentator noted. Though Merck reported over $12 billion in sales in the quarter, analysts drilled CEO Ken Frazier about Victrelis, which accounted for just $21 million. Looking for a positive catalyst in hepatitis C, they were disappointed to find Merck at the trailing end of a 75–25 percent split in the market. “There are headwinds for this industry, and the Merck outlook was indicative of the situation,” Damien Conover, analyst at Morningstar, concluded. “This just confirmed what people thought, with the environment forcing Merck to do cost cutting to adapt.”

Despite the ebullience at Vertex, which would spill into the next week even as the stock peaked at $52 before sliding to $43 along with the rest of the sector among broader economic fears, the spreading summer doldrums weighed on the industry, which more and more seemed stagnant, terminally self-afflicted. As Boger observed in the early days, no matter how different it tried to be, Vertex would be held to account by Wall Street not only for what it could control but also for a myriad of intangibles
beyond its reach. “I’m not worried about us,” he said. “I’m worried about others falling on us.”

Washington was a separate matter. The federal debt-ceiling “crisis,” manufactured by the Republicans who took control of the House in the 2010 elections, drove the country to the brink of default until, late on the night of July 31, Obama and congressional leaders of both parties broke the stalemate. The ceiling, which had become a bargaining chip in the debate over government spending, was extended in exchange for $900 billion in immediate across-the-board budget cuts. A “super-committee” was assigned the task of coming up with a second round of deficit reduction and a “trigger” was adopted that signaled that if Congress failed to enact the cuts the result would be sweeping reductions in military spending, education, transit, and Medicare payments to health care providers. By the end of the week, credit rating agencies began downgrading US government securities for the first time in history. Stocks plummeted.

Vertex was aloft, yet VRTX got slammed, plunging 17 percent. Partridge, alarmed by the disconnect, sought to reassure employees who, just as they expected their 401(k)s to pop, watched VRTX get swept down. Conflating the broader anxious investment climate with what would soon be dubbed the “Dendreon effect,” he encouraged them, in an article for the company newsletter, to be clear-eyed about what was happening. He wrote:

Amid the broader market decline, stocks of health care companies have taken a disproportionate hit recently, in large part because investors believe that the debt-ceiling agreement will result in near-term, potentially significant cuts in health care spending. The health care sector had outperformed most other sectors since the beginning of the year, making it relatively easy for investors to sell these stocks, book a profit and walk away.

To put this in perspective, Human Genome Sciences (just launched Benlysta, a lupus drug) lost nearly 25 percent last week, while InterMune (launching Esbriet for idiopathic pulmonary fibrosis)
lost 29 percent. Important to note, Vertex is still up about 23 percent on the year, while the NASDAQ biotech index is down by 3 percent. In the NASDAQ 100, Vertex is the tenth best performing stock this year (beating such household names as Electronic Arts, Starbucks, Apple and Gilead). So, despite the downturn, we’re hanging in there.

We have reason to be optimistic about the months ahead as well. The Incivek launch has so far exceeded Wall Street’s expectations, and recent IMS data suggests to many smart investors that this out-performance will continue. We are only a few months away from regulatory submissions of a second drug, VX-770, for cystic fibrosis. Our value is clear and measurable, and we are well positioned to see investors come back to the stock once the dust settles from the panic selling.

Smith viewed the dip as a short-lived phenomenon, an imperfect storm. He calculated there were three forces affecting VRTX: the stomach-churning uncertainty in the capital markets, generating a flight from equities; broad calls from chief investment officers to pull money out of any company launching a high-priced drug because launches are high risk and many fail; and, disassociated from the other two, Vertex’s internals. Those, he believed were solid, starting with the launch. “Count the scrips,” he said. “The scrips are coming in, day after day. We continue to advance toward the filing of the cystic fibrosis drug, which we have great confidence for. We have greater clarity with the FDA about how to advance VX-770 monotherapy into other mutations, thereby broadening the benefit. We’re coming up on data with JAK 3. And financially we’re just getting a capital structure that is giving strength to do things in the future. So inside the walls of Vertex the company is just getting stronger and stronger.”

What worried him most, short term, was a severe adverse event with Incivek. Until the company could treat tens of thousands of patients, any such reported event, even a one-off, would be statistically meaningful and reputationally a major setback. Early on, it could stop a drug in its tracks, so however promising Incivek’s ramp now looked, everyone on
the ET worried about one. “I don’t want to blow up a patient,” Smith said. “We’ve built a big tanker here that doesn’t turn in tight circles. Our operating costs are close to $1 billion annually. And we need this launch to keep going. We need a good strong top-line for 2012. We’re living by this drug.”

Where Smith and Emmens were in strong agreement was on the company’s long-term outlook and the need to balance strategy and opportunity to outthink Wall Street now and over the next several years. The challenge came down, as Boger had posited to the Harvard Business School team, to managing portfolio risk. Looking a decade out, Emmens couldn’t envision Vertex’s expanded product line, in what new diseases, but he thought he had an idea of what it might look like in say, 2016. “It’s probably what you’re seeing,” he said. “If we have the best anti-inflammatory for inflammatory diseases, including RA, it’s a six-billion-to-ten-billion-dollar product. Flu could be a billion or two per year. Epilepsy could be five hundred million bucks, but the market has no clue about that, because when there’s no model the market doesn’t know what to do with you.”

Of all the scenarios clouding Emmens’s forecast—besides, of course, an unanticipated late-stage failure—the most ominous was the one where Vertex, beaten to market by an all-oral treatment for hepatitis C, suffered a sharp drop-off in sales of Incivek before its JAK-3 inhibitor or its flu molecule, now just starting to be tested in humans, reached approval. Each week the rapidly increasing prescriptions grew into a sales curve with a trajectory that would generate for several years at least enough cash to grow the company
and
reward investors. But what if an all-oral regimen came sooner, or the drugs furthest along in the pipeline failed, or were delayed? Three and four years into the future could open a yawning gap between what the company was bringing in and what it was spending.

Smith jauntily started most visits to Emmens’s office by offering his preferred solution, also the preferred solution of every analyst: “So where’s our late-stage nuc?” The Alios drugs trailed by at least a couple of years compounds being tested, singly and in combinations with partners, by Pharmasset, BMS, Gilead, and several other companies. If nucs would
eventually overtake protease inhibitors, as they had done with AIDS, Smith thought Vertex needed to be far more aggressive. Emmens saw the future differently. His urgency was less about satisfying those who considered that scenario as a major threat than about positioning Vertex to be in the right place in 2020 and beyond.

“We’re working on a midterm play,” he said. “One of the things we could do, with a lot of money, is buy one of these companies and change the game. There’s two reasons you do things, and you’re often doing them both at the same time. You either do them offensively or defensively. We’ve done some defensive moves. We haven’t done the offensive move yet. Ian wants to cover the bases, and he knows Wall Street will respond positively to that. But I think the market will be chopped up, with all these tie-ins. I’m not so sure I want to be in this market in 2017, to any great extent. I don’t want to depend on it, because gradually you get chopped away. Even if we’re the market leader, as these guys come in, you ain’t going up, you’re going down. And Wall Street kills you.

“I constantly fight with Ian on that. He wants today to make the market happy. I’m worried about ten or fifteen years out.”