The Antidote: Inside the World of New Pharma (59 page)

“I agree with that,” Koppel said, “but I need to know near-term what the cash flow generation is.”

“Just take the October number and flatline it.”

If putting a price on Vertex or any company by trying to model the future was bound to be futile, as the last few months had proven, neither of them could resist the exercise. Emmens’s model of finding really sick people and making drugs for them might satisfy scientists but the Street demands valuations based on something more tangible, even if it’s a speculative algorithm that blends and ranks various likelihoods, a garbage-in, garbage-out system.

“It could be worse,” Koppel said. He explained how his team had graded the probabilities for what would happen to Incivek’s revenues
over the next three years in the event of ten different outcomes. “We have complete discounted cash flow (DCF) models behind each one of these. If it’s severe, we’re thinking it goes 2 billion, 1.7, 1.3, and then off the map. If it’s moderate—and these are back of the envelope—let’s say 2.2, 2.3, and 1.5. And if it’s light, it’s our original numbers before this weekend—”

“Yeah, yeah, that’s fine . . .

“Do they get a nuc or not?” Koppel continued. “We charge them a billion and a half dollars in capital, and we say they can sustain from 2015 to 2020 at between 1.5 and 2 billion. If no, then it’s just the cliff.”

“When do you cliff it?” Porges asked.

“2016.”

“I cliffed it at the end of 2014.”

Koppel laid out a range of options for VX-770, from clinical and regulatory failure to approval in record time and blockbuster sales. Porges studied them.

“Okay, what do you think are the probabilities that it doesn’t work in other gating mutations?” Porges asked.

Koppel brightened. “I think it’s going to. We say it’s a ninety-five percent chance it reaches the market and a sixty percent chance they get more than just G551D.” He explained that after blending the eight most likely scenarios and crunching the numbers, his researchers came up with a price target of $48 a share—approximating Porges’s $50. They were on the same page, if not yet reading from the same verse.

Porges put down the iPad. “This is so McKinseyesque. It’s why I never worked in the organization. I could fire a rifle straight through this and blow it up,” he said, pausing. “You haven’t modeled what if Pharmasset fucks up.”

“What are you gonna tell me, that you can model better than I can model?”

Porges rose to the challenge.“The big variable is realized net present on CF. Very important on the DCF.”

“They’re gonna have to spend a billion and a half and do something,” Koppel said, returning to the lack of a late-stage nuc.

“Buy back the stock! If the company is such a bargain, buy it back!”

Koppel had consulted by phone with associates back in New York the night before and again that morning. He wanted Porges’s bead on what he considered the likeliest simulation: “Moderate warehousing. They try to maintain the free cash flow—I give them a billion and a half dollars. And I give them the base CF plus the conductance.”

Porges scratched his forehead, smiling skeptically. He returned to his earlier point. “ So, how are we gonna incorporate in the model Pharmasset’s primary development strategy not working?”

“Well, then it’s just upside; but then it’s not worth modeling. I’m not gonna make an investment thesis that the competition is gonna fuck up. Right now I’m just trying to find a base on the freakin’ stock. I’m not frightened right now, but the bears have proven correct on all three of their theses. At some point as an investor, you’re blind if you can’t admit you’ve been wrong. I’m not wrong on the launch. I’m not wrong on how they compare with boceprevir. I’m not wrong on CF. But I’m certainly wrong on perception and I’m wrong on management’s competence and poor decision making on how to sustain their hep C franchise.”

Here was the rub: Emmens and Vertex
saw this coming
. Why they let it happen when Koppel, Porges, and others were urging them to take Pharmasset out before it got too expensive was beyond reason. They couldn’t understand it.

“It’s amazing,” Porges said. “The downfall of just about every pharmaceutical company that ultimately fails is almost always scientific hubris. The guys at the top in the scientific department get positive reinforcement from scientific success, and then they overstate their own ability to make scientific judgments based on new information. That’s what happened at Merck. That’s what happened, certainly, at Amgen. You can almost argue that it started to happen at the end at Genentech. It’s happened at Gilead. And it’s probably what’s happening here.

“Four years ago, I told them they should have bought bloody Pharmasset, when it was a billion dollars—”

“So did I. We all told them. But they think they’re smarter.”

“That’s what I said: scientific hubris.”

What neither of them knew was that Emmens, in fact, had pursued Schaefer Price, taken him to dinner in 2009, proposed that the companies
collaborate, telling Price that the combination of VX-222 and Pharmasset’s compound would be “a global segment killer.” Price had been eager and receptive—until the next Monday, when Pharmasset’s scientists inexplicably pulled out and Price didn’t notify him directly. “You don’t do that in CEO-land, by the way,” Emmens says. Unlike a cash-rich behemoth, Vertex couldn’t afford a takeout, friendly or otherwise, even if it wanted one, which it didn’t. Emmens knew others blamed him in hindsight and it nettled him when the Street didn’t assume he’d tried to do the obvious.

Koppel mulled Porges’s postmortem. “I agree when you have success you think no one is better than you and you can do everything yourself internally. But I still think there’s something special in that organization.”

“On the ability to come up with innovation, I completely agree with you.”

“But they’re not being paid for it. No one cares.”

“Their downfall,” Porges said, “is that they failed to get the nuc, period, and that they failed to get Pharmasset. In the same way when I wrote the note that Gilead should have bought Vertex seven years ago, Gilead turned up its nose and said, ‘Oh no, we don’t really like telaprevir.’ They’d be in a totally different position. They wouldn’t be trading at seven times forward earnings.”

“Right. Because they’d at least have the telaprevir free cash flow, and they’d have one or two other assets.”

Lunchtime approached. A couple of retirees read the
Chronicle
in plush chairs by the gas fireplace, and groups of businesswomen and a few families clustered near the desk. Both Porges and Koppel had appointments, calls to return. Porges rose abruptly to leave.

“So in the same way Gilead thought it knew better, and that the drug wouldn’t come to market, Peter Mueller thought he knew better and thought this drug wouldn’t make it.”

“Here’s where we are,” Koppel said. “We all want Vertex to succeed better than it’s succeeding now. They need to get a nuc. Or they need to say they’re going to milk telaprevir and get out, and don’t spend the money on a quad. I do want to turn the card on the Phase II triple all-oral. Because it would be worth developing that if there is a real issue
with genotype 1 on 7977. But the data better truly be pristine. The data better be really good efficacy with clean side effects.”

Porges was philosophical. “Pharmasset is so far out on a limb—the fact that they’ve been pounding this 100, 100, 100 so hard. If that’s all this is about, those expectations are off the charts. Pharmasset is saying we can treat everybody the same, regardless of viral variability or patient variability. The more variability you find in the absence of interferon, the more vulnerable Pharmasset’s thesis is. Their thesis depends on curing patients independently of host response—completely independently.”

He turned on his heel to go. “A shit show,” he said.

Despite the pain of the moment, the acid test of Vertex culture was its firm faith in science. After the Liver Meeting, Cumbo foresaw a period of “free play”—speed dating among the major players in hepatitis C, where they frantically sought to hook up either through collaborations or M&A. He trusted Mueller, Kauffman, and the R&D organization to remain all-in on advancing an interferon-free therapy, and though he had to reassure his people blindly, not knowing what Vertex’s next move might be, long experience in an industry where failure and disappointment are norms had taught him to prize an even keel. Partridge, his own faith buttressed by newly inspired prospective shareholders, sympathized:

“It was bruising to the people who came into the company and worked so hard to make the launch a success—the people who are actually in the field, talking about Incivek, educating nurses, or being the sales reps for docs, or being the community liaison or what have you. All those people did a phenomenal job. Well, that ought to be rewarded. But the stock doesn’t reflect that sort of success, and the headlines are negative. That’s deflating, when you work that hard to produce an outcome, and it doesn’t carry over.”

Pangs of disappointment and recrimination flashed through the company. Like the field force, Ann Kwong, promoted to lead the hepatitis C franchise, was whipsawed by the uncertainty. For years, using HIV as her example, she’d warned that Vertex could wind up like Abbott and
Merck, pioneering developers of protease inhibitors shut out when Gilead rapidly overtook the market with a nuc-centered once-a-day cocktail. Avoiding her usual high profile at the Liver Meeting, she pressed Mueller and Wysenski hard, behind the scenes, to move more aggressively.

On the surface little had changed but the sudden explosion in competition, not a winner-take-all free-for-all but an industrywide hunt for multiple combinations of antivirals to match with the most appropriate patients. Merck, Roche, BMS, Novartis, Johnson & Johnson—all were actively realigning. Most desperate was Gilead. John McHutchison’s team was running trials of six drugs in various combinations, but so far had discovered no category-changer to stave off the destruction when its major HIV patents all expired in 2015.

Less than three weeks after the Liver Meeting, Gilead Chairman and CEO John Martin announced that the company was acquiring Pharmasset for $137 per share—about $11 billion. Eyebrows were raised not just by the size of the trade but the whopping 85 percent premium. Two days later VRTX closed at $26.60, giving it a market capitalization of less than $5.5 billion—a nearly 60 percent drop from the heady days six months earlier when, on the cusp of the most robust drug launch in history, everyone on Wall Street was projecting that Vertex would sell $2 billion of Incivek in 2012. Now that was history. If any pharma CEO wanted to take Vertex out, the time had become unexpectedly ripe, but no serious moves were made, or even rumored within the company. With its hepatitis C revenues up in the air, the rest of Vertex’s value, invested heavily in R&D, defied computation. It simply wasn’t the kind of risk-mitigating trade industry behemoths were seeking now.

Emmens hoped the company’s next CEO would be Dr. Jeffrey Leiden, who joined the board in 2009 and who also sat with him on the board of Shire. Leiden, fifty-six, was a rare hybrid, a distinguished cardiologist and professor of medicine at Harvard who joined Abbott in 2000, presided over its labs through the rollout of Humira, and went on to become president and chief operating officer of the company’s pharmaceuticals group. Leiden left Abbott in 2006 to become managing director of a life sciences venture capital firm. Emmens respected him and considered him the only candidate to meet Vertex’s specifications:
high-science background, major commercial and financial experience, strong judgment and leadership skills.

He chose Boger and two other members to direct the search, telling Boger, “You’ve got to be convinced. If you’re not, I’m worried.” Boger had lobbied to have a commitment to the Vertex values enshrined in the job description, and the board agreed. He thought scientists as a cultural type were generally undervalued for the breadth of their thinking, once telling a reporter, “It’s much more likely that your top scientist can whistle the melodies from three sonatas than it is that your humanities-trained person can pass the science section of the MCAT.” Leiden, an elected member of both the American Academy of Arts and Sciences and the Institute of Medicine, won Boger over handily at his interview.

On December 9 Vertex announced that it was initiating safety and tolerability studies with both Alios nucs. Effectively, Vertex decided to back off from its quad strategy for nulls and invest more heavily in nuc-based regimens favoring genotype 1. Mueller commented that the company hoped to advance rapidly into Phase II development during the second half of 2012, and that those studies would evaluate the compounds in conjunction with Incivek and VX-222 and possibly ribavirin. A play, if not
the
play in hepatitis C, the announcement was well received on Wall Street, where shares of VRTX began to recover, climbing back above $30.

Vertex’s wild year wrapped up swiftly with the usual preholiday preparations, the wind-down to a forced two-week vacation at Christmastime before the lead-up to the Morgan Conference in January, when the cycle, enlarged by the expected launch of Kalydeco, would start all over. It was the season of prizes and surveys. On the website TheStreet, readers voted Emmens best biotech CEO of 2011, with 33 percent of the vote. But columnist Adam Feuerstein, taking matters into his own hands, retrospectively fixed the balloting, awarding a tie to Price, who came in last with 11 percent. “That’s not right,” Feuerstein wrote of the survey results. “Therefore, I’m using my prerogative as the overseer of this award to bestow upon Price special recognition for the extraordinary job he did this year. It’s easy to make the case for Price being the true Best Biotech
CEO of 2011. I don’t mean to diminish anything accomplished by Emmens and the other nominees, but Price deserves praise for moving the field of hepatitis C therapy forward by a great big leap and also for helping his shareholders profit.”