Wall Street Journal - October 29, 2003
David P. Hamilton, Staff Reporter of The Wall Street Journal

Not exactly.

Consider Vertex Pharmaceuticals Inc., a Cambridge, Mass., biotech that's been around since 1989. Founded by ex-Merck scientist Joshua Boger, Vertex aimed to vastly improve the lengthy and risky process of developing new drugs by incorporating the latest in computer and biological technology.

Essentially, Vertex figured it could tweak the structure of drug molecules to make them interact more effectively with the body's proteins. At the time, it was a revolutionary notion, so much so that journalist Barry Werth chose Vertex as the subject of his 1994 book "The Billion Dollar Molecule."

Unfortunately for Vertex and its investors, that billion-dollar molecule has so far eluded it. The company did launch its first drug, an AIDS medication known as Agenerase, in 1999, and a second-generation version called Lexiva just won Food and Drug Administration approval.

But Vertex's history demonstrates that biotech risk isn't limited to the possibility that experimental drugs will fail in clinical testing, as the vast majority do.

Vertex is still piling up operating losses of more than $100 million a year -- a figure that has more than doubled since Agenerase hit the market. So far, investors don't appear particularly impressed with Lexiva, either. While biotech stocks in general have had a good year, rising more than 40% since January, Vertex shares are down about 20% over the same period.

Analysts such as Edward Nash of the brokerage firm Legg Mason Wood Walker Inc. expect that Lexiva could sell more than twice as well as Agenerase if it is successful in taking market share from similar AIDS drugs, known technically as HIV protease inhibitors. Lexiva, however, is also likely to cannibalize sales of the older drug relatively quickly, Mr. Nash says. In any case, Vertex will receive only 15% to 20% of those sales, since both of its drugs are marketed by pharmaceutical giant GlaxoSmithKline PLC.

Although Vertex shares have risen considerably since the company's 1991 initial offering, when they debuted at a split-adjusted $4.50, they haven't produced better returns than more conservative investments. Had you invested $100 in Vertex at its IPO, your stake would now be worth $274. The same amount invested in 20-year Treasury bonds over that period would now be worth $319, according to Ibbotson Associates, an asset-allocation firm in Chicago.

By other measures, Vertex is still doing well for a biotech. Launching two drugs in its 14 years of its existence was no small feat, even if Agenerase has generally been a commercial disappointment. Vertex has a roster of large pharmaceutical partners, eight additional experimental drugs in various stages of clinical development, and more than $600 million in cash.

Still, none of those financial or scientific strengths ensure Vertex's success. For instance, the company's detailed structural study of HIV protease, the protein blocked by protease inhibitors, allowed it to move ahead quickly with Agenerase. But development wasn't fast enough for Vertex to beat other protease inhibitors to market.

Worse, Agenerase ran into unexpected problems in midstage clinical trials. The drug appeared effective and no worse in terms of side effects than other protease inhibitors, but the company's scientists suddenly found that the drug wasn't as well absorbed in the body as previously thought. Vertex chemists were able to compensate by changing the pill formulation, but as a result, patients had to take the drug as eight separate pills twice a day.

"We had a not-completely commercially unviable, but a commercially unattractive formulation," Dr. Boger says now. Lexiva, by contrast, is a more soluble molecule that the body breaks down into smaller pieces, one of which is essentially identical to Agenerase. Patients can take it as one or two pills a day.

Dr. Boger, Vertex's chief executive, says the company has deliberately ramped up its research spending to maximize its chances of turning one of its current experimental drugs into a blockbuster, generally defined as a product that generates more than $1 billion in annual sales. "The idea is that the company is made off of solid base hits, and we're just waiting for a grand-slam home run," he says.

By the end of this year, in fact, Vertex plans to reserve two of its drug candidates for solo development, meaning that it would reap all the financial rewards if either turned into a commercial success. Vertex has pinned its hopes for profitability on that eventuality. Among those candidates are experimental drugs for treating hepatitis C infection and autoimmune diseases such as rheumatoid arthritis and psoriasis.

Doing so, however, won't come cheaply, as Vertex must also shoulder the entire cost of pushing those drugs through expensive late-stage clinical trials. Although that process will almost certainly require additional funds, the company hasn't said whether it will approach the public markets for the money.

The company's existing and future partnerships could certainly help, since Vertex stands to receive milestone payments and royalties if any of the experimental drugs it has licensed to Big Pharma prove successful. But Legg Mason's Mr. Nash, while bullish on the company, warns that Vertex still needs to shore up its cash position, not least because it will likely have to repay $315 million in convertible debt in cash.

That debt, which Vertex sold near the peak of the 1999-2000 biotech-stock bubble, can only be converted to stock if the company's stock price soars past $92.26 by 2007. That's a long shot, given that the company's shares now trade at $12.96.

"I think Vertex is now poised at the gate for the payoff of [our] strategy," Dr. Boger says. Investors looking for a home run will just have to hope he's lucky enough to be right.

Write to David P. Hamilton at david.hamilton@wsj.com
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