Vertex Pharmaceuticals: Buy Proposal
Entry Price Band: $20-$30
Exit Price: $60
Fair Value Price1: $44.50
Stop Loss Threshold: $15
Time Horizon: 2-5 years
MED 275: BIOPHARMACEUTICAL INNOVATION
March 9, 2010
Healthcare | Biotechnology
Liliana Chan-Hou | [email protected]
Christine Kang | [email protected]
Erin Parker | [email protected]
Nina Wong | [email protected]
Ming Yan | [email protected]
Introduction
Investment Thesis: We believe VRTX to be a fundamentally
strong company that’s projected to corner the market and that
financially outperforms its peers.
Market Data:
Ticker:
Current Price:
Shares Outstanding:
52-Week Range:
Avg Daily Volume:
Market Cap:
Insider Ownership:
Institutional Ownership:
Dividend:
VRTX
$41.40
181.19mm
25.94 - 44.24
3.57M/1.70M
$6.81bn
0.72 %
95.50 %
N/A
Company Profile: Vertex develops small molecule drugs
principally for the treatment of hepatitis C and cystic fibrosis.
Lexiva for HIV Infection is the company’s sole drug on the
market. It has Telaprevir and VX-770 for HCV and cystic
fibrosis, respectively, currently in Phase III development. Vertex was founded in 1989 by Josh Boger. The
company owes much of its success to him. He was an outstanding fund-raiser and managed the company’s
cash flow well. The company currently has a market cap of approximately $8.31 billion. Vertex was one of
the first biotech companies to employ a clear strategy of rational drug design rather than combinatorial
chemistry.
Markets: Pending Telaprevir’s approval, Vertex has the potential to be a market leader in both the United
States and China. There are 3.2 million people in the US living with chronic Hepatitis C and 17,000 are
newly infected each year. The US Hepatitis C market in projected to be worth $7.7 billion in 2013.
Telaprevir is expected to capture about 40% of the market, thus generating $3.6 billion in revenue for
Vertex, which holds the marketing right in North America. In addition, China is another promising potential
market; currently there are 41 million people infected with HCV in China, where Hepatitis C infection is the
highest in the world.
Recent News:
Vertex Issues FY 2010 Guidance Below Analyst Estimates: The company expects a GAAP net loss
which includes a restructuring expense. While Vertex's GAAP net loss rose from $459.9 million for the year
ended December 31, 2008 to $641.6 million for the year ended December 31, 2009, the loss comes more
from increased investment than it does from falling revenues. With a cash position of approximately $1.3
billion entering 2010, Vertex is investing in key activities to support the potential launch of Telaprevir and
to move the company toward its near-term and long-term business objectives. As they near completion of
the Phase III development program for Telaprevir, they are increasing their investment in critical pre-launch
activities, including building of product supply, the further expansion of Vertex’s commercial infrastructure
and the hiring of key employees to support the implementation of commercial functions. Additionally, they
plan to continue investing in research and development to support proof-of-concept clinical trials.
1
Reuters Knowledge Wall Street Analyst Consensus Estimate – www.knowledge.reuters.com – March 8, 2010
MED 275: BIOPHARMACEUTICAL INNOVATION
March 9, 2010
Vertex targets RA and epilepsy in proof-of-concept clinical trials
In a strategic move that will surely diversify its portfolio, Vertex has committed to
conducting proof-of-concept clinical trials with novel compounds targeting rheumatoid
arthritis and epilepsy. They expect to generate initial clinical data from these trials later in 2010, which could
provide important insight into the value of these compounds to patients and to Vertex.
Company Analysis
Pipeline:
MED 275: BIOPHARMACEUTICAL INNOVATION
March 9, 2010
Competition: Many of Vertex's competitors, including major pharmaceutical companies
such as Schering-Plough, GlaxoSmithKline, Wyeth, Pfizer, Roche, Amgen, Novartis and
Johnson & Johnson possess substantially greater financial, technical, and human
resources than Vertex. Telaprevir’s main competitor is Merck’s (formerly Schering-Plough) Boceprevir.
Like Telaprevir, Boceprevir is also in Phase III of clinical trials. Both drugs are expected to launch in 2011 in
the United States. Another rival of Telaprevir is Roche/Pharmasset's R-7128, a nucleoside polymerase
inhibitor for chronic Hepatitis C in Phase IIb clinical trial.
Competitive Advantages: The current standard of care of Hepatitis C is lacking. HCV patients currently
receive a combination of pegylated interferon-alfa (PEG-IFN) and ribavirin. The treatment involves once-aweek injection for 48 weeks. In addition, only 50% of the patients are responsive to the treatment2.
Telaprevir is an oral pill that patients take in combination with the standard treatment, and shrinks the
treatment duration from the current standard of 48 weeks down to 24 weeks. This is important because the
treatment for HCV cause miserable side effects including flu-like symptoms. Further, Vertex’s Telaprevir
was proven to have worked on 79% of the patients, including those who didn’t respond at all to prior
standard treatment.
Response Rate
Treatment Period
Standard
50%
48 Weeks
Telaprevir
79%
24 Weeks
Form of medicine
Invasive
Oral
Although both Telaprevir and Boceprevir are both likely therapeutic options for future Hepatitis C
treatment, Telaprevir is viewed more positively by clinicians due to its shorter treatment duration for certain
patients and efficacy in treating previously nonresponsive patients. According to Decision Resources
Analyst Alexandra Makarova, M.D., Ph.D, "Relative to Boceprevir, Telaprevir's potential shorter treatment
duration is indeed an advantage for Telaprevir."
Vertex is competitive because of the significant commercial potential of hepatitis C virus pipeline. The
launches of several agents currently in late-stage development - most notably Telaprevir, Boceprevir and
Roche/Pharmasset's R-7128 - will help to expand the market dramatically from $2 billion in 2008 to nearly
$7.4 billion in 2013.
Intellectual Property: Vertex has retained exclusive commercial rights to Telaprevir in North America and
the firm will receive royalties on sales abroad from partners Janssen Pharmaceutica (a Johnson & Johnson
JNJ company) and Mitsubishi Tanabe, should the drug gain approval. Telaprevir is pending patent approval
in the US and has already received patent approval in Europe. In addition to Telaprevir, Vertex has also
secured patents covering the manufacture, pharmaceutical compositions, formulations, and dosing regimens
of VX-813, VX-985, and many other HCV protease inhibitors. Those patents expire in 2021 and 2025,
respectively, but due to the Hatch-Waxman amendments, Vertex is eligible for patent term extension of up
to five years.
2
Nature - http://www.nature.com/nrd/journal/v5/n9/full/nrd2134.html - March 8, 2010
MED 275: BIOPHARMACEUTICAL INNOVATION
March 9, 2010
Technology: Vertex's leading drug candidates were all discovered in-house, thus lending
credibility to its drug discovery technology and its potential to generate additional
pipeline candidates in the future. The biotechnology company uses an integrated,
multidisciplinary approach - employing biophysics, computer-based modeling, and functional genomics - to
speed up the discovery and development of new drugs. They have also invented some technologies, such as
virtual screening and E-VIPR (electronic stimulation voltage ion probe reader), a proprietary technology
which enables scientists to quickly sift through tens of thousands of compounds to find the most promising
candidate molecules. This is significantly faster than a previous standard technique that assessed one
compound at a time.
Partnerships: Most of its activity has been in collaboration with much larger pharmaceutical firms. The
collaborations help provide financial and other resources to support research and development programs.
Vertex has partnered with Janssen Pharaceutica, a Johnson & Johnson company, Mitsubishi Tanabe and Eli
Lilly for the development and commercialization of Telaprevir. By partnering with these companies, Vertex
can share its drug development costs, gain validation for their drug, obtain undiluted capital and minimze
financial risk.
Regulatory Environment: Telaprevir and VX-770 have received Fast Track designation by the FDA,
meaning they have more FDA guidance through the process but does not necessarily leads to priority
review or accelerated approval by the FDA.
Reimbursement: Vertex anticipates that third-party payers will reimburse for drugs if they are successful at
obtaining marketing approval from FDA, but Vertex expects increasingly challenging cost-effective pricing
of their drugs. Vertex will also be receiving royalties for drugs commercialized by their collaborators.
Evaluation of Management:
Vertex has an experienced management team and board of directors to guide the company as it prepares to
launch its potential blockbuster Telaprevir. Former board chairman and founder Joshua Boger led Vertex as
chief executive from 1992 until 2009. Boasting a doctorate in chemistry from Harvard, Boger deserves
much of the credit for Vertex's development into a leading biotech with promising late-stage drug
candidates. However, Boger retired in May 2009 and was replaced by newcomer Matthew Emmens, a
current board member and former chief executive and board chairman at Shire Pharmaceuticals SHPGY.
Given his extensive business background, we think Emmens is well-suited to guide Vertex as it becomes a
more mature operation. While Boger has been instrumental in Vertex's success thus far, we believe the
current executive team, half of whom have over 15 years of experience in the industry, are equally capable
of making this a profitable company.
Matthew W. Emmens became Chairman, President, and CEO of Vertex in 2009. He has 35 years of
experience in the pharmaceutical industry and previously served as CEO of Shire Pharmaceuticals Group
(03-08) and EMD Pharmaceuticals (99-01). He has also held positions at Astra Merck and Merck & Co.
Ian F. Smith is the Executive Vice President & Chief Financial Officer and joined Vertex in November
2001. Before that, he served as a partner in the Life Science and Technology Practice Group of Ernst &
Young LLP, an accounting firm, from 1999 to 2001.
Peter Mueller became Executive Vice President, Global Research and Development, and Chief Scientific
Officer, in May 2009 though has been with Vertex since 2003. He is responsible for Vertex's R&D and
regulatory affairs. He has a Ph. D. in Chemistry and his prior experience includes being Senior Vice
President of R&D at Boehringer Ingelheim Pharmaceuticals, Inc.
MED 275: BIOPHARMACEUTICAL INNOVATION
March 9, 2010
Risks: Vertex expects to incur future losses and may never become profitable. Its
profitability depends heavily on its ability to obtain approval for and successfully
commercialize Telaprevir, its leading drug candidate. Should Telaprevir not succeed,
Vertex's business will be materially harmed.
Furthermore, Vertex may have difficulty raising addition capital for research and clinical trials due to its
large outstanding debt of $287.5 million of 4.75% convertible senior-subordinated notes due 2013. All of
Vertex’s drug candidates remain subject to clinical testing and regulatory approval. If the clinical trials
prolong or delay, the drugs could not be commercialized.
Finally, with two additional hepatitis C therapies in clinical development, Vertex is heavily concentrated in
this increasingly competitive market. Numerous drug developers are working on hepatitis C treatments that
could top Telaprevir's convenience and efficacy. With Telaprevir poised to hit the market in 2011, ScheringPlough's SGP late-stage protease inhibitor Boceprevir poses the most immediate threat. Over the long term,
Vertex will have to contend with numerous other competitors--including fellow development-stage biotech
InterMune ITMN--that seek to top Telaprevir's convenience and efficacy. Nonetheless, Vertex is the
current market leader, with a 70% success rate in Phase III trials and the preference of clinicians for
Telaprevir over Boceprevir. A recent study by Decision Resources, one of the world's leading research and
advisory firms for pharmaceutical and healthcare issues, found that physicians would prescribe Telaprevir to
more than 50 percent of their hepatitis C virus genotype 1-infected patients and will prescribe ScheringPlough's Boceprevir to less than 30 percent of these patients. Although surveyed physicians perceive both
Telaprevir and Boceprevir as efficacious drugs, they value (among other factors) Telaprevir's shorter
duration of treatment as compared to treatment duration using Boceprevir. Despite the risk from
competitors developing similar protease inhibitors, Vertex is still well-positioned to corner the market.
Expected future events that will affect price: Vertex's market price could be significantly and adversely
affected by announcements of results of clinical trials of its drug candidates or those of its competitors,
issuance of additional shares of common stock, introduction of new drugs by competitors, government
regulatory action, public concern over safety, and changes in patents and other intellectual property rights.
In addition, since clinical trials of HCV drug candidates occur over two years, any new information
regarding Telaprevir and its competitive drug candidates during this time can substantially affect investors'
perceptions of its future prospects.
MED 275: BIOPHARMACEUTICAL INNOVATION
March 9, 2010
Financials and Valuation
Income Statement Analysis
 Revenues have been steadily rising from $160.89mm (2005) to $175.50mm (2008)
 R&D is the company's largest expense and surpasses revenues, R&D rose from $248.54mm (2005) to
$516.29mm (2008), this is actually a positive signal because it indicates future growth for the company's
revenue as it develops more core pipeline products
Cash Flow Statement Analysis
 Company's cash from investing activities is largest use of cash, also signaling positive future growth
 Cash from operating activities has been low and negative as a result of net loss
Fair Value Analysis
 We referenced the Knowledge Reuters database to retrieve our fair value estimate of the company
 Knowledge Reuters pools together the median of all Wall Street Research Analysts fair value models
 We believe VRTX to be fair valued at $44.50
Comps Analysis
 Our comps analysis enables us to see where VRTX stands relative to its competitors
 Larger comps indicate market leadership, profitability, sustainability, and that an acquirer would be willing
to pay more for the company because it’s worth more
 VRTX has significantly larger comps relative to its competitors which signal its financial outperformance
MED 275: BIOPHARMACEUTICAL INNOVATION
March 9, 2010
VRTX Comparable Companies Analysis
Ticker Name
Description
ACHN Achillion
Chronic hepatitis C and antibacterials for resistant bacterial infections.
ANDS Anadys
DVAX Dynavax
Focused on biopharma for hepatitis C and oncology.
HGSI Human Genome
Sciences
IDIX
Idenix
ITMN Intermune
SCLN SciClone
VRTX Vertex
VRUS Pharmasset
Median
Product candidates include a hepatitis B vaccine; hepatitis C therapy;
hepatitis B therapy.
Albuferon for chronic hepatitis C, LymphoStat-B for systemic lupus
erythematosus, and ABthraxtm for inhalation anthrax.
Commercialized drug for hepatitis B virus licensed to NVS and drug
candidate (IDX899) for (HIV).
Company’s development includes idiopathic pulmonary fibrosis (IPF),
hepatitis C virus (HCV) protease inhibitor.
Sells Zadaxin for hepatitis B virus (HBV) and the hepatitis C virus
(HCV).
Oral hepatitis C protease inhibitor and an antiviral treatment for
hepatitis C virus (HCV) infection
Develops oral therapeutics for chronic hepatitis C virus (HCV) infection
and (HIV) infection.
Market
Price
02/24/10
Value
($ mm)
Multiples
Price / Revenue
CY 10E
CY 11E
Growth Rates
EV / Revenue
CY 10E
CY 11E
Revenue
CY 10E
CY 11E
$2.30
$2.24
61.31
83.57
7.1
24.0
6.1
10.8
6.1
16.1
5.2
7.3
3546.22%
N/S
16.19%
121.76%
$1.51
62.33
2.0
4.0
1.2
2.4
-30.77%
-49.16%
$28.81
4,750.00
26.5
8.4
27.6
8.7
-34.40%
215.90%
$2.95
66.34
10.5
6.8
8.0
5.2
45.10%
54.14%
$14.78
46.67
2.6
1.8
2.7
1.9
168.05%
44.59%
$3.37
47.20
2.1
2.0
1.7
1.5
3.10%
8.85%
$39.42
199.96
60.6
9.1
52.5
7.9
27.89%
565.19%
$22.44
30.16
81.1
36.1
33.6
31.2
-37.21%
124.49%
10.5 x
6.8 x
8.0 x
5.2 x
45.10%
87.95%