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After “Hubris” and Its HCV Collapse, Can Vertex Avoid Same Mistakes?

Xconomy Boston — 

Five years ago, in November 2011, a company from Princeton, NJ, called Pharmasset shared news that would have an impact on millions of people around the world with hepatitis C. Its experimental drug PSI-7977 had quickly cleared the virus from 40 patients, with minimal side effects, and they had stayed infection-free. If the data held up in wider testing, it could mean that hepatitis C could be cured someday with a short course of pills, without the flu-like symptoms that dogged regimens of the past.

“It was absolutely the biggest deal,” says Durhane Wong-Rieger, a longtime hepatitis C patient advocate who now runs the Canadian Organization for Rare Disorders. “It was the evidence we’d all been looking for.”

Officials at Vertex Pharmaceuticals (NASDAQ: VRTX), who were planning a move from Cambridge, MA, into a new $800 million headquarters with views of Boston Harbor, should have seen something much different in those Pharmasset data: An oncoming freight train. According to Vertex’s CEO, Jeff Leiden, then just a Vertex board member, not everyone did.

With what Leiden (pictured) now calls “hubris” and “blindness,” Vertex failed to react quickly enough. Its own hepatitis C drug was crushed. In three years, Vertex went from having a billion-dollar hepatitis C business to zero—abandoning the research completely.

Now Vertex has another flagship franchise, consisting of two drugs approved for the rare and deadly disease cystic fibrosis and perhaps more on the way. Sales of both drugs, ivacaftor (Kalydeco) and the combo pill ivacaftor-lumacaftor (Orkambi), reached almost $1 billion in 2015 and are growing. But the drugs aren’t cures, and competition looms.

Has Vertex learned from its past missteps? “They are on more solid footing than they were, but there’s no such thing as solid footing in this industry,” says Rajeev Shah, a managing director at biotech investment firm RA Capital, which had been a Vertex investor but no longer is. “The moment [a company] becomes a little passive and unaware of the hundreds of threats coming at it is the moment that it risks being extinct.”

Six months before the Pharmasset data release, Vertex had won FDA approval of telaprevir (Incivek), which was a big advance in the treatment of the liver-damaging hepatitis C virus (HCV). Vertex began as a bootstrapped startup in 1989 and was on its way to being a profitable enterprise that helped thousands of patients with a devastating disease. Telaprevir sales rocketed to nearly $1 billion in the first six months, at the time the fastest drug launch ever.

But the Pharmasset data came out, and Gilead Sciences (NASDAQ: GILD), looking to build upon its lucrative portfolio of HIV treatments, pounced. It bought Pharmasset in November 2011 for $11 billion and continued PSI-7977’s stellar run of clinical data. Called sofosbuvir (Sovaldi), the drug won FDA approval in December 2013. With evidence of up to 90 percent cure rates in three months and a very clean safety profile, sofosbuvir quickly made telaprevir obsolete.

Vertex

Other similarly effective HCV drugs have followed. Telaprevir’s sales cratered, and Vertex axed 15 percent of its workforce in October 2013. In August 2014—just six months after moving into its new glass towers—Vertex announced plans to take telaprevir off the market. Then it exited HCV research entirely.

“It was absolutely a neck snapping phenomenon,” says Leiden.

Yet it wasn’t a fatal blow. Thanks to foresight, luck, and no small amount of help from a nonprofit foundation, Vertex had a Plan B that turned into a lucrative Plan A.

The company won approval in January 2012 of ivacaftor, the first drug to directly address the molecular malfunction that underlies the deadly disease cystic fibrosis (CF), which causes thick, sticky mucus to clog the lungs. Ivacaftor-lumacaftor followed three years later. Vertex has reinvented itself as the leader for CF treatments.

“We’re a very, very different company than we were four years ago,” says Leiden. “We’ve learned a lot from that experience.”

Vertex started out as an early believer in “rational” drug design—building drug molecules to fit the structure of specific biological targets, like a lock and key. Vertex went public in 1991 and used its discovery tools on one project after another, from immunosuppressive drugs for organ transplants, to HIV drugs, to HCV medicines. Its acquisition of Aurora Biosciences in 2001, and a critical $150 million in research funding from the Cystic Fibrosis Foundation (which just committed another $75 million to the company last week), led it to CF. Much of that narrative was captured in two books about Vertex, The Billion Dollar Molecule from 1994 and its 2014 sequel The Antidote: Inside the World of New Pharma, both by veteran journalist Barry Werth.

In its early days, Vertex helped bring two HIV drugs to market. But it never turned a profit and ended up selling its rights to the drugs. Meanwhile, Vertex continued to plug away on telaprevir and its May 2011 approval triggered a “huge celebration,” Leiden says. It was the end of a long scientific journey. Analysts predicted more than $2 billion in annual U.S. sales—an example of how estimates of future drug sales should be viewed with healthy skepticism.

Telaprevir never came close to that, and now Vertex must prove that it can do what it couldn’t before: diversify into new areas without losing its key franchise.

The company has work to do. Despite the near-$1 billion in 2015 sales from its CF franchise, Vertex has been trying to stem massive losses, which peaked in 2014 at $739 million before dropping to $558 million last year. In its 27 years, Vertex has turned a profit once, and a slim one at that, in 2011.

The company recently lowered its sales projections for 2016, but Vertex has generated net income in the first two quarters (by non-GAAP accounting), meaning its long-awaited era of sustainable profitability might be on the way if it can keep hold of its current dominance in CF.

That adds to the pressure of defending its CF franchise. “If [and] when a better choice comes along, it will penetrate [the market] quickly,” wrote ISI Evercore analyst Mark Schoenebaum in a research note earlier this year.

One former executive says CF should be easier to defend than HCV.

Nancy Wysenski, who was chief commercial officer from 2009 to 2012, says telaprevir’s downfall was partly due to doctors holding off because they knew better options with gentler side effects—sofosbuvir and others—were coming soon. It’s the same reason telaprevir did so well at first; it promised fewer side effects and better cure rates than the then-standard interferon treatments. HCV is a chronic disease, and many patients can withstand being off the drug for some time.

“None of that exists in CF,” Wysenski says. “These are sick kids. Who’s not going to treat a sick kid, right? It’s an entirely different treatment paradigm.”

Additionally, there is no rival miracle drug on the horizon coming to threaten Vertex’s cystic fibrosis business. Ivacaftor is no miracle, either. It improves lung function but doesn’t cure the disease. And it is approved only for patients with genetic mutations who comprise about 5 percent of the roughly 70,000 people worldwide with CF. But Vertex sees it as the backbone of “cocktails” that would treat a wider swath of patients with different genetic characteristics. The ivacaftor-lumacaftor pill is the first such combination, and is approved for about a third of patients with the disease. Early data on a closely watched three-drug combination, which could expand Vertex’s reach further, are expected shortly.

But there is room for improvement, and others are trying to one-up Vertex, like Belgium’s Galapagos NV, which is working with pharma giant AbbVie (NYSE: ABBV) on its own cocktail of CF drugs.

Leiden says Vertex scours for CF drugs outside its own walls and has looked at “almost every asset out there.”

It has inked deals with Parion Sciences, Moderna Therapeutics, and CRISPR Therapeutics. The Parion deal is meant to complement Vertex’s own in-house CF work with drugs that add to its cocktail approach. With Moderna and CRISPR, Vertex is getting involved with cutting edge drugmaking methods like messenger RNA and gene editing, hoping to find long-lasting or even permanent CF treatments. Vertex hopes this multi-pronged approach will keep it ahead of the pack, and Leiden swears that the company is taking a different approach than with HCV. “We won’t repeat that mistake in CF,” he says.

But whose mistake was it? Leiden, who succeeded Matt Emmens as CEO in February 2012, says there was conflict within Vertex as to the threat the competition presented. Some saw the coming crash of telaprevir, while others “just didn’t want to believe it or didn’t have enough experience to really believe it could happen,” Leiden says. Vertex believed it ultimately had the best drug in telaprevir and never made an offer for Pharmasset, says Leiden: “It was a combination of hubris and putting on blinders, and you just can’t do that in this innovative world.”

By the time it became clear Pharmasset had a winning drug, Gilead was “very far along” towards its acquisition, Leiden says.

Only two members of the company’s previous management team remain: CFO Ian Smith, and executive vice president of policy Amit Sachdev.

Xconomy reached out to several current and former Vertex executives and board members about the HCV collapse. Many declined comment, didn’t respond, or deferred to other executives. Reached by e-mail, one ex-board member “respectfully disagree[s]” with Leiden’s take, but wouldn’t comment any further. However, The Antidote, the second of Werth’s two books about the history of Vertex, gives insight into executives’ thinking at the time.

Werth notes that in 2011 CFO Smith thought Vertex “needed to be more aggressive” and acquire a late-stage “nuc,” a type of oral nucleotide drug (like sofosbuvir) that had safety risks but had shown promise in treating HCV. Then-CEO Emmens, however, “saw the future differently,” according to Werth. Emmens was less concerned with the urgency of fighting the near-term threat of nucs than “positioning Vertex to be in the right place in 2020 and beyond.” (Vertex licensed two “nucs” from San Francisco-based Alios Biopharma in 2011, but they hadn’t begun clinical testing yet and were years behind the competition. Vertex gave up on the drugs when it ended its HCV work three years later.)

Wysenski says the truth is more nuanced. Emmens, who could not be reached for comment, was supportive of making deals to protect Vertex’s HCV future, but wanted to “balance that with the longer term needs of the company,” she says. At the time, Vertex was developing drugs for CF, flu, rheumatoid arthritis, and other diseases, and it only had a certain amount of capital to work with. Still, Vertex had other HCV drugs in development, and was meeting with and having discussions with “every company” in the HCV sector. It wasn’t clear at the time who the winner would be, according to Wysenski.

While missing out on Pharmasset changed the course of Vertex, Emmens’ reasoning has since proved prescient. Emmens told Werth in 2011, before the Pharmasset/Gilead deal, that he was wary of HCV as a long-term business: “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, these guys come in, you ain’t going up, you’re going down.”

It’s not even 2017 yet, and Gilead is already seeing this happen. It was a Wall Street darling when its $11 billion Pharmasset deal yielded sofosbuvir and follow-on drug sofosbuvir-ledipasvir (Harvoni), which produced the most successful drug launches ever and a remarkable $50 billion in cash and other assets. But sales and Gilead’s share price have begun to decline, and frustrated investors and analysts want another big buyout to turn things around. “Put simply, [HCV] is turning out to be a ‘flash in the pan’ market,” Leerink Partners’ Geoffrey Porges recently wrote in a research note.

Vertex, in the meantime, has decided to branch out into other diseases, with a famous geneticist helping to navigate. Vertex in 2015 hired David Altshuler as its R&D chief. Altshuler is a founding member of the non-profit Broad Institute of Harvard and MIT and helped drive genetics initiatives such as the 1000 Genomes Project, an international effort that began in 2008 to catalogue the DNA of a thousand people.

Leiden wants Vertex to make “transformative medicines for serious specialty diseases,” which in the drug business often means products for rare disorders that sell for a high price and don’t require a big sales force. (Vertex has about 20 salespeople in the U.S.)

From the outside, though, it seems the strategy hasn’t taken full effect. The firm’s pipeline looks a bit like a grab-bag of different drugs for cancer, pain, and spinal cord injury, among others, some of which don’t seem to be good fits.

Oncology, in particular, can require big expensive trials and a large sales force; Leiden says the company might sell off its cancer drugs if they show early promise.

David Altshuler

Meanwhile, Altshuler (pictured above) wants to build out a pipeline of drugs for rare diseases that are caused by easily identifiable genetic mutations. A few are already in preclinical development. One aims to treat alpha 1 antitrypsin deficiency, which causes liver and lung damage; another is for adrenoleukodystrophy, which causes brain damage.

The company has also made bets on unproven drug-making methods such as gene editing and messenger RNA therapies, via its collaborations with CRISPR Therapeutics and Moderna.

“We’re in this really wonderful middle ground” between a small and large company, Altshuler says. “We’re nimble enough that there’s a chance for the company to pivot to what the future might be.”

Vertex managers are exploring other ways to be “nimble”—or as nimble as a firm can be with two towers, state-of-the-art facilities, and an auditorium that can fit hundreds of people. A proposal from longtime research scientist Patrick Connelly to work on genetic heart disease led to an internal program that allows anyone to pitch ideas.

Connelly, who feared the effects of moving into shiny new facilities—“we started to ask ourselves how this was going to change us”—came up with the pitch program, which has the rather un-nimble name of Vertex Opportunities for ‘Intrapreneurship’ and Corporate Evolution, or VOICE.

At the inaugural VOICE competition in 2015, 33 teams of employees made short presentations in front of the whole company at a happy hour gathering. Vertex picked a few winners and funded the ideas. One pitch, for example, came from Setu Roday, a senior scientist in Vertex’s materials discovery department.

Roday’s brother died of the blood disease beta-thalassemia when Setu was young. He argued that Vertex should get into hemoglobinopathies—blood diseases like beta-thalassemia or sickle cell disease. “It influenced where we went,” Connelly says. “The company was not looking at this at all.”

Roday is now involved in the collaboration with CRISPR Therapeutics. The first program from that deal, a gene editing product for an unspecified hemoglobinopathy, could begin clinical testing next year, according to CRISPR’s recent IPO prospectus. Two other programs pitched by employees have received an investment, though Connelly wouldn’t provide specifics.

Vertex is also kicking around the idea of funding academics and giving them free lab space in the Vertex towers to incubate their own companies.

In-house incubators are no guarantee of tapping into innovation; many big drug firms have created them, and some like Pfizer and Biogen have reversed course and scrapped them. But Vertex is trying many ways to learn from the past and prepare contingency plans. Could it end up becoming a completely different company?

“You can’t be complacent, you can’t stop,” Leiden says, “because innovation is going on around you relentlessly.”