4 Keys to Vertex Pharmaceuticals' Success

Motley Fool analyst Max Macaluso discusses the keys to Vertex Pharmaceuticals' success with Barry Werth, author of "The Antidote: Inside the World of New Pharma."

Mar 3, 2014 at 9:37AM

Over the last 10 years, shares of Vertex Pharmaceuticals (NASDAQ:VRTX) have soared more than 635%. That growth was driven by ground-breaking clinical research and successful FDA drug approvals, but success stories like this are exceedingly rare in the biotech space. To gain insight into why Vertex has been able to succeed, and what it takes to make it in this challenging industry, Motley Fool analyst Max Macaluso spoke with Barry Werth, author of The Antidote: Inside the World of New Pharma.

Biotech isn't the only place to find hyper-growth stocks. Here are six stocks for growth-minded investors.
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his six carefully chosen picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

A full transcript follows the audio clip below.

Max Macaluso: We're going to talk a little bit more about Vertex's founder later on, but let's talk a little bit more about what you thought of the company when you first started talking with the scientists there, and observing their research.

A lot of biotechs just don't make it. Either they burn too much cash and they go bankrupt, or their clinical programs don't succeed. Were you actually confident that Vertex would stay in business for, now, more than 25 years, or were you initially hoping to tell the story of a biotech that crashed and burned?

Barry Werth: No, I didn't want to tell that story. Unfortunately, that story is all too frequent.

No, I didn't know or anticipate whether Vertex could last for 25 years, but they certainly talked as if it was going to take 25 years or more, before they knew whether they were really doing it right. That impressed me.

The trick with writing a book about scientists that you're hanging out with is, how do you define the time period, and elongate it enough so that something will actually happen? I wasn't sure, when I agreed to stay there through 1989 and 1990, and into 1991, that they were really going to be able to accomplish anything.

As it turned out, during that time, their initial project did crash and burn, but part of Boger's initial strategy was to widen the scope of opportunity quickly, so they had a second follow-on project, which was in HIV, and they actually did produce a drug out of that.

I think what I like about these two books is that they don't describe the usual scenario, which is that a company has an insight, develops something, and then either runs out of money, or runs out of runway, or gets a bad clinical result, and has to fold up -- or else is successful but gets eaten up by a larger company.

One thing that was very, very clear from the beginning is that Vertex wanted to remain independent. They had all come from Big Pharma. They didn't want to work for Big Pharma again, so they were very resistant to the idea of ever getting bought out, taken out.

Macaluso: In terms of Vertex as a company, it's been very successful. It's also been a very successful stock. After watching Vertex for more than two decades now, I'm curious if you can boil everything down and talk about the three keys that you think were essential to Vertex's success.

Werth: If you don't mind, I'm going to make that four, but the three are ... I'll compare them to height, width, and length.

What Vertex was trying to do was to build a big enough machine so that, if any part of it broke down, the whole thing wouldn't come crashing down around it -- and that was really crucial. They had initially maybe $7-$8 million in seed money, but Vertex founder, Josh Boger, and his chief business guy, Rich Aldrich, did three or four "death marches," as they called them, through executive suites in East Asia every year, to raise money.

Initially, there was money to be found among the big pharmaceutical companies here, but the Japanese companies were particularly interested, and a couple of their initial corporate partners were Japanese companies. They would go to literally the ends of the Earth to raise money.

They knocked on doors endlessly, until they were able to raise enough money so that they didn't have to rely just on one or two, or even three programs. The whole key was getting as many programs up and going as quickly as possible, because the second part of this -- after the height of it -- was the width of it.

Boger and the others understood that this was a very high-risk business, and that the only way they were going to be able to survive was to improve their hit rate, so they needed to get eight or ten or a dozen projects up and going, as quickly as possible.

Actually, there's quite an interesting Harvard Business School case study about Vertex's portfolio development. It's so interesting to me because this was in 2002, and Boger explained to the researchers that they were very consciously trying to distribute their risks.

There were molecule risks; that is, your molecule can be toxic, and you can go very far down the line before you find that out. There's market risk; that is, who is the competition and what are they going to be coming out with? There's mechanism risk, which is always a tremendous risk in biomedicine, because you just don't know what kinds of side effects you're going to trigger when you start altering some sort of biological mechanism.

Anyhow, the point of this is that Boger said, "In most companies, you're not even aware of what your biases are, but we are very self-consciously trying to distribute our risks so that as we move ahead into a period of progressively more investment, we don't get blindsided later on. Ten years down the line, you don't want to get blindsided later on."

In fact, what happened was they launched their hepatitis C drug in 2011, and it became the fastest, most robust drug launch in history -- and then almost as quickly started to decline because of unanticipated side effects and because of unanticipated competition.

But, they had their cystic fibrosis program following closely behind, and that's the program that's going to carry the company forward. So, number two is the width of their portfolio; very, very wide.

Number three is raising tremendous amounts of capital, so that you've got a very long runway. The hepatitis C program took 15 years to bring the drug out. The cystic fibrosis program took 13 years to bring a drug out. Unless you're in for the long game, you can't possibly succeed.

So, it's height, width, and length. Then, finally, it's leadership. I think if Boger hadn't infused the place with the spirit that, "We're only going to take on the hardest diseases and shoot for breakthroughs, not incremental advances," I don't think any of this would have happened.

Max Macaluso, Ph.D., has no position in any stocks mentioned. The Motley Fool recommends Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers