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.
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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.