Vertex Full Steam Ahead

Anyone who complains about the high cost of new drugs only has to look at yesterday's 2008 financial guidance from Vertex Pharmaceuticals (Nasdaq: VRTX  )  to see how expensive the drug development process is.

In 2008, Vertex expects its research and development bill to be a whopping $490 million to $520 million to usher its pipeline drugs like potential hepatitis C treatment telaprevir into phase 3 testing. Even with telaprevir development partner Johnson & Johnson (NYSE: JNJ  ) footing the bill for a portion of its R&D spending, that's still a whole lot of money to spend on a pipeline with only one compound relatively near approval.

Let me give you an idea of how huge Vertex's R&D budget is: Its 2008 forecast will be more than 50% of what Biogen Idec (Nasdaq: BIIB  ) and Forest Labs' (NYSE: FRX  ) spent in their last fiscal years. Of course, Biogen and Forest are, respectively, about eight and more than five times the size of Vertex by market capitalization.

Vertex expects to burn through $320 million to $350 million in 2008, as its phase 3 studies for telaprevir begin enrollment, which is similar to the $325 million in cash that Vertex burned through in 2007. It has $468 million in cash and investments on its balance sheet and yesterday announced plans to raise up to an additional $359 million in a convertible note and share offerings. Altogether, this will give Vertex enough cash to last for at least the next two years.

Vertex announced last month that, if all goes well, it will be filing for marketing approval of telaprevir in patients just diagnosed with hepatitis C in late 2010. To help stave off the need for another massively large share offering, as Vertex mentioned on its conference call yesterday, it may partner out some of its earlier stage compounds or sell off the royalty stream it gets from an already approved HIV drug that is marketed by GlaxoSmithKline (NYSE: GSK  ) .

Investors and analysts like myself may find the costs of telaprevir development astronomical, but that's the price of keeping U.S. marketing rights to a potential blockbuster compound and also of not cutting corners with the development of telaprevir (like so many other young drugmakers, such as Dendreon (Nasdaq: DNDN  ) , have done). Vertex's stock has taken a mighty fall lately (as has its contribution to our Rule Breakers scorecard), but it will only be a few years at most before we find out whether Vertex's strategy pays off.


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