A New Suit for Vertex

As Rule Breakers analyst Charly Travers once said, "Drug fails, get sued." Vertex Pharmaceuticals (Nasdaq: VRTX), however, is getting sued after one of its drugs apparently succeeded.

Shareholders filed class action lawsuits against the company last week related to its reporting of clinical trial results for its hepatitis C treatment, telaprevir. The lawsuits charge that the company violated federal securities laws by issuing a series of misrepresentations about telaprevir to the market last year.

One suit claims that Vertex "shocked investors when it disclosed less than stellar results from a phase of testing [PROVE-2]," and that "the results came as a surprise to investors since the company failed to indicate the findings of PROVE-2 during the Class Period."  

All the shareholder lawsuits appear to be based on Vertex's PROVE-2 phase 2 telaprevir study results, announced last year, which appeared somewhat underwhelming at first glance. For instance, compared to the control group in the study, telaprevir improved on the number of patients cured of their hepatitis C only by six percentage points.

However, the lawsuits don't mention that the control group in this study performed unusually well, with 59% of patients showing no signs of hepatitis C, when the interim PROVE-2 results were announced last year. Even more importantly, the control group study results were still not yet complete. Such results almost always get worse over time, as some hepatitis C patients experience relapses (a phenomenon known as viral rebound).

Historically, fewer than 50% of newly infected chronic hepatitis C genotype 1 patients are cured of the virus when given standard interferon treatments from Roche and Schering-Plough (NYSE: SGP). So the 65% of patients cured of their hepatitis C after being given telaprevir in addition to the standard of care look pretty good in the PROVE-2 study.

When compared to the control group in another Vertex phase 2 study (PROVE-1), which is further along than PROVE-2, Vertex's telaprevir results look even better. Only 45% of PROVE-1 control group patients had no signs of hepatitis C at the end of their treatment.

Investors currently holding shares of Vertex should do themselves a favor and avoid these class action lawsuits. Even if Vertex's insurance agency gets lazy and settles the cases for several hundred thousand dollars, litigation fees would likely eat up whatever proceeds shareholders could gain from such baseless lawsuits.

Drugmakers will always know the results of their own clinical studies ahead of time. They'll always decide to wait until scientific conferences or journal article publications to release that data. And as such, they will always be open to these sorts of shareholder class action lawsuits, whether or not the suit has merit.

This same ritual happens to nearly every drugmaker, as it did to former Hidden Gems pick Flamel Technologies (Nasdaq: FLML) last year. For better or worse, this aspect of pharma investing will never go away.