Vertex Pulls a Wimpy

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After four follow-on stock offerings in the last three years -- the number of shares outstanding has increased a whopping 57.8% since the end of 2005 -- it's nice to see that Rule Breakers pick Vertex Pharmaceuticals (Nasdaq: VRTX) has a plan to raise some cash that won't dilute its shareholders.

Vertex licensed its phase 3 hepatitis C drug telaprevir to Johnson & Johnson (NYSE: JNJ) outside the U.S. It's due $100 million when the marketing application is filed in Europe and another $150 million when the drug is launched there.

Rather than waiting until April 2012, which is when it estimates it will get that money, Vertex is planning to sell its rights to those payments in exchange for a smaller payment made now. Vertex may be acting like Wimpy -- "I'll gladly pay you Tuesday for a hamburger today" -- but in drug development, cash is like Popeye's spinach and it seems like a good move.

This isn't the first time that Vertex has monetized future revenue. Last year the drug company released GlaxoSmithKline (NYSE: GSK) from royalty payments on its HIV drug, Lexiva, in exchange for some up-front cash.

Telaprevir is in a heated race with Schering-Plough's (NYSE: SGP) -- soon to be Merck's (NYSE: MRK) -- boceprevir to be the first next-generation hepatitis C drug to hit the market. Selling off the royalty rights to the drug, like it did with Lexiva, would be difficult without the full phase 3 data from both boceprevir and telaprevir, because estimating sales would be difficult for any potential buyer.

It'll be interesting to see how much Vertex can get for the milestone payments with the phase 3 trials still ongoing. In addition to discounting the lost interest on any cash paid to Vertex, the entity that buys the rights to the milestone payments is taking on the risk that telaprevir will not have a marketing application filed or get regulatory approval, so it will have to discount that, too.

If Vertex cannot get a large enough payment, it might make more sense for it to wait until after the phase 3 trials are complete to try this again. Either way, it's certainly creative in raising cash.

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