How big is the ceiling? Investors always want to know the potential upside for the investment risk they're willing to take. Is the possible reward as great for investors in Jeff's Button Factory (Ticker: NOZIP) as in Brian's Biotech Baubles (Ticker: CLONE)? Hardly. But then, neither is the risk.
Wednesday's column asked what gold lay ahead for the first generation of biotech drug makers, such as Amgen (Nasdaq: AMGN), that are now profitable, and for the second generation, such as Human Genome Sciences (Nasdaq: HGSI), with no profits, that want to grow up to be very big drug makers like Pfizer (NYSE: PFE) or Merck (NYSE: MRK).
The second group is more risky, of course, but there is more potential upside. One company there hasn't received the attention it deserves: Vertex Pharmaceuticals (Nasdaq: VRTX), headed by CEO Joshua Boger, whom I interviewed in March. The complete Boger interview appears on the Rule Breaker Strategies discussion board. This week I spoke with Vice President for Research, John Thomson, about Vertex's post-interview acquisition of Aurora Biosciences (Nasdaq: ABSC).
These folks are serious. I asked Boger if Vertex's ambition was to be as big as a Pfizer or a Merck in ten or 20 years, and he responded, "Yes, our ambition is that," but he acknowledged that the unprecedented pace of biotechnology change is tearing up the landscape, adding "that the shape and size of that ambition is still a subject for discussion. I'm not sure what the largest drug company in the world will look like 20 years from now. I suspect it will look a little bit different from what the largest drug company looks like today." That's one reason he told me that Vertex is not about one technology or another -- it uses whatever works.
You say kih-nase, I say kie-nase
Boger says that when he was at Merck in 1989 it was becoming clear that at least two things -- huge advances in computation and the benefits from human genome work on the horizon -- would "rebuild the entire drug discovery process." He also foresaw what's actually happened: Large drug makers like Merck -- which he praised repeatedly -- "access the technologies but really fundamentally don't rebuild their drug discovery process." Founding Vertex offered him the chance to build drug discovery in the new world. Thomson, who had been in talks to leave his assistant professorship in Wyoming and join Boger at Merck, tracked him down and signed on at Vertex as employee #2.
The company began what became a huge research and development program concerning kinases. Boger: "The kinase gene family codes for about 500 human kinases, proteins inside of every cell that control virtually every cell process. They're... traffic cops in the cell. They stop and go signaling inside cells. The wonderful thing about the kinases is that... there seems to be a kinase in just about every disease process, specifically, or maybe two or maybe three... you might be able to intervene in just about every disease."
Are kinases just pie-in-the-cell? Hardly. Novartis' new Gleevec leukemia treatment just happens to be a kinase inhibitor. And Novartis just happens to have signed a record-breaking pact last year with Vertex to develop kinase drug candidates. Hmmmm... Novartis, kinase, deal with Vertex. Do I hear "synergy," and "proof of concept"?
(To learn more about the Vertex-Novartis deal, read this column. When it originally appeared, I incorrectly reported that the pact did not provide royalties to Vertex from Novartis sales of the eight drugs possible from the pact. There are in fact significant royalties, and the column is corrected.)
The proof is in the pipeline
In its 12 years, Vertex produced a worthy drug pipeline. It has one drug on the market, HIV treatment Agenerase, which is co-marketed with GlaxoSmithKline (NYSE: GSK) and Japan's Kissei Pharmaceuticals and provides Vertex a hefty 15% royalty on sales. Vertex also sports one drug in Phase 3 human trials, and five in Phase 2, and one in Phase 1-2, as well as three more in preclinical testing. (The phases of human drug testing are necessary to produce data for the Food & Drug Administration.) Here are the Phase 2 and 3 drug candidates:
therapeutic ~U.S. patient area product Phase population partners? HIV VX-175 3 850,000 GSK Hepatitis C VX-497 2 2.7M* none Cancer Incel 2 500,000** none Inflammation VX-740 2 2.1M*** Aventis VX-745 2 2.1M*** Kissei (Asia) Neurological timcodar 2 N/A# Schering AG disease (option)
**incidence of solid tumor cancer
source: Vertex Pharmaceuticals (website and publications)
It's one thing to say "Wow! Look at all the drugs in trials!" and another to evaluate odds of success, potential markets, and the competition for a drug, as well as the share of sales the developer gets (all, a split, or royalties). (To learn a framework for evaluating companies developing new biotechnologies, go no farther than The Motley Fool's Guide to Biotech Investing. For clear, easy-to-follow help in getting started, check out our Biotechnology and Pharmaceutical InDepth pages.)
All my children
When I asked Boger to pick out a drug currently in trials that most excites him, he quipped, "We have 12 drugs in development, and it's like asking, 'Can you pick out your favorite child?' Allow me to protest that I love all my children equally ...'" But he did oblige with the story behind VX 745, a pill -- a small molecule drug -- for rheumatoid arthritis, "a disabling disease that results in progressive degeneration of joints, and a lack of function in those joints, causes a lot of pain, and even more particularly it causes a loss of function." If you know anyone with the condition, you know this is real.
He said, "Up until very recently the most prevalent therapies for rheumatoid arthritis were really ones that handled the pain of the disease, made it a little bit less, but didn't modify the disease process itself. The disease kept going on, the joint kept deteriorating. [The only] drugs available [that] had the potential to slow down the disease process... were quite toxic..."
Then came a real breakthrough: Immunex's (Nasdaq: IMNX) Enbrel. It's an injectable protein molecule that, Boger says, actually "seems to slow or even stop progression of the disease. That's pretty exciting and that's made that molecule a huge success. And it deserves to be. The way that it does it is by actually blocking the agent, called TNF [tumor necrosis factor, which is a] natural part of your body, but it goes out of control in rheumatoid arthritis, and causes joint degeneration and inflammation that's associated with rheumatoid arthritis."
So why VX-745? Boger: "What VX -745 does is block TNF at an earlier stage [than Enbrel does], really in a stage before it's even released in the body." And it's a pill, which means home administration. Enbrel sales this year are estimated to hit $750 million -- and not more merely because of supply limits. This suggests that the market for a pill that attacks the disease even earlier faces a substantially larger market. Not bad -- and Vertex owns all rights to VX-745 outside of Asia.
Both Boger and John Thomson emphasized Vertex's work in kinases, but they have more in mind. Enter Vertex's recent purchase of Aurora Biosciences for $592 million in stock, which Thomson explained. In short, apart from Aurora's profitability -- rare among drug discovery platform companies -- it offers a hugely successful, validated technology for assay (testing) screening. Vertex will use its technology and equipment to enhance its ability to test not just how a compound works in the lab -- in vitro -- but inside actual living cells.
Thomson says that Aurora's technologies are universally applicable not only to Vertex's kinase research, but across a number of gene families that represent great opportunities -- proteases, GPCRs, and phosphotases. If you want more information, check the post on the Rule Breaker strategies board summarizing my conversation with Thomson about Aurora's technology and benefits.
You can't tell from words on a page, but I need to say that both of these folks have infectious enthusiasm and much patience -- even when somebody asks them a question they've answered 1,000 times before (and whose answer probably appears on the website). Refreshingly, they praise competitors and aren't spending more time courting the media than running their company. It's no basis for investment, but this is worth a little on the side for risk-tolerant investors who are interested in second-generation biotech drug makers and who should give Vertex a closer look.
Tom Jacobs (TMF Tom9) grew up near a company called Voplex, which could add some fun to the Vertex Vortex. At press time, he owned no shares in companies mentioned in this story. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.