Vertex Pharmaceuticals (NASDAQ:VRTX) is a rare biotech success story. Started in 1989 by chemist Joshua Boger, the company was fueled for many years by three key ingredients: a unique approach to drug discovery, the tenacious dedication of a small group of scientists, and an ambitious long-term vision. It took decades for Vertex to translate its research and development efforts into FDA approved products. Investors who were early believers in the biotech's mission and willing to take on risk, however, have been rewarded for their patience; shares are up more than 1,760% since the stock's IPO in 1991.
But don't for a minute think that Vertex's trek to commercialization was easy, or that the company is no longer facing challenges.
Over more than two decades, Vertex has faced management shake-ups, suffered growing pains as it shifted its focus from drug discovery to sales and marketing, and has had to reinvent itself numerous times to stay relevant in this ever-changing industry. In 2011, for example, Vertex boasted the fastest drug launch in history after its hepatitis C therapeutic, Incivek, surpassed $1 billion in sales after its first year on the market. Those sales quickly eroded, however, after competitors emerged with more effective antiviral medications. Vertex was able to avoid disaster by quickly shifting its focus to its cystic fibrosis program, and shares have climbed almost 87% over the last twelve months as investors expect the company to expand its portfolio and develop more breakthrough therapies in the years to come.
To gain more insight into the history of Vertex Pharmaceuticals and learn what it truly takes to create a winning business in the fiercely competitive biotech industry, Fool.com's health-care bureau chief Max Macaluso spoke with Barry Werth, an award-winning journalist who has followed Vertex almost from the day it opened its doors. Werth's book The Billion-Dollar Molecule, widely regarded as a must-read for passionate biotech investors, offered an inside look at Vertex soon after it was established. Earlier this month, Werth released a sequel, The Antidote: Inside the World of New Pharma, which continues the Vertex story and chronicles the company's path from a fledgling start-up to a company with a multibillion-dollar market cap.
In the following interview, Werth discusses his experience covering Vertex, how this company has managed to maintain a thriving culture focused on innovation, and the qualities that make a biotech like Vertex succeed over the long term.
A transcript follows the audio clip.
Max Macaluso: Hi, Fools. I'm Max Macaluso, the health-care bureau chief here at Fool.com. Joining me today is Barry Werth, the author of The Antidote: Inside the World of New Pharma. Barry, thank you very much for taking the time.
Barry Werth: My pleasure.
Macaluso: Barry, let's get started. Your book is about Vertex Pharmaceuticals, which went public in 1991, alongside dozens of other biotech companies. I'm curious: What made Vertex stand out from the crowd? Because The Antidote is actually a sequel to your other book, The Billion-Dollar Molecule, which is also about Vertex. What was it about this particular biotech that stood out?
Werth: What made Vertex stand out from the crowd, I think from the beginning, was Josh Boger's pedigree. Most of the biotech companies during that period were founded by either academics, or people from the managerial side of Big Pharma, who had ideas about how to position new technologies, new insights into individual diseases.
But Vertex was different from the get-go, because Boger was leaving Merck when Merck was the most admired corporation in America, and he left because he thought that Merck was no longer organized in a way to enable it to discover breakthrough drugs for serious diseases.
When he left Merck, without any people, without any proprietary knowledge, without any patents -- really, without anything -- he went home and wrote on a whiteboard his goals for Vertex. They were: "Become Merck, but better; design better drugs, faster; and become the 21st-century biopharmaceutical company."
I think that what distinguished Vertex more than anything else at that time was the scope and breadth of its ambition. It was shooting to not just develop a new drug, or build a company based on some novel use of a new technology, but really to displace what everybody agreed was the world's best drug discovery company.
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?
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 [million], $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, No. 2 is the width of their portfolio; very, very wide.
No. 3 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.
Macaluso: Let's talk a little bit more about Vertex's leadership and founder, Dr. Joshua Boger. In The Antidote, you actually draw parallels between Dr. Boger's visionary leadership and Steve Jobs. Can you elaborate a little bit on this?
Werth: Yeah. Around Apple, the description of Jobs was that he had what people called a "reality distortion field." I really like this term.
I think it means a lot of things, but I think in many cases it means that you convey -- through a mixture of an abundance of confidence, and a vision, and marketing, and chutzpah, and a number of other characteristics -- the idea that something that everybody else thinks is impossible, can actually be done.
You distort the reality for the people around you, so that they begin to believe that the normal limits that apply elsewhere, don't apply to them. That's the way that I think Boger and Jobs are similar.
Now, Jobs, if you read the Walter Isaacson biography, often used this field in kind of an aggressive, or belligerent, or antagonistic way. That is, he would stare coldly through his underlings, until they cracked. That was never Boger's style. He's much more humorous and ironic in the way that he does this.
But he set goals that simply couldn't be met by conventional means, and the scientists found that extremely liberating, because they knew they couldn't get there through incrementalism, so they had to devise radical new approaches -- and they did.
Macaluso: But actually, in The Antidote, you talk about this leadership and the grand vision that Dr. Boger had actually being a risk for the company and investors.
Werth: Yes. Many people outside the company, and some people inside the company, thought that it was simply too grandiose, and that Boger was getting carried away by his own vision.
It was grandiose, but it also inflated the sense of opportunity that the people around him had. Altogether, was it too grandiose or too hubristic? I don't know. I think the proof is that, 20 years out, they were able to introduce back-to-back breakthrough drugs which is, if not unprecedented in the industry, certainly very rare.
Macaluso: Something else you talk about in The Antidote is Vertex's unique culture, and the culture of innovation. I loved a quote from the book. It was said by Dr. [Vicki] Sato, who was president of Vertex at the time: "We didn't have any positions, because we never had any positions."
Dr. Sato was trying to recruit another scientist from a competitor, and they just didn't have a position to offer her, because the company didn't have formal positions. It sounds like Vertex had a very flat organizational structure. Do you think the company flourished because of this?
Werth: I absolutely do. As I said, many of the people who started out with Boger, who he refers to as the "torchbearers," came from Big Pharma. What they had discovered, more than anything else, is that within pharma there was an immobilizing sludge of middle management; that there were layers and layers and layers, and everybody had to report up the chain of command.
Even at Merck at this time -- now remember, Merck was the most admired corporation in America -- but even at Merck at the time that Boger left, the chemists reported to me, there were benchmarks and goals set; numbers of compounds made, for instance, in a program. It didn't matter whether they were an improvement over anything else. It didn't matter whether they did anything. Because of the management structure, everybody had to meet their metrics, and that will just absolutely kill any kind of innovative thinking or risk-taking.
I'm not sure that Vertex was completely different from other small companies. I think many of them are driven by this spirit of "Let's take the big chance. Let's seize the big opportunity. Let's go for it."
But two things that Boger did, I think, were really instrumental. One was, rather than set up any sort of management structure at all initially, he had scientists from across disciplines co-managing all of the projects. These were project councils. They were like Lenin's soviets; they were set up to democratize and equalize the voices within the organization.
The other was what the scientists themselves referred to as Boger's "social experiment." That is, they craved, many times, more authority, more direction, but he absolutely refused and let them figure it out for themselves. Through that, numerous champions arose, and these eventually became the scientific leaders of the organization.
The quote from Vicki Sato I think is an interesting one, because it comes in the context of a discussion that this scientist that they were trying to recruit had had with a colleague of hers. She was coming from Schering-Plough. She was going to be heading up their brand-new virology unit, and a colleague of hers said, "How many positions did she give you?"
The woman, who eventually came to run virology at Vertex, said: "It doesn't matter to me how many positions. It's are they really committed? Do they really want this? Are they going to do it right?"
What Sato said to her is: "We'll find the positions. We'll come up with them." And they did eventually, and Vertex has a very strong virology group as a consequence.
Macaluso: Let's talk a little bit more about how Vertex's culture has changed over time, because you started covering the company when it was really just a start-up, up until it became a commercial-stage company. What were the three most shocking changes that you saw in this time?
Werth: It's interesting. The CEO who succeeded Boger said to me repeatedly, "Everything changes on the day you become profitable." Vertex went, I suppose -- you probably know this better than I -- about as far as any biotech has gone, without becoming profitable.
They had, in their first 22 years, two profitable quarters. They didn't really start turning a regular profit until they launched their hepatitis C drug. Imagine any other company, in any other industry, going 20 years without making a dime and, in fact, losing -- or burning, or investing -- huge amounts of capital.
Vertex spent almost $4 billion before it turned its first regular profit, $755 million in the last year. This is just what it takes, to bring out a breakthrough drug.
To answer your question, I think as long as they were unprofitable, they were able to keep their virtue, but everybody recognized that as soon as they began to turn a profit, Wall Street was going to say: "Well, OK, we've invested all this. We want the money back now."
There's a much stronger strain now, within the company, of trying to satisfy Wall Street -- which I think Boger predicted would undermine the company's sense of itself as a breakthrough company, and also alter its direction. What sort of effect that's having right now, I don't really know.
Macaluso: Barry Werth, author of The Antidote: Inside the World of New Pharma. It's a great book. Thanks very much for your time, Barry.
Werth: Thank you so much, Max.