The Antidote: Inside the World of New Pharma (55 page)

“IMS owned up to the last two weeks in September being a little bit off, but they weren’t acting with any urgency,” Partridge recalled. “So we said, ‘Look, this is creating a big disruption in our business. You guys are creating us all kinds of problems, so what can you do to clear it up for everybody? It has to be in a broad disclosure format because we can’t do selective disclosures. And, by the way, you’re creating this mess, so we’d appreciate your speaking on behalf of your own product, so we don’t have to issue a press release to say what we
think
is happening.’ ”

Here—with the question looming over where the next pool of patients for Incivek would come from just as Pharmasset upped the ante, not with data but confidence enough in PSI-7977 to try to leap ahead with two small, but provocative, Phase II studies—was an opening for the “long/short” thesis you could drive a freight train through. Based on three shreds of disconnected and questionable intelligence, it became immediately popular to think that doctors had already started holding back—warehousing—patients in anticipation of the next wave of treatments, that Incivek was fizzling, and that Pharmasset was the future.

Emmens, despite his irritation, conceded the allure for investors, the elegant either/or/but-certainly-one-of-them simplicity of the long/short play. “You make it us against Pharmasset, and you take one or the other. What a great trading opportunity that is. You think they’re gonna come and take our business in two years, so you say, ‘I can bet on that, and I can hedge a little with Vertex,’ since if Pharmasset blows up we’ll go up like crazy. If you’re in hep C, that’s what the bet is right now.”

VRTX plunged 9 percent by the end of trading, with five times the average volume. Pharmasset soared to an all-time high. After the stock markets closed, Bank of America–Merrill Lynch biotech analyst Rachel McMinn, usually bullish on Vertex, wrote a call note downgrading her target price. McMinn still recommended the stock as “a buy” but in cutting her target to $65 from $72 she took $3 billion out of her valuation, sparking a second round of selling when trading resumed on Tuesday. Throughout the morning Partridge took more urgent calls from longtime fund managers reporting that they couldn’t stop the portfolio executives around them from selling VRTX. Reg FD sealed his lips. His futility was self-evident.

“We couldn’t comment because our quarter was closed and we couldn’t preannounce earnings,” he recalled. “We told people, ‘We can only say what we said before—which we really believed in.’ We couldn’t tell them what was going on with IMS. We know IMS was looking into why their data might be inconsistent, but there was nothing more we could tell them.”

Smith hoped investors believed in the long-term value of the company. “You’re effectively playing the trust-me card,” he observed, “but you don’t know where the trust-me card kicks in.” He pressed Emmens to step in to protect the stock and Emmens phoned the CEOs of IMS and Caremark, urging them to act quickly to correct the numbers. The directors were arriving the next day for a regular all-day meeting, and though he already had urged them to filter out Wall Street’s heedless volatility, which in many ways was just as damaging as the dark-arts trades and destructive lending practices that aroused Occupy Wall Street and most of its supporters, Emmens worried that the board, too, needed to be reassured, if not about the actual figures, by an awareness that he and Smith were on top of the situation. He summed up the rising disconnect in his cover letter to the other directors:

What a great time in the history of Vertex. Execution by our team has been virtually flawless. With a blockbuster launch and another breakthrough medicine about to be submitted for approval, we are working on our future, with ten clinical projects encompassing eight different compounds, seven of which already have proof of concept. Beyond a great launch, everything else has been on time and nothing has failed in the clinic yet. This situation is unprecedented in our industry. As they say in the understated German way, “Not bad.”

The only frustrating part is that Wall Street is focused elsewhere. The markets are bearish, highly volatile, and as a result myopic. I think they will ultimately catch up to our breadth and true value.

It wasn’t until midday Wednesday, while the directors met in the fourth-floor boardroom in JB-II, that IMS notified the company that it
would issue a bulletin regarding sales figures for the last two weeks in September. The after-hours announcement stated that the figures for the figures had been wrong (scrip estimates actually rose 5 percent for the week ending the twenty-third and 4 percent for the week ending the thirtieth) and that IMS was still missing sales data which might result in updated estimates. VRTX stabilized at a floor of about $40. Emmens, with an agenda that included several hours of discussion about finding a new CEO before his contract expired and a scheduled report from Vertex’s advisor on the company’s takeover risk, was not mollified by the correction. “This is crap,” he muttered, scanning his BlackBerry during a break. “This is not our business. This in not what we’re in business to do.”

Even with a depressed share price, Vertex was fortunate that the lust for mergers and acquisitions in biotech—what its advisor called “trades”—had cooled as Big Pharma tried to absorb those it had made during the frenzy of the previous decade. The company was safeguarded by its relatively high price and by the faith of the large funds—Fidelity, Wellington, Brookside, and a few others—that held 90 percent of its stock and whose managers, however bemused to be losing money on a portfolio leader, hadn’t panicked. Even at $40 a share, Vertex’s valuation was above $8 billion, meaning that, with a premium of 50 percent or more based on its rapidly improving balance sheet, strong cash position, and promising pipeline, it would cost another company $12 billion to $15 billion to take it out—a sizable enough trade to force an aquiring CEO to think long and hard.

Whereas three weeks earlier with Friedman he had been jovial, now Emmens was grim.
Where did it stop?
Wall Street’s negativity toward the possibility of success in biotech had clouded its judgment so severely that a single misreported data point had ignited a stampede. It didn’t matter what you did, he thought, only how much fear the naysayers could whip up on any given day. Twenty-two years of ferocious innovation and backbreaking science and you still faced being downgraded $3 billion overnight because of an isolated, incorrect, one-week sales
estimate
combined with the sudden perception that an untested rival would someday soon eat your lunch. Vertex remained lucky for the moment, but Emmens worried deeply about the overall trend, and he wasn’t
sanguine about the company’s ability to withstand a future raid on its independence if the situation didn’t reverse.

“It’s really hard now,” he muttered. “Their biggest concerns, every one of them, we’ve showed them that’s wrong. You
can
make a pipeline; proof of concepts
are
working; we’ve
got
a blockbuster; it’s
not
a soft launch; we’re
getting
the patients; we’re
getting
the price. So it’s very frustrating to be hitting all those marks, and they’re off somewhere else. I don’t care about the share price, but this is an incredible bargain for somebody to look at it in terms of enterprise value. I think there’s a disconnect now between the value the market gives you versus what it would be to another pharma company, in terms of profitable assets.

“This company,” he said, toting the math, “you would be buying immediate income, a billion in cash by the time you closed, and pipeline. If we’re a nine-billion-dollar company, at fifteen billion they can give you a fifty percent net premium, and the next day still make it accretive.
Duh
. What you have to do is convince your shareholders that the company is undervalued, that the market is screwed up.” He recalled a scene from
Jaws
. “Maybe you can. Or, ‘Maybe the shark go away.’ You beat on the water, or maybe he comes up and bites you.”

The next morning, following IMS’s product bulletin on Incivek, VRTX rebounded nearly 7 percent to $43 a share—20 percent less than it lost on Monday. Emmens, Smith, and Partridge hoped the end result would be to reaffirm Vertex’s credibility while disparaging the validity of outside estimates, but the damage was done. Porges, who’d also challenged the IMS estimates based on his own focus groups and expansive modeling of how the medical community was adopting the drug in stages, told Reuters the episode should teach investors to wait for reliable data. Seizing the opportunity to defend the long thesis on Vertex, he sniped competitively at BOI-ML’s McMinn, his erstwhile ally in the tug-of-war with Morgan’s Meacham, Citi’s Werber, Friedman, and the rest of the shorts.

“This is the nature of any drug launch,” Porges told the newswire, “and no pharmaceutical or biotechnology company marketing analyst with any measure of experience would make judgments about the performance of a launch, and a product’s long-term potential, based on
one, two or even three weeks of market audit data . . . We trust that the investment community will be discouraged from doing the same after this correction.”

“The future,” Vertex’s takeover defense banker liked to tell clients, “gets repriced every day.” New information roils both the math and psychology of every investment decision. CEOs of big companies prowling for acquisitions ask themselves whether they’re willing to bet their jobs on a trade, because if they’re wrong, their company’s stock will go down, and they’ll be fired.

By the next Friday, big drugmakers scouting Vertex saw the future as anything but a race between two small companies competing, zero-sum, for primacy in hepatitis C. Abbott announced, based on very small midstage trials, that it could have a twelve-week all-oral four-drug combination therapy on the market by 2015. Using data culled from a pair of studies with just forty-four patients, the company projected SVR rates as high as 90 percent, with annual sales of about $2 billion. Two weeks before the Liver Meeting, Abbott stock—ABT—bobbed nicely for a couple of days while Vertex, Pharmasset, and Gilead all retreated as Wall Street absorbed the increased likelihood that several companies would slice up the opportunity in hepatitis C, as Emmens predicted.

Murcko took Friday off to move his mother from a hospital to a rehabilitation center in Connecticut. His regular monthly meeting with Mueller was scheduled for Monday, and he emailed Mueller before he left to let him know he’d be out for the day. “Never heard a thing back from him,” he later recalled. “Nothing, which I thought was weird. Just didn’t make any sense at all. I thought ‘Jeez, he must really be preoccupied with something.’ I didn’t know what.”

If disruptive innovation means a state of permanent revolution inside those companies that promote it, the challenge ahead was how to scale Vertex’s creative DNA and expand its frontiers while trying to build a productive, sustainable R&D pipeline. “The issue, as always here, is, ‘Are we fearless enough and can we execute well?’ ” Murcko said. For years Mueller had had up to twenty direct reports. He wanted to streamline and simplify his leadership structure, bring some people up, shift some
around, move functions, eliminate redundancies. In an effort to create powerful and aligned R&D organizations, he named two heads of research—Cambridge site head Mark Namchuk for North America and longtime UK site director Julian Golec for the EU—to spearhead the discovery of future medicines. He promoted Chris Wright to run global medicines development and affairs, putting him in charge of all clinical duties including regulatory affairs. In the process, he decided to disband Murcko’s Disruptive Technology group and reintegrate it piecemeal into the functional lines.

Monday afternoon Murcko walked into Mueller’s office for his meeting, carrying a stack of research papers and brimming with a long list of ideas. For years he’d been pushing the company to think harder about neurodegenerative diseases, and he had been pleased on Science Day that the keynote speaker was a pioneer in treating ALS—Lou Gehrig’s disease—an opportunity now for follow-up.

Mueller preempted him. “Your position has been eliminated,” he said. Murcko groped for an adequate response. He had no trouble seeing the logic of the move. Most midsized companies outgrew the need for chief techologists and his independence and influence had been shrinking since Mueller terminated his new project group in 2008. But emotionally Mueller, whom he’d struggled alongside for nearly a decade, seemed absent, conveying no trace of friendship or familiarity, much less sympathy or remorse. He was reading from a script.

“That’s apparently fairly common,” Murcko recalled. “He didn’t want to talk about anything else. The conversation lasted four and a half minutes. I asked him a couple of questions. One was, ‘Is there anybody else in my area who was being let go?’ I was worried about my secretary, Vicki. He said, ‘I don’t want to talk about that.’ I asked whether there was anything . . . actually it was more of a statement. I said, ‘To my knowledge there was no paper trail of any kind of any dissatisfaction with anything that I’ve done. Is that accurate?’ He said, ‘Yes.’