Vertex Pharmaceuticals Incorporated

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Vertex Pharmaceuticals Incorporated

130 Waverly Street
Cambridge, Massachusetts 02139-4242
U.S.A.
Telephone: (617) 444-6100
Fax: (617) 444-6680
Web site: http://www.vpharm.com

Public Company
Incorporated: 1989
Employees: 813
Sales: $160.9 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: VRTX
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Vertex Pharmaceuticals Incorporated is a Cambridge, Massachusetts-based drug discovery company that was founded to pursue rational drug design techniques to make drugs that target specific diseases. In business since 1989, Vertex has only two minor HIV drugs to its credit and has never turned a profit, but the company has great expectations for two of its hepatitis C drugs in clinical trials, and also has a number of cancer drugs in the pipeline. Vertex is not lacking in corporate partners who believe in its potential. Companies that have forged alliances include GlaxoSmithKline, Eli Lilly, Schering AG, Aventis, and Novartis. Vertex is a public company listed on the NASDAQ. In addition to its Massachusetts' headquarters, Vertex maintains operations in San Diego, California; Madison, Wisconsin; and Oxford, England.

FOUNDING IN 1989

Vertex was founded in 1989 by Joshua S. Boger, the company's longtime president, chief executive officer, and chairman. Boger, who once claimed that his first business experience was franchising a lemonade stand as a youngster, earned an undergraduate degree in chemistry and philosophy from Wesleyan University in Connecticut, followed by master's and Ph.D. degrees in chemistry from Harvard University. He then spent a decade at the research labs of Merck, Sharp & Dohme, ultimately heading the biophysical chemistry and medicinal chemistry of immunology and inflammation departments. It was also at Merck that Boger organized a rational drug development effort, or structure-based drug design that relied on computer modeling to analyze the molecular structures of enzymes and proteins connected to specific diseases and creating custom drugs to inhibit them. Together with colleague Dr. Manuel Navia, Boger worked on a project at Merck to develop a drug to block a virus enzyme (called a protease), key to the replication of HIV, the cause of AIDS. A number of major pharmaceutical companies were in a race to develop drugs to block HIV protease activity, but it proved to be an extremely difficult task, one so exhausting that Boger left Merck in 1989 to start his own company, Vertex, taking Navia with him.

INITIAL PUBLIC OFFERING: 1991

While Boger and Navia were determined not to chase after a protease inhibitor, they were still very much devoted to rational drug design, establishing the first pharmaceutical company predicated upon it. According to the Wall Street Journal, "Key to Vertex's strategy was Dr. Navia, whose expertise is using computers to create three-dimensional images of protein molecules. Wearing '3-D eyeglasses,' researchers can then manipulate these images on a computer screen, twisting and turning the Tinkertoy shape to scan the active site for molecular canyons and ridges where a drug inhibitor might lodge." The initial goal of the new company was to develop an inhibitor for the molecule FKBP, which Boger and Navia believed was the element of the immune system that caused the body to reject transplanted organs. The immune suppressant could also be used to attack rheumatoid arthritis and other disorders. Boger proved especially adept at exciting investors about the project, raising $60 million, half from such investors as Avalong Ventures, Greylock Management, J.H. Whitney & Co., New Enterprise Associates, and Norwest Ventures. The rest came from Japan's Chugai Pharmaceutical Co. Vertex was also able to engineer an initial public offering (IPO) of stock at $9 per share in 1991.

Boger assembled a staff of young researchers whom he drove hard. After two years of effort, they came to the disappointing conclusion that FKBP was the wrong molecule to pursue. Worse yet, a former member of Vertex's Scientific Advisory Board, Stuart Schreiber, was the one to uncover the enzyme calcineurin, which they should have been studying all along. The researchers began investigating calcineurin, but by that time the company was also pursing the one subject it had vowed to avoid: the protease inhibitor. According to the Wall Street Journal, Navia had a vision of the shape of the molecule while reading a scientific paper about a new AIDS drug. Although his inspired idea failed to pan out, it served to rekindle his pursuit of the elusive inhibitor. Navia and his group assembled increasingly more precise 3D models of the protease and learned that the enzyme, which could be portrayed as a jawlike cavity, only required a few small pockets to be filled in order to be blocked. The team then produced scores of new chemicals to fill those pockets before settling on one that appeared to do the job without being damaged by the digestive tract. In 1993 Vertex signed collaboration agreements with GlaxoSmithKline and Kissei to develop protease inhibitors to treat HIV infection. The resulting drug was then put into clinical trials to gain approval from the Food and Drug Administration. Phase II clinical trials commenced in 1997 on Agenerase.

Vertex bolstered its capabilities in 1995 with the addition of such technologies as combinational chemistry and functional genomics. They were then put to use to take on the Hepatitis C virus, which is able to hide from the body's defenses in order to replicate at an astronomical rate, often leading to cancer or liver failure. In 1996 Vertex determined the shape of the enzyme: It possessed a shallow pocket, which unfortunately made it difficult to develop an inhibitor to fit it. A year later the company entered into a collaboration agreement with Eli Lilly to develop protease inhibitors to treat Hepatitis C.

Also in 1997 Vertex reached an agreement with Kissei Pharmaceutical Co. Ltd. to develop kinase inhibitors to treat inflammatory and neurological diseases. Kinases were a family of proteins that sent signs from different parts of a cell. In some diseases, especially cancer, the actions of the kinases were disrupted. The company's initial work in the mid-1990s in this area involved the development of compounds to block a kinase protein that caused arthritic joints. Clinical trials on this drug were launched in 1998, the research also leading to a blocker for a second kinase, which played a role in strokes. As a result, Vertex made an even greater commitment to the study of kinases.

In 1998 Vertex forged an $88 million agreement with Schering A.G. to develop drugs (neurophilin ligands) to help regenerate nerves damaged by neurological diseases. The year also saw a pair of Vertex drugs enter clinical trials, an inhibitor to treat rheumatoid arthritis and the Hepatitis C virus inhibitor. Several other drug candidates entered Phase II studies. In addition, the company opened a research and development facility in the United Kingdom in 1998.

COMPANY PERSPECTIVES

Vertex Pharmaceuticals Incorporated is a global bio-technology company committed to the discovery and development of breakthrough small molecule drugs for serious diseases. The Company's strategy is to commercialize its products both independently and in collaboration with major pharmaceutical companies.

FIRST PRODUCT ON
MARKET: 1999

Vertex saw the launch of its first product in May 1999, Agenerase. Unfortunately there were other drugs on the market that performed as good or better. Hence, Agenerase enjoyed only modest sales, around $80 million a year at best, hardly enough to turn Vertex into a profitable concern. However the company still had commercial hopes for the seven drugs it had in the pipeline. The company found yet another research partner, forging a pact with Taisho Pharmaceutical Co., Ltd. to develop caspase inhibitors to treat neurological and cardiovascular diseases. Caspases were a class of proteins that killed damaged cells. By inhibiting them, the collateral tissue damage caused by strokes, heart attacks, or liver disease could be minimized.

Vertex signed its largest development deal in 2000, an $800 million pact with Novartis AG that dwarfed the size of previous agreements. The two companies planned to develop eight drugs targeting kinases to treat a wide variety of diseases, including cancer and arthritis. Especially noteworthy was that Novartis did not seek a stake in Vertex, a reflection of how much value it placed in the expertise Vertex had to offer. In addition, Vertex signed a $95 million development agreement in 2000 for caspase inhibitors.

To this point, all of the growth at Vertex was internal, but in 2001 the company tried its hand at external growth, using nearly $600 million in stock to acquire San Diego, California-based Aurora Biosciences Corp. Although Aurora did not bring any late-stage products, it did offer a drug discovery system that could quickly test multiple drugs against multiple targets, portraying the effects of drugs on living cells, which could help greatly in reducing the time required to develop products. The hope was that by combining their technologies the two companies could develop into a drug discovery powerhouse. It would also open up the company to a new range of collaborative and product opportunities.

Vertex started 2002 with a dozen products in the pipeline and more than $740 million in cash and investments. The company was well positioned to finally realize its goal of becoming a major drug company, but getting over the hurdle to commercial success, let alone producing blockbusters, remained out of reach. Disappointing results from a trial on a rheumatoid arthritis drug caused the price of Vertex stock to plunge by nearly 20 percent in April 2002. By the end of the year the company lost another $108.6 million and still had little more to offer than drug candidates. In 2003 the company decided on a more prudent course, focusing its resources on products it believed were the most fully developed. In keeping with this shift in strategy, Vertex cut its workforce by 13 percent, eliminating 111 jobs, including 65 in the Cambridge headquarters. The year also brought some unwanted publicity in the form of the company's former chief lawyer, Andrew S. Marks, who pleaded guilty to insider trading for dumping stock in September 2001, just prior to an announcement that Vertex was halting clinical trials on its arthritis drug. By selling 20,900 shares, Marks saved about $180,000, but faced a $1 million fine and as much as ten years in prison.

Vertex focused on advanced products in 2004, directed at the treatment of cancer, viral infections, and inflammatory diseases. The company was especially optimistic about its Hepatitis C therapies in the pipeline, the development of which it hoped to accelerate. Excellent results from a trial of a new experimental drug to treat pancreatic and colon cancer was also reason for optimism. Wall Street concurred and bid up the price of Vertex stock. More good news followed in 2005, when the company received positive data regarding its VX-950 oral drug for the treatment of Hepatitis C, resulting in another surge in the price of Vertex shares. Nevertheless, the drug was still years away from ever entering the marketplace. In San Diego, in the meantime, the former Aurora unit was making significant progress on an experimental treatment for cystic fibrosis. Early results were such that Vertex decided to make it one of the key drug development projects in 2006. In addition, VX-702, an oral treatment for rheumatoid arthritis, was also looking promising. As a result of these positive developments in 2004 and 2005, the price of Vertex stock more than doubled in a year's time.

KEY DATES

1989:: Company is formed.
1991:: Initial public offering of stock is conducted.
1993:: GlaxoSmithKline development agreement is signed.
1999:: First product reaches market.
2001:: Aurora Biosciences Corp. is acquired.
2006:: Johnson & Johnson marketing agreement is signed.

More strong results for VX-950 followed in February 2006. By July, Johnson & Johnson agreed to pay as much as $545 million for the rights to sell the treatment in Europe and other international markets. Tests had only been conducted with 60 people, yet the VX-950 looked so promising it "galvanized Wall Street analysts," in the words of the Boston Globe. The paper added, "Success could vault the company, a money-losing firm known primarily for its research expertise, into one of the region's largest drug makers." In addition, the company's rheumatoid arthritis treatment, VX-702, was perceived to have blockbuster potential. Should either drug succeed, not only would Boger's vision for a new paradigm in drug development be vindicated, the company he founded would likely become an acquisition target and possibly make him a very wealthy man.

Ed Dinger