The Antidote: Inside the World of New Pharma

by Barry Werth

  On closer inspection, the combination was no panacea. As hivandhepatitis.com, which evaluates experimental antivirals, reported, nearly alone among the media: “Because the researchers were uncertain whether the two oral drugs alone would work, they chose a population of relatively easy-to-treat patients who could be most easily ‘rescued’ if the experimental regimen failed: treatment-naïve people with HCV genotypes 2 (about one-third) or 3 (about two-thirds), and no cirrhosis; about 40 percent also had the favorable IL28B CC genotype. A majority were men, most were white, and the average age was about 48 years.”

  In other words: no nulls, no treatment failures, no harder-to-treat genotype 1 patients, few higher-resistance black people, no seriously ill cirrhotics, no elderly—the very populations Vertex went to pains in its pivotal trial to show it could cure. And, so far, no relapses.

  After Gane finished his report, the moderator invited responses. A respectful silence descended for twenty seconds over the main hall and the overflow room. “You’ve stunned the audience,” the moderator told Gane. The lead question from the floor spoke to a shared hesitation. Prior nucs designed to inhibit the HCV polymerase had gotten knocked out in large studies due to toxicity. Wouldn’t PSI-7977 suffer the same fate? Gane could make no guarantees, but he optimistically reported that during the twelve weeks of the study he and his colleagues had seen no safety signals.

  Enthusiastic applause ripped through both rooms. Smith, seated a dozen rows from the back, clapped appreciatively while Mueller, standing at the rear, kept his hands in his pockets. Most stunning was the instantly telescoping timetable. Pharmasset would doubtless move full-bore into Phase III. It was chasing the megamarket for direct-acting antivirals against hepatitis C much sooner, and with a much more potentially credible candidate, than Vertex and Merck thought possible even six months ago, on the eve of the first real breakthroughs against the disease in a decade. The pace of change had suddenly lurched by an order of magnitude: a breathtaking speedup and a boon for patients no matter which drugmaker prevailed.

  Giddy Pharmasset senior executives cruised the sea of fund managers and analysts, ten-deep at the bar, during the company’s investor relations event that night in a contemporary art gallery a dozen blocks from the Moscone. They showed a short movie, The Nucinator, starring CEO Schaefer Price as a Schwartzeneggeresque avenger. Price played the leader of of the Nucleotide Resistance Movement, a heavily armed, emotionless, and efficient killing machine who leads the way to an interferon-free world for patients with hepatitis C by exterminating all types of HCV. The film had amusing, low-budget dialogue to go along with the cartoonlike WowPowBam! fight scenes: “Competition crusher!” and “Now that’s what I call viral suppression!” The crowd cheered lustily.

  Price owned 3 percent of the company. Later, in his remarks, he predicted an interferon-free world by 2014. Under the heading “Who cannot take interferon?” Price put up a slide of an iceberg, the vast submerged area representing a huge phantom patient population that, lest anyone still need convincing, he believed more than justified Pharmasset’s overweight valuation. He talked passionately about “everyone treated with the same regimen . . . our drug being an all to everyone,” and unveiled, Steve Jobs–like, the product: a lavender oval-shaped pill embossed with the company’s logo and a 1. “One pill, once a day,” he said. “And it’s pretty, too.”

  By the next morning, VRTX plummeted. Partridge saw there was nothing Vertex could do to stem the damage. He was worried, but not deeply so, even as it scraped 17 percent lower over the next twenty-four hours, to $30. Partridge was already getting calls from contacts attracted by the daily downward repricing of the stock, and they were the kind of desirable, long-term “value” investors who buy into companies selling at less than their intrinsic worth and whom he and Smith had been chasing for years. He was grim about disappointing shareholders and employees, but as he enjoyed noting, danger was also opportunity.

  Smith, pacing the lobby, spoke by phone with Emmens, then grabbed a bag of potato chips and roamed the aisles of scientific posters at the far end of the exhibition space from the Vertex booth. He liked to get off alone and think in a crisis. He and Emmens agreed on the issue: “Do we chase hepatitis C?” Two schools of thought competed within the company: those who wanted to race ahead and those who thought the game was over. Smith worried about disgruntled investors and the hundreds of people inside Vertex trying to build the hepatitis C franchise, but the good news was: “CF is awesome. It’s going to carry us through.”

  No one at Vertex was immune to the reality that, for patients, the twenty-year chase in hepatitis C was at last producing new cures with astounding speed and chances of success, especially relative to other diseases, and in the larger sphere this could only be considered a triumph for all involved. But all had their roles to play, and after the Liver Meeting they faced the certainty that the revenue arc for the next couple of years would be significantly lower and shorter than projected, ratcheting up the pressure on all of them. Patients were still lining up for treatment and so Vertex redoubled its program to sell Incivek hard now while targeting those groups—cirrhotics, nulls, people coinfected with HIV—who couldn’t wait for the next wave of treatments. “Making hay while the sun shines,” Sachdev said.

  Vertex threw a formal IR event that night in a posh suite at the Four Seasons. A more staid affair than Pharmasset’s, it was an opportunity to present new quad data that showed higher-than-anticipated SVR rates in some of the hardest-to-treat patients. The improvement went all but unregarded by the analysts, who had spent the day conferring with KOLs and had come to the conclusion that Pharmasset’s story would surely result in wholesale warehousing of patients, especially if, as it appeared, the five-year campaign for testing baby boomers soon succeeded and diagnosis rates spiked. Patients were the coin of the realm. The analysts were taking them away from Vertex and giving them to Pharmasset. Koppel and Porges, investor and analyst, sat in the back checking the score of the Eagles-Bears game on Koppel’s iPad.

  “I hope this is the nadir,” Wysenski murmured. Stepping off the elevator, she had bumped into Pharmasset’s chief commercial officer buttonholing one of her salespeople. The final night of the conference, they were all beat, bored by the eternal road show Sturm and Drang and the peculiar savagery of the Liver Meeting, where it seemed you were either way up or way down. It could be worse: they could be Merck. Everyone was eager to get to the airport. Each night Sachdev had sat through several dinners lasting until one thirty. He tried to reschedule on an earlier flight so he could crash in his own bed, sleep for an hour, and have the next day to work and see his kids.

  Kauffman, happy with the quad results and not disappointed to be flying out the next morning to join Smith and Partridge for a few days at a Credit Suisse investor conference in Phoenix, was the least downbeat. After the CF meeting, he too agreed that cystic fibrosis would bring more value to the company than hepatitis C. VRTX might be in crisis but Vertex was exceeding his ambitions. As for Pharmasset, he preferred to wait to see the data.

  Koppel sat spread-legged late the next morning on a couch in a solitary corner of the Four Seasons lobby, hunched over a coffee table, typing on his iPad, bristling with mixed emotions. Vertex had preoccupied him for more than a week. It was rare, and probably unhealthy, to become so personally invested in the gyrations of one bet, but the long/short thesis had swept everyone investing in either company deeply inside the fortunes of both. He was disgusted with Emmens and Wysenski. He didn’t believe they had a midterm play and thought what they should do was quickly buy one of the two remaining companies with a late-stage nuc, Idenix, 13 percent of which Brookside owned. “Not only did they not put fear in the minds of the shorts, they supported the shorts. I’ve never seen a management team support the shorts in the way that they did,” he said.

  Porges arrived, crossing the room from the elevators with a seasoned look: funereal, but gleeful to be getting out of town. “There’s blood in the water,”
he mocked ghoulishly, doubling down on his Australian accent for effect. “The piranhas are circling. But there’s life in the corpse. Stock at thirty—fifty is the number we came up with.” He sat down, chortling, “These guys fucking suck.”

  “This is what I did yesterday,” Koppel said. He proffered the iPad. It showed a chart combining and comparing thirty possible scenarios based on three columns of data—probabilities of a host of likely contingencies. “I said there are essentially three different major questions with the company right now. What’s the degree of the warehousing? Do they get a nuc or not, which essentially is a proxy for can they maintain their 2015 hep C franchise? And what are the scenarios for CF?”

  “Time out,” Porges interrupted. “I’d be interested in this, but the only part of this that really matters is this.” He pointed to the last column.

  “I agree with that,” Koppel said, “but I need to know near-term what the cash flow generation is.”

  “Just take the October number and flatline it.”

  If putting a price on Vertex or any company by trying to model the future was bound to be futile, as the last few months had proven, neither of them could resist the exercise. Emmens’s model of finding really sick people and making drugs for them might satisfy scientists but the Street demands valuations based on something more tangible, even if it’s a speculative algorithm that blends and ranks various likelihoods, a garbage-in, garbage-out system.

  “It could be worse,” Koppel said. He explained how his team had graded the probabilities for what would happen to Incivek’s revenues over the next three years in the event of ten different outcomes. “We have complete discounted cash flow (DCF) models behind each one of these. If it’s severe, we’re thinking it goes 2 billion, 1.7, 1.3, and then off the map. If it’s moderate—and these are back of the envelope—let’s say 2.2, 2.3, and 1.5. And if it’s light, it’s our original numbers before this weekend—”

  “Yeah, yeah, that’s fine . . .

  “Do they get a nuc or not?” Koppel continued. “We charge them a billion and a half dollars in capital, and we say they can sustain from 2015 to 2020 at between 1.5 and 2 billion. If no, then it’s just the cliff.”

  “When do you cliff it?” Porges asked.

  “2016.”

  “I cliffed it at the end of 2014.”

  Koppel laid out a range of options for VX-770, from clinical and regulatory failure to approval in record time and blockbuster sales. Porges studied them.

  “Okay, what do you think are the probabilities that it doesn’t work in other gating mutations?” Porges asked.

  Koppel brightened. “I think it’s going to. We say it’s a ninety-five percent chance it reaches the market and a sixty percent chance they get more than just G551D.” He explained that after blending the eight most likely scenarios and crunching the numbers, his researchers came up with a price target of $48 a share—approximating Porges’s $50. They were on the same page, if not yet reading from the same verse.

  Porges put down the iPad. “This is so McKinseyesque. It’s why I never worked in the organization. I could fire a rifle straight through this and blow it up,” he said, pausing. “You haven’t modeled what if Pharmasset fucks up.”

  “What are you gonna tell me, that you can model better than I can model?”

  Porges rose to the challenge.“The big variable is realized net present on CF. Very important on the DCF.”

  “They’re gonna have to spend a billion and a half and do something,” Koppel said, returning to the lack of a late-stage nuc.

  “Buy back the stock! If the company is such a bargain, buy it back!”

  Koppel had consulted by phone with associates back in New York the night before and again that morning. He wanted Porges’s bead on what he considered the likeliest simulation: “Moderate warehousing. They try to maintain the free cash flow—I give them a billion and a half dollars. And I give them the base CF plus the conductance.”

  Porges scratched his forehead, smiling skeptically. He returned to his earlier point. “ So, how are we gonna incorporate in the model Pharmasset’s primary development strategy not working?”

  “Well, then it’s just upside; but then it’s not worth modeling. I’m not gonna make an investment thesis that the competition is gonna fuck up. Right now I’m just trying to find a base on the freakin’ stock. I’m not frightened right now, but the bears have proven correct on all three of their theses. At some point as an investor, you’re blind if you can’t admit you’ve been wrong. I’m not wrong on the launch. I’m not wrong on how they compare with boceprevir. I’m not wrong on CF. But I’m certainly wrong on perception and I’m wrong on management’s competence and poor decision making on how to sustain their hep C franchise.”

  Here was the rub: Emmens and Vertex saw this coming. Why they let it happen when Koppel, Porges, and others were urging them to take Pharmasset out before it got too expensive was beyond reason. They couldn’t understand it.

  “It’s amazing,” Porges said. “The downfall of just about every pharmaceutical company that ultimately fails is almost always scientific hubris. The guys at the top in the scientific department get positive reinforcement from scientific success, and then they overstate their own ability to make scientific judgments based on new information. That’s what happened at Merck. That’s what happened, certainly, at Amgen. You can almost argue that it started to happen at the end at Genentech. It’s happened at Gilead. And it’s probably what’s happening here.

  “Four years ago, I told them they should have bought bloody Pharmasset, when it was a billion dollars—”

  “So did I. We all told them. But they think they’re smarter.”

  “That’s what I said: scientific hubris.”

  What neither of them knew was that Emmens, in fact, had pursued Schaefer Price, taken him to dinner in 2009, proposed that the companies collaborate, telling Price that the combination of VX-222 and Pharmasset’s compound would be “a global segment killer.” Price had been eager and receptive—until the next Monday, when Pharmasset’s scientists inexplicably pulled out and Price didn’t notify him directly. “You don’t do that in CEO-land, by the way,” Emmens says. Unlike a cash-rich behemoth, Vertex couldn’t afford a takeout, friendly or otherwise, even if it wanted one, which it didn’t. Emmens knew others blamed him in hindsight and it nettled him when the Street didn’t assume he’d tried to do the obvious.

  Koppel mulled Porges’s postmortem. “I agree when you have success you think no one is better than you and you can do everything yourself internally. But I still think there’s something special in that organization.”

  “On the ability to come up with innovation, I completely agree with you.”

  “But they’re not being paid for it. No one cares.”

  “Their downfall,” Porges said, “is that they failed to get the nuc, period, and that they failed to get Pharmasset. In the same way when I wrote the note that Gilead should have bought Vertex seven years ago, Gilead turned up its nose and said, ‘Oh no, we don’t really like telaprevir.’ They’d be in a totally different position. They wouldn’t be trading at seven times forward earnings.”

  “Right. Because they’d at least have the telaprevir free cash flow, and they’d have one or two other assets.”

  Lunchtime approached. A couple of retirees read the Chronicle in plush chairs by the gas fireplace, and groups of businesswomen and a few families clustered near the desk. Both Porges and Koppel had appointments, calls to return. Porges rose abruptly to leave.

  “So in the same way Gilead thought it knew better, and that the drug wouldn’t come to market, Peter Mueller thought he knew better and thought this drug wouldn’t make it.”

  “Here’s where we are,” Koppel said. “We all want Vertex to succeed better than it’s succeeding now. They need to get a nuc. Or they need to say they’re going to milk telaprevir and get out, and don’t spend the money on a quad. I do want to turn the card on the Phase II triple all-ora
l. Because it would be worth developing that if there is a real issue with genotype 1 on 7977. But the data better truly be pristine. The data better be really good efficacy with clean side effects.”

  Porges was philosophical. “Pharmasset is so far out on a limb—the fact that they’ve been pounding this 100, 100, 100 so hard. If that’s all this is about, those expectations are off the charts. Pharmasset is saying we can treat everybody the same, regardless of viral variability or patient variability. The more variability you find in the absence of interferon, the more vulnerable Pharmasset’s thesis is. Their thesis depends on curing patients independently of host response—completely independently.”

  He turned on his heel to go. “A shit show,” he said.

  Despite the pain of the moment, the acid test of Vertex culture was its firm faith in science. After the Liver Meeting, Cumbo foresaw a period of “free play”—speed dating among the major players in hepatitis C, where they frantically sought to hook up either through collaborations or M&A. He trusted Mueller, Kauffman, and the R&D organization to remain all-in on advancing an interferon-free therapy, and though he had to reassure his people blindly, not knowing what Vertex’s next move might be, long experience in an industry where failure and disappointment are norms had taught him to prize an even keel. Partridge, his own faith buttressed by newly inspired prospective shareholders, sympathized: