(Bloomberg) -- Over the last decade, Vertex Pharmaceuticals Inc. has transformed cystic fibrosis from a debilitating lung disease to a manageable condition for most people who suffer from the inherited ailment. That feat also cemented Vertex’s place in the Boston biotech pantheon.
Yet the curse of success weighs heavily on the company, which is under pressure to prove it’s not a one-hit wonder. Two recent setbacks shook Wall Street’s confidence that Vertex can do it again, sending the stock tumbling more than 40% since hitting a $303 peak in July 2020.
The same dilemma has plagued other beloved biotechs, including Celgene Corp., Alexion Pharmaceuticals Inc. and Gilead Sciences Inc. If Vertex follows their path — the first two were sold and Gilead grew through acquisitions — its future could look very different.
“I’ve seen this cycle happen again and again,” said Brian Skorney, a Robert W. Baird & Co. analyst. "It’s something that’s usually hard to break out of.”
This year, Vertex’s monopoly on treatments for the underlying genetic causes of cystic fibrosis, which afflicts an estimated 83,000 people largely in the U.S. and Europe, will ring up about $7 billion in sales. The company has a $47 billion market and a nearly $7 billion cash cushion.
Those are enviable numbers, but in biotech, investors are always looking for the next billion-dollar thing, turning up the heat under new chief executive officer, Reshma Kewalramani, to produce another blockbuster.
A medical doctor, Kewalramani joined Vertex in 2017 from Amgen Inc. and became CEO in April 2020. She’s now the lone woman to lead one of 17 companies in the XBI — the SPDR S&P Biotech exchange-traded fund of industry stocks — with a market cap over $10 billion.
In an interview from Vertex’s imposing glass headquarters in Boston’s Seaport district, Kewalramani, 48, outlined the company’s strategy: Focus on diseases with a high unmet need and where Vertex understands the human biology; conduct smaller clinical trials; then move quickly to present results to regulators.
The most promising targets include treatments for severe kidney and liver conditions, blood ailments such as sickle cell anemia and beta thalassemia, Type 1 diabetes and pain.
The CEO anticipates Vertex’s next product will be a gene-editing therapy it’s developing with CRISPR Therapeutics AG for sickle cell and other inherited blood disorders. She expects to soon finish enrolling people in the latest clinical trial and to submit an application to the U.S. Food and Drug Administration in late 2022.
“We're not going to be 100% successful, but are 1, 2, 3, 4 of the disease areas and assets that we're working on going to be successful? I have absolute confidence that the answer to that is yes,” she said.
Kewalramani, whose family came to the U.S. from India in 1983, parries questions with rapid-fire answers, often making multiple points with surgical precision. And she isn’t afraid to warn investors that the road ahead could be bumpy. “The laws of physics still apply to us,” she said.
Investors are reeling from Vertex’s stumbles over the past year in its most advanced development program — treatments for alpha-1 antitrypsin deficiency, a genetic mutation that prevents the body from making the protective protein, often leading to severe liver or lung disease.
The company discontinued one drug candidate about a year ago due to safety concerns and a second in June after concluding it wasn’t likely to benefit patients. Kewalramani insisted the trials demonstrated a clear biologic effect and that the company will continue exploring molecules in this area. But the news stoked fear on Wall Street that Vertex won’t be able to diversify, at least not for awhile.
“It’s great from a scientific standpoint, but from a business and investing standpoint, the fact they’re not able to move along basically moves it back to square one,” said Amy Kong, chief investment officer at Barrett Asset Management LLC, which owns about $5.4 million of Vertex shares.
Venture capitalist Kevin Kinsella and Merck & Co. scientist Joshua Boger founded Vertex in 1989 with the novel idea of designing drugs based on understanding the proteins they wanted to target inside the body rather than creating molecules and seeing what worked, the approach of large pharmaceutical companies at the time. A little more than two decades later, Vertex introduced its first product, a treatment for hepatitis C called Incivek.
The drug helped Vertex turn its first profit. It also became obsolete almost immediately.
Gilead’s Sovaldi was far more effective, forcing Vertex to focus elsewhere to avoid a near-death experience. Vertex concentrated on developing medicines for cystic fibrosis, in which a genetic mutation prevents a protein from functioning properly, causing thick mucus to build up in the lungs, making it difficult to breathe and often resulting in frequent infections.
In 2012, U.S. regulators approved Vertex’s Kalydeco, which helps the faulty protein work better, making it the first drug to treat the underlying cause.
Almost a decade later, Vertex still dominates cystic fibrosis treatments. With the introduction of its latest drug, Trikafta, Vertex can treat about 90% of patients worldwide. And it’s not done yet: The company is studying another combination therapy and is working with Moderna Inc. to find a treatment for the 10% of patients not currently helped by Vertex drugs.
“The one lesson we learned really well with Incivek is we didn't work hard enough to continue to innovate and didn't out-innovate ourselves,” Kewalramani said. “That will never happen again here.”
While those with cystic fibrosis must spend hours on daily therapy and take as many as 50 pills a day to help with nutrition absorption, Vertex's drugs, along with new antibiotics, have vastly increased life expectancy. Decades ago, most cystic fibrosis sufferers died by the age of five. Life expectancy for those born between 2016 and 2020 is now 50 years, according to new data from the Cystic Fibrosis Foundation.
“We have to remind ourselves Vertex’s story in CF is pretty remarkable in our industry,” said Liisa Bayko, an analyst at Evercore ISI, whose daughter’s friend takes Trikafta. “I don’t know if I can even point to another example of this.”
People name-drop their ties to the company with pride in a city where it’s normal to list your pedigree. Notable alumni include Mark Murcko, co-founder of Relay Therapeutics Inc.; Laura Sepp-Lorenzino, chief scientific officer of Intellia Therapeutics Inc.; and Vicki Sato, a venture partner at Arch Venture Partners LP who sits on numerous biotech boards.
Vertex has snapped up talent from other biotechs, increasing its ranks to about 3,800 people, up from 2,200 since Kewalramani joined four years ago. A wall in the lobby displays pictures of people who take its drugs. So many patients visit Vertex’s headquarters that the company has organized tours. The logo on its Boston headquarters is so large you can see it from the wharfs across the harbor — symbolizing Vertex’s outsize success.
Other projects in Vertex’s pipeline include a drug to slow or block a gene called APOL1, which can cause kidney disease. Vertex plans to publish safety and efficacy results from its latest clinical trial by the end of the year, said Kewalramani, a kidney specialist.
It’s simultaneously working on manufacturing insulin-producing pancreatic cells to transplant into people with severe Type 1 diabetes, in which the pancreas doesn’t make enough insulin naturally. The company is also developing a device that could protect the transplanted cells from being attacked by the immune system.
While exciting, these medicines could take years to develop — if they work at all. “They’re taking on some enormous medical and development challenges,” said Geoffrey Porges, an analyst with SVB Leerink LLC. “They’re very interesting, but if you’re going to go for home runs, you better take a lot of swings because you’re going to miss a lot of times.”
Stuart Arbuckle, Vertex’s chief operating officer, said that misunderstands Vertex’s strategy. Narrowing the company’s focus vastly increases its probability of success, he said. Vertex spent $11.8 billion on drug discovery research and development between 2000 and 2019, most of which went toward cystic fibrosis.
Trikafta’s patents in the U.S. and Europe are good until 2037, but competition could be coming from drugmaker AbbVie Inc., which is testing its own treatment for cystic fibrosis. The company could be a serious competitor, a prospect that analysts said also weighs on the stock. Kewalramani takes a defiant tone. Any new drug, she said, would need to show it’s better than Vertex’s treatments, pointing out that Vertex is also working on its own new formulation.
Other pitfalls could loom. Trial results for the gene-editing therapies suggest they could cure painful and deadly blood disorders. Pricing, however, could be a problem. Vertex already faced controversy over the cost of the cystic fibrosis treatments: An annual supply of Trikafta costs more than $300,000.
Yet the company has overcome pricing opposition before, most notably in the U.K. Governments that resisted covering earlier cystic fibrosis drugs are now paying for Trikafta because it’s so effective, said Dan Lyons, a portfolio manager and research analyst at Janus Henderson Group Plc, which owns $785 million worth of Vertex stock.
There’s always the possibility another company could scoop up Vertex. But that could be an expensive purchase, Barrett Asset’s Kong said, leaving investors to pin their hopes for the stock’s recovery on what’s in the pipeline.
People buy biotech stocks “with the idea that most of these things are going to fail,” said Skorney. “But some are going to work and it’ll be like a lotto ticket when it works.”
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