Vertex executives defend R&D strategy: 'Exactly the time to double down' under pressure

Three months ago, Vertex Pharmaceuticals announced news that investors had been eagerly awaiting. The drug the company was developing for a rare genetic disease showed the expected efficacy in a small trial—raising levels of a key protein without harming patients. Executives said the finding meant Vertex could eventually pioneer a new type of drug for a disease with no effective treatments, much as it had done in cystic fibrosis.

But the announcement also included a significant disclosure: Vertex had decided the drug was not strong enough to advance to the next stage, just like another candidate it had previously tested for the same disease—alpha-1 antitrypsin deficiency (AAT). The company said it would develop better drugs and has since been trying to convince investors and analysts why it remains confident.

"Now is the time to double down, not walk away," CEO Reshma Kewalramani said in an interview with BioPharma Dive. "This is exactly the most critical moment."

These data and Wall Street's reaction reflect Vertex's current situation. Early this century, its hepatitis C drug business shrank rapidly due to competition, and since then Vertex has rebounded with four cystic fibrosis drugs that together are expected to generate annual revenue of more than $7 billion. This string of successes has made Vertex—one of the oldest and most prestigious drug developers in the biotech industry—one of the most valuable companies in the sector.

However, Vertex's diversification efforts have yet to bear fruit, and threats to its business are looming, with criticism growing. Over the past year, the company's stock has fallen nearly 30%, hitting lows not seen since 2019. Analysts have begun to question Vertex's strategy and value; among them, Brian Abrahams of RBC Capital Markets has even suggested that if recent weakness persists, the company could consider selling itself or splitting into two businesses.

"They lack recent successes to change the narrative," Abrahams said in an interview, adding that recent setbacks could shift attention away from its strong cystic fibrosis drug business.

Vertex is not the first company to reach such a crossroads. Although many have tried, few biotech companies have built multiple drug franchises strong enough to support a company. Even those that come close can stall. For example, Alexion and Celgene both faced difficulties expanding beyond their flagship drugs, and investor dissatisfaction built up over time, eventually leading to the acquisition of both companies.

"They are victims of their own success," said Stifel biotech analyst Paul Matteis of Vertex. "Many large companies in biotech reach a point where they build an excellent company on one drug, and the investment question becomes—can you do it again?"

A widening perception gap

In 2015, David Altshuler, a renowned geneticist and founding member of the Broad Institute of Harvard and MIT, joined Vertex, tasked with helping advance the company's diversification strategy. This multi-pronged plan aimed to protect Vertex from repeating the collapse of its hepatitis C business. Two years later, Kewalramani, a physician by training and former Amgen executive, joined, holding several senior management roles at Vertex before becoming CEO in 2020.

At the core of the strategy is developing drugs that have a major impact on serious "specialty diseases"—often rare diseases, where drugs can be sold at high prices and require only small sales teams. Essentially, Vertex's strategy is to become an expert in specific disease areas and iteratively advance multiple similar drugs, hoping one will stand out.

"When you truly open up a disease area, you create disproportionate value," Altshuler said in an interview, contrasting his company's approach with the more common industry strategy of "advancing as many programs as possible across broad therapeutic areas."

To that end, Vertex is willing to try any type of drug, from chemical drugs to complex gene-editing therapies, and its pipeline has changed significantly as a result.

When Kewalramani joined in 2017, all of Vertex's clinical-stage drugs targeted cystic fibrosis. Today, the pipeline is dominated by gene-editing therapies for two chronic blood diseases, oral small-molecule drugs for pain and a kidney disease, and cell therapies for type 1 diabetes, along with a new cystic fibrosis drug in late-stage trials (and, until the recent setback, an AAT treatment).

The company has also become more aggressive in deal-making, partnering with several small biotech companies at the forefront of drug research.

"I see us as an accelerating R&D engine," Kewalramani argued. She said it is difficult for a biotech company to expand from one approved drug to multiple, and "expanding from one disease area to multiple is even harder."

However, the gap between Vertex's view of its progress and that of some analysts and investors is widening. Matteis said many investors had given Vertex "the benefit of the doubt," believing its extraordinary achievements in cystic fibrosis could extend to other areas. But the company has since abandoned two experimental pain drugs and two AAT drugs, which has shaken confidence. RBC's Abrahams noted that for a company with a $7 billion business, the "maturity" of its other drugs may be "somewhat lower than people would expect."

Another analyst, Geoffrey Porges of SVB Leerink, wrote in June that unless Vertex makes a major deal or its market value shrinks enough to make it an acquisition target, he expects little to change. Meanwhile, Vertex may face another threat—data from AbbVie, its closest competitor in cystic fibrosis, is expected in 2022.

Matteis believes supporters see that Vertex has fended off many potential competitors in cystic fibrosis, has a dominant and still-growing business, and is building with discipline. But skeptics believe the cystic fibrosis drugs are already fairly valued, and the market needs confidence in its follow-on products.

An outsider's perspective

The tension between these two views has heightened the pressure on Vertex, which Kewalramani acknowledges is an inevitable part of running a large biotech company. "If you can't imagine working in a high-risk environment, drug development is clearly not the career choice for you," she said.

However, both Kewalramani and Altshuler firmly defend their R&D plans, arguing that the market has not recognized the company's overall progress.

"Observers have a narrow view. People can only remember a few things at a time," Kewalramani said. "Focus is on one thing at a time, and then it's a buildup to binary events," she said, referring to data readouts that can cause sharp stock swings.

Take AAT, for example, where both executives believe Vertex has made significant progress. Patients receiving Vertex's latest drug saw elevated levels of the key protein, which declined after stopping the drug, while the placebo group showed no such effect.

"The data we obtained strongly support continued investment," Altshuler argued. "This reminds me of where we were in cystic fibrosis five to ten years ago," he added, noting that Vertex's initial drugs for that disease also produced only "meaningful but modest" improvements in lung function markers.

"We won't declare victory before success arrives," Altshuler said. "But we have conviction."

This leaves Vertex's analysts and investors—at least for now—needing to decide whether to believe the company is on the right track in AAT and other areas. For example, Abrahams said the recent results show "a certain proof of concept" supporting Vertex's confidence, but still raise questions. These include: Vertex's AAT drug did not appear significantly better at higher doses, and the magnitude of effect the company is pursuing seems "far-fetched," as Matteis put it.

"From the outside, it's hard to know exactly what they see," he said.

Therefore, Vertex is relying on the credibility it has built over the years and asking for patience. The question facing Kewalramani and Altshuler is how much time investors are willing to give the company.

"There are no shortcuts to truly changing the lives of patients with serious diseases," Altshuler said. "The value is there, so we will do our best to achieve it."