A Review of Vertex Pharmaceuticals R&D Portfolio Management

By: Emery James Baker MS, MBA

November 15th, 2010

Contents
Management Stance ................................................................................................................................. 1

Decision made but the right one? ............................................................................................................ 2

Recommendations .................................................................................................................................... 3

Functional Analysis: .................................................................................................................................. 5

Additional Strategic Issues: ................................................................................................................... 5

Symptoms of business issues - Functional Analysis .............................................................................. 5

SWOT analysis ........................................................................................................................................... 6

Management Stance
As discussed in the HBR Case 9-604-101, Vertex Pharmaceuticals had an interesting problem to
address in October of 2003. Fundamentally the financial model that the firm had existed under
was no longer viable and an alteration in spending was absolutely necessary. This is the fact
driving a major management decision to be made, Vertex needed to address its funding issues by
limiting its portfolio.

By limiting the development R&D work to focus on only two viable compounds they could
reduce spending low enough to allow the firm to accomplish a few key tasks. First the company
would ramp up and make any developments necessary in the Sales and Marketing organization.
The second was to focus on a pair of drug candidates all the way through development to sale
without partnership for the first time.

Vertex had built its business from the ground up. This required seed money as well as a
financial model that would allow the company to remain solvent while remaining in business.
The financial model they choose was to favor new drug discovery and then license out or
establish elaborate partnerships that cover drug development costs as well as Distribution/
Marketing and Sales.

Fundamentally Vertex had no true Drugs of their own on the market. Wall Street and the
licensing market in general was about to change all of that whether Vertex liked it or not. Two
issues needed to be dealt with. First Vertex was starring at a significant amount of convertible
debt that would not be refinanced under the existing financial model, what happened to the old
methodology?

Basically big Pharma was no longer interested in early stage licensing deals. Developing drugs
from early development partners was just too expensive and the market was flooded with early
development opportunities. Big Pharma wanted late stage winners. Drugs in later stage
development posed much less risk, lower development costs and still offered Big Pharma
companies high profit margins by leveraging the maturity and sheer size of their Manufacturing
and Sales organizations.

The old funding model was now dead and Vertex needed to make a change. So they decided to
narrow the pipeline and go for a drug of their own if not two true Vertex discovered, developed
and sold drugs. The question was which two and what to do from a strategic point of view with
these candidates that they would not pursue as actively, shelve them as backup solutions or
attempt to license them out for operating capital.

Decision made but the right one?

Section C of this case (HBR 9-606-117) reveals the Vertex decision. Due to extenuating
circumstances obvious candidates could not be pursued. Vertex also decided to pursue four
projects instead of limiting themselves to two (all of the following candidate descriptions can be
found within HBR case 9-604-101).

They would not pursue VX-148 (a strong candidate) due to testing results. They also decided to
focus on the Hepatitis C market and fully develop its Hepatitis C leaders. MMPD combined
with another candidate VX-950 (VX-950 was a good candidate for development as well) would
give the company a strong target market platform.
Finally Vertex would continue development on VX-765 and VX-702 but not with vigor;
however they would not be licensed or shelved. The underlying question is was it prudent to
follow this approach given all the factors and financials?

Recommendations
Hindsight being 20/20, perhaps the four product approach was a little ambitious. Ignoring the
current state of Vertex (the firm is still in business and performing well).

Figure 1 11/15/2010 Vertex Stock Price

Vertex did not achieve their goal. Somewhere along the decision process Vertex lost sight or
believed they could not obtain the goal of owning an independent product or products. The
Hepatitis C product platform development never went truly independent. Partnerships are
heavily involved in the current development of Telaprevir (VX-950).

Telaprevir is being developed by Vertex Pharmaceuticals in collaboration with Tibotec, Janssen,

and Mitsubishi Tanabe Pharma. Vertex retains commercial rights to Telaprevir in North
America. Tibotec has rights to commercialize Telaprevir in Europe, South America, Australia,
the Middle East and certain other countries. Mitsubishi Tanabe Pharma has rights to
commercialize Telaprevir in Japan and certain Far East countries. A major partnership with
Janssen Pharmaceuticals exists as well with Janssen retaining all commercialization and
development rights for VX-950 in Europe, South America, Middle East and Australia. Tibotec
and Janssen are both heavy hitters for Johnson & Johnson; this clearly puts a large market
ownership under the J&J family of companies and not Vertex.

In addition as we can see from the pipeline snapshot below, VX-702 has fallen by the wayside as
a drug candidate in serious contention. As for VX-765 (Vertex offering for treatment of
Rheumatoid Arthritis and Osteoarthritis) has had serious development slowdowns based on the
current phase 2 status in comparison to its position in 2003. RA and RA pain management has a
very profitable target market. As a matter of fact during the 2003 analysis period VX-765 was
expected to be applicable for some 21 million people. The fact that the compound is a small
molecule drug and could be taken orally was a distinct advantage in a market that is served by
injection based large molecule competition. Why is this drug not further along?
It is the position of this writing that Vertex did not make the correct decision in 2003. The
company attempted to serve too many masters and not focus on its goal. Perhaps the corporate
culture had an influence on the decision. Vertex admittedly has a culture that values everyone’s
opinion and does not mandate direction. Perhaps it was the perceived failure of VX-148 on the
cusp of decision deadlines. In either case Vertex did not focus its development efforts or
financial resources on two primary drugs. They made the attempt to develop four candidates and
did not seem to perform exceptionally.

Vertex is still following its older financial model to license out compounds and attempt t to have
larger pharmaceuticals carry the financial burden (and lions share profits if successful) Perhaps
Hepatitis C was a correct choice for a treatment target but too (or two) many compounds were
funded to allow Vertex to break the dependency bonds it must maintain with larger
Pharmaceutical companies.

Figure 2 Current Vertex Pipeline

Functional Analysis:

Additional Strategic Issues:

Vertex made serious strategic decisions that would influence their growth and survivability over the next
ten years:

 Attempt to fund and develop four compounds to market fruition

 Spread capital across new sales and marketing division as well as R&D

 Restrict Collaborative efforts to focused, small ventures

Symptoms of business issues - Functional Analysis

1. Organizational structure very indecisive

2. Constrained by an old financial model, no longer profitable
3. Unfocused R&D Spending
4. To many partners
5. Building in house Sales and Marketing from scratch while under pressure from debt
6. Authority Vs. Responsibility, battles between R&D and Corporate
7. Narrow Channels, need to embrace more revenue opportunities
8. Failures of acceptance other organizational issues from one division to another
9. Weak, young Pipeline, Products too far away to motivate
Management Functions/ Planning Organization Control

Business Functions

Top Management 1, 8 2, 3, 7 2, 3, 4, 9

Marketing 5

Finances 3 3 1

Production/ Sourcing 9 5 5

R&D/ Technology 7,9 1 3

Human Resources 5 5

SWOT analysis
Vertex Strengths
 Innovative Product Delivery Mechanism
 Fast to change
 Strong Licensing ability
 Scientific pedigree

Vertex Weaknesses
 Few novel products
 Underperformance of pharmaceutical process (too many outside partners
 Capital

Vertex Opportunities
 No brand alignment to overcome
 Growing global market
 Many promising compounds

Vertex Threats
 Mergers or acquisitions from other larger Pharmaceutical companies
 Increased competition due to other firms perfecting Vertex processes
 Competition to promising compounds
Swot Analysis Vertex Timeframe 2003

Vertex Strengths Vertex Weaknesses

 Innovative Product Delivery Mechanism  Few novel products
 Fast to change  Underperformance of pharmaceutical
 Strong Licensing ability process (too many outside partners
 Scientific pedigree  Capital

Vertex Opportunities Vertex Threats

 No brand alignment to overcome  Mergers or acquisitions from other larger
 Growing global market Pharmaceutical companies
 Many promising compounds  Increased competition due to other firms
perfecting Vertex processes
 Competition to promising compounds