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A Review of Vertex Pharmaceuticals R&D Portfolio Management

By: Emery James Baker MS, MBA November 15 th , 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).

Vertex (the firm is still in business and performing well). Figure 1 11/15/2010 Vertex Stock Price

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.

to break the dependency bonds it must maintain with larger Pharmaceutical companies. Figure 2 Current Vertex

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 process (too many outside partners

Strong Licensing ability

Scientific pedigree

Capital

Vertex Opportunities

Vertex Threats

No brand alignment to overcome

Mergers or acquisitions from other larger Pharmaceutical companies

Growing global market

Many promising compounds

Increased competition due to other firms perfecting Vertex processes

Competition to promising compounds