Vertex Company Analysis (Circa 2003)

Overview

The central challenge facing Vertex Pharmaceuticals is the problem of picking a winner when it can’t predict the future. The company’s own future requires the successful development and marketing of new drugs in order to maintain cash flows and viability.

Vertex’s has achieved Porter’s “difference” by not searching for new drugs through the common scientific procedure of random hit or miss. The core approach it uses is “rational drug design” where research efforts are guided in advance towards a known, previously identified molecular target.

Management has indicated it will develop two new drugs from four candidates, and hold or license out zero, one or two of the remainder. This creates a combination of 24 possible ways for the company to proceed (Appendix A.) One of these ways will be the best, one will be the worst.

Analysis and Directly Related Recommendations

Porter’s Five Forces Analysis

• Threat of New Entrants - The industry is always facing the threat of startup biotech companies leading to the ever-present risk that a newcomer will overturn a Vertex drug via new techniques.

Recommendation 1: The company’s strong in-house R & D must be supplemented by a global search for new ideas and techniques. This will minimize the risk of a surprise and the risk of an under-performing insular R & D dept.

• Threat of Substitutes - There are few outsiders offering true substitutes. The only practical substitute for industry drugs is taking no drug at all because of cost issues.

• Bargaining Power of Suppliers - Each of Vertex’s four candidate drugs has, in effect, its own unique supply chain with different issues. For example, development of VX-765 might harm Vertex’s relationship with its partner Aventis.

Recommendation 2: Avoiding entangling alliances with potential competitors and tripwires that limit the company’s freedom of action. Partners can slow the drug development process as occurred with Vertex’s first HIV protease inhibitor.

• Bargaining Power of Buyers - Managed health care, generics and political problems have weakened pharmaceutical companies and marginally strengthened the position of buyers and their insurers.

Recommendation 3: Vertex needs to participate strongly in industry lobbying to protect its position and the viability of future R & D in the face of short-sighted attempts to cut drug prices.

• Industry Rivalry - Many industry players offer “me too” versions of what is basically the same drug.

Recommendation 4: Vertex should avoid “me too drugs” unless the financial payoff is very large. This means VX-702, which uses “a novel approach”, and VX-765, which unlike other drugs in its class “could be taken orally”, would deliberately sidestep the threat of near- term substitutes.

Monte Carlo Simulation

• The company faces many risks inherent in the 24 possible decisions it could make, arising from target, mechanism, molecule and market risks. Further, management is undoubtedly contributing systematic bias to its own analyses.

Recommendation 5: Use the Monte Carlo simulation technique to evaluate all 18 possible decisions from a probability point of view, which is most likely to filter out bias and outperform human intuition.

APPENDIX A: Combinatoric Listing of the 24 Possible Management Decisions

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