A Comprehensive Essay
Yes, we have stories to tell about some of our picked stocks which proved to be highly successful after being condemned by erroneous evaluations from unfair analysts. Some of these firms faced problems that are not unusual for drug designing and developing firms. While trying to overcome their obstacles, the firms in question were faced with unfortunate debilitating attacks by critics and sell-side investors in addition to incompetent bloggers filling the Internet with unfair articles against struggling, but capable firms.
Telling the stories, we believe, will deepen readers’ understanding of the difference between investors’ reactions to the news, as announced by the firms themselves, or as restated differently by the evaluators. What makes the stories in this comprehensive essay interesting is that they are real and tackle real firms that managed to pass very difficult tests with outstanding marks.
Helping the biotech firms succeed and prosper is their solid science, their breakthrough technologies, and their proven products’ tolerability and efficacy in treating diseases that had yet to find treatments. This simple reality helped to design our evaluation strategy; assessing the biotech firms’ sciences, technological capabilities and products’ promises became our priority for a fair evaluation of both the development-stage biotech firms and the revenues and incomes-generating firms. We did not ignore other technical market criteria which also directly, and indirectly, influenced the biotech stocks’ performances in the stock market.
Most of the essay stories are informative and interesting. They are about firms that struggled but ended up producing breakthrough blockbuster products that made huge improvements in the biological and pharmacological sciences. These advancements have improved clinical methods; they were proven to be game-changers in the diagnoses and treatments of chronic intractable and life-threatening diseases, including cancers.
Vertex Pharmaceuticals: The First Case in Point
Founded in 1989 by Joshua Boger and Kevin J. Kinsella, Vertex Pharmaceuticals (VRTX) was one of the first firms that used rational drug design as opposed to combinatorial chemistry in creating targeted products. Rational drug design involves constructing the designs of the product based on the target that the scientists want to block or support. That’s what created the ability for Vertex to start its life as a scientific creator, professor, and a leading institute of biological sciences.
In the beginning, Vertex’s pipeline was focused on viral infections, inflammatory diseases, autoimmune disorders and cancer. Vertex’s early pipeline and marketed products were targeting devastating and life-threatening infections, including AIDS & Hepatitis C Viral (HCV) infection. Both HIV and HCV treatments were granted approvals in the United States and Europe.
Investor’s reactions to the approvals boosted the firm’s stock price, but not for long.
Vertex’s HIV treatment could not beat the competition from Gilead Sciences (GILD) and other firms’ products, which led many analysts to downgrade VRTX and its market performance.
Vertex’s HCV treatment, which was expected to be a cure, caused intolerable itching and could not compete with Gilead’s or AbbVie’s (ABBV) HCV products.
The setbacks led analysts to downgrade Vertex’s stock and led the sell-side investors to instigate a selloff of VRTX. While the stock was tumbling, the firm’s’ scientists’ were working towards selecting the firm’s next project. Cystic fibrosis (CF) was one of the possibilities. Designing products that can treat CF could be the best choice that might put the firm on the road towards generating future growth. Vertex did not waste any more time and made the decision to act. Vertex was lucky to find out that the the Cystic Fibrosis Foundation was ready to help.
The Cystic Fibrosis Foundation
In 1989, scientists who were supported by the Cystic Fibrosis Foundation discovered the CF gene, the root cause of CF’s devastating disease. Unfortunately to the detriment of CF patients, their families and friends, much of whom believed that the discovery of the CF gene would quickly lead to the design and development of new drugs to fight CF, their dreams did not materialize.
About a decade later, two important CF drugs were created and approved, with the Foundation’s support. The problem with these products was that the two drugs were not breakthrough treatments and did not address the underlying cause of the disease. All they accomplished was to overcome some CF symptoms.
In 1998, Robert J. Beall, Ph.D., then president and CEO of the Cystic Fibrosis Foundation, decided to fund drug development among for-profit companies a step considered a major gamble. Regardless, Dr. Beall began contacting pharmaceutical firms for partnership. Two drug companies returned his calls in the year 2000; Aurora Biosciences was one of them. This firm got the job and $40 million; Vertex Pharmaceuticals accepted the challenge of discovering compounds that would correct the core genetic defect in people with CF.
In 2014 the Cystic Fibrosis Foundation sold royalty rights for CF treatments developed by Vertex for $3.3 billion bringing resources to the fight against CF which was never thought possible. Under terms of the agreement with Royalty Pharma it is possible the Foundation may receive additional funds in future years.
The Foundation has also explained that the funds will be used to accelerate the development of lifesaving new therapies, to provide high-quality care and programs that support people with CF and their families as well as to pursue daring new opportunities to one day find a lifelong cure.
Furthermore, the Foundation is currently funding research programs with leading biopharmaceutical companies, including Pfizer (PF), Genzyme, Editas (EDIT) and others. The Cystic Foundation has stated on its website that it has invested $425 million as part of its venture philanthropy model to accelerate drug development for CF.
While looking at Vertex’s history and struggles we did not see it as a failing company but as a biotech firm that has solid science, creativity and a great capability for designing targeted drugs. Instead of rushing to act negatively against the stock, we looked carefully at what happened regarding its HIV and HCV products and concluded the following:
- Vertex owns a drug design capability that a few firms from among hundreds of biotech companies have, which is an advantage.
- The firm has been capable of developing and marking two extremely important drugs for two debilitating and life-threatening diseases. At the time very few firms were capable of designing and developing such novel products.
- The firm’s management has demonstrated strength, dependability, courage, knowledge and diligence.
We decided to look at the firm’s technological capabilities, pipelines of products, lead products and the diseases they are supposed to treat. Regarding the diseases, we looked at whether they had ever been treated before or just needed to improve its treatments. We also looked at how big or small the markets are for the disease and the number of competing treatments that might have been developed by other firms.
We looked at all these subjects before we considered looking at the technical criteria that might also affect the performances of the biotech stocks. Our rule of thumb dictates that a biotech firm with negative technical criteria and a pipeline of promising products can succeed and grow while a firm with positive technical criteria and a negative pipeline of products are sure to fail.
So before we picked Vertex we looked carefully and deeply into the disease the firm embarked on treating. This is what we found:
Cystic fibrosis is an inherited life-threatening disease that affects many organs. The disease is caused by a mutation in the cystic fibrosis conductance transmembrane regulator (CFTR) gene. The CFTR mutations cause changes in the body’s cell’s electrolyte transport system, causing the cells to absorb too much sodium and water. It causes problems with the sweat and mucous glands.
- A person will be born with CF only if 2 CF genes are inherited–one from the mother and one from the father.
- CF affects the respiratory system, the digestive system and the reproductive system.
- It affects the pancreas.
- The secretions from the pancreas become thick and clog the pancreatic ducts, causing a decrease in the secretion of pancreatic enzymes that help digest food.
- A person with CF has trouble absorbing proteins, fats, and vitamins A, D, E and K.
- Severe pancreatic problems cause the death of pancreatic cells, which could lead to glucose intolerance and Cystic Fibrosis-Related Diabetes (CFRD).
- The symptoms of CF that may be due to involvement with the GI tract include Bulky, greasy stools, rectal prolapse, delayed puberty, fat in the stools, stomach pain and bloody diarrhea.
- A small number of people may develop liver disease, including, enlarged liver, swollen belly, yellow skin, and vomiting of blood.
- Most males with CF have blockage of the sperm canal. This is called the congenital bilateral absence of the vas deferens (CBAVD). This results from the thick secretions clogging the vas deferens causes infertility.
Looking at the complexity of CF, the young people it devastates and the early deaths it causes, with no treatment existing until the early 2000s, we realized how important the job that the Cystic Fibrosis Foundation has asked Vertex to do. We also realized how difficult this job has been. We decided to follow up on the firm’s work so we can consider whether or not to pick VRTX as an investment opportunity.
At that time Vertex was a stock to downgrade by the analysts, to forget about by investors, a game to play by day traders and to continue selling by sell-side investors.
Following up on the firm’s scientists’ work was important for us. If the Vertex group would succeed in designing treatments that can deal with CF at its root-origin, the firm’s stock price would soar.
On March 18, 2011 we decided to pick VRTX at $44.39. The stock is trading now at $228, after giving away more than $3 to profit-taking following a rally in the past two trading days that added around $12 to the stock price.
To Be Continued…
In part 2 we deal with the following questions:
Why did we pick Vertex? What did they do?
What’s going on with the firm’s Cystic Fibrosis products: Kalydeco, Orkambi, and Symdeko, and the newly approved Trikafta?
What does Vertex intend to do with gene editing they now have access to through their collaboration agreement with CRISPR Therapeutics (CRSP)?
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