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No. of Recommendations: 8
Me again, same invitation, more confused after reading xerohype's biotech seminar post re not mixing GG with biotech, and all the gorilla stuff in the KARB criteria. So, I'll copy my VRTX summary and let you all decide whether I should try to pursue it further:

-------------------------------------------------------

Historical Perspective:

I became turned on to VRTX through reading The Billion Dollar Molecule by Barry Werth. The book is extremely well written, and follows VRTX from conception through IPO, which encompasses approximately 1989-1991, although there is a lot of jumping back to earlier, formative events influencing the people & companies central to the story: Josh Boger (founder & CEO of VRTX), Max Tishler (Father of Merck), Stu Schreiber (brilliant scientist first with, and then competing with VRTX, founder of Ariad), and Thomas Starzl (Pioneer of organ transplantation).

I wish I could do a proper review, but the typing thing is killer. I do highly recommend the book for those who are interested and/or speedy readers. For this, I'll enumerate the parts that stand out in my mind:

1. Growing up in N. Carolina, graduating at the top of his class at Wesleyan (where he trained with Max Tishler), getting his Chemistry Ph.D. at Harvard, & then becoming (I believe) the youngest senior director of Chemistry at Merck, JB left to found VRTX in 1989. It was his conviction (which I strongly resonate with) that location was critical & that the critical location was Cambridge - home to Harvard University & the Massachusetts Institute of Technology.

2. JB planned on calling his company Veritas, which is Harvard's motto. Sounds like it took every person in the company & then some to convince him that this was pushing things just a little too far. He finally modified this to Vertex.

3. JB insisted that his scientific advisory board include top scientists both from academia and industry, a novel and difficult idea as these two types of scientists often thrive on mutually exclusive values and goals. In fact, this was to lead to some difficulties with S. Schreiber that would really push VRTX to its limits.

4. When S. Schreiber solved the 3-D structure of FK-506 Binding Protein, submitted his paper to Science and then told JB about it, rather than give up JB kicked out the jams and had his people solve the structure by complementary measures in approximately 1 month (this is 1991). When Nature rejected VRTX's first manuscript without sending the paper out for review, JB not only got the rejection reversed, but had the publication expedited to coincide with the Schreiber paper.

5. While much is made of Mark Levin's ability to strike tremendous deals for MLNM (all completely deserved, IMO), the example often used is the ~$500 million deal with Bayer. On May 9th, VRTX & Novartis established an$800 million alliance for drug discovery & early development wrt the family of protein kinases.

Current Drug Sales

For the
nine months ending September 30, 2000, Vertex's royalty revenue of approximately $9,005,000
was based on worldwide sales of Agenerase™ by Glaxo Wellcome of approximately $60 million.

Cambridge, Massachusetts; October 23, 2000 -Vertex Pharmaceuticals Incorporated
(Nasdaq: VRTX) announced today that its collaborator, Glaxo Wellcome, has received approval
from the European Commission to market the HIV protease inhibitor (PI) Agenerase (amprenavir),
in all 15 countries of the European Union. Agenerase is indicated in combination with other
anti-retroviral agents, for the treatment of PI-experienced HIV-infected adults and children above 4
years of age. In connection with today's announcement, Vertex will receive a $3 million milestone
payment from Glaxo Wellcome, payable in the fourth quarter of 2000.

It's pretty clear that VRTX is not even close to the $150 million mark yet.

The Pipeline:

Vertex's most advanced ICE inhibitor, VX-740, is in Phase II clinical development for the treatment of rheumatoid arthritis as part of a worldwide collaboration with Aventis S.A. Vertex's ICE inhibitors have the potential to treat a range of inflammatory, cardiovascular, and neurological diseases. As part of the agreement, Aventis will pay Vertex up to $206 million for the development of HMR 3480/VX-740 in three different indications, and Aventis will pay for 100% of development costs. Vertex will receive royalties based on product sales, and retains co-promotion rights in the United States and Europe.

Vertex's most advanced p38 MAP kinase inhibitor, VX-745, is in Phase II clinical development in collaboration with Kissei for the treatment of rheumatoid arthritis.

Vertex's most advanced IMPDH inhibitor, VX-497, is in Phase II clinical development in combination with interferon alpha for the treatment of hepatitis C virus infection. (January 21:Phase II trial begins with IMPDH Inhibitor VX-497 for the treatment of psoriasis).

Vertex remains actively involved in the discovery and development of next-generation HIV protease inhibitors. A prodrug of amprenavir, named VX-175, is in Phase II clinical testing with development partner Glaxo Wellcome.

Incel™, an intravenous compound, and VX-853, an oral compound, are intended to be administered in combination with cancer chemotherapy agents. Phase II trials investigating the activity of Incel in combination with other agents for the treatment of advanced refractory ovarian cancer and small cell lung cancer are currently underway. Data from a broad Phase II program of six clinical trials, evaluating Incel's potential to resensitize drug-resistant tumors to chemotherapy in a range of cancer types and therapeutic regimens, is providing the basis for designing a Phase III clinical development strategy for Incel.

Vertex recently completed a study of timcodar in patients with diabetic neuropathy, assessing safety and pharmacokinetics over a 28-day dosing period. In 1998, Vertex began collaborating with Schering AG of Germany on the discovery, development and commercialization of neruophilin ligands for the treatment of neurological disease. Schering AG has an option to develop and market timcodar. Timcodar is currently in Phase II clinical trials.

Vertex's drug VX-148 is a potent inhibitor of IMPDH in cells believed to be responsible for the over-active immune response produced in patients with autoimmune diseases. According to the biotech club interview, VX-148 is now in Phase I trials.

In Summary, 7 compounds in Phase II trials = 2 + 1 in Phase I = 0.2, so CCI = 2.2 (the phase 1 is a little iffy at present, so I'll go with an even 2).

Incel in separate Phase II trials for cancer of prostate, ovary, breast, soft tissue sarcoma, and lung (small cell).

VX-497 also in Phase II for Psoriasis

TCI = 12(.286) = 3.43

A Closer Look at the Pipeline:

While VRTX is involved in a variety of diseases based on their small molecule expertise, I'll try to focus on their involvement in the treatment of rheumatoid arthritis, an autoimmune disease affecting primarily the joints.

Autoimmune disorders occur when the body's immune system turns against itself, attacking various tissues as if they were foreign pathogen. There are more than 50 distinct autoimmune diseases and syndromes which affect about 5% of the population. Examples include rheumatoid arthritis, multiple sclerosis, Crohn's disease, lupus, and psoriasis. The total societal disease burden for autoimmune disorders is difficult to estimate because while some of these are chronic debilitating diseases, others are less serious. However, autoimmune disorders are felt to be among the most expensive diseases faced by society. As a result, they are the subject of significant research in both academic and industrial laboratories, with therapeutic approaches ranging from gene therapy to antisense to administration of antibodies, vaccines, and a variety of cytokines.

Many current therapeutic strategies attempt to downregulate the entire immune system by causing generalized immunosuppression, in the hope that this will reduce the specific action of the T cells involved. Unfortunately, generalized immunosuppression has not met with the success expected, and may lead to a variety of serious side effects including life threatening infections with microorganisms that would not normally pose a threat to an untreated individual. Newer approaches are employing therapies based on immunomodulation, rather than immunosuppression, by
administration of cytokines such as interferon (IFN).

In the US, rheumatoid arthritis affects about 43 million people, or about 15% of the population, at a total disease burden close to $65 billion. Prescription sales of drugs used to control the disease are in excess of $3.5 billion, growing at about 11% annually. I got these numbers from an article that cited www.tdrdata.com, which appears to require a subscription. Currently, a great deal of attention is focused on nonsteroidal anti-inflammatory drugs which inhibit the cyclooxygenase (COX) enzymes. COX-1 and COX-2 are central to the production of prostaglandins, produced in excess at sites of inflammation. COX-1 synthesizes prostaglandins that are involved in theregulation of normal cell activity, whereas COX-2 produces prostaglandins mainly where inflammation occurs. Thus, selective inhibition of COX-2 in particular is sufficient to limit inflammation significantly, and COX-2 inhibitors, such as Celebrex, are heavily prescribed. There are still some concerns about side effects arising from the inhibition of a key enzyme in tissues and organs other than the ones affected by the disease, such as the kidney and the brain.

In vitro models of arthritis based on tissue culture of rheumatoid synovial fibroblasts. The latter are being used increasingly to study specific signal transduction mechanisms in the disease. This is where VRTX comes in, as indicated by these excerpts from a recent press release:

Vertex announced today the selection of VX-954 and VX-702 as new drug development
candidates from the Company's p38 MAP kinase research program. P38 MAP kinase is an
enzyme that regulates the production of interleukin-1 beta, interleukin-6 and tumor necrosis factor
alpha, which are involved in acute and chronic inflammatory response. Inhibition of p38 MAP
kinase may be an effective strategy for slowing the progression of acute and chronic inflammatory
reactions. As part of a collaboration with Vertex, Kissei Pharmaceutical Co., Ltd. holds an option
to develop VX-954 and VX-702 in Japan and other Far East countries. Vertex's p38 MAP kinase
inhibitors have the potential to treat a range of inflammatory and cardiovascular diseases. Vertex's
most advanced p38 MAP kinase inhibitor, VX-745, is in Phase II clinical development in
collaboration with Kissei for the treatment of rheumatoid arthritis.


AND

Vertex announced today the selection of VX-765 as a new drug development candidate from the
Company's ICE research program. ICE is an enzyme that regulates the production of IL-1 and IFN
gamma, intercellular mediators that initiate and sustain the process of inflammation. Inhibiting ICE
may be an effective strategy for curtailing damaging inflammatory processes common to a number
of acute and chronic conditions. Vertex's most advanced ICE inhibitor, VX-740, is in Phase II
clinical development for the treatment of rheumatoid arthritis as part of a worldwide collaboration
with Aventis S.A. Vertex's ICE inhibitors have the potential to treat a range of inflammatory,
cardiovascular, and neurological diseases. Vertex retains development and commercial rights to
VX-765 and other drug candidates that may be selected from the Company's second-generation
ICE research program.
The drug candidates announced today represent classes of compounds that are distinct from
first-generation inhibitors designed by Vertex that are now in clinical development. Each was
chosen from among several lead candidates that met stringent criteria for selection, including
potency, bioavailability, half-life, ease-of-synthesis, and preclinical indicators of safety. Each drug
candidate has demonstrated a therapeutic effect in two or more models of disease activity.


So VRTX is on the bleeding edge of rational drug development for treating highly prevalent diseases with huge market potential. Great. Any competition?

In their October supplement on Industry Trends, Nature Biotechnology has a table entitled Selected companies with arthritis R&D programs which lists 36 companies with products anywhere from Lead to Market. Selecting from companies we've talked about:

On the market: Immunex's Enbrel (soluble TNF receptor)

Phase III: IFN-gamma (BGEN), TNF-alpha MaB (CAT)

Phase II: IL-8 MaB (ABGX), oral TNF-binding protein (AMGN)

And the list goes on…

The same issue contains a review of signal transduction, from which I excerpted the following:

As almost all known diseases exhibit
dysfunctional aspects in these networks, there has been a great
deal of enthusiasm for the prospect of identifying novel drug
targets based on knowledge of key signal transduction
components and their links to disease.
Because of their link to disease, all major pharmaceutical and
biotechnology companies have active drug discovery programs based on understanding signal transduction pathways.


-snip-

Signal transduction companies currently face two key
challenges: First, the pathways themselves are still far from
being completely understood. Second, key pathway
components suspected of participating in disease will have to
be validated as potential drug targets.


-snip-

With all the current excitement over genomics-based drug discovery, signal transduction platforms are sometimes less highly valued as a means to creating novel therapeutics.
However, it must be kept in mind that gene sequences alone
are not sufficient to provide novel drug targets. This is where a
drug discovery platform based on interacting molecules inside
cells is very powerful. Various genomic and proteomic
approaches are contributing toward mapping signal
transduction and linking it to disease, and this platform
promises to have a very significant future in drug discovery.


I'm not including links because they are so long they wreck the formatting on the board. If you want to check out this excellent resource, from which most of my information has been drawn, go to www.nature.com, choose Nature Biotechnology from the pull down menu, then choose supplements from the Nature Biotechnology Table of Contents page.

I am reminded of something Warren Buffett said in the 1999 Fortune interview:

The other truly transforming business
invention of the first quarter of the
century, besides the car, was the
airplane--another industry whose plainly
brilliant future would have caused
investors to salivate. So I went back to
check out aircraft manufacturers and
found that in the 1919-39 period, there
were about 300 companies, only a
handful still breathing today. Among the
planes made then--we must have been
the Silicon Valley of that age--were
both the Nebraska and the Omaha, two
aircraft that even the most loyal
Nebraskan no longer relies upon.

Move on to failures of airlines. Here's a
list of 129 airlines that in the past 20
years filed for bankruptcy. Continental
was smart enough to make that list
twice. As of 1992, in fact--though the
picture would have improved since
then--the money that had been made
since the dawn of aviation by all of this
country's airline companies was zero.
Absolutely zero.

Sizing all this up, I like to think that if I'd
been at Kitty Hawk in 1903 when Orville
Wright took off, I would have been
farsighted enough, and public-spirited
enough--I owed this to future
capitalists--to shoot him down. I mean,
Karl Marx couldn't have done as much
damage to capitalists as Orville did.

http://www.fortune.com/fortune/1999/11/22/buf5.html

Alliances:

Forgetting about the HIV protease inhibitor agreements with Glaxo & Kissei, which began in 1993 & totaled $62million (since all but $2million have already been paid as of 12/99), VRTX has 6 agreements with big pharma (Kissei, Aventis, Lilly, Schering, Taisho, and Novartis). 2 began in 1997, 1 in 98, 2 in 99, and 1 in 00. Total $$ involved are: Early - $28 million, Mid - $290 million, and Late - $906 million, for a total of $1.22 billion. As of 12/99, approximately $50 million has been paid, leaving up to $1.17 billion to be collected in coming years. The crown jewel was the $815 million agreement with Novartis earlier this year, which I believe holds the record for biggest deal between biotech & big pharma.
http://www.vpharm.com/frame09.html

These deals seem critical to VRTX as 85% of revenues for 1st 9 months of 2000 came from these, with 15% from sales & royalties ($49 million & $9 million, respectively).

For the qualitative aspects, I'll refer back to the biotech club interview with CEO Joshua Boger:

Working with Big Pharma...

Q: Vertex seems successful at striking deals with Big pharma. How do you divvy up the leads with other companies that you are in agreement with?


There are no two of our agreements that are exactly alike. I can speak to the Novartis agreement. There are a lot of unusual things about that agreement, favorably unusual forus. One of the more unusual things is that Novartis has virtually no control over the research and early development process… It's our choice [as to] which kinases to work on, and which disease categories to concentrate on, which compounds to select, and what the criterion for selection is. And that agreement has us taking compounds all the way into man and into the earliest proof of concept studies in man. That agreement has them able to take up the development at the clinical proof of concept point, and they can elect to do that and continue the development with their dollars and expertise… They have a very big investment, not only of dollars, but they've ceded the kinase area for the next six years to us. That's a big cede. If they [are not interested in pursuing a lead], it reverts to us. A lot of these agreements are structured so that if the partner doesn't take it, they still get to hold it, keep it captive. In this case,you really have to listen to them, otherwise you can't extract any value from it.

I think our goal is to deliver more drugs than we are committed to delivering to them. We hope to overperform. Even so, I think we'll both be listening to each other's needs and opinions…it really is a partnership among equals, this is how it is constructed.

Q: How do you decide on striking a deal with pharma that will provide funds now in exchange for potential royalties later, instead of looking to private or public equity offerings?

It's interesting. I don't think it's as black and white. I'll give an example in an another agreement. Our agreement with Aventis is on our inflammation compound VX-740, which is in Phase II studies in rheumatoid arthritis (RA) this year and larger Phase II studies. The compound has the potential to be applied not just in RA where we're studying it right now and where they're studying it and where they're paying for the trials. [But the compound also has potential in] osteoarthritis and a number of otherdiseases…
Quite literally, if we hadn't done that deal, I do not know how we would have studied the compound in osteoarthritis, because the trials would be not just expensive, its not just [about] money … but the trials are logistically very difficult to run. And in the end, the drug would have to be sold through general practitioners, so if you thought about selling it yourself in the US, you would need 5000 sales people for a start, and you need them on the ground. I think the total dollar return is larger by having the Aventis deal, assuming it does get developed for osteoarthritis, then if we hadn't done the deal. So if you say, "Did you give up something to Aventis?", well it was a net positive. Absolute positive. Now I don't even to have to go to the risk/reward sharing. They also have all the risk. But that's almost a bonus in that case. I've not only off-loaded all the financial risk, but I think I've also increased the potential market by two to threefold, and in that deal still retained 30-40% of the margin of everything that's done. That's an easy equation. I'm ahead on an absolute basis.

Q: And do you typically approach several companies before signing this type of a deal?

Every deal we've done has been different… In some cases, we've talked to lots of people in simultaneous business discussions. Making a business deal is all about understanding the other person's needs. If you quickly find out about the person on the other side of the table, and can put yourself in their chair and find out what's valuable to them…and you find that what you can bring to a collaboration or a deal is very high from their perspective, then you have a higher likelihood of making it… I often hear that, "If you come into a business arrangement, we'll bring this of value". Well this same"thing" you bring of value has very different value to different people. It's more important to assess the value to the other person rather than it is to think of it as a block of gold.

That's the way we look at the business development.


Management:

Digger:

For any company that is trying to develop a therapeutic product for market, whether it is a drug, biologic or device, I like to see someone on the Sr. Management team with direct responsibility for quality and technical devlopment as differentiated from science or R&D. In these small companies, when I see a VP with Product Development/Quality Systems mentioned, I know that Sr. Management has experience with manufacturing a regulated product. It is my opinion that there are failures in approval which are due to inability to handle scale-up, quality control and quality assurance, rather than the actual safety and efficacy of the product. I also think, although I can't prove this, that it is likely that some products which fail in Phase IIs due to lack of efficacy, fail because of problems with formulation, clinical supply and manufacturing quality, but I can't prove that.
http://boards.fool.com/Message.asp?mid=12034414

John J. Alam M.D. , Vice President of Clinical Development
Dr. Alam joined Vertex in October 1997 from Biogen, Inc., where he held a variety of positions from 1991-1997, including Director of Medical Research and Program Executive for Avonex (beta interferon). Prior to joining Biogen, Dr. Alam was a Research Fellow at the Dana Farber Cancer Institute and had completed an internal medicine residency at Brigham and Women's Hospital in Boston. Dr. Alam holds an M.D. from Northwestern University Medical School and a S.B. in Chemical Engineering from the Massachusetts Institute of Technology.

Bjanssen:

So far the best management structures I've seen in biotech have two things in common.

1 The board of directors either includes a couple of very very good scientists OR they use a scientific advisory board. These scientists are sometimes at the tail end of their career maybe still teaching maybe editing some journals but sometimes these folk are very active scientists still.

2 The second thing I've seen in good biotech management structures is a CSO or chief scientific officer.

http://boards.fool.com/Message.asp?mid=12811110&sort=username


Scientific Advisory Board
Vicki L. Sato, Ph.D., Chairman of the Scientific Advisory Board

Steven J. Burakoff, M.D., Chair, Department of Pediatric Oncology, Dana- Farber Cancer Institute; Professor of Pediatrics, Harvard Medical School

Eugene H. Cordes, Ph.D., Professor of Pharmacy and Chemistry, University of Michigan at Ann Arbor

Jerome E. Groopman, M.D., Chief Division of Experimental Medicine, Beth Israel Deaconess Medical Center; Recanati Chair of Medicine and Professor of Medicine, Harvard Medical School

Stephen C. Harrison, Ph.D., Higgins Professor of Biochemistry, Harvard University; Investigator, Howard Hughes Medical Institute; Professor of Biological Chemistry and Molecular Pharmacology and Professor of Pediatrics, Harvard Medical School

Jeremy R. Knowles, D. Phil., Dean of the Faculty of Arts and Sciences and Amory Houghten Professor of Chemistry and Biochemistry at Harvard University

Robert T. Schooley, M.D., Tim Gill Professor of Medicine and Head of Infectious Disease, University
of Colorado

Vicki L. Sato Ph.D., Senior Vice President of Research & Development, Chief Scientific Officer

Dr. Sato joined Vertex from Biogen, Inc. where she was Vice President, Research and a member of the Scientific Board. As research head at Biogen, she directed drug candidates in the fields of inflammation, immunology, AIDS therapy and cardiovascular therapy from early research into advanced development. Dr. Sato received her A.B. in Biology from Radcliffe College and A.M. and Ph.D. degrees from Harvard University. Following postdoctoral work in chemistry and immunology at U.C. Berkeley and Stanford Medical School, she was appointed to the faculty of Harvard University in the Department of Biology.

Zeke/Jeff/Haseltine:

So, look at the past track records of company executives. Where did they come from? What are they known for? Where have they worked?

Dr. Haseltine next suggests reading the articles published by the company's scientists.
http://boards.fool.com/Message.asp?mid=13625187

Joshua Boger Ph.D., Chairman, President & Chief Executive Officer
Dr. Boger is Vertex's scientific founder and was Senior Director of Basic Chemistry at Merck Sharp & Dohme Research Laboratories. He headed both the Department of Medicinal Chemistry of Immunology & Inflammation and the Department of Biophysical Chemistry. In 10 years at Merck, he developed an international reputation as a leader in the applications of computer modeling to the chemistry of drug design. He applied these techniques to the design of compounds in a number of therapeutic areas, including aspartic protease inhibitors. Dr. Boger received a B.A. in Chemistry and Philosophy from Wesleyan University, and M.A. and Ph.D. degrees in Chemistry from Harvard University in the laboratories of Professor Jeremy Knowles. He did postdoctoral research in molecular recognition in the laboratories of Professor Jean-Marie Lehn in Strasbourg, France.

Recent reviews by VRTX scientists:

Structure & Function of Hepatitis C virus NS3 helicase CTMI 2000
NMR Screening in Drug Discovery Curr Opin Biotech 1999

My weekend reading:

Reduced apoptosis and cytochrome c-mediated caspase activation in mice lacking caspase 9 (includes a cover photo – does that count extra?) Cell 1998

Cell articles on IMPDH, Hepatitis C protease
Nature and Science articles on IL-1 converting enzyme (ICE)

Which brings me to the good backing stuff. It seems to me that this is already sort of covered by the alliances with big pharma, as their scientists are in a much better position to judge the value of a biotech's science than Bill Gates

Patents: 185 patents or pending (about equal numbers of each). They seem to my eye to be significant work for the most part. Like my hero, Phil Fisher, I don't want to put too much emphasis here. So, I won't.

The M ratio (or whatever it's called):

$5 million/$290,000 = ~17.

Rulemaker Metrics:

Sales Growth:

Q3: 2000 – 13,866; 1999 – 7,225 = 190% Q3/Q3 growth.
1st 9 month numbers: 58,423/23704 = 146% growth

R&D/Sales:

Q3: 21,348/13,866 = 150%
1st 9 months: 59,776/58,423 = 100%

Gross Margin:

1st 9 months: Royalties & product costs = $3119, therefore GM = 95%

I assume this is a result of alliances where other pharma do the selling (in this case Glaxo), so I don't know what this metric tells us, if anything

Net Margin:

Net Income (due mostly to the cost of R&D) = -10,483 for Q3; -14,029 for 1st 9 months.

Cash King Margin

Cash flow statement did not accompany Q3, but is available for Q2/ 1st 6 months. For 1st six months of 2000: Net Income = -$3546, but Cash from Operating Activities = +$7428. Property & equipment cost $4432, leaving us with Operating Cash Flow = $2996, and CKM = 2996/44,557 (total revenue for 1st 6 months) = 7% (which just meets the old RM criteria). Also, as VRTX is generating rather than consuning cash, we don't need to be concerned with the "burn rate".

Cash-to-debt:

As of 9/30/00:

Cash, cash equivalents, and ST investments = $713,347
Long-term obligations (their term, and I like it) = 348, 121

Therefore Cash to LTD = 2 (comfortably above the desired 1.5)

Foolish Flow Ratio:

As of 9/30/00

Total Current Assets = $722, 185
Cash, CE, STD = $713,347
Current Liabilities = $199,837
ST Debt: ..the remaining $162 million of the $175 million aggregate principal amount of the 5% convertible subordinated notes due March 2007 were converted into VRTX common stock.

Assuming this all means that there is no short-term debt, the Flowie = (722,185 – 713,347)/199,837 = 0.04, which sounds a little too good to be true!

Most of these metrics look pretty good for VRTX, though I really have a hard time thinking about what the gross margin, operating cash flow/cash king margin, and Foolish flow ratio mean for a Tier 2 biotechnology company.

In thinking about these RM type metrics, I realized that VRTX does fairly well with the exception of net and cash king margins. I also realized that the reason for this is the relatively huge amount of sales $$ which are put into R&D (100%). While this is very important for a biotech company, and would make Phil Fisher happy, I wanted to figure out how much VRTX would have to decrease their R&D budget (assuming this was the only place they could cut back for the argument's sake) in order to pass all RM criteria. For this little fantastical excursion, I also assumed that sales growth & the flow ratio would suffer by an equal percentage to the R&D cuts (30%). Also, as there is no RM criteria for R&D/Sales, I used AMGN's 25% as a surrogate criteria.

RM Criteria VRTX(actual) VRTX(model)

R&D/Sales 25% 100% 70%
Rev Growth 10% 190% 130%
Gross Margin 50% 95% 95%
Net Margin 10% -24% 10%
CashKing Mgn 10% 7% 35%
Cash/LT Debt 1.5 or greater 2 2
Flow Ratio 1.25 or less 0.04 0.06

In my neverending attempt to try to figure out how much to pay for a share of VRTX, I calculated the P/GF for VRTX, even though net income is negative. I came up with 80, which is a far cry from 10 or less recommended in L10. OH, well…

I think that VRTX is a great company with Top Dog/First Mover status in the use of protein structure to develop novel therapeutic agents. As the field of proteomics emerges, I think that it is likely that VRTX will blossom into a full-fledged pharmaceutical compant that will be called upon to translate data from Syrrx, SGX, and the like into marketable agents.
When asked by VCs what makes VRTX special, Josh Boger's standard reply is : I know what a drug is. Simple, yes, but to the point.

Is VRTX a great stock at current valuations? I don't know. Feel free to let me know any and all thoughts you have on this that might help us to decide whether this is true (as I suspect it is) or false (as I suspect it is for MLNM at current valuations).
http://boards.fool.com/Message.asp?mid=13689648&sort=recommendations

-------------------------------------------------------

I think that VRTX may be a RB in the traditional TMF sense, but not a gorilla candidate, whick seems to be what you are looking for here.


Please let me know your thoughts on this.

Thanks,

Mark

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