Thursday, October 01, 2009

Vertex: What's a Biodollar Worth, Ctd.

A few months after announcing that its European telaprevir milestones were up for sale, Vertex said last night that it had signed a deal--actually a two-part deal--that would net it $155 million for the future payments from J&J.

Oddly it's the second such deal this week (as you can see by our repeated use of the photo to the right) and the second such deal in, oh, ever? Correct us if we're wrong but we haven't seen this sort of thing outside of this deal and Dow selling its milestones to Valeant.

In any case, $155 million isn't bad for $250 million worth of biobucks--of course Vertex may have to pay it all back, see below. The biobucksbuyers weren't named, as they weren't in Vertex's sale of its royalty stream on GSK's HIV protease inhibitors. CFO Ian Smith said on a call yesterday with investors that there were four buyers, with one principle investor.

Interestingly Smith broke down the kinds of buyers Vertex thought might be interested in the milestones: equity investors, royalty stream buyers, and "folks that move in the middle that do debt and equity and all kinds of top securities."

The royalty buyers were interested, but wanted a piece of Vertex's royalty from J&J, which is in the mid-20% range. That was a deal-breaker for Vertex. The equity guys--if they believed the product would be a success and therefore saw merit in buying the milestones--thought their money would be better spent buying Vertex shares, where they'd see a better return on investment. So Vertex "ended up with... more convert debt equity type money, still high quality," said Smith.

So let's take a look at the two part transaction: in transaction A, Vertex gets $120 million cash in exchange for notes securitized with $155 million in J&J milestone payments. If the payments come through as expected, by 31 October 2012, the milestone buyers get the cash. If these payments don't come through, Vertex makes up the shortfall--in any case, the buyers get $155 million, but Vertex pays nothing before 31 October 2012. In transaction B, Vertex gets $35 million in cash in exchange for $95 million of J&J milestones related to launch in any two territories. If those milestones don't come through, Vertex doesn't have to pay a dime.

Why the split? Smith again: "From an investor's perspective, they have effectively provided Vertex with $155 million which, to a certain point, is interest free. Upon the achievement of milestones, they then get their return on the $155 million." But "the allocation between $120 million and $35 million, it's important, but it's mainly important from the tax perspective of how the transaction came together."

From Vertex's perspective--and we'd define that as the 'going all-in on telaprevir' strategy--the biotech gets access to cash at a reasonable cost. Smith pins that down around 15% cost of capital, "depending on your probability of success with the milestones."

So what's a biobuck worth? In this case, that still depends, ironically, on whether telaprevir is approved and launched in Europe. For the investors who paid out $155 million, they'll get either $155 million or $250 million in return in three years (it's hard to see a middle ground). For Vertex, they get 62% of the value up-front, and if the drug fails, they pay it back.

Of course the milestone sale wasn't the only news out of Vertex yesterday. The company provided a corporate update with a few tidbits: chief commercial officer Kurt Graves has resigned, the company is pushing forward with VX-509, a JAK3 inhibitor going into Phase II in RA, and financial guidance has been updated--Vertex expects a wider loss this year. You can read all about it in "The Pink Sheet" DAILY.

Some observers have been concerned about Graves' departure (the market doesn't like something about the announcement, as Vertex's shares are off more than 6% today). But we see this as a natural consequence of Vertex CEO Matt Emmens' arrival. We don't know anything about the particular circumstances of Graves' exit, but think about it like this: when your CEO is at the core an R&D guy (Josh Boger), you bring on a top commercial guy (or gal!) to help transition the company as your product nears the market; Graves was hired out of Novartis in 2007.

But earlier this year, Vertex went and got itself a new CEO, Emmens, who is a commercial guy (read this September IN VIVO feature Q&A with Emmens about Vertex's transition for more background). His and Graves' skill-sets overlap significantly. Emmens even noted on the call yesterday in response to a question from a concerned analyst that "from my perspective, Kurt and I had very similar backgrounds ... my background is commercial and has been in a variety of areas. And I plan to get involved. We are not behind ... by any means."

Meanwhile Vertex plans to end the year with about $800 million. That is if they don't find something else to sell.

unadulterated version of image by flickr user mackius used under a creative commons license. we're really getting a lot of mileage out of a photo and a little amateur MS Paint work.

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