How Eli Lilly Let a Billion-Dollar Molecule Slip Away and Make a Fortune for Vertex

8/4/10

Careers can be made in the drug development business on a single drug like telaprevir, the hepatitis C treatment from Vertex Pharmaceuticals (NASDAQ:VRTX). If it gets approved, the drug has the potential to become a leading treatment for the chronic liver disease—and to make a multibillion-dollar fortune for Cambridge, MA-based Vertex—within the next few years.

So it’s a bit of shocker to people when they find out that the pharmaceutical powerhouse Eli Lilly (NYSE:LLY), which collaborated with Vertex to discover telaprevir, gave away almost its entire stake in the drug back in December 2002. Indianapolis-based Lilly began working with the smaller Vertex to discover drugs for hepatitis C virus in 1997, and telaprevir emerged as the two companies’ lead compound in the program in 2001.

Jump ahead to this spring. Vertex, which has West Coast operations in San Diego, reported in May that telaprevir passed a pivotal test, curing three out of four patients with the disease in a Phase III clinical trial, a major hurdle in its bid to gain FDA approval of the drug. The drug, known as a protease inhibitor, is considered by some a breakthrough because it has shown that it can cure patients at the twice the rate of existing therapies. Company executives say they hope to garner permission to begin sales of the drug in 2011.

While those results have helped Vertex build up a $7 billion market capitalization, hardly anybody remembers who could have been its early collaborator. Lilly played a key part in developing and funding early research of the drug, which analysts now project could become a $2 billion annual seller in the U.S. alone within two years of its potential launch. It’s a decision that Lilly has to regret, given that telaprevir’s potential has made Vertex the third most valuable biotech company based in Massachusetts, behind only Genzyme (NASDAQ:GENZ) and Biogen Idec (NASDAQ:BIIB).

“Telaprevir would not exist if Lilly hadn’t been involved in the collaboration,” says Roger Tung, a founding scientist of Vertex who supervised the group that worked with Lilly researchers on telaprevir. He is now founder and CEO of Lexington, MA-based Concert Pharmaceuticals. “Lilly was very involved, they did a lot of work, and they contributed substantially to the science.”

In hindsight, there’s a lot to be gleaned today from Lilly’s decision to end its work on telaprevir—and Vertex’s moxie to advance the drug into initial clinical trials several years ago on its own and without the backing of a major pharma player. Two former Vertex executives, who were once intimately involved in the firm’s collaboration with Lilly, biotech investor Rich Aldrich and Concert’s Tung, shared their perspectives on the deal that, fortunately for Vertex, fell apart.

At Vertex, the research budget relied heavily on contributions from its large pharma collaborators such as Lilly, GlaxoSmithKline (NYSE:GSK), and Sanofi-Aventis (NYSE:SNY). “We did a lot of deals while I was [at Vertex],” says Aldrich, the former chief business officer of Vertex who led its initial deal with Lilly. “The Lilly deal was an important one.”

Rich Aldrich, founding executive of Vertex.

Rich Aldrich, a founding executive of Vertex.

During the collaboration, Lilly paid Vertex at least tens of millions of dollars in initial and annual fees and contributed its own scientists’ efforts to advance research of hepatitis C virus. The virus, which causes chronic damage to the liver, affects an estimated 170 million people worldwide and 3 million Americans. Existing drugs for the disease cause flu-like symptoms and patients must typically take them for nearly at year.

However, changes at both Lilly and Vertex led to the two firms’ “mutual decision” to part ways in late 2002. Officially, Lilly wanted out of its partnership with Vertex because of changes in its research priorities, and Vertex wanted to retain greater ownership of the drug than it would have if it kept Lilly as a partner, according to a Vertex regulatory filing.

Unofficially, there was more to the breakup than that.

Around the time telaprevir started nearing its first human studies, Lilly tried to renegotiate the original deal it had struck with Aldrich that heavily favored Vertex, according to Tung. Lilly had agreed to pay for clinical development of the drug, tiered royalties to Vertex on potential North American sales of the treatment in the 20-percent range, as well as a portion of funding for Vertex’s planned specialty drug sales force, Aldrich says.

“I assume Lilly’s projections for producing that molecule and running the clinical program got very high as the drug advanced,” says Aldrich, who left Vertex in 2001, the year before the company and Lilly terminated their collaboration. “Add in the projected cost of a big launch in a new area, and the royalty and marketing support built into the deal with Vertex; at some point the projected return-on-investment must have turned negative.”

Tung, who remained at Vertex until 2005, says that unspecified personnel changes at Lilly also factored into the pharma giant’s decision to nix its partnership with Vertex. “Within Lilly, there were personnel issues that led toward this not being one of their more favored programs,” Tung says. “Some of the champions of the program within Lilly eventually got sidelined, so their political ability to push this forward was compromised.” Tung didn’t name who the telaprevir champions were at Lilly, or identify who put the kibosh on the program at Lilly later on.

Eli Lilly did not return a phone call seeking comment on its former partnership with Vertex this week.

In the ultimate pact to end the deal with Lilly, Vertex kept exclusive worldwide rights to telaprevir and Lilly was granted unspecified royalties on potential sales of the drug and others discovered in their collaboration. In the years that followed, Vertex went on to form separate deals to co-develop the drug with Janssen Pharmaceutica, a unit of New Jersey-based health products giant Johnson & Johnson (NYSE:JNJ), and the Japanese drugmaker Mitsubishi Tanabe, for markets outside the United States. Vertex retains exclusive rights to the drug in this country.

Vertex aims to confirm the results of its Phase III study in data from two other late-stage trials, the first of which will be revealed this month and the second in September. As of March 31, the company has spent more than $2.8 billion since its founding in 1989, much of it on the development of telaprevir. So expectations for the drug are quite high.

“Vertex has spent a lot of money to get to this point,” says Aldrich, who still works closely with Tung as co-founder and chairman of Concert. “If telaprevir had failed or just stumbled at any point along they way, they would have been in big trouble. At this point, it looks like the bet will pay off big for Vertex.”

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  • http://telapravir Joanna Scarsella

    I cannot wait until this medicine comes out! I am excited and you have given me HOPE that I might actually defeat Hep-C that has been killing me for years.

  • Stephen Randolph

    It’s about time!!! I wish the fda would get off their butts and get this drug going. I have had hep c since 1984 and it is a lot of fun having it. Mr doctor tells me 06/11 it will be available but that is not soon enough for me. Let me try it now before any further damage is done. What is the worst thing that could happen to me…..the drug does not work so I think I should be the option to take it now or not.