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Boston Capital

Vertex faces real world

By Steven Syre
Globe Columnist / April 26, 2011

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Just about six years ago, Vertex Pharmaceuticals Inc. shares started to take off like a rocket.

The Cambridge company’s stock, which had spent more than a year slumming around the $10 per share price range, climbed to nearly $45 within the next 10 months. The catalyst: early but very promising results for its new hepatitis C treatment.

Now five more years have gone by, the drug called telaprevir has passed every one of its many clinical tests with flying colors and Vertex has completed extensive work to manage the commercialization of its potential blockbuster. Telaprevir will almost certainly win approval from federal regulators later this week. In the biotech world, that kind of success practically qualifies as a fairy tale.

The value of Vertex shares yesterday: $48.04.

There is a lesson in the charts that map the price of Vertex shares over the past six years. It tells you a good deal about the past and should serve as a caution about the future.

The stocks of smaller drug companies are volatile investments that routinely stray from rational pricing, for better and worse. Investors are quick to embrace a new product’s potential and bid share prices through the roof. But what happens when those treatments finally meet the real world?

Vertex shares haven’t remained stagnant over the past five years. The stock has bumped up and down but still finished yesterday at a price close to its value of five years ago. As a company, Vertex is actually worth much more today because it has sold about 43 million additional shares to the public to finance its own expansion over the past five years. But any investor who bought Vertex shares in early 2006 is roughly breaking even today.

That speaks volumes about the kind of irrational exuberance that can drive a small drug company’s stock and how hard executives have to work — often for years — to just pull even with expectations measured in the price of a share.

So what about the future?

There are some reasons why Vertex shareholders could profit handsomely in the future. Telaprevir could do well out of the gate and become the combination drug of choice for other hepatitis C treatments that may be approved in the future.

Beyond the hepatitis market, Vertex is working on promising treatments for patients who suffer from cystic fibrosis. Clinical results for those treatments, described in this space last month, are very good for a small percentage of patients who suffer from the disease and more moderately encouraging for many others.

But that reality problem persists. Investors already presume telaprevir will be approved this week, and most analysts think it will soon command about 70 percent of the market to treat hepatitis C patients. Can Vertex really do even better than that?

Vertex will face competition in this market. Regulators are also considering approval for a rival drug from Merck & Co. The Vertex treatment seems to have an edge, but funny things happen in the midst of big-money competition in the drug business.

No doubt, Vertex will dramatically brighten the prospects of patients with a very serious disease soon. How investors fare is not nearly as obvious.

. . .

The state’s pension board will hold a special meeting today to talk about its ownership of Hess Corp. The pension fund owns about $28 million worth of Hess shares, representing about 0.1 percent ownership of the company. Hess has been promoting a controversial plan to build a liquefied natural gas facility in Fall River. Senator John Kerry, as well as US Representatives Barney Frank and James McGovern, wrote to state Treasurer Steve Grossman this month, asking the pension fund to divest its Hess shares. Divestiture would require an act of the Legislature.

. . .

Unicredit SpA, the big Italian bank that owns Pioneer Investments, has officially pulled the plug on efforts to sell the money management business. Unicredit announced nearly a year ago that it was going to explore “strategic options’’ for the investment business. Now the bank has decided “the best solution is for Pioneer Investments to focus on its organic growth.’’

Pioneer’s American operation, based in Boston, manages about $68 billion and employs about 575 people in the United States.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.