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Memo 2: Vertex Pharmaceuticals: R&D Portfolio Management (A)

Prepared by: Group 7

Karen Garcha

Davinia Anderson

Garrett Dorrian

Anh Duong

Rob Power

For: Dr. Cormac Mac Fhionnlaoich

February 2012

What approach should be used to make a decision like this?

Vertex has four potential projects and due to financial constraints it can only pursue two of them. Vertex needs to identify the drugs that meet the criteria outlined below.

Financial: Vertex has been a loss making company for the last five years. The company had a convertible bond (worth 315 million) which was due in the next four years and amounted to half of company cash and short term investments (Exhibit 2a). Since Vertex decided to develop drugs on its own it could not depend on any outside sources of funding. Therefore, of the 600 million the company had in cash only approximately 285 million was available to be spent on potential projects. The firm should choose the drugs that stay within these financial parameters and bring in the highest long term gains.

Probability of reaching the market: Exhibit 7 of the case shows the probability of success for each drug throughout each phase of drug development. From these figures we can arrive at the overall probability of commercialized success for each drug. These probability figures are summarized in Table 1 of the Appendices. Based on the table VX-950 and VX-148 are the best options due to high success probabilities coupled with good return on investment figures.

Qualitative risk factor: The above two approaches are based on quantitative assessment methods however a thorough analysis requires that qualitative issues be taken into consideration. The case outlines four kinds of qualitative risk that Vertex had to cope with: Target, Mechanism, Molecule and Market risk. A table of these risks can be found in the Appendices. According to our analysis VX-950 has the lowest qualitative risk whereas the VX-765 has the highest. These...