I guess when your lead candidate, Teleprevir, posts SVR (sustained virological response) rates like these, in patients that have failed other courses of treatment — for the debilitating disease Hepatitis C, you can pretty much ask for anything – and get most of it. From Vertex’s press release, of this morning:
. . . .Vertex announced its intention to sell the rights to certain milestone payments tied to the future regulatory filing, approval and market launch of its hepatitis C virus (HCV) protease inhibitor drug candidate, telaprevir, in Europe.
. . . .Janssen Pharmaceutica N.V., a Johnson & Johnson company, agreed to pay Vertex a total of $250 million in aggregate milestone payments for successful development and launch of telaprevir in the European Union.
The milestones anticipated for telaprevir in Europe include $100 million related to regulatory filing and approval and $150 million related to launch of telaprevir.
Vertex anticipates, based on projected development and commercial timelines for telaprevir, and assuming successful development, that it will earn these milestones prior to April 2012. If the intended sale of the future milestone payments announced today is successful, Vertex would receive a one-time cash payment that reflects a substantial percentage of these future milestones payable by Janssen. . . .
Vertex is pretty much able to write its own ticket here. Instead of selling additional common stock, and thus diluting the various holders of the $320 million Goldman, Sachs underwritten offering of just last year, Vertex is shopping the rights to its next J&J milestone payment — a notion that would be unthinkable for a candidate like Schering-Plough’s Boceprevir. Not that any third party is heloing fund Schering-Plough’s candidate — but the molecule hasn’t posted anywhere near the efficacy data that Vertex’s Teleprevir has. It is telling that Morgan Stanley, often a banker for Schering-Plough, is structuring the auction of the milestone payments for Vertex. Let’s take a look at how this all might work out.
It is an open question, but one must start by assigning a discount, or risk value, to the possibility that Vertex never reaches the market approval trigger for the milestone payment. Me? I’d not be surprised to see the discount at which this deal gets done (exclusive of the present-value of money, or interest discount — see next paragraph) come in at under 10 percent.
Said another way, before paying a simple time-value of money discount, I think Vertex might pocket over 90 percent of the $250 million, or $225 million. Pretty impressive, given that the Teleprevir Phase III trials are still underway, and Phase II trials aren’t completely concluded.
Now, let’s surmise that Morgan Stanley is suggesting that a 3 percent annual interest/discount rate for getting the money over two years early, is appropriate, in this market. And let’s rather conservatively project that the milestones would both occur mid-2012. We’d then reduce the $225 million by another 6.09 percent (to allow for compounding, if the amount paid today, had earned 3 percent in each of the next two years, reaching $225 million by mid-2012. That interest equals $13.7 million; $13.7 million off of the $225 million leaves $211.3 million, when $225 million in 2012, is discounted to today’s value), or $211.3 million — net, to Vertex, today — from the auction. Not too bad, as haircuts go, from Vertex’s perspective.
