Big Pharma's valuations are depressed; biotech is red-hot. Alliance volumes have fallen, but average deal values are up. The valuation divide masks the subtler cracks dividing biotech's elite from a mass of undifferentiated technology providers. Drug companies are recognizing that basing discovery programs around new, proprietary targets is highly risky and lengthens R&D time. Targets themselves, absent optimized lead compounds, are increasingly commoditized. Therefore, companies who don't provide integrated discovery capabilities aren't going to get the high-value deals that will justify their current, sky-high valuations. Meanwhile, companies with integrated solutions must back up their promises of productivity enhancement with their own money--though they also get a richer share of the end proceeds.

Intent on finding drug leads, Vertex constructed an integrated drug-discovery platform based on understanding the structures of biological targets and then using that understanding to construct complementary compounds and compound libraries more likely to produce lead drug candidates, not simply screening hits. Its extraordinary productivity has led it to adopt a risk-reducing, alliance model, quite unlike the bet-the-farm strategies of most of its peers. Instead of focusing on a few partnerships and a few drugs for its own commercialization, Vertex has spent its time maximizing the number of programs it can put into drug development, largely through partners. To make up for the value it sacrifices by foregoing full commercialization, as well as the risks that its partners might slow development of Vertex programs, it generally insists on full control of the discovery end of R&D as well as a higher-than-average proportion of the products' end sales. Multinationals have generally balked at such deals and so the majority of Vertex's partners have been mid-sized regional players willing to cede discovery responsibilities and a larger share of the profits. But Vertex's $800 million chemogenomics deal with Novartis changes the company's deal and strategic profile; Vertex has complete authority over discovery through phase II; Novartis has control over the later stage. The deal, and its size, effectively validates and defines the Vertex strategy. Still, Vertex's focus on the early side of R&D, with less apparent commitment to creating a product franchise, has hurt its valuation, particularly at a time when investors expect biotech companies to take full advantage of at least some of the products they create.

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