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Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX)

Q3 2006 Earnings Call

October 26, 2006 5:00 pm ET

Executives

Lynne H. Brum - Vice President, Strategic Communications

Ian Smith - Chief Financial Officer

John J. Alam - Chief Medical Officer

Joshua S. Boger – Chief Executive Officer

Analysts

Rachel McMinn - Piper Jaffray

Jeffrey Porges - Stanford Bernstien

Hari Sambasivam - Merrill Lynch

Howard Liang - Leerink Swann

Yaron Werber – Citigroup

Jason Zhang – Prudential

Steve Harr - Morgan Stanley

Meg Malloy - Goldman Sachs

Annabel Samimy - UBS

David Witzke - Banc of America

Adam Cutler - JMP Securities

Operator

Good afternoon. My name is Richard and I will be your conference operator today. At this time I would like to welcome everyone to the third quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a Question and Answer Session. [Operator Instructions] Thank you. Ms. Brum, you may begin your conference.

Lynne H. Brum - Vice President, Strategic Communications

Thank you, Richard. Good afternoon. This is Lynne Brum, Vice President of Strategic Communications. On behalf of our Vertex’s Executive team, I welcome everyone to today’s call. Today’s call will focus on the following, first momentum and HCV drug developments. We’re executing the phase IIb global development program for Telaprevir VX-950 and anticipate steady progress in news flow from this program in the coming months.

Second, pipeline of first in class compounds. We have a pipeline of proprietary and collaborative drug candidates that provides us with significant development opportunities. Third, financial strength. We are managing our financial profile in order to prepare the Company for its next stage of growth. These thing will be discussed and expanded upon during today’s call by Ian Smith our Chief Financial Officer, Dr. John Alam our Chief Medical Officer and Dr. Joshua S. Boger our President and Chief Executive Officer. In addition Dr. Victor Hartman, our Executive Vice President of Strategic and corporate development is also here with us and will be available for the Q&A portion of today’s call.

Before I turn the call over to Ian, I remind you of the following. Information discussed in this conference call may consist of forward-looking statements and as such are subject to the risks and uncertainties discussed in detail in our reports filed with the Securities & Exchange Commission including our 10-K. Next, GAAP and non-GAAP financial measures may be discussed on this call. Information regarding our use of non-GAAP financial measures is available in our third quarter 2006 financial press release. As always you can visit VRTX.com to listen to the conference call and view a PowerPoint presentation or download a podcast. Lastly, I would like to note that we have allocated 45 minutes for today’s call. After our prepared remarks we will accommodate as many questions as time permits. Once the call concludes our IR team joined by Ian will be in our offices to answer any additional questions you may have. I will now turn the call over to Ian.

Ian Smith - Chief Financial Officer

Thanks, Lynne. Our financial strategy is to balance the risk and research and development with a strong financial profile. This enables the Company to support the long-term investment required to fully develop our R&D opportunities. Specifically in 2006 we have significantly enhanced our financial strength. We completed a $330 million equity offering and secured a significant collaboration to support the development of Telaprevir.

The financing and the collaboration are reflected in our third quarter financial results which demonstrate a strong balance sheet and increased revenue from collaborations. The full results are available in our press release. I will begin with our long-term financial strength on our balance sheet. We ended the third quarter of 2006 with $752.3 million of cash, cash equivalents and other investments. This includes proceeds from the equity offering completed in September and $865 million up-front payment received in July from our collaboration with Johnson & Johnson.

To add to this strong cash position we also reduced our overall convertible debt obligations during the year. We end the quarter with only $42 million in convertible debt due in 2007 and only $59.6 million of convertible debt due in 2011. The 2011 debt is callable in February 2007 and has a conversion price of $14.94.

In summary, our balance sheet is very strong. Now to the operations, the third quarter loss before certain charges and gains was $47.9 million compared to a prior year loss before charges of $40.8 million. Our operating expenses or most specifically our R&D expense significantly increased. However, these increases were primarily offset by a significant increase in revenue. Our third quarter 2006 GAAP net loss was $51.8 million compared to the prior year net loss of $79.6 million. The 2006 and 2005 GAAP net losses include charges for restructuring, stock-based compensation, and equity exchanges of convertible notes and gains from investments.

Total revenues for third quarter were $53.3 million, an increase of $17.1 million compared to the prior year. The increase was principally due to $25.4 million of revenue recognized from our Telaprevir collaboration. This development based revenue replaces revenue that was previously generated from research based collaborations. We expect this trend of increased revenue being derived from development related programs to continue in 2007.

The third quarter 2006 R&D investment was $96.1 million including $7.6 million of stock-based compensation compared to an R&D investment of $63.6 million in the third quarter of 2005. The increased investment reflects expanded development activities associated with our global Phase II development program for Telaprevir and the initial investment to commercial supply.

Our SG&A expense was $14.8 million including $1.7 million of stock-based examination compared to the prior year of $10.7 million. This increase reflects investments into infrastructure to support the growth of the company.

In summary, our income statement trends reflect the advancement of our business and the strong operational leverage of the J&J collaboration. Now to the full- year 2006 guidance, due primarily to the proceeds from our equity offering, we’re adjusting our guidance for year end cash, cash equivalents and available sales securities. We expect these amounts to be in excess of $725 million at year-end. We continue to anticipate that our loss excluding certain charges and gains will be in the range of $180 to $195 million. We expect full-year 2006 GAAP loss will be in the range of $222 to $237 million. The GAAP loss is expected to include approximately $42 million of stock-based compensation expense, restructuring charges, loss on exchange of convertible notes and other gains.

The 2006 loss guidance is primarily dependent upon the achievement and timing of milestones from our R&D collaborations. The milestones relate to compound acceptances and clinical advancement of compounds.

Looking into 2007, we’ve created a strong balance sheet and have tremendous collaborations to support the significant investment required to successfully drive our business. We are moving forward with a financial profile to support the investment challenges we’re taking on. I will now turn the call over to John.

John J. Alam - Chief Medical Officer

Thank you, Ian. We’ve been progressing rapidly with PROVE 1 and PROVE 2. Two clinical trials in the U.S. and Europe. And are prepared for a continuous flow of data as we head into 2007 with emergence of the first data sets from the program likely to come in December. We expect data from our Phase IIb program to define the product profile of Telaprevir and to establish a registration path for the program. On track with our timeline we completed enrolment of 250 patients in the PROVE 1 clinical trial in the third quarter. Patients were enrolled in 35 centers across the U.S. in less than ten weeks. The number of centers is important as we plan for our PROVE 3 and subsequent Phase III trials. We spent a significant amount of time preparing each center for Phase II which we think should facilitate a straight forward transition to Phase III.

Now turning to the specific data flow for the PROVE 1 program, as I review these events it may be helpful to refer to slide 13 on our webcast presentation. In December we expect to have the first on treatment data from the initial randomization of 80 patients, 60 of whom received 12 weeks of Telaprevir therapy in combination with pegylated interferon and ribavirin. These data will reflect analysis of the safety and antiviral activity of 12 weeks of Telaprevir based combination therapy. We then expect to have in the first quarter of 2007, the three months post treatment or SVR 12 data on patients in the 12 week arm who receive Telaprevir in combination with pegylated interferon and ribavirin. In the second quarter of 2007 we expect that 6 month SVR date will be available from patients in the 12 week triple combination arm of the study.

Our PROVE 2 trial in Europe is progressing well and all sites in France and Germany are now open. Additional sites in the U.K. and Austria are expected to be open in the coming weeks. We continue to expect to complete PROVE 2 enrollment in the fourth quarter. We will then expect the first data to become available from PROVE 2 towards the middle of 2007. When enrollment is complete we expect to be able to provide more information on specific timing of data events from PROVE 2. Data from PROVE 1 and PROVE 2 patients will inform the design of our Phase III trials.

Now turning to PROVE 3. The preliminary analysis including histopathology data from the six months toxicology studies with Telaprevir in two species rat and dog, has now been completed. Based on this analysis we believe that these non-clinical studies will support PROVE 3, a clinical trial that will evaluate six months of therapy with Telaprevir in combination with pegylated interferon and ribavirin in more than 400 treatment experience patients. With these results we remain on track to start the clinical trial in the fourth quarter.

In addition with regard to certain questions that we have received, we have initiated in this quarter both a thorough QTC study and a multi-dose study with Retonovir. These studies are part of our global Phase II program and are designed to support our registration package. Ian touched upon our plans for investment in the Telaprevir development program broadly. The clinical trials I just mentioned (inaudible) one part of bringing the major drug to a marketplace. We’re also preparing for commercial success of Telaprevir. We completed the technical development work for the commercial formulation of Telaprevir and have established a dosing regimen of two 375-milligram tablets to be taken every eight hours. This launch formulation is what will be used in our in PROVE 3, the six-month clinical trial in treatment experienced patients. We’ve begun to manufacture drug registration batches and we expect to complete all registration batches of Telaprevir in the first half of 2007.

I would now like to take a few minutes to bring you up to date on our other pipeline programs. In addition to Telaprevir we have other first in class product candidates in our pipeline targeting major diseases, and these are being developed to achieve our goal of developing a robust pipeline. First mentioned VX-770 an oral drug that could address the underlying defect in cystic fibrosis. We completed a Phase I clinical trial in healthy volunteers and in patients with cystic fibrosis in the third quarter.

We also announced today that we have completed a viability study with a new tablet formulation for VX-770. Our goal is to begin a Phase II clinical program in patients with CF in 2007. In other Vertex VX-702 oral p38 MAP kinase inhibitor being investigated for the treatment of rheumatoid arthritis. We filed an IND in the third quarter. The IND is now open and we’re taking steps to initiate a thorough QTC study.

Also in the fourth quarter we expect to start a 12 week 120 patients phase 28 clinical trial in patients with RA on a background of methotrexate. Upon completion of the QTC constituted and the 12 week Phase IIa study we plan to conduct the largest six-month Phase II study on a background of methotrexate in approximately 400 patients.

Now to VX-680. The first clinical data for VX-680 which is being developed by Merck in a broad range of cancers is starting to emerge in blood cancers. At the end of the third quarter data from [hemonologic] trials with VX-680, was published in journal of blood. These data demonstrated the first clinical activity of an oral kinase inhibitor in three patients with T31 (inaudible) mutations with either or chronic myeloid leukemia or CML on acute lymphocytic leukemia or ALL.

These patients had failed prior therapy with currently marketed and second generation therapies. These are preliminary but are very encouraging data. We expect additional clinical results for VX-680 to be presented at the American society of hematology or ASH conference in December. We also believe that VX-680 has the potential to advance into late stage clinical development.

Before I close, I would like to remind everyone that five abstracts have been accepted for presentation at ASLD this weekend, which is taking place here in Boston. Although we can’t discuss any data tonight from the upcoming presentations on our call, the ASLD lifts tomorrow morning. At that time we’re planning to issue a press release announcing top line data from the presentations that will take place Sunday, Monday and Tuesday. I look forward to speaking with you after the release and throughout the conference. I will now turn the call over to Joshua.

Joshua S. Boger – Chief Executive Officer

Thanks Alam. Let’s start my brief remarks by reiterating that Telaprevir continues to be our highest priority. HCV as a major disease and more than 3 million people in United States with chronic HCV. There is tremendous unmet medical need. We believe our lead investigational product has the potential to address the significant unmet need in the treatment of HCV. The Telaprevir development and commercialization program is running on all cylinders. The global Phase IIb development program is well under way. Data from this program will begun to roll out in the fourth quarter of this year and will be followed by a steady stream of data during the first half of 2007. This data will inform us as we design future trials for Telaprevir and determine its full medical and commercial potential.

We have a tremendous opportunity to truly make a difference in patients lives. At the same time we also face challenges that go along with this kind of opportunity. As we look ahead to our strategic plan for Telaprevir in 2007, we’re focused not only on the clinical development of this drug candidate but also on our commercial objectives. We completed the commercial launch formulation and are on track to complete registration batches of the drug in the first half of next year. We’re fully committed to realizing our vision of transforming HCV disease. We have the financial, operational and strategic resources to support our objectives and execute on a larger scale in 2007. We’re focused on capturing the full potential of Telaprevir. We look forward to continuing to update you on our progress and across our business. Lynne, back to you.

Lynne H. Brum - Vice President, Strategic Communications

Thank you, Joshua. We would now like to open up the call to your questions. Richard.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Rachel McMinn with Piper Jaffray.

Rachel McMinn - Piper Jaffray

Thanks very much. A couple of questions. Now that you have your six-month tox studies, they are almost complete, is there a way to extend VX-950 dosing in PROVE 1 or PROVE 2 in some other longer duration arms to perhaps six months and if you don’t want to do that, perhaps let me know why that wouldn’t be strategic for you to do?

John J. Alam

Hi Rachel, this is John. We will not be extending dosing in the PROVE 1 and PROVE 2 trials. And its really just the timing of we have -- we’re going to be as you know we started dosing in PROVE 1 early in the third quarter, and the timing really doesn’t work in terms of filing the data with the FDA and extending in dosing in these studies. As you know our data overall support that three months of dosing with Telaprevir will in fact provide sufficient viral suppression to be able to eradicate the virus.

Rachel McMinn - Piper Jaffray

Okay. I guess just on the total other end of the spectrum, if PROVE 1 actually shows better efficacy with a longer duration treatments, will you have enough preclinical toxicity data in time for your Phase III to actually treat patients for 48 weeks?

John J. Alam

Just to clarify, the comment on the three months is in terms of treatment naive patients. PROVE 3 as you -- we are targeting up to six months of duration with Telaprevir. We will have by the time we are to Phase III additional toxicology data as well, but again in neither or naive treatment experienced parents we believe three to six months of Telaprevir will be sufficient.

Rachel McMinn - Piper Jaffray

But just to clarify, though, if you see that you need longer duration for your Phase III’s won’t be set back, you will still have enough preclinical talks to go out to twelve months if you need to?

John J. Alam

We do have nine-month toxicology studies that are ongoing. They were actually started -- the nine-month toxicology study in the doc started simultaneously with the six-month study, so that’s obviously going to read out in the near future, but let’s say that the results that we’ve obtained in the six-month toxicology studies again do support dosing up to six months, and we would expect that similar type of results in the nine-month studies.

Rachel McMinn - Piper Jaffray

Okay. All right. Thanks very much.

Lynne H. Brum

Thank you, Rachel.

Operator

Your next question comes from Jeffrey Porges with Stanford Bernstien.

Jeffrey Porges - Stanford Bernstien

Thanks very much, guys, for taking the question. Particularly interested in the potential implications of the FDA panel’s guidance about development. They sort of were pretty clear that you need to be adding a new drug to standard of care and you need to be looking at SVR 24 weeks after the end of the standard care arm. What do you think the implications of this are for Phase III design and where you might need to go in terms of duration of dosing in the study and the duration of the study?

John J. Alam

Hi, Jeff. This is John again. Actually I think the outcome of the FDA discussion, the committee discussion in general was very positive. In fact, consistently positive. The most important take away was that they clearly affirmed that the virologic end point SVR at the end of 24 weeks of treatment is and should be the primary end point for any strategy that whose goal is to eradicate the virus, any antiviral strategy. So, any other end points, histologic, et cetera, are all become secondary end points. They also specifically to the FDA’s question of does the SVR need to be defined at the same time point which is 24 weeks after control across all treatment arms, there was actually the advisory committee was very specific that the timing should be 24 weeks after the duration of treatment and regardless of what the duration is. A very positive outcome there as well in our mind. I will say that the other positive development in the discussion was they did talk that’s also Phase III for registration. But there was a discussion that the advisory committee supported that in moving from Phase II to Phase III that using a what they called an SVR 12, 12 weeks after the end of treatment that you can use that information for phase transition going from Phase II to Phase III.

Jeffrey Porges - Stanford Bernstien

What does all of that mean for Phase III design, then?

John J. Alam

I think the Phase III design will be for us will be based on the clinical results PROVE 1 and PROVE 2 as they rollout. If we -- as we expect, if we are able to demonstrate robust SVR 12 and then full 24 weeks SVR data with the durations that we have in the trials, then that would support moving into Phase III with those -- with 12 to 24 weeks of duration. Again, we would expect that SVR 12 data from both the 12-week and the 24 week which otherwise we call the 12 plus 12 arm to provide the data to support the design of the Phase III trials.

Jeffrey Porges - Stanford Bernstien

Sorry, to hop on, but, John, do you need to have 72-week control arm in the Phase III study, then?

John J. Alam

That’s a discussion we’re going to be having with the FDA. At this point it is a discussion that doesn’t -- there is no reason to have the discussion because we really need the data with PROVE 1 and PROVE 2 to have the discussion with the FDA. As you know, our view is that whether we have a control arm in Phase III or not, by the time we get into 2008 we will have data -- our plan is to have data and our expectation is to have data from three large trials, PROVE 1, PROVE 2, PROVE 3, each of which has a control arm, and has the ability to demonstrate superiority as powered in that way to standard of care. But at that point we won’t need to have the data from -- we won’t need to wait on the data from the control arm in Phase III to file an NDA, but again the specifics of that is going to be data driven and based on discussions with the FDA we will -- which we will engaged in starting in the second and middle half of next year.

Jeffrey Porges - Stanford Bernstien

Thanks very much.

Joshua S. Boger

Jeff, I just want to jump in and reiterate two things. First of all we were very pleased with the FDA meeting and actually I think the FDA should take a pat on the back for holding the meeting. This was them getting ahead of what is clearly could be a transformation in a major disease, and they were calling everyone together to hear those opinion, and I think they should be congratulated for doing that. The outcome really backed up every major assumption that we have designed our Phase II program around and the remaining questions can’t be answered without data, and that’s the data we’re going to get in Phase II. We’re overall very pleased and think this was a very positive step and it rules a lot of uncertainty that otherwise might have remained if the FDA has not taken a step. So, we’re very pleased.

Jeffrey Porges - Stanford Bernstien

Thanks very much.

Lynne H. Brum

Thank you, Jeff.

Operator

Your next question comes from Hari Sambasivam with Merrill Lynch.

Hari Sambasivam - Merrill Lynch

Yes thank you. Question for perhaps John. John, when you look at the original trials for peginterferon and ribavirin or pegasys and ribavirin, is there some correlation between the patients who are – who have undetected virus at 52 weeks and how many actually stay that way at the end of five to six-month treatment free period. I guess what I am trying to get a sense of is in terms of back filling for PROVE 1, we’re obviously expecting the data over the next several weeks or so, and I am just wondering from a rule of thumb what should we be expect that PCR negative number to be at the end of that 12-week period.

John J. Alam

So the -- the first question of those were undetectable, I think the question is really how many would we expected to relapse at the end of -- if they are undetectable at the end of treatment, so the data that we have are with the pegylated interferon and ribavirin. It is about -- the relapse rate is around 20% or 80% of those are undetectable at the end of treatment remain so at six months of follow-up, again that’s for pegylated interferon and ribavirin. The data at week 12, the published data is using an assay that have the sensitivity of less than 50 units per ml and at week 12 one would expect between 40 and 50% of patients to be less than 50 at week 12 of treatment and again with pegylated interferon and ribavirin with a less than 10 assay, a more sensitive assay which is what we are using in our trial, that number would be expected to be lower, somewhere in the 35% to 40% range. In terms of our own results and our combination with Telaprevir, peg and ribavirin we would obviously expect a substantially higher percentage of patients to be undetectable at week 12.

Hari Sambasivam - Merrill Lynch

That’s great. Thank you.

Lynne H. Brum

Thank you, Hari.

Operator

Your next question comes from Howard Liang with Leerink Swann.

Howard Liang - Leerink Swann

Thanks very much. You mentioned you manufactured a commercial – or you are going to manufacture a commercial batch you have a formulation for that. How is that different from your clinical batch?

John J. Alam

It is the same. We have a commercial formulation. The actual Telaprevir is the same, but we said in previous call that we have the commercial formulation which is a very minor, very minor tweak from the formulation that’s been used in the Phase II trial to date, and that that formulation will be used in PROVE 3. It is really the kind of minor tweaks you have to solidify a formulation for the market, so we’ll be running the PROVE 3 trial with the market formulation, but it really is virtually identical to the formulation we’re using in the rest of the Phase II trials.

Howard Liang - Leerink Swann

If I can ask another question, there has been some recent development in the Hepatitis C protease inhibitor field in terms of partnering. Do you see not (inaudible) with interferon as a disadvantage for Telaprevir?

John J. Alam

I don’t think bundling is going to be possible since one of them is injected and one of them is -- I don’t think bundling is in the future of the hepatitis C field any more, so I don’t see any disadvantage at all. I personally see it disadvantage in any attempt to try to bundle a particular interferon with a therapy. I don’t think doctors are going to put up with that.

Howard Liang - Leerink Swann

Thanks very much.

Lynne H. Brum

Thank you, Howard. Richard?

Operator

Your next question comes from Yaron Werber with Citigroup.

Yaron Werber – Citigroup

Good afternoon. I have two quick questions. One actually is a follow-up to a previous question. Just so we -- it is for John. Just so we understand, you mentioned that at week 12, 20% of patients who are undetectable end of treatment are expected to relapse. So, if we just conceptually first thinking about potentially for you to file based on Phase II data, does that mean that you and I think previously you said you need roughly 70, 75% SVR rate. Does that mean we need to see at least 90, 95% undetectability at week 12 based on PROVE 1 and PROVE 2?

John J. Alam

Hi, Yaron. The question was on peg ribavirin and my answer was only to what’s seen with current therapy. It’s a completely different -- it was not intended to discuss what we expect in terms of Telaprevir and peg and ribavirin. In fact, the comment I made is at the end of treatment with peg and ribavirin, week 48 of those who are undetectable, 80% of those patients get to an SVR. With pegand ribavirin at week 48, it’s somewhere between 55% and 65% of patients with genotype 1 HCV will be undetectable and then of those, 20% will relapse leading to a final SVR rate between 40% and 50%. Again, it is completely different dynamic and set of numbers that we expect with in the PROVE 1-2 trials in the Telaprevir containing arms.

Joshua S. Boger

With a very slow drop in viral load that the standard of care induces in its second slope. You just can’t use the rule of thumb in the standard of care to predict that rate for regimen to drop the virus faster. So don’t use that number. That number is the wrong number. What is the number we’ll find out. It will be lower.

Yaron Werber – Citigroup

Maybe as a follow-up to that, it’s sound like we are going to hopefully see some data at ASLD which is the longer term follow up in the previous Phase Ib and Phase IIa studies and it sounds like you’re going to probably discuss them tomorrow morning. Are we going to see some 48-week follow-ups so we can start look at ultimately what the relapse rates are?

John J. Alam

Well, what -- there will be data on the follow-on therapy with -- in from both of the 14-day and the 28-day combination studies, and, yes, we will talk about it after the press release goes out tomorrow morning.

Yaron Werber – Citigroup

Okay. Just a final question from me. There has been a lot of discussion recently about rashes based on some websites which obviously are never substantiated. I just wonder if Vertex has any public comment to make about that.

John J. Alam

As is consistent with our overall policy, I can’t comment on any of the specifics of ongoing blinded studies. As I said in my prepared remarks, our first safety analysis will be in December when we look at the first 80 patients, and then otherwise I will just say that just remember with the rash that you do see it with Peg and ribavirin. It’s seen in about the quarter of all patients who are cheated with pegylated interferon and ribavirin, and it’s clear that there are patients who have to discontinue treatment because of what’s so-called ribavirin rash, and that may run in the 1% to 2% range of patients who are treated with. Again, this is not peg and ribavirin, pegylated interferon and ribavirin.

Yaron Werber – Citigroup

Thank you, John.

Lynne H. Brum

Thanks Yaron.

Operator

Your next question comes from Jason Zhang with Prudential.

Jason Zhang – Prudential

John, did I hear you right that you said you started a trial or study with ritonavir and if it is true can you give us some little more detail?

John J. Alam

Hi, Jason. We have what is ongoing is a -- what we had said we would start in the fourth quarter, a multi-dose pharmacokinetic drug-drug interaction study in healthy voluntaries all through ritonavir and with low dose ritonavir with Telaprevir. It’s a two-week dosing regimen study, and it’s really to establish as you know, we had a single dose study that we had completed in the first half of the year that did show some increases in blood levels when low dose ritonavir was administered with Telaprevir, and we need to confirm that in a multi-dose study to really talk to understand fully what level of increase in blood levels and half life we would see. Once we have that data, we can talk more specifically about the opportunities and how we go forward. It’s a study that we’re doing regardless because in the HIV co-infected population we’re obviously going to have to understand that drug-drug interaction between low dose ritonavir and Telaprevir.

Jason Zhang – Prudential

Do you have any kind of hurdle that you will have to meet for you to make a clinical decision meaning, okay, you look at PK, look at a lot of blot level concentration, but what would be the comfortable level for you to see this will help or (inaudible) and you don’t have to worry about it in the future.

John J. Alam

We’re making no assumptions of what kind of changes in blood levels we’re going to see, and we’re doing this study. We have to do this study regardless. We’ll see how the data come out and based on that we’ll make a decision of how we would go forward in the non-HIV co-infected population, and then again regardless we need to understand this to do any work in the HIV co-infected population.

Jason Zhang – Prudential

Okay. Thanks.

Lynne H. Brum

Thank you, Jason.

Operator

Your next question comes from Steve Harr with Morgan Stanley.

Steve Harr - Morgan Stanley

Two quick questions. First off, on the FDA panel, seemed like there was a lot of confusion about what even defined the refractory patient, and what would be necessary to complete a study in the refractory patient population. Do you feel comfortable that you have the guidance you need to start Prove 3 and use that as a registration study?

John J. Alam

Hi, Steve. Yes, yes.

Steve Harr - Morgan Stanley

And then what will be your definition of refractory patients?

John J. Alam

It will be a very broad-based definition of treatment failures. We are rather than -- I mean a lot of discussion in the advisory committee discussion really was a very much I think a -- somewhat of an academic discussion if you really wanted to understand certain aspects of who is a responder and who is not a responder and what kind of response you would see with novel therapy, from a clinical practice standpoint in the real world, you often don’t understand exactly what the responses were during the prior course, during the first course with peg and ribavirin, because they’re not monitored that carefully. That was really part of the reason why that was there was so much confusion around it. We are working towards kind of cutting through the more scientific aspects or academic aspects of that and focus on what the real world patient who simply failed peg and ribavirin looked like, and that’s what we’re going to include broadly in PROVE 3.

Steve Harr - Morgan Stanley

And just a separate question on the manufacturing front. I think last quarter you guys said that manufacturing at this point was kind of bottleneck towards filing with eight potential bottleneck towards filing with completion registration batches in the first part of ‘08 and now you’re saying the first part of ‘07. Does that mean the bottleneck has been removed and that you can accelerate filing if the clinical data just as appropriate.

Ian Smith

Steve, I believe I was the one to answer that question the last time. I don’t think I used the word bottleneck. So, that’s a new word, and there is a bottleneck. Obviously in every process something has to be rate limiting.

Steve Harr - Morgan Stanley

Sure.

Ian Smith

That’s not a negative statement. That is how life is put together. So there is very limiting step in everything. I think I believe the last time I said that preparing for commercial launches is the -- really the time limiting factor, and manufacturing and inventory build for commercial launch. It’s not the registration batches that are limiting.

Steve Harr - Morgan Stanley

Okay. Just getting enough drug on board, and that’s still out there with your goal of completing that by first part of ‘08? Is that a fair way to put it?

John J. Alam

I don’t think we’ve given a goal on that. We said we are consistent with NDA, and in 2008, and a launch subsequently, so we had some optimistic internal projections of how well this drug might do. Obviously the data is going to determine -- is going to determine the size of the launch, but in any case, it’s likely to be the getting ready for a commercial launch that is in the end the time-limiting factor for the whole program, and the clinical program will be busy most of that time with both required clinical studies and clinical studies that will fill out the picture on Telaprevir. Remember it ‘s not about getting a drug approved. It’s about getting a drug used, and that’s providing all the clinical data that physicians need and all kinds of populations, and we’re committed to having that information available at launch.

Steve Harr - Morgan Stanley

Thanks.

Lynne H. Brum

Thank you, Steve.

Operator

Your next question comes from Meg Malloy with Goldman Sachs.

Meg Malloy - Goldman Sachs

Thanks very much. Just a couple of quick ones. One additional thing that came out of the FDA discussion was the role of ribavirin, and my take on what they came to is that it was certainly necessary to study which is very much how you positioned your studies and as I recall there is one arm in PROVE 3 that would enable an assessment ex ribavirin. I was wondering if you’re still plan to go include it that way. Just a quick follow-up on ritonavir study, is that data that you would potentially share with us John sometime in the first half of next year?

John J. Alam

Hi, Meg. On the first question, yes, we are across our studies the majority of the arms have both pegylated interferon and ribavirin and consistent with the perspective that’s kind of the first step out. The study, we do have one arm without any ribavirin actually in PROVE 2 in the European treatment naïve study, and there is a 80-patient arm which is match to an 80-patient arm of three drugs for 12 weeks duration, so Telaprevir, peg interferon, ribavirin for 12 weeks, 80 patients and one arm of Telaprevir and peg interferon without ribavirin in 80 patients. On the ritonavir boosting, I think what we would communicate around is really what our steps forward would be and what our strategy in that area and then it’s really based on the results of that study that will guide us both in the HIV co-infected population and in the non-HIV co-infected and in the mono infection population how we would see low dose ritonavir playing out in either one of those two contexts.

Meg Malloy - Goldman Sachs

That was helpful. If I could just ask quick one to Ian, should we expect the revenues from J&J to kind of approximate what you saw in Q3 on a go-forward basis or will that be a little bit have more variance to it?

Ian Smith

Thanks for the question, Meg. The revenues you saw in Q3, the base level of revenues, there are further revenue that can be achieved under the collaboration, and those relate to achieving milestones at the compounded bunches, so looking at Q3 as a base, that’s fair to look at.

Meg Malloy - Goldman Sachs

Okay. Thank you.

Lynne H. Brum

Thanks Meg. Next question, please.

Operator

Your next question comes from Annabel Samimy with UBS.

Annabel Samimy - UBS

Hi, thanks. A couple of quick questions and other one on ritonavir. Is there anything that we can extrapolate from the ritonavir and HIV that you might expect for the boosting you could get for VX-950? The concern is three times a day dosing is hard for compliance, and have you had, you know, has ritonavir helped HIV in that way?

John J. Alam

Hi, Annabel. This is John. There is no specific way to come to one number, and that’s why we’re really doing the study, and that we’ve held off on discussing what the opportunities or potential might be until we have those results. With any of the HIV protease inhibitors with low ritonavir, each one has a different level of boosting across the entire spectrum of PI’s.

I will also just say that for a -- in distinction to HIV, again, we are dealing with here with a defined duration of treatment. It’s not chronic dosing, and we believe that with the formulation that we have which leads to two tablets, every eight hours, I would say that’s a very reasonable regimen to take for 12 to 24 weeks, and it won’t be -- it should not be particular issue, and it is a very practical regimen for patients to take for one duration, one time, to with the objective of eradicating the virus forever.

Annabel Samimy - UBS

Okay. And another quick question regarding the current PROVE 1 study. Are you currently conducting EKG studies throughout the whole entire PROVE 1 study or obvious studies going to hold off until -- are the QTC studies covering that?

John J. Alam

We’re not doing EKG’s on an ongoing basis in PROVE 1 -- in the PROVE studies. We did do extensive digital electro cardiograms in the original controlled environment of the original stage 1 studies in both healthy voluntaries and in HCV patients. There was absolutely no signal or concern that came out of those studies. We’re doing this study because it is a requirement in the U.S. to do these studies. It’s a prior to Phase III for all our understanding is all small molecule inhibitors, whether there is a risk identified or not, and we’re not doing it because there is any particular concerns in any of the earlier studies. In fact, it’s quite the opposite. The results we have did not suggest any concerns with regard to cardiovascular safety.

Annabel Samimy - UBS

Great. Thank you.

Lynne H. Brum

Thank you, Annabel. Another time check, I think we have time for two more questions.

Operator

Your next question comes from David Witzke with Banc of America.

David Witzke - Banc of America

Thanks. Good afternoon. A couple of quick financial questions, Ian, R&D came in a bit lower than our expectations. Do you still see R&D in the 375 to 395 range?

Ian Smith

Hi, David. The guidance for R&D was still in that 375 to 395 range. Remember that guidance is the GAAP range, and therefore also includes stock-based compensation.

David Witzke - Banc of America

And then –

Ian Smith

Actually, David, I am not sure how you follow your own numbers, but if you wanted to exclude the stock-based compensation, the guidance is actually $347 million to 367 for the full year.

David Witzke - Banc of America

That’s helpful. And is there a milestone payment on the start of a non-responder Phase II this quarter of size?

Ian Smith

We don’t specifically disclose the individual milestones. We have the possibility of achieving a milestone under the J&J collaboration this year, and that’s built into our financial guidance.

David Witzke - Banc of America

Finally on the commercial formulation, should we assume it’s the same chemical isoform or polymer or did the crystal structure change?

John J. Alam

No, it’s exactly the same.

David Witzke - Banc of America

Thank you.

Lynne H. Brum

Thank you, Dave.

Operator

Your final question comes from Adam Cutler with JMP Securities.

Adam Cutler - JMP Securities

Thanks for taking the question. I am wondering if you can just comment on the pace of enrollment? It sounds like it’s going quite well. Is that something we can consider or run rate or is this ahead of or behind your expectations?

John J. Alam

For PROVE 2?

Adam Cutler - JMP Securities

Right.

John J. Alam

Our -- we are – it’s basically in line with our expectations. We’re targeting completing enrollment in PROVE 2 within this quarter before the end of the year.

Adam Cutler - JMP Securities

Okay. Thanks. Maybe one other question if I may, it did seem like that one thing that came out of the FDA advisory committee was that the FDA would potentially be open to studies looking at more than one investigational agent in the same study. Is that something that you would consider at some point?

John J. Alam

Yes.

Adam Cutler - JMP Securities

Okay. Is that something you would consider prior to your NDA filing or is that more of a Phase IV type of thing in your mind?

John J. Alam

I think it really depends on the pace of evolution of the other therapies that we might want to combine with, and there is a -- it is a -- there is a lot of different things that play into that. Competition, the safety profiles of the additional stat C agents that we might want to look at and specifically some of the preliminary inhibitors and how they evolve, but there needs to be agents that have sufficient antiviral activity on their own and have a safety profile that doesn’t otherwise put at risk the NDA program that we’ve put together.

Adam Cutler - JMP Securities

Okay. And then one last question. Just to ask the ritonavir question from another angle, if you’re ritonavir – your early ritonavir studies do seem to indicate that boosting with ritonavir would allow for BID dosing, is that something you would consider incorporating into your Phase III?

John J. Alam

Again, our primary strategy here is with the formulation that we have in the treatment regimen that we have which is two 375-milligram tablets given every eight hours which again for a 12-week regimen in a serious disease indication, one-time treatment is a very practical reasonable regimen, and it’s been shown in the HIV arena that for 12-week duration, compliance is very good over that time period, so we don’t feel compelled to look at additional dosing regimens within the Phase III program. How we again move forward specifically with low dose ritonavir and how that fits into our next stages of clinical programs would really including the Phase III program will completely depend on the results that we see from the ongoing study.

Adam Cutler - JMP Securities

Thanks a lot.

Lynne H. Brum

Thank you, Adam. And Richard, we would like to conclude the call now and thank everyone for joining us. The IR team will be in our office tonight to answer any follow-up questions. Good night, everyone.

Operator

That concludes today’s third quarter results conference call. You may now disconnect.

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