Vertex Pharmaceuticals, Inc. (NASDAQ:VRTX)
Credit Suisse Group Health Care Conference Call
November 9, 2011 10:30 am ET
Ian F. Smith – Executive Vice President & Chief Financial Officer
Adam D. Cutler – Credit Suisse
Adam D. Cutler – Credit Suisse
Good morning, everybody, and welcome to the Credit Suisse Health Care Conference. I’m Adam Cutler, one of the firm’s Senior Biotechnology Analysts. I’m very pleased to introduce our next presenting company, Vertex Pharmaceuticals.
It’s a very exciting time at Vertex having launched INCIVEK, which is proving to be one of the most successful drug launches of all time, and with an exciting pipeline of drugs for cystic fibrosis, rheumatoid arthritis, and other conditions.
Our speaker today is Ian Smith, Chief Financial Officer, and I believe he will be joined in the breakout session by Bob Kauffman, Chief Medical Officer; and Michael Partridge from Investor Relations. So, I’ll turn it over to Ian.
Ian F. Smith
Thanks, Adam, and good morning to everybody, and good morning to those joining us on webcasts. Before I start, I would like to refer you to the Safe Harbor statement. There are risks in our business and they’re more fully disclosed on our SEC filings.
So, over the last few days we’ve been to a number of different medical conferences up and down the West Coast. I think it’s a sign of Vertex is broader than hepatitis C. We’ve been forging ahead in hepatitis C, trying to improve regimen’s for patients, improve cure rates, and reduce durations of treatments for the patients over a number of years. And more recently, though, we’re emerging into another disease, and that’s cystic fibrosis. We’ve always been committed to building a global health sciences company at Vertex. It takes time, but we’re starting to arrive there today.
And I’m going to talk about a number of different medicines today. Clearly we’re going to talk about HCV and cystic fibrosis, but I’m also going to touch on a number of other medicines that we have in development.
A quick review of the corporate profile of Vertex. Well, firstly, we are primarily in hepatitis C and cystic fibrosis. We recently launched a drug named INCIVEK that’s created a new hepatitis C regimen that’s built around INCIVEK that has significantly improved viral cure rates in this disease, as well as shortening the duration of treatment.
We’ve recently filed another drug in the area of cystic fibrosis with the global authorities both in the U.S. and Europe. And I will talk a little bit about time-to-market, hopefully, for that drug. And then also, how we may expand in cystic fibrosis, which is a significantly large orphan disease, if that’s not an oxymoron, but it is a large orphan disease.
Today, we’re starting to develop a new asset within the company, and that’s financial strength. Over the years we have relied on your support to fund the company to build a franchise in hepatitis C and cystic fibrosis. But as of the third quarter, the company was cash flow positive and we continue to be so, depending on how we continue to sell INCIVEK into the market. But cash is an asset for the company, and I have made recent comments regarding the strength of the balance sheet and how we may use that cash in the future.
The pipeline’s broad; all to often it’s a focus on hepatitis C, but it’s much broader than hepatitis C. We are forging ahead, and we’ll talk about our portfolio of hepatitis C drugs and the priorities that we have there.
And cystic fibrosis, again, there’s a portfolio of drugs within the cystic fibrosis programs and how we intend to get to a broader set of patients. I also want to just note to you that there are other drugs; we can for now put these in the speculative area. It is important in a company that’s building itself around multiple diseases to have a pipeline of opportunities.
We could debate about the progression of these compounds and the time-to-market and the utility. It’s just a very important part of our business. Though we continue to follow the signs, build drugs in these serious diseases, and today rheumatoid arthritis, epilepsy, and flu are just a couple, or a few, of the other areas that the company is focused in.
So, let’s go to HCV and KALYDECO for cystic fibrosis. INCIVEK is the drug we launched in May of this year, and financially I think that’s a good mark to see how that drug’s doing. In just the first full quarter, our market, which is quarter three, we sold approximately $420 million of INCIVEK-based product, which is quite astounding. And we appreciate the recognition, Adam, of you acknowledging the success of the launch. And we anticipate that that will continue to move along, and we’ll focus today on how we broaden the application of INCIVEK to patients, and also broaden the prescriber base of the physicians that write for INCIVEK.
KALYDECO is a compound that’s – or a drug or medicine – for cystic fibrosis. It targets the underlying genetic disease for cystic fibrosis. And if this drug is working the way that we hope it is, while the patient is on KALYDECO, that patient might not actually be suffering the cystic fibrosis. And I’ll talk a little bit about that in a moment. So the early insights into the launch, the launch is going tremendously well. We’ve treated over 17,000 patients in just the first five months of launch, which is a tremendous penetration into this market. The physicians have received INCIVEK very, very nicely.
What we find is all the deciles that treat this disease, greater than 70% market share, all the way down from decile 10 through to decile 1. So the acceptance of the product, and the preference of the prescriber or the physician to write for INCIVEK, is really thrilling for us as a company that they choose INCIVEK to try and treat this disease. From a payer side, very important in terms of reimbursement these days, we’ve had great acceptance for the product, and we’ve got over 180 million lives now covered. And for the majority of the lives that are covered, we are at parity for one other drug within this class that is available for patients. But for the majority of that, it’s 180 million lives, and there is parity.
So, as you can see, by all measures patients, physicians, payers, it’s a very, very successful launch and we anticipate that that will continue. If we look into the future, how do we think about getting to more patients, getting to more prescribers? I don’t mean to oversimplify it, but if there’s 8,000 physicians, there’s probably 2,000 physicians to 4,000 physicians that have not yet written a script for INCIVEK.
Our idea is to broaden the prescriber base. As you broaden the prescriber base, it’s a multiplication of physicians and scripts, and therefore there’s further growth. And I have actually been quoted of calling this kind of the fire-hydrant approach, which is you turn one fire hydrant on, they’re the high-prescribing physicians. They keep going, they keep writing, there is a constant flow through their clinic, while you run down the line and turn on the lower-prescribing physicians and they’ll start to prescribe as well.
So there is growth in this market ahead of us. It is a large market. We’ve only treated 17,000 patients of what we could have been, could be, 1 million diagnosed patients in the U.S. today. So, there is a lot of growth that’s in the future and a lot of patients still to be treated.
Now to the strategy, there’s been much debate over the last few days regarding the company’s strategy in hepatitis C. It is a fast-moving space. It always is when it’s a cure market and the best cure is where the patient would like to go. But it’s good to have this opportunity to, I think, clarify some of what may be misperceptions of the company’s strategy that have formed outside the company in the last couple of days.
Our goal in this disease is an all-oral therapy. We still believe we have that opportunity in genotype 1 patients. We have a very nice combination program that is still ongoing in the clinic that gives us a chance at an all-oral therapy.
We’ll get that data towards the end of this year, early next year, but it is the combination of a couple of direct antivirals with ribavirin. And we’ll see how that study goes, but it is focused on 12 weeks of combination therapy of three oral drugs, and may offer an opportunity for high viral cure, and move that quickly into the clinic so it quickly comes to patients, genotype 1 patients. So we’ll see how that moves along.
But for today, if we look at what we’re doing and where we’re focused over the next few years, there is available therapy that are INCIVEK-based therapies, and that’s an INCIVEK plus interferon and ribavirin. And today through, we believe, through the middle part of this decade at least, there is a great opportunity with this regimen that’s INCIVEK-based. We continue to expand the label, improve the dosing, target co-infected patient’s with HIV/HCV, and we’re also targeting those more difficult to treat patients that haven’t had options in the past.
So we’re building from the ground up, which over the next few years we believe we’ve solidified a very solid market position, and then we’re moving toward the all-oral. We may try other regimens; we call them QUADS, which is two direct antivirals added to interferon and ribavirin for the harder-to-treat patients. But ultimately we want to get to the all-oral therapy as quickly as possible.
If you look at our pipeline, how do we do that? Well, we have a number of studies that we continue to outline and it’s a complex area, but there’s a number of studies that are targeted at these patient populations. Starting with those today, as we expand the label, and then moving all the way through to the oral combinations, three drugs, four drugs, maybe even two drugs at some point. There’s lots of different ways to get to an all-oral therapy, but ultimately the goal is 12 weeks high viral cure, a tolerable regimen for genotype 1 patients, and we believe we’re on track for that.
Cystic fibrosis is our other major area. And again, this is an area that you could say, conceptually, is similar to HCV. We have a good start, in fact, an incredible start, but it’s also very different than HCV. We’ve been targeting the correction of this disease, or the underlying defect of this disease, for nearly 10 years to 15 years.
The founding science in cystic fibrosis came through in 1989 when it was first thought that the underlying defect was the CFTR gene. And we targeted that with a compound that effectively corrects a misfolding, and therefore the patient might not actually have cystic fibrosis when they’re on one of our drugs. It does apply to a certain set of patients, but we have hope that we will advance to other mutations within this disease to treat many patients.
It is defined as a disease that’s approximately 70,000 patients around the world. It is an orphan disease. Because of the way our drug may be working, it could benefit children, young adults, potentially extend lives, but certainly make lives much higher quality while these people are living with the disease. Therapies today have mainly focused on signs and symptoms. What we’re trying to do is go beyond that. Can you correct the underlying defect? If you can correct the underlying defect then the patient will live more healthy and potentially longer. There are a couple of other therapies that are trying to do this, but nothing like VX-770 or KALYDECO, as it’s now named, the way that it works towards this disease.
Just a quick stop-off on the science here to get an understanding of how we’re approaching this disease. VX-770 or KALYDECO targets a subset of this disease that’s known as the G551 mutation. Just quickly, these patients have channels on the cell surface of the lung. The way our drug works is it corrects a misfolded protein. If that protein is corrected, then it actually opens up blocked channels. I don’t, again, mean to oversimplify this, but when those channels are opened the patient breathes a lot better, significantly better. And what we saw is approximately 16% relative improvement in breathing in both young adults, defined as 6 through 12, and then 12 and older. So an incredible result in this disease after defining this defect that causes the disease over 20 years ago.
Now taking that concept, we do look to other mutations within the disease. In fact, a lot of the science and the work that we have done in this disease, we’ve ended up grouping the mutations in three sets. Group 1, is, plainly said, it has channels on the cell’s surface that are closed. So VX-770 has already shown a proof of concept there that if you have channels on the cell surface of the lung, then we can open those. The results have been dramatic: the patients feel better; they put on weight; they have less pulmonary exacerbations; they breathe a lot better.
Group 2, they have what’s known as a conductance channel or, let’s say, residual function of CFTR on the cell surface. It means that they’ve got channels on the cell surface, but maybe not as many as those in Group 1. But if you believe in the concept that our drug works to open up the channels, then they should open up the channels that are on the cell surface with these Group 2 mutations.
We’re strong believers that the drug works. We have strong in-vitro data. We’d like to do the clinical studies. We’re in discussions with the FDA, as we speak, to design studies so we can apply KALYDECO to these Group 2 mutations. And to give an idea of the importance of moving VX-770 along this chain of mutations, the Group 1 mutations probably apply to around 4% to 5% of the 70,000 patients with this disease, and Group 2 is probably another 5%.
So if we have the opportunity to treat close to 10% of the 70,000 patients worldwide, it’s going to be a tremendous benefit for the patients with this disease. But of course, also, it’ll be important for the company to broaden its base within this disease with KALYDECO and therefore the return to the company.
Just quickly, we have already studied age 6 and older, and we filed recently with the FDA. We would hope that the drug is approved come spring of next year and is being taken to patients. We do have other studies going on in infants. And then as I said, the Group 2 mutations, where we want to move to as quickly as possible, we believe our drug works in those mutations, and therefore expanded it into Group 2 mutations. We hope to be back to you very soon to let you know how those studies may proceed, so we’re able to expand the labeling to the Group 2 mutations.
Before I leave cystic fibrosis, there is a third group. This is more complex. Again, I don’t mean to oversimplify, but Group 3 mutations or Group 3 patients, they actually don’t have the channel on the cell surface, so you can’t just apply 770 and open up the channel and improve the breathing. There is another drug that’s required here.
We have a second drug that sometimes I call it the traffic cop. It basically points the channels to the cell surface. They get to the cell surface, then the idea is 770 opens up those channels. These patients have a more severe form of the disease, more difficult to treat. We believe a combination approach is the right way with these patients, and therefore the way we’re studying these patients is in combination therapy.
Quickly, the results that I just put up on the screen in front of you, is, we treat a patient for two weeks with VX-809. That’s the – it’s a corrector compound. This is the traffic cop; it sends the channels to the cell surface. We then apply VX-770 to open up those channels that are on the cell surface, and we measure the benefits of this drug with a biomarker at this point that points towards the potential clinical benefit for dosing combination drugs for patients with this disease. These mutations apply to approximately 80% to 85% of the patients with this disease. This really would unlock treating the majority of the patients if we can take a corrector and potentiator approach, a combination approach to these diseases.
What’s amazing about this slide, which is early data, it is biomarker data, but it’s an important biomarker within this disease. It’s why QUAD has always been a measure of the severity of the disease. What you can take away from this slide is that there is a significant reduction in sweat chloride for a large portion of these patients that could be the initial marker that the combination therapy provides a chance for clinical benefit in the future.
So saying that, if you think about the Group 1, Group 2, Group 3 mutations, we’re advancing down this continuum to get to as many patients as possible. We’re already in Group 1 mutations. We filed the KALYDECO both in the U.S. and Europe. Group 2, we hope to be moving into Phase 3 studies to expand our label. And then the Group 3, the Group 3 mutations we’re taking a combination approach. We actually have two corrector drugs that we can put with VX-770. And we’re actually on the way, doing a study that has longer duration and higher doses of VX-809 and VX-770, and results from those studies should come in 2012.
So cystic fibrosis is emerging as a very important area for the company. A lot of the debate today is around hepatitis C and our strategy. We’re firmly committed to hepatitis C. We believe that we can get to an all-oral therapy very soon in terms of measuring the period of – that the disease has been designed. It is a cure market. And with cystic fibrosis, we’ll move quickly along with this continuum of mutations to expand the number of patients that we can treat.
Outside the area of HCV and cystic fibrosis, I’ve mentioned that we do have other drugs. I’m just going to quickly stop on one. There was a third conference that’s been going on over the last five days, as well as a conference for where we were cystic fibrosis and HCV, and that’s ACR.
And we presented our data recently at that conference just a couple of days ago for an immunosuppressive compound. It’s a highly selective JAK3 inhibitor; targets the JAK3 molecular target. We have shown results already in terms of a proof of concept for this rheumatoid arthritis drug, and the results compel us to move into a longer duration study, a study that is six months long for patients that have a background of methotrexate.
We anticipate starting that study towards the end of this year, early next year, and have results back to you in 2012. It’s a very exciting area. Most of you probably are aware that Pfizer has an interesting compound, similar mechanism, not quite as selective as our JAK3 inhibitor, but they were able to show as a proof of concept and they’re in Phase 3. We’re fast following with this drug. Our hope, even though the date is early, is that we differentiate and therefore provide the patients with an opportunity with this drug.
So I’m just going to finish and open up for question-and-answer. But the pipeline is broad. There is a high, heavy focus on hepatitis C and cystic fibrosis today, but there is also this speculative opportunities that have good chances as we move forward.
I wish I had more chance to talk to you about each one of them, because each one of them is highly compelling. Each one of them was once where our drugs were in hepatitis C and cystic fibrosis. And where we are with hepatitis C and cystic fibrosis today has been an important move for patients with these diseases over the last decade, and we hope to do the same with the drugs that are moving along the pipeline.
So thank you for your attention today, and I’ll open it up for question-and-answer.
Adam D. Cutler – Credit Suisse
So you noted that we just came off of AASLD meeting and you discussed a little bit of your strategy. There was a lot of data presented from Vertex as well other companies at AASLD. And I’m curious if you can comment, is the Vertex expectation for how HCV therapy is going to evolve or the speed with which it might evolve different now after AASLD? And how does that impact your development strategy, if at all?
Ian F. Smith
So, I think, I appreciate the question, Adam, because it appears to be the question or the statement or the conclusion whoever’s making it or saying it. We go into the conference, every conference, each year where there’s a lot of science presented in a cure disease. And therefore, it’s also, it’s always fascinating when we go to these conferences.
So we did learn new things. Where they highly surprising? No. I think some of the results were very good and that’s important for the field. But did we learn anything for where we’re directed in terms of a company and a priority? We’re still highly focused on an all-oral regimen as fast as possible for these patients. We believe that we have a basis for that. We have two direct antivirals, which is INCIVEK and VX-222; the combination of those two drugs is highly potent and appears to be safe over a period of 12 weeks.
We’ve shown data as well already throughout this year. And the question for us is having that third agent, does it get you to a 12-week high viral cure, all-oral therapy? We believe that we have that opportunity. We have a study that quickly enrolls – sorry – allows us to take a look at the data very shortly. That will give us a good read of what the timeline that we’re on. Also we can consider placing VX-222 and INCIVEK with other compounds, other direct antivirals. The opportunity is still in front of us. As we come out of AASLD, were we aware, did we acknowledge good data? Absolutely. But we’re in the field of genotype 1, and there is still a great opportunity based on how we think about timelines, the regimens that we’re running, and the possibility to create high viral cures with those all-oral regimens.
And so this is a space that’s important. And timelines are also important, because if the timeline actually is different, then people are concluding – it also means the timeline for an INCIVEK, interferon, and ribavirin based therapy is longer than what people might conclude. And I have been a little surprised by people’s reactions of the timeline of our base therapy today. It’s been well received. We’re treating thousands of patients, and we anticipate that to continue. And that’s going to be an important source of financial asset, as I said earlier, for the company as we progress further into this disease. We have a great start and we’re going to continue to build on it.
Adam D. Cutler – Credit Suisse
Maybe just to follow up on the financial assets, it seems like a good segue, and then we can, after this, move to the breakout session. But now with the success of INCIVEK, and regardless of the shape of the tail of INCIVEK or your HCV franchise, you’re clearly going to be generating a lot of cash in the near term and beyond.
Can you talk a little bit about your thinking about how to handle that cash, and any possible capital redistribution?
Ian F. Smith
Sure. It seems to be a frequent question that’s asked of many companies in the space today, and we see what certain companies have done in terms of, specifically, Amgen recently. I would just say that for Vertex at this stage, we’re at that early part of the curve, which is Q3 of 2011 was our first quarter where we’ve been cash flow positive.
So it’s thrilling to be cash flow positive, but as we look into the future, I do look forward to the company accumulating cash. It’s a – if I answer this in a financial way, I guess part of it is pride after so long. But the financial hydraulics of the company are unusual in that we do have this opportunity, because of the patients we’re treating and the value that we’re creating for the company, that we are able to actually generate significant cash while maintaining the breadth of the pipeline of opportunities that I just described. That is unusual in this industry to have the reinvestment into R&D and pipeline while still creating the cash.
So therefore, where it places you years out, or end of next year or the year after, it places you still with the potential to develop new medicines, but you’re also accumulating cash at the same time, so you’re actually able to do both. So the question is, is what you do with the cash you create? And it is a question that’s asked of us now. It may be early to commit to anything like that, but if you can’t make the cash work for you in terms of reinvestment in the company and the disease areas that you’re in, then I think you should think about things such as opportunistic share buybacks.
They’re interesting ideas. There’s no commitments to them at this point, but they’re interesting ideas. There are times when, on a macro basis as an officer of a company, you believe that stocks can be disconnected from the value of the company. You can also look at it on a micro basis. We find it fascinating at this point that conclusions are already being drawn. We think they may have been drawn a little too quickly in hepatitis C.
And so there are opportunities at certain times to think about that, and I just think it’s a little early to commit to anything at this point. We’re very excited about creating cash; we’re at the early part of it. But that’s how we think about it conceptually. Can you put the cash to work? If not, look at ideas when there’s dislocation on a micro or macro basis of the company’s stock, and it might actually be that that’s a good return if you make that choice for a buyback.
Adam D. Cutler – Credit Suisse
Thank you very much.
Ian F. Smith
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