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Vertex Pharmaceuticals Inc. (NASDAQ:VRTX)

Q4 2007 Earnings Call

February 11, 2008 5:00 pm ET

Executives

Michael Partridge - Senior Director of Strategic Communications

Kurt Graves - Executive Vice President and Chief Commercial Officer

Ian F. Smith - Chief Financial Officer and Executive Vice President

Dr. Joshua S. Boger - Founder, President and Chief Executive Officer

John J. Alam - Executive Vice President Medicines Development and Chief Medical Officer

Analysts

Geoff Porges - Sanford C. Bernstein

Steven Harr - Morgan Stanley

William Sargent - Banc of America

Meg Malloy - Goldman Sachs

Rachel McMinn - Cowen

Richard Smith - JP Morgan

Brian Abrahams - Oppenheimer

Thomas Russo - Baird

Hari Sambasivam - Merrill Lynch

Annabel Samimy - UBS

Lisa Bayko - JMP Securities

Operator

Operator: Good afternoon. My name is Johnathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vertex Year-End 2007 Financial 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. Mr. Partridge, you may begin your conference.

Michael Partridge - Senior Director of Strategic Communications

Good afternoon. This is Michael Partridge, Senior Director of Strategic Communications. Welcome everyone to Vertex’s 2007 year-end conference call. Today’s call is focused on reviewing Vertex’s business priorities for 2008 and outlining the financial strategy that supports these priorities. This evening, we also announced that we have filed registration statements for a combined offering of our common stock and convertible debt. We will not be providing any information about the offering in today’s call and refer you to the press release for specific details.

Joining on today’s call from Vertex are Kurt Graves; Ian Smith; Dr. Joshua Boger; and, Dr. John Alam who 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 Kurt, I will 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 and Exchange Commission, including our 10-K.

GAAP and non-GAAP financial measures will be discussed on this call. Information regarding our use of non-GAAP financial measures and a reconciliation of those measures to GAAP is available in our fourth quarter and full year 2007 financial press release which can be accessed on our website at vrtx.com.

Unless otherwise noted, all 2007 expenses and 2008 guidance discussed in this call are inclusive of stock-based compensation.

As always, you can visit our website to listen to the conference call and view a PowerPoint presentation or download a podcast.

Lastly, after our prepared remarks, we’ll take as many questions as we can. But, in the interest of time, we will conclude the call at about 6 p.m. Once the call concludes, our IR team joined by Ian, Kurt, John and myself will be in the office to answer any additional questions.

I will now turn the call over to Kurt.

Kurt Graves - Executive Vice President and Chief Commercial Officer

Thank you Michael and good evening everyone. We started our 2008 with a major accomplishment on telaprevir and the FDA as well as the EMEA, and we believe the fundamental value drivers for telaprevir and for the rest of our growing portfolio have never been stronger or more promising. With that said, it’s a great pleasure to be here tonight speaking with you about our 2008 business plans. I'd like to start-off with a focus on our pipeline, our portfolio strategy and our key priorities for 2008. Then, I will hand it over to Ian to give you an overview of our financial results and our 2008 financial strategies and outlook for the year.

To start-off, there are four major components of our portfolio strategy that each aim to expand the breadth and depth of value across their pipeline. First and foremost, we aim to execute Phase III policy to fully leverage the differentiated profile and first-to-market opportunities with telaprevir and key telaprevir life cycle programs. Second, now that telaprevir is in the final stage of development, we aim to take definitive steps to build a multi-drug HCV portfolio around telaprevir, our second-generation protease inhibitors and other targeted external assets to build a leading HCV franchise. Third, we aim to demonstrate the value of key assets outside of HCV that are advancing in our clinical pipeline with a focus on progressing two novel compounds for cystic fibrosis and a novel JAK3program for immune-mediated inflammatory diseases. The fourth and last area of our portfolio strategy is to partner in our out-license assets where Vertex doesn’t have a core therapeutic area focused and/or where we see a collaborator that can add unique value to our assets.

Let me briefly expand in each of these four strategies in our portfolio. First, starting with telaprevir. We plan to leverage the agreed Phase III trial design which is solely focused on 24 week durations with the RVR design to realize the full potential of telaprevir's profile. Our aim remains to deliver high rates of cure together with a compelling reduction in the duration of therapy for patients and their doctors. In doing so, we believe we can and will set high competitive hurdles at launch and continue to improve upon them through ongoing life cycle development activities in the areas of dosing and novel combination studies just to name a few of the things we are working on in 2008.

We also have plans to prepare and leverage first-to-market opportunities which are so valuable in the HCV category in particular. Our plan with important studies like PROVE 3 in treatment failure population is to generate additional data that will put us in a position to fully capitalize on this first-to-market growth opportunity. There are many treatment failure patients in the market some having failed standard-of-care several times that urgently need new therapy that gives them a shot at virological cure. Our aim is to be the company that first meets these needs and capture the full opportunity.

For naive patients, we already have robust Phase II data showing significantly higher cure rates of SVR with our 24 week telaprevir-based regimens compared to 48 week's of standard-of-care. We believe that we have designed a pivotal Phase III trial that could at a minimum replicate the efficacy and safety results that we achieved with a 24 week regimens in PROVE 1 and PROVE 2.

Beyond the pivotal Phase III trial, we are also focused on meeting three core elements of an overall registration package with the FDA for treatment-naive patients. Let me outline to you those three elements. Element #1 is obviously the pivotal Phase III three arm trials starting this March. The second element of the registration package is having a safety data base of 1,100 to 1,500 patients treated with their highest potential dose of telaprevir. And the third element is a second well-controlled study either in treatment-naive patients or treatment failure patients.

To meet our registration package requirements on patient database size and a second well-controlled study, we've chosen a plan that we believe gives us flexibility and also covers our basis with two solid study options. Option one is with a 400 patient treatment-naïve trial that we will be enrolling this year where we aim to generate confirmatory data that a telaprevir-based 48 week regimen offers no risk benefit advantage over the 24 week regimen that we will utilize in our Phase III study and plan to take to the market. We believe this data is helpful for meeting our registration and labeling goals. But even more important, we believe adding supportive data showing there is no risk benefit advantage of a 48 week regimen could help us speed the adoption and comfort level with our 24 week regimens in the marketplace where it's most important.

A second study possibility for registration purposes is represented by PROVE 3. PROVE 3 is a well-controlled 440 patient study evaluating different telaprevir regimens in treatment failure patients. I want to be clear here, our expectation that this trial could be included as part of a registration package depends in part on the strength of the data. All patients have completed telaprevir dosing in this trial and we anticipate receiving interim data during the second quarter of this year at which time we and Tibotec will then discuss the results with FDA and EMEA. Both options give us flexibility and support a rapid time-to-market. We project having final SVR data from PROVE 3 by year-end 2008 and final SVR data from the other two trials within the first half of 2010.

Moving onto our second portfolio strategy, which is focused on building a leading and sustainable franchise in the HCV category. Beyond the core registration strategy with telaprevir, we have built multiple life cycle efforts underway to improve and optimize telaprevir’s profile further. But we also aim to build a leading multi-drug HCV franchise. We believe HCV will require multi-drug regiment to achieve cure rates and this is unlikely to change for sometime. Therefore, one of our key goals is to stand the forefront of innovation in defining the most effective regimens for patients. To build out our HCV portfolio in 2008, we need to strengthen our protease inhibitor physicians by bringing forward two second generation protease inhibitors specifically VX-500 and VX-813 as rapidly as possible.

Telaprevir has set very high hurdles on the two most important attributes of efficacy in duration of care however, if something can be designed to compete with it or even define a new combination treatment approach we tend to be the company that brings that to the marketplace through our knowledge and expertise in the area.

In parallel, we tend to use our leading protease physician with telaprevir and our two second generation proteases to evaluate and attract combinations with novel interference and our attractive STAT-C combination products like polymerase inhibitors to building a leading multi-drug HCV portfolio. Through collaborations, joint studies and our product deals, we are targeting multiple options in this area to build our strength, and we believe our strategy is a win-win for those with complementary therapies.

The third component of our portfolio strategy goes beyond HVC, where we’ve chosen to focus our portfolio and compete in other specialized disease categories with very high unmet medical needs. I will briefly review three potential opportunities we are focused on in 2008.

First in Cystic Fibrosis, we are leading in the development of two novel compounds that work on the fundamental underlying biochemical defects in CFTR. VX-770 is the CFTR potentiator compound in Phase IIa trial, and VX-809 is the CFTR corrector compound in the Phase Ia clinical trial in healthy volunteers.

CF is a specialized indevastating disease, and it affects approximately 30,000 children and young adults throughout the US. It is another example of a disease category where we believe Vertex is targeting the right market one with huge mobility and mortality rates, where our approached to therapies isn’t just another symptomatic therapy, but instead, with a potentially transformational therapy that could if successfully developed be disease modifying for patients who today only have an average expectancy of 37 years. We hope to change that life expectancy.

In addition, we have ongoing preclinical activities for a number of early stage compounds that we plan to take in the clinical development this year. Specifically, we announced today that we expect to initiate clinical development of a novel and potentially differentiated JAK3 inhibitor and mid 2008 for the treatment of multiple immune-mediated inflammatory diseases such as Rheumatoid arthritis, psoriasis, organ transplant and other serious diseases.

During 2008, we plan to generate data that could establish the potential of these compounds as potentially disease modifying breakthrough product opportunities.

In the fourth and last component of our portfolio strategy consistent with our disease area and overall portfolio strategic direction, we end the partner or out licence assets in our earlier stage pipeline that either don’t fit with our targeted disease areas and/or where we believe the collaborator can add unique incremental value to the asset. An example here could be with our JAK3 program which has the potential to be developed in multiple autoimmune inflammatory disease areas in parallel.

In summary, we are at a new and very exciting stage of development as a company, where we are focused on rapidly progressing the company towards our first significant commercial launch with telaprevir, and at the same time we are fortunate enough to have a growing portfolio of novel assets in the clinic or just about to enter the clinic for HCV, cystic fibrosis and multiple immune-mediated inflammatory diseases.

We look forward to updating you on progress throughout 2008. Thank you for your attention this evening. And I’ll hand it over to Ian. Ian, over to you.

Ian F. Smith - Chief Financial Officer and Executive Vice President

Thanks, Kurt. Today I’ll cover two topics. First I’ll discuss our 2008 financial profile and how we are directing our investments in our business compared to 2007. And second, our financial strategy to support our planned investment profile.

As you heard from Kurt, we have identified four key business and portfolio priorities for 2008. In summary, we are investing to drive and expand the first-to-market opportunity with telaprevir and our next generation HCV portfolio assets. While advancing our clinical development to drug candidates by other important diseases such as cystic fibrosis and autoimmune and inflammatory diseases.

In addition, we maintain our proprietary research and continue to productively add to our clinical pipeline. Now for the 2008 investment profile and how this compares to 2007. Regarding to a 2008 loss excluding charges and gains to be in the range of $320 to $350 million, similar to that of our 2007 non-GAAP loss of $325 million.

In 2008, we are fully funding our opportunity in HCV and this is the priority in our business. In the other areas of our business, we are trailing investment levels to reflect data from ongoing studies on our balance sheet profile specifically. We have important ongoing studies and commitments to early stage and mid-stage compound that may result in significant opportunities in the near-term. Our level of investment commitment into these areas will be data driven and will reflect our assessment to our financial profile as we proceed through the year. We expect full year 2008 GAAP loss in a range of $380 to $410 million which is similar to the 2007 GAAP loss of $391 million; both numbers include approximately $60 million of stock based-compensation and restructuring expense.

We are forecasting total 2008 revenue in the range of $200 to $220 million. This represents a slight increase from 2007 revenues of a $199 million and is mainly driven by revenue drive from our development based collaborations.

Our revenue forecast for 2008 is consistent with that of prior years. We are principally reliance on our existing development collaborations including revenues from milestone achievements, most notably, a $45 million milestone, which we expect to received upon the initiation of dosing of patients in a Phase III study of telaprevir. We anticipate new collaborative revenue that could be between $20 and $40 million.

Now, to the R&D investment. We forecast in 2008, the R&D investment will be in a range of $490 to $520 million for the full year, which includes approximately $45 million of stock-based compensation. This is similar to our 2000 R&D expense of $513 million, and it also includes our investment in telaprevir commercial supply. Our priority of HCV, and we are managing the investment into earlier and mid-state opportunity based on important clinical data in our financial profile.

We expect SG&A expenses to be in the range of $110 to $120 million in 2008, including $10 million of stock-based compensation. This is an increase of 2007 SG&A expense of 85 million commensurate with our commercial expansion to support HCV and internal organizational development to score the progression of our business.

In summary, we believe we have a balance – our 2008 investment towards advancing our HCV portfolio while advancing and creating other significant clinical opportunities.

Now to the balance sheet. We entered 2008 with cash and equivalents position of approximately $468 million, and we are currently engaged in a process that may result in the monetization of our HIV royalty toward further capital to our business. With additional cash inflow from our R&D collaboration including milestones that I have mentioned, we are well positioned to drive significant value from important clinical events.

In closing, we are fully funding our opportunity in HCV as this is our priority. And while we progress other aspects of our business, we have managed the operating investment to be dependents on both data from ongoing study and the balance sheet profile. Josh, over to you.

Dr. Joshua S. Boger - Founder, President and Chief Executive Officer

Thanks Ian. We are increasing the fundamental value in our business. We believe the progress we are making with telaprevir, as well as across our organization is positioning us to succeed at a corporate and commercial goals. We've established eventual strategy to support these objectives and look forward to making focus investments in 2008. In the past several months, we completed productive interactions with both the FDA and EMEA relating to the registration program for telaprevir.

We are confident our Phase III program, one is being viewed enthusiastically by the clinical community will confirm the benefits of a 24 week telaprevir based regimen. We believe it will help to assure in a new paradigm for the treatment of HCV. We look forward to starting a pivotal trial in March. We talked about several milestones for you on the call today. We know it is up to us to deliver in order to establish a successful business for many years to come, and we are focused on delivering. I look forward to reporting to you on the progress of Telaprevir in the year ahead. There are lot of data being generated from clinical trials across our pipeline it should be an exciting year.

I will turn the call now back to Michael.

Michael Partridge - Senior Director of Strategic Communications

Thank you, Joshua. We will now open up the call to your question.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Geoff Porges from Sanford C. Bernstein.

Geoff Porges

Thanks very much for taking the question and congratulation guys on getting the financing helpfully out of the way in future. Number of questions on development strategy here. You are standing a little bit more bullish in your comments on PROVE 3. Why are you becoming more confident? Could you give us a sense of what you are saying, and frankly when we might hear about it, but also, is it true now that you are actually seeing end of treatment data for the 24-weeks arms already at the basis for your stent. Secondly on the enrollment for Phase III for the telaprevir study, what assumptions are you using behind the completion of enrollment at the end of the year. That seems a little bit longer than in the past, typically this run rates. And then finally, on additional deal flow, could you give a little bit more color Kurt on what opportunities you see from the early stage assets where you might be focusing your attention on the BD activity? Thanks.

Kurt Graves

Thanks a lot Geoff. Its Kurt, I’ll start it off and I’ll ask John to make a couple of comments here as well. On your first question on the development strategy and maybe sensing some more confidence from us around PROVE 3. I think the most important thing I can say about that for us is an organization and for the compound in general is that this particular segment of patients the treatment failure patients are the highest unmet needs segment in the marketplace. And as we continue to do market research and talk to customer about this (Inaudible) patients which has changed a couple of weeks ago, and made a firm impression on me just about how much demand there is out there for new therapies that can present an opportunity to cure these patients. So for both reasons of unmet need market size and having a first-to-market opportunity focused on that opportunity, it’s very key to us as a company. And I’ll turn it over to John to talk about from our clinical scientific perspective.

John Alam

Okay. So in terms of the PROVE 3 trial itself, you know, it’s obviously an important trial for the very reasons that Kurt outlined. The treatment-failure population is an area of great unmet needs and I think the clinical community has a tremendous amount for that reason, has a tremendous amount of interest in the outcome of the trial of the size of PROVE 3. It’s a significant trial to 440 patient trials. The status of the study at this point is that, as Kurt said, all the dosing in the telaprevir arms have been completed. And more specifically, all treatment is now complete in the two 24-week arms, which includes one arm which is the 12-foot 12-arm that has performed as well as it has in PROVE 1 and PROVE 2. The first interim will be focused on SVR 12 data in those two 24-week arms and that will be done within the second quarter. We obviously don’t have the data at this point. But we are optimistic particularly around and I am personally, I am optimistic around the 12-foot 12-arm, because of the data that we’ve obtained with the 12-foot 12-arm in PROVE 1 and PROVE 2. And I think with that we can, it is – we are optimistic about getting a differentiated result with the 12-foot 12-arm even in the treatment failure population. I am not going to go through the specifics of the data from PROVE 1 and PROVE 2 of why we are optimistic. I am surprised to say that it's clear that if you go through the data in detail, there are patients who would have been non-responders if they had been treated with just interferon and ribavirin who are getting clear responses and even to SVR with the 12-foot 12-regimen. And there are patients who would have relapsed with the standard of care who are not relapsing and getting to SVR with the 12-foot 12-regimen.

Geoff Porges

Thanks. Enrollment John?

John Alam

Enrollment in Phase III, I don’t think we have changed the guidance that the study is set to be initiated next month within the next several weeks, and we are looking to six to eight month enrollment period for that study. It will be done within the fourth quarter, which I think is right on target for 1050 patient trial.

Kurt Graves

And Geoff, there is a third component of your question on additional deal flow.

Geoff Porges

Yeah, where are you going to focus, where you see the value opportunities there?

Kurt Graves

Yeah, I alluded to it a little bit Geoff in the call. One area that we have an exciting compound is our JAK3 compound, which is obviously a very interesting in the industry overall right now. And we feel that we have got a potentially in our role and potentially differentiated compound there. The issue for us as a company is that JAK3 as a target is a highly interesting target, because it can potentially be used in several; really we’re talking here four or five up to six different diseases of significant size. And to be able to maximize the value of that asset, we’re going to be having discussions with people about how to maximize the value of that asset for each disease state, but also from a development timing perspective, developing multiple indications in PLL. So, when we sit back as a company, we look at our priorities in HCV being our top priorities both around telaprevir and our second generation program. We know that we probably need to collaborate here to maximize the value of the asset with JAK3, if we intend to develop it in multiple diseases. So, that’s an example of one, where we’re focused on discussions with collaborators. But we also have areas in the area of oncology perhaps around POK and CMET, we are obviously still working on 702 and we are having different discussions with partners there. So, that will give you a feel of what we are looking at.

Geoff Porges

Okay. Thanks very much.

Operator

Your next question comes from Steven Harr from Morgan Stanley.

Steven Harr

Yeah, a couple of questions. As we look out of the next couple of years, where do you expect to see the burn rate go, it’s been above $300 million now for a couple of years as the potential for telaprevir not to launch until 2011, your need for capital that could be extensive. And then, second of all, John if you want just comment over on b.i.d. dose, I know you guys had RVR data in-house or you should have it in-house either already a very soon any chance if you could see something from that. And then, third, I know you already win over PROVE 3 job. If you could just help us understand why you think that however, it might be different than what we saw for telaprevir which really struggled in this environment that will be great? Thank you

John Alam

Thanks Steve. Thanks for the question. So, a very common question, the Vertex one. . Thanks for brining it out. He is asking me to look into the future is very difficult. Obviously, the way that we look at it as the burn is reflected both the investments that we chose to make to drive the opportunity. So for example, we have a very large opportunity in HCV and how did you take the most of bad opportunity HCV looking at all the multiple patients and building commercial supply, multiple patient population building commercial supply to launch the drug successfully.

So looking out in the future very difficult to comment into the future when you are asking about 2009 and 10 it will be a function of the opportunity at that time, clearly it won’t be focused on hepatitis C at that point, which brings me back to 2008 which is something clearly I can comment on. What I hope you see in our financial guidance of today is the number that is similar to 2007 the guidance is $320 to $350 million non-GAAP guidance, which is consistent in 2007. If you look underneath of loss guidance the principle driver of our loss is our R&D investments, when you look underneath the R&D investment what you see is a large development investment and the large development investment is principally driven by hepatitis C on the investment to build commercial supply to launch this drug into multiple patient populations. So, we are managing the burn, as I look at this a very balanced way. We are looking hepatitis C to see as a priority investment, we want to fully fund hepatitis C. The rest of our pipelines were awaiting data. We progress it. We evaluate the balance within research and development in the early stage pipeline versus the life stage opportunity, and as always we are looking at our balance sheet profile and trying to manage it accordingly. But you ask me to look at multiple years will depend on the opportunity at that time.

John Alam

So, on your two clinical questions Steve. This is John again. So, I am starting actually with your second question on PROVE 3. Again, given the data that we’ve seen with PROVE 1 and PROVE 2 and the design of PROVE 3, and the patient population that we are studying, I personally and I think as a company we do believe that we can and we’ll be successful in the PROVE 3 trial.

Now the comments regarding the (telaprevir), when I’d to keep in mind that they did study, they did not actually study the broader treatment failure population. The study that they conducted was in a very specific population that actually represents a distinct minority of their overall treatment failure population.

Now whether or not Telaprevir can be successful within that niche, we will see the data. But I think given again the level of activity that we’ve seen in PROVE 1 and PROVE 2, we should see a high level of response in the broader both non-responder and the relapse to population that we are evaluating in PROVE 3, and in fact represents the broader treatment failure and medical need in that population.

With regard to b.i.d. dosing, we expect on the first pharmacokinetic data within the first half of the year, and actually clinical data from patients in terms of response on treatment response rate within the second half of the year.

Steven Harr

Thank you.

Operator

Your next question comes from the line of William Sargent from Banc of America.

William Sargent

Hi! Thanks for taking my question. Two quick questions first I guess based on your anticipation of getting data from the Phase III programs, did you also anticipate a filing in the first half of 2010, or Telaprevir. And then also, I was wondering if you could help us by differentiating all the more for the second generation PI’s how they might differ from each other and what the new addition to the PI pipeline could bring to the table? Thanks.

John Alam

On the first question with regards to timelines, what I covered in the script is essentially telling you that we have coming out of the meeting with the FDA, an agreement that we have one Phase III pivotal trail that’s focused on 24 weeks and that as a company the rest of the registration package will require that we have a second well controlled study.

We have two options to meet that, one option could be PROVE 3 pending the results of that study which will finish and we’ll have results on the end of 2008. The other study is the 48-week study, that study will finish like the first pivotal Phase III trial, and will have rest of the data from both of those in the first half of 2010.

So, theoretically that creates different filing assumptions. We think for a base case assumption for planning purposes right now you should assume the 2010 filing timeframe based on the results that we talked about, but there could be an opportunity based on when we finish the first pivotal study, and if PROVE 3 is positive that that can work for a filing package as well.

William Sargent

And in the second generation PI’s?

John Alam

Could you restate your question on that?

William Sargent

Yes. I was just wondering now that you’ve got two second generation PI’s and beginning to look at them from the clinical development standpoint, what to get help us differentiate the two a little bit further or is it same scaffold just looking at slight modifications?

John Alam

We haven’t given on any particular details and rather than start going down giving out details of that right now, I think the most important thing on the second generation is that we obviously know the hurdles that we’ve established for Telaprevir and we think those are very high and we’ve designed these specific to second generation compounds to meet or beat the hurdles that we set in Telaprevir in at least one or more dimensions as it relates to efficacy, safety dosing the obvious areas that you consider, but right now we are not prepared and we are obviously focused on generating data as soon as we can, and when we have relevant data will disclose that to you at the appropriate time.

William Sargent

Would you anticipate that being in 2008?

John Alam

It depends on the data. If anything it would be in the later 2008, early 2009 time-frame most likely given where we are in clinical development.

William Sargent

So there is a potential that we would not get any further data on this compounds in 2008? If the data is something that I guess, what depends on the data, I guess, could you clarify that a little bit further?

Kurt Graves

So, well you are asking for a disclosure commitment to this point regarding the second generation compound, the way we look at this is the most important data is when we are in patients and how these drugs act in patients. So the point we have that data, we will provide it to the street.

William Sargent

Thank you.

Operator:

Your next question comes from the line of Meg Malloy-Goldman Sachs.

Meg Malloy

Thanks very much, I guess there are two followup questions. One is, could you clarify what top-line data we will get from PROVE 3 in Q2 versus year-end and from your perspective, can you share with us what you think would constitute a registrational result?

Unidentified Company Representative

Meg thanks for that question. May be the disclosure question you are asking, I will take and let John take the second part of question, which was a registration result I believe, if I got the question correctly.

So, PROVE 3 is John and Kurt have both explained, very important study for us based on the population but also some of the excitement you heard John talking about to the opportunity for a good result. We want to preserve the integrity of that study and the result that we would get from that study, take the data which we will have available to ourselves early in the second quarter and told to the FDA regarding that result.

At that point based on the discussion with the FDA we will have a better understanding of the path forward in treatment failure patient. Once we have more clarity on the path forward in treatment failure patient and we would look to disclose that as it is relevant to the market which could come around the middle part of the year may be the second part of the year. So that’s the disclosure path in terms of protecting the PROVE 3 data. John, do you want to comment on the registration?

John Alam

I think its really just coming down to the strength of the result, both in the product treatment failure population relative to what one would expect within the standard of care arm, its probably a little premature at this point to give a specific expectations, but it really does comedown to consistency of response and level of response. And I would like to just take the opportunity to add a little bit to the prior response on the (telaprevir), the telaprevir versus telaprevir in this patient population because it is – its in this specific population where potency and early viral HCV RNA reduction is where you would expect the most impact as much as, in the treatment naïve it has an impact in terms of duration of treatment and being able to bring the duration from 48 down to 24 weeks.

I think in the treatments failure population and in particularly in the non-responder, it become the question of whether they are going to respond or not based on whether you have an early and potent reduction in HCV RNA or not, which is why as much as the non-responder population, the niche population the (Inaudible) would evaluate is going to be tougher to treat, but at the same time, I think there is a reason and a specific scientific rationale why telaprevir may impact have a very different effect in that population relative to the (Inaudible).

Meg Malloy

Okay. Can I have follow-up, can you give us a sense of what percentage of the patients will be non-responders versus relapsers and would you have statistical power to show a difference in both subsets?

John Alam

The study is about 60% non-responders and 40% relapser and it's powered to be able to show an overall effect. I would obviously be able to look at trends within the sub-population. Depending on the result within the standard of care on how low it is and we do expect that actually to be very low. We may be able to make some specific interferences within the sub populations, but it's not really the design, because in the actual clinical community, sometimes the specific distinctions are not made. It really is more -- from a patient perspective what matters is whether you achieved an SVR with peginterferon and ribavirin or not.

Meg Malloy

Thank you.

Operator

Your next question comes from the line of Rachel McMinn from Cowen.

Rachel McMinn

Yes. Thanks very much. A couple of questions, I guess I’m a little bit confused on your, I guess the believe that PROVE 3 would be supportive of FDA approval in the treatment-naïve setting, is that just because you think you are whistling a safety issue there and that the 48-week trial is really not relevant to supporting approval? And then, just on the manufacturing planning, I wanted to better understand if you are taking into account if there is any way you believe that PROVE 3 to be registration enabling on its own or we should really do manufacturing planning is all towards the 2011 March?

Kurt Graves

Rachel, its Kurt. Let me try and answer both of those questions. As it relates to the FDA registration package, you are actually correct, all that’s required for registration is our primary pivotal Phase III study, the three-arm Phase III pivotal trial that we have.

The second component that we got clarity on from the FDA is that we will need a safety database of 1100 to 1500 patients. And the third component for that registration package is that we would need to have a second well controlled study as part of the overall NDA package. That second well controlled study doesn’t necessarily have to be in the treatment naïve populations. So, if PROVE 3 is positive, we assumingly discuss with them is that, that is one potential option to have a registration package based on for that data, but it obviously depends on the data which we haven’t seen yet.

John Alam

And Rachel to the manufacturing question, unless you strike right at the heart of some of the conflict within managing the financial profile and investing in the opportunity. So, the way that we are looking at PROVE 3 and the potential for early launches. At this point in time, we are investing and looking forward to the potential for an early launch when we get data in the next couple of months that will actually help us understand the opportunity for an early launch.

So, as we run the business we are investing. We don’t want to be core show off with the opportunity for this what would be a significant upside for ourselves on patients with the drug and treatment fairly population. So, we do invest to maintain that opportunity, but if the data comes soon in the next couple of months, next few months, then we'll be able to tailor our investment based on our expectations and that’s exactly how we are managing the business, and I hope that was coming through with some of the prepared remarks that I have.

Rachel McMinn

Okay. And, then just last question for John on PROVE 3? Is there a particular number like a threshold FCR number that we should be thinking about as being in the FDA's list?

John Alam

No, again it's the answer I provided earlier. It comes down to the level of clinical benefit and it's hard to project at this point.

Rachel McMinn

Okay. Thank you very much.

John Alam

Thank you.

Operator

Your next question comes from the line of Richard Smith from JP Morgan.

Richard Smith

Yes, good evening. Just go back to PROVE 3 one more time. My understanding is that you just need to show an improvement over the standard of care, one or the other arm irrespective of whether the patients are non-responders or relapsed patient, do they see pulling non-responders and relapse together?

John Alam

That’s correct. That is how the trial is designed and powered.

Richard Smith

Alright. If you get a response, maybe distinguish between non-responders and relapses by just saying based on sort of the real world, it doesn’t really matter. So, you could actually not succeed in non-responders, but succeed in relapses, but that doesn’t matter as long as the arm rule is a success versus control?

John Alam

Well, I think ultimately how the drug is used clinically which will be defined by the label and their results would be based on what the data show. If there is a result that’s specific to relapses then that’s how we would expect the drug to be used. But again I think that we are going to be data driven and that there are several categories of treatment failure patients there. Relapses there are non-responders that are not non-responders and there are non-responders that are now responders and then have no response at all. And in the case of interferon and ribavirin they do breakout very specifically, how they breakout in terms of response to telaprevir is something that we are going to be able to define based on the analysis and one of the key objectives of the analysis that we will be conducting in the second quarter.

Richard Smith

That kind of breakout could be something on the label or they just could be something on label?

John Alam

I think the label would always be driven by whatever the results are, but in terms of population sizes the partial responders who respond but don’t get all the way undetectable is actually is the largest population within the non-responder population followed by the relapsers, followed by the non-responders which is actually the smallest population of the overall treatment failure population, which again is part of the reason why we are optimistic, because the largest component of the treatment failure population actually does have underlying interferon, ribavirin respond, but its simply not complete. And then given the importance of telaprevir, we would expect a good response in that broader population.

Richard Smith

Okay. Thank you.

Operator

You next question comes from the line Brian Abrahams from Oppenheimer.

Brian Abrahams

Hi, thanks for taking my question. Just two quick questions one for John and then one for either Ian or Kurt going back to PROVE 1 among the patient in the 12-foot 12-arm, who didn’t facility RVR criteria and with convenience failures and rose into the 12 to 36 regimen. Can you give us to what proportion of those patients ended up achieving in SVR. And then for Ian or Kurt can you quantify the component of R&D that’s allocated for the commercial supply investment in 2008 and give us a sent how we should be thinking about that going forward? Thanks.

John Alam

On the first question, I actually can't provide you that answer because there is still actually in follow up and the full SVR from the patients who went on to 48 week, the SVR 24 result we wont have, we don’t have at this point.

Brian Abrahams

Are you seen any patients who achieved in SVR 24 or an SVR12 from among that health group at this point?

John Alam

I don’t know the answer toe the question because it was in design that way. The analysis as specific interims and that specific interim that you’ve seen those patients were simply anyone who will continuing on interferon and ribavirin, they were considered a failure. What I can tell you is in the 48-week arm of the patients who achieved an SVR, there were a number of patients who when went onto 48-weeks did not have an RVR. But when they completed 48-weeks, the 5% of that group of the overall treatment actually achieved a SVR-12. And I know the answer because I was part of the analysis plan. So, we do expect because of that in the Phase III trial, because of the design of the Phase III trial where patients who don’t achieve an RVR that they go that they will get 48 weeks of treatment. And if they achieve an SVR, they will be included in the analysis. We do expect relative to the PROVE 1 result that we would see for the 12-foot 12-arm, we would see a higher SVR result in Phase III than we saw in PROVE 1.

Ian Smith

Brian to your second question with regarding to commercial supply. We are not providing guidance on that this year. We did last year because it was a new investment and my criteria within our business. We started to invest because of a timeline to market. It is part of the hepatitis C commitment, which is the main components of our developments investment. And we are going to build the commercial supply based on the time line to market.

Brian Abrahams

Okay. Thanks for added information.

Ian Smith

Okay.

Operator

Your next question comes from the line of Thomas Russo from Baird.

Unidentified Company Representative

Hello.

Thomas Russo

Hi, thanks for taking the question I was just trying to clarify the meeting with the FDA for the interim results of PROVE 3 and the possible discussion of a 400-patient trial are those - is that the same meeting and the same discussion or those separate meetings?

John Alam

At this point there is no further anticipation discussion around the treatment-naïve registration plan. I think Kurt very specifically outlined the discussions and agreements. It is the one Phase 3 trial that we've discussed here that we are going forward with. And an understanding that there is a requirement for a second adequate well-controlled trial and that can be fulfilled in a number of different ways and we made the decision and it is up to us on how we proceed there.

The discussion that we do anticipate later in the second quarter would be around treatment-failure registration plans and path forward and that would be based on the PROVE 3 interim analysis that I described earlier.

Thomas Russo

And based on typical enrollment timelines, do you think you could wait to have that meeting before kicking off potential 400-patient trial?

John Alam

We are going forward with that trial, the 400-patient trial in the treatment-naïve setting, our plan is to go forward in that trial and actually not hold off and wait for the discussion to really both manage our timeline and we are going forward with that. And we do have a side from fulfilling the requirement for the second adequate well-controlled trial we have a specific other set of reasons to conduct that trials in order to, and the reason it accelerate the move to, the shift in the treatment paradigm to the 24-week regimen which I may ask Kurt to comment on further of how that trial fits into our overall strategy.

Kurt Graves

Thanks John. The point John is making is based on what are our market research and obviously where physicians have treated patients with standard of care for 48 weeks for so long in genotype 1 patients, we feel that the primary data obviously for our labeling is going to be based on the Phase III trial which is solely focused in 24 week durations. But to accelerate adoption of that 24-week regimen we think it will also be important to have data and the information it shows there is no additional risk benefit, advantage of appear 48-week arm versus what we will show and intend to show wit our 24-week arms. And, by having both pieces of that data, we feel that the health clinicians feel comfortable stopping therapy at 24 weeks and everybody is achieving RVR.

Thomas Russo

Okay. Makes sense, thanks a lot.

Operator

Your next question comes from the line of Hari Sambasivam from Merrill Lynch.

Hari Sambasivam

Thank you. My question has been answered.

Operator

And, your next question comes from the line of Annabel Samimy from UBS.

Annabel Samimy

Hi, thanks for taking my questions, most of them have been answered. Just really quickly on PROVE 3, can you give us an idea about whether one can expect the same type of dropout rate on as an treatment-naive population given that this is a sicker patient population and maybe more motivated with your options and what has the dropout rate historically been for these treatment-experienced patients?

John Alam

Yes, Annabel. It’s a good question, thanks for asking. I was just, as I mentioned on the call, on the clinic just over a week ago and I asked the investigators there to show me up closing personal, a lot of treatment-failure patients. So, actually it was fortunate enough to see a lot of people treated in the HALT-C trial and as you know most of those patients were treated and failed standard of care therapy three or four times.

And we are actually so motivated to get a viral cure they enrolled in the HALT-C trial which is still is ongoing treating patients for up to two years on maintenance lower doses of standard of care medicines.

My strong takeaway from that investing to the investigators talk about that patient population and what the PROVE 3 results could mean as that if anything is very likely to be less of a tendency in the patients and doctors to discontinue in this treatment setting because these people are really sick; I saw a women on that had failed standard of care three times already had had pulmonary hypertension, was on a ventilator and was basically on her last days because there was really nothing left for her. There is a high motivation on patients and doctors to treat here and I think will see that in the PROVE 3 results.

Annabel Samimy

How about when looking at the study are all of the arms going to be looked at in conjunction with another or are they apart enough to be looked at separately and show strong enough treatment effect?

John Alam

The study is sized for, obviously dependent on the magnitude of the effect but it is sized so that any one arm can show demonstrate superiority and effectively demonstrate efficacy as compared to the standard of care.

Annabel Samimy

Okay great. Thank you very much.

Operator

And, ladies and gentlemen we have time for one more question, and that question comes from the line of Lisa Bayko from JMP Securities.

Lisa Bayko

Hi, most of my questions have been answered already but, two quick ones. Can you please describe the type of data and perhaps when we might see data from the cystic fibrosis program? And then secondarily, I just want to clarify that your revenue projections for this year do not include the monetization of the HIV program?

Kurt Graves

While we start with this, the easy one first which is the revenue projections did not include the monetization of our HIV program.

John Alam

So the cystic fibrosis program there are two different compounds with different mechanisms each of which from a clinical and scientific standpoint can have the potential to, as Kurt described, have significant impact on the line, mechanism of disease and biochemistry and ultimately to the disease process, that are now in the clinic.

With VX-770, we expect the first data from the two-week cohorts, all within the next several months, it will be end of first quarter, early second quarter and then there is a, based on that we are going forward into a 20-day cohort which will obviously provide both more safety and efficacy results. And the data from that cohort we expect in the second half of the year. And then, VX-809 is just recently gone into the clinic and based on the Phase 1a result we would then proceed to a multiple dosing study and then a proof of concept study.

Lisa Bayko

Okay. Thanks a lot.

John J. Alam – Executive Vice President Medicines Development and Chief Medical Officer

So that concludes our call for tonight. Thank you very much for listening to our call. If you have additional questions or would like to conduct further follow-up, we will be available in our offices this evening to talk with you. Thanks again.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Vertex Pharmaceuticals Inc. Q4 2007 Earnings Call Transcript
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