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Vertex Pharmaceuticals Incorporated (VRTX)

Q4 2005 Earnings Conference Call

February 7th 2006, 4:30 PM.

Executives:

Lynne Brum, Vice President of Strategic Communications

John Alam, M.D. Executive Vice President, Medicinal Product Development, Chief Medical Officer

Ian Smith, Executive Vice President, Chief Financial Officer

Joshua Boger, Ph.D., Chairman, President, Chief Executive Officer

Victor Hartmann, M.D., Executive Vice President, Strategic and Corporate Development

Analysts:

Mark Augustine, Credit Suisse

Jason Zhang, Prudential Equity Group

Jeffrey Forges, Sanford Bernstein

Steve Harr, Morgan Stanley

Andrew McDonald, ThinkEquity Partners

Meg Malloy, Goldman Sachs

Joe Pantginis, Canaccord Adams

Operator

Good afternoon, my name is Tonya and I will be your conference operator today. At this time, I would like to welcome everyone to the Vertex Pharmaceuticals conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Miss Brum, you may begin your conference.

Lynne Brum, Vice President of Strategic Communications

Thank you, Tonya. Good afternoon, everyone. This is Lynne Brum, Vice President of Strategic Communications at Vertex. On behalf of the senior management team, I thank everyone for joining us today. As we get started, I'll remind you that information discussed on 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. During this call, we'll discuss financial results using both GAAP and non-GAAP financial measures. Additional information on the use of non-GAAP financial measures is available in our full year 2005 financial press release.

Earlier today, we issued a press release announcing preliminary results from our 28-day Phase II combination study with the X-150. And at the close of market today, we issued Vertex's full year 2005 financial press release. You may visit our website at www.vrtx.com to listen to the conference call and view a Power Point presentation via the Internet. On our website, you may also download a broadcast. A replay of the conference call will be available via the internet until the end of the day, February 21st.

2005 was a success for Vertex. We achieved our research, clinical, and financial objectives. Most notably in 2005, we produced clinical data for our protease inhibitor, the VX-950, that was unprecedented in the field and generated value for our shareholders. We announced today preliminary results from a Phase II, 28-day study of VX-950 in combination with peg-IFN and ribavirin which further highlights potential of this compound to transform the treatment of hepatitis C. With 2006 underway, we are now committed to moving the VX-950 to a broad Phase II program so we can initiate Phase III studies in 2007, further advancing proprietary Vertex compounds targeting rheumatoid arthritis and cystic fibrosis and collaborating on compounds for cancer, pain and HIV, and maintaining a strong financial profile to support continued developments of our proprietary program. In today's call, we'll review our 2005 financial results and provide full year 2006 financial guidance.

In light of today's news announcing preliminary results for our 28-day, Phase II combination study with the VX-950, Dr. John Alam, Vertex's Executive Vice President, Medicinal Product Development, and Chief Medical Officer, will speak next. He'll review these clinical results for the VX-950 and the 2006 clinical milestones for our core program. Then Ian Smith, Vertex's Executive Vice President and Chief Financial Officer, will summarize Vertex's full year 2005 financial results and outline our full year 2006 financial guidance. Then Dr. Joshua Boger, Vertex's Chairman, President and CEO, will provide his perspective on 2006 in the context of Vertex's long term goals. And Dr. Victor Hartmann, Vertex's Executive Vice President, Strategic and Corporate Development, is also here today and will be available in the Q&A portion of today's call. I'll turn the call over to John.

John Alam, M.D., Executive Vice President, Medicinal Product Development, Chief Medical Officer

Thank you, Lynne. 2005 was a very successful year for Vertex. We made significant progress across our pipeline and with the VX-950, in particular. In 2006, we look forward to conducting additional studies with the VX-950 that will support the transformational profile of this compound and also look forward to clinical data readouts from other key program this year. I will devote the majority of my prepared remarks to discussing recent progress and upcoming milestones for VX-950, VX-702, the VX-770, our newly designated cystic fibrosis drug candidate, all of which are Vertex driven compounds.

I will begin with the X-950. We continue to execute on a broad development program that is designed to establish the product profile of this potentially transformational compound by the end of 2006. We announced today preliminary results from a 12 patient, Phase II, 28-day study of VX-950 in combination with pegylated interferon and ribavirin. The antiviral activity of the combination was consistent across all patients enrolled in the study. At the end of 28 days of dosing, plasma HCV RNA levels in 12 of 12 patients, or 100% of the patients, were below the limit of detection of the most sensitive available assay or 10 units per milliliter in the Roche-Taqman assay. The distribution of baseline viral loads was typical for a treatment 90 study population. Currently available results indicate that viral levels dropped rapidly in all patients in the first few days of dosing, with continuous viral decline in all patients observed throughout the four weeks of dosing.

Specifically, by the end of week one, 6 of 12 patients had HCV RNA plasma levels below 30 units, the limit of quantization, and 2 of 12 patients had plasma viral levels below 10 units, the limit of detection. At the end of the second week, 11 of 12 patients had HCV RNA plasma levels below 30 units, with the one patient who had viral levels above 30 units was a viral level of 43 units. Also at the end of this same week, the second week, 3 of 12 patients had plasma levels below 10 units. And by the end of treatment at 28 days, 12 of 12 patients had the HCV RNA plasma levels below 10 units. All patients completed 28 days of dosing and no treatment discontinuations or serious adverse events were reported. A completely safety analysis is being conducted and we expect to present detailed results at a medical conference later this year.

These antiviral results surpass anything reported in the field to date and further highlight the potential of VX-950 to fundamentally change HCV therapy by potentially increasing the proportion of patients that achieves sustained viral response with shortened treatment duration. If successful, this paradigm shift would make curative therapy available to a much broader range of patients with HCV. Our next studies are intended to collect data to substantiate this point.

In 2006, we will conduct a broad clinical program for VX-950. We have announced today that we have completed three month toxicology studies in two species. Results from these non-clinical studies support our plan to initiate a three-month, Phase II study with the VX-950 and pegylated interferon, with and without ribavirin, in more than 200 patients. We will submit this toxicology data, along with the study protocol, in the first quarter to the FDA for review. At this time, we anticipate starting the three-month Phase II study in the second quarter following FDA agreement. This Phase II study is the most important trial for VX-950 this year, as our goal is to evaluate the potential of this compound, to obtain SVR with three months of treatment. We believe that three-month, post-treatment data from this Phase II study of VX-950 will provide critical information on the ability of VX-950 to produce sustained viral responses in HCV patient and allow us to move to Phase III in 2007.

Additionally, we continue to build our infrastructure to support the advancement of our pipeline. We have recently added several key personnel to specifically help prepare for a late stage development of VX-950 including Jennifer Jackson, VP of Regulatory Affairs, who joined us from Biogen, and has played a direct role in numerous NDA and BLA filings in her career. John Condon, VP of Manufacturing and Supply Operations, who joins us from Millennium, where he was responsible for the manufacture and distribution of Xyacated Integron. At Vertex his responsibility for the clinical packaging and distribution and to build a commercial supply chain for VX-950. Craig Million, our new VP of Commercial Development. Craig comes to us from Pfizer where most recently he was a U.S. commercial lead for Lipitor, the largest selling drug in the history of the pharmaceutical industry.

I will now turn to our P38 MAP kinase inhibitor, VX-702. We believe an oral compound like VX-702 could address a significant medical need in the treatment of rheumatoid arthritis and other inflammatory diseases. In the second quarter of last year, we initiated a three-month, Phase II clinical study in rheumatoid arthritis with VX-702 and completed enrollment ahead of schedule early in the fourth quarter of 2005 with a total enrollment of 315 patients. This study will help define the safety, tolerability and clinical activity of the VX-702 as monotherapy over three months of treatment in patients with moderate to severe rheumatoid arthritis. We are pleased to report today that all patient dosing in this study, with the original intent of treating 315 patients, is now complete with approximately 275 patients completing 12 weeks of dosing. We expect to report topline data from this study early in the second quarter of 2006. The primary end point that will be measured and reported in this study is a reduction in clinical signs and symptoms of NRA patients after 12 weeks of treatment using the American College of Rheumatology or ACR20 criteria.

We also announced today that our collaborated began Phase I clinical trials in Japan with VX-702 in the fourth quarter of last year. Dependent on the outcome of the Phase II monotherapy study, Vertex plans to initiate a three-month, Phase II study of the VX-702 in combination with methotrexate in RA patients in the second half of 2006. We look forward to presenting the results of the monotherapy Phase II study at a medical conference and further defining the potential transformational profile of this oral compound.

Now turning to cystic fibrosis. We announced today details of a plan critical profile involving our first CF compound, VX-770, for 2006. We plan to file an IND and initiate clinical development in the next few months and progressive studies in CF patients in the second half of the year. VX-770 is a small molecule oral compound that is designed to potentiate activity of the defective CFTR channel in cystic fibrosis patients. In the lab, using cells from CF patient where there is CFTR present on the surface of the cell, VX-770 has demonstrated the ability to restore the function of that defective cell membrane protein.

In addition to VX-770, we continue to advance a research program at restoring the normal levels of CFTR channels to the cell membrane. We announced in January of this year that the CF Foundation would provide an additional $22 million to Vertex to further this research through early 2008. New oral treatments that address the underlying biochemical defect of this genetic disease represent potentially exciting breakthroughs for CF patients and complement Vertex's current pipeline of transformational compounds.

In summary, VX-950, VX-702 and VX-770 offer excelling opportunities for Vertex. 2006 will be a year to establish the ability of VX-950 to achieve SDR, to validate the clinical potential of VX-702 and to explore the clinical potential of VX-770. Compounds being developed in collaboration with pharmaceutical companies also have the potential to deliver key data points in 2006. We look forward to reporting all these results to you in the year ahead. I'll now turn the call over to Ian.

Ian Smith, Executive Vice President, Chief Financial Officer

Thanks, John. As you may understand, the challenge of 2006 is finance and to focus on these options that John has described. This is a nice challenge to be faced with. In 2005, Vertex took several steps to improve the financial profile of the Company. We raised approximately $175 million in an XT offering, decreased convertible debt by $155 million through the exchange of debt for common stock, and significantly grew our revenue stream, all of which facilitated increased development investments in our key programs. As a result, Vertex now enters 2006 in a strong financial position with operating leverage that supports the development of our clinical products. This financial strength enables us to broadly invest in VX-950, our highest corporate priority and to maintain the trajectory of the 2008 NDA. VX-950 is a program that requires comprehensive and complete investment to ensure its full value is realized and no corners will be cut. Phase II activities in 2006 represent an important inflection point in the value of this compound and potentially may establish a therapeutic profile as we move into 2007.

Before further comment on 2006, I will now review our 2005 financial results. The 2005 loss before charges was $147.1 million, or $1.65 per share, which is consistent to $145.2 million, or $1.85 per share in the prior year. The loss in 2005 was characterized by increased development investment that was offset by increased revenues. The 2005 loss was within the range we've provided for the year. Our 2005 GAAP net loss was $203.4 million or $2.28 per share. This net loss includes charges of approximately $48.2 million resulting from the exchange of approximately $155 million debt to equity and $8.1 million of restructuring expense. The 2004 GAAP net loss was $166.2 million or $2.12 per share.

Total revenues for 2005 were $160.9 million compared to $102.7 million in 2004. In '05, we saw a significant increase in both HIV product royalties and collaborative R&D revenues. HIV royalties for the year were $32.8 million compared to $17.3 million in 2004, and the product is performing robustly with total worldwide sales of approximately $200 million compared to $115 million in the prior year. Collaborative R&D revenues increased from 85.4 to $128 million in 2005 and are reflective of new R&D collaborations and the achievement of development milestones under these collaborations. Those components, new collaborations, and development milestones remain an important contribution to the continued revenue growth in 2006.

Now to the R&D investment. Our total R&D investment was $248.5 million compared to $192.2 million in 2004. This increased R&D expense specifically reflects increased development investment to prepare for and conduct later stage clinical trials of our products in hepatitis C and rheumatoid arthritis. We expect this trend will continue into 2006. From a research perspective, we have maintained our investment into research at a level that is relatively consistent with 2004 and such investment continues to be primarily funded by research-based collaborations. Our SG&A expense for '05 was $44 million which remains consistent to 2004. In summary, the increase in our operating expense in 2005 was primarily funded by an increase in revenues. We expect this trend to continue as we look to 2006.

Now to our balance sheet. We ended the year with $407.5 million in cash, cash equivalents and available securities, $42.1 million in convertible debt due in 2007, and approximately $118 million of convertible debt due in 2011. The 2011 debt, however, has a converting price of $14.94 and is callable after February 2007. In summary, our financial strength and operating leverage has improved compared to the prior years, and we've established a financial platform to support significant later stage product investments.

I'll now turn to our 2006 financial guidance. This is again characterized by increased development investment that will be primarily funded by increased revenues and will be supported by a strong balance sheet. Firstly though, I will note that we have considered the impact of the adoption of FAS 123R regarding stock based compensation expense and I will provide loss guidance, both including and excluding an estimate of those charges. We recognize the complexity of this new rule and are happy to discuss it in more detail its estimated impact on our 2006 financial expectations after today's call.

We expect our full year 2006 loss, excluding stock based compensation expense and restructuring charges, to be in the range of $165 to $185 million. And we expect full year 2006 GAAP loss in the range of $205 to $225 million. The GAAP loss is expected to include approximately $34 million of stock based compensation and approximately $6 million of restructuring charges. The estimated restructuring charges relate to the imputed interest cost of our restructuring. The loss guidance of $165 to $185 million is an increase over the 2005 loss and reflects increased development investment as we expect to advance compounds in hepatitis C, rheumatoid arthritis and cystic fibrosis. We expect that the increase in development investment will be significant and as with prior years, will be balanced by expected increase in revenues and stronger balance sheet.

We are forecasting total revenue to be in the range of $210 to $235 million in 2006. This is an increase from 2005 revenues, and is mainly driven by development milestones and revenue expected from new collaborations involving certain of our later stage development compounds. The components of 2006 revenue guidance are as follows. HIV product royalty of approximately $40 million continuing on from a strong 2005 fourth quarter of $9.7 million of royalties. Collaborative R&D revenue of approximately $110 million. This revenue relates to existing collaborations and milestones that we can expect to achieve under these collaborations. And new R&D collaborations will account for the remainder of the total revenue guidance.

Now to the R&D investment. In 2006, we expect to make a substantial investment in VX-950 to support a broad Phase II development program. We expect to invest, subject to continued progress in clinical development, to prepare for registration studies beginning in 2007. VX-950 is the principal driver of growth in the R&D investment compared to 2005 and as I said, a corporate priority. We project that in 2006, the R&D investment, including the stock based compensation expense of $28 million, will be in the range of $350 to $370 million for the full year. Excluding stock based compensation, this is an increase of approximately $75 to$95 million and reflects our commitment, subject to clinical data driving this investment, to realize the full value of our later stage clinical compound. As in prior years, the amount and the rate of development investment, including the preparation for registration studies and the building of infrastructure to support later stage development compounds, will be determined on the basis of quality of data and information that enables us to evaluate the risk of the investment.

Now to the research components of R&D. We are expecting research involvement will be relatively consistent with five years and the majority of this investment will continue to be funded by collaborative research-based revenue. This specifically allows us to direct our available capital to the development and product opportunities. We expect SG&A expenses, inclusive stock based compensation of $6 million, to be in the range of $55 to $60 million in 2006. From a balance sheet perspective, we expect to end 2006 with more than $300 million in cash, cash equivalence and available for sale securities. We expect our cash position to be supported by upfront payments from new collaborations and the exercise of employee stock options. As in 2005, we will continue to conservatively manage our debt profile of the Company.

To close on 2006 guidance, I'd like to comment on the trend of our projected quarterly losses. We expect our quarterly losses will be higher in the earlier part of the year and lower in the latter part of the year, principally driven by the timing of achieving milestones and new R&D collaborations in the second half of 2006. This is a trend that's consistent with prior years. We anticipate a loss for the first quarter of 2006, excluding restructuring the next stock compensation, to be in the range of $48 to $53 million. And we anticipate a GAAP loss for the first quarter of 2006 in the range from $58 to $63 million. We expect this loss to decrease in the second half of the year.

In summary, 2006 is a year in which we are increasing our development investment to realize the medical and commercial potential of later stage compounds. Our financial profile and our business model, which have been and we expect will continue to be supported by collaboration, provides a platform for this investment, enabling us to obtain key clinical data from our drugs. I will now turn the call over to Joshua.

Joshua Boger, Ph.D., Chairman, President, Chief Executive Officer

Thanks, Ian. 2006 has the potential to be another kind of breakout year for Vertex. VX-950 continues to exceed expectations in the clinic. We continue to make encouraging progress outside the clinic as well, in toxicology, in manufacturing and formulation. There is much to be done and it is planned to happen very quickly. Over the rest of 2006, numerous planned clinical studies for VX-950 could substantially define the transformational profile for the drug, positioning us for confirming pivotal studies in 2007 and filing the following year. We are working hard here to make all of that happen.

The rest of our breakthrough pipeline continues to advance as well. VX-702 for rheumatoid arthritis is completing a large Phase II trial and we expect to have data soon. We expect our lead oral compound for cystic fibrosis, VX-770, a new concept in treating this genetic disease with an oral drug, should be in patients in the second half of the year. Stay tuned for data from these programs.

Collaborative development programs are advancing rapidly as well. VX-680 in cancer, VX-944 in cancer, and VX-409 in pain, and our discovery engine that brought forth all of these compounds into our pipeline should continue to bring forth wonderful new possibilities. We have the team, we have the strategy, we have the plans, and we have the resources to optimize these many potential transformational products. We are excited and we are busy. I thank you for your continued interest in our progress. Over to Lynne.

Lynne Brum, Vice President of Strategic Communications

Thank you, Joshua. Tonya, we are ready for questions.

Questions-and-Answer Session

Operator

At this time, I would like to remind everyone in order to ask a question, please press '*' then the number '1' on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Mark Augustine with Credit Suisse.

Q - Mark Augustine

Congratulations on more great news today. I wanted to ask two things. One was just to provide any color, if you're comfortable, on the new collaboration revenues. Specifically, is anything on the table for VX-950 or implied in that guidance? If so, what, or if not, what of the later stage compounds you'll move to might in fact be part of that consideration?

A - Ian Smith

It's Ian. How you doing? Maybe I'll take the first part of that question related to the guidance and then maybe Victor has further comment. Just to reiterate what was on the call, we have provided revenue guidance of $210 to $235 million. I think it is important to understand the components of that revenue guidance. The first piece is $40 million relating to royalties, which is just continuing on from 2005. Then there's $110 million from R&D collaborations and the remainder would come from new relationships. Just doing the simple math, that shows that it could be between 60 and $85 million of new collaborations. What we specifically stated in the prepared remarks is that the principal driver of those new collaborations would be the later stage products. As you can imagine, as the products get further down the pipeline and have greater value, we have greater potential to secure collaborations and generate significant revenue for the Company. That is the basis that we have put together, the revenue guidance for the year.

A - Victor Hartmann, M.D.

And Mark, we will be looking for a partner in 950 in territory that is not a partner, that we know we have a foundation in Japan and other Asian territories with Mitsubishi and in the U.S., and we are looking for a partner in Europe and other available territories. We are in discussions with a number of potential partners.

Q - Mark Augustine

Just one other thing, if you could. I didn't know if I heard anything too specific to it on the call, perhaps a manufacturing update for us would be great. Thanks.

A - Ian Smith

Maybe John, if you want to, I can certainly tell you that we've progressed significantly. We've progressed significantly with the manufacturing capabilities for the Company. We continue to outsource our abilities and we are in a very nice position as we go into later stage Phase II. As we put together the financial guidance for the year and certainly in our development investment for the Company, there is an expectation of continued investments for drugs to gain drug products to perform later stage trials and also to prepare somewhat for 2007. Maybe I'll turn it over to John.

A - John Alam, M.D.

Yes, I think there was no specific update because everything is really on track. Either we have provided the, implicit in the results of the stage I combination study was in fact that the tablet formulation performed as expected both from a kinetic and then from an antiviral standpoint in that study where the monotherapy results were very consistent with what we had seen with the oral suspension previously in patients with HCV. So aside from the topline results there, I think that was a very encouraging result for us to be able to accomplish those results with the tablet formulation. The new results announced today with 12 of 12 patients being undetectable, less than 10 units of HCV RNA at 28 days, was also performed, that study was also performed with the tablet formulation. So again further encouraging news in terms of where we stand from a CMC standpoint. And otherwise broadly, we are on track for the high level objective on the CMC side that Joshua had laid out earlier that by the end of the year, we would be in the registration campaign in terms of manufacturing, which implies a further set of progress throughout the year in terms of having an established process to be able to manufacture the tablets with a registration campaign.

A - Joshua Boger, Ph.D.

Mark, we are in very good shape in regards to the manufacturing and have this well under control.

Q - Mark Augustine

All right. Thank you very much.

Lynne Brum, Vice President of Strategic Communications

Thank you, Mark.

Operator

Your next question comes from Jason Zhang with Prudential Equity Group.

Q - Jason Zhang

Thanks. Actually, I have two questions. John, could you tell us what have you learned in this base study, particularly the contribution of in the regimen and if you compare the two-week study with two weeks out from this trial, it seems to suggest that adding ribavirin has contributed to some effect. Well, actually, the opposite, that if you just look at the week two results of this study, particularly if you look at the number of patients below the impactability, there are actually less patients than what you have seen in that two-week study.

A - John Alam, M.D.

I think primarily what we learned, and this was the objective, was to see what would happen in terms of the response as we went out from two weeks to four weeks. And I think the really, the very positive part of the results is in fact that there's continuous viral decline with very strong results of everyone coming to less than ten units per milliliter. That was the trend out of the two-week study with interferon in VX-950. As you know, we all, the question was would that continue as you went to longer duration of treatment, and that's exactly with we saw with all patients coming down and no evidence of breakthrough or plateau. And I think that's the really strong result within this study.

In terms of the ribavirin part, another part of the result was in fact that from a safety standpoint, there was no obvious signal that came out in the triple combination. But I think from an efficacy standpoint, from an antiviral effect standpoint, it's really hard to compare across studies, across continents. It's a different patient population here. Right, the numericals, in terms of less than 30 or less than 10,may be slightly better in this study, but I think it's, I wouldn't at all conclude that the ribavirin is necessarily the contributor of that. We have a lot more analysis of this particular study to do, of looking at the individual patients and what their characteristics were in terms of baseline RNA levels and all of that, and compare them before, but I think even with that, I wouldn't count that a conclusion. We are going to look at the contribution ribavirin, the potential contribution of ribavirin more directly in the next study, the three-month study, where we will have both a 950 interferon arm and a 950 interferon ribavirin arm with the third arm as a control arm.

Q - Jason Zhang

And then do you actually look at the second first slope in the study and compare that to the VX-950 plan? Do you actually see a more steeper slope than the as compared to VX-950 plus interferon?

A - John Alam, M.D.

When you're getting most of the patients down to less than 30, or half the patients at day 8 and 11 out of 12 by the second week, it's really hard to get a good sense of the second slope. We are going to do that analysis and you'll hear about it at an upcoming scientific meeting, but I wouldn't hold out a lot of hope in terms of very detailed understanding of the second slope.

Q - Jason Zhang

Okay. And then the last question is actually for Ian and if you look at the balance of why your revenue, you say you already have from the existing club ratio, and also your revenue guidance, the balance is now 60 to 80 million. If we only just consider one deal with the VX-950, I don't think you are implying that up front payment you are going to receive from a possible deal is in that range? How should we look into that?

A - Ian Smith

You are correct. We are not implying that, and maybe if I could reiterate that component, I actually stated that the R&D collaborative revenue would be around $110 million from existing collaborations. And that the new deal collaborations would be $60 to $85 million. We have a lot of assets that can generate that new deal revenue. What we are focused on in 2006 is the latest stage assets and specifically VX-702 and VX-950. But we have a number of other assets that are at the earlier stage. And as you're also familiar, Jason, we have in the past also taken research collaborations, which provide a significant funding to the Company and actually hedge our investments into research while we are focused on development. So we have a number of opportunities to generate the targeted $60 to $85 million of new deal revenue and as in prior years, we expect to execute on this.

Q - Jason Zhang

Thanks.

Lynne Brum, Vice President of Strategic Communications

Thank you. May we have our next question please? Tonya?

Operator

Your next question comes from Jeffrey Forges (phonetics) with Sanford Bernstein.

Q - Jeffrey Forges

Thanks very much for taking the question. Congratulations on the results today. I'll change speed a little bit and ask a few questions on VX-702. Could you shed some light on why the 11% dropout in the Phase II study, what the delta was in those patients and what happened there? And then, could you perhaps explain why you're going into another Phase II with the VX-702 and does that imply you would not be proceeding to a Phase III in a monotherapy study and what potentially other indications are there out there that you might consider for 702? And then finally, the collaborative, the new deals. Should we anticipate the VX-702 would be the subject of a worldwide deal or some sort of European or ex-U.S. rights? I'm just wondering where your strategy is in terms of Vertex's retained ownership for that market. Thanks.

A - John Alam, M.D.

This is John. I'll go at the first two and Victor will talk with regards to the collaboration. I think the withdrawal rate here was completely consistent with studies in rheumatoid arthritis, particularly in a monotherapy setting. I don't think there's any real surprises there. If anything, it may, in fact, be on the low end of what you would see, remembering that a third of the patients in this study were receiving, were receiving placebo. So nothing really surprising. At this point, I can't provide any further color in that regard, but we are actually, I would say focused more on the 275 patients who completed 12 weeks of treatment, which I think is a positive result.

In terms of the next Phase II study, the difference is that it is in combination with methotrexate and it is an established treatment paradigm in rheumatoid arthritis. It used to be in combination with methotrexate the majority of patients diagnosed with RA in the rheumatologist's office, being followed by rheumatologists, are on methotrexate already. That is the established treatment paradigm and recommendation of the American College of Rheumatology that anyone with a diagnosis of rheumatoid arthritis should in fact go on a disease modifying agent and often preferably methotrexate relatively early on and then if they don't have the appropriate response, that they would be treated with another agent, either switched or in combination. In terms of developing in RA, you can't really cordon off that population of patients and simply say your drug is going to be only used as monotherapy. You actually do need to, you have an obligation to evaluate the drug in combination with methotrexate both from a safety and an efficacy standpoint. We would need to do a Phase IIb study in methotrexate on methotrexate as well. The two studies in, were the monotherapy and the combination study along with the Phase I package that we've developed would then support from a clinical standpoint going into Phase III.

A - Victor Hartmann, M.D.

Jack, this is Victor. On 702, we do have a partner in Japan already, which is Kissei. They have initiated Phase I work in Japan. We do intend to enter intro collaborations in remaining territory. We do certainly intend to retain some rights, either and/or potentially there's an indication that we intend to look at.

Q - Jeffrey Forges

I'm sorry. John, could you just add what other indications might be suitable without committing yourself but in terms of where you're thinking might take you?

A - John Alam, M.D.

I think the beginning point are really the anti-TNF agents and where they've been most successful. It's probably the most obvious place to go. That would include inflammatory bowel disease and psoriasis. There are a number of other inflammatory diseases, including the respiratory diseases such as COPD and potentially even cystic fibrosis, where P38 specifically has been identified as an interesting target, or a mechanism to study there, but there is no prior clinical experience with a mechanism that would shut off TNF or I08, which P-38 could do as well in those contexts.

Q - Jeffrey Forges

Thank you, that's very helpful.

Lynne Brum, Vice President of Strategic Communications

Thank you, Jeff. May we have our next question, please?

Operator

Your next question comes from Steve Harr with Morgan Stanley.

Q - Steve Harr

Good afternoon. A couple of questions. The first one on the VX-950 Phase IIb program. Will you expect to show us the three month efficacy data, or are you going to wait until you have the full SDR data before we see anything?

A - John Alam, M.D.

We are certainly going to be evaluating through the course of the year that the clinical data from that study at various points, including at the end of treatment time point, as well as three and six month follow-up time points. What we've said in terms of all of that data, the key data from an overall program and Company standpoint are the three-month follow-up data, which would be, from our perspective, the trigger point and the decision point for moving into Phase III, with the plan target there would be to move into Phase III early in 2007.

Q - Steve Harr

John, in your three-month annual talks, what is your dose in toxicity?

A - John Alam, M.D.

I can't comment on any specific findings in our toxicology studies. We don't comment for competitive reasons. We do believe that the studies and the results will support the three-month clinical studies.

Q - Steve Harr

And then if I could, just one more question on 702. I just want to kind of frame the expected outcomes when they come out. Obviously there is a risk of at least some toxicity, given the patient population, and the history of this category. What type of an efficacy divided by safety bar would you consider acceptable? Could you walk us through how you're thinking about that right now, John, before you've seen the data?

A - John Alam, M.D.

What we've said is that a reasonable expectation for HI 20 responsers are what's already been presented where the biological agitator agent. In fact, the early data with two different inhibitors, that have been presented in which there's a range in a three-month study that goes anywhere from 40% to around 60%. And anywhere in that range would be a reasonable expectation for 20 responses. I think to go past that, it becomes actually a pretty complicated discussion because there's any number of different outcomes. Trying to anticipate all of those upfront, I'm not sure would go very far. I will say in terms of background, it is a reason why we do have a placebo group. It's a pretty large study. I think with 315 patients, we'll get a pretty good sense of, we'll have a very good comparative and be able to make a good assessment of the safety relative to what we would see in terms of background events in this type of population.

Q - Steve Harr

So for you to go forward, you want to see data comparable to TNF despite the, inhibitors, despite the fact that it's an oral pill. You might not expect what you saw previously which was about a 40% ACR, 20 score.

A - John Alam, M.D.

What I would say, well, first of all, there are published data with antibiology anti-TNFs which have 42% ACR 20 response rates. That's the comment that in any given study, you have, you're going to get a range of outcomes. As I said, I think a range of outcomes there would support going forward, and it's the full assessment of both HER-20 response rates and the safety profile, as you said, that will allow us to go forward.

Q - Steve Harr

That's very helpful. I appreciate it.

Lynne Brum, Vice President of Strategic Communications

Thank you Steve. May we have our next question please?

Operator

Your next question comes from Andrew McDonald with ThinkEquity.

Q - Andrew McDonald

Great guys. Thank you for the call and congratulations on the great results. I want to follow up a little bit on 702. Clearly a combination with methotrexate, that three-month study is going to be very important for you. Methotrexate as a monotherapy can lead to liver toxicities, elevated liver enzymes and, as you know, leflunomide has suffered because it can't be used in combination with methotrexate. I'm wondering if you have any pre-clinical data which gives you a little bit of comfort as to whether or not you could combine702 with methotrexate without seeing elevations in liver enzymes, liver toxicities?

A - John Alam, M.D.

There is no good model of the methotrexate in use. Animal model methotrexate induced liver effects. So there isn't a model that one could try to look at that particular issue. I would just come back to that we don't have the data yet and we'll be looking at the data earlier in the second quarter. But I think it is an encouraging sign that we were able to enroll the study as quickly as we were able to and that 275 patients completed 12 weeks of dosing.

Q - Andrew McDonald

Right. And these patients have had some exposure to DMARDs but presumably not a whole lot of exposure. So I'm wondering, obviously, ACR20 scores for 702 are going to be relative to placebo. I was wondering if you can give a little bit of color on what you expect for placebo rates in this study since they can vary quite a bit too.

A - John Alam, M.D.

Placebo HS response rates in a monotherapy study such as this should be somewhere in the 20 to 30% range. And you're right that if the placebo responses are closer to 20, than in that 40 to 60 range, the outcome in the active drug is on the lower range and if the placebo response is closer to 30, the outcome in terms of ACR20 response is going to be higher part of that range. You're absolutely right, it is one of the reasons why there's a range of outcomes and one needs to look at the full totality of the results. I would say the first step of a positive finding would be statistically significant and then it's, I think, that's really the objective of the study to demonstrate a clear effect on HER20 and I think, beyond that, trying to compare to any other treatments, which are going to be different studies, different patient populations, et cetera, the paper comparisons would be very hard to make. That's really our first objective, along with demonstration of safety. If we can achieve those two, we'd be very pleased.

Q - Andrew McDonald

And finally, is there any indication, is there any data out there that can guide you as to what to expect in chronic, with chronic p38 inhibition? In other words, this is a three month study but RA patients, patients with other pro-inflammatory diseases, will probably need to be dosed longer than three months. And no one really knows what inhibition of p38 long-term will do. Do you have any insights?

A - John Alam, M.D.

I'm not sure that, as you know, there is no other experience, there is no chronic dosing experience with p38 MAP kinase inhibitor. I believe the longest is out to six months. There may be additional studies ongoing with other p38 inhibitors that will provide some information in that regard, but I think that three months certainly gives you a good sense of what types of safety issues may arise in longer termed dosing as well, which is why we have said that with a 315-patient study, that we are going to be able to get a pretty good assessment of the tolerability and safety profile. Of course we can't, with longer term dosing, without doing it, we can't give you a specific answer. I would say that outside of just the general free floating concern of p38 involved in various processes, there aren't really any specific issues that I would look to that are linked to p38 inhibition.

Q - Andrew McDonald

Great, thank you very much.

Lynne Brum, Vice President of Strategic Communications

Thank you, Andrew. Next question, please.

Operator

Your next question comes from Meg Malloy with Goldman Sachs.

Q - Meg Malloy

Thanks very much. Two questions, one on 702 and the other on 950. On 702, could you just maybe just drill down a little bit, do you have specific criteria on what would be the percentage of patients, let's say, that would get to two or three times upper limit of normal that would be sort of a go/no-go decision for pursuing things in RA. And then separately, if you were to see that kind of a result, would you still pursue it in some of these other indications where the interaction with methotrexate might be of a lesser concern? And then finally on 950, I was wondering, Joshua, if you would elaborate a little bit more on some of the additional Phase II studies that you're planning this year beyond treatment experience? Thanks.

Lynne Brum, Vice President of Strategic Communications

Thank you, Meg.

A - John Alam, M.D.

On 702, we do not have any specific criteria. Again, I think it's, it's too, it's a much more complicated set of results that we have to look at the totality both in terms of efficacy and safety before making a decision to go forward. So again, I would point out that the data to just simply, the experience in terms of treatment and dosing to this point with the number of patients who were able to successfully complete are encouraging to us.

A - Joshua Boger, Ph.D.

I would comment generally. I think we'll be letting out more of our Phase II plans as we get closer to executing them. In addition to the our anticipated study, in patients as you mentioned, we would anticipate also beginning later in the year treatment experience patient study that may be similar in design, but there may be differences there. We anticipate that before Phase II studies are completed and the Phase III are completed to be studying the drug, number of special populations, and in order to set up those studies would be running some of the setup studies for those in 2006. So I think I'll, and I said that we are likely to do some more studies in a particular settings in monotherapy as well and I think we'll have to be a little bit coy about the details there.

Q - Meg Malloy

Okay. Thanks. Can I circle back to John just as a quick follow up?

Lynne Brum, Vice President of Strategic Communications

Sure.

Q - Meg Malloy

Would there be, let's say, if you do get elevations that were not going to be compatible with methotrexate, would there be other areas that you could then pursue with 702 and do you have that priority on those?

A - John Alam, M.D.

Yes and we don't have a priority at this time. Our focus is on moving forward in rheumatoid arthritis. It's been all along. It's the area where p38 has already shown clinical data that it can achieve HER20 response rates. And obviously the anti-TNF have provided the most amount of validation in that context. So I think it's a natural place for an oral TNF blocker to be. And again our focus is to work through that and move into, hopefully, into later stage and registration path in 2007.

Q - Meg Malloy

Okay. Thanks very much.

Lynne Brum, Vice President of Strategic Communications

Thank you, Meg. We have time for one last question.

Operator

Your last question comes from Joe Pantginis with Accord Adams.

Q - Joe Pantginis

Thanks. It's Canaccord Adams. Just a couple of quick questions. Based on your 40 to 60% reasonable hurdle rate for ACR20, do you think the additional modulation of Aisle 1 with 702 can lead to a further improvement from a mechanistic standpoint and then also would you also look for ACR20 to be your primary end point in the combination study? Thanks.

A - John Alam, M.D.

Could be, but we just, there's no way to know. Even with good results, let's say we do achieve a high HR20 response. It would be very hard to know the relative contribution of TNF inhibition versus aisle one inhibition. In the RA setting, TNF does seem to be the key target, the one you want to inhibit. That's why I would expect, but how you would pin it down as to what was driving it, it's hard to know. In the methotrexate study as well, as a three-month study, ACR20 would be the primary end point there as well. I think to look at ACR50 or other end points, one really needs to look at longer duration trials than three months of treatment.

Q - Joe Pantginis

Thanks a lot.

Lynne Brum, Vice President of Strategic Communications

Thank you, Joe and thank you everyone for joining us tonight. Thank you everyone for a terrific set of questions. If you have a question that was not answered on today's call or you didn't have a chance to ask your question, please free to call us tonight or tomorrow. Thank you everyone, good night.

Operator

Thank you for participating in today's teleconference. You may now disconnect.

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