Vertex Pharmaceuticals Inc. Q3 2007 Earnings Call Transcript

| About: Vertex Pharmaceuticals (VRTX)
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Vertex Pharmaceuticals Inc. (NASDAQ:VRTX) Q3 2007 Earnings Call October 29, 2007 5:00 PM ET

Executives

Lynne H. Brum - VP, Strategic Communications

Ian F. Smith - CFO and EVP

Kurt C. Graves - EVP, Chief Commercial Officer, and Head, Strategic Development

John J. Alam - EVP, Medicines Development and Chief Medical Officer

Analysts

Geoffrey Porges - Sanford Bernstein

Steve Harr - Morgan Stanley

Hari Sambasivam - Merrill Lynch

Meg Malloy - Goldman Sachs

Annabel Samimy - UBS

Richard Smith - JP Morgan Securities

Operator

Good afternoon. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everybody to the Third Quarter 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.

Ms. Brum, you may begin the conference.

Lynne H. Brum - Vice President, Strategic Communications

Thank you, Chris. Good afternoon. This is Lynne Brum, Vice President of Strategic Communications, and welcome everyone to the Vertex’s third quarter 2007 conference call.

Two themes categorize our progress in the third quarter. First, progress in Phase II development with Telaprevir on HCV. We have three ongoing trials of Telaprevir, which will provide the key information to support late stage Telaprevir development. At AASLD, clinical investigators will present interim efficacy data highlighting sustained virus response rate for shorter duration therapy compared to the current treatment, and second, progress in the pipeline. Today, we announced two new drug candidates, which are progressing towards the clinic by year-end. The first of the second generation HCV protease inhibitor and the second the corrector compound for CF.

These topics will be discussed and expanded upon during today’s call by Ian Smith, Kurt Graves, John Alam and Joshua Boger will join us for Q&A.

Before I turn the call over to Ian, I would remind you of the following. Information discussed in this conference call includes forward-looking statements, which are subject to risks and uncertainties discussed in detail and our reports filed with the Securities and Exchange Commission including our 10-K.

Also 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 on our third quarter 2007 financial press release, which will be accessed on our web site at www.vrtx.com. Unless otherwise noted, all 2007 expenses and guidance discussed in this call are inclusive of stock-based compensation. As always you can visit www.vrtx.com to listen to the conference call, and view a PowerPoint presentation or download a podcast.

Lastly, after our prepared remarks, we will accommodate as many questions as time permits. Once the call concludes, our IR team, joined by John, Kurt, and Ian, will be in office to answer any additional questions you may have.

I will now turn the call over to Ian.

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

Thank you, Lynne. Financial summaries for the quarter is one of investment to drive our business, specifically investment in Telaprevir and its supporting activities.

During the third quarter, we also repaid our remaining convertible debt. We have maintained a strong cash position with no outstanding convertible debt. In summary, the strong balance sheet with approximately $515 million in cash, cash equivalents, and marketable securities.

Now to our income statement. Our third quarter GAAP net loss was $107 million compared to the third quarter 2006 net loss of $52 million. The increased loss was primarily due to an increase in development investments for Telaprevir as well as other areas to support the advancement of our business. The third quarter non-GAAP loss before certain charges such as stock-based compensation and restructuring was $93 million compared to 2006 non-GAAP loss of $48 million. Stock-based compensation and restructuring was $93 million compared to 2006 non-GAAP loss of $48 million.

Total revenues for third quarter were $41 million compared to $53 million for third quarter 2006. The decrease in revenue was interpreted impart to less revenue from research-based collaborative program, other collaborations are now principally focused on supporting our development programs.

Back to R&D. Our total R&D expense was $129 million compared to $96 million in third quarter 2006. This increase was reflects development investments to support the global Phase II clinical program of Telaprevir. We also continue to invest in the Phase II trial VX-770 in patients with cystic fibrosis and the other earlier stage programs.

Our third quarter SG&A expense was $21 million compared to $15 million in the third quarter 2006. This increase reflects cost associated with building infrastructure, including an increase in a number of employees to support the clinical advancement and the commercialization of Telaprevir.

Back to our 2007 financial guidance. We are reiterating our guidance established in February 2007, for our GAAP and non-GAAP loss as well as our expected year-end cash and equivalents position. Additionally, as we look to the fourth quarter of the year, we expect revenue to increase and operating expenses to be consistent with the third quarter of 2007.

I will now turn the call over to Kurt.

Kurt C. Graves - Executive Vice President, Chief Commercial Officer, and Head, Strategic Development

Thank you Ian and good evening everyone. I would like to discuss three new developments in our pipeline. The first involves our deep commitment to HCV.

As you all know progressing Telaprevir is our top priority. I have now been at Vertex for few months and as we realize the unmet needs in the treatment of HCV, I would like what I see about our position in HCV, our interactions with FDA and thought leaders and the significant market opportunity ahead of us. Our merging date that will be released today at AASLD will reinforce our confidence in the direction of our overall HCV development program. While Telaprevir is setting new standards in the development HCV. We aim to be a top innovator and leader in the field long-term. Because of this, it is the right time for us to be making investments into a second generation HCV protease inhibitor program.

Today we announced that we have selected our second protease inhibitor, the VX 500 for development and expect to enter the clinic by the end of the year. We recognize that the HCV landscape is competitive with many product candidates in development. Telaprevir is leading the field to strength the acquisition as a leader in STAT-C therapies, we will continue to move Telaprevir ahead as a cornerstone to establishing a broad presence in the treatment of HCV. We will also love to build the pipeline of HCV products with significant depths and breadth as the focus of an emerging franchise and enable Vertex to capture and build the Company on this tremendous opportunity. We are convinced this is the best strategy short and long-term for our success

Secondly, we have aligned our investments to reflect our commitment to Cystic Fibrosis, a major focus in our pipeline is in CF. We recently selected a second compound for development, VX-809, representing a new mechanism of action. This is a collector compound and we are excited to now have two compounds going forward, targeting the serious disease. Lastly, tonight as we focus our current development priorities on HCV and CF, we have also evaluated data from our recent studies of VX-702, including data from a safety study to evaluate cardiovascular effects and another one from Phase II, a 130 patient trial evaluating VX-702 on a background of methotrexate for the treatment of rheumatoid arthritis.

On the basis of these study results, we believe further development of the VX-702 as warranted. We continue to believe there are unmeet needs and commercial opportunities for our p38 inhibitor in inflammatory diseases. However, as we advance our expanded HCV and CF programs and focus our resources, it is now our goal to seek a collaborator who can support the development of the VX-702 going forward.

I will now turn it over to John who will provide a larger clinical update focused on Telaprevir.

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

Thanks Kurt. Today I will talk broadly about where we are in development with Telaprevir and up coming milestones for the program. I will also provide a brief update on our pipeline.

Since AASLD begins at the end of this week, we are reserving our detailed Telaprevir discussion for the data presentations and the investor relations that is scheduled in conjunction with the medical conference. We have high confidence in Telaprevir. It is out top priority. At AASLD, which starts this Friday, we will be presenting important data from two compressive trials, involving more that 500 patients. From a Novel drug development perspective, we believe it's the most extensive data to be presented in the HCV arena in several years. First and foremost, it will be the first time that extensive SVR24 and SVR12 data will be presented on HCV protease inhibitor.

Along with the topline data, we have also began to characterize the effect of an initial rapid decline in maximizing on treatment response, minimizing viral breakthrough, and achieving SVR. This is truly a meaningful time for Vertex and advancement of our therapy through HCV and we look forward to speaking with you about Telaprevir data at AASLD.

We told you on our last call that we would begin discussions with FDA in the third quarter. These interactions began in August and at that time we presented the data we had in hand. The discussions are progressing and are today constructive. We continue to submit new data to the FDA as it becomes available to Vertex. More specifically, we have recently provided to the FDA the SVR data that will be discloses at AASLD.

We look forward to continue our interactions based on the new data. In addition to providing data, we plan to discuss a protocol for the next stage of development of Telaprevir. We expect to provide an update on our discussions with the FDA as soon as they are complete. Together with Tibotec, we're planning additional trials to evaluate Telaprevir in certain important HCV subpopulations. In the coming months, we're focused on initiation of our first clinical trial in patients with genotype two or three and initiation of a clinical trial with Telaprevir dosed twice daily in combination with pegylated interferon and ribavirin. The details of the latter trial can now be found on clinicaltrial.gov.

In summary, we believe Telaprevir has the potential to significant advance how we may treat HVC in the future.

I‘ll now turn the call back to Lynne.

Lynne H. Brum - Vice President, Strategic Communications

Thank you, John. And Chris we like to now begin the Q&A portion of the conference call.

Question and Answer

Operator

[Operator Instructions].

And your first question is from Geoffrey Porges with Bernstein.

Geoffrey Porges - Sanford Bernstein

Thanks very much for taking my question, and congratulations for bringing VX 500 out of the closest. I’m sure other people will ask about that. I just wanted to talk about PROVE 3. You're obviously see data from PROVE 3 here at AASLD, but I think you've been fully enrolled since June or so. Could you give us a sense of when is the last patient will come off treatment in that trial for Telaprevir and when we might see the first efficacy results? How that might be disclosed? And then give us a sense, John, of why you think that Telaprevir could work in this patient population and setting when Schering's drug clearly didn't work? And then, finally, what the threshold for IVR rate required for you to justify some sort of urgent… early discussion with the FDA about the data would be? Thanks.

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

Thanks Geoff. This is John. PROVE 3 is the Phase II b study of Telaprevir in 440 patients with genotype 1 HCV, who have not achieved SVR with the previous interferon base treatment. It’s a very broadly defined group of patients who failed previous treatment with pegylated interferon and ribavirin. The study was fully enrolled in the second quarter with the patients being randomized equally across all four treatment arms and studies being conducted in more than 50 centers in the U.S., the EU, and Canada. We expect all the patients who have completed the Telaprevir duration of treatment which is 12 weeks and one treatment arm and 24 weeks in two of the three Telaprevir treatment arms to complete all Telaprevir dosing near the end of this year and would expect the first read out and critical results from this study in 2008. the study is being monitored by IDMC who are following some of the more individual data, both safety and bio break through data more carefully but in terms of first data that will be available at a high level to us, efficacy data would be some time in 2008.

It is very different study in terms of the patient population then the results that were recently announced with another HCV protease inhibitor in that it is a broadly defined patient population treatment area which would be expected to have a better underlying interfere on ribavirin responsiveness than the very strictly defined I would say almost niche population that was included in the other study population. The study that only included patients who had, had less than a two log reduction in HCV-RNA and that's one of two reasons why we do expect a fundamentally different response, the other reason is that the level of early rapid bio suppression even in the first 24 to 48 hours that we see with Telaprevir is distinctly… is unique and as such has a potential we believe to convert some of the even… some number of the intrinsically non-responsive interferon ribavirin to change the responsiveness interferon and ribavirin. Obviously, ultimately that result will only be… whether that will Phase out or not we will only see it in the data but it is one of the reasons why we have the IDMC to monitor for if it works that there was a profound number of patients who were having no response or break through than they could institute changes as necessary.

Geoffrey Porges - Sanford Bernstein

I am sorry, what about… what do you think the threshold is for being some of that you didn’t gauge in the discussion with the FDA about?

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

In terms of responsiveness I think it’s too early to say right now. Our focus right now with the FDA is obviously in the treatment naïve context.

Geoffrey Porges - Sanford Bernstein

Okay. Thanks very much.

Lynne H. Brum - Vice President, Strategic Communications

Thanks, Geoff. Chris, next question please.

Operator

Yes your next question is from Steve Harr with Morgan Stanley.

Steve Harr - Morgan Stanley

Yes. Thanks, I had a couple of questions. The first one on VX-702? Would you just give us some ground reality around potentially either, what you consider to be adequate data. Is it safety or efficacy at point that you were really looking for here in the methotrexate study and second when might we actually see the full presentation of the data?

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

So thanks Steve, this is John again. On VX-702 in the rheumatoid arthritis study there was a statistically significant effect in terms of ACR20 response rates and in terms of thorough QTc study we believe the growth. Our analysis of the data indicate that in fact at the 10 mg dose level that was evaluated, there is definitely a path forward with the QTc results that we have and they would support further evaluation of that 10 milligram dose. And in particular with the rheumatoid arthritis study results, we would expect to provide more detail at a relevant medical forum. It’s too early to say specifically where at this point, we have just recently started analyzing the data and there is a lot of work ahead to fully understand the data in this study and tie it back to the results we had in the prior study.

Steve Harr- -Morgan Stanley

And then second. You guys have previously discussed beginning the Phase III trial, for Telaprevir priority year ahead. Is that something that’s on the table or just given the time lines with the FDA. Should we think about that as early 2008 or right now?

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

The results that we are going to be presenting in terms of SVR and overall safety and efficacy results that we will be presenting at AASLD. We believe due support, moving Telaprevir in particular with the 12+12 regimen into Phase III, the timing of that and the specific study that is on is absolutely contingent on the dialogue and the process that we are following through with the FDA. At this point again they have recently… we have recently provided the most recent SVR data to them and it’s premature at this point to really say. I can’t really go into detail of how that will play out, but we are continuing to be focused as it’s obviously a very high priority for us to reach an agreement with the FDA and move it forward, and in order to respect the integrity of the process for the FDA, I am not going to comment more specifically at this time on the timing and the specifics of the process.

Steve Harr - Morgan Stanley

Great. Thanks.

Lynne H. Brum - Vice President, Strategic Communications

Thank you, Steve. Chris, may we have the last question please?

Operator

Absolutely. Your next question is from Hari Sambasivam with Merrill Lynch

Hari Sambasivam- -Merrill Lynch

Hi, yes. Thank you, John. Just a quick question on VX-500. Could you just give us a sense of what aspects of 950 that you are trying to differentiate this particular drug from… is it dosing, is it safety efficacy, all of the above, could you provide some detail?

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

Hi, Hari. I am actually going to let Kurt answer that question.

Hari Sambasivam- -Merrill Lynch

Thank you.

Kurt C. Graves - Executive Vice President, Chief Commercial Officer, and Head, Strategic Development

Hari, we are not disclosing too much about the particular profile aspects of the compound right now. We obviously feel Telaprevir we got a great asset with a great profile to start from. And as you might imagine when we are looking at a second generation program our criteria are that we would have to see a compound that has the promise to do even than what we have already achieved with Telaprevir, and there are a few possibilities for sure in the second generation compound when we see it might have the potential to exceed what we have already achieved with Telaprevir. But we don't want to go into specifics at this point in time, and we are excited about the compound.

Hari Sambasivam- -Merrill Lynch

Thank you.

Lynne H. Brum - Vice President, Strategic Communications

Chris, next question please.

Operator

Your next question is from Meg Malloy with Goldman Sachs.

Meg Malloy - Goldman Sachs

Thanks very much. I guess two questions, one on 702. Could you characterize the kind of partnership you would like to establish? Is this something you would be interested in sort of sharing half the burden of? And secondly, I respect you probably don't what to go into too much of detail as you are still in discussion with the FDA, you just reiterated that you 12 plus 12 is likely efficacy arm, but are there other things outstanding that you think need to be elucidated with the FDA before potentially beginning studies with respect to safety or resistance other populations anything along those lines you could comment on?

Kurt C. Graves - Executive Vice President, Chief Commercial Officer, and Head, Strategic Development

Sure I’ll star up with 702 and maybe John will talk a little bit more about the FDA process. 702, it’s to really say exactly what type of deal we going to be looking at we will be talking to a number of interested parties that have been in contact with us and that we want to reach out to figure out what the best deal is. But we are looking for someone who can really take on the next phases of development for 702.

Meg Malloy - Goldman Sachs

So, is royalty kind of collaboration as knocking [ph] cards, the 50-50 kind of share?

Kurt C. Graves - Executive Vice President, Chief Commercial Officer, and Head, Strategic Development

We’ll come back to you with the details on that later,.

Meg Malloy - Goldman Sachs

Okay. Thanks.

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

And this in John. Hi, Meg. On… in terms of where… on the specific issues we are discussing with the FDA, I am not going to go into detail. I would just say that in the data, we presented to them… earlier in the third quarter that we reviewed all of the available safety data with Telaprevir or all the data… the four set of safety data from PROVE 1 and PROVE 2 were provided to them, because that was through to the full duration Telaprevir dosing in those studies was through to 12 weeks. So, all of that information was already available to them in the prior discussion. I think the… and it’s really the next meeting and discussion will very much be focused on the additional SVR data that comes out of the completion of the interferon ribavirin dosing in the 24 week arms as well as 12 and 24 week follow up.

Meg Malloy - Goldman Sachs

Okay. Thanks. That’s helpful. Thanks a lot.

Lynne H. Brum - Vice President, Strategic Communications

Thanks Meg. Next question please.

Operator

Your next question is from Annabel Samimy with UBS

Annabel Samimy - UBS

Thanks for taking my call. I was just curious to know now you've got some of the discontinuation rates from PROVE 2 and dropouts appear similar to PROVE 1 do you have to rethink you strategy in how to correct some of the side effects profiles an just something that you're contemplating in Phase III drivers from the designs for Phase III?

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

Annabel, this is John. Yes, so, the PROVE 1 and PROVE 2 discontinuation rates being similar. In our mind overall, it’s actually quite reassuring. It’s part of what we’ve… as we've gone from early… from almost a year ago in December when we first looked at the first interim analysis from PROVE 1 to today as the findings have remained actually quite consistent with no additional safety findings. And in particular, as we see more in terms of the skin events where it is a very much a typical drug induced rash without… which resolves upon discontinuation. As we see more data we have close to 400 patients in PROVE 1 and PROVE 2, we are well into dosing as many… in 300 plus patients in PROVE 2. I think our safety profile and understanding of it is becoming that much more robust, and again, the fact that there’s no new findings is continues to be actually a strong finding. Now having said that, we are… as we said we are evaluating potentially alternative treatment regiments in particular potentially looking at durations of Telaprevir that are somewhat shorter than the 12 weeks. We would expect in the next phase of trials for the 12 plus 12 arm to be the base case, to be at the core of that trial. But we may evaluate alternative durations as well, shorted the durations to potentially impact that discontinuous rate, though overall you see the data from the 12 for 12 arm at AASLD, starting later this week and it does support evaluating that Arm in a Phase III study.

Annabel Samimy - UBS

All right. Thank you.

Lynne H. Brum - Vice President, Strategic Communications

Thank you, Anabelle. Chris, we have time for one more question.

Operator

Okay. Your final question comes from Richard Smith.

Richard Smith - JP Morgan Securities

Hello. Good evening. Just a quick question on… you mentioned earlier about the timing if you get the green light on a Phase III trial. How quickly can you use the stop at fall off after getting the… what you call the fined off by the regulatory body?

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

Hi, Richard. There is no real generic answer to that. It really just comes down to the specifics of the trial, the design and the specific agreements with the FDA. We would obviously be focused on turning around that agreement and starting a study very quickly. We would have all of the operational pieces in place and be able to initiate that as quickly as possible, but that cant give you a one number. It would really depend on the specific circumstances.

Richard Smith - JP Morgan Securities

All right. Thank you.

Lynne H. Brum - Vice President, Strategic Communications

Thank you, Richard. Thank you everyone who asked a question tonight. I think we took a range of representative questions based on the call we had this evening. A number of us will be with the IR team taking additional follow up questions after the rest of the evening and we look forward to seeing everyone at AASLD next week. Thank you very much. Good night.

Operator

And that concludes today’s conference call. You may disconnect at this time.

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