福泰製藥 (VRTX) 2003 Q4 法說會逐字稿

Good afternoon. My name is Taylor, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Vertex Pharmaceuticals conference call. (OPERATOR INSTRUCTIONS). Ms. Brum, you may begin your conference.

Thank you, Taylor. Good afternoon everyone. This is Lynn Brum, Vice President of Corporate Communications and financial Planning of Vertex. On behalf of the senior management team, I thank everyone for joining us today. As we get started, I will 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 the discussed in our reports filed with the Securities and Exchange Commission, including our 10-K.

At this time, Vertex's fourth-quarter and year-end 2003 financial press release has been issued. Please visit our Website at www.vpharm.com to listen to the conference call and view a powerpoint presentation. And. A replay of the conference call will be available via telephone and the Internet until the end of the day February 25th.

During the call today, we will discuss Vertex's 2003 financial results, as well as our priorities for investment in 2004. In 2003 Vertex accomplished the following. We launched the new HIV protease inhibitor, Lexiva, in the U.S. with our partner, GlaxoSmithKline. We expanded our commitment to developing new treatments for viral disease by selecting the oral HCV therapy, Merimepodib, as a lead product candidate for full development and commercialization by Vertex. This decision has allowed us to prioritize our portfolio and focus our development investment. We made progress with key drug candidates, including VX-950 and VX-385 for viral diseases and VX-765 for inflammatory conditions. And we also built momentum in key discovery programs including kinase and ion channels (ph).

In 2003 Vertex also faced challenges. Specifically from a financial perspective, discussions regarding new partnerships did not come to completion in the timeframe we had anticipated. Looking ahead, the Vertex management team is committed to advancing our business and building value in 2004. Specifically we will continue to make focused strategic investments in R&D that will enable us to move our pipeline forward. We also expect to find new collaborations which will strengthen our financial profile.

In a moment, I will turn the call over to Ian Smith, Vertex's Senior Vice President and Chief Financial Officer, who will summarize Vertex's year-end 2003 financial results and provide financial guidance for 2004. He will also comment on Vertex's amended agreement with Novartis. Then Joshua Boger, Vertex's Chairman and CEO, will discuss the outlook for Lexiva, as well as our milestones and vision for 2004. John Alam, Vertex's Senior Vice President of Drug Evaluation and Approval, and Dr. Tony Coles, Vertex's Senior Vice President of Commercial Operations, will join us on the call for Q&A. Vertex's IR team joined by Ian Smith will be available at the conclusion of this call to answer any questions you may have.

I will now turn the call over to Ian.

Thanks, Lynne. Today I will focus on our 2003 results and the operational aspects that drive our 2004 financial guidance. I would like to note that during this call we will discuss financial results using both GAAP and non-GAAP financial measures. Additional information regarding our use of non-GAAP financial measures is available in our 2003 press release.

Our 2003 GAAP net loss was $197 million or $2.56 per share and diluted share. This net loss included a $92 million charge for restructuring and other expense and $70 million of income from discontinued operations. The 2003 GAAP net loss of $197 million compares to the 2002 GAAP net loss of $109 million or $1.43 per basic and diluted share. The 2003 loss on a non-GAAP basis, excluding restructuring and other expenses and the income from discontinued operations, was $175 million or $2.27 per basic and diluted share compared to a 2002 loss of $137 million or $1.81 per basic and diluted share.

I want to state that the 2003 net loss is higher than we are comfortable operating the business, specifically considering the stated development of our pipeline and our financial obligations. It is for this reason that operationally and financially we have addressed and are addressing these concerns, and I will discuss these activities in more detail when I outline the 2004 guidance later in the call.

Now to the details of the 2003 results. Total revenues were $69 million compared to $95 million in 2002. This decrease resulted from the conclusion in 2002 of certain R&D collaborative arrangements between Vertex and other companies. Next to our R&D investment, 2003 R&D was $200 million compared to $198 million in 2002. In 2003 the focus of our development investment was clinical trials and activities that would enable a privatization of drug candidates for late stage development. The completion of these clinical activities in 2003 has enabled Vertex to focus its proprietary clinical pipeline on its anti-viral information product portfolios. Products outside these core areas represent potentially valuable worldwide licensing opportunities for Vertex.

We believe with the privatization of our pipeline in 2003, together with our restructuring announced last June, we will have greater flexibility for R&D investments. While we reduced our research investment in 2003, drug discovery remains vitally important to Vertex. Our main focus continues to be in kinase and ion channel with focused targeted efforts in other areas as well. On the basis of this investment, we expect to advance multiple compounds into preclinical development in 2004.

The SG&A expense is $39 million in 2003 convert to $41 million in 2002. Net interest expense for 2003 was 1.9 million compared to net interest income of $11 million in 2002, reflecting approximately $10 million of reduced returns on our invested funds. This is primarily driven by a lower interest rate environment in '03 compared to '02.

In 2003 Vertex recorded a $92 million charge related to restructuring and other expenses. This mainly results from the June 2003 operational restructuring and the anticipated cost to restructure real estate lease. The lease restructuring is expected to address the Company's future obligation of an estimated $20 million per year in facilities operating expenses and a contractual construction obligation. This will provide more flexibility to downstream investment in the business.

This charge will be reviewed quarterly and updated as necessary with credits or charges to our P&L until the restructuring of the lease is complete. These quarterly updates are done in accordance with FAS 146, accounting for cost associated with exit of disposable activities.

We also recorded income from discontinued operations of approximately $70 million. As a result of the sale of assets and liabilities of the discovery tools and services business, we have prepared the 2003 and 2002 financial statements showing the results of operations related to this business and the line item income loss from discontinued operations in accordance with FAS 144.

Now turning to our balance sheet. Vertex began 2003 with $635 million of cash, cash equivalents and available for sale securities and ended the year with approximately $583 million. In 2003 our net cash position decreased only $52 million, which is significantly lower than our loss before charges and gains. We were able to maintain this liquidity profile on our balance sheet through the sale of our discovery tools and services business, which realized in total approximately $100 million in cash proceeds and also served to focus Vertex on its core business of pharmaceuticals.

In addition, on February 10, 2004, we announced the exchange of a portion of our 2007 convertible notes for newly issued 5.75 percent convertible notes due 2011. This resulted in deferring $153 million of 2007 debt obligation to February 2011. We continue to have a total of $315 million of convertible notes outstanding; however, $162 million of 5 percent convertible notes are due in September 2007 and $153 million of 5.75 percent convertible notes are now due in February of 2011.

The exchange was privately negotiated and was executed with five holders of our 2007 convertible notes. For Vertex this exchange mitigates some of the term risk in the 2007 debt obligation and introduces more equity flexibility into the convertible debt than we had with our existing 2007 notes. The newly issued notes have a equity conversion price of $14.94 and are callable by Vertex after three years.

I will now turn to a discussion of our financial guidance for 2004, which was originally provided on February 3rd, 2004. We expect our full-year 2004 loss will be in the range of $140 to $150 million before any charges and gains compared to $175 million in 2003. This reduced loss is primarily driven by increased revenues and prioritized R&D investment. Additionally we may record specific charges and gains relating to the cost of a facilities restructuring and the write-off of a financing cost relating to the 2007 convertible note that was exchanged.

We expect total revenues to be in the range of $90 to $100 million in 2004. This will be comprised of $60 to $65 million in committed funding and milestones from existing collaborative partners and specifically includes anticipated preclinical milestones from our amended Novartis collaboration and HIV milestones from GSK. In addition, we expect $15 to $18 million from HIV product royalties.

Collaborations will continue to be a major component supporting our business strategy going forward, and we are currently in discussions with pharmaceutical companies regarding potential partnerships and see numerous opportunities for both research and product-related collaboration which may result in additional revenue and cash flow in 2004.

Vertex prioritized its R&D investment toward proprietary drug candidates and believed that a pipeline and research progress represents a key driver of shareholder value in 2004. The Company projects that R&D costs will be in the range of $190 to $205 million in the full year 2004.

We expect SG&A expenses to be in the range of $38 to $43 million, which is essentially consistent with the previous three years. From a balance sheet prospective, we expect to end 2004 with more than $350 million of cash, cash equivalents and available for sale securities in addition to debt due in 2007 and 2011.

In concluding my remarks on 2004, we have provided guidance on an annual basis; however, I would like to provide you with the expected trend of the 2004 quarterly results. I will start with our expenses and specifically R&D. R&D investment has a fixed element, but it is also dependent on the timing of clinical trials. On this basis, we expect R&D to be between $45 to $50 million each quarter with the highest amount securing later in the year consistent with the commencing of certain significant clinical trials. We expect our SG&A expense to consistently be around $10 million a quarter, reflecting its relative fixed cost nature.

The other major driver of our quarterly financial performance is R&D and product royalty revenue. We expect revenue in Q1 2004 to be approximately $16 million and then increasing throughout the year. We have a base of fixed contracted revenue. An additional quarterly revenue amount will be determined by the timing of milestones, potential sighting of new collaborations, and increases in HIV product royalties as Lexiva gains market share and is launched in Europe.

Most of the metrics of our financial guidance are in Vertex's control, with main variable being the revenue generation for new pharmaceutical collaborations. At this point, we anticipate that any new collaborative R&D revenue would be recognized in Q2, 3 and 4, with the majority in the second half of the year. As such, depending on the timing and the impact of potential new revenue, we anticipate that our net loss will decrease each quarter throughout the year.

I would now live to discuss our amended agreement with Novartis, which we announced February 10, 2004. The revised agreement provides strategic alignment of both companies' business objectives. Specifically it enables a more rapid and earlier transfer of drug candidates discovered by Vertex to Novartis for preclinical development. Vertex continues to be responsible for drug discovery, and Novartis will continue to provide research funding over the six-year term of the collaboration, consistent with the original collaboration.

Through 2006, we expect to recognize research revenue of approximately $100 million, and Novartis will now be responsible for preclinical and early clinical development, which was previously the responsibility of Vertex. The earlier transfer of drug candidates will provide Vertex with an accelerated opportunity to achieve preclinical and clinical milestones and to create cash flow and revenue while retaining significant downstream rights for Vertex. Vertex will receive $10 million from Novartis for the selection of preclinical compounds and then will be eligible for an additional $25 million in precommercial milestones as the product moves through the clinic.

The earlier transfer of drug candidates to Novartis will provide Vertex with greater ability to focus its development resources and investment onto proprietary drug candidates. Vertex will continue to receive royalties on sales of products that are commercialized as part of the collaboration. The royalty rate starts in double-digits and increases with sales and, as such, are consistent with all of our pharmaceutical partnerships.

The amendment to the collaboration has a positive operational impact to Vertex and for the kinase program. We are making good progress across the research program and anticipate advancing a steady flow of novel kinase inhibitors in 2004 and future years.

I will summarize my remarks by saying that our financial position remains sound, and our financial strategy will continue to focus on financial strength to balance our research development and business objectives.

I will now turn the call over to Josh.

Thank you, Ian. Vertex will focus this year on furthering our key clinical development programs as we continue our transition to become a product revenue driven company. Our product development and research progress provide a solid foundation for Vertex's goals, sustained revenue and profit growth in the coming years. Based on our focused investment in R&D, we anticipate significant new flow in 2004, which will highlight the clinic and commercial potential of our pipeline of products.

I will now provide specific details for some of our more visible programs. I will first turn to Lexiva, the second marketed product from Vertex's HIV protease inhibitor partnership with GlaxoSmithKline. We are encouraged to see that Lexiva appears to be steadily gaining ground in the PI category, a category, which according to IMS data, is currently growing at a rate of 11 percent year-over-year. Early data indicates that growth of Lexiva is outpacing the decline in sales for Agenerase. This tells us that new patients are driving the Lexiva sales uptake, which is as we anticipated, based on Lexiva's key attributes. We look forward to approval in the European Union in the first half of 2004, followed by the launch of Lexiva under the brand-name Telzir in the EU in the second half of 2004.

Turning to Vertex's lead proprietary product candidate in our HCV franchise, Merimepodib, Merimepodib represents an innovative approach to the use of combination therapy, which we believe may work by exploiting a cellular mechanism to starve the hepatitis C virus of an RNA building block that is essential for viral replication. We prioritize Merimepodib for full development based on positive data from a study with HCV patients who had not responded to treatment with combination therapy of interferon in ribavirin. Six-months study results demonstrated proof-of-concept for Merimepodib and HCV based on an assessment of the compound's tolerability and clinical activity.

The extension phase of this triple combination study now being completed will provide useful insight for us as we design future studies and treatment refractory patients. Specifically we are looking to the extension phase data to provide information regarding the safety profile of Merimepodib for an additional 24 weeks and to guide decision-making on the appropriate doses and duration of treatment. We are talking with the FDA and with clinical experts as we finalize the clinical task force for Merimepodib. We believe this path can include the initiation of a potentially pivotal Phase IIB study in 2004.

In the Merimepodib development program, we see opportunities to apply innovative clinical strategies to evaluate triple combination therapy, and we believe that the data we have generated so far in clinical studies provides a strong rationale for novel and exciting clinical approaches. We continue to believe that targeting treatment refractory patients represents the fastest path to the market, but we also expect to explore the use of Merimepodib in treatment naive patients in future clinical studies.

In addition to our lead candidate, Merimepodib, we are also looking ahead to the future complementary HCV product opportunities. HCV protease inhibitors, which could be the first direct antiviral introduces the treatment of chronicle hepatitis C, represent an important part of our future commercial aspirations in this area. Vertex made a number of presentations at various scientific and medical meetings in 2003 describing preclinical progress with VX-950, our lead HCV protease inhibitor. We received positive feedback from the scientific community about this exciting new compound.

This year we expect to present new data from preclinical studies evaluating VX-950 in combination with other HCV therapies. We expect this data to be presented at the upcoming meeting of the International Congress on Antiviral Research, ICAR, in May 2004.

On the clinical front, activities are underway to enable the start of a Phase I study of VX-950 and healthy volunteers in the first half of 2004. With the successful outcome, we did anticipate evaluating the antiviral activity of VX-950 in patients for the first time in a Phase IB trial later in 2004.

I would now like to highlight some of the products in Vertex's inflammation product portfolio. Turning to VX-765, Vertex's oral (inaudible) inhibitor. In 2003 we completed a multiple dose Phase I study. To date we have reported the VX 755 has met or exceeded the pharmacokinetic and pharmacodynamic objectives necessary for the program to move into Phase II clinical development. The newest data from our Phase I program showed the treatment with VX-765 results in dose dependent inhibition of (inaudible) levels of IO-18 (ph), an important cytokine.

This is the first demonstration of this effect for any drug in human and presents us with key data that provides a strong rationale for evaluating VX-765 in patients with inflammatory diseases. IO-18 (ph) as a cytokine is increasingly recognized as a key contributor to certain inflammatory conditions, particularly psoriasis. We intend to initiate an additional proof-of-mechanism study in patients with disorders of ICE regulation as early as the second quarter of 2004. We anticipate continuing into Phase II a development with VX-765 and a specific inflammatory disease indication in the second half of 2004.

I would like to wrap up my remarks now with a broader view of Vertex's outlook for 2004. We set forth ambitious goals for the Company in 2003, and I am pleased to say that despite an unexpected setback, we made strong progress to further our corporate and clinical objectives throughout the year. Entering 2004, Vertex is committed to the development of our own products. The privatization of our pipeline marks an inflection product in the transformation of Vertex into a fully integrated drug company.

For 2004, we believe believe the following corporate goals and milestones represent key value drivers for Vertex. We will advance our HIV franchise with our partner, GlaxoSmithKline. Together we and GSK will focus on launching Lexiva in Europe under the brand-name Telzir and beginning Phase II development with the third generation HIV protease inhibitor, VX-385. Independently Vertex will focus on advancing its financing its proprietary HCV pipeline.

In our HCV portfolio, we intend to accomplish the following goals in 2004. Initiate advanced development of the oral HCV therapy, Merimepodib. Conduct Phase IA and IB clinical development for our oral HCV protease inhibitor, VX-950, an advanced second generation HCV compounds into preclinical development. During 2004, we will also advance our inflammation pipeline. We expect to initiate Phase II development development of VX-765 in a specific inflammatory disease. Complete our pilot Phase II trial of the P-38 map (ph) kinase inhibitor, VX-702, for acute coronary syndromes or ACS and continue to work through the toxicology evaluation for Pralnacasan in partnership with Aventis.

In 2004 we will continue to make focused investments in our discovery organization that allow us to ensure we generate a continued flow of novel drug candidates into our pipeline. This year our focused discovery efforts are directed toward new drug candidates in our kinases and IN channel research programs.

Already in 2004, Vertex has accomplished some important corporative objectives, the result of focused execution by the management team. We have successfully amended our collaboration with Novartis. We have improved our capital structure through exchange of more than $150 million of our convertible debt, and we have set a commitment to reduce our loss. As we move further into 2004, we will continue to focus on corporate activities that will enhance our financial profile. We look forward to updating you in the months ahead as we make continued progress with our Commercial Operations, clinical pipeline, research programs and business strategy as we seek to build shareholder value.

Lynne, back to you.

Thank you, Joshua. Taylor, we are ready to begin the Q&A.

(OPERATOR INSTRUCTIONS). Geoffrey Porges, Sanford Bernstein.

Quickly on the financials. Could you just give us a sense of what the range of the maximum/minimum obligations for the lease and the timing of the lease obligation through '04 will be, and then also what if any is the cash impact throughout the year?

Then secondly, just a question on Lexiva. If you would give me a sense of how much of current Lexiva use is boosted and unboosted, and then what is the outlook for reversing Abbot's price increase on Novia (ph)?

In response to the lease question, it is very difficult to estimate what a minimum and maximum lease exposure is in terms of the restructuring. Let me talk about more of what we have in our financial statement to cover the exposure. At the end of December, we have a reserve of $70 million. That $70 million is our best estimate based on current discussions, ongoing discussions with potential sub-tenants of the building. It is reflective of market rates today, and also what our contractual commitments are to our landlord at this point. So we have put all those inputs, and our best knowledge is provided as an exposure of 70 million, and that is reflected in our balance sheet.

If you actually sublet the building, could that number go down significantly?

It would depend again on what the sublet rental income would be. So it depends upon the deal that we would strike with a subtenancy. It could go down, yet it could go up depending on market conditions.

Can you give us a sense of the boundaries of how much -- what is a realistic estimate of how much it could go down or up, and what the swing value is there?

There really isn't. What we do, as you will see when we file our 10-Q, we provide sensitivities to the key inputs to the exposure. Those are market rates and also timing to finding the subtenancy, and we specifically disclose those sensitivities in our 10-Q filing, which, again, we will do when we file our 10-Q for the year -- 10-K for the year-end, sorry.

I look forward to that.

He also had a question on Lexiva that was directed to Tony Coles.

On the question regarding Lexiva, our modeling expectations are that the majority of Lexiva prescriptions will be on a boosted basis, somewhere between 60 to 75 percent, which will be typical for agents like this, which require or which use more there in combination.

Regarding the Abbot price increase and the reversal of that, it is not generally our practice to practice to comment on other companies either pricing policies or what is happening at the moment. However, I will add that many of us are familiar with some of the inquiries lead by the State Attorney General into this particular practice. As a result of that, we cannot clearly speculate on what will happen. But I do want to say that given that the majority of HIV and AIDS patients are covered by the ADAPT (ph) and/or Medicaid in this country somewhere about 60 to 70 percent or so, we don't believe that the (inaudible) price increase will have a significant impact on the majority of patients taking Lexiva.

Thank you, Tony. I think Ian had something to add to his comment.

You did ask about the cash flow as well, so at December year-end, we had the $70 million accrual. The target of the cash of $350 million for year-end 2004 is reflected on settling that liability within 2004.

Thank you.

Steve Harr, Morgan Stanley.

Thanks for the clarity on the cash flow. The other thing I would ask on the cash flow is on the long-term obligations, is there anything in there from Novartis, and what is that obligation right now?

There is. There is approximately $30 million in the balance sheet at the end of the year relating to Novartis, and that is a long-term obligation. Depending upon how much cash we had used and compounds that they collect, the amount could be repayable on a short-term basis. But those funds that we have used in developing compounds under the original contract do not have to be repaid until the termination of the collaboration with Novartis.

So there is no long (inaudible) as well as with the restructuring of this deal, any type of expectation that you could get a $5 million loan for each nomination. Now that is part -- that is when they actually take the drugs over?

That is correct. Just to review some of the key terms there, Steve, is the transfer of drug candidates occurs at the preclinical stage. Under the original contract, Novartis did provide us development funding for the costs that we would have incurred during preclinical and clinical development through to proof-of-concept. We no longer bear our investment. We don't bear the investment costs, and we don't bear the investment risks because the compound will be transferred at the preclinical stage in Novartis, and at that point, they will pay us a $10 million milestone upon selecting a compound.

Okay. Great. Then either Josh or Tony, are we going to see the Pralnacasan rheumatoid arthritis data sometime soon?

(multiple speakers). There are no immediate plans to disclose that data. There is not an upcoming scientific meeting in the near-term. The data will be available to Aventis within the first half of this year, and we will be analyzing it.

So we might expect to see it over the course of the next year or so?

Yes.

Phil Nadeau, SG Cowen.

Thanks for taking my question. First on Lexiva, what were the exact sales numbers posted by GSK for the quarter?

Thanks for the question. It is Tony Coles. We actually don't comment on the booked sales. What I can tell you is that on a combined basis, the new prescription for Agenerase and Lexiva are up 110 percent since the Lexiva launch. On a combined basis, that franchise of products from a new prescription basis are currently averaging 5.3 percent of the PI market, excluding Novia (ph).

So this performance on a prescription basis is on track with our expectations for the rest of the year and suggests that Lexiva is off to a healthy start.

Fair enough. Can you remind us what the cost of royalties come from?

That is a royalty payment we make to Cil (ph), and a good approximation for financial forecast is that is one-third of the royalties we actually receive.

Okay. I guess this is a question for Josh. At the analyst meeting in December, it sounded as if Merimepodib was going to move into pivotal development in late '04, but in your comments that you just made, you said a Phase IIB study.

I said potentially pivotal Phase IIB, so there is no change there. It is just more specific information.

Fair enough. And last for Ian. You talked a little bit about what is in that long-term obligations lines on the balance sheet. But could you talk about what aside from Novartis payments is reflected there?

In terms of cash repayments, the Novartis and the debt obligation is a long-term obligation. A lot of the other amounts that are in there is actually deferred revenue from amounts that we have received as upfront payments from corroborations. So the cash obligation in that long-term liability really remains. It is a debt obligation and the Novartis obligation.

I think Joshua wanted to add to his answer.

I wanted to clarify on the Merimepodib pivotal plan. As you know, in many areas in antiviral -- HIV sets the standard for this -- it is really quite common, and the regulations are certainly written to encourage the development of compounds such as Merimepodib where in an unmet medical need through a processes that would lead to approval off of Phase IIB study. So that has always been our assumption given the path to approval through the treatment of refractory (ph) population.

That is obviously a negotiation with the FDA, so I don't want to get out ahead of ourselves. But when we talked about potentially pivotal studies in 2004, that is the underlying assumption, which I don't think is an overly aggressive assumption given the need in the marketplace and the data that we have so far.

Tony had an addition to his answer.

Just so I am clear, it is actually the Lexiva new prescriptions that are currently averaging 5.3 percent of the PI market. I had given you a statistic for the combination, so it is Lexiva, the 5.3 percent.

Fair enough. Thanks.

Meg Malloy, Goldman Sachs.

Sorry about that. I was talking to myself on the mute button there. Just a couple of quick follow-ups. On Merimepodib, I think we are still awaiting the 48-week data and some six-months follow-up data for the first part of 2004. Is that still on track?

Yes. What we had said is that we would complete the study and the full data set would be available by -- the data lock would occur by the end of the first quarter, and we are actively working toward that. As Josh said in his discussion, our main objective there is to obtain the safety data for the additional 24 weeks of treatment and any other information we get toward helping design the Phase IIB study?

When do you think we would have an update on what the strategy will be for that program?

In terms of the strategy going forward, that would be within the second quarter. Again, as Joshua said, we are in the midst of discussions with the FDA, as well as with clinical experts, and that is all towards really pinning down the specific design of the Phase IIB study. And I think you can expect more information than that regarding the second quarter.

Just a quick follow-up on Steve's question on the osteoarthritis data. I take it from your response we probably won't hear much of an update on Pralnacasan until maybe the second half of this year? I know there are ongoing Phase I type studies and additional animal types work.

Steve's question was specifically on the rheumatoid arthritis trial. The Phase IIB trial that the data for which is ongoing --

Osteoarthritis is we are awaiting data as well, aren't we?

We reported data in the first week of January, the top line results of the osteoarthritis trial, which had shown again consistent and excellent safety profile as we have seen in all of the clinical studies to date, and we demonstrated that there was an effect on the biomarkers of cartilage and bone turnover. There was a statistically significant effect there.

In terms of signs and symptoms, which is measured by the Womack Index for measuring symptoms of osteoarthritis, there was significant reductions in all treatment groups, including the controlled group, and there was not a discernable difference between Pralnacasan and placebo on the signs and symptoms.

Then what we had said is in terms of going forward, there were no immediate decisions in terms of going forward in osteoarthritis because that really comes back to the overall decision on how we're going to go forward in the development program, and that is dependent on working through the toxicology issues, which is an ongoing effort and will be ongoing throughout the year.

Okay. Thanks very much.

Dennis Harp, Deutsche Bank.

Hi and thanks for taking the question. Ian, I was wondering if you could shed a little bit more light on the milestone payments that may come in 2004? You mentioned 10 million when pre-clinical compounds are selected by Novartis. When would we see that happen? Is that a first-half event, second-half event, and what other milestones might happen in '04 and approximate timing?

Sure. Let me focus on two key areas, which are Novartis calibration and also GSK collaboration. We do have some small milestones that we would be able to recognize during 2004 relating to European approval on Lexiva as our Telzir, as it will be known in Europe, launched. And there is a small amount, and those could occur towards the middle of the year.

When you look at the Novartis milestones, which are more significant as I have described on the call, $10 million for the initial selection of a compound. That could occur in the second half of the year. We hope to produce and provide to Novartis around the middle to the second half of the year the compounds, but there is a period of time where they have to evaluate the compound, and they effectively have 90 days to evaluate the compound.

So I would also point out that although it is a $10 million milestone and if accepted it is $10 million of cash that is payable to ourselves, the revenue recognition around those milestones we actually have to spread the revenue over the remaining period of the research contract in accordance with the most recent accounting rules surrounding revenue recognition. So the $10 million is receivable in cash. It is non-refundable clearly, but then we would spread that $10 million over the remaining period of the research contract.

The financial guidance that I have provided to you, which gives guidance of $90 to $100 million in total revenues for the year includes $15 to $18 million of royalty revenues and also includes $60 to $65 million of contracted revenue. That 60 to 65 includes our expectation of both the GSK and the Novartis milestones.

That is very helpful. I had a follow-up question on the Merimepodib potentially pivotal to the study. The discussions with the FDA, would that encompass a special protocol assessment?

At this time, because our discussions are all about a Phase IIB trial, we have not submitted a special protocol assessment, and we don't plan on doing so in the immediate future.

Okay. Thank you.

Setal Patel (ph), CCL Partners.

Thank you for taking my question. When you were discussing the VX-950, you mentioned there was data coming out this May. Could you just remind me again what that data is about, please?

Yes, we can do that.

The main piece of data will be further in vitro work looking at combinations of VX-950, the activity of viral protease inhibitor with other antiviral agents and specifically interferon.

And then later you said that there will be a Phase I data started in patients with AIDS; is that correct?

We're planning on initiating the Phase I single does study in healthy volunteers within the first half and then initiating a first pilot study in patients who are infected with HCV in the second half of the year in Phase IB study.

Great. For 702, are you still expecting data in the first half for ACS?

We're planning on completing a Phase IIA study in ACS patients in the first half of this year. The primary of that study is safety. It is the first study we have conducted with VX-702 in patients with ACS, and there will be some number of biomarkers that have been incorporated in the study that we will be evaluating. There are no clinical end-points that are objective in that study.

Are you also still planning to take 702 into additional indications later this year?

We're not at this time anticipating going into any additional indications.

Okay. Thank you very much.

I just want to make clear that we are evaluating other chronic indications, so the full development plan for 702 could contemplate other chronic indications. John's comments speak specifically to 2004.

Maybe I could just add with how we focused on something from a financial perspective, we focused our pipeline for 2004 in the future years toward antiviral inflammation compounds. 702 is a compound that we will be looking for a worldwide partner with the potential of proceeding in a cardiovascular indication. That is an indication of where we would look to seek a partnership.

Actually if I can ask a follow-up question. When you have discussed the collaborative revenues indicating some future partnerships, does that include preclinical partnerships or partnerships with your current clinical compounds?

It is actually all the above in that if I, first of all, focus on discovery, we have a very active business development program in the area of high-end channels and (inaudible), and we are very hopeful there to find the right partner to advance that research effort and for that partner to take on development candidates that we would hope to produce this year from that research effort.

And then from the product side, because we have prioritized our development portfolio towards antivirals and inflammation, there are a number of compounds now that we are searching for worldwide partners and specifically those compounds that contrast such as VX-944, which is an oncology indication. VX-702, as we just discussed, is targeted at ACS. So there are a number of types of partnerships that we have extensive business developments in, and maybe Tony would further comment.

I think it is a nice description. I think the intent of your question is to dissect whether we intend to continue with discovery collaborations, and there the answer is of course we will, in addition to these clinic-ready assets that are available where we believe putting them in the hands of partners will create more value for them as we continue our focus behind antivirals and inflammatory-based therapies.

(OPERATOR INSTRUCTIONS). Meirav Chovav, UBS.

This is actually Annabelle Shamimi. I just wanted to clarify something on the guidance. You have revenue guidance of 90 to 100 with the breakdown that I guess sums up to 75 to 83. I guess we are assuming correctly that you have got other partnership revenues in there that have not been formalized yet. Correct?

That is the right way to look at it. What I tried to do is provide you with our guidance of the total revenues for the year and really break that down into the components where $60 to $65 million relates to existing partnerships. $15 to $18 million of that relates to royalty revenue, and the remainder to build it up to the $90 to $100 million of total revenues would be new collaborations, both in the discovery and product area.

Great. I just wanted to clarify that. Thank you very much.

Geoffrey Porges, Sanford Bernstein.

Great. We are beginning to double up here. A follow-up question on the debt. Could you just comment on whether you are planning to retire the rest of the debt in similar fashion? First of all, I guess you can tell us whether you're obligated to offer the same terms to the other debtholders? And secondly, whether you are interested in that, and whether it is something that we should anticipate?

At this point, no, we are not. Let me first on the (inaudible) very specific reasons to that. First of all, the debt exchange that we have performed over the last week was a privately negotiated exchange, and it was not a public tender. There are specific rules that surround that, and therefore, we targeted a small number of holders and a maximum number of value of debit that we were able to do. Clearly we moved through that, and we have executed around that.

At this point, we are happy that we have mitigated some of the term risk in our balance sheet shape and also brought back some flexibility in terms of optionality of equity flexibility. But the remaining 2007 debt, there are no plans at this point to exchange or to retire it as we speak.

So we should assume that that essentially needs to be refinanced at some point through an equity offering?

That is not how I would look at it. To me it is an obligation that is on our balance sheet, and as we manage our balance sheets and our capital structure, it is something that we will address as the business progresses.

Taylor, do we have any last questions?

Dennis Harp, Deutsche Bank.

I just had a follow-up question on the revenue guidance and the new deals that are not yet closed. How do those have to be structured so that you can recognize the upfront payment as revenue, as opposed to having to spread those payments out over several quarters?

Do you have about four hours? The revenue recognition rules surrounding collaborative arrangements are very very complex as we are probably all aware and have changed significantly over the last three years. That is something that I would prefer to talk to you directly off-line given the complexity of the rules and just really point to the guidance that was provided we are comfortable in providing, and perhaps we could talk about the revenue recognition rules off-line.

All right. That would be fine. Thanks.

Thank you, Dennis, and thank you everyone for joining us today on the Vertex Pharmaceuticals conference call.

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