福泰製藥 (VRTX) 2004 Q1 法說會逐字稿

Good afternoon. My name is Marianne, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Vertex Pharmaceuticals 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 period. (OPERATOR INSTRUCTIONS).

Ms. Brum, you may begin your conference.

Great. Thank you, Marianne. Good afternoon, everyone. This is Lynne 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'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 recent 10-K.

At this time, Vertex's first-quarter 2004 financial press release has been issued. Please visit our Website at www.VRTX.com to listen to the conference call and view a Powerpoint presentation. A replay of the conference call will be available via telephone and the Internet until the end of the day, May 10th.

During the call today, we will review Vertex's first-quarter 2004 financial results and clinical progress, as well as discuss our goals for 2004. I will begin by briefly reviewing our business highlights from the first quarter.

First, we continue to advance our HIV franchise with partner GlaxoSmithKline. Approval of Lexiva under the trade name Telvir (ph) is on track in the EU for midyear. We remain focused on building our hepatitis C product opportunities. Recent data supporting the potential of our HCV drug candidates were presented at the annual meeting for the European Association for the Study of Liver, EASL, in Berlin, Germany. We've made significant progress in drug discovery in the area of cancer, as exemplified by the publication of the first crystal structure of the FLT-3 kinase by Vertex researchers in molecular cell and the publication of pre-clinical results of the VX-680 in nature medicine.

We took important steps to address our financial profile in the first quarter. We successfully amended our collaboration with Novartis, enabling us to transfer drug candidates to Novartis prior to preclinical and clinical investments. We improved our capital structure with the exchange of a significant portion of our convertible debt due in 2007 for convertible notes due in 2011. The objective of Vertex's management team is to maintain this progress in the second quarter and throughout 2004, building value in our business and bringing us further down the path of becoming a major drug company.

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 first-quarter 2004 financial results, and provide commentary on the remainder of the year. Then Dr. John Alam, Vertex's Senior Vice President of Drug Evaluation and Approval, will review our product pipeline, with a focus on our proprietary products targeting HCV and inflammation. John will provide a perspective on recent progress in drug discovery, as well. And then Dr. Joshua Boger, Vertex's CEO and Chairman, will review upcoming milestones in the context of a vision for Vertex's business moving forward. 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 follow-up questions you may have.

I will turn the call over to Ian.

Thank you, Lynne. Today I will focus on our first-quarter 2004 results and the business outlook for the remainder of the year. 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 first-quarter 2004 financial press release.

Now to our financials. Our first-quarter GAAP net loss was $40.4 million or 52 cents per share. This compares to 2003 first-quarter GAAP net income of $20.6 million or 27 cents per share. The net income in the prior year was primarily the result of a $69.2 million gain from our divestiture of the discovery and tools and services business. The 2004 first-quarter loss, before charges and gains, was $36.2 million or 46 cents per share, compared to $44.4 million or 58 cents per share in the prior year. The decreased loss is driven by lower operating expenses.

Now to the specific details of the first-quarter financial results. Total revenues were 17.5 million compared to 16 million 2003. This growth was due to increased royalties from our HIV products following the successful launch of Lexiva in the U.S., as well as increased revenue from our R&D partnerships. According to the IMF data, the number of protease inhibitor prescriptions in the U.S., excluding ritonavir, is growing at a rate of 12 percent year over year, and Lexiva is one of the only two products growing in the PI market segment. The most recent market data indicated that Lexiva and Agenerase have combined market share of 9.1 percent, and this continues to grow.

Now, turning to our operating expenses, in 2003 we made a number of significant decisions to address the Company's operating base. Specifically, we reduced headcount, mainly in research, and we prioritized Vertex's product development portfolio. These decisions plus the management of timing of our R&D investments has resulted in R&D costs of 41.7 million for the three months ending March 31, 2004, compared to $51.6 million in the same quarter last year.

To provide you with more detail, our research investment was $30.3 million in the prior year, compared to $26.4 million in the first quarter of 2004, and the development investment was $15.3 million in 2004, compared to $21.4 million in 2003. We expect this level of research spend to continue, but the level of development investment will vary, dependent on the timing of the our clinical trials.

The decisions we made to address our financial profile in 2003 have enhanced our abilities to support our proprietary products and broaden their opportunities. This additionally resulted in clear and defined collaborative opportunities for potential partners, which John Alam will discuss in his remarks. Our SG&A expenses for the first quarter of 2004 were $9.7 million, compared to 9.5 million in 2003, and we would expect this to remain at a similar level for the remainder of the year.

Now, to our balance sheet. Vertex ended the first quarter with approximately $520 million in cash, cash equivalents and available-for-sale securities. In addition to this strong liquidity position, we improved our capital structure during the quarter. Specifically, in February, we exchanged approximately $153 million of our 2007 convertible notes for newly issued 2011 convertible notes. This transaction deferred a significant debt obligation, and also added equity sensitivity to the outstanding convertible note. The new notes have an equity conversion feature of $14.94, and are callable on or after February 15, 2007. This transaction, in addition to addressing our operating base, significantly improves our financial profile compared to 2003, and we will continue to make steps in this direction during 2004.

I will now turn to the remainder of the year. Our 2004 first-quarter loss before charges and gains was 36.2 million, and we expect the second-quarter loss before charges and gains to be in the range of $40 to $42 million. This is the result of increased development investment, as we begin to prepare for certain clinical trials, specifically the Phase IIb study for merimepodib and the Phase I study for VX-950, both for hepatitis C.

Additionally, today we are reconfirming our full-year 2004 financial guidance. Based on our current projections, we continue to anticipate a 2004 loss in the range of $140 to $150 million before charges and gains. And consistent with this guidance, we are also reaffirming our revenue, R&D, SG&A and balance sheet components of our 2004 guidance that we provided earlier this year.

Components of our financial gains that we have somewhat less control over are milestones in new collaborative revenue. We remain committed to the full-year revenue guidance that I provided in February. Specifically, we have seen significant activity around Vertex's research and development programs that we have identified for collaborations. The maturation and development of these assets of Vertex aligns with the needs of larger pharmaceutical companies. For this reason, we remain confident that we will meet or exceed our milestone in collaborative revenue targets for the year.

I will summarize my remarks by saying that we continue to balance our financial strength with our long-term research, development and business goals. We're investing in R&D to drive our proprietary hepatitis C and inflammation products to late stage development and commercialization, and we will continue to enhance our financial profile by improving our capital structure and increasing our collaborative revenue.

I will now turn the call over to John, who will discuss Vertex's pipeline opportunities in more detail.

Thank you, Ian. We made progress on the development front in the first quarter, in particular with merimepodib and VX-950, which are drug candidates being developed by Vertex for the treatment of hepatitis C virus infection. Merimepodib, our lead oral drug, holds the potential to provide enhanced antiviral activity in combination with the current standard of care in HCV. At the molecular level, merimepodib functions to deprive the HCV virus of critical building blocks that it requires to replicate. We have demonstrated that merimepodib is additive or synergistic to the effects of interferon and ribavirin, making it ideally suited to be tested in combination with these agents.

Last week, clinical investigators presented their data from the Phase IIa triple combination study involving merimepodib with pegylated interferon and ribavirin in treatment of refractory HCV patients at the annual meeting for the European Association for the Study of the Liver, or EASL, in Berlin. This was the first presentation of these studies at a major international liver conference, and the data were positively received.

To review some of the data that were presented, merimepodib was well-tolerated through 48 weeks of dosing, representing the primary objective of the study. Specifically, merimepodib did not appear to exacerbate the incidence of the known toxicities of interferon and ribavirin. Additionally, we saw evidence of merimepodib's antiviral activity in this study. In the as-treated analysis at 24 weeks, 667 (ph) or 86 percent of patients in the high-dose arm had undetectable HCV-RNA, a result that demonstrated dose-dependent antiviral effect for merimepodib at 24 weeks, which was the end of the core study portion.

In the intent-to-treat analysis through 24 weeks, in the high-dose arm of the study, 8 of 11 or 73 percent achieved undetectable HCV-RNA at any timepoint, compared to 3 of 10 or 30 percent in the control arm. Results in the control arm are consistent with what has been seen in multiple studies of pegylated interferon plus ribavirin in patients who failed a combination of standard interferon plus ribavirin, giving us confidence that the participants in our study are reflective of the broader nonresponder population.

We reviewed the data from the study extensively with external advisers, and have used their feedback to guide the design of a Phase IIb clinical study, which we plan to initiate in the second half of 2004. The objective of this Phase IIb study will be to demonstrate the antiviral activity of merimepodib in combination with pegylated interferon plus ribavirin in patients who had not responded to a previous pegylated interferon plus ribavirin combination treatment, essentially confirming the antiviral effect seen in the Phase IIa study, but in the current nonresponder population. The study will also be specifically sized to demonstrate an increased sustained viral response rate or SVR. We presently believe that a clinical strategy targeting nonresponders represents the fastest path to the market for merimepodib. We believe that the full clinical and commercial potential for merimepodib will be further realized based on the use of treatment-naive patients as well as treatment-refractory patients, and we are actively exploring study designs for a study in treatment-naive patients. At EASL, we also presented new data from preclinical studies evaluating VX-950, our lead HCV protease inhibitor, and one of the most advanced in development in the industry.

Direct-acting antivirals such VX-950 hold the promise of fundamentally changing the treatment paradigm in HCV, either as monotherapy or as a new backbone for combination approaches. Among the data presented at EASL were results that showed that VX-950, combined with reduced doses of interferon alpha in the HCV replicon systems provided antiviral activity similar to the higher dose of interferon given alone. These results suggest that VX-950 may pave the way for new treatment approaches and combinations in the clinic.

Also, consistent with our HCV portfolio strategy, and in light of the clear clinical and commercial advantages of an all-oral combination approach in HCV, we are actively evaluating that antiviral activity of merimepodib combined with VX-950 in vitro. We anticipate initiating a Phase I clinical trial of VX-950 in healthy volunteers in the second quarter of 2004. Positive results from the study will be used to support clinical evaluation of VX-950, based on the 950's (ph) antiviral activity in HCV infected patients.

Turning to our inflammation and autoimmune disease portfolio, I'd now like to provide an update on two products in clinical development at Vertex, VX-702 and VX-765. VX-702 is Vertex's lead p38 MAP kinase inhibitor. Based on its mechanism action, VX-702 may have application in a wide variety of diseases based on its effects on the pro-inflammatory cytokines TNF-alpha, IL-1 and IL-6.

We have completed the enrollment in treatment of 44 patients in our pilot Phase IIa study of VX-702 in patients with acute coronary syndrome or ACS. The last patients enrolled in the study are completing post-treatment follow-up, and we are beginning to analyze the data in detail. We have successfully completed dose escalation to dose levels that we know from the Phase I study are pharmacodynamically active and block cytokine production ex vivo. And we have observed no untoward safety events to date. At this time, we believe that once the safety data is fully analyzed, this Phase IIa study could be enabling for a Phase IIb study that could establish proof concept in ACS.

We have now also completed dose ranging studies in healthy volunteers with VX-702 with up to 28 days of dosing, enabling us to evaluate longer treatment durations in future studies of ACS or in other indications. Given the broad potential of p38 inhibitors such as VX-702 in a range of indications, we believe that the full value of this compound will be best captured as part of the strategic collaboration, and we have begun to discuss possibilities with potential partners. In the next several months, we expect to provide an update on topline clinical results from the ACS study, and we expect to present detailed results in a future scientific forum.

Turning to our ICE program, VX-765 is an oral inhibitor of interleukin-1 beta converting enzyme, or ICE, in development at Vertex targeting inflammatory diseases. We are still on track to initiate Phase II development in the second half of 2004, and we expect to update you in the next several months on development plans with that compound, specifically our selection of a Phase II indication.

I would now like to turn to some of our recent advances in drug discovery. Vertex's clinical pipeline is supported by exceptional capabilities in drug discovery and innovation. Even as we invest to bring our proprietary drug candidates into advanced clinical studies, Vertex seeks to maintain a steady stream of breakthrough drug candidates moving out of research and into early development. Today, there are two areas I would like to cover in more detail -- our emerging drug discovery efforts targeting cancer and our work targeting ion channels for a range of disease indications.

Beginning with oncology, we have made significant progress in drug discovery targeting cancer over the past few years, highlighted by the emergence of new compounds with very promising therapeutic profiles. In the first quarter of this year, we published in nature medicine early findings for VX-680, Vertex's lead compound targeting Aurora kinases. The publication of this research has garnered a great deal of interest in the oncology research community, as Aurora kinases are implicated in the transformation of normal cells into tumor cells, the proliferation of tumor cells and the down (ph) regulation of the body's own tumor suppressor system. We share the emerging external view that VX-680 is the type of compound that could transform the future of cancer treatment.

Vertex currently owns the worldwide rights to VX-680, which is poised to enter Phase I clinical development. And the Investigational New Drug Application, or IND, has been filed with the U.S. FDA, and the IND is now open. Based on the investment required to fully establish the central role of a breakthrough drug such as VX-680 in the treatment of a broad range of cancers, we think the commercial opportunity for VX-680 will be greater in the hands of a partner. We are actively discussing partnership opportunities that will retain significant downstream participation for Vertex. Our experience with Aurora kinase demonstrates our ability to move rapidly into a leadership position in key areas of research. We published a first three-dimensional crystal structure of Aurora A kinase in 2002, and announced the advancement of VX-680 into pre-clinical development shortly after that. As part of our broad kinase research program being conducted in collaboration with Novartis, we are also establishing leadership positions around other novel targets of interest.

Most recently, Vertex researchers were the first to publish the structure of FLT-3 kinase, a key target implicated in the uncontrolled growth of immature blood cells seen in leukemia. Based on our drug discovery progress in kinases, we anticipate advancing additional high-value kinase inhibitors into preclinical development in 2004, principally focused in the area of cancer.

I would also like to mention some very important work that is been taking place at Vertex, principally at our San Diego site, directed at drug discovery in the area of ion channels. Based on our proprietary capabilities in high-content cell assays and our medicinal chemistry efforts targeting ion channels, we have made significant progress designing and optimizing new types of selective ion channel modulators. We have multiple drug discovery programs in the ion channel area, including discovery of novel sodium channel modulators for the treatment of pain. One of our most advanced programs is in the ion channel area target cystic fibrosis. As you may know, cystic fibrosis or CF is a genetic disorder in which a defective gene causes the body to produce an abnormally thick, sticky mucus that clogs the lungs and leads to life-threatening lung infections. These thick secretions also obstruct the pancreas, preventing digestive enzymes from reaching the intestines to help break down and absorb food. CF is a fatal genetic disease affecting approximately 30,000 children and adults in the United States.

Vertex initiated research in the area of CF in 2000 as part of a collaboration with the Cystic Fibrosis Foundation. The principal defect that results in CF is in fact a malfunctioning chloride ion channel in the cell membrane. At Vertex, focused efforts to design compounds targeting this biological pathway have recently produced some potential breakthroughs. Vertex has now identified two types of proprietary compounds representing two different mechanisms which are highly active in diseased cells and improve the function of the defective ion channel. Most recently, we demonstrated that both classes of compounds are active in bronchial epithelial cells that have been isolated from CF patients. To our knowledge, these are the most robust data to date indicating that targeted small-molecule approaches can restore function in CF cells.

Important (ph) work remains to be done before we can test these compounds in the clinic, but we are highly encouraged by this early progress. Furthermore, the approach we're following may also have broader applications beyond CF in other serious pulmonary diseases. We anticipate discussing our advances in cancer and our programs in ion channel drug discovery in more detail in the coming months, including presenting data at scientific forums. These research efforts and other efforts underway at Vertex are important sources of value, ones that provide continuous innovation in our pipeline and in those of our partners. These efforts are truly differentiating for Vertex, and are an important engine of our future growth.

Joshua, over to you.

Thanks, John. Vertex's pipeline progress, improvements in our capital structure and the favorable amendments to our Novartis agreement all are indications of the positive momentum that has characterized 2004 for Vertex. We have significant news flow ahead in 2004, reflecting our focused investments in research and development and the ability of our business model to capture value, and we expect that momentum to continue.

In our HIV franchise, we anticipate continued prescription growth for Lexiva in the U.S. and approval by midyear of this product in the European Union under the trade name Telvir. We also anticipate, around the end of the year, the start by GlaxoSmithKline of Phase II clinical development of VX-385, our third-generation HIV protease inhibitor.

As you have heard, we have focused internally on our proprietary product candidates, notably those in development for hepatitis C virus infections. This area excites us. The market is large and proven, yet most of the medical need is unmet or poorly addressed. Addressing this unmet need has huge potential, and we are a clear leader in research and early development. Oral agents such as merimepodib and VX-950 have the potential to change the treatment paradigm in HCV, and we believe our development plans in 2004 will help to chart the path to approval and commercialization of these product candidates.

Vertex leads also in two related novel approaches to inflammation, with compounds that block key inflammatory mediators. Our Phase II trial of VX-702, our p38 MAP kinase inhibitor, initially targeting acute coronary syndromes, along with the expanded Phase I study results we obtained on VX-702 in the last several months, has us in the position to move to more advanced Phase II trials, most probably with a partner. With our wholly-owned ICE inhibitor, VX-765, we are on track to initiate Phase II clinical development in a specific inflammatory disease in the second half of the year. In addition, we will continue to work through the nonclinical toxicology evaluation for pralnacasan, our ICE inhibitor, in partnership with Aventis, with a goal of reentering the clinic with that compound in 2004 or 2005.

As John mentioned, our drug discovery organization remains vibrant and productive. Our advances in ion channels and cystic fibrosis are representative of the important progress we have made in developing an integrated and productive drug discovery operation at our San Diego site. Broadly, our progress in drug discovery targeting membrane-bound targets is providing us now with important product and business development opportunities. You should be hearing more about these in the months to come.

Earlier this year, we generated enormous excitement in the scientific and medical community around the first animal data on VX-680 for cancer, the most advanced of a wave of specifically designed kinase inhibitors coming from our large research program in that area. This compound, controlled by Vertex and now ready for human clinical trials, demonstrates the power of our engine of product creation in an area of great medical and investor excitement. You will be hearing more about VX-680, and more about additional kinase inhibitors for cancer and for other indications. Stay tuned.

Vertex is one of a few biotech companies whose pipeline has been created and continues to be driven by innovation in drug discovery. We're seeing increased recognition in the value of these innovations, particularly reflected by the high degree of interest from potential partners across the breadth and depth of our research and development programs. The level and degree of interest is as high or higher than it has been at any time in the last several years. We are well-positioned to maximize value, and we intend to do so aggressively. We expect to initiate new collaborations in 2004, which capture near-term value as well as preserve downstream economic participation for Vertex and Vertex shareholders. We're confident in our ability to deliver on our 2004 pipeline and financial objectives. The achievement of these objectives will maintain our trajectory toward our goals of multiple products on the market, product-driven growth and profitability. Lynne, back to you.

Thanks, Joshua. We will now open the call to your questions.

(OPERATOR INSTRUCTIONS). Steve Harr, Morgan Stanley.

I had a couple of questions. First of all, on the Aurora kinase, just given the relatively limited number of resources necessary to bring an oncology product through Phase I/II, and probably the significant value that could be created with a limited investment, why are you looking to outlicense drug so early?

And then the second question, which may be a good one for John, just help us understand a little bit around VX-497, why there looked to be a large diminution in the effect long term, and there really was not much difference, if you look (indiscernible) analysis, between patients on the drug and those not, at 72 weeks.

Okay, Steve, I think Tony will take the first part of your question.

Regarding VX-680, as everyone is well aware, we prioritized antivirals and autoimmune and inflammatory conditions, in our efforts to focus our investment and to expand our strategic efforts in two consolidated areas. We did that at the end of last year.

Because VX-680 falls outside of those two therapeutic areas, we believed that we would be better off and would create more value for the asset by placing it in the hands of a partner with a global infrastructure for development and commercialization. So we are intent on remaining focused behind the two key therapeutic areas that we have talked about, and we are also intent on retaining significant downstream returns and value for Vertex through any partnering effort we have behind VX-680. So we fully anticipate participation in that program on a downstream basis.

Now, to John for the second part of your question.

On merimepodib, the relapses, which is what you are referring to -- is just patients how had responded who relapsed after the end of treatment. The relapse rate that we saw is actually completely consistent with the patient population that we were in. There are now four different trials that have been presented of pegylated interferon plus ribavirin in patients who were nonresponders to standard interferon and ribavirin, or revatron (ph). And in every one of those trials, there's two pieces of information that come out. One is that at 24 weeks, about 30 percent of patients become responders, and that is what we saw in our control arm. And then, of those patients who respond, around two-thirds of the patients will relapse, and that is what we saw in our study, both in the control arm and of the patients who were 497 responders.

But it is the reason why, actually, our primary objective in the study, when we were looking at antiviral data, is that we were looking at 24-week data. With the size of trial that we are looking at, and you have two-thirds of the patients relapsing, it is clear that the numbers were going to drop off too much to really get an assessment in terms of sustained response rates. And our study was designed from the beginning, as we had said from 18 months ago now, that our objective was to look at the six-month data at both the safety and the efficacy data, and based on that we would make a decision of whether we would go from Phase IIa to Phase IIb. And I think, overall, as we have said, the safety information was very compelling and very good. And the efficacy data, the antiviral data, at the timepoint in the core study exceeded our expectations. And we believe on that basis, that it's appropriate to move from the Phase IIa study to the Phase IIb study.

John, in the past, you guys have discussed using the Phase IIb study as a registration study, potentially, on an accelerated approval. Given the lack of long-term remissions here, is that realistic? Or do you think you need longer-term data to register the drug?

Again, in the current study, the objectives in the Phase IIa study were to look at whether there was evidence of initial antiviral response or not, basically to prove whether the triple combination is more (indiscernible) from an antiviral standpoint than the standard combination. And we believe we have information to support that. The next step is really to move into Phase IIb, to do some further dose ranging, to consider different dosing durations, as well. And all of that will optimize, we believe, our overall effect, and then to do a study that is large enough in order to be able to get a real understanding of the effect on sustained response rates. But one really does not want to take a shot at the sustained response rates until you have gotten that first set of information and you have actually designed the study, in terms of dose regimen, dose duration, all of that, in order to be able to run the right study to look at sustained responses. And we believe that we are actually quite well-positioned to move from the Phase IIa study into Phase IIb, where we will be getting our first real look at sustained responses.

Meg Malloy, Goldman Sachs.

I just wanted to follow up on Steve's question, and I guess your answer would suggest that you'll finish the Phase IIb study, and then will likely have to do a larger study to get sustained response data? Is that a fair read?

There is more to come, I think, over the next quarter on the details of the Phase IIb study. But we will be designing that study with -- our objective is to design that study with interim milestones that reduce our risk during the course of the study. The registration path within nonresponders is a discussion still to come with the FDA, and would likely come at some of those milestone points within the current Phase IIb study. And I think that would determine, in a nonresponder track, where we would come out and what we would need for registration.

For the treatment-naive population, clearly we would need to do an additional study or two, and we're starting to explore designs in that arena. And then the third option, which is to develop merimepodib with or without ribavirin in combination with VX-950 -- that would obviously take a full development path from Phase IIa dose ranging in various combinations going forward, which we could not really get into until VX-950 has gone through its first set of studies in HCV-positive patients.

I'm sorry, not to -- so, if I am understanding this correctly, there is some chance that in the nonresponder population, depending on what you see at the interim analysis, that you might use the IIb study to file on that population? Is that correct?

The precedent in this area has been -- in antivirals and, I think, broadly in certain areas -- hepatitis C is certainly considered a serious disease. The nonresponder population clearly does have a significant unmet medical need. And it is that type of context that the FDA documents, particularly around accelerated approval, does provide you more flexibility and does provide the FDA more flexibility in terms of what they would need in order to provide approval. But that discussion we have not had yet, and we think the best time to have that discussion is actually with more data in hand.

And if I may, one quick question for Ian. Could you just remind us what the interest rates are on the '07 and '11 debt, please?

On the 2007 convertible note, it's a 5 percent coupon, and on the 2011 convertible note, it's a 5.75 coupon.

Dennis Harp, Deutsche Bank Securities.

On merimepodib, what is the rate-limiting step to getting the Phase IIb study up and running?

It's a combination of just all the startup activities, starting with running a full protocol. And then we are -- and to have the protocol reviewed with the FDA, getting their input. We are working actively with them, get their full buy-in (ph) to the next study. And then it's all the clinical operations work of getting the sites together, and then getting the drug to the sites, getting the drug package, getting the drug to the sites. But it's really all the normal course of action, and I think the timeframe we are working in is pretty consistent with the industry. And we are expecting to start the Phase IIb study early in the second half.

And when might you start the first studies in treatment-naive patients?

As I said, we are in the stages of discussing study designs, talking to investigators. And it's relatively preliminary, but our target is within the next 12 months or so.

Derek DeBruin, UBS.

This is actually Annabel Saminy for Derek. A quick question on merimepodib again. Just based on the data that you saw from the 48 weeks, has your idea of the trial design changed at all from your ideas based on the 24-week data? Like are you possibly using merimepodib more as an initial therapy, or is that changing at all in that sense?

We are using the full set of data from the Phase IIa study to design the Phase IIb study, and you'll get more information in the next few months in that regard.

And how big are you expecting it to be, the Phase IIb study?

Again, we will provide that in the reasonably near future.

And just one question on Lexiva. It looks like -- you mentioned that the PI market is growing at around 12 percent, excluding ritonavir. But just from the results, we saw that your royalties decreased quarter over quarter. Can you sort of shed some color on that?

Yes, the PI market is growing at about 12 percent, which is a healthier clip than we have seen in this marketplace in a long time. We obviously don't provide sales breakdowns for Lexiva and Agenerase. But I can tell you that overall, we are on track with our expectations for the full year for the royalty for the HIV franchise.

(OPERATOR INSTRUCTIONS). Hari Sambasivam, Merrill Lynch.

A quick question on the VX-702. Could you kindly talk a little bit about what kind of end point you are looking for in the Phase IIa studies in terms of efficacy, and also positioning of the drug going forward a little bit?

The Phase IIa study is -- the primary objective, as with most Phase IIa studies, is very much in terms of safety. The ACS population in particular are on a variety of other anticoagulants, including in particular a whole panel of antiplatelet and anti-coagulant agents.

So the safety steps are very important, that you are not somehow interfering or potentiating the effects of some of those agents. And there have been issues with a number of other mechanisms of getting into bleeding issues if you are, in a sense, with the wrong mechanism or dose escalate too aggressively. It's the reason why the achievement of dose escalation and getting to the dose levels that we were hoping to get to is, in fact, a positive development, and we believe it is supportive of the next set of studies we would go into.

In terms of efficacy, given the size of study we were conducting, which is 44 patients altogether across several dose groups -- really, in terms of clinical efficacy event rates, MI, urgent (ph) revascularization or DAT (ph), you just -- clearly we are not going to get any insight in that regard. We are measuring drug levels of VX-702. We are measuring some of the biological markers. But again, the likelihood is in this size study, it may be difficult to pick up a signal. And the place where you can get real insight in ACS in terms of efficacy is in the Phase IIb setting, where I think most proof-of-concept studies in that disease indication is really run in Phase IIb.

What type of patients are you using?

The current population are patients who are -- with ACS who are undergoing PCI. And we are looking at some of the biological markers on cytokines, in and around the PCI, because it's during the percutaneous coronary intervention, so either angioplasty or stent placement, you actually get an additional significant increase in a fair number of patients. And we are going to be looking to see if there's any modification of that increase or not. But again, the primary objective was very much safety, and we are hopeful that the full dataset, when analyzed, would allow either us or a partner to go forward into a Phase IIb study.

Kevin Gale (ph), Radcliff (ph).

I wanted to know if you guys have -- I didn't remember seeing it -- and maybe if you could break out where you think the dollars are coming from for the rest of the year, percentage royalties versus percentage partnership and R&D funding. And then, as a follow-up, you mentioned that you are going to continue to improve the balance sheet during the year, and I would like to know how you are planning to do that or some things you are considering there.

The first part of your question was regarding our guidance, and you specifically asked about the revenues. So, in February, we did provide full-year guidance regarding revenue, and that was to set a target there of $90 to $100 million of revenues. The components of that are $15 to $18 million of HIV royalties and $60 to $65 million of collaborative revenues from existing partnerships. And clearly, the number in between there to get to the 90 to 100 million is our expectation around new collaborations and milestones of those collaborations.

In terms of the comment around strengthening our financial profile, let me first of all tell you what we have done. It is important to the Vertex management team to continue to have strength to continue this investment, but we did make steps during 2003 regarding reducing our operating base. And coming into 2004, we did do a restructuring regarding our 2007 notes.

Regarding the remainder of 2004, I would say that our primary focus will be in the area of collaborative arrangements, and look to bring cash flow into the Company through those arrangements. And Tony specifically talked to VX-680 earlier in this call. John specifically spoke to VX-702 in this call. And we have also spoken, as Joshua mentioned in his comments regarding some of the exciting innovation and visibility of compounds in our discovery efforts in ion channels and cystic fibrosis. And I think those are the main areas that we would see collaborative efforts, though continuing to reduce our overall net loss and also bring cash flow into the Company. We will remain vigilant regarding the capital markets, and remain opportunistic with the intent of strengthening our balance sheet as we end the year.

At this time, there are no further questions. Ms. Brum, are there any closing remarks?

No, we would just like to thank everyone for joining us on the Vertex conference call this evening, and we will be in our offices to take any further questions. Thank you.

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