福泰製藥 (VRTX) 2004 Q3 法說會逐字稿

My name is Edward and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Vertex Pharmaceuticals conference call. All lines have placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. Lynne, you may begin your conference.

Good afternoon. 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 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 in detail in our reports filed with the Securities and Exchange Commission, including our 10-K.

At this time, Vertex's third-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 the Internet until end of day November 8.

During the call today, we will review the third-quarter financial results, as well as discuss recent progress in the clinic. I will begin by briefly reviewing highlights from the third quarter. Our revenue line has improved, based on the signing of new collaborative agreements, as well as increased contribution of HIV product royalties. We and Glaxo SmithKline won marketing approval for Telzir in the EU, and this drug has now been launched in a number of EU countries.

We also strengthened our balance sheet to the (ph) additional private convertible debt exchange, and we have remained focused on conducting key clinical trials of our core products. During today's call, we will provide additional detail on these accomplishments. We look forward to a strong finish to 2004 and paving the way for a productive 2005.

In a moment, I will hand the call off to Ian Smith, Senior Vice President and Chief Financial Officer. He will summarize Vertex's strategic financial and operational progress third quarter 2004 financial results and review our full year 2004 financial expectations. Then Dr. John Alam, Senior Vice President of Drug Evaluation and Approval, will review our significant recent clinical advancements and discuss our next steps with key pipeline programs.

Then Dr. Joshua Boger, Chairman and Chief Executive Officer, will close with his outlook for the remainder of the year, focusing on our key achievements for 2004. Vertex's IR team, joined by Ian Smith, will be available after the conclusion of this call to answer any follow-up questions you may have. I will now turn the call over to Ian Smith.

Thanks, Lynne. It's another quarter of significant improvements to our operating profile. We continue on track to achieve our 2004 revenue and loss objectives, and our balance sheet is stronger going into 2005. There are two specific aspects of the third-quarter results that are markers of this success.

Firstly, increased revenues and a reduced operating loss. Secondly, an improved capital structure and increased financial strength; specifically we have now deferred most of our 2007 obligations to 2011.

Now for the financial results. During the call, we will discuss financial results prepared in accordance with GAAP and non-GAAP financial measures. Additional information regarding our use of non-GAAP financial measures is available in our third-quarter press release.

The third quarter '04 GAAP net loss was $38.8 million, or 49 cents per share, compared to prior-year of 86.4 million, or $1.12 per share. The prior-year net loss included approximately $42.4 million of restructuring and other expense. Excluding the charges, our third quarter '04 loss was 36.2 million and 46 cents per share, compared to '03 of $45.2 million or 59 cents per share. This reduction of loss was driven by increased revenues.

Specifically, third-quarter revenues were 26.8 million compared to the prior year of 15.8. The November 2003 launch of Lexiva in the U.S. and the initiation of our oncology collaboration with Merck in the second quarter this year were the main drivers of this increase. This stable base of revenues will support our R&D investment as we move into 2005, while enabling us to reduce our operating loss in future periods.

Looking to our major expenses. R&D investment for third quarter of '04 was $48.8 million, compared to $49.6 million in the same quarter of '03. Our research investment is primarily funded by our research partners, and development expenses are driven by our core pipeline products, where we retain a development and commercial interest. Our SG&A expenses for the third quarter of 2004 were $10.6 million, which is generally consistent with the third quarter of 2003.

Vertex ended the quarter in a healthy cash position, with approximately $418 million in cash, cash equivalents, and available for sale securities. As a result of the convertible debt refinancing, we now have an improved capital structure, with $232.4 million in convertible notes due in 2011 and only $82.6 million due in 2007. In addition, the 2011 debt has a conversion price which provides more flexibility as we continue to manage our capital structure in the future.

Now to comments on our 2004 financial guidance. As the year progresses and we continue to achieve our key financial and operating goals, we remain confident and committed to the financial guidance for revenues, R&D expense, and loss that we outlined at the beginning of the year. Additionally, based on our year-to-date financial performance and as a result of upfront payments from our new collaborations, we anticipate the year-end 2004 cash balance of approximately $375 million, an increase of $25 million from our previous guidance of 350.

In summary, over the last year, Vertex has taken significant steps to improve its operating profile and financial strength. Today, and as we finish 2004, we have good business shape, balance, and direction and the financial platform to support investment into our business, in particular our core products as they enter clinical proof of concept studies. The remainder of 2004 and 2005 present significant opportunities for Vertex to drive value based on near-term clinical product advancements. John, over to you.

Thanks, Ian. We continue to accomplish our R&D objectives, reflecting focused investment in our proprietary products and continued development progress by our partners.

Starting first with our hepatitis C, or HCV development program. In the third quarter, we initiated the Phase IIb METRO study with merimepodib, or MMPD, our lead oral therapy for HCV. This study, the METRO study, is designed to evaluate MMPD in combination with pegylated interferon and ribavirin in 315 patients who were nonresponsive to prior combination therapy. The study is actively enrolling patients, and as the enrollment progresses, we will be able to provide an update on the progress of this study.

The next major milestone for this program will be a meeting with the FDA to define the path forward to registration in a nonresponder patient indication. At this time, we anticipate having these discussions and updating the investment community on the registration path by the end of 2005. The specific timing of the discussion will be dependent on the availability of the METRO study's 24-week interim data, which will form the basis for the FDA meeting.

Additionally, we are on track to initiate a 28-day clinical virology study that will evaluate the effects on viral load of MMPD and ribavirin in an all-oral combination without interferon. The objective of the study is to determine whether the synergy between MMPD and ribavirin that is seen in vitro can be repeated in patients infected with HCV. Demonstration of synergistic activity of MMPD in ribavirin patients would not only support the use of this combination as part of the triple combination of MMPD, ribavirin, and pegylated interferon, but would also provide the basis for MMPD and ribavirin in all oral combinations with direct-acting antivirals, including orally-active HCV protease inhibitors. We expect to start this 28-day study by year-end -- the 28-day study with MMPD and ribavirin alone.

Turning now to our second oral HCV program, VX-950, the direct-acting antiviral targeting the hepatitis C protease. In the third quarter, we successfully completed a Phase Ia single-dose escalation study of VX-950. Results of the Phase Ia study indicated that VX-950 met its primary objectives of safety and tolerability. In addition, in the Phase Ia study, we achieved concentrations of the drug in the blood that we believe will be therapeutically active in HCV patience.

The successful completion of this study provides us with great excitement, as we look forward to initiating the first study of VX-950 in patience with hepatitis C infection by the end of this year. We anticipate receiving the antiviral data from this Phase Ib study in the first half of 2005.

At the end of this week, researchers at Vertex will present six abstracts at the 2004 AASLD conference in Boston. These include a late-breaker abstract on results of the recently completed VX-950 Phase Ia study in healthy volunteers, abstract number LB-20. This is the first time detailed clinical results will be presented on VX-950.

We will also present pharmacokinetic and pharmacodynamic results from a Phase (technical difficulty) study of merimepodib, abstract member 193. Among other results, analysis demonstrates a statistically significant relationship between concentrations of MMPD and the level of viral load reductions achieved in individual patients. Additional abstracts that will be presented by Vertex can be found on the AASLD website.

Next, I will discuss briefly our recent progress in another focus area, oral anticytokine programs targeting treatment of inflammatory diseases. Last week, we reported at a medical conference detailed results for our lead oral p-38 map kinase inhibitor, VX-702, in the treatment of acute coronary syndromes, or ACS. In the Phase IIa study of 45 ACS patients undergoing percutaneous coronary intervention, or PCIs, such as stent placement, VX-702 was well tolerated and showed excellent pharmacokinetic characteristics.

In addition, we obtained compelling insight into the ability of VX-702 to reduce important biomarkers of inflammation in ACS patients. Specifically, when compared to placebo, once-daily doses of VX-702 for five days demonstrated a dose-dependent inhibition of the inflammatory biomarker, C-reactive proteins, or CRP, that was dramatic and sustained.

Moreover, the magnitude of the effect was substantial. For example, at 48 hours post-procedure, while median CRP levels increased nearly 100 percent in the placebo group, they dropped or decreased 60 to 70 percent in the higher-dose VX-702 treatment group, indicating marked suppression of inflammatory activity. This was a very exciting finding and was the first demonstration of a reduction in CRP for patients in a cardiovascular setting using an oral anticytokine therapy.

Overall, the potent anti-inflammatory effect of VX-702 observed in the Phase IIa study not only strongly supports further development of VX-702 in acute coronary syndromes, but the general nature of the inflammatory biomarker as evaluated provide insight into the development of VX-702 in multiple other inflammatory indications.

As we discussed in our conference calls during 2003, our intention with VX-702 has been to progress into Phase II in both acute and chronic disease indications. Based on preclinical and clinical studies that we have conducted, including the ACS Phase IIa study and a 28-day healthy volunteers study, we now have defined the dose range and established a safety profile to move forward with longer-term treatment for VS-702.

At this time, Vertex's focus for VX-702 is the selection of an indication (ph) for a three-month study in a chronic disease indication. Consistent with our prior statements, ACS remains an indication that could be pursued by a partner with experience in cardiovascular drug development. We look forward to updating you on the development path as we review our portfolio investment for 2005.

Turning to a VX-765, a lead oral interleukin converting enzyme, or ICE inhibitor. We announced today that we expect to begin a Phase IIa study in 2004 in psoriasis patients with modern to severe psoriasis that requires systemic therapy. This study will be a four-week study conducted in the U.S. under an IND. The biological and clinical rationale for VX-765 for the treatment of psoriasis is strong. Specifically, there is an established link between serum IL-18 levels and inflammation seen in psoriasis. This link is important, because ICE regulates IL-18 production, and from Phase I studies completed earlier this year, we know that VX-765 significantly lowers IL-18 levels in healthy volunteers in a dose-dependent manner.

The purpose of the upcoming four-week study will be to establish the safety and pharmacokinetics of VX-765 in patients in order to establish the basis for a longer-term proof of concept study in the disease. We look forward to describing further details of this study to you when the trial gets underway in the next few months.

I will now conclude with an update on the status of other drugs in our pipeline that are supported by partners. Today, we announced achievement of another clinical milestone with initiation of the pilot Phase II clinical trial of VX-385, the third generation HIV protease inhibitor from our collaboration with Glaxo SmithKline, or GSK. Finally, as part of our collaboration with Merck, they are on track to initiate the Phase I clinical development of VX-680, a novel oral kinase inhibitor, in cancer patients by the end of this year.

In summary, Vertex has made significant advancements across our pipeline, both in the quarter and throughout the year, and we are prepared to conduct significant proof of concept studies for our proprietary compounds in 2005 that have the potential to create significant value for Vertex. This is an exciting time for the Company and I look forward to continuing to report our progress to you. I will now turn over the call to Joshua.

Thanks, John. It has been a productive third quarter and year-to-date. Increased balance sheet strength, improved financial operating profile, clinical progress with our core programs; we continue to achieve our 2004 goals. Vertex's core pipeline is distinguished by products with the potential to change the way physicians and patients think about disease. Two drugs positioned to shift the treatment paradigm in chronic hepatitis C; two oral cytokine inhibitors, which could revolutionize the treatment of inflammatory diseases, ranging from cardiovascular disease to RA to psoriasis. Important news flow lies ahead for these programs as we make further clinical advances in 2004 and into 2005.

As examples, we are poised to start the start of a clinical proof of concept study with the direct antiviral VX-950 in patients with hepatitis C. Also positioned to initiate a clinical proof of concept study with VX-702 and a chronic inflammatory disease. These and other events have the potential to drive significant value for Vertex in 2005.

Financially, we are prepared to make the investments necessary to drive our programs forward. New collaborations, which have already helped to improve Vertex's operating profile in 2004, will further strengthen our financial platform going into 2005. And our ability to innovate in drug discovery continues to drive new product opportunities. We anticipate new drug candidates, a novel kinase inhibitor targeting cancer, and a novel ion channel modulator targeting neuropathic pain moving out of discovery and into development in the near term, demonstrating a unique source value for our business.

In summary, we are confident in our ability to deliver on our near-term pipeline and our financial objectives. The achievement of these objectives will maintain our trajectory toward our goal of multiple products on the market, product-driven revenue growth, and profitability. Lynne, back to you.

Thanks, Joshua. Edward, we would now like to open the call to questions.

(OPERATOR INSTRUCTIONS) Geoff Porges with Sanford Bernstein.

Congratulations on a good quarter. A couple of quick questions. First, just in terms of the revised guidance for the year, I was wondering if you could tell us whether you're holding to the same revenue guidance. Because it looks as though with the current quarter, you're still guiding to, I think -- your earlier guidance was 90 to 100. So wondering if you could give us an update on that and what the composition of that is. Because given the visibility we now have to the royalty run rate for Lexiva, I'm just wondering what is built in, and particularly in terms of one-time payments and acceptances from Novartis.

And Josh, if you could just go through those anticipated milestones again that you expect between now and the end of the year from the preclinical pipeline, that would be helpful. Thanks.

First of all, I did not revise the guidance. I just want to be clear on that. The only piece of financial guidance that I revised on the call was actually to reset our cash guidance for the end of the year, which I moved from the initially 350 million up to $375 million. The full-year guidance for the P&L remains consistent to that that we provided at the beginning of the year.

And specifically, you asked regarding the revenue. The revenue guidance is targeted between 19 and $100 million. And the specific components of that I have guided at the previous quarter call $75 million would be derived from existing R&D collaborations, royalties would be 15 to 18 million, and milestones would provide the incremental amount to put us in the full year again (ph) to 90 to 100 million.

Just to pick up the question -- I think I understood. You wanted me to review the discovery, as it were, candidate milestones, the things coming out of discovery into development?

Yes. You went through them quickly; that would be helpful.

We anticipate moving out of discovery into development a kinase inhibitor targeting cancer that we have not told you about before, and a novel ion channel modulator that we would be targeting to neuropathic pain. And we will be telling you more about those as they make that transition.

And they will not be subject to the Novartis agreement or anything?

I think I will wait until we announce those to tell you more about them.

Okay. Thanks very much.

Dave Witzke with SunTrust.

Thank you for taking my call. First question regarding merimepodib. Can you help us better understand the timeline of when we may see data releases in the METRO study?

This is John Alam. On MMPD, as we discussed, really the next major public milestone will be our updating the registration path forward. And that will be based on discussions with the FDA, and those we anticipate will be based on 24-week data from them METRO study. And the discussions themselves we are targeting for the second half of 2005. The data themselves, the 24-week data, would be presented at appropriate medical conferences sometime after the data is available. And it is always -- at this point, it is a little speculative to talk about when exactly the data would be available and what meetings would work from a timing standpoint.

Thanks. And you're looking at both 50-milligram and 100-milligram doses?

Yes, we are.

And equal patient numbers?

Yes, it is a balanced randomization to control 50 and 100 milligrams twice a day on a background of pegylated interferon and ribavirin.

Thanks. And in the 28-day clinical virology study with ribavirin, what dose are you looking at?

We have not announced those. We will provide that once the study is underway, which we are targeting before the end of the year.

Okay. And the 950, the 14-day study -- correct, is it kind of second quarter '05, and in what form would you release the viral load data?

The study will be initiated by the end of the year, and we anticipate that the data will be available in the first half of 2005. We are not prepared at this point to be more specific about how and where the data would be announced -- would be revealed.

Understood. And final question, if I may, on 702. In ACS, is it correct you would not move forward without a partner, and if so, where are you in negotiations and what type of deal structure would you pursue?

So, that is correct. As we have said, to go forward into a Phase IIb study in ACS, we would require a strategic partner. At the same time, our current focus is very much towards moving into a chronic disease indication and moving into a three-month study. The results in the study were obviously quite dramatic in terms of reduction in C-reactive proteins. That is relevant for ACS and we think that will be an important part of any discussions we would have with any prospective partners. But it is a more general statement about the activity, the potency if VX-702 than just ACS. And we think that data, along with the safety data that we have generated to this point, will be equally important in our consideration of moving into a chronic disease indication.

I'm sorry. I don't understand. In the chronic disease indication, you would take that yourself?

There are clearly certain disease indications where we do have experience, we understand the disease and we believe we could go forward with it by ourselves. And that is certainly part of the consideration in terms of the specifics of chronic disease indications is our ability to go forward into the study on our own.

Thank you.

Steve Harr, Morgan Stanley.

Good evening, a couple questions. First one on pralnacasan. I guess when this was put on clinical hold a year ago, you throughout you would be able to give us an update around this time in 2004. Are you able to give something right now, or the fact that you call VX-765 your ICE inhibitor is statement enough?

What we have said in our 10-K this year was that we anticipate -- at the original conference call, we said at least one year, and we gave a more specific guidance of 12 to 24 months from the time it was put on that we pulled back on the clinical studies. The toxicology efforts within Sanofi-Aventis now are going forward on plan. All the clinical studies have been initiated and the data will come in that timeframe over now the next year.

Okay. And just on the hepatitis C program, how committed are you to bringing that forward on your own or are you looking at different structures for partnerships, either X U.S. or even within the United States?

Steve, this is Ian. I'll take that question. In terms of the U.S. commitment, we view taking that compound forward ourselves at this point. However, as with a lot of our core compounds, we are looking for partnerships outside the U.S., specifically in Europe and the Far East, and that's the direction we will continue.

Then one last question. Ian, when you talk about these products driving you to profitability, at this point are you able to give any kind of rough estimate around what that timeline might be towards profitability or how much capital you're going to need to reach that time?

Two pieces in that question, Steve. First of all, not providing specific guidance in terms of the date of profitability, although our profitability will be driven by the launch of the Vertex product or a blockbuster product that one of our partners takes to the market, which we generate significant royalty return for us. In terms of financing the future investment into the Vertex compounds and research, today we have nearly $418 million of cash. We have a very strong debt profile after the financings that we have performed this year, so I view us in a very healthy position going into 2005. And we now have the ability to invest in four core compounds that are approaching significant proof-of-concept studies which will been tried Vertex forward, and we can choose in terms of opportunistic financing as we move through 2005.

I think you had mentioned before changing the risk profile of the Company back toward one where you're burning more in the 130 to 150 million range. Is that just a good back-of-the-envelope number for us to think about over the next couple of years?

I haven't provided any financial guidance for 2005 and onward, however consistent with my prepared remarks on this call as you can see the trajectory that Vertex has been working towards is disciplined financial management of both its balance sheet and its operating profile. Hopefully you can see that in the results that we provided you in the year-to-date and we continue to proceed forward in that direction.

Great, thank you.

Meg Malloy, Goldman Sachs.

I just have two quick questions. One is can you provide any detail on the clinical studies for 950 in terms of entry criteria and time? And then secondly a similar question in terms of psoriasis, any data that you can give us in terms of entry criteria and background therapy?

On VX-950 it will be -- the Phase Ib study will be in patients who are ATV RNA positive, that have detectable HIV-RNA. And beyond that, I think all the inclusion including criteria will be more just the usual things that you have in a Phase I study looking at antiviral effect. With the protease inhibitors, the experience with the BI compound was there that was really no difference in effect between whether they were treatment experienced or not, and that is exactly what you would expect, because a protease inhibitor is really targeting something completely different and is acting in a completely different way from interferon and ribavirin. So prior treatment with those therapies would not be expected to have any effect on a potent direct-acting antiviral like a protease inhibitor. So we don't plan on being very limiting in terms of inclusion/exclusion criteria there.

That is helpful. And the timeframe for that study, that is the duration of treatment?

It would be 14 days of treatment in ATV-infected patients.

Sorry, I think I missed that. You probably said that. Okay.

And then with VX-765, it would be at 28-day study moderate to severe patients with psoriasis. It needs to be sufficient that they are candidates for systemic therapy. But I think again the other inclusion/exclusionary criteria would be really pretty well the expected ones for this stage of development. But we will provide more specifics on the design of the study once the actual treatment period is started and we are targeting starting that study before the end of the year as well.

Okay, so I guess that would mean that these are patients that are not refractory to the biologic.

I think in terms -- this study, the goal here is primarily safety and pharmacokinetics. We are going to be looking at some of the efficacy parameters as well. As has been shown with the biologicals, in general, you tend to see increasing effect when you go from 4 weeks to 12 weeks, so we would expect to see really the best read-out in terms of efficacy in subsequent studies from this study. So we will be looking at, again, a number of different efficacy parameters as well.

You know, it is probably -- in order to be able to have a shot at being able to see efficacy there, it would be in our best interest to exclude patients who have been treated with the anticytokines, with injectables.

Thank you.

Annabel Samimy with UBS.

Thanks for taking my call. Wanted to go back really quickly to the cash question. You didn't change financial guidance for your P&L, but you did raise the cash. What specifically caused you to raise that cash balance?

Thanks for that that question. Specifically, it was the structuring (technical difficulty) collaborations that we entered into this year, and I'm very pleased to say that those discussions and collaborations have been very successful. We were able to achieve upfront cash payments as part of the structure of those arrangements. As you are probably familiar, we cannot necessarily recognize that as revenue given the current accounting guidance in this area. But the strong performance in structuring those arrangements has provided us with a solid cash position as we go into Q4.

Okay, great. And a quick questions on merimepodib. Were you originally going to have any kind of 12-week interim data or was it always the 24-week data, and how is the study enrolling? Is it enrolling rapidly or is it on track? How is it going?

There are three different interim analyses, 12, 24, and 48 week. The 12 week -- we believe in terms of our discussions with the FDA, the 24-week data are the most important data and what they will want to see for us to have a productive discussion with them. In particular, as you recall, the MMPD treatment period is 24 weeks in that study, and so the full safety data will be available at that point. We do not anticipate disclosing the 12-week data separate from the 24-week data.

And in terms of enrollment progress, we are not quite prepared -- it is still relatively early to give you specific guidance in terms of when we anticipate completing enrollment. As we get into the study a little bit more -- the study was started in second half of July, and so really end of summer. So we have had about 1.5 months of real study enrollment and startup performance. So it is a little bit early to give you a sense of exactly how things are moving along. But as soon as we have a better sense of a target for completing enrollment, we will update you.

Thanks. Also one other question on 765. It's a four-week study, so when might we be able to see some results from that, announcement of results?

We would anticipate completing that study in the second half of 2005.

Okay, great. Thank you.

Joe Pantginis of J.B. Hanauer.

Just to add on a product to some earlier questions, anything you could say regarding inclusion criteria for the patients for the 385 trial?

No more specific than we have announced. These are stable HIV-infected patients. But really it is very much a Phase IIa safety and pharmacokinetics study, and I think it is a relatively open population. It is not controlled in terms of what background therapies they are on.

Okay, thanks a lot.

There are no further questions at this time.

Great. Thanks everyone for joining us on the Vertex conference call tonight and we will be in our offices to take any additional follow-up questions. Thank you.

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