福泰製藥 (VRTX) 2005 Q2 法說會逐字稿

Good afternoon, my name is Paige 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 been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. [Operator instructions]

Thank you. Ms. Brum, you may begin your conference.

Thank you, Paige. Good afternoon.

This is Lynne Brum, Vice President Corporation 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 that you information discussed on this conference call may consistent 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.

I'd also like to note that during the call we'll 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 second quarter 2005 financial press release.

At this time, Vertex's second quarter 2005 financial press release has been issued. Please visit our Web site at www.vrtx.com to listen to the conference call and view a Power Point presentation. A replay of the conference call will be available via the Internet until the end of the day August 10.

I'll begin by reviewing recent news flow. Our second quarter performance was defined by significant clinical and financial accomplishments. In particular, we presented positive preliminary results from the Phase Ib study of VX-950 and announced plans to begin Phase II development in the second half of the year.

We completed enrollment in the Phase IIb METRO study of merimepodib. We initiated a 300-patient Phase II clinical trial of VX-702 in patients with rheumatoid arthritis.

Further, our collaborator, Merck, expanded the Phase I development program for VX-680 targeting cancer, and we strengthened our financial position by raising more than $175 million in gross proceeds in a common stock offering.

Vertex is on track to achieve our clinical and business objectives in 2005. Our accomplishments to date have positioned us to generate increased shareholder value during the second half of the year and beyond. We look forward to communicating our progress to you.

On today's call we will make our prepared remarks and then open up the call to questions.

Ian Smith, Vertex's Senior Vice President and Chief Financial Officer will begin with a summary of the second quarter 2005 financial results, and provide commentary on our expectations for the second half of the year. Then Dr. John Alam, Vertex's Senior Vice President of Drug Evaluation and Approval will provide his perspective on our recent clinical process, and then Dr. Joshua Boger, Vertex's Chairman, President and CEO will review upcoming milestones in the context of the strategic direction of our business.

I'll now turn the call over to Ian.

Thanks, Lynn.

We are indeed at a very exciting time in our business. In particular, we entered the second half of the year positioned to pursue our opportunities in hepatitis C and inflammatory diseases.

The first half of 2005 included tremendous advancement with our hepatitis C products as well as the initiation of a key clinical study in rheumatoid arthritis.

Additionally, we enhanced our long-term financial strength and continued to increase our revenue to support our R&D investment. We look forward to continuing this momentum in our business.

I'll now provide you with commentary on our second quarter financial results.

Our second quarter GAAP net loss was $41 million, or $0.50 per share. This compares to 2004 second quarter GAAP net loss of $44.3 million, or $0.56 per share.

The 2005 second quarter loss before charges and gains was 42.7 million, or $0.52 per share compared to $42.4 million, or $0.54 per share in the prior year.

Our loss this quarter is compatible with the prior year. We saw continued revenue growth which offset the increased development investment in our proprietary drug candidates.

Total revenues for the second quarter were 32.3 million compared to $18.5 million in 2004. The increased revenue is a result of collaborative agreements signed in 2004 and early 2005, and an increase in HIV product royalties.

We expect continued growth in revenues in the second half of the year with the signing of new collaborations and the achievement of R&D milestones under our existing collaborations.

In the second quarter our total R&D investment was $59.4 million compared to $47.5 million in the same quarter last year. The growth principally relates to the development investment to prepare for and conduct clinical trials for our product in hepatitis C and rheumatoid arthritis.

The research component of our R&D investment remains comparable to the prior year and continues to be significantly funded by collaborative revenue.

Our SG&A expenses for the second quarter were $10.8 million compared to $10.2 million in 2004.

Now, to our balance sheet.

Vertex ended the second quarter with enhanced long-term financial strength. We have approximately $446.6 million in cash, cash equivalents, and available for sale securities which includes net proceeds from our recent $175.7 million equity offering.

We have $82.6 million in convertible debt due in 2007, and $232.4 million due in 2011. The 2011 convertible debt currently has a conversion feature that is in the money, priced at $14.94, and a non-call period through February 2007.

I'll now turn to the full-year financial guidance. We are increasing our loss guidance before charges and gains from a range of 125 to $135 million to a new range of 140 to $150 million.

Our business has had significant advancements with the clinical results in hepatitis C and we want to maximize our opportunity for success. This includes increased investment to accelerate VX-950 product development.

We believe that accelerated and comprehensive investment in a broad Phase II clinical program, as well as accelerated investment in manufacturing and formulation will reduce operational risk in the latter stages of product development. Based on this plan, by the completion of Phase II in 2006, we expect to have greater visibility into VX- 950's place as a key agent in hepatitis C treatment as well as a commercially scalable drug product manufacturing process well in advance of a potential market launch.

To date, we have already made significant progress with VX- 950. Including completion of a Phase Ib clinical trial which demonstrated that VX-950 can produce a profound bowel reduction in hepatitis C patients over a two week period as compared to other single agents.

We have also made significant progress in formulation and now have a tabular formulation ready for use in the next Phase Ib study of VX- 950 to be administered in combination with pegylated interferon and for use in the Phase II development.

In addition, we are progressing well with chemistry, manufacturing and controls, or CMC component of drug development process.

We have produced more than 80,000 tablets of VX-950 to support the clinical studies. And specifically, we expect to be making VX-950 on a one ton scale in 2006 with a goal of starting production of registration batches by mid 2006, depending on clinical trial and other development outcomes.

To continue this progress, we are accelerating our investment in the development of VX-950. And therefore, we are increasing our guidance for R&D expense from a range of 225 to $240 million to a new range of 235 to $245 million. This drives the increase full-year loss guidance that we are providing today.

We remain committed to revenue guidance provided earlier this year of 150 to $160 million and SG&A guidance of 42 to $46 million.

With the successful completion of our equity offering, in the second quarter, we have revised upward our expectation for cash and equivalents at the year-end to more than $380 million.

For third quarter, we anticipate a loss in the range of 45 to $48 million. Due to our expectations for timing of signing new collaborations, and the achievement of collaborative R&D milestones, we expect that our fourth quarter loss will be significantly lower than the third quarter.

I'll also take this opportunity to update you on our progress with respect to our Candle Square lease facility.

I am pleased to report that we have a sublease with Momenta Pharmaceuticals and have a commitment subject to final approvals to enter into sublease with Genzyme Corporation. These subleases total 120,000 square feet.

We expect to utilize the remaining rentable space over the next 12-24 months for our own future operational needs to accommodate continued advancement of our pipeline, most notably in the areas of CMC enformulation. These new developments support our business needs and also help to provide more clarity into our [inaudible] to offset future lease obligations.

In summary, we expect the building will be occupied by Vertex, Genzyme and Momenta and will be fully utilized.

I will summarize by saying that we take a disciplined approach to monitoring the management to our financial profile. We seek to make prudent financial decisions to balance our R&D risk and product development opportunities.

Our continued financial strength for our business at our stage of development reflects this focus. We're excited about our prospects for the remainder of 2005, which we believe will be highlighted by continued clinical progress.

John? Over to you.

Thank you, Ian.

Vertex has made progress across its pipeline in the second quarter. Most significantly in May, we presented positive results from the Phase Ib clinical trial of the HCV protease inhibitor VX-950.

We have discussed these results in some detail over the past six weeks so today I will primarily focus on our strategy going forward.

We presented the Phase Ib results for the first time at the Digestive Disease Week conference in Chicago on May 17. In the best dosed group, 750 milligrams every eight hours, patients achieved a median 4.4 log reduction in HCV-RNA after 14 days of treatment.

With these results, we demonstrated that VX-950 produced the most profound reduction in viral load ever seen with a single agent in HCV patients over a two-week period.

Today, I can report to you that we have now completed the formal analysis of the safety data from the HCV patient segment of the Phase Ib study. The results show that VX-950 was well tolerated and no safely concerns were identified.

The most common adverse events reported in the study were all mild in severity and were similar in frequency between VX-950 and placebo-treated patients. In addition, patients were monitored during the 14-day study for potential heart rhythm disturbances using digital electrocardiograms, or ECGs, and I can report to you today that there were no adverse findings from the digital ECG monitoring.

We expect to report details of the full safety analysis at a medical conference in the fall. Based on the highly encourages efficacy and safety results from the Phase Ib study, we are now working on an aggressive development and commercialization plan for VX-950.

I'm pleased to report that we are meeting or beating all internal time lines for the initiation of the next set of clinical studies. Specifically, I can report that we have completed one month toxicology studies in one species, and will complete a one month toxicology study in a second species this quarter.

Additionally, three months toxicology studies in two species will be initiated this quarter. These non-clinical studies will support the anticipated duration of treatment in the Phase II program for VX-950.

We are also progressing well with formulation development for VX-950. We have developed a tablet formulation that we will use both in the Phase Ib viral kinetics study and Phase Ib combination, interferon combination of viral kinetics study and Phase II study.

Compared to the oral suspension used in the first Phase Ib study, the tablet demonstrates substantial increased bioavailability in non-clinical studies, a finding that was consistent across two species.

We have also achieved a high drug load per tablet. Based on the non-clinical studies, we expect the tablet formulation to show increased bioavailability in humans, and we will confirm this in a healthy volunteer pharmacokinetic study this quarter.

If confirmed, increased bioavailability, along with increased drug load, will translate into a dosing regimen involving a small number of average-size tablets and would provide continued support for evaluating twice daily dosing of VX-950 in Phase II.

During the next several months, we will continue to consult with medical advisors, the FDA and other regulatory authorities, on the design of clinical studies that will fully explore VX-950's therapeutic profile.

In the fourth quarter, we expect to initiate a Phase Ib combination study of VX-950 with pegylated interferon to be conducted in Europe with top line data available to us in late 2005 or early 2006. This study will enroll approximately 20 patients.

The design of this study will enable us to gain important pharmacokinetic and safety information as well as viral kinetic information, in advance of Phase II.

We expect to file an IND with the U.S. FDA in the fourth quarter of 2005, and we expect to initiate stage two clinical development of VX-950 in the U.S. by year-end. In Phase II, we anticipate treatment durations of both one month and three months.

In this broad Phase II program we plan to evaluate VX-950 in combination with pegylated interferon, and VX-950 as monotherapy. We are also currently considering adding ribavirin to the treatment regimen in a subset of patients referring the combination of VX-950 and pegylated interferon.

Dose and dose regimens for these studies will depend on results from the healthy volunteer study this quarter. We expect to provide more information on the design of our Phase II program in the fourth quarter.

We also look forward to reporting additional data from our VX-950 program and medical conferences in the second half of 2005. This is a very exciting time as we prepare for the next steps for VX-950.

Now turning to merimepodib.

We have two clinical studies underway with this compound which is another oral HCV drug candidate in development at Vertex. We are conducting a 28-day clinical virology study MMPD and ribavirin and are on track to complete this study in the second half of the year.

In the second quarter, we completed enrollment in the METRO studies with a total of 356 patients. This study involves a triple combination of MMPD pegylated interferon and ribavirin and is one of the largest and most complex Phase IIB studies ever conducted in HCV and underscores the capability to conduct studies in HCV that we have achieved in our clinical development organization.

We expect to meet with the FDA by the end of 2005 regarding the registration path for MMPD in the non-responder population. Initiation of further triple combination of studies of MMPD, including potential studies in treatment [naive] patients will be deferred until after our discussions with the FDA.

In addition to HCV, we achieved several important clinical milestones with other products in our pipeline. In the second quarter, we initiated a Phase II clinical study in rheumatoid arthritis, or RA, with our p38 MAP kinase inhibitor VX-702.

This study will help define the safety, tolerability and clinical activity of VX-702 in approximately 300 patients with moderate to severe RA treated for three months. The randomized double-blind placebo-controlled Phase II study will assess two doses, 5 and 10 milligrams of VX-702 given once daily without concomitant methotrexate.

The primary end point of the study is to measure the reduction in clinical signs and symptoms of RA in patients after 12 weeks of treatment using ACR-20. Measurements of ACR-50 and ACR-70 improvement will also be used to define clinical response to treatment with VX-702.

We expect to complete enrollment in this study by year-end and to complete this study and obtain data in mid 2006. We believe that there could be a heightened focus on p38 inhibitors at a class in the second half of the year with the anticipated disclosure of RA clinical trial data on another pharmaceutical company's p38 MAP kinase inhibitor.

We believe VX-702 has best-in-class potential based on its favorable pharmacokinetic property, specifically, a potential once daily dosing regimen of 5 or 10 milligrams of drug, positioning Vertex as a leader in this important field.

In the second quarter, we also completed enrollment in a Phase IIa study of our oral ICE inhibitor VX-765 and we expect to report top line results from the study in the fourth quarter.

Turning now to some of our collaborative-driven products.

During the quarter, Merck expanded its clinical program for VX-680, a small molecule inhibitor of Aurora kinases by initiating and additional Phase I clinical study in patients with hematologic cancers including acute and chronic leukemia. With the start of the study, Merck now has three clinical studies underway with VX-680 in cancer.

This broad development program should begin to yield informative results on the therapeutic potential of VX-680 as early as the second half of 2005. We look forward to continuing to report on the progress of VX-680.

Recently, we also announced that the third generation HIV protease inhibitor, VX-385 in development by GSK, has received fast track designation from the FDA. VX-385 is the third novel orally available HIV PI developed under the collaboration between Vertex and GSK.

In the second half of 2005, we expect that GSK will present preliminary results of a Phase IIa study with VX-385 at a medical conference and initiate Phase IIb development.

In summary, Vertex has made significant progress in the clinic year-to-date. We are on track to achieve all of our clinical milestones for the year, and look forward to reporting our continued progress.

Joshua, over to you.

Thanks, John.

Vertex had a very strong first half of 2005. The clinical and business progress we have achieved over the past six to 12 months has given us significant momentum to continue to build value in our business.

Over the next several months we expect to achieve clinical milestones for our drug candidates that target HCV, inflammation, HIV, and cancer. Importantly, the proceeds of the $175 million common stock offering will help support investment in our pipeline of proprietary products.

We believe that VX-950 has breakthrough potential. We are committed to capturing the full commercial value of this product and expect continued positive news flow during the second half of the year as we prepare for Phase II development.

Based on our progress with the VX-950 program, the commercial opportunity in HCV, and the ability of this program to drive value for Vertex and its shareholders, we made the strategic decision to accelerate our investment in CMC, invest in a broad comprehensive Phase II program, and lower risk in the program overall. We believe that this is a smart use of the financial resources entrusted to us by shareholders.

The breadth of first in class opportunities that we have in development in HCV, inflammation, HIV, and cancer distinguishes Vertex and underscores our ability to create value and drive growth. We are expecting clinical data read-outs from as many as six clinical programs by year-end, VX-950 and HCV, MMPD and HCV, VX-385 in HIV, VX-702 in RA, VX-765 in psoriasis, and VX-680 in cancer.

Our business model is robust and enables us to bring forward multiple compounds independently and with collaborators, leveraging our capacity for innovation. We plan to advance two or more new drug candidates from discovery to pre-clinical development in 2005.

We continue to expect to sign a new collaboration or collaborations to support R&D investment in the Company. We look forward to report our progress to you throughout the year.

Lynne, back to you.

Thank you, Joshua. We'd now like to open up the call to your questions. Paige?

[Operator instructions] We will pause for just a moment to compile the Q&A roster. Your first question comes from Geoffrey Porges with Sanford Bernstein.

Great. Thanks for taking the question and thanks for the additional guidance for the year.

Just a quick question about the progress on 950. Could you give us a sense of exactly, you know, do you have a b.i.d. dosing pill right now and how many milligrams are in the pill?

And I sort of have a related question for the 385, which is, could you tell us what dosing that protease inhibitor will have? It just seems though it's important in that class. Thanks.

As I said in my, this is John. As I said in my presentation, you know, the dose and dosing regimen, we can't give you a precise number at this point because it will be dependent on the results from the pharmacokinetic study that we'll be conducting in this quarter.

As I said, given the pre-clinical data, our expectation is, is that bioavailability for any given milligram dose of drug, the amount of drug that gets in the bloodstream will go up substantially with the tablet formulation, and therefore, if we are targeting the same dose level that produced the 4.4 log reduction in viral load, the 750-milligram dose level, likely with the tablet, the actual dose that we would need to achieve the same blood levels will in fact go down substantially.

And equally, that gives us opportunity as well with different dose levels to be able to hit the same trough concentrations with a lower frequency of dosing. So by no means are we ruling out being in twice a day dosing in future clinical studies.

I'm just a little confused. Is that additional PK study necessary before you determine the dose for the second Phase Ib study in Europe?

That's correct. It will help us determine the dose that we would use in that study.

We are, we will target the trough blood concentrations that we saw in the optimal dose group, the dose group that showed the greater than 4 log reduction in viral load, but what amount of drug we would need, what amount of the tablet we would need to achieve that is going to be dependent on the blood levels that we see in the pharmacokinetic study.

Okay.

And with VX-385, I don't believe GSK has disclosed the dosing regimen as yet.

Thanks a lot.

Jeff, I just wanted to add on the 950 dosing, is that given that as is usual in this field, Phase I dosing was not with the Phase II formulation.

It's only good news that we're actually advanced enough to be able to be setting tablet formulations we believe very early in the Phase II process and indeed at the end of Phase Ib, so the only news here is that we're ahead of schedule with moving to tablet formulation and by higher bioavailability, that necessarily means that one has lower amounts of drug to achieve similar blood levels as John said.

So the news is that we're ahead of schedule, not that we're doing anything that's a new risk factor. It's all good news here.

Thanks a lot.

Your next question comes from Mark Augustine with Credit Suisse First Boston.

Thank you for the updates and congratulations on some great manufacturing and formulation progress. I wanted to ask, one point of clarification on a question, you talked about manufacturing at one ton scale. Is that now or is that the target you had mentioned for mid 2006? Describe the significance of that.

I think the significance of it is that we have made, even in the last month or two, we've made continued progress in both the process chemistry and issues around scale-up that are, as I say ordinary course of business but we've actually been making more rapid progress, so what we see now is a projection of where we'll be in the early part of 2006, being at the one ton scale and right now, from where we stand, we don't see any major issues standing between where we are now, which is on a substantial scale but not at one ton and the one ton scale.

So it is a projection that has all the usual caveats for what I know today, but it's substantially ahead of the schedule that I would have given you just a couple of months ago.

Thank you. And one follow-up would be, what additional information can you share with us from the completed one-month animal toxicology study? Thank you.

We can, I can't provide you any specific details in that regard but it's just to say there is continued progress, we are on track for the IND filing later in the year and starting Phase II, and again, everything is on track for that.

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

Your next question comes from Steve Harr with Morgan Stanley.

Good afternoon, guys.

Hi, Steve.

John, a question on the cardiac monitoring. You mentioned that you did EKGs and did you guys, and there were no signs of any arrhythmias, did you guys also do signal average EKGs and look for any conduction abnormalities or has what you done so far really just shown that there's gross arrhythmia?

We did specifically look at the various integrals to see if there were any conduction abnormalities and there were none seen.

Great. Thank you very much.

Yup.

Thank you, Steve.

Your next question comes from Meg Malloy with Goldman Sachs.

Thanks very much. I have two questions. One is, I think you mentioned that you had produced 80,000 tablets. I'm a little confused. I understand that you won't know what the PK is until you study that demand but don't you know what the amount of milligrams in those tablets are? Is there any more detail you can give on that?

And then secondly, I was hoping you could run through the terms of your Phase II studies once you establish PK, what the likely time series would be, because you'll probably will get your first read on efficacy, you know, after one-month's treatment, so I'm wondering, you know, when you think you might be able to get the first efficacy read from that Phase II study? Thanks.

I'll start. This is Joshua. I'll start with that, on the tablets.

Yes, indeed, you're correct, we have produced 80,000 tablets and indeed we know how much drug is in them but we're not sharing that information with you. We took a calculation based upon the animal bioavailability as John said, the bioavailability that we've seen with this tablet formulation in two species of animals has the kind of consistency that in my experience has a very high likelihood of translating to man, but we've got to prove that.

So we've made some assumptions about that and made tablets that would then yield the Phase Ib and then later Phase II dosing to be, as John said, a small number of average-size tablets. So we've made some assumptions about that in the production of tablets.

If the bioavailability is off by a little bit, that won't affect the time line. If we were completely wrong about that, we would have to remanufacture tablets but we still have time to do that.

Hi, Meg. This is John. Let me just run through then, maybe for the next six to 12 months of activities on the clinical and regulatory side.

So in the fourth quarter, we would essentially in parallel file the IND in the U.S. and start the Phase Ib combination study, and then complete that study within the fourth quarter, and as I said, we would have top line data available to us by the end of 2005, early in 2006. And from there, in terms of the, and then the Phase II study, the one-month arm of the Phase II study would start before the end of 2005, that's our target, and then the data would roll out based on both the end of treatment data and then follow-up data would define whether we're achieving, as we SVR or not.

And so from the one-month portion, we would expect on treatment data, and then the follow-up data by the middle of 2006 or so. And the three-month arm, we would anticipate starting that early in 2006 and would have SVR data from that study by the end of 2006.

So there will be, you know, there will be a whole series of data, both efficacy and safety that will be coming throughout, I think starting in fourth quarter onwards and for the next 12 to 18 months.

Great. Thanks very much.

Your next question comes from Hari Sambasivam with Merrill Lynch.

Yes, thank you. Just a follow-up question on that cardiac effect that you had talked about. What would be the requirements from the FDA in terms of a formal program? Would a standard ICH sort of safety program be adequate given this issue or do you think you would have to sort of do something more extensive in terms of high dose studies or following these patients for a longer time for cumulative effects, et cetera?

The second question is, on the Phase Ibs, are you looking at naive patients are these non-responders as well?

Starting with the cardiovascular side, again I think that based on everything we know from the non-clinical studies of VX-950 and what the safety profile that we've obtained to this point, we actually don't think there is a particular risk from a cardiac standpoint or a particular safety issue from the cardiovascular standpoint. And we believe ultimately that the assessment that any reasonable assessor of all of the data that's available to us, that's the conclusion that they would come to.

And that is how the ICH documents define what you have to do in terms of cardiovascular studies and safety studies in the clinic. It's really, it's a step risk assessment starting in vitro, in vivo in animals, and then early clinical data, and if there isn't a signal, then your requirements for a high degree of monitoring and further work go down substantially.

It's only when there is a signal that they have, that they ask for, you know, very formal clinical studies to try and address those issues. And again, there is nothing in all of the data from non-clinical and clinical studies that would suggest that there is a cardiovascular risk with VX-950.

And then in terms of the Phase Ib study, both in the Phase Ib study and in the Phase II program, we would anticipate being in treatment naive patients.

Thank you.

Thank you, Harry.

Your next question comes from David Witzke with Banc of America Securities.

Thanks. First question, I guess, because the best viral reduction was seen at the highest trough level, I guess, with the t.i.d. 750 mg, is there any reason to believe that even higher trough concentrations are better and would you look at higher doses in the next Phase II study?

This is John again. We are absolutely considering looking at higher doses. I think it's one of the comments I'll come to, one of the comments I made in my presentation, the clinical safety results were, from the study were very strong. There was no hint of being at a, you know, close to a maximum tolerated dose.

So it appears that we actually have the ability to move upward in exposure, and go up in terms of the trough concentrations. And we will likely do that in the Phase II program particularly in the monotherapy context.

And a question on, I guess, on the viral kinetics. With standard of care, early viral response is predictive of SVR, do you expect anything different with VX-950 or is that drug related?

I think it actually, I think it is in fact generalizable that the faster you bring a viral load down, the shorter the ultimate treatment duration needs to be to eradicate the virus and achieve sustained neurological response, or SVR. I think where the field is moving to is getting away from just a 2 log drop, as being a marker of a viral load, of an early virologic response and moving towards whether you achieve HCV-RNA undetectable status or not, either getting to less than 50 or getting to less 30 international units per mil.

Because that's what actually what drives shorter durations of treatment and there are very good correlations now in a variety of different settings, and the best example was in the genotype 2-3 patients where with peg and ribavirin, if you can get a patient HCV already undetectable after four weeks of treatment, those patients only require 12 weeks of treatment to eradicate the virus.

And it is a fundamental argument for why we believe with the VX-950 where we are getting patients undetectable with only, within two weeks of treatment that we are going to be substantially be able to shorten, substantially shorten the duration of treatment with VX-950-based therapy.

And I want to come back to this higher exposures investigation. I do think it's important to keep the nomenclature correct. We actually don't expect to go to higher doses, doses is a weight of a pill, because our expectation is that with the higher bioavailability of our new tablet formulation that we will get higher exposures with lower number of milligrams.

So I think what we're really saying is that to be clear, is that we have, all the data now suggests that we can explore higher exposures, that's likely to be with a lower amounts of drug.

That's helpful. And finally, the 10 million or so higher R&D guidance, should we assume this incremental amount is entirely due to VX-950 accelerated development?

Yes.

Thank you.

Thank you, David. May we have our next caller please?

Your next question comes from Joe Pantginis with Adams Harkness.

Hi. Thanks for taking the question. Can you reiterate your product and partnering views on 702 in the cardiovascular arena based on your previous data in ACS?

Sure, how are you doing, Joe?

Good, how are you?

Good, thanks. So for clarity, our number one priority with VX-72 is rheumatoid arthritis, and rheumatoid arthritis is a disease that we will pursue at this stage under Vertex. There is no intention at this point to search for a partner to pursue a cardiovascular disease.

It would be very difficult to study the drug in a cardiovascular disease such as ACS while pursuing it in a disease such as rheumatoid arthritis. So we focus down behind rheumatoid arthritis, and it is a study that we can conduct and create value for this drug.

Okay. Thank you.

Thank you, Joe.

Your next question comes from Annabel Samimy with UBS.

Just really quickly, back on 702 and the partnering. Why would there be any reason for you not to want to partner if you partner out the ACS you essentially out license the rights so it's really no development expense on your back, really?

I will try, hi, Annabelle, I'll try again.

Clearly, when you choose to out license a compound you are sharing the value with the collaborator you choose to out license it with. The way that we view VX-702 is that 702 is applicable to rheumatoid arthritis, it is a disease that we can study the drug in at that stage.

We want to create the value for Vertex at this point. We have the resources. We have the capabilities and therefore we want to drive it forward in rheumatoid arthritis.

To search for a partner that would allow us to broaden the indications would be difficult at this stage, especially when you're comparing diseases such as rheumatoid arthritis to acute coronary syndromes. So at this point we're focused on RA.

At a later point in time when we understand the drug's profile of rheumatoid arthritis we may consider other options but right now it's rheumatoid arthritis.

Okay. And just, you know, p38 [inaudible] kind of is being developed by several other players also and they're looking at cancer indications. Have you considered any of the cancer indications at all?

I think consistent with Ian's commentary, we've considered a lot of things. In fact, I believe that we were the first to report p38 data pre-clinical data on p38 and cancer. So we actually are the, as far as I know, the originators of that concept. So we are very aware of it.

And again, just consistent with Ian's theme here is, I ultimately, the p38 MAP kinase inhibitors and particularly VX-702, with its very favorable PK profile, could be utilized commercially and medically in a variety of diseases. How we choose to develop it though is to explore it initially in rheumatoid arthritis, and that we can do ourselves.

Down the road, as we learn more about the drug, as we establish it in rheumatoid arthritis, we may expand into a large number of other areas, but we're focused right now on RA. But we are very aware of all the potential applications.

Okay. I guess I don't know where I'm going with this. I'm trying to figure out in terms of partnering opportunities are you looking more towards some pre-clinical compounds from partnering or are you looking at some of your development compounds at this point for partnering?

Annabel, the items that would drive the partnering revenue stream, that is still is critically important for Vertex, are the earlier stage opportunities, so one of the benefits of having a very productive 2004 research year is that we have a number of molecules, VX-692, which is a gyrase compound, VX-409 a nine channel modulator for pain, we have a number of early stage opportunities that have a lot of interest from big pharma today.

Those are opportunities that line up nicely with partnering at this because they're products at their earliest stage. They're products that they're in areas that we are not currently focused in, and we look to out license those opportunities to drive the collaborative revenue line that we would then reinvest in our proprietary products in inflammatory diseases and hepatitis C.

Okay. Great. Thank you. That's helpful.

Thank you, Annabel. May we have the next caller?

As a reminder, if you would like to ask a question, you may do so by pressing star then the number one on your telephone keypad. Your next question comes from George Pullap with Needham & Company.

Thank you for the update. I appreciate the additional information on the cardiac safety in VX-950. Can you also comment though on any studies or any data you might have regarding the potential for development of resistance and any studies in that vain?

So the viral sequence analysis from the Phase Ib study is still ongoing and we expect to report the first set of data from that at a scientific conference this fall.

Okay. Thank you very much.

Thank you, George. Paige, do we have time for one last question?

Your last question comes from Han Li with SunTrust Robinson Humphrey.

Yes, thank you for taking my questions. This is for John. Regarding another HCV compound, merimepodib, while we're expecting the 24-week result from the METRO study in the second half of this year, do you already have the 12-week early viral response data available?

We're actually planning on obtaining the 12-week antiviral response data from the METRO study this fall and that will be, in fact, a primary basis of the discussions we'll be having the with the FDA before the end of the year.

How about the 12-weekday data?

It would be based on the 12-week data and, you know, whatever, as much 24-week data as is available at that point.

Okay. And the second question is related to 702 p38 MAP kinase inhibitor. Do you have any activity data from prior clinical studies?

Yes, in rheumatoid arthritis?

Yes, or other indications?

Or other indications?

So there are two lines of data here that end up, there are actually three lines of data that end up converging. Two of them are with VX-702.

One is in terms of clinical safety and tolerability, where we have dose VX-702 for one month, without significant clinical toxicities and particularly without evidence of clinically relevant hepatotoxicity, liver toxicity which has been an issue with other p38 MAP kinase inhibitors. Now that study we conducted at a dose level that is in the range that we evaluated.

And then the second point, in the ACS study with VX-702, where we saw significant and potent anti-inflammatory activity in the same dose range and exposure range that we saw the safety profile in study one.

Now, for specifically in rheumatoid arthritis, our data actually comes from our first generation compound, VX-745, which had demonstrated proof of concept in patients with rheumatoid arthritis with a statistically significant effect on ACR-20 response rate at three months of treatment.

Now, what's important is that we have data on blood concentration and effect levels from all three of those settings. And in particular, with VX-745 in the rheumatoid arthritis setting, so we know the level of essentially p38 inhibition that we need to achieve in order to achieve a robust ACR-20 response rate.

And that, all of those factors were involved in choosing the doses of 5 and 10 milligrams for the rheumatoid arthritis study, and critically, it is a dose range that we do expect to see potent anti-inflammatory activity and translated into ultimately ACR-20 response rates with VX-702.

Okay. So the 702 is an analog of 745?

It is not an analog of 745. They're chemically distinct compounds.

But we have a whole range of pharmacologic versus concentration response ratios between 745 and 702 in both pre-clinical, in animal models and in man, in patients. And it's actually a relatively consistent ratio, 702 is more potent.

But it's a consistent ratio across of variety of different settings, so we can apply the knowledge we have with 745 to 702, which is then a more potent and also a, from a pharmaceutical standpoint, a much preferred drug with a long half life and a clear once a day potential.

All right. Thank you. Congratulations on a productive quarter.

Thank you. We'd like to end the conference call now. Thank you everyone for participating and the Investor Relations group will be here tonight, tomorrow, for the rest of the week to answer any questions you may have as a follow-up. Thank you.

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