福泰製藥 (VRTX) 2006 Q2 法說會逐字稿

Good afternoon. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

[OPERATOR INSTRUCTIONS] Ms. Brum, you may begin your conference.

Thank you, Ashley. Good afternoon. This is Lynne Brum, Vice President of Strategic Communications at Vertex. On behalf of 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 10-K. During this 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 2006 financial press release.

At this time, Vertex's second quarter 2006 financial press release has been issued. Please visit our website at www.vertex.com to listen to the conference call and view a power point presentation via the internet or download a podcast MP3 file. A replay of the conference call will be available via the internet until the end of the day, August 9th.

Our second quarter performance was marked by continued advancement of VX-950, our investigational HCV Protease Inhibitor with a presentation of key data at two medical conferences, the initiation of our global Phase 2b development program, the proved studies, and the signing of a major collaboration with Janssen Pharmaceutica a J&J company. In addition to the significant achievements with VX-950, we made additional progress in other areas of our pipeline, including the initiation of a Phase I clinical trial and the fast track designation of VX-770 in cystic fibrosis and the initiation of Phase II development with VX-680 in colon cancer by Merck. We also announced that Merck has begun patient enrollment in its second Phase II clinical trial of VX-608 [inaudible].

Joining me on the call is Vertex's Chief Financial Officer, Ian Smith, who will review our second quarter results, discuss the financial impact of our VX-950 collaboration with J&J and the 2006 financial guidance. Then Dr. John Alam, Vertex's Chief Medical Officer will provide an update on VX-950 and other programs in development, and then Dr. Joshua Boger, Vertex's President, CEO will provide a perspective on Vertex's recent corporate advancements. Over to you, Ian.

Thanks, Lynne. The first six months of 2006 provided a significant amount of new data relating to our development programs. In particular, new data for VX-950, including clinical advancements of the compound and new data on the evolving competitive landscape. These each point to greater visibility of VX-950's opportunity. Later, I'll provide detail around the financial commitment behind this opportunity, as well as the significant financial contribution expected from our collaboration with J&J.

I'll first review the financial results for the second quarter. These results are characterized by a prioritization within our development portfolio and an increase of development investment directed towards VX-950. As we prepare for and commence later and larger scale clinical trials. The second quarter lost before charges for stock compensation and restructuring was $65.6 million or $0.60 per share compared to a prior year loss before charges of $41.6 million or $0.51 per share. Our second quarter 2006 GAAP net loss was $77.7 million or $0.72 per share compared to the prior year net loss of $41 million or $0.50 per share. The 2006 GAAP net loss includes $11.6 million of stock-based compensation.

Total revenues for the quarter were $29.7 million compared to $32.3 million in the prior year. The 2006 revenues reflected decrease in research collaborative revenue. Specifically, revenue from our Novartis collaboration decreased in the second quarter as we reduced research activity dedicated to this collaboration. This change is consistent with the advancements of our business.

We would advance to a point where research-based revenue will become a smaller component of our R&D collaborative revenue. With the signing of VX-950 collaboration, we now anticipate higher levels of revenue and funding to be derived from collaborations that support our development programs. Including development reimbursement and milestones as compounds advance. Combining these development-based revenues with continuing HIV product royalties, we expect to continue to receive significant funding that will provide support to our R&D investment.

Our second quarter 2006 R&D investment was 93 -- $91.3 million included $9.8 million of stock based compensation, compared to $59.4 million in the second quarter of 2005. This investment reflects increase and expanded development activities associated with the Prove I and Prove II studies for VX-950 and increased investment in other pipeline opportunities, including a Phase I clinical trial with VX-770 and cystic fibrosis and preparation for further studies with VX-702 in rheumatoid arthritis.

We've also made decisions defer certain non-deactivities into later periods, to A, prioritization of resources towards VX-950. In addition to our clinical investment to support 950, we have increased our CMC investment in order to manufacture a drug product to support our Prove I and Prove II studies and to build a reliable supply chain for the manufacture of commercial product.

Turning now to research, we continued to invest relatively consistent compared to previous quarters and the second quarter of 2005. Our SG&A expense for 2006 was $14.4 million, which has increased over 2005 and is reflective of increased investment to support the growth of our business.

Now to the balance sheet. We ended the second quarter of 2006 with approximately $316 million in cash, cash equivalent, and available sales securities. This amount does not include the $165 million up-front payment from our J&J collaboration that was received in early July.

As a result, we begin the third quarter with close to $480 million of cash, cash equivalents, and available sales securities following the receipt of this payment. Additionally, we have $42.1 million in convertible debt due 2007 and approximately $118 million of convertible debt due in 2011. The 2011 debt has a conversion price of $14.94 and is callable after February 2007. In summary, we began the third quarter in an improved and stronger financial position and we expect to continue to receive significant revenues from development collaboration and HIV royalties that will provide important funding to our business.

Now to our new collaboration with J&J. The signing of the J&J collaboration is important to enhance in the success of VX-950. It brings important capabilities and resources to Vertex and will provide a significant financial contribution. The financial terms are commensurate with the opportunity and importantly, Vertex retains North American rights and a significant share of the commercial economics in other territories outside North America.

In summary, the terms of the collaboration include a total of $545 million in upfront and potential milestone payments consisting of the following: $165 million upfront payment, which was received in early July, an additional $380 million in milestone payments subject to the successful development from launch of VX-950 in multiple countries, a 50% reimbursement of global development costs incurred by Vertex, and a tiered royalty percentage in the mid-20s subject to the successful commercialization of VX-950 in J&J's territory. J&J has also agreed to pay certain third party royalties in its total.

I'll make a brief comment on the accounting for the main elements of the collaboration, as many of you have been asking. Firstly, the upfront payment we expect to amortize the upfront payment over several years as we continue to be involved in the development and commercialization of VX-950. Next, we expect to recognize milestone payments upon achievement of these at-risk substantive events and we expect to recognize the revenue for development cost reimbursements as we incur development costs. In total, we would expect to recognize approximately $70 million in collaborative revenue in 2006 from the J&J collaboration. This amount is included in our revenue guidance for the year.

Now to the full-year 2006 guidance. I'll first state that we reaffirm the revenue guidance we provided earlier in this year. The revenue guidance a range of 210 to $235 million and we're well on track to achieving that target. However, we have accelerated and expanded VX-950 clinical program, the investment into the supply chain, and we have prioritized certain development activities while deferring others. As a result, we have made adjustments to our 2006 R&D and loss guidance.

Our guidance for R&D expense has increased by $25 million to a new range of 375 to $395 million, or 344 to $364 million excluding stock-based compensation. The increase in R&D expense impacts our full-year loss, although, our strengthening revenue profile offsets some of the R&D increase. We now anticipate our loss, excluding stock-based compensation restructuring charges, will increase from a previous range of 165 to $185 million to a new range of 180 to $195 million. We expect our full-year 2006 GAAP loss will be in the range of 222 to $237 million. The GAAP loss is an increase from the prior range and is expected to include approximately $42 million of stock-based compensation and restructuring charges.

Importantly, although we are increasing our 2006 full-year loss guidance, we expect to finish 2006 in a stronger financial position than we previously guided. As a result of the $165 million payment received from J&J, we are now in a position to have in excess of $400 million of cash, cash equivalents, and available sales securities at year-end compared to our previous guidance of $300 million.

In summary, with a strong cash position, we can focus on maximizing the opportunity with VX-950 by increasing our investment in development and manufactured 950 to advance the program as rapidly as possible. I'll now turn the call over to John.

Thank you, Ian. VX-950, which now goes by the generic name [indiscernible] is obviously the major focus of our clinical development activities. In the second quarter alone, we made significant progress with VX-950. We presented data on this compound at Easel(ph) and DDW, two major HCV(ph) conferences. We also held two conference calls that highlighted progress in VX-950, the initiation of our global Phase 2b program and the strategic collaboration with J&J. Therefore my prepared remarks will be brief and focus on updates in our clinical development program.

The most important clinical news in the quarter was initiation of the Prove I study as part of a global Phase 2b program for VX-950. This global program will examine multiple regiments of 12 weeks of VX-950 based therapy to address the question of what SVR rate can we achieve with 12 weeks of dosing, that's creating multiple avenues for clinical success and more than one potential path to our NDA. The Prove I study is actively enrolling up to 260 treatment IE patients at approximately 30 centers in the U.S. Approximately 160 patients have already entered into screening, which keeps on track for enrolling all 260 patients into the trial within the third quarter of this year.

As I next review the specific data milestones in Prove I, it may be helpful to refer to slide number 16 on our Webcast presentation. First, in the fall of this year, we expect the first clinical results, which will consist of 12-week on treatment data from the first randomized AD patients. This will primarily be a safety analysis, but will include information on how many of the AD patient who is received VX-950 in combination have undetectable viral loads or less than 10 units of ATBRNA(ph) per milliliter. After 12 weeks of treatment with VX-950, interferon and ribavirin.

With the progress we have had in the trial at this point with enrollment and our understanding of the time required to complete a comprehensive safety analysis, we expect to have these first results available in mid- to late fourth quarter of this year. These data will be important to help us understand the antiviral efficacy and safety of 12 weeks of treatment with VX-950 in combination with interferon and ribavirin. We expect additional data readouts from Prove I throughout 2007. However, the data in the first half of the year will be most important to inform our next set of decisions for late-stage development.

Specifically, we expect within the first quarter of 2007 to have completed an analysis of the three-month post treatment data from the 12-week treatment duration arm. Next in the second quarter, we expect to obtain six-month post treatment or full SVR data from the 12-week treatment arm, as well as at three-month post treatment data from the 24-week arm. As a reminder, the 24-week arm includes 12 weeks of VX-950 in combination with the standard of care followed by 12 weeks of treatment with standard of care alone.

In addition to Prove I, as part of our global Phase 2b program, we have also now initiated the Prove II study which is based in the EU and designed to enroll 320 treatment naive patients. The first study center is now screening patients and we are otherwise focused on broad based Prove II site initiation. With progress we have achieved to date in initiate additional sites, we expect to complete enrollment in Prove II in the fourth quarter. We expect that the data flow from this study will trail Prove I by a few months based on the larger size of Prove II and the timing of site initiation.

A third Phase 2b study of VX-950, that is the one in patients who have previously failed pegylated interferon and ribavirin these are on track to start in the fourth quarter. All in, we anticipate a continuous flow of data from the Phase II clinical program this year into next year and will generate a large amount of safety and efficacy data. With the planned progress in this study we expect to be in a position to initiate a Phase III clinical trial in the U.S. in mid-2007 and maintain our timeline for 2008 NDA filing.

A collaboration with Janssen, Tbotech(ph) and J&J will contribute significant clinical and regulatory capabilities to our global program. Fundamentally, the collaboration with J&J was established to bring capabilities to Vertex to help us launch VX-950 worldwide. One capability is in manufacturing, J&J as 23 manufacturing facilities across 11 countries. With access to this capability, Janssen and Tbotech are positioned to effectively support and compliment Vertex's manufacturing activities for VX-950.

Specifically, the global supply chain will enable us to diversity the supply risk and will provide an alternative supply source to develop large product quantities of VX-950. At present, Vertex and J&J are forming joint committees covering key areas of development and will initiate joint planning activities. We look forward to capitalizing on Tbotech's experience as we advance development of VX-950 in Europe and other regions. Vertex will continue to develop the VX-950 in North America and retain North American commercial rights.

Turning eastwards, earlier this month Mitsubishi Pharmaceuticals initiated a Phase I clinical trial in the far east for VX-950. The start of this trial is another milestone for the program. As a result of our [inaudible] and our collaborations with J&J and Mitsubishi Pharma VX-950 is now being evaluated in clinical trials around the world.

Beyond VX-950, we conducted a series of clinical trials in the second quarter across our pipeline. Specifically, we successfully conducted a drug drug interaction study in patients with rheumatoid arthritis receiving methotrexate and then with VX-702, our oral anti-cytokine drug candidate.

We have also started and completed dosing in the first two quarters of healthy volunteers in a single dose healthy volunteer study with VX-770 in cystic fibrosis. We will evaluate multiple doses VX-770 in healthy volunteers in a said single doses of VX-770 in patients with CF as part of this study in the second half of this year. And finally in the second quarter, our collaborator, Merck, initiated Phase II development of VX-680 in advanced colo-rectal cancer and today I'm pleased to announce that Merck has begun patient enrollment in the Phase II study of VX-680 in lung cancer.

Looking ahead for VX-702. As part of our efforts to manage resources and focus on VX-950 development, we have opted to move to 2007, the start of a large Phase II clinical trial of VX-702 on [indiscernible]. We remain on track to file an IND in the U.S. and will proceed to conduct a thorough QTC study in the second half of this year as planned. To remind you, QTC studies are now being required by the FDA for all small molecule drugs prior to late stage development. Under this modified plan, we would expect to have additional risk flowing information before heading into the six-month study in patients with rheumatoid arthritis in 2007.

Our clinical activity across our programs are robust. We are in execution mode across our clinical pipeline. In the next few months before year-end, we expect with VX-950 to have obtained the first clinical data with prove I, completed enrollment into Prove II, and initiated enrollment into Prove III, which is our study in treatment experience patients. With VX-702, we will have filed and opened a US IND and conducted the first clinical trial under the IND with VX-770 and completed a Phase I single and multi dose clinical trail in healthy volunteers and patients with CF, positioning us for proof of concept studies beginning early in 2007.

I look forward to continue to update you on our clinical progress. I'll now turn the call over to Joshua.

Thanks, John. It's useful to remind -- we remind ourselves that it's been a little more than 12 months ago that we announced the first exciting clinical data for VX-950. Since that time, we've generated compelling data in two further studies in which VX-950 demonstrated dramatic antiviral activity and excellent tolerability. We've begun a global Phase 2b program that could establish for the first time VX-950's ability to achieve high rates of viral eradication with short course therapy in hepatitis C.

With VX-950, we see a tremendous opportunity. We also have a deep sense of responsibility to patients, to physician, and to society. Given our extraordinary clinical results and consistent, steady progress, contrasted with some recent disappointments and delays from others in the field, we now feel that sense of responsibility weighing even more strongly on our shoulders. J&J and Mitsubishi share our vision of the opportunity and they also share the weight of the responsibility. Together, we're committed to fully capitalizing on VX-950's extraordinary medical and commercial potential. We look forward to continuing to update you on the progress of VX-950 and our other pipeline products throughout the year. Lynne, back to you.

Thank you, Joshua. And Ashley, we're now ready to open up the call to questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Jason Zhang with Prudential Equity.

Thanks. John, let me just try to get a little bit more of the detail in terms of the data you were about to share starting from the end of the [indiscernible] You said 80 patients will have response data, I guess, the end of treatment response data and also safety data. In need of late fourth quarter-based year, and then you said in Q1 next year year, you'll have three months [indiscernible] data for the 12 weeks treatment on, and also the second quarter six months [indiscernible] data.

And I'm just wondering for the 12 weeks treatment, are we talking about the 20 patients we are going to see more patients than what we know before? Just wanted to get a sense of how many patients data are we going to see?

Thank you, Jason. So we will again, let me just reiterate. The first set of data will be on the first 80 patients who complete 12 weeks on study, which will include approximately 60 patients who will have received VX-950 pegylated interferon and ribavirin for 12 weeks. That is an on-treatment analysis and we'll have that data -- we'll have the analysis complete and available in mid- to late fourth quarter. Again, approximately 60 patients and it's antiviral activity and safety information with 12 weeks of dosing with VX-950 in combination. I think that by itself is very important information and it is the next significant step forward.

Now, going into then, and again all of that before year-end. Going into 2007, in the first quarter, as you say, the three month SVR data will be in the treatment arm in Prove I where they stop all treatment, including the peg and ribavirin at 12 weeks, and that will be in a part of the leading cohort, it will be in 20 patients. In the second quarter, we would then have additional data from those 20 patients. We would have six-month follow-up data, but we will have three months follow-up data, or as you say, three months SVR data in the full group of patients in the 24-week arm, which is 80 patients.

And then I'll remind you, as we go through in Prove II, there are a total of 160 patients who complete -- who finish all treatment at 12 weeks and all of that data will be available starting in approximately the middle of 2007 and onward. There's a very rich data flow with significant reduction in clinical risk at each -- in really every quarter going forward.

Okay. So again, like, if you just look at this data, so basically in the second quarter of '07, you will have three months SVR data from 20 patients who are only treated with VX-950 plus peginterferon and ribavirin, and you could make a comparison to some patients who have been treated that way and then follow-up with another three months of peginterferon and ribavirin. Is that a fair statement? Basically, in the second quarter, if you want to make a comparison, you will have data at that point?

I lost you in some of the numbers, but let me just say -- I'll just reiterate, in the second quarter of 2007, we would have three-month follow up data from the 24-week arm in 80 patients and six month follow-up data in 20 patients from the 12-week treatment arm.

Okay. Okay, good, thanks.

Your next question comes from Rachel McMinn with Piper Jaffray.

Thanks very much. I guess two questions, one on the competitive landscape, I'm just wondering, you mentioned it a couple of times, wondering if you can maybe address some investor concerns there related to some of the setbacks for other competitors and how you see that impacting VX-950, particularly on the safety front?

And then the second question, I'm just wondering if any of the trials that you're planning or have started this year for 950 are going to take a look at the frequency of dosing, the Q8 hour dosing for VX-950 now that you have the background of peg ribavirin and if you're going to be examining that at all further?

Thank you, Rachel.

This is John again. So on the competitive side, what I would say, I think the high-level summary given the developments in the last few months, I think our position has been significantly strengthened. I think we feel that we're in an extremely strong competitive position.

Both given the developments with us and VX-950 and some of the developments in terms of competitors. Again, on our side, within the second quarter, more data presentations very strong data presentations, advancement, clinical progress with Prove I, Prove II initiating, with really, I would say, extremely rapid encouraging uptake into Prove I to this point and then obviously the J&J collaboration bringing in significant capabilities on all fronts. So I think we've made significant advancement.

On the competitive side, on a number of different fronts, particularly in terms of competitive protease inhibitor programs, they've clearly stepped back. Specifically, I think, and perhaps most importantly with Schering Plow, given that they have been the other one who are publicly in the clinic, are in Phase II. What they actually, in one of their own symposia, at a recent meeting, at an international hepatitis meeting in early July, what they stated is that in their Phase II clinical program that all the patients at doses lower than 800 milligrams were being rolled over on to an 800 milligram dose of their protease inhibitor, which clearly indicates that the lower doses had effectively failed and more importantly in terms of where they stand competitively, that they don't have a dose.

At this point, they really need to step back and wait for that dose level to play out before making any next step decisions of how they're going to proceed in that program. Which I think is a major step back for their program in terms of what had been there announced intentions of when their next decision-making time [inaudible] would be.

The other program is on the BMS side where there is less public information, both in terms of where they had been or where they have been. The published information that we have is that they had -- they were very early in the clinic, at best, and at this point for a variety of -- for unclear, technical reasons, they are no longer continuing with that program in the clinic. I would remind you from what's known about the BMS program and the compound, is that it's a very different chemical structure from VX-950 and, if anything, it's more closely related to the BI compound which had been discontinued previously.

I think just to broaden out the picture a little bit, and we're not actually celebrating -- we're not celebrating the bad news for others. It really does come down to us as an increase in our relatively better competitive position, just increases the responsibility that we feel. But we also know that in other areas for us since other approaches to ATV have stumbled also in the recent past, including the approach by [Anatis] which has run into difficulties related to that approach, and really the -- to date, anyway, failure of the preliminary inhibitor programs to really show the kind of data that would make them competitive in a sense, with our protease program.

So, again, we're not celebrating the misfortune of other, as more saying I think our competitive position has strengthened significantly,which only increases the efforts of us in J&J and Mitsubishi.

The second question in terms of alternative dosing regiments. At this point, the dose level and the dosing regimen we have, right now we're very pleased with the results we've seen with this with a very strong clinical data across multiple studies now. And we believe it's the right dose and dose regimen to go forward with into the Phase 2b programs. And give us a highest likelihood of success.

In terms of alternative dosing regiments, what we've talked about to this point is that we would be evaluating the use of or the addition of Retonovir to reduce blood levels of VX-950 and potentially the half-life. We would be evaluating that later on this year, within the second half of this year in a multidose clinical study in healthy volunteers. That will provide us information on how much of an increase in blood levels and half-life we obtain with that, and that will guide us going forward into any additional studies we would conduct with VX-950 and Retonovir in combination with interferon and or ribavirin or potentially ribavirin as well.

In terms of twice a day dosing regimens, I think we would, really at this point, wait on the next set of clinical data that we obtain over the next few months. In particular, the 12-week data that I talked about earlier that we would obtain within the fourth quarter -- because I think that will provide us more information in terms of the blood level correlations and what type of flexibility we have in terms of blood levels, trough levels and then flexibility in terms of dosing regimen. And so, we would not make any further decisions in terms of dosing regimens until that data is available.

Thanks very much.

Your next question come from Jeffrey Porges with Sanford Bernstein & Company.

Perhaps you can give us a little bit more financial color. First of all, just on the milestone payments and looking ahead to the balance of the year, you're sticking with your OA (ph) guidance in terms of the mix of revenue and how you're going to get there. And then just looking ahead, should we be anticipating that you'll be scaling up your SG&A starting in the first half of 2007 in anticipation of successful development of 950? You do have some resources to add there and just wondering what the timing you're thinking about that would be?

Thanks, Jeff. So first to the revenue guidance as you point out, we are reaffirming our revenue guidance of 210 to $235 million. And I think the way to look at the revenue number is that there are certain amounts of revenues in there that should be considered lower risk. The revenues are generated from HIV royalties or revenues that are generated from collaborations that are already in position. And if you do look at the revenue in that way, what it says is for the remainder of the year, we have to achieve between 35 and $60 million in milestones and new deal revenue.

So we set a strong target at the beginning of the year, well on the way to achieving the 210 to $235 million. The J&J collaboration was a significant contribution, but we still have some work and that's to achieve a 35 to $60 million to get within the revenue guidance, but we can achieve that with milestones from current collaborations, compound acceptances from maybe Merck or Novartis and also new collaborations that we continue to work on. So we feel as though we're well on track with the revenue guidance.

As far as the SG&A rate is concerned, it's a small increase on prior quarters, just commensurate with the growth of the business. As we go into 2007, we'll have to consider the rate of development of VX-950 and how close and how quick that product is moving towards the market. But there is going to come a time when we should appropriately invest, specifically in commercial activities, to support the compound. And that may be mid later 2007. We have to see the rates of development of VX-950. That's how we're looking at the SG&A as well.

Thanks very much. That's helpful.

Your next question come from Yaron Werber with Citigroup.

I have a question that has to do with -- can you just walk a little bit through, what do you need to have done in terms of manufacturing scale up in order for you to file in next year? Can you just kind of walk us through the process and how much supply do you think you'll be able to launch with this?

Could you just repeat the question, in terms of this year what you're --

No, let me repeat the question. In terms of for you to be able to file let's say by the end of next year, can you just walk us as to what do you have to accomplish on the manufacturing side? And how much -- what kind of commercial supply would you envision having early in the launch? I'm just trying to get a sense as to, the uptick is going to be fairly significant, fairly quickly as to where are you're going to be in terms of full scale up at a time in which you're potentially launching.

This is Josh. I'm the chemist in the room, so let me start the answer.

Thanks, Josh.

They don't let me in the laboratory, but I still think of myself as a chemist. The regulations are that you need to establish registration batches and registration batches have to be exactly the same process that you're going to manufacture the commercial scale, they have to be -- everything has to be tightened down all the way to the product specifications. And the size of those have to be within a certain factor of your launch sizes. And we have said and we are on track for the beginning of those registration batches of material, i.e., we'll be manufacturing at commercial scale. We're already starting that process now. We'll be manufacturing the first registration batches later this year.

So that's the general answer to the question. What I'm not -- what we're not going to do at this point is give you the size of our launch capabilities because, of course, that would be a backended way of giving you a sales forecast, which is a little too premature. Just say that we are planning, we and J&J are planning for a very big launch, right off the bat.

The timing of the registration batches starting before the end of this year is consistent with our objective and our stated objective of filing NDA in 2008.

Right. And that's if you back calculate that, that's all consistent.

Can you give us a sense as to how long would it take you to actually reduce the three registrational batches? And how long are they going to have to be in stability testing to fulfill the requirements of the NDA?

You need to have one year in life stability before launch and before filing, so you can back calculate that.

Is there any way you -- if you were able to file under an accelerated provision file with less than 12 months of stability?

There are certainly ways to do that. I would just say that in any fast program like this, there are numerous aspects to an NDA and they're all fighting each other to get off the critical paths. So if you pull one of them off the critical path something else emerges in the critical path. That's certainly theoretically possible, that's not our plan at present. And how soon do you think you'll have the three patches completed? In time to file the NDA in 2008 with one-year stability.

Okay, great.

Thank you, Yaron. May we have our next caller, please.

Your next question comes from Joshua Schimmer with Cowen and Company.

John, what do you think the fastest would be that you could generate data for Retonovir boosting the VX-950, and how does the ability to generate that data impact your potential plans to file on the [inaudible] to the results which will not include Retonovir [inaudible] arms?

Hi, Joshua. The next set of clinical data -- the next set of clinical data with Retonovir and VX-950 would be pharmical connetic(ph) data, drug drug interaction data for probably up to approximately two weeks together, where they're given together in healthy volunteers. And we would expect to have that data near the end of this year. We're planning on conducting that study within the second half of this year. Depending on the results of those studies, we would move into patients with hepatitis C and look for an antiviral effect within sometime in 2007. The specific design and what the strategy, again, would be very much dependent on the actual results.

Now, we have no intention of in our first set -- it's obvious the boosting won't be in Phase 2b and we have no intention, or our plans are not to have Retonovir boosting in Phase III. The reason why it's not that critical is that it be in Phase III is that we have single dose data and the data that we have to this point, while did show some levels of increase in exposure, they weren't of the level that if -- that is likely -- that we will need to redo the programs, that's fundamentally our view of this drug, the safety profile, the efficacy profile of VX-950 will change when you combine with VX-950 -- with Retonovir.

So if you follow that, what we try to say, I think it was in and around Eastel, with the data that we had available, is that Retonovir may give you some modest increased in blood levels and half-life, which may give you some increased flexibility in terms of dosing regimen, but it's really not going to change a profile. So it's okay in that sense to go forward with the dose level that we have and go forward into that into the market.

And again, I'll reiterate that the data that we have with 750 milligrams every 8 hours is very strong antiviral data, very good safety data to this point. We think it's a dose regimen with the formulation we have, reasonable number of pills, reasonable-sized pills and it's a dosing regimen that we can run with for a long time.

I guess your point may have been more subtle than what I appreciated, I guess. How do you address the potential commercial conundrum where you launch and price VX-950, assuming it's going to be a three-times-a-day drug and then after approval and launch, new information comes out that shows Retonovir boosting can take the dosing to twice a day and you're priced at three times a day, and potentially cut your market by a third?

Great question and that is exactly what our clinical program is really designed to -- amongst other things, to address at this point. We will know well in advance of pricing, which will be at the time of launch, exactly what the profile of Retonovir boost 950 is. If it is in fact get you to BID with a lower dose level of VX-950, if that's the answer, we'll know that and actually have profiled that far in advance. It won't be on the label, but will be pricing with that information in hand. And if it is, if it's obvious that the market is going to move very quickly to a twice a day regimen with Retonovir boosting, we would obviously price with that in mind. And all of it, the clinical -- well, ultimately, developed a label as rapidly as we can.

And just to add to that, lest we sound like that that's the only way to get to twice a day dosing, there are a number of others avenues that may be explored here in a similar fashion in clinic prior to launch that give us information about twice a day dosing of 950 without Retonovir. All that goes into then the calculation of value delivery that you use to set pricing. And then you can back fill postlaunch with label information to that effect. But I think the important take away is that we're on top of that commercial problem. We're doing everything we cannot to get blindsided by it postpricing and if you've got any other ideas, send them along.

I wish I did. Maybe one last quick question. John, do you have an update on the patients in the earlier Phase II trials who are continuing on peg ribavirin having finished their VX-950 course?

We would expect to -- at this point, the original studies are basically done, but they're obviously being treated with longer term duration with peginterferon and ribavirin and we would expect our investigators to be presenting an update on that information at ASOB(ph) in late October.

All right, thank you.

Your next question comes from Andrew McDonald with Thinkequity.

Great, thanks for taking the call. I've got several questions as well. First, what is the royalty due to you from Mitsubishi?

It's an escalating royalty. We haven't actually disclosed them and are not at liberty to disclosing the royalty with Mitsubishi. But it's consistent with how it will Vertex does [inaudible] collaboration. We always said a royalty is a priority in terms of the collaborations and the economics. We then look to the other elements, the collaborations such as up fronts and [inaudible] milestones. But we did once again look to it to a significant royalty to provide us the return if the drug gets to market. But we're not at liberty to disclose the Mitsubishi royalty.

Great. Maybe you can give out a little bit more details on the enrollment in Prove I. I know you said that you had 160 patients in screening. I'm wondering how many patients have actually been dosed and for how long? If you can give any color there.

I can't give you anymore information -- I can't provide any more information than what I provided in my prepared remarks. But, again, we are -- obviously, patients are being dosed in order to maintain our target of the 260 patients in the study, fully -- in the study by and included dosed by the end of the third quarter. You can also -- we are explicitly, also reiterated the fact that we would have the first 80 patients completing 12 weeks of being on study, the 12 weeks of the VX-950 period in the study and have time to do the analysis, which normally would take three or four weeks and still get to having all that data available in mid- to late fourth quarter.

Okay. And then I wanted to ask you about preclinical toxicology, animal pox. I'm wondering if you've completed longer term toxicology studies beyond three months?

We have six months toxicology studies ongoing. They started in March in both species and they're ongoing and we expect to complete those trials before -- and have them fully analyzed within the fourth quarter which will support longer duration of VX-950 than three months, which we would expect up to six months of dosing of VX-950 in the treatment failure study which is on track to start within the fourth quarter.

That was my final question is, what's the design of the Prove II study as you have it now?

It's a little early. We are -- we're working with investigators, we will -- in finalizing that protocol, there will obviously be a regulatory review as well before that protocol is started. As we always do, given all of those discussions, we'll provide more detail on the design of that study when we start the study.

And then maybe finally, since treatment failure population represents a significant unmet medical need there, could you file an NDA based on the data that you generate out of Prove III and Prove I and II?

What I've stated previously, our primary path to NDA, to the NDA in 2008 is based on having Phase III clinical data in the package and that Phase III study would start in the middle of 2007. The key point there is that we would start the Phase III program in mid-2007 while the Phase II program, all three studies, Proves I-III are ongoing.

As the data evolve from those studies and become -- including the control arm data, become available to us in 2008, there's certainly strong data, and as you say, I think you're right, Andrew, that in particular in the treatment failure study, strong data there would may be sufficient to support a filing base based on that set of data. At this point, projecting out the specifics of how we would -- whether or not they would be sufficient and it's obviously a little early.

Thank you very much for taking my questions.

Thank you, Andrew. May we have the next caller, please.

Your next question comes from Richard Smith with J.P. Morgan.

Just quick question. On the Mitsubishi, that Phase I trial, is it an ATV infected patients, and if so is it more than just unit type I patients?

It's in healthy volunteers.

Richard, to add to that, in this program there is a plan to add other gene types, right, John?

Yes, we will be -- as we move forward with VX-950, it's clear that the -- based on ongoing data that both genotypes 2 and 3, and in fact genotypes 4 as well, there's a high likelihood that VX-950 would be active in those genotypes as well. We would plan on clinical studies in those genotypes later on, likely in 2007. I think the focus right now is on Proves I, II, III, generating the data and based on the next set of clinical data, we would look to that will help us design those trials in the other genotypes.

And Mitsubishi is certainly planning to move into patients as well. But the first study they've started is the normal volunteer PK study in Japanese -- or Asian population.

And in Japan, the percentage of patients who are genotype 1 is actually very similar to the U.S. It's around 75% and it's really 70 to 75% in U.S., Japan, Europe, in all the major pharmaceutical markets. It's really as you get away from the major pharmaceutical markets that the other genotypes become more prevalent.

Just one other question. With, [indiscernible] I thought the Phase III was going to start in '06, now '07. Any reason for that move?

I think when we went into the year, it was clear that the program is moving in the clinic on track. It's in Phase 2b and that study is progressing as we had hoped and I think between us and GSK, all of the safety and efficacy data that we've seen to this point remains very encouraging. When we went into this year, that's the target that GSK had provided that they would be in Phase III before the end of the year. It was clearly an aggressive target from the beginning. As we've gone through the year and based on the information that we have as we go through the year it's clear that it's not going to happen before the end of the year.

Okay, thanks.

Your next question comes from Steve Harr with Morgan Stanley.

Could you just give us a little granularity now that you've had a few weeks to digest the J&J deal on your amortization schedule you expect going forward.

I assuming you're referring to the upfront payment?

Exactly.

I can't give you the specific timeline. I can give you the rules, the accounting rules, unfortunately, around it. You're required to amortize upfront payments over the period that you remain involved with the development and commercialization of the drug. We made an estimate of that period and we are spreading the upfront over there. Right now, I can only provide you with, it's several years and I'm not going to be more specific than that and we're applying the appropriate accounting.

Several, I guess several implies to mean not less than five, this goes out to the end of commercialization?

No, it doesn't necessarily. It's how you're involved with commercialization. So for example, for the early launch of the drug say in Europe and the U.S., we may have a joint commercial committee to coordinate the launch of the drug. But once that committee dissolves, that would be the end of your involvement. We're not looking at this through the whole commercialization period, it's more the period you believe you're actively involved as a partner with J&J. We have to make an estimate around that.

Understand. And then, John, on VX-702, what lead to -- I think you had planned previously to get the drug into Phase 2b later this year, what additional studies do you need to do that you had not planned upon before, or is it just a simply a matter to get the time to check all the boxes?

There are no additional trials that are driving -- additional trial requirements that are driving pushing out the study of the methotrexate combination trial. It's all based on, it's really based on the ramp and the clinical program in VX-950 with Prove I, Prove II, prove III, three large Phase 2b trials that in aggregate are going to enroll more than 1,000 patients. We looked at where our priorities were. This was another large Phase 2b trial and just said that what's most important right now is VX-950.

We're going to focus our resources there. We're ramping up our organization to take on these multiple trials as we're speaking, but the best match for our ramp with the ramp on 950 and then investing in 702 was that we'd run the 702 trial we'd start in early 2007.

It's important to remember that when we gave that initial timing guidance, we were also saying that we thought our Phase II program would be more than a couple of hundred patients in our Phase 2b program. So that Phase 2b program with 950, our Phase 2b program is four or five times larger than we were guiding you to and we thought early in the year. So it's just -- it really is a prioritization of resources both monetary and human.

But there is ongoing progress with 702. We've completed drug drug interaction study in rheumatoid arthritis patients, that was in the second quarter. We're on track to file an IND and start the first clinical study under the IND.

Great, thank you.

Thank you, Steve.

Your next question comes from Meg Malloy with Goldman Sachs.

Just one clarification on the Phase 2b for 702, is that intended to be an international study?

Yes.

Okay. [inaudible] I'm sorry?

Yes.

Okay, fine. That's all I have, thank you.

Thank you, Meg.

Your next question comes from George Fulop with Needham & Company.

Thanks for the update. In general, do you have a sense of what the total of Prove I, II, III, Phase 2b program R&D expense, might be a ballpark range for that. And second, a follow-up on the VX-702 prioritization, was there any clinical factors or any clinical evaluation of the portfolio risk perhaps into the decision beyond the financial burden?

George, we don't provide individual R&D data around our programs. So I apologize that I can't give you that visibility. In terms of the prioritization, I'm just going to add to what John said before, we're still a fast-growing company with a number one priority of VX-950. And as we have to manage our R&D investment, [inaudible] the numbers we've discussed today, it's significant. We had to make choices.

The VX-702 study that we were considering was a large number of patients and would have required a large number of resources to enroll and to manage that trial. We made choices and prioritized 950 and deferred some of the dollars and used the resources on 950 today.

And as Meg asked, it is an international trial. It would be a study in Europe, which requires -- it's a different resource requirement and we have experience with that, but it's a significant resource requirement. And again, it's just from a people standpoint, we wanted to make sure we were on target on 950. That's our number one priority.

All right, thank you.

Your next question comes from Annabel Samimy with UBS .

Thanks for taking my call, my questions, most of them have been answered but I want to understand. I think at the end of four weeks, you're going to be doing an analysis to determine whether the various arms continue on 12 weeks or 24 weeks of therapy and I was just wondering, are we going to see any kind of analysis of that four-week data or any kind of RVR data on that analysis?

This is John again, no, there will not be -- the four-week data will not be provided. It's actually the way the study will be running in terms of individual patient responsibility, there'll be an independent monitor that will provide -- that will review the information and just feed back simply a yes or no without actually any of the data of whether they should stop at 12 -- whether they should not be stopping at 12 and 24 weeks. The assumption is basically that most if not nearly all patients will in fact stop at 12 and 24 weeks given the data that we've had to this point.

So the 12 week analysis -- the first 12-week in data is going to be 20 in each arm that were on treatment, correct?

Yes, but, at the 12 week time point, whether they're stopping the peg and ribavirin at 12 or 24 weeks effectively doesn't matter. And so that their data will really be reported as, what the -- in the total number of patients who receive VX-950 peg and ribavirin for 12 weeks, what are the safety results and what are the antiviral results in aggregate.

Just going back to a previous question for the follow-up data from the Phase II, given that you're not going to be releasing any data until late in the fourth quarter, at the medical meetings in the fall, is it primarily the updates from the initial Phase II studies or the Phase I studies or of patients that were on VX-950 and then remained on their care over time? Are those the updates we're going to be seeing, or is it something else?

You will certainly see that data. I think beyond that at this point, all the abstracts have been submitted at ASLD and by ASLD policy, we actually can't talk about what's going to be presented there until they've been accepted. And as we get into the fall, into September and we know which abstracts are being presented at which meetings, we'll provide more information on that.

Could it potentially be something from the Phase II program?

No, from the Prove I study, there will be no -- there not be any information at ASLD from Prove I.

Going back to another question also, again, just talking to a number of physicians and recognizing that one of the greatest needs for this type of drug is in the treatment experience population. So if you actually have very strong Phase II data in this treatment experience population, I just want to understand, you could actually include it within your NDA and get approval for both indications, or you're going assumption right now is you just get treatment naive?

No, our objective is to have treatment experience and treatment naive in our label.

Okay. For the primarily approval?

And that's always been our plan.

Okay, all right. Thank you.

Your next question comes from Hari Sambasivam with Merrill Lynch.

Thank you. Most of my questions have been answered, just a very brief question on 702. In terms of the type of patient population you're thinking about, John, is this going to be a post PMF Asian population or is it more of a demark post-demark population could you just maybe talk about who you're aiming the drug at?

Our primary objective would be in patients who are on -- who are already receiving methotrexate and have an inadequate response. It's really the most obvious point of commercial entry is to treat patients when otherwise in the current time there is a decision point as to whether you would go on to an injectable therapy or not. There's actually a -- I think there's a pretty significant delay in many contacts before patients go on to the injectables.

The objective here which to provide an oral, once a day drug that becomes a much lower hurdle than the injectable therapies so that more patients actually are treated what is by what is the recommended approach in rheumatoid arthritis now, which is combination therapy, with methotrexate plus an anti-cytokine in order to achieve maximum suppression of inflammation.

That's great. The other question I had was just in terms of subpopulations of ATV, any thoughts on how you address the ALT normal populations, John?

I think the ALT normal population actually becomes all that much more obvious for a stat C, a specifically targeted antiviral therapy, one that's directed at the virus to use that therapy in that context. It's all about thinking about the disease for what it is, which is a viral disease rather than a liver disease at its core. And that with a antiviral agent like VX-950, the targeting therapy based on ALT levels becomes less and less than approach.

And it's clear the clinical community is moving to that in any case because ALTs are really not all that informative in terms of histology, but I think what they're really moved to with better therapies, higher efficacy rates, shorter duration of therapy if you are in combination with an interferon is going to be towards treating based on viral parameters. And that is a logical [indiscernible] and I think VX-950 fits very nicely into that.

Thank you.

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

I had to hop off, so, hopefully it wasn't asked but a couple of modeling questions for Ian. The $380 million in development milestones. Can you remind us what percent is clinical development milestones? And finally not sure I heard the revenue recognition guidance right, but the upfront amortized over several years and the actual clinical milestones recognized on receipts, is that accurate?

Sure. David, the way to look at the $380 million, is firstly, they are all development or approval milestones as opposed to a sales milestone, which you may find in a collaboration. There are not sales milestones in the $380. So they are based around clinical advancements and then approval points in the J&J territories. So hopefully that will help you understand that the milestones do come soon, given the timeline that John's explained earlier.

Now, on the upfront payment, I didn't provide a specific period that we are amortizing the $165 million over, but I provided a basis of how we're estimating that period, which is the period of involvement of development and commercialization. And involvement being defined as the period that we work together with J&J, which may be around the initial launch of the drug. And we have to forecast that at this point in time and then update the estimates as we move along.

And is the upfront treated different from the clinical milestones, meaning are the actual development milestones recognized on receipts?

Yes, they are. I'm sorry, if I wasn't clear. So the upfront, the 165 is amortized over a period of involvement with J&J, and then the development milestones, if they're considered substantive and at risk then you record those as revenue when you achieve that at-risk event.

That's helpful, thank you.

Thank you, next caller.

Your next question comes from Howard Liang with Leerink Swann.

Thanks. Couple questions. First, what is the nature of the QTC study that you're planning on for 702 and whether you have plans for a similar study for 950?

The study is what I would describe, it's really a routine QTC study. It's conducted, there are a set of guidelines by the FDA that -- that provide information on designing such studies. And it's really -- and it is what the FDA has moved to over the last few years, it's effectively from a, this is a highly recommended study to effectively, this is a required study for all small molecules, whether or not there's any particular risk identified for QT prolongation in prior clinical or animal studies.

With VX-950, given what I just said, we would guess that would be a requirement for VX-950 as well and it is a study that will be conducted within this year. But I will remind you that we've talked about the issue of electrocardiograms and cardiovascular safety risk with VX-950 extensively. We've actually done intensive digital ECG monitoring in the clinic, in patients previously and there were no adverse consequences, no evidence of QT prolongation, and we view this upcoming study as really a formality in order to meet the regulatory requirements.

Just then on the Prove I, Prove II studies, maybe a little bit more color, how frequently are patients checked by the physicians during the study and how often are the viral load measured during the study?

They're both seen and evaluated with RNA measurements very frequently. This is a -- a particularly in Prove I as our first Phase 2b study, we haven't provided any specific details on that, but it's very frequent.

Thanks.

Ashley, we have time for two more questions.

Your next question do come from Adam Cutler with JMP Securities .

I'm just wondering if you can let us know when we might be hearing about results from the VX-770 studies, VX-680 studies and the [brocanavier](ph) Phase 2b studies?

I think it's a recording question.

I'll take these, the disclosure question, Adam, good to hear from you. So we're not going to commit right now to a time line of what we will disclose around 770, 680 and brocanavier. First of all brocanavier and 680 we are somewhat subject to working with our partners Merck and GSK there. But what with will commit to, is when we have substantive information from the study, which may be later this year or early next year, we'll provide you with those details.

Great, thanks.

Thank you, Adam. Ashley, our last question.

Your next question comes from Bob Al(ph) with [inaudible].

Thanks for taking my call. I have two quick questions. One is, what are the two [inaudible] animals that were used in the toxicology study?

Issues of animals.

With VX-950, it's rat and dog.

The other question is whether the royalty payments that on VX-950 to [inaudible], are they the same regardless of your graphic locations or different from one kind?

I didn't catch your name.

Bob.

Thanks, Bob. They are worldwide and in certain territories our partners will pay for those royalties. In the territories we're responsible for, we will be required to pay those royalties. They are small, single digit royalties and we haven't disclosed the number, but they are small single digit royalties.

Final question. Are they the same for you, I mean, are the rate the same across different locations?

Yes, they are.

Okay, thanks.

Thank you, Bob. I would like to thank everyone for joining us. I know the call went on long based on the significant information we conveyed tonight. In the first half of '06 we reported significant milestones and accomplishments. We expect robust [inaudible] the second half of the year So, thank you everyone for participating in our call tonight. Good night.

This concludes today's second quarter financial results conference call. You may now disconnect.