福泰製藥 (VRTX) 2008 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the Vertex year end results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

It is now my pleasure to introduce your leader for today's call, Mr. Michael Partridge. Go ahead, sir.

Good afternoon. This is Michael Partridge, Senior Director of Strategic Communications. Welcome, everyone, to Vertex's 2008 year end conference call.

2008 was an exceptional year for Vertex. Our highest business priority for 2008 was Telaprevir, to continue our progress in clinical development and establish Telaprevir's differentiated profile and first to market opportunity. We announced today that we have completed enrollment in the Phase III realized study for treatment failure patients. With the Phase III advance study in treatment-naive patients and the supplemental illuminate study already enrolled, we have now completed enrollment in our registration program, with approximately 2,200 patients.

Telaprevir was not the only contributor to Vertex's progress in 2008. We unveiled compelling early clinical data for our cystic fibrosis drug candidate, VX-770, which has created the opportunity for VX-770 to move rapidly into a registration program in the first half of 2009. Telaprevir and VX-770 represent potentially significant medical advancements and are Vertex's highest priorities in 2009.

Additionally, in 2008 we were fortunate to add approximately $800 million of cash through the sale of our HIV royalty and two successful financings. We ended the year with approximately $832 million in cash, cash equivalents and marketable securities. This cash position allows us to advance our core opportunities in HCV and cystic fibrosis, while maintaining an important investment into product creation.

Joining me on the call today to review Vertex's business priorities for 2009 are Dr. Freda Lewis-Hall, Ian Smith and Dr. Joshua Boger. Kurt Graves is also with us and is available for Q&A following our prepared remarks.

I will remind you, information discussed on this conference call may include forward-looking statements. Please see the risks and uncertainties related to our business discussed in detail in our reports filed with the Securities and Exchange Commission, including our 10-K.

GAAP and non-GAAP financial measures will be discussed on this call. Information regarding our use of non-GAAP financial measures and a reconciliation of those measures to GAAP is available in our fourth quarter and full year 2008 financial results press release. You can visit our website, VRTX.com, to read the press release, listen to the conference call, view our Power Point presentation and/or download a podcast.

We will take questions after our prepared remarks tonight. Following the call, our Investor Relations team, joined by Ian and Kurt, will be in the office to answer any additional questions you may have.

I'll now turn the call over to Freda.

Thank you, Michael.

Our clinical progress in 2008 has positioned us for continued and important clinical advancement in 2009. We are well under way in our broad Phase 3 pivotal program for Telaprevir in both treatment-naive and treatment-failure HCV patients, and we now have an opportunity to initiate a registration program with our lead cystic fibrosis drug candidate, VX-770. Telaprevir and VX-770 are two late stage product candidates in serious diseases with very high unmet medical needs.

First, to Telaprevir. The advanced Phase 3 trial is evaluating 24-week regiments in treatment-naive, genotype I, HCV patients. We announced today that we have reached a point in the trial where all Telaprevir dosing is complete. This is an incremental milestone in our development, but important, as it confirms a significant increase in patient and physician experience with the drug and in our safety evaluation. More than 1,600 patients have now been treated with 8 or 12 weeks of Telaprevir in Phase 2 or in Phase 3.

Second, we have another trial under way in treatment-naive, genotype 1 patients, called ILLUMINATE. We announced recently that we had completed enrollment of approximately 500 patients. ILLUMINATE was designed as a supplemental study for treatment-naive patients.

We are taking great care to build a clinical package consistent with high regulatory standards to support Telaprevir's filing. ILLUMINATE is not required for registration, but we believe that it will provide additional data on 24- and 48-weeks of therapy in patients who achieve a rapid viral response, and will provide clinicians with additional information on 24-week regiments following potential approval.

And third, we initiated in September of last year, the realized Phase 3 trial in genotype 1 HCV patients who failed to achieve an FDR with prior treatment of pegylated interferon (peg-IFN) and ribavirin (RBV). This trial is differentiating for Telaprevir, as it is the only Phase 3 trial to evaluate all major treatment failure groups, including the difficult to treat in all responders. We announced today that we have completed enrollment in this study.

In summary, during the second quarter, we anticipate completing Telaprevir dosing in the entire Phase 3 program, which supports our timeline to an NDA filing. Also in the area of HCV, we have a portfolio of additional HCV protease inhibitors in development. We created a portfolio with the goal of identifying molecules with potentially advantageous characteristics that may further advance the treatment of HCV.

That mission for our second generation program, to further advance treatment of HCV, got harder in 2008. As Telaprevir showed very compelling SVR results in Phase 2 trials of treatment-naive and treatment-failure patients, and the challenge is even more difficult with the progression of our Phase 3 programs. Telaprevir is also setting a potentially high hurdle to beat in terms of dosing convenience, with interim results that we presented from the 160 patients C2 08 study at AASLD.

In that study, through 12 weeks of Telaprevir, in combination with Pegasys and ribavirin, safety observations were not substantially different between twice and three times daily. The viral break-through rates were low and also not substantially different, and more than 80% of patients had undetectable virus at weeks 4 and 12 in both the twice-daily and three-times daily arms, which are the best on treatment antiviral results we've achieved.

When you combine all of these data, they support continued evaluation of twice daily dosing of Telaprevir. And twice daily dosing may be important for advancing the future treatment of HCV with novel combinations.

VX-500 was the first of three novel compounds to enter the clinic, and following results of a Phase 1b dose ranging three-day viral kinetic study in treatment-naive genotype 1 HCV patients, we have decided that VX-500 did not meet our criteria to continue development.

Telaprevir has indeed set a high standard. Evaluation of other novel HCV protease inhibitors is continuing.

VX-813 has completed a multidose Phase 1a study in healthy volunteers, and VX-985 is in early development. Our goal of furthering a treatment for HCV also includes priority for evaluating other combination treatments, and particularly those that include two direct acting antiviral therapies. This remains a high priority with our business, and we are following the progression of STAT-Cs in development at other companies.

Now turning to cystic fibrosis. We have designed three clinical trials as part of our registration program for VX-770, with the intent of further evaluating the safety and full utility of this product candidate across different age groups and CFTR genotypes.

We recently announced the focus of each clinical trial. These trials include, first, a primary trial designated to enroll patients ages 12 and older who carry the G 551 D mutation. Second, a trial designated to evaluate VX-770 in pediatric patients ages 6 to 11, with the G551D mutation. And third, a trial that will enroll CF patients with the delta F5 08 mutation on both alleles. We anticipate that the primary end point of the two trials including patients with G551D mutation will be safety and improvement in lung function or FEV 1, while we will continue to measure sweat chloride as one of the secondary end points.

We view the third study in the delta F5 08 patients as important for exploring how patients with this mutation may respond to VX-770. The primary end point of this study in patients homozygous for the delta F5 08 mutation, is safety and FEV 1. Sweat chloride will be one of the secondary end points in this study as well. We will provide more details, such as number of patients and duration, closer to the initiation of each trial.

We also continue to expand our clinical development efforts in cystic fibrosis with our corrector compound, VX-809, which progressed well throughout 2008 with three Phase 1 studies now completed. The most recent was an escalating single-dose pharmacokinetic and safety trial in patients who carry the delta F5 08 mutation. We plan to initiate a Phase 2 study in patients with CF in the first half of 2009.

The delta F5 08 mutation is the most common mutation and is present on at least one allele in approximately 90% of patients with CF. If VX-809 demonstrates significant clinical activity in patients with this mutation, with an acceptable safety profile, it could potentially expand the opportunity in this major disease.

We are energized by the progress achieved in 2008, and are very excited about the opportunities that lie ahead in 2009. I would now turn the call over to Ian.

Thank you, Freda. Today I'll cover our 2009 financial guidance and how we're managing the investments in our business to protect our financial position in these difficult economic times, while supporting our core development opportunities and product creation. I'll also compare this guidance to our 2008 financial results.

We issued full 2009 guidance today, consistent with our strategies to support the advancement of Telaprevir and VX-770, our two registration compounds. HCV has always been our priority. However, in 2008, we made significant progress with VX-770, and are now investing to support a major opportunity in cystic fibrosis.

As a result, this guidance fully funds our broad Phase 3 program for Telaprevir and the registration program for VX-770, while also investing to prepare the Company commercially.

It takes into account our current expectations for 2009 revenue based on the ongoing business development activities, while respecting our strong balance sheet position. We recognize the inherent challenge of managing our investment according to our need to maintain financial strength.

Now to our 2009 guidance. Our plan is to manage a 2009 non-GAAP loss, excluding certain charges and gains, in the range of $400 million to $435 million, slightly higher than our full year 2008 non-GAAP loss of $398 million.

In 2009, we are fully funding our opportunities in HCV, CF and research product creation. In the other areas of our business, we are tailoring investment levels to reflect data from ongoing studies in our balance sheet profile.

These decisions, which are focused primarily on the earlier stage development assets, may lead to choices that could drive revenue and capital through business development activities. This is a strategy we've utilized effectively in prior years to manage our cash investment profile.

We expect full year 2009 GAAP loss in the range of $495 million to $530 million, which is slightly higher than our 2008 GAAP loss of $460 million. The 2009 GAAP loss includes approximately $95 million of stock-based compensation and restructuring expense. The 2008 GAAP loss included $62 million of stock-based compensation and restructuring expense.

Now to a little more detail on our guidance. We are forecasting total 2009 revenue in the range of $140 million to $150 million(Sic-see press release). This compares to 2008 revenues of approximately $176 million, which was generated primarily from R&D collaborative revenues and revenue from the amortization of our 2008 royalty monetization.

As a component of our revenue forecast, we anticipate new collaborative revenue from business development activities in the range of $60 million to $80 million. This revenue will be primarily driven by our business development activities, focused on our earlier stage programs.

Now to the R&D investment. We forecast in 2009 that our R&D investment will be in the range of $500 million to $530 million for the full year, which includes approximately $75 million of stock-based compensation.

This is similar to our 2008 R&D expense of approximately $516 million, and is primarily driven by Phase 3 clinical trial spend for Telaprevir, investment in Telaprevir commercial supply, and investment into the CF registration program, while also supporting an investment into product creation, which remains relatively similar to prior years.

We expect SG&A expenses to be in the range of $130 million to $140 million in 2009, including $16 million of stock-based compensation. This is an increase over 2008 SG&A expense, which was approximately $102 million, commensurate with our commercial expansion into supporting HCV and CF, and the internal organizational development to support the progression of our business.

Now to our balance sheet. We entered 2009 with cash and equivalent position of approximately $832 million. With this strong cash position and potential to additional cash inflow from new collaborations, we are well positioned to invest into two registration programs in parallel, and prepare for commercialization in HCV and cystic fibrosis.

In summary, we are investing in Telaprevir, where we believe we can set a high competitive hurdle, and also advancing our clinical development in another important disease, cystic fibrosis. These are our key business priorities for 2009, and our financial strength provides support in these objectives and move us close to our ultimate goal of commercializing our first therapeutic products.

I'll now turn the call over to Joshua.

Thanks, Ian. A few days ago, we announced a leadership transition at Vertex. This is a key step in the evolution of the Company and recognizes how close we are to bringing two very significant medicines to the market. Those medicines have the potential to represent major advancements in the health of millions of patients, and our sharp focus is on realizing these possibilities.

Matt Emmens, who has been a Vertex Board member since 2004, has been appointed President of Vertex and he will assume the roles of Chairman and CEO in May. I will be stepping down as CEO, but retaining an active role on the Board.

As Vertex nears its next major jump in its upper trajectory, the transition to commercially-driven growth, I wanted to bring in a new leader ready to take Vertex to the next level. That leader is Matt.

Matt has been an active and involved Director of Vertex for the past four years. He was most recently CEO of Shire and has an exemplary track record of leading companies through major product launches and making great companies greater.

Matt possesses the qualities that we need now and will need to move towards that singular objective of bringing novel medicines to patients and their families. His accomplishments are many.

I welcome Matt to his new role as President of Vertex, and I look forward to his leadership as we complete late stage development, file our NDAs and prepare for the market.

Before I close, I would like to thank the dedicated team at Vertex for the excellent work they have put in to create this Company, for those of you who have supported us along the way. I salute your efforts and thank you for giving me the opportunity to lead this Company for the past 20 years. Vertex's future is very bright, never brighter, and I'm very proud of what we have achieved together.

Michael, back to you.

Thank you, Joshua. We'll now open up the call to questions.

(Operator Instructions). Your first question comes from the line of Rachel McMinn from Cowen & Company. Go ahead.

Thanks very much. Two questions. One on the financial. Ian, maybe you could talk a little bit more about the $60 million to $80 million in collaborative revenues from business development activities. I guess, how confident are you in this level for 2009. And then just a totally separate question, on C2 08, you were talking about data in 2009. Is it fair to assume that we wait for, that you're going to wait for all the data from the study, even in the few patients receiving 48 weeks of therapy, so that should be later in the year as opposed to earlier in the year?

Thanks for that question, Rachel. I'm actually going to turn the first question over to Kurt, who has responsibility for business development, and then I'll take the disclosure question on the C2 08 data.

Hi, Rachel. It's Kurt. Thanks for your question on the collaborative revenue guidance that Ian gave.

We feel really confident about our position right now, Rachel. As we've said with JAK 3, the first half of this year, we're entering the point where we're going to have a Phase 2 ready asset and an asset that we feel is really differentiated. There's a lot of interest in that particular asset right now and our program in that area.

On top of that, though, we also have obviously other early stage compounds. A second major bucket, without getting into details, is ongoing collaborations or new collaborations that we're looking to initiate this year in 2009 that can bring in additional sources of non-dilutive capital.

And thirdly, it's probably important to remind you that we also have geographic rights to our 2 G program, our second generation HCV program, as well as our CF assets outside the US, and across those multiple opportunities, I think we're in a real good spot to deliver on the guidance that Ian's talking about.

Thanks, Kurt.

And then to your second question, Rachel, regarding C2 08 data, the way we look at this is, we haven't actually pinpointed an exact time when we'll disclose such data.

I think the disclosure that we're most keyed on would be, how that data drives the next decision of the study, so I think that would be the appropriate time. But picking a specific event or medical conference, it's too early to do that at this point, but it would be in 2009, and it would be coincident to also to the progression within BID.

And can you maybe just elaborate a little bit more on what you need to see, so let's assume that the EVR data -- the SVR data supports what you've already seen with EVR. Are you willing to go in then and find a very large non-inferiority study, is that really the next step, or is there some other avenue to develop twice a day?

So again, a question that we can't be specific on the answer with that, we'll have to take a look at the data. We'll have a discussion with the FDA, and in conjunction with the FDA we'll make a decision on when and how to run that study.

Okay, thanks.

Your next question comes from the line of Ted Tenthoff from Piper Jaffray. Go ahead, sir.

Great, thank you very much, and congrats on a tremendous year, and Josh, all the very best. Question, as you're looking at the landscape now, incremental data coming out of other oral direct antivirals, can you give us some guidance of what this plan is, to start to evaluate Telaprevir in combination with other studies? Do you guys want to drive that bus? I'm sure you have folks, a lot of folks who are talking to you about potential combination studies. Just give me a flavor of what your thoughts are there.

Ted, it's Kurt Graves. I'll field the question. It's a good question. It's one we've been talking about for a little while, and it's still a top priority for the Company to really be at the forefront of not only leading with Telaprevir getting to the market first, is the first specifically targeted, direct acting antiviral, but also to be in a lead position to shape the evolution of next regiments if they happen.

We have had ongoing discussions with multiple parties, small companies right up through big pharma companies, about assets that we feel could be complementally to Telaprevir. And honestly, I feel we've made good progress on that. The biggest thing that's preventing us from getting into studies right now is the stage of development of some of those assets and being able to get a good read on the safety profile in particular of those assets.

As you might imagine, having something that is really safe is important to us while we're still in late stage development of Telaprevir, but we've got our criteria very clear. We feel we've got a good handle on a few attractive opportunities in the space, and we're hopeful that if those compounds continue to progress that we can enter into studies in 2009.

Excellent. That's helpful. Thanks.

Your next question, sir, comes from the line of Michael Aberman from Credit Suisse. Go ahead.

Great, thank you very much. I have a question about VX-770. I wonder if you could give any more color on trial design. You mentioned the three trials, but the duration of the trials, the number of patients that you're contemplating.

Yes, actually I had mentioned earlier that we were planning to disclose that information the closer we get to fielding each of those three trials.

So not yet.

Not quite.

Okay, great. And in terms of, you mentioned just in terms of combination, waiting for the right asset. I mean do we think we could see any activity in that front this year based on the discussions you've had with some of these companies? For combination studies?

Yes, it's a good question, thanks. It is possible this year that we could see that activity. If we find the right asset that's got the right kind of profile, it would bear intention to do that. It's really right now solely based on finding the asset that meets our criteria that's far enough along in development that we can initiate that work.

Okay. That's great. Thanks.

Your next question, sir, comes from the line of Geoff Porges from Bernstein. Go ahead, sir.

Thank you very much for taking the question. And Josh, I would also like to congratulate you on the success you've had with the Company. We'll miss the scientific focus you've brought to Vertex and to the industry.

Couple of questions. Ian, could you give us a sense of what you expect cash to be at the end of the year, given your guidance? And secondly, on the stock option expense, could you give us a little bit of the context around why it appears to be going up as a percentage of your discretionary expenses so much? Back of the envelope, it looks as though it was around 8% in '08 and about 14% in '09.

And then I just wanted to also get, the only, the REALIZE trial, you didn't tell us when you expected to get results in the press release, but you did for the other two trials. Could you just give us a sense whether that is also first half of 2010 or whether that's to-be-determined? Thanks.

Why don't we do REALIZE first.

Yes, we can do REALIZE first, because that one's pretty quick and easy. We do expect for the data to deliver from REALIZE in the first half of 2010 as well.

Great, thanks.

So Geoff, to the cash question, our non-GAAP loss number is a very good proxy for our cash burn number. It's one of the reasons that we give the non-GAAP number. Clearly there's always non-cash items in your P&L, such as stock compensation, depreciation, other things, and then there's also offsetting things that provide cash.

But the way to look at our burn for the year, we start with $832 million of cash and equivalents, and our burn can be $400 million to $435 million through the year, and that gives you an idea of where we would expect to be at the end of the year.

Okay, thanks.

And then secondly, you were asking about the increase in the stock compensation expense, and just to be specific, in 2008, our stock-based compensation, including restructuring, was around $66 million, and the guidance that we've given for 2009 is approximately $95 million. The increase is mainly driven by stock compensation expenses, not the underlying restructuring piece that's within that.

And that's primarily because we're significantly increasing the number of employees at Vertex. We added nearly 300 to 350 people in 2008 to a base that was closer to 1,000, so nearly 20% to 30% increase in our employee base.

And also, additionally, the way the stock compensation charge works, it is a function of a Black Shoals valuation. And the Black Shoals valuation off a $33 stock price versus $18 and some lower prices in other years, is increasing our stock compensation expense. And there also is another aspect of the stock compensation expense this year, which relates to the leadership transition, which we have to take a charge at this point in time for.

Okay, thanks very much.

Yep.

Your next question, sir, comes from Geoffrey Meacham from JPMorgan. Go ahead, sir.

Hi, guys. This is Terry Quinn in for Geoff today. Thanks for taking the question.

Actually I have another question for you, or two more questions for you on the combo therapy. Just broadly speaking, is there, would you guys say that there's a particular class that you're most excited about? And then just in terms of moving forward with the combo therapy, is it your bias to in-license the other component or to move forward jointly with a partner? Thanks.

Thanks. Two good questions on the combination things and understand where they are coming from.

I can tell you from all of the work that we've done and the data we've seen, it's not as simple of an answer to nail it down to one class versus the other. Each of these assets are different.

I personally don't think at this stage that we can say one class has clearly got an edge over the other class based on all the profiles that we see, so it's not quite that simple on the class piece of it.

As it relates to the second part of your question, I don't really think that we're approaching this as a bias towards acquisition or licensing. We really are trying to find the best top two or three assets out there, and I think we're in a great position at Vertex because of Telaprevir being so far ahead, and with the profile it has, that most people, if not all of them that we talk to, want to collaborate with us.

And once we find the top two or three assets that are far enough along, we intend to get into collaborative work. And whether that might be a small targeted acquisition or whether it's a licensing depending on probably what the other side wants to do, we'll move forward on that basis.

Okay, thanks. Can I ask just an additional follow-up on VX-770? Just, in terms of the end point, you guys had said previously that it looks like that FEV-1 will be the primary end point. I'm just wondering if you can talk at all about whether you approached the FDA about using some of the additional end points from the prior study as a primary end point, and what that dialogue was like, to the extent that you can elaborate on that?

Thank you, that's an excellent question. One of the things that I'm often reminded of when people ask questions about the development of 770 is that this is really a first. It's a first for us and it's a first for the FDA in evaluating a disease modifying compound in the area of CF. And so we really have worked hard in the partnership for devising what the appropriate development strategy is, and as well what the end points are.

So not having had this experience before, the sweat chloride and the MPB, which are good signals, if you would, for CFTR activity impact, would seem to be markers or end points that we could essentially swap out for the variable FEV-1, as the indicator of lung function improvement, but I'm not sure that collectively we're there yet.

There's certainly not enough experience with the sweat chloride in this area, and in fact, we're hoping that the development program as we have it designed will help to begin to establish some of these alternative end points or additional end points as meaningful ones moving forward in the development of treatments with CF. For CF, sorry.

Thanks a lot.

Your next question comes from Liisa Bayko from JMP Securities. Go ahead.

(inaudible) wanted to just, can you remind us if you're doing an SPA for the CF program?

Interesting, lots of interest in 770 today. So we are actually in ongoing discussions with the FDA and other regulatory authorities, and have not committed yet to doing an SPA, so we are still in negotiations around the overall design, but feel very comfortable that we are still on track to a first half of the year start with our pivotal program.

What would be the rationale for not pursuing an SPA?

Well, I think that there are a number of pros and cons that you can consider around an SPA. And in fact, the comments that I just made earlier around the novelty, if you would, of fielding a development program for a disease-modifying therapy that has not been tested before, might be a place that you want some flexibility as you evolve the development paradigm. And I'm assuming you ask because you're really familiar with the SPA's, which means you know that they are not flexible instruments, so we don't know yet whether or not the pros for using a SPA would outweigh the cons for that.

Okay, and then can you just qualify FDA's comfort level with using FEV-1? I mean that's a pretty standard end point NCF, correct?

Absolutely. And I think that they are clearly comfortable with the FEV-1 as an end point. Again, the point of negotiation in the work that we're doing together with them is defining additional end points that are meaningful both in this development program, but could be meaningful moving forward in the development of compounds for the treatment of -- or disease-modifying compound for the treatment of CF.

Would that be more as a co-primary end point or are you just going to pursue a single primary end point?

Still in discussions at this point. So as we have those discussions and start to solidify where we are, we'll be able to report those things out to you, along with the duration and the exact sizes of the trial.

Okay, and then -- that's great. Can you just give us a little bit of a brief description of the evidence you have that 809 may work in the delta 5 08 population?

So we do have some pre-clinical data that suggests that there may be some activity in the delta F5 08 population. Translating that into the clinical arena is what we're grappling with. And we are not certain at this point how that will translate meaningfully, and we are actually excited on both 770 and 809. 770 with the opportunity in the third trial that I described earlier, to test the work of 770, or the proposed success of 770 in this population, and then also in 809, to be able to move in that this year to begin to take a look at this population as well.

Okay, thank you. And then quick question for Ian. You mentioned business development activities and your burn rate. Are we to assume that you will likely not access the capital markets this year directly, or is that something that you would consider opportunistically?

Well, I think the last point, opportunistically, I think in this business you always should be opportunistic. But the way that we put our business plan together for 2009 is really acknowledging what is going on around us. We're fortunate that in 2008, we were engaged in a number of capital raising activities, and we take a very strong balance sheet into 2009 with $832 million of capital.

And then we've put together a plan this year where we can support our major activities, engage in some business development activities that provide us capital, and in summary, the plan positions us to go through 2009, which looks like it will be a tough time in the market. So we're certainly in a position where we're not required to go into the markets, which has been a little different in the Vertex of the past. But I think in this business, you should always remain opportunistic.

Okay, great. Thank you very much.

Your next question comes from Steve Harr from Morgan Stanley. Go ahead.

You guys know that you have completed dosing in the treatment portions of your Telaprevir programs in the treatment-naive populations. Is there anything you can comment on about dropout rate from those studies?

No. That's the short answer. It's a very good question, and there's certainly lots of curiosity around that. We monitor the trials, as you know, on an ongoing way from a safety perspective, but wouldn't have data that would be available to discuss around dropouts at this time.

Great, thank you.

Steve, it's Kurt. Just to build on what Freda is saying, obviously with the Phase 3 pivotal studies, that's all blinded information to us and the studies are ongoing. But I think your question's a good one. And I just wanted to add a point to what Freda said that, we're pretty optimistic right now based on feedback we're getting from clinical investigators about the patient management, the [rash] management program that we have going on in our clinical studies.

And I think as a proxy, you can look at the results we're seeing in study C2 08. Because in study C2 08, not only are we seeing the highest on-treatment response rates that we've ever seen with Telaprevir to date, over 80% at 4 weeks, we're also seeing the lowest discontinuation rates that we've seen in a study with Telaprevir so far. And that's because when we entered study C2 08 and now our Phase 3 programs, we have implemented the rash management program in those studies, and are feeling and good hearing good things from investigators about how they are implementing that in the studies.

Next question, please?

Your next question comes from the line of Tom Russo from Baird. Go ahead.

Good afternoon. Ian, your comments on cash burn, based on the timeline for different programs in Phase 3, is there any reason why the cash burn in 2009 should go up versus -- I'm sorry, 2010 should go up versus 2009?

Difficult to look to see where the forecast is for our cash burn in 2010, Tom. A lot of that is a function of the opportunity in development, and I'll give you a, one specific example. We might be running combination studies with Telaprevir at this point in time to forecast that and therefore to give you a burn for that period in time is very difficult, but, so I can't give you a forecast at this point in time. It's going to be a function of development and product opportunity as we go into 2010.

Okay, and then, do you have any visibility at all into how things are looking in study 2 08 beyond week 12, and if the data's blinded, is there anything that looks different than would be expected?

So it's -- no, we're not opening up that trial to take a look in, as it's ongoing at this point. So there is nothing further to add than the data we disclosed at ASLD in November of last year.

Okay, thank you.

Your next question comes from the line of Howard Liang with Leerink Swann. Go ahead.

For Telaprevir, what is the minimal package needed to file? And knowing where your competitor is, how important is it for you to be first on market? If there is an area where you would consider filing without all three trials, gaining a small time edge.

Hi, yes. Thank you for the question. Right now what we are looking at is a second half of 2010 file, that is based on the treatment-naive and the treatment-failure data, and we are excited about that possibility because we think that it gives us the broadest label in both the naive and the treatment-failure patients.

So it would be filing on all three Phase 3 trials?

Yes, so the core of our file is actually the advanced trial in treatment-naive and the REALIZE trial, trials C2 16, which is in treatment-failure patients. And the study 111 trial, which I'm assuming you're referring to, is really a supplemental study that's designed to help kind of further inform us about clinical data that we expect would be needed after approval.

Okay, great. Just another quick question now on the CF program, could we have the 809 Phase 2a data this year, and also regarding 770, could there be data from the supportive trials, so I'm referring to the pediatric and adult 05 08 trials before the completion of the trials, the supportive data on those two trials?

Howard, you're asking a disclosure question and I'll take it. At this point in time, it's difficult to.pinpoint that time, given that we don't approximately know the start of the studies, so very difficult. But it would be towards the end of the year, beginning of next year, based on our expectations if the study starts at this point in time.

What about the 770 supportive trials? Can that be -- I know those are (inaudible) trials, but can we see them, see the data before the end of the study?

Highly unlikely, for the 770.

Okay, thank you.

Your next question comes from the line of Terence Flynn from Lazard Capital Markets. Go ahead, sir.

Good afternoon. Thanks for taking the question. Just a quick follow-up to Howard's first question. Just, I know you guys have laid out kind of three filing scenarios in the past for Telaprevir and given some probabilities around those. Can we assume now that you're essentially going to file on data from advanced REALIZE and ILLUMINATE, and that's your go-forward strategy as opposed to, say some of the earlier strategies that you guys had proposed in the past?

So, Terrence, thanks for the question. It's a question that's frequently been asked and more recently it's being asked because a lot of people are asking about the earlier filing opportunity with a narrow label targeting treatment failure patients. We're still going to ask the question of the FDA in terms of presenting them the data. But as Freda said, we're mainly focused on the second half of 2010 and a broad label filing.

Okay, and when would you have a potential discussion with the FDA regarding, say, the proof 3 and study 107 data?

In the first half of this year.

First half, okay. Thanks a lot.

Your next question comes from the line of Bryan Adams from Abrams -- pardon me, from Oppenheimer and Company. Go ahead.

Hi, there. Thanks for taking my question. I was wondering if you could maybe elaborate a little bit more on the Phase 1 data that you saw for VX-809 in CF patients, and in particular, I was wondering if there were any dose-dependent safety signals and whether or not you took any efficacy measures?

Brian, I'll just take it just to clarify the question first. You are asking about 809?

Correct.

Because it was a single-ascending dose (inaudible) patients.

Correct.

So, as typical with single ascending dose studies, it's a case of moving up the dose curve at high dose levels to allow to us move into a Phase 2 study. So the key end point there was -- is safely dosing a single dose, and we achieved that end point to move into a Phase 2a type study.

Was there a further question? I'm sorry. I just wanted to try and clarify it.

Yes. I was just wondering if you had seen any dose-dependent safety signals in that study. If there was a maximum tolerated dose that you reached with the single ascending doses.

We did not, no.

Okay, and then a question for Ian. With respect to the R&D, the expected R&D for 2009 versus 2008, I'm just wondering to what extent is the R&D being flat to down driven by decreased commercial supply investment in Telaprevir?

It's not -- that's not a significant driver of a year on year comparison. One of the things that is affecting the year on year comparison is that we share development activities with Tibotec, so for example, Tibotec is running the REALIZE study, that's the registration study in treatment-failure patients. They actually carry the cost of that study, and then we have to reimburse them for 50% of that study because of our contractual relationship. That charge of 50% goes to our revenue line as a decreased revenue number.

But there is one thing that's affecting our R&D line in comparison year on year is that Tibotec are actually doing more development activities in 2009 than they were in 2008.

That's very helpful. Thanks for taking my questions.

Your next question comes from the line of Jason Zhang from BMO Capital Market. Go ahead.

Two questions, the first is on VX-500, you said that three day virokinetic study did not meet the prior criteria. Could you be a little more specific, is that mainly on viral reduction or is the other parameters that you look at that led you to make this decision?

Well, thank you for your follow-up question on VX-500. Let me take a second to contextualize what we're doing with the second generation program.

So first of all, I want to remind you that we're taking a portfolio approach. That is we have three HCV protease inhibitors, different in structure to Telaprevir and different from each other in profile, we expect, and our intent is to select the most attractive candidate to move forward to advanced development. As I mentioned earlier, we're doing that against the bar, if you would, that Telaprevir set high and moved higher in 2008.

And so if we think of this aggregate of three in the context of furthering the advancement of Hepatitis C treatment, that is a backdrop that we use for evaluating 500, and also the one that we'll use for evaluating 813 and 985.

So VX-500 was the first that kind of moved forward, and we used those recent results to determine that it hadn't met our overall criteria for advancement in this scenario. So our plan right now is to continue as previously planned, to evaluate VX-813 and 985 in order to select one to advance to further development.

Is there anything that you could refer to pre-clinic study that can guide you or you really have to rely on human -- I would assume mostly viral reduction data to decide?

Well, I'll jump in, Jason. There's a number of hypothesis that we're testing with the portfolio of assets. We don't want to align all of those different hypothesis with each individual assets for the obvious reasons at this point.

And I'll ask Kurt to comment on why we're running this kind of portfolio approach with next generation proteases, but it is about where we might see the market in 2015, and so when we evaluate VX-500, it doesn't reach that high bar. We think there's other ways to get to better combination therapies come 2015, and Telaprevir remains in a very, very strong position.

Kurt, do you want to comment on the market?

Yes, just to pick up on what Ian said, Jason, and to comment a little bit about the market and how we look at this. If you back up and you look at the strategy, we're looking at as a Company right now in Hepatitis C, we've got three shots on goal. That's the way we look at it internally with our second generation protease inhibitors, and with Telaprevir setting the bar so high, especially in the BID part of the profile in 2008, we now get to look at those three internal shots on goal with really clear parameters around dosing, efficacy, safety, combinability, its chance at ultimately maybe being a fixed dose combination in the future. Those are the kinds of criteria we look at.

And we get to make, I think, well-founded go/no-go decisions on each of those assets. And our determination on VX-500 was, of the three shots on goal we have, to not move forward with that when it continued to progress the other two assets.

As it relates to where we see the market going, we're really talking about a timeframe here. If you go as fast as possible, of 2015 plus and for competitors behind us, even later than that. And when we look at it from that perspective, not only do we have a couple shots on goal internally, but we think we have multiple shots on goal externally, and that's the work that we're doing to find other novel agents to combine our own Telaprevir. And between both of those strategies that we're deploying, we feel we're in a really strong spot and making good solid decisions as we go.

Financial question for Ian, your SG&A increased about 30% in 2009 compared to 2008, but we are not at position to see any major commercialization activity yet in 2009. I was just wondering, what's the main reason for that 30% increase in SG&A?

Well, actually, Jason, the assumption's incorrect. As you might imagine, with a product opportunity in Hepatitis C and potentially being two years away from the market, less than two years away from the market, we are actually significantly, during 2009, investing commercially to prepare the Company, and that's what drives that increase.

A way to think about this, as we end 2009, we may be less than a year away from launching a product. So, yes, there is an investment that we are ramping up into the commercial infrastructure of this Company during 2009. I don't know whether Kurt wants to add to that, in the areas we are.

No, I think Ian gave you the important message there. We're taking calculated, but very conscious decisions to build our commercial organization, and not just commercial, really even beefing up areas of our medical affairs organization, our pricing and reimbursement organization, how we're dealing with policy makers in Washington. So it's a broad, comprehensive approach to prepare the market, prepare the product, and prepare the organization for launch.

The only thing I would add to what Ian said is, we're also taking measured and calculated steps to get ready for, I think what became the new surprise in 2008 that's hitting us in 2009, and that's the chance that we could be launching two products in the same 6 to 12-month window, if VX-770 progresses. And that's some incremental pieces of readiness that we have to take on as a Company.

Okay, thanks.

Your next question comes from Alan Carr from Needham & Company. Go ahead.

Good afternoon, everyone. Couple questions about your earlier stage programs, and want to follow up first on the VX-500, I think you brought up a couple times the dosing is something that was a particularly high bar set by Telaprevir. So does that mean that that's the particular challenge that you're running into with VX-500, as opposed to potency or safety profile? And then also, can you clarify the status of VX-985? Is that one in the clinic or is that pre-clinical?

Go ahead.

It's Kurt. We -- as it relates to VX-985, it is pre-clinical. We anticipate that will be moving into the clinic in 2009.

As it relates to your question around VX-500 and dosing, we right now feel that, I mean our planning assumptions internally are that we likely have Telaprevir as a BID drug. This decision around VX-500 was not related to dosing. It's more related to the high bar Telaprevir has set in every dimension of its profile, and what we need to see to make a significant advancement beyond that.

Okay, and then quickly around the JAK 3 program, are you going to move that into Phase 2 even if you don't have a partner, or is that something that's dependent on having a partner?

That's a really good question. We plan to have a partner on board when we make that decision. We think that's best for the development of the compound, together with whatever partner we choose. There is a lot of interest in this. We're having multiple discussions right now, so I'm hopeful that that can be taken care of by itself in the partnering discussions we're having.

Okay, and I think I understood this probably. I just want to check and make sure. I think one of the first questions was relating to your guidance for the year in terms of revenue. Is that -- the partnership revenue included some potential new deals for the year, right?

That's correct.

Okay, great. Thanks very much.

Okay.

Your next question comes from Jason Kolbert from ThinkEquity. Go ahead.

Great, thank you. I would just like to go back to the top line revenue question for a second, because you talked about the fact that the expenses associated with, and I believe you said, was it the ILLUMINATE trial or the ADVANCE trial, are hitting the revenue line, and I guess changed your reimbursement rates, because in '08, we know we had total revenues of $175 million. A substantial amount of which was reimbursements. In '09, if I include $60 million to $80 million in new revenues from new in-license programs like the JAK 3 inhibitors, than the total collaborative revenue line actually goes down, and I guess that's because expenses associated with the trial that Tibotec is running or being subtracted out of the total reimbursements. Is that the right way to think about this?

So Jason, maybe I could try and simplify it, if you don't mind.

Thank you.

It's actually -- and it is actually a lot more straightforward than that in that, broadly, the studies and activities that are being performed by Tibotec, are at their cost, but we have to refund them effectively, or fund them 50% of their costs. That funding that we provide to them goes as negative revenue, so it does reduce our revenue line. It really is just as simple as that.

Whereas in the past, if we have activities that we perform, that hits, we take that cost through our R&D line and they reimburse us 50% of our activities and that goes through our revenue line. It's really as straightforward as that.

Okay, but it's a little bit like shifting R&D expenses really out of R&D through the revenue line.

You got it. That's the simple concept, yes.

Okay, great. And another question about milestone payments. What kind of milestones should we be looking at '09 as these trials wrap up?

So in the revenue guidance we provided in 2009, there are no significant milestones. The milestones come more towards filing an approval in 2010. So, the predominant amount of revenue we're guiding to in 2009 is actually R&D cost sharing from Tibotec, but then also the amortization of our royalty from the disposition of the royalty stream last year.

As well as the original $165 million payment, which continues?

Yes.

Okay, terrific. Thank you so much.

Your next question is a follow-up question from Geoff Porges from Bernstein. Go ahead, sir.

Thank you very much. Ian, I just wanted to go back to something you said on the call first. You said it may be less than a year from launching a product at the end of 2009. Perhaps you could just clarify that.

And then, just for Freda, a follow-up question on the CF program. Could you confirm whether those three Phase 3 trials, they seem to be in quite different patient populations, are all necessary for registration or is the principle strategy the 12 and older, and the G 501 D population? Thanks.

So, no, thank you, because that deserves some clarification. Right now, we consider the registration package, the totality of the three trials. Remember, we're dealing with an ultra orphan indication here, so a very small patient population overall to deal with.

The first study, which is the 12 and older patient population certainly acts as the core of this, but in our work with the FDA, it's clear that additional data or information on the pediatric population given the nature of CF, is really important. And also to have data that supplements our overall safety data in terms of the number of patients, and then last but not least, using that last delta F5 08 study to supplement our understanding, as well as supplementing the safety data for the registration.

So it's all three, and each of them plays a different part, if you would, in providing a data in support of registration.

Okay.

And Geoff, I appreciate you keeping me honest, so from the end of 2009 and 12 month marking, yes, we're probably not quite into the launch of Telaprevir, but it would follow shortly after.

Okay, thanks.

And sir, at this time, we have no further questions.

Okay. Thanks, everyone, for joining us tonight. If you do have further questions, we're in the office and available to take your call. Bye for now.

This concludes today's presentation. You may now disconnect your lines.