福泰製藥 (VRTX) 2009 Q2 法說會逐字稿

Good afternoon. I'm your conference facilitator today. At this time, I would like to welcome everyone to the Vertex Pharmaceuticals conference call. (Operator Instructions). Mr. Partridge, are you ready to begin?

Yes.

Perfect. Thank you, very much. You may begin your conference.

Good evening. This is Michael Partridge. Welcome to Vertex's second quarter financial results conference call. Our top priority remains the late-stage development of Telaprevir while maintaining a position to commercialize Telaprevir. The first half of 2009 has been marked by steady progress towards these goals, and we see continued opportunity to build value in our business in the second half of the year. In the second quarter, we completed the Telaprevir dosing portion in our Phase III trials, an important event in this registration program. Also, in the second quarter we initiated a Phase III registration program for our lead product candidate VX-770 targeting the orphan disorder Cystic Fibrosis. Financially, we have taken steps to improve our balance sheet through an amended agreement with Mitsubishi-Tanabe which places our pro forma cash position at more than $850 million at June 30, 2009. At the same time, we reduced our 2013 convertible debt outstanding from $288 million to $144 million.

Now looking ahead to events in the second half of the year, the FBR 24 data from study C208, which is evaluating twice-daily dosing of Telaprevir, has been accepted as an oral presentation as part of the Presidential Plenary Session at ASLD on November 3. We are also conducting a multiple dose viral kinetic study with VX- 222. We are about to start a drug-drug interaction study with Telaprevir and VX 222 this quarter. These studies will support the first study that combines these drug candidates in HCV patients. The studies plan to start as early as the fourth quarter.

Following me on today's call will be prepared remarks from Matt Emmens, Ian Smith, Dr. Peter Mueller, who is joining us from Munich, Kurt Graves, and in addition, Dr. Bob Kauffmann, our Chief Medical Officer, who will join for us Q&A. I will remind you that information discussed on this conference call includes forward-looking statements, which are subject to the risks and uncertainties 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 second quarter 2009 financial press release, which can be accessed on our website.

Unless otherwise noted, all 2009 expenses and guidance discussed in this call are inclusive of stock-based compensation, executive transition expenses, restructuring expense, acquisition-related expenses, and loss from exchange of convertible debt. I'll now turn the call over to Matt.

Thanks, Michael. As you know, I joined Vertex as President in February and took the reigns as Chairman and CEO this May. I want to begin this call by telling you what I've been up to and provide some thoughts about the company's current position and how we plan to become a fully capable and profitable biopharmaceutical company.

We're focused today, as you would expect us to be, on doing everything we can to make our HCV and CF programs successful. That is executing and development, submitting the NDAs and building the commercial capability that enables us to develop these markets and establish market leadership. But we're not just launching one or two drugs. We're creating a brand-new company.

What I'm focused on, along with the management team, is putting in place the strategy and organizational structure at Vertex to make all of this happen. From my firsthand observations at our research sites, consultations with the board and discussions with the management team, I can tell you that Vertex's most important differentiating feature is innovative research, which provides opportunities to develop and commercialize products. It's how we got Telaprevir. It's how we got our Cystic Fibrosis drug candidates, and it's how we created our JAK3 inhibitor compound. The ability to discover and subsequently develop important medicines is the basis of our business.

It's also where we believe much of our future growth will continue to come from. In the future healthcare market, the most important thing is going to be to demonstrate value to payers. We will do this by focusing on leading edge science, science that can create innovative compounds that address unmet medical needs and can be clearly differentiated. We believe that today, this is the only viable way to compete successfully. We believe that science is our competitive advantage, and the investment will pay off.

I mentioned strategy. We are planning to be a profitable, highly successful, independent biopharmaceutical company with participation in multiple therapeutic areas. This requires continuous R&D investment. We are financially strong, but we need to closely manage our cash investment, both today, as we are bringing Telaprevir and our CF programs closer to market, and in the future, where we will also be focused on growing the bottom line. If we can retain rights to even more of our pipeline compounds in the future, we firmly believe that it can drive remarkable value creation for you, our shareholders.

Regarding structure, I'm working to achieve a tighter integration between the research, development, and commercial teams within Vertex to better prepare for the future. For example, I've asked Kurt, who heads commercial, and Peter, who heads R&D, to work together to define a unique structure that will allow for a more seamless transition from discovery all the way through to the markets. This is conceptually simple, but it takes work to achieve and practice, and it's very important because the payoff in terms of alignment effort is huge.

There is tension today, as there should be, between the investments that our pipeline requires, our business needs, our desire to retain rights to medicines we have created, and ensuring that we are adequately capitalized to progress these opportunities ourselves. I am working closely with Ian, as well as Peter and Kurt, to balance our opportunities with the fiscal discipline that will support strong shareholder returns in the future.

Before I turn this back to Ian, I would mention that we will see a lot of important data from Vertex over roughly the next 12 months. We will learn more about how well our CF compounds work when dosed over long periods of time and in different patient subtypes. We will see how well twice daily Telaprevir performs. We will see early indications of how well the combination of Telaprevir and VX- 222 does in knocking down the HC virus in patients and of course we will get all of the Phase III data from Telaprevir.

I realize that most investors in Vertex today focus primarily on Telaprevir and Hepatitis C. With the completion of dosing, we wait optimistically for final Phase III data. However, my job is to look to what's next. Our success will be defined not only by Telaprevir, but what opportunities we address beyond that, and we have many opportunities. Our protease inhibitor, our Cystic Fibrosis compound and other compounds that are either about to enter the clinic or are in earlier development all have the potential to change diseases, change lives, and change the trajectory of our company.

I, along with our researchers and our board, are intensely excited by the prospects we see ahead. There are many reasons that I chose to join Vertex at this time. I can tell you today that they have all been confirmed.

Ian, over to you.

Thanks, Matt. Good evening to everyone. I'm pleased with the progress we've made in 2009 financially. We completed the second quarter with $754 million of cash, cash equivalents and marketable securities. And are now adding a further $105 million to our cash position, as a result of successfully amending the 2004 agreement with Mitsubishi Tanabe, resulting in a pro forma cash position of more than $850 million as of June 30, 2009. This is a strong financial position supporting the advancement of our business.

Our internal focus has been on advancing HCV and CF registration programs, and maintaining our operational and financial flexibility. This has involved making disciplined investments, raising capital and reducing our existing convertible debt obligations, and thirdly, pursuing business development activities to raise non-dilutive capital. All of which are directed at maintaining a strong financial position to support the company through to a cash-flow positive position while managing our capital structure for shareholder return. We are executing well against these priorities, from a financial perspective this year, we are adding approximately $420 million to our balance sheet to an XT offering and a business development transaction.

From a capital structure perspective, we reduced our debt obligations by 50% and now have $144 million of outstanding 2013 convertible debt, which has a conversion price of approximately $23 and is callable in February 2010. In the second half of the year, we have additional business development activities ongoing that may further add to our 2009 year end cash position, including the monetization of our Telaprevir European milestones. We continue to progress this initiative, with several parties and may add to the cash position we already have.

Furthermore, productizing our activities could result in further cash and revenues. In view of these ongoing activities, we are reiterating our 2009 non-GAAP loss of $400 million to $435 million, and our year end cash position of approximately $700 million therefore taking a strong position into 2010. In summary, we are focused on building financial strength in our balance sheet that is positioning us nicely to continue to invest and build our business as we progress into 2010, our planned Telaprevir NDA submission year.

Now to the second quarter 2009 financial results. The numbers I will review here are important measures. However, at this stage of our business, we think the true financial measure is that of our cash position, our common shares outstanding, balanced against the future cash investment required to move the company to cash flow positive based on the products we expect to commercialize.

Now to the income statement for the quarter. The second quarter 2009 non-GAAP loss before certain charges was approximately $129 million compared to a second quarter 2008 non-GAAP loss of approximately $74 million. The increase was primarily attributable to a reduction in collaborative R&D revenues, as we received a large milestone payment in the second quarter of last year, we had no comparable payment in this year's quarter. The GAAP net loss for the second quarter of 2009 was approximately $171 million, compared to a GAAP net loss of approximately $91 million in the second quarter of 2008.

Total revenues for the second quarter of 2009 were approximately $19 million compared to $69 million for 2008. We expect the amended agreement with Mitsubishi Tanabe will contribute to quarterly revenue in the second half of the year, as a result of amortizing the $105 million payment received up front over the period of the Telaprevir development and registration in Japan. Total R&D expense was approximately $139 million compared to approximately $130 million in the second quarter of 2008. The investment continues to primarily support the development programs of HCV, Cystic Fibrosis, and new product creation from research.

Our second quarter SG&A expense was approximately $33 million compared to approximately 26 in the second quarter of 2008, an increase primarily resulting from our commercial plan, as we prepare for the launch of Telaprevir. I'll close by repeating my earlier comments, that we're focused on our cash position -- structure and the investment to support the company through being cash flow positive. At this time, it is the key measure in our business, and we anticipate entering 2010 in a strong financial position, with approximately $700 million of cash, cash equivalents and marketable securities. We may also add to this position, with further product outlicensing activities and the monetization of our European Telaprevir milestones.

Peter, over to you.

Thank you, Ian. Can you hear me?

We can.

Perfectly.

Oh, good. So we are very pleased with the progress we are making with our two key registration programs in APV and CF. In HCV, our Phase III Telaprevir registration program is advancing and we believe that the outcome of the trials will provide a best in class product profile for treatment naive and treatment failure patients. We have reached several key milestones in the registration program, including completion of the Telaprevir dosing portion in June. In our treatment knee eve trials -- all patients reached the 24-week time point in July. In the Phase III realized study in treatment failure patients, all patients have completed dosing of Telaprevir and are now beyond week 20 of the study.

We expect to have SVR 24 data from the command to eliminate in the first half of 2010 and from the realize study in mid 2010. We also think that the CMC, the chemistry, manufacturing and controls part of Telaprevir development is in great shape. We have fully integrate and cross validated supply chain in place today, which can manufacture Telaprevir to our product at commercial scale. All registration components are completed successfully and our validation components of Telaprevir are on track and aligned with our commercial launch time lines. [Mainsay] has also put in place an excellent supply chain to meet their territory needs, which also will provide a backup supply chain for us in North America.

So in summary, we are on track to submit an NDA for Telaprevir in the second half of 2010. We will have data from Phase III and we expect to have the CMC portion complete by that time. With the data we have already, we have begun to prepare the NDA documents, and we will be working closely also with Tibotec in the months ahead so that we can coordinate submissions in the US and EU next year.

I would like now to quickly update you on the status of study C208, an exploratory study being run by Tibotec, evaluating twice daily dosing of Telaprevir compared to three times daily dosing. We announced that an abstract representing the study C208 has been accepted as an oral presentation during the Presidential Plenary Session at the upcoming ASLD conference on Tuesday, November 3 in Boston. We expect that SVR 24 data from the study will be available for the presentation.

Based on the 12-week on-treatment results announced last year, our confidence has been high for the potential to further develop and pursue twice-daily dosing for Telaprevir. We will work closely with our collaborator, Tibotec, who is conducting the study and the regulatory authority to determine the right path forward for establishing this dosing regimen on the label for Telaprevir.

Turning elsewhere in our HCV portfolio, in addition to Telaprevir, we are also focused on the evolution of HCV treatment towards STAT-C combinations and specifically the combination of Telaprevir, our protease inhibitor with VX 222, our HCV polymerase inhibitor. The combination of these compounds has the potential to further improve HCV therapy and enable treatment for a much broader group of HCV patients.

Additionally, we are conducting a viral kinetic study of VX222 to evaluate the interviral activity and safety when dosed as a monotherapy. In this study, we are evaluating a broad range of doses of VX 222. We expect to complete the study in the third quarter. The next few weeks, we will plan to initiate the drug-drug interaction study with VX 222 and Telaprevir. With data from both of these trials, we expect to start the first combination study of Telaprevir and VX 222 in patients with HCV as early as the fourth quarter.

As you all know, we have also a pipeline of additional novel HCV compounds and our goal here is with our current portfolio of additional HCV compounds to conduct clinical study to identify compounds that are appropriate for further development, including combination therapy, and to demonstrate how they can be clinically and commercially differentiated from other HCV products in development. Advancement of these programs will be data-driven, and we look forward to providing an update on these programs as appropriate.

So now let's turn to our Cystic Fibrosis program. I want to start with VX-770, an oral drug candidate that targets the mutated F508del protein, which is the result of an underlying genetic defect that causes Cystic Fibrosis, as you all know, an orphan disorder. In the second quarter, we initiated the Phase III registration program for VX-770. The program consists of three separate trials, STRIVE, ENVISION, DISCOVER, all of which have been designed to evaluate the utility of VX-770 across different age groups and genotypes, including children as young as 6 years of age. In the registration program, VX-770 will be dosed as a single tablet twice daily.

STRIVE is our primary trial, evaluating 48-week dosing in patients aged 12 and older who carry the G551D mutation on at least one allele. We will be measuring FEV-1 at 24 weeks at the primary end point and at 48 weeks at the secondary end point to assess the ability of any observed response, as well as to generate additional safety data to support the NDA submission. We will also be looking for increased activity for measurement such as sweat chloride, which may provide the basis for understanding how VX-770 can change the underlying process.

The ENVISION trial, the second part, is a two-part study of VX-770 in children ages 6 to 11 who carry the G551D mutation. The selected dose of 100-milligram twice a day will be confirmed in the PK analysis in the first part of the trial and other than that, the study is very similar to the STRIVE study. If VX-770 can modify the course of this disorder, its benefits may be the greatest for young children who retain more of their airway function. We now have multiple clinical sites set up and running for our STRIVE and ENVISION trials. We expect to complete enrollment in the STRIVE trial in the first quarter of 2010. We look very much forward to providing additional upgrades as appropriate as these studies progress.

The DISCOVER trial is an exploratory trial, evaluating 16 weeks of dosing in patients aged 12 years and older who are homozygous for the F508del mutation. We are conducting this study for two primary reasons. First, to provide a fuller assessment of safety in CF patients, and secondly, to determine the potential for benefit in this population F508del is the most common CF mutation.

So now let's turn to the compound VX-809, our second compound targeting this orphan disorder. VX-809 is an investigational CFTR corrector compound It is our hope that VX-809 might be able to broadly address the unmet need in CF by targeting the F508del mutation. We are currently running a Phase II A trial of VX-809. So this trial is primarily a safety study, it is also designed to assess the potentially effective VX-809 that is has on biomarkers of CFTR function including sweat chloride and major potential different.

VX-809's potential effect on the clinical end point of lung function will also be measured. Any trend toward improvement that indicates that VX-809 could help to increase CFTR activity would be very encouraging for further development of VX-809 alone or in combination with VX-770. We have contracted in vitro study, which have shown the potential to combine VX-770 and VX-809 together. Since VX-809 is designed to allow more functioning CFTR to get to the third surface than VX-770 the potential for CFTR to work better once it gets there, this approach potentially could further increase CFTR function in a large majority of CF patients. We believe that if our in vitro data showing the potential for the combination of VX-770 and VX-809 translates into clinic, it could be positioned to enable the first evaluation of the VX-770 and VX-809 combination study in patients in the second half of 2010.

Before I close, I would like to highlight also data from our Phase I trial of our cap compound, VX-509. In this trial, VX-509 was dosed at three doses for 14 days in healthy volunteers. Our early data suggested a promising safety profile and a profound close dependence and reversable reduction in PSTAT-5, a specific biomarker of JAK3 activity. VX-509 also showed a high degree of activity for JAK3 or JAK2 in humans. This is very consistent with observations from our previous in vitro and preclinical in vivo studies. In vitro VX-509 has been shown to be greater than n 1000-fold more selective for JAK3 compared to non-JAK kinases and approximately 25- to 150-fold more selective for JAK3 compared to other JAK isotypes in cell-based assays. Taken together, this data shows the highly selective JAK3 mechanism of action. The Phase I results support the current product profile for that stage of development and also supports moving ahead into a Phase II group of concert studies in rheumatoid arthritis.

In summary, we believe that execution of our priority HCV and CF clinical programs has been very robust. By achieving critical milestones according to our set time line, we continue on track to submit our NDA for Telaprevir next year and establish a profile for VX-770 and potentially its combinations for VX-809 for Cystic Fibrosis. I will now turn the call over to Kurt.

Thank you, Peter. And good evening, everyone. Tonight I would like to make some brief remarks on our commercial preparations and business development activities and then move into our Q&A session.

We are now more than halfway through the Telaprevir Phase III registration program and commercially we are preparing for successful launch. As you know, while there are a lot of commercial preparations ongoing, the most important thing you can do to secure a successful launch is deeply understand the market and deliver a highly valued and highly differentiated advance in therapy. Our clinical and commercial teams have worked closely together to do exactly that. That is understand what it will take to succeed in the marketplace and then develop Telaprevir's profile for what we hope will be the leading ACV therapy for years to come.

Through our extensive market research with patients, providers, and payers, we are preparing to deliver a product profile that aims not only to meet market needs, but also separate us from the competition, both short and long-term. In the short-term, our data from Phase II trials suggests, one, superior SVR rates versus current therapy in both treatment naive and all treatment failure subgroups. Two, rapid viral responses, within four weeks, that predict viral cures in patients treated for only six months versus today, 12 months of therapy. Three, twice-daily dosing potential, which we'll learn more about at ASLD. And four, a well documented safety and tolerability profile for a true triple therapy.

In the midterm, we believe a major advance beyond what Telaprevir is achieving as a protease inhibitor is based on the potential of combining two direct-acting antivirals, or what we call novel STAT-C regimens. With the right combination of two or three drugs, such as the protease like Telaprevir, and a polymerase, like our VX-222, we believe there's a chance to produce a significantly improved regimen, and we are currently well positioned to lead in that evolution in HCV treatment, should it happen.

In summary for HCV, as we move to the final stages of our registration program and prepare to file and launch Telaprevir, we're taking the key commercial steps needed to differentiate Telaprevir during a launch period, while also focusing on the strategy to differentiate Telaprevir in the mid and long-term as well. We look forward to sharing upcoming clinical data around Telaprevir, including twice-daily dosing data at ASLD and then data from the first STAT-C proof of concept trials, which we are looking forward to initiate as early as the end of this year, with results as early as the first half of 2010. As Matt noted earlier, most investors look at Vertex through an HCV lens, and there are clearly good reasons to do so, given our leading STAT-C portfolio and the HCV market opportunity.

But I would urge you to take a deeper look at our CF program, particularly our lead CF product candidate, VX-770. It's moving quickly and while still early from the perspective of how much data we have, it could prove to be a real source of value for Vertex in the not too distant future. Because we are targeting a devastating orphan disorder, with promising early data, the program has moved quickly into Phase III, and we are putting teams in place to prepare for a potential approval and launch as a monotherapy and also in potential combination with our second CF investigational compound, VX-809.

Now, a few comments on our recent business development announcement. As you know, we have been negotiating an amendment to our original Telaprevir agreement with Mitsubishi Tanabe in Japan and the Far East. The previous agreement signed in 2004 when Telaprevir was still preclinical contemplated that Mitsubishi would focus on evaluation of Telaprevir as a monotherapy through Phase II development. Given the successful progression of Telaprevir in combination therapy that's happened since, the amended agreement now covers the development of Telaprevir in combination with PEG-interferon and Ribavirin in Mitsubishi's territory.

The key terms are as follows. We will receive a payment of $105 million following signing and up to an additional $65 million during the approval and initial launch period. This is in lieu of potential royalties under the original agreement that were calculated as a capped percentage of net sales minus our costs of supply to Mitsubishi. In addition, we will be transferring manufacturing rights to Mitsubishi Tanabe and they will be responsible for their own supply chain by the launch of their product in Japan. In summary, we believe the amendment captures value today with additional value potential based on early commercial success.

As you can see, our business development activities are playing a central role to providing capital to fund our business. With Mitsubishi now completed, we continue multiple business development opportunities, including the J & J milestone monetization and our outlicensing of our JAK3 inhibitor, VX-509 and VX-467. We will make choices on whether to pursue these opportunities, based on the value we want to capture, our assessment of the future value of these assets relative to our current cash needs, and the financial strength of our business.

In summary, in the first half of the year, we are very pleased with the advancements in our lead programs in HCV and CF. And the commercial preparation for these markets, as well as the key business development activities that continue to provide value and fund our business in the near term. Michael, back to you.

Thanks, Kurt. We would now like to open up the call to your questions.

(Operator Instructions). Your first question comes from the line of Brian Abrahams with Oppenheimer and Company. Please go ahead.

Hi. Thanks very much for taking my questions and congratulations on continued progress. Just wondering, how important will the SVR data from C208 be --

Excuse me, Ms. Pike?

Hello? Can you hear me? It's Brian Abrahams.

Had a little bit of interference, but go ahead.

The question on C208, wondering how important the SCR data is going to be in shaping your decision as to how to move forward with twice-daily dose Telaprevir, what some of the potential paths might be for exploring that further. Have you given any thought to whether you might report the SVR data from that study as a top line prior to the presentation at ASLD.

Hi, Brian. Thanks for the question. Given it's a disclosure question, I'll take it. The data, we are still collecting the data from the C208 study the abstract was accepted for oral presentation in the Plenary Session at ASLD. We will be preserving that data for ASLD disclosure.

Okay, and then just a real quick question on 222. Wondering how consistent has the viral kinetic and safety data been and the dose ranging study you're conducting relative to the original study that was conducted by ViroChem Pharma.

This is Bob Kauffmann. I'll try to answer that one. The study's ongoing at this point and we're continuing to evaluate the data. There's several dose groups being done and we're still in the midst of it. So it's really premature to talk about what's happening there.

When might we see that data?

That hasn't been decided although this point. Depends on when the study finishes, and we normally reserve those kind of disclosures to a medical conference we'll be looking for a conference to present those data at a later time.

Might be submitted at a late breaker at SLB?

The key information from that data is to inform the STAT-C combination study that we expect to start towards the end of this year. If we're starting a STAT-C combination study, you should expect to see some disclosure around that dose of sending study around towards end of this year.

Terrific. That's very helpful. Thanks very much for taking the questions.

Your next question comes from the line of Geoff Porges with Bernstein. Your line is open.

Thanks for taking the question. Matt, welcome to the Vertex investor community. Before I ask but your new job, would you mind if I ask you a few jobs about your old job and company? I'm just kidding.

On the JAK3 program, though, perhaps Peter, if he's still on the line, could let us know, was there -- any dose limiting toxicity seen in Phase I, were there any hematological or biochemical changes seen in that Phase I. What dose did you see? Could you comment a little bit, Peter, about what sort of Phase II you're contemplating, kind of design, and, Ian, maybe you could just give us the sense of what the cost might be if you were to embark on that yourselves. Thanks.

Geoff, as Michael mentioned earlier in the call, Peter's actually in Germany. The way we're arranging it, Bob Kauffmann will take most of the clinical questions, so Bob can ably answer that question and then I'll follow up.

Great.

The studies that were done, as you know are single and multiple dose, dose ranging in healthy volunteers with a very prominent biomarker component. I would say that in the dose range that we studied, the compound was very well tolerated. We really didn't observe any, any significant toxicities that would limit further development of the drug. I can't comment on the specific, specifics of the safety profile, but I will just say that there was nothing there that certainly would prevent us from going forward in any of the indications that we contemplate at this point.

And Geoff, to your question on costs, an interesting one, because cost of running the kind of study we're thinking about could be around $15 million spread over the period of running that study. The challenge for us is as we look around collaboration and collecting value from outlicensing the drug versus the cost to run the study, and then we measure that against the broad financial profile of the company. But it would be about $15 million to run a proof of concept study.

Perfect. Thanks very much, Ian.

Your next question comes from the line of Geoff Meacham with JPMorgan. Your line is open.

Geoff, are you there?

Can you hear me?

Yes.

Yes, okay. So question for you on 770, based on what you know, what you guys know today, is there any reason to think that you could see lower FEV-1 or maybe a different AE profile at 48 weeks versus the 24-week study?

This is Bob. There's no reason to think that. Most compounds and most drugs that are tolerated at 24 weeks usually maintain that tolerability profile. As you know, we're early in the program, we don't have a large amount of long term data, so we'll have to see, but at this point, we have no reason to think there would be any drop-off in tolerability over that timeframe.

Just thinking commercially, how long would you envision the duration of therapy potentially to be?

We believe it would be life-long.

Okay. And then follow-up for you on the HCV side, for 222, can you talk about how many doses you're actually testing and maybe any preliminary cut about maybe the design of the combo trial with Telaprevir.

We're examining a number of doses of 222 and I think when we get ready to report the results we can be more forthcoming about both the doses that we've used and what we've seen. I'm sorry, your second part of your question?

Just anything you can tell us how you're at least thinking about the initial design of the combo trial of 222 with Telaprevir.

Yes. I think that will depend a little bit on what we see with the data from 222. We certainly envision a combination sort of dose ranging trial. The Telaprevir dose that we're using currently clinically is likely to be fixed and we'll probably vary the 222 dose around it. How many doses we would study I think very much depends on how much we see and we're not quite there yet.

Got you. Okay, thanks.

Your next question comes from the line of Ted Tenthoff with Piper Jaffray. Your line is over.

Thank you very much. I applaud your efforts to pull forward the cash to close the gap towards Telaprevir launch. Can you give us any update on how the possible sale of the European milestones are going?

So we're in the midst of that process, Ted. We did disclose in a we initiated the process a couple weeks ago, really from a point of -- if we're talking about such a significant transaction from a Reg FD perspective, we did have to let the investor base know as well. But it's still ongoing. We expect to conclude the process shortly. At this point, I don't want to talk about value.

There has been much debate, as I'm sure many that on the line today, much debate as what the right value is. What I would say, though, is the way we measure the value, which is, we look at the capital it provides this business today, and we're adding that capital to the business today, it'll allow us to evaluate the R&D position of our business. We'll evaluate it in that sense. As you can tell, right now, the business is going along nicely. We want to defer any need to access the Capital Markets and therefore we're bringing cash to the business development activities as Kurt mentioned, and we're going to take a close look at the value from the milestones to see whether it can continue to help us keep certain assets within the business and we'll make that choice in the future.

That's very helpful. And just as a quick followup, does this number and potential business development opportunity get you to the point where you could get to launch without raising additional capital, or how does that all factor out in your view?

So step by step, appreciate the focus on the capital structure, but it's step by step right now. And on the call, I have already provided guidance that with the completed transaction with Mitsubishi, we should end the year in excess of $700 million in cash. The way that I first want to measure is to say how much capital can we raise from a milestone monetization that would add to that position. I think when we add that cash onto the ending position at the end of the year, I think we'll be in better position to answer the question as that funded through to cash flow positive. So step by step, and right now it's about taking a strong balance sheet into 2010 and we'll evaluate the, let's say the value of the transaction versus the value of the breadth of the financial strength of the business as we go into 2010.

Great, excellent. Good luck.

Your next question comes from the line of Phil Nadeau with Cowen and Company. Your line is open.

Good afternoon. Thanks for taking my questions. My first one's on manufacturing. You mentioned in the prepared remarks that you have a supply chain up and running. And as I'm sure you're aware, there's some very aggressive analyst estimates out there for the launch of Telaprevir that include multibillion dollars of sales within the first couple years of launch. What type of manufacturing capacity will you have at the time of launch and is there any risk that you wouldn't be able to supply the market if some of the more optimistic projections come true?

So I'll take the initial part of that question and maybe, Peter will add to it. But broadly, we have our own internal forecasts, and as we work closely with our suppliers, we're building to ensure that we're in adequate position to support that demand. The way that we're building the supply chain, though, is also to provide buffer in terms of whether it's an upside or a downside case compared to our internal forecasting. What I mean by that is the way that Peter, and Peter is responsible for the supply chain, but the way Peter and the team of building the supply chain is to build and stockpile the raw material. Why that is important is the raw material actually has a very long shelf life and it's also important because we can convert raw material to finished product very quickly. What it allows you to do is to build buffer in your supply and then access the raw material based on the demand when you get closer to the time. But we'll be well positioned when we come to launch.

Okay, and on the raw materials side, is there any raw material that's particularly hard to get, anything that we should pay attention to as we kind of assess your ability to build inventory?

Peter and his team have put a great supply chain in place that was fully outsourced. We've avoided the sometimes massive investment that's required to build your own manufacturing facilities. It starts in China, comes through Europe, and ends up in the US. And we're in very good shape and we have access and been supplied all of the process that we require.

You and maybe one comment in addition to all of that, you are a good manufacturing guy now. If we have each and every intermediate step, raw materials, and other -- that have to go into the formulations, primary suppliers and backup suppliers, there is no shortage in supply anticipated as we go forward.

Okay, and--

All of them are validated and basically have FDA consideration.

Okay. Maybe a question for Kurt along the lines of the launch. Seems like there's increasing controversy building on how much capacity there is within the medical community for retreating or bringing new patients back to go on Telaprevir. I'm sure you've done a lot of work along those lines. Could you share some of that with us? How many more patients could be treated upon the launch of Telaprevir than are treated today?

Yes, it's a good question. Thanks for asking it. We've gotten this from a number of people over the last few months. And I think there's a couple ways I can try and give you a simple answer to it. Number one is the number of patients that are getting treated on average today this year and going forward is probably in the range of 60 to 70,000 HCV patients. You should contrast that to the peak patient treatment years of mid 2000s where patients were getting treated up to 140 to 150,000 patients per year.

So we already know one simple thing. If you double the current market capacity, that's already been done in the past. The other thing we've done in an office by office or practice by practice level is try to project how many patients are currently in that practice and how many new patients can come in. And we've looked at the highest volume prescribing practices to understand what they do to manage capacity. And the big difference we found there is that the number of nurses or physicians assistants in that practice is what really enables more volume in terms of numbers of patients treated.

And we hear from all the people that we've done extensive research with that there's not going to be a capacity issue. Maybe with the very top, top KOLs they might need to add one or two more NPs and PAs if things really take off like gang busters in the launch. But we don't see any major barriers or capacity issues in all the work that we've done.

Okay, great. And just one -- contraction study, have you done preclinical drug interaction studies to see if there's any preliminary signs of danger and if so, would it have been in the results?

We haven't done those studies. This is Bob. We haven't done those studies. We just based on our assessment on the metabolism of the two drugs, which is how one normally does it. Animal DDI studies don't help that much. We really feel quite confidence our choice of the doses and the design of that trial based on the metabolism data.

Okay, great.

Just add on to what Bob said there, the metabolism profiles of both of these drugs are very different. So we're not going into this trial really concerned about drug drug interactions. We're just doing it to be extra safe. Based on the metabolism profiles of 222 and Telaprevir, we wouldn't expect to see drug-drug interactions.

Okay, thank you.

Your next question comes from the line of Maged Shenouda with UBS. Your line is open.

Thanks. My questions have been asked. Thank you.

Your next question comes from the line of Yaron Werber from Citi. Your line is open.

Thank you for taking my question. Ian, just a question for you, the JAK3 compound could be pretty interesting and it sounds like you're obviously building a pretty big cash position and I mean we could have even gotten to profitability without raising further cash, assuming, let's say, that the R&D spend next year -- the total expenses to remain pretty flattish from this year, i.e. R&D comes down -- is there a scenario by which you actually keep the JAK3 and develop it yourself, assuming you can monetize the European royalties and the milestones, and then second question, just help us understand, the $105 million payment that you'll get from Mitsubishi in Q3, how do you -- do you amortize it through the revenue line, or is it a one-time sale? Thanks.

Thank you, Ron, for the question. Let me first deal with the easy question, which is the amortization of revenue. So that's just a GAAP accounting answer, which is we amortize that upfront payment over a period of continued involvement with our partner. So that will be over a number of years. As far as the question of could we keep the JaK compound as opposed to outlicensing, it's hard. Matt came into the business and a few months ago and his first question to us was, this is a great compound. Why are you guys outlicensing it. And then Kurt's out there and he's generating great value with the discussions that we have with the pharma company. And then you've got the third prong, which is I'm out there seeing whether we want to monetize milestones.

So what we've got to do is we've got to pull those components together. There's great value in R&D of this kind of compound with this kind of profile. We're very excited about it. Kurt can generate value based off that. And I'm trying to see whether we can create kind of a capital structure and a cash position that allows us actually to get everybody happy, which is Matt gets to keep the drug and Kurt actually has a reason to say, to say no from an outlicensing, and I get to say we have adequate capital to run this business and take on those R&D opportunities, which is what we're in business for.

So is there a scenario that we keep the JAK compound? Yes. I think there is. We have to look into the future, though, and continue down the track that we are doing. And see how much capital we can raise from the milestones and see what the value could be from an outlicensing of JAK and I think we're going to get some good visibility on that, in the very near future. But clearly we're in business to create drugs and the JAK compound is a very exciting compound.

Your next question comes from the line of Michael Aberman with Credit Suisse. Your line is open.

Hi, guys. Thanks for taking the question. I suppose I have a similar question on the amortization, but it's more on the guidance. Obviously the net income in the first half was much higher than half of what your guidance is. And I'm wondering if you can help us understand how we should be thinking about your potential next milestone, let's say an upfront payment on JAK3, for example, as part of included in that guidance. And so is it a revenue driver that brings down that net loss per quarter in the second half? Or should we be thinking about it more on the expense side?

So great question, thanks, Michael. So the guidance that we provided on the call, I'll just state that again, which is a pro forma net loss, or a non-GAAP net loss, sorry, between 400 and 435, and specifically it is depending on doing future outlicensing activities. And the reason for that is because if we outlicense a compound such as JAK, and we provide worldwide rights to a partner, because we don't have continued involvement other than to collect in the future, you actually get to record all of that as revenue. So clearly that would have a big impact on our revenue line, very different than the Mitsubishi program, which you have to spread because of our continued involvement in rights that we own of Telaprevir.

So an outlicensing program around the JAK compound would be a significant contribution and also as we provide the guidance, the guidance is pending outlicensing activities. The interesting thing of all of this is when you look at the milestones, if we choose to monetize milestones, it would provide cash flow to our business, but that doesn't hit our P&L, so the guidance, to be clear, is 400 to 435, subject to future outlicensing activities, and the year end cash position is approximately $700 million, and if we do further business development activities such as outlicensing, or the monetization of milestones, we should be above $700 million. We would add to that position.

And if I can also follow up on the JAK3, does that -- what about keeping some rights? I mean you obviously have US rights. You've retained US rights for Telaprevir. Are you thinking at all of worldwide deal for JAK3, or might you try to, again, maintain some, some rights to future development for JAK3? And does that change ow you would amortize a deal?

This is Kurt. I'll make a couple comments on this just to pick up on what Ian was saying. As it relates to a potential partnership around JAK, what we would be looking for and any collaboration is a really qualified company that is a potential worldwide collaboration. Obviously that's the way to best achieve the maximum value for the asset. And all the parties we've been talking about are global players. Many of them with deep category experience and drug development knowledge in this area. As you can tell from what Ian said and what Matt said earlier, it's a very interesting, ongoing debate in the business because we need to maintain our strong financial position and Ian's very clear about that.

But we see great value in the JAK compound. And I would just like to add that eventually we'll probably need to have a partner in JAK. The question is on what exact point in time and what kinds of terms? But once we get to -- move into full development, this is a program that could have up to six or seven different indications. And while we're doing HCV and CF, we're going to need a partner to move fast enough in parallel and multiple indications to really realize the maximum value of this. What we're doing internally right now is figuring out the best time to do this deal, with the right partner and on the right terms. And that's where we're at right now.

There's high interest in the asset. I think our discussions with partners is only bold enough on how attractive this asset is, once we saw Pfizer's efficacy data and when you look at our Phase I package, we have a Phase II asset that could really be differentiated. And we want to make sure we select the right partner, if and when we do one, and that we do it on terms that maximize the value to us. Your last question was would we potentially keep some rights to that, or territory rights? It's certainly one of the things on our mind and one of the things we're discussing with some of the partners.

Before I get back in the queue, if I could just -- I hope this wasn't asked already, but in terms of the BID, can you help us understand, sounds like you're very optimistic about the potential there. I'm wondering, have you had discussions with the FDA, or how confident would you feel about a pathway -- how quickly after launch can you get BID either, A, on the label, or B, as an option for physicians? And what do you think needs to get done after this trial?

It's Kurt, and it's a good question. Obviously from a commercial perspective, we want to get BID on the label as soon as we can and that's clearly our goal. We're still going to have to have discussions with both US and Tibotec will be having discussions with European regulatory authorities about the best way to do that. There are a few different scenarios where we will be discussing with health authorities about exactly how we can do that. The worst case scenario is that we have to do a Phase III trial, non-inferiority type design, but that's the worst case, the longest timeframe for us to do that, which will be within a couple years of probably launch. But there are other scenarios and options that we've developed to have those discussions with health authorities and we're just not all the way through those yet, so we'll keep you updated as those discussions progress.

And I'll get back in the queue. I appreciate the questions. Thanks.

Thank you.

Your next question comes from the line of Liisa Bayko with JMP Securities. Your line is open.

Just one quick question. As we look to next year and your commercial ramp, can you talk about maybe when you'll start to build your commercial infrastructure in terms of bringing salespeople on? Will it be prior to launch, or are you going to wait until you're actually approved and ready to launch before bringing them on? How should we think about the build for next year? Thanks.

Liisa, it's Kurt. Good question. In terms of ramp, since this is obviously a very important launch for us and our first launch as a company, one of the things that you want to make sure you do when you launch a drug is have some relationship with key customers prior to the day that the drug is actually approved and you show up on their doorway. How long that is before launch is a discussion we're having intermittently, but what I could guide you on is that we will be looking to establish a relationship with our most important customers in advance of that launch period and subject to all the other financial comments Ian made, we need to do that in a way that makes sense financially for the business.

Okay. That's helpful. Thank you.

Your next question comes from the line of Tom Russo with Robert W Baird company. Your line is open.

Most of my big picture strategic questions have been asked. Just returning to 222, in that trial, is there also a part B looking at triple combo? And if so, how many weeks would triple combo be studied? And when might we see data from that?

So it's a good question that you're asking, but let me try and back up a little bit. What we're doing right now is we're identifying the best doses to take forward in a STAT-C combination trial. When we identify those doses, and hopefully in the third quarter of this year and move into our first combination trials, our goal at a high level, if I can capture it for you that way, is to start to identify dual and triple therapy regimens. That is the goal of the next phase of our proof of concept work when we first start our STAT-C combination trials and it will be regimens that do explore potentially a dual therapy of Telaprevir and 222 alone. And the two triple therapy regimens, 222, Telaprevir and Ribavirin , and/or 222, Telaprevir and

Okay, and, Kurt, I think I ask you this every couple of quarters, but since you've been out doing more market research, what is the current thinking on pricing? And I know, you look at the cost per cure. Is that at this point in the effort, is it focused more on naives, or are you talking to payers about cost per cure and failures? Can you give us a flavor for where that stands?

Yes, we're, A, doing a lot of market research. But to answer your question directly, we're looking at the value proposition of the drug in the context of what Telaprevir can do in terms of curing a lot more patients than what the healthcare system is paying now or will pay in the future. So we're doing a lot of health economics and outcomes research right now to establish the burden of this disease to payers. You might want to look at a study we just put out recently called the Millman Report. That will give you a perspective of how we're looking at it from an outcomes and value-base perspective. I would say that the cost per cure analysis, this is only one of the points of analysis that we'll talk to payers about, we'll also talk about the burden to the broader healthcare system when establishing our value proposition and ultimately then setting our price. Thanks for the question.

Thanks.

Your next question comes from the line of Jason Kolbert with ThinkEquity. Your line is open.

Hi, I same question for Kurt, just a little different spin. Given the burden that new STAT-C therapies are likely to place on the government and private insurers, what negotiations, what plans are in place in advance in terms of strategies to understand what reimbursement might look like?

So the biggest thing before we go out and talk to payers, which medical and health economic experts can do and through various publications that we plan between now and the period of launch are really focused on what I was saying earlier. To educate payers on what the current cost of the healthcare system right now are of HCV patients, which are pretty sizable and significant. But more importantly, we're doing a lot of modeling to identify the burden of this disease and the cost to payers, if they didn't intervene with a higher curative therapy like Telaprevir and Interferon and Ribavirin because this disease is now where patients have had the disease for 25, up to 30 years for some of them, the costs are going to exponentially increase over the next decade. That education is the most important thing that we can be doing before we then go out and talk to them close to launch, what our price is, and how reimbursement will happen.

So can I ask you a little bit of a different twist on the same question, which is assuming that VCH-222 and a combination adds value, it increases SVR, shortens duration of therapy, but in terms of costs can you double the cost for an incremental increase in SVR if, a year or two years after TVR launches you've got a combination product?

That's a great question and one we spend a lot of time speculating on and planning scenarios around internally right now. I think one of the key things it comes down to going back to the earlier questions on our trial design is will Telaprevir and 222, assuming success, will it be a dual regimen, where we get rid of interferon and ribavirin. In that scenario, I think it will be a great value proposition and give us a lot of pricing leverage because right now there's a sizable piece of the market that can't even take and won't take interferon. Depending on what our regimen looks like, I think there's a lot of value for an oral or even a triple therapy STAT-C combination regimen. So we're not too worried about having the pricing leverage if we get cure rates up into the mid-80s, high 80s, I think you've got a great proposition. If you get rid of interferon and ribavirin, you've got an awesome value proposition to the healthcare system.

Yes, that's the holy grail in Hep C, that's for sure. Last question would be, do you have any idea what you think it will take in terms of a head count and sales reps to reach the US market?

In terms of sales reps, which are, one component of your commercial model, there's other customers we have to deal with, too, but if you just take it down to a sales rep view of the commercial model, it's in the range of 100 to 150. It's very, very small. This is a very targeted market. You're talking about 4000 physicians and 2000 to 2500 group practices. So it's, it's very concentrated and given the low marketing and sales investment versus a lot of other diseases and the price we can leverage on this, it's a very attractive business for us.

Okay. Thank you very much. Very exciting time, particularly for HCV patients.

Thanks.

Your next question comes from the line of David Bu with Goldman Sachs. Your line is open.

Thank you for taking the question. I was wondering if you could talk CF actually. So first, on the patients and the trials that you have going on, do you -- is this -- is this a disease that you actually need to get at the patients before there's longer term damage or fibrosis or anything else in the lung, and can you hit some of the older or more severe patients with these compounds?

This is Bob. I'll answer that question. In the data we've presented so far, those are in patients who already have a substantial amount of lung damage and we've been able to show benefit in terms of FEV-1 in the short-term and that's obviously what we're attempting to confirm in the pivotal program. But as you can imagine, you would likely gain greater benefit by treating patients before they develop significant lung damage. And our program is really designed to kind of march down the age range. We're down to 6-year-olds in our current studies. The PK data, safety data we developed there will allow us to get down into, we hope infancy and the ultimate goal is to begin to treat patients as early as possible. So we certainly agree with you that the benefit may well be greater in that group. We'll obviously to see what happens, but we're pretty optimistic that we can really make a difference in the natural history of the disease by treating patients that early.

And with regard to the, to that question, is there any difference between the corrector or potentiator, would you anticipate there to be any difference between the corrector and the potentiator?

I guess our assumption, which is logical, is that improving the CFTR function is what results in all the other benefits, as long as the corrector and potentiator improved CFTR function we would expect the same benefits to accrue. So I think that's really what the basis for that program will be. But that's what our expectation is. I think any improvement in CFTR function is going to translate into clinical benefit.

Great. And then finally, probably getting, getting ahead of ourselves a little bit, but in terms of sort of the commercial landscape, I was wondering if, again, it seems like this would be a pretty concentrated market and I was wondering if you could sort of talk about the, you know, sort of the physicians and the patients and what the market dynamics look like.

This is Kurt. Obviously in an orphan disorder and from a concentration point of view, it's one of the most concentrated markets I've seen. You're talking both US and Europe having to have a sales force of no more than 40 to 50 reps to cover the offices. So it's a market where from a patient point of view, there's not a lot of market development activity, at least in the developed world. European countries and the US, diagnosis is done very well and upwards of 85 to 90% of patients are diagnosed in the system, followed very closely by their prescribers, so you're not doing a lot of market development, market expansion activities. A lot different from, say, HCV where a lot of the market still has to be diagnosed and developed.

All right, thank you.

Your next question comes from the line of Terence Flynn with Lazard Capital Markets. Your line is open.

Hi. Thanks for taking the question. Just on the monetization of the Telaprevir EU milestones, I was wondering if you guys approached J&J first and what they might have said about any potential deal.

Thanks for the question. We considered all possible avenues and we continue to consider all possible avenues. As we've looked at the milestone -- sorry, the monetization of these milestones, the milestones that relate to the filing and launch in Europe reach out as far as 2012. We looked at this as a financial transaction and if we can capture value from whichever channel that is, we will maximize that value.

Okay, and then just a second question, I know you guys will have someone-year durability data on SVR from the proof 3 trial. Just wondering, looking at the historical literature for PEG-ribavirin treatment in treatment-experienced patients, what's the percentage of patients that will have I guess a late relapse in I guess the different subsets of treatment-experienced patients, can you guys give me a sense of just historical data there for PEG-riba? Thanks.

This is Bob. I'm not aware of any published or even anecdotal data on the various subgroups of treatment-experienced patients, this is just an area that's really expanded a lot with the development of STAT-C combination treatments with PEG and ribavirin. There's nothing to say. We do know that for naive patients, not sure it would be really any different for treatment-experienced patients, but the rate of relapse beyond week 24 is extremely low, probably in the 1% per year level and many of those may actually be reinfections as opposed to relapses and in many cases they have been proven to be reinfections, so it's extremely small. We wouldn't expect it to be any higher.

Okay, thanks a lot.

Your next question comes from the line of Ian Somaiya with Thomas Weisel. Your line is open.

Thanks. I apologize if you've already answered this question because I jumped on a little late. But you've been fairly clear on the timing of the Phase III data for Telaprevir. I was just hoping if you could walk us through a time course of either actions or events to help culminate the actual regulatory filing for Telaprevir. And then I just had one follow-up question.

This is Bob. I guess I can speak to that. Our time line is second half of 2010 and we'll be analyzing data and putting summaries together and all of that during the time between the time we have the data and the first half of 2010, mid-2010 till the second half.

I was maybe hoping--

Not much else to say.

I was hoping for more specifics on when do you anticipate putting together a manufacturing portion submission or what's already been done, what's rate limiting step, is it simply the clinical section that's, that you're waiting on to be able to file the application?

I mean normally, clinical is on the rate limiting step to filing and that will be the case here as well. There's certainly summaries that can be written or already being written. For example, the non-clinical summaries, some of the manufacturing summaries and clinical pharmacology pieces are already in process. Those will expand as we get the additional data and in reality, though, as you're aware, the largest he bit of the data that really goes into the filing will come out of the Phase III program, which is of course the last thing we'll get. We are certainly in advance writing everything that we possibly can.

Just as the one follow-up, one question was on the PROVE 3 , you submitted the data from the trials at the FDA. Just curious, what the intended submission was or the FDA requested it, just trying to get a better understanding of

Bob, again. We inform the FDA of all key data in the program as it comes in to make them aware of what we're seeing, both on the safety and the efficacy side. Other than that, I really can't comment any further on the responses, but we certainly sent it in.

Okay, thank you.

Your last question comes from the line of Geoff Porges with Bernstein. Your line is open.

Thank you very much for giving me a chance for follow-up. On the VX-770, Bob, perhaps you could give us a sense of how long you think the DISCOVER trial will take to enroll. Is it possible you'll have the result for that study before you have the results from the other Phase IIIs. Just trying to get a sense of when we might get a real glimpse of either the breadth or the real utility of 770 from one of these longer trials.

We're sequencing the start of the three trials that we've been talking about. In that population, obviously it's a little bit larger population, but given the way these are being sequenced, I would -- we don't have really firm dates yet because we're still early in the enrollment period. But I anticipate that all of the data will come in at around the same time, perhaps a little shorter for the trial you mentioned just because the treatment duration is a little bit less. As to what we would disclose about that, I think we would have to do that later as we get closer to when that might happen.

Great. When do you think that might be, then? When does that classify in your mind all of the data?

I think it would be best to put off the answer to that question until we actually get some amount of enrollment under our belts and we get a better sense of how it's going.

Okay.

I'm sure we'll give you some information about that at a later time.

Geoff, this is Kurt, too. Just to complement what Bob said, because your core question was around the breadth and clinical utility of 770. You should know that there's a registration program that we always talk to you about with the study that were outlined in our press release, but we also will do other non-registration work to explore the clinical utility of this drug probably before launch and other mutations. So the data that will come out on 770 is, yes, going to come from registration programs, but there could be other proof of concept trials and other mutations that will come out prior to launch as well, because we know the medical community and certain parents and patients with CF will want to know what the breadth of the clinical utility of 770 is and we want to be in a position to provide as much information about that when we launch the product as possible.

Thanks very much.

Thank you. This concludes the Q&A portion for tonight's conference call. Michael Partridge, did you have any final remarks?

Yes. Thanks, everybody, for tuning in tonight. If you tried to get into the queue and were unsuccessful or is it you have still additional questions, I want to say that Ian, Kurt, and Bob, and the Investor Relations team will be in our offices tonight and available to take your questions. Thanks very much, again, for joining us. Have a good evening.

This concludes today's conference. You may now disconnect.