Analyst Conference Summary

Biotechnology

conference date: May 1, 2014 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2014 (first quarter, Q1, 2014)

Forward-looking statements

Overview: While the pipeline is promising, sales of current products have plunged y/y. Revenue guidance for 2014 and operating expense for 2014 both revised downward.

Basic data (GAAP):

Revenue was $118.5 million, down 66% sequentially from $351.2 million, and down 64% from $328.4 million in the year-earlier quarter.

Net income was negative $232.5 million, way down sequentially from $44.3 million, but improved from negative $308.0 million year-earlier.

Earnings Per Share (EPS) were negative $1.00, down sequentially from $0.19, and improved from negative $1.43 year-earlier.

Guidance:

Changed full year 2014 financial guidance. Kalydeco revenues are expected between $470 and $500 million. Total non-GAAP revenue expected between $520 and $550 million. Non-GAAP operating expenses expected between $890 and $930 million.

Conference Highlights:

Vertex has decided "to end further investment in hepatitis C research and development activities." However, Vertex hopes to license out its hepatitis therapy. This follows Incivek for Hepatitis C plunging to revenues of $3.9 million in the quarter.

The focus going forward will be on therapies for cystic fibrosis (CF). Vertex will continue to invest in research and development. Maintaining financial strength is a priority.

Product revenue was $103.5 million, royalties $10.7 million, and collaboration revenue $4.3 million.

Vertex's broader goal is treating the vast majority of people suffering from cystic fibrosis (CF). Actions to be taken in 2014, if successful, should provide returns in 2015 and beyond.

Kalydeco (ivacaftor) for cystic fibrosis label has been expanded. Today marks the start of CF awareness month. Believes Kalydeco could achieve $1 billion to $1.5 billion in annual revenue if additional populations (marketed indications, geographic expansion, and label expansion.) can be successfully added. In February began treating patients with 8 additional gating mutations. Applying to the FDA to adding R117H mutation patients could happen in mid 2014, despite missing primary endpoint in trial.

U.S. sales of Kalydeco were $56 million, international $44 million.

Kalydeco revenues are expected to grow through 2014 based on label expansion and geographic expansion. Believes about 150 patients in the U.S. are covered by the label expansion, and about 250 in the EU.

Non-GAAP results: net income negative $151 million , down sequentially from negative 128.4 million. EPS negative $0.65, down sequentially from negative $0.56.

VX-661 twelve-week Phase II study is was initiated in the second quarter. A VX-661 plus Kalydeco 28-day Phase II study showed statistical significance in people with the F508del mutation and the G551D mutation who were already taking Kalydeco, and the combo was well tolerated (but the study had only 18 patients). VX-661 has been granted orphan drug designation by the FDA.

The Phase IIb study of VX-509, a JAK3 inhibitor for rheumatoid arthritis met its primary endpoints in Q4, so Vertex is pursuing collaboration agreements to further global development.

VX-809 (lumacaftor) plus ivacaftor in two Phase 3 dosing studies is complete with data expected in mid-2014 and regulatory filings in the second half. This combination could address 28,000 patients.

See also the Vertex Pharmaceuticals Pipeline page.

Cash and equivalents balance ended at $1.32 billion, down about $150 million sequentially from $1.47 billion. No debt.

Cost of revenue was $8.6 million. Royalty expense was $6.9 million. Research and development expense was $239.0 million. Sales, general and administrative expenses were $74.2 million. Restructuring expense was $6.2 million. Total costs and expenses were $334.8 million, leaving operating profit at negative $216.4 million. Other income was $0.5 million. Income tax benefit $0.8 million. None of the loss was attributed to noncontrolling interests.

Non-GAAP operating expense is being reduced going forward. Believes can exit 2014 with a strong balance sheet.

Q&A:

661 + Kalydeco study placebo arm? The placebo arm was just 4 patients, for blinding. It was not really intended as a controlled trial as a placebo group.

Does the 661 data indicate a need for a second corrector? Our view of 661 was enhanced by this data. We can correct a single dose, including with patients who had been stable on Kalydeco. We are still thinking of 661 as part of a triple regimen.

G551D patients in trial, are they typical of such patients? Severity was a little bit lower than we have seen in some studies, but well within the normal range.

Larger study for heterozygous patients 661 + Kalydeco, why not consider? When we get all the results in we will consider what the right path forward is.

CF program, acquiring complementary assets? We want to continue our CF leadership. We also survey all the other therapies that are available.

Placebo patients, any statement about how they fared? Again, 4 patients, and they had modest shifting around, typical of the disease. So less changes than the treated patients.

We always look at the entirety of the results of the data, to see if there is really statistical significance. We saw an effect of 661 on cells in the lab. We saw a statistically significant change even just with 14 patients in the trial. There was a consistency of statistical signicance overall.

Is the 661 dose used the one that would be taken forward to a pivotal trial? We are not ready to decide on the dose for a pivotal trial.

Kalydeco revenue drop in Q1? In Q4 the revenue was inflated by some one-time adjustments, while in Q1 2014 some of those same impacts were negative. There was increased stocking in Q4. The underlying patient demand was rock solid and very similar in terms of total patients and compliance between the two quarters.

Patient population sizes for 611 + Kalydeco, with one allele that respond to Kalydeco and another that is a 508? In the G551D patients between 65% and 70% are 508 on the other allele. That is directly applicable to what we showed today. There are a number of Kalydeco functional alleles, such as gating and residual function. The reasonable math is that about 65% to 70% with a Kalydeco-responding allele on one side will have 508 on the other. What we don't know is the numerator: how many residual functions will be responsive to Kalydeco.

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