Analyst Conference Summary

Biotechnology

conference date: January 27, 2016 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2015 (fourth quarter, Q4, 2015)

Forward-looking statements

Overview: Strong revenue ramp accelerated, became profitable on a non-GAAP basis.

Basic data (GAAP):

Revenue was $417.9 million, up 35% sequentially from $309.8 million, and up 189% from $144.6 million in the year-earlier quarter.

Net income was negative $75.5 million, up sequentially from negative $95.1 million, and up from negative $176.7 million year-earlier.

Earnings Per Share (EPS) were negative $0.31, up sequentially from negative $0.39, and up from negative $0.74 year-earlier.

Guidance:

For the full year 2016 Kalydeco revenue is expected between $670 and $690 million (excluding label expansion to residual function mutations). Orkambi revenue guidance will be given at a later date. Expects revenue for Orkambi mainly from the U.S. and Germany.

Full year non-GAAP operating expenses are expected in the range of $1.18 to $1.23 billion.

Conference Highlights:

Orkambi was approved by the FDA on July 2, 2015 for cystic fibrosis (CF) patients with two copies of the F508del mutation. It was approved in Europe in Q4. Sales were $219.9 million in the quarter. Orkambi was approved in Canada on January 26. As of December 31 4,500 patients had started treatment in the U.S. All 50 states have made at least one Medicaid payment for Orkambi.

Kalydeco (ivacaftor) for cystic fibrosis had sales of $180.7 million, up 9% sequentially from $165.9 million and up 45% y/y from $124.4 million. Completed key reimbursement discussions in Europe and benefited from label expansion.

Non-GAAP results: Net income $43 million, up sequentially from negative $31.9 million, and up from negative $132 million year-earlier. EPS $0.17, up sequentially from negative $0.13, and up from from negative $0.55 year-earlier. Excludes stock-based compensation of $45.4 million and $77.8 million in other adjustments, as well as Incivek revenue.

Vertex plans to submit a supplemental new drug application to the FDA in Q2 for Orkambi in children ages 6 to 11 with two copies of the F508del mutation, based on a recently completed Phase 3 study.

VX661 trials for CF are ongoing.

Vertex plans to bring two next-generation correctors for cystic fibrosis, VX-152 and VX-440, into clinical development.

On October 7, 215 a supplemental NDA for Kalydeco for patients aged 2 and up with one of 23 residual function mutations was submitted to the FDA. PDUFA date is February 7, 2016. About 1,500 people are in this category in the U.S.

Vertex is exploring other therapies for CF and other indications including cancer and pain, including VX-970, a kinase inhibitor, for solid tumors. Two Phase 1 studies are ongoing.

Approximately 25,000 people should be eligible to be treated with either Kalydeco or Orkambi. Vertex hopes to eventually be able to treat all CF patients with these or newer drugs.

See also the Vertex Pharmaceuticals Pipeline page.

Cash and equivalents balance ended at $1.04 billion, up sequentially from $1.0 billion. Debt reduced to $295 million.

Cost of revenue was $63.1 million. Royalty expense was $1.3 million. Research and development expense was $310.4 million. Sales, general and administrative expenses were $97.1 million. Restructuring expense was $1.5 million. Total costs and expenses were $473.4 million, leaving operating loss of $55.5 million. Interest expense $20.7 million. Other expense was $1.7 million. Income tax benefit $1.7 million.

Q&A:

Persistence rates for Kalydeco, could they apply to Orkambi? We expect there to be a peak of about 8,500 Orkambi patients. We expect to get to the peak number in 2016. In the Phase 3 studies 5% to 15% of patients discontinued. With Kalydeco discontinuation was around 5% in clinical trials, but rose to 10% in the real world. Compliance with Kalycedo has been about 85%. We don't have data on patients restarting after a discontinuation.

661 and Kalydeco drug interactions in trials? VX 152 and 440 Phase 2 designs will likely have multiple doses. It is hard to speculate from preclinical data.

How to think about the residual patients? We are pleased with the evidence of efficacy in a population where it gets difficult to show it, since they start at a higher level of function. There are about 1,500 patients with the 23 mutations. The trial size was small, so there is not a bolus of patients to transfer to commercial.

We expect to submit the pediatrics data later this year and would expect a six month review time.

We were not saying Orkambi discontinuations are more important than compliance. We have seen the analyst sell-side estimates for 2016 sales, but we would emphasize thinking about how long it will get to peak patients, gross to net discounts for Medicade patients, and compliance (what percent of pills prescribed are actually taken during the prescription period). We believe it could take 12 to 18 months to reach all German patients. We do believe we have seen sell-side models that would be hard to reach.

Australian market size? The label could cover 1,500 patients of the about 4,000 total CF patients in Australia. There will be a pricing negotiation with the government there. The rate of uptake is likely to be slower than for Kalydeco because of the much larger number of patients that need to be processed.

About 30% of Canadian potential Orkambi patients on the current label are likely to have private insurance, which may slow down the adoption process.

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