Vertex Pharmaceuticals Incorporated (VRTX) Earnings Call Transcript & Summary

All right. Good morning, everyone. My name is Cory Kasimov. I'm the senior large-cap biotech analyst at JPMorgan, and it's my pleasure to be hosting the next session here. And instead of a standard presentation, we're doing a little fireside chat without the fire. And doing it -- it's really a pleasure to be doing this with Vertex. And it's a good time to be doing it with the transition that's taking place between Jeff and Reshma. But -- so we'll go through a list of questions here. I may also remind everybody that we are not having a breakout session. So this is in lieu of a breakout session, just to make sure no one is running to the room across the hall and fighting the lunch crowd. And with that, maybe I'll turn it over first to Jeff to make some introductory remarks.

Yes. Thank you, Cory. It's always good to start our year here at JPMorgan with you. It's sort of become a tradition. And so both Reshma and I are really pleased to be here. We'll start with the usual safe harbor statement. We are going to be making, both Reshma and I, some forward-looking statements this morning. So of course, I would refer all of you to our 10-K and other SEC filings for more information about the risks and opportunities of our business. I should also note that we are not going to be reiterating our 2019 guidance here, nor are we going to be giving you 2020 guidance. We'll be giving you, as we usually do, our final 2019 numbers on our fourth quarter call in a couple of weeks and also be giving you 2020 guidance at that point. So as Cory said, this is somewhat of a transition year for Vertex. I'm going to be moving on from the CEO role to the Executive Chairman role in April, and Reshma will be taking over as CEO in April. And so we thought we would try a little bit of an experiment, a different kind of presentation. And rather than me getting up and giving a formal presentation, we thought it would be more interesting for you to do this experiment, sort of a fireside chat, where Cory can ask us questions about the current and the future state of the business, and you can hear from both of us at the same time. So Cory, fire away.

All right. Thank you. So Jeff, I'll start with you. And I mean, clearly, you saw significant progress across the business in 2019, both for CF, but also importantly, non-CF pipeline and financially. So maybe just set the stage a little bit. Can you summarize what you see as the company's key accomplishments for the past year?

Sure. Yes, it was a truly remarkable year for Vertex, largely because all of the parts of our business: research, development, commercial, BD, really met or exceeded our goals for the year. And as you know, Cory, every year I come and give you a report card by which you can measure our progress for the next year. And actually, this is the report card that you're seeing up on the screen that I showed last year, and I think you can see quite easily that we did meet or exceed all of the goals that we set for ourselves and for you and our investors last year. I'm not going to read this for you, but maybe call out a couple of milestones. I think in the area of CF, obviously, the early approval of TRIKAFTA, 5 months ahead of the PDUFA date in October, was the major milestone in our CF franchise. And not only for Vertex, this was a true medical milestone for the CF community. And we've been on this journey for more than 10 years now to create a single medicine that could treat 90% or more of all CF patients at very high efficacy, and that dream became a reality with the approval of TRIKAFTA. The other thing, though, that happened that may not have gotten as much attention is, in the second half of the year, we were able to come to agreement on reimbursement in multiple countries outside the U.S. for our existing medicines, for ORKAMBI and SYMKEVI, in some of the big countries, so France, England, Spain, Australia as well as some of the smaller companies like Northern Ireland, Wales and Scotland. That was incredibly important because it meant that 9,000 new patients could get access to our existing medicines, SYMKEVI and ORKAMBI, outside of the U.S. Turning to the pipeline. One of the biggest challenges for all biotech companies is to move from that first medicine to the second, and even more so, from the first disease to the second, and we've been working on that very hard for the last 5 years. As you know, I'm particularly proud of what David Altshuler, our Chief Scientific Officer, and his group have done. We have accelerated our pipeline dramatically over the last couple of years to the point where we are now in 5 diseases outside of CF with 7 medicines in the clinic, and Reshma will tell you something about that as we go on. But those are the medicines that are going to drive the future growth of our business as the CF franchise matures into the middle part of the next decade. And then finally, maybe turn to the financials. Obviously, as we have treated more patients with CF around the world over the last several years, that's resulted in remarkable financial performance for the company. And we are seeing continued double-digit top line growth, very healthy expansions of our operating margins as well as significant amounts of free cash flow, and that's certainly continued in 2019 as well. Now some people, some of our investors have asked me, "Well, it seems like it all happened at once. How did that work in 2019?" And what I told them is, actually, this was the culmination of a very disciplined execution of a strategy that I first showed all of you back in 2012 here at JPMorgan. It's almost exactly the same slide I showed you then. This is really the secret sauce of Vertex. It's the strategy that's gotten us to where we are, and as Reshma will tell you, it's the strategy that we intend to follow into the future. And so I thought I'd spend just a couple of minutes on this to make sure that those of you less familiar with the company know what we're doing and why we're doing it. It's 2 parts. It has a corporate strategy. Vertex invests in scientific innovation to create transformative medicines for serious diseases in specialty markets. And every part of that is essential for the strategy. In other words, we believe that scientific innovation is the only way to create true value in this industry for patients as well as for investors. We only work on transformative medicines. You will never see a me-too medicine from Vertex, a nutraceutical, those sorts of things. That's just not what we work on because we think that transformative medicines are the highest value for patients and for us as a company. And we are very disciplined about sticking to specialty markets. And the reason for that is we can sell our medicines into those markets with very low SG&A expenditure, which allows us to reinvest the vast majority of our operating expenses into R&D, which is obviously essential for this kind of serial innovation model. Now that corporate strategy is very tightly coupled to our research strategy. And again, kudos to David Altshuler and his group for articulating this, I think, in a very succinct way. And we're very disciplined. Every project in our pipeline, as Reshma will tell you, fits this research strategy. So we only work on truly validated targets. The reason most drugs fail isn't because of safety, it isn't because they don't hit their target, it's because the target is the wrong target. It's not associated properly with the disease. And so every one of our pipeline projects has a validated target, as you'll see. We're focused on using creative and predictive lab assays and biomarkers that will predict our clinical outcome. So you know in CF, we've used our HBE cell assays and sweat chlorides that actually quantitatively predict the FEV1 improvement we'll see in clinical studies. And that tremendously raises the probability of success in late clinical development. We're focused on rapid registration paths. One of the things I think both Reshma and I are proudest of is the fact that if you look at TRIKAFTA, a recently approved triple combination, it was less than 4 years from the synthesis of that compound in a laboratory in San Diego to FDA approval. I have never seen another example of that in my 30 or 40 years in the industry. And while all of our projects aren't going to be less than 4 years, I promise you that, we are using the same kinds of approaches to accelerate clinical development. And then finally, we are therapeutic modality agnostic. As you know, we are traditionally a small molecule company, but you've seen us spend a lot of time and money over the last several years to expand into nucleic acid therapies, gene editing, cell therapies. And the reason for that is we are looking for the best modality for the disease we're interested in. We're not interested in just using one modality for every disease, and we'll talk more about that as well. But I think we have a very nice toolbox now of modalities that will allow us to address the diseases that we're actually interested in. So Cory, maybe back to you.

No, that's great. So we're going to get into the pipeline and strategy and everything. But I guess one of the questions I want to focus on is what investors ask us about the most, and that's TRIKAFTA and the ongoing launch. So maybe Reshma, can you give us an update on where you are with TRIKAFTA and how that launch is proceeding so far, at least, qualitatively?

Sure. Sure. So Cory, the early approval in October of 2019 of TRIKAFTA in the U.S. for the 12-plus age group was just an enormous milestone for us as a company, but for patients as well. This is a medicine with high efficacy. It has a really good-looking benefit-risk profile, and we got a very broad label here in the U.S. And patients and physicians have reacted to that really positively. With regard specifically to the commercial launch, obviously, really early days. We're only a couple of months in, but we are very pleased with what we're seeing. We talked about 2 factors in our quarterly call that we're watching closely that we see as the drivers for the launch trajectory. The first is the throughput of patients through the clinic. That's just to say the capacity. There's only about 250, 270 CF clinics in the U.S., and this is just about patients getting through. And the second is reimbursement. That just takes time, state by state, plan by plan. But I will say from where we are today, early days, only 2 months in, the patients are getting through the clinic, they are getting initiated on therapy, and the reimbursement is shaping up nicely. So we are really pleased with what we're seeing here. As Jeff said, in a couple of weeks, on our earnings call, we'll give you details about the launch. We'll be able to give you final 2019 numbers, 2020 guidance, something for all of us to look forward to.

Okay. So then Reshma, it certainly sounds like the U.S. launch is proceeding very, very well in that patient segment, age 12 and up. What do you do -- what does Vertex do to make sure you get TRIKAFTA to the 90% of patients around the world who could be a candidate for the drug?

Yes. Yes. Great question. You can follow along on the slide and sort of look at the numbers, but here's how I would break it down for you. What we're looking at here now is the ongoing launch in the U.S. for TRIKAFTA 12-plus. That is going to be followed by the regulatory approval of TRIKAFTA in the EU. We applied for that filing in Q4 of 2019, so that puts the approval in Q4 2020 or so. That's going to be followed by reimbursement discussions and the commercial launch in the EU and other countries. And that's going to be followed by expansion into the lower age groups, just like we've done with KALYDECO, ORKAMBI, SYMDEKO, SYMKEVI. We've already started the studies for the 6- to 11-year age group, and that's going to lead to expansion of the label, both here in the U.S. and outside the U.S., and that's how we get to 90% of patients from where we are today.

Okay. All right. So then this, I guess, Reshma, is the transition point we go from CF to the pipeline. You've obviously had tremendous success, the company overall in CF. We've seen a lot of companies struggle as they try to go and diversify beyond that initial approval indication from a single disease. Obviously, the company has been working very hard on this front, but can you summarize where you are with the pipeline right now beyond cystic fibrosis?

Yes. Cory, I cannot underestimate, and I don't think anybody does, the challenge of going from one medicine to many, one disease area to many. And this is something we've been thinking about and working on diligently for the last many years. As Jeff alluded to, David Altshuler and his research group have really accelerated our pipeline in the last 3, 5 years. You can really think about our pipeline in 2 components. The first is a small molecule pipeline. That's really come up through our own internal research engine. And then our cell and gene therapies, gene-editing pipeline, that has largely come to us through our business development activities. But regardless of whether you're thinking about our internal pipeline or our pipeline that's coming through business development, really 3 things are exactly the same. The first and probably the most important, each and every one of these diseases, pain, APOL1-associated kidney disease, AATD, sickle cell, beta-thalassemia, DMD, type 1 diabetes, whatever you're looking at, they follow our R&D strategy and our corporate strategy to a T. These are all diseases of high unmet need. We understand causal human biology. We have biomarkers that translate from bench to bedside. These are all programs with efficient development pathways and they're all served by specialty markets. That's probably the most important thing to know about our pipeline. Second, the pipeline is broad. 5 disease areas already in the clinic today, and we'll talk through 2 more that are in late preclinical development that I know I'm really excited about, but I know Jeff and David are equally excited about. And the third thing to know is that this pipeline is at a point, it's a very special point. We're on the pull, we're on the brink, we're poised to look at Phase II proof-of-concept data in this next, let's call it, 12-, 15-month period, and I think that's really important to talk about. I'll say a couple of words about one of our small molecule programs, just as an exemplar of this part of our portfolio, and then I'm going to ask Jeff to comment on the cell and genetics portfolio. I could go on and on about AATD, but I'll keep my comments short. This is a disease that's scientifically, medically, clinically, looks a whole lot like CF. This is a disease that's genetic in nature. This is a disease that is a lung disease. This one also happens to have a very significant liver component. This is a disease that is a misfolding protein defect. And this is a disease that we're going to apply -- we are applying the same approach as we did with CF. That is to say, small molecule oral correctors to refold this misfolded protein, and in so doing, really target the underlying cause of disease. One last thing to tell you on this particular page is the number of patients, the estimate is about 100,000 in the U.S. and in the EU. I suspect that's an underdiagnosis just because there's not universal screening in diagnosis, but that's a number to start with and that's the kind of patient population we're looking at. One last thing to tell you before I show you these data preclinically that are terribly exciting is, in essence, in normal people like you and me, this protein, alpha 1 antitrypsin, it's made in the liver, secreted into the bloodstream and it goes to the lung where it does its job, which is to prevent auto digestion of the lung through the various proteases in the body. That's what's supposed to happen. In these patients with this mutation, their protein, because of this defect, is misfolded. It does not get secreted into the bloodstream. So the liver ends up having disease. And because it doesn't get secreted into the bloodstream, the lung is not protected, and you get this early form of COPD. That's -- those are the 2 really big clinical manifestations. And Jeff, if you would advance the slide. Here's the data. Again, I could spend an enormous amount of time on this. But what I will tell you is that what you're looking at on the left-hand side of the slide is AAT levels, functional serum AAT levels in a transgenic mouse that is expressing the mutant human protein. And in the blue, what you see is vehicle-treated animals, low levels of functional AAT. And in the red, what you see is a rapid and a sustained increase in functional serum AAT levels. The magic number here to look for is 11 micromolar. That's the protective threshold. When you get above that, people with this mutation don't have disease. And in this case, in our animal models, you see we are multifold there. Now equally interestingly and to many, maybe myself included, is the data on the right side. That's the pathology sample from the liver, that kind of brownish red what you see there, that is the misfolded protein in the liver. That's what's causing the liver disease. And in 12 weeks of treatment with 1 of our small molecule correctors, what you see is really remarkable clearance of this disease. Very quickly, where are we? We have finished the Phase I studies. We started Phase II in December of 2019. And again, I expect in this next 12-, 15-month period, we'll be able to look at some results from our program. Jeff, a little bit on the cell and gene therapies?

Sure. So I think you can hear from Reshma's voice how excited we are about the internal innovation that David and his group are doing across a number of diseases. But no matter how good we are at internal innovation, obviously, we can only capture a very small percent of the innovation going on in the biotech world. And so we have ramped up our business development activities pretty substantially over the last couple of years as we've had more capital to invest. And we've done it with a very strategic focus in a couple of areas. One, we were interested in new therapeutic modalities that could complement our small molecule approaches, and particularly in gene editing, where we've built a large portfolio in gene therapy and in cell therapies. And two, we were interested in bringing in additional programs that would supplement our pipeline, early-stage preclinical or clinical programs where we could add value through our clinical, regulatory and commercial expertise. And this slide just shows you 4 of those programs: sickle cell and beta-thalassemia, which came to us through our collaboration with CRISPR starting in about 2015; Duchenne muscular dystrophy, a gene-editing approach that came to us through our recent acquisition of Exonics in 2019; and type 1 diabetes, which is a cell therapy approach for type 1 that came to us through our most recent acquisition of Semma Therapeutics. And as Reshma said, every one of these meets and matches our corporate strategy and again, our research strategy. Won't have time to talk about all of them, but let me show you some data from sickle cell and beta-thal, those are the 2 most advanced programs, and show you why we're so excited about this new technology and this new approach. So this is a gene-editing approach, in which we're trying to use gene editing in a single treatment to essentially cure patients with beta-thalassemia and sickle cell disease who express the mutant form of the beta-globin protein. And we published these results with our partner, CRISPR, a couple of months ago now, and I'll just walk you through them quickly. This is one patient with beta-thal on the left, one patient with sickle cell on your right. So early days, one patient of each. Each treated with a single treatment of our CTX001 product. And on the left, this is a very severe beta-thal patient, almost making no hemoglobin of their own, and requiring a transfusion every 2 to 3 weeks for life to just maintain their hemoglobin concentrations in the physiologic range. Patient was treated once with CTX001. And you should look at the blue bars here because we're monitoring fetal hemoglobin levels in this patient, and you can see that within a very short period of time, their fetal hemoglobin rose, eventually up to around 10 to 11 grams per deciliter and their total hemoglobins were 11 to 12 grams per deciliter. That's the same hemoglobin I would have or Reshma would have if you drew our blood today. And that was sustained over a 9-month period of time. And to correlate with that, the patient has had -- required no transfusions over that 9-month period of time, despite the fact that they had been getting 1 transfusion every 2 to 3 weeks prior to that. Right-hand side, very similar data in sickle cell. Here, we measure the percent fetal hemoglobin because we know from experiments of nature that if you have more than 30% fetal hemoglobin in sickle cell disease, you don't get the symptoms of the disease. So that's the number we're aiming for. And you can see one treatment in -- with CTX001 resulted in a rapid increase in fetal hemoglobin up to 47% or so of the total hemoglobin, and that was seen in more than 90% of the cells. And to correlate with that, this patient who had been having about 7 painful vasal occlusive crisis each year, has had no painful crisis in the 4 months since they received this single treatment. So while this is still very early days, these are essentially functional cures that we're seeing in these 2 patients with a single treatment with this gene-editing approach. And that's why we're so excited to accumulate more patients, which we're doing now as these trials continue to enroll, and you'll see more data from additional patients coming in 2020. Cory?

All right. So given how well CF is progressing, along with the pipeline investment being made, kind of putting this all together, how should we think about revenue and earnings growth for Vertex?

Yes. Yes. It's a great question, and you can follow along on the slide that's up on the board. The bottom line is, I think it's really no secret that Vertex has delivered extraordinary performance over the last many quarters. I mean that in terms of revenue, in terms of expansion of the operating margin as well as in generation of free cash. That's allowed us to do what we really want to do, which is to invest in internal R&D as well as in business development. You can see the numbers here. When I look over 2020 and, let's call it, the next 10 years or so, what I would say is the first half of this period is going to be about the CF franchise and treating more patients. The U.S. launch of TRIKAFTA, followed by the European regulatory approval and launch there, followed by expansion to the lower age groups, I see that being carried in terms of growth through the middle of the decade. After that, I see the pipeline kicking in. And we are talking about 5 disease areas in the clinic, the 2 additional ones in late preclinical development. And while not all of them are going to work, not all of them have to work. Even if a couple do, and I fully expect that they will, we're talking about significant opportunities that are going to carry us through the back end of the decade. And that's really the picture that you see here.

Okay. So then Reshma, maybe to close, Jeff just started this conversation and always shows us the scorecard for how to judge the company going into a new year. So maybe can you just kind of wrap up by highlighting the key milestones you anticipate for 2020?

No pressure, Reshma.

No, no, not at all.

The pressure comes next year.

I quite like the report card. I think it's a good way for us to give you what we're looking at in terms of milestones and for you to hold us accountable to what we say we're going to do. Here's the report card for 2020. I'll call out a couple of things. Obviously, in CF, which is at the top of the list, what we're looking at is the ongoing U.S. launch and European regulatory approval. In the middle of the screen, importantly, these are the proof-of-concept data we called out, AATD, sickle cell, beta-thal. And we have set an ambitious goal for ourselves for the Semma program. That's the type 1 diabetes program, cell therapy. We are looking to bring that into the clinic, 2 patients, late 2020, early '21. And we talked about the finances already. We're looking forward to double-digit top and bottom line growth in 2020. Cory, if you would indulge me, we've had time to talk through all of these specifics and put up the goals. I want to take a step back and let you know where I see the company at 50,000 feet. This company has never been stronger. We have never been better positioned for success. Our strategy is working exactly as we expected. The pace of discovery and development of new medicines for a number of disease areas has never been greater. And based on this, I have high confidence that we're going to be able to continue to deliver great value for patients, for our company and for shareholders for many years to come. And I am looking forward to coming back next year, telling you about the report card and the progress.

We look forward to having you back with Jeff. Congrats on a remarkable run. And Reshma, best of luck. You're joining the company at a great time.

Thank you so much.