Vertex Pharmaceuticals Incorporated (VRTX) Earnings Call Transcript & Summary

All right. Good morning, and once again, welcome to the 39th annual and first, and hopefully, only time, Virtual JPMorgan Healthcare Conference. My name is Cory Kasimov. I'm a senior large-cap biotech analyst, and it's my pleasure to introduce our next company, Vertex. And CEO, Reshma Kewalramani. Please note that this -- after the presentation, we will have a Q&A session right here in the same Zoom room. [Operator Instructions] And if it's easier, you can also e-mail me questions as well, and I'll be monitoring my inbox. So with that, let me turn things over to you, Reshma.

All right. Great. Thanks so much, Cory. Good morning all. Despite the very different format and the inability to see any of you, I'm really pleased to be here today and excited to share a preview of where we're headed in 2021 and beyond. We're poised to deliver continued growth in our cystic fibrosis franchise, important readouts from multiple transformative medicines in our pipeline and standout financial performance. I'll review the details behind these headlines over the next 25 minutes or so. And to keep us in sync, I'll call out the slide numbers. I'll also point out that there is an appendix at the end of the slide set with some reconciliations for those of you who may be interested. On Slide 2, you'll find our safe harbor statement, and I'll also refer you to our SEC filings to review the risks and uncertainties in the business. Slide 3. At the beginning of the year at each JPMorgan, it's been our tradition to show you a scorecard and to tell you what you can expect from us in the coming 12 months. This is the same scorecard we shared in January of 2020, now filled in. 2020 was a very important and positive year for the company. In cystic fibrosis, we achieved all of our goals and we did so earlier than expected. We made significant progress in our pipeline, in particular, with our partners at CRISPR Therapeutics, demonstrating proof-of-concept in both sickle cell disease and beta-thalassemia. We missed on generating proof-of-concept data from our first AATD molecule, but we remain very well-positioned with this program with a key data readout, for VX-864 in the first half of '21. We filed the IND for the cells-only program for type 1 diabetes, and now we await regulatory feedback. The program hasn't yet moved to the clinic. Hence, the green arrow going sideways. Finally, in terms of financial performance, it remains strong. And our revenue guidance for 2020 of $6 billion to $6.2 billion at the midpoint represents a little bit over 50% growth over 2019. Before diving into 2021, let me take a step back and start with the review of strategy, which is on Slide 4. I hope this will serve as a helpful framework for the remainder of the presentation. Our corporate strategy and business model are unique and differentiated by a focus on serial innovation to bring high-value transformative medicines for serious diseases, served by specialty markets. The strategy leads to a virtuous cycle of revenue growth based on treating more patients, low SG&A spend, high operating margins, and allows for significant reinvestment in R&D. Underpinning this corporate strategy is a very deliberate R&D strategy to only pursue diseases where we understand causal human biology, have validated targets, biomarkers that translate from the bench to bedside and efficient development and regulatory pathways. This strategy has been designed to identify diseases, targets and tools to deliver greater success. Turning to Slide 5. Probably the best way to understand our overall approach to drug development is to understand what drove the success in CF. CF is a serious disease. We understand causal human biology. In CF, we develop the laboratory assays, our HBE cells, and establish biomarkers, chloride transport that translate to the clinic, sweat chloride and ppFEV1 in patients. And we use these assays to identify molecules with the potential to fundamentally transform the course of this disease. Based on the large in vitro effects, which translate into the clinic, our CF medicines were able to move quickly through development. TRIKAFTA, our newest medicine, went from first synthesis in the lab to approval in the U.S. in under 4 years. And it's not just rapid R&D progression. It's also about excellence in commercial execution. The speed at which we've been able to bring this medicine to patients has driven rapid revenue and earnings growth which has enabled significant reinvestment in R&D to discover and develop more medicines and treat more patients. CF is an exemplar of our strategy in action, and our goal is to recapitulate what we've done in CF to transform more diseases. Moving to Slide 6. What you see is that at our core, we're a disease-based company. It's not a portfolio built around a therapeutic area or a particular platform. It's a portfolio designed around the disciplined application of our R&D strategy. And when you apply the criteria, the need to understand causal biology, biomarkers, validated targets, et cetera, what you see is that some diseases like cystic fibrosis, AATD, type 1 diabetes, Huntington's disease, are examples of diseases that fall in. NASH, depression, influenza, amongst others, are diseases that fall out. These diseases that fall out are serious diseases with significant unmet need. But we're not working on them because at this time, we may not understand causal human biology or because we lack biomarkers that translate well from the lab to the clinic or because they require a large commercial footprint. This disciplined application of our strategy is working, and we're active in the clinic in a half a dozen disease areas. We've achieved proof-of-concept in a number of programs and we anticipate achieving proof-of-concept in additional programs in the coming years. And we have a number of programs in late preclinical development as well as in discovery research. Slide 7. Based on our learnings in CF, there's an operating model here and a flow to the execution of our R&D strategy. Once we pick the disease and the approach, we are all in to crack the biology as we like to say. This is about demonstrating that we can interdict effectively on the given target in a relevant model of human disease. This step can take years and the culmination of the step and the closing of the loop of cracking the biology are the POC results. And we have that in CF, in pain, in beta-thalassemia and sickle cell disease. Once we crack the biology and because of our conviction in the disease and in the target, we then want to translate this into multiple assets. We pour on the chemistry or the nucleic acid therapy or the therapeutic, as it were, to do this. This means iterating and optimizing assets so that we have multiple therapeutics with the kind of safety and efficacy and drug-like properties that we can advance into the clinic. And we don't stop there. We take a portfolio approach to development. That is to say we bring multiple molecules forward in parallel into early clinical development. This portfolio approach really does 2 things: one, it allows for the best therapeutic to be selected for pivotal development; and two, it mitigates the risk of molecule-specific failure. This portfolio approach is exactly what we did in our triple combination program in CF. and that's what led to the selection of TRIKAFTA for the combination that we filed and launched. Moving to Slide 8. This chart represents the pipeline, by disease and by stage, reflecting those programs that have a lead asset already in the clinic. Our pipeline is broad and deep and spans small molecules to gene and cell therapies, and in total, has 6 disease areas active in the clinic. Across the pipeline, you can see the portfolio approach at play in this view with the lead molecule or therapeutic at an advanced stage and follow-on approaches behind it. Moving to Slide 9. As mentioned, we're a disease-based company. And once we have committed to addressing a disease, we are relentless in our pursuit of it. This means we don't limit ourselves to any 1 modality. We know from experience, our own experience, that the modality employed can be key to transformative outcomes. On the left panel, you see our CFTR modulators, which were the first molecules that work by correcting protein folding. We and our partners at CRISPR Therapeutics were the first to put gene editing into the clinic for a genetic disease. And on the right, you see other examples of new modalities that we're exploring, not as platforms but for their ability to specifically address diseases and targets in which we have interest. mRNA is a therapeutic by way of our collaboration with Moderna, cell therapy for type 1 diabetes from our acquisition of Semma and partnering with Kymera in targeted protein degradation are just a few examples of the continued investment in expansion of our toolkit. Slide 10. With that review of strategy, let me give you a picture of how I see the next few years shaping up. In CF, it's all about reaching more patients. On the pipeline outside of CF, we're approaching a number of key milestones across all stages of development in a number of disease areas. We remain committed and continue to invest in internal and external innovation. And with regard to business development, given our strong balance sheet and growing financial firepower, our focus is on mid- to late-stage assets that fit our R&D strategy and tools to expand our toolkit. By treating more CF patients and transforming more diseases, we see continued strong financial performance. Let me move on to Slide 11 and start with CF. We recently refreshed the CF epidemiology, which we do every so many years, and this exercise revealed the opportunity across the developed world is larger than we had previously understood. Today, we estimate that there are 83,000 CF patients in the U.S., EU, Canada and Australia. Previously, you'll recall that number was 75,000. Two key dynamics explain this augmented number set. First, the availability of transformational medicines has brought more new patients into therapy and into registries. And second, registries themselves, especially outside the U.S., have improved their data capture. At present, we're treating about 40% to 50% of the CF population. And there are more than 30,000 patients who are addressable with our triple combination therapy, but who are not yet on treatment. We're working hard to bring the triple combination to all of these patients. Next, and moving on to Slide 12. I want to focus on growth in CF from triple combination in the near term. Growth really falls into 3 categories. First, in the U.S. expanding to younger patients and to those with rare mutations. Second, patients largely in the EU, who are starting treatment in newly launched countries that have reimbursement. And third, patients in countries where we're pending regulatory approval and/or reimbursement. Turning to Slide 13. Beyond the near term, we see opportunity for continued innovation and value creation in CF. TRIKAFTA is transformative and has set a very high bar for efficacy. Yet, it's been our long-standing goal to bring CF patients to carrier levels of sweat chloride because those patients or those people, I should say, who are carriers show little to no manifestation of disease. And so we're working on this. And from a business perspective, follow-on regimens will have lower or no royalties and extended duration of exclusivity. Second, we're investing to reach the last 10% of patients who make no CFTR protein. Because they make no CFTR protein, a nucleic acid approach, be it mRNA or gene editing or gene therapy will be needed. And delivery to lung is the key challenge here. This is a tough problem, but I'm pleased with our progress, and we are resolute in our determination to crack this one. Moving on to Slide 14. Beyond CF, there are a number of opportunities in our pipeline. And I'm going to highlight 3 in particular, today. The first program, Slide 14, is really two, beta-thalassemia and sickle cell disease. These programs are the most clinically derisked outside of CF, and that's to say they've already achieved proof-of-concept. Sickle cell disease and beta-thalassemia are serious diseases caused by mutations in the beta-globin gene that lead to impairment in either the quality or quantity of the beta-globin protein. The key clinical manifestations of sickle cell disease are vaso-occlusive crisis, or VOCs. And in beta-thalassemia, it's anemia requiring transfusions. Our approach is to increase hemoglobin F, thereby raising total hemoglobin levels, preventing or eliminating VOCs and preventing or eliminating transfusions in the case of beta-thalassemia. Turning to Slide 15. There's a specific biological insight from human genetics that guided our approach here. Experiments of nature revealed that patients with sickle cell disease or beta-thalassemia, who also have hereditary persistence of fetal hemoglobin, had high hemoglobin F levels and suffered far fewer manifestations of their disease. It turns out that persistent expression of fetal hemoglobin can be driven by genetic variance in a repressor gene, BCL11A. Armed with this insight, we and our partners at CRISPR Therapeutics, set about using CRISPR/Cas9 gene editing to reactivate fetal hemoglobin via this target. And just as we did in CF, we established the model systems and use biomarker assays to crack the biology. We developed highly effective and specific editing of the blood stem cells, and we were able to show that we could create persistent and robust expression of hemoglobin F. With that, we advanced 2 trials into the clinic in late 2018, one in severe sickle cell disease and one in transfusion-dependent beta-thalassemia. Turning the page to Slide 16. In late 2020, actually in December 2020, the same year that Emmanuelle Charpentier and Jennifer Doudna received the Nobel Prize in chemistry for their discovery of CRISPR-Cas9, we and CRISPR Therapeutics shared the clinical results from this program, which really was nothing short of remarkable. In the CTX001 program, at ASH and simultaneously published in the New England Journal of Medicine, the results you see in Slide 16 are the results that we presented. We have now demonstrated proof-of-concept in these 2 diseases, and we've clearly cracked the biology coming full circle from what we saw in the labs to what we see in patients. Most importantly, these results, the results in the 3 patients with sickle cell disease and the 7 patients with beta-thalassemia, show that the beta-thalassemia patients are now transfusion free. The sickle cell patients are VOC free. And while we have to treat more patients and we have to follow patients for longer periods of time. These results really hold the promise of a functional cure. Moving to Slide 17. Here's where we're going from here with this program, starting with the clinical trials. This program has momentum and is progressing rapidly. We have dosed more than 20 patients to date, and our goal is to complete enrollment across both trials in 2021. CTX001 has been granted almost every designation from the regulators that you could imagine from RMAT to PRIME to orphan. And this allows frequent and productive discussions with the regulators. We have initiated these discussions and expect to come away with an understanding of the filing requirements in this year. Lastly, on manufacturing, genetic therapies are known for being complex to manufacture at scale and to bring to market. We and our partners at CRISPR have focused on manufacturing from the very beginning, with the process designed to be robust and consistent from clinical development through to commercialization. Manufacturing requirements will certainly be a part of our conversations with the regulators, and we look forward to that dialogue. Moving to Slide 18. With our approach, we're focused on patients with severe disease defined by frequent VOCs in the case of sickle cell disease and frequent transfusions in the case of beta-thalassemia. And patients who are eligible for stem cell transplantation. In that regard, for sickle cell disease, we estimate the prevalence should be about 25,000 people in the EU and U.S. who may benefit from our approach and about 7,000 patients for beta-thalassemia across these 2 regions. In addition to advancing, the CTX001 program in its current form, we're also working on the potential for gentler conditioning regimens, which would allow many more patients to benefit from our gene-editing approach. As you can tell, we're excited about this program, and we look forward to sharing more progress as the year continues. Moving on to Slide 19, and moving on to alpha-1 antitrypsin deficiency or the AATD program. We estimate there are 80,000 people who are symptomatic with this disease in the U.S. and Europe, but just 20,000 patients who are diagnosed. This is a $1.3 billion market already with only 8,000 people under treatment. This is clearly both an underdiagnosed and an underserved disease. Most AATD, as I think you know and as we've talked about before, is caused by a mutation which causes misfolding of the AAT protein. This misfolded AAT protein is trapped in the liver where it can cause liver disease. And because it cannot do its job to protect the lung, you see a lung disease that looks like early emphysema. The key point here is AATD has 2 primary manifestations, one in the lung and one in the liver. And if you're going to transform this disease, you really have to be able to tackle both manifestations. And our approach does exactly that. Indeed, it's the only 1 in development that does. Our small molecule approach is to correct this misfolded protein. And by doing so, it holds the potential to treat not only the lung disease but also the liver disease. Moving on to Slide 20. As we did in CF, we've established the preclinical models as well as the biomarkers to test this approach. We've discovered multiple molecules that produce remarkable results preclinically. And on the left panel, you see some of these results. This is a transgenic mouse, which expresses the human Z-AAT protein -- sorry, the Z-AAT gene. And our molecules have been shown to restore AAT levels, functional AAT levels, to, let's say, the therapeutic beneficial level. Not shown on this slide, treatment also reduced the toxic buildup of misfolded AAT in the liver. On the right side, what you see is the proof-of-concept Phase II study. In CF, we've already come full circle, and we've been able to translate what we saw on the lab through to the clinic. We haven't reached that stage yet in AAT. That's exactly what we're doing right now with that proof-of-concept study that you see on the right panel. The study design is straightforward. It assesses multiple doses over a 28-day period with the primary endpoint of functional AAT levels in the blood. The most advanced molecule, VX-864, which is currently in Phase II, we anticipate to have the results from that study in the first half of 2021. Turning to the next slide, Slide 21. This is the third and last program I want to highlight today. It's our type 1 diabetes program. The first point to make is type 1 diabetes is not rare. There are more than 2 million people with type 1 diabetes around the world. We know exactly what causes this disease. It results from autoimmune destruction of pancreatic islet cells. There are biomarkers that translate well from the bench to the bedside, glucose, hemoglobin A1C and islet cells. And as such, type 1 diabetes really checks all of the boxes and fits the R&D strategy perfectly. The real innovation here has been generating fully differentiated insulin-producing pancreatic islet cells and manufacturing these cells at scale. The second critical innovation is the development of an immunoprotective device. And so our type 1 diabetes program has 2 prongs. First, is the islet cell-alone approach. This, we believe, could serve 60,000 or so patients. This will require immunosuppression. The second is the cells in the immunoprotective device. This approach would not require immunosuppressive therapy, and as such, would open up this potentially transformative treatment to many more patients. Moving to Slide 22. The important point to note on this slide is that cell therapy works. We already know that. We know that because cadaveric islet cell transplants have been performed for 20 years. And the outcomes are impressive, elimination of severe hypoglycemic events, control of blood glucose and in some patients, insulin independents. But the issue has always been and remains today the insufficient supply and the variable quality of cadaveric cells. This is exactly the problem that our program addresses. We're not in the clinic with this program now. But we have filed the IND. Turning to Slide 23. With regard to the financials, our business performance over the last few years has been strong. We've treated more and more patients, and our CF product revenues have grown significantly. And we've guided that our revenue will reach between $6 billion and $6.2 billion by the end of 2020. And our future is bright. Based on our anticipated CF progress, and the advancement of our pipeline, we expect to be able to drive continued significant growth in the years to come. Moving on to Page 24. At the end of the third quarter, we had approximately $6.2 billion in cash and no debt. And with regard to deploying this capital, we continue to believe the greatest value we can generate is by investing in innovation, both internal and external. In terms of business development, our strategy to identify assets that complement our CF pipeline, tools and technologies to expand our toolkit and assets that fit our R&D strategy remains the same. What has changed is where we are with the triple combination, which can treat up to 90% of patients with very high efficacy, and the strength of our balance sheet. And this now allows us to focus on 2 priorities: mid- and late-stage assets in areas of interest, and tools and technologies to expand our toolkit. Moving on to Slide 25. On Slide 25, here, again, are the milestones that you can track to mark our progress from here. Historically, we've given you a 1-year scorecard, but this view opens up the aperture and gives you visibility into the breadth and depth of the pipeline and the opportunities we're working to deliver, not just in the next 1 year, but in the coming few years. In CF, as we've touched upon, it's all about continued innovation and reaching more patients. Outside of CF, we have programs with expected important milestones in all stages of development. In addition, we're going to continue our focus on innovation, including business development. And on the financial front, we expect continued significant growth in CF product revenues, new product launches to drive additional growth, and disciplined expense growth, allowing continued high operating margins and cash flow. Let me close with Slide 26. Vertex has a proven track record of creating breakthrough medicines and transforming lives. We have the ambition to transform many more diseases. And our pipeline of small molecules, cell and gene therapies is poised to do just that. I've said it previously, and I'll reiterate it here. Not every program will work, and not every program has to. But if we transform even 2 or 3 more diseases, just like we did CF, and I have high confidence that we will, the value that we will create for patients, for Vertex and for shareholders will be significant. With that, let me turn it back over to Cory.

All right. Great. Thank you, Reshma. It was a great presentation. We'll move into Q&A now. [Operator Instructions] And we do have a couple that are in there.

Let me start, though, on the CF front. And maybe, Reshma, can you help us understand TRIKAFTA's growth trajectory and peak opportunity following the products, great start in the market? And how does this new epidemiology data you're disclosing today with an additional 8,000 estimated patients can strengthen your conviction on that front?

Yes. Yes. There's a few questions packed in there, Cory, so I'm going to unpack it. And let's start with the overall market. We are revising our 75,000-patient number, which is what we had previously understood to be the number of CF patients in the U.S., Australia, Canada, Europe to 83,000. And that really falls into all regions and into all of the kinds of patients you might imagine in the 12-plus age group, in the lower age groups and across the genotypes. But if I really think about the trajectory and where I see the near-term growth for the triple combination, it's really in 3 categories. First, bringing TRIKAFTA 6 to 11 in the U.S. That filing went in, in December and we project the approval to be mid- of this year. Second, the rare mutations, people who are 12 plus in the U.S. That approval came through in December of last year. Second, bringing the triple combination to Europe, in the countries like Germany, the U.K., Denmark and Ireland, where we have reimbursement deals or portfolio deals so that they have regulatory approval, and there is reimbursement. So we have patients that we're working to get access to as we speak. And lastly, patients in countries like Australia and Canada where we're pending regulatory approval. And countries largely in the EU, where we have regulatory approval, but we're working on reimbursement, think France, think Spain, think Italy.

Okay. And then I want to bring in an investor question. Has reimbursement for TRIKAFTA, KAFTRIO moved more quickly than you expected given its efficacy?

Yes, yes. What a great question. And as you can see, we've really had a push. We have really worked very hard to get reimbursement in the -- reimbursement in the U.K. came before regulatory approval, and we're just absolutely delighted to see that. I'd say there's a couple of reasons for that. Absolutely, the high efficacy and the benefit/risk profile, I think that's important. I also think that we have learned through our experiences with ORKAMBI and SYMDEKO. We've learned the people. We've learned the process, and that learning has translated to quicker reimbursements with the triple combination. And I also think that the patients have really made it known that they want access. And I think that, that has been what has also helped move this quicker than what one might have expected.

Okay. And then on the pipeline front, can you talk about your expectations and level of enthusiasm for VX-864 for AATD? And how much those are may be impacted by the 814 discontinuation last fall?

Yes, yes, yes. The disease, AATD, is a really serious disease. And these 2 manifestations of lung and liver really demand that if you're going to transform this disease, and that is our intention to transform this disease, you need an approach that can tackle both. That's why I'm so enthusiastic about our approach, and that's why I remain enthusiastic about our small molecule approach because it holds the promise to treat both those manifestations. I'm excited about the VX-864 program. We're continuing to enroll patients and dose patients. And I do anticipate that results will be available in the first half of this year. So a little bit more patience, but not too much longer now.

Okay. I have a couple more in -- audience questions, asking essentially the same thing, and it's around your diabetes program. And does the submitted IND cover the device-based type 1 diabetes cell therapy? Or is it just the cell-alone system? And what is the time line for the program compared to the cells-alone program.

Yes. Yes, great question. Let me make sure I take a moment to explain this program. It's really 2 programs. So the first is the cells-alone program. And that's the one for which we filed the IND, and that is the one that I anticipate will, therefore, go to the clinic first. The second program is the cells with device, and we're working towards the IND on that. As we get through the next few months and over the course of this year, and as we get close to the clinic, I'll certainly update you and give you more progress on that one. But what we are working on right now is that first program, the cells-only program.

Okay. And then Reshma, I wanted to go back and ask about just capital allocation and business development. And how does pipeline progress inform your outlook on BD and M&A? Is the willingness to look at larger opportunities or later-stage assets really just based on the company's increasingly strong balance sheet?

Yes, yes. Cory, it's a great question, and it's really the latter. This is about our strategy in business development. And as I said, it's been the same strategy really for the last, oh, I don't know, 8 years or so. And let me reiterate that. It's about assets to complement our CF pipeline. It's about finding assets that fit our R&D strategy and tools and technologies for our toolkit. And you've seen us transact over the last several years in exactly that way. What is changing is where we are in CF. As I said, we have TRIKAFTA that's able to treat up to 90% of patients, very high efficacy. And that's why we're focusing on 2 areas. Assets that fit our R&D strategy and the tools and technologies. And it's really our balance sheet. It's really our growing financial firepower that allows us now to look at mid- and late-stage assets. And so you're going to see us focus on those 2 areas, mid- and late-stage assets that fit our strategy, and tools and technologies.

Okay. Terrific. And then sticking with the financial theme for just 1 more question. Given that the pipeline is expanding rapidly and into areas that are kind of new to Vertex or outside of CF. How should we think about OpEx and margins over the next few years?

Yes, yes. So Cory, you know that we're not going to give revenue guidance at the conference or OpEx guidance. We will do so on the call in January. But what you should expect from us is continued investment, we have a really good-looking pipeline. We have a number of programs approaching mid- and late stage. And you can certainly expect that we'll be investing behind that.

All right. Another audience question I will ask, and I'll just read it word for word. Great presentation. What are your thoughts on continued role of inhalation antibiotics for CF pulmonary disease in patients on Vertex combination therapy? Do you feel the role these medications and the ones in development may decrease with great results from Vertex drugs?

Yes. What a great question. Really, this is about the fact that we've already demonstrated in the randomized clinical trials that the triple combination not only increases ppFEV1 substantially but decreases pulmonary exacerbations, hospitalizations, et cetera. One would expect that, that means the bacteria, the infections that the patients get, would decrease. And there's also good reason to believe that the kinds of infections would change. While we don't have that information yet, we have an entire program of real-world evidence and analysis of registries to look at exactly these kinds of questions: what kind of bacterial infections are our patients getting? Are they changing? Are they decreasing in the use of antibiotics or pancreatic enzymes, et cetera? So I don't have an answer for you today. It's a great question, but we are looking at that.

Okay. Terrific. Well, Reshma, that is, unfortunately, all we have time for now. So I want to thank you for presenting yet again and for the discussion. So really enjoyed it and look forward to talking with you, and hopefully seeing you soon.

Cory, it was good to see you. Thanks so much.

All right. Take care.