Vertex Pharmaceuticals Incorporated (VRTX) Earnings Call Transcript & Summary

Good morning, everybody, and thanks for joining us for the next session. I'm Matthew Harrison, one of the biopharma analysts here at Morgan Stanley. Very pleased to have Vertex with us for the next session. Before we get started, I need to read a disclosure statement. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at morganstanley.com/research disclosures. So before we get into Q&A, I'm going to turn it over to Reshma to make some opening comments, and then we'll jump right into it.

Great. Hey, thanks, Matt, for the invitation to participate, and good morning all. I also will be making some statements because there are some risks and uncertainties that could impact the actual events of our business. I'll direct you to our SEC filings where this is all discussed in greater detail. I'm going to lead off with some remarks on our strategy. Stuart will provide a perspective on the CF business, and then I'll return to provide you a summary of the near-term milestones for our pipeline programs. I think that will be useful as we get into the Q&A section. Our corporate strategy and business model are unique and differentiated by a focus on creating transformative medicines for serious diseases that are served by specialty markets. Our reason for pursuing the strategy since 2012 is based on the belief that these types of medicines create the most value for both patients and for our shareholders. Underpinning this, we have a very deliberate R&D strategy that is disease-based. We focus on diseases where we understand causal human biology, where there are validated targets and biomarkers that translate from bench to bedside. We have therapeutic modality-agnostic. And finally, we take a portfolio approach to each of our pipeline programs. Why do we do this? For 3 simple but very powerful reasons. First, we believe that this R&D strategy produces a much higher probability of success of making transformative medicines. Most drugs fail because they are aimed at the wrong target. By focusing on validated targets, we significantly decrease this risk. Second, this strategy allows us to create more rapid and successful clinical development programs based on the critical information we obtained from our preclinical and Phase I/II data. Think of this as chloride transport in our HBE cells and sweat chloride clinically in CF. And finally, our portfolio approach allows us to bring multiple medicines into clinical development in parallel, thereby accelerating our ability to identify the best medicine for each disease. As we'll discuss today, every program in our broad pipeline reflects this differentiated strategy. And our 4 approved CF medicines represent a clear validation that this strategy is working. The fact that Vertex, known for its small molecule prowess and small molecules used to transform CF, is also the first company to use gene editing to potentially cure patients with sickle cell disease and beta thalassemia is another strong validation of our strategy. I'm going to pass it on to Stuart for some comments on CF.

Thanks, Reshma, and thanks, Matt, for allowing us to be here. Our CF business is performing exceptionally well. Throughout 2021, we've continued to deliver strong revenue growth driven by the rapid uptake of KAFTRIO outside of the U.S. and indeed, we are in our eighth consecutive year of at least double-digit revenue growth. Over the summer, we announced reimbursement agreements in France and in Italy, and I'm delighted that as a result of these and the multiple other agreements that we've reached, we're now able to secure access for many, many patients outside of the U.S. And importantly, we've reached these agreements at levels that reflect the true value of the triple combination. Consequently, in July, as many as you know, we raised our revenue guidance for 2021 by $500 million. And the midpoint of our guidance range, $7.3 billion, represents 18% growth over 2020. And there's still a lot of growth left in CF. We estimate that there are 30,000 patients still left to treat with our CFTR modulators, and we have high confidence that we're going to reach them in the next few years. So we expect strong continued performance from our CF business, significant top and bottom line growth into the middle of the decade. It's also important to emphasize that our CF revenues are very well protected by the triple combination strong IP, which extends into the late 2030s and this could be further extended by the new next-in-class triple, which we recently moved into pivotal clinical trials. This is a very long duration franchise. Because of our differentiated business model, we can deliver high margins and strong cash flows, while at the same time, sustaining robust levels of investment into internal and external R&D. Finally, just as our CF experience has provided us with a blueprint through our R&D strategy, it has enabled us to create a foundation of commercialization capabilities in pricing, market access, advocacy, manufacturing, supply chain and best-in-class patient services. And these capabilities are going to be critical to help us commercialize the next wave of transformative medicines, starting with CTX001. Reshma, back to you.

Hey Matt, I know we're going to be spending some time in Q&A talking in detail about the pipeline, but let me outline the key clinical milestones we expect over the next 3 to 6 months here. First, VX-147 Phase II proof-of-concept results in APOL1-mediated FSGS. First data from the VX-880, that's the cells alone program in patients with type 1 diabetes. The Phase II proof-of-concept results for the NaV1.8 program, VX-548 in acute pain. And of course, the CTX001 program, which is past the POC stage and in pivotal development, it continues to make strong progress as it advances towards regulatory filings. I know that we are in a show-me world, and that's okay. Given the strategy I described, we have confidence that we'll succeed in multiple of our programs outside of CF, each of which represents a significant opportunity for patients and multibillion-dollar opportunity for the company. Matt, with those opening comments, I'll turn it back to you for questions.

Great. Perfect. Thank you for those, and thank you for all the content in those. So why don't we kick off just sort of the top 3 questions I get in CF, and then we can talk about the rest of the pipeline. So maybe on Phase III, I think one of the things that I know you guys have expressed, but I'm not sure all investors have the same view is just around the confidence of differentiation for the next-generation triple. So maybe you could just talk about why you have that confidence in differentiation.

Yes. Matt, very happy to do so. Vertex has developed and built a leadership position in CF over the last many years. And our triple combination of TRIKAFTA or KAFTRIO, as it's known in the EU, has indeed set a very high bar in terms of safety and efficacy, and it can treat up to 90% of patients. Having said that, we're committed to finishing the journey and bringing the majority if not all patients to carrier levels of CFTR function. And we are clearly in the lead to do just that. That's what the VX-121, 561 test program is about. And while TRIKAFTA has set a very high bar, let's talk about exactly what we're doing to create even better small molecule combinations. Over the last couple of years, we've discovered new and better potentiators and correctors. The first of these is the triple combination, VX-121, TEZ-561 that has recently moved into pivotal development. Based on in vitro results, these are our HBE cells, in which they showed greater efficacy. Even compared to TRIKAFTA, both on chloride transport preclinically and clinically in terms of sweat chloride in our Phase II studies. We also saw impressive improvements in lung function. If I just pick out the FF population, we saw 15.9%, almost 16% improvement in ppFEV1 on top of SYMDEKO. That's from the Phase II results. And these results are what give us high confidence in the probability of success with the VX-121, TEZ-561 regimen in the Phase III studies that we've just initiated. One more point. Patients, it offers the convenience of VX-121, TEZ-561 for once-daily dosing. And for the company, there's enhanced economics from this regimen. I want to be clear though, we're not done. We've identified potentially even better regimens in our labs in San Diego, and we're looking forward to bringing one or more of those regimens into the clinic soon.

Perfect. And then can you talk about the economics? Because I think one of the companies that has royalties on those has a different view than you do on the economics. So maybe you could just explain your position?

Sure thing. Stuart, I'll ask you to take that one.

Yes, Matt, it's a great question. And this really isn't a matter of different points of view. Our contract with the CF foundation is definitive on the royalty obligations. The royalty obligations for our CF medicines is different based on the chemical structures of the different compounds in the regimens. So for the VX-121, VX-561 and tezacaftor regimen will only owe royalties on the tezacaftor portion of that regimen. Therefore, the royalty obligations would be in the low single digits. On TRIKAFTA, by comparison, we owe royalties on ivacaftor, elexacaftor and tezacaftor, which when combined, is why we have low double-digit royalties on that regimen.

Okay. Perfect. Perfect. And then I guess last question is people are focused on an early stage program from AbbVie. Maybe you could just provide your perspective on how you would encourage investors to think about that program?

Yes. Yes. Matt, as you know, it's not our practice to comment in detail on other companies' programs. So let me instead provide some context for the competitive landscape and how you can view that. The availability of TRIKAFTA has completely changed drug development in CF. We've talked about the very high bar that TRIKAFTA sets both for efficacy and safety. And honestly, it's going to be difficult for any new regimen, including our own, to surpass TRIKAFTA. It's important to note that as we collect more data with TRIKAFTA, including real-world and longer-term data, the bar with TRIKAFTA just keeps going further up. In terms of safety, we now have tens of thousands of patient years' worth of data supporting TRIKAFTA's safety profile. In terms of long-term efficacy, historically, we've talked about the rate of decline of lung function in CF patients and slowing that rate of decline with CFTR modulators. Recently, we just announced 2-year follow-up data from the pivotal studies of TRIKAFTA, and that showed no decline in lung function. That's the first time anyone has achieved such an incredible milestone with any CF medicine. And it's going to take any competitor years to try and replicate these data. As a practical matter, TRIKAFTA will reach the vast majority of eligible patients before any competitor can come to market. And maybe more importantly, to gain patient and physician adoption for future regimens, they're going to have to be at least as good, if not better, than TRIKAFTA, but not only in short-term clinical trials, not only in terms of sweat chlor, like ppFEV1 but also long-term outcomes like pulmonary exacerbations, weight gain, FEV1 decline, mortality. This will take many years, thousands of patients, and it's going to be very challenging for any competitor to switch patients from TRIKAFTA to any new medicine without long-term data. Two final comments, Matt. Preclinically, chloride transport and HBE cells is the only well-validated translational model for CFTR modulators. We're unaware of any regimen, of course, aside from our own that have reported data in HBE cells, let alone clinical data that can meet the bar that TRIKAFTA has set. And clinically, in terms of developing improved regimens that drive the majority of patients to carrier levels of CFTR expression, we are years ahead, years ahead of any competitor with our next triple regimen. This is the 121, 561 TEZ combination that we've been talking about, which is already in Phase III.

Great. Perfect. Thank you for those comments. Maybe we could move into the wide range of the pipeline assets that you highlighted are going to read out throughout the rest of this year. But why don't we start with the CRISPR program, in sickle cell and TET. And I guess the way to start out is, if I look at the valuation of CRISPR, and I look at how investors are valuing that program inside Vertex, where you ostensibly own more than CRISPR does of the asset, there seems to be a big disconnect. So what do you think Vertex investors are missing in terms of the value of that program?

Yes. Yes. Matt, it's a great opportunity, and thanks for the chance to talk about CTX001. Let me break this up into 2 parts that I think are equally important when you think about the value of this program. First, let's start with what is the molecule and what's the market opportunity? CTX001 has the potential to not only be first-in-class, but best-in-class as a onetime curative therapy for sickle cell disease and beta thalassemia. If you look at the market opportunity, it is large. There are more than 170,000 people in the U.S. and Europe who have either sickle cell disease or beta thalassemia. Of those, 32,000 have severe disease. And of those, 25,000 have sickle cell disease, and the vast majority of those patients are in the U.S. As you know, Matt, potentially curative therapies for severe genetic diseases are already on the market with prices of about $400,000 to a little bit over $2 million per patient. That's the market opportunity we see. Moving to the science. You know that there are people who have mutations that lead to either sickle cell disease or beta thalassemia who also have persistence of fetal hemoglobin. Those patients show virtually no manifestations of their disease. It's leveraging that insight that we chose a gene-editing approach specifically to target BCL11A, a gene that represses fetal hemoglobin and we are recapitulating this experiment of nature. We've already shared data on the first 22 patients at EHA this summer. And in all of those patients, we raise fetal hemoglobin levels significantly. Beta thal patients, all of the beta thal patients in that data set achieved transfusion independence, all the sickle cell patients achieved VOC or veno occlusive crisis independence. And all of these patients have essentially achieved a functional cure. The safety profile is similar to seeing with busulfan conditioning and clearly different than what we see with the lentiviral therapies. We have now dosed more than 50 patients. We're on track to complete target enrollment this quarter. We expect to close out our regulatory discussions in the coming months. And we plan to file for regulatory approval towards the end of '22. Given the safety and efficacy, the progress that we're making, I see the probability of CTX001 being our next commercial launch at close to 100%. I'll close by just saying that with the current busulfan-based conditioning regimens, sickle cell and beta thal represent a multibillion-dollar opportunity. But we're working hard, as are others on gentler conditioning regimens and that could increase the size of this opportunity to threefold.

Reshma, if I can just ask one follow-up and then, I guess, a second question. I think you said you plan to file by the end of '22, but you're finishing up regulatory discussions. Can you just, I guess, tell us how much clarity you have and is end of 2022, your goal? Or should we believe that, that's sort of based on clear regulatory interactions?

We've talked, Matt, previously about the fact that we're the beneficiaries of almost every regulatory designation you can have both here and in the EU. We've had productive discussions with regulators on both sides of the pond. And while we are going to conclude our discussions in the coming months, it's pretty clear that what we are talking about in terms of what we would need for our filing has to do with the number of patients in the filing, the duration of follow-up and CMC manufacturing information that the regulators are looking for. And we feel really good about the fact that the -- towards the end of '22 is when we plan to file.

Okay. Great. Good. And then maybe we can talk about the market opportunity. And I guess one of the things I observed when I talked to investors who have looked across either gene therapy or gene-editing programs here is that I think they go and they look at how much uptake there is of transplant for sickle cell patients, and they see that, that's very low. And they even look at some of the other new medicines, which obviously wouldn't have the same kind of efficacy profile that you're delivering with this, but they see uptake in them has been somewhat challenging as well. And so they worry about even if you deliver a highly efficacious therapy that uptake may be challenging. So could you comment on your views on that and how to think about the market opportunity?

Yes. Yes. Matt, obviously, in terms of transplant, when you're doing an allogeneic transplant, there is a limitation of donors, and there's the obvious concerns around graft-versus-host disease. So that's a different kettle of fish. We've actually done a lot of work on this question that you asked about uptake of medicine like CTX001. And I'm going to ask Stuart to address that.

Yes. Thanks, Reshma. So in my experience, the uptake in new therapies is dependent on a number of things, right? One is the severity of the disease, the level of unmet need, and then just as you said, Matt, what is the profile of the technology that you're bringing forward. There's no doubt that sickle cell and beta thalassemia are devastating diseases, requiring frequent hospitalizations, transfusions. They have a huge impact on patients' quality of life and result in early mortality. So we're confident that a onetime safe therapy that represents a functional cure will be embraced by patients and their physicians. But it's not just my opinion on that. I think there's a couple of specific bits of data I'd point you to that I think really reinforce that opinion. The first one is our clinical trials. They have enrolled much faster than we projected. And the interest in our clinical trials is high and only getting higher as we release more data on the impact that the procedure is having on patients. And if you talk to some of the patients who've been treated in our trials, I think you'll get a better understanding of the true transformational nature of this therapy. And then secondly, consistent with much of the internal market research we've done, there are published surveys here in the U.S. that consistently indicate that physicians consider about 1/4 to 1/3 of their sickle cell disease patients would be good candidates for a onetime functional cure even that uses the current conditioning regimens, and that really triangulates to the 32,000 or so patients, severe patients that Reshma alluded to earlier. So we feel pretty good about the level of uptake we're likely to see with CTX001.

Okay. Perfect. Great. Look, we could spend much more time here, but you've obviously got a handful of other programs, so let's keep going. Type 1 diabetes, I think an earlier stage program, but also a program that's moving into the clinic. So I guess my question would really be around we've seen islet cells implanted in academic settings previously. And obviously, your first clinical trial here is taking islet cells from your own cell line and implanting those in patients. So one, how should the street think about risk and a positive outcome from this study? And then maybe more importantly, also just talk about how you think about the differences in the market because there obviously haven't been enough of islet cells to transplant from an academic setting and why you haven't seen a lot of uptake there?

Yes. Yes. Matt, just to be clear, the VX-880 program, the naked cell program is already in the clinic. It's already in Phase I/II trials, and we've already dosed the first patient. So on the type 1 diabetes program, we have really 2 programs here. The first and the one that's in the clinic is VX-880, that's the naked cell program. That's where we have a stem cell-derived, fully-differentiated, insulin-secreting islet cell product that we are putting into patients with type 1 diabetes. Let me start with the market opportunity there. There's about 60,000 patients with type 1 diabetes in the U.S. and Europe who are potential candidates for this first approach. And that group of 60,000 is made up of those people with very brittle diabetes, with many episodes of what's called an SHE or symptomatic hypoglycemic episode. Obviously, that is a deadly consequence of this disease. And another 15,000 or so who are already transplant recipients and therefore, are already immunosuppressed. They already take immunosuppressive medicines. We know, and to your point, Matt, cadaveric islet transplants already work, and we've known that for 20 years. In terms of completing the market opportunity, the pancreatic islet or full pancreas transplant, let's use that one. The cost of that is about $400,000 patient -- per patient as the price. If you use that as a rough estimate for a cell-based treatment and you conservatively assume that only the transplant patients, only those who received the kidney transplant avail themselves of this therapy. That's 15,000 times this illustrative example, you're already at more than $5 billion. So the naked cell program is a very substantial opportunity. To go to the science map, we already know the cause of type 1 diabetes, it's pancreatic islet cell destruction by autoimmune cells. Cadaveric islets, as you already mentioned, they work. We know that. The issue is limitation on both quality and quantity of cells. And what we have done with Doug Melton and the Sema Group before Vertex has created a proprietary ability to manufacture a robust supply of fully differentiated insulin cells. We're the only ones who've done this. We are the only company that the FDA has allowed to dose with naked cells in patients. And let me just give you a quick status update on where we are. As I said, the I/II program, the Phase I/II program is underway. We've already dosed the first patient. Like with CTX001, we anticipate the proof-of-concept with VX-880 will be established with a relatively small number of patients over a reasonably efficient time frame. In fact, we will see initial data in the next 3 to 6 months which should give us a good sense of both safety and efficacy with this approach. And maybe most importantly, we're in the lead and we believe this is going to be a big opportunity for patients and a multibillion-dollar opportunity for the company.

Just one quick follow-up. When you talk about data in the next 3 to 6 months, is that on multiple patients or just the single? Can you just give people some idea of what that actually looks like?

Yes. I expect us to have data in the next 3 to 6 months on more than one patient.

Okay. Great. Just given the time, why don't we touch on pain and kidney, so we make sure we touch on everything. So on pain, I think the biggest question is, people saw you make or basically establish efficacy of NaV1.8. And then there was sort of a time where you didn't move those compounds ahead. And so I think there's been a lot of confusion about how confident you are in those programs. So maybe just talk about your confidence in these next assets and how clear you think the readout from these Phase II studies are going to be in terms of driving a pivotal program?

Yes. Matt, we have high confidence in the pain program for 2 real big reasons. One, it's a genetically validated target NaV1.8; and two, we ourselves have pharmacologically validated the target with the VX-150 program. I want to start though with the market opportunity here to make sure that this is well understood. I'm going to ask Stuart to cover that first, and I'll come back on the science.

Yes. So Matt, we just focus on acute pain for now, which is where our current Phase II studies are focused. Acute pain therapies represent 1.8 billion with treatment days a year in the U.S. alone. And despite more than 90% of those prescriptions being generic, it's still a $4 billion market today. So if you think of a typical branded acute pain medicine might be something like $10 a day, a new product that takes even a small percentage of those treatment days, has multibillion-dollar potential. Then we know there is a significant unmet need in pain. There hasn't been a new class of pain medicine in over 30 years. Reliance on opioids has created a crisis of unprecedented proportions that we're all well aware of. So the potential for a new class, a novel class of medicines that has opioid-like efficacy without the addictive potential and other side effects is clearly very significant. And then one question which we often get asked is what about the concentration of acute pain, it is actually quite a concentrated market. And so we believe with a specialty size sales force infrastructure, we'd be capable of reaching a large proportion of those acute pain prescriptions. So a really very significant market opportunity just in acute pain alone.

On the science, Matt, as I just described, we have a genetically validated target in NaV1.8, and we ourselves have pharmacologically validated that target with VX-150 three positive Phase II results across acute neuropathic and osteoarthritic pain. So where we are now is at the stage of rapidly advancing multiple molecules with the ideal drug properties that we're looking for. And that's where our portfolio approach comes in. And we have multiple NaV1.8 inhibitors in our pipeline. The most advanced of this is VX-548. VX-548 is now in Phase II proof-of-concept studies in both bunionectomy and abdominoplasty. What I see in VX-548 is an excellent preclinical and clinical profile. It's much more potent than VX-150, multifold so and has a favorable safety profile. And so in this Phase II study, we're going to be able to explore the full efficacious dose range. Both of these studies, abdominoplasty and bunionectomy, are generally faster run. It's only a few days of dosing. And I expect the results from the bunionectomy study, which started a little bit before abdominoplasty, to be available in early '22. With positive results from these studies, we plan to move quickly into pivotal trials for acute pain. And I just want to also let you know that outside of acute pain, we're also expecting to initiate proof-of-concept trials in neuropathic pain in Q4 of this year.

Great. Perfect. Well, we have a few more minutes here to make sure we tackle kidney. So I thank you for letting us get through everything. So maybe on kidney, I think the real question is, I guess, twofold. One is confidence in the upcoming study and what level of proteinuria knockdown we need to see? And then secondly, if you can establish that APOL1 is a validated target, what's the opportunity across a broad range of APOL1-mediated disorders?

Yes. Yes. Matthew, let's start with the second question first. This is another large, multibillion-dollar market opportunity. We estimate that there are about 100,000 patients in the U.S. and Europe with non-diabetic primary proteinuric kidney disease. I know that's a mouthful, but that's the group of patients with -- who have APOL1 mutations where APOL1 is the genetic driver of their disease. Compared to people who don't have 2 APOL1 alleles, not only is the risk of developing kidney disease, multifold hired 17x in the case of FSGS. But importantly, the course of disease is far more aggressive. So APOL1 is a strongly validated target. And our goal here is to treat the underlying cause of disease. And I do want to emphasize that we're the only ones who have a program that targets the underlying cause of APOL1-mediated kidney disease in the clinic. And we aim to do so by blocking APOL1 with a small molecule. We intend to look for reductions in proteinuria in the Phase II study. And of course, the expectation is that, that leads to slowing of the progression of kidney disease. I see this as a high probability of success based on this genetic validation of the target. With regard to where we are, the Phase II program in APOL1-mediated FSGS is ongoing. We are on track for the results to be available in the second half of this year. And what we are looking for is double-digit percent reduction in proteinuria. That's important because proteinuria is an outcome that regulators have expressed openness for in terms of accepting that as a surrogate endpoint. If successful, this would be the first-in-class demonstration of proof-of-concept for APOL1 inhibition, and it would propel us into pivotal development in people with APOL1-mediated kidney disease including, but not limited to FSGS.

Well, great. Reshma, Stuart, thank you for being here. Thanks for getting us through all the topics and look forward to many of the upcoming data releases.

Matt, thank you so much.

Welcome, Matt. Bye now.