Vertex Pharmaceuticals Inc (VRTX) — Q2 2021 Earnings Call Transcript

Good evening. This is Michael Partridge. Welcome to the Vertex second quarter 2021 financial results conference call. Making prepared remarks on the call tonight, we have Dr. Reshma Kewalramani, Vertex’s CEO and President, Stuart Arbuckle, Chief Commercial and Operations Officer, and Charlie Wagner, Chief Financial Officer. We recommend that you access the webcast slides on our website as you listen to this call. This call is being recorded. A replay will be available on our website. We will make forward-looking statements on this call that are subject to the risks and uncertainties discussed in detail in today's press release and in our filings with the Securities and Exchange Commission. These statements, including, without limitation, those regarding Vertex’s marketed CF medicines, our pipeline and Vertex’s future financial performance, are based on management's current assumptions. Actual outcomes and events could differ materially. I would also note that select financial results and guidance we will review on the call this evening are non-GAAP. I will now turn the call over to Dr. Reshma Kewalramani.

Thank you, Michael. As we reach the halfway point in 2021, our business is performing exceptionally well and is very well-positioned for the future. Our CF franchise is strong and growing. During the second quarter, we reached a number of new reimbursement agreements with the triple combination, as well as other CFTR modulators in our portfolio, including in major markets like France and Italy, earlier than expected. These reimbursement agreements are occurring in a timeframe that is far quicker than is typical for OUS markets. Importantly, we are achieving reimbursements at levels that are robust and reflect the value of our CF medicines. We also secured regulatory approval for the triple combination in the six to 11 age group for the U.S. Taken together, these additional reimbursement agreements and regulatory approvals provide thousands of new patients with access to our medicines. As such, we're raising our 2021 guidance range by $500 million to a range of $7.2 billion to $7.4 billion, reflecting 18% year-over-year growth at the midpoint of the range. But our work in CF is not done. There are still more than 30,000 people with CF who are yet to be treated. By reaching these patients, we see continued significant growth for the CF business. With regard to the pipeline, progress is accelerating across the portfolio. We now expect to achieve targeted enrollment in both CTX001 studies in Q3. We have initiated the VX-548 Phase 2 program in acute pain. We are on track to begin the Phase 3 next in class triple combination program in CF shortly.

Thank you, Reshma. I'll begin by reviewing the Q2 revenue performance of our CF medicines. Our Q2 global revenues reached nearly $1.8 billion, driven by increasing revenues outside the U.S. as a result of the launch of KAFTRIO and continued strong performance in the U.S.

Thanks, Stuart. In the second quarter of 2021, Vertex again continued its record of outstanding financial performance. In fact, we're in the midst of our eighth consecutive year of at least double-digit revenue growth. Second quarter total product revenues were $1.79 billion, an 18% increase compared to the second quarter of 2020. This growth was primarily driven by strong international uptake of KAFTRIO and continued performance of TRIKAFTA in the U.S. Our second quarter revenues included $1.26 billion in the U.S. and $536 million outside the U.S. Ex-U.S. revenues for the quarter grew 71% over the prior year, reflecting the full quarter effect of prior initiations in Europe, as well as new patient initiations in countries where patients have access to KAFTRIO. Our second quarter combined R&D and SG&A expenses were $537 million compared to $467 million for the second quarter of 2020, driven largely by investment in our clinical stage programs and our research pipeline. As our pipeline continues to expand and mature, we expect our R&D investments will continue to be substantial while we drive toward proof of concept data and further clinical and regulatory progress across the pipeline. Our continued growth in revenues combined with carefully managed growth and spending translates to a second quarter operating margin of 57%. With our strong revenue and profitability, we ended the quarter with $6.7 billion in cash following the one-time $900 million payment to CRISPR Therapeutics for the amended collaboration. Our strong financial performance to date, the future growth profile in CF, and the tremendous potential of our broad and deep pipeline made this the right time for the $1.5 billion stock repurchase authorization that we announced in June. This authorization gives us the opportunity to repurchase stock at very attractive prices as we seek to offset future dilution from equity programs. Now to guidance, we are making a significant upward revision to our previously issued 2021 guidance for total product revenues to a range of $7.2 billion to $7.4 billion. This $500 million increase in our revenue guidance range reflects year-to-date business outperformance, as well as the rapid progress we've made in reaching new reimbursement agreements. Year-over-year, this guidance represents nearly 18% growth at the midpoint. As is our practice, the guidance only includes revenue for countries that are currently reimbursed. Future new reimbursements are not included. We are maintaining our non-GAAP OpEx guidance for the full year 2021 at $2.25 billion to $2.3 billion. Driven by R&D investment, we anticipate that our OpEx in the second half of 2021 will be sequentially greater than in the first half of the year. Specific drivers include the new economic split under the amended CTX001 collaboration, advancement of VX-548 to multiple studies in pain, and investment to support type one diabetes clinical development. For our non-GAAP tax rate, we continue to guide to a range of 21% to 22% this year. Looking to the future, the financial profile of our business is exceptional in many ways. First, we expect to see continued significant top and bottom line growth from our CF franchise into the middle of the decade, as we continue to reach more and more patients. Second, our CF revenues are well protected by the triple combinations strong IP which extends to the late 2030s and which could be further extended with the new next in class triple now entering pivotal trials. Third, our differentiated business model and lean SG&A lead to high margins and strong cash flow, which allows for sustained levels of investment into internal and external R&D and continued strong earnings growth. Finally, we have a number of multibillion-dollar opportunities advancing in the pipeline, many with near-term milestones, including those in beta cell, sickle cell disease, APOL1-mediated kidney disease, pain, type 1 diabetes, and AAT, each of which have the potential to drive significant growth beyond CF into the 2030s. With that, I'll turn it back to Reshma to close.

Why don't we go directly to questions and open the phone lines now.

Hi, guys. Good evening. Thanks for the question. Reshma, I know that there's an important Phase 2 readout for FSGS later this year, and you've talked about that. And I know you've talked about what you're looking for in terms of reduction in proteinuria. I guess, my question was twofold. One, are there scenarios where reductions are more modest, and you have to think about what that would mean for going forward? And second, if it was really good reductions, reduction of proteinuria is surrogate so when you still need to run a much longer study, appreciate its genetic mutation patient population. So maybe you could talk to those scenarios and how you think about the robustness of data? Thank you.

Yeah. Hi, Mike. The question you asked is about the VX-147 program, for others on the phone, this is the APOL1-mediated FSGS program that is currently in Phase 2 and we are on track to readout the Phase 2 results in the second half of this year. The way I see this program, Mike, and what we're really looking for is safety for sure. It's a Phase 2 program. On the efficacy side, you're right, it is about percent reduction in proteinuria. We're looking for double digit reduction in proteinuria because at those levels, it's meaningful. It is correlated with improvements in GFR, and the hard endpoints of time to ESRD. As with all of our programs, Mike, we have a portfolio approach here. I am excited to see these results. The community, physicians, and patient groups, and the regulators, particularly in the U.S., have had multiple workshops and conferences over the last several years. The regulators have expressed openness for proteinuria to be the regulatory enabling endpoint. Now, whether that's an accelerated approval, whether that's a full approval, all of that will need to be discussed as we progress the program and have those discussions with the regulators. I've been pleased with how the regulators have thought about it and the fact that this is indeed a genetically defined renal disease. The regulators have often talked about a homogeneous proteinuric kidney disease, and that is what this is. So I feel optimism for proteinuria to be the regulatory enabling endpoint. Obviously, that makes for a more efficient trial.

Good afternoon. Thanks for taking our question. A two-part regulatory question from us. You recently announced the design of the CF Phase 3 trial. It's notable because as a non-inferiority primary endpoint, we're curious to know whether simple non-inferiority is sufficient to support FDA approval, or if the FDA asked for superiority or something else from the secondary endpoints? And then the second part of the question is, when will we get similar details on what's necessary to file CTX001? I think you've been guiding an FDA update sometime this year; we're kind of curious, is that going to come sooner rather than later? If you have any preliminary idea of what will be necessary for filing that candidate? Thank you.

Sure. Let me take the CTX001 question first. As I mentioned in my prepared remarks, we are now looking to achieve completion of target enrollment in Q3. That’s really a very near-term completion of the targeting enrollment. What we’re really looking at now, and I've described before, as we've had these conversations with regulators, and we do have the benefit of having many regulatory designations, so we've had productive discussions with the agency. It's about the size of the filing package. It's about the duration of follow-up and the CMC manufacturing controls. I'd like to say achievement of enrollment is really short-term. It's about the duration of follow-up and CMC manufacturing. I do expect that we're going to bring those discussions to a conclusion in the next coming months. I do anticipate filing to be possible in the next, let's call it, 18 to 24 months. So that's really what it looks like on CTX001. On the Phase 3 next in class CF program, we've gone through our discussions with the regulators. We've had our end of Phase 2 meetings. This trial design reflects those considerations and those discussions. I will point out that as I look at the VX-121 data, there are three really important elements that stand out to me. The first is that in our HBEF, our HBE assays translate very well into the clinic, not only qualitatively but quantitatively, singularly or in combination, so one-on-one alone or in combination with tezacaftor 561. The results in our HBEs show that one-on-one is more efficacious, more efficacious than even TRIKAFTA. That’s saying something. In the Phase 2 results, you can look at the sweat chloride, which is the real direct translation of chloride transport in vitro. You can see that we're observing numbers around 45 to 45 millimolar with the one-on-one regimen versus 33 to 39. That was observed in Phase 2 with the TRIKAFTA regimen. And of course, ppFEV1, which is more variable, but even that has indications for being better than TRIKAFTA. While the primary endpoint is non-inferiority, I see a lot of optimism in these data that may even have the potential to be better than TRIKAFTA.

Great afternoon, guys. Thanks for the question. Just a couple for you guys. So on the pipeline, I know there's been a lot of emphasis on BD. But for what you have today in the pipeline, are there investments that you can accelerate to get into registration trials faster, for example, like in pain? And then, when you look at CF, beyond rolling out across the EU, and maybe adding younger patients across the board, what do you think? I know you're not going to give long-term guidance, but what is the normalization of the market look like in terms of maybe the incidence rate? What are you guys assuming? I'm just trying to get a sense for when CF is more moderate growth, is that the timeframe when you think you're going to have more of a P&L impact from sickle cell and beta thal from CTX001 or other elements of the pipeline? Just trying to get a sense to put all the pieces together for kind of the long-term growth picture? Thank you.

Yeah, it's a great question, Geoff. Let me set it up for you and then I'm going to ask Stuart to comment on market dynamics. Then I'll come back and address your question about the pipeline and how we see that going. What I see to start with is, I really see continued significant growth for many years to come in our CF franchise. I'm going to ask Stuart to outline those dynamics for why I say that.

Yeah, Geoff. As you know, we updated our estimates of the epidemiology for people living with CF in the U.S., Canada, Europe, and Australia earlier this year to approximately 83,000 patients. We’re probably treating about half of those patients today. We updated our guidance today to a range of $7.2 billion to $7.4 billion. What that means is, and I don't want to gloss over this, there are more than 30,000 patients remaining who are eligible for our CFTR modulators. They are likely to benefit from our existing CFTR modulators. Those 30,000 patients really fall into three categories. The first one is people who live in countries where we have regulatory approval and we've secured reimbursements, and we are beginning the launches in those markets. As you know, launches of our CF medicines tend to be very rapid. The second group of patients lives in countries where we have regulatory approval but don't yet have reimbursement. We've had a great year securing reimbursement for KAFTRIO, just under a year from the EMA approval, and I have full confidence that we're going to continue that run and secure additional reimbursement agreements in countries where we don’t have it today. Finally, we also need to get down to younger patients. As you know, we've done that with KALYDECO and ORKAMBI, and given the benefit-risk profile of TRIKAFTA, we fully expect we'll be able to reach younger age groups. Over the next several years, we see multibillion-dollar revenue growth potential through getting to those more than 30,000 patients. Additionally, we're also working on the 7% to 10% of patients who won't be eligible for our CFTR modulators, using genetic approaches through our collaboration with, amongst others, Moderna. So, we do see continued growth of our CF franchise for several years to come, based on continuing to execute in the way that we have done over the last few years. To tell you how the pipeline is going to layer on top of that, I'll hand it back to Reshma.

The pipeline is progressing nicely, and I actually would say it's accelerating. Let me tell you why I say that, the pain program is now in Phase 2 for the bunionectomy study, and in parallel, we’re going to start up the abdominoplasty study very shortly. The CTX001 program, as I said in my prepared remarks, is going to achieve target enrollment in Q3 now. When I think about VX-147, that is absolutely on track to have results in the second half of this year. When I put all of that together, it looks like a really important next six to nine months in terms of not only data readouts, but the opportunity to advance milestones in each of these programs. That’s not even talking about the programs that are in late preclinical development or in Phase 1. We are investing heavily in our pipeline. It is because the pipeline is accelerating, and there are many opportunities for us to get to the next important milestones in clinical development. I'd be remiss if I didn't say a word about VX-880. This is the naked cells only approach. This one is a Phase 1/2 trial, and I would think about this one as similar to CTX001, in that a reasonably small number of patients in a reasonably efficient timeframe will really tell us what we have. So that was another one that I think is going to be important to keep our eyes on and to invest behind.

Thanks for taking my questions. For CTX001 on manufacturing, do you have an understanding of the assays required or how differences could play out regulatory wise versus gene therapy given this is a new technology? With your work with Moderna on mRNA and gene editing, maybe you could just help us understand how that's progressing and when those might enter the clinic?

Sure. Salveen, with regard to CTX001, we really have had the opportunity to have multiple discussions with the regulators, not just on what the potential filing package could look like, in terms of the clinical data, sample size, etc., but also on CMC and manufacturing. We have a very good understanding of what the agency both here and outside the U.S. would like to see in terms of potency assays and release assays. That work is going very well. In terms of the mRNA program, you know that we have multiple programs for the last 10% of our CF patients, the most advanced of which is the mRNA program in partnership with Moderna. There are two components here: the mRNA construct itself, and its delivery. We have made solid progress on both of those. I would say that the important one is on delivery. It's a little too early for me to give you timing on when that would enter the clinic, but I will say that progress has been very good. I'm feeling very optimistic about our ability to get to that last 10% of patients, maybe even compared to six months ago.

Hi, thanks for the question. I need to ask about the Galapagos situation as attention turns to their upcoming data. I understand they are behind you, but could you provide more insight into the biology and your perspective on their drug? Additionally, you mentioned timelines for your pain pipeline. Could you clarify what we can expect over the next six to nine months? When might we see data from pivotal trials that are enrolling quickly? Please share your expectations for the next data set and what the benchmarks might be. Thank you.

Yeah, sure thing, Robyn. Let me start with pain. I'm really excited about our pain program. You know that we have a program in NaV1.8 that's the one that's furthest ahead. In our discovery and preclinical research, we also have programs in NaV1.7. The reason I'm particularly excited about NaV1.8 is it's a genetically validated target for sure. But it's also pharmacologically validated by our very own VX-150. The molecule that's in the clinic now, VX-548, has all the attributes we were looking for in terms of potency, as well as in drug-like properties, BDIs, manufacturability, etc. This one looks very exciting to us. It's already in the bunionectomy study that is up and running as a Phase 2 proof of concept study. The abdominoplasty study is right behind it, and that should start up very shortly. We're also interested in pursuing peripheral neuropathic pain in the NaV1.8 area, given that our VX-150 molecule had positive proof of concept data in both acute and neuropathic pain. Those studies are very short in duration because it's procedures like bunionectomy, where treatment lasts over a couple of days, making the results obtainable in a reasonably efficient timeframe. I expect that the bunionectomy results will be ready by the tail end of this year or the beginning part of next year with abdominoplasty results thereafter. That's how I'd encapsulate the pain program. Regarding the Galapagos data and any competitive dynamics, I’d rather focus on our portfolio and tell you about how I see it. The VX-121 561 tezacaftor has the potential to bring greater patient benefit than TRIKAFTA. It's a once-daily dosing, which I believe adds convenience for our patients. In all honesty, the greatest threat to TRIKAFTA, the greatest competitor to TRIKAFTA, is our very own VX-121 561 tezacaftor.

Great. Thanks. Good afternoon. I appreciate you taking the question. I actually want to follow up, Reshma, on what you were just talking about, on Phil's earlier question on the QDCF study but from a slightly different point of view. Recognize it's designed to demonstrate statistical non-inferiority from a regulatory standpoint. What do you think you need to show for this to actually displace a product as good as TRIKAFTA in the market? I'm assuming dosing once versus twice a day isn't enough on its own? And did you say in the prepared remarks I just want to make sure we have this right, that the royalty on the QD goes to low single digits from low double digits? Do we get that right?

Yeah. Cory, with regard to the study, you're right. For the regulatory enabling endpoint, it is a non-inferiority study, and that non-inferiority is on ppFEV1. You're also correct that the royalties go from low double digits with TRIKAFTA, KAFTRIO, to low single digits. Let me just take a step back, though, and help maybe everyone on the phone line understand our perspective on the one to one program, and why we're really doing this. Our long-standing goals in CF have been threefold. First, bring forward a medicine that can treat up to 90% of patients with cystic fibrosis, give that a check; that's TRIKAFTA, KAFTRIO. Second, get patients who can benefit from CFTR modulators to the highest levels of efficacy, which means that we want to bring patients to carrier levels of sweat chloride. This is really important because, as those levels improve, the better the outcomes for our patients. The third big goal has been to get to the last 10% of patients. The VX-121 561 tezacaftor program is all about that big goal number two: getting patients to carrier levels of sweat chloride. While it's true that some patients on TRIKAFTA can achieve that, we’re looking to get many, many more patients to those levels, if not all patients, and that is what VX-121 561 tezacaftor is aiming for.

Hi, thanks for taking the question. I want to ask a little bit more about the FSGS study design. Can you talk about sort of the background therapies that patients will be on? And will they be on study background meds headed into the study? Or, will there be any changes ahead of the study? And when will you allow for the use of steroids? Just curious about some of the other factors. Thank you.

Yeah, sure thing, Lisa. In our Phase 2 study, we are looking at patients who have APOL1-mediated FSGS with two APOL1 risk alleles. We are looking for patients with heavy amounts of proteinuria. We are allowing patients to be on background therapy. We are looking for a double-digit percent reduction of proteinuria that I was talking about earlier, on top of whatever background therapy our patients may be coming into our trial with.

Hey, guys, good evening. Thanks for taking my questions. So two questions on VX-121. Can you talk about where you're planning to conduct a Phase 3 triple combo study? Is that going to be in the U.S. or outside the U.S.? Would you expect any medium-term impact on TRIKAFTA or KAFTRIO revenues? And then, it looks like the sweat core that you've observed, at least in the VX-121 trials, is dose-dependent. Do you feel you've fully explored the dosing curve here? Any safety or pharmacodynamics reason not to further dose escalate just given the high bar set by TRIKAFTA? Thanks.

Sure thing. Brian, we are going to be conducting the study in the usual countries, U.S., and European countries, the standard. Remember, both studies in the VX-121 program are compared to TRIKAFTA or KAFTRIO, so this is not placebo-controlled. Patients are going to be on active therapy in either arm, which makes it a lot easier for patients to enroll into this study. Regarding the impact on revenues for TRIKAFTA, we don’t see any impact on revenues to TRIKAFTA. With regard to how we selected the dose, how we approached this program, we shared results from the Phase 2 study. As with all of our programs, we take all that data and do quite a bit of modeling and simulation to identify the best dose that maximizes efficacy and has the greatest benefit-risk profile. That’s what we've done with the regimen we've selected. What I see in these data is in vitro chloride transport that may be even better than TRIKAFTA. We've observed higher chloride levels, which is the most approximate translation of chloride transport, so the sweat chloride levels in our Phase 2 trial are higher than what we saw with TRIKAFTA. ppFEV1, which you know has greater variability, is also showing potential to be better than TRIKAFTA. What’s obvious is that TRIKAFTA is a great medicine; we think we have something that might be even better than that with VX-121 561 tezacaftor, and I'm really looking forward to the Phase 3 results.

Great. Thanks so much, and congrats on the quarter. I just had a couple of other APOL1 questions, if you don't mind. One was just on finding these patients. I know the study or at least preclinical trials have been going on for a little over a year, and the implied sample size is estimated to end up at around 10. Has it been difficult to find patients? Is genetic testing a headwind? And then second, Reshma, I know you talked about this is obviously a first study. Double-digit proteinuria is a goal. Can you just contextualize that in terms of what thresholds have changed in proteinuria have predicted clinical benefit in the past? Is there a minimum change that has been relevant to get FDA comfortable with accelerated approval? Thanks so much.

Yeah. All great questions about the APOL1-mediated FSGS program. Let me start with the clinical trials and the enrollment. First and foremost, we are on track to have results this calendar year in the second half of the year. It has been a study that took some time to enroll, and I'm not surprised about that. The factors that we need to think about are, the study started right in the middle of the pandemic, which was a challenging time for patient recruitment. Secondly, this is a disease for which we don’t routinely employ genetic testing in renal medicine, so it takes time to find eligible patients, conduct genetic tests, and have them enroll in our studies. Lastly, APOL1-mediated FSGS is a smaller segment of the spectrum of APOL1-mediated kidney disease. These patients, because they are fewer in number, are spread across the U.S. and often live far from testing centers, making it particularly difficult during the pandemic. Regarding the goal, we look for percent decreases in proteinuria, and I think double-digit decreases in proteinuria in this Phase 2 study, as a first-in-class molecule for this genetically validated target, would be excellent. As for what the agency might be looking for, it really depends on the kidney disease of interest. In this case, a homogeneous kidney disease that is genetically defined could have different considerations. I believe that a percent reduction in double digits would have significant implications.

Hey, good afternoon, everyone. Thanks for taking my question. Mine is really on the diabetes program. Thinking strictly about the opportunity for patients who are going to require lifetime immunosuppression, how do you think about differentiation from your cell line versus sort of donor cells, which I think should probably get approved in the next month? Is there a supply constraint there due to sourcing that you think you can overcome with your stem cell line? Are there other characteristics of differentiation that you think can make your technology work better? Then, I know you are working on encapsulation for protecting the differentiated islet cells to reduce immunoreactivity. But are you exploring other ways, such as the induction of immune tolerance or cell editing to get around the need for immunosuppression as well? Any thoughts on those pathways?

Yeah, really great questions, Brian. I'm excited to talk about the Type 1 diabetes programs. First, let’s start with the broader scope—we have over 2 million patients with Type 1 diabetes in the U.S. and Europe. The potential to help patients is enormous. Now, regarding encapsulation, having the cells encapsulated in a device is crucial as it can be immune evasive, reducing the need for immunosuppressants. I think the device approach is elegant because it simplifies the procedure. However, we're keen on exploring other approaches to immune evasion beyond the device. Our lead approach involves encapsulated cells in a device. As for the differentiation from cadaveric cells, those cells are limited by quality and quantity, making procedures difficult for patients. Our approach stems from stem cell-derived, fully differentiated, insulin-producing islet cells, allowing us to overcome those limitations.

Operator, we have time for one more question.

Hey, guys, thanks for squeezing me in. Just a quick question on how you’re kind of thinking about maybe kind of external deals, maybe are there an interest in proof of concept? Are you still kind of focused on earlier stage deals? Thanks.

I'm sorry, Alethia. We couldn't hear your question in the room? Could you repeat your question?

Yeah. With your external deals kind of in the early stage or in the late stage? But then, I guess, just some thinking about maybe significant timelines with the CTX001 program being a little bit more delayed than we thought? Thanks.

I think the question is about deals, external deals; we’re looking at what phase might we be looking at?

Alethia, we are interpreting your question. We remain focused on innovation, both internal and external. We’ve previously discussed our areas of interest and how we view this, specifically in CF and assets that fit our sandbox diseases. Our R&D strategy involves both internal and external innovation. You have never seen us invest more in our internal innovation. Our pipeline has a mixture of assets, both from our own developments and acquisitions, and partnerships like CRISPR and Moderna. You should expect us to continue in the same way.

Thanks, operator. Thanks, everybody, for tuning into tonight's call. The Investor Relations team is in the office, and we look forward to any additional questions that you have. Have a good night.