Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) Q2 2023 Earnings Call Transcript

Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) Q2 2023 Earnings Call Transcript August 1, 2023

Vertex Pharmaceuticals Incorporated beats earnings expectations. Reported EPS is $3.89, expectations were $3.88.

Operator: Good afternoon and welcome to the Vertex Pharmaceuticals Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Susie Lisa, Senior Vice President, Investor Relations. Please go ahead.

Susie Lisa: Good evening, everyone. My name is Susie Lisa and as the Senior Vice President of Investor Relations, it is my pleasure to welcome you to our second quarter 2023 financial results conference call. On tonight’s call making prepared remarks we have Dr. Reshma Kewalramani, Vertex’s CEO and President; Stuart Arbuckle, Chief Operating Officer; and Charlie Wagner, Chief Financial Officer. We recommend that you access the webcast slides as you listen to this call. The call is being recorded and 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 cystic fibrosis 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 that we will review on the call this evening are presented on a non-GAAP basis. In addition, the impact of foreign exchange is presented inclusive of our foreign exchange risk management program. I’ll now turn the call over to Reshma.

Reshma Kewalramani: Thanks, Susie. Good evening all and thank you for joining us on the call today. After a strong start to the year, we saw continued momentum into the second quarter across all aspects of the company. Our CF business continues to grow and we are reaching more patients than ever. In the second quarter, this expanded reach drove 14% global safe product revenue growth versus the prior year period. And with this first half performance, we are raising our full year 2023 CF product revenue guidance to a revised range of $9.7 billion to $9.8 billion. As we continue to deliver in CF, we’re also investing for future commercial excellence, ahead of multiple potential near-term launches. In exa-cel in both severe sickle cell disease and transfusion-dependent beta thalassemia which we expect will be the first in our next wave of launches.

In VX-548 for acute pain, another multibillion-dollar commercial opportunity and in our Vanzacaftor triple combination therapy for cystic fibrosis which provides the opportunity to further extend our leadership in CF. In addition to these 4 disease areas, our mid-stage clinical pipeline continues to develop rapidly and marked progress towards our 5 launches in 5 years goal. Recent achievements include: the VX-147 or Inaxaplin pivotal trial remains on track to complete the Phase IIB portion of the study by the end of this year. In our type 1 diabetes program, both VX-880, the naked cells and VX-264, the cells plus device programs are now in the clinic and dosing patients. Additionally, we announced a strategic long-term manufacturing agreement with Lonza for our type 1 diabetes cell therapy programs.

And finally, an accelerated time line for the VX-548 Phase II study in peripheral neuropathic pain, where we now expect the study to complete by the end of 2023. In total, we’re advancing programs in 8 disease areas through mid- and late-stage development, 6 of which are now past the proof-of-concept stage as detailed on Slide 5. Beyond our clinical pipeline, we’re also advancing the next wave of research stage assets, reflecting programs sourced from both internal and external innovation. This includes programs in Duchenne’s muscular dystrophy, myotonic dystrophy type 1, the NaV1.7 program for pain and gentler conditioning agents for use with exa-cel. In the CF franchise, in R&D and across the business, this quarter, Vertex has continued to make meaningful advancements to bring our CFTR portfolio to more patients around the globe and bring additional first-in-class or best-in-class potentially transformative medicines to multiple new disease areas.

With that overview, I’ll turn to the details of recent R&D progress, starting with CF. While TRIKAFTA delivers tremendous benefit for patients. If it’s possible to do better, we’re committed to being the ones who do so and that is the goal for our next-in-class vanzacaftor triple combination therapy. I am pleased to share we expect to complete all 3 Phase III studies, SKYLINE 102 and 103 in patients ages 12 years and above and the RIDGELINE study in patients ages 6 to 11 by the end of 2023 and release results from these 3 studies in early ’24. We have high expectations from the vanzacaftor triple program to lead to further improvements in CFTR function based on the totality of the evidence generated to date. The most direct readout of higher CFTR function is chloride transport in vitro and sweat chloride in patients.

In vitro, our human bronchial epithelial cell assays with the vanzacaftor triple showed greater restoration of chloride transport than with TRIKAFTA. And in Phase II in patients the vanzacaftor triple clinical studies showed correspondingly lower levels of sweat chloride than in previous studies with TRIKAFTA. We, therefore, believe the vanzacaftor triple has the potential to provide patients with enhanced clinical benefit, the convenience of once-daily dosing. And additionally, the Vanza Triple carries a substantially lower royalty burden. Another important program in our CF portfolio is VX-522, our CFTR mRNA therapy in development with our partners at Moderna for the more than 5,000 CF patients who cannot benefit from CFTR modulators. We have enthusiasm for this approach for 3 key reasons, based on what we’ve achieved to date: first, the delivery of mRNA at high efficiency into HBE cells in vitro; second, expression of CFTR protein leading to high levels of chloride transport; and third, successful nebulize delivery of mRNA in both small and large animals resulting an expression of CFTR protein in the desired cells.

We continue to enroll and dose CF patients in the single ascending dose or SAD study of VX-522. And we expect to complete the SAD portion and initiate the multiple ascending dose portion of the study this year. Turning now to exa-cel, our CRISPR/Cas9-based gene editing program for sickle cell disease and transfusion-dependent beta-thalassemia which targets the most severe patients and an estimated patient population of approximately 32,000. Exa-cel holds the promise to be a onetime functional cure for these diseases. On the regulatory front, the FDA has accepted our filings and granted priority review in sickle cell disease with the December 8 PDUFA date. Along with a standard review in beta-thalassemia with the March 30, 2024 PDUFA date. The FDA has indicated an advisory committee will be held and we look forward to the opportunity to discuss the high unmet need, share results from the exa-cel studies and discuss the transformative potential exa-cel holds for patients.

Outside the U.S., in the EU and the U.K., reviews for our exa-cel filings are also well underway. Our oral presentation, the most recent EHA meeting in June, provided new data that were the basis of the EMA and MHRA regulatory filings. Both trials met the primary and key secondary endpoints with follow-up in some patients of more than 36 months. The exa-cel EHA results continue to demonstrate transformative, consistent and durable benefit for patients as measured by freedom from severe vaso-occlusive crises for 94% of SCD patients and transfusion independence in 89% of TDT patients. The safety profile was generally consistent with busulfan conditioning and bone marrow transplantation. Another significant opportunity for exa-cel is in younger patients and the pediatric trials in both sickle cell disease and beta thalassemia are underway.

We have enrolled more than half the target number of patients in both pediatric studies and have dosed multiple patients. This is an important area of focus given the opportunity to intervene earlier and potentially prevent organ damage and other complications before they ever occur. As the PDUFA dates approach in the U.S. and reviews come to conclusion in the U.K. and EU, we look forward to bringing this onetime potentially curative therapy to thousands of patients with severe sickle cell disease and transfusion-dependent beta-thalassemia. Turning next to our pain program and VX-548, our novel, highly selective NaV1.8 inhibitor that holds the promise of effective pain relief without the side effects or addictive properties of opioids. In acute pain, I am pleased to share that all 3 Phase III studies, 2 randomized controlled trials and a single-arm safety and efficacy study will complete by the end of this year, with results available in late 2023 or early ’24.

The pace of this Phase III program has been rapid which we see as indicative of the high unmet need and strong interest in an efficacious, non-opioid acute pain therapy. We have high confidence in the outlook for these Phase III studies given: one, the genetic and pharmacologic validation of the target; two, multiple proof-of-concept trials with the predecessor molecule and with VX-548 itself; and three, the similar methodology, design and endpoints of our Phase III studies compared to the Phase II program. Closing on acute pain, recall that the phase III program has been designed to support a broad model-to-severe acute pain level which would enable prescribing and usage across mule setting including in Hospital or the ambulatory surgical center post-discharge and in the home.

We are also studying VX-548 in diabetic peripheral neuropathy or DPN. A type of peripheral neuropathic pain that represents yet another significant area of unmet need and another multibillion-dollar market opportunity. We have previously delivered positive proof-of-concept data in peripheral neuropathic pain with the predecessor molecule VX-150. The current study in DPN with VX-548 is a 12-week Phase II dose-ranging proof-of-concept study. I am pleased to share the time line for this DPN study has accelerated and we have recently completed enrollment. This study will complete by the end of this year and we expect to share results in late 2023 or early ’24. Moving now to type 1 diabetes, where we’re evaluating stem cell-derived, fully differentiated insulin-producing islet cells for people with type 1 diabetes.

Our goal is to develop a functional cure for the millions of people living with type 1 diabetes, including the more than 2.5 million patients in North America and Europe alone. The VX-880 program is our foundational cell therapy program for T1D in which we have already demonstrated proof of concept. In the VX-880 trial or the naked cell program, patients take standard immunosuppressants to protect the islets from the immune system. We presented updated clinical data on Parts A and B of the study at the recent American Diabetes Association Meeting. The presentation at the ADA showed that all 6 patients treated with VX-880 engrafted islet cells, produced endogenous insulin and had improved glycemic control while reducing or eliminating exogenous insulin use.

Importantly, the 2 patients with at least 1 year follow-up saw a complete elimination of severe hypoglycemic events, maintained hemoglobin A1Cs below 7% and were insulin independent. Further, patients who were earlier on their course of therapy were on a similar trajectory as the 2 patients with long-term follow-up. Based on these results, the VX-880 trial has now advanced to Part C, where patients are treated concurrently at the full target dose. And as part of our global study plan, we’ve now opened clinical trial sites in Europe in addition to those already open in the U.S. and Canada. Our second program, VX-264, the cells plus device program encapsulates these same cells which have already demonstrated proof of concept in a proprietary immunoprotective device.

And hence, there is no requirement for immunosuppressants. I am pleased to share that enrollment in the VX-264 study has initiated and we have already dosed the first patient. The third program is our hyperimmune program in which we edit the same fully differentiated cells to cloak them from the immune system. This represents another path to obviating the need for immunosuppressants. In March, we expanded our collaboration with CRISPR Therapeutics into type 1 diabetes to use CRISPR/Cas9 to make these edits and we continue to make progress in this research stage program. Transitioning now to Inaxaplin or VX-147, the first potential medicine to target the underlying cause of APOL1-mediated kidney disease or AMKD, a genetically defined disease that affects approximately 100,000 patients in the U.S. and Europe alone.

Recall the Inaxaplin pivotal program for patients with AMKD is a single adaptive Phase II/III study with a pathway to accelerate approval in the U.S. The Phase IIB dose-ranging portion of the study continues to enroll and dose and remains on track to complete this year. We also continue to work to enhance AMKD disease awareness and genetic testing availability to support diagnosis, including through partnerships with Natera, a leader in genetic testing and Arkana, a leader in renal pathology services. To close an update on our Alpha-1 antitrypsin deficiency or AATD program, our small molecule approach targets both the lung and liver manifestations of this disease that affects an estimated 100,000 people in North America and Europe. Our program is exploring 2 hypotheses: first, longer treatment duration with VX-864; and second, a more potent molecule with VX-634.

The Phase II program for VX-864, a 48-week study in patients with AATD that assesses both liver clearance of Z polymer and functional plasma AAT levels is ongoing and is anticipated to complete enrollment later this year. VX-634, the next-in-class molecule with multifold greater potency and better drug-like properties is projected to complete its Phase I trial by the end of this year. Overall, the AATD program remains on track and we look forward to sharing results in 2024. With that, I’ll turn it over to Stuart to provide a commercial update, including details on our launch preparations for exa-cel.

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Stuart Arbuckle: Thanks, Reshma. From a commercial perspective, we had strong second quarter results as we continue our focus on reaching all patients eligible for our CFTR modulators and maintaining high levels of adherence for patients treated with our medicines. In addition, we continue to prepare for multiple potential near-term launches, including exa-cel in severe sickle cell disease and transfusion-dependent beta-thalassemia VX-548 in moderate to severe acute pain and the vanzacaftor triple combination in CF. At the same time, we are developing new capabilities to support the commercialization of other pipeline assets. such as disease awareness for AMKD and investing in our manufacturing capabilities for type 1 diabetes.

Given our nearest term opportunity is exa-cel in hemoglobinopathies where we have completed our regulatory filings in Europe and the U.S. and also being granted PDUFA dates in the U.S. This quarter, I will focus my comments about our pipeline on prelaunch activities for exa-cel. But briefly first on CF. At the beginning of this year, there were more than 20,000 people with CF in North America, Europe and Australia, who could benefit but were not yet being treated with a CFTR modulator. We continue to bring our medicines to these patients through new approvals and uptake following additional reimbursements with a focus on reaching younger patients and this will continue to be a driver of near-term growth for our business. Second quarter 2023 CF revenue growth of 14% was consistent with this outlook and was driven primarily by expanded use of our medicines in younger age groups.

Following U.S. TRIKAFTA approval in children ages 2 to 5 in late April, we’ve seen strong interest from the CF community with the first prescription written just hours after the approval and uptake across all eligible patients. Outside the U.S., KAFTRIO growth has continued to be strong in patient ages 16 and older, following approval, reimbursement and successful launches in multiple geographies. In addition, we received EU approval for ORKAMBI in children ages 1 to 2 in early July and we continue to expect approval for KAFTRIO in the EU in children ages 2 to 5 by the end of this year. We are also actively enrolling our KAFTRIO study in children ages 1 to 2. Overall, we see continued growth for our portfolio of CFTR modulators, driven by approvals, reimbursement and uptake of our medicines in younger patients.

In addition, approvals of future CF medicines will also drive growth. Notably, our next-generation vanzacaftor triple seeks to provide improved efficacy for patients and a new treatment option for those who have discontinued prior CFTR modulator therapy. And longer term, VX-522, our mRNA approach could offer a therapy for the more than 5,000 patients who cannot benefit from CFTR modulators. Shifting now to exa-cel which holds curative potential for patients with severe sickle cell disease and transfusion-dependent beta thalassemia both chronic diseases that can be disabling and life-shortening and have an extremely high burden of care. On previous quarterly earnings calls, I provided details for exa-cel on the estimated eligible patient population, the geographic concentration of those patients and our proposed ATC network of 50 centers in the U.S. and 25 in Europe.

The hiring and training of our field and medical education teams and insights from physician and patient market research. This quarter, I’d like to provide our perspective on access and reimbursement and our discussions globally with payers and policymakers. Our teams continue to make excellent progress in pre-approval discussions with both government and commercial payers in the U.S. and Europe. With more than a dozen cell and gene therapies on the market, payers across different channels are increasingly experienced with these transformative types of therapies. In the U.S., approximately 65% of patients with sickle cell disease or beta thalassemia, have coverage through government programs with the majority via Medicaid and the remaining 35% of patients are covered by private insurance.

Our teams have already engaged Medicaid administrators in all 50 states with a particular focus on the 24 states with the highest prevalence of sickle cell disease, accounting for an estimated 90% of Medicaid patients with SCD. We’re encouraged by the enthusiasm from state Medicaid administrators for exa-cel as well as the proactive steps they are taking to prepare for the availability of therapies like exa-cel including the enablement of separate payment policies for coverage of the cost of the therapy, distinct from the cost of the bone marrow transplant procedure. The Medicaid-focused CMS cell and gene therapy access model also continues to make progress towards its anticipated launch in 2026. The model is clear evidence of the federal government’s recognition of the potential transformative value of gene therapies like exa-cel to treat sickle cell disease and their interest in finding innovative payment solutions and pathways for state Medicaid programs.

Shifting to commercial payers. We have had high levels of engagement with commercial payers, including the top 4 payers that account for approximately 80% of commercial lives. And our goal is to facilitate timely coverage decisions upon a potential exa-cel approval. Our pre-approval discussions have been encouraging and are focused on disease burden, epidemiology estimates, our clinical data and potential payment models. In Europe, the MAA reviews are well underway and thus, we are also working on paving the way to secure reimbursed access for patients in our targeted European markets. We have been engaging with health systems to educate them on the significant disease burden on patients, health care systems and society. In addition, we have been meeting with European health authorities to understand their interest in different payment models and to communicate the holistic value of a onetime potential functional cure.

Given the urgent unmet need for new treatments for sickle cell disease and beta thalassemia, there is significant interest from patients and physicians, particularly in geographies with high concentrations of the eligible patient population. To conclude, it’s a remarkable time to be at Vertex. We continue to make progress treating more CF patients while our excitement for the transformative promise of exa-cel for patients and the resulting multibillion-dollar market opportunity continues to grow as we approach potential approval. We are also preparing for multiple additional near-term launches, including the vanzacaftor triple in CF and VX-548 in acute pain, both of which have the potential to dramatically improve patients’ lives. I’ll now turn the call over to Charlie to review the financials.

Charlie Wagner: Thanks, Stuart. Vertex’s excellent results in the second quarter of 2023 demonstrate once again our consistent strong performance and attractive growth profile. Second quarter 2023 revenue increased 14% year-over-year to $2.49 billion. Growth was led by a 26% year-over-year increase outside the U.S. on continued strong uptake of TRIKAFTA-KAFTRIO in markets with recently achieved reimbursement as well as label extensions in younger age groups. Similarly, expansion in younger age groups helped drive 7% U.S. revenue growth following the recent FDA approval of TRIKAFTA in patients ages 2 to 5. Second quarter and first half revenues also benefited from increases in channel inventory in certain international markets which are expected to draw down in the second half.

Second quarter 2023 combined non-GAAP R&D, acquired IP R&D and SG&A expenses were $1.04 billion compared to $750 million in the second quarter of 2022. Q2 2023 results include $110 million of acquired IP R&D charges compared to $62 million of such charges in the second quarter of 2022. Second quarter 2023 IP R&D expense reflects a $70 million milestone to CRISPR Therapeutics for progress made in our hypoimmune program for type 1 diabetes. Aside from our investments in external innovation and the resulting higher acquired IP R&D charges, operating expense growth was driven as expected by continued investment in research and our advancing pipeline which includes mid- and late-stage clinical assets across 8 different disease areas. The most significant areas of increased investment versus prior year included the clinical studies for the vanzacaftor Triple-NCF for VX-548 in acute pain and for type 1 diabetes.

In addition, we continued our pre-commercial activities for exa-cel and other anticipated near-term launches, given the potentially transformative benefits to patients and multibillion-dollar market opportunities for our mid- and late-stage programs, we will continue to invest appropriately. Second quarter 2023 non-GAAP operating income was $1.15 billion compared to $1.19 billion in the second quarter of 2022. Second quarter non-GAAP earnings per share were $3.89, representing 8% growth compared to $3.60 in the second quarter of 2022. We ended the quarter with $12.6 billion in cash and investments. Now switching to guidance. Given our strong first half results and our consistent execution, including the successful launch of TRIKAFTA in patients ages 2 to 5 in the U.S., we are increasing our 2023 revenue guidance as detailed on Slide number 16, for the full year 2023, we now expect CF net product revenue of $9.7 billion to $9.8 billion, an increase of $100 million to $150 million compared to our prior range of $9.55 billion to $9.7 billion.

Note that this revenue guidance includes an expected approximate 150 percentage point headwind to our revenue growth rate, consistent with our prior expectations. In addition, given our December 8 U.S. PDUFA date for exa-cel and sickle cell disease, 2023 product revenue guidance continues to reflect revenue from cystic fibrosis products only. We are also raising our 2023 guidance for combined non-GAAP R&D, acquired IP R&D and SG&A expenses to a range of $4.1 billion to $4.2 billion, an increase of $200 million from prior guidance. This increase reflects higher IP R&D expenses from new business development, including collaborations with Entrada in DM1 and with CRISPR in type 1 diabetes. Our 2023 non-GAAP operating expense guidance now includes approximately $500 million of upfronts and milestones compared to the $300 million projected at the start of the year.

We continue to invest a majority of our operating expenses into R&D, given the momentum in our multiple mid- and late-stage clinical development programs. We are also funding the expansion of our commercial capabilities in anticipation of the multibillion dollar opportunities represented by our programs with near-term launch potential while continuing to leverage an attractive business model afforded by our focus in specialty markets. Our guidance for projected full year 2023 non-GAAP effective tax rate of 21% to 22% is unchanged. In closing, Vertex delivered excellent results for the second quarter of 2023. We delivered strong revenue growth, completed important regulatory milestones, updated on significant clinical trial programs and invested internally and externally.

As we continue to advance our programs in 2023, we anticipate further important milestones as highlighted on Slide 17 to mark our continued progress in multiple disease areas. We look forward to updating you on our progress on future calls and I’ll ask Susie to begin the Q&A period.

Susie Lisa: Thanks, Charlie. Gary, can you please view the first question?

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Q&A Session

Operator: [Operator Instructions] Our first question is from Phil Nadeau with Cowen & Company.

Phil Nadeau: Just a couple on exa-cel. In the prepared remarks you mentioned or at least in the press release, you mentioned that an advisory committee is likely, does Vertex have any sense of what is likely to be discussed or debated at the advisory committee? And then second, for Stuart, thanks for all your comments on the commercial prep. We have seen gene and cell therapy launches get off to a relatively slow starts of late with some not actually having patients dosed for 7 or so months after approval. What does Vertex learn from that? What could you do to increase the speed at which patients are adopting exa-cel post approval?

Reshma Kewalramani: Phil, this is Reshma. Let me take the first part of your question and then I’ll ask Stuart to comment on the commercial launch readiness. With regard to exa-cel, the FDA has informed us that there will be an advisory committee. This is not unexpected as we’ve discussed in the past, given the new mechanism of action. We don’t have further details. Those will be forthcoming. And I expect we’ll know more as we approach the date of the AdCom which we don’t have today either. However, conventionally, the advisory committees usually take place about 1 to 2 months before the PDUFA date. So that’s the general framework that we’re looking at. We are very excited to have the opportunity to share our data, to talk about the benefit risk and to talk about the transformative potential and to have the patient’s voices heard at the advisory committee. Let me turn it over to Stuart to comment on launch readiness.

Stuart Arbuckle: Yes, Phil, so thanks for the question. Obviously, the first most important step to provide the conditions for a successful launch are going to be to secure access and reimbursement because as you know, without access and reimbursement, there really is no opportunity for patients to get treated. And that’s why I focus my comments on that and we are doing everything we can with payers, both in the U.S. and internationally try and get access and reimbursement as close to regulatory approval as we possibly can. Obviously, that’s not entirely within our control but that’s what we’re working on. In terms of the kind of uptake curve in the future, now, obviously, that’s going to depend on the interest from physicians and patients.

We know that, that is very high. But I would remind you that, as I’ve said on previous calls, we do expect the uptake with exa-cel to be slower, obviously, than we see with our CF medicines where the launches are almost vertical. And that’s largely because, as you know, this is a multi-month process that a patient has to go through to get treated with exa-cel. Obviously, they have to decide with their physician that they want to go through a gene therapy. They have to have their cells collected. The cells then have to be edited, returned to the site and then the patient has to schedule coming in for essentially the equivalent of a bone marrow transplant before they’re actually dosed with the exa-cel drug product. So it is a multi-month process from start to finish for any individual patient.

And so that’s why we’ve always said this launch, we do expect to be slightly slower in uptake rate than in cystic fibrosis but we continue to believe there’s a lot of interest. It’s a big market opportunity and we see exa-cel as a multibillion-dollar opportunity in the future.

Phil Nadeau: Great. One follow-up, if I may. On the reimbursement, we’ve seen warranty agreements put in place by one recent gene therapy launch. Is that something you’re considering or you think would be helpful?

Stuart Arbuckle: Sorry, Phil, I didn’t quite catch the question. Can you say it again?