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Vertex's Alios Nucleotides
  Jan 17, 2012
Y. Katherine Xu, Ph.D
William Blair & Company, L.L.C.

Initial viral kinetic data of the Alios nukes in second quarter 2012: the saving grace of the Vertex HCV franchise. The field of HCV has moved quickly to interferon-free, all oral, and pan-genotypic combinations; the acquisitions of Pharmasset by Gilead and Inhibitex (INHX $24.55; Outperform) by Bristol-Myers Squibb (BMY $33.80) underscore the strategic importance of potent nukes and the heightened sense of urgency in the HCV race. Vertex's HCV franchise is quickly becoming obsolete; to stay in the race, Vertex has to develop all oral, pan-genotypic combinations as quickly as possible, and the Alios nukes are the key to such hope. Vertex in-licensed two nuke candidates from Alios in 2011, and the monotherapy viral kinetic data is due out in second quarter 2012. Should either or both of the Alios nukes demonstrate >4 log viral load drop, Vertex could have its own nuke+ribavirin (R) combo. Further, the two Alios nukes also have the potential to form a nuke+nuke combo, a feat only Gilead/Pharmasset could have accomplished before PSI-938 was put on clinical hold in December 2011.

The Vertex HCV Franchise in 2012: Alios Nukes Are Key Drivers The Life Cycle Management Strategy for Incivek Appears to Be Obsolete in the Face of the Pan-Genotypic Push Led by Gilead/Pharmasset

Vertex has been conducting a series of label-extension studies for the Incivek+P/R (PEG-interferon and ribavirin) regimen, including in African Americans, HIV co-infected patients, post-transplant patients, and IL-28B CC patients with a shorter duration (12 weeks). The OPTIMIZE study of Incivek twice daily (BID) versus three times a day (TID) will also read out mid-2012, which will simplify the regimen. The quad of Incivek+VX-222+P/R will be studied in certain niche populations such as advanced liver disease patients, null responders, and patients with various co-morbidities. The interferon-free, genotype (GT) 1-only combo of Incivek+VX-222+R will also report data during first quarter 2012. While such planning made sense previously, it has been rendered obsolete by the pan-genotypic push from Gilead/Pharmasset and the rest of the field, in our opinion.

Data From All-Oral ZENITH Arms Unlikely a Strong Driver for the Vertex Stock

The arms E and F of the ZENITH study evaluate the all-oral triple regimen of Incivek+VX-222+R for 12 weeks in GT1b and GT1a patients, respectively. The two arms completed enrollment during third quarter 2011, and early treatment data and partial SVR data will be available during first quarter 2012. We believe the SVR needs to be above 80% for the combo to be taken into Phase III studies. If Vertex initiates Phase III studies of the triple combo during 2012, there is a possibility for the combo to reach the market in 2014.

However, it is highly likely that Gilead will have the pan-genotypic PSI-7977+R regimen on the market in 2014 as well. We do not believe a GT 1 only, more complicated regimen with worse safety profile such as Vertex's triple combo would be competitive against a simple, safe, and pan-genotypic nuke-based regimen. As a result, we do not believe the data from ZENITH during first quarter 2012 will become a strong driver for Vertex stock.

Alios Nukes Are the Saving Grace; Phase I Viral Kinetic Data Due Out During Second Quarter 2012

· Phase I seven-day viral kinetic data is expected during second quarter 2012.
Should either or both of the Alios nukes demonstrate >4 log viral load drop, Vertex stock would react favorably, in our opinion.

· Various combo studies involving the nukes could be initiated during second half 2012. Combo studies to follow could include either nuke in combination with Vertex's marketed HCV protease inhibitor (PI), Incivek, or non-nuke (non-nucleotide polymerase inhibitor), VX-222; however, such combos will still target GT1 only. If either Alios nuke is potent enough, Vertex could have its own pan-genotypic nuke+R combo. Further, the two Alios nukes could also form

a nuke+nuke combo, a feat that only Gilead could have achieved before PSI-938 was put on clinical hold in December 2011.

· Gilead/Pharmasset sets the bar; Vertex plays catchup with Alios nukes. Gilead/Pharmasset could push an all-oral, pan-genotypic combination onto the market in 2014 that could achieve 90% SVR in as few as three months. With the current Vertex HCV portfolio, the company does not appear to be able to produce a Holy Grail regimen and start Phase III studies in 2012 for approval in 2014. The Alios nukes will be the saving grace for Vertex's HCV franchise; however, the nuke-containing combos may not reach the market until 2015 or later.

HCV Franchise Valuation

.............assuming Gilead's interferon-free, all-oral, pan-genotypic, PSI-7977-containing regimen reaches the GT1 market around mid-2014, leading to a secondary warehousing effect starting mid-2013.

Beginning in 2017........sales estimates for the Alios nukes, which might be conservative. We currently assign a 36% probability of success for a Vertex pan-genotypic nuke regimen to reach the market, with peak worldwide sales of $1.0 billion (table 1).

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