CAMBRIDGE, Mass. (

TheStreet

) --Two words investors don't want to see in a

Vertex Pharmaceuticals'

(VRTX) - Get Report

press release: Viral breakthrough.

Yet that's what Vertex disclosed Monday in its otherwise unremarkable third-quarter earnings report. A phase IIb study combining two of the company's experimental hepatitis C drugs -- VX-222 and telaprevir -- had to be modified after viral loads in some patients rebounded during the first four weeks of treatment.

The adversely affected patients were being treated with a low-dose of VX-222 plus telaprevir. That dosing regimen is being discontinued due to the viral breakthrough, Vertex said. Other hepatitis C patients continue treatment in the ongoing study with a high dose of VX-222 plus telaprevir as well as four-drug regimens of VX-222, telaprevir, long-acting interferon and ribavirin.

The future of hepatitis C treatment is in the combination of new drugs that act powerfully and directly against the virus, eliminating the need for patients to rely on older, established drugs like long-acting interferons and ribavirin which work in less than half of patients and causes bothersome side effects.

Vertex's effort in this race is centered around the VX-222/telaprevir combination, so Monday's disclosure of a hiccup in the ongoing phase II study is likely to raise some investor concerns. Other companies developing their own direct-acting antiviral combinations include

Roche

,

Bristol-Myers Squibb

(BMY) - Get Report

,

Gilead Sciences

(GILD) - Get Report

and

Boehringer Ingelheim

.

In its defense, Vertex said on a conference call that viral breakthrough in the low-dose VX-222/telaprevir arm of the study was not accompanied by any safety issues. Patients continue to be treated with a high-dose VX-222-telaprevir combination, also without safety issues. None of the patients in the remaining three arms of the 100-patient study have experienced viral breakthrough, the company said.

Vertex is gearing up to complete an approval filing for telaprevir in the coming weeks based on data from phase III studies which demonstrated the drug's ability to sharply increase the hepatitis C cure rate compared to the current standard of care. Vertex will seek telaprevir's approval for both

hepatitis C patients starting treatment for the first time

as well as

patients who have failed to respond to previous treatment

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.

Data from these pivotal studies of telaprevir will be presented at the American Association for the Study of Liver Disease (AASLD) annual meeting, which runs Oct. 29 through Nov. 2. The AASLD meeting will also showcase for the first-ever presentation of phase III data from a

Merck's

(MRK) - Get Report

competing hepatitis C drug boceprevir

.

Vertex is hoping to launch telaprevir early next year. The drug will be dosed three times a day initially in combination with long-acting interferon and ribavirin, but Monday the company announced plans to start a new phase III trial testing a more convenient, twice-daily dose of telaprevir.

A completed phase II study of

twice-daily telaprevir was presented at last year's AASLD meeting

and showed promising results.

From the financial ledger, Vertex's third quarter loss widened to $209 million, or $1.04 a share from $149.6 million, or 84 cents a share, in the year-ago quarter.

Vertex ended the September quarter with $1.2 billion in cash, including $400 million raised last month in a new convertible debt offering. Vertex said it remains on track to lose $750 million this year, in line with previous guidance.

Vertex shares closed Friday at $37.32, ahead of the company's earnings announcement.

--Written by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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