福泰製藥 (VRTX) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vertex Pharmaceuticals Inc. fourth quarter 2011 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded. Now I'll turn the conference over to Michael Partridge. Please begin.

Good evening, and welcome to Vertex's 2011 financial results conference call. 2011 began a fulfillment of Vertex's vision of improving patients lives with breakthrough medicines. As we look to 2012, we are focused on balancing the revenues we are generating with the breadth of investment required to drive continued innovation in our pipeline and generating significant earnings and cash flows. With me today to review our 2011 accomplishments and outlook for 2012 are Dr. Jeff Leiden, who will kick off the call with an overview of our business focus for 2012; and Ian Smith, who will comment on selected year-end and fourth quarter 2011 financial results and 2012 financial guidance.

A press release announcing our fourth quarter and 2011 financial results and 2012 financial guidance has been issued. Please refer to this release for the primary line items within our income statement. After our prepared remarks, we will be joined by Dr. Peter Mueller, Nancy Wysenski and Dr. Bob Kauffman and will be happy to take your questions. We will ask you to please limit your questions to one with a related follow-up. We're stopping tonight's call promptly at 6.00 PM and for any questions after that we will be in our offices to take your call.

Finally, let me note that information discussed on this conference call includes forward-looking statements which are subject to the risks and uncertainties discussed in detail in our reports filed with the Securities and Exchange Commission, including our 10-K. GAAP and non-GAAP financial measures will be discussed on this call. Information regarding our use of non-GAAP financial measures and a reconciliation of those measures to GAAP is available in our full-year 2011 financial results press release which is on our website.

All 2010 and 2011 expenses discussed in this call exclude stock-based compensation expense, restructuring expense, and any intangible asset impairment charges net of tax, any revenues and expenses related to certain September 2009 financial transactions, commercial milestone payments and items related to Vertex's collaboration with Alios. Thank you, and I will now turn the call over to Jeff.

Thanks, Michael. I joined Vertex just six weeks ago and I am extremely pleased with the execution we are demonstrating across the business. On today's call, I want to reiterate for you again what I said at the beginning of the year at the annual JPMorgan Healthcare Conference and what I said two days ago when we announced the approval of KALYDECO, and that is that Vertex is well-positioned to be a global business, to help many more patients with serious diseases, and to continue to generate significant cash flows. In less than a year, Vertex received approvals and launched two breakthrough medicines in different life-threatening diseases, INCIVEK for the treatment of hepatitis C and KALYDECO for the treatment of cystic fibrosis.

Looking ahead, we have a pipeline of eight other potential medicines and expect to generate proof-of-concept data for many of these programs throughout 2012. This is a very exciting and deep pipeline that gives us the opportunity to launch additional new medicines over the next few years that could deliver significant benefits to patients and their families and significant value to Vertex and our shareholders. Launching INCIVEK last year was a crucial turning point for Vertex and enabled us to demonstrate not only our research and development expertise, but also our ability to build a commercial team that flawlessly executed one of the most successful drug launches in the industry.

Prior to launch, we anticipated strong demand for this medicine from people living with hepatitis C and the healthcare providers who treat them. But INCIVEK's performance in the first seven months exceeded even those expectations. INCIVEK is now available in multiple countries including the US, Canada and nine countries in Europe. We believe this reflects the clinical benefits of the drug and the outstanding work of our commercial organization. Our fourth quarter and year-end 2011 results reflect the very rapid launch of INCIVEK and have created strong cash flow to enable investment in our late stage pipeline of medicines while also returning value to shareholders.

Ian will review our financial results with you momentarily. As our hepatitis C commercial group remains keenly focused on INCIVEK's launch we are progressing efforts to sustain our leadership in hepatitis C for the long term. We have a number of future opportunities in this disease including an all-oral regimen in Phase 2 and two novel nucleotide medicines which are now in Phase 1. These nucleotide compounds are pan-genotypic in vitro and we expect to obtain viral kinetic data this year, not only genotype-1 but also in multiple HCV genotypes. In the area cystic fibrosis, the team's execution on the development and regulatory submissions of KALYDECO for the treatment of a subset of patients was absolutely extraordinary.

As a result of these efforts, we launched our second breakthrough medicine within nine months after the launch of our first, and only three months after the submission of the NDA. Nancy and her team are working together to bring KALYDECO to CF patients aged 6 and older with a G551D mutation. And I'm pleased to announce that just two days after approval, KALYDECO has begun to arrive at the network of specialty pharmacies. Through our disease education initiative we're providing doctors and nurses with specific resources to understand the science behind CFTR modulation and the importance of knowing a patient's genotype.

We're also educating the community on KALYDECO's label and the patients who can benefit from this medicine to enable the successful outcomes that patients, providers and payers all want. And we're equally excited about ways to improve the treatment for other people living with cystic fibrosis. KALYDECO is part of a long-standing and ongoing program, our work is not done. We have a portfolio of medicines and we're committed to doing everything we can to help as many CF patients as possible. Specifically, we are now getting ready to start three additional studies of KALYDECO as monotherapy, which may help to expand the addressable population. With positive results from these studies, we believe we could submit data to begin to expand KALYDECO's label as early as 2013.

We're also exploring combining KALYDECO with VX-809 and VX-661, two potential medicines known as correctors, which target the most common CF mutation called Delta F508. We have exploratory studies ongoing in parallel with these medicines and expect to get clinical data from these studies later this year. Beyond our hepatitis C and cystic fibrosis areas, we're advancing our pipeline of other medicines. We're initiating Phase 2b studies of VX-509, our selective JAK3 inhibitor for rheumatoid arthritis and other autoimmune diseases, and VX-765 for epilepsy. Also this year, we're planning to initiate a proof-of-concept study for VX-787, a novel medicine for influenza.

These opportunities in our drug pipeline are both diverse and global, and could build upon the revenue base of INCIVEK and KALYDECO to provide substantial growth for Vertex in the next three to five years. We fundamentally believe that the value of our business will be driven by innovations in our pipeline, while we maintain a financial return from our marketed drugs. In summary, only a few biotech companies are fortunate enough to go from being a drug development Company to a successful commercial organization with multiple approved medicines. And fewer have done so with a broad and diverse pipeline in serious diseases like we have developed at Vertex.

As we look ahead, we see 2012 as the year that underscores to many our capability to consistently discover, develop and bring breakthrough medicines to patients. Thank you, and I'll now turn the call over to Ian.

Thanks, Jeff, and evening to everyone. Financially, 2011 was a turning point for the Company. It marked Vertex's first full year of profitability and reflected the success in treating a significant number of hepatitis C patients with INCIVEK. We've now transitioned to a business generating significant revenues and as we enter 2012 we have a financial objective to balance our investments into R&D, required for innovation and growth opportunities, while still generating significant earnings and cash flows.

Tonight I'm going to report on our GAAP and non-GAAP income for the full year 2011, and then focus my remarks on how we're financially managing 2012. I will, of course, be happy to address any questions during the question-and-answer session. First, to our 2011 financial results. The GAAP net income attributable to Vertex in 2011 was approximately $30 million, or $0.14 per diluted share. This compares to a $755 million 2010 GAAP net loss.

For the full year 2011, our non-GAAP net income was approximately $16 million, or $0.08 per diluted share which compares to a $606 million of 2010 non-GAAP loss. We achieved these results, and specifically the full-year profitability, due to the successful launch of INCIVEK in the US coupled with a focus on financial discipline that balances the investment necessary for continued innovation. Before I turn to the guidance we're providing for 2012, I'd like to remind everyone that at the end of 2011 we had NOLs, that is net operating losses, of approximately $3 billion. Utilization of these NOLs contributed to the cash position in 2011 and will continue to reduce our tax obligations going forward.

Now turning to the financial guidance for 2012. The components of the guidance we're providing are as follows. INCIVEK net product revenues and non-GAAP total operating expenses excluding cost of revenues stock-based compensation and the expenses related to accounting treatment of the Alios collaboration. These are important financial measures of cash inflows and reinvestment back into our business. We may provide further financial guidance in 2012 as we gain more understanding of the revenues generated from the recently approved and now launched KALYDECO, and also the royalty revenues from the recent approval of INCIVO, which is marketed in Europe by J&J. Both may provide substantial revenues and contribute to earnings and cash flow.

We believe our 2012 guidance reflects our ability to build value by creating earnings while we continue to prudently invest in our pipeline of medicines to drive further innovation. It's a careful balance of priorities. First, we expect US INCIVEK net product revenues to be within a range of $1.5 billion to $1.7 billion for the full year of 2012. This compared to 2011 net product revenues for INCIVEK of approximately $951 million, which represents the first seven months of sales for INCIVEK. Additionally, this compares to our fourth quarter INCIVEK revenues of approximately $457 million.

The 2012 projected INCIVEK revenues are based on our assessment of the genotype-1 hepatitis C market, our understanding of the underlying demand, trend in physician treatment decision-making and our general market knowledge. It also takes into account the anticipated increases in the gross to net adjustments from our weighted average cost or list price based on contractual terms with commercial and government payers.

Next, projected 2012 non-GAAP total operating expenses, specifically those of R&D and SG&A expenses, we expect these expenses to be in the range of $1.03 billion to $1.13 billion compared to $981 million for 2011. This is an increase of approximately 10% using the midpoint of our 2012 expense guidance. This also compares to approximately $276 million for the fourth quarter of 2011.

Now looking at the individual components of the non-GAAP R&D and SG&A expenses. First, our R&D expenses are anticipated to be in the range of $690 million to $760 million. This compares to approximately $627 million in 2011, and approximately $166 million for the fourth quarter of 2011. This spend will be focused on the advancement and the initiation of multiple clinical trials planned in several different serious diseases including our lead programs in hepatitis C and cystic fibrosis, as well as clinical programs in rheumatoid arthritis, influenza and epilepsy.

On the commercial side of our business, we will continue to support the launch of INCIVEK and the recent US launch of KALYDECO for cystic fibrosis patients. We will also incur costs associated with the initial preparation for and the potential launch of KALYDECO in the EU later this year. To support these important areas of our business, we anticipate SG&A expenses to be in the range of $340 million to $370 million. This compares to $354 million for the year ended 2011, and approximately $110 million for the fourth quarter of 2011. In summary, we believe the approval of our first two medicines has demonstrated our capability to develop breakthrough medicines in serious diseases. But we would not be where we are today without shareholder support in making significant investments in the pipeline to advance these innovations.

We are now fortunate to have a strong capital structure, and significant cash inflows from product revenues that we believe will enable us to deliver significant return back to our shareholders while maintaining investments in our business. Thank you for your support, and, Michael, back to you.

Thank you. Tyrone, we'd now like to open up the call to questions.

Thank you. (Operator Instructions) Our first question is from Geoffrey Porges of Bernstein. Your line is open.

Thanks very much for taking the questions. Congratulations on the first year of profitability. Ian, a couple of questions on your philosophy in giving us this guidance. First of all, you seem to be guiding that INCIVEK is expected to be down modestly versus the fourth quarter. And can you tell us what you thought about that? And secondly, as you think about expenses, presuming there may be some revenue opportunities emerging from either KALYDECO or else coming from royalties, do you expect expenses would be fixed at those levels or would they ramp up if there was incremental revenue? And lastly, could you just give us a sense of whether you think this gross margin is sustainable at this level given the portfolio? Thanks.

Okay, Jeff, how you doing? I think I got all five of those questions. (laughter) So let's start, and if I missed any, please take me back. First of all, why guidance? Well, as I'd said in my prepared remarks, we do think it's important to give the investors and analysts a good understanding of the cash inflows that are coming into our business and then how we choose to reinvest them versus allowing them to drop to the bottom line. The key line items in terms of those coming into our business are in the INCIVEK net revenues.

We feel as though we have a good understanding of the hepatitis C market, and the range that we gave up $1.5 billion to $1.7 billion is a range that we're confident of achieving in 2012. Other line items on the revenue, though, it's a little more difficult because we're at the earlier stages of launches of products. So the KALYDECO revenue stream for 2012, we have to see how that goes, and then also the same with INCIVO which is, of course, INCIVEK in Europe. But that is also at its early stage of the launch. As we go through the year, we get a better understanding, we may provide further guidance. Those are two line items that could provide significant cash inflow to the business.

And as we go through the year, then we may give further guidance on those line items. But at this stage, it just feels too early. From an expense base, clearly, the trajectories in our business of R&D, which have been questioned a number of times, we want to give the guidance on how are managing the business financially on the investment side. And as you see, the total operating expense guidance that we're giving, it is a 10% increase on the prior year, but from an SG&A perspective, it is being held fairly constant to 2011. There is slight growth in the R&D side, but that's because of the progression and advancement of development programs.

So we wanted to give that kind of financial structure to the business and that's the reason to give the guidance and we have the confidence to give that guidance. To your other questions, you asked about the INCIVEK trajectory, I assume you are comparing it to a Q4 number. We were fortunate in Q4 to benefit from this rapid uptake following launch where there was a high volume of patients flowing into the system, which we, clearly, benefit from a revenue perspective as we went to the fourth quarter.

As we go into 2012, we're establishing where we believe the run rate of the patients are flowing through the system and that's reflected in our guidance of $1.5 billion to $1.7 billion. I would point out, we did benefit early on by patients that were waiting for therapy, then came our approval and they came into the system. We do feel as we give guidance of $1.5 billion to $1.7 billion that we have a confidence of achieving that. As far as the other revenues, I mentioned those. Those are the INCIVO royalty revenues and also the KALYDECO revenues.

Expenses in terms of how the business performs through the year, we're holding ourselves accountable internally to the numbers that we've provided to you, so we do not see those flexing and we have a number of programs internally ongoing in the Company that maintain those expenses and in some parts of our business, actually, take the expense away. As far as the gross margin on the products, we see it remaining fairly similar to 2011. We've always mentioned that the gross margins for the products we sell should be above 90% including the royalties that are attached to some of those products. So we're still in good shape as we go into 2012 on the gross margins of the two products that are now in the market.

Thank you very much. Appreciate that.

Thank. The next question is from Terence Flynn of Goldman Sachs. Your line is open.

Hi, thanks for taking my question. Congrats on the progress. I just had a question on the ongoing KALYDECO 809 trial. I was wondering, first, if you can give us any update on enrollment? And then, two, maybe you could help us frame what you guys would view as a go/no go decision for taking that combination forward into a larger Phase 3 program?

Hi, Terence. That's Peter speaking, and Bob will also maybe say a couple words to that. So first of all, Cohort 2 enrollment is going as expected, no delays or anything. We are expecting mid-year to have data that might be available for broader communication. Everything so far is on track and there are no stoplights that I can see at this given point in time. So what was the other question?

This is Bob. Your second point is sort of our benchmarks for going forward into Phase 3. We've been asked this many times and it's very hard to put an exact number on it. I think a lot will depend on what we see in the trial. Obviously, looking at (inaudible) results and lung function results and it's just pretty hard to really pin ourselves down to something.

The other comment I want to add, the decision is not solely on 809. We have two correctors, the other one is 661. It is not a binary yes or no, it is choosing the best regimen as we go forward. And we will get data in the course of the next couple of months to get a better insight, as Bob said, what there is. So don't see it as just an 809 type of event, see it as a broader approach to identify a viable regimen that treats this broader population.

Okay, and can I just ask one follow-up on the design of the KALYDECO 809 study? I was wondering, I know you're enrolling both patients, homozygous and heterozygous, for F508 Delta. Is that a pre-specified stratification criteria, and are there set numbers of patients for each of those you're going to enroll?

Yes. There's specific subgroups. The majority of the trial is the homozygous patients and there's one cohort of heterozygous patients and enrollment is, obviously, separately into those groups.

Okay, thanks a lot.

Thank you. Our next question is from Rachel McMinn of Bank of America-Merrill Lynch. Your line is open.

Yes, two questions, one very specific, a broader one. On the specific one, I'm wondering, even though you can give us guidance for INCIVO, can you give us a sense of what INCIVO royalties really were in the quarter, whether there were one-time stocking effects in 4Q? Just want to make sure we don't overestimate the run rate going into 2012. And then the broader question on capital allocation, the exiting CEO had kind of previously articulated that R&D investment would kind of be first into the pipeline, second into kind of small M&A and deals, and then third, a distant third would be share repurchases. Jeff, I was wondering if you could, if I could take your temperature on your view of that capital allocation strategy? Thanks.

Hi, Rachel it's Ian. So the royalties from INCIVO in the fourth quarter were approximately $16 million. There is a little bit of stocking in there, but it's also right at the beginning of the approvals and launches of INCIVO in the various European countries. It has been approved in the major European countries now. We would anticipate that the run rate of that royalty to pick up significantly, frankly, as we go into 2012.

And, Rachel, this is Jeff on your question on capital allocation. I think Matt and I were and are in complete agreement about that. As you know, I've told you before we're quite excited about a number of opportunities in our current pipeline, including our Alios nukes, triple oral in HCV, our KALYDECO label expansion in CV, and then, of course, the combination studies. And behind that, the flu, the epilepsy and the JAK compounds. So there are a lot of exciting things to invest in. We plan invest in them because not to do so would be to starve the future growth of our business.

With respect to M&A activities, I think like most companies, we keep a careful eye on what is going on on the outside. We're in the fortunate position of not having to do deals because of our pipeline. On the other hand, we're always looking for interesting things that can complement what we have internally and we will continue to do so.

And I'm sorry, just a quick follow-up to that. Anything specific on HCV, or do you feel comfortable your HCV portfolio?

We feel very comfortable with our HCV portfolio. In fact, I would say as I look at it, and I've been looking at it for a while now, it's the broadest and deepest portfolio that allows us the most swings at the ball, Rachel. And I think, again, I've talked with you about this before, I don't think anybody knows exactly what the winning combinations are going to be yet for the different patient sub-populations, and what I like about our pipeline is we have many different swings at the ball. With the two Alios nukes, which can be combined with each other, ribavirin, obviously, our non-nuke, VX-222, and INCIVEK. So I think when I look at our pipeline, we have the component parts to create a number of winning regimens and we plan to pursue several of those to understand how they are going to work and how it's going to play out in these different patient sub-populations.

Perfect, thanks very much.

Thank you. Our next question is from Geoff Meacham of JPMorgan. Your line is open.

Hi, thanks for taking the question. This is actually Mike in for Jeff. Just wondering if you can maybe break out for us INCIVEK patient numbers in terms of the dynamic between those that are naive and experienced, and maybe sort of what you're seeing and how that is sort of changing over time? Thanks.

Sure, Mike, this is Nancy. Actually, when we first launched the drug we saw a slight tip toward the naive patient group at about a 60/40 split, and to date but really hasn't changed. And I think that's an indication of the fact that there are a good number of patients who are out there, who are still coming into offices, that are seeking treatment from all types of backgrounds, and contributes to some of the facts that Ian mentioned in our guidance for this year.

Great, thanks.

Thank you. Our next question is from Mark Schoenebaum of ISI. Your line is open.

Hi, this is Wes sitting in for Mark. I actually had a question about the SG&A guidance. I noticed that the fourth quarter SG&A expense annualized is larger than the 2012 guidance. So I was wondering if you could just talk about how the split of SG&A expense will occur over the quarter? And also, over the year, excuse me, and also if you could explain the variance of that annualized 4Q SG&A number? Thanks.

Sure, appreciate the question, actually appreciate you pointing it out, something financially we're actually very proud of. So we have a number of initiatives, as I mentioned in answer to another question, within our business where we're looking at processes and efficiencies and we've set ourselves some objectives, and we're going to be going about some things different this year than we have in the past. And we expect those to result in expense savings. There have also been a few costs that have been of a one-time nature in 2011 that we will no longer be incurring. But we're at that stage of our business where we have gone through our business, how we operate, look at processes, and we're trying to find out how we can operate our business efficiently while maintaining our priority and key focus on investment in R&D that will drive the future of the Company. And I appreciate you asking the question because it's coming through in the SG&A line.

Great, thank you.

Thank you. Our next question is from Yaron Werber of Citi. Your line is open.

Hi, this is Gloria on for Yaron. He wanted to know whether or not you would consider buying back CF royalties from the CF Foundation? And also, if I could ask a second question, for Q4 '11 it seemed that you had a tax rate of 10.7%. We were wondering if you can sustain that through 2012?

Yes, thanks for the question, a couple questions there. First of all, we don't comment on potential business development type transactions. I would say that if there is something that is interesting for our business and makes financial sense we'll give it consideration. As far as the tax rate concern, I understand your question, it is a little confusing, the number that you're referring to is actually the tax line that we have to consolidate from Alios and it's actually not our taxes. The accounting for Alios is that we actually have to consolidate Alios into our financial statements. We then remove them on the bottom line. So it's actually not our tax line item.

As I mentioned in the prepared remarks, we actually have NOLs that allow us to offset the income that we make and our tax obligations are actually minimal. So cash tax obligations are minimal, we do have some small state taxes but it really is minimal. If you look to the non-GAAP financials that we disclosed in our press release, you'll see that the true -- kind of the true tax cash rate.

Thank you, next question, please?

Thank you. Our next question is from Howard Liang of Leerink Swann. Your line is open.

(Inaudible) did you say anything about the contribution from inventory changes to the sales in the fourth quarter and whether there were any sales to a third party for clinical supply?

Could you say that again? It didn't come through quite clearly, please?

Inventory change and any sales for clinical trials.

Okay. In terms of, if you measure from September 30 through to December 31 and look at the level of inventory it was negligible change, Howard. I don't have an impact on the revenue recognition.

Any contribution from sales to third party for clinical supply and whether that may continue in 2012?

There have been pieces within our revenue line where third parties have been buying INCIVEK for their own clinical trials, but as you might expect, it's the majority of sales are to patients.

Okay. If I could just follow up a separate question, you're interferon-free regimen, how you make the determination to move forward, what would it take for you to move to Phase 3 for the 222 INCIVEK ribavirin combination? When would you consider trial-specific for subgroups for genotype-1 patients, 1a or 1b?

Yes, this is Bob, we are awaiting the results of the SVR 4 data from the ribavirin triple, and, clearly, that will be the most important piece of information that we get in order to decide whether to go forward. Obviously, the bar is set really quite high in the field for, certainly, for expectations for what SVR rates are, and, obviously, we'll be looking to see that we have a competitive regimen based on the data that we obtain. We have multiple potential non-interferon-based regimens and we will have to spend some time thinking about sort of allocating resources to those various options, including the ribavirin triple, and then coming a little later in the year the possibility of combinations with the Alios compounds. And there's a lot of mixing and matching within our own portfolio that we believe can occur. So it's going to be a bit of a complex equation but it will surely be data driven.

Thank you.

Thank you. Our next question is from Jason Kantor of RBC Capital Markets. Your line is open.

Yes, a couple of questions. First of all, congratulations, again, on KALYDECO. In terms of the launch, I know that awareness for this drug was really high and genotyping was also something that has been done a lot, and there's a lot of interest in those trials, so I'm wondering, should we be thinking about this as a real bolus of patients that come on very quickly following the approval? And also on the HCV market, if you could give us some sense of what you think the market dynamics are right now in terms of capacity, warehousing, and any kind of seasonality that we can expect in Q1? Thanks.

Great, Jason. Let me see if I can hit all that. So first of all, on cystic fibrosis and KALYDECO, this is a very well-known patient community, and as you know the majority of them are children and they are in routine care at a predictable number around, just slightly more than 110 CF centers across the United States. What that means is that they all show up for care at least once quarterly. And since the vast majority of them have already been genotyped, either the patient, their caregiver or the physician is clearly aware of which patients KALYDECO will be used in.

We've heard a few early rumors that in some cases they're actually canceling their routine clinic appointments in order to open up days just to be dedicated to bringing in these patients. But I think from those comments you can probably begin to think through what that uptake is going to look like. Switching over to HCV, capacity and warehousing. Well, first of all, to the talk about the market in general as it relates to capacity, last year as we launched, we saw a really huge spike in treatment because prior to the launch of the PIs, there really weren't any medications that were nearly as efficacious.

So what that meant was that we really had to jump and some of the offices realized that stretched them a little too far and the general capacity has calmed down a little. Following that, we saw the holiday effect. We talked about that holiday in advance, I think what we saw was consistent with what we expected and what the historical use, even with the pegylated interferon showed. And then typically, what happens is in January you see a restabilization, and we believe that restabilization will -- well, it's already beginning to occur, it will continue. And that the slope of that curve for next year is going to, again, be consistent with what we've seen with the pegylated interferon in being a pretty steady sort of state.

In terms of warehousing, we're not quite certain that we've burned through all the warehousing that occurred prior to the launch of the PIs. We see those patients continuing to come in. And although every physician makes some unique determinations in a patient's first call, kind of a patient's first visit, they tend to put a patient aside here or there. We don't think that there is any significant impact from their thoughts about future therapies, and really, there's not that much information out there yet. So it's too early to even begin to think about quantifying an impact like that. But we'll be watching it through the year and keeping you apprised as we see things develop differently.

Thank you.

Thank you. Our next question is from Matt Roden of UBS. Your line is open.

Hi, guys. This is actually Andrew in for Matt, and congratulations on the quarter. I was wondering if I could ask, I guess, your general interest on partnering, specifically for 509 and 787? Those are pretty sizable markets and I think the clinical requirements for a trial in flu, as well is in RA are pretty significant. So what are your thoughts on how you would manage those kind of Phase 3s on your own as opposed to kind of getting a partner to help manage some of those costs? Thanks.

Thanks for the question. I'll start by saying that if we have the opportunity to run a Phase 3 with these drugs and these diseases, I think that's a rare opportunity for a company. So you can see where we're leaning as business. The hardest thing to do is actually get the molecule all the way through, ready to start of Phase 3 in these diseases. So if we're successful with the next stages of these two compounds that you refer to, we'd look forward to running a Phase 3. We think we have the capacity in our business both from resources and financial resources to run those to Phase 3 and they are a big opportunity for us. And as we look into the future, if we have the ability to run those to Phase 3 what it says is we actually have that opportunity for continued revenue growth in the middle and latter parts of this decade. As far as considering the compounds going outside the Company, we don't comment on those kind of transactions. We're running the studies, as Peter has mentioned, and Jeff has mentioned, and we look forward to getting the results from them.

Okay, thanks.

Thank you. Our next question is from Ted Tenthoff of Piper Jaffray. Your line is open.

Thank you very much. I have to say, looking into 2012 I'm very excited about where the Company is and congratulations on launch and approval of KALYDECO. I actually had two quick kind of housekeeping questions. Ian, you said about the tax rate, that it would be -- remain kind of low. Will it be -- can you give us any guidance on what that actually might be? Because I know there's a lot of different parts to that. And also, and I had to -- you'll have to excuse me if I missed this, but I recall that you got the EU milestones for payment for approval of INCIVO last quarter, but I didn't see where that came out in this quarter. I just wanted to see if you have any comment on that?

Sure. So, have a little patience on this and we don't get through it, Ted, then I'll certainly catch up with you offline on the taxes. But I'd just ask you to refer to the reconciliation of GAAP to non-GAAP and what you'll see on the left-hand side where you've got the GAAP numbers you will see a provision for income taxes. And as somebody mentioned earlier, that is up around [10%-ish] but that actually is a somebody else's tax line that we're consolidating, unfortunately. When we do our reversals for the Alios transaction and other kind of deferred type tax assets we end up with minimal taxes. That is the tax position and the cash tax position of the business and it's because of the NOLs.

The NOLs aren't just federal NOLS, we have state NOLS, as well, so we take advantage of those. As you think about a cash tax for our business, certainly, as we work through the $3 billion with NOLs they will continue, the cash taxes will continue to be minimal in our business. So I'd just ask you to take a look at that GAAP to non-GAAP reconciliation, as I say, I can do it offline. As far as the INCIVO milestones are concerned, we did have milestones that were recorded earlier in the year and we actually reversed those out in the non-GAAP and I think those were recorded, if I remember correctly, in Q3. And that's why they do not show up in Q4 -- yes -- the milestone that came in in Q4 was the Mitsubishi milestone and you'll see that, that's $65 million.

Yes. Okay, perfect, I appreciate the comments there. I'm looking forward to a good launch for KALYDECO.

Thank you.

Thank you. The next question is from Brian Abrahams of Wells Fargo. Your line is open.

Good evening, this is Matthew Andrews calling in for Brian. Thank you for taking the question. On Tuesday you noted that there were 190 patients in the persist long-term follow-up KALYDECO study with about 100 of those being in the US. Can you discuss the EAP, how many patients are in that? How many are enrolled in the US and Europe? And how quickly the ones that are in the United States could transition over to commercial therapy? Thank you.

So I think it currently, so that's Peter speaking, Matthew, in the US, that's correct, that's currently about 100 patients on that will trickle off in the next -- start in Q2 and lasting all into first quarter of 2013. And in Europe, it is set up for now sort of as an inpatient program with about 100 patients overall, but there's not 100 on right now, it's about 30 or so. That's about what we have right now. But we are in negotiations with different countries to see whether we can reach out there and launch the program.

Okay, thank you.

Thank you. The next question is from Ying Huang of Barclays. Your line is open.

Thank you for taking the question and congratulations on the quarter. First question, you commented on your still burning to the warehouse patients from the (inaudible) interferon days, but are you guys actually seeing actually warehousing of these patients again for the next wave of interferon [R] regimen? And if, yes, do you actually figure in that when you provide the guidance for $1.5 billion to $1.7 billion this year? And secondly, I have a follow-up on the financials.

Okay, let me take the first part of that, Ying, that's a great question. So you're right, there are two different issues around warehousing. And the comment that I made earlier, what I was trying to explain is that when a patient comes in and a physician decides to treat they always sort of triage them in their own mind, and as they believe that there are new therapies that may come down the road, they begin to add those into their thinking. However, at this point in time, it's really too early for us to think about any quantitative impact from what we're seeing in the market and we believe that if there is any warehousing like that that has occurred it's really very minimal. So we're not very concerned about that at this point and our current view is baked into our guidance of $1.5 billion to $1.7 billion.

Great, thanks. And then, Ian, I just calculated your cost of goods sold for 4Q, it is only 5%. If you look at the whole year 2011 it's about 6.7%. When you commented on that for 2012 your costs will be consistent to '11. Did you specifically mention that it was closer to the whole year average of 2.7%, or it's actually going to be consistent to the 5% you recorded in 4Q here? Thanks.

Ying, I always appreciate your accuracy of comparing 5% to 6%. Certainly, we're very focused on that but I'm not going to go beyond the comments that I made earlier. I think the past cost of goods line is a pretty good indicator of how of 2012 will go, as well.

Great, thank you.

Thank you. Our next question is from Liisa Bayko of JMP Securities. Your line is open.

Hi, thanks for taking the question, and congratulations on a great quarter, as well. Can you maybe just talk about -- I'm just trying to figure out the gross to net adjustment for KALYDECO. And then, maybe a follow-up question in the same regard is just on changes in stocking that occurred for INCIVEK in the US? Thanks.

Sure. I'll take the latter first, Liisa, thanks, which is the stocking between September 30 and December 31 there was minimal change. So there wasn't a change in the levels of inventory at the wholesalers so it didn't really have an impact on the revenues that we recorded in the fourth quarter. As far as the gross to net adjustment is concerned on KALYDECO, we explained this on the call the other day which is that this is primarily driven by the split in patients which are either on commercial insurance or supported through the government.

We anticipate this market is split 60/40, 60% being commercial insurance and 40% being government, and there is minimal discounting, minimal discounting on the commercial side. And on the government side, there is a statutory or mandatory discounting that ranges between 15% and 25% which will give you an idea of, if you blend those patient flows, it will give you an idea of the gross to net adjustment.

And then how do we think about for KALYDECO where any payment for free drug or co-pay assistance runs through and what -- how do we think about that as a percentage of the cost?

It's very small.

Okay.

Really doesn't impact the gross to net.

And just one follow-up, if I may. Were there -- was there any change in patient discontinuations for INCIVEK in the quarter from past? I'm just trying to reconcile what the demand looks like from the prescription audit versus what you actually reported?

We are not aware of any changes at this point in time, Liisa.

Okay, great. Thanks a lot.

Thank you. OUr next question is from David Friedman of Morgan Stanley. Your line is open.

Hi, thanks for taking the question. Just two quick ones. The first is can you let us know gross sales for INCIVEK for the quarter? And then the other is, in the combination CF study that you ran in the past with 809 and 770, could you just describe any PK-related drug interactions between the two drugs?

So I actually don't have the gross sales number available, David, but if the question is referring to what was the gross net discount in the fourth quarter?

Yes.

It was slightly above that of the third quarter. It approximated 13%, approximated. The reason why I give that number is it gives you an indication of how we go into 2012. I did mention in my prepared remarks that we anticipate a widening of the gross to net margin, that's because we have more covered lives with our insurers these days. And we're also maybe seeing more flow through the government channel, as well. So I give you as a marker and those we go into 2012, the gross to net adjustment is built into the guidance we gave of $1.5 billion to $1.7 billion.

Thanks.

And I might, this is Peter speaking, Mark. So with respect to your question of the earlier 778/809 study, I think we didn't release any data around PK in any specificity, however, I want to say, just remind you that it was a viable regimen, it was safe, it was a safety study. And it basically has proven the concept, at least the mechanism, to the point that we saw action on the channel which is basically proof that the target basically gets to the surface and does something. And the chosen dose at those phase was maybe not high enough to see a therapeutically relevant outcome, it was sort of borderline. But we learned that is the part of the Cohort 2 study, investigate different, those regimens, in different concentrations and then basically have maybe a better inroad into that patient population.

Okay, but you can't say whether there's any drug/drug interaction or PK change from 809?

There's nothing out of the extraordinary, so, and we will study that as we go forward.

Okay. Great, thank you.

Thank you. Our next question is from Marko Kozul of ThinkEquity. Your line is open.

Hi, good afternoon, and thanks for taking the question, and I also echo my congratulations. A few quick cystic fibrosis questions, part A is if we were to assume encouraging data from Cohort 2, mid-2012 for the combo KALYDECO with 809 what might Phase 3 designs look like? And part B, you announced, I think, today the start of the VX-661/KALYDECO study. I was wondering if you could outline its design? Thanks.

So let's assume that data comes positive, that is always a good optimistic view. I think we cannot really 100% speculate what the design finally is because it needs regulatory authorities to approve that. We have to have a type C meeting to go into that and those discussions are basically partly ongoing and we will go from there. It is still to be determined how long those studies have to be, and how much and how big the safety -- the patient populations have to be to require basically a safety database that is wanted. So I can't really speculate on that because you have to have on a case-by-case basis a regulatory interaction. You have to have that not just in the US, but also globally, this is a global program, and I think we have to align sort of regulatory views in the world and we're currently doing that.

So in terms of, just one last comment is, obviously, the endpoints, of course, are likely to be the same as the ones we did for the 770 program. Those are the standard endpoints. In terms of 661, obviously, that program is at an earlier stage and so the study is really looking at 661 individually in homozygous Delta F patients, and then 661 in combination with KALYDECO in the same patient population. And so we're kind of working our way through the monotherapy part of it and then we'll be doing some of the combination work.

Right. And the data you might expect in sort of the [first] quarter for 661 study in combination or alone with 770.

And maybe just a quick follow-up, the 661 dose, is that dose escalated as 809 is in the current ongoing combo, as well? Thanks.

Yes, we'll be looking at multiple dose levels of 661 in that study.

Thanks again for taking the questions.

Operator, we have time we think for two more questions.

Thank you. Our next question is from Brian Skorney of Brean Murray. Your line is open.

Hi, yes, this is actually Dan Brims in for Brian today. I have one quick question, I think I might have missed it. Did you mention what the gross to net was going to be for KALYDECO as well as what your gross to net is for INCIVEK right now?

Well, Dan, I'll start with INCIVEK. We give guidance of $1.5 billion to $1.7 billion for 2012 and that incorporates a gross to net adjustment, that is the net INCIVEK revenues. In the fourth quarter, we were at a gross to net adjustment of around 13%. It may widen slightly from there into 2012, not significantly. As far as KALYDECO is concerned, the gross to net adjustment is made up of the mix of patients, whether their commercially insured or supported by the government. On the commercial side, which we anticipate is maybe 60% of the cystic fibrosis patients, the discounting is minimal, really minimal. And then on the government side, there is a -- which would be 40% of the patients -- there is mandated and statutory discounts and support that is between 15% to 25%. So I'm sure you can do the triangulation from there.

Okay. And one other quick question, with Japan, I guess, you're getting milestones in place of royalties there. What would be triggering those royalties and when would -- when might you be seeing some of those? Or those milestones, excuse me?

So while ago, in fact, years ago, the collaboration we struck with Mitsubishi Pharma was actually, we did not have royalties once the drug was on the market. It was actually a sales milestone. We received that sales milestone in the fourth quarter of 2011, it was $65 million, and that was recorded in the financial statements of this fourth quarter 2011.

And that's all you're going to be getting from that collaboration then?

Yes.

Okay. Thank you.

Thank you. Our next question is from George Farmer of Canaccord. Your line is open.

Great, thanks for squeezing me in, I really appreciated. I was wondering if you could give us any feel for the duration of activity you're seeing with KALYDECO, at least without going into too much detail in the persist trial? And do you think that duration can continue on based on what you know now? And also, when do you think you'll be able to disclose more about the Alios nukes and the Phase 1 trial design?

So, George, that's Peter speaking. The first is about duration and the longevity of KALYDECO activity and efficacy in patients. As you know, we have patients on trial which is sort of about 60 weeks to 90 weeks. And those are all basically still performing the same way as they did sort of when they kicked in the benefit of the regimen, which is sort of after two weeks. So it's a long-lasting type of thing. Anecdotally, we also have patients that we know on KALYDECO now for up to three years, and I think they are still performing well. And actually, you also have to look at the other way around, some of those patients anecdotally had to basically, because of some other circumstances, let out KALYDECO for a couple weeks in the regimen because of antibiotic situations and other things. And they deteriorated quickly down to, from [FAV] 90 down to 40 or so, or even less. And then when they came back on KALYDECO, they basically reaching the high levels again that they had seen sort of beforehand. So what that tells you this there is a true, long-lasting efficacy of that. I cannot say more than three years but that's, for a stage when you launch a product, quite an amazing timeframe.

Yes, it's wonderful.

And I must say there is a high hope that it will last even longer. So that's to that point, so it's not like a one-day (inaudible) when everything is out, so it's long lasting, at least in my view. Now the other thing is that Alios compounds. Basically, as Jeff said, we will do a couple of different studies with them, so there is an G1 population, obviously, there's a genotype-1, a and b, which is sort of the first cohort that we basically look into. Those data you will see in the course of the second quarter, towards sort of mid-year.

We also are about to initiate another arm which has pan-genotypic regimens in there. So we will basically evaluate genotype-2, -3, -4, -5, -6 and all those, so that we have real data and not just speculations. And then basically, we also will look into, let's say, a combination of each of them with ribavirin and see what that does. And this will all come in the course of this year, and you will see an (inaudible) maybe start in the first set of data from our other oral regimen, which is basically INCIVEK 222 and ribavirin. We might come at that point in time with some data, we will try, at least, as we record data. And then, as I said, mid-year you will see what Alios does.

I'm really convinced it will be exciting and then (inaudible) ASoD you have a bunch of other data that help you to make a good judgment about that program. I'm really excited, those molecules are behaving very well so far, and I'm looking forward for a good outcome.

Great, thanks very much.

Well, thank you very much. We appreciate your participating tonight. We'll be happy to take additional questions in our offices. Thank you, and look forward to seeing you soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.