福泰製藥 (VRTX) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Vertex Pharmaceuticals Incorporated second quarter 2012 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) And as a reminder, this conference is being recorded. Now I'll turn the conference over to Michael Partridge, Vice President of Investor Relations. Please begin.

Good evening and welcome to Vertex's second quarter 2012 conference call. Vertex continued to make progress in the second quarter of 2012 to build our global business. With our approved medicines, in its first full quarter, KALYDECO achieved $46 million in US sales, reflecting increased uptake in people with CF who had the G551D mutation. We also announced on Friday that we have received approval of KALYDECO in the EU.

INCIVEK, for the treatment of hepatitis C, reported sales of $328 million in the second quarter. We continue to lead the market in hepatitis C. Approximately 70% to 75% of new DAA prescriptions written in the US are for INCIVEK. However, the number of patients initiating treatment for hepatitis C has declined compared to late 2011 and early 2012. Therefore, we have revised our 2012 guidance for total INCIVEK net revenues today. Highlighting our progress in R&D. In cystic fibrosis, which clinical results in study initiation, we advanced our efforts to be able to expand the number of CF patients we may ultimately treat. And in hepatitis C, we today announced promising seven-day viral kinetic data for our first nucleotide analog, ALS-2200, that we licensed from Alios BioPharma.

To discuss these and other developments on the call tonight we have Dr. Jeff Leiden, CEO and Chairman; Ian Smith, CFO; and Dr. Peter Mueller, head of Research and Development and Chief Scientific Officer. After the prepared remarks Bob Kauffman, Vertex's Chief Medical Officer, will join us and we will take your questions. We expect to conclude the call as close to 6.00 PM as we can manage. To help us do that, we would ask that you please limit your questions to one with a related follow-up.

I will 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 including our 10-K and 10-Q reports which have been filed with the Securities and Exchange Commission. These statements, including, without limitation, those regarding the market launch of INCIVEK and KALYDECO and our guidance, are based on management's current assumptions and are subject to risks and uncertainties that could cause actual outcomes and events to differ materially.

GAAP and non-GAAP financial measures will be discussed on this call. Information regarding our use of these measures and a reconciliation of non-GAAP to GAAP is available in our second quarter 2012 financial press release, which is on our website. Thank you. And I will now turn the call over to Jeff.

Thank you, Michael. Good evening, everyone. 2012 has been a very dynamic and productive year for our business. During the last seven months, we have delivered a series of important advancements. For cystic fibrosis the approval and successful launch of KALYDECO in the US. More recently, the approval of KALYDECO in Europe and positive Phase II data for the VX-809 plus KALYDECO combination in delta F508 homozygous payment patients that supports progressing to a pivotal program. And now at hepatitis C, very impressive seven-day viral kinetic data for ALS-2200, our nucleotide analog.

With these advancements, all made from the start of this year, we're demonstrating our consistent ability to discover, develop and commercialize multiple transformative medicines. Which in turn, represent the strong foundation for the sustainable long-term growth that we expect to create with our business. During the last few months I've been working closely with the cystic fibrosis and hepatitis C franchise teams at Vertex.

I'll provide a perspective on how we are positioned in these markets and also strategically how we are planning on extending and enhancing our presence in the treatment of these diseases. I'll also highlight for you what I think are the tangible markers for our progress as a business that we will ask you to focus on in the months and years ahead. After that, Ian will review our financial performance, our 2012 guidance, and discuss how we're prioritizing investment in our business. And Peter is going to provide you with a more detailed update on data and recent developments in our pipeline.

Beginning with cystic fibrosis, Vertex is seeking to fundamentally change the outlook for people with this disease and we have made excellent progress toward the goal this year. KALYDECO, which was approved earlier in the year in the US for G551D CF patients, aged six years and older, has been rapidly adopted in the US as a groundbreaking new medicine that addresses the underlying cause of the disease in these patients. The launch of KALYDECO has exceeded our expectations. We are currently treating a significant number of G551D patients and we expect additional G551D patients to begin treatment in 2012, including patients who are rolling off the PERSIST Phase III extension study.

Our field teams have done an excellent job with the launch, working to educate physicians and caregivers about KALYDECO and helping eligible patients and their families get the medicine. Last week we received approval in the EU for KALYDECO for G551D patients, and our team there is working to make KALYDECO available as soon as possible in multiple countries. We also believe that we can significantly expand the CF population that is addressable with KALYDECO alone. And towards that end, we have initiated additional mono therapy studies that Peter will discuss in his remarks. If our strategy is successful these studies could increase the addressable population from the current 4%, to 8% to 10% of the CF population, and potentially more as we consider the applicability of KALYDECO to certain other people with CF.

During this quarter we also produced clinical data that provided convincing insight into how we may be able to treat a much greater number of people with CF. The Homozygous Delta 508 population. Specifically, we reported Phase II combination data for VX-809 and KALYDECO, which support moving into pivotal development targeting delta 508 homozygous patients early next year. If successful with these development efforts, we could potentially address 60% or more of the cystic fibrosis population with our different medicines. CF is a serious genetic disease and I'm very proud that our team is at the forefront in developing potentially life-changing medicines for patients and their families. We are committed to being a leader in cystic fibrosis and continuing to work closely with the CF Foundation, patient groups, physicians and patients and their families around the world, to develop additional breakthrough medicines and to provide hope.

Let me now turn to hepatitis C. We are leaders today in the treatment of this disease and with the portfolio of novel medicines we have in development, we think we are well-positioned to continue to deliver new regimens for the treatment of hepatitis C. I'll make comments on INCIVEK's recent performance and near-term outlook. We've learned a lot about this evolving market in recent months and I want to share our thinking in terms of how we're approaching our commercial efforts. I'll also talk about our ongoing plans to develop all oral treatment regimens for the future, which I think is very promising, based on today's announcement about our new program.

Let me start with INCIVEK and two things that have not changed in the first half of this year. INCIVEK market share and persistence rates. First, markets position. INCIVEK has been and remains the leading direct acting antiviral, or DAA. 70% to 75% of genotype 1 patients who initiate therapy with a DAA in the United States continue to initiate treatment with INCIVEK. This position, which we have maintained since the launch of the drug, and which we expect to maintain, speaks to strong execution by our commercial team, as well as to the benefit that this treatment provides to those with hepatitis C.

Second, persistence rates. That is the number of patients completing 12 weeks of treatment with INCIVEK. Persistence rates for INCIVEK remain strong and this has been consistent since launch, which once again speaks to the benefit of INCIVEK and the execution of our commercial for team. What has changed in this market is the number of hepatitis C patients initiating treatment, which I'll refer to as the treatment rate. This treatment rate is changing faster than we expected compared to earlier this year, and this is the reason for our revised guidance that Ian will talk about during his remarks.

I'd like to describe the pattern we've observed to provide some perspective for you on the 13 months since INCIVEK was approved. Soon after launch in the fall of 2011, the annualized treatment rate for all genotype 1 patients had increased to approximately 90,000 to 105,000 patients per year, due in large part to the influx of warehouse patients seeking treatment with the newly approved DAA. During the first four months of 2012 this treatment rate stabilized at approximately 70,000 to 75,000 genotype 1 patients per year. The guidance range that we set in February and reiterated in April was based upon this relatively stable treatment rate adjusted downward for anticipated seasonality and potential for fewer patients to start treatment as the year progressed, as well as on our stable share of this market and our persistence rates. However, in May and June the number of people with hepatitis C initiating any type of therapy substantially decreased by 20% to 25% when compared to the first four months of this year.

We attribute this decrease in the overall hepatitis market to two main factors. First, physicians deferring treatment of patients, especially those with less advanced liver disease, following the presentation of multiple sets of mid-stage results for oral combination therapies at this year's EASL conference in April. And second, an increase in the number of ongoing and planned clinical trials in hepatitis C, which has drawn in increasing numbers of patients. The timing and impact of these factors has been difficult to predict and forecast, especially the deferral of treatment in some patients.

Based on this change in treatment patterns, we are adapting our marketing efforts for INCIVEK and we have also revised our 2012 INCIVEK revenue guidance. As I mentioned, we believe that expectations of future all oral regimens are an important factor in the decreased treatment rates we're seeing over the last few months. Therefore, I would also like to provide some perspective on Vertex's potential to participate in the evolution of these all oral therapies. Based on the Alios data we reported today, we are moving quickly to develop all oral regimens for hepatitis C that we believe could make a major difference for patients and be highly competitive as hepatitis C treatment continues to evolve. We're very encouraged by the clinical potency of ALS-2200 and the compound has shown excellent tolerability to date. Therefore, we believe ALS-2200 could be a central component for future all oral combination regimens.

Our guiding principle in the development of all oral regimens is that we want to do what's best for patients. Our new Alios data, coupled with the evolving regulatory pathways, opens the field for us to pursue multiple options. Our key imperatives with our all oral development program are first, evaluate combination regimens with our own DAA's, and consider combination regimens with other company's DAA's. And second, gather as much Phase II data as quickly as possible and in parallel, to enable us to pick the best regimen or regimens to take forward into a pivotal program next year.

More specifically, our approach will be to initiate smaller Phase II studies of ALS-2200 plus multiple other therapies this year to design -- to guide the design of a pivotal trial. Given the many unknowns concerning different all oral combinations, we believe it will be important to design our pivotal program based upon efficacy and safety data from these Phase II studies. With this Phase II data in hand in the first half of next year, we will then target the initiation of a pivotal program starting in late 2013, which we believe represents the best and shortest duration regimen or regimens for people with hepatitis C. Peter will talk more about our data and our plans in a moment.

In summary, during the last year we have seen a significant evolution in our business at Vertex. Our teams have produced a series of major clinical and commercial achievements that have markedly enhanced the foundation of the business going forward. These achievements, which speak to Vertex's ability to consistently discover develop and commercialize multiple breakthrough medicines, are the foundation upon which we will build a sustainable growing global business over the years to come. I look forward to updating you as we go. I'll now turn it over to Ian.

Thank you, Jeff. Good evening to everyone. Financially, 2012 is demonstrating that we have a diverse revenue base with multiple sources. These revenues remained significant and are important to enable reinvestment in our pipeline for future growth and value creation in multiple diseases. Now to the results.

In second quarter 2012, total revenues were approximately $418 million, compared to approximately $114 million in the same quarter of last year. The key components of these second-quarter revenues are as follow. First, we reported approximately $328 million of INCIVEK net product revenues. This reflects a strong April and then a decrease in a number of new patients initiating treatment, most notably in May and June, as Jeff has already described.

Second, we recorded $46 million of net product revenues from KALYDECO, which reflects the first full quarter of sales since launch in February earlier this year. This reflects strong patient demand, the connectivity of the CF community, and the broad awareness of the importance of KALYDECO. We expect this revenue stream to grow as more people start and maintain treatment with KALYDECO. We have now received approval in Europe to add to this revenue base and provide further growth. We foresee a sustainable long-term and growing revenue base from KALYDECO.

Third, we received $33 million of royalty revenues, including $28 million of INCIVO royalty revenue from J&J. We expect our INCIVO royalties will continue to contribute positively to our financial results during 2012, given that INCIVO is now available in more than 25 countries. And finally we received collaborative revenues of $12 million. These revenues primarily fund R&D activities where we have relationships in the areas of hepatitis C and cystic fibrosis.

The GAAP net loss attributable to Vertex was $65 million in the second quarter of 2012, or approximately $0.31 per share. The net -- the non-GAAP net income was approximately $100 million, or $0.46 per diluted share. The non-GAAP income includes three charges, $31 million excludes three charges -- my apologies -- $31 million in stock compensation, $56 million related to increasing the fair value of the expected future payments under our Alios collaboration following the positive viral kinetic data announced today, and a $78 million charge in the cost of product revenues to reserve against the potential excess INCIVEK inventory.

And now 2012 financial guidance. Based on the recent decline in the number of hepatitis C patients initiating treatment, we have revised our 2012 forecast for a total annual INCIVEK revenues to $1.1 billion to $1.25 billion. This range reflects recent decline in patients initiating treatment, which Jeff noted.

Now to our operating expenses. Based upon the achievements of multiple successful proof of concept studies in cystic fibrosis, ACD, and RA respectively, being VX-809 and KALYDECO combination results reported in the second quarter, the viral kinetic results in ALS-2200, announced today, and the results of VX-509 in rheumatoid arthritis last year, we have increased and accelerated our investment into these high-priority programs. These monies were significant. Despite its increased investment, we have maintained our operating expense guidance for 2012 of $1.03 billion to $1.13 billion, which we provided on our February 2 call. We accomplished this by prioritizing and reducing expenses, specifically with significant reductions in G&A spend and aligning our commercial spend to follow future demand in the markets we are in. These expense reductions have enabled us to reallocate resources towards and within R&D to support the acceleration of these programs, yet maintain our operating expense guidance.

In summary, we continue to derive a significant revenue and cash flow from INCIVEK sales and INCIVO royalties. KALYDECO continues to exceed our expeditions, and with the clinical results in hepatitis C and CF, we hope to expand our presence and the number of people we can treat over the long-term. Now with viral kinetic data announced today for ALS-2200, our nucleotide analog for hepatitis C, we have the potential to participate in the high-value HCV market with all oral combinations. We accomplished all of this while generating earnings and cash flow to end the quarter with approximately $1.2 billion of cash and equivalents. I will now turn the call over to Peter.

Thank you, Ian, and good evening, everybody. My remarks will cover some of the pipeline advances that we have made in recent months, most notably in the areas of CF and hepatitis C.

In cystic fibrosis, during the second quarter we announced resource from a Phase II study of the correct VX-809 in combination with KALYDECO. We are very pleased with the resource we have found and data support to start of a pivotal to the program early next year. To briefly summarize the key data again, the top dose of VX-809, 600 milligrams once daily, showed a mean absolute improvement in FEV1 of 3.4% over the 56 day course of the study compared to base line, and a 6.7% improvement in FEV1 over the placebo arm for the same time period. Both of these were statistically significant with P values of 0.03 and 0.002 respectively.

To ask the most important data comes from the period between day 28 and day 56, which was when the patients were actually receiving VX-809 and KALYDECO in combination. A distinct pattern emerged between day 28 and day 56. All the dose arms involving VX-809 and KALYDECO in combination improved over this time period, while the placebo arm declined. The 600 milligram dose showed the best response of -- within subject mean absolute improvement in FEV1 of 6.1% over this time period, with a P value of less than 0.001 and a mean absolute improvement in FEV1 compared to placebo of 8.6%, also with a P value of less than 0.001. More than half of the patients in the 600 milligram once daily arm experienced a greater than 5% absolute improvement in FEV1 during this period.

VX-809 was well tolerated as a single agent and in combination with KALYDECO. Adverse events and severe adverse events were similar between VX-809 and placebo groups. We have analyzed the data many different ways, by dose versus placebo versus baseline, and on an individual patient basis. All of this analysis support the conclusion that VX-809 in combination with KALYDECO was well tolerated and associated with significant clinical activity. We expect that investigators will present additional Phase II combination data at the medical conference this fall. We continue to make progress in designing a pivotal program in the delta 508 homozygous patients 12 years and older and are on track to initiate a global pivotal program in the early part of 2013, pending discussions with regulatory authorities. Our goal is to confirm the results of cohort two of the Phase II study by evaluating 600 milligram once daily of VX-809 and potentially other doses in combination with KALYDECO twice a day.

We have also initiated two important new Phase III studies of KALYDECO mono therapy. The first is a 40 patient study in patients with at least one copy of the R117H mutation, and the second is a 20 patient crossover study of patients with a non-G551D [gating] mutation. These are both six-month studies with primary endpoints of FEV1 and safety. We anticipate having results of both studies next year, with the goal of generating data that will support an expansion of KALYDECO's label to address these populations. Just last week, we received approval of KALYDECO in EU for G551D patients aged six and older. I'm proud of the efforts of our team to achieve this first European approval for a Vertex medicine.

I would also like to comment on our second CFTR corrector, VX-661. The Phase II study is ongoing, it's lowering the corrector VX-661 in combination with KALYDECO in CF patients who are homozygous with delta 508. This study is designed as a dose escalation placebo-controlled study. Part A of the study, which we initiated earlier this year, is evaluating different doses of VX-661 alone or in combination with KALYDECO for 28 days in approximately 100 patients in total. The design is different than the Phase II VX-809 study, reflecting the earlier stage of development for VX-661. This is our first trial of VX-661 in patients. We expect to conclude all dosing and follow-up in part A of the VX-661 study before we discuss results publicly. And we anticipate that this will take place in 2013.

Now, turning to hepatitis C. Today, we announced seven-day viral kinetic results for ALS-2200, a nucleotide analog that was licensed from Alios last year. These are very encouraging results that allow us to move rapidly into Phase II all oral studies later this year. We achieved a median reduction of 4.54 [blocks in ACD RNA] from baseline, into seven-day trial with a 200 milligram once a day dose. The activity was consistent among patients with a range of 3.81 to 5.08 blocks after seven days of treatment. The initial drop in viral load in this dose group was steep. 3.85 blocks after three days and ALS-2200 was also well tolerated. There were no SAE's or dropouts.

From here, we are advancing rapidly to all oral interferon-free combination studies. We expect to begin two clinical studies with compounds within our own portfolio in the second half of this year. First, a Phase II 12 week study of ALS-2200 in combination with INCIVEK in genotype 1 patients. And second, also a Phase II study, 12 weeks of ALS-2200 in combination with ribavirin in genotype 1 patients. These studies will evaluate safety and efficacy as measured by SVR 4 and SVR 12 and should enable us to move into advanced studies. As Jeff mentioned, we will consider regimens with our own compounds, as well as the merits of combining ALS-2200 with other leading direct antivirals currently in development. We will work towards the best target regimens for the different patient populations in hepatitis C.

In summary, our efforts in cystic fibrosis reflect the conviction that we can leverage our R&D experience, scientific knowledge and capabilities, to make a big difference in the lives of many patients with cystic fibrosis. In our ongoing efforts in hepatitis C demonstrate our commitment to continued innovation in this area. I would like to thank our development teams who have executed extremely well to advance and broaden our pipeline in the last 12 months.

Before I finish, I will just highlight one more high-priority program, our JAK3 inhibitor, VX-509. We established proof of concept in rheumatoid arthritis last year and advanced this program now into Phase IIb to study VX-509 on a background of methotrexate. We are enrolling now and we expect to initiate studies in auto-immune mediated inflammatory diseases beginning in 2013. Beyond hepatitis C, CF and RA, we have important programs in development, targeting flu, epilepsy and other diseases. I look forward to reporting on our progress in those areas in upcoming quarters. I will now turn it back over to Michael.

Thank you, Peter. That now concludes our prepared remarks. Tyrone, we'd like to open up the call to questions.

(Operator Instructions) Geoffrey Porges, Bernstein.

Congratulations on another important discovery or at least development program. Well done. Just a few questions. On the Alios nucs, the first is -- Bill, sort of technical questions is the first we learned much about them. Peter, can you tell us whether there are -- whether there is any C3 or 4A metabolism there or likely interactions?

Secondly, if you were to cast a wide net, what would be your preference for combination with the nucs, given the profile you've seen so far? You conspicuously didn't mention 222 and I wonder if we should read anything into that? And lastly, is there any dose response worth pursuing to a higher dose than the 200? Thanks and I'll get back in the queue.

Not exactly in the order that you gave them, but let's say for 222, it was not knowingly omitted, for sure. We're certainly looking at ways of folding that into our development. We've mentioned the two potential Phase 2 studies that we're planning. They may well be other Phase 2 studies in more difficult to treat populations where a somewhat larger number of compounds combined together might be useful. And that's likely where you'll see 222 come in. We also could combine it with one of the nucs and there would be no reason not to do that. It's just that we've chosen INCIVEK as the initial one that we're going to pursue.

In terms of dose response, yes, we're going to be exploring that more with some PK/PD analyses to try to figure out if it makes any sense to go higher. And we certainly could do that if we choose to do so. In terms of SIP metabolism, at this point, we don't know that much about these compounds. They just obviously have been in very short term studies. But in general, nucs have not really had major drug interactions with other compounds and we would expect these to be similar. Obviously, we'll see what we get in future studies.

Thanks very much. I'll jump back in the queue.

Rachel McMinn, Bank of America Merrill Lynch.

I also had a couple of LIS questions. I wanted to better understand why you're interested in doing separate studies, one with telaprevir and one with the ribavirin, but not looking to do triple? And just make sure that the ribavirin study is going to be in genotype 1 and understand that rationale?

And is this nuc the adenosine? Can you tell us which -- what the base is? And should we presume that because you've made the decision to go forward that if you -- are there any inferences to make on the other Alios nucs? So if the data looks just as strong, are you planning on -- how would that influence your clinical decisions going forward? Thanks.

Maybe I'll take the last one first. And just say that clearly we have the data for ALS-2200 in our hand right now, and our plan is to move as quickly as we can with that compound. If all goes well with 2158 and we have another compound, obviously we'll fold that into development when it comes along. And that could be in the setting of either new nuc combinations or combinations of each one with other compounds. I wouldn't otherwise read anything into it except just that two studies are just not running completely in parallel with each other.

In terms of the structure, we haven't revealed that so I won't say much more about that. In terms of the ribavirin study, yes, we do plan to do all of our work in genotype 1. We see that as where the biggest unmet medical need is at that point. And so we would pursue that.

And one of the reasons to do the ribavirin plus 2200 study is obviously part of the goal of Phase 2 is to gather some additional, well-needed safety data on the compounds in longer durations. And we just want as clean system as we can to be able to tease out the safety profile of 2200 from the other compounds. The reason for separate studies is convenience rather than folding everything into one humongous thing. It is easier to manage separate studies.

I'm still unclear why you wouldn't just run triple. If you have an arm without the PI, one with the PI, why wouldn't you run all three together?

Just our preference to do it this way.

Obviously, we just deceived this data and we're thinking through it. It gives us a lot of optionality, as you point out with respect to our own compounds. As we said, we'll consider combining 2200 with other folks' compounds as well. I want to be clear as part of what you're hearing is an evolution of our thinking as we understand what the true optionality here is. And I think the important thing to take away from this is that our plan is to do multiple Phase 2 studies quickly in order to pick the best combination that we can take forward into Phase 3 based on actual efficacy and safety data.

Great. Thank you very much.

Mark Schoenebaum, ISI Group.

Quick one. Do you guys have the data in-house for 2158? I don't know if -- you may have mentioned and I may have missed it. And maybe on CF, on the 661 trial can you be really clear, is there an interim or is there not an interim in that trial? And what changed that caused you guys to move the timelines out from this year to next year? And also on that, can you remind us of the design? Also on the combo, can you give us an update on when you're actually going to meet with the FDA to talk about a Phase 3 design? Thanks.

I'll take the 2158 question. And that is the study is ongoing and still blinded so there's nothing really much that I can say about it.

So with respect to 661, Mark, it's a complicated study. It's adaptive trial design so we will have some data as we go along and we want to see the entirety of the data before we basically make any statement to the outer world, obviously. And that takes a while. So it's not a linear type of design. It's an adaptive trial designed to make sure we look at the compound from different angles and get a good feeling about dosing and compatibility with 809. So we hope that if everything goes well we can provide you data in 2013. So that's -- for this piece in terms of -- what was the other question?

The Phase 3 on the combo. When you may meet with the FDA?

Towards the fourth quarter of this year we will have a meeting and then talk about how we go forward that is needed to initiate the trial the beginning of 2013.

Can I slip one in for Ian? Ian, if revenues decline -- I know you're not giving 2013 guidance but a general philosophical question -- if revenues continue to decline into 2013, how should we be thinking about our 2013 expense modeling?

Actually, to the expense question, Mark, I think you can expect us to look at it the same way that we have this year. What we're trying to communicate on this call is a very active program, specifically in our G&A area this year, as well as being nimble as we see markets change and adapt our marketing programs as well. That's allowed us to maintain the guidance that we have this year despite the increased investments in the priority programs.

As we go into 2013, we have to have a good understanding, we'll get more data and more understanding of the market. But in terms of philosophical question, we're trying to minimize the G&A, the SG&A in our business to the extent we can to prioritize that investment into R&D into these high-value programs.

Thank you.

Mark, this is Jeff. Maybe just to add even a bit higher-level view, because Ian reviewed the pure financial considerations, I think our vision and our strategy has been quite consistent, which is that we're trying to build a global multi-product business that can produce long-term growth. And obviously we've made some important and impressive progress this year on our late-stage pipeline.

As we go into 2013, I think we want to continue to invest in that pipeline to maximize value. And we'll do so. But we've also said we're going to be financially very disciplined, both in terms of prioritizing programs and in terms of controlling our expenses. And that's our plan. And we'll give you more insight on that as all the pieces of the puzzle from both revenue and expense side come together later this year.

Thank you.

Yaron Werber, Citi.

A few questions if you don't mind on the Alios nucs. One, any sense you can give us what was the breakdown between 1A and 1B in that study? Second question, did you see any breakthrough at all on therapy and then three, what's the metabolism of the nucs? Are they metabolized by the liver at all? Just give us a little sense on what are you seeing in animals?

As you saw in our release, the patient population was primarily genotype 1B. That's likely just geographically based. The study was conducted primarily in Eastern and Western Europe. In terms of breakthroughs, there were none on therapy. And metabolism we haven't really talked about very much, so there's not much to say about those. These are nucleotide pro-drugs and so they are metabolized as they get into the liver through first-pass metabolism into the active compounds.

Just in terms of the 1A/1B breakdown I'll just say that in general for the nucs, there really hasn't been any real difference in activity between genotype 1A and 1B clinically. In vitro for these compounds, there's no real difference between them. And when you look at the data in the trial, even though there were just a couple of people with genotype 1A, the viral declines were really indistinguishable from the genotype 1B patients. So we don't really anticipate there being any big difference there.

And maybe a last question, how do you -- give us a little bit of a sense, you have a lot of work to do. This data is fantastic, but you have data on eight patients at seven days. At this point, you need to do drug/drug interactions, you need to have several hundred patients on drug before you can move into a pivotal -- just trying to understand how is it possible that you can start a pivotal study within 16 months or so?

The way we do it is to move as quickly as we can into a broad Phase 2 program that will give us the safety database that we need. And we don't disagree with the numbers. It will be hundreds of patients required, and we anticipate gaining those in various combinations in a series of Phase 2 studies, perhaps in different patient populations to basically try to define the right regimens for the right patients. And that is how we will go forward.

And we anticipate being able to move quickly. There's a great demand for patients to enter trials with nucs because of their potential advantages. We don't expect any difficulties with recruitment. And so we will be moving it along quickly.

Yes. And as we go forward, when you really look into how those trials normally proceed, we have really an option here by end of next year to basically enter into a pivotal program. The nice thing, as Jeff alluded to, is we will have numerous evaluations of differing combinations in different patient populations that gives us a good sense what is the best direction and for a particular patient population that we want to move forward. I think our decision will be data-driven and safety-data-driven. And so we go forward by end of next year with as a solid program. And I think that gives us an option to be a player in the field.

Geoff Meacham, JPMorgan.

For KALYDECO and the R117H pivotal, it looks to be a six-month study. I'm curious if there's an interim at, say, three months and then if you guys are thinking initially that your delta F homozygous study will also be six months or have you had any preliminary discussions with FDA that it still will have to be a 12-month pivotal? And I have one follow-up.

With respect to the mono therapy in KALYDECO label extension studies, 117 and the gating, the non-551D gating, both of them will be six-month studies without interims. So we are not doing interims here. It's a small patient population. You don't want to disturb the integrity of the drug by doing interims. So we are not doing this. So the data will be available at the course of next year. And then we will basically file an SNDA to get a label extension so that's for this part.

In terms of the combo 809 for 12 years and older, we are currently planning a study that has, from a global point of view, the ability to produce one-year safety and one-year efficacy data and we might, depending on discussions with regulatory agencies, have an option in the US maybe to start an earlier rolling submission as we did with KALYDECO. And that could be on the basis of half a year data point. But I think that needs to be discussed with regulatory agencies.

Got you. And just the follow-up is on the hepatitis C franchise. I'm curious if you guys have some ROI target for hep C? I'm trying to get a sense many maybe at a higher level what magnitude of investment are you willing to make given the current dynamics of the market and the landscape? Thanks.

Yes. It's a good question. Obviously this is a very dynamic, very competitive market. And rather than go into ROI details I would say what we said before, which is that we need to be convinced that we have winning regimens that will allow us to address large parts or large portions of this market going forward.

I think as you probably remember, we said that our new data needs to be competitive with anything out there in order to move forward. We feel it is which is why we're going to move forward. And we'll make the same kinds of decisions as we go and collect our Phase 2 data prior to moving into Phase 3 to make sure, again, that we're not chasing the market with a second-rate or a non-competitive regimen. But we think that the new data we provided today is a good start.

Okay. Thanks.

Matt Roden, UBS.

Congrats on the Alios data here. So on the hepatitis C program, a couple questions here. Can you talk about the baseline characteristics a little bit, maybe the IL28 genotype, BMI, things like that just so we can maybe help assess the degree of difficulty, if you will, on this study? Secondly, if you can speak to any treatment-emergent adverse events in the study?

And then for planning purposes, as you move into a pivotal study, is it your assumption that if there is a new standard of care established by that time in the overall space whether or not you would actually have to run up against an active control or whether or not you could take advantage of the progressiveness that the FDA is taking forward in the current hep C studies?

In terms of baseline characteristics, there's nothing particularly notable about them. The IL28 B genotype distribution was as you would expect, but we have not yet analyzed the study by IL28 B individual subjects, so I can't say too much about that nor by any of the baseline factors. So that will be coming as we look at the data. Obviously it's very fresh so we don't have a whole lot of additional analyses. In terms of adverse events, they were typical for a Phase I study. That's all I can say. And obviously we'll provide more information when these data are presented at a medical conference.

In terms of the regulatory strategy, I think it's just a little bit early to say at this point. The FDA, as they have done publicly in a number of settings, has indicated a great deal of flexibility in the development of all orals. We hope to take advantage of that. It may help us to speed up our program, but it's really premature to think about the comparators and all that part of it. Obviously we'll gain more information as we go along.

And then I just want to add two comments to that. First of all, from a baseline point of view, viral [RNA] is pretty high. It's six-point something. That means it's hard to bring patients in general, so that means we really picked hard-to-treat people. That's number one. And on top of that, I want to just make sure that we are all understand that there were no severe adverse events in this entire study, which is actually an important outcome too.

Okay. Great. And related, as a follow-up on the last question, and that is it safe to assume or should we infer that since you are continuing to invest in hepatitis C with an early stage asset here, that it's your view that the commercial market will be more sustainable under all oral standards of care as opposed to the rapid rise and rapid decline of the treatment rate, both 10 years ago and then again in your experience with pegylated and telaprevir?

Our view is that this is a large market that will likely evolve into multiple segments, some of which will be large. And that once all orals come, there's a very nice commercial opportunity. There is also a great opportunity to treat more patients, which is very, very important. And so as we look at it, as I said, once we see our Phase 2 data I think we'll be in a good position to conclude whether we have what's called winning or first-rate regimens that can address some of these large patient populations. And if we do, that's a worthwhile investment for us and a worthwhile investment for patients.

Thanks very much.

Liisa Bayko, JMP Securities.

When we think about the combination with INCIVEK and the Alios nuc, can you talk about the type of regimen or dosing you're thinking about for INCIVEK? Are you going to be considering daily dosing and lower doses than currently available? How should we think about that?

We'll likely be dosing INCIVEK twice a day dosing in the combination studies. In general, principals of antiviral therapy are that you don't generally lower levels doses of each of the agents. You obviously need them to cover the variance for the other, so I would not anticipate any different dosing of INCIVEK than we are currently using.

And along with timing wise -- 12 weeks -- just trying to think about if there's a way to make the safety or tolerability a little more tolerable in the combination?

Yes. So just a quick word on that, obviously we had a little bit of a window into the safety profile of INCIVEK without peg interferon in the [Zena] study dual arms and it was actually quite a bit more favorable as you'd expect than what we saw with the triple therapy. And it gives us some amount of confidence that we'll be able to design tolerable regimens, and clearly will confirm that when we combine them with the nucs but that is one of the goals, of course, of Phase 2 is to get that information. And we are looking at 12 weeks as our primary development there.

Okay. Thanks. And a question on the CF program, are you considering higher doses of 809 currently? Are you exploring any? And then I wanted to understand the launch plan in Europe. In what sequence will you be rolling out in countries, timing and how should we think about price? Thanks.

The first thing with the dosing. So as we said, I think there are two aspects of the people trials, number one is you have to confirm what you have to see or what you have seen in cohort two in Phase 2, which is the 600-milligram once a day and KALYDECO 250 twice a day. And we actually planned, because we see from the response that we might not have maxed out yet, we will try several other does regimens that are higher on the VX-809 and one of them as we always said could be a BID 400. So that gives you a higher exposure and hopefully then a better translation into the correction, but that's what we are trying to do.

First, as I think we mentioned before, we've been planning for this launch so the entire commercial organization is in place in Europe. We're focusing on the four major countries with most of the G551D patients, which is Germany, France, UK and Ireland initially, although we may roll it out in additional countries over time as we identify these patients or they are identified to us.

As I'm sure you know, the way reimbursement works in Europe is a little different. It's negotiated country by country. And we are just beginning those discussions now with each of the countries. Therefore, it's early to talk about price and we'll keep you informed as we go. But as I said before, we view the value -- the pricing of our medicines with respect to their value to patients and we think that based on the data this is a very valuable medicine for G551D patients.

Terence Flynn, Goldman Sachs.

Just was wondering if you can give us any update on how many of the patients have rolled over from persist onto commercial KALYDECO? And if all of them have rolled over and then any details on the gross to net this quarter for KALYDECO? And then I have one follow-up.

With respect to the rollover, we are not providing detailed information on the patient numbers. They started rolling over in May and they will continue to rollover, most of them actually in the first third in the fourth quarter. So far the rollovers are going well, Terence, with a sense it's been a fairly easy process to move patients over.

Your other question was on the gross to net for KALYDECO. And again, we haven't disclosed a number. The gross to net for KALYDECO is really based mostly on payer mix. And the payer mix is about 70% commercial, 20% government and 10% other. That may change a little bit over time as we get more government funded patients on the drug. But we don't anticipate it will be a major change.

Okay. And then have you guys looked at any of the PK/PD data yet from the KALYDECO 809 Phase 2 trial? And where are you on that front?

We're looking at those data constantly. We will basically present some of them most likely in a conference later this year.

Any details you can share with us?

No. Not at this given point in time. I think what I indicated is that we go for higher does regimens, which gives you an indication that we have a confidence that we reach exposure levers that are covered by our safety ranges, and that's, I think, the most we can say at this given point in time.

Okay. Thanks a lot.

Tom Russo, Baird.

Congrats on the great results for the nuc. First question and then a follow-up, wanted to get a little more granular thoughts on cross-company collaborations. Maybe the appetite that you have, mechanisms that you'd favor, how advanced any conversations you've already had are and whether one or more of the Phase 2 trials that you're talking about could be adapted to accommodate outside compounds?

We're not going to comment on any specific discussions or strategies there. I would really go back to what I said originally, which is our goal is to find the best regimen or regimens for patients. We think there's still a fair amount unknown about what those regimens are. And our goal is to learn more about that. And I think the classes of molecules one would combine with the nuc are pretty obvious at this point, so they don't bear reiterating. But it is our plan to go forward with our own drugs in combination with the nucs. As I said, we would consider combining them with the drugs of other companies as well.

Okay. And then other question, I don't think we've really seen or heard much on the pre clinical for the nucs yet. Is there anything that you can say on the dose limiting talks or how close -- how much coverage you have in terms of the therapeutic window versus the 200 milligrams that we're seeing today?

I think there will be data in the upcoming conference that basically describes the pre-clinical profile. We have spoken a little bit about that in the earlier days and I want to repeat that. So we did a careful evaluation of this before we made a decision to pursue Alios nucs. And on that basis, safety was an important component. And as I said then, I say now, it was from a pre-clinical point of view, one of the safest if not the safest nucs that we have seen in the landscape out there. And I think it was part of the decision to go forward.

Okay. Thanks, Peter.

Ying Huang, Barclays.

Congratulations also on the nuc data. My first question is for Bob. Can you confirm that in the Phase I trial for the placebo-treated patients there also predominantly genotype 1B? And then question for Ian, the excess inventory at $78 million, is that all accumulated from 2Q of this year? Thanks.

So just a quick answer. Yes, the placebo subjects were predominantly 1B.

And to your question on inventory, it's actually the inventory we've built over quite a long period based on our expectations of the market. And consistent with how we've communicated on this call, we have seen a change in that market and declining treatment rates, which has resulted with reserving against potential for excess inventory.

Thanks. And then if I can squeeze one more in for Peter, do you guys have sufficient toxicology data to support 12-week study in human now?

Yes, we do. 12-week is all basically ready to go. And as we go forward, we will provide actually six-month tox data to have longer treatment regimens possibilities if we decide so.

Great. Thanks.

Brian Abrahams, Wells Fargo Securities.

My congrats as well on the Alios nuc data. Question on the KALYDECO 809 combo, recognizing that the design is still evolving I was wondering if you could talk about how you might be thinking about inclusion criteria for a Phase 3 versus a Phase 2? I'm just wondering if there's anything you're seeing as you continue to look at the Phase 2 data that might be suggestive of ways you might further enrich the population?

And then on KALYDECO pricing, can you confirm that the ultra-orphan status whether or not with the ultra-orphan status KALYDECO you still need to go through the value assessment process as in Germany and the UK? Thanks.

So, Brian, in terms of inclusion and learning something from a Phase 2 towards Phase 3, I think there was a broad population that we will include that's obviously, as we said, first homozygotes and we will not have any particular exclusions as for probably all homozygotes, the 508 patients in a certain age group. That's what drives the selection of the patients. We have to go with 12 years and older to grow on a fast-track because that's what we have tested in Phase 2.

That's the only marker in a way that we have and then there's the usual selection of people that have sometimes contraindication in terms of the co-medication, which they can't go, that's normal. But I think broad population for almost everybody in the age group for 12 years and older. That's sort of what I can say to this.

Brian, in terms of KALYDECO reimbursement in Europe again, as you know, whether it's orphan or not, it does need to go through the German value process. And you may have seen recently the UK has been changing its rules around the value process. And we're just talking with the UK about whether we will come under the new rules or the old rules since they are literally changing over the last couple weeks. I can't give you a final answer on that yet.

Thanks very much.

David Friedman, Morgan Stanley.

Thanks for taking my question. It's actually just around the R&D. Is there any way that you guys could discuss or in general buckets, what the R&D breakdown is in terms of hep C, CF, basic, research, and other?

No. We haven't actually broken it down that way. I think what we said today is that our philosophy, our strategy if you will, is to reinvest in the most promising late-stage programs and we consider CF, HCV and JAK to be promising programs. We clearly need to continue to invest in research, otherwise we won't have future late-stage programs. And then we take a very careful look as we get proof of concept with the earlier development compounds to make sure we have transformative medicines that we are bringing to late stage pipeline's.

All right. Thanks.

Katherine Xu, William Blair.

If you look at the hep C competitive space, you have Gilead already having a co-formulated double combo going to Phase 3 in the end of this year. So if you are going to Phase 3 a year later, are you targeting a profile of a pan-genotypic combo or do you think you can still go with genotype 1 only combo that your analyses can still be successful?

Obviously, we don't comment on what Gilead is doing so I can just tell you what our strategy is. And as I said, we plan to test multiple all-oral regimens in Phase 2 between now and the first half of next year in multiple small studies. And based on both safety and efficacy results, we think that's going to allow us to design a single or multiple pivotal trial which will go in parallel with a high probability of success. We can do that by the end of next year.

Do you think that will be a pan-genotypic combo or is that a target profile you're going with or you're just genotype 1 only is okay as well?

Our initial strategy really is genotype 1-specific. That we still believe is the major unmet need. I think if you look around the world at all the markets and all the various genotype distributions, it still comes out that genotype 1 is the most valuable proposition.

Got it. And follow-up if I may, for 2518, the other nuc. What is taking so long? Just curious. I thought both studies were started around the same time. And what is taking longer for the other one?

It's not so long. Basically, the studies -- the 2158 study started about a month later than the 2200 study. Obviously, running one program on time is hard. Running two programs exactly in parallel is almost impossible. And recruitment's been a little bit slower than we expected in the countries where it's being run, so we do expect the data sometime in the next couple of months.

Thank you.

Howard Liang, Leerink Swann.

The INCIVO royalty is down quarter over quarter. Can you give some color where your partner is in European launch and whether we should expect that line to increase over time?

As I mentioned in my remarks, we've been -- INCIVO has now been approved in over 25 countries, most of the major European countries and certainly in the major countries. So they are at the earlier stage of launch, a lot of those approvals have been this year, so we'll look to see how they perform in those markets.

Great. And I think you said that you're interested in combining 2200 with other nucs. Would that be with 2158 or other experimental nucs?

Our goal would be potentially to combine 2158 and 2200 together. We haven't really thought about other nucs at this point. And obviously, we won't know the feasibility of that until we have 2158 data.

Thank you.

Michael Yee, RBC Capital Markets.

On 661, I don't think the answer was fully clear. Can you better describe the adaptive design? I've got a lot of questions on that and trying to understand what actually triggers a readout. Is it safety? Is it an efficacy time point? Maybe explain that a little bit better because I thought as -- it was dose escalation. So the longer it goes the higher doses you're going at?

I'll point out that there is a slide on the webcast that has a bit of a graphic that describes how the doses escalate a little bit and other features in the design, but I'll let Peter -- Peter says the slide describes it pretty well.

Okay. And let me ask one last question now. On the 809 combo on Phase 3, you said you could look at higher doses. What data do you have to support higher doses? They were never tested in Phase 2, so wondering how that's possible in Phase 3.

We have obviously Phase I data that basically measured the exposure levels. And that is linked to safety in humans, but also in animals. And that gives us basically using PK/PD modeling the opportunity to feel like different doses that are within that safety range.

Okay. That's helpful. Thanks.

Michael, we'll give you a call and walk you through the slide and describe how 661 works. We find most of the questions regarding the 661 study is when data is available and the design will help you understand the final data will be available in 2013.

That's why I asked. Thanks.

Ted Tenthoff, Piper Jaffray.

In first quarter of KALYDECO launch, you said that estimated roughly 60% of patients were of G551D patients in the US were on drug. How has that changed in the second quarter? Has that increased, and can you provide what that level is?

As we said on our first-quarter call, we are not going to provide numbers of patients going forward. To clarify what we said, we said 600 patients in the US at the end of the first quarter. And as I said today, the number has increased and we anticipate it will continue to increase, both as we identify new G551D patients and as G551D patients rollover from persist.

Great. Thanks. And then for Ian real quickly, with the focus of more on R&D, does that change the breakdown in R&D in that $690 million to $760 million guidance that you've given?

The relative weighting of those two remains similar.

Okay. Thanks.

Phil Nadeau, Cowen & Company.

At the risk of asking something you just said you're not going to answer, as you've launched in the US, have you found -- is there anything that's changed your mind on the number of G551D patients in the US? Do you still think that's about 1,100 patients? Similar question about the four countries you mentioned earlier, you said 1,000 to 1,100 patients approximately the right number of G551D patients in those four countries?

A good question, Phil. In the US nothing has changed our estimate of 1,000 to 1,100. Our best estimate in Europe is also around 1,000 to 1,100, although I always put the caveat on this, Phil, that as you know, the genotyping in Europe is not as advanced as it is here. And so the precision of the 1,000 to 1,100 in Europe is a little bit less than what we know in the US.

And did you have any compassionate-use program in Europe that has enrolled patients? Are there any patients on drug today?

Yes. There are. We have a program in France that's enrolled some patients as part of a APU program. And we anticipate those patients will roll over to commercial drug now that it's approved.

Okay. Would you care to tell us how many patients that is?

No. We haven't disclosed how many patients that is. It's a small number.

Okay. Thanks for taking my questions.

Brian Skorney, Brean Murray.

Congrats on the data from the Alios nuc. Just digging a little bit more on the molecule with the understanding you're not ready to talk about the structure, but just in terms of a little bit of a comparison to the resistance of this drug compared to the other nucs, which I think all have the two methyl nucleotide background, I'm just wondering is it a totally different structure than that? And in pre-clinical studies have you've been able to select for resistance and what sort of mutations would confer resistance to this drug? Thanks.

I really can't talk at all about the structures. I will just say that these compounds have a very high barrier to resistance. And, therefore, are excellent combinations for other drugs, much like the other nucs that have been described.

Thanks.

There will be a bit more detail coming out at a medical conference later on some of these issues.

Okay. I'll wait for them.

Okay.

Operator, this is Michael. We are now about 10 minutes past our planned stop time for the call so the interest of everybody's time we'll take just two more questions. Thanks.

[Ravi Mehrotra], Credit Suisse.

Congrats on the data. This is actually Kuhn calling on behalf of Ravi. I had a question regarding one of the trials for the Alios nucs with ribavirin. I just wanted to know if there was anything in the data that you've seen that would suggest that your nuc with ribavirin might give you better results than what we've seen so far. Thanks.

That's obviously why we're going to do the study is to find out. Clearly the properties that we've seen so far, very high level of antiviral activity would make it potentially a good companion with ribavirin. And as I said both efficacy wise and safety wise, we think it's a good trial to you.

Okay. Thanks.

The other thing that is impressive what we said in the call is we had a very steep decline from the viral kinetic point of view of 3.85 drop in three days, which is a good indicator that you might have a good chance for combination and good viral outcome at the end of the day.

Alan Carr, Needham and Company.

Any sense of off label use other genotypes patients using KALYDECO? Thanks.

As you know, Alan, we only promote KALYDECO for the labeled indication, which is G551D greater than six, and we don't track or keep track of any off- label use, so I don't have any data of off-label use.

Thanks.

Thanks very much, everybody, for joining us tonight. I think everybody got to ask at least one question. If you didn't get your follow-up or you have additional questions for any of us, happy to talk further tonight. Thanks very much for tuning in.

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