福泰製藥 (VRTX) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vertex Pharmaceuticals first quarter 2013 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions.)

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Michael Partridge, Head of Investor Relations. You may begin.

Thank you, operator and good evening to everyone.

Joining me on tonight's call are Dr. Jeff Leiden, Vertex's Chairman and CEO, Stuart Arbuckle, Chief Commercial Officer and Ian Smith, Chief Financial Officer. Jeff will begin with a review of our progress this year in executing against our long-term strategy of creating innovative medicine with a focus on specialty diseases, then Stuart will comment on market trends for our key medicines, Kalydeco for people with cystic fibrosis, who have the G551D mutation and Incivek for hepatitis C. And in to close, Ian will review the first quarter financial results and update our 2013 net guidance for Kalydeco net revenues.

After prepared remarks, Robert Kauffman, Chief Medical Officer and Peter Mueller, Chief Scientific Officer will join us for a question-and-answer period. After the call, we will be available in our offices for follow-up.

Before we begin, I will note that information discussed on this conversation call includes forward-looking statements which are subject to the risks and uncertainties discussed in detail in our 10-K reports which has been filed with the Securities and Exchange Commission and also in the press release announcing our financial results tonight. These statements, including without limitation, those regarding the commercial performance of Incivek and Kalydeco, our development and expectations and our guidance are based on management's current assumptions and are subject to the 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 GAAP to non-GAAP is available in our first quarter 2013 financial press release which is on our website, and I would also refer you to the information on slide 4 of tonight's webcast.

I will now turn it over to Jeff.

Thanks, Michael.

Good afternoon, everyone. I'm pleased to discuss with you the progress that Vertex has made in 2013.

Earlier this year, we identified key priorities that would enable you to measure the progress of our Business. In January at the JPMorgan conference, I outlined three strategic imperatives for our Business that would position us for long-term growth. First, prioritizing our development investments to advance our late stage medicines. We have important late stage medicines in development for cystic fibrosis, hepatitis C, and autoimmune diseases, and our goal is to provide these therapies to patients, their families and health care providers as soon as possible.

Second, focus on continuing to create innovative medicines for serious diseases out of our R&D efforts. Making ground breaking new medicines is the reason Vertex was founded. It continues to define who we are today.

And third, maintaining our financial strength. We recognize that we're in an important period of investment to realize sustained growth opportunities in the near future, and the funding of this investment while maintaining our balance sheet strength is an important priority.

So far, in 2013 we have accomplished a great deal to advance our late stage medicines and show the potential to bring further ground-breaking therapies to patients. We also continue to maintain our financial strength with a good financial performance for the first quarter. In cystic fibrosis, we received breakthrough designation from the US FDA for Ivacaftor as monotherapy. We have multiple studies underway that could potentially expand the Kalydeco label. We are on track to have the first clinical data for Ivacaftor monotherapy outside of G551D in the second half of 2013.

We also received breakthrough designation for the combination of Ivacaftor with our lead corrector molecule, VX809. With the VX809 plus Ivacaftor combination, we reached agreement with the regulatory authorities and have now begun a phase III program that will evaluate six months of treatment in 1,000 patients homozygous for the Delta 508 mutation. We anticipate that we will receive phase III data and submit an MDA for this combination in 2014.

We also reported phase II data earlier this month with another corrector, VX661, that has further validated the strategy of combining a corrector and a potentiator to treat CF patients with two copies of the Delta 508 mutation. Also, we announced that we continue to advance an additional corrector, VX983, and we expect to start a combination study with this compound in people with two copies of the Delta 508 mutation in the second half of this year.

In hepatitis C, we have initiated two 12-week studies with an interferon-free, all-oral regimen of our nucleotide VX135 in combination with ribavirin, and one of these studies is now fully enrolled. Our strategy is to conduct multiple phase II studies of VX135 in multiple combinations with other DAs in phase II to position us to initiate pivotal development of VX135 in 2014. This quarter we are starting our first phase II study in HCV patients combining VX135 with another DA, Bristol Myers Squibb's NS5A inhibitor, Daclatasvir.

Financially, we are making significant investments which we believe are important to position us for sustained future growth. These investments are focused in R&D for the creation of meaningful new medicines. As part of the strategy we outlined in January, we described how we would control our operating expense and reduce our SG&A investment compared to prior years, and thereby direct our investments towards our pipeline and research efforts. These actions are reflected in our Q1 results which Ian will cover in more detail.

To maintain financial strength, we are also seeking to maximize revenues of our approved medicines. Stuart will provide some color on this in a moment, but I will say that I am pleased with our performance this quarter, which shows our important position in hepatitis C and also demonstrates the value of Kalydeco for certain people with CF. In summary, our strategy has provided hope for people with serious diseases and has created significant value for shareholders and a platform for long-term growth.

Now, I would like to turn it over to Stuart.

Thank you, Jeff, and good afternoon.

I will provide some background and commentary on our improvements in Incivek for genotype 1 chronic hepatitis C infection and Kalydeco for CF patients who have the G551D mutation. Starting with in Incivek, we launched Incivek for hepatitis C in May 2011 and now, just two years later, we have treated more than 60,000 patients in the United States. While fewer patients are starting treatment for hepatitis C compared to this time a year ago, the hepatitis C market remains substantial and Incivek continues to be the market leader with approximately 75% of new patients in the US, a number that is unchanged since launch.

Vertex recorded $206 million for net revenues in Incivek in the first quarter. We expect Incivek to remain the market-leading therapy throughout 2013. However, the number of hepatitis C patients starting treatment in the US has been in decline since the second quarter of last year, and this trend is likely to continue in the US. Outside of the US, Janssen market's Telaprevir is Incivo, and Vertex receives a royalty. Incivo availability has continued to expand to additional countries and based on Janssen's sales in the first quarter of 2013, Vertex earned $39 million in royalties. Janssen has attributed the strong performance of Incivo in the first quarter to a continued successful rollout of Incivo in Latin America.

Moving now to Kalydeco. We launched Kalydeco in the US in early 2012 for cystic fibrosis patients with the G551D mutation, age six and older, and we saw rapid adoption amongst US patients. By the end of 2012, we were treating the vast majority of the eligible G551D patients in the US. For the first quarter of 2013, we achieved US sales of Kalydeco of approximately $50 million, in line with our US sales in the fourth quarter of 2012.

In the European union, Kalydeco was approved in July of 2012 and since then, our key objective has been to complete the reimbursement process in the major markets so that we can make Kalydeco available to the patients who need it. It we forecasted growth for Kalydeco in 2013, which reflected our expectation regarding the timing of achieving reimbursement and the speed of uptake in the region.

We achieved approximately $12 million in Kalydeco sales outside of the US in the first quarter, which represents reasonable growth over Q4 2012. However, we expect this to accelerate in Q2 2013, given the progress we have made in achieving reimbursement approval in the major European countries. Specifically, in these major market, Kalydeco began to be available in Q1 with commercial reimbursement starting in Q2. The uptake in these markets has been strong, which reinforces our confidence in the growth we can achieve for Kalydeco revenues in 2013.

In summary, I'm pleased with Incivek's performance within the hep C market and in the ongoing launch of Kalydeco.

And now, I will turn it over to Ian.

Thank you, Stuart.

I will start by reaffirming our business and financial strategy, that is, we are investing in the advancement of important medicines that, if successful, will drive sustained long-term business and financial growth. From a financial perspective, our goal during this period is to maintain financial strength. Stated simply, protect our balance sheet by prioritizing our spend toward R&D and balancing our expenses with revenues.

Now, to the first quarter 2013 results. Total revenues were $328 million. Our total non-GAAP operating expenses, excluding cost of revenues and other charges, were $275 million, and we had a non-GAAP profit of $5.7 million. From a balance sheet perspective, we completed the quarter with approximately $1.24 billion of cash, cash equivalents and marketable securities, and $400 million of 2015 convertible debt outstanding. This debt has early conversion features based on certain stock prices. These results are consistent with our strategy of maintaining our financial strength while progressing our medicines in development.

Now, to the more detailed results. In the first quarter, Kalydeco revenues were approximately $62 million, approximately $50 million in the US and $12 million outside the US. Uptake in early 2013 has been strong in key countries outside the US, and this uptake provides us with the visibility into total Kalydeco revenues for the remainder of 2013. For this reason, we are increasing Kalydeco revenue guidance today.

Incivek revenues in the first quarter were $206 million, reflecting continued demand for hepatitis C treatment, even as the market anticipates the arrival of other regimens beginning in 2014. Incivo royalties were $39 million and combined with Incivek revenues, we continue to anticipate significant HCV revenue contributions to our top line in 2013. Finally, collaborative and other revenues in the first quarter were $22 million, bringing total 2013 quarter revenues to $328 million.

Now, to the non-GAAP operating expenses of $275 million which excludes cost of revenues and other charges. This is similar to prior year. Within our first quarter 2013 non-GAAP operating expenses, there has been a significant decrease in SG&A comparison to our fourth quarter 2012 and also comparison to the first quarter of 2012 while we continue to prioritize our investments into R&D. In particular, our late stage development investment into our programs for CF, HCV and autoimmune disease programs increased our R&D investment compared to prior year.

Before I move to our 2013 financial guidance, I would like to provide a comment on our GAAP net loss of $308 million. That includes a charge of $412.9 million for the impairment of our HCV asset, VX222. At this stage of development of our portfolio of HCV assets and given the progression of other regimens by other companies, we are unable to support the fair value of VX222 on our balance sheet and accordingly, we are taking a writedown in the value of this intangible asset. We also recorded a tax benefit for VX222 of $127.6 million. Results in a net charge of $285 million.

Now, to the 2013 financial guidance. Today, we are reiterating our total revenue guidance of $1.1 billion to $1.25 billion that we provided in February 2013. While we are increasing the Kalydeco components of revenues to $300 million to $340 million from $280 million to $320 million we gave previously. Today, we are also reiterating our non-GAAP operating expense of $1.09 billion to $1.15 billion. In summary, financially, we're executing on our strategy and prioritizing investment within our Business to drive long-term growth.

I would now like to open up the line to questions.

Thank you.

(Operator Instructions)

Our first question comes from Geoffrey Porges of Bernstein. Your line is open.

Thanks very much for taking the question, and I think the first time on a Vertex call I have been able to congratulate you on saving expenses.

So, my first question is, is this SG&A run rate sustainable at this level after you pulled back on HCV? But if you're successful with expanding NCF, would you anticipate that going back up to the prior level, or is this the sort of thing that we should be forecasting going forward?

And then I just wanted to get someone's perspective on what was presented over the weekend at Amsterdam. And it wasn't a formal investor event, but has this changed how you look to partnering VX135? And I'm thinking particularly about some of the issues that have come up, for example, with Telaprevir and the pre-existing resistant mutation. Do you think you should be looking elsewhere for further combination studies as a result of that? Thanks.

Geoff, we will take the HCV and [easel] question strategy first, and Jeff will take that.

Geoff, let me take the strategy question, and then I will turn it over to Bob for the more detailed scientific question around resistance mutants. I think you know, our strategy all along has been to combine VX135 with multiple other DAAs and actually collect the data in phase II that we think will allow us to pick the best regimen or regimens to take forward into pivotal development next year. And I think the results we saw at easel really only reaffirmed our confidence in that strategy.

So, as we discussed today, we have multiple partnerships in which we can look at 135 with ribavirin and at least three other DAAs, and it is our plan to continue that strategy going forward. I think at the end of the day, the data will really speak to this, but I think the picture is becoming pretty clear that a nuke will be the backbone of most of these straightforward DAA regimens, and we think VX135 is competitive with any nuke out there.

So, let me turn this over to Bob for your specific question.

Hi, Geoff, this is Bob.

Hi, Bob.

So, with specific reference to the Q80 var -- baseline variant, we are aware of those data. In the two studies, two phase III studies they reported, there appeared to be some decrement in SVR in the patients with those variants at baseline. It wasn't dramatic, but probably there was some decline.

On the other hand, in combination with the nuke, it may well not really be a clinical issue. And obviously, that is something we will evaluate in the initial studies. But it certainly doesn't change our strategy of working with Simeprevir as part of our combination regimens.

Right, thanks. And Ian, on the SG&A?

Yes, and Geoff, thanks for that. I will just kind of bring you to the broader picture. Back in February, we did give OpEx guidance, total non-GAAP OpEx guidance of 1.09 to 1.15. We are reiterating that today.

The number that you point to, though, the SG&A expenses where we're approximately $80 million for Q1, I can see what you're doing, you're taking that and multiplying it by four and saying that may be just under the guidance we gave of 3.40 to 3.60. We are still reiterating the 3.40 to 3.60; we still are launching a, what we believe is an important drug and still expanding into Europe, and so there are marketing expenses that go along with that. So, we're reiterating the components of our guidance today as well, and that SG&A component we see 3.40 to 3.60.

Okay, thanks.

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

Thanks for taking the question. I got a CF one and then an RA one.

I want to get a sense from you on the Kalydeco monotherapy trials, the G117H and then G551D in younger patients. It has been ongoing for a while, so is it that the entry criteria are narrow, or is it a matter of just finding patients? I would have thought that these would have enrolled fairly quickly, given the visibility and the clinical effect in the STRIVE study.

This is Bob. For the non-G551D gating, that study is fully enrolled, so that one is well underway.

The R117H study is still enrolling, although it is well along in its progress. And that, I think, is just a combination of it is still a pretty uncommon mutation, and so finding patients who meet the entry criteria is -- it just takes time. But I think we're making good progress there, and we expect enrollment to be finished sometime soon.

And Geoff, I would just add, there is the other study that it in the other gating mutations, which has completed enrollment and we anticipate seeing the first data from that from the second half of this year.

And in terms of the kids that you are referring to, I think you have to go through a global process that has the pip process in there in Europe, which is quite a lengthy process, which now is finalized and now we are ready to go.

Got you. Okay, and just a follow-up -- or a second question on VX509, I know you guys have talked about partnering this out. And maybe to Jeff's perspective, given his background, is there a data set or an efficacy benchmark that you would reconsider that from a development perspective, to take it on your own? Or is that going to be 100% partnering or bust?

Geoff, thanks for asking the question. I think as we've looked at what it takes to develop this asset and multiple indications and multiple geographies, which I think is what is going to be needed to be competitive, that is really a process that we feel comfortable with only in a partnership. So, that really is our plan going forward.

Got you, okay. Thanks.

Thank you. Our next question comes from Michael Yee of RBC Capital. Your line is open.

Yes, hey, thanks. On a question on hep C, obviously you are going to get presumably some Bristol/Vertex combination data sooner than the others. And obviously, I think we can all see what a nuke in NS5A has done out there with other collaborations. Time is of the essence and the other studies may take longer.

If the data looks really good, why would we wait? Maybe you can walk through some of the strategy and timing of that as you think about that end of this year, going into 2014. And then second question is just on the CF809 phase III studies, would you expect this to enroll faster than the Kalydeco studies, given there are definitely a lot more patients out there than G551? Thanks.

Michael, this Jeff. Let me take your first question and then maybe I will turn it over to Bob for your question on the CF enrollment. With respect to the timing of these different studies on VX135, just to be clear, we're not necessarily going to wait. We agree with you that speed is of the essence here, and we hope to begin collecting data, actually, as soon as the third quarter of this year, with some combinations, like the ribavirin study, and then subsequently with the others.

And as you say, if we saw a combination that was clearly a winning combination or an ultra competitive combination, we wouldn't wait to move it forward. Because we agree that we want to go as quickly as possible to patients.

Okay.

And then your other question?

Speed of the 809 enrollment verse Kalydeco, yes.

Yes, we haven't really given any information on how quickly we expect to enroll. I think they will be rapid. The patients are highly interested.

In general, first of all, we are recruiting a lot more patients into these two trials than we did with the Kalydeco study, so that will be a factor. And the other is that site startup tends to be more of a limiting factor in some respects than actual patient recruitment. Once the sites are up and running, they tend to recruit very quickly. And we're obviously doing as fast as we can to get the sites up and running, but that tends to be to more rate limiting step.

Michael, we will probably have a better understanding of speed of enrollment when we're on our July quarterly conference call, and maybe we will give some comments at that time.

Okay, perfect. Thank you.

Our next question comes from Rachel McMinn of Merrill Lynch. Your line is open.

Yes, thanks very much. I wanted to go back to hep C for a moment and get a patient number. How many patients worth of data do you think you will have by the end of the year when you add all of these studies up? I think safety is the big question that a lot of people have.

And then also wanted to get your perspective on heterozygous, when we could see the first studies initiated there. I don't know if that is something that you think is a next step for 661, or we would have to wait until 2014 before you'd consider starting any of those studies.

And really quick on a housekeeping question, are there any other commercial CF milestones that we should be thinking about near-term? If you could give us a little bit more color on the structure of how we think about sales-based milestones, that would be helpful for modeling purpose, thanks.

So, this is Bob. I will take the safety question. It is a little bit of a hard question to answer because obviously, the studies are ongoing and we will have varying lengths of safety data at any time point toward the end of the year.

Well, specifically, 12 weeks, then.

Yes, we will have 12-weekday data, probably on the order of 40 to 50, maybe 60 patients by then.

And is that really enough to go into phase III then, Bob?

Not necessarily at that point, but we will be expanding these studies and starting additional trials so that we will be augmenting that safety database through the end of 2013 into early 2014 in order to get enough patients to go into phase III.

Rachel, just on your question that you asked, you did specifically mark it to the end of the year. But the way these studies progress is we do start the smaller study and expect to expand that study in the second half of this year. So, as you look, as we go into 2014 and through 2014, we continue to accumulate patient experience.

That is why we have made the statement we believe we will be in pivotal development to do that in 2014. It is not from the initial study and it is not marked from the patients at the end of this year, but it's as we go into 2014, we will have accumulated more patients.

And finally, Rachel, your question on the heterozygous, this is Jeff, we are considering with regulatory authorities how to approach the heterozygous. We have a couple of different approaches. I think it is too early for us to give you specific plans.

But we are formulating plans, both with our current correctors, as we've said. But also with combination with second generation correctors, and we want to move as quickly as we can to that population of patients.

And to your financial question, Rachel, to the milestone payments, we did make a payment of approximately $9.5 million this quarter, or the first quarter, in connection with our CF revenues. There are future milestones, but we will disclose those as we achieve them based on certain sales levels.

Okay. Thank you.

Our next question comes from Mark Schoenebaum of ISI Group. Your line is open.

Hey, guys. Thanks a lot for taking the question. I have two pretty simple ones.

One, the first one, would it be possible for you to -- and maybe you have answered this and I just don't know, but would it be possible for to you tell us where the IP is down filed for Kalydeco 809 and 661. And where you will be manufacturing those three drugs?

The second question is a hep C market question. Do you guys, would you happen to have the following number, the number -- roughly the number of hepatitis C patients today? If you have genotype 1, that's fine, but the number of hepatitis C patients today who you think are under the active care of an HCV treating specialist? Thank you very much.

Thanks, Mark for the question. I will take the tax question. And what I would say is, we've taken all of the appropriate tax planning steps. We believe there is a lot of value in our CF franchise, and we believe that we are going to be global with the franchise.

So, we have taken all of the appropriate tax steps at this point in time that a company should take. And -- but to project out a tax rate at this point in time, I think it is a little too early. I think as we get close to profit, then we would be happy to start giving you some guidance towards that. But you can expect that the tax structuring for the Company, we're taking appropriate tax steps.

Can you can tell us where you will be making it?

It's -- no, not at this point.

Okay.

It is actually less relevant to where it is being made.

Okay.

The other point I would point out, just because you are asking about tax, I think it is also important to note that Vertex has approximately $3.5 billion of NOLs that do get offset against profits before you start paying cash taxes. So, that will clearly benefit our cash flow in the early years of profitability. And to your other questions --

Yes, Mark, we will have to get back to you on that.

Okay, no problem. Thanks a lot, guys. I appreciate it.

I can't give it to you off the top of my head.

The next question is from Yaron Weber of Citi. Your line is open.

Great. Thanks for taking my questions. So, I just have a few questions, a little bit all over the place.

But just starting with 135, just as a follow-up to a previous question, so it will be for Bob. So Bob, it sounds like you are going to have 40 to 60 patients by the end of the year, safety, that is going to be the preliminary 12 weeks of safety that you need to do with the preliminary experience, with 135, with another agent. So, at some point during the year, are you going to enroll that into, or broaden that into an expanded sort of cohort that is going to have probably, I would imagine 100 or 200-plus patients.

Any sense, when are you going to have the 12-week safety from that, because that is going to be really gate laboring to starting phase III? So, that is going to be the first question, then I have a follow-up.

So, I think you can add up the timing, it will probably be in the, certainly in the first half of 2014, that we will have that information and expect to take that to regulatory agencies to gain approval for the pivotal program.

Because one of the things that I'm trying to understand a little bit is the key to you to -- and do you think it is relevant that -- I would imagine you guys need to and want to be in phase III before potentially Avery, and then Gilead going to be out there with their all-oral regimen, because that could signify a change in care. Is that something that you agree with, or no?

I agree with that, and that is our strategy.

Okay. Second question, just on -- thank you for that. Kalydeco, the $12 million OUS, can you give us a little bit of a sense, how much of that was in Scotland? And I'm trying to see, did you get anything at all in the UK, and I imagine Ireland was on board. I'm trying to get a sense, that $12 million, which countries were on board already.

Yes, so reimbursement in most of the US and Ireland didn't kick in right until the back end of Q1 and at the beginning of Q2. So, the majority of the $12 million, the majority of the growth over Q4 was from existing markets like Germany, where we're already on the market and reimbursed. We are really expecting the growth in the UK to come in Q2 and beyond.

Okay. And do you see any growth at all coming up in the US at the moment? Or do you really need to -- do we need to really wait for new mutations to really expand the market here?

Yes, I would agree with that. We've said a number of times, the vast majority of G551D patients over six in the US have already been receiving treatment. So really, what is going to lead to growth in the US is those new indications that we're working on with Ivacaftor in monotherapy.

Great. And just a final question, and thanks for bearing with these questions. Does the CF Foundation get royalties from minus and 661 and 809? Thank you.

We haven't disclosed whether royalties are actually paid. But we will at a future point later in development.

Okay. Thank you.

Our next question comes from Lisa Bayko of JMP Securities. Your line is open.

Hi, thanks for taking the question. I just wanted to verify what is the nature of the data you will be presenting at the upcoming European cystic fibrosis foundation, or cystic fibrosis conference? And then a quick question on your intentions for the convert. Thank you.

Thanks, Lisa. Well, as usual, we don't get ahead of data that that would be -- data and presentations that would be accepted at these major medical conversations, so we will be advising you of that at a future point in time. As far as the debt is concerned, we have $400 million of 2015 convertible debt. It does have provisional call features. It has a hard call provisional call after October 2013, that if the stock trades above $48, then we can call the debt.

And it also has a soft call feature. Sometimes people aren't aware of that. But it does have a soft call feature that if the debt trades just above $63 for 20 days out of 30, then we do have the opportunity and will have the intent to convert it into equity.

So, we are happy with maybe having that opportunity in the near future to convert the debt into equity, which is all consistent with the broad financial strategy of managing the P&L that the revenues to the operating expense and then managing the cash on the balance sheet, and also managing the debt on the balance sheet.

Thanks a lot.

Our next question comes from Brian Abrahams of Wells Fargo Securities. Your line is open.

Hi, thanks for taking my question. You presented a lot of preclinical tox work that you had done on 135 relative to other molecules. I'm just wondering if you can give us a sense as to maybe how comfortable the FDA is with this idea that it is the interaction with my mitochondrial DNA that caused the tox for other nukes, which obviously you guys have less of with the 135.

Is there any other preclinical work that you might be able to do in parallel to enable yourself to move even more quickly through the clinic, or is the rate limit expect here just combo PK rather than just FDA? Thanks.

So Brian, it's Peter speaking. With respect to the agency, we had quite intense discussion about the safety profile of 135 alone and in combination with potential other agents. And I think we, from a tox point of view, satisfied their needs. I think there that is no additional tox status that we will do.

And from a clinical point of view, we agreed to a cautious forward program, that if successful, will then basically open up toward enrollment as we go forward. So, I think with everything accepted, I think there is no more that we have to do.

Thanks very much.

Our next question comes from Robyn Karnauskas of George Bank. Your line is open.

Thanks for taking my question. Just one other question on hep C.

Obviously, the J & J time lines have slowed, and you're seeing second quarter for the Bristol study. What gets you more comfortable that you can hit those time lines with Bristol? And maybe more specific question, what steps or interaction needs to be taken before you start the Bristol study?

This is Bob. Just first of all, there are no drug interaction studies that we're required to do before we start the combination with Daclatasvir. We will just be measures pharmacokinetics of the components in the first small cohort of patients to get started.

And the J & J time line is really driven by the outcome of the drug interaction studies, which are ongoing. Once we have those data and can confirm the doses we are going to use, we will be raring to go and ready to go into phase II.

As a follow-up, do you control the Bristol study or is that really in Bristol's hands?

We're running the Bristol study.

Okay, great. Thank you.

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

Great, thanks for taking the questions. So, Kalydeco in Europe, to get to the lower end of guidance, it looks like we will need to see some greater sequential gains this year than what you had in the first quarter and presumably, that comes from expanded geographies in Europe.

Can you speak to the line of sight that you have a little bit more specifically as to what regions are going to come on board in the second quarter and thereafter, that is going to enable you to get to the guidance range that you have? And then I have a follow-up on heterozygous, if I may. Thank you.

Sure, Matt, let me talk through. So, in reimbursement terms, which is the key to kind of the accelerating growth that we are projecting, we have achieved reimbursement across the UK and the Republic of Ireland, with the exception of Wales. The notable markets there are England, Scotland and Ireland, which have the largest preponderance of patients.

So, them coming on stream, in addition to France and Germany where we already have reimbursements in place, that is what leads us to believe that we can be more sure of the revenue expectations in 2013. And that reimbursement backed up by the reaction we have seen from CF patients in CF centers, and the initial uptake we've seen since reimbursement kicked in, that is what gives us more confidence in the guidance that we are updating today.

Thanks for that, Stuart. Very helpful. And then on the Heterozygous, we have seen that with the VX809 that the heterozygous data weren't sufficient for moving forward, as you guys talked about.

When you think about 983 and 661, presumably you guys mow more about these molecules than we do. Is there anything about those two molecules that give you any confidence or any inkling that they may be more successful than 809 in the heterozygous when combined singly with Kalydeco? And then sort of follow on to that is, ultimately, do you think you are going to need to have a triple combo, that is two correctors in Kalydeco, to get the results that you need in the heterozygous population?

Great questions. And so I think as we've said before, we believe from what we know today, and it is still based on a fairly small amount of data, that the heterozygous are going to be more difficult to treat than the homozygous, both from our cell studies and what we've seen, as you point out, with 809 in the clinic.

We may do some more work with the single correctors, first generation correctors like 661 and 983 that do have different pharmacokinetic and tissue penetration properties. But I do -- if you can me to handicap it today, I think the ultimate solution to the heterozygous will really come from the combination of a first and a second generation corrector with Kalydeco. It's one of the reasons why we are trying to move those second generation correctors forward as quickly as we possibly can.

Thank you very much.

Thank you.

(Operator Instructions)

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

Thanks, guys, for taking my questions also. I have one that is, assuming everything else being equal, would you rather have an acquisition of a company where you do have a PI or an (inaudible) in there before you can have everything in the combo under one umbrella? You can get 100% economics, given your stock has appreciated large lately.

And then secondly, on CF, we know that you're pushing already three compounds in the clinic for CFTR correctors. What is your view of the competition? And we know that Novartis has one CFTR [drop off] in phase I as well. What is your strategy, can you elaborate a little bit? Thank you.

I will take the M&A question that you asked, and then Jeff will talk about the CF strategy. First of all, M&A and licensing and other things, they're tactics to the end game. Clearly, if are you in a position where you can control the regimen, it is easier in terms of moving through development and also controlling the commercialization of that regimen.

However, I would say at this point in time as we progress forward, you're seeing us execute on the strategy that we think we're looking to create the best regimen of what 135 is in the middle of. And we continue to execute around that and give ourselves multiple chances, and at this point, we are just going to continue along that strategy.

And then with respect to the CF strategy and the competition, we're in a very fortunate position here that our scientists started working on this problem 14, 15 years ago now and clearly established a leadership position in the science, which is reflected in the portfolio of drugs we have.

On the other hand, we fully expect that there will be competition. That's the way this industry always works once someone sees the successes, and we anticipate that. Our strategy is to move as quickly as we can with our portfolio, get those to as many patients as possible to benefit them, and we think in the long run, that is best for patients and best for Vertex.

Great. Thank you.

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

Thank you very much. I have a couple of questions on VX135. One specific question, on the 40 to 60 patients by the end of the year, just in terms of makeup of that, would that be 20 patients each from each of the ribavirin combination studies and 20 from the Daclatasvir study?

Yes, that's approximately right.

Okay. And I guess a question -- a quick follow-up on it, where is the GSK combo study? Have you seen that?

So, our strategy obviously is to have a number of collaborations and we're moving forward with that. We've started a number of studies so far this year. And we have had the opportunity to start the Daclatasvir study more rapidly, based on BMS. However, we're now evaluating the initiation of the remaining studies, and we will be getting back to you with the time line of that as they go forward.

Okay, great. And a broader question is, when you make a decision next year about how to move forward -- what regimen to move forward into phase III, what profile of the combination are you shooting for, is pan-genotypic coverage, specifically genotype 3 coverage, important?

It is a great question. I think we've said all along, Howard, that we believe today, anyway, from what we've learned, that we are going to need a highly efficacious regimen, which for us means SVRs of greater than 80% certainly in genotype 1. We are going to need a short duration of therapy, which we believe is 12 weeks or less, and we are going to need a very highly tolerable therapy.

In addition, there's some other potential differentiating points, and they really have to do with pan-genotypic, as you point out, and they have to do with some of the sicker patient populations. And our strategy is to investigate our regimens, first for the sort of the basics, if you will, and then see if we can develop differentiated regimens around some of those other properties an get them out there quickly.

Thanks very much.

Our next question comes from Phil Nadeau of Cowen and Company. Your line is open.

Thanks for taking my questions. Just three quick ones. First on a follow-up to Howard's.

We've seen a couple of doublets in HCV in type one already, and they haven't produced SVR rates of greater than 80%. Are you seeing something preclinically that suggests that VX135 doublet could hit those -- that SVR level, or are these largely done to increase the safety database?

And second, for Ian, could you just let us know what you assume in your guidance is the timing for the launch of Sofosbuvir? Does your guidance anticipate competition from Sofosbuvir in the fourth quarter of this year?

And then third, Jeff, for you, you mentioned moving the second generation correctors along as quickly as possible. Could you give us some updated idea when those could get into the clinic? Thank you.

There are a lot of questions. You might have to remind me of a couple of them as we go, but first let me answer the first one. First, I want to be clear, when you are talking about doublets, you're talking about a nuke plus ribavirin, is that right?

Yes, that's right.

Yes, we think that -- the reason that we are really pursuing for a nucleus ribavirin first is to understand the safety profile and the potency of our nuke alone before we combine it with other DAAs. But our belief is for the majority of the patients one will need two DAAs and certainly, you can see that reflected in our strategies. I think that is probably the answer to your first question.

You want to just repeat the rest of the other three questions so I can remember?

Yes, so the second one was for you also, and that is an update on when the second generation correctors could get into the clinic. And then the third was for Ian, and that is, what is -- what timing of Sofosbuvir approval is assumed in the guidance that you read today?

With respect to the second generation correctors, what we said is our goal is to get one of them or more than one of them into the clinic by the end of next year, that's 2014.

Okay, great, thanks.

And Phil, to the guidance, I will say again, we provided total revenue guidance. The only line item guidance we provided in revenues was to Kalydeco. We have accounted for what we see as the potential decline for patients initiating treatment. I actually mentioned that in my prepared remarks.

Okay, great. Thank you.

Our next question comes from Katherine Xu of William Blair. Your line is open.

Hi, can you hear me?

Yes, hi, Katherine.

Good evening. I have a couple of questions.

So when you start the VX135 and the second half of your combo study, are you still going to be required to monitor the cardiac EKG, CG and other markers? Just curious about that.

And then are there -- is there a cap of sales in the UK, including Ireland, Scotland and Wales, et cetera, for orphan drugs? Is there a cap on the cumulative sales? Just those two for now.

Bob will take the first question and Stuart will follow-up, Katherine.

Ultimately the answer is, that is something we will be discussing with the regulatory agencies once we have the initial data going forward. Our hope is that we will have made a substantial clearance of safety with those initial groups of patients. But obviously, the outcome will depend on our discussions with the regulators, so it is kind of hard to really answer that one definitively at this point.

And on the -- is there a financial cap for orphan drugs in the UK? There isn't a financial cap in those countries. The real cap is the number of eligible patients with G551D that we can bring benefit to.

The only country that kind of has a cap really is Scotland, in that Kalydeco is covered in Scotland under a Red Zs fund. That Red Zs fund was put in place earlier this year, there's about, I think 21 million pounds in that Red Zs fund. That is certainly more than enough to cover Kalydeco for all of the eligible patients in Scotland.

So, I think the short answer to your question, Katherine, is no.

If I may, just a quick follow-up on pricing, when you look at our models for the combo, the double combos for homozygous and potentially the triple combo for heterozygous, how do we -- how should we think about pricing? Do we look at the similar pricing of Kalydeco right now? Or should we think --?

Well, I'm not going to tell you how you should look at pricing, but what I will say is this is far too early for us to be talking about pricing when we've really only just begun the phase II program for 809. And it is really much too early in the process to be making any comments on price from our end.

Thanks.

Operator, this is Michael Partridge. Given the time, we will take one more question.

Our final question comes from Salveen Richer of Canaccord Genuity. Your line is open.

On the 661 program, I think have you additional studies reading out in the second half. Can you maybe comment on what these studies are and whether we should expect 983 data in the second half as well?

And then on Kalydeco, and I could be wrong here, but I think you took a price increase in January, but you're looking at the last three quarters being flat. So, just wondering what was playing out in Q1? Were there dropouts or so forth? Thanks.

Maybe I will take the disclosure of data in the second half of the year. We don't anticipate any significant data disclosures regarding VX261 in the second half of the year. Although we did mention on our call the other week that we do need to take the data we received from the current -- the most recent phase II study and other studies and have a discussion with the regulatory authorities. That will then put is in a position to communicate to you the next steps of VX661.

If I try and think about other data regarding CF in the second half of the year, it would probably be at the medical conference and specifically, the US-based medical conference for cystic fibrosis. And as I said earlier on the call, we don't pre-announce what we will be disclosing at that meeting. And your second question, I'm sorry?

It was on price, Ian. I think -- let me take that one. We did take a price increase in the US within the quarter. That's correct.

From quarter to quarter, there is really multiple factors that can affect our revenue. There's lots of puts and takes, as it were, within one particular quarter.

Let me just address one thing that I think you are alluding to, was there was a dropoff or increased dropoff of patients? That didn't happen. Our persistence and compliance rates are very high with Kalydeco and have been very stable over time.

What we're really focused on is the annual revenues for Kalydeco. We feel very good about the revised guidance that we provided today.

And Salveen, I was just checking my notes, you mentioned what we would be doing for VX983 in the second half of the year. And just a couple of weeks ago when we had our call, we also talked about entering a combination study in patients with VX983 in either cap, so that would be in the second half as well. Whether we receive data from that, unsure at this point in time. That study has not started yet.

So Salveen, thanks very much for that. And on behalf of the Vertex team, thanks very much for joining us tonight. If you have additional questions, we will be in the office and we will be happy to take your call. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.