福泰製藥 (VRTX) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Vertex Pharmaceuticals Incorporated third-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 introduce your host for today's conference, Michael Partridge, Vice President of Investor Relations. You may begin.

Thank you, operator.

This morning, we announced our third-quarter financial results, and in conjunction with that, the decision to reduce our workforce, and to focus on our investment on future opportunities in cystic fibrosis and other key R&D programs. On the call today, Jeff Leiden, Vertex's Chairman and CEO, will comment on these announcements in the context of Vertex's long term strategy. Then Bob Kauffman, Vertex's Chief Medical Officer, will review Vertex's recent clinical progress in the areas of cystic fibrosis and also review the current status of our hepatitis C and JAK3 development programs. Following that, Ian Smith, Vertex's CFO, will review financial results and provide some perspective on the financial impact of today's announcement on Vertex's profile going forward.

Please note that Stuart Arbuckle and Peter Mueller are not available to be on the call this morning. They are communicating with their teams regarding the reduction in workforce announced today. It is our intention to conclude today's call before 9.30 AM. After the call we will be available in our offices for follow-up.

Before we begin I'll note that information discussed on this conference call includes forward-looking statements, which are subject to risks and uncertainties. These risks and uncertainties are discussed in detail in our 10-K and 10-Q reports filed with the Securities and Exchange Commission, and also in the press release announcing our financial results this morning. These statements, including without limitation, those regarding the commercial performance of INCIVEK and KALYDECO, our development plans and expectations, and our guidance are based on Management's current assumptions. These statements are subject to risks and uncertainties that could cause actual result 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 third-quarter 2013 financial press release and is described on slide 4 of this morning's website.

I'll now turn it over to Jeff.

Thank you, Michael, and good morning.

Given the nature of today's announcements, I know we are joined by a significant number of Vertex employees, members of the media, and other interested parties, as well as many investors and analysts. I'd like to thank all of you for joining the call.

Today, we made two announcements. The first was to announce a reduction in workforce related to INCIVEK, and the resulting focus of investment into our opportunities in cystic fibrosis and our research in early development programs, including all oral regimens for hepatitis C. This includes the elimination of 370 positions. We made this decision in response to the continued and rapid decline in hepatitis C treatment rates, which resulted in the reduced use of our marketed therapy, INCIVEK. The overall reduction in hepatitis C treatment has occurred as physicians and patients anticipate the arrival of new treatment regimens.

We reached a point where our level of investment and support for INCIVEK was beyond what we believe is necessary to support future physician and patient demand. The groups most impacted by this decision are those related to the promotion and development of INCIVEK. Related G&A infrastructure has also been reduced. This announcement today represents perhaps the most difficult choice for a company to make, and we did not make this decision lightly. Vertex is a very special place, the creativity, passion and dedication of employees define us as a Company. The hepatitis C market, however has changed very rapidly. Reduction in workforce is difficult but it's the right thing for our business, particularly in light of the significant potential we have for future growth.

Going forward our investment in our people are focused on two key areas -- one our CF programs; and two our earlier stage research and development programs, including VX-135 as part of all oral regimens for hepatitis C. INCIVEK was and still is a breakthrough medicine. It transformed the treatment of genotype one hepatitis C patients by doubling cure rates in half the time. Since launch in 2011, more than 100,000 patients have been treated worldwide with this medicine. INCIVEK has transformed our Company as well, bringing in more than $2.8 billion in revenues and royalties since launch and creating a foundation from which we can execute a broad strategy to drive sustained growth. We're continuing to make significant progress against this strategy, which we discussed with you earlier this year, and I'd like to spend the next few minutes reviewing our progress with you.

The first part of the strategy is prioritizing our development investment to advance our cystic fibrosis pipeline. Two weeks ago at the NACF conference we told you about our progress towards expanding the number of CF patients we can treat and maximizing the clinical benefit we can achieve with our transformative CF medicines. We're on track to get key data later in 2013 and throughout 2014.

The second part of the strategy is to focus our research and early development efforts on innovative medicines for serious diseases. In hepatitis C, we continue to pursue a potential opportunity to participate in the future market of all oral regimens with development of VX-135, our nucleotide polymerase inhibitor. We remain committed to innovation, and I expect you will hear more about some of our emerging early stage programs in 2014. Although it is still early, areas of significant progress include novel approaches in oncology, next generation correctors for CF, and small molecule approaches for progressive multiple sclerosis.

As discussed previously, we also made a decision to seek a partner to advance global development of our JAK3 inhibitor, VX-509. We recently obtained positive 12 week results from a Phase 2b study of VX-509 which will be presented as a late breaker at the ACR conference in San Diego later today. We're committed to pursuing a potential collaboration for further development of VX-509.

The third part of our strategy is to maintain our financial strength. This will support our continued investment to drive the creation of new medicines. We finished the third quarter with more than $1.4 billion in cash, cash equivalents and marketable securities. In summary, we are focusing our business towards cystic fibrosis and earlier stage pipeline programs. We're well positioned as we move into 2014. Ian will describe the financial implications in more detail during his remarks.

I'd like to conclude by thanking and recognizing the many colleagues who have contributed to the success of INCIVEK and the success of Vertex. I will be meeting with Vertex employees today and tomorrow and I'll tell you what I will tell them -- the Management team and I are deeply grateful for everything they have done and continue to do to transform lives. Vertex remains a Company dedicated to the creation of transformative medicines. KALYDECO and INCIVEK have benefited so many patients and there is much more that we can do to bring innovative medicines to the people who need them.

Thank you. I'll now turn it over to Bob.

Thanks, Jeff, and good morning.

My remarks will focus on three important clinical areas for the Company. First, I'll recap the updates we gave on our CF development pipeline at the North American Cystic Fibrosis Conference earlier this month. Then, I will review the current status of our nucleotide polymerase inhibitor VX-135. Finally, I will review some of the highlights of the VX-509 RA data that are being presented today at ACR.

Beginning with cystic fibrosis. We presented a comprehensive update in Salt Lake City two weeks ago during the North American Cystic Fibrosis Conference. I will briefly summarize the main points here. First, key clinical data to help understand the full potential of ivacaftor monotherapy is expected to be available in the next eight months. The key studies and anticipated timing of data for ivacaftor monotherapy are shown on slide 6 on the webcast. These include Phase 3 studies in the other gating mutations and R117h populations, as well as a study in children ages two through five with gating mutations, and a proof of concept study in patients with residual function. If successful, we believe ivacaftor monotherapy has the potential to reach more than 7,000 people with CF.

Second, we have completed enrollment in our Traffic and Transport Phase 3 studies evaluating fixed dose combinations of lumacaftor, otherwise known as VX-809 and ivacaftor in F508del homozygous patients ages 12 and older. We are evaluating multiple endpoints in Phase 3 including our primary end point of lung function as measured by relative change from baseline in FEV1, and secondary endpoints including change in weight, rate of pulmonary exacerbations and change in quality of life as measured by the CFQR. If successful with the combination of lumacaftor and ivacaftor in F508del homozygous patients, we may expand the treatment population by another 28,000 patients. We expect to have data from these studies in mid 2014.

Third, VX-661. For VX-661 we see two principal potential roles. The first role representing our primary strategy is as a first generation corrector as part of a triple combination that includes a next generation corrector and ivacaftor to potentially create a combination medicine for F508del heterozygous patients that may also enhance benefits in the F508del homozygous population. To further this strategy, we plan to advance VX-661 into a 12 week Phase 2b study in combination with ivacaftor in F508del homozygous patients. This study is designed to provide safety and efficacy data for VX-661 and ivacaftor, and we expect to initiate this study in the first quarter of next year following approval of the study protocol by regulatory authorities.

In addition, VX-661 could serve to enhance efficacy in an F508del heterozygous population that is known to respond to KALYDECO. For example, in patients with G551D on one allele and F508del on the other allele by correcting the F508del CFTR protein produced in these cells which can then be potentiated by KALYDECO. We have now begun enrolling a four week proof of concept study evaluating VX-661 and ivacaftor in patients with both the G551D and F508del mutations. We anticipate data from both of these VX-661 studies in 2014.

Now on to hepatitis C. Our goal is to develop VX-135 as part of a potential all oral 12 week or less pangenotypic regimen with high viral cure rates. We have conducted two studies of VX-135 with Ribavirin, principally to evaluate the safety of VX-135 over the course of 12 weeks. Data from a 20 patient study conducted in Moldova is being presented at ASLD. VX-135 was well tolerated in this study and we are reporting an SVR12 rate of 10% and 50% respectively in the 100 and 200-milligram groups in this study. Additionally, in the US study of 10 patients receiving the 100-milligram dose of VX-135, we are reporting an SVR4 rate of 10%.

A 20 patient study of VX-135 and Daclatasvir, an NS5A inhibitor from Bristol Myers Squibb is ongoing in New Zealand. We expect safety and efficacy data from this study in the first quarter of 2014. Our plan is to analyze and discuss the data with regulators and our partner to determine the next steps. We have a complete DDI study of VX-135 and Simeprevir, otherwise known as TMC435, and we are discussing with J&J the design of potential additional studies for this combination. VX-135 is on partial clinical hold in the US. Before finalizing a response to the FDA on the hold, we have decided to include 12 week safety and SVR data from the current VX-135 and Daclatasvir study as part of our submission.

Lastly an update on our JAK3 inhibitor VX-509. Later today 12 week data from a 350 patient, 24 week Phase 2b Study of VX-509, dosed once and twice daily in combination with methotrexate in patients with rheumatoid arthritis, is being presented as an oral late breaker at the American College of Rheumatology meeting. We have already summarized the key 12 week results in a press release on October 18 when the abstract was published online. In the study response to therapy was rapid. All VX-509 dose arms had statistically significant ACR20 improvements over placebo by week one.

A further comment I will make on these data is that the ACR50 and 70 rates in patients treated with VX-509 were significantly greater compared to placebo at the 12 week evaluation point and still appear to be increasing. We await the week 24 analysis of these efficacy and safety endpoints. These results further validate JAK3 as a potentially valuable mechanism to treat autoimmune and inflammatory diseases.

With that, I'll turn it over to Ian.

Thank you, Bob.

I'll start with today's announcement to reduce our workforce and focus our investment, and how such actions affects the Company financially as we enter 2014. I'll then provide direction on our anticipated financial profile for 2014 and discuss our third-quarter financial results. While there are many strong financial aspects to our business, in particular our current cash position and our growing revenues from KALYDECO, the decline in the hepatitis C treatment rates has occurred at a rapid pace and this has adversely affected our near term revenue outlook. We have therefore chosen to restructure our business. Our developments in commercial investment will be focused on multiple opportunities in cystic fibrosis, which have the potential to drive significant revenue growth in the near term, and also focused our most promising early stage research and development programs, including development of all oral regimens for hepatitis C.

We've also adjusted our infrastructures for a G&A investment to reflect the updated needs of our business. These actions reduce our headcount by 370 people or approximately 15% of our workforce, and also include a reduction in other spending, principally in those areas that support INCIVEK. We expect to incur a total restructuring charge of approximately $35 million to $45 million in 2013, including a restructuring charge of approximately $11 million in the third quarter of 2013.

Importantly, these actions align our organization and our financial investment with the growth opportunities we see for our future. With clinical success in KALYDECO label expansion studies, success in addressing F508del homozygous patients with a combination therapy, and potential to further expand the number of CF patients we may treat, we have the possibility of emerging in 2015 as a high growth, high operating margin business with significant cash flow and earnings. We intend to continue to manage our business in this way while continuing to invest in product creation for the future.

I'd now like to provide some specific commentary on our financial profile as we head into 2014. First, from a balance sheet perspective. We finished the third quarter with more than $1.4 billion in cash, cash equivalents and marketable securities and we expect to complete 2013 and enter 2014 with $1.3 billion in cash, cash equivalents and marketable securities. This cash position is a strong starting point for 2014 and along with our growing CF revenues can fund 2014, a period when we receive important clinical data that sets the potential product revenue growth for the future.

Next, from an operating perspective, we expect 2014 total non-GAAP OpEx to be approximately $150 million to $200 million lower than the forecast of approximately $1.1 billion for 2013. The lower OpEx in 2014 is the result of reductions in our workforce and the realignment of our investment. More specifically, we see one, a $60 million to $70 million reduction in payroll and related costs. Two, a reduction of $30 million to $50 million in commercial and other expenses, primarily those to support hepatitis C sales and marketing. Three, a net reduction in R&D of approximately $35 million to $50 million which reflects INCIVEK, VX-509 and other development costs coming down. This is netted against an expected increased investment in cystic fibrosis. And four, a reduction of $25 million to $30 million in G&A costs and expenses.

We continue to analyze and plan our business and will provide a further update in early 2014. I will just make a quick comment that we expect research investment to remain relatively consistent between 2013 and 2014. We believe this level of ongoing operating expense provides financial leverage in our business as we move beyond 2014 with the potential revenue growth in cystic fibrosis.

Now turning to the third-quarter 2013 results. Total revenues were $222 million. Our non-GAAP operating expenses, which exclude cost of product revenues and other charges, were $276 million for a non-GAAP loss of $74 million or $0.32 per share.

Now for the more detailed results. In the third quarter, total KALYDECO revenues were $101 million, reflecting the fact that we are treating nearly all G551D patients in the US and the EU. With the sale to date in 2013 and the visibility we have into the fourth-quarter revenues, we have increased our 2013 KALYDECO net revenue guidance to between $360 million and $365 million from a previous range of $345 million to $360 million. As we have stated previously, we see the potential for KALYDECO growth in 2014 based on the following. Achieving reimbursement for G551D patients in Australia and Canada. And two, expansion of KALYDECO label into additional populations.

INCIVEK revenues in the third quarter were $86 million. This decrease in INCIVEK revenues compared to the second quarter stems from a smaller number of patients entering treatment as the next wave of treatment regimens is anticipated, as well as a reduction in channel inventory and lower realized revenue per unit sold as the mix shifts to government payers. INCIVEK royalties were $21 million compared to $44 million in the second quarter, driven by both patient warehousing and seasonal treatments -- seasonal changes in treatments. Finally, collaborative and other revenues in the third quarter were $14 million. Based on the sharper than anticipated decline in hepatitis C product and royalty revenues, we are revising our total 2013 revenue guidance down by approximately $100 million to $1 billion to $1.05 billion.

Now to our non-GAAP operating expenses of $276 million, which excludes cost of product revenues and other charges. This was lower than the prior quarter and was made up of approximately $202 million in R&D investments and $74 million in SG&A expenses. We expect 2013 non-GAAP operating expense to be approximately $1.1 billion, which is at the low end of the guidance range of $1.09 billion to $1.15 billion that we provided in February of 2013.

In summary, I hope the financial results reported today and the actions we have taken are understood in the context of how we're seeking to advance our business. In particular, I have provided some clarity around the opportunity for revenues and earnings growth that we see ahead of us and how we are managing our investment and aligning our business with our financial growth opportunity.

I'd now like to open the call for questions.

(Operator Instructions)

Geoff Meacham of JPMorgan.

Good morning guys. Thanks for taking the question. Just in light of the INCIVEK decision. Does this change the internal hurdle rate for you guys for VX-135 moving forward? I want to get a sense for how you're thinking about hepatitis C as we go forward.

So Geoff, thanks for the question. I'll actually take it. I think you said internal hurdle rate can I just clarify?

Yes, that's right.

So it is an early stage program, proof of concept study in terms of combination therapy that we're running VX-135 with Daclatasvir. As we look at that study, we need to get the data which we with anticipate will be in the first quarter of 2014 and at that point we'll decide on how we progress our business. We're very, [in fall] HCV oral therapies, and very aware of the external environment. It's progressing fast. It's highly competitive and we're going to be taking that into account when we get our data from this combination study that's being run down in New Zealand and I will advise you at that point in early 2014.

That's good. And then just one follow-up if I could on CF. For 661 plus ivacaftor, when you're looking at the G551D and the delta F hetero patients, how fast do you think when you get the proof of concept data, what could be the next steps there? Do you feel like you'd have to do a full on Phase 2b that's a 12 week study or do you feel like you could get into a faster population at the Phase 3 setting?

This is Bob. I'll take that question. Obviously, depending on the results we think we could move really fairly quickly into a more advanced program. Obviously, this would take some discussion with the regulatory agencies once we have the results of the study to decide on the next steps. But given the track record of ivacaftor and what we're developing in knowledge about 661, we could probably move into a Phase 2 study fairly quickly.

Okay, thank you.

Geoff Porges of Sanford Bernstein.

Thanks very much for taking the question, and I suppose congratulations on taking the tough decisions at the Company's P&L. A couple of questions. First, on VX-135, you haven't disclosed anything about genotype two and three and it would be helpful to know whether you've contemplated or are planning any studies in the other genotypes with the Ribavirin combination because certainly it appears as though it's reasonably well tolerated.

And secondly, just to follow-up on the question of hurdle, if you do not go ahead with VX-135, is there additional savings to your P&L if you abandon virology, and would that be the decision if VX-135 didn't go ahead? Thanks.

Geoff, I'll take the first part and then I'll turn it over to Ian. For genotype two, three, we did develop some data as you know in our virokinetic study, seven day data to show very good activity in both of those other genotypes. And we do plan to carry that forward into more advanced studies once we have the initial data in genotype one from the 135 and Daclatasvir study.

Whether we would pursue the Ribavirin and 135 combination I think is unlikely given the efficacy results that others have generated. And obviously, our work going forward would be likely with Daclatasvir in combination in those other genotypes.

Okay, thanks, Bob.

Geoff, thanks for the question. It gives me the opportunity to say that we're still in our planning phase as we look at 2014 and maybe I could expand on that which is the planning phase means we're still trying to gain an assessment of the revenue picture in 2014 as well. We've got some important data coming up, most proximal data is actually coming out of an R117H label expansion study. So again that will drive potential expectations on revenue in 2014 as well.

And then as far as the cost structure of the business is concerned, we are communicating $150 million to $175 million of savings off what we anticipate will be a $1.1 billion operating expense in 2013. We're pretty tight on those costs. We have good visibility on those costs and as I explained where they come from on the call.

As far as additional savings, if in terms of if decisions are made to pursue certain programs or not, and you referred to VX-135, those haven't yet been taken into account. So yes, there would be probably further savings beyond the $150 million to $175 million. We're planning for success at this point. That's how we run our business at this point in time. That's how we plan financially, frankly how we built the balance sheet to assume how we need to invest in the business. So we look forward to finding out what those results are out of New Zealand and probably late January, early February when we're on our year-end call, we'll give you the more precise GAAP financial guidance for 2014.

Okay, thanks very much, Ian.

Michael Yee of RBC Capital Markets.

Hi, thanks. Congrats as well. Two questions. One is on the expense structure, Ian maybe you could give us a little bit more specifics on the size of the R&D programs. In other words, what is, how much is early stage versus CF versus Hep C and same with SG&A. Maybe you could break that down a little bit so we know the size of the moving parts.

And the second question is on 661. You said you were starting a homozygous study, 12 week study. That data probably comes out some time after the 809 study, so maybe you could explain what the point of that study is and what we do with that once that data comes out, thanks.

Good morning, Michael. Thanks for the question. I'll first of all start by commenting on 2013 and kind of the trajectory for the R&D and SG&A. So as we look into the fourth quarter, so how you understand how we may finish the year, you should anticipate that our operating expense is very similar to actually the third quarter. You may see some slight reductions in the SG&A specifically because it's easier to adapt that cost structure with the decisions we've made in R&D. We still have a full program that's going ahead in many areas in R&D. So you'll see a slight decline in the fourth quarter of SG&A. But overall, relatively similar to the Q3 results.

I think more importantly as we look at 2014, and again I'll reiterate we are in our planning phase but I can give you an idea of the trajectory again, which is that when you look at the R&D expense in 2014, you should see a slight reduction. That's principally due to a reduction in development of areas that I mentioned in my prepared remarks which was VX-509 and INCIVEK-based therapies. We were actually still studying those in 2013.

The big reduction, and by the way we expect the research investment to stay relatively similar in 2014. The big reduction that you would expect to see when you look at the GAAP financials is in the SG&A area. That's where we have been able to reduce the costs around INCIVEK marketing and sales support. So you should see that decline in 2014.

And sometimes, even though I provide you some numbers, sometimes there are some missing features that are kind of buried within the numbers because we still are continuing to invest in cystic fibrosis, so we do actually anticipate an increase in the investment in development in cystic fibrosis, and also to support the launch and label expansion in 2014. So even though you're seeing these declines, we continue to invest in the area of cystic fibrosis to drive that growth opportunity.

But if I were to just ask a little more, what percent of your R&D is early stage versus CF, the clinical trials, CF clinical trials versus say early stage?

Back in February 2013 we gave that break out when we gave the guidance for the full year. I can't commit that we'll do that again at this point but that would be a better point in time that we would be able to help you understand the full profile for 2014. It's just a little early. We are only at Q3 2013.

Okay.

This is Bob. I'll take the second part of your question related to 661. So this is a study in homozygous patients. The reason for that obviously is that we want to be able to assess PKPD and efficacy and dose response as part of that study, the 12 week duration is really to get a much better handle on safety as sort of a second molecule coming through, the bar is fairly high compared to VX-809, we want to characterize it well. And we would then have an opportunity to further develop 661.

As to when the data would come out from those two studies I really can't speculate at this point. The ivacaftor 809 combination study and this one, we haven't started this one yet, so we don't really have that much visibility on the exact timing, but we will do that once we get the study enrolled.

Thanks.

Mark Schoenebaum of ISI Group.

Hi guys, thank you very much for taking the question. Thanks for all of the clarity. I had a longer term question. I know you aren't giving any kind of long term guidance, but this is qualitative I guess question. Am I thinking about this the right way, now that you're effectively reducing or eliminating or greatly reducing the hepatitis C infrastructure on the SG&A side you should be left basically with a CF infrastructure? And obviously if things play out the revenue growth for CF should be pretty dramatic. So my question is, as we look at the SG&A line over the very long term, and if we make then the assumption that Vertex stays focused commercially on cystic fibrosis, would it be reasonable to assume that that SG&A line really shouldn't grow all that much over the long term as revenue potentially grows, obviously a heck of a lot of things work out?

And then I had one more question, more on the clinical development side if I may. Could you just remind us of the powering on FEV in the KALYDECO plus 809 ongoing Phase 3 Traffic and Transport? And then also remind us what you deem to be a clinically meaningful improvement in FEV please.

And then just housekeeping. Do you happen to know how many INCIVEK patients were treated in the quarter in the US, if you happen to have that?

So Mark thanks for the list of questions and good morning.

Good morning.

Yes, so I think you're thinking about the business financially in the right way. We are consolidating down around cystic fibrosis at this point. That's where the growth opportunity is for us. We still have a research investment for product creation and we're still investing in that early stage all oral program for hepatitis C.

But in terms of earnings capability and cash flow if successful in the area of CF, we don't anticipate a significant expansion in SG&A. There will be some because you have got a launch of products, you're getting to a broader audience and there's a geographic, it's more of a US, Europe or North America and Europe type expansion, so there will be some growth. But the financial leverage in the area is important to us frankly, and that's why we're managing the business in this way.

This is Bob. I'll take the other part of the question in terms of the powering of this study. This study is powered based on a 5% relative improvement in FEV1. I won't really talk much about what we think is a clinically meaningful FEV1 change because I think you have to see the study endpoints in their totality, and particularly some of the non-pulmonary endpoints that we saw with ivacaftor actually are clinically quite meaningful to patients, the weight gain, reduction in exacerbations. So I think we should take a little bit more broad look at the way this study is being conducted. It is the case that the FEV1 change however is the primary end point and that's how the study was powered.

Mark this is Jeff. Just one minor addition really to elaborate a bit on what Bob said. You probably said the recent results from the GOAL study at NACF, which looked at a variety of other endpoints in patients treated with KALYDECO, including mucociliary appearance and digestive function, pseudomonas colonization. I think we really do think about these therapies as being systemic and one of the things that we will focus on as we move forward is measuring a number of these other endpoints because they really reflect patient outcomes very accurately.

Thanks Mark. Next question please?

Rachel McMinn of Bank of America.

Thanks very much. I'll try to keep my list a little bit shorter but I do have a couple of questions as well. Jeff, for you I guess I'm wondering why you chose not to make any changes to your research infrastructure. I think I recall that number being around $200 million annually.

And as a corollary, when do we as investors get more visibility into your efforts there, just in terms of value creation? On 135 can you confirm that 200 migs is being studied in the Daclatasvir study? And then what do you do if 135, just big picture question, if you can actually get this through the FDA and you get a profile that's worth reinvesting in, is this something that you plan to just partner off to multiple companies, keep, look to in license something to bring in with it? I just want to better understand your strategic outlook there, thank you.

Thanks, Rachel. I'll answer the first part of the question and thanks for it. This concerns our investment in research, and as Ian said, as we move into next year, we expect the investment in research to be approximately equivalent to what we invested this year. And the reason for that is straightforward, we believe that our research engine is really the current and future engine for the growth of the Company, actually with what I would consider a very modest spend in research.

This organization has produced a series of transformative drugs from INCIVEK to KALYDECO to now 809, 661, the JAK inhibitor et cetera. And certainly as we look to the future, we are relying on this engine to continue to do so. So we have a short-term financial issue that we're addressing in 2014 as Ian described, but it just doesn't make sense to cut the long term engine of growth for a short-term financial issue. We think we have a pretty good strategy for managing it otherwise.

Just, this is Bob. Just a quick comment on 135. We are studying 100 and 200 milligrams in combination with Daclatasvir.

And then Rachel to your point about in licensing, out licensing, and let's say a cooperative overall business strategy around hepatitis C broadly. To me, it's about the results we achieve in the combination study that's ongoing, and pending let's say the quality of the those results I think it sets a path. High quality results obviously means that Vertex is in the game of all oral therapies for hepatitis C. Something that's not high quality, then we have to understand how VX-135 may play a role in hepatitis C, whether that's with Vertex or with another company that has a combination approach.

And so I'd like to think that we're looking at our position in hepatitis C at this point by looking at the external landscape, understanding the commitment we have as a company but we've got to make a decision as we go into 2014 based on data.

I'm sorry your early stage pipeline, when do we get visibility outside of CF? Thanks.

Yes, as Ian mentioned we hope to begin to give you visibility to some of that next year, as you know traditionally, we do provide visibility once we begin to see human proof of concept data and we hope for some of the programs that will be beginning next year.

Ying Huang of Barclays.

Good morning. Thanks for taking my questions as well. So my first question has to do with the Australian Canadian patients with G551D mutations, so because it sounds like those are the two major markets where you not have tapped on KALYDECO. Can you give us a little bit of clarity in terms of patients number with that G551D mutation? Should we also assume 4% of CF patients and those who cultured having G551D?

And then secondly, the R117H trial success here. I've got a lot of questions from investors about the trial because we know now you're going to put out the top line data by the end of this year. I guess when we talk to physicians, there are many mild patients there. That's why some investors were concerned about the trial success for R117H, so I would like to have any thoughts from you guys.

And then lastly, given the I guess HCV strategic direction here in your Company, are you thinking differently about let's say the flu program as well or are you still going to out license that program and find a partner? Thank you.

So, Ying, thanks for the list of questions again. I'll take the first and last question and Bob can talk about 117H heterogeneity of population.

So first, Canada or Australia it's approximately 300 G551D patients, and that will be important once we gain reimbursement approval in those two countries to add to growth. And just staying on the KALYDECO growth path as you're aware, we do have a filing that's currently under review for other gating non-G551 patients, and that's currently being reviewed by the FDA and Europe.

As to the third question you asked which is our commitment to the flu program, the flu program is actually one of those molecules that we are seeking a partnership to advance forward. Given our focus in consolidation and let's say financial direction of the Company earlier this year we communicated that we would be along with VX-509 looking for a potential partner to advance the flu program, and we continue to seek that partner. Bob?

Yes, this is Bob. So on the R117H population, we estimate the total R117H population at around 1,100 patients worldwide. It is true that it's a heterogeneous group from really quite mild disease to almost no disease, all the way up to more significant disease with declines in FEV1 and exacerbations just like other patients with significant cystic fibrosis. So it is heterogeneous. The way we've tried to deal with that is to narrow the population that we evaluated in our study.

That population has a percent predicted FEV1 to baseline of between 40% and 90%, which for R117H clearly puts you into a more severe and more significant group. That is a way of kind of dealing with the heterogeneities to basically homogenize the population a little bit, and obviously, we'll see how the results come out when we have them at the end of this year. From a clinical point of view, how -- should this study be successful how the uptake will be I think we'll have to see. It likely will not be as rapid as what we have seen for KALYDECO and G551D.

Thank you.

Terence Flynn of Goldman Sachs.

Thank you for the question. Just maybe one point of clarification. Is there any sales force still left to market INCIVEK or is that completely restructured today?

And then was just looking back at your guidance you gave for peak KALYDECO sales, gave at NACFC, and if I do some simple math here it seems to me that I get about $180,000 per year on average for pricing for the drug on a worldwide basis. Just wondering if that's a good ballpark for net pricing or if there's other assumptions like a discontinuation rate that I might be missing that goes into that number. Thanks a lot.

Terence, thanks for the question. Can you just remind me of the first question? Oh, yes sorry, no we have completely restructured the marketing and sales support behind INCIVEK.

And then as to the realized price we don't comment on the realized price. We provide you guidance on total revenues for the full year of $360 million to $365 million.

Matt Roden of UBS.

Great, thanks very much for taking my question as well. First on 509, on efficacy it looks pretty potent here. Just wondering, Bob if there's anything mechanistic behind the two cardiovascular events that you've seen across the two studies and your relative comfort with the safety profile of the molecule overall?

And then how do you extract maximal value from 509? Has there been significant interest from other parties? I don't know to what extent you can comment on that, but when do you think would be the right time to look to partner?

And just lastly just wanted to follow-up on the earlier question on the R117H study. With considering the heterogeneity of this population, Bob, can you specifically speak to any steps that you took to control for that heterogeneity in terms of minimizing risk of baseline balances? Thanks a lot.

So several questions. First of all with 509, we agree with you the efficacy we think is really very good.

In terms of the safety profile we're actually quite pleased both in the safety profile, both without methotrexate in our prior study as well as this one. As you're well aware, cardiovascular disease is very common in this population, in fact it's the most common cause of death in patients with RA. So it's not unexpected in a study of these durations to see outcomes such as that. So looking over the program overall, we actually are pretty comfortable with the cardiovascular safety profile that we generated.

And I'll add to how to extract maximum value for the VX-509. For us it's a fascinating area but it's also a competitive area in terms of the all oral creation of these types of molecules. To get full success from the opportunity, you need to run multiple, let's say multiple studies in multiple diseases to get the full benefit as most companies are doing.

Given our focus at this point in time, we look for somebody else to do that so we continue to explore partnerships, it's nice to have such good data in our hands which will enhance those discussions with potential partners, and it may be even better to have our week 24 data as well, depending on how that comes out. And we'll continue that discussion with partners to do the right kind of partnership to extract the value. But our focus right now is around cystic fibrosis and all oral therapies for hepatitis C and also continue to invest in research.

And then this is Bob again. On R117H, I think the primary way that we try to manage variability was really by as I've said before, limiting the population to those with baseline FEV1 of 40% to 90%. Otherwise we relied on randomization as we usually do to create the balance between the treatment groups.

Bob there wasn't any specific stratification of any of the parameters that would speak to the severity of the population?

Honestly I don't remember that but I don't think there's anything major. I think it really was just the baseline FEV1 to define the population.

Great. Thanks very much for all of the clarity.

Yes.

Brian Abrahams of Wells Fargo Securities.

Hi, thanks very much for taking my questions. At the NACFC conference you outlined a relatively large population with residual function mutations. Can you give us the latest views of how you think the NF1 study would be interpreted by regulators just given the growing positive safety experience with the drug? And what the process would be for getting these groups on the label?

And then Bob maybe you could just remind us about the pre clinical assays you've looked at over time with 809 and KALYDECO and how the time frame and cell lines might be similar or different to some of the studies we saw from investigators at the conference last week, thanks.

Yes, so just in terms of the NF1 study, this is a proof of concept study. Obviously, we need to learn more about the efficacy of ivacaftor in this population. Obviously, depending on how this study comes out, of course we'll talk about it with the regulatory agencies. However, at this point, we are considering that we may need to run another study in order to get an approval, but obviously, much depends on what we actually see in terms of the results.

In terms of pre clinical assays, I think I know which paper you're referring to from the CF meeting, we've had some questions about that. Obviously, they have their data, we've done similar studies in cell lines for perhaps a somewhat longer duration. This is a combination of ivacaftor and VX-809. We don't see the same diminution of the activity of CFTR that we've seen in those studies. And I think from our viewpoint, the clinical data that we have really kind of trumps the non-clinical data in that we, both for 661 and for 809, have seen really well maintained clinical benefit over at least a 28 day period.

That's very helpful, thank you.

Yaron Werber of Citi.

Great, Thanks for taking my questions and I know it's a tough day over there, but I think you're doing the right thing. I have a couple questions on CF and if you don't mind a quick question on hep C. Just on, the residual function mutation, the KALYDECO proof of concept Phase 2 which is taking R117H plus a broader set of residual patients, what's your sense on the variability in phenotypically in the non-R117H population?

And then just on CF, a second question on R117H, is there -- can you correlate at all what the residual CFTR function is to the actual phenotype, the predicted FEV1? I'm trying to get a sense can you control for that variability by any way or no? And then I just have a follow-up on hep C.

So this is Bob. I'll try to answer those questions. In terms of the residual function, obviously we're, I think in the big picture, the residual function sort of part of the program starts to shift over from a genetically based program to a phenotypically based program. That's really where the end of one study fits in, is our first look as to whether it's feasible to do that, see how much variability we have and try to get a handle on what a path forward would be for that population.

And I think until we see those data it's going to be pretty hard to speculate. Obviously these are people that have sweat chlorides that tend to be lower than those with severe disease. They tend to have more mild disease, most of them are pancreatic sufficient as compared to insufficient and so there are many differences. I think that's why we're running an exploratory Phase 2 study.

One additional comment, this is Jeff, I'll remind you if you look back at the KALYDECO G551D studies, the responses that we saw really didn't correlate with the baseline FEV1 so we had patients with very high baseline FEV1 who actually responded very nicely. So I think until we get the data what we are really doing in the NF1 is we're studying, as Bob said, a spectrum of patients with different mutations and different severities to try to understand exactly the answer to your question. Until we see the data in a representative population, it's a little difficult to speculate.

Okay. And just, thank you for that and just a follow-up on hep C. At the 200, and maybe I'm asking to dive into some of your very early data on monotherapy with 135, at the 200-milligram dose, do you have enough potency do you think that with another DA, like Daclatasvir, you can really get to a high enough potency, or do you really think that you might need a third agent?

So the data we have is in our virokinetic studies where we have seen very good activity, comparable to that sofosbuvir, and that obviously kind of factored into our choice of doses that we're studying going forward. And obviously for the Daclatasvir study we'll see the results when they come out.

Thank you.

Operator, we're close to 9.30 so we have time for just two more quick questions, thank you.

Liisa Bayko of JMP Securities.

Hi. Thanks for the question. Actually most of mine have been answered but maybe just to drill down on Rachel's earlier question. Can you maybe, I know we'll hear about early stage pipeline development when it comes, but can you just maybe review the core areas that you're investing in? Obviously CF, virology with hep C and flu as a focus and then inflam. Is there anything else that we might expect something to come from, what are the core areas of investment? Thanks.

Yes, this is Jeff. So I think you've got it right. In the mid to later stage obviously CF, and then the all oral program in HCV which we've been talking about today. Flu is not a program that we're going to invest in further, just to be clear about that, nor do we plan to invest in 509 further.

But as you move back into the earlier stage pipeline we do have programs as we've said in cancer, in progressive MS, in Huntington's disease and others. And as well as the early stage CF programs and the second gen correctors. And it's those programs that I was referring to when I said we'll begin to get some data beginning next year and certainly into 2015 and as we get the human proof of concept data that's usually when we start really talking about these programs.

Thanks.

Robyn Karnauskas of Deutsche Bank.

Hi, thanks for taking my question. So I guess two things. Number one, what is the genotype composition for the 135 studies you reported today? And then the second question is, now that you have longer term data with KALYDECO, you mentioned outcomes, some outcomes measures. When you think about how pairs might look at an 809 KALYDECO combination, do you think that pairs will take into account the durability you see with KALYDECO and view it as a class of drugs or view the combination as completely independent? Thanks.

So this is Bob. The composition of the population is genotype 1 in the study that we were discussing today, the study that was conducted in Moldova. Most of the patients were genotype, in fact all of the patients were genotype 1b, which reflects the composition of the patients in that country.

And what about CC --

Pardon me?

What about subtype?

Yes, there was a mix of subtypes, it was relatively a little low on the CC patients but I think you'll see the full data when the poster is presented next week.

In terms of durability, without kind of getting beyond the data we currently have, I would say that based on the data from the Persist study, CFTR modulation appears to be a long term effect. There was really no diminution in the activity over a three year period with KALYDECO monotherapy. While obviously I can't speculate, because we don't have such long term data for the combination of 809 and ivacaftor, I would generalize it a little bit and just say that this mechanism appears to be one that produces a longer lasting effect. And obviously we'll see as we get further data over the next couple of years how that turns out. I think the payors obviously, if I can speak for them, I think they obviously will be interested in, and I think obviously very happy to see that this effect is long lasting, and for the patients clearly, very important.

Thank you, I'm going to turn it over to Jeff for some final remarks.

Yes, first of all thank you for your questions today. I just want to finish with a very clear acknowledgment of our employees. This is obviously a difficult day for all of us here at Vertex and I want to make sure to acknowledge the incredible work that our employees did to develop and commercialize INCIVEK. We've treated more than 100,000 patients worldwide with very high cure rates. This was and is truly a breakthrough drug, and we have a lot more to do, but I want to make sure to acknowledge what's been done by our employees because that really formed foundation of our Company going forward. Thanks very much for your questions and for joining the call today.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.