福泰製藥 (VRTX) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Vertex Pharmaceuticals Fourth 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 be given at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to hand the conference over to Mr. Michael Partridge, Vice President of Investor Relations. Sir, you may begin.

Thank you operator, and good evening everyone. Joining me on tonight's call are Dr. Jeff Leiden, Chairman and CEO; Stuart Arbuckle, Chief Commercial Officer; and Ian Smith, Chief Financial Officer. Our agenda tonight is as follows: Jeff will begin by reviewing Vertex's strategic business priorities for 2014, then Stuart will discuss fourth-quarter product revenue, and provide some commentary on the outlook for Kalydeco in 2014. To close, Ian will review the full-year 2013 financial results, and our 2014 financial guidance.

Joining us for Q&A will be Dr. Bob Kauffman, Co-Chief Medical Officer; and Dr. Peter Mueller, Chief Scientific Officer. We plan to conclude tonight's call at approximately 5:45 p.m. Please be considerate and limit your questions to one, with a related follow-up.

I will note that information discussed on the conference call includes forward-looking statements which are subject to the risks and uncertainties discussed in detail in our reports, including our 10-K and 10-Q reports, which have been filed with the Securities and Exchange Commission. These statements, including without limitation those regarding the commercial performance of Kalydeco and Incivek, our development plans and expectations, and our guidance are based on Management's current assumptions, and are subject to risks and uncertainties that could cause actual outcomes and events to differ materially.

Information regarding our use of GAAP and non-GAAP financial measures, and a reconciliation of GAAP to non-GAAP is available in our fourth-quarter 2013 financial press release. The press release is on our website. I would also refer you to Slide 4 in this webcast. Thank you, and I'll now turn the call over to Jeff.

Thanks Michael. Good evening. We received approval for Kalydeco for patients six and older with the G551D mutation nearly two years ago. Since that time, we have made significant progress toward our broader goal of treating the vast majority of people with cystic fibrosis.

Kalydeco is a transformative medicine. I would like to thank all the patients, families, doctors, nurses, and caregivers who were involved in the treatment of CF for their continued support as we seek to help more people with this devastating disease over the coming year.

Our strategy is to reach as many people with CF as possible with our medicines, and to enhance the benefit for those that we treat. This will be a very important year for patients for Vertex and for our investors.

I would like to briefly review Vertex's strategic priorities and goals for the year. The Management team and I see this year as a year of execution for the Company. If we are successful, this should deliver revenue and earnings growth for Vertex and its shareholders in 2015 and beyond.

This execution has three main components. First, we must remain focused on investing in priority development programs, particularly CF, in order to launch multiple transformative medicines globally in the near future. Secondly, we will continue to invest in early-stage research. Research has been a growth engine for Vertex for many years, and we expect it will produce many of our future medicines, including new clinical candidates in 2014.

Finally, we are committed to maintaining financial strength to support investments that create good medicines. We enter 2014 in a strong financial position to invest in our future. We have approximately $1.47 billion in cash, no convertible debt, and Kalydeco revenues that are expected to grow in 2014.

During 2013 we worked on each part of our financial platforms -- revenue, expenses, and the balance sheet. On the revenue side, we were able to launch Kalydeco successfully in Europe, and we're now reaching nearly all of the eligible G551D patients ages six and older in both the US and Europe. We expect further growth this year, pending Kalydeco geographic and label expansion.

From a balance sheet perspective, we converted all $400 million of our convertible debt in 2013. We start 2014 with a significantly stronger net cash position.

Finally, at the end of the year we restructured the business to provide significant expected savings in our operating expenses going forward, with the reduction of approximately $150 million to $200 million of non-GAAP OpEx in 2014 compared to 2013. We expect our current financial strength to allow us to invest in our key development programs, particularly in CF, and still maintain a strong balance sheet as we exit this year.

Looking back at 2013, I am proud of the execution that enabled us to meet or exceed these key goals which are shown on Slide 7 that we shared with you at the beginning of last year. We are outlining our key priorities from the start of 2014 so that you can again measure our performance as the year progresses. You can see these on Slide 8.

I will point out a couple of things in particular. The Kalydeco label expansion efforts and related clinical data will be an important market of our progress in helping more people with CF. Results from the Phase III traffic and transport studies in the Delta 508 homozygous population that we expect to see mid-year are a key milestone for the Company, potentially enabling us to begin to treat an additional 28,000 patients or more.

We plan to conduct a 12-week Phase II study of VX661 and Ivacaftor in Delta 508 homozygous patients in the first half of this year. Our goal is to potentially position VX661 to play a role in a triple combination with a next-generation corrector in the future. We are pleased that VX661 has now been granted breakthrough therapy designation from the USFDA.

I had the opportunity to meet with many of our investors and analysts at the JPMorgan conference earlier this month, and I returned from the conference confident that investors and analysts are aligned with our key business priorities for the year. I look forward to speaking with you and updating you as we progress. With that, I will turn it over to Stuart.

Good evening, everyone. Tonight I am pleased to report our fourth-quarter product revenue, and outline our expectations for Kalydeco in 2014. First, Kalydeco generated $371 million in worldwide net revenues for the full year, and approximately $109 million in net revenues in the fourth quarter, including US sales of $56 million, and international sales of $53 million. These results are a testament both to the transformative nature of the medicine, and the benefit it brings to patients.

It's worth noting that our fourth-quarter sales include approximately $8 million of inventory build, and one-time business adjustments that we do not expect to be repeated in future quarters.

We are now treating nearly all the eligible G551d patients in the US and EU. We're forecasting growth for Kalydeco revenue in 2014, as outlined in the guidance we provided at JPMorgan, based on the following anticipated key drivers. First, geographic expansion, from securing public reimbursement in Canada and Australia. We estimate that there are approximately 200 eligible G551D patients in Australia, and 100 in Canada. Secondly, label expansion into two potential patient populations. Other non-G551d gating mutations, and R117h patients.

For the non-G551d gating population, we have submitted an SNDA to the FDA, with a FIDUFA date of March 27. We've also submitted an MAA variation to the EMA for a similar label expansion in Europe, and we are in discussions with regulators about that label expansion. We estimate there are approximately 150 patients in the US, and 200 patients in the EU who are six years and older with these gating mutations. We also see the potential to treat additional patients if we can successfully agree a regulatory path for people with CF who have the R117H mutation.

To summarize, we expect these drivers to enable us to grow our Kalydeco revenue beginning in the second quarter, and continuing throughout the year. Our goal as always is to enable patients who could benefit from Kalydeco to access the medicine as fast as possible.

Turning briefly to Incivek. Fourth-quarter revenues in North America were approximately $19 million, bringing the total revenue for 2013 to $466 million. The continued decline in revenue throughout 2013 can be attributed to a decrease in new patient starts, inventory draw-downs throughout the extended channel, and a decrease in the realized price due to a change in the payer mix.

In summary, I am pleased with our results in making Kalydeco available to more patients who may benefit from this medicine, and I look forward to updating you on our continued progress in this area in 2014. I'll now turn it over to Ian.

Thanks Stuart, and good evening to everyone. Tonight I would like to discuss our current financial position, our 2013 results, and our financial strategies, including our 2014 financial guidance. For a detailed discussion of our 2013 financial results, please refer to our press release we issued earlier today.

First to our financial position and the progress we expect to make through this year. As Jeff mentioned, we are entering 2014 with approximately $1.47 billion in cash. This balance-sheet strength, combined with our expected growth in Kalydeco revenues, and other revenue sources, enables us to both invest in our pipeline and products, and still exit the year with a strong balance sheet. Additionally, pending success with our late-stage CF products, we have the potential to generate substantial cash flow and earnings in 2015 and beyond.

Now to the 2013 results. We generated $1.2 billion in total revenues in 2013, including $838 million in product revenue. This was made up of $371 million in Kalydeco revenue, and $466 million in Incivek revenue. There are also $157 million in royalty revenues, which includes $131 million in Incivek royalties. Lastly, we recorded an additional $218 million in collaborative revenues, including the $152-million HCV royalty sale to JMJ that we announced in November. Going forward, we will no longer receive Incivo royalties.

Turning now to 2014. We expect our total revenues to be in the range of $570 million to $600 million. We anticipate that this total revenue will be made up of approximately $470 million to $500 million in Kalydeco revenue, which Stuart discussed earlier, and approximately $100 million which includes committed and contracted collaborative revenues, and Incivek revenues.

Now to our operating expense guidance. We anticipate 2014 non-GAAP operating expense to be $900 million to $950 million, a decrease of $150 million to $200 million from our 2013 non-GAAP OpEx of approximately $1.1 billion.

The operating expense will vary quarter to quarter; however, we expect Q1 2014 to be lower than Q4 2013. We expect the amount to be lower in the second half of this year, given the timing of planned clinical trials and the realization of our previously announced cost reductions.

The main components of our non-GAAP operating expenses are R&D expenses and SG&A expenses. Our guidance for these items is $665 million to $695 million, and $235 million to $255 million, respectively.

I would now like to give you a break-down of the R&D investments of the Company. First, we plan to maintain our investments in basic research, with approximately $200 million to support the creation of future medicines. This is very similar to our 2012 and 2013 levels. Second, we expect to spend between $380 million and $410 million on late-stage development programs, mainly related to our multiple cystic fibrosis programs. This amount includes significant supply chain investments to prepare for commercial supply for the potential clinical success of Lumacaftor and Ivacaftor combination.

Finally, we expect to spend approximately $85 million on activities and obligations related to Kalydeco. These include safety, pharmaco-vigilance, medical affairs, quality, and the post-marketing commitments.

Turning now to 2014 SG&A guidance of $235 million to $255 million. We expect a significant reduction in SG&A, compared with $309 million in 2013. This is the result of reduced US sales and marketing expenses for Incivek, as well as a continued focus on limiting spend to only necessary investments to support our CF medicines.

Before I close, an item to note in our 2013 results is the asset write-down of VX135 and the related deconsolidation of our relationship with Alios. We are required to review all assets recorded on our balance sheet for potential impairment on a regular basis.

Based on the information we have today, including the clinical data and market data, our assessment with the $250-million carrying value of this asset the process was no longer justified. This impairment and deconsolidation actually results in a gain of approximately $68 million attributed to Vertex, which represents the net of all amounts expensed to date versus the actual cash payments to Alios.

Regarding the development of the VX135, our goal is to determine the best way to bring this medicine to patients and maximize the value. We remain in discussions with our two principal collaborators in HTB, Alios and BMS. Discussions are principally focused on the best way to advance this compound as part of our all-oral combinations, and the financial arrangements of each party. We recognize that time is of the essence in this area, and we hope to reach a conclusion on development plans soon.

In summary, we are committed to managing our operating expense at a decreased level compared to prior years, while maintaining our R&D investment to support future product creation, revenue growth, and earnings. We're committed to exiting this year with a strong balance sheet. We are optimistic that 2014 will be a transformative year for patients, for Vertex, and for our investors. With that, I'll ask the operator to please open the line for questions.

(Operator Instructions)

Geoff Meacham, JPMorgan.

When you look at the data coming up in CF for Kalydeco monotherapy, and one of the bigger populations is the patients with residual function, my question is what is your early data tell you about the treatment effectiveness population relative to if G551 could be. I'm looking forward, how should we think about what a Phase III would look like, depending on the Phase II outcome?

This is Bob. Geoff. We haven't really looked at the data from that trial yet. It has not yet been analyzed, so I can't really comment on what we have seen so far. You are familiar with the population of patients who are either pancreatic sufficient or have only a modest (inaudible - background noise) chloride increase, and we will be anxious to see the results and I think our plans will come from there.

Good. Earlier data on that, when you look at some of your (inaudible) data, (inaudible - technical difficulty) measure the effect size and the (inaudible) activity relative to other mutations?

Yes, the effect size is in many cases comparable to what we see with the G551D with Kalydeco monotherapy in vitro. We expect that to be in many of the mutations that result in residual function, but we will see a similar level of activity. I will remind you though that we also saw this in R117h, and the results of that study were somewhat complicated, so we're waiting to see the results of the clinical trial of residual function to really get a sense of how to proceed.

Last one on that, just because of the population being much bigger than G551d or R117h, do you imagine a Phase III would have to be a lot larger. Would this potentially be a 500- or even a 1,000-patient population in terms of the design of the Phase III, or do you feel like you can get this done in a relatively narrow study that would be, for example, like 12 weeks?

Yes, I can't really speculate on that, but I will point out obviously we have a fairly large safety database already on Kalydeco monotherapy that we'll be able to utilize to support the safety in this indication also. It is something we will have to discuss with the agency.

Geoffrey Porges, Bernstein.

Just a quick follow-on question on R117h and then a financial question, Ian. The boundaries of R117h's contribution, is it -- are they in or out -- is R117h in or out of guidance for 2014? What are the potential outcomes of those discussions in terms of revenue contribution? Then Ian, could you clarify how much -- you were very clear about what was in the OpEx, but how much incremental cash burn will you have on top of the OpEx during the year, so we can back into where cash might be at year end? Thanks.

I am going to answer the second question first, Geoff. We haven't given guidance, as you can see, on where we expect our cash position to be at the end of the year. The way that we manage our balance sheet is looking to cash from multiple sources. If you look at the 2013 financials and also when we file our 10-K in a couple of weeks, you'll be able to see that we do get our cash from multiple sources.

The way that we like to measure our cash burn, and it's one of the reasons why we give non-GAAP guidance is that the non-GAAP loss tends to be a very good proxy for our cash burn. There are some non-cash items in there, but they are both positive and negative, things like option exercise money or capital expenditures.

When you step back and look at our financials, what you tend to find is the non-GAAP guidance that we provide equates -- gives an approximate to our cash burn, because we are managing the balance sheet in that way. I will take a look at the K and understand it that way. Then also understand that the non-GAAP is a reasonable approximation.

Right. R117h?

Yes, if you could just remind me of that question again Geoff?

Yes, is R117h in or out of the guidance for this year? Regardless, what are the potential boundaries of what you might get from your regulatory discussions with R117h and how much that revenue opportunity could be?

There is a piece of 117h in there. Consistent with the communication we made at the end of last year, we want to have a discussion with the FDA regarding a filing opportunity regarding patients 18 and older. We are proceeding ahead there, and somewhat optimistic. We look forward to a contribution from that patient population financially in 2014.

It's small, because you've got to go through the review period and the approval, and then you've got to launch in that patient population, and it's US-based principally. There is a slight delay of timelines in Europe, so it's a small contribution.

Then I'd take the opportunity to your question, actually, to hand it over to Stuart, and maybe Stuart can give you an idea of how the revenue for Kalydeco builds through this. You can understand how we get to where we provided the guidance.

Yes, so Geoff, I think the first thing is probably to ground people on what the run rate is as we exited 2013. As I said, we did $109 million in the fourth quarter, but as I mentioned in my prepared remarks, about $8 million of that was some inventory build towards the end of the year, and some other one-time business adjustments.

Our run rate as we exit 2013 is just north of $100 million a quarter. As I outlined, we've really got two ways that we think we're likely to grow Kalydeco in 2014. The first one is geographic expansion, and we have ongoing discussions regarding reimbursement in Canada and Australia. There have been ongoing for a while, and we continue to be in very active negotiations with both of those reimbursement authorities.

We obviously have label expansions in the non-G551d gating. That's filed both in the European Union and here in the US. If successful, we would expect that to contribute to future growth. As Ian said, R117h is in the range of possibility. It's [encomprents] by our current guidance. But clearly we have to have discussions with the regulatory authorities, we have to put filings in, and then certainly in Europe, we've then got to secure reimbursement. As a contributor to our overall revenues in 2014, that's likely to be a very small contribution compared to some of those other growth drivers that I've mentioned.

Mark Schoenbaum, ISI.

(inaudible) sitting in for Mark. Just had -- maybe change the topic a little bit. VX135, a few questions come to mind, but to just to stick to this one, maybe you can give us, if there is an understanding as to the relapse that occurred in the 200mg-plus [decladager] arm, whether there's an understanding as to the reasoning. Was there deep sequencing, was there a possible mutation we are seeing?

This is Bob. Sequencing is ongoing in that study. We don't have any results yet, so I think we will report those likely at a medical meeting.

Rachel McMinn, Merrill Lynch.

I was a little bit surprised by the R&D numbers. It looks like there is a pretty big step-down there, just the split in OpEx, not the total OpEx. I guess I wanted to -- can you maybe walk through in a little bit more granularity what the -- how to think about that over the course of the year? As a follow up to that on the HCV side, if I'm understanding your comments there, should we assume at this point your guidance contains no HCV expenses, either legacy Telaprevir expenses or for 135? I guess in your ongoing discussions with Bristol, is that like a non-starter for you, you're not spending anything on (inaudible)?

Thank you Rachel, I am scribbling down the questions so I can get to all of them. First of all, the trend of operating expense. I will start by saying what you see is our operating expense in Q4 of 2013. You should see a 5% to 10% decline as we go into Q1 of 2014. Then when you look through the year, it off-loads around based on the timing of certain clinical trials. However it's not significant.

We do - we also just anticipate it might be a slightly lower run rate in Q3 and Q4. That's just given the timing of our major trial that we have ongoing with transport and traffic. In summary, there should be a slight tick down in Q1 compared to the prior quarter, and then as we go through the year you should anticipate less in Q3 and Q4, but not significantly.

As far as the questions on HCV, we have some small cost that we still incur in HCV relating to Telaprevir and those are like post-marketing commitments that unfortunately we're still contracted with the FDA to perform and complete. We actually exclude those as part of the restructuring of HCV so they don't get charged to the P&L. Most of these don't have any future benefits in our perspective, and that's why we don't incur them. Then as far as marketing and sales to the support of Incivek, that is absolutely negligible at this point in time.

Ian, you might want to comment on how we are treating R&D expense for HCV in and out of the budget, we talked about that quite a bit (inaudible - low volume).

Yes, I'm not sure Rachel. Did I answer your questions?

Hello, can you hear me?

We can now.

HCV, though, with 136. Is that completely out of your future?

Okay, I see. Thank you for clarifying. As we discussed at JPMorgan, our OpEx operating expense guidance of $900 million to $950 million includes $40 million to $50 million. But that's still in there. We are not spending against that, though. I want to be clear on that. We're not spending against that at this point in time as we decide on the direction for the program.

As I said in some of my earlier remarks, we are in discussions with both our principal partners in this area, both BMS and Arias. As we work through those discussions, will be back to you -- not only just with the direction, but the impact on our operating expense, if any.

Thank you.

We hope it to be soon.

Michael Yee, RBC Capital Markets.

I had a question on 661, and obviously you are starting a Phase II study in homozygous there. It almost is like a small replication of a Phase III. I just wanted to get your updated thoughts on how you view the profile of that drug, and whether you'd expect it to be any different from an efficacy profile versus 809, which we are going to get a Phase III read-in on. The value and read-through, and what can we glean from that data, and whether you would expect that to be after the Phase III data,? Maybe you can run through your thoughts on 661.

This is Bob. The study that we're about to start is a 12-week study, safety, efficacy in PK661 plus Ivacaftor. I think our thoughts about the profile of that compound really haven't changed at all. This is just the next step in the process, and we continue to be quite pleased with the results that we have seen so far with 661.

I wouldn't describe it as sort of a prelude to Phase III. It's a stand-alone Phase II-a study. The results will obviously help us going forward.

In terms of activity, it is very hard to speculate without seeing the data, but certainly we were pretty happy with the outcome of the 28-day study that we reported last spring. At the same time in vitro we think the activity of 809 and 661 are relatively similar in homozygous HBE cells. But until we see the clinical data with the longer dosing period, I think it's a little bit hard to speculate on that.

Michael, just strategically -- this is Jeff. I will remind you that how we are thinking about 661 as part of the portfolio. The primary way we are thinking about it is eventually as part of a triple, with a first- and second-generation corrector that would allows us to both increase activity in homozygous and potentially, plus pending the data, reach heterozygous, as well.

The other potential use of a 661 I guess is as a so-called backup for 809 in double therapy. Once we see the results of 809 next year, then we see the results of this Phase II trial, we will be positioned to give you a lot more strategic information about how we are to proceed.

Let me just ask that quick follow up. Obviously, we are planning for success. Were 809 not to work, there is some thinking that 661 would ultimately could still be used in the homozygous setting if you had a dual corrector, not just hetero but homo, so you would just be delayed. Is that the thinking there?

Correct.

Yes.

Matt Roden, UBS.

It's a logical extension of the earlier question on the R&D spend. Presumably if the CF program is positive, you will have more financial flexibility going forward. I was wondering if you can describe the bigger picture how you see a ramping up of R&D efforts again? Where do you get the programs, how fast can you ramp? Generally, what's your vision for R&D longer term?

The vision for R&D, I will leave it to Jeff and Peter to talk about that, but in terms of the investment profile for the Company, we don't see -- we get asked this question frequently, which is if your revenues increased and increased significantly, do you spend more of them in R&D?

The way that we view our financial investments in the area of R&D in the Company right now is on a research basis, we are very comfortable with the level of investment in research. It's been productive and it's produced the pipeline that we have today, and hopefully will continue to provide new clinical candidates.

We see it as a nice profile and we have multiple size, the smaller class that are highly focused in certain areas, and so we don't see a significant change in research investment. From a development perspective, development is a function and really only changes if you are moving into late-stage development with significant trials.

Again, it's not a function of a percentage of revenue, it's more of a function of opportunity. If there is the opportunity there that we believe can translate to future medicines, then we will be investing and those drugs.

Overall, when you roll this into how we look at the operating expense profile for the Company, we see the ability to drive revenue growth, pending the success of the important trials this year, we really see the opportunity to drive significant revenue growth, while not seeing a significant increase in operating expense.

We just don't see that, which therefore gives us the leverage from revenues on top of something that may marginally grow on operating expense. But it gives you the opportunity to generate significant earnings and cash flow. That's the profile that we are trying to manage to and be very selective about where we place our investments in R&D. I don't know whether Jeff or Peter want to make comments on R&D vision.

Yes, Peter has been doing a lot of nice work on R&D vision and strategy going forward, so maybe Peter you could have a few comments on how you are thinking about that? This has been a very productive organization, but the environment's changing in very interesting ways, and we're going to change with it.

I want to be brief because there would be many things to visit what's going on. I think number one Ian phrased it nicely. I think we have a productive R&D research engine that basically produces on a continuous basis molecules, and I have high confidence that that will also happen as we go forward.

Now in terms of focus, I think there is a change in the landscape out there that makes some adjustments necessary as we go forward in the future. It is not systematic regimen any longer that basically drives the show. It is transformational regimen that will drive the show, and driven by outcome and health care, visibility to outcome is basically the new hallmark that you have to shoot for. It drives us into diseases and disease approaches that deliver transformational outcome. That's our key focus, and adds security to what transformation, depending on what disease you are in.

We will be very specific to basically look into those type of approaches and mechanisms. As we go forward, that will not be just limited to fundamentals more molecules approaches. There will be broader efforts now in terms of cell therapeutic approaches, gene therapies in any of those that you can imagine. We are currently looking into what might play a role here. In fact, I want a high level of vision. There's always a broader platform into transformational outcomes and diseases of specialty need. That type is what we are shooting for.

I appreciate the perspective there. Ian, a quick financial follow-up. You mentioned in the release a couple of weeks ago a $60-million in interest expense in 2014, if I'm not mistaken. I didn't see it today's release. Does that still stand? Can you clarify if that's GAAP or non-GAAP?

Yes, that still stands. It is a GAAP and it's an interest charge the relates to -- well, it's actually a net interest charge, because it's partly -- it's an interest return from our invested capital that's on our balance sheet. It's principally driven by an interest charge on the lease of our building, and that's still there.

But it is going to be non-GAAPed out?

No, we will leave it in. It is a GAAP number.

I see. Okay, thank you.

Brian Abrahams, Wells Fargo.

Question for Bob about the long-term strategy in -- at 508 Dell and role of potentiators. What's the latest understanding of the channel-open probability in F508CFTR? I am wondering if your view is multiple correctors such as those within your portfolio could ultimately get the comparable activity without the need for Kalydeco? To that end, I'm wondering if you can give any more specific updates on the second -- the next-generation correctors you are presuming in terms of time line number we'll see move into the clinic this year? Thanks.

This is Bob. Just the last question first is our time line remains what we have said before. We expect to have a clinical candidate by the end of 2014. Depending on how things go there could be more than one clinical candidate, but that is likely the earliest one.

In terms of the channel-open probability, I think our general outlook at this point is that for F508Del with homozygotes and heterozygotes, the rate-limiting piece of this is the amount of correction that one can obtain, since potentiators are quite active on F508Del AFTR once they get to the cell surface.

I think our general thinking is we likely will always be in a situation where we are going to be wanting to use a potentiator in combination with a corrector. Since I think just are looking at additive effects of all these molecules on one another. In order to really get substantial CHR activity, we are probably going to need basically three drugs -- two correctors and a potentiator.

Lisa Bayko, JMP Securities.

Just wanted to get some commentary on what combination you think might be adequate to start targeting the heterozygotes?

Hi Lisa, it's Jeff. As we have said before, our thinking about this is really informed by the cell biology experiments. You will remember that in those experiments, double correctors -- I'm sorry, corrector plus potentiator, single correctors, 809 plus Kalydeco, 661 plus Kalydeco, really doesn't get you to the chloride transport that has been predictive of good clinical activity. That's been born out even in the clinical experiments we have done in the heterozygotes.

In contrast, when you use a first-generation corrector, a second-generation corrector, and Kalydeco, you get the levels of activity in the heterozygous cells that are similar to what you see with the single-corrector 809 plus Kalydeco, and that does read out in the clinic.

That is really the basis of our assumption, that three drugs -- as Bob said, a first-gen corrector, a second-gen corrector and Kalydeco is going to be necessary to reach the heterozygotes, the only exception being those heterozygotes who might be 508 on one [aleo], and Kalydeco-responsive on the other aleo. As you know, we are testing those with the combination of 661 plus Kalydeco right now in a four-week study.

Thanks. Can you remind us when we might see usage of Kalydeco in patients below age six and for the G551d population? Thanks.

That study is supposed to read out in the second quarter and it is on track for that.

Thank you.

That's the two- to five-year-old study.

Terence Flynn, Goldman Sachs.

I was just wondering if you can update us on the IP for the combination, with respect to maybe remind us on composition for 809 and 661, and then any combination patents that you might have? Thanks a lot.

Principally, the patent protection goes through mid-2020s. I can get the precise years for you, Terence, after we get off the call; but it is principally in the mid and late 2020s.

I think that is correct. In terms of combination, I think we have five in vitro prospective combination patents.

When would those go out, too? What would be the latest those -- the combo patents would cover to?

It would go to the mid-2020s, Terence. I can take a look at the dates and get back to you later.

Ying Huang, Barclays.

Quick one is what should we expect from the four-week Phase II study for the Kalydeco and 661 combo, in one (inaudible) G501d and then one (inaudible) 508Del? Then, can you give us your thoughts about the importance of the secondary end points from the ongoing traffic and transport studies in terms of regulatory approval, and also reimbursement from the payers, such as (inaudible) reduction and (inaudible)? Thank you.

Ying to answer the question, I'm going to get Bob to talk to the 508, 551, 661 study, and maybe Stuart will follow up with the secondary (inaudible - background noise) that we're measuring.

Again, we expect to have data in the second quarter on the Phase II study with Kalydeco and 661 in F50EDel, E551d heterozygotes. These are people that are already on Kalydeco commercially, and are enrolled in the study to add 661 on top for four weeks, and a four-week off period. Then the assessment, and we will have the results in the second quarter.

On the secondary end points, they're clearly going to be of interest to the regulators. Just to remind you in traffic and transport, we have things like exacerbations and weight gain, hospitalizations, quality of life; so that clearly of interest to the regulators while they still maintain a firm commitment to FUV1 as the primary regulatory end point.

As far as reimbursement authorities go, I would say they're even more important than FDV1 for a couple of reasons. Firstly, some of these secondary end points are of even more importance to providers and patients. From a payer's perspective, they are also very important that they are important from a cost-avoidance perspective.

If you can reduce exacerbations, if you can reduce hospitalizations, if you can be reducing concomitant medications, then clearly those are important cost offsets. The secondary end points are incredibly important, both from a regulatory point of view and from a reimbursement point of view.

Bob, if I may have a follow up. I guess we should expect additional FEV1 from the four-week study, right? Maybe it's some incremental secondary benefits here?

Not to speculate, but obviously we're clearly looking at FEV1 as one of the read-outs to determine if the combination actually has a benefit over the individual agent. We will see how the results come when we get them.

Robyn Karnauskas, Deutsche Bank.

Quickly, just to be clear, if you hit your primary end point -- I'm talking about the 809 combo trial. If you hit the primary end point but miss secondary end points, and you maybe believe you won't feel the secure, strong reimbursement or good pricing because you missed the secondary end points, would you wait to file with maybe the combo or the triple?

The second question is, Ian you mentioned JPMorgan talking about looking at products that are synergistic and additive and competitive. Given the cash position, what kind of deals are you thinking are optimal == licensing, partnership, M&A? Thanks.

I'll look for Bob to take the first question in terms of filing with when we meet the primary, if we meet the primary end point, she said.

Yes. Obviously, we are hoping to hit on more than just the primary end point, but certainly if we hit the primary we will file and bring this medicine to patients who need it.

Robyn, on types of transactions or collaborations that we are looking for, clearly focus right now is on VX509 and VX787, 787 being the molecule for potentially to help with flu. We'll continue to have discussions. In particular, we just received the 20-colleague data with VX509. That allows us to continue those discussions and, as those progress through this year, we will advise you appropriately .

Just as a follow-up, just to be clear, if the 809 combination trial -- say you don't hit your secondary end points, would you then potentially begin exploring another homozygous trial with the other combo to maybe secure -- get a drug on the market, or a combo on the market in that population that maybe does have better value to the patient?

Yes, and if I missed that in your first question, I'm sorry. I thought that's where you're focused. Also, part of our approach to this area is, as we mentioned back at NACF back in October, we're more active than we've ever been in terms of scouring the landscape. We want to look for technologies, assets, molecules, approaches that can be complementary, as well as maybe competitive. We have kind of a learning in this space when we were once in a prior disease. Today as we go out we look around, we do see some opportunities to enhance our position in CF.

As far as the particular question you were asking me about the 809, Jeff mentioned about the strategy with 661, that not only can that play a role in the triple-regimen where you've got dual correctors, but we also see that as a potential to play as a back-up, if needed.

I think that strategy, if you have more shots, it's better. We're committed to this disease long term. We think we've got a good understanding of the methods and actions, and how we can get these medicines to patients. We are going to keep going. We are committed to this space, and we think we are doing some incredible things for these patients. We want to broaden our efforts.

Operator, it's now past our planned stop time for the call. We think we have time for two more questions.

Ravi Mehrotra, Credit Suisse.

Thank you for taking my question, which is [Zukuroft] piece, but I'll give it a go. Can you give us any more color on your neurological disorder research efforts, in particular your MS program, specifically whether this program looks at remyelination?

I'll just quickly answer that actually, Ravi. it does look to remyelination. It's an early-stage program. It's in pre-clinical. As we progress in all these different areas that we have in research, we'll decide to the cover off at the appropriate time. We look forward to doing that, but yes we do have a program in MS, and it is a remyelination approach.

Katherine Xu, William Blair.

Just a very quick question. Now you have patients over six years old off G501d. They're pretty much all on drugs. Just curious, can you disclose the number of patients in the US versus Europe?

Yes, we think overall there are about 2,200 patients six years and older in the US, Europe, and also in Australia and Canada. As we have said nearly all of those have started therapy in the US and Europe, and we would hope to be able to do something similar in terms of bringing benefit to that same number of patients in Canada and Australia once we've been able to secure public reimbursement.

How much -- how many US versus Europe, each?

It is roughly a 50/50 split for G551d.

Thanks everyone for tuning in tonight. Kelly Willis and I are in our offices if you have any additional questions. Have a good night.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.