福泰製藥 (VRTX) 2014 Q2 法說會逐字稿

Good evening, ladies and gentlemen, and thank you for joining the Vertex Pharmaceuticals Incorporated second quarter 2014 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. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Vice President of Investor Relations, Mr. Michael Partridge. Sir, you may begin.

Thank you, operator, and good evening, everyone. Joining me on the call tonight are Dr. Jeff Leiden, Chairman and CEO, Dr. Jeff Chodakewitz, Chief Medical Officer, Stuart Arbuckle, Chief Commercial Officer and Ian Smith, Chief Financial Officer. Our agenda tonight is as follows. Jeff will begin by reviewing key priorities for our business. Then Jeff Chodakewitz will discuss our progress with our cystic fibrosis development programs and our strategy from here. Next, Stuart will discuss second quarter product revenues and the outlook for KALYDECO growth and will also review preparations for launch of the lumacaftor and ivacaftor combination. To close, Ian will review the second quarter financial results and provide commentary on our expected financial profile moving forward.

We plan for the call to run for approximately one hour. Please be considerate and limit your questions to one with a related follow-up. You can you access the Webcast slides by going to the Events section of the Investor Relations page on our website.

I will remind you that we will make forward-looking statements on this conference call. These statements are subject to the risks and uncertainties discussed in detail in today's press release and our 10-K and 10-Q which have been filed with the Securities and Exchange Commission. These statements, including, without limitation, those regarding the ongoing development and potential commercialization of lumacaftor, in combination with ivacaftor, and Vertex's other cystic fibrosis programs are based on management's current assumptions. Actual outcomes and events could 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 second quarter 2014 financial results press release. The press release is on our website and I would also refer you to slide 4 of tonight's Webcast. I will now turn the call over to Jeff Leiden.

Last month we shared positive results from our two Phase 3 studies of lumacaftor and ivacaftor in people with cystic fibrosis who have two copies of the F508del mutation. These results have given great hope and optimism to patients and families with this disease and to the physicians and healthcare professionals who treat them. As a Company, we have also greatly increased our understanding of CFTR correctors and the assays we use to evaluate our medicines during the last several years. Together, these developments provide us with further scientific validation for our ongoing efforts to develop transformative medicines that provide increased benefit for the vast majority of cystic fibrosis patients.

The Phase 3 results also increase our confidence that we can achieve our vision to be a leader in developing therapies for cystic fibrosis and innovative new medicines to treat other serious diseases, and to achieve our financial goals of delivering long-term, sustainable growth in revenue, earnings and cash flow. Today, I will review our three strategic priorities for achieving our vision as a Company. Priority one is to transform the treatment of cystic fibrosis with medicines that address the underlying cause of the disease. CF affects 75,000 children and adults in North America, Europe and Australia, and is one of the most prevalent orphan diseases. Slide five outlines our strategy to treat the vast majority of people with CF and also to further enhance the benefit for those we treat. With the clinical data we have today, we believe we are on track with this strategy.

KALYDECO is available today for people with the G551D and other gating mutations, and we have the potential to treat many more people based on our label expansion efforts for KALYDECO monotherapy. Jeff Chodakewitz will describe the details of these studies in his remarks. With the positive Phase 3 data for the lumacaftor and ivacaftor combination announced in June, we are now on the cusp of significantly expanding the number of CF patients who can benefit from our medicines. But even with the success of the traffic and transport studies and the momentum that we have created, our work in CF is far from done. We are evaluating the potential of our medicines in younger children and new groups of people with CF. And as we expand the number of people our medicines treat, we continue to seek ways to enhance the clinical benefit with next generation medicines and other combination regimens. We are deeply committed to being the leader in CF therapies and will maintain and build on our leadership by continuing to invest in our CF programs and by pursuing external opportunities that complement our internal efforts.

Our second strategic priority is to invest -- to advance our pipeline. We have a productive research engine that has created numerous innovative medicines over the last decade. We will seek to bring new medicines from our research labs into the clinic in the months and years ahead in a number of key specialty disease areas outside of CF. We are also continually surveying the landscape for potential medicines outside Vertex that create transformative opportunities in other serious disease areas of interest.

Executing well on our first two priorities will enable our third strategic priority, which is to achieve sustainable long-term growth in revenues, earnings, and cash flows, to allow us to continue to both invest in our business and to deliver superior returns for our shareholders. We have a strong financial position, nearly $1.5 billion in cash. And even as we grow our top line, we see our overall expense profile remaining roughly similar to where it is today. The strategy that we articulated 2 1/2 years ago has remained consistent, and we have continued to execute against that strategy. This execution has fundamentally changed the outlook for our business, increasing confidence in our plans for the future and for people with CF and their families. Now, I'll hand it over to Jeff.

Thanks, Jeff, and good evening. In my remarks, I will review the progress we've made on advancing our development programs in cystic fibrosis and highlight further potential developments we anticipate in the coming months. We have learned a lot from the clinical results we've obtained from numerous studies over the past year, and this knowledge positions us to further advance our CF pipeline and treat more people with this disease. Stepping back, what differentiates our CF program is our CF research platform. This platform has enabled us to select molecules that in human bronchial epithelial cells isolated from CF patients restore CFTR protein function and address the underlying cause of disease.

The in vitro results have turned out to be highly predictive of clinical benefit across many studies, and the mechanism of action restoring CFTR protein function has proved to be differentiated in terms of the breadth of clinical benefit that patients experience. Now, numerous clinical results over the past year have both further validated the predictive ability of our CF research platform and opened the door to treating many more patients, including those homozygous for the most common mutation, F508del.

First, I'll highlight our progress in establishing the benefit of KALYDECO monotherapy for more people with CF. We have confirmed KALYDECO's clinical benefit in patients with eight additional mutations, similar to G551D, and we received regulatory approval for these patients in the US earlier in 2014. We anticipate EU approval in the second half of this year. We submitted an sNDA in June and an MAA variation in July for KALYDECO monotherapy in patients 18 years of age and over with the R117H mutation. Additionally, we announced in May positive data from a proof of concept study in 24 people with CF who have residual function mutations. We plan to initiate a Phase 3 study this year in people with residual function mutations that will evaluate longer duration treatment with ivacaftor and perhaps treatment with combined therapy, pending the progress of VX-661 and discussions with regulatory agencies.

As we seek to expand KALYDECO use in younger patients, we have now conducted a PK and safety study in people with CF ages 2-5 with gating mutations. We expect to report the data from that study in the third quarter of this year and potentially file an NDA utilizing a child friendly formulation of KALYDECO in the fourth quarter of this year.

I will just close with KALYDECO by mentioning that one of the most interesting and encouraging recent findings has been long-term data in G551D patients. At ECFS in June, we showed that KALYDECO reduced the rate of decline in lung function over time by nearly 50% in G551D patients, which suggests that CFTR modulation can change the course of the disease. It is important to remember that people with severe forms of CF, such as those with G551D or F508del, typically lose nearly 2% of lung function each year. Thus, these results for KALYDECO give a broader view on the importance of our CF medicines over time.

With combination therapy, we reported the positive results in late June from the Phase 3 traffic and transport studies, which showed improvements in FEV 1 and other measures including pulmonary exacerbations in patients homozygous for the F508del mutation. We devoted a call last month to discussing these results, and I won't review the data here. But we are very encouraged by the positive feedback we continue to receive from the medical and patient communities. We will submit the NDA on a rolling basis. We expect to submit the first sections this week and to complete the submission for ages 12 and older in the fourth quarter.

As part of the registration program for the lumacaftor/ivacaftor combination, we conducted an exploratory study in patients who have one copy of the F508del mutation and a second mutation that is not responsive to either ivacaftor or lumacaftor alone. We reported data today from an eight week study of lumacaftor plus ivacaftor in this population. Although we did not see efficacy, this was consistent with our expectations and belief that a triple combination will provide us with the best chance to benefit these patients. Importantly, the safety results are consistent with the homozygous population and support our NDA and MAA filings. These results confirm our belief that we will need a different combination to be able to treat the F508del heterozygous patients who have a second allele that doesn't respond to a corrector or a potentiator.

Behind lumacaftor is another first generation corrector, VX-661, which may have a role in helping to treat three different populations. KALYDECO responsive patients with F508del on the other allele, F508del homozygous patients and patients with F508del on one allele and another mutation on the other allele that is not responsive to a corrector or potentiator. We are currently conducting a 12 week study of VX-661 in combination with ivacaftor in F508del homozygous patients, and we expect to have results in early 2015. We could consider clinical studies of a dual combination of VX-661 with ivacaftor for any or all of the three previously mentioned groups.

Additionally, we anticipate pursuing a triple combination in the future with VX-661 and ivacaftor along with a next generation corrector. We currently have several next generation corrector compounds in the lead optimization stage of research. Significant work remains to be done to move these into the clinic, but based on our progress, we plan to begin clinical development in 2015.

In summary, our CF development over the first half of 2014 has taught us a great deal about the clinical validity of our research platform, the ability of our approach to fundamentally change the course of the disease, and the potential to optimize therapy by treating each allele. We believe we are poised to treat many more patients and enhance the benefit for the patients we treat. With that, I will hand it over to Stuart.

Thanks, Jeff, and hello, everyone. Tonight I'll talk about our second quarter sales performance and the key drivers of KALYDECO growth for the rest of the year. I'd also like to discuss the priorities for the commercial organization as we prepare for the approval and launch of the lumacaftor/ivacaftor combination. Total product revenues were $122 million in the second quarter. The vast majority were KALYDECO, but I will note that INCIVEK generated $9 million in the quarter.

So, turning to KALYDECO. KALYDECO generated $113 million in product sales in the second quarter, including US sales of approximately $63 million and international sales of approximately $50 million. This represents an increase of $14 million over Q1 2014. Underlying demand and adherence in G551D patients continued to be strong, both in the US and internationally. The growth was primarily a result of the expansion of the KALYDECO label by adding eight additional mutations in the US, as well as treating some more people with G551D in Europe. The uptake in patients with the additional mutations is in line with what we experienced in bringing G551D patients onto therapy, and the majority of the eligible patients are already on therapy. We hope to reach nearly all of the approximately 150 eligible children and adults in the US by year-end.

Label and geographic expansion remain the key long-term growth drivers for KALYDECO. We were pleased to receive a positive opinion from the CHMP in the second quarter, recommending the approval of KALYDECO for people with CF ages 6 and older who have one of eight non-G551D gating mutations. The CHMP's positive opinion will now be reviewed by the European commission, and we anticipate approval in the second half of this year. There are approximately 250 children and adults ages 6 and older who have one of these additional mutations in Europe. In Canada and Australia, making KALYDECO available to the approximately 300 people with the G551D mutation was and remains an important objective this year.

We've made good progress in Canada. The letter of intent signed in June with the Pan-Canadian pricing alliance is an important step towards eligible Canadians receiving KALYDECO through public reimbursement. However, our work is not complete until each province has added KALYDECO to its individual drug program, which has to happen before people can get access to this medicine. Ontario and Alberta have added KALYDECO to their product listing agreements, and patients are beginning to be initiated in these two important provinces that account for over half of the G551D patients in Canada. We share the urgency of the CF community to bring this process to a successful conclusion, and we will work as quickly as the other provinces are able so that people can receive KALYDECO without delay.

In Australia, it has been 16 months since our first reimbursement submission, and the CF community is unfortunately still waiting for access to KALYDECO. Despite being offered a price equivalent to the best in the world, Australia is unique in not providing reimbursement and in addition, seeking to impose criteria which would effectively lead to half of patients not having access to KALYDECO. We believe that all eligible Australian children and adults should have the opportunity to receive KALYDECO. We remain committed to trying to reach an agreement and are waiting to hear back from the Department of Health on our proposal submitted in May.

Turning now to the lumacaftor/ivacaftor combination and our launch preparations. We expect to add additional physicians to our commercial team toward the end of the year to support both the increased number of patients in existing countries and expansion into new countries. One area of buildout is here in the US where we'll be adding more case managers to our patient services team who help providers and patients navigate the reimbursement process as well as help with education and compliance.

Internationally, we will need to establish a presence in some new countries in central, southern and eastern Europe, and also Latin America, in order to meet the needs of people with this more prevalent form of CF. Although we'll be expanding to many more countries, the incremental investment is relatively small, given the limited sales and marketing infrastructure needed in each country.

In summary, we are pleased with the progress we're making with KALYDECO as it continues to be made available to more patients who could benefit, and we are maintaining our KALYDECO net revenue guidance for the year. Also, our launch preparations for the lumacaftor/ivacaftor combination are well underway, and we are focused on bringing this transformational medicine to as many CF patients around the world as soon as possible. I'll now hand the call over to Ian.

Thanks, Stuart, and good evening, everyone. In my remarks tonight, I will review our financial results and then discuss near-term financial metrics that reflect our longer term financial expectations of the business. First to the financials. This quarter we generated $122 million in total non-GAAP revenues which included KALYDECO revenues of $113 million. The KALYDECO revenues are up 15% versus the second quarter of 2013 as we continue to expand the number of patients we treat. Our second quarter non-GAAP total operating expenses were $237 million, a decrease of $44 million compared to the second quarter of last year.

Within our operating expenses, our non-GAAP R&D expenses were $179 million for the second quarter of 2014, a reduction of $11 million compared to the second quarter of 2013, and non-GAAP SG&A expenses were $58 million for the second quarter of 2014 compared to $90 million in the second quarter of last year. As we have stated, these reductions in operating expenses overall reflect Vertex's decreased investment in hepatitis C and are refocused toward CF medicines. Our non-GAAP net loss was $142 million, or $0.61 per share compared to prior year net loss of $6 million. This increased loss was the result of significantly reduced, now excluded activities revenues in 2014. The key priority entering this year as we move through an investment period was to maintain financial strength and position the Company for future revenue and earnings growth driven by the success of our CF medicines. I'm happy to report that at the end of the second quarter, we have achieved both. A strong financial position and the successful progression of our CF medicines that position us for a future of financial growth.

Additionally, following the positive Phase 3 data for the ivacaftor/lumacaftor combination, which provided greater confidence in our future growth, we signed a credit agreement for $500 million, $300 million of which we added to our balance sheet in July, giving us now nearly $1.5 billion of cash, cash equivalents and marketable securities on our balance sheet. This additional cash strengthens our balance sheet and provides added flexibility as we work to further enhance treatment of cystic fibrosis. Specifically, we expect to utilize this financial position to support collaborations in priority programs in CF and in other areas.

Now, to our financial guidance. It remains unchanged for 2014, reflecting our expectation of growth in KALYDECO revenues and management of our operating expenses. Our KALYDECO net revenue guidance of $470 million to $500 million for 2014 anticipates the following. Revenues from Canada, following the recently signed letter of intent to enable public reimbursement, revenues from Europe, following the potential approval of KALYDECO for use in additional gating mutations, and revenues from Australia following the potential completion of reimbursement in the second half of 2014. Reimbursement in Australia is the key risk in achieving our KALYDECO revenue guidance for the full year.

We are maintaining our non-GAAP total revenue guidance to be in the range of $520 million to $550 million, of which, $470 million to $500 million relates to KALYDECO. Our total revenue guidance also includes royalties and other collaboration revenues, including those from our recent out licensing of VX-787, our novel flu medicine to Johnson & Johnson, for which we expect to recognize the majority of the $30 million upfront payment in the second half of 2014.

We are also maintaining 2014 non-GAAP operating expenses to be in the range of $890 million to $930 million. SG&A expense will increase incrementally going into 2015 as we seek to support label and geographic expansion for KALYDECO and prepare for the potential launch of ivacaftor and lumacaftor combination. We currently anticipate the R&D expense will decrease somewhat in the second half of 2014, reflecting the completion of the Phase 3 traffic and transport studies. Positive Phase 3 data for lumacaftor and ivacaftor combination has provided us greater business confidence in terms of our ability to treat many more people with CF, which puts us on a pathway to profitability and financial growth.

To echo Jeff Leiden's comments earlier in the call, our three strategic priorities are, one, transform the treatment of CF by continued internal investment and exploring external opportunities. Two, invest internally and externally to advance the development of innovative medicines to treat other serious diseases and three, deliver long-term, sustainable growth to enable continued investment in the business. Successful execution on these priorities will enable us to realize our vision to be a leader in developing therapies for CF and other serious diseases and to deliver meaningful return for our shareholders.

If successful, we will achieve a financial profile consistent with our large cap biotech peers, specifically, a growing revenue line based on the expansion of the number of patients we may treat with high value medicines, total operating expenses relatively similar to current levels, high operating margins given significant leverage from the revenue opportunity and significant cash flow generation. We look forward to sharing additional developments and regulatory milestones in the coming months. With that, I'll ask the operator to please open the line for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Geoff Meacham with JPMorgan. Your line is open.

Good afternoon, guys. Congrats on all the progress with CF. Want to ask you about the lumacaftor KALYDECO, the expanded access program. What can you tell us about it, and will you be able to provide access to patients that are younger than 12 years of age? Then I have a follow-up.

Hi, Geoff, it's Jeff Chodakewitz. Thanks for the question. We are working with our investigators, CF foundation patients to move forward on expanded access, but we really feel that what we need to do next is gain more experience in patients who have FEV1s less than 40. We're actively working on developing a protocol that we can put in place and get the drug to patients in that category. And then once we have that data, we'll understand more and see how to proceed from there.

Okay. Then just on the data today for heterozygous (inaudible) patients, A, was it a surprise to you guys, and B, does it sort of validate your view that you'll have to have two correctors plus KALYDECO? And can you tell us anything about the next gen corrector that you guys are still working through? Thank you.

Sure, thanks. First of all, no, it was not a surprise. And given the Phase 2 data, it really is essentially as we expected, but we did want to be sure that we understood this, given the medical need and the importance for patients. In terms of the -- your question about the next generation and what else for that population, as we mentioned, we are making progress on our next generation compounds. We have multiple compounds in lead op and things that are -- in terms of even greater activity that we're finding. And so we are anxious to bring one or more compounds forward next year.

In terms of whether this population will require three drugs, I think that is really still a question we understand that is probably the best chance, but there are some aspects of VX-661 that have slightly different characteristics like the lack of a drug-drug interaction that affects other [capital] levels and penetration into the lung. And so we'll have to think about whether we need to understand what the two drug combination might be able to achieve. That's how we're thinking about it right now.

Thanks.

Our next question comes from the line of Michael Yee with RBC Capital Markets. Your line is open. Hi, thanks. This is John on behalf of Michael Yee. First quick one. Based on the results today in the heterozygous study, given that the exacerbations in the traffic and transport were so strong, do you have any details on that? I have one follow-up.

This is still early data. We're still trying to understand all the information. But remember, this was only a study for eight weeks in 120 patients. So, whatever data we have is not going to be very meaningful.

Okay. Then as a follow-up, as you think and plan for the potential launch of the combo 809 drug for homozygous patients, how do you think the uptake of this would be similar or different from your experience with KALYDECO, given if you think about how KALYDECO managed to be well saturated within three quarters, but that this is only target population of approximately, I believe around 1,000, while for the new indication could be almost as big at 15 times that.

It's a great question. It's really too early to provide specific guidance around the launch trajectory and peak penetration. We do know that patients are waiting with great anticipation for this combination product, because there's no other medicines that treat the underlying cause of the disease. But as you said, in comparison to the G551D population, that's a significantly smaller population than people who have the 508del homozygous mutation, and that is going to present a logistical challenge to CF centers.

Just one more, along those lines, how many of those F508del homozygous patients are well identified and within the system? Thank you.

Given the prevalence of really very robust CF registries in certainly most of the major markets, I would say that the vast majority of the 508del homozygous population is well characterized.

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

Great, good afternoon. Thanks for taking my question. I have kind of a Company building question. You guys talked about your objectives of advancing your internal pipeline and also looking outside the Company for what assets may be relevant to you and at the same time, it looks like you've bolstered your balance sheet a little bit. You talked about the $1.2 billion you have on the balance sheet right now plus access to more. Does that -- should we take that as a signal that you've moved closer to deciding what directions you want to go in outside of CF? And what sorts of verticals should we be thinking about longer term for Vertex? I know you guys have spoken kind of vaguely about the types of programs that you'd be interested in, but I'm just wondering, are you getting any closer here? Is there any update that you can give us? Thanks.

Thanks for the question. This is Jeff Leiden. I think we've been pretty consistent in our strategy over the last couple of years in saying that we are interested in serious specialty diseases where we think we can actually make transformative medicine. Certainly CF is a beautiful example of that. And we plan to do that both internally and externally.

So, from an internal standpoint, we haven't talked a lot about it yet, but we do have programs in cancer and progressive MS, for example, and Huntington's disease. And all of those of, if you think about it, are very much like CF. Very serious diseases without much treatment where we think there's a scientific opportunity to make a difference. And similarly, we are looking outside, and one of the reasons we strengthened our balance sheet is to allow us to do certain kids of strategic transactions, starting in CF where we want to complement our internal resources. But also in other serious diseases outside that fit that kind of mold.

Thanks for that. And maybe just a quick follow-up on the heterozygous results today. Obviously minimal effect on FEV 1 here, but it looks like you did observe something on CFQR in sweat chloride. Is there anything to conclude from that that give you any maybe confidence that adding another piece of the puzzle with the triple combo is going to help?

Hi, it's Jeff Chodakewitz. I think in terms of the sweat chloride, we think that it is an important marker. I think that in -- I don't think this is new. It's really about saying, are we hitting pharmacologically the target and is it driving pharmacologic activity? We think that's important for how we think about compounds and that we're on a right track. I think that that will be valuable information. I don't think the fact that we didn't see an FEV 1 really changes that. In terms of the FQR results, I think we're really interpreting that with caution. We're going to look at that, but it was a somewhat variable response, and I think we just have to learn more.

Got it. Thanks very much.

Our next question comes from the line of Brian Abrams with Wells Fargo. Your line is open.

Thanks for taking my question. Just wondering if you had any clarity on the dose you plan to file on for 809 in combination with KALYDECO. And do your regular regulatory plans for ivacaftor or lumacaftor include a fixed dose combo of the two components?

It's Jeff Chodakewitz again. We're still analyzing the data, but we do plan to make our dosing decisions this quarter. We think it's going to be soon. And if we have those opportunities, we do anticipate trying to deliver fixed dose combination.

Thanks very much.

Our next question comes from the line of Robyn Karnauskas with Deutsche Bank. Your line is open.

Great. It's Lisa here for Robyn. Congrats on all the progress. Maybe two questions. One, can you give us a little more granularity in Europe about where kind of the most prevalent populations are on the F508del so we can think about modeling? And then I have a follow-up.

I can talk about where the populations are in Europe. Actually, they're pretty productly spread. This is the most prevalent form of CF, so pretty much follows the CF population and the population overall in those markets. And so it's a much less concentrated form of CF than something like G551D. Obviously, the Celtic mutation. It's more broadly spread, more evenly distributed, and that's the reason why we are going to need to expand into some new countries to be able to reach those children and adults with this form of CF.

And just as a follow-up, on the -- your original function trial in Phase 3, how are you thinking about duration in that trial, and do you think that 661 could help the duration be a little shorter in that trial in Phase 3?

Can we just clarify the question? It's not coming through real clear. Could you just clarify the question? Was it regarding how we think about those residual function patients?

How long the trial should be run. How long do you think a reasonable Phase 3 would be for the residual function population.

Robyn, I think that -- this is Jeff Leiden. I think the question you're asking is the length of the trial and also the role of 661 in residual function, if you I heard you correctly.

Yes.

Yes, I think we are learning a lot, as Jeff Chodakewitz said, about the length and size of these trials. And I also think we're learning a lot about the different combinations, and we do plan to take all of that into account, as well as our residual function data, when we go to the regulators and talk about size, duration of the trials and also about monotherapy versus a combination therapy. So, I think you can anticipate hearing more about all of that.

Great. Thanks.

Our next question comes from the line of Geoffrey Porges with Bernstein. Your line is open.

This is actually [Wenshi] here for Geoff. Two questions, the first one for Stuart. So, in preparation for the combo launch, what sort of payer discussions have you had, both in the US and outside the US? We've heard that you've already gotten some press mention for US with Medicaid and then also outside of US, you're having some difficulties, for example, in Australia, right? Now with the G551D homozygous being a significant step-up in patient population, so how do you anticipate that reimbursement and pricing is going to happen both in the US and ex-US.

We really haven't spoken to payers about the combination product because we didn't really have the Phase 3 data to be able to have those really meaningful discussions. They would have been purely theoretical. Now that we've got the data, we are beginning a program of research to go out and talk with payers, both in the US and internationally, that process is really just beginning.

In terms of what challenges we may have, I think what we know is that we've got a medicine which has a really impressive benefit for patients. It works really well on things that are important to payers, to physicians, to patients. We know there's a high level of anticipation for the product because nothing else treats the underlying cause of the disease. And whilst it is a larger patient population than the G551D patient population, it's still patients 12 and over with this form of CF still only accounts for 22,000 patients in the US, Europe and Australia. And so it's still a very targeted patient population. So, whilst it's a bigger population, it's still an very ultra orphan population.

The other thing I would say is, I'd use some caution extrapolating from one particular instance issue that we're having with Arkansas Medicaid, that's one isolated incident here in the US. And whilst Australia we've yet to reach an agreement, we've reached agreement and are getting reimbursed in 18 other countries around the world. And so I'd just caution you against extrapolating from those exceptions to projecting those to be the rule.

Thank you for that. As a quick follow-up, can you speak to your -- of any plans for R117H in the children patient population as well as patients with nonsense mutations in CFTR. Thank you.

It's Jeff Chodakewitz. Our -- as you know, our pivotal trial in R117H actually did enroll children as well as adults. I think we understand that data well. Even though we missed the primary end point in the study, we believe we have a strong argument and have filed that. And so -- and that will include potentially data -- or will include the data from children, and I think that has to be a dialogue because we studied a large number of patients. We studied a significant percentage of all the patients with R117H globally. We expect to -- we don't expect to do additional studies in R117H. We really do anticipate trying to understand the data that we have and make our best argument. In terms of children, are you -- I want to be sure I understand your second question, are you talking about --

Nonsense mutations, about 10% of the patient population, and are you thinking about them internal or external combinations to address that?

I think the patients with true nonsense mutations on both alleles obviously are not going to be helped by our current corrector therapies. And that's one of the areas where we're going to need to look outside as well for additional kinds of therapies to address those patients. As you say, it's about 10% or less of the total population.

Yes.

Our next question comes from the line of Liisa Bayko with JMP Securities. Your line is open.

Hi, there. Thanks for taking my question. First question's for Ian. I just wondered if you could quantitate in some way the revenue that might be at risk if -- for 2014 if Australia doesn't pull through with reimbursement, or maybe tell us how many patients there are and when you were expecting reimbursement? Just some way to quantitate that component.

Yes, thanks, Lisa, for the question. I'm not going to go down to the specifics of Australia. We're involved in, as you might expect, an interesting discussion down there in Australia, and I don't want to go into a lot of detail specifically for the revenue from that country.

Could you tell us how much patients there are, at least, or something like that with the G551D?

Yes, there's approximately 200 patients.

200. Okay.

And therefore, you can apply a normal uptake to it. But I would just add though, as you try to kind of pinpoint the revenue within our guidance, I would just add that given that we are dependent on Australia coming through, if it helps you understand where we are in the range of our guidance that we set earlier this year, which pushes us towards the lower end of that range that we provided earlier this year.

Okay. And then my next question is just one on pricing of the combination. Now that you've had a little more time to think about the data, what's the right way for us to think about pricing? Is it sort of pricing that's lower than current KALYDECO, or do you think that this can command more than that, given there's two drugs? What's the right way to think about really pricing for the combination for the homozygous by the way population?

Yes, Liisa, it's Stuart here. It's too early to make any comments on pricing. As you say, we do have the Phase 3 data now. Now that we have take data, as I referred to earlier, we can begin to build the clinical and economic evidence and begin to test that with payers to develop the support we're going to need for the pricing and reimbursement discussions that will happen down the line here. But we're not in a position to make specific comments on pricing at this time.

Okay. Fair enough. Thanks a lot for taking my questions.

Our next question comes from the line of Mark Schoenbaum with ISI Group. Your line is open.

Hi, this is (inaudible) sitting in for Mark. Just a couple questions. One of them, just curious, wondering about the long-term data from traffic and transport, when we might get an update on that. And then the other question, just sort of following up on the discussion about pipeline development and acquisitions. And perhaps you touched on it and I missed it, but just trying to better understand the features of those products, programs that make them attractive to -- specifically to Vertex.

Hi, it's Jeff Chodakewitz. I'll take the first part of that. In terms of the ongoing long-term extension study from traffic and transport, we do have planned interim analyses, and that will include safety evaluation as well as FEV 1. I guess I'd note that we have submitted abstracts on the 24 week traffic and transport studies to NACF and hope to be able to present those there. And our goal will be to include information coming out of the interim analysis at that meeting as well.

Thank you.

And then on your second question on attributes of assets that might be interesting to us, obviously the first set of assets would be those that could complement our own internal fee-up assets. We certainly understand how the combination therapy is going to be the rule for most patients, particularly as we move to higher and higher levels of efficacy. As you might expect, we're looking very closely at and for assets that could complement our internal assets in CF. Beyond that, as we've said before, we're very interested in very serious specialty diseases where we see an opportunity to make or acquire transformative therapies, therapies that make the same kind of difference that our CF medicines have made in CF. And so as we move forward, you can expect to see us looking at those kinds of assets.

Okay. Thank you.

Our next question comes from the line of Yaron Werber with Citi.

Hi, this [Kumar Arain] for Yaron. Thanks for taking my question. So, have you seen any changes in US reimbursement, and are payers evaluating the response to KALYDECOs as benchmarked to support ongoing payment? And for the CF collaborations which you're planning to do, is that going to hit the R&D? And when will that happen, whether it will hit this year or next year?

On reimbursement here in the US, the reimbursement for KALYDECO has been excellent from the moment the product was launched back in January 2012 and continues to be very broad. All eligible patients are able to access KALYDECO with the one notable exception that's been referred to in Arkansas. But other than that exceptional circumstance, KALYDECO is widely available to all eligible patients.

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

Hi. Thank you for taking my questions. I'm just curious about a recent paper, they did some in vitro experiments in F508 division cells and then found antagonism between KALYDECO and lumacaftor whereas in your preclinical experiments they were additive. Can you just comment on why that was the case, just in the preclinical setting in the cells, the design, the readouts? What were the differences?

It's Jeff Chodakewitz. It's think it's really hard for us to speak about somebody else's work. I think I really would just refer back to the experience we've had, as you noted, in our systems. And as we've talked about in our prepared comments, really, the fact that the assays in our labs have really been such important value in terms of identifying compounds and the translatability to the clinic and ultimately, we have the kind of clinical data that we spoke about on our last call.

Okay. And then if you don't mind, just a quick follow-up. In Canada, if you could remind us, how many G551D patients are there?

Yes, there's 100 G551D patients in Canada, roughly evenly split between those that have private reimbursement and those who have public reimbursement.

Thank you.

Our next question comes from the line of David Friedman with Morgan Stanley. Your line is open.

Hi. This is Brienne Kugler in for Dave. Thanks for taking the question. Just wanted to clarify some of your earlier comments. So, will you be filing with KALYDECO 809 on fixed dose co-formulation? And will you need to run any additional studies to support the co-formulation?

It's Jeff Chodakewitz. We obviously still -- as we've talked about, have to decide on the dose. But we do plan to file and with a fixed dose combination, we don't have -- need to do additional studies.

Thank you.

Our next question comes from the line of Kim Lee with Janney Capital. Your line is open. Kim, your line might be muted. Our next question comes from the line of Brian with Robert Baird. Your line is open.

Thanks for taking the questions, guys. I guess certainly it seems like payers push back on KALYDECO pricing to some extent, and it reflects their concerns about combination pricing. I just guess if you could kind of characterize, is this explicit in any of your payer discussions, or is this something that they're just kind of talking about to general media outside of that? And if it is part of the payer discussions on KALYDECO pricing, how are you addressing that with them?

I think the payer discussions we've had have been centered on the approved product. And while there is an awareness that we are looking to develop a pipeline of products, the conversations we've had with payers have been about providing access for patients who have the specific forms of CF that we're currently labeled for.

Thanks. Just on a housekeeping item, in INCIVEK revenue that you booked non-GAAP of $9 million, what's driving that? Is that just an accounting figure? It doesn't seem like demand sales based on IMS.

I'd first of all say it's not accounting. There are actually real sales, and maybe Stu wants to give a little bit of background behind that.

Yes, exactly. As Ian says this isn't really an accounting adjustment. It is the impact of residual demand for INCIVEK, so we thought it was notable to reference it. We're not necessarily predicting that there will be meaningful INCIVEK sales going forward, but we thought it was useful to reference it, seeing as it's part of our non-GAAP revenue.

Do you have any idea in what sort of paradigm is that being used? Is that being used on a ribavirin backbone?

We really don't have any insight into how that's being used. As we reduced our investments and all of our support for INCIVEK some time ago, we really have little insight into what's going on in that market. We just thought it was worthwhile noting it is a part of our non-GAAP revenues.

Thanks, guys.

Our next question comes from the line of Phil Nadeau with Cowen. Your line is open.

Thanks for taking my questions. Just a couple. First, on the children's study, ages 2 to 5, you said the primary end point is safety and then the secondary end point's more efficacy related. Are there any criteria for those secondary end points to be hit in order for you to file, or is it really just if you show safety you'll be able to extend the label down to H2?

No, it's really PK and safety, just to be clear. As you'd expect, most of the measures, can't even use in children that age. And the submission is really just focused on PK and safety.

And in your prepared remarks, you mentioned that you might investigate 661 in heterozygous patients. Are there any ongoing studies going on in 661 in heterozygous patients? What data will you have at the time that you design a Phase 3 program from 661 in heteros?

We do not have any ongoing studies for data specifically in that population with 661 right now. The only ongoing study is really the 12 week study that we referenced in homozygous patients.

The only thing maybe to remind you of is that we do have the previous data on the heterozygous patient very specific subset of those who have Delta 508 on one allele and a KALYDECO responsive mutation on the other allele. And that did show a significant incremental benefit of adding 661. That will be an important part of our exploration of 661.

Just trying to get a handle on your thought process. Would it be that if the 12 week study for 661 in homozygous patients produces somewhat better than 508 maybe you'd be willing to extrapolate that to the heterozygous patients, and that would be sufficient to go forward with the Phase 3? Is that sort of the thinking?

It's a good question. I think it's maybe even a little broader than that. As Jeff said, we really think about 661 in at least three or four settings. One is obviously in the homozygous patients in asking is it -- does it show benefits over and above what we see with 809? One is in the special population of heterozygous, which would really be a way of improving efficacy in those patients with a KALYDECO response of allele and 508 on the other allele, and that's number 70% of those who have a KALYDECO response to allele.

Then, of course, there are the what we call the half-mins. That is patients who have Delta 508 on one allele and the non-KALYDECO response of mutation on the other allele. And as Jeff said, there are some different properties of 661 from 809 that we do want to explore in that population to see whether we would see incremental benefit there. And then, of course, there's the basis of the three drug regimen with our next generation corrector. 661 is really a way that we see lots of different potential uses, many different options, and our plan is to explore those as quickly as possible in parallel.

Great. Thanks for taking my questions.

Operator, we have time for one more question.

Our final question comes from the line of Yigal Nochomovitz with Oppenheimer. Your line is open.

Thanks very much for taking the he question. I just wanted to clarify something on the next generation corrector program. Should we expect that the next generation correctors are going to get slotted into the combo regimens from day one? Or is there going to be a period where we see some initial monotherapy work to establish efficacy and safety? And I have a quick follow-up. Thanks.

Hi, it's Jeff Chodakewitz. I think -- from the -- when we first go into man, I think we have to, as you noted, to really understand, be sure we understand the performance of the drug itself. We have to start with at least some limited studies with monotherapy. Not necessarily in patients, but at least in healthy adults, and then we would take it from there.

Okay. Great. And then just very quickly, following up on Brian's question from earlier in the call on the homozygous combo filing, have you done any further data analysis on the traffic and transport results to point to one dose as potentially preferable over the other/? As well as if you could comment on any considerations regarding regiment simplicity and manufacturing requirements that are playing into your decision as to which dose to file on.

I think that the -- as I mentioned, our analysis is really still ongoing, and what we're really trying -- the biggest driver, as Stuart talked about, was really about the clinical data. We hope to be able to get there soon. Certainly from a patient perspective, we think that the regiment where patients take both drugs twice a day and could use one kind of image has advantages for patients in terms of simplicity. But we're really still looking at all the information.

Thank you very much.

That brings our question-and-answer session to a close. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a good day.