福泰製藥 (VRTX) 2016 Q4 法說會逐字稿

Good evening. This is Michael Partridge, Vice President of Investor Relations for Vertex. Welcome to our fourth-quarter and full-year 2016 financial results conference call.

(Operator Instructions)

This call is recorded and a replay of the call will be available later tonight on our website. Dr. Jeff Leiden, Chairman and CEO and Ian Smith, Chief Operating Officer and Chief Financial Officer, will provide prepared remarks this evening. Stuart Arbuckle, Chief Commercial Officer will join us a little later for Q&A. I will remind you that we will make forward-looking statements on this conference call. The statements are subject to the risks and uncertainties discussed in detail in today's press release, our 10-K, and other filings with the Securities and Exchange Commission.

The statements including those regarding the ongoing development and potential commercialization of our drug candidates and Vertex's future financial performance 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 the financial results press release. I will also refer you to Slide 4 of tonight's webcast. I will now turn the call over to Dr. Jeff Leiden.

Thanks Michael. Good evening everyone. Earlier this month, we met with many of our investors and analysts at the annual JPMorgan healthcare conference, where we outlined our priorities for 2017.

We have three key goals as we enter the year. First, we remain focused on increasing the number of people eligible for and being treated with ORKAMBI. Our progress toward this goal in 2017, will be measured primarily by achieving reimbursement for ORKAMBI in Europe and by the subsequent growth in our 2017 revenues.

Second, we're advancing multiple potential new medicines for CF that may improve treatment and also provide many more people with the first medicine to address the underlying cause of their disease. Over the coming year we expect to obtain data from across our CF pipeline that will mark our progress toward this goal. And third, we're committed to reinvesting in our pipeline to create future medicines for other serious specialty diseases beyond CF, while creating value for our shareholders.

Tonight Ian and I will briefly review some of the key 2017 milestones and activities that support these goals and how our progress will position the Company for continued growth in 2017 and beyond. First to ORKAMBI and our anticipated revenue growth for 2017. With the approval for use in children ages six to 11, ORKAMBI is now approved for approximately 11,000 people with CF in the United States.

Similar to the launch in those ages 12 and older, we've seen strong uptake of ORKAMBI in younger patients and believe that physicians recognize the importance of starting treatment as early as possible. Given the large number of eligible children and adults who have already started treatment in the US to date, we expect that further growth for ORKAMBI in 2017 will come primarily from eligible patients initiating treatment in European countries following the completion of reimbursement discussions.

Across Europe, we've completed the clinical and health economic assessments of ORKAMBI in key countries and are actively engaged in reimbursement discussions that will enable patients to initiate treatment with ORKAMBI. Importantly, we recently reached a formal reimbursement agreement in Germany that we believe reflects the value that ORKAMBI provides to eligible patients.

We expect to conclude additional reimbursement discussions in 2017 and anticipate rapid uptake of ORKAMBI following these reimbursement decisions; which will drive revenue growth beginning this year. We're confident that it is not a question of if we will achieve reimbursement outside the US, but a question of when.

Now to our pipeline of other potential new medicines for CF. Our goal is to create new medicines that treat the underlying cause of CF for all people with the disease. We have potential CF medicines in all stages of research and development and expect to obtain important, value-defining data from across our CF pipeline of eight approved and investigational medicines throughout 2017.

In the first half of this year, we expect to obtain data from the Phase 3 program of tezacaftor in combination with ivacaftor in two large groups of people with CF. Those with two copies of the F508del mutation and those with one copy of the F508del and one copy of a residual function mutation. These data are intended to support an NDA and MAA submission in the second half of this year.

Additionally, the Phase 3 studies are together expected to enroll more than 1,000 people with CF and will thus provide a robust evaluation of the safety of the tezacaftor/ivacaftor combination; an important consideration for the ongoing development of our triple combination regimens that also contain a next-generation corrector.

We have four next-generation correctors currently in clinical development, including two ongoing Phase 2 studies evaluating next generation correctors, VX-440 and VX-152 as part of a triple combination in people with one copy of the F508del mutation and one couple of a minimal function mutation and in people with two copies of the F508del mutation.

The third next-generation corrector, VX659 is currently being evaluated in a Phase 1 study in healthy volunteers and CF patients and the fourth VX-445 is expected to enter a Phase 1 study next month. Most importantly, we expect to have data in people with CF from three of the studies in the second half of this year. We believe that based on our in vitro data, a triple combination of a next-generation corrector with tezacaftor and ivacaftor could provide benefit for any person with CF who has at least one F508del mutation; approximately 90% of all people with the disease.

2017 will be a year of multiple important data events that will inform us as to the potential of our CF pipeline to both enhance treatment and also treat many more people in the years ahead. We look forward to updating you on our progress in CF throughout the year.

Before turning the call over to Ian to discuss our financial position, I will briefly review the key pillars of our research strategy which is designed to support the creation of future medicines focused on serious specialty diseases that are aligned to Vertex's corporate strategy and core capabilities. First, we're going to focus on validated targets that address the underlying cause of disease, just like we did with CFTR in CF.

Second, we're committed to developing assays both at the cell level and in humans that predict clinical efficacy. Third, we're only interested in discovering and developing transformative medicines for serious specialty diseases. Taken together, we believe this will allow us to identify rapid paths for clinical trials and registration just as we have in CF.

With these principles in mind, we've refined our internal research focus to ensure that the types of molecules we may discover in research, would also be the types of medicines that we would seek to develop and commercialize ourselves. Today we are focused on diseases in our research labs that are consistent with these research principles, including Adrenoleukodystrophy, Alpha-1 Antitrypsin Deficiency, Sickle Cell Disease, and Polycystic Kidney Disease.

We look forward to updating you on these and other similar programs as they progress over the coming years. With that I will now turn the call over to Ian.

Thanks Jeff and hello everyone. Tonight I will discuss our fourth-quarter and full-year CF revenues and revenues for ORKAMBI and KALYDECO. We will also review our 2017 financial guidance.

Our total CF product revenues in the fourth quarter of 2016 were $454 million, compared to $401 million for 2015. Our full-year 2016 CF product revenues, were approximately $1.68 billion; a significant increase compared to $982 million for 2015. For ORKAMBI, we reported fourth-quarter 2016 product revenues of approximately $277 million; a significant increase compared to $220 million for the fourth quarter of 2015.

Full-year product revenues for ORKAMBI grew to $980 million in 2016 from $351 million for 2015. 2015 revenues for ORKAMBI reflect two quarters of sales following the approval of the medicine in the US in July 2015. Fourth-quarter KALYDECO sales were $177 million, compared to $181 million for the fourth quarter 2015. Full year product revenues for KALYDECO grew to $703 million for 2016S from $632 million for 2015. Now to operating expenses.

Our fourth-quarter 2016 non-GAAP combined R&D and SG&A expenses were $295 million, compared to $282 million for 2015. Our non-GAAP net profit for the fourth quarter of 2016 was $88 million, or $0.35 per diluted share compared to a non-GAAP net profit of $44 million or $0.18 per diluted share for 2015. From a balance sheet perspective, we ended 2016 with approximately $1.43 billion in cash, cash equivalents, and marketable securities.

As part of the recently announced out licensing agreement with Merck KGaA for our oncology portfolio, we will receive an upfront cash payment of $230 million that would add to our current cash position in the first quarter of 2017, further strengthening our financial position.

This agreement and the related upfront payment is subject to the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. As we significantly added to our cash position over the recent months, we remain highly focused on reinvestment into our business to support our future growth.

Internally, this means we will continue to invest in key research programs to create future medicines and externally this means business development efforts will remain focused on bolstering our position in CF expanding our non-CF pipeline with early-stage external assets, and expanding our access to important scientific technologies that could represent transformative future changes to medicine. Now to the financial guidance for 2017, which we discussed in detail in our JPMorgan press release.

For ORKAMBI, we expect $1.1 billion to $1.3 billion in total net product revenues. The low end of this range reflects potential revenues from markets where ORKAMBI is currently reimbursed, including the US in eligible patients ages six and older and outside the US, mainly in Germany in eligible patients ages 12 and older.

The high end of the range reflects an estimate of potential additional European revenues in 2017 that is largely dependent on which European countries complete reimbursement agreements in 2017 and when these agreements become effective. Stated differently, revenue growth for ORKAMBI will be driven primarily by the completion of reimbursement discussions in Europe later this year.

We continue to expect our first-quarter 2017 ORKAMBI revenues will be similar to the fourth quarter 2016, given the majority of eligible patients in the US have initiated treatment. For KALYDECO, we expect $690 million to $710 million in net product revenues; as the majority of all patients eligible for KALYDECO have initiated treatment.

Further growth for KALYDECO revenues will only be driven by potential US approval for treatment of people with residual function mutations. Additionally, we expect to combine non-GAAP R&D and SG&A expenses of $1.25 billion to $1.3 billion for 2017 compared to $1.2 billion for 2016.

This reflects investment in our CF pipeline and in our global infrastructure for KALYDECO and ORKAMBI. Our path to treating many more people with CF, which will result in significant and sustained revenue growth, is clear. Importantly, as our revenues grow over future years we are committed to managing our operating expenses to drive earnings and operating margin growth.

With that I will open the line to questions.

(Operator Instructions)

Matthew Harrison, Morgan Stanley.

Great, good afternoon. I appreciate it. Thanks for taking the question. Can I ask on VX150, not an area that I think a lot of us are as familiar with, can you put in context what you see as the key competitive hurdles and how you plan to further develop that compound?

This is Jeff, thanks for the question Matthew. This is the first time we've really spent a lot of time talking about this, the clinical results. To start off and take a step back and remind you that pain is an enormous indication, actually multiple indications around the world. There been a novel pain mechanism of action in 40 or 50 years and obviously the recent attention of some of the side effects of pain medicines like opioids has made that even a more urgent problem.

You probably also know that the Nav channels are interesting because both Nav1.7 and 1.8 have been validated genetically in humans. Meaning that patients who have homozygous lost function mutations in 1.7 really don't feel any pain, as those are the famous firewalkers, and patients who have various gain of functions in 1.8 have hyper acute pain syndromes.

So one of the reasons they are exciting to us is they fit the Vertex strategy of having a validated target in an area of large unmet need, where if you had a medicine that could have that pain efficacy without the pain side effects some of the others you'd obviously have a very important new medicine for patients. So that's the background.

We have been working on 1.7 and 1.8 actually for some time in our San Diego labs. This is the first one of those molecules we're bringing forward, 150 to 1.8 inhibitor, and in this study which was a double-blind randomized placebo-controlled crossover study, which is I think the most powerful study in pain because of the placebo effects.

What we saw was a statistically significant reduction in pain using the WOMAC scale and also a number of other secondary end-points that were all consistent with that. And a tolerability profile that actually looked quite good in 124 patients. So that tells us that it works in this chronic OA pain. Again that's very different as you know from acute pain and it's very different from neuropathic pain.

So in order to fully understand the profile of this molecule our plan is to take it forward in a couple more exploratory studies. One in acute pain starting this year and then one in neuropathic pain probably starting later this year or early next year. When we have the results from those, we'll really understand what we have here.

And then we can really make decisions about how to bring it forward to patients most quickly. Eyeing these different indications, what our involvement would be, what the potential involvement with the partner might be, et cetera. All those questions are a little bit premature. The thing you should really take away is, it's yet another novel mechanism of action potentially transformative medicine to come out of our labs and because of that and the large unmet need, we're excited about it.

And just for clarity, why not move it ahead in OA right now? Is it because of the competitive landscape or because of commercial considerations including partnering?

Yes great question. I think in pain, at least the experiences that I've had in my career is you really want to understand the molecule fully to understand how you develop it to it's fullest potential for patients. And while we could take it forward in OA now, which is a large study and actually would probably not be consistent with our commercializing it, I think we're going to create a lot more value if we first fully understand the mechanism across the three different types of pain and then we can make a really rational development plan. I still think we have a nice competitive position even when we do that.

Okay, great thanks.

Geoff Meacham, Barclays.

Afternoon, thanks for taking the questions. When you look at the 661 combo data in the first half is it more important in the near term to have a new product cycle for ORKAMBI or are you thinking about this as being the cornerstone of a triple?

Is it more of a focus on limiting bronchoconstriction rather than higher FEV1. I have a follow-up too.

Thanks Geoff. As you know, we've always talked about 661 as having at least three goals. One, exactly as you said is, if it had an enhanced benefit tolerability profile in the Delta-F508/double 508's that are currently being treated by ORKAMBI, I think that would be important because we do have a subset of those patients that had not been able to tolerate ORKAMBI due to respiratory effects and we'd be able to reach more of those patients with such a combo.

The second purpose really is around those patients who are on KALYDECO monotherapy because they have regaiting and residual function mutation. Remember 90% of those patients have a Delta-F508 on the other allele. So if you could add tezacaftor to ivacaftor in those patients and produce enhanced benefit that would obviously be very, very important for those patients.

And you will remember that we actually published a Phase 2 study a couple of years ago, in a small number of patients but it was impressive in that it showed that adding tezacaftor to ivacaftor in those patients added an additional about 4.6% increase in FEV1. And that was a significant result. If we can reproduce that in our residual function and in gaiting mutations in this larger study, that's going to be very important for that population of patients and somewhat important competitively as well, since we tried to move most of those patients onto the double regimen.

And then the final one, just as you said, is it the basis for the triple regimen. And here were going to have 1,000+ patients of safety data in particular on 661 plus ivacaftor, meaning that two of the three components would have been fully vetted in our combination and we would only have to add the one component, the next-gen corrector, which we think moves that program ahead considerably and also gives us a pretty nice competitive advantage. So I think about it with those three different perspectives and frankly all of them are important but anyone of them could be successful.

Got you and Jeff I know you have talked about the productivity of your technology, when you look at generating new correctors. What would you say is the optimal number of leads or backups? Should we expect to see more going into Phase I? Just that JPM, obviously you added 445 to the pipeline but is four next-gen enough?

I mentioned that we literally have hundreds of these now. Obviously we're not going to bring hundreds forward into the clinic. We're bringing forward molecules that we think have particularly interesting and advantageous property compared to what is there.

My hope is that at some point, maybe relatively soon, we will stop because one of these looks very, very good as it goes through Phase 2 and we're ready and off to the races and it's going to be hard to improve on it. Sort of like KALYDECO was as an example, but until we see the data I'm just happy to have multiple swings at the ball and I think you can expect potentially to see even another one come this year depending on the data that we start to generate.

Okay, great thanks.

Michael Yee, RBC Capital Markets.

Thanks, I have two questions. One is following up on 661, on the efficacy side of the equation, do you have confidence that it's at least as good as ORKAMBI? And if it was not for some reason, given there's only been short-term studies, is there a rationale for not filing in that situation and using it as a triple? If it was lower would that change your confidence on the triple overall?

And then the second follow-up question is, you are mentioning a lot of comments around business development which we appreciate are you pretty focused on very early stage stuff or should we be not be surprised if you do something different than early stage? Thanks so much.

Yes Mike, this is Jeff, I'll take the first one and then Ian could take the BD question. With respect to 661 and efficacy, the reason we're doing the study is to get the final answer in a large number of patients but the reason we're doing the study is that our Phase 2 data did support the notion that it had an efficacy profile that was as good or better than ORKAMBI. And we're going to find out in a larger group of patients for longer now.

With respect -- I think you're sort of asking what would be a positive or what would be a good result as I interpret your question. A good result to me would be a drug that's approvable with an enhanced benefit tolerability profile in one of those groups of patients that I told you about. That would be a success and a safety database that was consistent with taking it forward as part of the triple.

Michael to your BD question, as I have said many times on this call, it's really a three-pronged approach. Firstly, we look at most things pretty much everything that's involved with cystic fibrosis that maybe complementary to how we're progressing our own medicines and we usually get the opportunity to work with a lot of those, let's call them other ideas internally in our labs in San Diego and run them through our assays so we get a pretty good look at how to progress in the area of CF. That is number one priority.

Secondarily, I would say that last couple of years we have also understood how we may expand our scientific footprint in a couple of markers for progression there, the two deals recently one with Moderna Therapeutics and the other with CRISPR for gene editing. And they've allowed us different modalities, different approaches to solving some of the problems we're trying to solve.

And then to your point there is a third leg to our BD approach in corporate development and that is potentially in licensing, potentially smaller M&A but it's really focused on early stage. Our priorities today in the business as I said is about growing our -- as well as growing revenues but growing our cystic fibrosis franchise and expanding scientific modalities. Then if we can expand our efforts into other diseases, we will at the right time.

Okay. Thanks that's helpful. I appreciate it.

Brian Abrahams, Jefferies.

Hi thanks very much for taking my questions. Two questions, first, I wonder if you had any updated sense of how compliance, persistence, and tolerability in the six- to 11-year-olds compares to adults? And secondly, I know you've mentioned the NDA for tezacaftor and KALYDECO would include data from the het/min study that was discontinued.

Just wanted to follow up whether at this point you had received the data and if you could potentially provide any general sense as to trends on lung function or biomarkers or perhaps rates of AE's, including bronchoconstriction, how those looked relative to prior ORKAMBI Phase 2 and the het/min population.

Brian this is Stuart here, I'll take the question on six-to-11 compliance and persistence and really it's too early to tell in that population in terms of actual data from the real world as it were. There are some reasons to be optimistic that it could potentially be better than in the 12-plus population. A couple of reasons for that, one we know from the clinical data that we have generated for the six-to-11 population that we do see less of the respiratory adverse events that we know were so important to some of the early discontinuations we saw with ORKAMBI in the adult population.

In addition, we also know from KALYDECO indeed for many other chronic therapies that compliance in the six-to-11 patient grew not surprisingly because of the parental supervision tends to be as high as it is if not higher than it is in any other patient group. So we don't have actual data really that's mature in the real world but I think there are some reasons to be optimistic that it could be higher than in the adult population. And for the second part of your question, I'll hand that over to Jeff.

Brian, I think the second part of your question was around het/min data from the tez/iva trial. Yes. We have seen that data. By the way the data Safety Monitoring Board has also evaluated that data, at some point we will publish it. I am not going to go into detail, I would just say there were no new or concerning safety signals seen in that population of a little over 100 patients.

Thank you.

Terence Flynn, Goldman Sachs.

Hi, thanks for taking the question. Maybe first just on Stuart to follow up can you tell us what's embedded in your ORKAMBI guidance for assumptions on persistence and adherence in the younger population?

Terence, I'm actually going to take that question. We provided guidance for ORKAMBI at JPMorgan as you know and that was $1.1 billion to $1.3 billion. The assumptions that are underneath the model, we'll be more toward provide you with revenue guidance and then also updating you on timing as we gather reimbursement at the different markets.

Just a quick commentary to the $1.1 billion to the $1.3 billion though. The $1.1 billion that's the low end of our guidance range. It's principally from the US market that does assume some growth in the six-to-11 population but also does assume there are some loss of patients due to the chronic nature of this medicine.

And then the growth beyond the $1.1 billion up towards the $1.3 billion and potentially above it if it's possible, will be driven by European reimbursement and approvals in the different markets and a key contributor to the growth of the revenue line in 2017 would be France.

Okay thanks Ian. Then just one on the pipeline, I think you are expecting VX371 plus ORKAMBI Phase 2 data in the mid-point of the year maybe just help remind us what you want to see to move forward with that combination or assuming you would move forward with 371 plus 661 KALYDECO?

I will take that Terence. First of all, I appreciate you recognizing that it was a transaction that we did in terms of an in-licensing because there was something that's going to one the questions that was earlier on the call, where we were able to scan the landscape for CF medicines and we were able to work with Parion Sciences and we saw in vitro by putting the ENaC inhibitor together with our own medicines we actually an additive benefit in our in vitro assay.

That's why we moved forward with that transaction. We are happy to say we are now in Phase 2 where we are studying the ENaC inhibitor with our ORKAMBI combination in 508/508 patients and we expect that data in the second half of the year.

Data to move forward obviously we would want to see a proof of concept of the combination of the ENaC inhibitor with ORKAMBI in the 508/508 patient and we'll be looking for risk-benefits and progressing based on that proof of study concept.

Okay, thanks a lot.

Cory Kasimov JPMorgan.

Good afternoon, thanks for taking a question. I actually have two of them for you as well. First of all, now that the list price has been published in Germany, can you discuss how that may or may not impact or facilitate pricing discussions with other European countries and then the follow-up is when we could perhaps expect to start hearing of progress on the gene editing and/or mRNA fronts. Thanks.

Sure Corey. As we've said we have come to a pricing agreement with general authorities at the back end of last year, which became public in the middle of this month and we're pleased to have reached that point with the German authorities.

In terms of the impact it's likely to have on other negotiations, well firstly it shows that we are able to come to an agreement with a very major market in Europe. It certainly puts a benchmark out there in terms of a price because that price is in the public domain and I hope it's certainly going to encourage governments in the interests of the patients in their countries who were waiting to get access to this great medicine that it's going to encourage them to act with a sense of urgency.

Exactly what that means quantitatively, is really very hard to say, but hopefully it encourages other governments to act as the German government has.

And Corey I'll take the second part on gene editing and mRNA therapy, as you remember with the CRISPR collaboration in gene editing its a multi-indication collaboration. We have six indications that we can choose from, we have announced two; which is CF and hemoglobinopathies. You've probably seen that CRISPR has recently announced their intention to try to get the hemoglobinopathy program into the clinic later this year.

We have been really pleased with how that's going. That's obviously a bit of an easier problem because it affects the [emo] gene editing. We're continuing to work on CF and as we get products that we think are approaching the clinic, we will start to tell you about them. It was somewhat similar with Moderna, Moderna has been a more recent collaboration where we are looking at CF only right now and as we get products that actually we believe to move into the clinic, we will start to give you updates on some of those time lines.

Okay, thank you.

Mark Schoenebaum Evercore ISI

Hi, thanks for taking the question. I was wondering back on ORKAMBI could you just give us an update as to where you are in French negotiations and remind us how big that market is? I think the news on 150 is great today, so just a question to make -- reduce my workload because I'm lazy, is there anything else outside of CF that we could see this year that could pop up like this that we should be aware of and thanks for everything while I was out. Thanks for helping out my team.

Mark, first of all this is Jeff, welcome back that's most importantly. I am going to let Stuart answer your first question. I will come back on your second one.

Mark, in terms of where we are in France. As you know these negotiations, while they are different country by country, all follow the same process, they have clinical benefit assessment, a health technology assessment, and then a pricing negotiation and in France, as with most of the other markets in the EU we are in that third phase of negotiations with France; talking about the specific pricing and reimbursement parameters, so that's the phase that we are in right now.

And we're looking forward to trying to bring those to a successful conclusion for the patients in France, many of whom are already enjoying the benefits of ORKAMBI.

Let me take the second part of your question mark. I don't want to steal all our thunder. We like some of these surprises but just give you a little bit of a survey of the landscape.

First of all as you know out-licensed our flu compound to J&J. They have been progressing that compound nicely and so is it possible over the next year or so you'll start to hear some more proof of concept there, we're obviously going to let them speak for the time lines but I think it's possible. Oncology, we just out-licensed four assets to Merck KGaA. One of those is in Phase 2 and again depending on how they progress the program, I think you could hear some proof of concept there.

The proof of concept -- most important thing for us is going to be the proof of concept studies with the next-gen correctors, which you will definitely hear in the second half of this year. And then I would say stay tuned for maybe another program or two to enter the clinic this year but we are going to surprise you with those.

Take care. Thanks.

Geoffrey Porges, Leerink Partners.

Thanks very much for taking the question. Stuart or Ian could you give us a breakout of revenue for KALYDECO and ORKAMBI, US and ex-US? And then the updated patient starts for the two products if you will? And then secondly just going back to the 150 and the pain target.

I'm looking at your own pipeline strategy criteria Jeff and wondering how developing a treatment for osteoarthritis fits with these criteria, particularly given the target, it's early stage, it's really a widespread disease, it's a chronic indication. So should we assume that ultimately that that might be a partnering candidate as well given that strategic focus?

So Geoff I will answer on the US, ex-US split. In Q4 of the $177 million that we reported for the fourth quarter, $101 million of that was in the US, $76 million of that was ex-US, so that's the KALYDECO Q4 numbers and that was essentially the same split for the full year. For ORKAMBI of the $277 million in Q4, $248 million of that was US and $29 million of that total was ex-US.

And the 150 question, it's -- I think your question was about strategic fit and commercialization, sort of divided into two parts. There is our research strategy, that you probably heard me and David R Schuyler talk about that a fair amount over the last year or so that is a focus on serious diseases with unmet needs, to look at validated targets where you have assays that predict response, and where you can make a transformative medicine.

And actually pain in general and mad channels fit those beautifully. They are fully validated targets on a serious disease with large unmet need where you can transformative medicine. Then you come to the commercial and development strategies. Pain is an area we can develop, but pain isn't really one disease as I said.

Pain is a number of different diseases. OA is a very different disease as you know from neuropathic pain, mad's a very different disease from acute pain, and there are different medicines that work with different degrees of efficacy in those diseases. So I would think of pain as a legacy program that fits our scientific strategy extremely well and depending on what the profile of the drug is, might fit parts of our commercialization strategy or might be more appropriate with a partner, but until we know the whole profile which is easy and cheap to determine at this point, we won't be able to come up with a strategy for how to create the maximum value from the asset. Once we do I think it will be pretty straightforward actually.

Great, thanks very much.

Alethia Young, Credit Suisse

Thanks for taking my question. One on 661, when you thought about powering the study for 661 homozygotes were there different assumptions in how you thought about it with 809? The reason why I ask is, if I recall correctly, I thought the 809 had two arms where you split the power and then I have one quick question on the residuals.

On the 661 strategy, the size of the homozygote study which I think is what you're really asking me about, was driven more by the necessary size of the safety database than it was by the powering for efficacy.

Because we need a total safety database which includes all the different trials, sufficiently large to get approval. And the biggest part of that turned out to be the homozygotes because they are the biggest population and therefore the easiest to enroll the fastest. So that's what really drives the size of that study, it is highly powered as it is.

And then on the residual study that's underway with 661, I know you said you were still in discussions with the FDA but can you help us think about what might be compelling data or fileable data more specifically?

Sure I do want to separate those two a little bit. The discussions that we're having with the FDA now are really around KALYDECO monotherapy, based upon our initial submission which contains a lot of in vitro data in the 23 different mutations as well as a small clinical study.

As you know we received a complete response letter from that initial application in February of last year and we been in discussions with them since then, because we feel there is sufficient data to very clearly show that the drug works. It's monotherapy in those patients, so that's one set of discussions which you should think of as separate from the new trials that we are talking about.

The new trials that you were talking about are part of the 661 program and in that particular residual function trial, there is a placebo arm, KALYDECO monotherapy arm, and a KALYDECO plus tezacaftor arm. So we are going to actually be able to see compare those three, if you will, and that data would hopefully provide the basis for submitting either KALYDECO monotherapy or dual therapy or both in the US and Europe and that's the data that we will see in the first half of this year. Is that clear how the two things are a little bit different?

That's helpful. Thank you.

Operator we have time for two more questions.

Ying Huang, Bank of America Merrill Lynch.

Thanks for taking my question. Number one I want to probe a little more about these six- to 11-year-old in the US. Given the number at 2,400 patients, I'm a little surprised you do not expect much incremental growth for ORKAMBI from 4Q 2016 to 1Q and another question on the VX-659, because the trial protocol has been posted on clinicaltrials.gov, you are excluding patients or healthy volunteers with any childbearing potential. So just curious did you observe any preclinical reproductive (inaudible) molecule or not? Thanks.

Hi Ying, it's Ian. Remember JPMorgan? I think you asked the very same question. We provided guidance in [4Q1] and that was we stated that we expected Q1 for ORKAMBI to be similar to that of Q4 2016.

And in that assumption, we are trying to help folks like yourself understand how the revenues may flow in 2017, with helping you understand that the low end of the guidance is still of revenues are coming from those approved markets, in those approved indications or patient categories that we're already in.

Within that assumption there is some expectation of growth but we are already treating the vast majority of the patients within those categories, so even though we may add new patients in the growth, it is somewhat offset by the loss of patients that are already chronically on the medicine or were chronically on the medicine.

We're also trying to help you understand that as we go out through the year, if the low end of the guidance is at $1.1 billion, we do expect that to be the exit run rate of 2016 and the earlier part of 2017, because we anticipate the growth which would be mainly from ex-US markets and principally Europe. That would be in the second half of the year, as I mentioned earlier on the call, a key contributor to that is actually France. So we're still in the same position and the same discussion we had back at JPMorgan.

So Ying on 659, a question on repro tox, we don't have the preclinical repro tox data yet and so the exclusion merely represents the typical caution until we have that data.

Got it. Thank you.

Phil Nadeau, Cowen & Company.

Good afternoon, thanks for taking my questions and fitting me in. Just two, first on Germany, in the past at some point you thought that there was some hesitation among physicians to prescribe ORKAMBI to patients in Germany without a final price. I'm curious whether you think that impediment continues to exist and now that you have the final price will there be an uptick in the use in Germany? That's the first question.

And then the second question is on the study looking at KALYDECO plus tezacaftor versus KALYDECO and placebo, in the residual function patients. Is there any requirement for that study to show a benefit of KALYDECO plus tezacaftor over KALYDECO monotherapy alone or is it really the relevant compare versus placebo in order for that label to secured? Thank you.

It's Stuart here, I'll take your question on Germany. Actually we don't believe that the hesitation to prescribe has been due to uncertainty about the final price that we would agree in Germany. The relatively slow uptake we've seen a Germany I think is due to a couple of things.

Notably the lack of experience, that many senses had with CFTR modulators at the launch of KALYDECO because of the fragmented nature of the market. And because in general a more conservative nature and approach to new medicines in Germany in many -- in that market compared to other markets in Europe.

And so I'm not really expecting the fact we been able to reach a final pricing agreement with the German authorities significantly changed the perception of ORKAMBI in the eyes of German physicians.

This is Jeff on your 661 residual function question, with each of the arms KALYDECO monotherapy and 661 plus KALYDECO will be compared to the placebo arm and in terms of what would be required to get approvals, it's really going to depend on the profiles of each of those.

It's not only about efficacy, it's about tolerability, it's about the overall profile. So when we see the data I think we will be able to give you a pretty good sense which directions we're going to take there.

Great thanks for taking my questions.

Now we will conclude our call. This is Michael Partridge. Thanks for your questions tonight. Thanks for tuning in. The Investor Relations Team is available for any follow-up that you have after the call. Enjoy the rest of your evening.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect.