Vertex Pharmaceuticals Inc (VRTX) — Q4 2017 Earnings Call Transcript

Good evening. This is Michael Partridge, Vice President of Investor Relations for Vertex. We're pleased to be able to talk with you tonight about our Fourth Quarter and Full Year Financial Results for 2017 and about our continued progress with the long-term leadership in the treatment of cystic fibrosis. Dr. Jeff Leiden, Chairman and CEO; Dr. Jeff Chodakewitz, Chief Medical Officer; and Ian Smith, Chief Operating Officer, will provide prepared remarks this evening. Stuart Arbuckle, Chief Commercial Officer will join us for Q&A. We recommend that you access the webcast slide as a supplement to the information from today's press release. These slides are available for download on the Investor Relations Page on our website. This conference call is being recorded and a replay will be available on our website. I will remind you that we will make forward-looking statements on this call. These statements are subject to the risks and uncertainties discussed in detail in today's press release and our filings with the Securities and Exchange Commission. These statements including without limitation those regarding the ongoing development and financial commercialization of any combination management of cystic fibrosis, Vertex's other cystic fibrosis programs, and Vertex's future financial performance, are based on management's current assumptions. Actual outcomes and events could differ materially. I will now turn the call over to Dr. Jeff Leiden.

Thanks, Michael. Good evening everyone. Today is a special day for everyone at Vertex and for the CF community, as it marks the sixth anniversary of the FDA approval for our first CF medicine KALYDECO. When KALYDECO was first approved in 2012, only 1,200 people worldwide were eligible for medicine to treat the underlying cause of their disease. Today, the number of people eligible for one of our CF medicines has grown to 34,000 worldwide and we will continue to expand the number of eligible patients in 2018 and beyond. In the past few years, and especially in 2017, we have made remarkable scientific progress that has moved us closer to achieving our ultimate goal in CF. We developed highly effective medicines for all people with the disease. In today's announcement that we have selected two next-generation correctors to advance into Phase 3 development as part of two different triple combination regimens, we've taken a significant step towards achieving that goal. I'd like to begin by acknowledging everyone who has helped to bring us to this important milestone in our more than 15-year journey to develop new CF medicine. I would especially like to thank the patients, families, and CF caregivers, for their unwavering support, as well as employees at Vertex for their commitment to this program. The data announced today are remarkable and demonstrate the potential for significant and consistent clinical benefits in patients with one F508del mutation and a minimal function mutation when treated with a triple combination regimen containing either VX-659 or VX-445. We remain focused on bringing forward the best triple combination regimen to patients as quickly as possible. Based upon the totality of the data collected today from four different triple combination regimens, and more than 200 people with CF, we believe that both the VX-659 and VX-445 regimens have highly compelling profiles for late-stage development. Therefore we have decided to advance both regimens into Phase 3, one of which we plan to evaluate at a once-daily regimen. We're having productive discussions with the FDA regarding Phase 3 programs for both triple combination regimens. We look forward to finalizing the design of these programs and remain on track to begin the first Phase 3 studies of a triple combination regimen in the first half of this year. As I look back over the past year, we made tremendous progress across all parts of our business and have positioned the company for further success. We continue to increase the number of patients eligible for and treated with our approved medicine which is driving significant revenue. We expect this revenue growth to continue which will in turn also drive significant earnings growth. We reported positive Phase 3 data for the combination of tezacaftor and ivacaftor and are awaiting FDA approval for this important new treatment option which will be a significant contributor to revenue growth beginning this year. We provided further hope for those still awaiting a new medicine, the cause of their CF with the selection of two next-generation correctors to move into Phase 3 development as part of triple combination regimen. And beyond CF we are preparing to begin clinical development of CTX001 in two devastating diseases Beta Thalassemia and Sickle Cell Disease, with our partner CRISPR Therapeutics. We also expect to move one or more potential medicines from our internal research programs into clinical development in other diseases this year. I look forward to updating you on our continued progress over the coming year and will now turn the call over to Dr. Jeff Chodakewitz to review today's announcement in more detail.

Thanks, Jeff, and good evening. I'm very pleased to share the initial results from the ongoing Phase 2 studies of the VX-659 and VX-445 triple combination regimen and to review our plans to advance these two different triple combination regimens into Phase 3 development. The initial Phase 2 data reported today are extraordinary from both an efficacy and safety perspective. Collectively, our Phase 2 studies in more than 200 CF patients provide compelling evidence of the significant clinical benefit that triple combinations may provide the CF patients. All four of our next-generation correctors were advanced into development out of our own labs based not only on their in vitro efficacy profile but also on their drug-like properties, including PK profiles, minimal drug interaction potential, ability to be co-formulated with tezacaftor and ivacaftor and others. All of the Phase 2 data generated to date have validated the rigorous selection criteria we use. We are today reporting top-line safety and tolerability data as well as efficacy information as measured by mean absolute within-group change and percent predicted FEV1, sweat chloride, and CFQR data for the patients with a minimal function mutation from each study. First to the Phase 2 data for the VX-659 triple regimen. This study evaluated VX-659 in combination with tezacaftor and ivacaftor or triple placebo for four weeks. 53 patients received one of three doses of VX-659 in combination with tezacaftor and ivacaftor. Across the study, the combination was generally well tolerated and the overall safety profile was favorable. The majority of adverse events were considered mild or moderate. There were no discontinuations due to adverse events. One patient interrupted triple combination dosing due to a rash which resolved following interruption of treatment. The patient restarted and completed triple combination dosing without any further rash. In the patients who received this triple combination, we observed significant improvements in lung function of 10.2, 11.6, and 13.3 percentage points across the three dose groups that were evident by the second week of the treatment period and sustained through the four-week dosing period. With sweat chloride, we saw significant decreases of 45.8, 43.7, and 51.4 millimoles per liter for the triple combination dose groups. These were the largest decreases in sweat chloride observed for any of our triple combination regimens to date. We also observed significant improvements in patient-reported respiratory symptoms of 24.6, 19.8, and 21.8 points for those on the triple combination regimen as reported in the CFQR respiratory domain score. I will now turn to the Phase 2 data for the VX-445 triple regimen. This study evaluated VX-445 in combination with tezacaftor and ivacaftor or triple placebo for four weeks. 53 patients received one of three doses of VX-445 in combination with tezacaftor and ivacaftor. Across the study, the combination was generally well tolerated and the overall safety profile was favorable. The majority of adverse events were considered mild or moderate. There were two discontinuations from the treatment groups due to adverse events and none in the placebo group. The treatment discontinuations occurred in the VX-445 100-milligram dose group. One of the treatment discontinuations was due to increased bilirubin with concomitant transaminase elevation which was observed on the final day of dosing. The patients' bilirubin levels returned to baseline during the safety follow-up period after discontinuation of treatment. The second discontinuation was due to rash and following discontinuation of treatment, the rash resolved. In those who received the VX-445 triple combination regimen, we observed significant improvements in lung function of 11.1, 7.8, and 13.8 percentage points that were evident by the second week of the treatment period and sustained through the four-week dosing period. With sweat chloride, we saw significant decreases of 38.2, 33.2, and 39.1 millimoles per liter for the triple combination dose groups. We also observed significant improvements in patients reported respiratory symptoms of 20.8, 15.4, and 25.7 points for those on the triple combination regimens as reported in the CFQR respiratory domain score. I would also note that we conducted post-dose spirometry evaluations for both of the triple combination regimens in these studies and observed no evidence of bronchoconstriction. The Phase 2 studies of the VX-659 and VX-445 triple combination regimens are currently ongoing in patients with two F508del mutations. An additional part of each study is evaluating a potential once-daily regimen that contains the once-daily potentiator VX-561 in place of twice-daily ivacaftor in patients with one F508del mutation and one minimal function mutation. These parts of the studies are fully enrolled and the remaining data from each of the Phase 2 studies are expected in the first half of 2018. Data from across our portfolio of next-generation correctors received to date show that the potential benefits of treating the cause of CF with triple combination regimens are clear, and support the rapid advancement of the VX-659 and VX-445 triple combination regimens into Phase 3 development. Our strategy of advancing both VX-659 and VX-445 into Phase 3 gives us the opportunity to generate data from two different triple combination regimens, including one that may be dosed once daily and pick the best regimen to bring to patients as quickly as possible. Our discussions with the FDA regarding our Phase 3 program for triple combination regimens have been productive and we have already shared with the FDA the available data for the VX-659 and VX-445 triple combination regimen. We are now focused on finalizing the design of the Phase 3 programs and we remain on track to initiate the first Phase 3 program in the first half of 2018, upon completion of these discussions. We plan to conduct two separate studies for each triple combination regimen, a study of each regimen in people with CF who have one F508del mutation and one minimal function mutation, and a study in those with two F508del mutations. Following the initiation of the Phase 3 studies with the VX-659 triple combination regimen in the first half of 2018, we plan to initiate the Phase 3 studies for the VX-445 triple regimen in the middle of the year. We plan to evaluate VX-445 in combination with tezacaftor and the once-daily potentiator VX-561 as a potential once-daily triple combination regimen, pending the Phase 2 data for this regimen, and also the completion of a long-term non-clinical toxicology studies for VX-445. In addition to evaluating each triple combination regimen in the studies I just discussed, we also plan to evaluate each of these triple combination regimens in patients who have one F508del mutation and a second gating or residual function mutation. These studies are planned to begin in the second half of 2018. Once our FDA discussions are complete, we look forward to updating you with more details regarding the specific designs of the study. Before I close, I'd like to thank everyone who took part in these studies for their commitment to helping us advance the treatment of CF. I'll now turn the call to Ian.

Thanks, Jeff, and good evening to everyone. 2017 was an outstanding year for Vertex and tonight I'm pleased to review our fourth quarter 2017 financials, and our 2018 full-year financial guidance for combined non-GAAP R&D and SG&A trends. Revenues first. Total CF product revenues of $621 million in the fourth quarter 2017 represented a 37% increase compared to $454 million we recorded in the fourth quarter 2016. Our product revenues grew each quarter throughout 2017 as we increased the number of patients treated with our approved medicine. Today, we estimate we have initiated therapy in over 17,000 of the 34,000 patients eligible for our medicine. We expect eligibility and the number of patients we treat to continue to grow throughout 2018. ORKAMBI reported fourth quarter 2017 product revenues of $365 million, a 32% increase compared to the fourth quarter of 2016. The growth in 2017 was driven by the continued uptake of the medicine globally, particularly in children ages 6 to 11 in the U.S. Fourth quarter 2017 KALYDECO revenues were $206 million, a 44% increase compared to the fourth quarter 2016. This significant growth in 2017 was driven by the rapid uptake of the medicine by patients in the U.S. with a residual function mutation following the label expansion of these patients in mid-2017. Our fourth quarter 2017 non-GAAP combined R&D and SG&A expenses were $355 million compared to $295 million in the fourth quarter of 2016. This increase was primarily due to the continued acceleration and advancement of our portfolio of triple combination regimens with CF and the investments to support the treatment of patients with our medicines globally. Non-GAAP net profit for the fourth quarter 2017 was $158 million compared to non-GAAP net profit of $88 million for the fourth quarter 2016. The increase in non-GAAP net profit was largely driven by the strong growth in total CF product revenue. Our financial performance in 2017 has resulted in a full year non-GAAP operating margin of 26% compared to 17% for the full-year of 2016. As we continue to increase the number of patients that we treat with our medicines we expect our operating margins to continue to expand in the future. We also strengthened our balance sheet during the year, as we ended 2017 with approximately $2.1 billion of cash, cash equivalents, and marketable securities compared to $1.4 billion at the beginning of the year. This increased cash position was after we paid down $300 million in the first quarter 2017 that was outstanding under our revolving credit facility. Now turning to guidance. We provided financial guidance for combined non-GAAP R&D and SG&A expenses. As we have stated previously, we expect to provide 2018 revenue guidance when we receive FDA approval for the tezacaftor/ivacaftor combination. The FDA action date is February 28, 2018. When we provide revenue guidance it will be for total CF product revenues and will not include guidance for individual products. We expect significant CF product revenue growth in 2018, driven by the launch of tezacaftor/ivacaftor in the U.S. for eligible patients 12 and older, and we will treat more patients with ORKAMBI in countries outside the U.S. As we think about the first quarter 2018, we anticipate revenues will be impacted by higher gross-to-net revenue adjustments that we experienced in the first quarter of each year and by channel inventory build that occurred in the fourth quarter 2017. Now to operating expenses. In 2018, we expect combined non-GAAP R&D and SG&A expenses of $1.5 billion to $1.55 billion. The key investment drivers are the execution of pivotal studies for two triple combination regimens, supply chain investment for the potential commercial success of the triple combination regimen, and incremental investment to support the planned launch of tezacaftor/ivacaftor. As we anticipate our revenue growth will significantly exceed the increase in our operating expenses, we do expect operating margins and earnings to continue to expand in 2018. 2017 was a transformative year for Vertex and the continued execution across all parts of our business has positioned us to deliver sustainable revenue and earnings growth as we significantly increase the number of patients we treat with our medicine. With that, I will now open the line for questions.

Thank you very much and congratulations guys on the expected results and the spectacular Phase 2 data. I was particularly struck by one number which was a 51% sweat chloride response which was quite remarkable. Perhaps Jeff could you comment a little bit about what appears to be the difference between 51% and 39% sweat chloride response and is that suggesting to you that 659 might be a little bit more active and potent? And then, could you also comment on why no 561 plan with 659 since it looks as though 659 is a little bit cleaner, a little bit more active; why wouldn't you want to be planning on doing a 561 combination? Thanks, appreciate it.

Yes, Geoff, this is Jeff Leiden. Thank you for both questions. Let me address the second one first; it’s a strategic portfolio question. I want to remind you that our goal is to provide the best treatment for these patients as quickly as possible. That's one reason we're advancing two regimens into Phase 3. As you noted, both appear very promising, and all four of our regimens have results that are strong enough to move forward. We're advancing two to mitigate the risk of rare off-target toxicity associated with the next-gen corrector in one of these regimens. By pursuing two options, we reduce that risk. Regarding your question about advancing one regimen with ivacaftor and one potentially with VX-561 — and I say potentially because we still need to confirm that with our VX-561 results — the reasoning is similar; it helps to mitigate risk. VX-561 is quite similar to ivacaftor, but it is a different chemical compound. We’ve only seen it in a small number of patients. I would prefer not to rely entirely on that option and risk encountering an uncommon tolerability or safety issue with ivacaftor that could delay both programs. So we reduced that risk. Ultimately, if we conclude that VX-659 and ivacaftor is the best regimen, that's the one we plan to move forward with and commercialize. We believe we can quickly transition to a once-a-day regimen with VX-561 using some bioequivalence data. We are utilizing a portfolio strategy to manage both of these risks, and we have a plan to achieve that once-a-day regimen whether VX-659 or VX-445 becomes the preferred option.

Great, thanks Jeff. And anything in the difference between the sweat chloride and the FEV1?

Yes, thanks for pointing sweat chloride. As you know, we always talk about FEV1 and sometimes out of breath and neither as sweat chloride. One of the things that's really impressed me about the next-gen data in general is the sweat chloride drops we are seeing. Remember this is an augmenting the most difficult-to-treat patients with only one F508 allele and we're seeing drops of 40 to 50 millimoles, and north of 50 millimoles, which is truly remarkable. I think it suggests that we are really very effectively getting at the underlying cause of this disease which is what is so reassuring about the consistency of all these data. I don't think there are differences, honestly, between 40 and 50 millimoles in this number of patients that we put ahead on if they're both really profound. When it comes to picking regimens, it's really not any one value; it's not just sweat chloride; it's not just the FEV1 response; it's the totality of the profiles. The good news is they all look very, very good. We are picking a bit between sirloin steak and filet mignon here, but it will take these in the end to take the winner based upon the totality of the profile, both efficacy and safety, tolerability.

Thanks for the question and congrats on all the announcement of data today; it's a two-part question. First was maybe just comment on the dose response and the tolerability profile of the two programs; it seems like there’s sort of a dose response, but also maybe not really clinically meaningful? And then the second part of that is maybe just comment on the Bilirubin case and then as it relates to the Phase 3 design; rather than asking about the duration of efficacy of Phase 3, maybe just remind us what's the precedent for filing on duration of safety and how much safety you would need to file these types of things or win these types of things? Thanks so much.

Thanks, Mike. I'll address the first part regarding the tolerability of dose response. I'll let Jeff discuss the Bilirubin aspect before I return to the safety and timing question. First, concerning dose response, I find it impressive that we examined four regimens at multiple doses, and they performed remarkably well. In this 20, 22, 40, or 50 patient study, every case except one shows a clear dose response, whether we consider sweat chloride or FEV1. The compounds behaved consistently in this respect. The outlier you're mentioning is the 100 milligram dose of 445, where the FEV1 and sweat chloride responses are similar to those of the 50 milligram dose. However, when we increase to 200 milligrams, we see a significant change. We were curious about this and focused on understanding exposure response rather than just dose response. We reviewed exposures across all studies, especially this one. Interestingly, the exposures for the 50 and 100 milligram doses of 445 are quite similar, and both FEV1 and sweat chloride responses align closely with those confidence intervals. With the move to 200 milligrams, we observe a clear distinction and an increase in both exposure and responses. Thus, 445 also displays consistent behavior, particularly when we consider the relevant aspect of exposure versus response. Regarding tolerability, I will allow Jeff to address Bilirubin shortly. One reassuring point is that we observe excellent tolerability across all doses. There is no indication of any tolerability issues related to dose or exposure with these compounds, which gives us confidence in the therapeutic index. This will facilitate our selection of optimal doses for each compound as we proceed. Now, let's turn it over to Jeff for the tolerability discussion.

Sure. I do think that consistency across the dose range is really very, very telling. Mike, in terms of your specific question on Bilirubin, I think the really key point here is that this was an isolated finding. There was no evidence of transaminase elevations or any other findings about the liver as you heard actually with interruption that rapidly resolved, and the one patient actually restarted and continued on without any further elevation. That's really a pattern that isn't clinically concerning, so we don't see it as an issue.

Finally, your duration of Safety day question, as you know, we don’t really speculate on that's an FDA or European Regulator decision at the end of the day. I can point you to our historical data where we've been between six months and a year of safety data in most of these studies, but these are the sessions we’re having with the FDA. I think the important point is that this is a medicine; these medicines would be things we are asking children to take for the rest of their lives. We want to make sure that we have a complete safety dataset that we're comfortable with and that regulators are comfortable with. The efficacy and safety ratio at the end of the day will be the decision-making.

Hi guys, thanks for the question. I also wanted to offer my congrats. Just ask two questions a little bit different way. I know the goal here ultimately is to maximize FEV1, but it's also obviously to get to a positive risk-benefit as quickly as possible. How do you guys balance those two and what do you think the upper end of an FEV1 could be? I’m just trying to think down the road competitively when you have perhaps new therapy or other combinations available in development? Thanks.

Let me answer they are a bit related, Geoff. First of all, just to be clear, while FEV1 is an important indicator of acute benefit, our goal is actually bigger than that, and we measure efficacy in this disease not only by FEV1 but by long-term efficacy results that we have been seeing very clearly with both KALYDECO and ORKAMBI. That includes decreases in the slope of the decline of the lung function curve; it includes hospitalization, pulmonary exacerbation, and IV antibiotics, all of which are very favorably impacted by both KALYDECO and ORKAMBI. At the end of the day, it's really the combination of the acute response you can get and all of those chronic things determine what we would create as success in CF. That's particularly true as you move back to the younger age patients. There may be and likely will be a ceiling on acute FEV1 in a 30-year-old patient who starts with an FEV1 at 50 because they have structural lung disease and you won’t be able to reverse that. It's a very different story in a young two-year-old or one-year-old who is starting with an FEV1 at 95 or 100, where you're really trying to do something different there; you are preventing the disease or modifying the course of it, and of course that's our ultimate goal. Acute FEV1 is one measurement, and it depends a little bit on who you are treating as to what the ceiling will be. I don't think we have fully explored that ceiling yet; one of the things we want to do. I want to be really clear that the long-term goal is much more than acute FEV1; it's really modifying the course of the disease long-term as measured by all the things I just told you about. One of the reasons we want to look at that with the triple is this may be the last time that anyone can do a placebo-controlled trial of a CFTR modulating therapy. Obviously, those longer-term endpoints are going to be very useful and very interesting and important for us to measure.

And Jeff, just as a follow-up to that, as you guys have great technology looking at cellular assays and pulmonary assays, I mean, once you get into the clinic with these Phase 3s, what is the interest or focus level on getting some proof-of-concept data and things like IVF or COPD, something pulmonary but not quite CF, or have you guys not gone down that path yet?

Yes. I was expecting a different question about whether we are still working on improving correctors. So let me clarify that. The answer is yes. We understand from natural experiments that if you are a carrier, meaning you have one mutation but a normal allele, your chloride transport is about 80% of normal. We know you do not develop the disease. We believe that if we can bring everyone to carrier status with a triple regimen, and we are making progress with some of these regimens, we can treat early and actually convert patients into carriers, which is our ultimate goal. We will keep working on better next-generation correctors because we see that we can still enhance efficacy. Regarding IVF and COPD, our main focus is currently on completing the work in cystic fibrosis. We aim to provide these triple therapies to everyone with one 508 or two 508 alleles, which will keep us busy over the next couple of years. Once we complete that work, we will consider other potential applications for these medicines, but for now, we are prioritizing cystic fibrosis.

Good afternoon. Maybe I would add my congratulations on good data in the quarter, first scientific one then a financial one. On the scientific side, you mentioned that the compounds are well tolerated, but you did note some pulmonary type side effects in the adverse events. Can you talk a little bit about the characteristics of those pulmonary side effects? Were those kind of like what we've seen with KALYDECO where it’s clear that the lungs have been cleared and that's what gives rise to the sputum and coughing, or were they of different characterization?

So thanks; it's Jeff Chodakewitz. No, I think you have it exactly right. In fact, it was things like cough and sputum clearing that really they reported as adverse events, but we actually think of them almost as a marker of potential effects of the underlying pharmacology that we're trying to achieve. That's really the way. I would say just one other comment that we look very specifically, as we mentioned in the prepared remarks right from the beginning of these studies, to look for any kind of post-dosing decreases in FEV1. We've got all that data and there is nothing there. The pattern is exactly what you're describing.

Okay. Then second on the side effects you mentioned that there is really nothing concerning about the Bilirubin or rash. Was there anything confounding in those patients that could have given rise to those side effects that was not trigger-related?

No. Remember, which is a good thing, there were very small numbers of people with any of these adverse events we’re talking about. I think it's really too early to tell whether there are any other confounders. But again, the important thing is that they were generally mild to moderate, they resolved quickly, and as we told you, the safety profile is very favorable.

Sure. Thanks for the question, Phil. When you look at consensus coming to the call even though we won't be giving guidance, we thought that question may come up. And so, firstly, I would say that the number that we see in the consensus for 2018 does reflect growth which is consistent with how we think about 2018. Obviously, we are waiting on the approval of tez/ivacaftor; that will be the major growth factor for the 2018 revenue line. So as we look at that consensus number, we like where it is; it's consistent with how we’re thinking about it. We will give you greater clarity once we get the approval in tez/ivacaftor. I would take this opportunity to remind those who are on the call that it is our intent to give 2018 revenue guidance, but that would be a total CF revenue guidance. With the approval of tez/ivacaftor we should see switches from ORKAMBI to tez/ivacaftor, we should see going from KALYDECO to tez/ivacaftor. So for us, the guidance will be total CF revenues. Consistent with some of my remarks made on the prepared remarks, I would just ask people to work with our IR group after the call to think about the models through the year. Q1 we do anticipate being affected by the inventory build that would have occurred in Q4 of 2017, although we're still committed to growth driven by the approval of tez/ivacaftor.

Yes, but it wasn't very big. I’ll give you a comment on the nature of it. So in the U.S., given how the New Year felt there was some inventory stocking in the U.S. In Europe, there was some forward buying around Europe that would not normally have occurred in Q1 that was actually pulled forward into Q4. The size of it, it's around $10 million to $15 million. If you think about how that gets pulled into Q4, it has a double impact in terms of helping Q4 but offsetting in Q1. Obviously, we still have a great Q4 number so the demand is strong, more patients are going on drug and compliance is good.

Hey guys. Thanks for taking my question. Congrats on the very telling data. Maybe we'll start with the triple. Just when you talk about European reimbursement and the portfolio deals, do you think the long-term data you're generating over time in real-world experience will drive these combinations? Or is it a combination of all things? And then the second question is just as far as the sickle cell program with CRISPR; what is the next step maybe taken in the U.S. for an IND filing? Can you give us any updated thoughts around design things?

Yes, Alethia, it's Stuart here. I'll take the first question, and then Jeff Leiden will take the question on sickle cell, so. I think one of the driving factors behind governments being interested in these portfolio arrangements is the rapid progress they can see that we are making in developing treatments that treat the underlying cause of the disease in up to 90% of patients. Yes, that's been one of the most compelling things to governments around the world; they've been interested because they can see the rate of progress we're making and how good the results are that we're seeing in these patients. So that's been certainly a very strong drive to them wanting to talk about portfolio-type arrangements.

It's Jeff Chodakewitz here. I want to provide a quick update on sickle cell. As you know, we filed with CRISPR the Clinical Trial Application for beta thalassemia at the end of 2018. We are currently working with CRISPR to prepare the Investigational New Drug application and expect to file it this year. Following that, we plan to initiate studies on both sickle cell and beta thalassemia. However, we need to advance further in this process before we can provide a more precise timeline.

Just follow-up on that. I mean is there any different conversation around bringing these programs into the clinics between U.S. and Europe?

The Beta thalassemia program will be done in Europe, and the sickle cell will program will be done primarily in the U.S.

Hi, thanks for taking the questions. Congrats on the quarter. Maybe can I ask you to look at the FDA requirement on the Phase 3? Given the data you have seen so far, including today's efficacy in Phase 2 as well as the Phase 2 designation. Do you guys think the FDA will require the same amount of safety data as well as the same duration for efficacy analysis in the Phase 3? And then also on the rash and bilirubin; did that happen in the lower dose or higher dose of those two trials? Thank you.

Yes, it’s Jeff Leiden; I’ll answer your first question. I think we learned a lot during these CF trials as the FDAs as we worked together over the last six or seven years through a number of different medicines. As you know, for example, we tend to see the full FEV1 effects within 48 weeks, and everything that we're seeing here suggests that is going to be true as well. I think that in general the efficacy time points can be on the shorter side; in other words, you don't need six months for your data. On the other hand, safety is obviously very important here as well, and you don’t get a read on safety data in four weeks or eight weeks, so it’s likely going to be longer. That's exactly what we’re discussing now, which is what is the length of each one of those endpoints, particularly the safety database, how big should it be, and how long should it be? As soon as we know that we will let you know.

In response to your question about dosage, it was actually a mix of doses and exposures, with no clear connection observed.

Hi, thanks for taking the question. Maybe two for me; I was wondering at a high level if you can just give us some framework for how to think about tezacaftor/ivacaftor pricing; what are some of the key inputs? And then, as we see the data today again, does this change that discussion at all as you guys think about potential pricing? And then on the triple combo Phase 3 program and homozygous patients, will it definitely include a control arm and what will that control arm be? Can you tell us at the point? Thank you.

Terence, on tezacaftor/ivacaftor pricing, I’m obviously not going to comment specifically on it; we'll do that at the point that we get approval from the regulators. The considerations we're taking into account are really the same as we've taken into account consistently for KALYDECO and ORKAMBI, and that is the magnitude of the clinical benefit that we are able to deliver. As you know, we believe we’ve got a very strong profile with the tezacaftor/ivacaftor, and then consideration is the size of the patient population we'll be able to benefit. We will be taking those same considerations into account when we come to making the pricing decision on tezacaftor/ivacaftor pending regulatory approval.

With respect to the homozygous trial, we're still discussing that, but will there be a control; almost certainly yes. Remember, most of these homozygous patients will be either on ORKAMBI or tezacaftor/ivacaftor, so it will likely not be a placebo-controlled one.

Hey guys, thanks for taking my questions, and my congratulations on the data and the quarter as well. On the triple, I guess I’m wondering broadly speaking what primarily drove your selection of these next-generation correctors over 440 and 152, and what did you see with the additional dosing of 152? Could 152 and 440 still serve as backups? And then on the Phase 3 plans, I know these are still under discussion, but just wondering if the right way to think about this is for the heterozygous/minimal function group to potentially, for heterozygous/minimal function patients, to come through first just given the unmet need and possibly different regulatory barbs as to homozygous, or should we expect those to sort of follow through concurrently? Thanks.

Yes, this is Jeff Leiden again. When it comes to selecting among the four different regimens, we analyzed all available data, taking into account acute FEV1 and sweat chloride levels for efficacy, as well as tolerability and safety profiles. We also considered co-formulability, the required dose, the possibility of a single pill, and manufacturability. It was a tough decision because all options were strong candidates for Phase 3 trials, which is a great situation to be in. However, there were notable differences. For instance, 659 and 445 could potentially be taken once daily, which we see as beneficial, while 152 and 440 would clearly require a twice-daily regimen, giving an advantage to the former. Additionally, 440 had some preclinical data, whereas 659 and 445 did not, which also played into our decision-making. Overall, when we assessed factors like efficacy, safety, tolerability, co-formulability, and manufacturability, 659 and 445 emerged as the strongest options. Regarding your question about heterozygous/minimal function versus homozygous patients, we firmly believe that the data supports the use of these triple therapies for anyone with one F508 or two 508 alleles, whether they are heterozygous or homozygous. Our aim is to expedite the clinical course to achieve this goal. You are correct that the heterozygous/minimal function group has a significant unmet need, as they currently lack CFTR modulation. However, it's important to note that in homozygous patients, we observed a substantial incremental effect on FEV1 when adding a next-generation corrector to tezacaftor/ivacaftor. While the immediate need may seem less urgent in that group, we believe the potential benefits are equally significant, and we do not want to neglect any patient population or slow down progress in any area. We are actively discussing with regulators the best approach to ensure swift action on this front.

Great. Thanks very much for taking the question. I guess I just wanted to ask one follow-up on safety and tolerability here; you saw some rash across both studies you commented before about GI issues. What I was wondering is can you just talk us a little bit about some of the clinical side effects you’ve seen versus what you’ve seen preclinically with these components and do they match up at all? The basis for the question is pre-clinically you seen some of the chest patients before with ORKAMBI, and then I was unclear; you didn’t see it at a high frequency in some of the initial studies, so I’m just trying to understand your comfort around some of these issues? Thanks.

Hey, it’s Jeff Chodakewitz. Maybe a couple of comments. One at a big picture, I think that the adverse events profile that we have talked about tonight I hope it comes through that no matter how you look at it, whether you look at SAE’s, clinically, labs, all those things, the profile from both of these regimens is actually very favorable. That's great combining with the efficacy we’re really excited about moving them forward. There is really nothing that particularly stands out; we try to give you a sense of the information. I do want to go to your question and the comment about bronchoconstriction; that was actually something that we saw clinically in ORKAMBI. We think we don’t see it in tezacaftor/ivacaftor. We did look for it very specifically in our Phase 1 and Phase 2 studies, and there was no evidence of that. So we feel very good.

Hey good afternoon guys, and thanks for taking my questions. I guess I would want to ask the question regarding potential duration of the Phase 3 studies another way; I'm curious if it’s possible if there could be different durations from the standpoint of the tezacaftor/ivacaftor safety data you've already amassed relative to Tez 561. So might the first one be shorter from that standpoint? My second question, I apologize if I missed there already on today’s call, but how should we think about the company’s tax rate in 2018 and beyond given the tax reform? Thanks.

With respect to your first question, Cory, in terms of tezacaftor/ivacaftor and how does that influence the duration here. The clean finding that we have seen with tezacaftor/ivacaftor are certainly major deriskers of the safety profile of the triple. But as in any combination, when you add a new agent, the key is what about the new agent, that what drives the length and size of the safety database. That won't be affected by the fact that tezacaftor/ivacaftor turns out to be a very favorable safety and tolerability profile. So the discussion is really about we have a new combination with a completely new agent; basically two of them, 659 and 445; what's the appropriate safety database timing and duration to look at that new combination?

And Cory, on the taxes, just walk you through this. First of all, I remind you that we do have operating losses within the U.S., so as we create profits right now, those operating losses offset those profits. So we have minimal tax liability, minimal cash tax liability. At this point, we are not recording an effective tax liability either. As we work through those NOLs and we get and the accounting allows for, we will stop reporting in tax and pay taxes. We have our tax structure within the company that matches our global operations, which results in a tax rate that would be in the low 20s once we start to pay. We have benefited, like many other companies that have a U.S. presence with the tax reform and the lowering of the domestic tax rate, but that benefit is smaller because we also accumulate profits outside of the U.S. as well.

Hey, good afternoon guys. Thanks for taking my question. Just based on your commentary around plans to start pivotal programs for 440 and 152 should we take it that you have completed chronic talks at this point? Is there anything to speak of there? Can you comment on what species and duration you have seen and what, if any, end organ talks there is?

Brian, could we clarify the question? You asked about 440 and 152.

Yes, yes, sorry.

The chronic talks is complete for 659 and there was nothing there that in any way affected our plans to take it forward to Phase 3. The chronic talks for 445 is not yet complete, but it will be very shortly.

And then just also want to confirm on the go-forward strategy of combining 659 with ORKAMBI; this is a risk mitigation strategy for 561, right? There is no concern about it, or you are looking at it as an acuity drug on top of tezacaftor/ivacaftor in Phase 3?

Yes, correct. This is all about KALYDECO being twice a day; both 659 and 445 have clear once-a-day PK profiles.

Hi guys, thanks for taking my question, and congratulations on the data. I apologize; I’m working from home and my children are with me and they’re loud today. One question I have...

So do you have any questions; we are happy to take those too Robyn, no problem?

I just want to ask a big picture question for you. You have been waiting for this data for a long time, and it is clearly remarkable and exciting. Now that you have this data and likely that Phase 3 could replicate these results, how do you run the company differently? Does it change the way you think about setting a limit for the size of mergers and acquisitions? Additionally, how do you start planning for converting results? Everyone is going to move in this direction eventually; what steps do you take now to ensure that conversion happens quickly once the sales are finalized?

Yes, great questions, good questions that we ask ourselves and we are working on for a little while now certainly as we see this data, they become quite relevant as you point out. I will sort of give you my impression and how I think about it rather than I hope my management team agrees. First of all, we need to finish this journey in CF. To me, that is largely an execution task; we need to move as quickly as possible to get these Phase 3 up and running, fully enrolled; get the data out there, and when we finish this journey for 90% of CF patients. That’s a very responsibility we take seriously for this community. As I said, we continue to work on even better next-gen connectors. At some point we need to make a decision about whether when to take those into clinics; it's a good carrier-like effect for everybody. As we said before, there is still 10% of patients with CF who won’t be amendable to CFTR modulatory therapies because they have minimal mutations, and those patients are going to need generic approaches. We are working on that as well, although we feel that that is considerably further out. The first mission is to finish the journey in CF; see if we can get some generic therapies for 10% of patients; really just change the course of this disease or prevent this disease. The second part of the journey is what's beyond CF. Can we do this again? As I said at JPMorgan, I sometimes get asked the question, 'Why do you think you can do this in another disease? You're sort of a CF company. Why do you start to invest in other diseases?' My answer is we have already performed many times in this company, starting with HIV or HCV, oncology, and you may have seen some of the news about the flu compound we released today. This is obviously now with CF multiple times. This is a company that has a very special innovation engine and can create transformative drugs. Although we haven’t talked about it, we have been working on that in four or five diseases, including sickle cell and a few others. Some others that we’ve been starting to talk about are also moving on very nicely. We want to use some of the revenue we have here to reinvest in our internal research programs. We also want to use this because we will have a lot of financial firepower to supplement our innovation through external BD kinds of programs of many flavors. You've seen us do CRISPR; you've seen us do Moderna. You will see more of those deals; you could see some bigger ones but still focused around the same strategy, making transformative drugs for serious diseases of specialty markets, expanding our therapeutic modality capabilities to things like gene editing and gene therapy and other kinds of modalities, and supplementing our early-stage pipeline. That's really the plan; in many ways, the strategy has gotten simpler; it's become more about execution, and we are very pleased with the way the team executes, and it’s why we feel so confident about the future of the company.

Hey guys, this is Neil on for Adam. Just wondering about what kind of preparations you guys are doing to ensure a successful launch of tez/ivacaftor, and then if you guys can just talk for a minute about how you expect the launch curve to play out and what you expect as far as uptake?

Yes, thanks Neil. Yes, the commercial team, I would say, has got pretty good at launching products. We have had the benefit of, as Jeff just described, that incredibly productive research and development engine here, which is in CF has generated new products, new indications, new age groups, time and time again. The team is I would say a pretty much well-oiled machine when it comes to executing these launches, so they're ready to go. The teams are trained. We have scaled up here in the U.S. in our case management group, because one of the most important things we can do is ensure patients are onboarded effectively. That group has been trained and expanded to account for the additional patients we are anticipating seeing. We are as ready as we can be, and we’re eagerly anticipating the approval in the near future. In terms of the launch trajectory, it's really difficult to say exactly how that’s going to play out; it's going to depend on obviously the timing of the approval, and us being able to secure access and reimbursement, which I’m confident we will do here in the U.S.; we have done for KALYDECO and ORKAMBI. Then we will have to see how some of those launch dynamics play out in the real world in terms of persistence and compliance. Certainly, everything about KALYDECO and ORKAMBI would tell us we should expect to see great uptick, great persistence, and great compliance, and that's what we are anticipating.

All right. And then I just had one other one for tez/ivacaftor and the EU. How do you think the agreement is going to work out with those countries? They already have agreements on ORKAMBI; how should we think about that?

Well, I think that really goes to the different process or the different countries. It's hard to give you one answer for Europe as a whole in countries where we have an individual pricing reimbursement agreement around ORKAMBI. There is really going to be two parts: either the stand into the sequential approach where you apply products by product. Obviously, we are preparing to do that in line with getting our regulatory approval for tez/ivacaftor in the second half of this year. In some markets, for instance, like in Ireland where we have a portfolio agreement with, we are anticipating in line with that agreement that we will get access for those patients at the time we get the regulatory approval for tez/ivacaftor. To me, that is one of the great benefits for patients and physicians of these portfolio agreements. As I mentioned earlier in answer to somebody else's question, I think that the tez/ivacaftor data and now the triple combination data is only going to further interest in these kinds of portfolio agreements.

Good afternoon, guys. Congrats on the data. Thanks for taking the question. First, on the pivotal triple combo studies, can you maybe just talk about your level of comfort that U.S. and European regulators will be aligned on the safety duration you need to see? And then just on the internal non-CF pipeline beyond the VX-150 data, and acute pain; are there any internal clinical data we should expect to come out over the course of 2018? Thank you.

Carter, this is Jeff Leiden. We’re talking with both European regulators and U.S. regulators about all the same issues that we discussed in the call. Of course our goal is to align those studies as much as possible between those. When we get agreement with both of them, let you know exactly how they'll look. With respect to the non-CF pipeline, as you know, we’ve said that we expect to start Phase 1 studies in sickle cell and beta thalassemia program this year; those regimen patients. We expect one or more other programs from our internal research group to also enter the clinic this year. It's a little early to predict exactly when we will start to see the first clinical data.

Hi, thanks for taking the question. Maybe two quick questions here if I may. The first is which dose of 659 and 445 are you taking into Phase 3? And then I have a follow-up commercial question.

Yes, we haven’t yet finalized the doses; that’s one of the things we’re discussing with regulators. One of the reasons that we did the studies the way we did and that we're actually very pleased with the results. We do feel we have a very dosing exposure response that occurs for both of these compounds that will make it easier for us to pick the best dose.

And then very quickly on commercial, if I may, my apologies but how do you think about the value that you’re going to be generating here for heterozygous/minimal function patients? Often times people think that as you expand populations in orphan diseases, you have to cut price; but at the same time, Vertex has spent significant capital investing in brand new drugs for these severe diseases. How should we be thinking about the economic value you’re providing, especially given the actual efficacy you’re showing here? Should our base case assumption be flat pricing versus KALYDECO, or even a discount, or do you actually see the value that you’re providing here to patients?

Well, having just released the Phase 2 data, announced that we're moving forward into clinical development, we're not about to start speculating specifically about pricing. Obviously, the data we released today demonstrate that we think these triple combinations have the opportunity to provide tremendous value for patients in the first instance based on the efficacy and safety profile that we've shown. In terms of the economic value for them, clearly that's something that’s going to be considered way down the line; we’ll take into account the same considerations that I've said we always have, which is the magnitude of the benefit that we’re providing and the number of patients that we are able to benefit. Those are the two considerations that we will continue to take into account as we move forward. The most important thing is with the data we released today; it gives us a clear path to begin providing CFTR modulators throughout the 90% of patients, and that’s our primary goal.