Vertex Pharmaceuticals Incorporated (VRTX) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Second Quarter 2011 Financial Results Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. And now, I would like to introduce your host for today, Michael Partridge.

Thank you. Good evening, and welcome to Vertex' second quarter 2011 conference call. We are 2 months into the launch of INCIVEK combination treatment for people with genotype 1 chronic hepatitis C. We are tremendously pleased with the uptake of this medicine, as well as the positive feedback from the hepatitis C community. At the same time, we are launching INCIVEK, we continue to advance our pipeline. We expect to submit the NDA and MAA for VX-770 targeting cystic fibrosis patients with the G551D mutation in October. We have recently provided new data from combination approaches for hepatitis C and CF and we are now looking forward to data and presentations from other studies in hepatitis C, CF and rheumatoid arthritis in the second half of this year. We aim to establish additional product opportunities in these serious diseases. We remain financially strong, with a cash position of approximately $600 million at the end of the second quarter, this is sufficient to support continued launch activities of INCIVEK and the development of our clinical stage programs while supporting us through to cash flow positive. With me on the call tonight are Matt Emmens, who will provide a perspective on Vertex' recent progress; Ian Smith, who will review our second quarter financial results; Nancy Wysenski, who will provide commentary on the INCIVEK launch; and Dr. Peter Mueller, who will highlight key upcoming pipeline milestones. After the prepared remarks, we will be joined by Dr. Bob Kauffman and we will be happy to take your questions. We will conclude the call tonight promptly at 6:00 p.m. Once the call concludes, our IR team, joined by Ian and Nancy will be in the office to answer any additional questions. Finally, let me note that information discussed on this conference call includes forward-looking statements, which are subject to the risks and uncertainties discussed in detail in our reports filed with the Securities and Exchange Commission, including our 10-K. These statements, including those regarding the market launch of INCIVEK, are based on management's current assumptions and are subject to risk and uncertainties that could cause actual outcomes and events to differ materially. GAAP and non-GAAP financial measures will be discussed on this call. Information regarding our use of non-GAAP financial measures and the reconciliation of those measures to GAAP is available in our second quarter 2011 financial press release, which is on our website. Thank you, and I will now turn the call over to Matt.

Thank you, Michael, and good evening, everyone. Since the company went public in 1991, we have begun nearly all quarterly calls by talking about pipeline progress and clinical data. This quarter, we are very excited to lead off, instead, with commentary about our efforts to bring INCIVEK combination treatment to the many people with hepatitis C. As you know, today is World Hepatitis Day. It's a day focused on raising awareness of viral hepatitis and bringing hope to millions of people affected by this disease. It's fitting on a day like today for me to be able to tell you that we are now delivering on the vision that a handful of scientists had more than 20 years ago. We have an approved medicine available for people with hepatitis C that was developed here at Vertex. I'm proud of what we've accomplished and humbled to think about what it means for patients. We believe INCIVEK represents both near-term and long-term value for the company and its shareholders. INCIVEK is establishing a base, upon which, we can grow the company, retain and attract the brightest people to work with us across the organization and potentially develop more new breakthrough medicines that cure or dramatically improve the treatment of serious diseases. Now back to the launch of INCIVEK. Approval of this medicine enables our commercial and medical affairs teams to reach out to providers and patients who have waited years for improved hepatitis C treatment. We're hearing a great deal of positive comments from patients, nurse practitioners and physicians about what INCIVEK offers them. In particular, the ability to offer a straightforward, short-course therapy, 24 weeks, for the majority of treatment-naïve patients, with significantly higher viral cure rates compared to pegylated-interferon and ribavirin alone. Early in the launch, we are seeing both treatment-naïve and treatment-experienced patients being started on INCIVEK combination therapy. This is an encouraging sign. We believe it highlights a broad awareness and acceptance of this important new medicine. To that point, I would like to acknowledge all of our employees, but in particular, the cross-functional efforts of our commercial team. This group continues to work incredibly hard to educate physicians, patients and payers on INCIVEK. And the feedback has been positive as measured by the volume of reported prescription in just the first couple of months of launch. A further testament to our preparedness and ability to deliver INCIVEK to people with hepatitis C was our ability to fulfill co-payment and financial assistance program for those who qualified in many cases within days of their request. We are also looking forward to and actively planning for our upcoming presence at the annual AASLD meeting in San Francisco in early November, where we expect to continue to report on INCIVEK and other programs in development. Even as we launch INCIVEK, we continue to focus on further advancing the treatment paradigm in hepatitis C for the years ahead. Earlier this week, we announced data from our 4-drug combination regimen, including INCIVEK and VX-222, which suggests the potential to treat patients with genotype 1 hepatitis C in as few as 12 weeks and no longer than 24 weeks. In addition, the Alios collaboration we signed in the second quarter adds 2 new compounds to our broad hepatitis C portfolio, and these compounds offer the potential to further improve combination regimens. Looking beyond hepatitis C, we are seeing a number of positive developments in other pipeline programs especially in our cystic fibrosis program. I know you've heard me say this before, CF is a devastating disease for children and adults who have it as well as their families. Our researchers and clinicians are working tirelessly to learn as much as we can about CF and improve the lives of people living with it. It is important to note that while we prepare for an NDA and an MAA submission for VX-770, we continue to treat approximately 190 people who were enrolled in our STRIVE and ENVISION Phase 3 studies and who have rolled over into the PERSIST study. We also recognized the immediate needs of some people with the 551D mutation, who did not meet eligibility criteria in our studies and who are in critical medical need. These people may benefit from VX-770 prior to FDA approval and we are beginning to open clinical trial sites as part of an early access program here in the U.S. We are currently working with the regulatory authorities outside of the U.S. with the goal of implementing additional EAP programs in other countries later this year. To date, we have built on many accomplishments to support our business, and going forward, we'll keep investing in areas, where we believe we can make dramatic advances in treatment. That includes hepatitis C and cystic fibrosis and our pipeline of other innovative medicine. Thank you for your time, and I would like to turn the call over to Ian, who will review the second quarter financial results with you. Ian?

Thanks, Matt, and good evening to everyone. 2011 is an important year that we had anticipated, and we are starting to create significant revenues and cash flows from the sale of INCIVEK, which gives us a financial foundation to continue to advance a broad pipeline of potential new medicines for future growth. The market opportunity that exists for INCIVEK is very large, and with this new opportunity, we are giving careful consideration to managing reinvestment and R&D for future growth, yet achieving earnings and cash flow both for shareholder value. I'd now like to turn to a review of our second quarter results. First, total revenues for the second quarter of 2011 increased to approximately $114 million compared to approximately $32 million in the same quarter last year. The higher revenue in the second quarter of this year was due to approximately $75 million of ex-factory net product revenues from INCIVEK, which became commercially available in the U.S. during the second quarter. Of the $75 million in net product revenues, approximately 50% remained in the distribution channel as of June 30. I'll note that as of the date of this call, the majority, the vast majority of the product in the channel has already been sold through to patients. This is consistent with our expectation of an average of 3 weeks of INCIVEK in the distribution channel going forward. Our second-quarter net product revenues of approximately $75 million were derived from the gross product revenues of approximately $83 million. The gross-to-net reduction is based upon payer mix as well as other factors such as the terms of our distribution agreements, the impact of our patient-support programs. In the first month of launch, our gross to net reduction was driven principally by a payer mix that was dominated by commercial insurance. We expect the payer mix to include more government payers in the future and move towards being more typical of hepatitis C market. Nancy will provide you with additional commentary on INCIVEK launch in just a moment. Now to the GAAP and non-GAAP bottom-line results. Our GAAP net loss attributable to Vertex for the second quarter was approximately $174 million, compared to approximately $200 million for the second quarter of 2010. Our non-GAAP loss attributable to Vertex for the second quarter of 2011 was approximately $136 million compared to $143 million in the second quarter of 2010. Based on anticipated revenues due to the successful launch of INCIVEK, we expect to be earnings-positive in 2012. With respect to the details of our operating expenses, the increase compared to 2010 was principally driven by the support to launch INCIVEK and the expansion of development portfolio. For more information, please refer to our income statement, which can be found in our second quarter press release. From a cash perspective, we ended the quarter, August 2011, second quarter 2011 with approximately $600 million of cash, cash equivalents and marketable securities. Additionally, INCIVEK sales through June 30, added approximately $80 million in accounts receivable and we expect these receivables to be realized in cash in the coming weeks. We have a strong financial position and believe we have the cash and working capital flexibility to support the launch of INCIVEK and support the company through its cash-flow positive. Turning now to the 2011 financial guidance. On today's call, we're increasing our 2011 total operating expense guidance provided early this year. We are increasing our range of -- to $960 million to $980 million from an initial range of $890 million to $930 million, representing an increase of approximately $60 million. As a reminder, this guidance includes principally R&D and SG&A expense and excludes cost of revenues and stock-based compensation expenses. This increase is due to EU expansion to support the launch of VX-770 for cystic fibrosis in this region, development expenses associated with the Alios collaboration and other costs that are funded through our collaborations, such as manufacturing telaprevir by -- for J&J and expanded CF research activities. Of note, that in the remainder of 2011, we expect to receive approximately $30 million from J&J and the CF Foundation, which we recognize as revenue in the R&D collaborative lines. This additional revenue will offset -- partially offset the increase in our forecasted 2011 OpEx guidance. We continue to manage the total operating expense for the company, with a view to a financial profile that maintains reinvestment into R&D and also achieves profitability. Specifically, as we look to 2012, based upon revenues from a successful launch of INCIVEK, we expect to be significantly earnings-positive in 2012. In summary, we have a strong initial launch of INCIVEK. We continue to reinvest for growth, and we have a strong balance sheet to support the company. Thank you, and over to Nancy.

Thank you, and good evening, everyone. I'd like to provide some commentary about the launch of INCIVEK and the progress we've made since approval on May 23. I'll first highlight our time-to-market. Just 3 days, after approval, the first 28-day kit of INCIVEK was being dispensed to a patient. These speed was the result of a determined effort from a cross-section of our company, including the supply chain, marketing, sales and patient-assistance teams. I'd like to compliment and thank them for this outstanding outcome during our first commercial launch. After ensuring INCIVEK's availability, we turned our focus on broad patient accessibility. I'm pleased to report that our physician and patient support systems for INCIVEK are fully operational and running smoothly. With these systems in place, we're embarking upon our primary goal of curing as many people with hepatitis C as possible with INCIVEK. We believe that INCIVEK is a powerful, straightforward regimen that can offer clinical benefit to a wide range of people with genotype 1 hepatitis C. The feedback from the field has been very encouraging. Through July 15, only about 7 weeks into launch, we estimate that more than 3,000 patients have started therapy with INCIVEK. This uptake serves to reinforce that physicians and patients are receptive to our product profile. Now I'd like to share with you some of the insights about the type of physicians prescribing INCIVEK, the INCIVEK reimbursement process and the type of patients taking INCIVEK at this point in the launch. First, to physicians. Consistent with our expectations, a majority of INCIVEK prescriptions are being written by specialists. Gastroenterologists, hepatologists and infectious disease specialists represent approximately 70% of total INCIVEK prescriptions written to date. Early in the launch, as expected, the majority of prescriptions come from high-volume prescribers. Next, reimbursement. Managed care organizations have supported broad availability of INCIVEK. It's too soon in the process to discuss tiering within managed care. We'll be in a better position to provide insights such as this as more contracts are put in place. For context, historically, plans have placed pegylated-interferons on Tier 2 or 3. Our comprehensive co-pay assistance program is helping to reduce patient's out-of-pocket expenses, and for those who qualify, to cover their drug costs entirely. Finally, on to our patients. Our early tracking indicates a broad mix of treatment-naïve and treatment-experienced patients receiving therapy with INCIVEK, consistent with the broad labeling of the medicine. At this stage of the launch, treatment-naïve patients represent more than half of the new patients receiving INCIVEK. So in summary, we're very pleased with the launch of INCIVEK to date, and I look forward to updating you on our continued progress. Now, I'd like to turn your attention to our next program in cystic fibrosis and some of the insights and progress from the commercial perspective. As Peter and his team prepare for the NDA and MAA submissions for VX-770, we have begun to lay the needed groundwork for the medical affairs and commercial teams to support the potential global launch of this medicine. This includes hiring of select member of field-force employees and people in marketing and managed markets. We recently hired a General Manager for our EU operations, based in Switzerland. And this person is now focused on filling crucial positions for implementing a commercial effort needed in Europe. We also hired a Head of U.S. sales to build out our U.S. CF sales team. We envision the structure of the global CF team to be small and focused, including a sales team of fewer than 20 therapeutic specialists in the United States. In Europe, our early work will be focused on reimbursement, followed by the build-out of the sales team. At the same time, we're educating healthcare providers on the CF disease state, including the importance of a greater understanding of CFTR modulation and awareness of their patient's genotype. We've been working closely with the CF community on creating educational resources for patients and caregivers to help them manage this disease. In addition, plans are underway for establishing a comprehensive patient-support program to help ensure that no eligible patient goes without this medicine. The CF patient population and community are urgently seeking a new medicine that targets the underlying disease and not just the symptoms. We hope that you share in our enthusiasm as we move towards our goal of providing this medicine to the CF community that is truly in need of improved treatment. Thank you. And I'd now like to turn the call over to Peter.

Thank you, Nancy, and hello, everyone listening to today's call. Obviously, we had a tremendously productive first half of 2011, with the successful advisory committee for INCIVEK and hepatitis C and subsequent approval and launch, as well as completion and readout of Phase 3 data for VX-770 in cystic fibrosis. These were all major milestones for the company and represented the successful outcome of many years of research, clinical, CMC and regulatory efforts. Our hepatitis C and cystic fibrosis programs are critical programs for the company, and we expect that the second half of the year will be marked by additional data and presentations from these programs to help further improve therapy in hepatitis C and position ourselves potentially, to treat a greater number of people living with cystic fibrosis. I'd like to start today with a review of our efforts on the cystic fibrosis front. With the Phase III data in hand, we are aggressively preparing the MAA and the NDA documents and expect to submit those applications in October, specifically targeting approval in children aged 6 and older and adults with the G551D mutation. We conducted a successful pre-NDA meeting in the U.S. and rapporteur and co-rapporteur meetings in Europe to support the submissions, and these meetings were very, very constructive. Specifically, in line with our commitment to make VX-770 available to CF patients who can benefit from the medicine, we are focusing our attention on additional studies. First, we have developed a pediatric formulation of VX-770 and have discussed with the FDA a protocol for initiating a registration study in younger children ages 2 to 5. This will be an important study, and we believe VX-770 could potentially benefit people with cystic fibrosis who are treated earlier and before significant damage to the lung is incurred. Secondly, during our pre-NDA meeting for VX-770, we have productive discussions regarding the potential future evaluation of sweat chloride data to understand its use as a marker for clinical benefits. As an outcome of these discussions, we are developing clinical protocols for studies of at least 4 weeks in duration to evaluate whether VX-770 monotherapy has a clinical benefit in people with scaling [ph] mutations other than G551D, as well as other mutations that have residual CFTR function. Additional information will be provided at the completion of discussions with the FDA and other regulatory agencies concerning these proposed protocols. We expect these studies to begin in the first half of 2012. Next, I will highlight our combination therapy studies in cystic fibrosis. In the second quarter, we have announced results from Part 1 of our Phase II combination study, this VX-809 and VX-770. This study is designed to evaluate the treatment cystic fibrosis in people with the F508del mutation, the most common CFTR mutation. Based on these data, we expect to initiate Part 2 in September pending FDA approval of the broader design. We expect Part 2 of the drug will evaluate higher doses of VX-809 monotherapy for a minimum of 4 weeks followed by a dosing of VX-770 and VX-809 in combination for a minimum of another 4 weeks. This study will measure sweat chloride FEV1 and safety as well as other markers of clinical activity in people with cystic fibrosis with either 1 or 2 copies of the F508del mutation, that is F08del heterozygotes and homozygotes. Now turning to Hepatitis C and our clinical activities focused on further improving the treatment regimen. We are conducting currently several programs in parallel to achieve this goal. One approach is our 4-drug therapy evaluating multiple 12- and 24-week response guided regimens of INCIVEK, VX-222, this pegylated-interferon and ribavirin. This week, we announced the study week-24 interims data, which included SVR12 results from patients who were treated for 12 weeks only. Results show that at least 1/2 of the patients who were treated for 12 weeks in the high dose VX-222 are eligible to stop treatment with the 4-drug regimen at week 12. One of these patients, of these patients, 14 out of 15 or 93% of patients achieved SVR12. The patients who were assigned the 24-week regimen remained undetectable at the end of the treatment. In addition, interim safety results from the recorded arms showed that mild GI symptoms and mild fatigue were the most frequently recorded adverse events. Side effects are consistent with the known safety profile of INCIVEK combination treatment, and the interim data suggest potential to treat Hepatitis C in as few as 12 weeks and no longer than 24 weeks. We look forward to the outcome in patients receiving 24 weeks. This data will guide our future development of this very important regimen. Our second approach to improve the regimen is on all oral triple interferon-sparing regimen with INCIVEK, VX-222 and ribavirin. We expect to complete enrollment in these study arms evaluating genotype 1A and 1B hepatitis C patients in the third quarter. Our third approach will involve nuclear-type compounds from a collaboration designed with Alios last month. We are working with them diligently to initiate first-in-human trials later this year to set the stage for potential oral combination studies in 2012. Data from all of these programs will inform us of our next step in advancing this potential Hepatitis C treatment regimens. In addition, in the third quarter of this year, we expect to initiate a short duration study in approximately 400 genotype 1 treatment-naïve patients who have a specific polymorphism known as CC near the IL28B gene. This study will evaluate 12 weeks of INCIVEK in combination with pegylated-interferon and ribavirin. Data are expected in 2012. We estimate that close to 1/3 of the people who have not been treated for the Hepatitis C have this marker, and it could be a significant benefit for them if we can reduce treatment to 12 weeks while maintaining high viral cure rates. Now to the other pipeline programs. Turning next to our JAK3 inhibitor, VX-509. In September, we expect to announce top line clinical data from our Phase II proof-of-concept study in rheumatoid arthritis, which will include safety, tolerability and clinical efficacy measured by ACR20, 50 and 70 and other measures. Our goal in this study is to see tolerability and efficacy that enable us to identify a dose or several doses to take forward in development. We believe that as a selective JAK3 inhibitor, we have the opportunity, with 509, to see a wider therapeutic window that may not exist for retroactive JAK inhibitors. While rheumatoid arthritis is the first indication for which VX-509 is being evaluated by the company, we also believe there could be many other inflammatory indications where a selective JAK3 inhibitor could potentially have clinical benefit. We are also working on several exciting pre-clinical programs, and we expect that at least one new program, our flu program for VX-787 will start Phase I clinical trials in healthy volunteers in September to be followed by a Phase II trial in people challenged with an attenuated influenza virus in the first half of 2012. We recently completed a successful pre-R&D meeting with the FDA for this investigational medicine. VX-787 is designed to treat influenza A, including recent H1 endemic and H5 avian flu strains through a mechanism distinct from neuraminidase inhibitors, the current standard of care, and from other previously reported approaches known for treatment of flu. So in summary, we look really forward to keeping you updated on our progress in these programs and other programs as they advance and hope to bring forward more medicines like INCIVEK with the goal of improving the lives of people living with serious diseases. And now I'm turning back the call to Michael.

Thank you, Peter. That concludes our prepared remarks, and we'd now like to open the call to Q&A. So we can get to as many people on the call as possible, we ask you to limit yourself to just one question and one quick follow-up. Thank you.

[Operator Instructions] And we'll take our first question coming from Geoff Porges from Bernstein. Geoffrey Porges - Sanford C. Bernstein & Co., Inc.: I'll leave the questions on INCIVEK to others, I'm sure there'll be a lot. But Peter, it's great to have you on line. I'm intrigued by what you had to say about cystic fibrosis. In that pre-NDA discussions with the FDA, what is the endpoint going to be for these infant studies? It's pretty hard to get them to do an FEV1. And does that imply that the agency has accepted sweat chloride as a surrogate? Because I think you said that the duration of the studies in the other mutations, the gating and other mutations, would only be 4 weeks. Would that be a pivotal trial that would be label-enabling? And I just want to ask a question on 222 as well.

Okay. So this is a bunch of questions around cystic fibrosis. So, Geoff, first of all, I think we have, at this given point in time, not yet a final agreement from the agency about the protocol, but we have discussions. And obviously, we look in several read-out markers and see how it will come down the pike. There is Ribavirin and you are right, it might be harder to achieve. But I think nobody knows at the point in time. So this part of it, if we look at several ones and then make a decision, what it will come down the pike. In terms of sweat chloride being an accepted marker, I think at this point in time, sweat chloride is not an accepted marker in any environment. And I think what we committed is that we basically provide more information and data and analysis to move the discussion towards response-guided regimen. And I think this a great accomplishment because the agency recognizes that you have to make a move to handle the complicated situation with this genotypic approach in cystic fibrosis. They have 1,800 different mutations. We'll see how it goes. I think we have continued discussions ongoing with them and by end of the year, we can give you probably a little bit more insight what it will be. Now in Europe, the situation is sort of similar. They are more forthcoming within a class of mutations like the gating mutations, and we will see how that will translate into a label. At that given point in time, I think we are submitting basically documentation to both agencies and see where we go from there. Now in terms of when we started those studies, I think as you well know, it's sort of global studies. And you have to basically do a PIP evaluation upfront which is a cumbersome process and lengthy bureaucracy and a lot of bureaucracy across the globe. And that basically is the reason why we not start this year but the beginning of next year. I hope that answers all your questions. Geoffrey Porges - Sanford C. Bernstein & Co., Inc.: That's great. Can I just follow-up quickly on 222? Could you just tell us whether the -- how many actually patients had either breakthrough or relapse in the high-dose sort of the combination study? And then whether those patients were genotype 1A or 1B? How did they look, how did they breakout?

So Bob will answer that.

Geoff, this is Bob. There were no breakthroughs in the quad arms at all. And there was one relapse in the high-dose arm that we were describing. I don't know if that was a genotype 1A or 1B patient off hand.

And we'll take our next question from Rachel McMinn from Bank of America.

So on INCIVEK. Just curious, because we only have a couple of weeks in the quarter, can you give us a sense of the run rate coming out of June? Or since July is already pretty much done, can you give us a sense of what the monthly rate looks like, kind of, I guess just excluding inventory? And Ian, secondly, I really appreciate the color on the gross to net. Can you give a little bit more specifics? Are we talking about like high single-digit to 10% this quarter?

Rachel, this is Nancy. We continue to see very strong sales in July. We're very pleased, we're delighted to watch it. And in addition to watching the TRx and NRx counts rise, as I'm sure you are, we are also pleased by the fact that our wholesalers are reordering on a very regular basis.

Rachel, to your comment on gross to net. $84 million of gross translated to roughly $75 million of net for this quarter. As I mentioned in my prepared remarks, the gross to net adjustment is probably a little smaller than it's going to be in the future, given that at this point we have minimal channel inventory going through the government channel. Also as we go through the year and we put our commercial contracting strategies in place, we expect to see, let's say, greater discounts. To give you a number where we come out towards the end of the year and going into 2012, it's a little early to do that, but we certainly expect it to move into the double-digit range as we go towards the end of this year.

And if I may, just squeezing in one bigger picture question on your oral HCV strategy. Can we expect to see an external collaboration to add a third direct-acting antiviral to the mix? And if so, how much data from that collaborator do you need to consider such a partnership?

Well, yes, I think the strategy is that we basically keep all options open, and that also includes potentially the involvement of another collaborator, as we go forward. So what was your second question?

Just how much data would you need -- do you need to see 12 weeks of safety data or would you be -- is 2 weeks or 4 weeks enough?

No, I think that's very dependent what type of program you go for. I think, in general, what I'm personally looking for is the compound that is sort of added to the mix, coming out of our own research or from our collaborator, commensurate with the metabolic profile and a [indiscernible] Profile that makes the regimen work. And that's sort of a safety assessment that you have to do before you go in each and every collaboration or combination therapy. That's basically the main. Now obviously, I will be delighted to do something with more advanced compounds, because then, you're faster over the finish line but that's all matter of what will happen.

And we'll take our next question coming from Terence Flynn from Goldman Sachs.

Just wanted first if you can tell us the percent of your target accounts that have actually prescribed or ordered the drug and then just a quick follow-up.

When we look at the market overall and of course, it's all dependent upon how you define "the market," right? But when we use our own internal definition, it looks like physicians we've gotten to and nurse practitioners in total that between both products, about 15% to 17% of the market has been penetrated. What's really interesting is that as you look at the higher deciles, that percentage goes up dramatically. And it looks like more than 70% of the top-tier decile physicians are writing and of course, that's exactly what you would hope for in the launch of an innovative product because those are the people who influence the rest of the writers. And we see a very fine correlation between the decile of the physician and not only how many physicians are writing but also the number of scripts they're writing. So it's really a great trend.

And just one question on the royalty rate. It looks like it's about 7% this quarter. I know you don't have any actual cost of goods in there, but where can we expect the gross margin to come out in the future once you do start reporting a true cost of goods?

So Terrence, you're right. The royalty around 7% that you are seeing is royalty, and there's minimal cost of goods in there. It should stay that way for a while. We've been expensing our inventory through R&D leading up to the launch of the drug. So going into 2012 you should continue to see a margin that is significant given that we've already expensed our inventory.

We'll take our next question from Mark Schoenebaum from ISI Group.

First question is could you give us any data on the percent of patients that start therapy enter the second month? Because I stared at IMS data and it's very early to try to make anything of IMS data, but I stared at IMS data, it looks like we've tried to drive a refill rate basically into the second month. I'm just trying -- and it'd be great if you guys could actually provide that. And then for Peter, you said something about how Europe is more forthcoming about CF, perhaps a broader label, I was intrigued by that comment. Could you just clarify, please, what you meant by that?

Mark, this Nancy, I'll go first. And it sounds like you and I both spent a lot of time staring at IMS data. Ad It seems like it would be a fairly simple mathematical calculation. But it isn't. And I'll explain why it isn't. After I make a point that we're pleased with the numbers we're seeing when you look at the difference between the TRx, and new Rx and back that up against what the new Rxs would have been for the weeks that those refills would be occurring. Because when you look across both drugs, our trends are really solid and they seem to be trending in the right direction over time. The reason that you can't really nail that down, as you probably already know, is that when a patient shows up at a physician's office and they write them a prescription for INCIVEK, there's no way for us to tell whether they wrote that prescription for one month and it shows up as a new Rx or whether they wrote it for 3 months, so then you get one new Rx and 2 TRxs. A lot of times with new therapies, patients would just give them -- I'm sorry, physicians will just give the patient prescription for one month, and then when they do well they give them another prescription, which the pharmacy interprets as a second new Rx. So I'm sure you're aware that, that confusion is in there, but all that suggests is that with that as a potential adjustments, the refill rate is even higher than what the mathematical formulas would suggest.

And to the label discussion, I think we have successful discussion with the heat of CHMP, that basically makes all the final calls what goes into filings in Europe and given those discussions, we anticipate that the there is a possibility to get a label that basically covers all the gating mutations in Europe potentially.

And what percentage of the patients would that be, and then I'll drop off?

[indiscernible] Well it's another 1%, something like that in Europe.

And we'll take our next question from Howard Liang from Leerink Swann.

What's next for 222 and telaprevir combo? Are you taking the quad into Phase III? And then secondly, IMS data. Should we assume that one script equals 28 days of supply?

Well, I can take the IMS question, while they're deciding. Yes, you should assume that one script equals one kit or 28 days of therapy, that's absolutely correct.

In terms of the 222, as you know, there are data we reported out was just the SVR data from the patients assigned to 12 weeks and we really need to see the outcome in those who have been assigned to 24 weeks to kind of get a sense of what the overall SVR for that regimen is, that will help us to decide what the next set of regimens that we study. Whether we go directly to Phase III or have to do some additional work, I think will depend in large part on that and also the PK/PD assessments, a number of other assessments that we do. So I can't really say for sure. We're obviously are trying to move the program as quickly as we can.

On top of that, there is also the triple oral combination, where the 222 plays a major role and similar comments apply. I think we are in the midst of it and I think we will try to accelerate those programs as fast as we can in concert with approval from regulatory agencies.

And we'll take our next question from Geoff Meacham from JP Morgan. Geoffrey Meacham - JP Morgan Chase & Co: Question on VX-770, sounds like the label obviously, is going to be focused on G551D only, and just curious how quickly you guys think you can get out getting mutation data. Just trying to get a better sense for the size and scope of the Phase II that you have planned and I have a follow-up.

So in terms of the label in the U.S., it will be as a first label, most likely G551D only label, I think that is correct. In Europe, it might be potentially G551D plus the gating mutations. But it's all upon approval of regulatory agencies and this is sort of what it could be. Now in terms of when can we get more data, so obviously, we will start trials that will deliver data in the course of 2012. That help us to decide whether we can go either with smaller response-guided regimen, or we have to go with a more specific late mutation label expansion. And I think those studies are planned and will go on, but I think there's nothing we can say before the end of 2012. Geoffrey Meacham - JP Morgan Chase & Co: On the 770, 809 combo data for part 2, how long, what is the treatment duration? I think in your release, you said at least one month. How far would you anticipate going out and then some of your assays, do you show greater synergy between the 2 drugs over the course of time, say 1 month, 2 months, plus?

Yes, we're not actually certain yet of exactly the duration. We're looking at the current data to decide that. We said at least 4 weeks of monotherapy and at least 4 weeks of the combo in order to assess lung function, as well as sweat chloride, which is one of the goals from the second part of the study. And that's all we can really say at this point. Obviously, we'll give you more information when we get closer to starting it. And I'm sorry, the second part of your question? Geoffrey Meacham - JP Morgan Chase & Co: Was just, when you guys have had in vitro assays that combine the 2 agents 770, 809 that have shown synergy. And I'm wondering if that synergy or the sweat chloride or the conductance improves over time?

Those assays are generally short-term. Those are cell culture assays. You can't really carry them on for very long. So the data we have is really from the first study of 2 weeks of monotherapy and 1 week of the combination. Obviously, one of the reasons to look at longer duration is to see whether in fact there's any additional effect that can occur and then, we'll see how that third part comes out.

And we'll take our next question from Yaron Werber from Citi.

So two questions, one, just help us understand a little bit when you think of response-guided therapy in CF, presumably it's based on sweat chloride and is it at week 4 or do you have a sense at which point do you take the measurement? And then I have a follow-up on INCIVEK as well.

At this given point in time, I think we don't know what the market will be. I think there are several that you could think of. One is sweat chloride, I think that's the reason why we are currently conducting additional drugs to see how potential readout markers are usable across different mutation. Because that's sort of what the holy grail is and that we have to figure out, so we don't know yet. I think we will measure continuously at each and every visit what those different markers will do as we go forward. I think there's not yet a defined outcome that we can say 4 weeks or 8 weeks or 12 weeks is the right thing to do.

And then just so we -- and then, on INCIVEK, I mean if you calculate the launch happened in the week of March, I'm sorry May 23, so we're talking about maybe 5 to maybe as long 6 weeks, and you sold $75 million. And you said half was retail demand. And then you said that, that retail stocking in the order of around $37 million, $38 million is already out of the channel. So that's within 3 weeks. And then there would have been inventory on top of that. So is it -- it almost seems like I can back into a doubling of the rate of sales within the first 3 or 4 weeks in July over the last quarter? Am I thinking about this correctly?

Directionally, Yaron, I think you're thinking about it correctly.

And we'll take our next question coming from Ted Tenthoff from Piper Jaffray.

One thing I wanted to ask and Nancy, maybe you can answer this question for me. When it comes to detailing INCIVEK as a conversation that the reps are having with the hepatologists and the specialists, what is the message that's being delivered around rash and around the side effect profile? And kind of how to manage that?

In fact, just today we got some early feedback on the qualitative impact that our field sales force is having with physicians. And I'm very, very proud of the great job they're doing. They're out there, they know that this is all about the patients and offering them a higher cure rate, and that the best way to do that is to engage not only the healthcare practitioner, but the patient by fully educating them about this new therapy. All the adverse events including rash, how to look for that, how to watch for it, what physicians should do when they see it, all of the drug-drug interactions, and we have gotten really very solid feedback again from healthcare providers particularly, that they are enjoying this process and that they see our representatives as very trustworthy in bringing them the full set of information for the best outcome of the patient.

We'll take our next question from Brian Abrahams from Wells Fargo.

On the 770, 809 study, Peter if I heard you right, I thought you said that you'd be looking at the -- you're going to be looking at patient's hairs, I guess for Delta F508 as well, in the next set of studies, so was wondering if you could expand on the rationale for that? And then on INCIVEK, just wondering if you had a sense of your market share among PIs? And whether it's different between the treatment-naive and -experienced patients?

So I'll take the first part so, Brian, with respect to the rationale, I think as you know, you have basically 2 categorically different type of, let's say, mutations in terms of impact on functionality. One, that impacts basically the trafficking, which is basically fibroids, and those type of things. And the other one, that impacts basically gating or function when those channels are on the surface. Now when you have a homozygous, then it's easier than you know, you have basically sort of a trafficking and problem, when you have Delta F508, and that's easily treatable, with maybe even a monotherapy theoretically, with 809. When you have heterozygous, they have both defects. They have a trafficking defect and a potentiation defect. If they have a fibroid on one ileal and something else on the other ileal. And so they might benefit from a combination treatment that is a potentiator and the corrector. And therefore I think, we are trying to do that and I think that's a huge benefit for that population, in going with combination therapy, because they have 2 different defects to be taken care, and we have 2 very strong molecules and therapeutic regimen to them that help to fix both of them.

And Brian, to your question about market share, using the source of the IMS NPA, I can tell you that our market share is in excess of 75%, both for the most current week measured and the latest week is July 15, as well as for the launch to date.

And our next question is coming from Jason Kantor from RBC Capital Markets.

You talk about the gross in that being smaller because of mix, and that you're not really getting much out of the government channels. I'm wondering, is this kind of an untapped source of new patients that we can expect to come in? And I guess over what period of time would you expect those to come, and what percent of the population is that? And there were some concerns before the launch about the capacity to treat all of these patients. So I wonder where are we with respect to clinic capacity at some of these high-volume centers?

Jason, this is Nancy, I'll take both pieces of that. First of all, on the capacity that's a really easy answer, we don't think there is any limit on capacity. We say that for a couple of reasons because we've got physicians from all deciles rating the drug. So that means that you're getting not only the big thought leading institutional centers but also, more of the community-based independent GEs and so on and so forth. In addition to that, we are seeing new prescribers who haven't written historically, coming into the market. And that suggest again, that there is even more capacity that we haven't thought about. And now, I need to be reminded what the other question was.

The government channel.

Thank you, the government channel, this is pretty typical for any drug. When you first launch a drug, you make it available through the managed care plans and typically, that's through commercial plans. Government channels, as you can imagine, are some of the more cost sensitive channels, and then they therefore want to do a full formulary review before they add drugs to their formulary and/or that often involves contracting. So that -- it just takes longer. It's beginning now as is the contracting process with commercial plans. But it will take at least through the end of this year, and into 2012 before the majority of that contracting is complete.

And what percent of the treatable patient is that?

You know it varies if you look at ribavirin as a historical model, it's usually sort of about 60% commercial, and then about 25% between Medicaid, Medicare, and then you get VA, and there as well, VA Federal supply schedule which is the DoD, et cetera. So it varies. But I think we're seeing a higher rate of commercial business right now.

And our next question is coming from Tom Russo from Baird. Thomas Russo - Robert W. Baird & Co. Incorporated: Another question for Nancy, on market share. From survey work, we've been doing early in the launch, and I think it's reaching more community-based docs. We've seen telaprevir rated higher in all the attributes, but share maybe closer to 60%, 40% than the 75% so far in the script tracking. Just wanted to get your perspective on, is there any dichotomy between the top decile, first mover types and then maybe the next tier or 2 down in terms of market share split?

Not based upon the numbers I'm looking at. I can appreciate that you probably did a fine survey, but I can't comment on it, since I really don't have any of the details. Thomas Russo - Robert W. Baird & Co. Incorporated: And then, question for Peter. In terms of the telaprevir 222, ribavirin arms, interferon-sparing arms, will your topline release any data, maybe later this year or early next, if you in fact, compete enrollment in the third quarter?

It's basically, what most likely will happen.

I'd just add Tom, that in terms of disclosure and committing to disclosures at this point, let's see how the studies run their course and what's the appropriate time that we consider putting out interim or final data. So more to you on that later this year.

And our next question is coming from Phil Nadeau from Cowen.

Nancy, a question for you on scripts. You mentioned that 3,000 patients have started INCIVEK by July 15. And based on the new script numbers for INCIVEK as reported by IMS, there were about 3,900 NRxs. And I appreciate some of those NRxs are probably actually refills, but there weren't that many scripts written in early June, so it can't account for the entire difference between 3,000 number that you cited in kind of the number of scripts that IMS reports. So do you have a sense of whether IMS is simply overreporting the number of prescriptions versus what you yourself see? Or is there maybe some delay between when somebody gets a script when they are starting a therapy because of reimbursement or some other factor?

No, the scripts are captured when the patient actually goes to the pharmacy and fills it. So I think we're just trying to be reasonable about the way that we're characterizing this. And since there is that some percentage there that we don't know, could actually be TRxs. We feel confident saying that it's more than 3,000, but the numbers you're looking at are the same numbers we're seeing. So I think you're looking at it right, Phil.

I'd just add though, we had some commentary about whether to give you that number because we thought that people might try and reconcile new patients to scripts. We gave you a conservative number, I will tell you that. It's very dangerous to reconcile our patient number to scripts, given that there is under reporting in the scripts. And we're just broadly happy with the number of patients that have started on INCIVEK-based therapy. But we just wanted to give you a mark on how the launch was going.

And just one quick question on the 809, 770 combination program. In the past, you had said you're doing additional analyses based on the part 1 data to try to correlate factors with response, so some patients, clearly responding very well to 809, 770 in combination. Do you have any information on what those factors could be? Was it plasma levels of drug or anything else that you could identify?

Well, I think the evaluation is still ongoing, and we are not, at this given point, reporting those things out.

So we're right at 6:00 now, we will take 2 more questions.

We'll take our next question from David Friedman from Morgan Stanley.

Question on the CF program. The first is just quickly, will we see any 661 data before we see 661, 770 combo data? And then the other is how you settled on 4 weeks as the time for 809 dosing and combo dosing in the next 809, 770 trial?

This is Bob, I'll answer that. You likely will not see 661 data by itself before the combo, because the study may well have multiple treatments in it, and that hasn't been fully decided yet, but it won't necessarily be the case. And in terms of the duration, those were just possibilities. We have not yet finalized what the study design is going to be, so I think you should wait and see what we finally come up with, which I'm sure, we'll tell you about later on, when we're closer to it.

And we'll take our final question today from Katherine Xu from William Blair. Y. Katherine Xu - William Blair & Company L.L.C.: I was just wondering just following up to Phil's questions for some of the responders that these patients responded better to the combo in the first segment of the study. And you said something just -- I didn't hear at all. Your answer, what were the characteristics of those better responders?

You didn't say anything.

This is Bob, we didn't really know that. In every critical trial, there are always better responders and lesser responders. We're looking to see whether there's any characteristics there, but it's generally the case that there's a distribution of responses. So it's a matter of really going through the data carefully. We've not quite finished that yet so we have nothing really much to say. Y. Katherine Xu - William Blair & Company L.L.C.: Anything at ERS that you guys are planning? The ERS, the conference in September?

No, we are not planning anything there.

We will be at the U.S. CF conference though later in the year, which is in October. I believe that's on the West Coast in Anaheim. So we'll be there with a pretty large presence, given our expansion of our programs in the cystic fibrosis area.

Okay, thanks everybody for your kind words and your good questions. And we will be around in the office tonight to answer any additional questions you may have. Thanks again for joining us.

Ladies and gentlemen, this does concludes your conference. You may now disconnect and have a great day.