Vertex Pharmaceuticals Incorporated (VRTX) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Vertex Pharmaceuticals Incorporated First Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Now I'll turn it over to your host, Michael Partridge, Vice President of Investor Relations. Please begin.

Thank you. Good evening and welcome to Vertex's first quarter 2012 conference call. We're off to a great start for 2012. INCIVEK for the treatment of hepatitis C continues to lead the market in the U.S., and our collaborator, J&J, has now also achieved the leading share in major European countries with INCIVO. In the area of cystic fibrosis, we are making strong progress early in the launch of KALYDECO. The launches of INCIVEK in North America, INCIVO in Europe and KALYDECO in the U.S. are driving strong financial performance while we also continue to advance our broad pipeline of medicines for serious diseases. Vertex is now a multiproduct, profitable global business, generating significant revenues that enable investment for future medicines while delivering significant earnings and cash flow for our shareholders. With me on the call tonight are Dr. Jeff Leiden, who will provide a perspective on Vertex's recent progress; and Ian Smith, who will review our first quarter financial results. After the brief prepared remarks, Nancy Wysenski, Bob Kauffman and Peter Mueller will join us to take your questions. [Operator Instructions] We expect to conclude the call at 6:00 p.m. Once the call concludes, we will be in the office to answer any additional questions. I'll 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, including our 10-K, which have been filed with the Securities and Exchange Commission. These statements, including those regarding the market launch of INCIVEK and KALYDECO are based on management's current assumptions and are subject to risks 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 these measures and a reconciliation of non-GAAP to GAAP is available in our first quarter 2012 financial press release, which is on our website. Thank you. I'll now turn the call over to Jeff.

Thanks, Michael. Good evening, everyone. The approval of our second medicine, KALYDECO, in January of this year, the continued strength in the global launch of INCIVEK and INCIVO, the financial performance we've achieved while advancing our pipeline of medicines are all important measures of the success of our business model. We're particularly pleased that Vertex has grown rapidly into a global business with multiple approved medicines that are changing the lives of thousands of patients. My remarks today will cover 3 main areas: First, product revenues and earnings; second, our pipeline of additional medicines in development; and third, our business model. Starting with our approved medicines. The strength of the global launch for INCIVEK in North America and INCIVO in Europe and other countries. We launched INCIVEK in the U.S. in May 2011, and our partner, Janssen, begin launching INCIVO in the second half of 2011 in its own territories. INCIVEK and INCIVO are now generating a very significant revenue stream for us, approximately $390 million in the first quarter, including $357 million from INCIVEK and $33 million in royalty revenues from INCIVO. In the most recent months, we've observed a steady flow of people beginning treatment with INCIVEK, which to date commands a greater than 70% share in the U.S. INCIVO has also achieved a majority of share in the major European countries where the medicine is available. As INCIVO becomes available in more countries throughout the coming months, we expect to see continued significant growth in our royalty revenues. We move to KALYDECO for cystic fibrosis. We obtained FDA approval for KALYDECO and launched this breakthrough medicine just over 2 months ago for people with cystic fibrosis who have the G551D mutation. Reimbursement has gone smoothly and the launch is going very well. Approximately 600 people have started treatment with KALYDECO since approval, and we recorded approximately $18 million of net revenues in the first quarter. Again, we expect these revenues to grow as more patients begin and maintain treatment with KALYDECO. In the last few months, we've heard from many patients and their families, and this is one of the most gratifying aspects of bringing a medicine like KALYDECO to patients. Specifically, we've heard how much this medicine has impacted their lives, how they feel better, are healthier and are for the first time, optimistic about their futures. A young man with CF and his mom recently visited Vertex to share with us their experiences with KALYDECO, an experience that was truly life changing for their family in many ways. This young man told us that, thanks to KALYDECO, CF no longer defines him but is just a part of him. He's looking forward to applying to colleges. We are happy to hear that he visited one of our neighbors, MIT, during his trip to Vertex. It's these kinds of real-life experiences that inspire us and motivate our team to continue in our efforts to help others with this disease. I particularly want to give credit for the remarkable efforts of the CF community who have made it possible for so many people with CF to get KALYDECO so quickly following approval. This includes the CF Foundation, treatment centers, advocates in the CF community, families and friends of people with CF, as well as our own internal and field teams whose performance and commitment to this disease have been absolutely exemplary. We're also preparing for the potential approval of KALYDECO in Europe later this year. In addition, we're planning to initiate 3 pivotal studies of KALYDECO in 2012 that will enroll people with CF who have certain CFTR mutations not evaluated in the previous Phase III studies, as well as children with CF as young as 2 years of age. A study in people with the R117H mutation and a study of people with other gating mutations are both expected to begin in the middle of this year. And the third study in children with CF as young as 2 years of age who have gating mutations is planned for later this year, pending final feedback from regulatory agencies. If successful, these studies could expand the number of people with CF who could benefit from KALYDECO monotherapy to approximately 8% to 10% of the estimated 70,000 people with CF worldwide. Now I'd like to turn to the progress of our pipeline of developing medicines. Our next wave of potential new medicines could expand and extend our opportunities in CF and hepatitis C, and we're making very nice progress with potential treatments for diseases like rheumatoid arthritis and flu. In addition to the 3 pivotal studies of KALYDECO monotherapy that I just mentioned, we're also conducting 2 Phase II exploratory studies that combine KALYDECO with a CFTR corrector, either VX-809 or VX-661, and people with CF who have the most common CFTR mutation called Delta 508. The goal of combining KALYDECO with the correctors is to provide the majority of the CF population with a new treatment option. We expect to get the final results from the study of KALYDECO in VX-809 in mid-2012, followed by data from the KALYDECO on VX-661 study in the second half of this year. Because we have a deep knowledge and understanding of this disease, we have high hopes for what we may be able to do for the many children and adults living with cystic fibrosis. Now moving to hepatitis C, where the future goal in the treatment of this disease is to create well-tolerated, short duration, high viral cure regimens and specifically, interferon-free all oral regimens. Towards this goal we're in the process of initiating an interferon-free combination study with INCIVEK plus VX-222 and ribavirin. We'll also have the first day -- first 7-day viral kinetic data from the Alios nucs in the next couple of months. Pending these viral kinetic data, we're focused on starting additional combination studies with the nukes later this year. Now this area is moving very fast. However, based on our most -- the most recent data in the field, we believe we have several excellent opportunities to play a leading role in the future evolution of new all-oral treatments for patients with hepatitis C. We also continue to make progress in other areas of the pipeline with our medicines in development for rheumatoid arthritis and flu. In RA, we're in the process of starting a 6-month Phase IIb study with VX-509, our selective JAK3 inhibitor, and a background methotrexate. And in flu, we have now begun a proof of concept study for VX-787, where we will have data in the second half of the year. Let me close by stating that our business is strong and growing, with revenues from 2 marketed products and a significant royalty income that together allow for reinvestment to create future medicines, earnings and cash flows. What I highlighted for you this evening are the key ways to understand the positive trajectory of our business and the markers on the horizon for how we will drive growth in the future. I look forward to updating you as we go. Thanks, and over to you, Ian.

Thanks, Jeff, and good evening to everyone. Financially, 2012 is proceeding as we expected. And we have demonstrated that we now have a significant revenue base, one that is both diverse and has multiple sources. These revenues enable investment in our pipeline while also generating significant earnings. Now to the financials. In the first quarter of 2012, total revenues were approximately $439 million compared to approximately $74 million in the same quarter of last year. The key components of these revenues are as follows: Firstly, we reported approximately $357 million INCIVEK net product revenues, which were affected by a reduction of approximately $22 million in inventory levels by wholesalers between December 31, 2011, and March 31, 2012. The current wholesale inventory level for INCIVEK at the end of the quarter is now approximately 2.5 weeks. In recent months and early April, we observed a steady flow of patients beginning treatment with INCIVEK. Secondly, we recorded $18 million of net product revenues for KALYDECO, which reflected the first 2 months of sales. As Jeff mentioned, approximately 600 people with CF have now started treatment with KALYDECO since the approval in late January. This reflects the strong patient demand, the connectivity of the CF community and the broad awareness of the importance of KALYDECO for these patients. We expect this revenue stream to grow as more people start to maintain treatment with KALYDECO. Later this year, we expect approval in Europe and this will add to this revenue growth. The strength of the launch in the U.S. and potential future European approval put us in a position to quickly build a significant and sustainable long term revenue base from KALYDECO. Thirdly, $39 million of royalty revenues, including $33 million of INCIVO royalty from J&J. This is a very important and growing revenue stream for the company and contributes significantly to the bottom line. It reflects the fact that we start to see leadership extends beyond the U.S. and into Europe and other countries. INCIVO is now available in more than 15 countries worldwide and more launches are planned this year by our collaborator. We expect our INCIVO royalties will grow significantly in 2012 given the early stage of launch in these European countries and other markets. And finally, collaborative revenues of $24 million, a portion of these revenues provide funding for R&D activities where we have relationships in the areas of hepatitis C and cystic fibrosis. As total revenue resulted in the GAAP net income attributable to Vertex of approximately $92 million in the first quarter of 2012 or approximately $0.43 per diluted share, which includes stock compensation charge of $28 million. For the first quarter of 2012, our non-GAAP net income attributable to Vertex was approximately $119 million or $0.55 per diluted share. On the basis of $439 million of total revenues this quarter, our non-GAAP income from operations represent an operating margin of approximately 28%, and we expect this operating margin to grow significantly during the rest of 2012. We anticipate the growth of our operating margin to be driven by increases in total revenues and continued cost control over the top total operating expenses. The operating margin is an important financial measure that is consistent with our business model. In summary, we continue to see steady demand for INCIVEK. We are seeing significant and growing revenues from INCIVO royalties and we now have the first revenues for KALYDECO. Taken together, we are well positioned to advance our pipeline while generating significant earnings and adding to our current cash position of approximately $1 billion. Thank you. And, Michael, back to you.

Thank you, Ian. That concludes our prepared remarks and we'd now like to open the call to Q&A.

[Operator Instructions] First question is from Geoff Porges of Bernstein.

This is Aleks here for Jeff. Congratulations on a great start with KALYDECO. Could you please clarify to us what was the general inventory for KALYDECO? And I understand that all 600 patients are on the commercial drug, but then how many patients do you still expect are all off the trial to commercial drug? And then I have a quick follow-up question.

Okay, thanks for the question, Aleks, it's Ian. Just to confirm that the net sales that are recorded for KALYDECO for the first quarter are actually -- they're representing the sales to the patient. There is no significant inventory stocking that occurs with KALYDECO.

And Aleks, to the second half of your question, as you noted, we were very pleased that we have approximately 600 patients who are taking KALYDECO right now. We expect that there are approximately 100 patients in the U.S. on the PERSIST trial, and sometime between late second or early third quarter, in the beginning of next year, those patients will be completing that trial, and rolling over on to commercial supply.

Got it. And a quick follow-up question. Just thinking about the combination trial and we're getting a lot of questions on that, what percentage of patients do you need to see to have a response about a certain sweat chloride threshold level to decide to proceed to a Phase III trial?

Aleks, the ongoing trial is sort of a second cohort out of a longer existing exploratory Phase II setting. And basically, what we are looking into is predominantly safety and tolerability, that's number one. Then we look at a bunch of parameters, like sweat chloride and FEV and everything else. And then out of the combination of all of those, we will make a decision how we move forward.

Our next question is from Terence Flynn of Goldman Sachs.

Congrats on another strong launch. I was wondering if you can just tell us how many -- remind us how many centers you're targeting with KALYDECO and how many of those centers have already initiated patients on drug? And then on the European front, I was wondering if you guys have gotten the day 120 questions yet for KALYDECO and if there was anything new in there that you can tell us about?

To start with the question on KALYDECO, it all depends on -- the answer is really it all depends on how you count a center. So there are adult centers, there are pediatric centers, and if you want to literally go through an accumulated total count, you're looking at over 250 centers. But of those, there are probably 120 or so that are really critically important and we have penetrated and have prescriptions coming out of the vast majority of those critical centers across the U.S. Peter?

Well, Terry, with respect to the regulatory pass, we have submitted in time the MAA and our process is well on track. And as we said in our earlier, we will not comment on particulars on the regulatory path and we still are believing and are optimistically believing that we will be approved in third quarter of this year.

Our next question is from Mark Schoenebaum of the ISI Group.

This is Omar filling in for Mark. Just a couple of questions on KALYDECO. Number one, are there any patients among these 600 that are currently on drug that have some gating mutation other than G551D? And a quick follow-up to that, and in Europe, how does tier [ph] confirmation of G551D status differ just in terms of the mechanics versus how that plays out in U.S.?

Okay, Omar. Let me answer the first half and then I didn't quite literally understand the second half of your question in Europe. But in the U.S., we are very, very firm about the fact that we are promoting KALYDECO totally and only on label, which is only for the G551D mutation in patients who are 6 years old and over. Because of that, we have no real way to understand all the different genotyping mutations that would account for patients being put on the drug, but that's where we focus our promotion. And what was your -- the second half of your question relative to Europe?

Sure. So just trying to understand the mechanics -- just in the market, how do pairs verify that the patients that just initiated the drug had G551D? How does the process, just the mechanics of the process differ in Europe versus how they are in the U.S.?

I think that the general mechanics of reimbursement in Europe differ significantly from the U.S. in that you essentially have government-sponsored systems, so it's pretty much a one-payer system in the major countries and particularly the 4 driving countries that we'll be launching into for the G551D mutation. We really don't have insight into, in the U.S. or in Europe, how many plans will be asking to validate or if those that are, how they're going about that, I'm sorry.

Your next question is from Yaron Werber of Citi.

Gloria Woo in for Yaron. I just had a question about INCIVEK actually. I was wondering if you guys are going to update your guidance on INCIVEK based on your current run rate.

Thanks for that question, Gloria. We actually reiterated our guidance in our press release this evening, the guidance for the full year that we provided on February 2, that reiteration of guidance is a reflection of our experience this year with INCIVEK. January sales, as I mentioned in my prepared remarks, were affected by a drawdown of inventory of around $22 million. But for February, March and April, we saw a steady trend of scripts and billing, based on all of this, plus we did provide a 7% price increase effective April 1. We remain comfortable with our guidance for the remainder of the year.

And maybe to add to that, Gloria, this is Nancy. On the demand side, we've had a real steady stream of new RXs since the beginning of this year. If you look at your IMS data, you'll see that there have been between 850 and 1,000 prescriptions generated weekly, and that's been in a pretty tight range there. Just to add confidence to the information that we have related to sales to date, in visiting what several thought leaders, well more than several, last week at EASL, it's clear that there continued to be a good number of patients who are coming in to practices, who are requesting and need treatment for their hepatitis C, and based upon the information we have at this point in time, we continue to be confident that patients will be seeking treatment.

And Gloria, just to the other piece of our operating guidance, which is the operating expenses, we have an understanding and a controllable aspect of those operating expenses and based on that and the trajectory that we see for the rest of this year, we remain comfortable with the guidance we set earlier this year.

Our next question is from Rachel McMinn of Bank of America Merrill Lynch.

I have a couple of questions. When you talked about the Alios nucs, I might have missed this but you said the next couple of months, the data would be available? Does that mean we shouldn't be expecting it for sure in 2Q? And then on KALYDECO, can you talk about where you think a penetration is with the 600 patients. Does that include any off label use? And then, you might have just answered this but I might have missed it, on the price increase, how much of the 7% price increase is actually effective?

So Rachel, I'll take the first piece with the disclosure question. As we said in our proposed remarks, we expect the first data from the Alios nucs to be available in the second quarter of this year and then I'll refer to Nancy for the remainder of your question.

Sure. On the KALYDECO question, again, we're really pleased with the fact that we've got approximately 600 patients on drug. Because we're only promoting KALYDECO in the G551D patients who are over 6 years of age and those are the only patients that we interact with in the support of our patient support system, in helping them with reimbursement, we can't really speculate about any off label usage, we don't have insight into that. Moving along to the price increases, I'm sure you're aware, Rachel, we can't give you a specific number. But at any point, in a manufacturer's or in a product's life, when we take a price increase, not all of that drops to the bottom line because of agreements that you have with both, some commercial, as well as government payers.

Okay. So maybe the half of the price increase, somewhere around that?

The majority of the price increase drops to the bottom line, Rachel.

Our next question is from Geoff Meacham of JPMorgan.

This is John in for Geoff Meacham and I have a question more about the correctors, 809 and 661. Since they're coming in so close to each other at the end of this year and I'd assume with 809, what's the plan or the tag going forward since they're 2 similar mechanisms? If you could just elaborate on that.

John, that's actually a very good question. So here's Peter and the answer to that is, there is a differentiation between the 2 molecules and so 661, yes, has the same mechanism of action. It acts as the same type of corrector, but it has a different distribution profile as we have stated in earlier days. And what that could do is, it could give you an opportunity, because of higher exposure potentially in the lung to go with a lower dose regimen and a smaller pill burden and all those type of things in patient populations. If it materializes, based on data we will make a decision how we compared it to molecules, to each other and then go forward. I think it's too early to say something because those studies are ongoing and we have no data to make a decision at that point in time.

John, this is Jeff. I think you're probably asking the question, do we plan on waiting until we have all of the data before we choose between the 2 and the answer is no. Not necessarily. We're going to evaluate them independently. As we've said, we'll have the 809 data first. We'll look at all that data and make a decision on how to proceed with 809. We'll then have the 661 data, we'll look at all that data and make a decision independently. Is that your question?

Yes, that does. And since they're so similar, I don't assume that you would use them in combination with KALYDECO? Both of them?

You mean 3 drugs at a time?

Yes, exactly.

No, there's no intention to have a 3-drug regimen. So even the similarity from a mechanism point of view, they bind basically at the same binding site in a way. There's no other additivity expected.

Our next question is from Howard Liang of Leerink Swann.

Can you just -- do you have an estimate on how many G551D patients there are in the U.S.? I know you talked about 600 patients. I think normally, we think about 4% of the population has G551D, that was assuming that you already have half of the patients on the drug within 2 months?

Yes, Howard. This is Nancy. You're right. We think about 1,000 G551D patients in the U.S., but we have to keep in mind that as we don't yet have an the indication for those who are under 6 years of age, that does remove a small subset. So we're pleased and we believe that we have already reached a majority point of the appropriate potential patients.

And which countries has INCIVO been launched in?

INCIVO has been launched in more than a dozen countries in Europe, additionally in Canada. I don't know if you're looking for a list of those, but all the major countries in Europe, and they have already achieved the -- a dominant market share.

So the revenue -- or sorry, royalty from this quarter is already from those countries or is it only a subset of those countries?

It is from the countries that Nancy is referring to, to the launch, Howard. However, as you can imagine, it's really at the first stages of the launch. I made the comments in my prepared remarks that we do anticipate a growth from the royalty stream and that's because as they gain critical mass in each of the countries that should drive an increased royalty to us on a quarterly basis.

Our next question is from Jason Kantor of RBC Capital Markets.

Another congratulations on KALYDECO. I'm just wondering, so you got 600 patients really fast and you said you have another 100 patients in clinical trials that could roll off later this year or early next year. But is that gap, the remaining market share, is that something we should expect to also come on the therapy in sort of the same rapid trajectory? Or is there some portion of this population that's hard to get to for whatever reason?

Yes, Jason, as you might expect, every launch is unique. You typically start out with a really strong show when you've got a great product like KALYDECO and we're delighted that, that is exactly what is happening here. I can't really tell you. We'd all be speculating about where we'll be by a certain point in time or how many patients we'll have under treatment, but we're delighted with the fact that we've already gotten a majority of patients only 3 months into the launch and we know that there are another 100 imminent.

Now the 600 patients, that was as of the end of the quarter or that was as of today? And if you're giving us, INCIVEK kind of April trends, can we get the same for KALYDECO?

The 600 patients are as of last week, so in through the majority of April. And, no, I think the last number we've used is more than 35,000 patients on INCIVEK, but we don't have plans to update that number.

Our next question is from Matthew Roden of UBS.

This is actually Andrew in for Matt. And let me add my congratulations on the good KALYDECO number. I guess my question is a bit of an extension from the one just asked. You mentioned earlier the 120 or so critical centers. Of the 600 patients that are on drug right now, how many of those are coming from the critical centers? And I guess, I have a short follow-up.

I actually don't have those data. You may also recall that this launch came 3 months earlier than anticipated and everyone's moving at a pretty rapid clip here. So I can tell you that we have gotten prescriptions from all the major centers and in fact, from a majority of centers generally.

Okay. And I guess the follow-up would be, are the scripts coming 1 or 2 at a time? Or are docs putting the majority of their patients on drug?

Yes, I don't have insight into that.

Our next question is from Brian Abrahams of Wells Fargo Securities.

This is Matthew calling in for Brian. In light of the macro economic situation in Europe and some of the recent technology assessments by European countries for some recently approved pharmaceuticals, can you discuss your general thoughts about what clinical data from the KALYDECO studies do you believe will provide compelling evidence for the drugs benefiting in these G551D patients that will help enable strong reimbursement?

That's a great question, Matthew. And of course, speaking for Peter and Bob, we never know exactly what a label will read like until it's granted. But clearly, with the data that were involved in the U.S. label and how things are progressing in Europe, we feel confident that there will be significant information and that, that will enable us to approach the appropriate authorities in the 4 major countries, where 80% of the patients exist.

Our next question is from Ravi Mehrotra of Crédit Suisse.

This is Koon actually calling on behalf of Ravi. I have 2 quick questions here. First of all, how quickly could you move into a Phase III trial, depending on how the Alios nucs data looks, how quickly could you move into Phase III interferon-free combo trial? And a question on INCIVEK. Have you seen any indications of doctors warehousing patients in light of the recent development in HCV?

The first question was how fast can you move on the Alios. I think the first thing is we have to go in Phase II. We are currently in viral kinetic studies which is in Ib, and this will happen in the second half of this year. Shortly after, we have thought [ph] available. So I think we are preparing for that and then moving hopefully, one or several, depending on data outcome, regimens into a Phase II setting. And then basically from there, so it's not a question of Phase III, it's a question of pivotal drugs in general and you have to develop a development strategy basically that takes care of it. The only thing we have said is, which I will now reiterate is, we have a change with our regimens to basically come by the end of 2014 to the first submission for regulatory approval in an all-oral setting, whatever that setting might be.

This is Jeff, I guess the other one, other thing that I would add is obviously, we are -- as are others, are aiming for shorter and shorter trials with these all-oral regimens and hopefully getting down to the shortest 12 weeks, and that does have a major impact on the timing and the speed at which one can move in these trials, which is quite different from the previous trials containing peg and riba.

And the question related to warehousing, this is something we talked quite a bit about during our fourth quarter call and we had done some fairly extensive research looking into this. So although we're delighted and that we are also participating in the development of potential all-oral therapies, at this point, we don't have any data to suggest that there is additional secondary warehousing beyond what goes on all the time as physicians triage patients into appropriate therapies.

Our next question is from Ying Huang of Barclays.

I want to also echo my congratulations on the KALYDECO launch. First question, can you give us the gross to net adjustments for both the INCIVEK and KALYDECO last quarter? And then, Ian, you mentioned inventory drawdown for about $22 million for INCIVEK. Do you expect that to bounce back in the future quarters?

So just as a statement, the gross to net, first on INCIVEK, it actually did move up slightly in the first quarter, so the net revenues were affected by that. It moved from approximately 13% in our fourth quarter to 16% in this first quarter. We would anticipate that, that 16% around there will be maintained for the rest of the year. We've now completed the majority of our contracting process. On KALYDECO, we're still getting the better understanding of that margin or the net of the discount. It's early on in the launch so we're still setting up our contracting. For this quarter though, it was mid-single digits, maybe slightly above that, and we do expect that to increase slightly. And the -- oh sorry, the inventory question. Yes, so the inventory did reduce from December 31 to March 31 for INCIVEK inventory holding by approximately $22 million. So of course, that affects the revenues that we would accrue in the first quarter. As it affects going forward, we ended the first quarter with approximately 2.5 weeks of inventory, so that's a pretty low level of inventory. So as we go forward we're not sure where it will go, but it shouldn't have a significant impact as we move forward given that the drawdown has pushed the inventory levels to a low of 2.5 weeks.

The next question is from Liisa Bayko of JMP Securities.

Congratulations on the good launch of KALYDECO. As we think about the combination moving forward, what's really going to drive your decision about this particular combination? Is it really the FEV data or are you going to be thinking more about the sweat chloride? I'm just trying to anticipate the data that comes out.

Well, Liisa, that's Peter again. I think it's not the one or the other. You have to look at the overall pattern that you basically get in those exploratory trials, which is a smaller number of patients to make a decision. Obviously, from a therapeutic point of view, FEV is the one that is accepted by regulatory agencies and that has the major impact and so if you don't see anything in FEV, that's never a good thing.

Okay. That's helpful. And maybe just an additional question about -- on a different topic related to R&D. The Alios nucs, I'm just curious, obviously you have 2 and that prevents, I think some unique opportunities for development. But as you think about interferon-free regimens and the Alios nukes, what's really your strategy to develop these? Are you thinking new nuc combinations or combinations that are classes and might you consider looking outside of your own pipeline there?

Liisa, that's a good question. I think there is many different aspects that you have to consider in our HCV strategy. Given the fact that we believe, and I think are more and more sure that, that different patient populations might benefit from different regimens and that there is not a one size fits all regimen. And that will drive sort of how we basically go forward. The nice thing in the Vertex world, outside of having INCIVEK being the leading drug, is that we basically have a plethora of molecules that we can combine in many different forms and fashions. And there's not just a one regimen that we are looking into, and that's driven by patient populations that we select that we go forward. So I think we have here a very good opportunity. And so this is what it is. And then obviously, we will not stop here. We constantly also are looking for other opportunities and as you have seen companies partner in 2 things and we are completely open to consider those type in our strategy too.

Yes, Liisa, this is Jeff. I totally agree with what Peter said, and just to perhaps add a couple of things. I think we are in a uniquely advantageous situation because we have multiple swings at the ball inside, as Peter said, and we know they're combinable, and that's very important I think. The combinability has, in some cases, I think been lost in the discussion, we've done a lot of work on that. The second thing is, I think because we have some unique assets in particularly the nucs, that also would place us in a more powerful position with respect to partnering with other outside assets. And so our plan is to fully explore our internal pipeline, as well as once we have begin to understand that to explore partnering possibilities that might work for both parties.

Our next question is from David Friedman of Morgan Stanley.

It's in regards to, I think something that was mentioned earlier around off label use of 770, and you said that because you don't have, you're not promoting off label, obviously, and therefore you don't have interactions with people. Does that mean that there's no co-pay support or any other services that you are allowed to provide for patients who do not have G551D until they're labeled or is there some amount of interaction that you're allowed to have just to facilitate what was the physician's decision to put the patient on drug or not?

So David, that's a great question. And no, we have no -- we don't have any of our support programs extended to patients beyond the G551D 6 and over indication in our label.

And then just as a quick follow, do you have an estimate or have you gotten any sense of what an average co-pay is for a patient with this and what percent you've needed to provide some support to?

As you can imagine, the majority of patients do look for co-pay support, but those are usually in a very reasonable range. I know that some questions have come up about free drug and the provision of free drug occurs at an extremely low level. And so far, the data we have on co-pays is not at a very high rate. Ian, would you like to expound?

Yes. And David, just as I mentioned, a gross to net adjustment for KALYDECO earlier on this call, it's approximately 6%. That includes a lot of the patient support. So as you can see, there's not a significant discount on the gross to net due to patient support programs.

The next question is from Marko Kozul of ThinkEquity.

This is Irene in for Marko. When you present the first cystic fibrosis combination trial for KALYDECO and VX-809, what kind of data do you plan to report? In other words, do you plan to only provide mean FEV1 and sweat chloride data? Or might you consider also providing subgroup analysis and potential correlation data between FEV1 and sweat chloride?

At this time, we can't really prescribe the press release that we'll be putting out. What I could say is that when we have the data and we're in a position to release it, we'll provide you with the top line data from that study. But I can't go beyond that to this point in time because we don't know how we'll be providing it.

We have time I believe for 2 questions.

Next 2 questions is from Katherine Xu Ju of William Blair. Y. Katherine Xu - William Blair & Company L.L.C., Research Division: I'm just curious for the INCIVEK launch, what is the ratio between naive and experienced patients? Do you have a sense of that? And the other one is, do you have any pricing information on the ex U.S. countries that you have launched to date?

On the INCIVEK split, Katherine, we continue to see a majority of the patients coming in to the naive descriptor, about 70%. And Ian, do you want to comment on pricing in Europe? That's totally out of our control, as you know, and it's decided by Johnson & Johnson.

Yes. I mean, my comment is that towards the INCIVO royalty. We don't comment on J&J's pricing decisions. But the royalties, it's a significant royalty stream, as you can see in the first quarter, and that's just at the first part of this launch. So we anticipate that, that will growth and the majority of that royalty goes straight to our bottom line. So it's a very healthy cash flow for us given the scale of the European market and also the lead position that INCIVO seems to be in early on in the launch. Y. Katherine Xu - William Blair & Company L.L.C., Research Division: Great. And for KALYDECO so far, what is the percentage of reimbursed -- successful reimbursement decision?

I guess, Katherine, that's a really hard question to answer because the launch is so young, and in an orphan disease state, one typically expects that it might take as long as 2 to 3 months to receive reimbursement once the paperwork is put into place. So we're delighted that it's going as fast as it is and that the majority of patients have already received reimbursement, but of course, there are others who are still waiting and we believe that's probably part of why we're seeing a high ratio of commercial pays because typically, the commercial plans make quicker reimbursement decisions.

Our next question is from Alan Carr of Needham & Company.

This is Mark Vignola on for Allen. I was wondering if you guys could talk a little bit about the royalty expenses and what portion of that might be due to KALYDECO?

So we do have a royalty payment to the Cystic Fibrosis Foundation on the KALYDECO revenue stream. It's an escalating royalty that starts in kind of mid to high single digits and goes into preteens royalty once the product gets significant scale.

And it actually appears in the cost of product revenues line, the KALYDECO royalty that we pay out. It does not appear on the royalty payout revenue line. Are there any additional questions?

No further questions in the queue. I'd like to turn the call back over to management for any closing remarks.

Okay. Thank you very much for joining us tonight. We will be in the office to take any additional questions that you have. Have a pleasant evening.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.