Vertex Pharmaceuticals Incorporated (VRTX) Q1 2013 Earnings Report, Transcript and Summary

Michael Partridge - Senior Director of Strategic Communications Jeffrey M. Leiden - Chairman, Chief Executive Officer and President Stuart A. Arbuckle - Chief Commercial Officer and Executive Vice President Ian F. Smith - Chief Financial Officer and Executive Vice President Robert Kauffman Peter R. Mueller - Chief Scientific Officer, Executive Vice President of Global Research & Development and Member of The Scientific Advisory Board

Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division Michael J. Yee - RBC Capital Markets, LLC, Research Division Rachel L. McMinn - BofA Merrill Lynch, Research Division Mark J. Schoenebaum - ISI Group Inc., Research Division Yaron Werber - Citigroup Inc, Research Division Liisa A. Bayko - JMP Securities LLC, Research Division Brian Corey Abrahams - Wells Fargo Securities, LLC, Research Division Robyn Karnauskas - Deutsche Bank AG, Research Division Matthew Roden - UBS Investment Bank, Research Division Ying Huang - Barclays Capital, Research Division Howard Liang - Leerink Swann LLC, Research Division Philip Nadeau - Cowen and Company, LLC, Research Division Y. Katherine Xu - William Blair & Company L.L.C., Research Division Salveen J. Richter - Canaccord Genuity, Research Division

Good day, ladies and gentlemen, and welcome to the Vertex Pharmaceuticals First Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Michael Partridge, Head of Investor Relations. You may begin.

Thank you, operator, and good evening to everyone. Joining me on tonight's call are Dr. Jeff Leiden, Vertex's Chairman and CEO; Stuart Arbuckle, Chief Commercial Officer; and Ian Smith, Chief Financial Officer. Jeff will begin with a review of our progress this year in executing against our long-term strategy of creating innovative medicines with a focus on specialty diseases. Then, Stuart will comment on market trends for our key medicines, KALYDECO for people with cystic fibrosis, who have the G551D mutation and INCIVEK for hepatitis C. And to close, we will review the first quarter financial results and update our 2013 guidance for KALYDECO net revenues. After prepared remarks, Bob Kauffman, Chief Medical officer; and Peter Mueller, Chief Scientific Officer, will join us for a question-and-answer period. And after the call, we will be available in our offices for follow-up. Before we begin, I will 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 10-K reports, which have been filed with the Securities and Exchange Commission and also in the press release announcing our financial results tonight. These statements, including, without limitation, those regarding the commercial performance of INCIVEK and KALYDECO, our development plans and expectations and our guidance are based on management's current assumptions and are subject to the 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. The information regarding our use of these measures and a reconciliation of GAAP to non-GAAP is available in our first quarter 2013 financial press release, which is on our website. And I would also refer you to the information on Slide 4 of tonight's webcast. I'll now turn it over to Jeff.

Thanks, Michael. Good afternoon, everyone. I'm pleased to discuss with you the progress that Vertex has made in 2013. Earlier this year, we identified key priorities that will enable you to measure the progress of our business. In January, at the JPMorgan conference, I outlined 3 strategic imperatives for our business that would position us for long-term growth: first, prioritizing our development investments to advance our late-stage medicines. We have important late-stage medicines in development for cystic fibrosis, hepatitis C and autoimmune diseases, and our goal is to provide these therapies to patients, their families and healthcare providers as soon as possible. Second, focus on continuing to create innovative medicines for serious diseases out of our R&D efforts. Making ground-breaking new medicines is the reason Vertex was founded. It continues to define who we are today. And third, maintaining our financial strength. We recognize that we're in an important period of investment to realize sustained growth opportunities in the near future and the funding of this investment while maintaining our balance sheet's strength is an important priority. So far in 2013, we have accomplished a great deal to advance our late-stage medicines and show the potential to bring further ground-breaking therapies to patients. We also continue to maintain our financial strength with a good financial performance for the first quarter. In cystic fibrosis, we received breakthrough designation from the U.S. FDA for ivacaftor as monotherapy. We have multiple studies underway that could potentially expand the KALYDECO label. We are on track to have the first clinical data for ivacaftor monotherapy outside of G551D in the second half of 2013. We also received breakthrough designation for the combination of ivacaftor with our lead corrector molecule, VX-809. With the VX-809 plus ivacaftor combination, we reached agreement with the regulatory authorities and have now begun a Phase III program that will evaluate 6 months of treatment in 1,000 patients homozygous for the Delta 508 mutation. We anticipate that we will receive Phase III data and submit an NDA for this combination in 2014. We also reported Phase II data earlier this month with another corrector, VX-661, that has further validated the strategy of combining a corrector and a potentiator to treat CF patients with 2 copies of the Delta 508 mutation. Also, we announced that we continue to advance an additional corrector, VX-983, and we expect to start a combination study with this compound in people with 2 copies of the Delta 508 mutation in the second half of this year. In hepatitis C, we have initiated 2 12-week studies with an interferon-free all-oral regimen of our nucleotide, VX-135, in combination with ribavirin, and 1 of these studies is now fully enrolled. Our strategy is to conduct multiple Phase II studies of VX-135 in multiple combinations with other DAAs in Phase II to position us to initiate pivotal development of VX-135 in 2014. This quarter, we are starting our first Phase II study in HCV patients combining VX-135 with another DAA, Bristol-Myers Squibb's NS5A inhibitor, daclatasvir. Financially, we are making significant investments, which we believe are important to position us for sustained future growth. These investments are focused in R&D for the creation of meaningful new medicines. As part of the strategy we outlined in January, we described how we would control our operating expense and reduce our SG&A investment compared to prior years and thereby, direct our investments towards our pipeline and research efforts. These actions are reflected in our Q1 results, which Ian will cover in more detail. To maintain financial strength, we are also seeking to maximize revenues of our approved medicines. Stuart will provide some color on this in a moment, but I will say that I'm pleased with our performance this quarter, which shows our important position in hepatitis C and also demonstrates the value of KALYDECO for certain people with CF. In summary, our strategy has created hope for people with serious diseases and has created significant value for shareholders and a platform for long-term growth. Now I'd like to turn it over to Stuart.

Thank you, Jeff, and good afternoon. I will provide some background and commentary on our approved medicines, INCIVEK for genotype 1 chronic hepatitis C infection and KALYDECO for CF patients who have the G551D mutation. Starting with INCIVEK. We launched INCIVEK for hepatitis C in May 2011, and now just 2 years later, we have treated more than 60,000 patients in the United States. While fewer patients are starting treatment for hepatitis C compared to this time a year ago, the hepatitis C market remains substantial, and INCIVEK continues to be the market leader with approximately 75% of new patients in the U.S., a number that is unchanged since launch. Vertex recorded $206 million in net revenues for INCIVEK in the first quarter. We expect INCIVEK to remain the market-leading therapy throughout 2013. However, the number of hepatitis C patients starting treatment in the U.S. has been in decline since the second quarter of last year, and this trend is likely to continue in the U.S. Outside of the U.S., Janssen markets telaprevir as INCIVO, and Vertex receives a royalty. INCIVO availability has continued to expand to additional countries, and based on Janssen sales in the first quarter of 2013, Vertex earned $39 million in royalties. Janssen has attributed the strong performance of INCIVO in the first quarter to a continued successful rollout of INCIVO in Latin America. Moving now to KALYDECO. We launched KALYDECO in the U.S. in early 2012 for cystic fibrosis patients with the G551D mutation, aged 6 and older, and we saw rapid adoption amongst U.S. patients. By the end of 2012, we were treating the vast majority of the eligible G551D patients in the U.S. For the first quarter of 2013, we achieved U.S. sales of KALYDECO of approximately $50 million, in line with our U.S. sales in the fourth quarter of 2012. In the European Union, KALYDECO was approved in July 2012, and since then, our key objective has been to complete the reimbursement process in the major markets so that we can make KALYDECO available to the patients who need it. We forecasted growth for KALYDECO in 2013, which reflected our expectation regarding the timing of achieving reimbursement and the speed of uptake in the region. We achieved approximately $12 million in KALYDECO sales outside of the U.S. in the first quarter, which represents reasonable growth over Q4 2012. However, we expect this to accelerate in Q2 2013 given the progress we have made in achieving reimbursement approval in the major European countries. Specifically in these major markets, KALYDECO began to be available during Q1 with commercial reimbursements starting in Q2. The uptake in these markets has been strong, which reinforces our confidence in the growth we can achieve for KALYDECO revenues in 2013. In summary, I'm pleased with INCIVEK's performance within the hep C market and in the ongoing launch of KALYDECO. And now I'll turn it over to Ian.

Thanks, Stuart. I'll start by reaffirming our business and financial strategy. That is, we're investing in the advancements of important medicines that, if successful, will drive sustained long-term business and financial growth. From a financial perspective, our goal during this period is to maintain financial strength. Stated simply, protect our balance sheet by prioritizing our spend towards R&D and balancing our expenses with revenues. Now to the first quarter 2013 results. Total revenues were $328 million. Our total non-GAAP operating expenses, excluding cost of revenues and other charges, were $275 million, and we had a non-GAAP profit of $5.7 million. From a balance sheet perspective, we completed the quarter with approximately $1.24 billion of cash, cash equivalents and marketable securities and $400 million of 200 -- 2015 convertible debt outstanding. This debt has early conversion features based on certain stock prices. These results are consistent with our strategy of maintaining our financial strength while progressing our medicines in development. Now to the more detailed results. In the first quarter, KALYDECO revenues were approximately $62 million, approximately $50 million in the U.S. and $12 million outside the U.S. Uptake in early 2013 has been strong in key countries outside the U.S., and this uptake provides us with the visibility into total KALYDECO revenues for the remainder of 2013. For this reason, we are increasing KALYDECO revenue guidance today. INCIVEK revenues in the first quarter were $206 million, reflecting continued demand for hepatitis C treatment even as the market anticipates the arrival of other regimens beginning in 2014. INCIVO royalties were $39 million, and combined with the INCIVEK revenues, we continue to anticipate significant HCV revenue contributions to our top line in 2013. Finally, collaborative and other revenues in the first quarter were $22 million, bringing total 2013 quarter revenues to $328 million. Now to the non-GAAP operating expenses of $275 million, which excludes cost of revenues and other charges. This is similar to prior year. Within our first quarter 2013 non-GAAP operating expenses, there has been a significant decrease in SG&A comparison to our fourth quarter 2012 and also comparison to the first quarter of 2012, while we continue to prioritize our investment into R&D. In particular, our late-stage development investments into our programs for CF, HCV and autoimmune disease programs increased our R&D investment compared to prior year. Before I move to our 2013 financial guidance, I'd like to provide a comment on our GAAP net loss of $308 million. This includes a charge of $412,900,000 for the impairment of our HCV asset, VX-222. At this stage of development of our portfolio of HCV assets and given the progression of other regimens by other companies, we are able -- we are unable to support the fair value of VX-222 on our balance sheet. And accordingly, we are taking a write-down in the value of this intangible asset. We also record a tax benefit for VX-222 of $127.6 million, results in a net charge of $285 million. Now to the 2013 financial guidance. Today, we are reiterating our total revenue guidance of $1.1 billion to $1.25 billion that we provided in February 2013, while we are increasing the KALYDECO components of revenues to $300 million to $340 million from $280 million to $320 million we gave previously. Today, we are also reiterating our non-GAAP operating expense of $1.09 billion to $1.15 billion. In summary, financially, we're executing on our strategy and prioritizing investment within our business to drive long-term growth. I would now like to open up the line to questions.

[Operator Instructions] Our first question comes from Geoffrey Porges of Bernstein. Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division: So my first question is just -- is this SG&A run rate sustainable at this level after you pulled back on HCV? And -- but if you're successful with expanding in CF, would you anticipate that going back up to the prior level? Or is this the sort of thing that we should be forecasting going forward? And then I just wanted to get someone's perspective on what was presented over the weekend at Amsterdam. I know there wasn't a formal investor event, but has this changed how you look to partnering VX-135? And I'm thinking particularly about some of the issues that have come out, for example, with simeprevir and the preexisting resistant mutation. Do you think that you should be looking elsewhere for further combination studies as a result of that?

So Geoff, we'll take the HCV and EASL question strategy first and Jeff will take that.

Now Geoff, let me take the strategy question, and then I'll turn it over to Bob for the more detailed scientific question around resistance mutants. I think you know our strategy all along has been to combine VX-135 with multiple other DAAs and actually collect the data in Phase II that we think will allow us to pick the best regime or regimens to take forward into pivotal development next year. And I think the results we saw at EASL really only reaffirmed our confidence in that strategy. So as we discussed today, we have multiple partnerships in which we can look at 135 with ribavirin and at least 3 other DAAs, and it's our plan to continue that strategy going forward. I think at the end of the day, the data will really speak to this, but I think the picture's becoming pretty clear that a nuke will be the backbone of most of these straightforward DAA regimens, and we think VX-135 is competitive with any nuke out there. So let me turn this over to Bob for your specific question.

This is Bob. So just with specific reference to the Q80 baseline variant, we are aware of those data. In the 2 studies, the 2 Phase III studies they reported, there appear to be some decrement in SVR in the patients with those variants at baseline. It wasn't dramatic, but probably, there was some decline. On the other hand, in combination with the nuke, it may well not really be a clinical issue, and obviously, that's something we'll evaluate in the initial studies. But it certainly doesn't change our strategy of working with simeprevir as part of our combination regimens. Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division: And Ian, on the SG&A?

Yes, Geoff, thanks for that. I'll just kind of bring it to the broader picture. Back in February, we did give OpEx guidance, total non-GAAP OpEx guidance of $1.09 billion to $1.15 billion. We are reiterating that today. The number that you point to though, the SG&A expenses, where we're approximately $80 million for Q1, I can see what you're doing. You're taking that and multiplying it by 4, and saying that may be just under the guidance we gave of $340 million to $360 million. We're still reiterating the $340 million to $360 million. I mean, we still are launching a -- what we believe is an important drug and still expanding into Europe. And so there are marketing expenses that go along with that. So we're reiterating the components of our guidance today as well, and that SG&A component, we see $340 million to $360 million.

Our next question comes from Geoff Meacham of JPMorgan. Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division: I got a CF one and then an RA one. Want to get a sense from you, the KALYDECO monotherapy trials, the R117H and the G551D in younger patients. This has been ongoing for a while. So is it that the entry criteria are narrow? Or is it the matter of just finding patients? I would have thought that these would have enrolled fairly quickly given the visibility and the clinical effects in the STRIVE study.

So this is Bob. So for the non-G551D gating, that study is fully enrolled, so that one is well underway. The R117H study is still enrolling, although it's well along in its progress. And that, I think, is just a combination of -- it is still a pretty uncommon mutation, and so finding patients who meet the entry criteria is -- it just takes time, but I think we're making good progress there, and we expect enrollment to be finished some time soon.

And Geoff, I'll just add, there is the other study that's in the other gating mutations, which has completed enrollment, and we anticipate seeing the first data from that in the second half of this year.

And in terms of the kits [ph] that you are referring to, I think you have to go through a global process that has the kit [ph] process in there in Europe, which is quite a lengthy process, which now is finalized, and now we are ready to go. Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division: Got you. Okay. And just a follow-up on a -- or second question, on VX-509. I know you guys have talked about partnering this out and maybe to get Jeff's perspective given his background, is there a data set or an efficacy sort of benchmark that you would reconsider that from a development perspective to take it on your own? Or is that going to be 100% partnering or both?

Geoff, thanks for asking the question. I think as we've looked at what it takes to develop this asset in multiple indications and multiple geographies, which I think is what's going to be needed to be competitive, that's really a process that we feel comfortable with only in a partnership. And so that really is our plan going forward.

Our next question comes from Michael Yee of RBC Capital.

On -- a question on hep C. Obviously, you're going to get presumably some Bristol-Vertex combination data sooner than the others, and obviously, I think we can all see what a nuke and a NS5A has done out there with other collaborations. So time is of the essence, and the other studies may take longer. I mean, if the data looks really good, why would we wait? Maybe you could walk through some of the strategy and timing of that as you think about that, end of this year going to '14? And then second question is just on the CF 809 Phase III studies. Would you expect this to enroll faster than the KALYDECO studies given there are definitely a lot more patients out there than G551?

Michael, this is Jeff. Let me take your first question, and then maybe I'll turn it over to Bob for your question on the CF enrollment. With respect to the timing of these different studies on VX-135, just to be clear, we're not necessarily going to wait. We agree with you that speed is of the essence here, and we hope to begin collecting data, actually, as soon as the third quarter of this year with some combinations, like the ribavirin study and then subsequently with the others. And as you say, if we saw a combination that was clearly a winning combination or an ultra-competitive combination, we wouldn't wait to move it forward because we agree that we want to go as quickly as possible to patients.

And then your other question?

Speed of the 809 enrollment versus KALYDECO, yes.

Yes. So we haven't really given any information on how quickly we expect to enroll. I think they will be rapid, the patients are highly interested. In general, first of all, we're recruiting a lot more patients into these 2 trials than we did with the KALYDECO study, so that will be a factor. And the other is that site startup tends to be more of a limiting factor in some respects than actual patient recruitment. Once the sites are up and running, they tend to recruit very quickly, and we're obviously doing as fast as we can to get all the sites up and running, but that tends to be kind of the more rate-limiting step.

Michael, we'll probably have a better understanding of the speed of enrollment when we're on our July quarterly conference call, and maybe we'll give some comments at that time.

Our next question comes from Rachel McMinn of Merrill Lynch.

Wanted to go back to hep C. for a minute and just get a patient number. How many patients' worth of data do you think you'll have by the end of the year when you kind of add all these studies up? I think safety is kind of the big question that a lot of people have. And then also wanted to get your perspective on heterozygous, of when we could see the first studies initiated there. I don't know if that's something that you think is a next step for 661 or we'd have to wait into 2014 before you'd consider starting any of those studies. And really quick on a housekeeping question, are there any other commercial CF milestones that we should be thinking about near term? If you could give us a little bit more color on the structure of how we think about sales-based milestones, that would be helpful for modeling purposes.

So this is Bob. I'll take the safety question. It's a little bit of a hard question to answer because obviously, these studies are ongoing, and we'll have varying lengths of safety data at any time point towards the end of the year.

Well, specifically 12 weeks then.

Yes, we'll have 12-week data probably on the order of 40 to 50, maybe 60 patients by then.

And is that really enough to go into Phase III, then, Bob?

Not necessarily at that point, but we will be expanding these studies and starting additional trials, so that we'll be augmenting that safety database through the end of 2013, into early 2014 in order to get enough patients to go into Phase III.

Rachel, just on your question that you asked, you did specifically mark it to the end of the year. But the way these studies progress is we do start a smaller study and expect to expand that study in the second half of this year. So as you look, as we go into 2014 and through 2014, we continue to accumulate patient experience. That's why we've made the statement we believe we'll be in pivotal development in 2014. It's not from the initial study, and it's not marked from the patients at the end of this year, which, as we go into 2014, we will have accumulated more patients.

And then finally, Rachel, your question on the heterozygotes -- this is Jeff. We are considering with the regulatory authorities how to approach the heterozygotes. We have a couple of different approaches. I think it's too early for us to give you specific plans, but we are formulating plans both with our current correctors, as we've said, but also with the combination with second-generation correctors. And we want to move as quickly as we can to that population of patients.

And then to your financial question, Rachel, to the milestone payments, we did make a payment of approximately $9.5 million this quarter or the first quarter in connection with our CF revenues. There are future milestones there, but we'll disclose those as we achieve them based on certain sales levels.

Our next question comes from Mark Schoenebaum of ISI Group.

I have 2 pretty simple ones. One, the first one, would it be possible for you -- and maybe you've answered this and I just don't know, but would it be possible for you to tell us where the IP is domiciled for KALYDECO, 809 and 661 and where you'll be manufacturing those 3 drugs? Second question is, a hep C market question, do you guys -- would you happen to have the following number? The number -- roughly the number of hepatitis C patients today, if you have genotype 1, that's fine, but the number of hepatitis C patients today, who you think are under the active care of an HCV-treating specialist?

Well, thanks, Mark, for the question. I'll take the tax question. And what I would say is, we've taken all the appropriate tax planning steps. We believe there's a lot of value in our CF franchise, and we believe that we're going to be global with the franchise. So we're taking all the appropriate tax steps at this point in time that our company should take and -- but to project out a tax rate at this point in time, I think, it's a little too early. I think as we get close to profit, then we'd be happy to start giving you some guidance towards that. But you can expect that the tax structuring for the company is that, we've taken the appropriate tax steps.

Can you tell us where you'll be making it?

It's -- no, not at this point, and it's actually less relevant to where it's being made. The other point I'd point out just because you are asking about tax, I think it's also important to note that Vertex has approximately $3.5 billion of NOLs that do get offset against profits before you start paying cash taxes, so that will clearly benefit our cash flow in the early years of profitability. And to your other questions?

[indiscernible]

Yes, Mark, we'll have to get back to you on that. [indiscernible] top of my head.

Our next question comes from Yaron Werber of Citi.

So I just have a kind of a few questions, a little bit all over the place, but just starting with 135, just as a follow-up to a previous question, so it will be for Bob. So Bob, it sounds like you're going to have 40 or 60 patients by the end of the year of safety. That's going to be sort of the preliminary 12 weeks of safety that you need to do with the preliminary experience with 135 with another agent. So at some point during the year, you're going to enroll that into or broaden that into an expanded sort of cohort that's going to have, probably, I would imagine, 100 or 200-plus patients. Any sense when are you going to have the 12-week safety from that? Because that's going to be really gate limiting for starting Phase III. So that's going to be the first question, and then I have a follow-up.

So I think you can kind of add up the timing. It probably will be in the, certainly in the first half of 2014 that we'll have that information. I expect to take that to regulatory agencies to gain approval for the pivotal program.

Because one of the things that I'm trying to understand a little bit is the key to you to -- and do you think it's relevant that, I would imagine, you guys need to and want to be in Phase III before potentially AbbVie and then Gilead's going to be out there with their oral regimen because that could signify change in care. Is that something that you agree with or no?

I agree with that, and that is our strategy.

Okay, second question just on KALYDECO, the $12 million O-U.S., can you give us a little bit of a sense how much of that was in Scotland? And I'm trying to see. Did you get anything at all in the U.K.? And I imagine Ireland was on board. I'm trying to get a sense, that $12 million, sort of which countries were onboard already.

Yes, so reimbursement in most of U.K. and Ireland didn't kick in right until the back end of Q1 and at the beginning of Q2, so the majority of the $12 million, the majority of the growth over Q4 was from existing markets like Germany where we're already on the market and reimbursed. We're really expecting the growth in the U.K. to come in Q2 and beyond.

Okay. And do you see any growth at all coming up sort of in the U.S. at the moment? Or do you really need to -- do we really need to wait for new mutations to really expand the market here?

Yes, I'd agree with that. We've said a number of times, the vast majority of G551D patients over 6 in the U.S. have already been receiving treatments. So really, what's going to lead to growth in the U.S. is those new indications that we're working on with ivacaftor in monotherapy.

Okay, great. And just a final question, does the CF Foundation get royalties? Just remind us on 661 and 809.

We haven't disclosed where the royalties are actually paid, and we will at a future point later in development.

Our next question comes from Liisa Bayko of JMP Securities.

I just wanted to verify what is the nature of the data you'll be presenting at the upcoming European Cystic Fibrosis Foundation -- or Cystic Fibrosis Conference? And then a quick question on your intentions for the convert.

Great, thanks, Liisa. Well, as usual, we don't get ahead of data that would be data in presentations that would be accepted at these major medical conferences. So we will be advising you of that at a future point in time. As far as the debt is concerned, we have $400 million of 2015 convertible debt. It does have provisional call features. It has a hard call provisional call after October 2013. That's if the stock trades above $48, then we can call with that. And then it also has a soft call feature. Sometimes people aren't aware of that, but it does have a soft call feature that if the debt trades just above $63 for 20 days out of 30, then we do have the opportunity, and we'll have the intent to convert it into equity. So we're happy with maybe having that opportunity in the near future to convert the debt into equity, which is all consistent with kind of the broad financial strategy of managing the P&L, the revenues to the operating expense and then managing the cash on the balance sheet and then also managing the debt on the balance sheet.

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

You presented a lot of preclinical tox work that you have done on 135 relative to other molecules. I'm just wondering if you can give us a sense as to maybe how comfortable the FDA is with this idea that it's the interaction with mitochondrial DNA that caused the tox for other nukes, which obviously you guys have less of with 135. And is there any other preclinical work that you might be able to do in parallel to enable yourselves to move even more quickly through the clinic? Or is the rate limiting effect here just combo PK rather than FDA?

So Brian, that's Peter speaking. So with respect to the Agency, we had quite intense discussion about the safety profile of 135, alone and in combination with potential other agents. And I think we, from a tox point of view, satisfied their needs. I think there's no additional tox status [ph] that we will do. And from a clinical point of view, we agreed to [indiscernible] program, which is, if successful, we'll then basically open up towards the normal enrollment as we go forward. So I think there is everything settled [ph], and I think there's no more that we have to.

Our next question comes from Robyn Karnauskas of George Bank (sic) [Deutsche Bank].

So just one other question on hep C, so obviously, the J&J timelines have slowed, and you're saying second quarter for the Bristol study. What gets you more comfortable that you can hit those timelines with Bristol? And maybe, more specific question, what steps or interaction studies need to be taken before you start the Bristol study?

This is Bob. Just, first of all, there are no drug interaction studies that we're required to do before we start the combination with daclatasvir. We'll just be measuring pharmacokinetics of the components in the first small cohort of patients that get started. And yes, the J&J timeline is really driven by the outcome of the drug interaction studies, which are ongoing, and once we have those data and can confirm the doses we're going to use, we'll be raring to go and ready to go into Phase II.

And as a follow-up, do you control the Bristol study? Or is that really in Bristol's hands?

We're running the Bristol study.

Our next question comes from Matt Roden of UBS.

So KALYDECO in Europe and to get to the lower end of guidance, looks like you'll need to see some greater sequential gains this year than what you had in the first quarter, and presumably, that comes from expanded geographies in Europe. Can you speak to the line of sight that you have a little bit more specifically as to what regions are going to come on board in the second quarter and thereafter. That's going to enable you to get to the guidance range that you have? And then I have a follow-up on heterozygotes if I may.

Sure, Matt, let me talk through. So in reimbursement terms, which is the key to count the accelerating growth that we're projecting, we have achieved reimbursement across the U.K. and the Republic of Ireland with the exception of Wales. The notable markets there are England, Scotland and Ireland, which have the largest preponderance of patients, so them coming on stream in addition to France and Germany where we already have reimbursement in place, that's what leads us to believe that we can be more sure of the revenue expectations in 2013. That reimbursement backed up by the reaction we've seen from CF patients and CF centers and the initial uptake we've seen since reimbursement kicked in, that's what gives us more confidence in the guidance that we are updating today.

Very helpful. And then on the heterozygotes, so we've seen that with VX-809 that the heterozygotes data weren't sufficient for moving forward as you guys talked about. When you think about 983 and 661, presumably, you guys know more about these molecules than we do. Is there anything about those 2 molecules that give you any confidence or any inkling that they may be more successful than 809 in the heterozygotes when combined singly with KALYDECO? And then a sort of follow-on to that is, do you -- ultimately, do you think you're going to need to have a triple combo, that is 2 correctors and KALYDECO, to get the results that you need in the heterozygous population?

Yes, great questions. And so I think as we've said before, we believe, from what we know today and it's still based on a fairly small amount of data that the heterozygotes are going to be more difficult to treat than the homozygotes. Both of them are cell studies, and what we've seen, as you point out, with 809 in the clinic. We may do some more work with the single correctors, first-generation correctors like 661 and 983 that do have different pharmacokinetic and tissue penetration properties. But I do -- if you ask me to handicap it today, I think the ultimate solution to the heterozygotes will really come from the combination of a first- and the second-generation corrector with KALYDECO. And it's one of the reasons why we're trying to move those second-generation correctors forward as quickly as we possibly can.

[Operator Instructions] Our next question comes from Ying Huang of Barclays.

I have one on hep C. That is assuming that everything else being equal, would you rather have an acquisition of a company where you do have API or [indiscernible] where you can have everything in the combo under one umbrella? You can get 100% economics given your stock has appreciated a lot lately. And secondly on CF, we know that you're pushing already 3 compounds in the clinics for CFTR correctors. What's your view of the competition? And we know that Novartis has one CFTR drug [ph] in Phase I as well. What's your strategy there? Can you elaborate a little bit?

I'll take the M&A question in the U.S., and Jeff will talk about the CF strategy. I mean, first of all, M&A and licensing and other things, they're tactics to the endgame. Clearly, if you're in a position where you can control the regimen, it's easier in terms of moving through development and also control of the commercialization of that regimen. However, I'd say, at this point in time, as we progress forward, you're seeing us execute on the strategy that we think we're looking to create the best regimen of what 135 is in the middle of, and we continue to execute around that and give ourselves multiple chances. And at this point, we're just going to continue along that strategy.

And then with respect to the CF strategy and the competition, we're in a very fortunate position here that our scientists started working on this problem, 14, 15 years ago now and clearly, established a leadership position in the science, which is reflected in the portfolio of drugs we have. On the other hand, we fully expect there will be competition. That's the way this industry always works when someone sees the successes, and we anticipate that. Our strategy is to move as quickly as we can with our portfolio, get those to as many patients as possible to benefit them. And we think in the long run, that's best for patients and best for Vertex.

Our next question comes from Howard Liang of Leerink Swann.

I have a couple of questions on VX-135. One specific question on the 40 to 60 patients by the end of year, just in terms of makeup of that, would that be 20 patients each from each of the ribavirin combination studies and 20 from the daclatasvir study?

Yes, that's approximately right.

Okay. I guess a quick follow-up on that is, where is the GSK combo study? Have are seeing [ph] that?

So our strategy, obviously, is to have a number of collaborations, and we're moving forward with that. We've started a number of studies so far this year, and we've had the opportunity to start the daclatasvir study more rapidly based on BMS. However, we're now evaluating the initiation of remaining studies, and we'll be getting back to you with the timeline of that as they go forward.

Okay, great. And a broader question is, when you make a decision next year about how to move forward, what regimen to move forward to Phase III, what profile of the combination are you shooting for is pan-genotypic coverage, specifically genotype 3 coverage important?

Yes, it's a great question. I think we've said all along, Howard, that we believe, today, anyway, from what we've learned that we're going to need a highly efficacious regimen, which, for us means, SVR's greater than 80% certainly in genotype 1 naives. We're going to need a short duration of therapy, which we believe is 12 weeks or less, and we're going to need a very highly tolerable therapy. In addition, there are some other potential differentiating points, and they really have to do with Pan genotypic, as you point out, and they have to do with some of the sicker patient populations. And our strategy is to investigate our regimens, first, for the sort of basics, if you will, and then see if we can develop differentiated regimens around some of those other properties and get them out there quickly.

Our next question comes from Phil Nadeau of Cowen and Company. .

Just 3 quick ones. First on -- a follow-up to Howard's. We've seen a couple of doublets in HCV genotype 1 already, and they haven't produced SVR rates of greater than 80%. Are you seeing something pre-clinically that suggests the VX-135 doublet could hit those -- that SVR level? Or are these largely done to increase the safety database? And second, for Ian, could you just let us know what you assume in your guidance is the timing for the launch of sofosbuvir? Does your guidance anticipate competition from sofosbuvir in the fourth quarter this year? And then third, Jeff, for you, you mentioned moving the second-generation correctors along as quickly as possible. Could you give us some updated idea when those could get into the clinic?

Yes. That's a lot of questions. You may have to remind me of a couple of them as we go, but let me answer on the first one. So first, just to be -- I want to be clear that when you're talking about doublets, you're talking about a nuke plus ribavirin. Is that right?

Yes, that's right.

Yes, so yes, we think that a nuke -- the reason that we're really pursuing a nuke plus ribavirin first is to understand the safety profile and the potency of our nuke alone before we combine it with other DAAs. But our belief is, for the majority of patients, one will need 2 DAAs, and certainly, you can see that reflected in our strategy. So I think that's probably the answer to your first question. Now, you want to just repeat the rest of the other 3 questions so I can remember.

Yes, so the second one was for you also, and that's an update on when the second-generation correctors could get into the clinic. And then the third was for Ian, and that is what is -- what timing of sofosbuvir approval is assumed in the guidance that you reiterated [ph] today.

Yes. With respect to the second-generation correctors, what we said is our goal is to get one of them or more than one of them into the clinic by the end of next year. That's 2014.

And Phil, to the guidance, I'll just say again, we provided total revenue guidance. The only line item guidance we provided in revenues was to KALYDECO. We have accounted for what we see as the potential decline for patients initiating treatment. I actually mentioned that in my prepared remarks.

Our next question comes from Katherine Xu of William Blair. Y. Katherine Xu - William Blair & Company L.L.C., Research Division: I have a couple of questions. So when you start the VX-135 and daclatasvir combo study, are you still going to be required to monitor the cardiac, EKG, ECG and other markers? So just curious about that. And then, are there -- is there a cap of sales in U.K. and [indiscernible] Ireland, Scotland and Wales, et cetera, for orphan drugs? Is there a cap on accumulated sales? Just those 2 for now.

So Bob will take the first question. Stuart will follow up, Katherine.

So hopefully, the answer is that's something we'll be discussing with the regulatory agencies once we have the initial data going forward. Our hope is that we will have made a substantial clearance of safety with those initial groups of patients, but obviously, the outcome will depend on our discussion with the regulators. So it's kind of hard to really answer that one definitively at this point.

And on the, is there a financial cap for orphan drugs in the U.K., there isn't a financial cap in those countries. The real cap is the number of eligible patients with G551D that we can bring benefit to. The only country that kind of has a cap really is Scotland, in that KALYDECO is covered in Scotland under a rare disease fund. That rare disease fund was put in place earlier this year. There's about, I think, GBP 21 million in that rare disease fund. That's certainly more than enough to cover KALYDECO for all the eligible patients in Scotland. So I think the short answer to your question, Katherine, is no. Y. Katherine Xu - William Blair & Company L.L.C., Research Division: Okay. If I may, just a quick follow-up. On pricing, when we look at our models for the combos, the double combos for homozygotes and potentially, the triple combo for heterozygous. How do we -- how shall we think about pricing? I mean, do we look at the similar pricing of KALYDECO right now? Or should we think...

Well, I'm not going to tell you how you should look at pricing, but what I will tell you is it's far too early for us to be talking about pricing when we really only just begun the Phase III program for 809. And it's really much too early in the process to be making any comments on price from our end.

Our final question comes from Salveen Richter of Canaccord Genuity.

On the 661 program, I think you have additional studies reading out in the second half. Can you maybe comment on what these studies are and whether we should expect 93 data in the second half as well? And then on KALYDECO and I could be wrong here, but I think you took a price increase in January where you're looking at the last 3 quarters being flat. So just wondering what was playing out in Q1. Were there dropouts or so forth?

So maybe I'll take the disclosure of data in the second half of the year. We don't anticipate any significant data disclosures regarding VX-661 in the second half of the year. Although, we did mention on our call the other week that we do need to take the data we received from the current or the most recent Phase II study and other studies and have a discussion with the regulatory authorities. That will, then, put us in a position to communicate to you the next steps for VX-661. But try and think about other data regarding CF in the second half of the year, it would probably be at the medical conference and specifically, the U.S.-based medical conference for cystic fibrosis. And as I said earlier on the call, we don't preannounce what we'll be disclosing at that meeting. And your second question, I'm sorry?

It was on price, Ian, I think, let me take that one. We did take a price increase in the U.S. within the quarter, that's correct. From quarter to quarter, there's really multiple factors that can affect our revenue. There's lots of kind of puts and takes that were within one particular quarter. Let me just, though, address one thing that I think you were alluding to. Was there a dropoff or increased dropoff of patients? That didn't happen. Our persistence and compliance rates are very high with KALYDECO and have been very stable over time. What we're really focused on is the annual revenues for KALYDECO. We feel very good about the revised guidance that we provided today.

And Salveen, I was just checking my notes. You mentioned what we will be doing for VX-983 in the second half of the year, and just a couple of weeks ago, when we had our call, we also talked about entering a combination study in patients with VX-983 and ivacaftor. So that would be in the second half as well. Whether we receive data from that, unsure at this point in time, that study has not started yet.

So Salveen, thanks very much for that, and on behalf of the Vertex team, thanks very much for joining us tonight. If you have additional questions, we will be in the office, and we will be happy to take your call. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.