Vertex Pharmaceuticals Incorporated (VRTX) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Vertex Pharmaceuticals Incorporated Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Michael Partridge, Vice President of Investor Relations. You may begin.

Thank you, operator. This morning, we announced our third quarter financial results and in conjunction with that, the decision to reduce our workforce and to focus our investment on future opportunities in cystic fibrosis and other key R&D programs. On the call today, Jeff Leiden, Vertex's Chairman and CEO; will comment on these announcements in the context of Vertex's long-term strategy. Then Bob Kauffman, Vertex's Chief Medical Officer, will review Vertex's weakened clinical progress in the areas of cystic fibrosis and also review the current status of our hepatitis C and JAK3 development programs. Following that, Ian Smith Vertex's CFO, will review financial results and provide some perspective on the financial impact of today's announcement on Vertex's profile going forward. Please note that Stuart Arbuckle and Peter Mueller are not available to be on the call this morning. They are communicating with their teams regarding the reduction in workforce announced today. It is our intention to conclude today's call before 09:30 a.m. 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 risks and uncertainties. These risks and uncertainties are discussed in detail in our 10-K and 10-Q reports, filed with the Securities and Exchange Commission and also in the press release announcing our results this morning. 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. These statements 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. Information regarding our use of these measures and a reconciliation of GAAP to non-GAAP is available in our third quarter 2013 financial press release, and is described on Slide 4 of this morning's webcast. I'll now turn it over to Jeff.

Thank you, Michael, and good morning. Given the nature of today's announcements, I know we are joined by a significant number of Vertex employees, members of the media and other interested parties, as well as many investors and analysts. I'd like to thank all of you for joining the call. Today, we made 2 announcements. The first was to announce the reduction in workforce related to INCIVEK and the resulting focus of investment into our opportunities in cystic fibrosis and our research in early development programs including all-oral regimens for hepatitis C. This include the elimination of 370 positions. We made this decision in response to continued and rapid decline in hepatitis C treatment rates, which resulted in the reduced use of our marketed therapy, INCIVEK. The overall reduction in hepatitis C treatment has occurred its physicians and patients anticipate the arrival of new treatment regimens. We reached the point where our level of investment and support for INCIVEK was beyond what we believe is necessary to support future physician and patient demand. The groups most impacted by this decision are those related to the promotion and development of INCIVEK. Related G&A infrastructure has also been reduced. This announcement today represents perhaps the most difficult choice for a company to make, and we did not make this decision lightly. Vertex is a very special place. The creativity, passion and dedication of employees define us as a company. The hepatitis C market however has changed very rapidly. Reduction in workforce is difficult but it's the right thing for our business, particularly in light of the significant potential we have for future growth. Going forward our investment and our people are focused on 2 key areas. One, our CF programs; and 2, our earlier stage research and involvement programs including VX-135, as part of all-oral regimens for hepatitis C. INCIVEK was and still is a breakthrough medicine. It transforms the treatment of genotype 1 hepatitis C patients by doubling cure rates in half the time. Since launch in 2011, more than 100,000 patients have been treated worldwide with this medicine. INCIVEK has transformed our company as well, bringing in more than $2.8 billion in revenues and royalties since launch and creating a foundation from which we can execute a broad strategy to drive sustained growth. We're continuing to make significant progress against the strategy, which we discussed with you earlier this year, and I'd like to spend the next few minutes reviewing our progress with you. The first part of the strategy is prioritizing our development investment to advance our cystic fibrosis pipeline. 2 weeks ago at the NACF conference, we told you about our progress towards expanding the number of CF patients we can treat and maximizing the clinical benefit we can achieve with our transformative CF medicines. We're on track to get key data later in 2013 and throughout 2014. The second part of the strategy is to focus our research and early development efforts on innovative medicines for serious diseases. In hepatitis C, we continue to pursue a potential opportunity to participate in a future market of all-oral regimens with development of VX-135 our nucleotide polymerase inhibitor. We remain committed to innovation, and I expect you will hear more about some of our emerging early stage programs in 2014. Although it is still early, areas of significant progress include novel approaches in oncology, next-generation correctors for CF, the small molecule approaches for progressive multiple sclerosis. As discussed previously, we also made a decision to seek a partner to advance global development of our JAK3 inhibitor, VX-509. We've recently obtained positive 12-week results from a Phase IIb study of VX-509, which will be presented as a late breaker at the ACR conference in San Diego later today. We are committed to pursuing a potential collaboration for further development of VX-509. The third part of our strategy is to maintain our financial strength. This will support our continued investments to drive the creation of new medicines. We finished the third quarter with more than $1.4 billion in cash, cash equivalents and marketable securities. In summary, we are focusing our business towards cystic fibrosis and earlier stage pipeline programs. We're well-positioned as we move into 2014. Ian, will describe the financial implications in more detail during his remarks. I'd like to conclude by thanking and recognizing the many colleagues who have contributed to the success of INCIVEK and the success of Vertex. I'll be meeting with Vertex employees today and tomorrow, I'll tell you, what I'll tell them. The management team and I are at deeply grateful for everything they've done and continue to do to transform lives. Vertex remains a company dedicated to the creation of transformative medicines. KALYDECO and INCIVEK have benefited so many patients and there is much more that we can do to bring innovative medicines to the people who need them. Thank you. I'll now turn it over to Bob.

Thanks, Jeff and good morning. My remarks will focus on 3 important clinical areas for the company. First, I'll recap the updates we gave on our CF development pipeline at the North American Cystic Fibrosis Conference earlier this month. Then I will review the current status of our nucleotide polymerase inhibitor VX-135. Finally, I'll review some of the highlights of the VX-509 RA data that are being presented today at ACR. Beginning with cystic fibrosis. We presented a comprehensive update in Salt Lake City, 2 weeks ago during the North American Cystic Fibrosis Conference. I will briefly summarize the main points here. First, key clinical data to help understand the full potential of ivacaftor monotherapy is expected to be available in the next 8 months. The key studies and anticipated timing of the data for ivacaftor monotherapy are shown on Slide 6 on the webcast. These include Phase III studies and the other gating mutations and R117H populations, as well as the study in children ages 2 through 5 with gating mutations. And the proof of concept study in patients with residual function. If successful, we believe ivacaftor monotherapy has the potential to reach more than 7,000 people with CF. Second, we have completed enrollment in our TRAFFIC and TRANSPORT Phase III studies evaluating fixed dose combinations of lumacaftor, otherwise known as VX-809 and ivacaftor, and F508del homozygous patients ages 12 and older. We are evaluating multiple endpoints in Phase III, including our primary endpoint of lung function as measured by relative change from baseline in FEV1 and secondary endpoints including change in weight, rate of pulmonary exacerbations, and change in quality of life is measured by the CFQ-R. If successful with the combination of lumacaftor and ivacaftor in F508del homozygotes patients, we may expand the treatment population by another 28,000 patients. We expect to have data from these studies in mid-2014. Third, VX-661. For VX-661, we see 2 principle potential roles. The first role representing our primary strategy is as a first generation corrector, as part of a triple combination that includes a next-generation corrector and ivacaftor. To potentially create a combination medicine for F508del heterozygote patients that may also enhance benefit in the F508del homozygotes population. To further this strategy, we plan to advance VX-661 in to a 12-week Phase IIb study in combination with ivacaftor and F508del homozygous patients. This study is designed to provide safety and efficacy data for VX-661 and ivacaftor and we expect to initiate the study in the first quarter of next year, following approval of the study protocol by regulatory authorities. In addition, VX-661 could serve to enhance efficacy in an F508del heterozygous population that is known to respond KALYDECO. For example, in patients with G551D on one [indiscernible] and F508del on the other [indiscernible] by correcting the F508del CFTR protein produces in these cells, which can then be potentiated by KALYDECO. We have now begun enrolling a 4-week proof of concept study, evaluating VX-661 and ivacaftor in patients with both the G551D and F508del mutations. We anticipate data from both of these VX-661 studies in 2014. Now onto hepatitis C. Our goal is to develop VX-135 as part of a potential all-oral 12-week or less pan-genotypic regimen with high viral cure rates. We have conducted 2 studies of VX-135 with ribavirin, principally, to evaluate the safety of VX-135 over the course of 12 weeks. Data from a 20-patient study conducted in Moldova is being presented at AASLD. VX-135 was well tolerated in this study and we are reporting an SVR12 rate of 10% and 50%, respectively, in the 100- and 200-milligram groups in this study. Additionally, in the U.S. study of 10 patients receiving the 100-milligram dose of VX-135, we are reporting an SVR4 rate of 10%. A 20-patient study of VX-135 in declatasvir an NS5A inhibitor from Bristol-Myers Squibb is ongoing in New Zealand. We expect safety and efficacy data from this study in the first quarter of 2014. Our plan is to analyze and discuss the data with regulators and our partner, to determine the next steps. We have a complete DDI study of VX-135 and simeprevir, otherwise known as TMC435 and we are discussing with the J&J the design of potential additional studies for this combination. VX-135 is on partial clinical hold in the U.S. Before finalizing a response to the FDA on the hold, we have decided to include 12-week safety in SVR data from the current VX-135 and declatasvir study as part of our submission. Lastly, an update on our JAK3 inhibitor VX-509. Later today, 12-week data from a 350-patients, 24-week Phase IIb study of VX-509 dosed once and twice-daily in combination with methotrexate in patients with rheumatoid arthritis is being presented as an oral leg-breaker at the American College of Rheumatology meeting. We have already summarize the key 12-week results in a press release on October 18, when the abstract was published online. In this study, response to therapy was rapid. All VX-509 dose arms had statistically significant ACR20 improvements over placebo by week one. A further comment I will make on these data, is that the ACR50 and 70 rates in patients treated with the VX-509 were significantly greater compared to placebo at the 12-week evaluation point and still appear to be increasing. We await the week 24 analysis of these efficacy and safety endpoints. These results further validate JAK3 as a potentially valuable mechanism to treat autoimmune and inflammatory diseases. With that I'll turn it over to Ian.

Thank you, Bob. I'll start with today's announcement to reduce our workforce and focus our investment, and how such actions affects the company financially as we enter 2014. I'll then provide direction on our anticipated financial profile for 2014 and discuss our third quarter financial results. While there are many strong financial aspects to our business, in particular, our current cash position and our growing revenues from KALYDECO, the decline in the hepatitis C treatment rates has occurred at a rapid pace and this has adversely affected our near-term revenue outlook. We have therefore chosen to restructure our business. Our developments in commercial investment will be focused on multiple opportunities in cystic fibrosis, which have the potential to drive significant revenue growth in the near-term and also focused our most promising early-stage research and development programs, including development of all-oral regimens for hepatitis C. We've also adjusted our infrastructure support, our G&A investment to reflect the updates of needs of our business. These actions reduced our headcount by 370 people or approximately 15% of our workforce and also include a reduction in other spending, principally those areas that support INCIVEK. We expect to incur a total restructuring charge of approximately $35 million to $45 million in 2013, including a restructuring charge of approximately $11 million in the third quarter of 2013. Importantly, these actions align our organization and our financial investment with the growth opportunities we see for our future. With clinical success in KALYDECO label expansion studies, success in addressing F508del homozygote patients with our combination therapy and potential to further expand the number of CF patients we may treat. We have the possibility of emerging in 2015 as a high-growth, high-operating margin business with significant cash flow and earnings. We intend to continue to manage our business in this way, while continuing to invest in product creation for the future. I'd now like to provide some specific commentary on our financial profile, as we head into 2014. First, from a balance sheet perspective. We finished the third quarter with more than $1.4 billion in cash, cash equivalents and marketable securities and we expect to complete 2013 and enter 2014 with $1.3 billion in cash, cash equivalents and marketable securities. This cash position is a strong starting point for 2014 and along with our growing CF revenues can fund 2014, a period when we receive important clinical data that sets the potential product revenue growth for the future. Next. From an operating perspective. We expect 2014 total non-GAAP OpEx to be approximately $150 million to $200 million lower than the forecast of approximately $1.1 billion for 2013. The lower OpEx in 2014 is the result of reductions in our workforce and the realignment of our investment. More specifically, we see: 1, a $60 million to $70 million reduction in payroll and related costs; 2, a reduction of $30 million to $50 million in commercial and other expenses, primarily those to support hepatitis C sale and marketing; 3, a net reduction in R&D of approximately $35 million to $50 million, which reflects INCIVEK, VX-509 and other development costs coming down. This is netted against the expected increase investment in cystic fibrosis; and 4, a reduction of $25 million to $30 million in G&A costs and expenses. We continue to analyze and plan our business and will provide a further update to know the 2014. I'll just make a quick comment, that we expect research investments to remain relatively consistent between 2013 and 2014. We believe this level of ongoing operating expense provides financial leverage in our business, as we move beyond 2014 with a potential revenue growth in cystic fibrosis. Now turning to the third quarter 2013 results. Total revenues were $220 million. Our non-GAAP operating expenses, which exclude costs of product revenues and other charges were $276 million for a non-GAAP loss of $74 million or $0.32 per share. Now for the more detailed results. In the third quarter, total KALYDECO revenues grew a $101 million, reflecting the fact that we are treating nearly all G551D patients in the U.S. and the EU. With the sale to date in 2013 and the visibility we have into the fourth quarter revenues, we have increased our 2013 KALYDECO net revenue guidance to between $360 million and $365 million from a previous range of $345 million to $360 million. As we have stated previously, we see the potential for KALYDECO growth in 2014 based on the following: Achieving reimbursement for G551D patients in Australia and Canada; and 2, expansion of KALYDECO label into additional populations. INCIVEK revenues in the third quarter were $86 million. This decrease in INCIVEK revenues compared to the second quarter stems from a smaller number of patients entering treatment, as the next wave of treatment regimens is anticipated, as well as a reduction channel inventory and lower realized revenue per unit sold after mix shift to government payers. INCIVO royalties were $21 million compared to $44 million in the second quarter, driven by both patient warehousing and seasonal treatments -- seasonal changes in treatments. Finally, collaborative and other revenues in the third quarter were $14 million. Based on the sharper than unanticipated decline in hepatitis C product in royal revenues -- royalty revenues, we are revising our total 2013 revenue guidance down by approximately $100 million to $1 billion to $1.05 billion. Now to our non-GAAP operating expenses of $276 million, which excludes cost of product revenues and other charges. This was lower than the prior quarter and was made up of approximately $202 million in R&D investments and $74 million in SG&A expenses. We expect 2013 non-GAAP operating expense to be approximately $1.1 billion, which is at the low end of the guidance range of $1.09 billion to $1.15 billion that we provided in February of 2013. In summary, I hope the financial results reported today and the actions we've taken are understood, in the context of how we are seeking to advance our business. In particular, I have provided some clarity around the opportunities for our revenues and earnings growth that we see ahead of us and now we are managing our investment and aligning our business with our financial growth opportunity. I'd now like to open the call for questions.

[Operator Instructions] Our first question comes from the line of Geoff Meacham of JPMorgan. Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division: Just in light of the INCIVEK decision. Does this change the internal quarter rate for you guys for VX-135 moving forward? I guess, I just want to get a sense for how you're thinking about hep C as we go forward.

Geoff. I'll take that. I think is that internal hurdle rate, can I just clarify? Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division: Yes, that's right.

Yes. So it is an early stage program, proof of concept study into the combination therapy that we're running VX-135 with the declatasvir. As we look at that study, I mean, we need to get the data which we anticipate will be in the first quarter 2014, and at that point, we'll decide on how we progress our business. We are very and -- for AC overall therapies . We're very aware of the external environment, it's progressing fast, it's highly competitive, and we're going to be taking that into account when we get our data from this combination study that's been run down in New Zealand and we'll advise you at that point, in early 2014. Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division: Perfect. And just one follow-up if I could on CF. for 661, for ivacaftor, when you're looking at the G551D and the delta F hetero patient, how fast do you think when you get the proof of concept data? What could be the next steps there? Do you feel like you'd have to do a full-on Phase IIb, that's a 12-week study or do you feel like you could get into a faster population at the Phase III setting?

This is Bob, I'll take that question. Obviously, depending on the results, we think we could move really fairly quickly into a more advanced program. Obviously, this would take some discussion with the regulatory agencies, once we have the results of the study to decide on the next steps. But given the track record of ivacaftor and what we're developing in knowledge about 661, we could probably move into Phase II study fairly quickly.

Our next question comes from the line of Geoffrey Porges of Sanford and Bernstein. Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division: Couple of questions. First, on VX-135. You haven't disclosed anything about genotype 2, 3 and it would be helpful to know whether you contemplated or planning any studies in the other genotypes with the right environment combination because, I think, it appears as though it's reasonably well tolerated. And secondly, just a follow-up on the question of hurdle, if you do not go ahead with VX-135 is there additional savings to P&L, if you abandon virology and would that be the decision to see if VX-135, can go ahead?

Jeff, I'll take the first part and then turn I'll it over to Ian. For genotype 2, 3, we did develop some data as you know in our viral kinetic studies 7-day data to show very good activity in both of those other genotypes, and we do plan to carry that forward into more advanced studies once we have the initial data in genotype 1 from the 135 and declatasvir study. Whether we would pursue the ribavirin and 135 combination, I think it's unlikely, given the efficacy results that others have generated and obviously, our work going forward would be likely with the declatasvir in combination in those other genotypes.

And it gives me the opportunity to say that we're still in our planning phase as we look at 2014, maybe I could expand on that, which is planning phase means we're still trying to gain an assessment of the revenue picture in 2014 as well. We've got some important data coming up, most proximal data is actually coming out of an R117H label expansion study. So again, that will drive potential expectations on revenue in 2014 as well. And then as far as the cost structure of the business is concerned, we are communicating $150 million to $175 million of savings of what we anticipate will be a $1.1 billion operating expense in 2013. We are pretty tight on those costs. We have good visibility on those costs and as I explain where they come from on the call. As far as additional savings, if in terms of -- if decisions are made to pursue certain programs or not and you refer to VX-135, those haven't yet been taken into account. So yes, there would be probably further savings beyond the $150 million to $175 million. We are planning for success at this point, that's how we run our business at this point in time, that's how we plan financially, frankly how we build the balance sheet to assume how we need to invest in the business. So we look forward to finding out what those results are, out of New Zealand and probably late January, early February, when we're on our year-end call, we'll give you the more precise GAAP financial guidance for 2014.

The next question comes from the line of Michael Yee of RBC Capital Markets.

2 questions. One is on the expense structure. Ian, maybe you could give us a little bit more specifics on the size of the R&D programs. In other words, what is -- how much is early stage versus CF versus hep C. And same with SG&A, maybe you could break that down a little bit, so we know the size of the moving parts. And the second question, is on the 661. You said you're starting a homozygous study, a 12-week study. That data probably comes out sometime after the 809 stage, so maybe you can explain what the point of that study is? And what we do with that, once that data comes out.

Good morning, Michael. Thanks for the question. I'll first of all start by commenting on 2013 and the kind of trajectory for the R&D and SG&A. So as we look into the fourth quarter, so how you understand, how we may finish the year, you should anticipate that our operating expense is very similar to actually the third quarter. You may see some slight reductions in the SG&A specifically, because it's easier to adopt that cost structure with the decisions we've made in R&D. We still have full programs going ahead in many areas in R&D. So you'll see a slight decline in the fourth quarter of SG&A. But overall relatively similar to the Q3 results. And more importantly, as we look at 2014, and again, I'll reiterate we're in our planning phase, but I can give you an idea of the trajectory again, which is that -- when you look at the R&D expense in 2014, you should see a slight reduction as principally due to a reduction in development of -- in areas that I mentioned in my prepared remarks, which was VX-509 and INCIVEK-based therapies. We were actually still studying those in 2013. The big reduction -- by the way, we expect the research investment to stay relatively similar in 2014. The big reduction that you would expect to see when you look at the GAAP financials is in the SG&A area. That's why we've been able to reduce the cost around INCIVEK marketing and sales support. So you should see that decline in 2014. And sometimes even though I provide you some numbers, sometimes there are some missing features that are kind of buried within the numbers because we still are continuing to invest in cystic fibrosis, so we do watch the anticipated increase in the investment in development in cystic fibrosis and also to support the launch and label expansion in 2014. So even though you've seen these declines, would continue to invest in the area of cystic fibrosis to drive that growth opportunity.

But if I just to ask a little bit more, what percent of your R&D is early stage versus CF clinical trials versus early stage?

Yes. Back if February 2013, we gave that break out when we gave the guidance for the full year. I can't commit that we'll do that again at this point but that would be a better point in time that would be able to help you understand the full profile for 2014. It's just a little early, we're only at Q3 of 2013.

This is Bob. I'll take the second part of your question related to 661. So this is a study in homozygous patients. The reason for that, obviously, is that we want to be able to assess PK/PD and efficacy and dose response as part of that study. The 12-week duration is really to get a much better handle on safety as sort of a second molecule coming through, the bar is fairly high compared to VX-809. We want to characterize it well. And we would then have an opportunity to further develop 661. As to when the data would come out from those 2 studies? I really can't speculate at this point. The ivacaftor/809 combination study, and this one, we haven't started this one yet. So we don't really have that much visibility on the exact timing but we'll be able to do that once we get the study enrolled.

And our next question comes from line of Mark Schoenebaum of ISI group.

I had a longer term question and that can be any kind of long-term guidance but this is qualitative, I guess, question. Am I thinking about this the right way, now that you're effectively reducing -- eliminating or greatly reducing hepatitis C infrastructure on the SG&A side. It should be left basically with the CF infrastructure? And, obviously, if things play out, the revenue growth for CF should be pretty dramatic. So my question is as we look at SG&A line over the very long-term and if we make them the assumption that Vertex stays focused commercially on cystic fibrosis, would it be reasonable to assume that, that SG&A line really shouldn't grow all that much over the long-term as revenue potentially grows, obviously, heck of a lot of things work out? And then, I had one more question more on the clinical development side, if I may. Could you just remind us of the powering on FEV in the KALYDECO plus 809 ongoing Phase III's TRAFFIC and TRANSPORT, and then also remind us what you deem to be a clinically meaningful improvement in FEV, please? And then just housekeeping, do you happen to know how many INCIVEK patients were treated in the quarter in the U.S.? Do you happen to have that?

Thanks for the list of questions, and good morning. So, I think you are thinking about the business financially in the right way. We are consolidating down around cystic fibrosis at this point that's why the growth opportunity is for us. We still have a research investment for product creation and we're still investing in that early stage all-oral program for hepatitis C. But in terms of our earnings capability and cash flow, if successful in the area of CF, yes, we don't anticipate a significant expansion in SG&A. There will be some because you got to launch the product to get into a broader audience and it's a geographic -- it's more a U.S., Europe or North America and Europe type expansions. So there will be some growth but the financial leverage in the area is important to us frankly and that's why we're managing the business in this way.

This is Bob. I'll take the other part of the question. In terms of powering of the study. The study is powered based on a 5% relative improvement in FEV1. I won't really talk much about what we think is a clinically meaningful FEV1 change because I think you have to see the study endpoints in their totality, and particularly some of the nonpulmonary endpoints that we saw with ivacaftor, actually are clinically quite meaningful to patients, the weight gain reduction exacerbations. So I think we should take a little bit more broad look at the way this study is being conducted. It is the case that the FEV1 change, however, is the primary endpoint and that's how the study was powered.

Mark, this is Jeff. Just one minor addition or really to elaborate a bit on what Bob said. You probably saw the recent results from the GOAL study at NACF, which really looked at a variety of other endpoints in patients treated with KALYDECO, including mucociliary clearance and digestive function, Pseudomonas colonization. I think we really do think about these therapies as being systemic and one of the things that we will focus on as we move forward. It's measuring a number of these other endpoints because they really reflect patient outcomes very accurately.

Our next question comes from the line of Rachel McMinn of Bank of America.

I'll try to keep my list a little bit shorter but I do have a couple of questions as well. Jeff, for you, I guess, I'm wondering why you chose not to make any changes to your research infrastructure. I think I recall that number being around $200 million annually, and then I guess as a corollary, when do we as investors get more visibility into your efforts there, just in terms of value creation. On 135, can you confirm that 200 mix is being studied in the daclatasvir study? And then, what do you do if 135, just big picture question, if you can actually get those through the FDA and you get a profile that's worth reinvesting in, is this something that you plan to just partner off to multiple companies, keep, look to in-license, something to bring in with it. I just want to better understand your strategic outlook there.

Thanks, Rachel. I'll answer the first part of the question and thanks for it. This concerns our investment and research, and as Ian said, as we move into next year, we expect the investment in research to be approximately equivalent to what we invested this year. And the reason for that straightforward, we believe that our research engine is really the current and future engine for the growth of the company. Actually with a very -- what I would consider a very modest spend in research -- this organization has produced a series of transformative drugs from INCIVEK to KALYDECO to now 809, 661 to JAK inhibitor et cetera. And certainly as we look to the future, we're relying on this engine to continue to do so. So we have a short-term financial issue that we're addressing in 2014 as Ian described, but it just doesn't make sense to cut the long-term engine of growth for a short-term financial issue. We think we have a pretty good strategy for managing it otherwise. Bob, do you want?

Yes, this is Bob, just a quick comment on the 135, we are studying 100 and 200 milligrams in combination with daclatasvir.

And then the rituality of your point about in-licensing, out-licensing, and let's say, a corporal business development strategy around hepatitis C broadly. To me, it's about the results we achieved in the combination study that's ongoing, and pending, let's say the quality of those results, I think it sets a path. High quality results, obviously, means that Vertex is in the game of all-oral therapies for hepatitis C, something that's not high quality then we have to understand how VX-135 may play a role in hepatitis C. That's with Vertex or with another company that has a combination approach. So I'd like to think that we're looking at our position in hepatitis C at this point by looking at the external landscape, understanding the commitment we have as a company, but we've got to make a decision as we go into 2014 based on data.

And I'm sorry, your early stage pipeline, when do we get visibility outside of CF?

As Ian mentioned, we hope to begin to give you visibility to some of that next year. As you know, traditionally we do provide visibility once we begin to see human proof-of-concept data and we hope for some of the programs that will be beginning next year.

Our next question comes from the line of Ying Huang of Barclays.

So my first question has to do with the Australian and Canadian patients with G551D mutations. Because it sounds like those are the 2 major markets where you haven't passed on KALYDECO. Can you give us little bit color in terms of patients number with G551D [ph] mutations. Should we also see 4% of CF patients in those 2 countries having G551D? And then secondly, the R117H trial success here. So I've got a lot of questions from investors about the trial because we know that you're going to put out the top line data by the end of this year. I guess, when we talked to physicians, there are many mild patients there and that's why some investors were concerned about the trial success of R117H. So I'd like to have any thoughts from you guys. And then lastly, given the -- I guess, ACV strategic direction here in your company, are you thinking differently about, let's say, the flu program as well or are you still going to out-license that program and find a partner?

So, Ying, thanks for the list of questions again. I'll take the first and last question, and Bob can talk about 117H heterogeneity of population. So first Canada or Australia, it's approximately 300 G551D patients and that would be important once we gain reimbursement approval in those 2 countries to add to growth. And just staying on the KALYDECO growth path, as you're aware, we do have a filing that's currently under review for other gating non-G551D patients. And that's currently being reviewed by the FDA and Europe. As to the third question you asked, which is our commitment to the flu program. The flu program is actually one of those molecules that we are seeking a partnership to advance forward given our focus and consolidation, and let's say, financial direction of the company. Earlier this year, we communicated that we would be along with VX-509 looking for potential partners to advance the flu program. We continue to seek that partner. And Bob?

Yes, this is Bob. So on the R117H population, we estimate the total R117H population at around 1,100 patients worldwide. It is true that this is a heterogeneous group from really quite mild disease to almost no disease all the way up to a more significant disease with declines in FEV1 exacerbations just like other patients with significant cystic fibrosis. So it is heterogeneous. The way we've tried to deal with that is to narrow the population that we evaluated in our study. That population has a percent predicted FEV1 at baseline of between 40% and 90%, which for R117H clearly puts you into a more severe and more significant group. That is the way we're kind of dealing with the heterogeneity's to basically homogenize the population a little bit, and obviously, we'll see how the results come out when we have them at the end of this year. From a clinical point of view, how the -- should the study be successful, how the uptick will be? I think we'll have to see it, likely will not be as rapid as what we've seen for KALYDECO and G551D.

Our next question comes from the line of Terence Flynn of Goldman Sachs.

Just maybe 1 point of clarification. Is there any sales force still left to market INCIVEK or is that completely restructured today? And then I was just looking back at your guidance you gave for peak KALYDECO sales gave at NACFC. And if I do some simple math here, it seems to me that I get about $180,000 per year on average for pricing for the drug on a worldwide basis, just wondering if that's a good ballpark for net pricing or if there's other assumptions like a discontinuation rate, that I might be missing that goes into that number?

Terrance, thanks for the question. Can you just remind me the first question.

Is there any sales force?

No, we've completely restructured the marketing and sales support behind INCIVEK. And then as to the realized price, we don't comment on the realized price. We'll provide you guidance on total revenues for the full year of $360 million to $365 million.

Our next question comes from Matt Roden of UBS.

First on 509. The efficacy looks pretty potent here. Just wondering, Bob, if there's anything mechanistic behind the 2 cardiovascular events that you've seen across 2 studies and your relative comfort with the safety profile of the molecule overall. And then, how do you extract maximal value from 509? Has there been significant interest from other parties, I don't know to what extent you can comment on that but when do you think would be the right time to look a partner. And then just lastly, just want to follow-up on the earlier question on the R117H study. With considering the heterogeneity of this population, how can you specifically speak any steps that you took to control for the -- for that heterogeneity in terms of minimizing risk of baseline imbalances?

So several questions. First of all with 509. We agree with you, the efficacy we think is really very, very good. In terms of the safety profile, we're actually quite pleased to both -- the safety profile of both without methotrexate in our prior study as well as this one. As you're well aware, cardiovascular disease is very common in this population. In fact, it's the most common cause of death in patients with RA. And so it's not unexpected in a study of these durations to see outcome such as that. So looking over the program overall, we actually are pretty comfortable with the cardiovascular safety profile that we generated.

And I'll add to how to extract maximum value for the VX-509. It's -- for us it's a fascinating area but it's also a competitive area in terms of the all-oral creation of these types of molecules. To get full success from the opportunity, you need to run multiple, let's say, multiple studies, multiple -- in multiple diseases to get the full benefit as most companies are doing. Given our focus at this point in time, we look for somebody else to do that. So we continue to explore partnerships. It's nice to have such good data in our hands, which will enhance those discussions with potential partners, and maybe even better to have a week 24-day there as well depending on how that comes out and we'll continue that discussion with partners to do the right kind of partnership to extract the value. But our focus right now is around cystic fibrosis and all-oral therapies for hepatitis C and also continue to invest in research.

And this is Bob, again on R117H. I think the primarily way that we try to manage variability was really by, as I said before, eliminating the population to those with a baseline FEV1 of 40% to 90%. Otherwise, we relied on randomization as we usually do to create the balance between the treatment groups.

Bob, there wasn't any specific stratification of any other parameters that would speak to the severity of the population?

Honestly, I don't remember that but I don't think there is anything major. I think, it really was just a baseline FEV1 to define the population.

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

At the NACFC conference you outlined relatively large population with residual function mutations. Can you give us the latest views of how you think the NF-1 study would be interpreted by regulators, just given the growing positive safety experience with the drug and what the process would be for getting these groups on the label. And then Bob, maybe you could just remind us about the preclinical assays you looked at over time with 809 or KALYDECO, and how the time frame and cell lines might be similar, different to some of the studies we saw from investigators at the conference last week?

So just in terms of the NF-1 study, this is a proof-of-concept study. Obviously, we need to learn more about the efficacy of ivacaftor in this population, obviously, depending on how the study comes out, of course, we'll talk about it with the regulatory agencies. However, at this point, we are considering that we may need to run another study in order to get an approval, but obviously, much depends on what we actually see in terms of the results. In terms of preclinical assays, I think I know which paper you're referring to from the CF meeting. We've had some questions about that. Obviously, they have their data. We've done similar studies in cell lines for perhaps a somewhat longer duration. This is a combination of ivacaftor and VX-809. We don't see the same diminution of the activity of CFTR that we've seen in those studies. And I think from our viewpoint, the clinical data that we have really kind of trumps the nonclinical data and that we both for 661 and for 809 have seen really well-maintained clinical benefit over at least a 28-day period.

Our next question comes from the line of Yaron Werber of Citi.

I have a couple of questions in CF, and if you don't mind a quick question on hep C. So just, on the Class II residual function mutation, the KALYDECO kind of proof-of-concept Phase II, which is taking R117H plus a broader set of residual patients. What's your sense on the variability in phenotypically in the non-R117H population? And then, just to make [indiscernible] CF, the second question on R117H. Is there -- can you correlate at all what the residual CFTR function is to the actual phenotype, the predicted FEV1? I'm trying to get a sense, can you control for that variability by anyway or no? And then sort of a follow-up on hep C.

So this is Bob. I'll try to answer those questions. In terms of the residual function, obviously, we are -- I think in the big picture, the residual function sort of part of the program starts to shift over from a genetically-based program to a phenotypically-based program. That's really where the end of one study kinds of fits in, as our first look is to whether it's feasible to do that. We'll see how much of variability we have and try to get a handle on what our path forward would be for that population. I think until we see those data, it's going to be pretty hard to speculate. Obviously these are people that have -- sweat chlorides tend to be lower than those with severe disease, they tend to have more mild disease, most of them are pancreatic sufficient as compared to insufficient and so there are many differences, I think that's why we're running an exploratory Phase II study.

One additional comment. This is Jeff, I remind you if you look back at the KALYDECO G551D studies, the responses that we saw really didn't correlate with the baseline FEV1. So we had patients with very high baseline FEV1, who actually responded very, very nicely. So I think until we get the data, what we're really doing in the N01 is, we're studying, as Bob said, a spectrum of patients with different mutations and different severities to try to understand exactly the answer to your question. Until we see the data in a representative population, it's a little difficult to speculate.

Thank you for that. And just a follow-up on hep C. At the 200 -- maybe I'm kind of asking you to dive into your, some of your kind of very early data on monotherapy with 135. At the 200 milligram dose, do you have enough potency if you think that with another DAA like daclatasvir you can really get to a high enough potency? But you really think that you might need a third agent?

So, the data we have is in our biokinetic studies where we have seen very good activity comparable to that of sofosbuvir and that, obviously, kind of factored into our choice of doses that we're studying going forward and, obviously, for the daclatasvir study, we'll see the results when they come out.

Operator, we're close to 9:30, so we have time for just 2 more questions.

And our next question comes from the line of Liisa Bayko of JMP Securities.

Actually most of mine have been answered, but maybe just a drill down on Rachel's earlier question. Can you maybe -- I know we'll hear about early stage pipeline development when it comes but can you just maybe review the core areas that you're investing in, obviously, CF phorology we have C and flu as a focus in phlegm. Is there anything else that we might expect something to come from, what are the core areas of investment?

Yes, this is Jeff. So I think you've got it right. In the mid- to later stage, obviously, CF and then the all-oral program in HCV, which we've been talking about today. Flu is not a program that we're going to invest in further, just to be clear about that, nor do we plan to invest in 509 further. But as you move back into the earlier stage pipeline, we do have programs, as we said, in cancer, in progressive MS, in Huntington's disease and others and, as well as the early stage CF programs in the second gen correctors. And it's those programs that I was referring to and I said we'll begin to get some data beginning next year and certainly into 2015 and as we get the human proof-of-concept data that's usually when we start really talking about these programs.

And our next question -- our last question comes from Robyn Karnauskas of Deutsche Bank.

So I guess, 2 things. Number 1, what is the genotype composition for the 135 studies your reported today? And then the second question is, now that you have longer term data with KALYDECO, you mentioned outcomes, some outcomes measures. When you think about how pairs might look at in 809 KALYDECO combination, do you think the pairs will take into account the durability you see with KALYDECO and view it as a class of drugs or view the combination as completely independent?

So this is Bob. The composition of the population is genotype 1 and the study that we were discussing today, the study that was conducted in Moldova. Most of the patients were genotype, in fact, all the patients were genotype 1b, which reflects the composition of patients in that country.

And what about [indiscernible] city -- and what about subtype?

There was a mix of subtypes, it was relatively a little low on the CC patients, but I think you'll see the full data when the poster is presented next week. In terms of durability, without kind of getting beyond the data we currently have, I would say that based on the data from the PERSIST study, CFTR modulation appears to be kind of a long-term effect. There was really no diminution in the activity over 3-year period with KALYDECO monotherapy. And while, obviously, I can't speculate because we don't have such long-term data for the combination of 809 and ivacaftor, I would generalize it a little bit and just say that this mechanism appears to be one that produces a longer-lasting effect. And, obviously, we'll see as we get further data over the next couple of years how that turns out. I think the payors, obviously, if I can speak for them, I think they, obviously, will be interested in and I think, obviously, very happy to see that this affect is long-lasting. And for the patients, clearly, very important.

Thank you. I'm going to turn it over to Jeff for some final remarks.

First of all, thank you for your questions today. I just want to finish with a very clear acknowledgment of our employees. This is obviously a difficult day for all of us here at Vertex and I want to make sure to acknowledge the incredible work that our employees did to develop and commercialize INCIVEK, we've treated more than 100,000 patients worldwide with very high cure rates. This is what it is, truly a breakthrough drug, and we have a lot more to do but I want to make sure to acknowledge what's been done by our employees because that really formed the foundation of our company going forward. Thanks very much for your questions and for joining the call today.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day everyone.