Vertex Pharmaceuticals Incorporated (VRTX) Q2 2014 Earnings Report, Transcript and Summary

Good evening ladies and gentlemen, and thank you for joining the Vertex Pharmaceuticals Incorporated Second Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Vice President of Investor Relations, Mr. Michael Partridge. Sir, you may begin.

Thank you, operator, and good evening, everyone. Joining me on the call tonight are Dr. Jeff Leiden, Chairman and CEO; Dr. Jeff Chodakewitz, Chief Medical Officer; Stuart Arbuckle, Chief Commercial Officer; and Ian Smith, Chief Financial Officer. Our agenda tonight is as follows: Jeff will begin by reviewing key priorities for our business, then Jeff Chodakewitz will discuss our progress with our cystic fibrosis development programs and our strategy from here. Next, Stuart will discuss second quarter product revenues and the outlook for KALYDECO growth, and will also review preparations for launch of the lumacaftor and ivacaftor combination. To close, Ian will review the second quarter financial results and provide commentary on our expected financial profile moving forward. We plan for the call to run for approximately 1 hour. [Operator Instructions] You can access the webcast slides by going to the Event section of the Investor Relations page on our website. I will remind you that we will make forward-looking statements on this conference call. These statements are subject to the risks and uncertainties discussed in detail in today's press release and our 10-K and 10-Q, which have been filed with the Securities and Exchange Commission. These statements, including, without limitation, those regarding the ongoing development of potential commercialization of lumacaftor in combination with ivacaftor, and Vertex's other cystic fibrosis programs are based on management's current assumptions. Actual outcomes and events could differ materially. Information regarding our use of GAAP and non-GAAP financial measures and a reconciliation of GAAP to non-GAAP is available in our second quarter 2014 financial results press release. The press release is on our website, and I would also refer you to Slide 4 of tonight's webcast. I will now turn the call over to Jeff Leiden.

Thanks, Michael, and good evening. Last month, we shared positive results from our 2 Phase III studies of lumacaftor and ivacaftor in people with cystic fibrosis who have 2 copies of the F508del mutation. These results have given great hope and optimism to patients and families with this disease and to the physicians and health care professionals who treat them. As a company, we have also greatly increased our understanding of CFTR correctors and the assays we used to evaluate our medicines during the last several years. Together, these developments provide us with further scientific validation for our ongoing efforts to develop transformative medicines that provide increased benefit for the vast majority of cystic fibrosis patients. The Phase III results also increased our confidence that we can achieve our vision to be a leader in developing therapies for cystic fibrosis and innovative new medicines to treat other serious diseases, and to achieve our financial goals of delivering long-term sustainable growth in revenue, earnings and cash flow. Today, I will review our 3 strategic priorities for achieving our vision as a company. Priority one is to transform the treatment of cystic fibrosis with medicines that address the underlying cause of the disease. CF affects 75,000 children and adults in North America, Europe and Australia and is one of the most prevalent orphan diseases. Slide 5 outlines our strategy to treat the vast majority of people with CF and also to further enhance the benefit for those we treat. With the clinical data we have today, we believe we are on track with this strategy. KALYDECO is available today for people with the G551D and other gating mutations, and we have the potential to treat many more people based on our label expansion efforts for KALYDECO monotherapy. Jeff Chodakewitz will describe the details of these studies in his remarks. With the positive Phase III data for the lumacaftor and ivacaftor combination announced in June, we are now in the cusp of significantly expanding the number of CF patients who can benefit from our medicines. But even with the success of the TRAFFIC and TRANSPORT studies and the momentum that we have created, our work in CF is far from done. We are evaluating the potential of our medicines in younger children and new groups of people with CF. And as we expand the number of people our medicines treat, we continue to seek ways to enhance the clinical benefit with next-generation medicines and other combination regimens. We are deeply committed to being the leader in CF therapies, and we'll maintain and build on our leadership by continuing to invest in our CF programs and by pursuing external opportunities that complement our internal efforts. Our second strategic priority is to invest to advance our pipeline. We have a productive research engine that has created numerous innovative medicines over the last decade. We will seek to bring new medicines from our research labs into the clinic in the months and years ahead in a number of key specialty disease areas outside of CF. We are also continually surveying the landscape for potential medicines outside Vertex that create transformative opportunities in other serious disease areas of interest. Executing well on our first 2 priorities will enable our third strategic priority, which is to achieve sustainable long-term growth in revenues, earnings and cash flows to allow us to continue to both invest in our business and to deliver superior returns for our shareholders. We have a strong financial position, nearly $1.5 billion in cash. And even as we grow our top line, we see our overall expense profile remaining roughly similar to where it is today. The strategy that we articulated 2.5 years ago has remained consistent, and we have continued to execute against that strategy. This execution has fundamentally changed the outlook for our business, increasing confidence in our plans for the future and for people with CF and their families. Now I'll hand it over to Jeff.

Thanks, Jeff, and good evening. In my remarks, I will review the progress we've made on advancing our development programs in cystic fibrosis and highlight further potential developments we anticipate in the coming months. We have learned a lot from the clinical results we've obtained from numerous studies over the past year, and this knowledge positions us to further advance our CF pipeline and treat more people with this disease. Stepping back, what differentiates our CF program is our CF research platform. This platform has enabled us to select molecules that, in human bronchial epithelial cells isolated from CF patients, restore CFTR protein function and address the underlying cause of disease. The in vitro results have turned out to be highly predictive of clinical benefit across many studies. And the mechanism of action restoring CFTR protein function has proved to be differentiated in terms of the breadth of clinical benefit that patients experience. Now numerous clinical results over the past year have both further validated the predictive ability of our CF research platform and opened the door to treating many more patients, including those homozygous for the most common mutation F508del. First, I'll highlight our progress in establishing the benefit of KALYDECO monotherapy for more people with CF. We have confirmed KALYDECO's clinical benefit in patients with 8 additional mutations similar to G551D, and we received regulatory approval for these patients in the U.S. earlier in 2014. We anticipate EU approval in the second half of this year. We submitted an sNDA in June and an MAA variation in July for KALYDECO monotherapy in patients 18 years of age and over with the R117H mutation. Additionally, we announced in May positive data from a proof-of-concept study in 24 people with CF who have residual function mutations. We plan to initiate a Phase III study this year in people with residual function mutations that will evaluate longer duration treatment with ivacaftor and perhaps treatment with combined therapy, pending the progress of VX-661 and discussions with regulatory agencies. As we seek to expand KALYDECO use in younger patients, we have now conducted a PK and safety study in people with CF ages 2 to 5 with gating mutations. We expect to report the data from that study in the third quarter of this year and potentially file an NDA, utilizing a child-friendly formulation of KALYDECO in the fourth quarter of this year. I will just close with KALYDECO by mentioning that one of the most interesting and encouraging recent findings has been long-term data in G551D patients. At ECFS in June, we showed that KALYDECO reduced the rate of decline in lung function over time by nearly 50% in G551D patients, which suggests that CFTR modulation can change the course of the disease. It is important to remember that people with severe forms of CF, such as those with G551D or F508del, typically lose nearly 2% of lung function each year. Thus, these results for KALYDECO give a broader view on the importance of our CF medicines over time. With combination therapy, we reported the positive results in late June from the Phase III TRAFFIC and TRANSPORT studies, which showed improvement in FEV1 and other measures, including pulmonary exacerbations in patients homozygous for the F508del mutation. We devoted a call last month to discussing these results, and I won't review the data here but we are very encouraged by the positive feedback we continue to receive from the medical and patient communities. We will submit the NDA on a rolling basis. We expect to submit the first sections this week and to complete the submission for ages 12 and older in the fourth quarter. As part of the registration program for the lumacaftor/ivacaftor combination, we conducted an exploratory study in patients who have one copy of the F508del mutation and a second mutation that is not responsive to either ivacaftor or lumacaftor alone. We reported data today from an 8-week study of lumacaftor plus ivacaftor in this population. Although we did not see efficacy, this was consistent with our expectations and belief that a triple combination will provide us with the best chance to benefit these patients. Importantly, the safety results are consistent with the homozygous population and support our NDA and MAA filings. These results confirm our belief that we will need a different combination to be able to treat the F508del heterozygous patients who have a second allele that doesn't respond to a corrector or potentiator. Behind lumacaftor is another first-generation corrector, VX-661, which may have a role in helping to treat 3 different populations: KALYDECO-responsive patients with F508del on the other allele; F508del homozygous patients; and patients with F508del on one allele and another mutation on the other allele that is not responsive to a corrector or potentiator. We are currently conducting a 12-week study of VX-661 in combination with ivacaftor in F508del homozygous patients, and we expect to have results in early 2015. We could consider clinical studies of a dual combination of VX-661 with ivacaftor for any or all of the 3 previously mentioned groups. Additionally, we anticipate pursuing a triple combination in the future with VX-661 and ivacaftor, along with the next-generation corrector. We currently have several next-generation corrector compounds in the lead optimization stage of research. Significant work remains to be done to move these into the clinic. But based on our progress, we plan to begin clinical development in 2015. In summary, our CF development over the first half of 2014 has taught us a great deal about the clinical validity of our research platform, the ability of our approach to fundamentally change the course of the disease and the potential to optimize therapy by treating each allele. We believe we are poised to treat many more patients and enhance the benefit for the patients we treat. With that, I will hand it over to Stuart.

Thanks, Jeff, and hello, everyone. Tonight, I'll talk about our second quarter sales performance and the key drivers of KALYDECO growth for the rest of the year. I'd also like to discuss the priorities for the commercial organization as we prepare for the approval and launch of the lumacaftor/ivacaftor combination. Total product revenues were $122 million in the second quarter. The vast majority were KALYDECO, but I will note that INCIVEK generated $9 million in the quarter. So turning to KALYDECO. KALYDECO generated $113 million in product sales in the second quarter, including U.S. sales of approximately $63 million and international sales of approximately $50 million. This represents an increase of $14 million over Q1 2014. Underlying demand and adherence in G551D patients continue to be strong, both in the U.S. and internationally. The growth was primarily a result of the expansion of the KALYDECO label by adding 8 additional mutations in the U.S., as well as treating some more people with G551D in Europe. The uptake in patients with the additional mutations is in line with what we experienced in bringing G551D patients onto therapy, and the majority of the eligible patients are already on therapy. We hope to reach nearly all of the approximately 150 eligible children and adults in the U.S. by year end. Label and geographic expansion remained the key long-term growth drivers for KALYDECO. We were pleased to receive a positive opinion from the CHMP in the second quarter, recommending the approval of KALYDECO for people with CF ages 6 and older who have one of 8 non-G551D gating mutations. The CHMP's positive opinion will now be reviewed by the European commission, and we anticipate approval in the second half of this year. There are approximately 250 children and adults ages 6 and older who have one of these additional mutations in Europe. In Canada and Australia, making KALYDECO available to the approximately 300 people with the G551D mutation was and remains an important objective this year. We've made good progress in Canada. The letter of intent signed in June with the pan-Canadian Pricing Alliance is an important step toward eligible Canadians receiving KALYDECO through public reimbursement. However, our work is not complete until each province has added KALYDECO to its individual drug program, which has to happen before people can get access to this medicine. Ontario and Alberta have added KALYDECO to their product listing agreements, and patients are beginning to be initiated in these 2 important provinces that account for over 1/2 of the G551D patients in Canada. We share the urgency of the CF community to bring this process to a successful conclusion, and we will work as quickly as the other provinces are able so that people can receive KALYDECO without delay. In Australia, it has been 16 months since our first reimbursement submission and the CF community is unfortunately still waiting for access to KALYDECO. Despite being offered a price equivalent to the best in the world, Australia is unique in not providing reimbursement. And in addition, seeking to impose criteria, which would effectively lead to 1/2 of patients not having access to KALYDECO. We believe that all eligible Australian children and adults should have the opportunity to receive KALYDECO. We remain committed to trying to reach an agreement and are waiting to hear back from the Department of Health on our proposal submitted in May. Turning now to the lumacaftor/ivacaftor combination and our launch preparations. We expect to add additional positions to our commercial team toward the end of the year to support both the increased number of patients in existing countries and expansion into new countries. One area of build-out is here in the U.S. where we'll be adding more case managers to our patient services team who help providers and patients navigate the reimbursement process, as well as help with education and compliance. Internationally, we will need to establish a presence in some new countries: in Central, Southern and Eastern Europe, and also Latin America, in order to meet the needs of people with this more prevalent form of CF. Although we will be expanding to many more countries, the incremental investment is relatively small given the limited sales and marketing infrastructure needed in each country. In summary, we are pleased with the progress we are making with KALYDECO as it continues to be made available to more patients who could benefit, and we are maintaining our KALYDECO net revenue guidance for the year. Also, our launch preparations for the lumacaftor/ivacaftor combination are well underway, and we are focused on bringing this transformational medicine to as many CF patients around the world as soon as possible. I'll now hand the call over to Ian.

Thanks, Stuart, and good evening, everyone. In my remarks tonight, I will review our financial results and then discuss near-term financial metrics that reflect our longer-term financial expectations of the business. First are the financials. This quarter, we generated $122 million in total non-GAAP revenues, which included KALYDECO revenues of $113 million. The KALYDECO revenues are up 15% versus the second quarter of 2013 as we continue to expand the number of patients we treat. Our second quarter non-GAAP total operating expenses were $237 million, a decrease of $44 million compared to the second quarter of last year. Within our operating expenses, our non-GAAP R&D expenses were $179 million for the second quarter of 2014, a reduction of $11 million compared to the second quarter of 2013. And non-GAAP SG&A expenses were $58 million for the second quarter of 2014 compared to $90 million in the second quarter of last year. As we have stated, these reductions in operating expenses, overall, reflect Vertex's decreased investments in hepatitis C and a refocus towards CF medicines. Our non-GAAP net loss was $142 million or $0.61 per share compared to prior year net loss of $6 million. This increase loss was the result of significantly reduced, now excluded, HCV [ph] revenues in 2014. The key priority entering this year as we move through an investment period was to maintain financial strength and position the company for future revenue and earnings growth driven by the success of our CF medicines. I'm happy to report that at the end of the second quarter, we have achieved both: a strong financial position; and the successful progression of our CF medicines that position us for our future financial growth. Additionally, following the positive Phase III data for the ivacaftor/lumacaftor combination, which provided greater confidence in our future growth, we signed a credit agreement for $500 million; $300 million of which we added to our balance sheet in July, giving us now nearly $1.5 billion of cash, cash equivalents and marketable securities on our balance sheet. This additional cash strengthens our balance sheet and provides added flexibility as we work to further enhance treatment of cystic fibrosis. Specifically, we expect to utilize this financial position to support collaborations in priority programs in CF and in other areas. Now to our financial guidance. It remains unchanged for 2014, reflecting our expectations of growth in KALYDECO revenues and management of our operating expenses. Our KALYDECO net revenue guidance of $470 million to $500 million for 2014 anticipates the following: revenues from Canada following the recently signed letter of intent to enable public reimbursement; revenues from Europe following the potential approval of KALYDECO for use in additional gating mutations; and revenues from Australia following the potential completion of reimbursement in the second half of 2014. Reimbursement in Australia is the key risk in achieving our KALYDECO revenue guidance for the full year. We are maintaining our non-GAAP total revenue guidance to be in the range of $520 million to $550 million, of which $470 million to $500 million relates to KALYDECO. Our total revenue guidance also includes royalties and other collaboration revenues, including those from our recent out licensing of VX-787, our novel flu medicine to Johnson & Johnson, for which we expect to recognize the majority of the $30 million upfront payment in the second half of 2014. We are also maintaining 2014 non-GAAP operating expenses to be in the range of $890 million to $930 million. SG&A expense will increase incrementally going into 2015 as we seek to support label and geographic expansion for KALYDECO and prepare for the potential launch of ivacaftor and lumacaftor combination. We currently anticipate the R&D expense will decrease somewhat in the second half of 2014, reflecting the completion of the Phase III TRAFFIC and TRANSPORT studies. Positive Phase III data for a lumacaftor and ivacaftor combination has provided us greater business confidence in terms of our ability to treat many more people with CF, which puts us on a pathway to profitability and financial growth. To echo Jeff Leiden's comments earlier in the call, our 3 strategic priorities are: one, transform the treatment of CF by a continued internal investment and exploring external opportunities; two, invest internally and externally to advance the development of innovative medicines to treat other serious diseases; and three, deliver long-term sustainable growth to enable continued investment in the business. Successful execution on these priorities will enable us to realize our vision to be a leader in developing therapies for CF and other serious diseases and to deliver meaningful return for our shareholders. If successful, we will achieve a financial profile consistent with our large-cap biotech peers, specifically a growing revenue line based on the expansion of the number of patients we may treat with high-value medicines; total operating expenses relatively similar to current levels; high operating margins given significant leverage from the revenue opportunity; and significant cash flow generation. We look forward to sharing additional development and regulatory milestones in the coming months. With that, I'll ask the operator to please open the line for questions.

[Operator Instructions] Our first question comes from the line of Geoff Meacham with JPMorgan. Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division: I wanted to ask you about the lumacaftor at KALYDECO, the Expanded Access Program. What can you tell us about it? And will you be able to provide access to patients that are younger than 12 years of age? And I have a follow-up.

Geoff, it's Jeff Chodakewitz, thanks for the question. We are working with our investigators, the CF Foundation, patients, to move forward on Expanded Access. But we really feel that what we need to do next is gain more experience in patients who have FEV1 less than 40, and so we're actively working on developing a protocol that we can put in place and get the drug to patients in that category. And then once we have that data, we'll understand more and see how to proceed from there. Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division: Okay. And then just on the data today for heterozygous delta patients. A, was it a surprise to you guys? And B, does it sort of validate your view that you'll have to have 2 correctors plus KALYDECO? And can you tell us anything about the next-gen corrector that you guys are still working through preclinical?

Sure. Thanks. So first of all, no, it was not a surprise. And given the Phase II data, it really is essentially as we expected, but we did want to be sure that we understood this given the medical need and the importance for patients. In terms of the -- your question about the next generation and what else for that population, as we mentioned, we are making progress on our next-generation compounds. We have multiple compounds in lead op and things that are -- in terms of even greater activity that we're finding. And so we are anxious to bring one or more compounds forward next year. In terms of whether this population will require 3 drugs, I think that is really still a question. We understand that probably is the best chance, but there are some aspects of VX-661 that has slightly different characteristics like the lack of a drug-drug interaction that affects ivacaftor levels and penetration into the lung. And so we'll have to think about whether we need to understand; what the 2 drug combination might be able to achieve. That's how we're thinking about it right now.

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

This is John on behalf of Michael Yee. First, a quick one. Based on -- on the results today, in the heterozygous study, given that the exacerbations in the TRAFFIC and TRANSPORT were so strong, do you have any details on that? And I have one follow-up.

So we're -- this is still early data. We're still trying to understand all the information. But remember, this was only a study for 8 weeks in 120 patients. So whatever data we have, it's not going to be very meaningful.

Okay, okay. Then as a follow-up, as you think and plan for the potential launch of the combo 809 drug for homozygous patients, how do you think the uptake of this would be similar or different from your experience with KALYDECO given if you think about how KALYDECO managed to be well saturated within 3 quarters? But that -- this is only in target population of approximately, I believe, around 1,000, while for the new indication, could be almost as big as 15x that.

Yes, it's a great question. It's really too early to provide specific guidance around the launch trajectory and peak penetration. We do know that patients are waiting with great anticipation for this combination product because there's no other medicines that treat the underlying cause of the disease. But as you said, in comparison to the G551D population, that's a significantly smaller population than people who have the F508del homozygous mutation. And that is going to present a kind of a logistical challenge to CF centers.

Just one more. Along those lines, how many of those F508del homozygous patients are well identified and within the system?

If given the prevalence of really very robust CF registries in, certainly, most of the major markets, I would say that the vast majority of the 508del homozygote population is well characterized.

Our next question comes from the line of Matt Roden with UBS.

I've kind of a company-building question. You guys talked about your objectives of advancing your internal pipeline and also looking outside the company for what assets may be relevant to you. And at the same time, it looks like you've bolstered your balance sheet a little bit. You talked about the $1.2 billion that you have on the balance sheet right now plus access to more. Does that -- should we take that as a signal that you've moved closer to deciding what directions you want to go in outside of CF? And what sorts of verticals should we be thinking about longer term for Vertex? I know you guys have spoken kind of vaguely about the types of programs that you'd be interested in, but I'm just wondering, are you getting any closer here? Is there any update that you can give us?

Yes, thanks for the question. This is Jeff Leiden. So; I think we've been pretty consistent in our strategy over the last couple of years in saying that we are interested in serious specialty diseases where we think we can actually make transformative medicine. Certainly, CF is a beautiful example of that. And we plan to do that both internally and externally. So from an internal standpoint, we haven't talked a lot about it yet, but we do have programs in cancer and progressive MS, for example, in Huntington's disease, and all of those. If you think about it, are very much like CF, right? Very serious diseases without much treatment, where we think there's a scientific opportunity to make a difference. And similarly, we are looking outside. And one of the reasons we strengthened our balance sheet is to allow us to do certain kinds of strategic transactions, starting in CF, where we want to complement our internal resources, but also in other serious diseases outside that fit that kind of mode.

And maybe just a quick follow-up on the heterozygous results today. Obviously, minimal effect on FEV1 here, but it looks like you did observe something on CFQ-R and sweat chloride. Is there anything to conclude from that? Does that give you any maybe confidence that adding another piece of the puzzle with the triple combo is going to help?

So it's Jeff Chodakewitz. I think in terms of the sweat chloride, we think that it is an important marker. I think that -- and I don't think this is new, it's really about saying, "Are we hitting pharmacologically the target?" And "Is it driving at pharmacological activity?" We think that's important for how we think about compounds, and that we're on the right track. I think that, that will be valuable information. I don't think the fact that we didn't see an FEV1 really changes that. In terms of the CFQ-R results, I think we're really interpreting that with caution. We're going to -- we'll look at that, but it was a somewhat variable response, and I think we just have to learn more.

Our next question comes from the line of Brian Abrahams with Wells Fargo.

I just wondered if you had any clarity on the dose you plan to file on for 809 in combination with KALYDECO. And do your regulatory plans for ivacaftor or lumacaftor include a fix to those combo, the 2 components?

It's Jeff Chodakewitz again. So we're still analyzing the data, but we do plan to make our dosing decisions this quarter. We think it's going to be soon. And if the -- we have those opportunities, we do anticipate trying to deliver fixed dose combinations.

Our next question comes from the line of Robyn Karnauskas with Deutsche Bank.

It's Alethia for Robyn. Maybe 2 questions: One, what -- can you give us a little bit more granularity in Europe about where kind of the most prevalent populations are on the F508del just so when you think about modeling? And I have a follow-up.

I can talk about where the populations are in Europe. Actually, they're pretty broadly spread. I mean, this is the most prevalent form of CF, and so pretty much follows the CF population and the population overall in those markets. And so it's a much less concentrated form of CF in something like G551D oversee the Celtic mutation. So it's more broadly spread, more evenly distributed and that's the reason why we are going to need to expand into some new countries to be able to reach those children and adults with this form of CF.

Great. And just as a follow-up on the -- your residual function trial on Phase III. Like what do you -- how are you thinking about duration on that trial? And do you think that 661 could help the duration be a little shorter in that trial in Phase III?

So can we just clarify the question? It's -- to be honest, you're not going through real clear. If you could just clarify the question, was it regarding how we think about those residual function patients with...

How long the trial should be run? Like how do you think a reasonable Phase III would be for the residual function population?

Hey, Robyn, I think -- this is Jeff Leiden. I think the question you're asking is the length of the trial and also the role of 661 in residual function, if I heard you correctly?

Yes.

Yes. So I think we are learning a lot, as Jeff Chodakewitz said about the length and size of these trials. And I also think we're learning a lot about the different combinations. And we do plan to take all of that into account, as well as our residual function data when we go to the regulators and talk about size duration of the trials. And also about monotherapy versus a combination therapy. So I think you can anticipate hearing about more about all of that.

Our next question comes from the line of Geoffrey Porges with Bernstein.

This is actually Wen Shi here for Geoff. Two questions. The first one is for Stuart. So in preparation for the combo launch, what sort of payor discussions have you had both in the U.S. and outside the U.S.? Right, so we've heard that you've already gotten some press mention for U.S. with Medicaid. And then also outside of U.S., you are having some difficulties, for example, in Australia, all right? So now with the G551D homozygous being a significant step up in patient population, so how do you anticipate that reimbursement and pricing is going to happen both in the U.S. and ex-U.S.?

Yes, so we really haven't spoken to payors about the combination product because we didn't really have the Phase III data to be able to have those really meaningful discussions. They would've been purely theoretical. So now that we've got the data, we are beginning program of research to go out and talk with payors, both in the U.S. and internationally. That process is really just beginning. In terms of what challenges we may have, I think what we know is that we've got a medicine, which has a really impressive benefit for patients. It works really well on things that are important to payors, to physicians, to patients. We know there's a high level of anticipation for the product because nothing else treats the underlying cause of the disease. And whilst it is a larger patient population, the G551D patient population, it's still -- patients 12 and over with this form of CF still only accounts for 22,000 patients in the U.S., Europe and Australia. And so it's still a very targeted patient population. So whilst it's a bigger population, it's still a very ultra orphan population. Then the other thing I would say is I'd use some caution extrapolating from one particular instance issue that we're having with Arkansas Medicaid. That's one isolated incident here in the U.S. And whilst Australia, we have yet to reach an agreement, we've reached agreement and are getting reimbursed in 18 other countries around the world. And so I'd just caution you against extrapolating from those exceptions to projecting those to be the rule.

Yes. As a quick follow-up, can you speak to your -- and if any plans for R117H in the children patient population, as well as patients with nonsense mutations in CFTR.

So it's Jeff Chodakewitz. Our -- as you know, our pivotal trial in R117H actually did enroll children, as well as adults. I think we understand that data well. Even though we missed the primary endpoint in the study, we believe we have a strong argument and have filed that. And so -- and that will include potentially data, or will include the data from children, and I think the data have to be a dialogue because we studied a large number of patients. We studied a significant percentage of all the patients with R117H globally. So we expect to -- we don't expect to do additional studies in R117H. We really do anticipate trying to understand the data that we have and make our best arguments. In terms of young children, are you -- I want to be sure I understand your second question. Are you talking about...

Nonsense mutation is about 10% of the patient population. Are you thinking about some internal or external combinations to address that?

Yes, I think the patients with not -- true nonsense mutations on both alleles obviously are not going to be helped by our current corrector therapies. And that's one of the areas where we're going to need to look outside as well for additional kinds of therapies to address those patients. As you say, it's about 10% or less of the total population.

Our next question comes from the line of Liisa Bayko with JMP Securities.

First question is for Ian. I just wondered if you could quantitate in some way the revenue that might be at risk if -- for 2014 if Australia doesn't pull through with reimbursement. Or maybe tell us how many patients there are and when you are expecting reimbursement? Just some way to quantitate that component.

Yes. Thanks, Lisa, for the question. I'm not going to go down to the specifics to Australia. We're involved in, as you might expect, an interesting discussion down there in Australia and I don't want to go into a lot of detail, specifically for the revenue from that country.

Could you tell us how many patients there are at least or something like that with the G551D?

Yes, there's approximately 200 patients.

200, okay.

Yes. And therefore, you can apply a normal uptake to it. But I would just add, though, as you try to kind of pinpoint the kind of the revenue within our guidance, I would just add that given that we are dependent on Australia coming through, it helps you understand where we are in the range of our guidance that we set earlier this year, which pushes us towards the lower end of that range that we've provided earlier this year.

Okay. And then my next question is just one on pricing of the combination. Now that you've sort of had a little bit more time to think about the data, what's the right way for us to think about pricing? Is it sort of pricing that's lower than current KALYDECO? Or do you think that this can command more than that given there's 2 drugs? Or just what's the right way to think about really pricing for the combination for the homozygous 508 population?

Yes, Lisa, it's Stuart here. It's too early to make any comments on pricing. As you say, we do have the Phase III data now. Now that we have that data, as I referred to earlier, we can begin to build the clinical and economic evidence and begin to test that with payors to develop the support we're going to need for the pricing and reimbursement discussions that will happen down the line here. But we're not in a position to make specific comments on pricing at this time.

Our next question comes from the line of Mark Schoenebaum with ISI Group.

This is [indiscernible] sitting in for Mark. Just a couple of questions. One of them, just curious, wondering about the long-term data from TRAFFIC and TRANSPORT when we might get an update on that? And then the other question, just sort of following up on the discussion about pipeline development and acquisitions and perhaps, you touched on it and I missed it. But just trying to better understand the features of those products, programs that make them attractive to, specifically to Vertex.

It's Jeff Chodakewitz, I'll take the first part of that. So in terms of the ongoing long-term extension study from TRAFFIC and TRANSPORT, we do have planned interim analysis and that will include safety evaluation, as well as FEV1. I guess I'd note that we have submitted abstracts on the 24-week TRAFFIC and TRANSPORT studies to NACFC and hope to be able to present those there. And our goal will be to include information coming out of the interim analysis at that meeting as well.

And then on your second question on attributes of assets that might be interesting to us. Obviously, the first set of assets would be those that could complement our own internal CF assets. We certainly understand now the combination therapy is going to be the rule for most patients, particularly as we move to higher and higher levels of efficacy. And so as you might expect, we're looking very closely adding 4 assets that could complement our internal assets in CF. Beyond that, as we've said before, we're very interested in disease -- in very serious specialty diseases where we see an opportunity to make or acquire transformative therapies. Therapies that make the same kind of difference that our CF medicines have made in CF. And so as we move forward, you can expect to see us looking at those kinds of assets.

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

This is Kumar Raja in for Yaron. So have you seen any changes in U.S. reimbursement? And are payors evaluating the response to KALYDECO-class benchmark to support ongoing payment? And for the CF collaborations which you are planning to do, is that going to hit R&D? And when will that happen? Whether it will hit this year or next year?

Yes, on reimbursement here in the U.S., the reimbursement for KALYDECO has been excellent from the moment the product was launched back in January, 2012, and continues to be very broad. All eligible patients are able to access KALYDECO with the one notable exception that's been referred to in Arkansas. But other than that exceptional circumstance, KALYDECO is widely available to all eligible patients.

Our next question comes from the line of Katherine Xu with William Blair. Y. Katherine Xu - William Blair & Company L.L.C., Research Division: I'm just curious about a recent paper. They did some in vitro experiments in F508 deletion cells and then found antagonism between KALYDECO and lumacaftor, whereas in [indiscernible] experiments, they were additive. Can you just comment on why that was the case, just in the preclinical setting? The cells, design, the readouts, what are the differences?

So it's Jeff Chodakewitz. I think it's really hard for us to speak about somebody else's work. I think I really would just refer back to the experience we've had as you noted in our systems. And as we talked about in our prepared comments, really, the fact that the assays in our labs have really been such important value in terms of identifying compounds and the translatability to the clinic. And ultimately, we have the kind of clinical data that we spoke about on our last call. Y. Katherine Xu - William Blair & Company L.L.C., Research Division: Okay. And then if you don't mind, just a quick follow-up. See, in Canada, if you could remind us how many G551D patients are there?

Yes, there's about 100 G551D patients in Canada, roughly evenly split between those that have private reimbursement and those who have public reimbursement.

Our next question comes from the line of David Friedman with Morgan Stanley.

This is Brienne Kugler in for Dave. Just wanted to clarify some of your earlier comments. So will you be filing with KALYDECO 809 on fixed dose co-formulation? And will you need to run any additional studies to support the co-formulation?

So it's Jeff Chodakewitz. We obviously still as we talked about -- have to decide on the dose, but we do plan to file. And with a fixed dose combination, we don't have -- need to do additional studies.

Our next question comes from the line of Brian Skorney with Robert Baird. Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division: I guess -- certainly, it seems like payors push back on KALYDECO pricing. To some extent, it reflects their concerns about combination pricing. I just -- Jeff, if you could characterize, is this explicit in any of your payor discussions? Or is this something that you're just kind of talking about to general media outside of that? And if it is part of the payor discussions on KALYDECO pricing, how are you addressing that with them?

Yes, I think the payor discussions we've had have been centered on the approved product. And while there is an awareness that we are looking to develop a pipeline of products, the conversations we've had with payors have been about providing access for patients who have the specific forms of CF that we currently labeled for. Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division: And just on a housekeeping item. The INCIVEK revenue that you booked non-GAAP of $9 million, what's driving that? Is that just an accounting figure? It doesn't seem like demand sales based on IMS.

[indiscernible] accessible phase. It's not accounting. There are actually real sales, and maybe Stu wants to give a little bit of background behind that.

Yes, exactly. As Ian said, this isn't really an accounting adjustment. It is the impactive residual demand for INCIVEK. And so we thought it was notable to reference it. We're not necessarily predicting that there'll be meaningful INCIVEK sales going forward, but we thought it was useful to reference it, seeing that it's part of our non-GAAP revenue. Brian P. Skorney - Robert W. Baird & Co. Incorporated, Research Division: Do you have any idea in what sort of paradigm is that being used? Is that being used on a peg [indiscernible] backbone [ph]?

We really don't have any insight into how that is being used as we reduced our investments and all of our support for INCIVEK some time ago. We really have little insight to what's going on in that market. We just thought it was worthwhile noting it as it's a part of our non-GAAP revenues.

Our next question comes from the line of Phil Nadeau with Cowen.

Just a couple. First, on the children study ages 2 to 5, you said the primary endpoint is safety and then the secondary endpoint's more efficacy related. Are there any criteria for those secondary endpoints to be hit in order for you to file? Or is it really just if you show safety you'll be able to extend the label down to H2?

No, it's really PK and safety, just to be clear. It's -- as you'd expect, most of measures can't even use in children that age. So it's -- and the submission is really just focused on PK and safety.

Okay. And in your prepared remarks, you mentioned that you might investigate 661 and heterozygous patients. Are there any ongoing studies going on at 661 and heterozygous patients? What data, I guess, will you have at the time that you design a Phase III program from 661 and heterozygous?

We do not have any ongoing studies or data specifically in that population with 661 right now. The only ongoing study is really the 12-week study that we've referenced in the homozygous patients.

The only thing, maybe to remind you of is, that we do have the previous data on the heterozygous patients very specific subset of those who have Delta 508 on one allele and a KALYDECO responsive mutation on the other allele. And that did show a significant, incremental benefit of adding 661. That will be an important part of our exploration of 661 going forward.

Would it -- just trying to get a hang on, it's our process. Would it be that if the 12-week study for 661 in homozygous patients produces somewhat better than 508, maybe you'd be willing to extrapolate that to the heterozygous patients and that would be sufficient to go forward with the Phase III? Is that kind of -- is that sort of the thinking?

It's a good question. I think it's maybe even a little broader than that. As Jeff said, we really think about 661 in at least 3 or 4 settings. One is obviously in the homozygous patients and asking is it -- does it show benefit over and above what we see with 809. One is in the special population of heterozygous, which would really be a way of improving efficacy in those patients with the KALYDECO responsive allele and 508 in the other allele, and that's the number 70% of those who have a KALYDECO responsive allele. Then, of course, there's -- they are the what we call the hatmins [ph]. That is patients who have a Delta F508 on one allele and a non-KALYDECO responsive mutation on the other allele. And as Jeff said, there are some different properties of 661 from 809 that we do want to explore in that population to see whether we would see incremental benefits there. And then, of course, there's just the basis of a 3-drug regimen with our next-generation corrector. So 661 is really a way that we see lots of different potential uses, many different options, and our plan is to explore those as quickly as possible in parallel.

Operator, we have time for one more question.

Our final question comes from the line of Yigal Nochomovitz with Oppenheimer. Yigal D. Nochomovitz - Oppenheimer & Co. Inc., Research Division: I just wanted to clarify something on the next-generation corrector program. Should we expect the next-generation correctors are going to get slotted into the combo regimens from day 1? Or is there going to be a period where we see some initial monotherapy work to establish efficacy and safety? And I have a quick follow-up.

It's Jeff Chodakewitz. So I think from the -- when we first go into [indiscernible], I think we have to, as you noted, to really understand that -- to be sure we understand the performance of the drug itself. We have to start with at least some limited studies with monotherapy, not necessarily in patients, but at least in healthy adults. And then we would take it from there. Yigal D. Nochomovitz - Oppenheimer & Co. Inc., Research Division: Okay, great. And then, just very quickly, following up on Brian's question from earlier in the call on the homozygous combo filing. Have you done any further data analysis on the TRAFFIC and TRANSPORT results to point -- to 1 dose as potentially preferable over the other? As well as if you could comment on any considerations regarding regimens, simplicity and manufacturing requirements that are playing into your decision as to which dose to file on.

So I think that the -- as I mentioned, the -- our analysis is really still ongoing and what we're really trying -- the biggest driver, as Stuart talked about, was really about the clinical data. We hope to be able to get there soon. Certainly, from a patient perspective, we think that the match regimen where patients take both drugs twice a day and could use one kind of image has advantages for patients in terms of simplicity. But we're really still looking at all the information.

That brings our question-and-answer session to a close. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.