Vertex Pharmaceuticals Incorporated (VRTX) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Vertex Pharmaceuticals, Incorporated second quarter 2012 financial results conference call. [Operator Instructions]. As a reminder, this conference is being recorded. Now I'll turn the conference over to Michael Partridge, Vice President of Investor Relations. Please begin.

Good evening and welcome to Vertex's second quarter 2012 conference call. Vertex continued to make progress in the second quarter of 2012 to build our global business. With our approved medicines, in its first full quarter, Kalydeco achieved $46 million in US sales, reflecting increased uptake in people with CF who have the G551D mutation. We also announced on Friday that we have received approval of Kalydeco in the EU. Incivek, for the treatment of hepatitis C, reported sales of $328 million in the second quarter. We continue to lead the market in hepatitis C, approximately 70% to 75% of new DAA prescriptions written in the US are for Incivek. However, the number of patients initiating treatment for hepatitis C has declined compared to late 2011 and early 2012. Therefore, we have revised our 2012 guidance for total Incivek net revenues today. Highlighting our progress in R&D, in cystic fibrosis, with clinical results and study initiations, we advanced our efforts to be able to expand the number of CF patients we may ultimately treat. And in hepatitis C we today announced promising seven-day viral kinetic data for our first nucleotide analog ALS-2200 that we licensed from Alios BioPharma. To discuss these and other developments on the call tonight, we have Dr. Jeff Leiden, CEO and Chairman; Ian Smith, CFO; and Dr. Peter Mueller, Head of Research and Development and Chief Scientific Officer. After the prepared remarks, Bob Kauffman, Vertex's Chief Medical Officer, will join us, and we will take your questions. We expect to conclude the call as close to 6:00 p.m. as we can manage. To help us do that, we would ask that you please limit your questions to one with a related follow-up. I will note that information discussed on this conference call includes forward-looking statements which are subject to the risks and uncertainties discussed in detail in our reports, including our 10-K and 10-Q reports, which have been filed with the Securities and Exchange Commission. These statements, including without limitation those regarding the market launch of Incivek and Kalydeco and our guidance are based on management's current assumptions and are subject to risks and uncertainties that could cause actual outcomes and events to differ materially. GAAP and non-GAAP financial measures will be discussed on this call. Information regarding our use of these measures and a reconciliation of non-GAAP to GAAP is available in our second quarter 2012 financial press release which is on our website. Thank you. And I will now turn the call over to Jeff.

Thank you, Michael. Good evening, everyone. 2012 has been a very dynamic and productive year for our business. During the last seven months we have delivered a series of important advancements. For cystic fibrosis, the approval and successful launch of Kalydeco in the US, m more recent approval of Kalydeco in Europe, and positive Phase II data for the VX-809 plus Kalydeco combination in delta 508 homozygous patients that supports progressing to a pivotal program; and now in hepatitis C, very impressive seven-day viral kinetic data for ALS-2200, our nucleotide analogue. With these advancements, all made since the start of this year, we are demonstrating our consistent ability to discover, develop and commercialize multiple transformative medicines, which in turn represents a strong foundation for the sustainable long-term growth that we expect to create with our business. During the last few months I've been working closely with the cystic fibrosis and hepatitis C franchise teams at Vertex. I'll provide a perspective on how we are positioned in these markets and also strategically how we are planning on extending and enhancing our presence in the treatment of these diseases. I'll also highlight for you what I think are the tangible markers for our progress as a business that we will ask you to focus on in the months and years ahead. After that, Ian will review our financial performance, our 2012 guidance and discuss how we're prioritizing investment in our business. Then Peter is going to provide you with a more detailed update on data and recent developments in our pipeline. Beginning with cystic fibrosis, Vertex is seeking to fundamentally change the outlook for people with this disease, and we have made excellent progress toward the goal this year. Kalydeco, which was approved earlier in the year in the US for G551D…

Thank you, Jeff. Good evening to everyone. Financially, 2012 is demonstrating that we have a diverse revenue base with multiple sources. These revenues remain significant and are important to enable reinvestments in our pipeline for future growth and value-creation in multiple diseases. Now to the results. In second quarter 2012, total revenues were approximately $418 million compared to approximately $114 million in the same quarter of last year. The key components of these second quarter revenues are as follows. First, we reported approximately $328 million of Incivek net product revenues. This reflects a strong April, and then a decrease in the number of new patients initiating treatment, most notably in May and June, as Jeff has already described. Second, we recorded $46 million of net product revenues from Kalydeco, which reflects the first full quarter of sales since launch in February earlier this year. This reflects strong patient demand, the connectivity of the CF community, and the broad awareness of the importance of Kalydeco. We expect this revenue stream to grow as more people start and maintain treatment with Kalydeco. We have now received approval in Europe to add to this revenue base and provide further growth. We foresee a sustainable, long-term and growing revenue base from Kalydeco. Third, we received $33 million of royalty revenues, including $28 million of Incivo royalty revenue from J&J. We expect our Incivo royalties will continue to contribute positively to our financial results during 2012 given that Incivo is now available in more than 25 countries. And finally, we received collaborative revenues of $12 million. These revenues primarily fund R&D activities where we have relationships in the areas of hepatitis C and cystic fibrosis. The GAAP net loss attributable to Vertex was $65 million in the second quarter of 2012 or approximately $0.31 per…

Thank you, Ian, and good evening, everybody. My remarks will cover some of the pipeline advances that we have made in recent months, most notably in the areas of CF and hepatitis C. In cystic fibrosis, during the second quarter we announced results from a Phase II study of the corrector VX-809 in combination with Kalydeco. We are very pleased with the results we obtained, and they support the start of a pivotal program early next year. To briefly summarize the key data again, the top dose of VX-809, 600 mg once daily, showed a mean absolute improvement in FEV1 of 3.4% over the 56-day course of the study compared to baseline, and a 6.7% improvement in FEV1 over the placebo arm for the same time period. Both of these were statistically significant with P values of 0.03 and 0.002 respectively. To us, the most important data comes from the period between Day 28 and Day 56 which was when the patients were actually receiving VX-809 and Kalydeco in combination. A distinct pattern emerged between Day 28 and Day 56. All the dose arms involving VX-809 and Kalydeco in combination improved over this time period while the placebo arm declined. The 600 mg dose showed the best response of its in-subject mean absolute improvement in FEV1 of 6.1% over this time period with a P value of less than 0.001 and a mean absolute improvement in FEV1 compared to placebo of 8.6%, also with a P value of less than 0.001. More than half of the patients in the 600-mg once daily arm experienced the greater than 5% absolute improvement in FEV1 during this period. VX-809 was better tolerated as a single agent and in combination with Kalydeco. Adverse events and severe adverse events were similar between VX-809 and placebo…

Thank you, Peter. That now concludes our prepared remarks. Tyrone, we’d like to open up the call to questions.

Thank you. [Operator Instructions]. We have a question from Geoff Porges of Bernstein. Your line is open.

Thank you very much, and congratulations on another important discovery or at least development program. Well done. Just a few questions on the Alios nukes. The first is just, and they’re all sort of technical questions. It’s the first we learn much about them. Peter, can you tell us whether there's any CYP3A or CYP4A metabolism there or likely interactions? Secondly, if you would soft of cast a wide net, what would be your preference for a combination with the nukes given the profile that you've seen so far? You conspicuously didn't mention 222, and I wonder if we should read anything into that. And lastly, is there any dose response worth pursuing to a higher dose than the 200? Thanks. I'll get back in the queue.

Jeff, this is Bob. I'll try to take those questions, not exactly in the order that you gave them. But let's just say for 222 it was not knowingly omitted, for sure. We're certainly looking at ways of folding that into our development. We've mentioned the two potential Phase II studies that we're planning. There may well be other Phase II studies in more difficult to treat populations where somewhat larger number of compounds combined together might be useful, and that's likely where you'll see 222 come in. We also could combine it with one of the nukes, and there would be no reason not to do that. It's just that we've chosen Incivek as the initial one that we're going to pursue. In terms of dose response, yes, we're going to be exploring that more with some PK/PD analysis to try to figure out if it makes any sense to go higher, and we certainly could do that if we choose to. In terms of CYP metabolism, at this point we don't know that much about these compounds. They've just obviously been in very short-term studies. But in general, nukes have not really had major drug interactions with other compounds, and we would expect these to be similar. Obviously we'll see what we get in future studies.

Thanks very much. I'll jump back in the queue.

Thank you. Our next question is from Rachel McMinn of Bank of America-Merrill Lynch. Your line is open. Rachel McMinn – Bank of America-Merrill Lynch: Yeah, thanks very much. And I also had a couple of Alios questions. I guess I wanted to better understand why you're interested in doing separate studies, one with telaprevir and one with ribavirin, but not looking to do triple? And just make sure that the ribavirin study is going to be in Genotype 1 and understand that rationale. And then is this nuke, the adenosine, can you just tell us what the base is? And should we presume that because you've made the decision to go forward, that if you're -- I guess are there any inferences to make on the other Alios nukes? So if the data looks just as strong, are you planning on, you know, how would that influence your clinical decisions going forward? Thanks.

So, Rachel, this is Bob. Maybe I'll take the last one first, and just say that clearly we have the data for ALS-2200 in our hand right now and our plan is to move as quickly as we can with that compound. If all goes well with the 2158 and we have another compound, obviously we'll fold that into development when it comes along, and that could be in the setting of either nuke combinations or combinations of each one with other compounds. I wouldn't otherwise read anything into it except just the two studies are just not running completely in parallel with each other. In terms of the structure, we haven't revealed that, so I won't say much more about that. In terms of the ribavirin study, yes, we do plan to do all of our work in Genotype 1. We see that as where the biggest unmet medical need is at this point, and so we would pursue that. One of the reasons to do the ribarivin plus 2200 study is obviously part of the goal of Phase II is to gather some additional well-needed safety data on the compounds and longer duration, and we just want to clean the system we can to be able to tease out the safety profile of 2200 from the other compound. And just the recent separate studies is really just convenience rather than folding everything into one humongous thing. It just is easier to manage separate studies. Rachel McMinn – Bank of America-Merrill Lynch: And I guess I don’t -- yeah, I'm still unclear why you wouldn't just run triples. If you have an arm without PI-1 with PI, then why wouldn't you run all three together?

Rachel, this is Jeff. Obviously we've just received this data and we're thinking through it. It gives us a lot of optionality, as you pointed out, with respect to our own compounds, and as we've said, we'll consider combining 2200 with other folks' compounds as well. And so I just want to be clear that part of what you're hearing is an evolution of our thinking as we understand what the true optionality here is. And I think the important thing to take away from this is that our plan is to do multiple Phase II studies quickly in order to pick the best combination that we can take forward into Phase III based on actual efficacy and safety data. Rachel McMinn – Bank of America-Merrill Lynch: Great. Thank you very much.

Thank you. Our next question is from Mark Schoenebaum of ISI Group. Your line is open. Mark Schoenebaum – ISI Group: Hey, guys. Thanks for taking the question. A quick one, do you guys have the data in-house for 2158? I don’t know if you -- you may have mentioned and I may have just missed it. And then on, maybe on CF, on the 661 trial, can you just be really clear, is there an interim or is there not an interim in that trial? And what changed that caused you guys to move the timelines out from this year to next year? And also on that, can you remind us of the design? And give us -- and then also on the combo, can you give us an update on when you're actually going to meet with the FDA to talk about a Phase III design? Thanks.

I'll take the 2158 question, and that is the study is ongoing, it's still blinded, so there's nothing really much that I can say about it.

So with respect to 661, Mark, it's a complicated study, it's adaptive trial design. So we will have some data as we go along, and we want to see the entirety of the data before we basically make any statement to the outer world obviously, and that takes a while. So it's not a linear type of design. It's an adaptive trial design to make sure that we look at the compound from different angles and get sort of a good feeling about dosing and combinability with 809. So we hope that if everything goes well, that we can provide you data in 2013. That's for this piece. In terms of -- what was the other question that you had? Mark Schoenebaum – ISI Group: Oh, just the Phase III on the combo, when you may meet with the FDA?

Yeah. So, basically towards the fourth quarter this year we will have a meeting and then talk about how we go forward that is needed to initiate the trial at the beginning of 2013. Mark Schoenebaum – ISI Group: And can I just slip one, for Ian? Ian, if revenues decline next -- I know you're not giving 2013 guidance, but just a general philosophical question, if revenues continue to decline into 2013, what -- how should we be thinking about our 2013 expense modeling?

Actually, to the expense question, Mark, I think you can expect us to look at it the same way that we have this year. What we're trying to communicate on this call is a very active program, specifically in our G&A area this year as well as being nimble as we see markets change and adapt to our marketing programs as well. That's allowed us to maintain the guidance that we have this year despite the increased investments in the priority two programs. As we go into 2013, we have to have a good understanding. We'll get more data and more understanding of the market. But in terms of philosophical question, we're trying to minimize the G&A, the SG&A in our business to the extent we can to prioritize our investment into R&D into these high-value programs. Mark Schoenebaum – ISI Group: Thank you.

Mark, this is Jeff. Maybe just to add even a bit higher level view, because Ian reviewed the pure financial considerations, I think our vision and our strategy has been quite consistent, which is that we're trying to build a global, multi-product business that can produce long-term growth. Obviously we've made some important and impressive progress this year on our late-stage pipeline. As we go into 2013, I think we want to continue to invest in that pipeline to maximize value, and we'll do so. But we've also said that we're going to be financially very disciplined, both in terms of prioritizing programs and in terms of controlling our expenses. And that's our plan, and we'll give you more insight on that as all the pieces of the puzzle from both the revenue and expense side come together later this year. Mark Schoenebaum – ISI Group: Thank you.

Thank you. Our next question is from Yaron Werber of Citi. Your line is open.

Yaron, are you there? Are you on mute?

He has two lines in. Let's try the next line.

Yaron, are you there? Yaron Werber – Citigroup: Yes. I'm here. Can you hear me okay?

Yes. We can. Yaron Werber – Citigroup: Okay, great. So, a few questions, if you don't mind, on the Alios nukes. One, any sense you can give us what was the breakdown between 1A and 1B in that study? Second question, did you see any breakthrough at all on therapy? And then three, what's the metabolism of the nuke? Are they metabolized by the liver at all? Just give us a little bit of sense what you're seeing in animals.

Yeah. So this is Bob. As you saw in our release, the patient population was primarily Genotype 1B. That's likely just geographically based. The study was conducted primarily in Eastern and Western Europe. In terms of breakthroughs, there were none on therapy. Yeah. There were no breakthroughs on therapy. And metabolism we haven't really talked about very much, so there's not much to say about those. These are nucleotide pro-drugs, and so they are metabolized as they get into the liver through first-pass metabolism into the active compounds. Just in terms of the 1A/1B breakdown, I'll just say that in general for the nukes there really hasn't been any real difference in activity between Genotype 1A and 1B clinically. In vitro for these compounds there's no real difference between them. And when you look at the data and the trial, even though there were just a couple of people with Genotype 1A, the viral declines were really indistinguishable from the Genotype 1B patients. So we don't really anticipate there being any big difference there. Yaron Werber – Citigroup: And maybe just a last question, how do you -- give us a little bit of a sense, I mean, you have a lot of work to do. I mean this data is fantastic, but you have data on eight patients at seven days. At this point you need to do the drug-drug interactions, you need to have several hundred patients on drug before you can move into pivotal. We're just trying to understand how is it possible that you can start a pivotal study within 16 months or so?

Yeah. So the way we do it is to move as quickly as we can into a broad Phase II program that will give us the safety database that we need. And we don't disagree with your numbers that it'll be hundreds of patients required, and we anticipate gaining those in various combinations in a series of Phase II studies, perhaps in different patient populations, to basically try to define the right regimens for the right patients. And that is how we will go forward, and we anticipate to be on move quickly. There's a great demand for patients to enter trials with nukes because of their potential advantages. We don't expect any difficulties with recruitment. And so we'll move along quickly.

Yeah. And Yaron, as we go forward. Now when you really look into how those drugs normally proceed, we have really an option here by end of next year to basically enter into a pivotal program. And the nice thing, as Jeff alluded to, is we will have numerous evaluations of different combinations in different patient populations that gives us a good sense what is the best regimen for a particular population if you want to move forward. And I think our decision will be data driven and safety data driven, and so we go forward by end of next year with a solid pivotal program, and I think that gives us an option to be a player in the field.

Thank you. Our next question is from Geoff Meacham of JPMorgan. Your line is open. Yaron Werber – Citigroup: Good afternoon, guys. Thanks for taking the question. For Kalydeco and the R117H pivotal, it looks to be a six-month study. I'm curious if there's an interim, say, three months, and then if you guys are thinking initially that your delta F homozygous combo study will also be six months, or have you any preliminary discussions with the FDA that it still will have to be a 12-month pivotal? And I have one follow-up.

Okay. So, Geoff, hi. This is Peter, so I'll take that. With respect to the monotherapy Kalydeco labeled extension studies, 117 and the gating, the non-551D gating, both of them will be six-month studies without any interims. So we are not doing interims here, it's a small patient population, you don't want to disturb the integrity of the trial by doing interims, so we are not doing this. So the data will be available in the course of next year. And then we will basically file an SNDA to get a label extension. So that's for this part. In terms of the combo 809 for 12 years and older, we are currently planning a study that has, from a global point of view, the ability to produce one-year safety and one-year efficacy data. And we might, depending on and pending on discussions with the regulatory agencies, we have an option in GS maybe to start an earlier rolling submission as we did with Kalydeco, and that could be on the base of half-a-year data point. But I think that needs to be discussed with the regulatory agencies. Yaron Werber – Citigroup: Got you. And just the follow-up is on the hep C franchise. So I'm curious if you guys have some sort of ROI target for hep C. I'm just trying to get a sense maybe at a higher level, I mean what magnitude investment you're willing to make given the current dynamics of the market and the landscape. Thanks.

Yeah, it's a good question. Obviously this is a very dynamic, very competitive market. And rather than going to ROI details, I would say what we've said before, which is that we need to be convinced that we have winning regimens that will allow us to address large parts or large portions of this market going forward. I think as you probably remember, we said that our new data needs to be competitive with anything out there in order to move forward. We feel it is, which is why we're going to move forward. And we'll make the same kinds of decisions as we go and collect our Phase II data prior to moving into Phase III to make sure again that we're not chasing the market with a second-rate or non-competitive regimen. But we think that the new data we provided today is a good start. Yaron Werber – Citigroup: Okay. Thanks.

Thank you. Our next question is from Matt Roden of UBS. Your line is open. Matt Roden – UBS: Great. Thanks very much and congrats on the Alios data here. So on the hep C program, a couple of quick questions here. Can you talk about the baseline characteristics a little bit, maybe the IL-28 genotype, BMI, things like that, just so that we can maybe help assess the degree of difficulty if you will in this study? Secondly, if you can speak to any treatment emergent adverse events in the study. And then for planning purposes, as you move into a pivotal study, is it your assumption that if there is a new standard of care established by that time in the overall space, whether or not you would actually have to run up against an active control or whether or not you'd sort of take advantage of the progressiveness that the FDA is taking forward in the current hep C studies.

So, Matt, this is Bob. I'll take those. In terms of baseline characteristics, there's nothing particularly notable about them. The IL-28B genotype distribution was as you would expect, but we have not yet analyzed the study by IL-28B individual subject, so I can't really say too much about that, nor by any other baseline factors. So that will be coming as we look at the data. Obviously it's very fresh so we don't have a whole lot of additional analyses. In terms of adverse events, they were sort of typical for a Phase I study, is all I can say, and obviously we'll provide more information when these data are presented at a medical conference. In terms of the regulatory strategy, I think it's just a little bit early to say at this point. The FDA, as they have done publicly in a number of settings, has indicated a great deal of flexibility in the development of all-orals. We hope to take advantage of that. It may help us to speed up our program, but it's really premature to think about comparators and sort of all that part of it. Obviously we'll gain more information as we go along.

Matt Roden – UBS: Okay, great. And then related -- I guess as a follow-up on the last question, and that is, is it safe to assume or should we infer that since you're continuing to invest in hepatitis C with an early stage asset here, that it's your view that the commercial market will be more sustainable under sort of all-oral standards of care as opposed to the sort of rapid rise and rapid decline of the treatment rate both ten years ago and again in your experience with peg, ribavirin and telaprevir.

Yeah, this is Jeff. Our view is that this is a large market that will likely evolve into multiple segments, some of which will be large, and that one or all would come, there's a very nice commercial opportunity, there's also a great opportunity to treat more patients which is very, very important. And so as we look at it, as I said, once we see our Phase II data, I think we'll be in a good position to conclude whether we have, let's call it winning or first-rate regimens that can address some of these large patient populations. And if we do, that's a worthwhile investment for us and it's a worthwhile investment for patients. Matt Roden – UBS: Thanks very much.

Thank you. Our next question is from Liisa Bayko of JMP Securities. Your line is open. Liisa Bayko – JMP Securities: Hi. Thanks for taking my question. When we think about the combination with Incivek and the Alios nuke, could you maybe talk about the type of regimen or dosing that you're thinking about for Incivek? Are you going to be considering daily dosing and lower doses than currently available? How should we think about that?

This is Bob. We'll likely be dosing Incivek twice-a-day dosing in the combination studies. In general, principles of the antiviral therapy are that you don't generally lower the doses of each of the agents. You obviously need them to cover the variants for the other. So I would not anticipate any different dosing of Incivek than we're currently using. Liisa Bayko – JMP Securities: And along with the lines, timing wise, I guess 12 weeks is -- I'm just trying to think about if there's a way to make the safety or tolerability a little bit more tolerable in the combination?

Yeah. So just a quick word on that, obviously we had a little bit of a window into the safety profile of Incivek without peg-interferon and [disease] study dual arms. And it was actually quite a bit more favorable, as you'd expect, than what we saw with the triple therapy and it gives us some amount of confidence that we'll be able to design tolerable regimens. And clearly we'll confirm that when we combine them with the nukes. But that is one of the goals, of course, of Phase II is to get that information. And we are looking at 12 weeks as our primary development path. Liisa Bayko – JMP Securities: Okay, thanks. And then just a question on the CF program, are you considering higher doses of 809 currently? Are you exploring any? And then I just wanted to understand the launch plan in Europe. In what sequence will you be rolling out in countries, sort of timing, and how should we think about price? Thanks.

So I take, Liisa, the first thing with the dosing. So as we said, I think there are two aspects of the pivotal trials. Number one is you have to confirm what they have seen in cohort two in Phase II, just the 600 mg once-a-day and Kalydeco 250 mg twice a day. And we actually plan, because we see from the response that we might not have maxed out yet. We will try several other dose regimens that are higher on the VX-809. And one of them, as we always said, could be a BID 400 mg. So that gives you a higher exposure and hopefully then a better translation into the correction. But that's what we are trying to do.

And Liisa, this is Jeff. I'll take your question on the commercial launch in Europe. First, as I think we mentioned before, we've been planning for this launch, so the entire commercial organization is in place in Europe. We're focusing on the four major countries with most of the G551D patients, which is Germany, France, UK and Ireland, initially, although we may roll it out in additional countries over time as we identify these patients, or they identify to us. As I'm sure you know, the way reimbursement works in Europe is a little different. It's negotiated country by country. And we are just beginning those discussions now with each of the countries. It's therefore early to talk about price, and we'll keep you informed as we go. But as I've said before, we view the value -- the pricing of our medicines with respect to their value to the patient, and we think that, based on our data, this is a very valuable medicine for G551D patients.

Thank you. Our next question is from Terence Flynn of Goldman Sachs. Your line is open. Terence Flynn – Goldman Sachs: Hi. Thanks for taking the question. Just was wondering if you can give us any update on how many of the patients have rolled over from PERSIST onto commercial Kalydeco, and if all of them have rolled over? And then any details on the gross to net this quarter for Kalydeco? And then I have one follow-up.

Yeah, this is Jeff, so I'll take those two first. With respect to the rollover, we're not providing a detailed information on the patient numbers. They started rolling over in May and they will continue to roll over, most of them actually, in the third and the fourth quarter. So far the rollovers are going well, Terence, in the sense of it's been a fairly easy process to move patients over. Your other question was on the gross to net for Kalydeco. And again, we haven't disclosed the number. The gross to net for Kalydeco is really based mostly on payer mix, and the payer mix is about 70% commercial, 20% government, 10% other. That may change a little bit over time as we get more government-funded patients on the drug, but we don't anticipate it'll be a major change. Terence Flynn – Goldman Sachs: Okay. And then, have you guys looked at any of the PK/PD data yet from the Kalydeco-809 Phase II trial? And where are you on that front, I guess?

Obviously, we're looking at those data constantly. We will basically present some of them most likely in a conference later this year. Terence Flynn – Goldman Sachs: Okay. Any details you can share with us?

No. Not at this given point in time. I think what I indicated is that we go for higher-dose regimens, which gives you an indication that we have a confidence that we'll reach exposure levels that are covered by our safety ranges. And that's I think the most we can say at this given point in time. Terence Flynn – Goldman Sachs: Okay. Thanks a lot.

Thank you. Our next question is from Tom Russo of Baird. You're line is open. Tom Russo – Robert W. Baird: Good afternoon and congrats on the great results for the nuke. First question, and then a follow-up, I just wanted to get a little more granular thoughts on cross-company collaborations, maybe the appetite that you have, mechanisms that you'd favor, how advanced any conversations you've already had are, and whether one or more of the Phase II trials that you're talking about could be adapted to accommodate outside compounds?

Yeah, this is Jeff. We're not going to comment on any sort of specific discussions or strategies there. I would really just go back to what I said originally, which is our goal is to find the best regimen or regimens per patient. We think there's still a fair amount unknown about what those regimens are, and our goal is to learn more about that. And I think the classes of molecules one would combine with the nuke are pretty obvious at this point. So they don't bear really reiterating. But it is our plan to go forward with our own drugs in combination with the nukes. And as I said, we would consider combining them with drugs of other companies as well. Tom Russo – Robert W. Baird: Okay. And then, the other question, I don't think we've really seen or heard much on the preclinical for the nukes yet. Is there anything that you can say on the dose-limiting talks or how close -- how much coverage you have in terms of the therapeutic window versus the 200 mg that we're seeing today?

It's Peter speaking, Tom. I think there will be data in the upcoming conference that basically describes the preclinical profile. We have spoken a little bit about that in the earlier days and I want to repeat that. So we did a careful evaluation quickly before we made a decision to pursue Alios nukes. And on that base safety was an important component. And as I said then, I say now, it was, from a preclinical point of view, one of the safest, if not the safest, nukes that we have sort of seen in the landscape out there. And I think it was part of the decision to go forward. Tom Russo – Robert W. Baird: Okay. Thanks, Peter.

Thank you. Our next question is from Ying Huang of Barclays. Your line is open. Ying Huang – Barclays Capital: Thanks. Congratulations also on your nuke data. My first question is for Bob. Can you confirm that in the Phase 1 trial, for the placebo-treated patients, they're also predominantly Genotype 1b? And then I have a question for Ian. The excess I guess inventory, $78 million, is that all accumulated from 2Q of this year? Thanks.

So, just a quick answer, yes, the placebo subjects were predominantly 1B.

And Ying, to your question on inventory, it's actually the inventory we built over quite a long period based on our expectations of the market and consistent with how we've communicated on this call. We have seen a change in that market and decline in treatment rates which has resulted with us reserving against potential for excess inventory. Ying Huang – Barclays Capital: Thanks. And then if I can squeeze one more for Peter. You guys have sufficient toxicology data to support 12 weeks study in human now?

Yes, we do. Twelve weeks is all basically ready to go, and as we go forward we will provide actually six months tox data to have longer treatment regimens possibilities if we decided so. Ying Huang – Barclays Capital: Great. Thanks.

Thanks, Ying.

Thank you. Our next question is from Brian Abrahams of Wells Fargo Securities. Your line is open. Brian Abrahams – Wells Fargo Securities: Hi. Thanks for taking my questions, and my congrats as well on the Alios nuke data. Question on the Kalydeco-809 combo, recognizing that the design is still evolving, I was wondering if you could talk about how you might be thinking about inclusion criteria for a Phase III versus a Phase II. I guess I'm just wondering if there's anything you're seeing as you continue to look at the Phase II data that might be suggestive of ways you might further reach the population. And then just on Kalydeco pricing, can you confirm that the ultra-orphan status whether or not with the ultra-orphan status Kalydeco you still need to go through the value assessment processes in Germany and the UK? Thanks.

So, Brian, in terms of inclusion and learning something from a Phase II towards Phase III, I think there is a broad population that we will include it. Obviously as we said, first, homozygous and we will not have any particular, let's say, exclusions, and just it's probably for all homozygous delta 508 patients in a certain age group. That's sort of basically what drives the selection of the patients. We have to go with 12 years and older to go on a fast track because that's what we have tested in Phase II. That's the only sort of marker in a way that we have, and then that's the usual selection of people that have sometimes contraindications in terms of their co-medication which they can go, that's normal. But I think broad population for almost everybody in the age group for 12 years and older. That's sort of what I can say to this process.

Yeah, Brian, in terms of Kalydeco reimbursement in Europe, again, as you know, whether it's orphan or not, it does need to go through the German value process. And you may have seen that recently the UK has been changing its rules around the value process. And we're just talking with the UK about whether we will come under the new rules or the old rules since they're literally changing over the last couple of weeks. So I just can't give you a final answer on that yet. Brian Abrahams – Wells Fargo Securities: Thanks very much.

Thank you. Our next question is from David Friedman of Morgan Stanley. Your line is open. David Friedman – Morgan Stanley: Thanks for taking my question. It's actually just around the R&D. Is there any way that you guys could discuss or in just general buckets what the R&D breakdown is in terms of hep C, CF, basic research and other?

David Friedman – Morgan Stanley: All right. Thanks.

Thank you. Our next question is from Katherine Xu of William Blair. Your line is open. Katherine Xu – William Blair: Great. Good afternoon. I'm just wondering, so if you look at the hep C competitive space, you have Gilead already having a co-formulated double combo going into Phase III in the end of this year. So if you are going to Phase III a year later, are you targeting a profile of a pan-genotypic combo or do you think you can still go with Genotype 1 only combo that your analysis can still be successful?

Yeah, obviously we don't comment on what Gilead is doing, so I can just tell you what our strategy is. And as I said, we plan to test multiple all-oral regimens in Phase II between now and the first half of next year in multiple small studies, and based on both safety and efficacy results, we think that's going to allow us to design a single or multiple pivotal trials which will go in parallel with a high probability of success. Aand we can do that by that end of next year. Katherine Xu – William Blair: But do you think that'll be a pan-genotypic combo or is that a target profile you're going with, or you're just Genotype 1 only is okay as well?

Katherine, this is Bob. I mean, our initial strategy really is Genotype 1 specific that we still believe is the major unmet need. I think if you look around the world at all the markets and all the various genotype distributions, it still comes out that Genotype is probably still the most valuable proposition. Katherine Xu – William Blair: Got it. And then a follow-up if I may, for 25 -- is that 18, the other nuke, what is taking so long --

2158. Katherine Xu – William Blair: 2158, thank you. What is taking so long? I'm just curious. I thought both studies were started around the same time. And then what is taking longer for the other one?

It's not so long. Basically the studies -- the 2158 study started about a month later than the 2200 study. Obviously running one program on time is hard, running two programs exactly in parallel is almost impossible. And recruitment has been just a little bit slower than we expected in the countries where it's being run. So we do expect the data sometime in the next couple of months. Katherine Xu – William Blair: Thank you.

Thank you. Our next question is from Howard Liang of Leerink Swann. Your line is open. Howard Liang – Leerink Swann:

So, hi, this is Ian. As I mentioned in my remarks, we've been -- well, Incivo has now been approved in over 25 countries, in most of the major European countries and certainly in the major countries. So they're at that early stage of launch, a lot of those approvals have been this year. So we'll look to see how they perform in those markets. Howard Liang – Leerink Swann: Great. And I think you said that you're interested in combining 2200 with other nukes. Would that be with 2158 or other experimental nukes?

This is Bob. Our goal would be potentially to combine 2158 and 2200 together. We haven't really thought of that other nukes at this point. And obviously, we won't know the feasibility of that till we have the 2158 data. Howard Liang – Leerink Swann: Thank you.

Thank you. Our next question is from Michael Yee of RBC Capital Markets. Your line is open. Michael Yee – RBC Capital Markets: Thanks. On 661, I don’t think the answer was fully clear. Can you just better describe the adaptive design? You got a lot questions on that and I'm trying to understand what actually triggers a read-out. Is that safety, is it an efficacy time point? Maybe explain a little bit better, because I thought as you -- it was [dose] question, so the longer it goes, the higher doses you're going at.

Michael, this is Michael. I'll just point out that there is a slide in the webcast that has a bit of a graphic that describes kind of how the doses escalate a little bit, and other features in the design. But I'll let Peter... Okay. So Peter says the slide describes it pretty well. Michael Yee – RBC Capital Markets: Okay. Then let me ask one last question then. On the 809 combo on Phase III, you said you could look at higher doses. What data do you have to support higher doses? They were never touched on in Phase II. So, just wondering how that's possible in Phase III.

We have obviously Phase I data that basically measured exposure levels. And that is linked to safety in humans but also in animals. And that gives us basically, by using PK/PD modeling, the opportunity to select different doses that are within that safety range. Michael Yee – RBC Capital Markets: Okay, that's helpful. Thanks.

And Michael, we'll give you a call and walk you through the slide and describe for you how 661 works. And we find that most of the questions regarding the 661 study is once data are available, and the design will help you understand that the final data will be available in 2013. Michael Yee – RBC Capital Markets: That's why I asked. Thanks.

Thank you. We have a question from Ed Tenthoff of Piper Jaffray. Your line is open. Ed Tenthoff – Piper Jaffray: Thank you very much for taking the question. In first quarter of Kalydeco launch, you said that estimated roughly 60% of patients were, of G551D patients in the US, were on drug. How has that changed in the second quarter? Has that increased, and can you provide what that level is?

Yeah, this is Jeff. As we said on our first quarter call, we are not going to provide numbers of patients going forward. Just to clarify what we said, we said 600 patients in the US at the end of the first quarter. And as I said today, the number has increased, and we anticipate it will continue to increase both as we identify new G551D patients and as G551D patients roll over from PERSIST. Ed Tenthoff – Piper Jaffray: Great, thanks. And then, for Ian, just real quickly, with the focus of more on R&D, does that change the breakdown in R&D in that $690 million to $760 million guidance that you've given?

The relative weighting of those two remains similar. Ed Tenthoff – Piper Jaffray: Okay, thanks.

Thank you. Your next question is from Phil Nadeau of Cowen and Company. Your line is open. Phil Nadeau – Cowen and Co.: Good afternoon. Thanks for taking my question. Just to, Jeff, at the risk of asking something that you just said you're not going to answer, as you've launched in the US, have you found, or is there anything that has changed your mind on the number of G551D patients in the US? Do you still think that's about 1,100 patients? And a similar question about the four companies you, four countries you mentioned earlier, is 1,000 to 1,100 patients approximately the right number of G551D patients in those four countries?

Yeah, good question, Phil. So in the US, nothing has changed our estimate of 1,000 to 1,100. Our best estimate in Europe is also around 1,000 to 1,100, although I always put the caveat on this, Phil, that, as you know, the genotyping in Europe is not as advanced as it is here and so the precision of the 1,000 to 1,100 in Europe is a little bit less than what we know in the US. Phil Nadeau – Cowen and Co.: And did you have any compassionate use program in Europe that has enrolled patients? Are there any patients on drug today?

Yeah, there are. We have a program in France that's enrolled some patients as part of an ATU program, and we anticipate those patients will roll over to commercial drug now that it's approved. Phil Nadeau – Cowen and Co.: Okay. Would you care to tell us how many patients that is?

No. We haven't disclosed how many patients that is. It's a small number. Phil Nadeau – Cowen and Co.: Okay. Thanks for taking my questions.

Thank you. Our next question is from Brian Skorney of Breen Murray. Your line is open. Brian Skorney – Brean Murray: Hey. Good afternoon, guys. Thanks for taking the question, and congrats on the data from the Alios nuke. I guess just to kind of dig in a little bit more on the molecule with the understanding you're not ready to talk about the structure, but just in terms of maybe a little bit of a comparison to the resistance of this drug compared to the other nukes which I think are -- all have the two [meta] nucleoside backbone. I'm just wondering what -- is it a totally different structure than that? And in preclinical studies, have you been able to select for resistance? And what sort of mutations would confer resistance to this drug? Thanks.

This is Bob. I really can't talk at all about the structures. I will just say that these compounds have a very high barrier to resistance and therefore, are excellent combinations for other drugs, much like the other nukes that have been described. Brian Skorney – Brean Murray: Thanks.

There will be a bit more detail coming out at a medical conference later on, on some of these issues. Brian Skorney – Brean Murray: Okay. I'll wait for them.

Okay. Michael Yee – RBC Capital Markets: Operator, this is Michael. We're now about 10 minutes past our planned stop time for the call, so in the interest of everybody's time we will take just two more questions. Thanks.

Thank you. Our next question is from Ravi Mehrotra of Credit Suisse. Your line is open.

Hi. Congrats on the data. This is actually [Kuhn] calling on behalf of Ravi. I just had a quick question regarding your -- one of the trials for the Alios nukes which is the -- with ribavirin. I just wanted to know if there was anything in the data that you'd seen that would suggest that your nuke with ribavirin might give you better results than what we've seen so far. Thanks.

This is Bob. That's obviously why we're going to do the study, is to find out. Clearly, the properties that we've seen so far, very high level of antiviral activity would make it potentially a good companion with ribavirin. As I said, both efficacy wise and safety wise we think it's a good trial to do.

Okay. Thanks.

The other things that's impressive what we said in the call is it had a very steep decline from a viral kinetic point of view, is 3.85 log drop in three days, which is a good indicator that you might have a good chance for a combination and good trial outcome at the end of the day.

Thank you. Our next question, final question, is from Alan Carr of Needham & Company. Your line is open. Alan Carr – Needham & Co.: Hi, thanks for taking my question. Any sense of off-label use, other genotypes, patients using Kalydeco? Thanks.

Yeah, this is Jeff. As you know, Alan, we only promote Kalydeco for labeled indication, which is G551D greater than six, and we don't track or keep track of any off-label use. So I really don't have any data on off-label use. Alan Carr – Needham & Co.: Thanks.

So, thanks very much, everybody, for joining us tonight. I think everybody got to ask at least one question. If you didn't get your follow-up or you have additional questions, we're in the office, happy to talk further tonight. Thanks very much for tuning in.

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