Vertex Pharmaceuticals Incorporated (VRTX) Q3 2012 Earnings Report, Transcript and Summary

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

Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division Rachel L. McMinn - BofA Merrill Lynch, Research Division Gloria Woo Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division Omar Saad - ISI Group Inc., Research Division Michael J. Yee - RBC Capital Markets, LLC, Research Division Liisa A. Bayko - JMP Securities LLC, Research Division Alethia Young - Deutsche Bank AG, Research Division Brian Corey Abrahams - Wells Fargo Securities, LLC, Research Division Matthew Roden - UBS Investment Bank, Research Division Terence C. Flynn - Goldman Sachs Group Inc., Research Division Ying Huang - Barclays Capital, Research Division David Friedman - Morgan Stanley, Research Division

Good day, ladies and gentlemen, and welcome to the Vertex Pharmaceuticals Incorporated Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like introduce your host for today's conference, Mr. Michael Partridge. Sir, you may begin.

Thank you. This call was originally scheduled for Monday night and postponed due to the storm. We know there are many listeners who have been directly affected by the storm, and our thoughts are with them as they try to get things back to normal. So thank you to everyone for joining us tonight. Vertex continued to make progress towards building a global business in the third quarter of 2012. With KALYDECO, our approved medicine for people with cystic fibrosis with the G551D mutation, we achieved sales of $49 million in the quarter. We are now treating the majority of eligible G551D patients in the U.S. We believe that the near-term inflection point for KALYDECO growth is achieving reimbursement across the major European markets. In cystic fibrosis, our goal is to improve the lives of all patients with CF, and we're making progress toward this goal. We refer to KALYDECO as ivacaftor when discussing investigational uses, and ivacaftor monotherapy has the opportunity to address more patients through ongoing label expansion studies. In particular, we have initiated 3 additional Phase III trials of ivacaftor and together with other ongoing and planned studies could expand the treatable population to approximately 15% of CF patients. Additionally, on the basis of our recent Phase II VX-809 plus ivacaftor data, we are on track to begin pivotal development of this combination in F508del homozygous patients in early 2013. We believe the success with our ivacaftor label expansion studies and success with the VX-809 plus ivacaftor combination would enable us to address the majority of the 70,000 CF patients in the U.S. and Europe. With INCIVEK for the treatment of hepatitis C, we reported sales of $254 million in the third quarter. INCIVEK is the leading DAA in the hepatitis C market and continues to be an important medicine for hepatitis C patients. We reiterated our full year net revenue guidance for INCIVEK today. In hepatitis C, we are advancing our uridine nucleotide analog VX-135, previously referred to as ALS-2200, which we are developing in collaboration with Alios. We are executing on a strategy of developing VX-135 with other promising DAAs in multiple all-oral combinations. We announced agreements this morning with GSK and Janssen to enable us to evaluate VX-135 in multiple 12-week, all-oral combination regimens. Our goal is to complete multiple Phase II short duration, all-oral studies within 2013 and be poised to move quickly to pivotal development in 2014. Joining me on the call tonight to discuss Vertex's strategic and financial outlook and recent progress in our R&D pipeline are Dr. Jeff Leiden, Chairman and CEO; Ian Smith, CFO; and Dr. Peter Mueller, Head of Research and Development and Chief Scientific Officer. After the prepared remarks, Stuart Arbuckle, Vertex's recently appointed Chief Commercial Officer; and Dr. Bob Kauffman, Vertex's Chief Medical Officer, will join us for Q&A. We will conclude tonight's call at 6:00 p.m. To help us do that, we would ask that you please limit your question 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, our development plans and expectations, 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 reconciliation of non-GAAP to GAAP is available in our third quarter 2012 financial press release, which is on our website. I would also refer you to the information on Slide 5 of tonight's webcast. Thank you, and I will now turn the call over to Jeff.

Thanks, Michael. Good evening, everyone. To reiterate what Michael said, our thoughts are with those affected by Hurricane Sandy, including some of you on the phone. I'd like to acknowledge the many Vertex employees who worked through the storm and who are continuing to work hard, with the goal of making sure the patients who need our medicines can continue to get them. Tonight, I'd like to frame my remarks around Vertex's strategy and our priorities for today, tomorrow and the future. First, I'll provide a perspective on how we are positioned today in key diseases, and also how we are preparing to further improve treatment of these diseases tomorrow and in the future. I'll put these strategies in the context of our overall financial strategy and operating philosophy and describe how we're managing our business as we move forward into 2013. After that, Ian will review the details of our third quarter financial performance and discuss the activities we are undertaking to ensure that we are prioritizing our investment in the business. Then, Peter will provide you with some specific updates on recent progress in our pipeline and plans for tomorrow and the future and the serious diseases for which we are creating medicines. I'd like to begin tonight by formally welcoming Stuart Arbuckle, our new Executive Vice President and Chief Commercial Officer. Stuart joined us in early September and has hit the ground running, adding valuable insights and strategic direction from his 25 years experience leading global sales and marketing efforts at biopharmaceutical companies. As Michael said, he will join for the Q&A portion of the call. Let me begin with our approved medicines. We're proud to have 2 best-in-class therapies on the market: KALYDECO for cystic fibrosis and INCIVEK for hepatitis C. Beginning with CF, KALYDECO for CF patients with the G551D mutation age 6 and older is a transformative medicine that addresses the underlying cause of the disease in these patients. Today, only 9 months after launch, we are treating the majority of the eligible G551D patients within the U.S. and we have just initiated our launch in the EU. Over the next year, we expect significant revenue growth from KALYDECO monotherapy as we launch the product in Europe, Canada and Australia. But this is just the beginning of our efforts in CF. We've talked several times this year about our strategy in CF and how it is to fundamentally change the outlook for as many people with this disease as possible. First, by expanding the ivacaftor monotherapy label to address more patients who can benefit from this medicine alone. Second, by combining ivacaftor with the corrector compound to address the most common type of CF, which is the Delta F508 homozygous population that makes up about half of those with CF. And third, by further enhancing efficacy of our existing treatment regimens and potentially addressing those people with only 1 copy of the Delta 508 mutation, the heterozygotes, using second-generation correctors and dual corrector regimens. We believe that collectively these efforts could enable us to address up to an estimated 90% of all people with CF. In the third quarter, we've made significant progress on executing this strategy. We've now initiated 4 studies, 3 of which are pivotal Phase III studies, with ivacaftor monotherapy to significantly expand the CF population that we believe we can address with this medicine alone. If our KALYDECO monotherapy strategy is successful, we could increase the addressable population from the current 4% to perhaps up to approximately 15% of the total CF population. That would bring tomorrow's total population of CF patients in the U.S. and Europe who could benefit from KALYDECO monotherapy to about 10,000. We are also on track to initiate pivotal development of the corrector compound VX-809 and ivacaftor in Delta 508 homozygous patients in early 2013. We're preparing to meet with the FDA this quarter. Peter will go into more detail on our current pivotal trial plans. We are also advancing our VX-661, another corrector compound, in a proof-of-concept clinical study with ivacaftor in CF patients who are homozygous for Delta 508. We expect to have results from this study in the first half of 2013. If in addition to being successful with our monotherapy efforts we are successful with our combination development efforts targeting Delta 508 homozygotes, we could potentially increase the number of CF patients we could address up to 60% or more of the CF population. That's an estimated 40,000 patients in the U.S. and Europe. During the last several months, we've also made progress in identifying second-generation corrector compounds. We have identified second-generation correctors that show significant additive or synergistic activity in vitro when combined with VX-809 plus ivacaftor. We showed some of these results in Orlando a few weeks ago, and we look forward to providing you with more information on these compounds in 2013. Turning now to hepatitis C. Today, we are leaders with INCIVEK combination therapy. In the 17 months since launch, more than 50,000 people have been treated with an INCIVEK-based regimen in the U.S. and many have been cured or on their way to a cure. Our market position in hepatitis C is strong. INCIVEK has been and remains the leading direct acting antiviral or DAA. Approximately 3/4 of genotype 1 hepatitis C patients, who initiate therapy with a DAA, receive INCIVEK. Today, there are fewer hepatitis C patients starting treatment as compared to a year ago. Some patients are deferring therapy in anticipation of future treatment regimens. However, there are still many patients that want to be treated or who need to be treated today. For example, during the third quarter, we estimate that approximately 7,000 patients in the U.S. initiated treatment with INCIVEK. Our long-term strategy in hepatitis C is to maintain a significant presence as the treatment of this disease evolves, and we believe we are well positioned to do this with all-oral regimens built around our nucleotide analog VX-135. Our recently reported 7-day viral kinetic data suggests that VX-135 is highly potent and well tolerated. And we're executing on the strategy of evaluating multiple regimens to combine VX-135 with other promising late-stage DAAs. VX-135 has attracted a lot of interest from other companies in the hepatitis C field. I'm pleased that we are able to share with you some of our progress on this front today. Specifically, as Michael mentioned, we have established agreements to conduct all-oral, 12-week combination studies of our once-daily nucleotide with GSK's once-daily NS5A inhibitor, GSK 2336805, also known as GSK 805. In a separate agreement and study, combining VX-135 with the once-daily protease inhibitor, TMC435, being developed by Janssen and Medivir. We expect to initiate these combination studies beginning in early 2013 and to have Phase II data in hand from multiple combinations by the end of 2013. Based on these data, we will plan to pick the best regimens to advance in the pivotal development in 2014. In addition to cystic fibrosis and HCV, an important part of our R&D strategy has been to continue to bring innovative, potentially transformative drugs forward in other important disease areas. During the third quarter, in addition to CF and HCV, we continued to advance VX-509, VX-787 and several other exciting early-stage programs. In closing, some remarks on our operating philosophy and how we're managing our business today and in the future. Today, we have significant annual revenues from multiple sources that allow for the reinvestment into a diverse portfolio of discovery and development programs and commercial initiatives, while also creating positive cash flow and earnings. This has enabled us to complete the quarter with approximately $1.3 billion of cash and equivalents, while advancing our pipeline in CF, HCV and autoimmune diseases. We are excited about the product development opportunities we have. But at the same time, we are being disciplined in our investment in the business. As we enter 2013, we have and we will continue to prioritize our R&D projects, investing in those areas that we believe will create long-term value for patients and for Vertex while exercising strict financial discipline on SG&A spending. We remain mindful of our revenues and cash flows and how to most prudently invest these revenues to grow our business. In summary, we continued to execute on our strategy. Our business is strong with substantial revenues from 2 market medicines, a broad and deep pipeline that has further advanced during the first 3 quarters of 2012, and we have significant cash on our balance sheet. We are well positioned for growth over the long term. I look forward to updating you as we go. With that, let me turn it over to Ian.

Thank you, Jeff, and good evening to everyone. Financially, Vertex has a diverse revenue base and multiple sources. Our revenue is significant and enables us to fund reinvestment to our pipeline for growth. As we enter 2013, we're committed to maintaining financial discipline. We're mindful of these revenues and cash flows, and we'll prioritize, as Jeff says, our investments as we seek to grow the future opportunities in cystic fibrosis, hepatitis C and other priority pipeline areas. Now to our third quarter financial results. Total revenues were $336 million compared to $659 million in the same quarter of last year. Last year's revenues included $200 million in onetime milestone revenues due to the approval and launch of INCIVO in Europe. Without this milestone, our revenues were $454 million last year compared to $336 million this year for this quarter. The key components to the third quarter revenues are as follows: the first, we reported $254 million of INCIVEK product revenues. As Jeff noted, INCIVEK remains a market-leading DAA with approximately 7,000 patients initiating treatment with INCIVEK during the third quarter. We continue to see demand for INCIVEK-based therapy and we are reiterating our INCIVEK net revenue guidance of $1.1 billion to $1.25 billion for 2012. Second, we recorded $49 million of net product revenues for KALYDECO in the third quarter. This reflects the majority of eligible patients in the U.S. starting treatment with KALYDECO, with only a small number of patients initiating therapy in Europe prior to KALYDECO receiving -- achieving reimbursement in that region. The number of patients in the U.S. has a potential to increase incrementally in the near term as new patients initiate therapy and as the final patients roll off the cyst study and onto commercial drug. We anticipate that in the near term, the most important growth driver for KALYDECO revenue will be in reimbursement acceptance in Europe. We received European approval for KALYDECO in G551D patients in July, and we are making progress negotiating reimbursement country by country. We anticipate that in 2013, each of the 4 major European countries, which account for 80% of the G551D patients in Europe, will provide reimbursement for KALYDECO. Third, we recorded $26 million of royalty revenues including $20 million of INCIVO royalty revenues from J&J. We expect our INCIVO royalties will continue to be important to our financial results during 2012 and 2013 and in the future. The GAAP net loss attributable to Vertex was $58 million in the third quarter of 2012 or approximately $0.27 per share. The non-GAAP net income was $27 million or $0.13 per diluted share. The non-GAAP income principally excludes 2 charges: $27 million in stock compensation and $58 million related to the increase in fair value of expected future payments under our Alios collaboration. Now to our operating expenses. Beginning in the second quarter, we increased and accelerated our R&D investment on the base of clinical data into our high-priority programs in these areas of cystic fibrosis and hepatitis C. Despite the increased investment in these programs, we are reiterating our non-GAAP operating expense guidance for 2012 of $1.03 billion to $1.13 billion that we originally provided on our February 2 call earlier this year. We accomplished this by prioritizing and reducing expenses, specifically in the areas of reductions in G&A spend, aligning our commercial spend to follow future demand in markets in which we operate and reprioritizing investment in R&D towards key programs. This expense reduction and investment allocation is visible in our third quarter results. Our R&D spent is essentially flat compared to the second quarter despite the progress of our clinical pipeline. And our SG&A spend in the third quarter is significantly reduced compared to the second quarter. As we move into 2013, we plan to continue these initiatives. In summary, we continue to derive significant revenue and cash flow from INCIVEK sales and INCIVO royalties. KALYDECO is positioned to provide growth in the near term. And with the execution of our hepatitis C and CF strategies, we anticipate expanding our presence on the number of people we can treat over the long term. We are balancing this with our financial position and prioritizing our investments. I'll now turn it over to Peter.

Thank you, Ian, and good evening, everybody. Tonight, my remarks will focus on the progression of our pipeline, mainly in the areas of CF and hepatitis C. Two weeks ago, we reviewed our R&D strategy in cystic fibrosis at the North American CF Conference in Orlando and I want to briefly summarize and reiterate that strategy. We have demonstrated our commitment to discover new treatments for cystic fibrosis by working closely with the medical community and the CF Foundation for about 14 years now. Through our work, we have developed a proprietary research platform that enables us to uniquely target the underlying cause of that disease, the defective CFTR proteins. From this platform, we developed KALYDECO, an important breakthrough that is available today for G551D patients ages 6 and older. If you look to how we can further advance therapy in the near future, we have 3 studies underway to expand the label for ivacaftor monotherapy. These studies are: a 6-month Phase III study in patients with the R117H mutation, representing an additional 3% of the population; a crossover Phase III study in patients with non-G551D gating mutations, representing an additional 1% of the population; and a pediatric Phase III study in patients, aged 2 to 5 years, with gating mutations, where we expect to begin enrollment by the end of the year. We have also initiated a proof-of-concept study in patients with residual CFTR functions. We anticipate receiving the first data from these studies next year. If we are successful with these and other planned studies, we could treat many more patients with ivacaftor alone than we do today, up to approximately 15% of the CF population. Also, in the relatively near term, we have the potential to expand therapy to the largest group of CF patients, those homozygous for the Delta 508 mutation that make up an additional approximately 50% of the CF population. We presented Phase II results at the North American Cystic Fibrosis Conference a few weeks ago. And on the basis of these positive data, we are planning to initiate a pivotal program of VX-809 plus ivacaftor in the early part of 2013. While details of the pivotal program design will depend on the outcomes of regulatory discussions, we can provide some of what we think the important aspects of the pivotal program will be. Firstly, we will seek to confirm the safety and activity of 600-milligram VX-809 qd in combination with 250 milligram of ivacaftor twice a day in patients homozygous for Delta 508, 12 years of age and older. This was the regimen that demonstrated the greatest improvement in FEV1 compared to the patients' baseline and also to placebo in the Phase II study. Based on our experience with KALYDECO, we anticipate the pivotal study to be anything between 6 and 12 months' duration pending our discussions with the regulatory authorities. We expect that the primary endpoint will be change in FEV1. In fact, we will evaluate a number of other endpoints as well, including weight gain, reduction in pulmonary exacerbations and CFQ-R. Finally, we may include a higher dose of VX-809 where we've added the 400 milligram BID of VX-809 in an additional cohort of patients called Cohort 3. Safety and PK data from Cohort 3 will inform the potential inclusion of a 400-milligram BID VX-809 dose as part of the pivotal program. Cohort 3 is fully enrolled and we expect to have the data in time for the start of the pivotal program. The VX-809 and ivacaftor combination represents our first opportunity to create a significant treatment benefit for the most common group of CF patients, the 508 Delta homozygous group. But it is not the only program we have to address this population. We are working on strategies to further optimize therapy for these and additional patients, including Delta 508 heterozygotes. In this context, we are developing an additional novel corrector compound, VX-661, in combination with ivacaftor in a Phase II study. This study is designed as a dose escalation placebo-controlled study. The design is very different than the Phase II VX-809 study and it is our first trial of VX-661 in patients. Part A of the study which we initiated earlier this year is evaluating different doses of VX-661 alone for 28 days in approximately 50 patients and in combination with ivacaftor for 28 days in an additional 50 patients. The monotherapy doses escalate ahead of the combination doses. All arms are 28 days and each new dose enrolls a completely new set of patients. We will be evaluating safety and efficacy of these ascending doses, and this will inform our next steps with this combination therapy. We expect the results from this study will be available in the first half of 2013. Beyond VX-809 and VX-661, we are very exciting -- we have very exciting efforts underway to further expand and optimize therapy in CF. We have now identified novel correctors that in vitro have additive or synergistic activity with VX-809 and ivacaftor. This work is based on recent advancements in the understanding of the folding pathway of the CFTR protein. We look forward to updating you on our progress, the second-generation correctors and further combination approaches as we move ahead in 2013. In summary, in CF, we believe we are well positioned to bring innovation and clinical advancement to this area today, tomorrow and in the future. Now turning to hepatitis C. We have a range of development activities underway, but I would like to focus my comments on our nucleotide, VX-135. Based on our 7-day viral kinetic study, VX-135 appears to be a highly potent nuke with an excellent early clinical profile. We are excited to present some preclinical and viral kinetic data for this compound at the upcoming AASLD a week from now. Since receiving the viral kinetic results in July, we have articulated our strategy for how we think we can position VX-135 as an important backbone in future short-duration, all-oral regimens for hepatitis C. Today, we shared our significant progress with that strategy with the announcement of 2 agreements for Phase II combination studies. These collaborations will enable us to evaluate VX-135 in combination with 2 highly promising compounds, each of them representing complementary direct antiviral mechanisms. We intend to move as rapidly as possible. Specifically, we will begin a series of Phase II 12-week studies with VX-135 in combination with these oral DAAs with and without ribavirin. The goal of these studies will be to evaluate safety, decay in SVR in genotype 1 noncirrhotic naive patients. We are planning additional Phase II proof-of-concept studies with VX-135, including a study of VX-135 in combination with ribavirin by the end of 2012 and a study of VX-135 in combination with INCIVEK planned for 2013. We are aiming to identify the best regimens to treat hepatitis C patients, and our goal is to complete Phase II evaluation of multiple regimens in 2013, so that we can choose regimens for pivotal development in 2014. I will just quickly now -- during the third quarter, we also advanced Phase II development of VX-509 for inflammatory diseases including rheumatoid arthritis and VX-787 for influenza. In summary, our efforts in cystic fibrosis reflect a commitment to leverage our R&D expertise, scientific knowledge and capabilities to make a big difference in the lives of thousands of CF patients, and our ongoing efforts in hepatitis C demonstrate our commitment to continued innovation in this area. I look forward to reporting on our progress in these and other areas in upcoming quarters. I will now turn it back over to Michael.

Thank you, Peter. That concludes our prepared remarks. We would now like to open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Geoff Porges with Bernstein Research. Geoffrey C. Porges - Sanford C. Bernstein & Co., LLC., Research Division: Peter, I just want to follow up on some of the comments about 135 since it seems to be a focus inside and outside of the company. First, it's sort of an obvious question, which is this is a rapidly changing landscape, but can you tell us what sort of differences there are between this molecule and the other nukes that have failed recently and over time? And why should investors ascribe it in real value to this -- at this stage? What gives you the conviction? Secondly, related to 135, conspicuously, you're not mentioning VX-222. Is there any drug-drug interaction thing that you're concerned about there? Why wouldn't you want to combine this with 222 rather than combining it with ribavirin? And then lastly, could you tell us when we'll see the 787 influenza data?

So Geoff, this is Bob Kauffman. I'll take the first question. And yes, we recognize the rapidly changing landscape. We certainly recognize the issues that have occurred with a couple of other nukes in the space in the past few months. All I can say is that VX-135 has a very strong preclinical profile and in our early clinical study really was extremely well tolerated and produced very impressive antiviral activity and therefore, we have very great confidence going in. As we've noted, is a uridine analog, unlike some of the other compounds that have not done so well lately and it just gives us more confidence that we'll have a very good outcome in the next set of studies. Obviously, we recognize the limitations of the data we have. We have only 7-day safety data. Clearly, 12-week data will give us even more confidence, and that's why we're moving as rapidly as we can to obtain those data.

So Geoff, it's Peter speaking. I think good questions. So I want to just confirm on the one hand and what Bob said about 135, and I think the good thing for 135 is that it has a metabolic profile that allows us to basically combine it with many different molecules. And that leads me to your second question about what is about 222 and other molecules that we have in our portfolio. So obviously, we are currently looking deeply into what the best regimens are and we will have in mind different concepts where 222 is part of it. And we will come later when we prioritize whatever we can do. So 222 is a viable asset, a highly viable asset in our regimen and I think should not be forgotten. So and the last question was, when do we hear something about 661 and I turned it over to you that's a disclosure question -- the flu, the 787, yes.

Yes, topical in flu season. Thanks, Geoff. So as we have communicated earlier in the year, we anticipate giving you top line results from that study before the end of this year and we're still on track for that.

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

Two totally separate questions. One, just -- congratulations on the collaboration for 135, but I'm just wondering why you would bother running the INCIVEK combination study. Is that really just for safety, or is there really a point since you have this partnership now with a low-dose once-a-day protease inhibitor with a very well-established safety profile? And then secondly, Ian, I think you've talked a number of times of not wanting to be cash flow negative in 2013 or 2014. But at the same time, you're talking about putting more money into R&D from SG&A. So I'm just wondering how you can manage that? Can we be sure that R&D overall will be down annually in 2013 versus 2012?

Rachel, given there's a number of questions given the collaboration comment, we appreciate your thanks on the collaboration. Jeff is going to take the first piece, and then I'll take the financial question.

Hi, Rachel, it's Jeff. The first question really had to do with how we're thinking about prioritizing these different regimens. And I know you're familiar with this, but let me just take a step back and briefly rearticulate the strategy that we talked about in July, which was, we do feel that VX-135 has a profile as a nuc that makes it potentially a very valuable piece of multiple combination regimens. We also feel that it may be the case that there will be several regimens. One, optimal regimen, for example, for easy-to-treat patients and a separate one or separate duration for longer-to-treat patients. So our strategy was to combine 135, both with different combinations of our own medicines, 222, INCIVEK, et cetera, but also to be open to collaborations with others. And obviously, you've heard today about how we're executing on that strategy. If you look at where we are today, we feel really good about what have in hand, right, because we have now a very potent and tolerable members of each of the major classes that we think are going to be important; nucs, non-nucs, PIs and 58s. And so we're in a very nice position to begin to combine them in different combinations and learn pretty quickly in 12-week studies what the best or winning combinations are going to be. We're obviously in the process right now of prioritizing those studies. So we've told you that we're going to do VX-135 plus ribavirin. We certainly are going to do VX-135 plus 435, as well as the GSK 5A. And then we're trying to understand where INCIVEK and 222 are really going to fit into that, and we'll be able to give you a lot more details as we move forward. But the strategy remains the same. We're going to test multiple combinations, find the best ones for patients in 2013 so that we're in a position to pick those and move into pivotal studies in 2014. And I'm just really pleased now that we have all the pieces in hand to do that.

And, Rachel, to answer your question about financial profile in '13. I'm hoping that you did hear the comments that Jeff made in his prepared remarks and then also echoed by my own. You can see with just the results we've disclosed in the third quarter that we're working very hard towards prioritizing our R&D investment. As you can see that the R&D investment remains consistent with how we guided in the beginning of the year, and then also from Q2 to Q3, despite the increased investments in CF and HCV. So you can see that we're reprioritizing throughout our portfolio there, and we'll continue that effort into 2013 for the high-value programs. On the SG&A side, again, we can continue probably more dramatically if you see the reduction in SG&A spend between Q2 and Q3. Again, that's active management of SG&A. We're following where the demand is in the markets. We're looking at programs, looking at our infrastructure and we've made decisions there as well. So we're working very hard. These efforts will continue into 2013 and I'll just close by -- we are in our planning process. We're taking a look at what we believe our revenues may be for '13, 2013. Both the growth on KALYDECO side and what the potential is there, and specifically look into how we think we may go into Europe and penetrate that patient population for KALYDECO. And then on INCIVEK, acknowledging that INCIVEK, it is a challenge. We acknowledge that. And so we're taking those revenues and being mindful of our cash flows for reinvestment, and we'll give you more of an update specifically as we go into 2013 with our call early on in that year. But we're in the middle of that process. But I hope you can hear the themes that are coming through strongly on this call.

But you still agree cash flow neutral or positive next year?

As I said, we're going through our planning process because we need to understand what our revenues will be at this point in time and as we go to '13, we'll provide more specific direction for our business at that time.

Our next question comes from the line of Gloria Woo with Citi.

I have a question on CF and then one on your HCV. I want to know how quickly you anticipate countries in the EU picking up KALYDECO and whether you actually need formal NICE for that group, reimbursement for the U.K. and how many patients you think that in the U.K. and Scotland? And then moving on to HCV, could you just give us an idea of GSK's NS5A inhibitor and the potency? You mentioned it's going to be once-a-day pill, but can you give us a little bit more information out of the resistance profile, and how much data there is on that drug already? Just based on [indiscernible].

I'm sorry, Gloria, but with your questions, I'm not sure whether you're in the office or maybe you're out, given weather conditions this week, but your question really didn't come through very clearly. I'm not sure whether you can pick up the phone or whether there's something else, but it really didn't come through very clearly. If you could try repeating it and we'll try our best answer it.

Sure, I'll try again. Sorry, we're out of the office right now. Just first on KALYDECO, just as you would need a formal NICE reimbursement in the U.K. before you can have [indiscernible] use in Scotland and the U.K. and how many patients you think are in the U.K. and Scotland? And for HCV, can you give us some information on GSK's NS5A inhibitor? The potency, the resistance profile and any safety data that maybe in animals and humans? Did that come through?

Yes, it did. Maybe we'll just start with the HCV question, with the GSK's NS5A inhibitor and maybe Bob can give you a quick profile of that compound. I would also offer that following the call, Michael Partridge can send you a package on that. And so therefore, you will have specific details of what's been disclosed on that compound at previous medical conferences. But maybe Bob can give you a top line at this moment.

So this is a very -- we believe it's a very promising NS5A inhibitor. It's been evaluated in short-term viral kinetic studies, single-dose studies, and shows approximately a 3 log drop at the dose that's been chosen for further development, which is 60 milligrams. That 3 log drop is really comparable to the other NS5A inhibitors that are in development now, including one from BMS and one from Gilead. It is a once-a-day medication, a once-a-day pill. And in terms of its other profile, it has a very good preclinical profile and its resistance profile has not been fully discussed there in the midst of a 12-week study with -- in combination with peg and riba at the present time. It looks as though it has a resistance profile which is similar to the other NS5A inhibitors that are in development, but really, it has very good properties and we're really looking forward to the combination studies that we're about to start.

Then to the question on KALYDECO. Welcoming Stuart Arbuckle, our newly-appointed Chief Commercial Officer.

This is Stuart Arbuckle. So just addressing your questions on KALYDECO reimbursement in the U.K. As an open drug, it doesn't actually currently go through NICE but it is going through an official reimbursement process in England, Scotland and the other countries in the U.K. and the Republic of Ireland. We are in the middle of that process. It's going well, it's difficult to predict, though, exactly when that process will conclude. And in terms of patient numbers across Europe, we think there's about the same number of G551D patients in Europe as there are in the United States, but approximately half of them are in the U.K. and the Republic of Ireland.

Our next question comes from the line of Geoff Meacham with JPMorgan. Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division: I've got a couple on the CF combo. You guys mentioned you're meeting with FDA this quarter. I guess I appreciate the urgency on starting the Phase III. But first question is, should we read into this that you guys ultimately expect 661 to look less robust? In other words, why wouldn't you at least wait for that data? And the second question is, is the 800-milligram, 809 does look stronger than 400 or 600, do you think you go right into Phase III or do you think another FDA meeting to tweak your protocol would be required? And I have one follow-up.

Thanks, Geoff. Peter will take that question.

Geoff, it's Peter speaking. I think I'll start with the second question first about that is the BID 400-milligram question. Do we need to do another study to go in Phase III or go directly into Phase III. So the answer is, we have enough data in our Phase I and II packages gathered to basically do molecular modeling that gives you an insight about how you might conduct a Phase III study in different dose regimens. One is upwards like the 600-milligram that we have to confirm that is sort of standard approach, you know you have to confirm the data and what you have to have in Phase II. And the other one is go with a higher dose. And I think the twice 400 is, from a modeling point, what it is. That's the reason why we also do Cohort 3 to confirm that we have a chance to go with a higher dose in that study. We do not need -- at this given point in time, it is our strong belief, another study to add a higher dose of VX-809 into our Phase III regimen. Now the question will be, with the agency, what the right dose is and what the higher dose is. It might not necessarily be twice 400, it could be something else, but that is the reason why we did the study. So I think the answer is, no, we go directly into pivotal trials with 600-milligram as the confirmatory arm of it, and then there's another higher dose and that might be twice 400 or might be something else. So that's the first question. So the second question is, why do we not wait for 661 data in all these type of things? I think we have basically concluded a Phase II study, and we go as fast as we can with the regimen for the patient population that responded well over the finish line. And so, if you would wait with 661, you would delay basically substantially the entire development and the outcome. And we have a commitment to basically reach out to those patients as fast as we can. This is our commitment as a company, and I think the 809-770 combination is a very viable regimen that really will have big impact in a big population, and I think we want to not slow down by 2 years, waiting for 661. Geoffrey C. Meacham - JP Morgan Chase & Co, Research Division: And then a follow-up, just a quick one on the dual corrector strategy. Is the assumption that you guys would include 809 and KALYDECO as part of the combo? I guess I want to get a better sense for why do you think 2 new agents that are correctors may be needed or if it is sort of an add-on to 809 KALYDECO? And what have you seen thus far in some of your preclinical work?

So there's 2 questions. What we have seen so far is basically addition of a second-generation corrector to our existing correctors and KALYDECO. And so, there's an 809 ivacaftor or KALYDECO-type of regimen as a base, and you add in new correctors, and when you add in one of these, you basically get nice synergistic efforts. There is also what we have seen, the combination of 2 new ones that will bring you to very high levels of CFTR expression, which is I think a good one. And at the end of the day, it will probably be a mix-and-match out of different type of things. That you have in one case, maybe 770 and 809 and 1 of those correctors, in other cases, maybe the 2 correctors. And that is driven by the patient population that segregate in the CF world. Because you have heterozygotes, homozygotes, you have pancreatic insufficient ones and that might respond differently to different regimens. So it is basically not a one-size-fits-all solution, it is a patient tale of personalized medicine approach to treat those populations the best we can.

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

This is Omar filling in for Mark. I had a couple of questions, both on CF. Number one, on disclosure plans, so should we expect a press release with FEV1 data after Part A of 661 trial finishing? And also, when the third cohort in the 809 combination trial for the 400-milligram BID dose finishes, should we expect FEV1 data in a press release for that? And secondly, are there any plans for an extension phase of the 400-mg BID arm, beyond the 2 months?

Thanks, Omar. I'll take the disclosure questions and then maybe Peter can take whether there's a plan for any extension. I'm first going to go to the 400 BID, and I appreciate you asking the question, there's been a number of questions regarding disclosure of this data. I refer you back to Peter's commentary just a moment ago, which is the purpose of that study, which effectively is to support the data we'd already gathered from Phase I and Phase II with our combination therapy and into PK/PD modeling exercise and that data in Cohort 3 will supplement the data we've already collected. I think the key for us is that the Phase III study design, which we'll be shortly discussing with the regulatory authorities, and when we have a better understanding of what that protocol and design is and all the various ARMs and the duration of that study, we'll provide you a disclosure around the design for the Phase III. And at that point in time, in disclosing the Phase III data, we'll give you a basis for that protocol design. So that's the answer for the Cohort 3. And I'd just point out that it is only 15 patients and it is not powered to measure FEV. As far as VX-661 is concerned, that's in a combination study at this point. Bob described -- sorry, Peter described that study in his prepared remarks. It is a dose escalating study. Monotherapy, which goes to combination therapy, and then escalating doses. We are in the process of running that study and it will run into 2013. And at the point that we have completed the whole study, so it will be final data. We'll provide you with top line press release and that would include FEV, but it's effectively a safety and efficacy top line press release, and that will be in the first half of 2013. And as to your third question, I'm going to turn it back to Peter. That was regarding the extension.

Yes. And with respect to the extension for the twice 400-mg BID, we have no intention to basically have an extension for that particular small population at this given point in time.

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

On your plan to start combination studies with 135, with the new GSK and the J&J compounds, what data do you actually need to have or present to FDA or anything to actually start dosing patients? What actually goes on in that discussion? And related to that, I noticed that you said you actually need to have a drug-drug interaction with the J&J drug, but that wasn't really matching with the GSK drug. So I'm just trying to understand what logistically do you need to do to actually start dosing patients and what are the steps?

Maybe Bob will take the first question. Peter can talk about the J&J compound.

So in terms of going forward, we have an open IND in the U.S. and so it is a matter of submitting a protocol to the FDA for the review, and oftentimes, comments may come either in writing or on a brief telecon. But we have already had some discussions with them regarding our ribavirin study and the telaprevir study, and we certainly understand what's required in order to move forward, and we're planning on doing that with the ribavirin study, which will be starting imminently. The process is really very much the same with the other 2 compounds. Both are under review with the FDA. Their IND is obviously for both other compounds, and so it's a rather straightforward pattern to just get the FDA to cross-reference the INDs, review the data and then have a discussion about the protocol. Nothing complicated.

So what is going on? Maybe I'd just say, I think there is absolutely fair discussion going on in the FDA, and it is a compound-by-compound discussion and it's not a one-size-fits-all type of approach. I think you have to provide data and then basically you get, treated dependent on your data, and not necessarily dependent on other people's data. So I want to just say that. And then, that goes with the DDI study. So I think every compound has a different metabolism and dependent on what the metabolism is and what the potential interaction could be in combination of 2 compounds, you might consider or not to do a DDI study. And there is a difference between PIs and NS5As in general about how they get metabolized, and so there's not the same size and the same type of approach for each and every compound. And that's the reason why we basically opted for the Janssen compound, the TMC435, to do a DDI study up front to get the better doses.

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

I wanted to change topics to your influenza program. And I'm just looking at ClinicalTrials.gov and it says that you're going to inoculate healthy adult volunteers. First question is, who actually would enroll in the study? And number two, actually, the more important question is, what data are you looking for to really get excited about the program? And what's the hurdle for going -- to taking this program forward?

This is Bob. People volunteer for studies, is all I can say. Obviously, there's some remuneration that goes on for these volunteers. But it's just the way things work.

That was kind of a joke question. You don't really have to answer it. I just can't believe it. But I really was more interested in sort of like the -- when we think about the endpoints of what you're looking at and what is really going to be compelling to take the program forward?

So what we look for is obviously, we're looking for evidence of antiviral activity and that's really measured by viral shedding and nasal secretions, and that can be measured either by looking for a live virus or by various PCR technologies. So we're looking, first of all, for antiviral activity, we're obviously looking for the safety of the compound and we're also looking for a change in reduction of symptomatology. This is an attenuated strain of influenza, the subjects don't get that sick. But we do -- we are able to measure shortening of the clinical illness. And so it's really a combination of antiviral and clinical symptomatology measures that are the way one describes efficacy in these kinds of studies and that's really what we're looking for.

Liisa, I just want to add one thing to the enrollment because it might have sort of questions whether people want to get sort of infected. There is a flu camp in the U.K. that's called Flu Camp, and we are basically having the study completely enrolled at those, okay? So I think that would be a basically sort of currently in the data collecting phase. And that's reason why we basically hope by end of year be happy enough that we can sort of analyze and then tell you said sort of really next year what it is.

And can you get a little bit more specific? Like, quantitatively, what kind of threshold antiviral effect? Like how it will be measured and what levels you are going to be looking for? What range would be sufficient to move forward? And the same thing, I don't know if there's a way to talk about symptomatology or shedding, nasal shedding, et cetera?

I mean, the purpose of this study, really, first of all, is to look at the safety of the compound. It's our first real longer duration trial, and so we're looking for safety. We're also looking for dose response, because one of the goals of this trial is to help narrow down the dose range when we would ultimately conduct a study in natural influenza. And I would say that given that it's attenuated, given the characteristics of the way these studies are run, that's really kind of what we're looking for is a dose response. We're looking for as complete and antiviral response as we can get, and then we go on and do further trials.

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

This is Alethia in for Robin. Just a quick question on your guidance for INCIVEK seems to imply kind of a wide range of outcomes in Q4. I was just wondering if you could give us some color in what you're seeing around trends in Q4 in the hep C market in a little bit more detail?

I'll just, first of all, reiterate our guidance and why we're reiterating guidance, which is at this point through the year we've recorded net revenues for INCIVEK of around $940 million, and our guidance that we're updating tonight are -- reiterating tonight is $1.1 billion to $1.25 billion. And so when we see the current demand of our products, we are also heading into November now, but we're very comfortable in reiterating that guidance and we'll be providing more information on trends as we go in 2013. Obviously, we're watching it closely because it impacts how we think about our business for 2013.

And also on the TMC435 trial, is that a U.S. trial or a global trial?

It's likely that sites in the U.S., a substantial number of sites in the U.S. will be involved in that trial. The planning is still ongoing with Janssen who are going to be running that study.

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

With respect to the ongoing 661 study, I'm just wondering, what are you looking for to conclude dose escalation? Is that going to be driven more by safety or by efficacy? And should we take the official narrowing of guidance results to come in the first half next year to mean that you're at or near doses that you're expecting will have activity or at least exposure similar to 600 mgs of VX-809?

I'll take the first part of that in terms of guidance and disclosure, Brian. Frankly, I don't know whether there's a narrowing of guidance, we anticipate the data coming in the first half of 661 as I commented earlier. It is a dose escalation study. Maybe I'll turn it over to Bob in terms of what we're looking at as we go up in each of the doses. So, Bob, can you?

Yes. I mean, normally, we're looking for a dose response for the endpoints that we're looking at, which includes sweat chloride and other measures. And the hope is that we can define the large part of the dose response curve so that we can pick doses for the next set of studies. And that's really -- that's what we do.

I think the interesting piece here is that 661 has a different biodistribution, and so you cannot basically collect data from 809 and basically sort of refer to it. So you have to do your own study. Chances are here that you can come with substantially lower doses, and that's basically what we are trying to do to have basically a low [indiscernible] burden, a low dose burden and that allows us to do better combination studies in the future, with many different second-generation correctors or KALYDECO or anything in the mix.

Just of quick follow-up. Following the Phase II studies for the VX-135 combo, just wondering, forwardly speaking, what types of options you might envision would your preference be to pursue further studies with those compounds? Perhaps bring in other assets within the same classes? Where do you sort of foresee the next steps fast forwarding beyond next year?

This is Jeff. Let me answer it at a high level, and then Peter and Bob can add additional color. So as I've said before, we're really pleased with where we are today because we now have high potency and competitive assets in each of the major classes. So obviously our nuc, which you've seen the data on TMC, which you've also seen a lot of data on in the protease inhibitor class, we feel is an excellent next-generation protease inhibitor. 222, our non-nuc, which also is highly potent, you've seen some already [indiscernible]. And then the GSK NS5A, which as you know, look like they're going to be important components of regimens and it's a once-a-day highly potent NS5A that's already been in humans and shown very nice viral log drops. And so, I think we have the pieces in hand. But the question now is which regimens for which patients? We're going to try some 2 drug regimens, particularly for easy-to-treat patients. We may try some 3 drug regimens. But our strategy is to collect that data next year and based on the data, pick regimens to go forward with the pivotal trials in 2014. Now each of the collaborations we sign today are nonexclusive, and so we do have the opportunity as we go forward, if we see a compounds that would add benefits to patients to do additional collaborations. But we're pretty pleased with where we are today in terms of having all the pieces in hand to begin with these studies.

Our next question comes Matt Roden with UBS.

I wanted to get into the KALYDECO commercial trends a little bit. The experts tell us that KALYDECO is well penetrated with big academic centers. But just trying to get a sense of where we are on a broader basis, so we can understand what the -- where we are with the eligible segments that is not yet penetrated. What it will take and over what time frame do you expect a cashable station [ph]? I heard you mention at the top of the call that majority of those eligible in the U.S. are being treated, but can you actually give us more specific in terms of where we are in penetration into that market? How do you expect to convert those patients?

This is Stuart. I'll take that. So yes, you heard correctly, the vast majority of patients in the U.S. who are eligible are already taking the product. And so, in the U.S., while we're expecting a handful more of products to be added into the mix, we really are at the vast majority of patients right now and we're very pleased with that. As Jeff said, the uptick of KALYDECO has been astonishingly quick. In my experience, it's been an incredibly impressive launch and really reflects what a great breakthrough medicine KALYDECO is. And again, as Jeff said, in the future, we're expecting the major infection for KALYDECO in 2013 to come from uptick in the EU.

Can you comment on the gross to net? Was there any change this quarter? Just trying to get a sense of whether or not -- I mean, is $50 million really the -- can you formulate what the current level you have right now in the U.S?

I'll take that question. The gross to net -- or the discount has slightly increased through the year. As we launched it with -- it tended to be around 8% to 9%. And right now as we enter the fourth quarter, it's around 9% to 10%. That's really just a reflection of the patients that we're treating, and we'd anticipate that the continue into the future.

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

I was just wondering if you can tell us on the KALYDECO 661 Phase II trial, if there is an interim analysis? I understand you guys are going to release final data to us, but is there an interim analysis built into that trial? And then the second question is, thinking about the disconnect between, I guess, FEV and sweat chloride. Seeing the KALYDECO 809 trial, is there a rationale to think that you'd see a similar disconnect in the KALYDECO 661 trial?

Terence, I'll take the disclosure question. We'd like to complete the study. VX-661 in combination with KALYDECO, that means going through the monotherapy and then the combination period with each of the escalating doses. We'd like to complete all of those ascending doses, and at that point, with final and complete data, we'll provide a top line press release. And that's why we're guiding to the first half of 2013 in terms of a top line release.

So the second question that you had, this is Peter speaking, is about, do we anticipate a similar disconnect between sweat chloride and FEV? The answer is I don't know. Because that's why we are doing the study. And we will see at the end of the day what the relationship is, because they have very different molecules here that penetrate differently into the body and into the tissues. So I can't really answer that at this given point in time, that's one of the reasons why we're doing the study.

Operator, we're now 5 minutes past 6. We have time for 2 more questions.

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

So can you elaborate a little more on the decision to collaborate on VX-135 with GSK's NS5A inhibitor? We know that there's a scarcity of other nucs in development, that's why VX-135 is very precious. But there's no shortage of NS5A in development right now. So what attracts you guys in terms of the GSK's NS5A program compares to, let's say, a more advanced drug like Bristol's daclatasvir? And then second question is, do you guys think between your internal studies, for example, combination with INCIVEK and ribavirin, and then the TMC435 and then the GSK studies, you will have sufficient database in terms of safety to move on to a pivotal study in 2014?

So the first is about our excitement about the Glaxo 5A inhibitor. I must say, what I have seen from a preclinical package, it's really impressive. What I have seen in the clinic, it's really impressive. And the log drop is basically in the range that all the other 5As have. Interesting piece though is the metabolic profile that allows it to really be easily combined with our own molecules, which is a key criteria when you basically do combination regimens. And so, I'm really excited about that molecule. And I think it is far enough advanced and it is a once-a-day. That is the other piece. It offers the opportunity at the end of the day to come out with a once-a-day regimen. And given the 60-milligram dose that you basically have seen in the regimen, what it also allows this and that's why I'm really excited about it. To do coformulation studies and have maybe a once-a-day pill with whatever regimen that we have at the end of the day in mind. This is really fantastic. And so this is the excitement about this. And the other question was about, do we have enough data by doing all those Phase II studies to enter into Phase III in 2014? And the answer is absolutely yes because we will have a pooling concept from a safety point of view with everybody that has received 135, and then for the regimen that we pick, we have enough data to move forward in 2014 from an efficacy point of view.

And our last question, please.

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

Just 2 quick questions. The first is, in the ivacaftor, the minimal moderate CFTR residual function, how are you defining residual exocrine pancreatic function? And then just the second quickly is, do you have a sense as to how well efficacy in an experimental flu model correlates with the efficacy in a real sort of real life flu situation?

So for the second question, yes, it's an artificial system, and the goal is really to get some preliminary read on antiviral activity and more importantly, to narrow the dose range. One can get a sense of the dose range to be studied in subsequent natural influenza, and that really is the goal of the study.

I can add maybe one thing to that. That is maybe a different for 787 compared to Tamiflu. We have also a possibility to study viral clearance because that's a mechanism that actually, I think, that Tamiflu doesn't provide. And so we will also look into that. Bu that is basically the time factor to it. We do know with the challenge study what day you have infected and you can basically go backwards and say, what is the clearance after 1 day, 2 days, 3 days, which is really important thing to basically add value to the molecule. So that's the other piece that we have sort of look into.

In terms of the ivacaftor question, it's really primarily based on functional results. Those people who are dependent on pancreatic enzyme replacement are considered to be pancreatic insufficient, and those who can manage without them are generally pancreatic sufficient. And that's how we define it. Okay. Thanks, everybody, for joining us tonight. We are in our offices. If you didn't get ask a question or if you have a further follow-up, and I would add that we look forward to seeing many of you at the EASL League Conference, which starts in Boston at the end of next week. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.