Vertex Pharmaceuticals, Inc.'s (VRTX) CEO Jeffrey Leiden on Q1 2014 Earnings - Call Transcript

Vertex Pharmaceuticals, Inc. (VRTX) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014


Corporate Participants

Michael Partridge - Vice President-Investor Relations, Vertex Pharmaceuticals, Inc.

Jeffrey Leiden - Chairman, President & Chief Executive Officer, Vertex Pharmaceuticals, Inc.

Jeffrey A. Chodakewtiz - Chief Medical Officer and Senior Vice President, Global Medicines Development, Vertex Pharmaceuticals, Inc.

Stuart A. Arbuckle - Executive Vice President and Chief Commercial Officer, Vertex Pharmaceuticals, Inc.

Ian F. Smith - Chief Financial Officer & Executive Vice President, Vertex Pharmaceuticals, Inc.

Peter Mueller - Executive Vice President, Global Research and Development, and Chief Scientific Officer, Vertex Pharmaceuticals, Inc.

Other Participants

Geoff C. Meacham - Analyst, JPMorgan Securities LLC

Geoffrey Craig Porges - Analyst, Sanford C. Bernstein & Co. LLC

Mark J. Schoenebaum - Analyst, International Strategy & Investment Group LLC

Michael J. Yee - Analyst, RBC Capital Markets LLC

Terence C. Flynn - Analyst, Goldman Sachs & Co.

Brian C. Abrahams - Analyst, Wells Fargo Securities LLC

Ying Huang - Analyst, Barclays Capital, Inc.

Howard Liang - Analyst, Leerink Partners LLC

Matt M. Roden - Analyst, UBS Securities LLC

Liisa A. Bayko - Analyst, JMP Securities LLC

Brian P. Skorney - Analyst, Robert W. Baird & Co., Inc. (Broker)

Koon C. Ching - Analyst, Credit Suisse Securities (USA) LLC (Broker)


Operator: Good day, ladies and gentlemen, and thank you for your patience. You have joined the Vertex Pharmaceuticals Incorporated first quarter 2014 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder this conference may be recorded.

I would now like to turn the call over to your host, the Vice President of Investor Relations, Mr. Michael Partridge. Sir, you may begin.

Michael Partridge, Vice President-Investor Relations

Thank you, operator, and good evening, everyone.

Joining me on tonight's call are Dr. Jeff Leiden, Chairman and CEO; Dr. Jeff Chodakewitz, Chief Medical Officer; Stuart Arbuckle, Chief Commercial Officer and Ian Smith, Chief Financial Officer.

Our agenda tonight is as follows: Jeff Leiden will begin by reviewing Vertex's strategic business priorities for 2014. Then Jeff Chodakewitz will review our clinical progress in cystic fibrosis including the results of the study of VX-661 in combination with KALYDECO in G551D F508del patients. Dr. Chodakewitz joined Vertex at the start of 2014 and we are happy to have him join us on this and future calls.

Next, Stuart will discuss KALYDECO product revenues and provide some commentary on the outlook for KALYDECO growth in 2014. To close Ian will review the financial results and discuss our updated financial guidance. Joining us for Q&A are Dr. Bob Kauffman and Dr. Peter Mueller.

We plan for the call to run for a total of one hour. Please be considerate and limit your questions to one with a related follow-up.

This conference call will include forward-looking statements, which are subject to the risks and uncertainties including those discussed in detail in our reports filed with the Securities and Exchange Commission including our 10-K and 10-Q. These statements including without limitation those regarding the performance of 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.

Information regarding our use of GAAP and non-GAAP financial measures and a reconciliation of GAAP to non-GAAP is available in our first quarter 2014 financial results press release. This press release is on our website and I would also refer you to slide 4 of tonight's webcast.

Thank you. I will now turn the call over to Jeff Leiden.

Jeffrey Leiden, Chairman, President & Chief Executive Officer

Thanks, Michael, and good evening, everyone.

Vertex is in many ways a company in transition. We have made cystic fibrosis a clear focus of our business and we've made a decision to no longer invest in hepatitis C. At the same time we're continuing to invest in early-stage research to identify compounds in CF and other areas that could become transformative medicines for patients with serious diseases as well as opportunities for Vertex growth.

This transition in Vertex business represents our continued execution against three strategic priorities for 2014. I talked about these priorities earlier this year and I'd like to review them again now.

First, focus on driving forward our cystic fibrosis development programs to enable the launch of multiple transformative CF medicines globally. Our clinical and commercial teams have made significant progress in CF already this year. For example we have expanded the U.S. KALYDECO label to include additional patients. We have now completed dosing in the Phase III studies of VX-809. We have recently received orphan status for VX-661 and we are today reporting positive clinical results for a study of VX-661 in patients heterozygous for G551D and F508del.

Second, continue to invest in research, internal research is critical growth engine for Vertex and we expect that it will produce more transformative medicines to provide sustainable growth in the future.

And third, maintain financial strength so that we can continue to invest in the discovery and development of our new medicines. We ended the first quarter with more than $1.3 billion in cash and with KALYDECO revenues of approximately $100 million that we expect to grow through the year and in future years. This financial position supports our investments for future growth.

Our goal in CF is to treat as many people as possible and to enhance the benefits to those that we treat. Jeff Chodakewitz will give you more detail on our recent CF clinical progress. But before I turn it over to him I would like to acknowledge that today marks the start of CF awareness month and recognize all the patients, families, doctors, nurses and caregivers who are involved in the treatment of CF. Thank you for your continued support as we seek to improve the lives of more people with this devastating disease. Our continued progress in CF clinical development is a strong sign that our commitment to people with CF is unwavering.

With that I'll turn it over to Jeff.

Jeffrey A. Chodakewtiz, Chief Medical Officer and Senior Vice President, Global Medicines Development, Vertex Pharmaceuticals, Inc.

Thanks, Jeff, and good evening. It's a pleasure to speak with you all tonight.

I'll provide an overview of some important progress we've made with our three CF development programs, specifically ivacaftor monotherapy, lumacaftor and ivacaftor combination therapy and VX-661 and ivacaftor combination therapy.

Let me begin with ivacaftor monotherapy. Our clinical and regulatory efforts are focused on demonstrating clinical activity in additional patients that may benefit from this medicine. In February, following approval from the U.S. FDA we began treating patients with eight additional mutations with KALYDECO. These are all mutations for which in vitro data predicted clinical responsiveness to KALYDECO. We submitted an MAA variation to the European Medicines Agency and expect to receive an opinion from the CHMP for these additional gating mutations around mid-year.

An additional mutation for which we are seeking ivacaftor label expansion is R117H. As you may recall we announced results in December from a Phase III trial in this population. We did not achieve statistical significance in the primary endpoint for the overall population of this trial. But ivacaftor did produce a statistically and clinically significant improvement in FEV1 and other measures in a pre-specified sub-population of participants 18 years of age and over.

We plan to submit an sNDA and MAA variation for people with CF ages 18 and older with at least one copy of the R117H mutation. The sNDA submission is planned for midyear with the MAA variation to follow in the second half of 2014. We expect to continue our discussions with the FDA following our sNDA submission. We estimate that there are more than 700 patients age 18 and older worldwide with the R117H mutation.

We also believe that ivacaftor may be able to help other patients who have residual CFTR function. We are conducting a proof-of-concept study in these patients and we are on track to report results later this quarter. In our view a successful result in this study of approximately 20 participants would lay the groundwork for pivotal studies of ivacaftor in patients with residual CFTR function.

Finally we expect to report results from our pediatric safety studies of ivacaftor use in two to five year olds with gating mutations in the third quarter. All patients in the pediatric study who have completed 24 weeks of treatment have now progressed into the rollover study.

Moving to our lumacaftor ivacaftor combination program, the six-month dosing period is complete for the Phase III TRAFFIC and TRANSPORT studies in patients aged 12 and older who are homozygous for the F508del mutation. We are on track to report 24-week results from these studies around midyear. If these studies are successful, we expect to file an NDA and MAA later this year.

In TRAFFIC and TRANSPORT we are seeking to demonstrate a statistically and clinically significant improvement in absolute FEV1, the primary endpoint of the study and also benefits in important secondary endpoints including weight gain, pulmonary exacerbation and CFQR. We estimate that our studies are more than 90% powered for an absolute improvement in FEV1 of 3% from baseline compared to placebo at week 24.

In addition to lumacaftor, we are developing another first generation corrector, VX-661. Our principal strategy with VX-661 is to develop it as part of a future triple combination therapy with a next generation corrector and a potentiator. Dosing has begun in our 12-week study of VX-661 plus ivacaftor in patients 18 and older who are homozygous for the F508del mutation. We expect to enroll approximately 40 patients who will be treated with VX-661 plus ivacaftor or placebo.

Our goal of this study is to access the safety and efficacy of VX-661 plus ivacaftor over a longer duration of treatment. If successful, this study would be enabling for future development of VX-661 for use in a triple combination or potentially to progress it as part of a dual combination.

Today, Vertex announced results from a proof-of-concept study of the corrector VX-661 in combination with ivacaftor in CF patients who have the G551D mutation on one allele and the F508del mutation on the other allele. The basis for exploring the VX-661 plus ivacaftor combination in this population is based on in vitro observations from HBE cells in which adding VX-661 to ivacaftor improved chloride transport.

The purpose of this trial was to see if the improvement in CFTR function that we observed in the lab could translate into a signal of clinical efficacy in the G551D F508del heterozygous population. We dosed VX-661 at 100 milligrams daily in patients who were already taking 150 milligrams of KALYDECO twice daily for an average of one year. We were testing this clinical hypothesis for the first time and were not sure if we'd be able to detect a signal.

The patients that we enrolled were G551D patients who had already been receiving commercial KALYDECO and therefore were likely to have already seen a significant clinical benefit from taking this medication. Also, the study was small. We enrolled just 18 patients and the duration of therapy was short, just 28 days, for which VX-661 would be added on top of ivacaftor.

The results do, in fact, show a clear signal of efficacy. There was a mean 4.6 percentage point absolute improvement within group in PPFEV1 through 28 days. The relative FEV1 improvement was 7.3%. These improvements were both statistically significant. We also saw a small reduction in sweat chloride on treatment within group with a p-value of 0.053.

FEV1 and sweat chloride returned toward baseline in the four weeks following completion of the VX-661 treatment period. These off-treatment effects were statistically significant within group as well. In this study, four patients already receiving KALYDECO were randomized to placebo to maintain study blinding. From a safety perspective, the regimen was generally well tolerated over 28 days and all 18 patients completed the treatment period. The most common adverse events in the treatment group were cough, pulmonary exacerbation, headache and upper respiratory tract infection and we expect to present more details on these results at a medical meeting in 2014.

For us, there are really three important takeaways. First, once again, in vitro data with our CFTR modulators has been predictive of a clinical benefit in the specific patient population. Second, correctors like VX-661 appear to be clinically active on a single F508del allele. And lastly, these results suggest to us that treatment for heterozygous patients may be further enhanced with CFTR modulators that are tailored for each allele.

Based on the data announced today from this study, and pending the results of the 12 week study, we could decide to develop VX-661 as part of a dual combination for certain heterozygous patient groups. Also based on these data, we plan to discuss with global regulatory authorities the potential approval pathway for VX-661 in combination with KALYDECO for people with CF who have the F508del mutation and another mutation known to respond to KALYDECO alone.

In summary, I'm pleased with our progress with our CF development programs and I look forward to updating you throughout the year. With that, I'll turn it over to Stuart.

Stuart A. Arbuckle, Executive Vice President and Chief Commercial Officer

Good evening, everybody.

Tonight, I'll report on first quarter product revenues and outline our expectations for KALYDECO revenue growth in 2014. KALYDECO generated $100 million in world wide net revenues in first quarter including U.S. sales of approximately $56 million and international sales of approximately $44 million. This represents an increase of 61% from revenues of $62 million that we reported for the first quarter of 2013.

The reason for the decline from the $109 million we reported in the fourth quarter of 2013 was the favorable impact of stocking and other non-recurring business adjustments in the fourth quarter that we discussed on our quarterly call in January. We continue to see a very similar level of underlying demand and strong patient adherence to treatment.

We expect KALYDECO revenues to grow through 2014, beginning in the second quarter based on the following anticipated key factors. First, label expansion. Since receiving approval from the FDA in late February for three additional mutations, we have seen strong uptake, similar to what we saw in patients with the G551D mutation. We expect upside to continue as we seek to reach the vast majority of the approximately 150 newly eligible patients in the U.S. by year-end.

We have filed an MAA variation with the EMA for a similar label expansion and currently anticipate approval in the second half of 2014. Following EMA approval we will seek reimbursement for these new patients both in countries where KALYDECO is already formally reimbursed, such as France, and in new countries like Italy where, because there are so few G551D patients, the medicine has not yet been formally reviewed. There are approximately 250 eligible people with these additional mutations living in the E.U.

A second key factor of KALYDECO growth is geographic expansion from securing public reimbursement in Canada and Australia. The reimbursement process is unfortunately taking longer than we, and more importantly, people with CF wanted. Reimbursement discussions in both countries are active and ongoing, and our goal remains to get this transformational medicine to all eligible children and adults as quickly as possible. There are approximately 300 people with the G551D mutation in Canada and Australia and we know they, and their families are anxiously awaiting a positive outcome from these discussions.

To summarize, we expect label and geographic expansion to enable us to grow our KALYDECO revenues beginning in the second quarter and continuing throughout the year. This growth is reflected in our KALYDECO net revenue guidance, which we are maintaining.

I look forward to updating you on our continued progress throughout the year and I'll now turn it over to Ian.

Ian F. Smith, Chief Financial Officer & Executive Vice President

Thanks, Stuart, and good evening to everyone.

Tonight I would like to discuss our current financial position, our first quarter 2014 results, and our updated 2014 financial guidance.

During the first quarter, we further prioritized our development activities towards cystic fibrosis, our financial results and guidance reflect this prioritization. As we enter the second quarter we are a business primarily funded by CF revenues and a strong cash position. We are investing in the discovery and developments of medicines for CF and the creation of new medicines in other areas.

On to our cash position, we finished the quarter with over $1.3 billion in cash. This balance sheet strength combined with the expected growth in our KALYDECO revenues supports our business investment and still allows us to exit 2014 with a strong balance sheet. We continue to manage this cash position as a priority as it enables the transition of our business to growth and profitability driven by our CF medicines.

An example of our prioritization to protect our financial strength is shown by our decision not to proceeded with VX-135 in hepatitis C, amending our arrangement with Alios and our decision to out-license the compound. This is all reflected in our updated 2014 financial guidance that I will discuss in a moment.

Now to the first quarter 2014 results. We generated $108 million in total non-GAAP revenues in the first quarter. $100 million of this was KALYDECO. Based on our decision to end further investment in hepatitis C, as announced this evening, the HCV-related revenues totaling approximately $10 million are excluded from non-GAAP revenues.

Now to our operating expense. Our first quarter total non-GAAP operating expense was $234 million, down $41 million or 15% from Q1 2013. The first quarter non-GAAP operating expense includes $182 million of R&D expenses, compared to $195 million in the first quarter of 2013, and $52 million of SG&A expenses, compared to $80 million in the first quarter of 2013. These reductions of 7% and 35%, respectively, reflect our commitment to prioritization towards the CF medicines and the protection of our financial position.

Our GAAP net loss for the first quarter was $232 million, or $1 per diluted share. Our non-GAAP net loss was $151 million or $0.65 per diluted share.

Turning now to our financial guidance and firstly, our revenue guidance for the full year 2014, we are maintaining our KALYDECO guidance of $470 million to $500 million that we provided earlier this year. Achieving this guidance depends on three key drivers of growth: the continued uptake for the eight additional mutations in the U.S. and achieving reimbursement for the G551D patients in Australia and Canada and the approval for other additional gating-type mutations in the EU.

With the exclusion of our HCV revenues, we are revising our total non-GAAP revenue guidance to be in the range of $520 million to $550 million. This range includes some revenues for potential R&D collaborations.

Based on our move away from HCV and further focusing our investment towards CF, we are reducing our operating expense guidance. We now anticipate 2014 non-GAAP operating expenses to be $890 million to $930 million.

Additionally, I will just note that Q1 non-GAAP OpEx for R&D and SG&A provide a reasonable basis for modeling our expenditures during the rest of the year. Total spend may decline slightly towards the end of the year based on clinical development activities.

In summary, we are committed to completing 2014 with a strong balance sheet and managing our operating expense at a decreased level compared to prior years while we grow our CF revenues.

With that, I'll ask the operator to please open the line for questions.


Operator: [Operator Instructions] Our first question comes from Geoff Meacham of JPMorgan. Sir, your line is open.

<Q - Geoff Meacham - JPMorgan Securities LLC>: Hi, guys. Afternoon and thanks for taking the question. I've got a couple on the VX-661 KALYDECO combo study. I'm assuming that the patients on the placebo arm on just KALYDECO monotherapy were stable. That's not - that data isn't in the slide but I'm assuming that, that is largely unchanged over the evaluation period?

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: Hi, Geoff. So it's Jeff Chodakewitz. I think it's important to step back and say why those patients were in there. It's really - it was only four patients, as we mentioned, and they were really there for blinding. So we really focused on the within group analysis that you saw. It wasn't really a control - intended as a control trial with a placebo group, they were just there so - maintaining the integrity of the blind.

<Q - Geoff Meacham - JPMorgan Securities LLC>: I see. Okay, that makes sense. And then does this data change your view ultimately about the need for a second corrector? And I joined the call a little bit late so I wasn't sure if you guys gave an update on the next gen corrector behind VX-661. Thanks.

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: Hi, Geoff. It's Jeff Leiden. I think our view of VX-661, first of all, has been enhanced by this data. We're learning a lot as we progress VX-661 and I think from this trial we learned a couple things. One, that it's possible to correct a single delta 508 allele, at least in these patients with G551D on the other allele. And second that you could do that on top of patients who have been stably on KALYDECO for quite a bit of time. Most of the patients have been on for a year or so. And that was an important finding.

I think we're still thinking about VX-661 as part of a potential triple regimen to get the enhanced benefit for everybody that's homozygotes and heterozygotes, but I think what this data tells us is that VX-661 may also have a role in certain of these heterozygous patients, and that's worth exploring. You'll remember we talked about this being an interesting trial from that perspective a while ago.

<Q - Geoff Meacham - JPMorgan Securities LLC>: Gotcha. Okay. Thanks.

Operator: Thank you. Our next question comes from Geoff Porges of Bernstein. Your line is open.

<Q - Geoffrey Porges - Sanford C. Bernstein & Co. LLC>: Thanks so much for taking the question. I'd just like to follow up on the VX-661 combination, so first Jeff Chodakewitz, you mentioned the control group but could you tell us whether there was a difference in the cough exacerbations and other adverse events between the control group and the treatment group?

And then secondly, the G551D patients, are they typical of G551D patients? They seem to have a pretty low FEV1 as a starting point in this trial? And then, just to push a little bit more, why wouldn't you be contemplating now taking VX-661 with the standard dose of KALYDECO into a larger study in the homozygous delta F508s? Thanks.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: Great. Thanks, Geoff. So in terms of the placebo patients, again, it was really there for blinding. That's really what our intent was. In terms of the severity, I think it was a little bit lower, as you said, than perhaps we've seen in some of the studies. But I think it's well within the range and the groups were - and it was pretty balanced. And it was really just - we think it was really pretty representative of what we've seen in our 551D studies. I'm sorry, your last question was around...?

<Q - Geoffrey Porges - Sanford C. Bernstein & Co. LLC>: Around why wouldn't you...

<A - Stuart Arbuckle - Vertex Pharmaceuticals, Inc.>: Success of VX-661, Geoff, and whether we'd consider going into a larger study for the delta508 homozygous.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: So I think, for us, really we think we're just getting this data. We really have to understand it a little bit better. It's early days. We also have the ongoing 12-week study for VX-661 and ivacaftor in the f508del homozygous population. And what we're going to do is really step back when we get those results and really say what's the right path forward for VX-661?

<Q - Geoffrey Porges - Sanford C. Bernstein & Co. LLC>: Okay. Look forward to that. Thanks.

Operator: Thank you. Our next question comes from Robyn Karnauskas of Deutsche Bank. Your line is open.

<Q>: Great. Thanks, for taking my question. This is [ph] Alicia (25:43) for Robyn. Just another VX-661 question but just curious if this information that you have about VX-661, how does this change your perspective on acquiring or looking at complementary assets for your CF program?

<A - Stuart Arbuckle - Vertex Pharmaceuticals, Inc.>: So Jeff's going to take that question in terms of a portfolio approach.

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: Yeah. I think we've said all along that we want to continue our leadership position in CF and that's going to come in two forms. One is to continue to develop our expanding portfolio of medicines so not only 809 and VX-661 but next-gen correctors which we think are going to be very important in both expanding the reach and expanding the benefit.

But the other thing is we have a very active - as you can imagine, ongoing surveillance program of all of the potential other assets out there in CF. And we'll continue to watch that and make sure that we're either partnering, acquiring or doing whatever we can to get the best regimens we can in combination with our drugs.

<Q>: Great. Thanks.

Operator: Thank you. Our next questions comes Mark Schoenebaum of ISI Group. Your question, please.

<Q - Mark Schoenebaum - International Strategy & Investment Group LLC>: Thanks for taking the question and also thanks for all the detail on the call. I found it helpful, especially the commercial commentary. I just wanted to, on the placebo issue, would you guys be willing to characterize the behavior of the, I know it's only four, but would you guys be willing to characterize the behavior of the four placebo patients? Maybe give us some reassurance that they didn't behave as well as the treated patients or something like that?

Then my second question was, in the data where you removed the drug, were both drugs were removed, or was that, was that just VX-661? Thanks a lot.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: Great. Thanks, Mark. Sure. Let me try to give you a little bit more color. Again, it's four patients. I'd say that what we observed in those patients was really that there was modest shifting around. It was variable, as you'd expect in this disease with four patients getting placebo, and it was very typical of what we've seen in general with smaller cohorts of patients receiving placebo. So hopefully, that gives you a little better flavor of that.

<Q - Mark Schoenebaum - International Strategy & Investment Group LLC>: So modest would not be 4.6% on an absolute basis, I would imagine.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: Correct. It's modest changes.

<Q - Mark Schoenebaum - International Strategy & Investment Group LLC>: Thank you.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: So, I think that the other piece, in terms of the study design, was really that we started and then stopped the VX-661. KALYDECO, which the patients were receiving in the marketed setting, was continued throughout the study and in the follow-up period. They just stayed on their KALYDECO.

<Q - Mark Schoenebaum - International Strategy & Investment Group LLC>: Thanks very much.

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: Yes, Mark, it's Jeff Leiden. We've obviously had a number of questions on this and on the placebo group. Maybe let me take a step back, if you will, as I often do on these Phase 2 data, and tell you how we look at those data, which is, we always look at the entirety of the results, and we try to look at it from every direction to see if we're seeing a consistency and to see if we're seeing statistical significance.

I guess when I look at this data, the thing that is very convincing to me is that, when you start by looking at what we saw in the lab in cells, which was this additive effect of VX-661 on KALYDECO, in exactly these cells, G551D, delta 508, that, again, has translated into what we're seeing in the clinic. And obviously now we have 5, 6, 7 trials like that where the in vitro result translates into the in vivo results.

Then we saw the on effect when we added VX-661 to patients who were stable on KALYDECO, and honestly, with only 14 patients, surprisingly, we saw a statistically significant on effect. And then of course, the off effect is important, so we removed the VX-661 off the patients on KALYDECO, and we saw a statistically significant decrease, and that pattern, I think, in a Phase 2 trial, is always very important.

And then finally it correlated with sweat chloride, which always gives us confidence that what we're seeing is an on mechanism effect. So when I look, when I walk around the trial and look at it from all perspectives, I see a consistency of statistical significance and this nice correlation from in vitro to in vivo. I think that's what really gives us the high level of confidence.

<Q - Mark Schoenebaum - International Strategy & Investment Group LLC>: Thanks so much.

Operator: Thank you. Our next question comes from Michael Yee of RBC Capital. Your line is open.

<Q - Michael Yee - RBC Capital Markets LLC>: Hey, thanks. A quick question, first I will ask a question not related to placebo which is in your ongoing TRAFFIC and TRANSPORT study, I know they're still thinking about secondary endpoints and Wall Street's looking at how to evaluate that. Have you done any work around correlating waking and exacerbations and how that correlates to FEV1 effects? Obviously we know what the results were in the KALYDECO monotherapy studies and the effects there and what that translated to for waking exacerbations but given potentially less effects in the delta 508 homozygous population, how do you predict what would happen there or are we flying a bit blind? And I have a follow up.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: So it's Jeff Chodakewitz. Let me take a start at your question. I think that we - I don't think we looked recently at least in a formal way at correlations between these different measures, but I do think you raise a couple of important points. First of all is that we have to really understand the totality of the disease and really we're assessing the benefit for patients on all of those endpoints. It's really not just about any one of them but as you imply, it's really about understanding all of them and then understanding the pattern and seeing what benefit the drug brings.

We do have a set of secondary endpoints that we have pre-planned and pre-specified and that's going to include a number of important outcomes like BMI as you're talking about in terms of pulmonary exacerbations as well as patient reported outcomes like CFQR. So we're really going to take a good look at all of that and take the time to really understand all the results.

<Q - Michael Yee - RBC Capital Markets LLC>: Okay. And then the follow-up is I'm sorry I have to sneak in one more on the placebo but I mean these patients in the study, they knew it was a randomized study versus placebo. They didn't know the exact randomization. I'm just trying to think about how much placebo effect there really would be given the randomization of seven to two.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: All right. So it - people did - were informed of course that it was a placebo-controlled study, the patients knew that and they formed informed consent, but as is the intent we were very careful with the placebos so they would not be able to detect which one they were on.

<Q - Michael Yee - RBC Capital Markets LLC>: Okay. Thanks.

Operator: Thank you. Our next question comes from Terence Flynn of Goldman Sachs. Your question, please?

<Q - Terence Flynn - Goldman Sachs & Co.>: Hi. Thanks for taking the questions. First, I was just wondering on the, again sorry to go back to it, but the placebo group in the VX-661 combo trial, can you give us any sense of the sweat chloride data in those patients? I know you said it was - it sounds like the data bounced around a little bit. But just wondering if you could characterize that on a basis versus what you saw in the treatment group?

And then maybe just remind us, I know you guys had changed the end point of the Phase 3 combo study for KALYDECO 809. Can you just maybe give us some background there what drove that decision? Again, thanks a lot.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: Sure. So again, in terms of these sweat chloride in the placebo patients, it was quite - it was variable. There were modest changes, again very typical of what you'd expect to see with a small number of patients receiving placebo, and that was true across all the measures.

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: Receiving KALYDECO as placebo.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: Sorry, yes. Well they received placebo on top of KALYDECO. In terms of the Phase III end point change, just so I am clear, can you say a little bit more about which aspect of the day you wanted me to comment on?

<Q - Terence Flynn - Goldman Sachs & Co.>: Sure. Just I think you guys had switched from a relative to an absolute improvement in FEV, and was just wondering again what drove that decision?

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: So we think, in fact, that those measures are important. We did - specifically shifting to absolute was based on a request that we got from the FDA. But we're going to have relative as a key secondary measure. That's really the basis for our change.

Operator: Thank you. Our next question comes from Brian Abrahams from Wells Fargo. Your line is open.

<Q - Brian Abrahams - Wells Fargo Securities LLC>: Hi. Thanks for taking my questions. The first question on biology, do you believe that the increase in Group FEV1 VX-661 and KALYDECO study is due to enhancement of the G551D CFTR function or an action of a combo on the F508 CFTR?

And then just another question on placebo, sorry about that but I realize the study wasn't powered or designed this way, but if you were to do a statistical test on the VX-661 group versus placebo, just given the variability you described for the placebo and the statistical significance on the in group effect for the drug arm, would it be safe to say that placebo adjusted mean FEV1 improvements? Would it also have been statistically significant? Thanks.

<A - Peter Mueller - Vertex Pharmaceuticals, Inc.>: Hi. This is Peter speaking. I answer the biology question. And so we believe that we have and there is some in vitro data that justifies that is, that adding a corrector to the mix enhances trafficking of the CFTR protein to the surface. So part of the additional increase in activity that you see here is basically enhancing the amount of CFTR protein to the surface.

Now when it is on the surface it also gets potentiated by KALYDECO. So therefore you get basically a double effect. So in enhancing, trafficking and...

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: But I think, Peter, the question was do we believe the effect was predominantly on the G551D allele or the 508 allele and we believe the effect is predominantly on the 508 allele from everything we've seen in vitro.

<A - Peter Mueller - Vertex Pharmaceuticals, Inc.>: Oh yeah. Yeah. No that's correct.

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: And, Jeff, do you want to take that second question? Or the, I don't know, 100th question?

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: [Laughter] So I actually think that probably we've covered this quite completely and I think that the, we think that the important analysis that we talked about and that Jeff Leiden referred to is really the within group analysis both in terms of the sweat chloride and FEV1 the on and the off.

<Q - Brian Abrahams - Wells Fargo Securities LLC>: Okay. Thanks.

Operator: Thank you. Our next question comes from Ying Huang of Barclays. Your question, please?

<Q - Ying Huang - Barclays Capital, Inc.>: Thank you for taking my questions as well. I'm not going to beat a dead horse by asking on placebo again. So first of all can you tell us, do you plan to file the R117H indication here, is that based on the recent feedback from FDA and also EMA?

And then secondly also I noticed that in this trial you only tested 100 milligram dose for VX-661. Have you determined that, that's going to be the dose you will take VX-661 forward going into a potential pivotal trial?

And then lastly, KALYDECO, can you talk to us about the underlying demand like for example bottle dispense in 1Q over 4Q last year? And also maybe patients on therapy even though we know there's an inventory draw-down here. Thanks.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: Hi. So it's Jeff Chodakewitz. Let me take the first couple of those and I'll pass it on to Stuart.

In terms of the R117H we can't comment on our discussions with the FDA or speak on behalf of the FDA. But as we presented we think that the data coming out of that study for the patients who are greater than 18 was both statistically and clinically significant recognizing that we did fail on the primary endpoint. And we plan to file based on that analysis and we'll have ongoing dialogue with regulatory agencies.

In terms of the dose of VX-661 I - we're very early in our program. That was the dose that we studied but I don't think we're in a position yet to say that we've decided on what a VX-661 dose would be.

<A - Stuart Arbuckle - Vertex Pharmaceuticals, Inc.>: And on the revenue, the fourth quarter of 2013 was inflated by some one-off business adjustments. The first quarter was negatively impacted by some of those same impacts such as increased stocking in the fourth quarter. The underlying patient demand is absolutely rock solid and was very similar in terms of total patients, in terms of compliance, persistence and all those sort of things between the two quarters.

<Q - Ying Huang - Barclays Capital, Inc.>: Thank you.

Operator: Thank you. Our next question comes from Katherine Xu from William Blair. Your question, please?

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: Hello, Katherine?

Operator: Ms. Xu, please make sure your line isn't muted and if using a speakerphone lift your handset. We'll go to the next question from Howard Liang of Leerink. Your line is open.

<Q - Howard Liang - Leerink Partners LLC>: Thanks very much. A couple of questions, one science question, the other one commercial.

In the lab, can you remind us, did VX-661 have a bigger effect in the G551D 508del heterozygous cells or 508 homozygous cells? I guess, how do you think about the difference between G551D, 508 heterozygous versus homozygous? Why a positive signal that you saw here may or may not have read-through for the upcoming TRAFFIC, TRANSPORT studies?

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: So, Howard, it's Jeff. We did not mean to imply that this signal has implications directly that we can read out in the upcoming TRAFFIC and TRANSPORT so if you heard that, that's certainly not our implication. We believe that there's a lot of data that supports the upcoming TRAFFIC and TRANSPORT results from the in vitro data to the in vivo data and that's really where our confidence comes from for TRAFFIC and TRANSPORT.

What we did learn here, that I think was very, very important, is that patients who were stably treated on KALYDECO with all of the benefits they get on the G551D allele, who also have 508 on the other allele can see enhanced clinical benefit by adding in corrector and that was, obviously, a big question in our minds. Could you translate that out to an improvement in FEV1 once you'd already fully treated the 551D allele? And I think the answer from the study is clearly, yes. And that does have implications for how we think about developing VX-661 but not the TRAFFIC and TRANSPORT.

<Q - Howard Liang - Leerink Partners LLC>: Can I just follow up? I guess, why wouldn't it have read-through to TRAFFIC and TRANSPORT?

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: The readthrough that we had before, right? In other words we know that corrector plus potentiator is effective in patients who have delta 508 alleles and we've seen that in 809 in multiple studies, in five Phase II studies and we've seen it now with VX-661. So I guess if you said you have yet one more study that shows a corrector plus a potentiator can enhance 508 function, yeah, it does, but I think we had a lot of evidence there. Where we didn't have a lot of evidence is what happens when you add a corrector on top of KALYDECO in a 551D with one 508 allele. We just didn't know what was going to happen there. That's really what we learned from this trial.

<Q - Howard Liang - Leerink Partners LLC>: Okay. That makes sense. Can I just follow-up on commercially? I think most G551D patients have delta 508 on the other allele, so when you add VX-661 to KALYDECO, do you expect to realize more revenue per patient? And do you think the market can bear higher costs than KALYDECO?

<A - Ian Smith - Vertex Pharmaceuticals, Inc.>: So you're correct, about 70% of them have 508 on the other allele, the G551D patients. In terms of pricing, much too early to talk about that. We literally just got this data in the last few days. The thing we're really excited about is the fact that we appear to be able to be bringing additional benefit to patients who are already doing well on KALYDECO and that's about the maximum take-home I think you can take right now. It's really much too early to comment on what pricing implications that may have.

<Q - Howard Liang - Leerink Partners LLC>: Thanks very much.

Operator: Thank you. Our next question comes from Matt Roden of UBS. Your line is open.

<Q - Matt Roden - UBS Securities LLC>: Great. Thanks very much for taking the question. I had 12 placebo questions lined up but I think you've answered them all so I'll ask something else and congrats on the VX-661 data point.

So if you integrate everything you know about the correctors, all the pre-clinical and clinical data, do you have any basis for thinking about how the benefit, assuming there is one, changes over time once you get out past four weeks? So we have two four-week observations of combination therapy. So I'd like to get your thoughts as to whether or not you think there's a basis for believing the benefit can increase, stay the same or maybe wane as you go out to 24 weeks past the four-week readout. I know you have to do the experiment, but I'm just wondering if you have a basis for a view on that.

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: Yeah, I wish I could give you a real data-based answer. I just can't. At this point, what we have is four-week data and the only relevant piece of data I can give you is what we know about KALYDECO, right? Which is now we have multiple years, up to four and five years in some patients, some of which has been recently published, in which we're seeing a tremendous stability of the response starting at two weeks and going out multiple years but obviously that's KALYDECO. That's a potentiator. And unfortunately we just don't have longer data than that. We'll see the first evidence of this obviously with TRAFFIC and TRANSPORT and then as Jeff, said I think the VX-661 plus KALYDECO three-month trial is going to be very, very important; first obviously for safety but also because it's the first time we're going to see that three-month data with VX-661. And rather than speculate, I'd rather just show you the data when we have it.

<Q - Matt Roden - UBS Securities LLC>: Okay. And then on the multiple sclerosis remyelinating program, I think you previously described this as further along than your other pre-clin programs. Just wondering if this is something we could see in the clinic this year? Thanks.

<A - Stuart Arbuckle - Vertex Pharmaceuticals, Inc.>: So, Matt, I think you asked the same question on the last call as well but yeah, we do have a program in this area. It is early and there'll be a time when we give you more information on that.

<Q - Matt Roden - UBS Securities LLC>: Thanks very much.

<A - Michael Partridge - Vertex Pharmaceuticals, Inc.>: Operator, next question, please?

Operator: Thank you, sir. Our next question comes from Liisa Bayko of JMP Securities. Your line is open.

<Q - Liisa Bayko - JMP Securities LLC>: Hi, great. Thanks for taking the call. You talked about now exploring a regulatory pathway for the combination of VX-661 and KALYDECO in sort of that ideal situation where you have someone that responds to KALYDECO on one - an allele that responds to KALYDECO and another allele that's 508 - sorry, another allele that's, yeah, 508. Can you maybe talk about what the patient population size is for that, just so we can have a better sense?

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: So there's two ways to think about that, right, one is in the G551D patients where I think Stuart mentioned before somewhere between 65% and 70% or so of patients who are G551D on one allele are 508 on the other allele. So that's directly applicable to what we showed today.

The other one though would be KALYDECO - other KALYDECO responsive alleles such as gating and residual function. And so I think the math that's a reasonable thing to do is to assume around 65% to 70% of all those patients with the KALYDECO responsive allele on one side will have 508 on the other side. The thing we don't yet know is what is really the numerator there. How many of all those residual functions are going to be responsive to KALYDECO. And that's what we're going to figure out as we begin to get the results from these NF1 trials.

<Q - Liisa Bayko - JMP Securities LLC>: Okay. That's helpful.

<A - Jeff Leiden - Vertex Pharmaceuticals, Inc.>: Does that answer your question okay?

<Q - Liisa Bayko - JMP Securities LLC>: It does. Thank you very much.

<A - Michael Partridge - Vertex Pharmaceuticals, Inc.>: Operator, I think we'll take two more questions.

Operator: Absolutely, sir. Our next question comes from Brian Skorney of Robert W. Baird. Your question, please?

<Q - Brian Skorney - Robert W. Baird & Co., Inc. (Broker)>: Hey. Good afternoon. Thanks for taking the question and congrats on the data, very compelling. I guess the only thing I'm questioning, I sort of thought this was going to be a high hurdle because the patients are already on baseline KALYDECO. I would have expected them to be relatively healthy, but just on the FEV1 measurement it actually looks like they're sicker than patients who were enrolled in the original KALYDECO Phase III study who were on nothing. So could you just help us put this in context how sick these patients really were, even though they were on KALYDECO? And how meaningful the improvement winds up being from the addition of VX-661?

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: So it's Jeff, Brian. I think that the - first of all I think it is a high hurdle, as you said. We were not sure, given that and in fact a very high proportion of patients who get KALYDECO respond, we were not sure that we'd be able to show an improvement.

I think that in terms of the baseline, when we look back we do see some variability. Again, in terms of the - where patients end up after a period of time, I think this, the patients' baseline characteristics here were a little lower but really not out of the range that we might expect to see. And again, I think the fact that they were on stable KALYDECO for an average of about a year as we talked about, that's really, I think, just emphasizes the high hurdle that the small study had for showing a benefit. So - and that's why we're enthused about the result.

<Q - Brian Skorney - Robert W. Baird & Co., Inc. (Broker)>: Okay. Thanks, Jeff.

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

<Q - Koon Ching - Credit Suisse Securities (USA) LLC (Broker)>: Hi. Thanks for taking the question. This is Koon actually asking a question on behalf of Ravi. I just wanted to know if you'd comment on the range in the changes you saw in the absolute FEV1 and sweat chloride? Thank you.

<A - Jeff Chodakewitz - Vertex Pharmaceuticals, Inc.>: Hi, Koon. So no, I really think that this is - as we said, this is really very early results. It's a small study. We're really going to have to continue to evaluate it. We will be presenting the data in a scientific forum in the coming year.

<Q - Koon Ching - Credit Suisse Securities (USA) LLC (Broker)>: Okay. Thank you very much.

Jeffrey Leiden, Chairman, President & Chief Executive Officer

Thank you. Thanks for joining us this evening and we look forward to catching up with most of you soon.

Operator: Thank you, sir. Ladies and gentlemen, that does conclude Vertex Pharmaceuticals, Incorporated first quarter 2014 financial results conference call. You may disconnect your lines at this time. Have a great day.


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