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Edited Transcript of VRTX earnings conference call or presentation 27-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Vertex Pharmaceuticals Inc Earnings Call

Cambridge May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Vertex Pharmaceuticals Inc earnings conference call or presentation Thursday, April 27, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ian F. Smith

Vertex Pharmaceuticals Incorporated - CFO, COO and EVP

* Jeffrey M. Leiden

Vertex Pharmaceuticals Incorporated - Chairman, CEO and President

* Michael Partridge

Vertex Pharmaceuticals Incorporated - VP of IR

* Stuart A. Arbuckle

Vertex Pharmaceuticals Incorporated - Chief Commercial Officer and EVP

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Conference Call Participants

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* Adam Anderson Walsh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Senior Analyst

* Alethia Rene Young

Crédit Suisse AG, Research Division - Research Analyst

* Carter Lewis Gould

UBS Investment Bank, Research Division - Large Cap Biotech Analyst

* Charles Anthony Butler

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Cory William Kasimov

JP Morgan Chase & Co, Research Division - Senior Biotechnology Analyst

* Geoffrey Christopher Meacham

Barclays PLC, Research Division - MD and Senior Research Analyst

* Geoffrey Craig Porges

Leerink Partners LLC, Research Division - MD, Biotechnology, Director of Therapeutics Research and Senior Biotechnology Analyst

* Laurence Alan Carr

Needham & Company, LLC, Research Division - Senior Analyst

* Liisa A. Bayko

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Matthew Kelsey Harrison

Morgan Stanley, Research Division - Executive Director

* Mohit Bansal

Citigroup Inc, Research Division - VP and Analyst

* Philip M. Nadeau

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Terence C. Flynn

Goldman Sachs Group Inc., Research Division - MD

* Ying Huang

BofA Merrill Lynch, Research Division - Director in Equity Research

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Presentation

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Michael Partridge, Vertex Pharmaceuticals Incorporated - VP of IR [1]

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Good evening. This is Michael Partridge, Vice President of Investor Relations for Vertex. Welcome to our First Quarter 2017 Financial Results Conference Call. (Operator Instructions) This call is recorded, and a replay will be available following the conclusion of tonight's call on our website.

Dr. Jeff Leiden, Chairman and CEO; and Ian Smith, Chief Operating Officer and Chief Financial Officer, will provide prepared remarks this evening. Stuart Arbuckle, Chief Commercial Officer, will join us for Q&A. We will make forward-looking statements on this conference call. These statements are subject to the risks and uncertainties discussed in detail in today's press release, our 10-K and other filings with the Securities and Exchange Commission. These statements, including those regarding the ongoing development and commercialization of KALYDECO and ORKAMBI, Vertex's other cystic fibrosis programs and Vertex's future financial performance, are based on management's current assumptions. Actual outcomes and events could differ materially.

Information regarding our use of GAAP and non-GAAP financial measures and the reconciliation of GAAP to non-GAAP is available in the financial results press release. I would also refer you to Slide 3 of tonight's webcast.

I will now turn the call over to Dr. Jeff Leiden.

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [2]

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Thanks, and good evening, everyone. 2017 is an important year for Vertex, and we've had a strong start to the year with excellent progress across all aspects of our business. This progress has advanced us significantly toward our goal of developing medicines for all people with CF.

In the first few months of 2017, we continued to increase the number of people eligible for and being treated with our approved medicines, KALYDECO and ORKAMBI. In September of 2016, we received approval for ORKAMBI in children ages 6 to 11 in the U.S., and we've seen rapid uptake and strong compliance and persistence in these patients.

This quarter, we also submitted an MAA line extension to the European Medicines Agency for approval of ORKAMBI in children ages 6 to 11. There are approximately 3,400 children ages 6 to 11 who have 2 copies of the F508del mutation in Europe. We remain committed to expanding the eligibility for and access to ORKAMBI.

We've also made significant progress across our CF pipeline. Last month, we shared positive results for 2 Phase III studies of the investigational tezacaftor/ivacaftor combination: 1 study in people with 2 copies of the F508del mutation and 1 study in people with 1 F508del mutation and a second residual function mutations. Both studies demonstrated the clinically meaningful benefits, favorable safety and tolerability profiles across multiple patient groups. We look forward to submitting an NDA and MAA for tezacaftor/ivacaftor in the third quarter of 2017.

In addition, we have 4 next-generation correctors currently in Phase I and Phase II studies. We believe a triple combination of a next-generation corrector with tezacaftor and ivacaftor could provide benefit for the approximately 90% of people with CF who have at least 1 F508del mutation. We expect to have data in people with CF from 3 of these combination regimens in the second half of 2017, and I look forward to updating you on this progress over the coming months.

Lastly, we are focused on broadening our CF pipeline, and during the quarter, we announced an agreement to acquire CTP-656 from Concert Pharmaceuticals. Our goal is to develop the most effective and convenient medicines for people with CF, and CTP-656 has the potential to be used as part of a future once-daily combination regimen that can treat the underlying cause of CF.

These recent accomplishments give us tremendous conviction that we will achieve our vision of bringing new transformative medicines to people with CF around the world. Our continued progress has also positioned us well to meet our financial goals of delivering sustainable long-term revenue and earnings growth.

With that, I'll now turn the call over to Ian to discuss our financials.

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Ian F. Smith, Vertex Pharmaceuticals Incorporated - CFO, COO and EVP [3]

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Thanks, Jeff, and good evening to everyone. Tonight, I'll discuss the key aspects of our first quarter 2017 financials, and we'll also review our 2017 financial guidance.

Total CF product revenues of $481 million in the first quarter 2017 represents a 22% increase compared to $394 million we recorded in the first quarter of 2016. Additionally, it represented a $27 million increase compared to the total CF revenues of $454 million we recorded in the fourth quarter of 2016.

For ORKAMBI, we reported first quarter 2017 product revenues of approximately $295 million, an increase of $18 million compared to the fourth quarter of 2016. This increase was primarily driven by the rapid uptake for ORKAMBI in the 6 to 11-year-olds as well as strong persistence in compliance with this medicine in this age group.

First quarter KALYDECO sales were $186 million compared to $177 million for the fourth quarter of 2016. I'd like to point out that $9 million of this increase was based on mainly onetime adjustments related to reimbursement agreements in Europe.

We also continued to manage and prioritize our operating expenses. Our first quarter 2017 non-GAAP combined R&D and SG&A expenses were $313 million compared to $306 million in the first quarter of 2016 and compared to $295 million in the fourth quarter of 2016.

This revenue and expense profile resulted in a non-GAAP net profit for the first quarter 2017 of $101 million or $0.41 per diluted share compared to a non-GAAP net profit of $22 million or $0.09 per diluted share for the first quarter of 2016 and compared to non-GAAP net profit of $88 million or $0.35 per diluted share in the fourth quarter of 2016.

The significant growth in the net profit was largely driven by the strong growth in product revenues, while prioritizing and managing operating expenses.

From a balance sheet perspective, we ended the first quarter with approximately $1.4 billion in cash, cash equivalents and marketable securities. During the quarter, we received an upfront cash payment from Merck KGaA related to an out-licensing of our oncology portfolio. We also chose to repay $300 million that was outstanding under our revolving credit facility. Our financial position gives us significant flexibility to reinvest into the business to support our future growth.

Now turning to our full year guidance. For ORKAMBI, we continue to expect $1.1 billion to $1.3 billion in net product revenues. Where we land in this revenue range will be determined by the continued uptake and compliance of ORKAMBI in markets where it's been reimbursed as well as the completion of reimbursement agreements in individual countries within Europe. In particular, if we succeed in gaining reimbursements in France in 2017, this would be the major contributor to revenue growth this year.

After KALYDECO, we are increasing our full year guidance and now expect $710 million to $730 million in net product revenues due to the onetime reimbursement adjustments recognized in the first quarter and the strong underlying demand for the medicine.

Lastly, we continue to expect combined non-GAAP R&D and SG&A expenses of $1.25 billion to $1.3 billion for 2017, as we guided to earlier this year. This guidance reflects the rapid progression of our CF clinical development programs and the ongoing global launch of ORKAMBI. We do expect non-GAAP R&D and SG&A expenses to grow in the future quarters in 2017.

Our goal is to increase the number of people eligible for and being treated with our medicines around the world. We expect this to result in significant long-term revenue growth, and we are committed to investing to create new medicines in other disease areas, while managing our operating expenses and delivering significant earnings growth.

With that, I will open the line to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Phil Nadeau with Cowen and Company.

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Philip M. Nadeau, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [2]

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Congratulations on the progress and the strong quarter. One question on the -- on what was disclosed in the press release moving one of the studies of the triple combo from 2-week dosing to 4-week dosing. Could you talk a little bit more about that decision? What were the data or analyses that you did to support the longer dosing? And what do you hope to achieve or demonstrate with it?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [3]

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Phil, this is Jeff Leiden. I'll take that one. Maybe just to back up a little bit and remind you that we have 4 different triple regimen combos that are in clinical trials. We sort of think of them in 2 ways. VX-440 and VX-152 are the first wave. They're in Phase II trials. And as you know, those trials have 2 parts, both the het-min population and a homozygous population. And then the second wave is VX-659 and VX-445. And those are in Phase I trial, but the Phase I have a patient component as well. And before I answer your specific question, I would just say that we're very pleased with the progression of those, all 4 trials. They're all on time or actually a little ahead of schedule to deliver results for the first 3 in the second half of this year and the final one, VX-445, in the beginning of next year. With respect to VX-152 and your question now, the initial studies of VX-152, both parts, het-mins and homozygotes, were designed to be 2-week dosing studies. Based on the tolerability profile that we've seen so far, we've decided to extend the duration of the second trial, the homozygous trial, to 4 weeks. And the reason for that is it's just going to give us more patient information upon which to make the best decision about which one or several of these we're going to take forward into Phase III next year.

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Philip M. Nadeau, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [4]

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Got it. And one question we get about those Phase II trials is your plans for the Concert molecule? And then can you talk about your decision process there? How likely are you to move forward with ivacaftor/tezacaftor versus the Concert molecule in combination with tezacaftor?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [5]

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Yes. So our first priority is to get an excellent efficacy and tolerability regimen for patients who -- particularly het-mins, who have nothing today. In fact the BID regimen, everything that we've learned from those patients says that it will be well accepted because as you know those patients take many, many pills, 20 to 40 pills a day often. On the other hand, our ultimate goal is to get a highly effective and tolerable regimen that's once a day. And the good news there is that both VX-659 and VX-445 we believe are once-a-day regimens. We know that VX-661 is a once-a-day regimen. KALYDECO is a twice-a-day regimen, and so the impetus to acquire the deuterated KALYDECO from Concert was it's a once-a-day regimen, and we'd be able to combine it with VX-661 and either 659 or 445 to get a once-a-day, highly tolerable and highly efficacious regimen.

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Operator [6]

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

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Terence C. Flynn, Goldman Sachs Group Inc., Research Division - MD [7]

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I was just wondering, a follow-up on the triple combos. Maybe can you talk about your disclosure plans? Will you plan to release those as a group? Or will they come in -- come out as they come in? And then regarding the ongoing Phase III trial of tezacaftor and KALYDECO and the F508del plus gating patients, can you remind us of the design there and what you're hoping to see?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [8]

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Thanks for the question. I'll take the first part, the disclosure question. As we've done in the past, obviously, you're asking the question about future disclosures. I think our plan at this point would be to let the studies play out. We'll have a better visibility of the timing of the data coming from each of the studies in a couple of months from now, and I think at that point in time, we'll have a better understanding of how the data will roll out. Our intention actually is to provide you with a top line release probably in the form of a press release as usual and safety and efficacy data because these studies now are including patients with safety and efficacy data. And the data supports what the next steps are for each of the compounds in the triple combinations.

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [9]

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And Terence, this is Jeff again. On your question on the gating -- [on the] gating F508 trial. Just to remind you, this is really the follow-up Phase III program to the Phase II results we've already published that showed in our case about a 4.6% additional increase in FEV1 when you add tezacaftor and ivacaftor in these patients. This obviously is a larger trial, more than 100 patients. It's an 8-week trial. The control is ivacaftor monotherapy versus tez/iva. We're completing enrollment of that trial, and we expect to have the results in the second half of this year. Based on those results, we'll decide the regulatory strategy. It's a little too early to tell until we see what the results are, and it could be a different regulatory strategy in the U.S. and in Europe, as you can imagine.

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Operator [10]

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And our next question comes from the line of Matthew Harrison from Morgan Stanley.

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Matthew Kelsey Harrison, Morgan Stanley, Research Division - Executive Director [11]

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So I have another follow-up on the triple, I guess 2 pieces. So first, should we infer from your comments that you saw better tolerability than you were expecting and that's what allowed you to increase from 2 weeks to 4 weeks? And then why only extend to 4 weeks in the homozygous arm as opposed to both the homo and heterozygote arm?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [12]

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Yes, thanks for the question. So I think I would say this sort of the way I said it before, which is based on the tolerability that we've seen we felt comfortable extending to 4 weeks. It's a little -- whether that better or same, that's sort of a speculation. We have solid data, and so we're comfortable extending to 4 weeks. And in terms of why only one, it's just a matter of we really would like to see 4-week results if we can with several of these so that we can compare them directly. I'm not sure we need to do that in every population, and so we just decided on that particular population for this study.

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Operator [13]

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And our next question comes from the line of Geoff Meacham with Barclays.

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Geoffrey Christopher Meacham, Barclays PLC, Research Division - MD and Senior Research Analyst [14]

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Also another triple question. Obviously, 440 and 152 are ahead in terms of the development. But assuming those look good, is -- we just want to know what's the thought process? Would you wait for de-risking data on 659 or 445 combos before you think about a pivotal? Or just what's the decision factor there? And I have a commercial follow-up.

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [15]

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Sure. So first of all, we're thinking about the triple Phase III designs right now. So we're certainly not waiting even until we have data, Jeff. But the good news is because these trials are proceeding nicely, and in fact some of them ahead of schedule, we're going to have data from these -- at least the first 3 in a relatively short time frame, and the exact decision is going to be based on that data, obviously. It just depends on what we see in terms of making a decision to pull the trigger on one or more of these compounds. But I don't -- what I'm really trying to communicate to you is I don't think even in a case in which we wanted to wait, we're going to keep waiting very long because we're going to have the data in a relatively tight time frame, on at least 3 and maybe all 4 of the programs. And based on that data, we'll be able to make a good decision, I think, on taking one or more of them forward.

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Geoffrey Christopher Meacham, Barclays PLC, Research Division - MD and Senior Research Analyst [16]

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I got you. Okay. And just on ORKAMBI, I know it's hard to say, you guys reiterated for the year. Is there -- are there any sort of gating factors that you're thinking about in terms of France or other countries that are going to contribute to the year? In other words, as the year moves on, are you guys going to update us on the process? Or is it more or less just this is the revenue guidance for the calendar '17?

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Stuart A. Arbuckle, Vertex Pharmaceuticals Incorporated - Chief Commercial Officer and EVP [17]

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So Jeff, thanks for the question. Yes, we did reiterate our guidance, $1.1 billion to $1.3 billion. We understand we had a good first quarter with ORKAMBI. A lot of that was actually driven by faster penetration into the 6 to 11 category in the U.S. And so with the first quarter behind us, we are looking at that guidance, and we're between $1.1 billion and $1.3 billion. But there's still uncertainty as we play out the year on top of what we've already recorded in the first quarter or the run rate coming out of the first quarter. And that does mainly relate to timing of reimbursements in Europe, and the major contributor outside of the U.S. would actually be France. And as you are aware, there is a lot of uncertainty in France. One is the political environment over there at this point. They're going through an election. And then also, it's an unusual markets in that the patients in France are already on drug, and we already receive cash for them, so we don't have this huge advocacy pull to get reimbursement for the drug to ensure that the patients can then receive the drug. So it's an unusual market. It is probably the largest contributor outside the U.S. for the 2017 revenues, but there is still significant uncertainty surrounding it, while we continue to collect the cash. So we felt comfortable keeping our guidance at $1.1 billion to $1.3 billion.

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Operator [18]

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And our next question comes from the line of Geoffrey Porges with Leerink Partners.

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Geoffrey Craig Porges, Leerink Partners LLC, Research Division - MD, Biotechnology, Director of Therapeutics Research and Senior Biotechnology Analyst [19]

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So just to follow up on the question about the European reimbursement. Ian, could you talk a little bit more about if various parts of the U.K. and Benelux for ORKAMBI because they could certainly move the needle. Are they in your plan for this year? Or is that something we should expect for next year? And then if Stuart's available, love to hear where you are in terms of the uptake and the ongoing adoption in the 6 to 11-year-olds in the U.S. and whether that's a template that we could look for in other markets over time.

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Ian F. Smith, Vertex Pharmaceuticals Incorporated - CFO, COO and EVP [20]

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So I'll just take the front end of that, Geoff, and then Stuart is here, and Stuart can take the rest of the question. But I would just say the guidance that we gave of $1.1 billion to $1.3 billion does assume that we gain approval in certain markets, and they tend to be the smaller ones, and they also tend to be more impactful in the second half of the year. As of now, when we look at -- I'll just point out, when we look at Q2 for 2017, we actually see it to be very similar to Q1. But these other markets, even the smaller ones, we anticipate come on in the -- more in the second half of the year and contribute then, certainly France, as I just mentioned. But even the smaller markets as well, the ones you mentioned. And maybe Stuart could give commentary around those markets.

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Stuart A. Arbuckle, Vertex Pharmaceuticals Incorporated - Chief Commercial Officer and EVP [21]

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Yes. So as Ian said, the guidance incorporates the kind of range of possibilities because we can't be absolutely certain which countries we're going to reach agreements with and when. Certainly, we're pleased that we are beginning to see countries now strike pricing and reimbursement agreements with us. Obviously, Germany and Austria are already kind of online. We've added Denmark in the last few weeks, and we have an agreement in principle in Ireland. But as Ian said, those aren't really going to kick in, in terms of generating additional patients and therefore revenue until the second half. Discussions are then ongoing in those other markets that you mentioned like the Belgium, The Netherlands and the U.K., which is a particularly complicated market, not just because of the political situation there. But unlike many of these other countries, it doesn't really have a formal process that we can participate in to take it forward. And so we're really trying to develop with them a kind of bespoke process for ORKAMBI. In terms of the 6 to 11 launch, Geoff, which is the second part of your question, the launch is going well here in the U.S., as Ian referred to in his prepared remarks. The vast majority of the growth we saw between Q4 and Q1 was as a result of that 6 to 11 launch here in the U.S. And the launch trajectory in terms of uptake is very similar to the ORKAMBI launch, but we're also benefiting from what we expected, which is higher persistence and higher levels of compliance than we saw in the 12-plus population. And partly that's due to the profile of the drug in the 6 to 11 population that we saw in the clinical trials, and partly that's due to the fact that, not surprisingly, these patients are managed to a large extent by their parents in terms of compliance. So that's really how the launch dynamics are going for 6 to 11 here in the U.S.

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Ian F. Smith, Vertex Pharmaceuticals Incorporated - CFO, COO and EVP [22]

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You asked specifically was U.K. in our guidance for ORKAMBI for the year, and the answer is no.

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Operator [23]

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And our next question comes from the line of Cory Kasimov with JPMorgan.

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Cory William Kasimov, JP Morgan Chase & Co, Research Division - Senior Biotechnology Analyst [24]

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My first question is actually on KALYDECO. Curious about the trends there. I mean, if the product is generally fully penetrated, how -- where is the bump in guidance coming from with regards to the strong underlying demand? And then I have a follow-up bigger picture question.

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Ian F. Smith, Vertex Pharmaceuticals Incorporated - CFO, COO and EVP [25]

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So thanks for the question. I'll just walk you through kind of the math as to how we think about it and why we did increase the guidance. Obviously, we just recorded $186 million in the first quarter. There was some onetime items in there related to the settlement of contracts, and that's around $7 million or $8 million. But if you were to remove that amount out of the $186 million and then just say that's the run rate and multiply it by 4 and then add in the $6 million or $7 million, you're actually at $720 million. And so we decided to move the range up. We were once at $690 million to $710 million. So, obviously, even at our run rates plus the strong first quarter, we're above that guidance, so we moved it up, and we put a band around it. Because if there is better compliance and persistence, we have -- which we already have strong compliance and persistence, there may be a little upside. And if we have less compliance and persistence, maybe a little downside. So it was really a function of the math of the first quarter that puts you at $720 million, and we just put the guidance around $720 million, being $710 million to $730 million.

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Cory William Kasimov, JP Morgan Chase & Co, Research Division - Senior Biotechnology Analyst [26]

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Okay. Understood. And then bigger picture BD question. And now that you've out-licensed the oncology assets, I'm curious about your latest thoughts with regard to diversifying the business beyond CF? And kind of how do you prioritize building outside of that core competency versus continuing to build that fence around that vertical like your recent Concert deal?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [27]

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Great question, Cory, and a very timely question. So I'll answer the second part of it first. This is Jeff. There's no higher priority here than executing on our CF strategy. We're obviously making great progress there in pretty much all respects, and we're not going to take our foot off the gas. We're going to put our foot down on the gas. We really believe now we're well in sight of being able to find one or more triple combinations that's going to allow us to treat 80% to 90% of all patients. That's clearly priority #1 for the entire organization, as well as for the BD organization, by the way. If we did see anything else out there that was complementary and that we think would make better a regimen, we would certainly be interested in it. However, we also are getting much closer to the end, again, really in CF, we believe. And so it's a great time, and we have started thinking quite a bit over the last even year or so about what's next in CF. And so let me answer it from a strategic standpoint, and then I'll let Ian it answer maybe from a more specific BD standpoint. So strategically, as you know, we've for a number of years now talk about the CF experience as being a model for what we want to do; meaning high unmet medical need, potentially transformative therapies where there are no therapies and specialty markets that have very low SG&A expend requirements, which allow us then to funnel most of our revenue, or OpEx anyway, into R&D and new diseases. And that's exactly the kinds of disease we're looking for whether it's internal investments or external investments for what's after CF. And I think as you know, David Altshuler joined us several years ago. He's spent a lot of time, I would say, tailoring our portfolio of internal research to diseases like that. And there are diseases like that we've talked about like sickle cell disease, Alpha-1 antitrypsin disease, adrenoleukodystrophy. They all look and smell a lot like CF in a whole variety of respects. And I think that's what you can expect our internal portfolio to look like, and we have a number of those programs that we haven't talked about as well. And the other part of the tail end of the portfolio has been that we've out-licensed several assets that didn't fit that strategy, so you saw us out-license our flu asset, which was a really interesting drug but a community drug, to J&J, and you saw as out-license recently our oncology portfolio. Again, some really interesting transformative assets that didn't really fit our commercial and development strategy. So I'm pleased with where the internal portfolio is now and our investments in the internal portfolio, but we've also, obviously, recognized that like most companies at our size and stage we're going to have to supplement our internal portfolio, as good as it is, with some external assets as well, and you've seen us starting to do that. I think the good news is as our financial situation has strengthened considerably and our cash accumulation has strengthened and will strengthen it gives us that much more firepower to go out and acquire other programs and assets to complement our internal portfolio. You're not going to see us go out and acquire revenues, products with revenues in 2018 and '19. We don't need to. But maybe I'll turn it over there to Ian to describe again our BD strategy, with the only change over time being that we have more firepower to execute that strategy.

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Ian F. Smith, Vertex Pharmaceuticals Incorporated - CFO, COO and EVP [28]

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Thank you. I actually don't have too much to add when it come down to the -- Jeff has said it many times on this call, the #1 strategy is look at everything in CF that complements our approach in CF. Number 2 is continue to think about adding new platforms and different modalities that gives us opportunity in other diseases that Jeff was describing. And then #3 is how do we just continue to expand our pipeline. And to Jeff's point, today we have $1.4 billion of cash. We don't have debt. We do have a revolver facility but we -- with $800 million, but we haven't drawn anything down on it. So we have significant financial capability to continue to invest in areas that would be consistently with where Vertex is focused.

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Operator [29]

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Our next question comes from the line of Ying Huang with Bank of America Merrill Lynch.

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Ying Huang, BofA Merrill Lynch, Research Division - Director in Equity Research [30]

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Can you talk about the U.S. versus ex U.S. revenue breakdown this quarter?

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Ian F. Smith, Vertex Pharmaceuticals Incorporated - CFO, COO and EVP [31]

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Yes, Ying. So for ORKAMBI, of the $295 million in total, the U.S. accounted for $264 million. And x U.S. was the balance, $31 million. For KALYDECO, of the $186 million, we recorded $102 million of that was in the U.S. and $84 million was x U.S.

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Ying Huang, BofA Merrill Lynch, Research Division - Director in Equity Research [32]

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And then also you've mentioned that you just reached reimbursement agreement in Denmark and also in Ireland in principle. Can you talk about roughly are they close to what the pricing you've got from Germany?

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Ian F. Smith, Vertex Pharmaceuticals Incorporated - CFO, COO and EVP [33]

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Yes, thanks for the question. Yes. So we're delighted that we are reaching increasing numbers of pricing and reimbursement agreements. Denmark is one. We have an agreement in principle, as you said, in Ireland, and we're really pleased that these are coming through and the patients in these countries are now going to have access to the product, which will begin to contribute in the second half. In terms of specifically commenting on pricing, we, obviously, can't do that. These are confidential agreements between us and the relevant authorities, and so we can't comment on the specific prices.

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [34]

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And maybe, Ying, it may be an opportunity to talk about how we think about guidance going forward that -- talking about the price that we're getting, obviously, would be confidential, to Stuart's point. And so we are thinking more about helping you understand the revenue line by providing you guidance for a product. But then as we look into the future, obviously, we have the potential now to create more medicines that patients that may be on KALYDECO may move onto teza and iva, and those patients that once were on ORKAMBI may also move on teza/iva. So we're starting to think about how to help you understand our revenue trajectory. And a lot of the things that we're discussing here, obviously, we'll get some feedback from The Street as well. But what we're thinking about here is providing you kind of total CF revenues. So at the end of the day, our objective here is to use all the medicines to treat as many patients as possible. And ultimately, that's what important is treating as many patients as possible, which will translate to a total CF product revenue line. And so we're giving this some thought about how we provide guidance in the future as well.

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Operator [35]

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And our last question comes from the line of Tony Butler with Guggenheim.

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Charles Anthony Butler, Guggenheim Securities, LLC, Research Division - Senior Analyst [36]

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Jeff, 2, if I may. In clin trials, the size of the cohorts for 440 were vastly different from that of 152. And I'm just curious that as you roll out the press release later in the second half, will there be sufficient patients to actually make a judgment -- for us to make a judgment between the 2 different molecules in the triple and more importantly, whether or not there is comparative activity in het-min as well as in the homozygous cohorts? And the second question is very simply, does teza bind at the same site as luma?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [37]

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Yes, so let me answer both of those. So first of all, with respect to the size of trial, it may be a little misleading in terms of what you're looking at on clinicaltrials.gov because you want -- the 440 trial actually has 3 parts to it. The first part, Part A and Part B, are the initial smaller trials, 40 patients het-min and 25 patients homozygotes. Part C is a 12-week trial with 130 patients. That's what's contributing to the big patient number that you're seeing there. But Part A and B are the parts that we'll be making the decisions on with the data this year. And those are actually quite similar to 152. 152 has 35 patients in Part A and about the same number, maybe slightly smaller, in Part B. And so, in fact, we will have an apples-to-apples comparison. We chose the size of those trials based upon how all the experience that we've had in Phase II trials, which is now many, many Phase II trials with the [CFTR] modulators. And as you know, if you go back and you look at those trials, this kind of size of trial with 20 to 35 patients each has been very, very informative, and every case essentially predicted the Phase III result almost precisely. So we do have a high level of confidence that we're going to be able to compare these and make decisions based on these trial sizes. 659 is slightly smaller. It's one cohort of patient. And 445, again, is slightly bigger. But even there, we think we're going to get pretty good reads to be able to make good decisions about which ones to take forward.

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Charles Anthony Butler, Guggenheim Securities, LLC, Research Division - Senior Analyst [38]

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That's helpful. And again teza binds to the same site as luma?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [39]

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Yes. Thanks for asking again. Teza and luma do bind to the same site. They have the same, we believe, the same mechanism of action.

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Operator [40]

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

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Liisa A. Bayko, JMP Securities LLC, Research Division - MD and Senior Research Analyst [41]

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As you think about rolling out tezacaftor/ivacaftor and how will that interact with ORKAMBI? Would this be -- are you thinking about sort of phasing out ORKAMBI over time and a switch strategy? Or how should we think about the interaction of those 2?

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Stuart A. Arbuckle, Vertex Pharmaceuticals Incorporated - Chief Commercial Officer and EVP [42]

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Yes, Liisa. It's Stuart here. Great question, thanks. Obviously, we're very pleased with the data that we saw earlier this year from the tezacaftor/ivacaftor Phase III program. Clearly, the agent has a very positive benefit-risk profile. In terms of patient populations that we think are likely to be the most interested in it, if we start with the F508 homozygous population, we're really thinking there that -- as we know, there are a large number of patients wanted to be on the CFTR modulator like ORKAMBI but unfortunately weren't able to stay on the product often because of adverse events. We think that's going to a population of patients and their physicians who are likely to be very keen to try the lumacaftor/ivacaftor combination. We also know there's a number of patients who are naïve to therapy, have never tried ORKAMBI, and we think they also may think more favorably about the benefit-risk profile of tezacaftor/ivacaftor. So those populations would both be additional patients who might be taking a CFTR modulator. And really, that's likely to be our focus with tezacaftor/ivacaftor. If there are patients who are already on ORKAMBI and who are doing really very well, I think that's going to be a decision for the physician and the patient whether they want to consider transitioning to tezacaftor/ivacaftor. And then the second population, obviously, which would also be an additional population is the residual function population. And at present in both the U.S. and in the EU, those patients have no product which can treat the underlying cause of their disease. So that, again, would be an entirely new population. And that's why we say that tezacaftor/ivacaftor in addition to being the basis for the triple combination is a really important medicine in its own right because it's totally in line with our strategy of bringing medicines forward which allow us to treat more patients with CF.

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Liisa A. Bayko, JMP Securities LLC, Research Division - MD and Senior Research Analyst [43]

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Okay. Great. And then as we move to triple, are you thinking this is a kind of one-size-fits-all more or less across the majority of the CF patients where this would be applicable? Or do you think you might have still some doublets or different triple combinations for different populations?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [44]

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This is Jeff. That's a -- it's a great question and an important one. And I think there's still not a full understanding of this. I do want to spend a minute because our thinking has changed honestly too as we've started to see this data. The most important fact to sort of ground the answer in is that 80% to 90% of all patients with CF have at least one Delta F508 allele. That is they're either 50% homozygous 508-508 or they're 508 with something else on the other allele. It could be a minimal function mutation, could be a gating mutation, it could be residual function mutation. So there's really only about 10% of all the patients who don't have at least one 508 allele. And the reason that's important is because what we are learning is -- and I hope we'll see this result when we see the triple data in the second half of this year, that we believe a triple from all of our cellular data will allow us to address all of those patients maximally. That is if you think about the homozygous population, we believe that a triple will be better than any double. That's what our cell data tells us. And if you look at the het-min population, we believe that the triple, obviously, will be better than the doubles or the singles because right now those don't work. And if you look at the residual functions or the gating patients, 90% of those patients will have Delta 508 on the other allele, so a triple will be better for them too. And so once you get to that sort of insight, you realize that actually where this whole field is moving is away from the monotherapies and dual therapies to a single optimal triple therapy that's highly effective and tolerable that's going to treat these 80% to 90% of patients. And the patients who are left who don't have a 508, they'll be a small number of patients, for example, who have a gating mutation on one allele but not 508 on the other allele. They could be treated with KALYDECO monotherapy, but we're talking very small numbers here. And then the final 10% of those patients who don't have a 508 allele at all or a KALYDECO-responsive allele, likely stop codons for the most part, and they're going to need a genetic therapy like gene editing or gene therapy. So we believe this is going to very rapidly transition over to a single triple for 80% to 90% of the patients, a few patients left for us on KALYDECO monotherapy who don't have 508. And then the remaining 10%, 12% really will require genetic therapy, which, obviously, we're working on, but that's farther out.

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Liisa A. Bayko, JMP Securities LLC, Research Division - MD and Senior Research Analyst [45]

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And then I think just my last question just along these lines as well, is targeting CFTR as a triple kind of at the upper end or do you think there might be a quad after that? Or do you really have to think about other mechanism like ENaC? And if there's any update there, that would be great too.

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [46]

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Yes. You have a little bit of both. So we certainly are still interested in looking at mechanisms, ENaC being the first one, whereas as you know, we'll see some data in the second half of this year. The reason being it is a completely different mechanism, and so one might predict that no matter how [good] you got, you could add ENaC in and get some additional benefit. So that's one way -- one important way that we're thinking about it. With respect to taking a triple to a quad, it's more CFTR correctors and potentiators. I think we're going to have to see the data from these compounds and also continue to get data from our new second-gen correctors because we have -- we continue to see improvements in those. But I have to say the levels we're seeing -- and we've shown you this from cells in both het-min and homozygous [are all current]. The next-gen correctors, those like 659 in particular, are really quite high. And so yes, we can probably raise the bar a little bit maybe with some others, but we're probably closing in on maximum kind of therapy. I think the question will be how does that translate in the clinic? In other words, is there a ceiling in the clinic? And we just don't know yet. We haven't reached it. We know we can get 15% improvements from gating patients -- gating 508 patients with tez/iva. The question is -- and we'll see it from the triple, can we go beyond that? And I think only the clinical data is going to tell us.

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Operator [47]

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And our next question comes from the line of Adam Walsh with Stifel.

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Adam Anderson Walsh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Senior Analyst [48]

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My first question is on CTP-656. Can you give us some guidance around whether you think there would be any antitrust issues on the acquisition of that molecule from Concert, given that you already have KALYDECO? I did notice in the Concert proxy documents that you had withdrawn and refiled your premerger notification report form with the U.S. regulatory authorities there. Can you just kind of explain that to us whether or not you anticipate any FTC issues and what the timing of clearance would do? That's the first one.

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [49]

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Yes. Well, we're actually -- Adam, thank you for the question. We're actually in the review period now, and we're working with the regulators as they have found questions. Let me just be clear of why we want to acquire CTP-656. It is a deuterated ivacaftor, which based on earlier studies and PK work suggests that it's a once-a-day potentiator. That interests us because we have once-a-day correctors that both -- that Jeff referred to earlier on this call. So ultimately, we would like to think about a combination pill that's a once-a-day regimen, and CTP-656 gives us that opportunity. It's -- that would be the best regimen for patients as long as we have safety and efficacy, and it would be the most convenient for patients, and that is the plan. And so as we go through this review period with the regulators, we'll be helping them understand that taking forward CTP-656 this is the best route forward for the compound.

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Adam Anderson Walsh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Senior Analyst [50]

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And any color on the timing of when that might conclude, the clearance?

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Ian F. Smith, Vertex Pharmaceuticals Incorporated - CFO, COO and EVP [51]

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It can go on for a couple of months, few months. It's really subjective. We answer questions, and then they make their judgment. So it could move on. We do the -- Concert does also have an investor vote coming up, I believe it's in mid-May, on the approval of the transaction as well, subject to HSR.

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Adam Anderson Walsh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD and Senior Analyst [52]

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Right. And then different question on ORKAMBI the 6 to 11 population. You talked about strong compliance and persistence. When we think about that in the 6 to 11 population, should we be thinking compliance and persistence rates equivalent to, say, KALYDECO, maybe even a little bit better given the parents are involved? How should we think about those rates ultimately?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [53]

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Yes, Adam, we're moving away really from kind of diagnosing and describing every patient dynamic for every patient population for every country. But suffice to say, they are higher in the 6 to 11 population than we have seen in the 12-plus population with ORKAMBI, and they're much more KALYDECO like. You'd expect that. The profile in the 6 to 11 age group of ORKAMBI is very strong. And also, as I've said, they are managed by their parents to a large degree in terms of compliance.

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Operator [54]

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Our next question comes from the line of Mohit Bansal from Citigroup.

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Mohit Bansal, Citigroup Inc, Research Division - VP and Analyst [55]

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Maybe a big picture -- maybe a question on your base case assumption for the triple-combination trials. So is it fair to assume that you would be looking for a comparator trial against ORKAMBI for the triple combo at least in homozygotes? And do you think it makes -- it maybe makes it a little bit easier in heterozygotes given that you will have to compete against a placebo as a comparator there?

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Stuart A. Arbuckle, Vertex Pharmaceuticals Incorporated - Chief Commercial Officer and EVP [56]

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Thanks for the question. So let me start by just reminding you of our cellular results, right, which so far have translated into the clinic in pretty much every case. And those results show that a triple is clearly superior, quite superior. And we published those results in both homozygous cells and het-min cells to develop to either ORKAMBI or to VX-661 plus KALYDECO. So based upon those in vitro results, which as I said, have translated quite safely in the clinic, we expect -- actually expect the triple will be better in homozygous patients than the double, and expect it to be effective based on what we know so far. Obviously, we have to confirm all this in the clinic. In the het-min patients with both ORKAMBI and VX-661 and tez/iva, they have not been effective. So that's our expectation.

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Operator [57]

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Our next question comes from the line of Carter Gould with UBS.

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Carter Lewis Gould, UBS Investment Bank, Research Division - Large Cap Biotech Analyst [58]

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I guess in the wake of the positive tez/iva data, I was just curious how you guys are looking at the potential development scenarios for your ENaC inhibitor in case where there's positive Phase II data later this year? Would the plan still to be to move into a pivotal on top of ORKAMBI? Or would you pivot to teza/iva? Or is there's some other set of potential options we should be looking at?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [59]

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Yes. Great question. I think the way we're thinking about it is there are really 2 questions that we want to answer. I think the timing is going to work out pretty nicely here. The first question is really a biological question. It's if you add an ENaC inhibitor on top of CFTR modulation, do you see incremental results? So that's really a biologic question that is predicted by cell biology, but this cell biology is quite a bit more complicated than the simple chloride transport in HBEs. So we need to prove that. And I think we're going to get the answer to that in the second half of this year from this first trial. At the same time, we're going to get the answer to what happens with our triples clinically, how high can you drive FEV1 in both the homozygous and the heterozygous population. And so at the end of the day, what we're going to do with ENaC is going to really depend on looking at both those results together and basically asking ourselves a question, can we get a significant benefit over triple do we believe within an ENaC inhibitor? Because we do believe that quickly where everything is going to move to triples. So I think the ultimate question will be if you add an ENaC inhibitor on top of triple can you get significantly higher FEV1 responses? And that's really going to be dependent upon the magnitude of the FEV1 response to the triple and the magnitude of the improvement on the ENaC. The good news is we'll have both of those pieces of data toward the end of this year. I think we're going to be able to make a fairly straightforward decision.

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Operator [60]

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Our next questions come from the line of Alethia Young with Crédit Suisse.

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Alethia Rene Young, Crédit Suisse AG, Research Division - Research Analyst [61]

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Just maybe one that's a little more philosophical as well, like how many triple combinations do you kind of want to try? Like in this first tranche, you've kind of gone with the first 4. And then you'll see, and then you'll take a step back as to see whether you want to add mechanisms on top of that. Just maybe help -- give a little bit of color about what's going on in the lab and how you're thinking about kind of the progress beyond what you're doing with triples?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [62]

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Yes. So, obviously, we're going to get a lot of information from these 4 triples, I believe, because we're going to have a very nice set of data sets that compares in vivo to in vitro results with 4 different combinations. And that in addition to the fact that we've derisked the teza/iva double combination, both from efficacy and safety standpoint, gives me a high level of confidence that one or more of these triples will proceed into Phase III. So hopefully, that answers that part of the question. And it's going to depend obviously on what we see in the second half of this year. Now to your other question on what's going on in the lab, we still have very active program looking at triples. I think I've talked about this before. We, I think, originally figured how we identify these. And we've identified tens if not hundreds of additional next-gen correctors. Obviously, the only ones that we're going to bring forward of those into the clinic is something that we feel has a favorable profile compared to the ones that we've already done. It could be efficacy, it could be PK, it could be tolerability. And if we see those sorts of things, it's entirely possible that we bring one or more of those new next-gen correctors forward into the clinic toward the end of this year or next year. But I think -- I don't want to give you the impression that we're dependent on that because I have a high level of confidence that one or more of these triples, assuming that they play out, will be able to proceed into Phase III.

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Operator [63]

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And our last question comes from the line of Alan Carr with Needham.

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Laurence Alan Carr, Needham & Company, LLC, Research Division - Senior Analyst [64]

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A couple. One, what's your expectations for timing for the -- in the tez trial in 6 to 11 patients and when that data will be available? And then can you give us an update on Germany? That was one that -- a slow trajectory. I wonder if that's changed over time. And are you still have a high level of conviction that, that uptake was just restricted to Germany as opposed to some of the other countries in Europe?

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [65]

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Alan, it's Stuart here. Let me take the Germany question first. So yes, as you highlighted, we did see a slow uptake in Germany, and frankly it continues to be slow. We are continuing to add new patients day after day, week-after-week in Germany, but it continues to be relatively slow compared to France and to the U.S. We continue to believe that we will get to the majority of patients in Germany being initiated on ORKAMBI, but it continues to be slow progress. I do continue to believe that the uptake in other countries will be much more U.S. like and France like. And for instance, to give you an example, as a point that we are successful in signing a contract in Ireland where we have agreement in principle, I'm very confident based on the level of patient advocacy, the level of physician engagement with us and belief in the product that we'll see uptake there, which is much like we saw in the U.S. and in France. So I continue to believe that uptake in Germany is going to be a relative outlier for ORKAMBI. And you talked about teza/iva in 6 to 11, I'll hand the call off to Jeff.

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Jeffrey M. Leiden, Vertex Pharmaceuticals Incorporated - Chairman, CEO and President [66]

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Yes, so for the 6 to 11 teza/iva trial, just to remind you, this is really a safety, tolerability and PK trial in both homozygous patients and patients who have one Delta F508 allele with 1 ivacaftor-responsible allele. It's an open-label trial. It's currently enrolling. And once we see with the enrollment is, we'll be able to give you a sense of when we expect data. We actually haven't disclosed that because we just don't know yet.

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Operator [67]

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I'd like to turn the call back to Mr. Partridge for closing remarks.

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Michael Partridge, Vertex Pharmaceuticals Incorporated - VP of IR [68]

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Thanks, operator. Thank you, everybody, for dialing into our Q1 call. The IR team will be available tonight for any follow-up questions that you have. Have a good evening.

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Operator [69]

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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.