Vertex Pharmaceuticals Incorporated

Welcome to the Vertex full year and fourth quarter 2018 financial results conference call. This is Michael Partridge, Senior Vice President of Investor Relations for Vertex. Tonight, we will review our continued efforts to develop new medicines for all people with cystic fibrosis, recent advances in our research and development pipeline, and our 2018 financial results and 2019 guidance. Making prepared remarks on the call tonight, we have Dr. Jeff Lydon, Chairman and CEO, Stuart Arbuckle, Chief Commercial Officer, and I would like to welcome to the call Paul Silva, Vertex's Interim Chief Financial Officer. Paul has been Vertex's Corporate Controller and Chief Accounting Officer since 2008, and he and his team have worked closely with the Investor Relations Group since that time. Following prepared remarks from Jeff, Stuart, and Paul, Dr. Reshma Kewalramani, Chief Medical Officer, will join us for Q&A. We recommend that you access the webcast slides on our website as you listen to this call. The conference call is being recorded and a replay will be on our website. We will make forward-looking statements on this call that are subject to the risks and uncertainties discussed in detail in today's press release and our filings with the Securities and Exchange Commission. These statements, including without limitation, those regarding Vertex's marketed CF medicines, the ongoing development and potential commercialization of our triple combination regimens for cystic fibrosis, Virtex's other programs, and Virtex's future financial performance are based on management's current assumptions. Actual outcomes and events could differ materially. I will now turn the call over to Dr. Jeff Leiden.

Thanks, Michael. Good evening, everyone. Over the past several years, I've shared with you Virtex's strategy to create multiple transformative medicines for different serious diseases, by continuing to leverage our long track record of serial innovation. I'm pleased to review with you this evening the significant progress we made in 2018 on executing this strategy and to discuss the important growth drivers that we expect in 2019, which will include many important clinical, reimbursement, and commercial milestones in CF, as well as clinical data from across our research and development pipeline. In CF, we expect to obtain the Phase III data for the BX445 triple combination this quarter and remain on track to submit a new drug application for a triple combination regimen no later than mid-year. We also expect to see more patients initiating treatment with our medicines throughout 2019 as a result of global label expansions and from key reimbursement agreements reached in 2018, which will drive further revenue growth this year. In our non-CF pipeline, data expected in the first half of 2019 from our Phase IIb dose-ranging study of BX150 will inform our plans for potential Phase III development in pain. In our AAT program, we are advancing a portfolio of small molecule correctors, including our first molecule that entered Phase I development in late 2018 and a second that is expected to enter clinical development this year. And in sickle cell disease and beta thalassemia, we have now initiated enrollment of both of our Phase I-II studies of the gene editing treatment of CTX001. I will briefly review each of these pipeline programs with you this evening. First, the cystic fibrosis. Today, approximately half of all people with CF are eligible for a vertex CF medicine, and we stand on the verge of yet another dramatic advance in the treatment of this disease with our triple combination regimens that hold the potential to treat up to 90% of all people with the disease. Our progress in CF in 2018 was marked by two important achievements. First, we saw a significant increase in the number of patients being treated with our approved medicines. This was the result of the successful Symtico launch in the U.S., multiple label expansions for Kalydeco and Arcambi, and the completion of key reimbursement agreements around the world, which Stuart will review in a moment. And second, we made excellent progress in advancing our two triple combination regimens through Phase III development. It was on this call one year ago that we announced our plans to initiate Phase III development for two different triple combination regimens that include a next-generation corrector, either VX659 or VX445. In just one year, we completed enrollment of approximately 1,000 patients across the four Phase III studies and obtained the first Phase III data for the VX659 studies. These data showed clear and compelling evidence of the dramatic benefits that this regimen may offer patients with one F508 del mutation and one minimal function mutation, as well as the significantly enhanced benefit that a triple combination regimen may provide for those with two F508 del mutations who are already being treated with Symptico or Orkambi. We will obtain data for the VX445 triple combination regimen in the first quarter of this year, which will enable us to choose the best regimen to submit for regulatory approval. We remain on track to submit a new drug application for a triple combination regimen no later than mid-2019. We've set a high bar with the triple combination data, but we're also committed to creating even better CF medicines for the future, including once-daily triple combination regimens and regimens that contain other next-generation correctors that may have enhanced profiles. We have multiple molecules in preclinical and clinical development that may provide future improvements for the treatment of CF. Now to our recent progress outside of CF, where we are rapidly advancing a portfolio of potential new medicines through late preclinical and early clinical development across a range of serious diseases with large unmet medical need. I'll start with our AAT program, where we recently initiated clinical development of our first small molecule corrector. The similarities between our AAT and CF programs are striking, and we believe that we will be able to apply many of the lessons learned in our CF discovery and development efforts to accelerate and de-risk our activities targeting AAT. We believe that measurements of the circulating functional AAT protein in people with alpha-1 antitrypsin deficiency will provide us with an early and important marker for the potential of our medicines to treat the cause of this disease, just as the biomarker of sweat chloride did for us in CF. Turning to our research and development program in pain, we recently announced positive Phase II results for VX150 showing a significant reduction of pain in people with small fiber neuropathy. These data mark the third positive proof-of-concept study for VX150 in three different pain conditions and further validate the potential role of NAV1.8 inhibition in the treatment of pain. A Phase IIb dose-ranging study of VX150 in acute pain following bunionectomy surgery is now fully enrolled, and we expect data from this study in the first half of this year. Positive data from this study could support pivotal development of VX150 in pain. We have a portfolio of multiple additional NAB1.8 inhibitors in late preclinical development and expect to advance the first of these molecules into clinical development in 2019. We are also continuing to invest in the discovery of additional potential pain molecules targeting other new mechanisms given the significant need for new pain medicines. Moving on to the sickle cell disease and beta thalassemia programs, where, with our partner CRISPR Therapeutics, we've now initiated clinical studies of CTX001 for both of these important diseases. These studies represent the first clinical trials to evaluate a gene editing treatment using the CRISPR-Cas9 technology in these two serious diseases. As we advance these R&D efforts, we are constantly evaluating new external opportunities that could provide access to new technologies, platforms, or development assets. We have entered into multiple agreements in recent years that are aligned with our strategy, including our collaboration with CRISPR Therapeutics, as well as recently announced collaborations with Arbor Biotechnologies, Merck KGA, Genomics PLC, and Xchem. We entered 2019 with increased flexibility to do more deals that would further broaden our pipeline and enable us to continue to explore serious diseases with multiple modalities and technologies. As we look toward future years, Vertex has the potential for significant revenue and earnings growth through the mid-2020s, based solely on treating more patients with our approved and future CF medicines. Importantly, we also have a rapidly advancing portfolio of potentially transformative medicines for other serious diseases and the ability to enhance our internal R&D efforts with external innovation to drive long-term future growth. At Vertex, we believe that real value for patients and shareholders is created through scientific innovation, and I'm pleased that Vertex continues to be at the forefront of transforming the treatment of CF and other serious diseases. I will now turn the call over to Stuart to review our commercial progress.

Thanks, Jeff. I am pleased to review with you this evening our strong commercial performance for 2018. driven by the launch of Simdico in the U.S., and also our revenue guidance for 2019, which shows continued revenue growth as we treat more patients with our approved medicines globally. Approximately 18,000 patients are currently being treated with our CF medicines, and this resulted in CF product revenues of $868 million in the fourth quarter. The fourth quarter included $294 million in revenues from Simdico in the U.S., which was the primary driver of the significant growth in CF revenues in the quarter and throughout 2018. Our full-year 2018 CF revenues were $3.04 billion, a 40% increase compared to the $2.17 billion for 2017, which is a direct result of treating many more patients globally. In the US, we saw a large number of patients initiate and remain on treatment with Symdeko in 2018. Demand for Symdeko has come from all eligible groups of patients, including those who previously discontinued or never initiated Orkambi, and those who switched from Orkambi or Kalydeco to Symdeko. Given the profile of Symdeko, we had expected that persistence and compliance rates might be greater than those seen previously with Orkambi. and we are pleased to see this play out in the real world. While we are now well into the launch of Symdeco, we do anticipate additional patients will initiate treatment throughout 2019, including patients ages 12 years and older, as well as younger patients following potential approval in children ages 6 to 11, which we anticipate during 2019 and is reflected in the guidance I will discuss in a moment. Kalydeco revenues for 2018 were $1.01 billion, an increase of 19% compared to 2017. The increase in Kalydeco revenues is a direct result of treating more patients in the US based on label expansions received in 2017. Outside the US, we reached important reimbursement agreements for our CF medicines in Australia, Sweden, and Denmark in 2018. adding to the multiple agreements previously reached in Germany, Italy, the Netherlands, Ireland and other countries. These new reimbursement agreements allowed patients to have access to medicines that treat the underlying cause of their disease for the first time and provided a contribution to revenue growth for 2018. These agreements will also contribute to revenue growth in 2019 and beyond. Given the recent EU approval of Simkevi, known as Symdeco in the U.S., and our rapid progress in developing triple combination regimens, our ongoing reimbursement efforts remain focused on obtaining long-term portfolio agreements that not only provide immediate access to our approved medicines, but also a pathway to access and rapid reimbursement for future CF medicines. We've reached these types of agreements in multiple countries, and view these agreements as win-wins for patients and governments, as they provide certainty to patients that they will have immediate access to current and future innovations in CF from Vertex, and budget certainty to governments for the foreseeable future. Our progress in 2018 in launching Symdico, expanding the labels for Kalydeco and Orkambi, and achieving important reimbursement agreements for our medicines outside the U.S., has positioned us for continued revenue growth in 2019. Our 2019 guidance for CF product revenues is $3.45 to $3.55 billion, which at the midpoint reflects approximately 15% growth over 2018. As the timing of when we achieve future reimbursement agreements is not entirely in our gift, our 2019 revenue guidance only reflects anticipated revenues from regions where our medicines are currently reimbursed. Achieving additional reimbursement agreements in 2019 could provide upside to our revenues, and thus we would update our guidance as appropriate at that time. I would note that we expect to see a negative impact in the first quarter of this year from channel inventory build of approximately $10 million that occurred at the end of 2018, and from higher gross to net adjustments, which we typically experience in the first quarter. We expect that these dynamics may more than offset revenue growth from new patients, and that first quarter CF product revenues could be sequentially lower than the fourth quarter of 2018, despite our expectation for continued revenue growth for the full year, as noted in our guidance. I'm pleased with the continued progress we have made in bringing our CF medicines to many more patients globally, which has resulted in strong revenue growth to support our investment in the creation of new medicines for CF and other diseases. I look forward to talking further with you throughout the coming year and will now turn the call over to Paul to further review our financial results and guidance.

Thanks, Stuart, and good evening, everyone. Vertex's financial performance in 2018 was marked by 40% growth in CF revenues coupled with disciplined investment into our business. which drove significant increases in our operating margins, operating income, and cash flow. In addition to Stuart's comments on 2018 revenues and 2019 revenue guidance, I will provide additional remarks this evening regarding our 2018 financial results. I will also discuss our 2019 financial guidance for R&D and SG&A expenses and for our effective tax rate. All of the results and guidance I will discuss are non-GAAP. As Stuart noted, we saw a significant increase in CF product revenues driven primarily by the launch of Symdeco in the U.S. Kaleidico label expansions also contributed to the revenue growth in 2018, where Kaleidico revenues reached $1 billion for the first time since its approval in 2012. This underscores both the important role that Kaleidico plays in the lives of thousands of patients around the globe and the continued strong demand for the medicine as we expand its label to new and younger patients. Our fourth quarter 2018 combined R&D and SG&A expenses were $400 million compared to $355 million in the fourth quarter of 2017. Our full year 2018 R&D and SG&A expenses were $1.53 billion compared to $1.33 billion for 2017. The increase in these expenses was primarily due to the advancement of our portfolio of triple combination regiments and investment to support the use of our medicines globally. The significant growth in CF revenues in 2018 resulted in full-year operating margins of 37% compared to 26% for 2017, as well as operating income of $1.11 billion, a 97% increase compared to 2017. Net income for the fourth quarter of 2018 was $337 million compared to $158 million in 2017, Our full-year 2018 net income was $1.06 billion compared to $495 million in 2017. The significant increase in our quarterly and full-year net income was a result of the strong growth in CF product revenues. We also ended the year with approximately $3.17 billion in cash and marketable securities, compared to $2.09 billion at the end of 2017. We expect to continue to generate significant cash in 2019 and beyond. Now to our 2019 guidance. Today we are providing financial guidance for CF product revenues, as Stuart discussed, as well as for combined R&D and SG&A expenses in our anticipated effective tax rate. We expect combined R&D and SG&A expenses of $1.65 to $1.7 billion. The increase compared to 2017 primarily reflects CF development efforts, incremental investments to support the potential launch of a triple combination regimen, and investment to support the expansion of our pipeline into additional diseases. Now to tax guidance. On a GAAP basis, we recorded a $1.5 billion non-cash benefit in the fourth quarter of 2018 based on the reversal of the valuation allowance related to our net operating losses. Following the release of this valuation allowance, we will also begin recording a tax provision in 2019 and expect our full-year GAAP and non-GAAP tax rates to be 21% to 22%. The tax rate will fluctuate quarter to quarter this year with the highest rate occurring in the fourth quarter. The vast majority of our tax provision will be non-cash expense until we fully use our net operating losses. As Jeff noted, Vertex has a unique long-term growth outlook that is based on continued revenue growth in CF, resulting in expanding operating margins and increases in earnings and cash flow. I look forward to updating you on our progress. With that, I will turn the call back to Jeff. Thanks, Paul.

In closing, 2018 was a highly successful year of commercial and clinical execution across our business. Our achievements over recent months have positioned us for continued growth in revenue and operating income in 2019 and beyond, and for important near-term milestones across our R&D portfolio, both in CF and in other diseases. Our strategy of creating transformative medicines through serial innovation is working exceptionally well, as evidenced by the rapid progress seen across our business, and I look forward to updating you over the coming year. With that, I will open the line to questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touch-tone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. To prevent any backward noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Michael Yee of Jefferies. Your line is now open.

Hey, thanks for the question and congrats on a great quarter. Two topics I thought you could address. One is giving the street some comfort about, obviously, what's been in the news recently, the U.K., and more broadly speaking, the confidence that that region will work itself out, and to be specific, whether just a better pharmacoeconomic value drug will help solve that equation. And the second question is a pipeline question. You talked very nicely about AAT. You did say there's a second one coming in. Are those combinable drugs? Are they similar, just more potent? Maybe talk to how having two could actually be better than one, or maybe I'm getting ahead of myself. Thanks so much.

Hey, Mike, it's Stuart. I'll take the first question on the UK. Before I get on to the UK, I do want to reference, you know, we made great progress from a reimbursement point of view in 2018, and that's reflected in the results we were able to share with you today important agreements in places like Australia and Sweden and Denmark. Last year, and we've continued that momentum into 2019, where we have secured new agreements in places like Israel and Luxembourg and a pricing agreement for or can be for 6- to 11-year-old kids in Germany. So we continue to make great progress getting access for patients around the world Where we have been successful in large part is due to those countries using what we would consider to be appropriate methodologies to assess the value of these unique and transformative medicines. And because our goal is to get access for all eligible patients, we're continuing to pursue that with every bit of energy we can in the U.K., I think it's important to split the UK up. As you probably know, Mike, from a healthcare perspective, the UK is managed as a devolved country, so each country has its own process. So in Scotland, we've made great progress. We've reached an agreement with them about how they are going to assess our medicines, and we've submitted or are on the verge of submitting Orkambi and some Kevi to the Scottish government, and we're optimistic we'll get access there, hopefully in 2019. In England, unfortunately, we are yet to reach an agreement with them on what we would consider to be an appropriate methodology, but we're certainly not going to give up on that. We are going to continue to fight to get access for patients in England as we have for patients around the rest of the world. The last thing I'll say to you is that we know what the results will look like even if we put the triple combination regimen through the existing NICE methodology. even if the results are as good as we saw with 659 in the Phase III study that we released in November. And even those results, when put into the NICE model, don't come out with a valuation which we think in any way gets close to valuing the transformative nature of these medicines. And so even for the triple, we are going to continue to need to work with England to change the assessment methodology for our medicines. On the AAT question, I think I'll hand that over to Jeff.

Hi, Mike. It's Jeff. Thanks for the question on AAT. You know, in many ways, I think you can think of this as a very important lesson that we learned from our CFTR NextGen program. And we sort of have this saying here at Vertex, crack the biology, then pour on the chemistry. We believe we have cracked the biology of AAT. We have multiple correctors that can refold the protein and and causes to be secreted from liver cells in a functional form. And so we started planning on the chemistry about a year, year and a half ago, and to create multiple molecules. And the reasoning is just that our experience, as with the CFTR next-gen correctors, is they get better and better, and we like to take more than one molecule into the clinic because it's a portfolio risk mitigation strategy, if you will. You know, obviously these molecules have to not only be efficacious, they have to have the right PK, they have to have the right drug-drug interactions, they have to be tolerable. And so our strategy with AAT, and frankly with most of the programs you'll see us bring forward, is going to be to pour the chemistry on, create multiple molecules, bring those forward in the clinic, and compare them in early small studies, and we can get a pretty quick idea of which are the best molecules. And so these two AAT molecules, we don't think of them as additive, we really think of them as and different molecules that we're going to compare. And, by the way, you shouldn't be surprised to see us bring a third one forward as well, because, as I say, we just continue to get sort of better and better properties.

Got it. Thank you so much.

Thank you. Our next question comes from Jeffrey Porges of Leonard Airlines. That opens.

Thank you very much for taking the questions, and congratulations also on the great results. First, of the 18,000 patients, could you give us a sense of how many come from the U.S., and ideally, how many come from Europe? And secondly, could you give us the breakout for Kalydeco or Canby and Syndeco by the main geographies? And then just a question for you, Paul. Are you comfortable that we should model that 21% to 22% tax rate in our models going forward beyond 2019? I think that's what you suggested. I want to be clear about that.

Yes, that's true. And I'll take the first couple of questions there. Of the 18,000 patients who are actively being treated now, it's about two-thirds in the U.S. and about one-third ex-U.S. In terms of the breakout of the geographies in terms of the products, for Q4, for our Q4 revenues, for Kalydeco, the U.S. was $164 million, ex-U.S. was $95 million. For Orkambi, the U.S. was $225 million, and ex-U.S. was $90 million. And for Syndico in the U.S., it was $286 million. And XUS was $8 million, largely reflecting the launch that we just began to execute in Germany. So that's the breakout for the quarter. If you want to have the annual ones, I'd be happy to catch up with you after the call.

Great. Thanks very much.

Hey, Jeff. It's Paul. Thanks for the question. And I'm going to give a little bit more detail than your specific question just to kind of let you know how we're thinking about taxes. So in 2019, we expect the effective tax rate to be 21% or 22% for the full year, and it's primarily driven by a non-cash U.S. federal tax provision. And in future years, we expect that the rate could actually go lower due to geographic mix of income as our revenues continue to grow and our business advances globally. I'm not going to actually be able to give you what that rate is until we kind of get visibility of reimbursement in Europe. And then the other point I just want to make for everyone is that the majority of the guidance on the effective tax rate is non-cash, and we expect to pay only approximately $25 million of cash taxes in 2019 compared to the $16 million that we're going to pay in 2018. Great.

Thanks very much, both of you.

Thank you. Our next question comes from Phil Maddow from Cowan & Company. Your line is now open.

Good afternoon. Thanks for taking my question. Just a couple on revenue growth drivers. So in the 2019 guidance, could you give us some sense of how much of the revenue growth is coming from existing geographies with existing labels versus how much is coming from label expansions that you expect to get in 2019? And the second question on the portfolio agreements that you referenced, can you remind us which countries currently have portfolio agreements And how do you go about negotiating portfolio agreements in the additional territories? Do you have to wait for an approval, or is it something you can do proactively before, for example, the triples are approved? Thanks.

Yeah, Phil, so I'll take both of those. So in terms of the 2019 guidance, that reflects really three things. One is the sort of annualizing of the syndico launch in the U.S. into 2019. Also, the annualizing effect of the label expansions we saw for both Kalydeco and Orkambi in 2018, and a contribution from countries where we were able to achieve new reimbursement agreements in 2018. In 2019, we are not expecting a large contribution from new launches because we don't have as many of those in 2019. Probably the most notable contribution that we are assuming within our guidance is for the syndico in patients ages 6 to 11. And so that would be a new label expansion there. But the vast majority of it is coming from patients for whom we are labeled to get today. I'd just like to reiterate as well, it also assumes only revenues in geographies where we have reimbursement agreements today. if we were able to get significant new reimbursement agreements in 2019, and if they were material, then we would potentially have an upside to our revenue and update our guidance at that time. In terms of which companies have portfolio agreements, if you've seen one portfolio agreement, you've seen one portfolio agreement, Phil. So it would be difficult to describe them all, but we have them, for instance, in places like Ireland, We have an agreement in Australia where we have a path to getting syndico reimbursed when it's approved by the TGA, Denmark, the Netherlands. And so there is a number of different portfolio agreements. They're all slightly different. In terms of do we need to have regulatory approvals to get portfolio agreements, again, that varies country by country. But actually, many countries are well aware of how quickly our portfolio is advancing and how impressive the results look for our triple combination regimens. And so there's a significant interest from governments to be looking at these portfolio agreements even in advance of regulatory approval. Indeed, one of the countries we were talking about early on, England has been one of those markets that's expressed an interest in those portfolio agreements. And remember, the key to those is that they're a win-win-win for us, for patients, and for the government. The win for us is that we would like to be able to have reimbursement agreements which kick in as soon as regulatory approval has been agreed. They're a win for physicians and patients who get to choose the best vertex medicine as soon as they're approved, and they're a win for governments because they give them a level of budget certainty in treating their CF patients.

That's helpful. Maybe just one follow-up on the portfolio agreements. You mentioned Ireland, Australia, Denmark, and Netherlands. So as we model 2019 Simkevi sales, would it be reasonable to expect revenue from those four territories as well as Germany?

So... In countries in the EU where we have a regulatory approval for 12+, where those portfolio agreements are in place, we will be able to get access relatively quickly. I would remind you, though, that in large part, Simkevi is indicated for the same population as Orkambi, and in places like Ireland, for instance, and the Netherlands, we've seen very impressive uptake of Orkambi and very high persistence rates. So whilst patients and physicians will have a choice, essentially they'll be trading off what they think is the best medicine. That's helpful. Thank you.

Thank you. Our next question comes from Alicia Young of Antwerp Fitzgerald. Your line is now open. Hey, Alicia, are you on mute? Alicia Young of Antwerp Fitzgerald. Can you hear me?

We can hear you now. Can you hear me? Yeah, okay, cool. Maybe something wrong with my headset. Sorry, I apologize. I just wondered if you could talk a little bit about, you know, kind of your thoughts on M&A. I mean, you have a pipeline that's coming together, you know, obviously internally, but I just wanted to talk a little bit about what you might think is supplemental and interesting around doing external M&A or anything like that, and then also, you know, is that kind of delayed until you kind of figure out the CFO position as well? Thanks.

Yeah, Lisa, this is Jeff. I'll take those. As you know, for the last couple of years, we've been talking about a consistent what I call external innovation strategy, not just M&A but licensing collaborations, et cetera. It's really focused around three areas. The first is obviously CF, where anything that we feel would be complementary or additive to our current regimens would be of great interest to us. Honestly, we're seeing less and less in that particular bucket simply because we've set such a high bar now with the triple combination data. The second area is what I'll call technology and tools. We've had a very concerted effort to build a complete toolbox of technologies that we think would allow us to address the kind of serious diseases, and to some extent genetic diseases, that we're interested in in our pipeline. And you've seen us do a number of those deals. So CRISPR, Arbor, X-Chem, a genomics PLC. Those are all deals that you should think of as acquiring different tools that will let us optimally address the diseases that we're interested in. You should expect to see us continue to do that in areas of interest, nucleic acid therapies, gene therapies, et cetera. And then the third area would obviously be pipeline assets. And those pipeline assets would be consistent with our overall strategy of transformative medicines for serious diseases and specialty markets. And you should expect to see us do some of those as we find them. In general, they'll be earlier stage development assets where we think we can add value through our clinical development, regulatory, and commercial groups. What you won't see us doing is deals for on-market or late-stage products that are essentially there to buy revenue growth over the next five to seven years. Simply because we don't need that revenue growth, CF is going to provide that. And so you can expect to see us continue to do deals around those three focus areas. I would say that we're obviously building substantial financial firepower to do more of those deals, and we've wrapped up our external innovation group to allow us to do that. And so I do think it's fair for you to expect to see us complement our very rapidly advancing internal pipeline with some external innovation as well.

Thanks a lot, Mayor Thurow.

Thank you. And our next question comes from Jeff Meacham of Barclays.

Hey, guys. Thanks for the question. I know the plan is still obviously to select the NDA for the triple coming up in the first half. I just wanted to ask if your points of differentiation between the two or the metrics have changed at all. In other words, is it still about FEV1 and maybe less about pulmonary exacerbations or the like? And then Also, when you look at the part of the package, is there anything that has yet to be done in terms of non-clinical or that could be perhaps a gating factor or something that could push you to the second half of the year versus the end of 2Q in your guidance? And I have one follow-up.

Thanks, Jeff. This is Jeff. I'll take the first part, and Reshma maybe can take the second part. With respect to how we're going to compare the two assets, Again, I know you know this, but just a quick review. Now that the 445 trial is fully enrolled, we have a very good line of sight to the timing of when we expect to see the top-line data there, which is in the first quarter. So we're very confident that we'll have that kind of data that we can compare to the data that we've already reported for 659. As I said before, the way we're going to look at these two assets is the complete – profile, if you will, of both programs. And that goes all the way back to preclinical work. It includes things like PK, PD, tolerability, drug-drug interactions, as well as, of course, the efficacy measurements that you talked about with FEV1, but also things like sweat chloride. So this will be a very complete review of both assets. We're in a nice position of having a nice complete file on both assets once we get the 445 data and and I think we'll be able to then pick the best asset to move forward. And, again, we're very much on track to do that in the first quarter. We're confident that we will be able to make that decision on schedule in the first quarter, which would allow that mid-year NDA filing. But I'll let Reshma address the second part of the question with respect to the package and what's there.

Sure, sure. Thanks, Jeff. So regardless of whether the selection is for VX659 or for VX445, We're going to have all of the data that we need in Q1. You know that we already shared the data for VX659 late last year. The exact same package, the same amount of the data, and the same kind of data we're going to get very shortly for 445. And with regard to packaging that up, making sure that we have the CTD complete and the NDA filed, that's going to happen by mid of this year. That is something that we are very much on track for, and I have high confidence that it's going to happen.

Okay. And then just a follow-up. I know this was asked about the reimbursement OUS. I know in the past you guys have had a pretty defined strategy of, allowing kind of the patient community to sort of escalate and maybe to put some pressure on the payers, and this obviously has been the case in the U.K. and in France. But I wanted to ask you for the triple. Is there a different methodology or just something you can do differently maybe to help accelerate reimbursement, looking OUS, maybe just do things a little bit differently that could help speed up a process?

Yeah, Jeff, it's Stuart here. I wouldn't say that it's our strategy to get patients to put pressure on people. As you know, our development plans in cystic fibrosis are no secret to anybody. The community is very well aware of the progress we're making, very well aware of the clinical benefits these products look like they are delivering. And so I think quite rightly they are calling on their elected officials to get access to these medicines. I'll really refer back to what I said earlier. The key here from a kind of health technology assessment point of view is that the methodology needs to be appropriate for these types of medicines which are going to be used very early in people's lives, hoping to restore them to normal levels of chloride transport and deliver benefits over the very, very long term. And frankly, the assessment methodologies are not really fit for purpose to assess those types of medicine. So from a health technology assessment point of view, that is what we are continuing to work on and where we've done that, which is in many, many countries around the world, we've been successful. And then the other thing that I think is an important component of this is where we've been successful, I think, and a substantial portion of the time, it's because senior government ministers have taken an interest in this issue, being able to see our portfolio and how fast it's developing and the kind of benefits it could bring to their populations. So to me, those are two of the most important success factors in the UK and everywhere else around the world.

Thank you. And our next question comes from Paul in that case of people, your line is open.

Great. Thanks so much for taking my question. Two-part question on VX150. I guess, first of all, can you guys talk about the logic of doing more dose-ranging work here? Given that you have a few positive Phase IIs, a low AE rate, and there's a big unmet need for an opioid alternative, we were just wondering why not move faster into Phase III. And then secondarily, I was wondering if all strategic options for VX150 are still on the table And have you confirmed that you'll take this forward yourself at least to a targeted subset, or is an out-licensing still a possibility? Thanks so much.

Sure thing. This is Reshma. Let me take the first half of your question, and then I'll pass it on to Jeff for the second half of your question. So with regard to VX-150, which is our NAV 1.8 inhibitor that you pointed out, we've had now three out of three successful studies in in small fiber neuropathy as well as in bunionectomy, the reason that we're doing dose ranging is really two very simple points. One is regulatory. Regulators expect us to do dose ranging, and really what they're looking for us to do is to find the lowest efficacious dose. And so one is just a very practical point around the regulators. The second point is around just doing good drug development. What we did in order to get a proof of mechanism readout is we chose a high dose. Now what we need to do is to figure out what is the exposure-response relationship. Of course, that has important implications for picking not only the lowest efficacious dose, but also what the dose will be, which informs pill size, and that informs COGS, and other such things. So that's really what we're doing. I do want to let you know that the update on that one is that the Phase 2B is now fully enrolled, so we're going to be in a good spot to understand all of those pieces of information in the near future.

And maybe I'll take the second part. The question is really a commercial strategy question, I think. As I said before, we don't think of pain as a single commercial market. We think of it as multiple markets. As an example, acute pain, which is essentially post-surgical, post-procedural pain, mostly in hospitals, outpatient surgery centers, or a dentist's office, is in itself a multibillion-dollar opportunity. Typically, you'd like to have both an IV and an oral form of a new analgesic in that market. That's very much a specialty market. We think we can address large parts of that market ourselves, and it would be our plan, assuming we have the data that supports it, to pursue development and commercialization in that market ourselves. Small fiber neuropathy, similarly, a market that's typically in a set of pain specialist offices. It's a market that can be addressed as a specialty market, and it's one that, again, with appropriate data, we feel that we could develop and commercialize ourselves. You're very, very different from the chronic inflammatory pain. That's OA, low back pain, et cetera. That's predominantly a primary care market, and from our perspective, it's not a market that we would want to build commercial presence center develop, and that's one where you might see us go with a partner. We have had a fair amount of interest, as you might imagine, given this is the first real new class of analgesics from partners who have a lot of experience in these community pain markets. Does that answer your question about a commercial strategy?

Yep, it does. Thank you very much. Sure.

Thank you. Our next question comes from Terrence Flynn of Goldman Sachs, Carolina Open.

Hi, thanks for taking the question. I was just wondering if you can at all help us quantify the impact of improved persistence on Simdeco relative to Orkambi and maybe how this compares to Colodico, recognizing you have a lot more data on Colodico now, I think even out five years plus.

Thank you. Yes, without getting into the exact specifics and kind of the exact numbers because these things fluctuate over time, and obviously Symdico, we're 12 months into the launch, Orkambi is a lot longer, Kalydeco is more like six years, but certainly the persistence we've seen on Symdico is, as we anticipated, higher than we saw with Orkambi. It's not quite at the levels that we saw with Kalydeco, which were the highest personally I've ever seen for any medicine in the many years I've been doing this, so it's somewhere between Orcambi and Kalydeco, but Symdeco certainly is above Orcambi.

Okay. And then any more details you can give us on the patient mix for Symdeco? And have you guys seen any warehousing in the U.S. ahead of the triple combo potential launch? Thanks.

So in terms of the uptake, we've actually seen broader uptake for Symdeco across all of the patient groups that you would expect. it's been taken up rapidly in naive patients, patients who've never been on Orkambi, those who were discontinued from Orkambi, and then we've also seen a fair number of patients switch from either Orkambi to Kalydeco. So we've really seen uptake broadly across all of the eligible patient populations. Okay, thanks a lot.

Thank you. Our next question comes from Robin Parnascus of Citi. Your line is now open.

Hi. Thank you, guys, for taking my question. So, first of all, for switching to Symdeco, what are you learning about, or can be patients or political patients that are switching on to Symdeco, given that there's a longer patent life for Symdeco and the triple going forward? Are you seeing the switching in line with expectations? Do you think it will be capped at some point? The second question is just a follow-up on a previous question. It seems like a change from J.P. Morgan that you might look externally for a pipeline asset. Remember, J.P. Morgan, you discussed looking more for a platform to develop your, if you have the science to develop new drugs. Are you just seeing something in the market? Are things looking cheaper? What might have changed, or how are you thinking about it differently? Thanks.

Hey Robin, it's Stuart here. I'll take the first question and then Jeff can take the pipeline and external innovation question. So in terms of what we're seeing with patients who switch from Kalydeco to Symdeco or can be to Symdeco, generally we're seeing those patients have a great experience. We aren't seeing many of those patients either discontinue or kind of go back to their original medication. As you know from the The data in the RF population, we saw tesocaptor add substantial clinical benefit on top of ivacaftor, and so that, I think, is what's driving the majority of people who are making that transition. Obviously, with Simdico or Cambu, we don't have as much in the way of direct comparative data, but I think it's the overall benefit-risk profile of Simdico that I think people are are finding attractive, and that transition is going in line with our expectations. Then in terms of the external innovation, I'll hand that back to Jeff.

Hey, Robin, it's Jeff. Maybe just one other point on your question to Stuart about the switching. Obviously, this is relevant as well to the triples, and it's going to depend on the data and the label and lots of other things, but I do think the strategy here is to continue to provide better and better medicines for more and more patients, including the patients who are already on our drugs. And so assuming that, you know, the data that we're seeing now with 659, which is significantly better, as you know, than Cyntico, even in the Prochemizagis patients, we do expect over the long term the vast majority of these patients will switch over to triple. So that's just a sort of sidelight for the future. With respect to that, the pipeline and the BD strategy, I apologize if I miscommunicated that to you at J.P. Morgan. I obviously did. No, our strategy has been the same all along. So the three buckets of CF, as you point out, technology and tools, and certainly we've done a lot of those deals and will continue to do them, but we've always been interested in early-stage pipeline assets that meet our strategy, meaning they're potentially transformative drugs for serious diseases. As you know, they're not that easy to find, but we continue to look for them, and certainly if we find them in diseases we're interested in, you should expect us to do in-licensing or acquisition deals on those early-stage assets.

Great. Thank you. Thank you. Our next question comes from Brian Abrahams with RBC Capital Markets. Your line is now open.

Hi. Thanks very much for taking my questions, and congrats on the quarter. I was wondering if you could give us a little bit more color on the contribution of uptake in two- to five-year-olds to Orkambi revenues, maybe relative to the background dynamic of adults switching to Simdigo. And then separately on the triple, as you get more data in hand, I'm curious what type of translational or maybe educational work you'll need to do to bridge the shorter-term functional benefits from Phase 3s to the long-term outcomes that you've seen with other treatments like Kalydeco, that have been dosed over a course of years, and whether you've had any preliminary payer discussions or feedback on that front. Thanks.

So, Brian, I'll take the first question on Orkambi. So we have seen strong uptake with Orkambi in the two- to five-year-old patient groups, and as you might imagine, that kind of – helped to lead to a very strong quarter for Orkambi and did, if you like, kind of compensate for the fact that there are a number of patients who are switching from Orkambi to Simdico. As you know, because of these dynamics with the patient populations and the same medicines being approved in those same patient populations, that's why we've really gone to giving total CF product guidance now because it's hard to be specific about each and every one of these patient populations and exactly how many people are going to be on each medicine. And so that's why we've gone to total CF product revenues now. And then in terms of the triple data, I'll hand that over to Reshma.

Sure. So with regard to triple combination, as you know, the primary endpoint in both the 445 and 659 programs for the FS studies are PPFEV1 at four weeks and In the FMS studies, the interim analysis at four weeks, PPFEV1. Now, what's very interesting in that is the reason we decided to go forward with a PPFEV1 at four weeks is because, as you can imagine, we have a treasure trove of data looking at PPFEV1 over time through our Kalydeco experience or CanBe in Symdico. And what you see is that there is a very consistent relationship with what you see with CFTR modulators at week four and what you see later on, for example, at week 24 or week 52. And so I think that relationship is actually reasonably well understood amongst physicians as well as patients. The other interesting thing to note is, of course, in the SMS studies for both 659 and 445, we're going to have the 24-week PPFEV1 so we can start to do some analyses of rate of decline and such. and we are also going to have pulmonary exacerbations, BMI, CFQR. So there's actually quite a bit of data that's coming, and I've been very impressed with how well these studies have been understood by the community, not just the physicians, but patients as well.

Thanks very much.

Thank you. Our next question comes from Matthew Harrison of Morgan Stanley. Your line is now open.

Great. Thanks very much. I guess, Paul, I was wondering if you could talk a little bit about the operating margin progression. You've obviously moved up, I don't know, seven or eight points this year. How should we think about that relative to the revenue growth you're talking about in 2019 and beyond? Thanks very much.

Yeah. Hi, Matt. It's Jeff. Actually, maybe I'll take a little more of a strategic question since we've given you the guidance for 2019. So, As we look forward, and as you've seen over the last couple of years, there's a pretty consistent trend here of growing revenues considerably faster than operating expenses, which obviously results in operating margin expansion and increases in operating income. I think, as Paul mentioned, as we look forward to next year, we expect to see, on a current guide, a 15% top-line revenue growth, but a 21% growth in operating margin, reflecting exactly the same pattern going forward in 2019. Obviously, as we get to triples, that only accelerates because revenue grows even faster after the triple launches, and operating expenses, you know, we've maintained a pretty disciplined approach. So I think as you think about this long-term, without giving you long-term guidance, you should think about continuing operating margin and expansion and operating income increases, which also results in the cash flows that Paul mentioned. Does that give you enough detail on sort of how we think of it going forward?

Yeah, no, that's very helpful. And then if I can just ask one thought. I mean, other people have asked about XUS reimbursement on the call. I was wondering if you could just specifically address some of the news around compulsory licensing in some XUS countries and, you know, what you see as the path forward there or the likelihood of anything happening there. Sure.

Yeah, so Matt, it's Stuart here. I mean, the compulsory license issue has probably most recently been discussed in the UK yesterday. There was a debate on crown use, as they call it, in the UK. I think it's fair to say that the government itself in that debate recognized that this is a very complicated issue. It's a not entirely a viable option for multiple reasons, including that it's inconsistent with their desire to foster a vibrant life sciences ecosystem. We certainly agree with their perspective on that. I would say we're not really focused or particularly concerned, frankly, about compulsory licensing. What we're focused on is finding a solution in the short term for patients that provides access to or can be as soon as we can and our pipeline of future medicines as soon as they're approved.

Thank you.

Great. Thank you very much.

Thank you. Our next question comes from Corey Kasimov with J.P. Morgan. Your line is now open.

Hey, good afternoon, guys. Thanks for taking my question. I wanted to ask about AAT and wondering if you can talk about the potential cadence of initial clinical data and what you might expect to learn from healthy volunteers. And then I realize this is putting the cart before the horse a little here, but assuming the early clinical stage work goes well, what might a registrational pathway for this indication potentially look like? I'm curious, would you expect it to be biomarker or outcome-driven? I'm just trying to broadly understand what this program may encompass. Thanks.

Sure. This is Reshma. Let me take both halves of that question. With regard to the cadence of the trial process, So let me describe the trial. It's a fairly typical small molecule approach that we're taking here, SAD, single ascending dose, followed by MAD, multiple ascending dose. That's going to be done in healthy volunteers, and as soon as we get through that, we're going to be ready to go into patients. The good news on this program is that it's going to be a reasonably efficient program. I don't know if it's 30, 40 people, but a reasonably efficient program for us to be able to see whether our molecule is going to have the intended effect, which is elevations in AAT level and in activity. This is a fairly standard readout, and so we expect to have that in hand in the near future as soon as we get through our healthy volunteer studies. With regard to the registration path, we're early in here, but what I can tell you is that the existing therapies which you know are augmentation therapy, so it's an infusion of the protein. Those were approved. There's about four of them available on the market, and those were approved based on AAT levels. So that's one data point that you have to start with. We have to go through our conversations with regulators to see what the Phase III registration enabling endpoints are going to be here, but I do think that's an important data point to look at.

That's helpful. Thank you.

Thank you. And our next question comes from .

Great. Thank you for my question. Just a question on the two triplets. I know that in November you'd also indicated, you know, you had 12-week data and 26-week data that 659 had gone through. Can you just give us an update as to how you report the safety data also for both the projects as the efficacy readouts are coming up? Thank you.

Sure. So if I go back to our 659 release from late last year, I think that gives you a very good template for how you can expect to hear or share the data for 445, which will be coming this quarter in terms of both safety and efficacy. So on the efficacy side, you're going to hear us tell you about the PPFEV1 at four weeks from both the FF and the FMF trial. And with regard to safety, Now, on this one, we're going to give you the top line with regard to discontinuations, overall tolerability, but we're going to be very, very thoughtful about maintaining study integrity, and we're not going to go very far beyond that, just like you saw us do with 659.

Operator, we are now at the one-hour mark, so we will have time for one more question.

And our last question comes from Lisa Baco of J&P Securities. Your line is now open.

Hi. Well, a lot of my questions have been asked, but I did want to ask about the triple and sort of if you could describe the patent life around the triple. That would be helpful. Thank you.

Lisa, thank you so much for asking that. I'm glad you got to that. So, as you know, our plan is to co-formulate these, you know, into a single pill, in which case, The patent life around the medicine is actually determined by the longest patent life of the ingredients, single ingredients. And in the case of VX659 and 445, which both have pending patent applications, the patent expiry, if granted, would be 2037 in both the U.S. and Europe.

And any extensions on that, or that would be for any expenses?

Gosh, by 2037, I'm going to be way too old to even think about extensions. But we're, you know, obviously we're pleased with that patent life and really can't speculate on any extensions at this point.

All right. Thank you very much. Congratulations on a good quarter.

Thanks, Lisa.

Okay.

Thank you, everybody, for joining us tonight. The investor reduction team is in the office and happy to do any further follow-up questions.

Thank you, ladies and gentlemen. Thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.