Vertex Pharmaceuticals Incorporated

Welcome. This is Michael Partridge, Senior Vice President of Investor Relations. Tonight, we will review with you Vertex's business progress and provide our first quarter financial results. Making prepared remarks on the call tonight, we have Dr. Jeff Leiden, Chairman and CEO, Stuart Arbuckle, Chief Commercial Officer, and I would like to welcome to the call Charlie Wagner, Vertex's new Chief Financial Officer. Dr. Reshma Kewal-Ramani, Chief Medical Officer, and Paul Silva, our Corporate Controller and Chief Accounting Officer, will join us for Q&A. We recommend that you access the webcast slides on our website as you listen to this call. This 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, Vertex's other programs, and Vertex'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. During the last several years, Vertex has continued to pursue its strategy of investing in scientific innovation to create transformative medicines for serious diseases and then bringing these medicines to more patients around the world to drive significant revenue and operating income growth. In 2019, our success in executing against this strategy can be measured by the many important clinical, regulatory, and commercial milestones that we expect to achieve this year in both CF and in our non-CF pipeline. As we look forward to the next several years, we are more confident than ever that the continued execution of this strategy will allow us to create more new medicines that change patients' lives and in so doing deliver outstanding value to our shareholders. In CF, we're bringing our approved medicines to more patients globally through recent label expansions for Kalydeco and Orkambi and the approval and successful launch of Symdico. Approximately half of all people with CF are today eligible for a Vertex CF medicine. Our goal in CF is to develop medicines for all people with this disease, and we've made significant progress toward that goal with our triple combination regimens that we believe could treat up to 90% of all people with CF in the future, providing many patients with the first medicine to treat the underlying cause of their disease and also providing enhanced benefit for the vast majority of patients currently eligible for our three approved medicines. With both of our triple combination regimens, we have now reported Phase III data that showed potentially transformative clinical benefit for CF patients with two F508-DEL mutations as well as for those with one F508-DEL mutation and one minimal function mutation. In the second quarter, we expect to obtain the final 24-week data from our Phase III triple combination programs, which will allow us to choose the best regimen to submit for regulatory approvals globally. We remain on track to submit an NDA in the U.S. in the third quarter, followed by an MA in Europe later this year. We look forward to updating you on our plans and to sharing additional data for our chosen triple combination regimen later this quarter. I want to also highlight our recent progress outside of CF, where we are advancing potentially transformative medicines for pain, Alpha-1 antitrypsin deficiency, sickle cell disease, beta thalassemia, focal segmental glomerulosclerosis, and other serious diseases. Our discovery efforts are focused on validated targets in diseases in which we have a deep understanding of the underlying biology and genetics. By using early clinical markers to predict the potential for these medicines to have benefit, we believe we will significantly increase our probability of success in early proof of concept trials, enabling rapid development timelines. In our AAT program, we initiated clinical development of our first small molecule corrector, VX814, in late 2018, and are now moving this molecule through Phase I development. Today, we announced that we have received fast-track designation from the FDA for this molecule. We are also advancing other small molecule correctors of AAT through late preclinical development and expect to begin clinical development of a second small molecule AAT corrector in 2019. In pain, we have established proof of concept for NAV1.8 inhibition across multiple Phase II studies of VX150 in acute, neuropathic, and musculoskeletal pain conditions. Data from these studies, together with data from a Phase II dose-ranging study of VX150, will inform our potential development paths in pain. In addition to our lead molecule, VX150, we have a portfolio of multiple additional NAV1.8 inhibitors in late preclinical development and expect to advance the first of these molecules into the clinic in 2019. In sickle cell disease and beta-phalassemia, we are making rapid progress with our partner the Center for Disease Control and Crisper Therapeutics on the development of the gene editing therapy CTX001. Earlier this year, the first patient with beta-phalassemia was infused with CTX001, marking a significant scientific milestone for the field of gene editing and also a remarkable milestone for our collaboration with CRISPR. We remain on track to dose the first patient with sickle cell disease with CTX001 in the middle of the year. In addition to our internal R&D efforts, we are focused on gaining access to new technologies, platforms, and development assets through external partnerships that fit our strategy of developing transformative medicines for serious specialty diseases. Toward that end, we have entered into multiple collaborations over recent months, including those with Arbor Biotechnologies, Merck KGA, Genomics PLC, and XChem, which together provide us with access to a broad range of new scientific capabilities. And with our growing free cash flow, we have increased flexibility to enter into additional collaborations to further bolster our pipeline and provide access to new technologies. Before I close, I'd like to welcome Charlie Wagner to Vertex as our new Chief Financial Officer. Charlie joins us from Ortho Clinical Diagnostics, where he served as CFO and Executive Vice President of Finance. Charlie has served as CFO for public and private companies for more than 10 years, including roles as CFO for Brooker, Progress Software, and Millipore. Charlie brings to Vertex significant financial and operational expertise that will help guide us over the coming years as our business becomes more complex through continued global expansion, the treatment of many more patients, and the future launches of new medicines. In welcoming Charlie, I'd also like to thank Paul Silva for his leadership over the last three months as our interim CFO. Paul will continue to play an integral role within the finance organization, just as he has since joining the company in 2007. I'll now turn the call over to Stuart to review our commercial progress.

Thanks, Jeff. Tonight, I'll review our commercial performance for the first quarter, driven by the strong underlying demand for our medicines in the U.S. and internationally. In the first quarter, we continue to increase the number of patients being treated with our CF medicines globally, resulting in product revenues of $857 million. Compared to the fourth quarter of 2018, our first quarter 2019 revenues were negatively impacted by channel inventory build that occurred at the end of 2018, and by higher gross to net adjustments that we typically experience early in the year, as we highlighted on our call in January. The first quarter included $320 million of Simdico revenues, including $32 million of Simkevi revenues from outside the U.S., primarily from Germany. Simkevi launch in Germany is off to a strong start, with demand coming from patients who never initiated treatment with Orkambi, as well as patients who discontinued or have switched from Orkambi. Throughout 2019, we anticipate additional patients will initiate treatment with Simdico in the U.S. and the EU, including younger patients ages 6 to 11 in the U.S. following potential FDA approval later this year. With Kaleidico and Orkambi, we continue to see new patients initiating treatment, as we've secured new reimbursement agreements and received new regulatory approvals for young children around the globe. Based on our performance in the first quarter, we remain on track to deliver total CF product revenues of $3.45 to $3.55 billion for the full year. Outside the U.S., we continue to make progress achieving reimbursement for our CF medicines. We are focused on obtaining long-term agreements that provide access to all eligible patients. We are seeking agreements that appropriately value our scientific innovation and enable us to continue to invest in the discovery of future CF medicines and medicines for other serious diseases. I'm pleased that in the first quarter of this year, we've achieved multiple pricing agreements and reimbursement milestones. In Germany, we successfully expanded our pricing agreement for Orkambi, prompted by the EMA approval of the product in children ages 6 to 11 years. We've seen strong demand for Orkambi in Germany since the medicine was approved for these younger patients in January of last year. And this recent pricing agreement is further validation of the value that Orkambi provides. In Ireland, as part of our previously reached portfolio agreement, our medicines have now become available to children as young as one year old for Kalydeco, children as young as two years old for Orkambi, and patients ages 12 and older for Cinkevi, including those with a residual function mutation. We've also reached multiple new reimbursement agreements in smaller countries like Israel and Sweden, reflecting our commitment to bringing our CF medicines to all eligible patients around the world. And in Australia, we recently received a positive recommendation for Simdico from the Pharmaceutical Benefits Advisory Committee, an important first step toward formal reimbursement in patients ages 12 and older. The positive recommendation of Simdico comes as a result of our prior agreement in Australia for Orkambi, where we also defined a pathway for rapid access to Simdico. In summary, I'm pleased that we are bringing our medicines to more patients around the globe and with the resulting strong revenue performance in the first quarter of the year. With that, I will now turn the call over to Charlie to further review our financial results.

Thanks Stuart, and good evening everyone. I'm excited to join Vertex at such an important time in the company's growth, and I look forward to meeting many of you in the coming months. In addition to Stuart's comments on the performance of our CF products, tonight I'll review our first quarter financial results and our 2019 financial guidance. All of the results and guidance I will discuss are non-GAAP. 2019 is off to a strong start. Product revenues of $857 million represent an increase of 34% compared to the first quarter of 2018. This increase was driven primarily by the launch of Simdico in the U.S. in 2018 and the recent launch of Simkevi in Germany. Our first quarter 2019 combined R&D and SG&A expenses were $388 million compared to $360 million in the first quarter of 2018. This increase was primarily due to the incremental investment to support the global use of Vertex's medicines and the expansion of Vertex's pipeline in CF and other new disease areas. The significant growth in revenues and disciplined spending in the first quarter resulted in operating income of $377 million, an 81% increase compared to the first quarter of 2018. Net income for the first quarter of 2019 was $296 million compared to $196 million in the first quarter of 2018. We also continue to strengthen our balance sheet, ending the first quarter with approximately $3.48 billion in cash and marketable securities compared to $3.17 billion at the end of 2018. We expect to continue to generate significant cash flow throughout 2019 and beyond as more patients are treated with our medicines, which will enable us to continue our significant investment in internal R&D and in external innovation through business development activities. Now on to our 2019 guidance. Today we are reiterating our financial guidance for total product revenues, combined R&D and SGA expenses and our non-GAAP anticipated effective tax rate. As Stuart mentioned, we continue to expect total CF product revenues in the range of $3.45 to $3.55 billion. Our revenue guidance reflects anticipated revenues from countries where our medicines are currently reimbursed. Achieving additional significant reimbursement agreements in 2019 may provide upside to our We also continue to expect combined R&D and SGA expenses of $1.65 to $1.7 billion. The key investment drivers are ongoing CF development efforts supporting the potential launch of a triple combination regimen and expanding our pipeline into additional diseases. Our full year 2019 non-GAAP tax rate guidance of 21 to 22 percent is also unchanged. The vast majority of our tax provision will be a non-cash expense until we fully use our net operating losses. The financial profile of our business is strong and getting stronger. We continue to execute across all aspects of our business enabling significant revenue and operating income growth, advancement of our pipeline and investment in external innovation. I look forward to updating you on our progress going forward. With that, I'll turn the call back to Jeff.

Thanks, Charlie. I'm pleased that Vertex is on track to achieve the key goals we established at the start of this year and that we remain well positioned to bring our medicines to more patients, thereby driving significant continued growth in revenue and operating income in 2019 and beyond. Our strategy of creating transformative medicines through serial innovation is working and continues to drive all parts of our business. And I look forward to updating you on our progress 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 one on your touchtone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Jeff Meacham of Barclays. Your line is now open.

Afternoon, guys. Thanks for the question. I have a commercial and a clinical one. From the commercial side, when I compare the time needed to gain full reimbursement broadly across the EU, for you guys versus others in this space, it seems substantially longer. For Vertex, I guess it's obviously pretty important given the upcoming filing of the triple. So the question is, what do you think is the tipping point from here to change the conversation with payers across the EU? And what is the plan B? And then I'll follow up on that clinical question.

Yeah, thanks for the question, Jeff. It's Stuart here. Yeah, it's certainly taken longer than we would have liked to gain reimbursement. But I would like to remind you we've got reimbursement in many, many countries around the world, including in Europe. There are certainly some countries where we don't yet have access. And certainly, we're not going to give up for the patients who are waiting there until we do have access. As you know, every market's different. And so it's hard to generalize about the time that it's taken. Certainly, I think the individual tipping point's really very hard to say market by market because all of those markets are very different. Certainly, I think we've seen a significant increase in patient advocacy since the triple results were released because clearly, with a medicine which has that kind of level of benefit risk profile, clearly, there are patients who are going to want those medicines. And I find it very hard to believe that there's going to be governments that are going to want to deny patients access to such an important medicine that can treat the underlying cause of their disease.

OK, and then on the clinical side, in CF, you guys have been able to very quickly develop a whole series of compounds, next-gen correctors, and pretty rapidly. And they look very effective. But I'm just curious if, and I know you have a pipeline that's non-CF, but in other pulmonology diseases, COPD and IPF or something like that, is there a way to leverage what you have had success with in San Diego to look at the same assays and the like to come to the same kind of concept in other diseases where you have multiple shots on goal and a whole series of compounds? Thank you.

Yeah, Jeff, thanks for the question. This is Jeff Leiden, taking in a couple of different pieces. First of all, we are really pleased with the speed at which we've been able to develop a whole portfolio of molecules in CF. Just to remind you, molecules like BX659 and 445 were first synthesized in the laboratory less than three years ago. So we are not only through preclinical development, but through phase three development, three years from synthesis, which, at least in my 30 or 40 years in the industry, I haven't seen before. And we've taken a lot of learnings from that. And when I say we, I mean both David Altshuler in research and Raishma in development. The first thing is that we work on validated targets with cell markers and biomarkers in preclinical development that can predict clinical success. And that both increases the probability of success when we get into the clinic, but also speeds the work forward. We don't spend a lot of time in animal models. We move more rapidly into humans. And in all cases, and we'll talk about our pipeline, we have biomarkers in the clinic that predict early success with small clinical trials. And CF, as you'll remember, 18 or 20 patient phase two trials pretty much told us the answer. And as you'll see, that's true also of diseases like AAT and sickle cell and pain. And so we're certainly taking that lesson forward as well. You also asked about leveraging knowledge. And I do want to comment on one distinction. The way that we believe in leveraging knowledge is by leveraging scientific knowledge, not therapeutic area knowledge. In other words, you asked about COPD as an example. We don't have COPD programs, even given what we've done in CF, because we don't see the same scientific opportunity in COPD that we see in CF. And so we really pick by disease, not by therapeutic area, diseases where we see large unmet need and scientific opportunity. And then we do leverage that experience and knowledge into those. You know, AAT is probably the best example because it looks and smells so much like CF. But obviously it's a genetic disease like CF. It's a protein folding disorder like CF. We have a cell system and an animal system that we believe will predict clinical efficacy. And we have a simple biomarker and small trials that will tell us whether we're going to succeed or not. And so I think you can expect to see, you know, very rapid progress in a disease like AAT for the same reasons as in CF. And then maybe the final thing I would say is we do believe very strongly in this portfolio approach. And so you won't see us take rifle shots in these diseases. You'll see us create multiple molecules. And we have that in pain. We have it in AAT. We have it in FSGS. And we'll take multiple molecules into the clinic, which I think is a very important way to reduce risk.

Thanks a lot. I appreciate it.

Thank you. And our next question comes from Phil Nadel of Cowan & Company. Your line is now open.

Good afternoon. Thanks for taking my question. I have a commercial one and a clinical one for me too. First on the commercial side, could you give us an update on where the negotiations with England and France over reimbursement stand and whether there's any milestones that we externally could look for through the remainder of 2019 for progress in those negotiations? And then secondly on the clinical side, I'm curious about VX121 and VX561. You mentioned that has moved into phase two. When could we see that phase two data? And is that combo now the most likely route to registration for VX561?

Thanks. Phil, it's Stuart here. I'll take your commercial question and then Rashmal will take the clinical question. So as I said previously, we've reached multiple reimbursement agreements around the world over the last couple of years. And I'm pleased to say, as I mentioned in my prepared remarks, we've continued to make good progress in the first quarter. But we are certainly fully committed to securing access where we don't so that all eligible patients can have access to our approved medicines. Every country is different, so I'll talk about England and then I'll talk about France. As you know, we participated in the Health Select Committee inquiry in England in March. That allowed us to explain our position on our company, the value of our medicines and the approach that we were taking to those negotiations. And I think one of the most positive things out of that inquiry was that we are now back at the table with the NHS and NICE. And I see that as a very positive impact from the Health Select Committee inquiry. In France, we continue to be in productive discussions with the French authorities and likewise, we're fully committed there to securing access for any patients that don't have access. I would remind you in France, approximately 1,100 or so of the 1,700 Orkambi eligible patients above 12 were initiated on Orkambi and continue to be on Orkambi through our early access programs and we are being paid for those patients, but we won't recognize revenue for those patients until the final reimbursement agreement is secured. So what I can tell you is we are fully committed to getting access for those patients who have been waiting too long in England and those patients who are still waiting in France as well. I wish I could tell you exactly when we're going to reach a successful conclusion. Unfortunately, that's just not within our ability to predict that. So unfortunately, I can't point you to any specific milestones because there really aren't any along the way that would be externally visible.

Hi Phil, it's Reshma. With regard to VX121, this is our next generation corrector and we have initiated these trials and this is now in its Phase 2 proof of concept stage. It's a little too early to tell you when we're going to have the results, but I think from the speed that you can see us moving, I expect that we're going to continue to move with that kind of pace as VX121 makes it through Phase 2. With regard to VX561, that's the deuterated ivacaftor molecule and you'll remember the FDA asked us to take that through full dose ranging in monotherapy and that's the study that we are initiating now. You are right that VX561 is in combination with VX121 in the proof of concept study. But I will say that because we're doing the monotherapy full dose ranging, actually we can pair VX561 with any next generation corrector pair that we think is most appropriate. 121 is certainly one of those opportunities.

That's helpful, thank you.

Thank you. And our next question comes from Michael Yee of Jeffreys. Your line is now open.

Hey, thanks. Question on the CFTRIPLE program. I know that you or it appears that you're filing in the Hetman and homozygous population together, if I have that correct. Can you just maybe walk through what you're comparing and what you're looking at to figure out at what point you're going to pick one of those for both Hetman and homozygous? And then my second question was on the AAT program. You've made some comments about that. Could you just confirm what you might see in Phase 1, if anything, from a PKPG standpoint? That could be helpful, or you really need to see Phase 2 data. I think you need to get to like 11 micromolar of AAT. Maybe just talk about Phase 1 and Phase 2 a bit. Thanks so much.

Sure. This is Raishma. Let me take the first question first, and then we'll get to AAT. So as we've discussed on calls in the past, we are marching down the strategy that we laid out with regard to asset selection. And really, if I break that down, what that means is that we are going to be looking at 24-week data for both FF and FMS for both assets, VX659 and VX445. The 445 study went even faster than the 659 study, and that's really what set us up to have this opportunity to look at both sets of 24-week data. And you've actually gleaned exactly the right point. Because we can look at both 24-week data sets, we're going to be filing for both FF and FMS, regardless of which asset we choose. With regard to how are we going to make the asset decision, you know, who would have ever guessed that the efficacy would be at this level and literally superimposable? And that means we're going to be looking at the full totality of evidence. And of course it means PPFEV1, but it also means things like pulmonary exacerbations, all of the other secondary endpoints, and importantly, the full package of safety information. We're on track to make this decision in Q2 of this year and, importantly, file in Q3 of this year, regardless of whether the asset selection is 445 or 659. An important thing to share with you is with regard to VX445, that study has achieved its last patient last visit as of very recently, and so we're really in very good shape and a lot of progress since the last call. With regard to the AAT programs, I'm going to step back a little bit just to make sure everyone has all the information. And so that molecule is VX814, and we just announced today, and I'm delighted to reiterate that that molecule has received fast-track status from the FDA. That's important because I think it gives you an indication of the high unmet need, as well as the recognition that therapies are needed to improve the condition of these patients who have a very serious illness. That study started the SAD, Single Ace Ending Dose, Multiple Ace Ending Dose, in December of last year. We're going to have the PK results from that study. And then, well, I don't know the exact size. It's going to be efficient, as Jeff described in his prepared remarks. This is very much like CF, and we anticipate that 30, 40, 50 patients, something like that, is what we're going to need to examine. And the readout is very straightforward. It's AAT levels, and we know how to do that. So I anticipate that that's kind of what you're going to expect to see as this program comes to fruition.

Okay. Thank you,

guys. Thank you. And our next question comes from Alethea Young of Cantor Fitzgerald. Your line is now open.

I was just curious, actually, a little bit more about the Alpha-1 antitrypsin program, your second molecule. Are you guys thinking that over time it'll kind of be a combination game, or are you just kind of developing this molecule as a backup molecule? And if I may, I'm paying, can you just discuss some of the bait-limiting steps around making a strategic decision there? Thanks.

Sure. With regard to Alpha-1 antitrypsin, we have a approach here that is very, very similar to CF, and that is to say to have a portfolio of molecules. As we like to say internally, once you've cracked the biology, it's all about pouring on the chemistry. And so our portfolio of molecules, including the one that's in late preclinical development, is there to allow us to choose the very best molecules to bring forward. Unlike CF, just to comment very specifically on your question about is it going to be a combination or monotherapy approach, that's where it's not like CF. A single molecule, we believe, will be sufficient to treat the underlying cause of disease here. So that's AAT. With regard to pain, what we're really looking at here is positive studies with VX150 in a model of acute pain, that was bunionectomy, musculoskeletal pain, that was the osteoarthritis study, and small fiber neuropathy, that's the model of neuropathic pain. And then we went on to do a dose ranging study in bunionectomy because that was a good model for us to use. We're going to look at all of that data and look at our portfolio of molecules. Again, same strategy once we crack the biology, and I really do believe we've cracked the biology of 1.8, which is no easy task. You know many, many people have worked on this over a long period of time, including ourselves. We're going to have that all together, and in the second half of this year I anticipate we'll have all the information we need to decide on which molecule or molecules and exactly what the next step is.

Thank you. And our next question comes from Ying Heng of BOA Maryland. Your line is not open.

Hi, thanks for taking my questions. First one is on UK reimbursement. I believe Jeff mentioned previously that even with the clinical benefits of the triple combination you observed, still the NICE methodology may not come out with a pricing that's close to what you think is the value of this medication. So do you think based on your interaction with NICE recently, is there any change in the NICE thought process of how to value this? And then secondly, I think you also disclosed that the average blended revenue per patient was about $160,000 in 2018. Can you comment on the trend for that number going forward? Thank you.

Yeah, this is Jeff. Thanks for the two questions, and obviously they're related. So just to be clear on the triple, the NICE methodology has, as you know, a number of different components to it. A major one is the value of medicine to patients as described by the clinical results. And clearly there the triple is significantly better than the other two existing medicines that they've already evaluated. They haven't yet evaluated the triple in their system, so it's a little early to tell, but we certainly know from the clinical data that there is that major benefit. You know, with respect to the more general question of the NICE methodology and how well it applies to these kinds of precision medicines, I think you know that there's been quite a bit of discussion in the UK and in Parliament about the fact that it's probably time to take another look at that NICE methodology, not for community medicines and not for the ultra orphans where it seems to work well, but for exactly this kind of precision medicine for the patient populations that fall in between. And we do anticipate and hope over the next couple of years that that methodology may be revised as per the current discussions to better evaluate the value of these medicines. Obviously that's going to help too. With respect to the average blended price, you know, I think you can, we obviously don't give long term guidance on price. Certainly it's too early for triple price. We don't get long term guidance on revenue either. But I think one way to think about this is we're currently treating about 18,000 patients generating about three billion dollars in revenue. As we go to a triple world where the benefit to patients is greater, we certainly don't anticipate major decreases in the price of our triple versus our other medicines given its value. And so you can begin to sort of do some rough math around as we move from 18,000 to potentially 65 or 68,000 eligible patients what that might look like across the world.

That's awful. Thank you.

Thank you. And our next question comes from Jeff Reporges of SBB Learing, Carolina, is now open.

Thank you very much. Jeff, just to follow up on the prior question. I'm wondering if you could just confirm the year over year and sequential treated patient number trend so that we can see what the underlying dynamics are across all the different products. And could you give us a sense of what the sequential trend in the gross to net in the U.S. was? And then lastly, just wondering if you could give us an update on Alpha 1. Is it your belief that a serum Alpha 180 trypsin level will be sufficient for approval or is that just for the next study that you plan? Is there any obligation to show a pulmonary outcome benefit the way you do in CF? Thanks.

Thanks for the questions, Jeff. Maybe we'll do them in reverse order. Reshma will do the AAT question with respect to endpoints. Paul will do a bit on gross to net and how we're seeing that going forward this year. And I'll give you some color on how we think patient penetration will go over the next several years.

So, Jeff, this is Reshma. With regards to exactly what the regulatory enabling endpoint will be for our program, it's a bit too early to call that because we haven't engaged in all of those regulatory discussions. But what I can tell you is a little bit about the context of the currently available medicines. And then you could start to think about how this might all work. So there are about four companies out there that make augmentation therapy. This is therapy that you go into center once a week and you get an infusion of the protein. And this, as you know, has its own limitations in that it only really has the opportunity to treat the lung disease part of it. It really doesn't do anything for the liver disease, which is different than our approach, which is going to be able to target both liver and lung. But with that approach, all the companies have been able to secure U.S. FDA approval based on AAT levels. So that's the data point. And we have to go through our process to determine exactly how it's going to work for us. Stuart, sorry, that's Paul over to you.

Jeff, thanks for the question. So as we exited 2018, the gross ton net in the U.S. was approximately 10%. And I think we said in Q1 call and it's the same now, they expect 2019 to be between 10 and 12%. And that's driven by two things. One is increased purchases by 340B entities, which have a statutory rate discount similar to Medicaid. And then the second one would be the anticipated spend on our cost sharing programs. So those two things are kind of bringing that number up a little bit over the course of 2015.

And then Jeff, maybe for your final question, which is really about how do we see the penetration going with our medicines as we go forward. You know, I think there's going to be two phases. You can think about 2019 as being a continuation of some of the things that you've heard about, plus some new label expansion. So Simkevi, I think as Stuart mentioned, is also a very nice start in Germany and we expect to see continued growth there. There's still a bit of growth with Simdico here in the U.S., although we've probably seen most of that. And then these new label indications for younger ages, for Kalydeco, for Simdico in the U.S. to the younger age, et cetera, will provide more growth this year. And all of that is accounted for in our guidance for the year. What is not accounted for in our guidance for the year is if we were able to obtain reimbursement in one of the major countries, for instance, in England or France, the two big companies, obviously that would have a positive effect on this year's growth rate. Obviously, any early approvals for some of these label indications also might have a positive effect. And then we're really into the world of triples. As we get Google in triples, which as we've said, we believe can ultimately treat 90% of all patients, we do see significant penetration into that group going from 30,000 eligible patients to 55,000 or 68,000, and penetration of that age group that looks a lot like Kalydeco because of the efficacy of the drugs. So I think that's the way to think about the growth ramp going forward. Great.

Thanks very much.

Thank you. And our next question comes from Brian Abrams of RBC Capital Markets. Your line is now open.

Hi, there. Thanks for taking my questions, and congrats on all the progress. Two questions from me. On the AAT program, what gives you the most confidence that the AAT produced will be functional and that the liver outflow will reverse damage from the prior accumulation of toxic polymers to the same degree in humans who may have the disease long term, as you saw in the transgenic mouse model? And then just a second question commercially. I was wondering if you could help quantify the -over-quarter impact of inventory drawdowns across the CF portfolio. Thanks.

Yeah, maybe I'll take the AAT question, and Stuart will take the inventory question, I think. So on AAT, you're asking the most important questions, and one of the things we really like about the program is that we're able to test our correctors in both cells and in a transgenic animal that are actually expressing the mutant human protein, not a mutant mouse protein. So they're engineered with the human protein. And we can measure not only the levels, but we can actually measure functional levels. So we're not simply measuring by immunosus, the levels of this protein, we're actually measuring the functional levels. And that's how we have great confidence that we're actually producing functional protein. And in fact, we're clearing both the cells. And as you've seen, if you saw my J.P. Morgan presentation, we're clearing the liver in these animals of the misfolded human mutant protein. And that gives us a high level of confidence that we are actually able to produce, not only to correct the folding, but to produce functional protein once we do it. And that's a very, very important piece of the data package, which has encouraged us to move rapidly with the humans. Now, in humans, as Rachel said, we're going to be able to measure the same thing. We'll not only measure the serum levels of protein, which we can obviously do, but we'll actually measure the functional levels of protein in the serum. And we know from essentially an experiment of nature from the heterozygous parents of these patients, who are normal, by the way, if they express anywhere from 11 micromolar on a probably 17 micromolar is really a functional protein is really fully protective. And so we can simply measure the levels of functional protein in these treated patients. And again, with rather small trials like the CF trials know exactly where we are. But the cell data and the mouse data using the human protein gives us a high level of confidence. Did that answer your question? That's really helpful.

Thanks.

And in the liver, as I said, we're looking directly at the livers of the mice and we're seeing clearing. And at some point in this clinical program, we will also look at the livers of patients to confirm that that's true. Stuart, sorry. Yeah, and

Brian on inventory. So at the end of 2018, we had about 10 million dollars worth of inventory built here in the U.S. This is typical towards the end of the calendar year. That excess inventory was more than burnt off during the course of the first quarter. Great. Thanks so

much.

Thank you. And our next question comes from Corey Kessner of JP Morgan. Your line is now open.

Hey, guys. Thanks for taking the questions. A couple of quick CF ones for you. First of all, with Simdico, at this stage of launch, roughly what percent of patients are still switching to Simdico from other regimens versus those that are new to therapy altogether? And then secondly, thinking about VX561, how important do you believe a once a day regimen is for CF patients? Do you hear much pushback on the twice a day administration you have out there now?

Yeah, so Corey, I'll take those. So in terms of the switching and where are we versus uptake in NAIVES, we've really only got data on that for a substantial period of time here in the U.S., obviously, because we launched Simdico here in February of 2018. What I'll tell you is we've actually seen really high levels of uptake in all of the populations you might expect. Those patients who were naive to Orcambi, those that had never been exposed to a CFTR modulator before, those who were on Orcambi and those who had tried Orcambi and discontinued. So all of those groups we saw very substantial uptake. We're on the flatter part of the launch curve, I would say, here in the U.S., but we're certainly not flat. There are still patients being added in all of those categories just about every day. And one other thing I would say that we are able to be much more confident about now in the real world is we had always thought that given the profile of Simdico that we would expect to see high levels of persistence and compliance higher than we had seen in the early days. And that's something that we've seen with Orcambi. And I'm pleased to say that's exactly what's playing out in the real world. In terms of deuterated ibacaftor, 561, certainly given the uptake rates we see with our medicines, clearly a -a-day regimen for medicines which are as important as this, treating the underlying cause of the disease is not something which is inhibiting people from taking our medicines. And indeed, as you know, these patients are taking many, many different types and forms of medicines every day. And so a -a-day medicine is not difficult for them. However, our goal is to get to carrier levels of status and provide as much convenience as we possibly can for patients. And so we do see once a day being something that would be an advantage for our medicines, and that's why we want to bring 561 to patients as soon as we possibly can. Okay. Thank you.

Thank you. And our next question comes from Paul Maydess at Stiefel. Your line is now open.

Great. Thanks so much for taking the question. Just continuing the trend on alpha-1 antitrypsin, I was wondering if there are any biomarkers you can look at in early studies that can detect whether or not you're taking the vaccine. Whether or not your compound is having the benefit in the liver that you hope anything related to inflammation or liver enzyme elevations. And then secondarily, I was wondering if you could just clarify when or the current thinking on specific study designs for NAV 1.8 in Phase III and whether or not the next compound might go after any other pain indications outside of the ones you've pursued thus far. Thanks so much.

Sure. Let me take the NAV 1.8 first, and then I'll go backwards to AAT. So with regard to Phase III designs, I think the three models that we've talked about are a good way to think about it. The musculoskeletal pain and osteoarthritis, but there are obviously a number of other pain conditions in musculoskeletal that we could pursue. And in the small fiber neuropathy, which is what we did in the VX150 example, there is of course trigeminal neuralgia and other pain conditions that one would pursue to get the full breadth of neuropathic pain. And bunionectomy is a model of a cupine. I think the kind of studies you could imagine are bunionectomy, which would be the hard tissue, something like an abdominoplasty or a hernia repair as some of the soft tissue examples. And the guidance is actually fairly straightforward with regard to what kinds of studies you need to do in the approximate sample size for any one of these conditions. So I think what you'll see us do is bring the best molecule forward and then use the fairly typical Phase III development path to get these approved. With regard to AAT, I think the question was around how are you going to figure out whether or not there is liver impact? So this is kind of interesting. There's a paper from the Brantley Lab down in Florida, and it was out maybe two years ago, November, something like that. And what you can tell is that perhaps AAT is best known clinically as a disease that looks like COPD, just COPD in younger people. There's actually a substantial burden of liver disease, and that liver disease is manifest when you do something like a liver biopsy, which is what that Brantley series did. It actually looked at about 100 or so patients over time. Now, with regard to inflammatory markers or markers of liver disease, AST, ALT, that actually doesn't give you a very good idea. GGT is said to be very best, but it's not very sensitive, nor is it particularly specific. But I think something that Jeff said is really the important point. In our animal models, what we're doing is actually looking at liver tissue. So there's no guesswork here, and it's not a question of whether we see enzymes moving. We're actually looking at the liver cells with the misfolded protein and then the clearance of that with VX814. And I anticipate that as we go to clinical studies, biopsies are going to be an important part of that.

Great. Thanks so much. I hope that answers the question. Yeah, it does. Thank you very much.

Thank you. And our next question comes from Ravi Meiretra of Overcore ISI. Your line is still open.

Thank you for taking my question, which is around possible pharmacoeconomic arguments. For broad utilization of your CF franchise, you've got over a decade now of real-world clinical experience with your agents. So understanding that PE is an art form rather than science per se, can you give us some color on some of the PE data points you can or have taken to resistant payers?

Yeah, Ravi, this is Stuart. Thanks very much for the question. Yeah, as you say, pulmonary exacerbations themselves are a very, very important end point, certainly for patients and physicians, but also they are of interest to payers as well. One of the kinds of things that we've looked at on pulmonary exacerbations, both actually in our clinical trials, but also in our longer-term follow-up studies, include dissecting the pulmonary exacerbations into those that lead to things like IV antibiotics, those that lead to hospitalizations, what the length of those hospitalizations stays on, things like that, because obviously those are of interest to payers. As you say, we have the benefit of being on the market for a while now, and with Kalydeco we have the longest experience, but we've got increasingly large volumes of data on Olcambi as well. And so we're able to take not only data on pulmonary exacerbations, but increasingly being able to take data on perhaps even the most important outcomes, which are things like survival rates, things like avoidance of lung transplants and things like that. And so that database continues to increase. We certainly utilize that with payers around the world. We're building that into our pharmacoeconomic arguments. Obviously it requires a bit of a leap of faith for some of our newer medicines, because it's asking them to extrapolate from Kalydeco and Olcambi to, right now, Simkevi, and eventually to the triple combinations, but I don't think it's too much of a leap of faith for them to translate the benefits of one CFTR modulator to other CFTR modulators. And Robbie,

this is Jeff. Just to give you some of the data on it, if you're not familiar with it, the results that we're seeing with Kalydeco and some of these long-term registry studies are things like 50% plus decreases in mortality, a 50% decrease in the slope of decline of lung function, a 70% decrease in transplantation. So these are not subtle kinds of results. These are true disease modifying kinds of results. And when those are plugged into these pharmacoeconomic models, they have real impact.

Thank

you. Thank you. And our next question comes from Harder Shing of Oppenheimer & Company. Your line is now open.

Great. Thank you for the question. I appreciate it. I just had a question on the SimDeko launch. It's going very well. And I think you've got a sort of a comp with Orkambi with pair uptake both in the United States and XUS. And my sense is that the pace of uptake for SimDeko, which had better data than Orkambi, has been broader and quicker in the United States and in Europe and the rest of the world. Maybe you can just talk to that a little bit, or maybe I'm mistaken. I would really appreciate it. Thank you.

Yes, I would say in the U.S., we have always managed to get very broad access to our CFDR modulators, starting with Kalydeco and through Orkambi and now to SimDeko and even for each of the individual label expansions that we've had over time. So I don't think there's really a very substantial time difference. Certainly, I think payers are getting more accustomed to these agents and to the disease. And I think that's helping. So I think we are seeing some acceleration here in the U.S., but it's not not huge. What I think you're seeing play out outside the U.S. actually is the is a couple of things. Firstly, you're seeing the benefit of our portfolio agreements. And this was exactly what they were designed to do. They were designed to reduce the time lag between regulatory approval and reimbursement approval so that patients and physicians could get access to our newest and best medicines as soon as they possibly can. And so that, I think, is what's leading to the acceleration in patients being able to access SimDeko or Simkevi outside the U.S. versus what we saw with Orkambi. And then separately in Germany, what you're seeing is actually the launch of Simkevi is going substantially better than the launch of Orkambi. I think the team has done a terrific job there. Certainly, the benefit risk profile of the agent helps. But certainly the team has done an excellent job executing there in Germany. And the Simkevi launch is tracking substantially above the Orkambi launch at the same time point. We're seeing initiations in naive patients. We're seeing initiations in patients who had discontinuations. And we're also seeing some switching as well. And so I think that's really an example of the team executing really well.

Great. Thank you.

Thank you. Operator, we'll take two more questions.

Thank you. And our next question comes from Brian Sporny of Bayard. Your line is now open.

Hey, good afternoon, guys. Thanks for fitting me in here. Jeff, I know we've kind of talked around this a little bit before, but I just want to kind of push you again on the consideration of 659 and 445 and which one you ultimately move forward with. I mean, in chronic therapy, whether it's NRTIs and HIV or TNF, alphas, we really don't get kind of the full picture of efficacy and safety until you have tens of thousands of patient years behind you. So I guess my question is, why not just submit both for approval and start to build that database and let patients and physicians ultimately decide which is the better triple combination when there's enough information out there to decide if there are subtle differences?

Yes, it's a good question, Brian. We have talked about it a little bit before. And what we're balancing is our level of confidence in the information versus the potential confusion of patients and physicians when we're trying to launch two drugs simultaneously into the same population. And I think the good news here, and this is what Raishma said before, is just how good the efficacy data that we're seeing is. And so, you know, so far what we're seeing is it's a hard choice because they're so similar. And if that turns out to be true and we look at the 24-week data and we're seeing this kind of superior efficacy, not only across the primary endpoints but across all the secondary endpoints, you know, I think we're going to have a very high level of confidence that whichever asset we choose is the best one is going to be very, very good for these patients. And then on the other side of the equation, as you know, as I know from being around for a while, trying to launch two drugs simultaneously into one patient population and explain that to doctors and patients can be very, very confusing. And once you do that, the ability to ultimately make a decision and withdraw one drug is virtually impossible. And so you're committed to, you know, long-term having two drugs on the market that look identical and in different patient populations. And I think that's probably not the best thing to do for patients. So at the end of the day, the decision is it's best for patients to make the decision on the best asset and bring it to them. And we feel like we have enough data now in hundreds of patients so that we're going to be confident of what we're going to

see. Okay. Fair enough. Thanks, Jeff.

Thank you. And our last question comes from Alan Carr of Neenam & Company. Your line is now open.

Hi. Thanks for taking my questions. I wonder if you can elaborate a bit more about what's different with VX121, what you're hoping to see there. And then with the pain program, maybe a little more detail around this too in terms of what you're looking for for these next generation compounds that you have in relation to VX150. Why are you waiting to move forward with that and what's involved in the decision process here? Thanks.

Sure thing. This is Rasha. I'm going to tackle the first question and I'm going to toss it over to Jeff to talk about pain. So as you know, our long-stated goal, and it remains today, is to bring therapies for all patients with CF. And in there, what we're trying to do is bring patients to carrier levels. That's really, really important. And it also ties back to a point that Stuart made. We want to bring the most convenient regimen that brings all patients to carrier levels. And so what we're doing is in our labs in San Diego is we have assays, and many of you have seen them, our HB e-cells, that we now have a plethora of data of how these assays translate to the phase two and phase three results. And so we pick the best of the best molecules that come out of our labs. And when they meet these thresholds, and I admit it, we have set an extremely high bar. But when there are molecules like VX121 that meet this high bar, we advance them to the clinic to meet this ultimate goal.

Jeff? Yeah, with respect to the pain question, it's a bit similar to what Rachel was talking about before in terms of a portfolio model. First thing I would say is we have, I think, convinced ourselves and others that we have very high efficacy molecules here with 150 and the approach we've taken. I think we've convinced ourselves, because we've been in a reasonable number of patients, that the VX150 is highly tolerable. And we're also very convinced that there's not addictive potential in these drugs. Those were the high things that we were trying to match for a new pain compound. Now we're in the process of picking the best drug, and that involves a lot of other things. So for example, is it formulatable, both IV and PO? What are any manufacturing issues, cost of goods issues, dosing, dose scheduling? So in pain, what we'd like to have is the best molecule that combines efficacy, tolerability, lack of addictive potential, but also the right dose, the right dosing regimen, the IV to PO transition in the hospital. This is a pretty high bar. But because we have a whole portfolio of molecules, we believe we will find that molecule. And that's the one that we really want to take through Phase III and commercialize.

You're not running any efficacy studies with the earlier stage NAV1.8 compounds? It's just Phase I?

Well, they're earlier, right? So we hope to enter the clinic this year with them. We again have learned a lot from our VX150 experience, and so we hope that as we get them through Phase I, we'll be able to pretty quickly go through Phase II programs and compare them to VX150 and make decisions about which are the best molecules to take forward. And that doesn't mean, by the way, that it's not VX150, but I just want to make it clear that we're taking a portfolio approach. All right. Thanks for taking my

questions.

Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would now like to turn the call back over to Michael Partridge for any closing remarks.

Thank you all for joining the call tonight. The Investor Relations team is here in the office if you have additional questions. Have a good evening.

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