Vertex Pharmaceuticals Incorporated

Good evening. Welcome to the Vertex First Quarter 2020 Financial Results Conference Call. This is Michael Partridge, Senior Vice President of Investor Relations for Vertex. Making prepared remarks on the call tonight, we have Dr. Reshma Kehwal-Rahmani, Vertex's CEO and President, Stuart R. Buckel, Chief Commercial Officer, and Charlie Wagner, Chief Financial Officer. 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 available 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, our pipeline, 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. Reshma Kehwal-Rahmani.

Thanks, Michael. It is an honor as Vertex's new CEO and President to welcome you to this conference call. The COVID-19 pandemic has been a significant challenge for people around the world. These are tough times. We know and we see that the lives of people in every country around the world have been disrupted. We grieve with those who have lost loved ones and we salute the heroic work being done by those on the front lines of fighting the pandemic. Acknowledging that this is a difficult time for everyone, I want to begin by telling you why we believe that despite the pandemic, the future of Vertex remains brighter than ever. In many ways, Vertex is a unique company. A company with a proven track record as a serial innovator with four approved CF medicines, including Trikafta, a medicine we believe can treat up to 90% of CF patients around the world with high efficacy. A company with a broad clinical and late preclinical stage pipeline using multiple modalities to treat and potentially cure serious diseases outside of CF. A company with current and future top and bottom line growth and a strong balance sheet. And finally, a company with an extraordinarily talented senior leadership team and a diverse, inclusive workforce. In short, exactly the kind of company I want to be a part of going forward. At my core, I am a physician scientist driven by a deep passion to advance science and medicine in the interest of patients. Since joining Vertex, I have witnessed the ingenuity and drive that have enabled this company to tackle unprecedented challenges in discovery, development, and commercialization of new medicines. For example, our rapid advancement of our triple combination program through research and development and the early approval in the U.S. Today, the majority of eligible patients in the U.S. are already on Trikafta. It's hard to believe, but true, that the original PDUFA date for Trikafta was March 20, 2020. Another example is pioneering the use of CRISPR gene editing with our partners at CRISPR Therapeutics to potentially cure diseases like sickle cell and beta-thalassemia. I am humbled to have the opportunity to follow Jeff in leading this unique company. Now on to our Q1 performance. Vertex's business, as demonstrated in our record first quarter financial results announced today, is stronger than ever. Our Q1 CF product revenues compared to last year are up 77% to $1.52 billion, driven by the highly successful launch of Trikafta in the U.S. and the growth of Orkambi and Simkevi outside the U.S. Our non-GAAP operating income rose 133% to $877 million. Our strategy is working and we continue to grow our revenues and earnings while also investing significantly in innovation. As we look to the future, we are confident in the continued growth of our CF franchise for several reasons. First, our CF medicines are changing the lives of the patient populations they serve, and by addressing the underlying cause of disease, they are an important part of patients' efforts to remain as healthy as possible. Second, our supply chain to manufacture and distribute our medicines is robust, and we remain confident in our ability to continue to supply our medicines uninterrupted to CF patients around the world for the long term. Finally, while the course of the pandemic is unpredictable, we retain a clear line of sight to securing approval and launching the triple combination regimen in more countries around the world and in younger age groups and sustaining our CF leadership well into the next decade. Our vision has been for Trikafta to be able to treat 90% of all CF patients, and that vision remains very much intact. Given the strong performance of our CF products in Q1, we are raising our revenue guidance for the year to a range of $5.3 to $5.6 billion. Stuart and Charlie will review the factors underlying our new guidance in a few moments. Let me now turn to our pipeline and discuss how we are taking specific actions to continue to progress our clinical programs while protecting patients and health care providers. As you will see, each program is somewhat unique and different. First, our regulatory and development teams have been working diligently to stay on track with our submissions to regulators and to adapt our ongoing clinical studies as needed to ensure that they can be completed successfully. We continue to progress in our ongoing CF trials. For example, our CF regulatory team completed the submission of the SNDA in the U.S. as well as a type 2 variation to the EMA in Europe for Kalydeco for infants with CF down to four months of age. Similarly, we have been able to progress our FSGS program. Our clinical team for our APO L1-mediated kidney diseases program have been able in the past few weeks to initiate our phase two study of VX147 in APO L1-mediated FSGS, and we now have 13 sites open. On the other hand, we have recently temporarily paused enrollment or treatment in some ongoing clinical studies, including the phase two study of VX814 in our AAT program. Every program and every clinical study is different, and we have analyzed each situation closely and have made decisions based on the need to keep patients safe and to respect the need to preserve the resources of the health care system for where they are needed most. In addition to our clinical progress, we are working to maintain momentum in our late-stage preclinical programs so that we can move forward when it is possible to do so into -in-human studies. Though we have reduced the on-site occupancy at our sites to protect employees and our facilities, our research labs have stayed open, and we have prioritized activities that are IND-enabling for our next medicines entering development. This includes our cell therapy program for type 1 diabetes, where we continue to have a goal of starting clinical development in patients in late 2020 or early 2021. We are also continuing to progress our business development strategy and investing in external innovation. This week, we announced a collaboration with Affinia Therapeutics. This collaboration supports the discovery and development of novel AAV capsids for in vivo delivery of genetic therapies in a number of disease areas. We are pleased to bring this capability into the cell and gene therapy toolbox that we are building. Finally, despite the pandemic, we continue to grow our senior leadership team with several important new hires and promotions in Q1. The first is Dr. Carmen Bozek, who was promoted to Chief Medical Officer earlier this month. Carmen now has responsibility for clinical development, medical affairs, drug safety, global clinical operations, biometrics, and other related functions. Carmen has extensive experience in clinical drug development and joined Vertex in 2019 from Biogen, where she oversaw the development and regulatory approval of nine important medicines, including Tecfidera and Spinraza. The second is Dr. Bassiano Sanna, who joined Vertex when we acquired Sema in 2019, where he was CEO. We have expanded Bassiano's role, and he is Chief of Cell and Genetic Therapies at Vertex. In this new role, he now leads all of our gene editing, gene therapy, and cell therapy programs, as well as related technologies for sickle cell disease, beta thalassemia, DMD, type 1 diabetes, and others. Bassiano has extensive experience and expertise in cell and genetic therapies from prior roles at Magenta and Novartis, and I am confident that his skill set will enable us to build capabilities at Vertex that are second to none. I am absolutely delighted to have Carmen and Bassiano on the team. In summary, this extraordinary moment in time in which we find ourselves right now will pass. We will all get through this together. Despite these unusual circumstances, Vertex is well positioned to continue to serve our CF patients, grow revenues and earnings, and advance our pipeline of transformative medicines in disease areas beyond CF. Let me turn it over to Stuart.

Thanks Reshma. I am pleased to review with you this evening our continued strong commercial performance in the first quarter of 2020. I am very proud of our commercial supply, market access, patient support, marketing, and field teams who were fully prepared for the early approval of Trikafta in the US, and we also want to recognize the remarkable job that CF centers and healthcare professionals have done to respond to both the approval and the high level of patient interest in starting the medicine. Our teams have executed what is by every measure a very rapid and successful US launch of Trikafta for CF patients 12 years and older with at least one F508 del mutation. Approved in October 2019, five months ahead of its Purdue for date, Trikafta has been widely adopted. We have seen strong demand across all groups of patients eligible for Trikafta, and it is now being taken by the majority of the 18,000 eligible patients in the US. Total CF product revenues for Q1 2020 were $1.52 billion, and in its first full quarter Trikafta accounted for $895 million of those revenues. This was due in large part to more rapid than expected adoption of Trikafta in all eligible patient groups in the US. Geographically for our CF product portfolio, we recorded approximately $1.19 billion in revenues in the US and $328 million outside the US. Growth outside the US was driven by strong patient uptake of Orkambi and Simkevi following the completion of multiple reimbursement agreements in late 2019. In most countries outside the US where our medicines are reimbursed, the majority of eligible patients have now initiated treatment. Based on our strong Q1 revenue performance, we have raised our revenue guidance for the year, as Reshma mentioned. The new guidance and range takes into account both the rapid uptake of Trikafta we have seen since October 2019, as well as additional dynamics that we either saw during Q1 or that we anticipate as we move through the year. First, we did see some benefit in Q1 from early prescription refills by patients both in the US and outside the US, as well as advanced buying from some government payers outside the US. Second, while there are still new patients starting Trikafta treatment, the pace of initiation has slowed. A high percentage of currently eligible patients are already on Trikafta in the US and so we have reached the flatter part of the uptake curve. Additionally, COVID-19 has resulted in some CF centers limiting their non-emergency interactions and this could impact the rate of future initiations. Third, given that we have only just completed the first full quarter of the Trikafta launch, we know that we have yet to see the full impact of persistence and compliance rates on the ongoing utilization of this medicine. As with all of our medicines, the revenue impact of persistence and compliance does not become fully reflected until several quarters after launch. Looking ahead, the focus of our efforts to serve patients is twofold. First, ensuring that we can continue meet the strong demand for our medicines with uninterrupted supply. Our team has closely analyzed our existing supply chain and has worked during the emergence of the pandemic to ensure that there was no change in our ability to provide medicines to patients. Our manufacturing facilities have remained fully operational and we have continued to produce new supply of our CF medicines. We are confident that this will remain the case moving forward. Second, we are progressing with urgency to expand the number of patients eligible for and able to access our CF medicines. We anticipate several important milestones in the coming 12 months which are expected to drive access to our CF product portfolio for even more patients. The MAA for the Alexa-Kafta triple combination is filed and under review with the European Medicines Agency. Approval by EMA would significantly increase the number of patients eligible for the triple combination and enable us to begin reimbursement discussions across many European countries as well as provide rapid access in some countries where we have a portfolio agreement. We have also now submitted the Alexa-Kafta triple combination for approval in Switzerland and Australia. Also in Switzerland we have just entered a portfolio reimbursement agreement for both Simdico and or Camby and we look forward to treating more CF patients there. The Swiss agreement is also designed to include the triple combination in the future and with label expansion efforts we are on track to submit the SNDA in the US for Trikafta for the treatment of CF patients aged 6 to 11 with at least one F508 del mutation in the second half of 2020. We are pleased with the rate of uptake that we have seen for Trikafta in the US and for all Camby and Simkevi outside the US. We continue to see the potential to reach 90% of CF patients worldwide with Trikafta and we believe that this will continue to drive revenue growth for Vertex in the future. I will now turn the call over to Charlie.

Thanks Stuart. I will provide additional comments this evening regarding our Q1 2020 financial results and we'll also discuss our revised 2020 financial guidance. All of the results and guidance I will discuss are non-GAAP. First quarter total CF product revenues were 1.52 billion, a 77% increase compared to 2019. Trikafta sales in the first full quarter after launch were 895 million and remarkably Trikafta now generates more revenue than all of our other CF medicines combined. The growth of Trikafta reflects rapid uptake among newly eligible patients as well as among patients switching from other medicines. Importantly, our Camby and Simkevi continue to grow outside the US based on rapid uptake in key markets where we achieved reimbursement agreements in late 2019. In the first quarter of 2020 CF product revenues were 328 million outside the US, an increase of 51% over the prior year. Our first quarter 2020 combined R&D and SG&A expenses were 477 million compared to 388 million for the first quarter of 2019. Overall, the combination of significant growth in revenues and more moderate growth in spending in the first quarter resulted in an operating margin of 58% and operating income of 877 million, an increase of 133% compared to the first quarter of 2019. Net income for the first quarter of 2020 was 674 million compared to 296 million in the first quarter of 2019. Now I'll review 2020 guidance. Today we are revising upward our 2020 financial guidance for total CF product revenues to a range of 5.3 to 5.6 billion, which at the midpoint reflects 36% growth over 2019. This range reflects both the very strong Tri-CAPTA uptake that Stuart described in his prepared remarks as well as the moderating factors he described for the remainder of 2020. We are leaving our OPEX and tax guidance unchanged. Now turning to capital allocation. We finished Q1 2020 with 4.2 billion in cash and our top priority for capital allocation remains to reinvest in both internal and external innovation to create future medicines and our thinking and strategy in business development have not changed. We are focused on programs and technologies that can accelerate the creation of transformational medicines for the diseases in which we are interested. For example, this week we announced a new collaboration with Affinia Therapeutics. This collaboration gives us access to Affinia's innovative and novel AAV capsids and allows us to leverage their AAV expertise to advance the multiple gene editing and genetic therapy programs in development at Vertex. Finally, as we look ahead through 2020, we expect our strong cash flow to continue to support additional investments to fuel our long-term growth. Now back to Reshma for a few concluding remarks.

In closing, it's obviously a difficult time for people and for businesses around the world. You have heard tonight that Vertex is operating according to a set of clear principles and that we are committed to protecting the health and safety of our people and meeting the needs of the patients we serve. I am proud of the many Vertex employees who are going above and beyond adapting to new circumstances and continuing to advance our R&D programs and helping our business outperform expectations. I am also proud of our many recently announced philanthropic programs to help support the people and communities in which we live and work. The Vertex Foundation has made a number of donations, including to the Boston Resiliency Fund and to organizations around the globe providing health supplies to frontline workers and to support vulnerable populations through food, care, and education. I look forward to sharing further news of our progress in the months ahead. Thank you and we'll now open the call to questions.

Thank you. To ask a question you will need to press star one on your telephone. To withdraw your question press the pound key. And our first question comes from Phil Nadu with Cowan & Company. Your line is open.

Gaffney, thanks for taking my question and congrats on all the progress. Just a two-part question for me. First, you talked about the supply chain and manufacturing continuing at pace. Are there any pinch points that you can identify in your distribution networks that could hinder our patients access to your therapies? Anything from not being able to get their deliveries at home to lack of ability to have telemedicine reauthorizations for prescriptions that have already been written? That's part one. And then second question is just on the pipeline. I think we're all focused on the AAT program. Do you have a sense when you'll be able to provide guidance on when the data from the phase two study could be available? Thank you.

Phil, it's Stuart. I'll take the first question on supply chain and patients being able to get our medicines and then Reshma will cover AAT. So in terms of the supply chain and manufacturing, we don't see any pinch points really that are not anything that can be overcome. So far, as I mentioned in our prepared remarks, our manufacturing facilities have made remain fully operational. Our ability to supply medicines around the world has continued. Clearly with things like commercial flights being reduced, there have been some challenges, but it's really delays of a number of days and things like that. And certainly nothing that is disrupting patients ability to get their medicines when they need them. And so we continue to feel very confident that we're going to be able to continue to supply both patients who are currently on our medicines and be able to supply launches if we get subsequent approvals.

And

with that, I'll hand it over to Reshma to handle the AAT question.

Phil, this is Reshma. Just to remind everyone, the study that you're talking about is the VX814 study in the AATD disease area. This is a phase two dose ranging study, proof of concept study. It's about 50 people, three doses plus placebo. It's 28 days of treatment with another one month of follow-up. So that's the study we're talking about. And you're right. We had temporarily paused screening and enrollment. And where we are today is that we are in the process of re-initiating screening and enrollment on a site by site, country by country, region by region basis in those areas that are opening and are now able to resume clinical trial activity. With regard to when will the results be available, so this now depends on the dynamics around enrollment. And we'll only know that when we region by region, country by country. We are in the process of re-initiating screening enrollment, but we need a little bit more time to determine what those enrollment dynamics will be. We will know what that is. It's just going to take a little bit of time. And when we know, I will certainly update you. That day is not today.

That's very helpful. Thanks for taking my questions.

Thank you. Our next question comes from Michael Yee with Jeffrey. Your line is open.

Thanks. And congrats on the progress as well. Great quarter. I guess two questions. Forward looking, you have a European approval potentially coming. Can you just talk about how the dynamics of your existing portfolio deals were

reminding which countries have that and the pace and adoption of some of your recent other deals for the doublets could help accelerate the timing of uptake and launch in some of those other countries for Trikafta? Maybe just talk about how you think about that versus prior history of your other CF drugs in Europe this year. And then the second question relates going back to AAT. Appreciate the comments. I see that you didn't mention VF-864. Was there anything to say about that? Was that study completed? Maybe just make a comment about that. I thought that was finishing phase one. Thanks so much.

Okay, Mike. It's Stuart here. Yeah, I'll take the question on reimbursement, Mike. Firstly, thanks for the congratulations on the quarter. We feel thrilled with how well the business has performed in this first quarter of 2020. In terms of the EU approval for the triple combination and reimbursement, as you know, we filed and the file was accepted in October of last year and is currently under review. I really think of the access to patients outside of the US really being in kind of three categories. There's obviously a country like Germany which provides immediate access while you then negotiate the price that they will pay you on a prospective basis. Then as you say, there's a number of countries where we have portfolio reimbursement agreements. That's countries like Ireland, Denmark. Also, we recently concluded a similar agreement in Switzerland. All the portfolio agreements are all slightly different. Some of them include just the approved patient populations. Some of them like in Ireland, for instance, also include the FMF population as well. But we would imagine that soon after getting regulatory approval, we would be working with those countries to get hopefully access very, very quickly after the regulatory approval. Then there's the remaining countries where we don't have portfolio agreements where the regulatory approval really is the beginning of that reimbursement process. I do hope that our reimbursement processes can move more quickly. I think there are some reasons to be optimistic about that, Mike, not least because we have reimbursement agreements in the vast majority of countries now. That sets two things. It sets a price in the marketplace and it also sets a profile of benefit risk in the marketplace. As you know, we feel very good about the benefit risk profile of the triple combination compared to even our own transformative medicines. I am hopeful that that will provide a tailwind. Obviously, from a payer perspective, label-dependent, the triple combination could increase the number of eligible patients, which would be an increase in budget impact. I'm sure that's something we're going to have to negotiate with them. That's how we see the reimbursement landscape playing out subsequent to regulatory approval. On AAT, I'll throw it over to Reshma.

Mike, thanks for the question on VX864. VX814 is the one we just went through where we had temporarily paused screening and further enrollment. That's the one where we're in the of re-initiating both screening and enrollment. That's the one that's already in phase two dose ranging. VX864 is the next molecule in our AATD program. That one has completed its phase one study. We've had a chance to look at the safety and the PK. That one is going to be ready to go into its phase two proof of concept dose ranging study. I anticipate that that's going to happen in this year, the second half of this year.

Okay, thanks for that. Appreciate it.

Thank you. Our next question comes from Salveen Reichter with Goldman Sachs. Your line is open.

Good afternoon and congratulations on the launch as well. When you talked about guidance, you mentioned a couple of buckets here. Would it be possible to quantify how to think about the prescription refills and the buying patterns from other countries that were pulled forward? Secondly, with persistence and patient compliance, where do you see that level typically level off based on historically what's been seen with this franchise? Thirdly, I guess, on the pipeline, should we expect 147 data in .0.1 mediated kidney disease to be on track for the year? Maybe you could just frame for us what the clinical bar is here. Thank you.

Yeah, Salveen, let me ask Charlie to tackle the question around guidance. Then I'll come back and talk to you about 147. Charlie?

Yeah, thanks, Salveen. As you noted, we've increased guidance for the year to the range of 5.3 to 5.6. Really, the primary driver behind that is the success of launch and the significant patient uptake. You see that reflected in Q1. We're always mindful that folks not look at a single quarter of performance and extrapolate from there. I think it's important, as Stuart outlined in the call, we did see some patients refilling prescriptions early in the first quarter as well as some countries OUS accelerating their purchases, which resulted in a little bit earlier revenue recognition for us. We're not going to dollarize specifically, but I think you can conclude since we mentioned it was significant enough that we thought it was worth calling out. Then Stuart talked about the fact where we are in terms of the ramp up on patients. There are still some patients to get on drug, of course, but the rate of new initiations is slowing and could see some delays in future quarters as a result of changes in policies at CF centers in response to COVID. Then lastly, around persistence and compliance, I think the way to think about it is when patients first initiate on a medicine, their persistence and compliance rates are essentially at 100 percent, and that number only goes down from there over subsequent quarters until it levels out at more of a steady state. We've talked about in the past persistence and compliance, the combination of those two factors, even if you're at 90 plus percent on both, you do the math on that. You can see that we have to come down from 100 percent. Those will have an increasing impact over the balance of the second half of the year, and part of what we consider is we put the guidance together. Importantly, the midpoint of the guidance implies 36 percent growth year over year. It's an acceleration over last year's 32 percent. We are shaping up for another great year, and it really highlights just how differentiated this business is, particularly at this very uncertain time.

Rishma, with regard to your question around 147, just to remind everyone, this is our program in APOL1-mediated FSGS. FSGS is a APOL1-mediated FSGS, I should say, is a homogeneous kidney disease that is characterized by heavy pertinuria. Unfortunately for these patients, it's a relentless course of a decline in kidney function with one of only two outcomes. One is going on to dialysis or transplantation, and the other one, unfortunately, is death. Clearly a disease with high unmet need. This program, the key endpoint that we're looking for in terms of efficacy is pertinuria, and we are looking for a decrease in pertinuria. The renal community regulators in the U.S., the FDA, and academics, and those involved in research in kidney disease have had many conferences around the topic of endpoints. I think it would be very fair to say that pertinuria, which is the endpoint we are measuring in this phase two proof of concept study that I just described that we are now up and running in, that would be the endpoint of importance in phase three and in terms of patients. That's what we are looking for, and that's what we're monitoring for.

Thank you.

Thank you. Our next question comes from Jeff Meacham with Bank of America. Your line is open.

Hey guys, thanks for the question, and a big congrats on the quarter. Just had a couple, Stuart, when I look at the guidance, the run rate is higher than your guidance. Is the delta primarily from the expected decline from Simnico and Orkame just switching to Trikafta, or is it that you guys are being conservative? And then beyond the 10% of CF patients that you can't address today, are there any updates to the commercial efforts to expand the Trikafta CF patient base, for example, in Latin America, South Africa, or other regions beyond the ones that you're expected to go in? And just for Reshma, real quick on the pipeline, you guys have been pretty active on the BD front and have a ton of different assets and indications, but the question is, does the acceleration in the uptake can see a change or urgency or the size of future BD deals? Thank you.

Sure. Jeff, let me ask Stuart to go first and talk a little bit about the launch and some launch dynamics. I'll just make a quick comment. We have seen uptake of Trikafta in the US in all eligible populations, and we've just been so pleased to be able to serve all patients who are eligible. Stuart?

Yeah, Jeff, as Reshma says, the uptake of Trikafta has been very strong across all eligible patients, and that includes transitioning from our existing medicines where the indications are overlapping. So Kalydeco, Orkambi, and Simnico patients have been moving over from those medicines to Trikafta.

In

our results, that's obviously balanced by the growth we've seen outside the US with Orkambi and Simkevi, as it's called, outside of the US following the new reimbursement agreement. So we've really got that kind of, those two different dynamics going on, some cannibalization in the US and continued growth outside of the US. As Charlie referenced earlier, we did see in the first quarter some early refills by patients and also some advanced purchasing by some governments outside the US, presumably in response to the early days of the pandemic. That essentially is something that we would expect to sort of even out over the course of this year. In terms of the dynamics which we are anticipating could potentially play out for the balance of the year, as Charlie said, the biggest single factor really is going to be persistence and compliance. As he said, a patient, when they initiate therapy, they're 100% persistent and compliant, and as we know, those numbers are only going to drift downwards from there. Now, we expect them to be high with Trikafta because of the benefit risk profile, but those will have an impact on our future revenues, and that is incorporated as is a slowing of initiations into our revised guidance. As Charlie said, at $5.3 to $5.6 billion, that still represents at the midpoint 36% growth over 2019, which is actually an acceleration of the revenues we delivered in 2019. So we're pleased to be able to increase our guidance at this uncertain time. And then on the kind of capital allocation and BD question, I think I'll hand that one over to Ashley.

Sure. So with regard to our strategy around BD, the truth of the matter is that the strategy is exactly the same and nothing has changed. And for those of you who haven't heard me say it or haven't heard us say it, let me just say it very simply. We have three pillars in our BD strategy. The first is we look at anything that moves in CF regardless of modality, regardless of stage of development. The second is we look for early stage assets that fit into our corporate and R&D strategy and that fit into our sandbox. And I say early stage because up until recently, the assets in later stages of development have been fully priced if not overpriced, and our ability to bring value is in our research development regulatory and commercialization engine. And the third is to add tools to our toolbox. And you've seen us be very active in this area, including today's announcement with Affinia. We've done deals in small molecules. We've done deals with AAV manufacturing. We've dealt deals with CRISPR as well as in cell and other genetic therapies. And so those three pillars are going to stay exactly the same. Maybe what's changed for us is that we're very active in our strategy. And the third is where we find ourselves in terms of time is what we bring to the table is probably even stronger today than at any previous time. What I mean by that is we know exactly what we want. As I described, our strategy is really very clear and it's been there for some time. So we're very clear on what we are looking for. The second is our capacity to do deals and our ability to consummate deals is, I think, very strong. And you see that we were able to do the Affinia deal despite this COVID situation that is upon us. And the third is our balance sheet is strong and growing. And I think that is an important element in this moment in time.

Thank you. And we have a question from Paul Matisse with Stiefel. Your line is open.

Great. Thanks so much for taking my question. I wanted to ask one commercial question and one pipeline question. On the TriCAPTA launch, I was wondering if you could comment on physician-patient dynamic in the pandemic as it relates to prescribing. Do physicians need to see their patients in person to prescribe this medicine? And how might that vary in the US and Europe? And then second, on the AAT program, I was wondering if you've had any evolving thought on what might constitute a great outcome in that study? What AAT-level threshold do you think is kind of a home run and almost unequivocal in its implications of clinical benefit versus what level range might be a little bit harder to kind of extrapolate as we think about future outcomes? Thanks so much.

Hey, Paul. It's Stuart here. On the physician-patient dynamic, for sure that physician-patient dynamic has been disrupted by the pandemic for the reasons that you can imagine. Many of these physicians are actually on the front line, certainly the adult pulmonary physicians of dealing with the pandemic. And as you well know, CF patients do fall into that category of patients who would potentially be vulnerable were they to become infected. And so it certainly has disrupted the dynamic. What we do know though is that physicians and patients have managed to maintain very, very active dialogue, many of them moving to more remote digital ways of interacting. And those interaction levels are very high, although obviously -to-face interactions have been reduced in many places for all but emergency situations. That doesn't seem to have interrupted initiations too much in the first quarter, given the strength that we saw in the first quarter. But it is something that we are certainly conscious of and are aware may have an impact on the rate of future initiations. And it's one of the factors we've tried to take into account when establishing our revised guidance range. And AAT, I'll hand over to Reshma.

Sure. You know, what I can tell you is what are we looking for? How will we know that we've had success with our proof of concept study in AAT? So there are a few important parameters that we're monitoring as we think about the phase two dose ranging study. The first is safety. Obviously this is the first use of the correctors of the AAT protein in a population of people who have this disease. So safety is critical and it's right up there. The second is PK and exposure. We're looking to ensure that we have the right exposure, that we have the right dosing interval, and that we are seeing the kinds of impact that we are projecting based on our first human study. And then lastly, and probably what you are alluding to is the AAT levels, and that's really important. What I'm looking for here with our studies is that the levels go up, not only in terms of antigenic levels, but in terms of the functional AAT levels. And the reason I say that is I'm looking for the levels to go up and I'm not really focused on any particular number is this. You know when we think about drug development here at Vertex, we really divided into cracking the biology and then pouring on the chemistry. In this disease area, unlike in CF, the stage that we're really at and the part that's very, very difficult is cracking the biology. And our ability to look at safety, exposure, and note that the levels of both antigenic and functional are going up tells us that we've cracked the biology. And then it's a matter of pouring on the chemistry and that is amongst the two the easier, and I certainly don't mean to imply that the chemistry is easier, but it is the easier part of that equation.

Thanks very much.

Thank you. Our next question comes from Celcia Young with Cantor Fitzgerald. Your line is open.

Hey guys, thanks for taking my question or two and congrats on a very good quarter. One, I guess just philosophically, you know with what's going on with COVID, I mean do you prioritize kind of the near-term pipeline the same way? I mean some of this ties into what we've been talking about with AAT and getting that trial back up and running versus an SGS. Certainly people with lung may be a little bit more prone to these challenges. And then my second question just is that I want to talk a little bit about the FUNA deal today and what you think the adds and your capacity in DMD and CS.

Thanks. I think the you cut out just a little bit, but I think that the first question was around COVID and clinical trials. Well, just I wanted to understand

like if this changes the prioritization of your pipeline itself, like in light of what disruption you have with your clinical choice studies, some of them.

Sure, sure. So with regard to the COVID-19 situation and our clinical trials, our priorities remain very much the same. Our trials and CF are progressing and we've been able to continue that quite well. We've moved to telephonic visits. We've moved more to remote monitoring and such, but obviously the safety of our patients is our top priority. We're making sure that the integrity of our trials remain, but we have been able to continue our work in CF quite well. And the remainder of our pipeline outside of CF, as I said, the AATD program, we have already re-initiated our activities to have screening and enrollment restart in the 814 program. The FSGS program is actually exactly on time with the sites getting started up in April and huge credit. I am so proud of our Vertex team that have just stepped up and gone above and beyond to get this work done. And if you think about clinical trials as a whole, as I said in my prepared remarks, you know, each disease area, each study is quite different. It depends on the phase of the study. It depends on whether there is established benefit risk, and it even depends on some more nuanced factors around whether the study sites are affiliated, i.e. in the hospital itself, or separate institutions, separate buildings. Of course, the disease area matters because physicians in certain subspecialties are more pulled into the pandemic than in others. With regard to Afinia, what this really is is another tool in our toolbox, and you have seen us methodically, carefully, and very deliberately go around and assemble what I think is really one of the best, if not the best, toolboxes in the industry. This particular strategic partnership has to do with research activities to develop engineer capsids that have greater affinity and tropism for certain tissues like muscle for DMD 1, as well as for some of our other disease areas of interest. And given the presence and our great interest in genetic therapies, this is a key tool in our toolbox.

Thank you. And our next question comes from Evan Ziegerman with Credit Suisse. The line is open.

Hi, guys. Thank you for taking my question. Congrats on the progress. So looking towards potential reimbursement negotiations outside of the United States for Tri-CAPTA assuming approval, do you see any risk of access delays or issues if government budgets are impacted due to the economic decline as a result of the ongoing pandemic? And how flexible would you be to open up access for patients given these potential economic issues?

Thanks for the question, Evan. Clearly, the COVID-19 pandemic and government's responses around the world has put a significant strain on finances, and none more so than in their various health services. And we'll have to see how that situation plays out. Obviously, we're not actually in those reimbursement negotiations in the vast majority of countries yet because those really only commence at the point of regulatory approval. So we'll really have to see what approach they take at that point in time. As Reshma said, though, in her prepared remarks, this is a situation that will pass over time, and we're really going to be negotiating reimbursement agreements which are hopefully going to be long-lasting because this is a terrific medicine, one that we feel very strongly has an incredible benefit-risk profile, and therefore we believe deserves to be rewarded with a premium price that is reflective of the value that it brings to patients. So there's really not much more we can say about those discussions because we really haven't got into them with the various government authorities involved.

All right, thank you for

that. Operator Thank you. Our next question comes from Robin Kornowska with SunTrust. Your line is open.

Robin Kornowska Hi, guys. Thanks for taking my question. And I think you've done a great job sort of outlining a lot of the questions that we have. So great job in the call, great job in the quarter. Just to follow up a couple things. So Reshma, I know you said that your business development hasn't really changed as far as strategy, but you did highlight that you have more capacity to do deals. You have more cash and your balance sheet is strong. So what does that mean? Does that mean we could see bigger deals over time? And the second question is, you know, people believe, you know, Vertex is very protected given so many of your patients are government reimbursed. What are you seeing in the United States as far as any signals that there could be a disruption to reimbursement of your drug in the coming quarters as COVID moves forward and people may have challenges with obtaining employment? Thank you.

Reshma Naira Yeah. Thanks for those questions, Robin. With regard to BD, what can you expect from us? You can expect us to continue to be disciplined. Our strategy is really clear to us and we're very, very disciplined about executing on the strategy as I laid it out. You're right about the fact that our balance sheet is strong and getting stronger by the day and you've seen us transact on a number of deals, be it partnerships in the research arena or as you saw us do towards the tail end of 2019, two acquisitions, one with Exxonix and one with Sema. And let me just tell you, I am absolutely delighted with both of those acquisitions and very excited about the integration that has happened and the more we get into it, you know, the sweeter it gets. And so those have been very, very positive for us. The capacity that we've built here is increased to do deals. I'm very pleased with how the integrations have gone and Charlie's been running those. So our ability to do acquisitions and integrate is also advanced. And the fact that we have done this, have been recognized to be able to do it, I think is something that will do well by us as we go forward. So can you expect us to do more deals? Yes. Will they be greater in number? We're going to have to let some time pass, but that wouldn't surprise me. Are they going to be deals that are huge? Are we going to buy revenues? No, though that's not part of our strategy. And that's not what you're going to see us do.

And Robin, on the question of coverage here in the US, actually the majority of our pay mix is actually commercial rather than government. During the course of the quarter, we really haven't seen any change in our pay mix. Obviously, that's something that we are monitoring closely, sensitive to the increase in unemployment that there has been. And those uncertainties were one of the reasons why we widened our guidance range whilst at the same time increasing our guidance. We also widened our guidance range because there are a number of uncertainties that we are going to have to see how they play out over time. But certainly in the first quarter, we didn't see any change in our pay mix and or signals of disruptions to coverage for patients.

Thank you. Our next question comes from Mohit Bantao with Citi. Your line is open.

Great. Thanks for taking my question. Congrats on the progress. Just moving a little bit on the pipeline side, regarding your diabetes program, it seems like your approach uses a fully differentiated beta cell while there are other approaches including progenitor cells. Could you please help us understand how these could ultimately impact the end result and why one could be better than the other approach here? Thank you.

Mohit, I think you're asking about how our approach to type 1 diabetes and the cell program may be different from other approaches. Let me just tell you a little bit about our approach and then I can do a little bit of a compare and contrast for you. Our program that came into us with our acquisition of SEMA is really a program that is based on 20 plus years of work done by Doug Melton who is the preeminent beta cell physician scientist in the world. What SEMA was successful in doing and the reason that we were so excited about the acquisition is they have found a process and a methodology to not only develop, grow, and in an industrial manner make pancreatic islet cells. These islet cells are fully differentiated and they have also come up with a technology that allows for a device in which these cells can be placed that can be put into patients with type 1 diabetes and with the device the big idea would be no immunosuppression would be needed. Obviously immunosuppression is going to be required for the naked cells. I would say that a few differences compared to other approaches but the highlights of the following. The approach that we are pursuing pertains to fully differentiated islet cells and two that we have an approach here that has been tested in large animal models with the device that has shown itself to be a device that can be placed over time without the troubles that many others have seen.

Sorry, very helpful. Thank you.

Thank you and we have a question from Corey Kosmanoff with JP Morgan. Your line is open.

Hey, good afternoon guys. Thanks for taking my question. Just have one left for you on the topic of reimbursement. I wanted to ask about the ICER report on the cost effectiveness of Trikafta that was published earlier this week. We'd just love to get your thoughts on the current pricing versus their much lower recommendation and why do you think there's such a big discrepancy do you foresee or think is a risk of any pushback from payers as a result of this? Thanks.

Corey, thanks for the question. As you know, we have and others have some significant methodological concerns with ICER and the way it approaches an assessment of a medicine's value, both the methods, some of the rather arbitrary thresholds that are chosen and really its inability to fully capture the benefits of transformative medicines with lifelong benefits like ours. So we do have concerns with the methodologies and thresholds and I won't go into them in minute detail. In terms of the statistics, the most important statistic to me is that 99% plus of the patients who are eligible for Trikafta are covered by either government or commercial plans which are reimbursing the medicine and to me that's the most important statistic because it demonstrates that payers recognize the value of Trikafta and want to provide immediate access to it consistent with our label and if they hadn't done that we wouldn't have been able to deliver the great quarter that we've had and so we feel that's a much better mark of whether payers recognize the value of Trikafta and we are certainly going to be doing everything we can to ensure that the ICER report doesn't lead them to restricting coverage which I think would be a tragic day for CF patients. Okay, very helpful.

Thank you. If I could just add a comment, Corey, this is Reshma. Trikafta is a medicine with absolutely unprecedented efficacy. The benefit risk is 100% clear. It is something that is recognized by physicians and patients around the globe. I do not expect any change in pricing or our approach in the U.S. or outside the U.S. You know that we have a long tradition of pricing our drugs for the value that they bring and there is just no doubt about the value that this particular medicine Trikafta brings to patients.

Very clear and helpful. Thanks a lot.

Thank you. We have a question from Brian Abrams with RBC Capital Markets. Your line is open.

Hey guys, thanks so much for taking my question and congratulations on the strong quarter. A commercial question and a pipeline question. On the commercial side, any surprises in gross to net, any additional inventory build given the rapidity of Trikafta uptake and might you expect any benefits on persistence and compliance due to COVID-19 such that those may drift down less than would have been expected. On the pipeline side, with the PKPD characterized for 864, just curious if there is any additional insights you have on similarities and differences versus 814. Thanks.

Why don't I ask Stewart to comment on persistence and compliance and then I will ask Charlie to comment on the rest of your question. Stewart?

Yeah, Brian. On persistence and compliance, as we said in our prepared remarks, we did see patients refill early in the quarter, both here in the US and ex-US. Mathematically, that is an increase in compliance. However, we do expect that that is going to kind of play out over the course of the year and I don't expect that COVID-19 will really have a substantial impact on persistence and compliance of Trikafta. I think the thing that is going to drive the levels of persistence and compliance are the exceptional benefit risk profile that Raishma just mentioned. And then on the gross to net and inventory changes, I will hand that over to Charlie.

Yeah, Brian. On gross to net, nothing noteworthy in the quarter. The gross to net moves around a few invoices that come in, but nothing noteworthy in the quarter here. And then around inventory, I guess I would distinguish, you recall that in the fourth quarter we talked about a launch-related inventory build that was more of a channel inventory build and what we are talking about here as we are giving color on the first quarter results and on guidance is more of a patient-driven or government-driven inventory build, which is different from the channel build that we talked about in the fourth quarter. There is no incremental color in the first quarter on the channel inventory that has not changed significantly and is not part of the color that we are giving on the first quarter.

Operator, now that we are past 6 p.m., we have time for just one more question.

We have a question from Matthew Harrison with Morgan Stanley. Your line is open.

Great. Good evening. Thanks for fitting me. Stuart, I was just hoping maybe you could help us think about phasing of revenues broadly as we think about pushing into the younger patients as well as Europe. Just maybe remind us about the sizes of those populations relative to the population that you have currently penetrated with Trikafta. Thanks.

Yes, thanks for the question. Obviously, from a long-term perspective, we believe Trikafta has the potential to treat up to 90% of CF patients because of the levels of efficacy we are able to deliver. Clearly, to do that, we need to do a couple of things. One, we need to get it approved outside of the U.S. for the 12-plus population. Then obviously, we need to increase the label there to expand it down into lower-age populations. We have submitted in the back end of last year in Europe for Trikafta or the triple combination, I should say, for the 12-plus population. No, the label we are going to get there yet, so it's really impossible to tell you exactly how big the size of the eligible patient population is there. We have more recently also submitted in Australia and Switzerland, again, for 12-plus. In terms of the label expansions, in terms of taking the age range down, the 6 to 11 Trikafta SNDA here in the U.S., we anticipate submitting in the second half of this year. Really, the primary drivers of our guidance and the increase in our guidance are really Trikafta in the 12-plus population here in the U.S. and the growth that we've seen in Orkambi and Simkevi outside the U.S. as a result largely of the reimbursement agreements that we put in place in the second half of 2019.

Okay, operator, thanks, everybody, for joining the call tonight. The Investor Relations team is either in the office or remote, and we'll be following up with analysts who didn't get a chance to ask a question as well as any other questions you may have tonight. Really appreciate you dialing in

and stay safe. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect, everyone. Have a great day.