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Executives

Michael Partridge - IR

Jeffrey Leiden - CEO

Peter Mueller - Head, Research and Development and CSO

Stuart Arbuckle - CCO

Ian Smith - CFO

Bob Kauffman - CMO

Analysts

Geoffrey Porges - Bernstein

Geoff Meacham - JPMorgan

Mark Schoenebaum - ISI group

Rachel McMinn - Bank of America Merrill Lynch

Michael Yee - RBC Capital Markets

Lisa Bayko - JMP Securities

Yaron Werber - Citi

Robyn Karnauskas - Deutsche Bank

Terence Flynn - Goldman Sachs

Matt Roden - UBS

Christine Huang - Barclays

Sara Slifka - Morgan Stanley

Brian Abrahams - Wells Fargo

Sara Slifka - Morgan Stanley

Howard Liang - Leerink Swann

Katherine Xu - William Blair

Jason Kolbert - Maxim Group

Phil Nadeau - Cowen and Company

Vertex Pharmaceuticals Incorporated (VRTX) Q4 2012 Earnings Call January 29, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Vertex Pharmaceuticals Incorporated Fourth Quarter 2012 Earnings and Financial Results Conference Call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this call may be recorded.

I would now like introduce your host for today's conference, Mr. Michael Partridge. You may begin.

Michael Partridge

Thank you operator and good evening everyone. Joining me on tonight’s call are Dr. Jeff Leiden, Chairman and CEO, Dr. Peter Mueller, Head of Research and Development and Chief Scientific Officer, Stuart Arbuckle, Chief Commercial Officer and Ian Smith, Chief Financial Officer.

Our agenda tonight is as follows: Jeff will begin with Vertex’s strategy and key business priorities heading into 2013. After that, Peter will update our progress with our clinical development programs. Then Stuart will discuss INCIVEK and hepatitis C market trends and provide some commentary on the outlook for KALYDECO in the U.S. and Europe. And to close, Ian will review the fourth quarter and full 2012 results and our 2013 financial guidance. After the prepared remarks, Dr. Bob Kauffman, Vertex’s Chief Medical Officer, will join us for Q&A.

We would like to conclude tonight’s call at 6:00 p.m. We want every analyst who has a question to be able to ask and so please be considerate and limit your questions to one with a related follow up.

I will note that information discussed on this conference call includes forward-looking statements, which are subject to the risks and uncertainties discussed in detail in our reports, including our 10-K and 10-Q reports, which have been filed with the Securities and Exchange Commission. These statements including without limitation those regarding the market launch of INCIVEK and KALYDECO, our development plans and expectations, and our guidance are based on management's current assumptions and are subject to risks and uncertainties that could cause actual outcomes and events to differ materially.

GAAP and non-GAAP financial measures will be discussed on this call. Information regarding our use of these measures and a reconciliation of non-GAAP to GAAP is available in our fourth quarter 2012 financial Press Release, which is on our website. And I would also refer you to the information on Slide 5 of tonight's webcast.

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

Jeff Leiden

Thank you, Michael. Good evening. I had the opportunity to speak with many investors at the JPMorgan Conference earlier this month. What I spoke about then and what I’d like to reiterate is that during the last two years, Vertex has undergone a rapid and profound evolution. We launched two transformative medicines at that time; one for people with hepatitis C and one for patients with cystic fibrosis.

The successful launch of these medicines allowed us to significantly strengthen our financial position over this period. We finished 2012 with approximately $1.3 billion in cash and equivalents.

During the same period we also progressed multiple potential transformative medicines into late stage development and we are now poised to expand our presence in the importance of these areas of hepatitis c and CF.

Our evolution has positioned us with the future with a clear focus; using innovative science to develop new transformative medicines for people with serious diseases in specialty markets.

Let me now take a moment to discuss the four strategic priorities that we believe will enable us to achieve this goal. Priority one, we are focusing investment on key development programs on cystic fibrosis, hepatitis c and autoimmune diseases.

In cystic fibrosis, Vertex has a long term strategy just to provide benefit to as many CF patients as possible and to maximize the benefit for these patients with our approved and investigational medicines. KALYDECO has already approved for people with the G551 D mutation and CFTR gene. There are approximately 2000 such patients worldwide age six and older that we hope to treat.

In 2013, we are conducting multiple Phase 3 and other proof of concept label expansion studies of Ivacaftor monotherapy. Ivacaftor is the generic name for KALYDECO. If successful, these studies would allow us to treat up to 7000 patients worldwide with Ivacaftor.

We also expect to initiate a pivotal phase 3 development program this quarter for combination regimen of VX-809 and Ivacaftor and people with CF who have two copies of the Delta F508 mutation. These patients represented approximately 50% of the worldwide CF population or about 35,000 people.

In hepatitis c, our long term strategy is to develop simple all-oral regimens with durations of 12 weeks or less that provide a high viral cure rate. In 2013, we plan to conduct multiple phase 2 studies of 12 week all-oral treatment regimens that include our nucleotide analog VX-135. Our goal is to generate both safety and viral cure data in the second half of 2013 to support the start of pivotal development of one or more all-oral regimens in 2014.

In autoimmune diseases, our strategy is to maximize the value of our JAK3 inhibitor VX-509 across multiple autoimmune diseases globally. We continue to progress our phase 2 B study of VX-509 in people with rheumatoid arthritis and we have initiated a small phase 2 MRI study in RA as well and we expect data later this year. To broaden and accelerate the global development of VX-509, we will evaluate collaborative opportunities that could provide both funding and capabilities.

Priority number two, we will continue to invest in innovative research programs to support development of new specialty medicine for serious diseases. Vertex’s research efforts are concentrated on additional advancements in CF and other genetic diseases, such as Huntington disease as well as serious diseases in specialty market such as progressive multiple sclerosis and cancer. Innovative research is what creates our transformative medicines and we will continue to support these productive efforts.

Priority three, we plan to maximize revenues and cash flow from our marketed products INCIVEK and KALYDECO. In particular we see the potential for increase uptake of KALYDECO for patients in Europe and other countries outside the U.S. And finally priority four, maintaining our financial strength to support future long term growth and shareholder return. Ian will discuss this in a few moments.

There are important milestones in 2013 that will allow both you and us to measure our business progress. We described these milestones to you on January 7th and are showing here again on slide 7. In many ways these milestones position us to provide more certainty around the market opportunities for our clinical stage medicines throughout 2013.

In summary, as we enter 2013 we are executing on a clear strategy and set of goals and we look forward to keeping you informed of our progress throughout the year. I will now turn it over to Peter.

Peter Mueller

Thank you Jeff and good evening everyone. My comments this evening will focus on the priority development areas that we have identified for investment in 2013 those of cystic fibrosis, all-oral hepatitis C therapies, and autoimmune diseases.

Beginning with cystic fibrosis, we are pleased that both KALYDECO and the VX-809 plus Ivacaftor combination regimen received breakthrough therapy designation from the FDA.

While the specific implications of this new designation are not yet clear, we are committed to working with regulators to explore novel and potentially more rapid development strategies for both the KALYDECO label expansion and VX-809 plus Ivacaftor combination regimens.

Finding the outcome of our discussions, we hope that this will enable us to reach more patients as soon as possible. Currently, we are working toward agreement with regulators on phase 3 trails signs for our combination regimen to treat CF patients, homozygous for the Delta-F508 CFTR mutation. We expect to complete these discussions and initiate a phase 3 program this quarter.

As for the KALYDECO label expansion studies, all of these trials are currently ongoing and we anticipate having the first data from these trials in the second half of 2013. Vertex expects to discuss with the FFDA and European Regularity Authorities any potential implications of breakthrough therapy designation on the timing and content of regulatory submissions in the U.S. and EMEA to support the expansion of the KALYDECO label.

Also in CF we are on track to report data from the VX-661 plus Ivacaftor Phase 2 combination study in 508 homozygous patients. We plan to report safety and efficacy data from this trial including FEV 1 and sweat chloride on each of four cohorts in the first half of this year.

Turning now to hepatitis C, in the first half of 2013 we expect to get three 12 week Phase 2 studies underway, VF 135 in combination with ribavirin, VX-135 in combination with GSK's NS5A inhibitor GSK 805 and VX-135 in combination with the protease inhibitor TMC 435.

We expect to have 12 week safety and first SVR data from these regimens in the second half of 2013 and our goal is to choose one or more regimens to move into pivotal development in 2014.

Now moving to our immune diseases and our selective check 3 inhibitor VX 509. We expect to have data from the Phase 2B study in rheumatoid arthritis in the second half of 2013. Additionally we recently initiated a 40 patient MRI study to evaluate the potential for VX-509 to improve joint health and structure in rheumatoid arthritis patients. We also expect results from this trial in the second half of 2013.

Finally I note that we are in the process of analyzing and reviewing the VX 787 data from our Phase 2 challenge study in influenza and we expect to report the results in the coming weeks.

In summary, our clinical pipeline is advancing its plans and I really look forward to updating you as we progress, I will now turn over to Stuart.

Stuart Arbuckle

Good evening everyone. Tonight I'd like to give you some background on our performance with INCIVEK and KALYDECO in 2012 and what we foresee as we head into 2013.

In hepatitis C, we remain the market leader with approximately three out of four new patients in the U.S. initiating therapy with INCIVEK, a measure unchanged since launch.

As we've said previously, in 2012 we saw treatment rates change in anticipation of the potential for new more convenient regimens that may treat hepatitis C. This led to a reduced number of HCV patients initiating treatment, beginning in the second quarter and continuing through the, rest of 2012. As a result of these dynamics INCIVEK revenues in 2012 were $1.16 billion, with $223 million of revenues in the fourth quarter.

In 2013 we anticipate maintaining our market leading position. However, we do expect a further decline in patients initiating treatment. We expect continued demand for INCIVEK for motivated patients who don’t want to wait for treatment, as well as patients who are too advanced with their disease and can't wait for treatment. Therefore we expect INCIVEK will continue to be an important revenue contributor to our total revenues in 2013.

In the EU and other areas outside the U.S., the use of INCIVO to treat hepatitis C patients increased in the fourth quarter compared to the third quarter 2012, resulting in an increased royalty to Vertex.

INCIVO is now available in 40 countries, and we expect modest growth in the INCIVO royalty in 2013, resulting from the expansion of INCIVO into new geographies and a slow anticipated rate of patient warehousing in advance of potential new therapies compared to that in the U.S.

Now turning to KALYDECO; we achieved a $172 million in revenues for KALYDECO in 2012 following the U.S. launch in February. Specifically in Q4, total revenues were $58.6 million, with a majority of those revenues derived from the U.S. We are treating the vast majority of G551D patients aged six and older in the U.S. and we expect to maintain the level of our current U.S. quarterly revenues.

We anticipate growth of KALYDECO in 2013 will come from Europe, beginning in the second quarter as a result of the previously announced access and reimbursement decisions from Scotland and England.

Reimbursement discussions are progressing well in the other markets, and we expect to have completed them across the major EU markets, that is the UK, Ireland, Germany and France in 2013. Combined, these markets represent approximately 80% of the G551D population in Europe.

In summary, I am pleased with the performance of the commercial organization in 2012 and as we begin 2013, we have two important medicines for patients that contribute significant revenues for our company.

With that I will turn it over to Ian.

Ian Smith

Thanks Stuart and good evening to everyone. Tonight I would like to discuss our financial position and the strategies that support funds for 2013; specifically, our focus on 2013 financial guidance and the basis for such guidance. A detailed discussion our 2012 financial results was provided in the press release we issued earlier today and I’m happy address any aspect of those results during Q&A.

Firstly to our financial position how we may expect to progress through 2013? As Jeff mentioned, INCIVEK is been incredibly successful for Vertex, generating more than $2 billion of revenue since launch and we expect it to continue to contribute significant revenues in 2013.

We expect INCIVEK revenues, combined with the expected growth in KALYDECO revenues and other revenue sources will enable us to complete 2013 in a strong financial position, while also supporting investment into the company.

This investment will provide important data throughout 2013 to guide our future business opportunities. We are in an investment period for our business and we expect to return to revenue in earnings growth based on the successful advancement of our life state medicines.

Now, for the 2013 financial guidance and the basis for such guidance. We expect 2013 total revenues to be in the range of $1.1 billion to $1.25 billion. These revenues will enable investment into our business while maintaining our strong financial position.

Our 2013 non-GAAP operating expenses will be in the range of $1.09 billion to $1.15 billion and principally consist on our R&D and SG&A expenses. Our non-GAAP OpEx guidance excludes cost of revenues, charges to stock base compensation and expenses related to accounting for our Alios collaboration.

Now for the components about total revenue guidance. We expect growth wide KALYDECO revenues to be in the range of $280 million to $320 million. These projected revenues are based on maintaining our currently, quarterly revenue rates of approximately $50 million in the U.S and EU revenues that would grow in 2013.

The two main factors that will impact growth are one, the time to complete reimbursement negotiation processes with each of the remaining major European countries Germany, Ireland, France and rest of the UK and two, the rate of adoption by G551D patients outside of the U.S.

Because of this the growth will likely not be lineal. We anticipate that the first quarter 2013 KALYDECO revenues will be similar to that of the fourth quarter 2012 and that growth in revenues should commence in the second quarter of 2013.

For combination in INCIVEK revenues, INCIVO royalties and collaborative and other royalty revenues, we expect a of range revenues of $820 million to $930 million. We anticipate significant revenues from INCIVEK, although we do expect the continuing decline in the HCV patient treatment rates and reduced quarterly revenues, compared to $223 million in Q4 2012.

With respect to INCIVO royalties, in Q4 2012 we realized $36.8 million of royalties, compared to a third quarter of $20 million of royalties and we expect INCIVO royalty to show modest growth in 2013, compared to a $118 million in 2012, consistent with the reasons mentioned earlier.

Finally, we have collaborated other royalty revenues in 2012 of $76 million and we anticipate a similar level in 2013. These revenue assumptions are based on existing relationships and do not include any potential collaborative and other royalty revenues. To reiterate, we are providing 2013 total revenue guidance of $1.1 billion to $1.25 billion.

Now to the operating expenses, we are providing 2013, non-GAAP operating expenses, guidance of $1.09 billion to $1.15 billion. The operating expense will vary quarter-to-quarter; however we anticipate that the first quarter 2013 will be similar to that to the fourth quarter 2012, given the timing and initiation of planned clinical trial and certain marketing expenses as well as the realization of identified cost reductions.

The main components of our operating expense are R&D and SG&A expenses and our 2013 guidance for these expenses is $750 million to $790 million and $340 million to $360 million respectively.

I'd now like to take a few moments to provide a better understanding of this R&D investment. Essentially something to do in three categories. First, we plan to invest approximately $200 million in basic research to support the creation of future medicines. This is consistent with our 2012 levels.

Second, we expect to spend between $400 million and $440 million on life stage development programs. Over 80% of this development amount is in to support cystic fibrosis and Hepatitis C and also includes significant supply chain investments to protect commercial supply for the potential clinical success of the X-809.

And finally, we expect to spend approximately a $150 million on the variety of essential activities and obligations relating to our commercial products. These include safety, pharmacovigilance, medical affairs, quality and post-marketing commitments for INCIVEK and KALYDECO.

Turning now to 2013 SG&A guidance of $340 million to $360 million; we are anticipating a reduction in SG&A compared with the $390 million in 2012. This is a result of reduced U.S. marketing expenses for INCIVEK and KALYDECO and a broad review of our business while we made cost reductions for which we expect to see the full effect in 2013.

In summary, we are committed to managing our operating expense at a level to 2012, while increasing our R&D investment to support our late-stage medicines and reducing our SG&A expenses.

We believe our 2013 guidance reflects our ability to maintain financial strength while we continue to invest in our pipeline of medicines to drive future growth. We are carefully balancing these prioritize.

With that, I’ll ask the operator to please open the lines for questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question is from Geoffrey Porges, of Bernstein. Your line is open.

Geoffrey Porges - Bernstein

So just a follow up on Peter’s comments about the CF combination programs, could you confirm that the 400 mg BID information has been provided to the FDA and that you are just waiting for them to come back before starting at phase 3 and then, and by implication that you have applied to add that on to the study. And then secondly on 661 you have mentioned the Cohort 3. Could you give us a little bit more color on where you are in the recruitment of the Cohorts, specifically as the first 120 patients being recruited and being studied at the 28 days of the end of the treatment so that you are starting to get that PK/PD data in now?

Bob Kauffman

So Jeff, this is Bob. I will take the first part of the question and if you remember the Cohort 3 was designed really to provide PK/PD data to fit into our PK/PD model as well as safety data at the dose level of 400 mg BID. Data has been provided to the FDA along with our plan for the phase 3 program and yes we’re in active discussions with them at this point to finalize that program and obviously we will provide further feedback once we get that information.

Geoffrey Porges - Bernstein

And 661?

Bob Kauffman

With respect to 661, yes the study is well along and recruited and we are waiting for the data to come in and as we said before, we will be providing for that study in the first half of the year.

Operator

Thank you. Our next question is from Geoff Meacham of JPMorgan. Your line is open.

Geoff Meacham - JPMorgan

So for the KALYDECO, the ongoing monotherapy trial, can you give us any updates you have on the enrollment status for the different studies and then maybe speak to the review timeline, given your interpretation for the breakthrough designation? I have one follow up?

Bob Kauffman

This is a Bob. I’ll maybe take the last part first. Yes, obviously we have breakthrough designation although we are working with the FDA now to determine exactly what impact that will have on those programs and with respect to the review time, I can’t really give you any further update at this point. Those discussions are ongoing. The studies are moving along very well. Particularly the mutations, other gating mutations aside from G551D is fully enrolled and moving along, R117H doing very well as well, and the N1 (ph) study again also doing well. So, no issues with recruitment.

Geoff Meacham - JPMorgan

And then for KALYDECO commercially in Europe, I don’t know if it’s possible to get a little bit more granular with kind of what you think the pace of reimbursement discussions will be. That will be helpful, but maybe you could also address other region such as Australia that may be also similar to the review cycle and maybe any other sort of gaining factors that you feel like, when it comes your European reimbursement that you can give us some clarity on the next quarter.

Stuart Arbuckle

Sure Geoff. It’s Stuart. So, I have to say we are pleased with the speed with which the discussions have gone and frankly I’m delighted that, already we are able to come to a satisfactory and positive conclusion with England and as we said, we’re expecting that to really pick up from Q2.

As you’ll know, in Scotland they created a special orphan drug fund and have said that all patients with G551D mutation in Scotland will be eligible for that fund which begins in March. And all I can really tell you about the other discussions is that they are very active. They are ongoing, they are very productive.

Nobody has any doubts about the clinical benefit that KALYDECO brings and we’re working as quickly as we can to bring them to a successful conclusion across the major markets in Europe.

In terms of Australia, we filed and we’re hopeful that we’ll see an approval but the product this year, as you know the process for reimbursement in Australia is as rigorous and lengthy as anywhere else the rest of the world and I wouldn’t necessarily be optimistic that we’ll be able to conclude that within 2013.

Bob Kauffman

And Geoff, let me just add in to Stuart’s comment with in my prepared remarks, how this translates to revenue expectation in 2013, I do want reiterate that we anticipate in Q1 the KALYDECO revenues to be similar to that of Q4 2012 and based on Stuart’s outlining of the timing of approval for reimbursements in these markets and specifically those four major markets in Europe, we would anticipate growth starting to be seen the second quarter of 2013.

Operator

Thank you. Our next question is from Mark Schoenebaum of ISI Group. Your line is open.

Mark Schoenebaum - ISI group

First one is, why would the FDA not allow you to include the 400 mg BID dose in a pivotal trial hypothetically; and number two, what should our investor expectations be for 661 trial? Small number of patients, no run in, should we be expecting that to be changed or not in your opinion?

Jeff Leiden

Thanks Mark. I’ll have Bob answer the first question and as you talked about investor expectations, always want to set expectations, but I will take the second question.

Bob Kauffman

So for the first one, we’ve submitted data to them and we’re in discussions; I can’t comment on the nature of those discussions, but obviously in every case they will be looking at the data we sent in to verify for themselves that they believe the risk benefit is favorable for the inclusion of that dose and I think we’ll see how that goes.

Jeff Leiden

And Mark to your second question, so the VX-661 study in combination with KALYDECO or Ivacaftor is it is a different study design than the VX-809 and Ivacaftor study and so give me an opportunity just to describe the study design with them, in terms of what that means of (inaudible). It is a dose escalation study, so low-dose monotherapy moves into that low-dose combination therapy and then as you move through that you move into higher doses monotherapy and then in combination therapy. It is sequential dose escalating study.

We are moving through it, as Bob mentioned earlier and we would anticipate in the first half of this year providing you a topline result of that FEV, sweat chloride and safety and so we look forward to providing that data at a later point in time.

Peter Mueller

The only comment I want to make on top of that is, it is a different set of patients in the monotherapy versus in the combo and it's not like what it was in 809. So there's no lead in phase or any of those things going on.

Mark Schoenebaum - ISI group

Is that a risk Peter, and then I'll drop off; that there is no lead in phase or am I over thinking it, thanks.

Peter Mueller

No, there's no risk as much as we can see it.

Operator

Thank you. Our next question is from Rachel McMinn of Bank of America Merrill Lynch. Your line is open.

Rachel McMinn - Bank of America Merrill Lynch

Just, I guess to go back to the question that's been asked a couple of times on the high dose of VX-809 inclusion in the Phase 3, do you view that as a potential sticking point in the conversations or is really focused on the actual end points. I think you guys have talked about the potential to have a six months efficacy end point as opposed to 12 months.

And then just separately on KALYDECO 4Q sales, was all of the gross in the fourth quarter Europe, so U.S. was flat, so I just want to make sure I understand that. And then finally can you just give us a little bit more color on your 135 ribavirin study. It says in clinical trials you're enrolling 150 patients as a target but I think you've talked about initially being a much smaller cohort. So I wanted to get a sense of how many patients are really being enrolled initially in that study.

Bob Kauffman

This is Bob. I'll take the first and the third and I'll leave the middle for Ian. So in terms of the 809-770 combo trial, no, we don't see any sticking points here and I think the only thing I’ll say about some of the other points you mentioned is that obviously we have breakthrough status for this program as well, and clearly the discussions we're having with the FDA may be colored by the discussions regarding breakthrough status and what impact that might have on the study. Right now I just don't have anything to report about that so I think I'll just have to leave it that way.

And for the third point about the 135 and ribavirin, yes the study is, we have a clear way forward to begin that trial. We have been asked to go slowly with some exploratory number of patients, initially with very careful monitoring. We’ve included the monitoring in the protocol and we're about to get that underway.

The exact patients numbers yes, I know what's listed there, we'll be going a little bit slowly to begin with and then we expect that that will accelerate once we have some initial data and we are quite cognizant of the need for safety data in that program to progress into Phase 3 and so we’ll be looking at that very carefully as we go along.

Ian Smith

And on KALYDECO, Rachel, yes the majority of the growth between Q4 and Q3 was a result of Europe as we said on the Q3 call. Back then we had already had the vast majority of G551D patients in the U.S. who were already being treated. We added a few through Q4 as they rolled off some of the long terms extension studies and things like that. But the vast majority of the growth Q4 was due to Europe.

Operator

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

Michael Yee - RBC Capital Markets

On the Cohort 3 of the combo study, can you perhaps describe qualitatively what you were looking for in your PK/PD analysis, and whether today these are that generally supported what you were looking for? And then on 661, I know you sort of described the design of the study, but what is your stopping criteria? How do you define when you would actually stop and report results? Thanks.

Bob Kauffman

So in terms of Cohort 3, we have a PK/PD model for the combination and really what we are looking for is consistency with the model and we always look for whether we are getting more bank for the bug with higher doses and that’s really part of the assessment. And actually I would say that is the same philosophy regarding the stopping criteria in the 661 trial.

Again, we always look for PK/PD relationship, whether we are getting plateauing of the PK and PD responses and obviously safety factors into the decision about whether they continue to dose escalate or not. So it’s just a combination of things. It’s pretty hard to give a hard and fast rule.

Operator

Thank you. Our next question is from Lisa Bayko of JMP Securities, your line is open.

Lisa Bayko - JMP Securities

Can you give us a little more color, this may have been asked already, but just on the discussions, let’s say in the key European countries, France, Spain, Italy; just it’s really important for timing and modeling, kind of where we might expect those to roll out.

Jeff Leiden

Yes, so with France, I will say the discussions are ongoing, and our next important time point with them is likely to be around February, is when they said that they would get back to us and they have been public about that being the date when they would kind of next have reached a decision.

In Italy, Italy really isn’t a major market for patients with G551D. So, I won’t comment more on that and in Germany, the product is available currently and is reimbursed and we’re in discussions as is the normal cost of things in Germany to establish the kind of ongoing price that the product will be reimbursed at. Those discussions are ongoing. Again tough to predict exactly when they’ll come to a conclusion.

So, I wish I could be more precise but just the nature of these things is that they are difficult to predict in any event. I think they are particularly difficult when you’re dealing with such a breakthrough medicine where they have a real desire to try and get them available for their patient and so it’s just tough be to be most specific, I’m afraid.

Bob Kauffman

Lisa, it’s something that sometimes happens and recite a discussions with investors that ask me about this expectation, it helps to frame the market for people. It’s not always clearly understood but approximately 80% of the G551D patients in Europe are actually in France, Germany and UK and Ireland and then 80% of that 80% is actually in UK and Ireland. So, as you try and triangulate the timing in let’s say the revenues, that might give you a little more understanding but to this point, we’re engaged in discussions with all those countries.

Lisa Bayko - JMP Securities

Okay. And then just anymore granularity on, I know you had some push back with pricing but there has been some fund set aside with the other regions within in the UK. When might we expect to start seeing revenue there?

Bob Kauffman

Well, in terms of revenue from England and Scotland, Scotland they’ve set aside a separate fund. In England they’ve agreed to reimburse it. We expect to see commercial sales in England from Q2 and the Scottish fund is supposedly open from March 1st.

So really as Ian said, we were expecting Q1 to be similar to Q4 and then Q2 is when we’d expect the growth really to pick as patients get broader access and reimbursement in those major markets like England and Scotland.

Operator

Thank you. Our next question is from Yaron Werber of Citi. Your line is open.

Yaron Werber - Citi

One, just to follow up on Lisa, and so Stuart, just to clarify, in Germany you said that you’re still negotiating the price to a certain degree but as you said the product is available and it is being used. So I'm just trying to get a sense, are you recording most of the revenues in Germany with potential reserve against potential discounts in the future or how do we think about that?

And then, second, and I just hate to bring this up, I just want to be clear. In terms of your communication on the combination data, this quarter on the combo of the KALYDECO and 809, the height of the 400 milligram BID, are you going to show us the full efficacy data, once you communicate whether you've taken that into Phase 3 or is that something that would be communicated in the future after Q1?

Stuart Arbuckle

On the question on Germany, so yes Germany has essentially a two-step process. So products are reimbursed almost immediately following their approval and yes we are recording commercial sales in Germany already.

And then in parallel to the product being available as is the standard part of the process in Germany, you then negotiate the price that the product will be reimbursed at on an ongoing basis. So, we are in that kind of path of that second part of the process currently. And then on the combo data, I'll pass that off to Ian to answer.

Ian Smith

Yes, and Yaron, thanks for the question. Again it gives us chance to continue to clarify and to expect this data disclosure. So, as we said in the past, we’re currently in discussions with the FDA regarding the protocol design for our Phase-3 with Ivacaftor combination with 809 and that discussion is now under the umbrella of breakthrough designation. So we’re still engaged in those discussions.

Once those conclude and we have a clear line of sight for that Phase 3 protocol, we will find out whether the 400 BID dosing of 809 is included as they dose on in Phase 3. Consistent with that disclosure we will provide the basis for the inclusion in the Phase 3 protocol, or as non-inclusion and so that's the point we would expect.

Now the basis for that disclosure would be based on the basis that we find that it is included or not included within that protocol, and so we look forward to clarifying all of that in the first quarter. As we've announced we expect to initiate this Phase 3 study in the first quarter of this year.

Jeff Leiden

Yaron, this is Jeff. Maybe one comment on Germany just to make sure that you are thinking of it the way we are, Stuart said we are reimbursed at this point in the final pricing discussions but during that first year when those negotiations were going on, there is not full uptake nor do we expect full and rapid uptake in Germany. There tends to be a much slower uptake until formal reimbursement is obtained and so just want to make sure that you are thinking of Germany as something that clearly is not fully penetrated at this point and will continue to grow when and if we get reimbursements.

Operator

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

Robyn Karnauskas - Deutsche Bank

I guess for 661, so will the part A data that you are going to release the first half of this year, give you enough information to have a sense of whether or not you are going to take product forward or do really need to see the part B and C to give you greater comfort and then also regarding Ireland, like what gives you confidence seeking the reimbursement. Is it just a pharmacoeconomic question or is it really a price negotiations at this point?

Jeff Leiden

So Peter will take the first question.

Bob Kauffman

And then Stuart to follow up.

Peter Mueller

Yes, so in terms of the value of 661 and our decision to move it forward, the study part A would basically give us enough confidence to make a decision whether we move forward or not. I want to just reiterate at one point in time, there is another discussion any longer whether we exchange 809 to 661. 661 is a separate molecule and if we decide so has a different base for future regimens like combination regimen with auto correctors and 809 is basically on its own on a fast track moving forward.

Stuart Arbuckle

And on Ireland, I guess the first thing I would say is whilst the past is not necessarily a perfect predictor of the future, I would say the success we have already had with gaining access and reimbursement for KALYDECO gives me a lot of confidence that we’ll reach a successful conclusion in Ireland and in addition to that, as I say, the discussions are ongoing, they are going well.

There is clearly a high level of unmet need in Ireland. It has the highest incidents of G551D mutation in the world and so there is a desire on both sides to reach an amicable solution and I am optimistic that we will do so.

Operator

Thank you. Our next question is from Terence Flynn of Goldman Sachs. Your line is open.

Terence Flynn - Goldman Sachs

I was just wondering in terms of, I guess that first on the CF combo program, if you can provide us with any insight on how you are thinking about six months versus 12 month end point with respect to exacerbations. So it seems to me like there is a focus on 12 months for the exacerbation data. So, I was wondering if that’s in line with your thinking.

And then on 661, was wondering in terms of the dose escalation, if you could maybe just provide us with some additional details on how and who made the decision to stop at the dose you decided to stop on and if you think that’s enough or if you think there is a possibility that maybe you have to go back and use some further dose exploration work, how you did with 809.

Bob Kauffman

This is Bob. Maybe I will do the second one first and the team has made a decision about the dose escalation all the way through the trial and that who is empowered to do that. That’s all I can really say about that one.

In terms of the 809-770 combo trial, I really can’t comment on durations at this point. I think that’s still a topic of discussion. Again, largely and part of our breakthrough designation discussion with FDA. All the endpoints that you measured are certainly ones that are interest to us. They all are very important ones and they are all going to be included in the trial but the durations I think are not at all settled at this point.

Operator

Thank you our next question is from Matt Roden of UBS. Your line is open.

Matt Roden - UBS

So just going back to the 400 milligram BID dose, Bob you mentioned the PK/PD models that you’ll be comparing the data against and can you help us with what your bar is for inclusion in the phase 3. In other words does it have to be better than the 600 milligram QD dose or could it be similar and justify inclusion in phase 3,

I guess what I am trying to get to is would you caution us against drawing conclusions about what the data implies simply by its inclusion or exclusion from the phase 3. And then secondly just real quick, can you update us on how you plan to address the Delta F508 patient population, I haven’t heard about that in a while.

Bob Kauffman

So to answer the first part of your question, it’s just a complicated equation about how one factors in all the pieces here. Remember that the Cohort is relatively small.

The PK/PD data tend to be more powerful than just estimates of the effects that are seen in the small study and we are really looking for consistency within RO (ph) and that will determine whether we go forward or not. Clearly the safety piece of it was also a factor and all that was provided to FDA and we are looking forward to completing those discussions.

Jeff Leiden

And Matt, as we have said before, this isn’t only about an increased overall dose. This is Jeff. Importantly the BID dose potentially changes both D-Min and C-Max (ph) and we are learning a lot of what the effects of C-Min and C-Max (ph) may be on efficacy as well. So as Bob said it’s more complicated than simply a higher dose.

It’s really how that dose is distributed and what exposures are both at C-Min and C-Max (ph) and that’s why it was so important to confirm the PK/PD model.

Peter Mueller

And in terms of the heterozygous, I think those two comments will be made number one. I think we anticipate that we have basically include some heterozygous in our Phase 3 program from a safety point of view. So we will explore basically the combination there. And the other thing is, as we go forward with the dual corrector and other programs, that basically the main route that we try to explore value for patients of that category.

Operator

Our next question is from Ying Huang of Barclays. Your line is open.

Christine Huang - Barclays

This is Christine Huang on behalf of Ying Huang. First I had a question about whether the decision has been made to include the VX-809 monotherapy arm in the Phase 3 trials and secondly on VX-661, also wanted to drill a bit further on the stopping criteria. Did you see any of those being for toxicity or have you seen satisfactory long function improvement to stop the dose escalation. And lastly on VX-135, have you conducted any preclinical test to rule out cardiovascular tox?

Bob Kauffman

Okay so let’s see, I’ll take the last one first and yes that as part of our standard battery of testing we always do cardiovascular evaluations and they were satisfactory to move the molecules forward.

For 661, it’s an ongoing study and I just can’t really comment on the findings or where the criteria for stopping or not stopping in that trial. When we report the results you will really see how we came out. And in terms of an 809 monotherapy arm, again I’m not able to comment on that until we complete our discussions with the FDA.

Operator

Thank you. Our next question from David Friedman of Morgan Stanley. Your line is open.

Sara Slifka - Morgan Stanley

Hi this is Sarah calling for Dave. On a slightly different topic, just had a quick question about the upcoming flu data. Can you give us a sense of what information we could expect in the press release and I think the initial guidance release data was actually 4Q. So if you could talk about what’s causing the delay?

Bob Kauffman

In terms of the delay really, the recruitment went on little longer than we thought. There was also little bit delay in some of the bioanalytic work that supports that trial, particularly some of viral titer work which is very extensive and just took a longer than we thought. Can you repeat the first part of the question?

Sara Slifka - Morgan Stanley

Yes, what you should expect in the press release.

Jeff Leiden

Yes, I think we've talked about this once before, but clearly, the primary end points that we're interested in are the antiviral effect, measured by virus excretion and also clinical symptomatology, as well as the safety of the molecules. I think those are the three key pieces that you'll be looking for.

Operator

Thank you, our next question's from Brian Abrahams of Wells Fargo, your line is open.

Brian Abrahams - Wells Fargo

A question on 135, obviously one of the last nukes standing. I'm just wondering if there are any external assets or classes that you're still considering for potential combinations to leverage its scarcity value and ensure that it's a backbone in future combinations, sort of wondering if getting through that initial highly monitored cohort is gaining factor and then just a quick follow up on KALYDECO commercial dynamics in the U.S., just wondering if there's any opportunity for additional use in the label indication, perhaps with slight increases, improvements in compliance and why are those few patients who are not on it still on the sidelines?

Jeff Leiden

Yes Brian, this is Jeff, I'll take the VX-135 question. I think you remember that we said probably five, six months ago now that our strategy is to find the best combination of all our medicines for patients with HCV, both by combining VX-135 as a backbone with our own medicines but also potentially with those of others and of course that led to the collaborations with J&J and GSK, which we're very pleased with, with respect to additional assets, if we found an asset that we thought added significant value to VX-135 we'd be open to combining with that as well.

Ian Smith

Yes, and just on KALYDECO in the U.S., frankly there's very, very, very few patients on the sidelines. The vast majority have been exposed to KALYDECO at some point in time. In terms of compliance is there an opportunity to increase that? Possibly, but actually the compliance rates are remarkably high, much higher than we would see with virtually any product I've come across in 26 years doing this.

So there may be some marginal increases we can get, but they really are on the margin, which is why we say that kind of net, net, we're expecting to maintain the quarterly revenues we're seeing here in the U.S. in Q4 as we move into 2013.

Operator

Thank you. Our next question is from Howard Lang of Leerink Swann. Your line is open.

Howard Liang - Leerink Swann

Does the breakthrough designation cover all of additional indications for monotherapy KALYDECO, including patients with residual CFTR function and one, should we expect to see that phase 3 data, could it be this year?

Peter Mueller

So the breakthrough designation has two components. One is for KALYDECO and the label expansion intent that we have, which covers basically those populations that you have mentioned. We will know when we know what we discussed with the agency in terms of breakthrough, at what point in time we have a submission criteria and then we will also see what data we will release at what point and time. But that’s still ongoing discussions and therefore it’s hard to predict.

Bob Kauffman

And Howard, to the second part of your question of when you could that see KALYDECO monotherapy data and the other mutations we have guided to the second half of this year, we anticipate to start seeing data from those studies.

Operator

Thank you. Our next question is from Katherine Xu of William Blair. Your line is open.

Katherine Xu - William Blair

So with regard to VX-135, I’m just wondering, in the initial cross ribavirin study, how many patients do you need to get to, I might have missed this because I couldn’t hear it very well. How many patients do you have to get through to get the sense of safety that could be satisfactory to go on?

And then on the tightening of KALYDECO Europe, just curios, do you have some kind of guidance on the pricing relative to the U.S.; and in Germany, in UK, Ireland, and in France. Relative to the U.S.; how should we think about pricing?

Bob Kauffman

So for VX-135, we are looking at a relatively small number of patients in that initial cohort and then an expansion, once we receive those data and we expect that that will occur relatively quickly to allow us to expand. That is in the first of the trial, the ribavirin 135 trial. As you know we are also initiating trials with the GSK and the TMC molecules, and those will be following the initiation of the ribavirin trial.

Katherine Xu - William Blair

The small number will be 20 or 100, any?

Bob Kauffman

Yes, in the order of 20 or so. And then, Katherine, on price; I’m obviously not going to talk to the specifics of the pricing discussions that we are having in Europe but what I will say is that obviously we view KALYDECO as a breakthrough medicine and we have priced it as such for the value it brings to patients and we believe we know from clinical trials, it brings the same value to patients in the EU as it does in the U.S and we going to be and are defending that value in our ongoing discussions with reimbursement authorities.

Operator

Thank you. Our next question is from Jason Kolbert of Maxim Group. Your line is open.

Jason Kolbert - Maxim Group

And answered but I’d like to explore little bit about what’s really next with flu? What kind of expenses you’re prepared to spend in order to support that program or whether you’re going to be looking for other sources of funding outside of the company?

Bob Kauffman

If we progress forward, and we’ve been very clear about our priorities for investment in 2013 and if we haven’t, I’ll take the opportunity to say cystic fibrosis, Hepatitis C, all-oral therapies, and autoimmune diseases. Therefore, that does exclude investment towards flu. We’re still waiting on the data. If the data is good and signals a progression forward, then would use maybe collaborations or external monies to fund the next steps of development for the flu molecule.

Michael Partridge

Operator, we have time for about one more question. We are right up on call time.

Operator

Alright, our final question is from Phil Nadeau of Cowen and Company. Your line is open.

Phil Nadeau - Cowen and Company

Stuart, I wanted to follow up on some of the comments you made about Ireland. I think you said that negotiations going well there and proceeding. But the dossier from the International Center for Pharmacoeconomics is actually available online and in that it says that basically you can’t recommend reimbursement at the submitted price and you need to either, fortify the clinical data, the long term clinical data to suggest a mechanism, such as performance based, risk sharing or significantly cut the price.

So, can you talk a little bit more about why Ireland is going well and what the next steps are there and when we might get clarity on when or if they are going to reimburse?

Stuart Arbuckle

Sure, yeah. Just to set expectations, these reimbursement type discussions have a number of phases. There usually an evaluation of clinical benefit. That’s always been unanimously positive for KALYDECO. Then there is often an assessment, sort of from a cost effectiveness point of view and then you get into, on a little substantive discussion about the data and the discussions on price.

All I’ll say is that those discussions continue. They are ongoing. This is all part of the process. These things aren’t linear. You get these kinds of tos and froes and as I say I remain optimistic that we will reach a successful conclusion in Ireland and exactly when that is, I can’t say but I remain optimistic.

Phil Nadeau - Cowen and Company

Okay. And could you give us some senses of what additional data you have to submit to them either on the long term clinical benefit or performance based risk sharing scheme?

Stuart Arbuckle

I really can’t go into the details of the data that we’re submitting.

Michael Partridge

Thanks very much everyone for listening tonight and for your questions. We will be in our offices tonight following the call for any follow up. And now Jeff will provide the final word.

Jeff Leiden

Yes. Thanks Michael. I think as you heard tonight, we feel that we’re very well positioned as we go into 2013. We have strong financial position, we have two products that are performing well and we expect to continue to perform well and we have a late stage pipeline that's advancing going nicely with the number of milestones coming up through the year that will allow us and you to judge our progress. So we look forward to updating you as we get those milestones and we’re looking forward to 2013. Thanks.

Operator

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.

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