Michael Partridge - Vice President-Investor Relations Jeffrey M. Leiden - Chairman, President & Chief Executive Officer Stuart A. Arbuckle - Executive Vice President and Chief Commercial Officer Ian F.

Smith - Executive Vice President and Chief Financial Officer David Matthew Altshuler - Executive Vice President, Global Research and Chief Scientific Officer Jeffrey A. Chodakewitz - Chief Medical Officer & Executive Vice President.

Michael J. Yee - RBC Capital Markets LLC Geoffrey Meacham - Barclays Capital, Inc. Samir Siddhanti - Goldman Sachs & Co. Matt M. Roden - UBS Securities LLC Brittany R. Terner - JPMorgan Securities LLC Catherine Y. Hu - Bank of America Merrill Lynch David N. Lebowitz - Morgan Stanley & Co. LLC Brian Abrahams - Jefferies LLC Odysseas D.

Kostas - Evercore ISI Phil M. Nadeau - Cowen & Co. LLC Charles Butler - Guggenheim Securities LLC Liisa A. Bayko - JMP Securities LLC Katherine Xu - William Blair & Co. LLC Ted A. Tenthoff - Piper Jaffray & Co (Broker).

Good afternoon ladies and gentlemen. My name is Candice. Vertex's Third Quarter 2015 Financial Results Call is about to begin..

Good evening everyone. This is Michael Partridge, head of Investor Relations for Vertex Pharmaceuticals. Welcome to our third quarter 2015 financial results conference call. At this time all participants are in a listen-only mode. Later we will open the lines for questions.

As a reminder, this conference call is being recorded and a replay will be available following the conclusion of tonight's call on our website. Joining me on tonight's call are Dr. Jeff Leiden, Chairman and CEO; Stuart Arbuckle, Chief Commercial Officer; Ian Smith, Chief Financial Officer; and Dr. David Altshuler, our Chief Scientific Officer.

Doctor Jeff Chodakewtiz, Chief Medical Officer, will also be available for Q&A. Our agenda tonight is as follows. Jeff will review the progress with our cystic fibrosis medicines. Stuart will review the third-quarter sales performance of our marketed products. Ian will review the third quarter 2015 financial results and update our 2015 guidance.

And to close, David will discuss our research strategy and our early development pipeline. You can access the webcast slides by going to the event section of the investor relations page on our website. I will remind you that we will make forward-looking statements on this conference call.

These statements are subject to the risks and uncertainties discussed in detail in today's press release and our 10-K which has been filed with the Securities and Exchange Commission.

These statements, including without limitation, those regarding the ongoing development and potential commercialization of our drug candidates, those about Vertex's other cystic fibrosis programs and Vertex's future financial performance are based on management's current assumptions. Actual outcomes and events could differ materially.

Information regarding our use of GAAP and non-GAAP financial measures and a reconciliation of GAAP to non-GAAP is available in our third quarter 2015 financial results press release. I would also refer you to slide four of tonight's webcast. I will now turn the call over to Dr. Jeff Leiden..

Thanks, Michael. Good evening everyone. Three years ago we outlined a clear strategy designed to establish a foundation for sustainable business growth.

This evening I'm pleased to report that we continue to make excellent progress toward achieving our long-term vision for 2016 and beyond, significant revenues and revenue growth from multiple high-value medicines, high operating margins and a pipeline of additional transformational medicines.

Our goal in CF is to reach the vast majority of people with this serious disease and to continue to enhance the benefit for the patients who we treat, and we continue to build on a track record of innovations discovered, develop and deliver transformative medicines to more people with CF.

Let me summarize our recent commercial success and development progress in CF.

In July ORKAMBI became the first FDA-approved medicine to treat the underlying cause of CF for the approximately 8,500 people in the US 12 years and older with two copies of the F508del mutation, and as of September 30, 2015, we already were treating more than 3,000 of these patients.

Our sNDA has been accepted by the FDA for the expanded use of KALYDECO in people aged two and older with one of 23 residual function mutations that result in CF. This may accelerate access to KALYDECO for more than 1,500 patients in the US.

The European Union CHMP recently issued three positive opinions for KALYDECO and ORKAMBI, all with the potential to significantly expand the number of eligible patients for our CF medicines.

In fact, at this time last year, we were approved to treat approximately 2,600 people with CF worldwide, whereas today there are more than 25,000 patients approved or under regulatory submission for our medicines.

We are currently conducting two Phase 3 clinical studies of ORKAMBI in children ages 6 to 11 years old and plan to submit an sNDA to the FDA in the first half of 2016. There are approximately 5,500 children with CF in the US and Europe with two copies of the F508del mutation.

Following closely behind ORKAMBI, we have the VX-661 plus ivacaftor pivotal Phase 3 development program underway, which is expected to enroll more than 1,000 people with CF across four studies. We expect to complete enrollment in mid 2016.

At the North American Cystic Fibrosis Conference we announced that we are advancing two next generation correctors, VX-152 and VX-440, into the clinic, and we expect to dose the first healthy volunteer with VX-440 this week.

We believe these new correctors hold tremendous promise as part of a triple combination regimen for the 80% to 90% of CF patients with at least one F508del allele, thereby possibly allowing us to treat patients we are not yet treating and also to enhance the benefit for those we already treat.

The strength of the ORKAMBI launch to date and the continued expansion in the number of people eligible for KALYDECO are further evidence that we continue to execute against our key goal to become a company that can reinvest to create future medicines and deliver returns to shareholders.

As I noted at the NACF conference we also continued to advance early stage development programs outside of CF for the treatment of cancer, pain and other diseases, which represents an important diversification of our development portfolio. Dr.

David Altshuler, our Chief Scientific Officer, will discuss our research strategy and some of our emerging compounds later on this call. As you know, David was one of the four founding members of the Broad Institute of Harvard and MIT where he served as Deputy Director and Chief Economic Officer.

David is an experienced physician and human geneticist and we tapped him to lead our research organization earlier this year so that we can bring his experience to bear as we continue to deliver transformational medicines to more people.

Before I turn the call over to Stuart, I wanted to mention how delighted we are to have entered into a research collaboration with CRISPR Therapeutics to discover and develop potential new treatments aimed at the underlying genetic causes of human disease.

Gene editing represents a new and powerful technology platform that could represent a future paradigm shift in the treatment of CF as well as other genetic diseases, and we're excited to be working with CRISPR, a company at the forefront of using gene editing to create new treatments.

With that, I'll hand it over to Stuart to discuss Vertex's third quarter sales performance..

Thanks, Jeff, and hello everyone. Tonight I will review KALYDECO performance in the third quarter and our progress in making ORKAMBI available to eligible patients in the US. Global sales of KALYDECO this quarter were $166 million, comprised of US sales of approximately $95 million and ex-US sales of approximately $71 million.

This represents a 31% increase over the $127 million we recorded in the same quarter last year. The growth of KALYDECO is a result of continued geographic and label expansion.

We have seen strong uptake in patients with the R117H mutation following approval in the US in late 2014, and in children ages 2 to 5 with eligible mutations following US approval at the end of March 2015.

Internationally, there has also been rapid uptake of KALYDECO, by eligible patients in Australia and in patients with non-G551D gating mutations in several European countries where these mutations are prevalent. We've made significant progress in securing reimbursement in Europe this year.

As a result, the vast majority of eligible gating patients in Europe now have access to KALYDECO. We expect that growth in the number of patients receiving KALYDECO globally in the fourth quarter of 2015 and into 2016 will be tempered by enrollment in the VX-661 pivotal program, as previously described. Now turning to ORKAMBI.

Since the FDA approval of ORKAMBI on July 2, we have been focused on educating healthcare providers on the medicine and working with payers to secure reimbursement for the approximately 8,500 eligible patients in the US. Sales for the third quarter totaled $131 million.

More than 3,000 patients have started treatment in the US, underscoring the important advance this medicine represents in the treatment of CF and the strong interest from both patients and their doctors.

Our field teams around the country have visited all of the 275 CF centers in the US since approval, and virtually every center has initiated patients in ORKAMBI. As we anticipated, interest in the medicine is very high, which has put a significant administrative burden on centers as they work to initiate patients on treatment.

As expected, we are seeing broad coverage of and access to ORKAMBI, which reflects payer understanding and appreciation of the seriousness of the disease and the significant value of a medicine that treats the underlying cause of CF. The majority of commercial and government payers with eligible patients are reimbursing for ORKAMBI.

In those plans with published policies and/or defined prior authorization criteria, almost all are reimbursing to label. There are a small number of plans not yet allowing access to ORKAMBI and we anticipate they will complete their formal ORKAMBI reviews and define their final policies in the coming months.

Our patient support team has been working diligently to help patients navigate the reimbursement process and is working to reduce the time it takes for patients to get their prescriptions filled.

For any chronic medication, compliance and adherence are important facets of patient care, so they will be increasing their focus to ensure that patients are able to take ORKAMBI as prescribed and so benefit from the medicine. Outside of the US, we continue to expect approval in the EU in the fourth quarter of this year.

Our EU commercial infrastructure is largely in place and upon approval, we will then begin pricing and reimbursement discussions on a country by country basis to secure reimbursement for eligible patients who may benefit from ORKAMBI. With KALYDECO, the completion of reimbursement discussion took nine to 20 months following approval.

In summary, geographic and label expansion continue to drive significant growth in the number of patients we treat with KALYDECO, and with the launch of ORKAMBI, we are significantly expanding the number of eligible CF patients we treat. I'll now hand the call over to Ian..

Thanks, Stuart, and good evening everyone. Firstly to the financials. Our CF revenues were $297 million this quarter as we significantly increased the number of eligible people we treat with KALYDECO and ORKAMBI. KALYDECO sales of $166 million were up 31% versus the third quarter last year and up 7% versus the second quarter of 2015. Now ORKAMBI.

The launch in the US is off to a strong start. We recorded $131 million in net revenues. Inventory levels are normal with one to two weeks in the channel. Gross to net adjustments were in the high single digits due to a more rapid uptake for patients within commercial plans as compared to government pay plans.

We continue to expect Medicaid mix to be 35% to 40% in the longer term, which will increase gross to net adjustments into the mid teens by late 2016.

We expect continued revenue growth into 2016 as we approach peak penetration in the US market in the second half of 2016 As for Europe and other ex-US countries, we expect to recognize the first ORKAMBI revenues in Europe in the first half of 2016.

These revenues will be mainly generated in Germany given that pricing and reimbursement approvals in other countries will take some time to finalize.

We do expect French regulatory authority to grant an ATU, or temporary authorization for use, for ORKAMBI in 2015 but we will not recognize revenues from these sales until we receive formal reimbursement approval in France. Our third quarter non-GAAP R&D and SG&A expenses were $278 million, an increase of $66 million compared to last year.

This increase is mainly attributable to an increase in sales and marketing expenses supporting the launch of ORKAMBI and research and development cost to support the advancement of our CF medicines. The scale of our R&D organization and SG&A infrastructure is appropriate for our business.

We expect modest increases in operating expense in 2016 and these will be driven by the progression of our CF medicines in development and geographic expansion to support the international launch of ORKAMBI, but we are rapidly moving toward steady state.

While we expect to invest significantly in R&D we are committed to managing our operating expenses to ensure significant operating margins moving forward. Our non-GAAP net loss has narrowed to $32 million compared to prior year non-GAAP net loss of $86 million, and this is primarily driven by the significant increase in CF product revenues.

From a balance sheet perspective, we've maintained a strong position with approximately $1 billion of cash at the end of the quarter. Now let's turn to the 2015 financial guidance, specifically KALYDECO revenues and the combined R&D and SG&A expenses.

At the time of our second quarter 2015 earnings call in July, we anticipated 2015 KALYDECO net revenues to be between $575 million and $590 million, and we are now increasing KALYDECO net revenue guidance to be between $605 million and $620 million for the full year of 2015.

For the non-GAAP operating expenses, we now expect our combined non-GAAP R&D and SG&A expense for the full year to be in the middle of the range we provided in January of this year of $1.05 billion to $1.1 billion.

In summary, we are in a strong financial position today and focused on delivering financial profile that includes sustainable revenue and earnings growth while continuing to invest to create more medicines and support access to those medicines already approved. Now over to David..

Thanks, Ian. It's great to be here. Good evening everyone. At Vertex, our strategy is to invest in science to create transformative medicines for serious diseases in specialty markets.

This is an enormous challenge because doing anything for the first time involves considerable risk, but it's also a great opportunity, because we live in a time of accelerating breakthroughs in science that can be applied to solve important problems that were previously thought to be intractable.

There are three main points I would like to make about Vertex research, and I'll make comments on each of them. First, CF represents Vertex's most significant success to date and is where we expect our research and early development will continue to have the biggest impact in the near term.

Second, cystic fibrosis provides a good template to understand the kind of diseases we expect to pursue in the future. And third, lessons from our work in CF are guiding our early clinical programs in other areas.

I'll reference five different candidate medicines in pain and oncology that were discovered by Vertex scientists and that are progressing in early development. As you know, in CF we're advancing two next generation correctors, VX-152 and VX-440, out of our labs and into first in human studies.

In vitro data show that in combination with VX-661 and ivacaftor, these compounds resulted in chloride transport that was approximately three fold greater than the use of lumacaftor/ivacaftor combination in these cells.

These data gives us optimism in that hopefully one day we will be able to address the vast majority of CF patients with a triple combination therapy and also to continue to enhance the benefit for those we are already treating. Our research strategy with CF is not limited to our internal programs.

We are also looking externally to bring in compounds that complement our CFTR modulators. And this is enabled by our CF research expertise. Our CF research platform allows us to robustly characterize the activity of external compounds and their potential to work in combination with our existing regimens.

This approach formed the basis for the collaboration we signed with Parion for ENaC inhibitors. And we showed at NACF the ability of Parion's ENaC inhibitor to enhance the effects of ORKAMBI in vitro. We are looking far into the future of CF treatment to understand what impact new treatment modalities could have.

This week, we announced a collaboration with CRISPR Therapeutics to use the CRISPR-Cas9 gene editing platform to create new medicines. CRISPR-Cas9 is an important scientific and technical breakthrough that holds significant promise for the future discovery of potentially transformative treatments.

And this collaboration will evaluate the use of CRISPR-Cas9 across multiple diseases where targets have been validated through human genetics. We are excited to begin our initial gene editing research on discovering treatments to address the mutations and genes known to cause and contribute to CF and sickle cell disease.

Thinking about CF more conceptually, the combination of what we learned through our CF research and the increasing flow of information from human genetics forms a template for our future discovery of precision medicines. First, our CF research program was directed at a target that was validated as an underlying cause based on human genetics.

Second, by understanding the natural history of disease and using proprietary in vitro assays, we had a highly focused goal for CFTR modulation. Third, we had early markers of clinical effect that were highly predictive of late stage success. And finally, these features have led to repeated success from the lab to the clinic.

There are many lessons here that we can apply so that we can invest wisely and increase our chances of success in the future. Our investments are being evaluated based on insights from human biology, the therapeutic approach and clinical development path criteria that we learned from our work in CF and can now apply to other diseases.

In the area of pain, we have two compounds in early development, VX-150 and VX-241 target sodium channels with strong rationale for the treatment of pain based on human genetics and well documented roles in pain sensation.

Specifically, the basis of our program is a key insight from human biology, the gain or loss of function mutations in key sodium channels can increase or decrease pain sensation.

In cancer we have three compounds in early development, VX-970, VX-803 and VX-984, that target key cellular pathways responsible for DNA repair, a fundamental mechanism underlying the development and growth of cancer.

In fact, DNA repair was recognized in 2015 with the Nobel Prize in chemistry citing three academic scientists for their pioneering efforts to map at a molecular level how cells repair damaged DNA. The Nobel Committee specifically cited the implication of this work for the development of new cancer treatments.

In healthy cells, properly functioning DNA repair mechanisms protect against the development of problematic mutations. In cancer however, these systems of DNA repair are known to go awry, allowing cancer cells to both accumulate mutations and increase their ability to survive and proliferate.

The new Vertex cancer medicines now in early development target two key nodes in the DNA repair system, kinases known at ATR and DNA-PK. Modulating activity of these two kinases is predicted to be critical to continued cancer cell survival in the face of DNA damage.

In addition, we believe that these new compounds can be targeted to patients based upon a knowledge of the genomic alterations or characteristics in each patient's cancer, allowing a precision medicine approach to help increase benefit by targeting those patients more likely to respond.

With the most advanced compound, VX-970, we and a national cancer institute are now conducting a number of early studies in tumor types that are predicted to be responsive to an ATR inhibitor. The first Phase 1 clinical data for VX-970 will be presented at the triple meeting in Boston in November.

In closing, we are pleased with the significant progress we are making in developing additional CF medicines, especially for the tens of thousands of patients living with CF who do not have a medicine that targets the underlying cause of their disease.

We look forward to telling you more about our research strategy and our emerging clinical programs as they progress. And with that, I'll ask the operator to please open the line for questions..

Thank you. And our first question comes from Michael Yee of RBC Capital Markets. Your line is now open..

Hey, thanks. Good afternoon. Congrats on a great quarter. Two topics I wanted to get some more color on. The first, just on the launch. Can you speak to more specifically how much inventory stock in that was? I think you said one to two weeks, or is that like $15 million to $20 million or so? Maybe help us there. And you said that centers were burdened.

I just want to understand that comment a little bit and whether you thought there's any seasonality or things like that as we should be thinking about Q4. So talk a little bit about those things. And then my second question as a follow-up is on Europe.

I know you just got a recommendation for approval, but broadly speaking, should we be thinking about price deltas in US and Europe somewhat similar to what we see for KALYDECO here? How should we think about any deltas there? Thanks..

Okay, Michael, thanks for the questions. On inventory, yes, your assessment is right. It's right in that $15 million to $20 million range, was the initial inventory build for ORKAMBI. The rest is really driven by organic patient demand.

In terms of our comments about the burden on CF centers, this is really just reflecting what we heard from centers actually prior to the launch. And we are seeing it play out during the launch. This is just a larger volume of patients than they had to try and get initiated on KALYDECO when we launched it.

And so that administrative burden of helping patients through the payer reimbursement process is a very burdensome one for centers. And they certainly are relaying that to us. However, as we said in our prepared remarks, through the end of September, we have seen over 3,000 patients initiating on therapy.

So the centers are really working through that process. And I don't think we really are seeing it as a seasonal impact. It really is just a function of working through a new launch with payers. In terms of the EU -.

Would you see seasonality in the fourth quarter? There's a lot of things going on in the fourth quarter.

Do you expect any impact there?.

I don't think so. Not in terms of patient visits and things like that. I wouldn't imagine though what we're going to see is a linear trend in terms of the launch. Launches just don't develop in that way. I think it's going to be a more asymptotic launch curve that you would normally see.

But in terms of seasonality, I don't expect that to be much of a factor. In terms of in Europe, our approach to pricing is going to be very similar to that which it was here, perhaps with once exception.

We're certainly going to be taking the same sort of things into account, the seriousness of the disease, the clinical value we've demonstrated through treating the underlying cause of the disease, the investments we've made and continue to want to make in R&D to discover and develop future transformative medicines for CF patients and in other diseases.

But we're also going to have to be sensitive to the economic environment in Europe, including the potential budget impact that ORKAMBI could have in what in almost all cases are single payer markets.

And so to finish on that and just to reiterate what Ian said in our prepared remarks, we do expect to recognize revenues for ORKAMBI in the EU in 2016, but these revenues are going to be primarily from Germany with minimal if any contribution from other countries..

Okay. Thank you..

Thank you. And our next question comes from Geoff Meacham of Barclays. Your line is now open..

Afternoon, guys. Congrats on the ORKAMBI launch and thanks for the question. A couple for Stuart and some for David.

For Stuart, just on ORKAMBI, wonder if you – and I know it's early, but can you speak to the wait time to get a script approved? Does it differ among the different payers? And then, again it's early, but when you look at the feedback from the launch in the initial month or two in terms of the profile, is there any differences that you see commercially versus the TRAFFIC and TRANSPORT Phase 3s? And I have some clinical follow-ups..

Sure, Geoff. In terms of wait time, the average time from a prescription being written to a patient actually initiating treatment or getting a pack through specialty pharmacies is about a month right now. Obviously it's very early, and so that number moves around a lot as patients move through the process, but right now it's approximately a month.

In terms of the profile, I guess I'd say the only difference is that obviously TRAFFIC and TRANSPORT had FEV1 criteria, inclusion/exclusion criteria, so the 40% to 90%.

And certainly we're aware that there are patients who've been initiated with FEV1s below 40% and patients who've been initiated with FEV1s above 90% because the vast majority of payers are reimbursing to label and the label doesn't include any FEV1 restrictions.

So that's really the major difference that I would suggest between what we're seeing in clinical practice and what we saw in TRAFFIC and TRANSPORT..

Okay. And then for David on the two next gen correctors, and congrats on getting those, advancing those, do they change the half-life of CFTR, a mature CFTR that's delta F? I know that was a little bit of a hot topic last year at NACF when you look at what VX-809 did to that.

And then not on the slide, but I was curious if you had looked directionally, how the second-gen correctors also synergize with ORKAMBI versus the 661/KALYDECO combination?.

Yeah, Geoff. This is Jeff Leiden, maybe I'll take those. So in the first question, at least so far we're seeing that when you add all three drugs together, you don't get the effect on correcting CFTR half-life that we've seen with the two drugs, at least with 152 and 440. And your second question was around ORKAMBI.

I think we've shown the data with 661, we've shown the data compared to ORKAMBI, and it's really quite similar. We see about that threefold increase..

I got you. Okay. Okay. Thanks..

Thank you. And our next question comes from Terence Flynn of Goldman Sachs. Your line is now open..

Hi, this Samir on for Terence. Can you provide any commentary regarding the prescribing turns specifically in October? Thanks very much..

Samir, yeah I mean we're not going to really provide details on a month by month basis. Over the course of the quarter, as we said, we saw just over 3,000 patients initiated. Obviously that's been a fairly steep ramp and I wouldn't anticipate that the launch trajectory is going to be linear. That's just not the way that product launches go..

Thank you..

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

Great. Thanks for taking the questions. Congrats on a great launch. I just want to make sure we're crystal clear on the inventory part. With the levels of inventory that you have, it sounds to me like we should not expect that in the fourth quarter that there's any slack to come out of that system. Just want to verify that that's what you're telling us.

And then I guess related on the next quarter's trends, I guess it seems like you're approaching already almost 50% penetration in a partial quarter of sales.

Is there any reason that the homozygous F508del population won't be practically fully penetrated by next quarter?.

So, Matt, I'll take the first question on the inventory levels. So I did mention on my prepared remarks that we are at normal inventory levels, which are between one and two weeks. We'd anticipate that being similar at the year end as well.

The amount that was actually in the channel relating to one to two weeks at this stage of the launch was approximately $17 million, so that $15 million to $20 million that was mentioned before. I think the key to take away is this is a normal level of inventory as we move quarter to quarter or through the year end..

And then on the actual number of eligible patients who are on it, it's actually more like 35% rather than the 50%, Matt. 3,000 patients out of the approximately 8,500 eligible patients here in the US. And so as we said, we wouldn't expect it to continue in a linear way. That's just not the way product launches go.

There's obviously a lot of initial pent up demand and patients and physicians excited about the launch. We still expect that we are going to get to the vast majority of patients over the course of 2016. But we wouldn't expect the launch trajectory to continue in a linear fashion..

Okay. Thanks for that. I really appreciate the comments. I guess, Ian, if I could just sneak in a quick capital allocation question. I'm sure you'll be getting a lot of these as your cash flows ramp up. And I don't really mean this from a margin or profitability perspective.

I'm just saying that if we do assume some robust margins in the business, can you talk about your priorities for the use of cash? Maybe even rank order in terms of importance, allowing the balances to rise or getting involved in M&A in-licensing or share repurchase activity? Just wanted to get a sense of your broad thinking as you approach the swing to cash flow positivity..

Sure. Thanks for the question, Matt. And just to comment, it's a great question because as we turn profitable, which we do anticipate in the fourth quarter, we're now cash accumulation. And over the years, we've been cash preservation while we reinvest in the business. So we are a different company as we head into the fourth quarter.

As we think about the allocation of cash, I start with the receipt of cash is actually the revenue. And just to be basic about this, but the receipt of cash is the revenue. As we think about reinvestment on allocation of that capital, it does go towards R&D for our business, the internal R&D.

But as we develop our business, we also consider the external investment in R&D. And I think you saw that with the example this week of us signing a collaboration with CRISPR Therapeutics that we're very excited about. You've also seen it earlier this year where there's been licensing products that complement our approach in CF.

So we're already starting to allocate that revenue capital toward internal R&D and also acquire products or expand our scientific footprint. And you should anticipate that to continue.

As far as thinking about other allocation of capital rather than just accumulate on the balance sheet, we do think about our capital structure and the shares outstanding. And we need to continue to think about that going forward, but it becomes a prioritization, and first it is about investment in medicines for the future which provides growth.

However, if the capital becomes available that we would consider addressing our capital structure, we'd also make that choice as well..

Really helpful. Thanks, Ian..

Thank you. And our next question comes from Cory Kasimov of JPMorgan. Your line is now open..

Hey, guys. This is Brittany on for Cory. Thanks for taking the questions.

Is there anything you're seeing in the early launch of ORKAMBI in the US that changes your expectations for Europe? And then on the CRISPR collaboration, are there any early signs you're seeing in the applicability of gene therapy to CF? And then also just what advantages did you see with CRISPR versus other gene editing technologies? Thanks..

In short, Brittany, the answer to your first part of the question is no, not really. I mean we're seeing what we anticipated we'd see with the launch here in the US, which is a lot of enthusiasm from physicians and patients for the first drug that treats the underlying cause of their disease.

And I expect there'll be a similar level of enthusiasm from physicians and payers in the EU. So there's really nothing we're seeing here which is changing my view about how I think the launch is going to progress in the EU..

And with regard to CRISPR, we believe that CRISPR-Cas9 is a powerful technology that holds really great promise for discovering transformative medicines for genetic diseases including CF. And we're very excited to work with CRISPR Therapeutics as a leader in that field, and it's a good fit for Vertex..

Great. Thank you..

Thank you. And our next question comes from Ying Huang of Bank of America Merrill Lynch. Your line is now open..

Hi. It's actually Catherine for Ying. A couple questions from us.

On the payer mix, of the over 3,000 patients that started in 3Q, what percentage were Medicaid patients? And then can you speak to your expectations for compliance of the ORKAMBI patients versus those on KALYDECO? And then just lastly for the triple combination, just wanted to clarify, are you planning to move both combinations forward, or will you pick one? Thank you..

So Catherine, a few questions there. Maybe I'll take the first one in terms of the revenue split and Stuart will take the second, and Jeff Chodakewtiz can clean up for us. So first for the split between, let's call it the government channel and the private payer channel, it was about close to 20% in the government channel.

That translated to a gross to net adjustment of our gross price of just below 10%. I did make some comments earlier that as this launch proceeds, we do anticipate that the government channel does rise up to somewhere closer to 35%.

And when we're at that steady state of 35% government and 65% private, then we would anticipate something in the mid teens as a gross to net adjustment. Stuart..

And then Catherine in terms of compliance, obviously early days so far in the launch.

But in terms of what we would anticipate, overall my anticipation is that our compliance with the therapy will be high, and that's because I think physicians will do a great job explaining to patients, and patients I think on the whole understand that this is a medicine that's treating the underlying cause of their disease.

So I think overall the compliance rate is going to be high. I think KALYDECO compliance would be the upper end of my expectations, if I'm perfectly honest. It's the highest compliance rate I've ever seen for any chronic medication.

We'll certainly be doing everything we can to appropriately support patients to maintain a high level of compliance with ORKAMBI as well, but I think KALYDECO would be at the upper end of my expectations..

And in terms of next gen, as you know we're going to move both of those molecules into man. We're going to learn about these compounds as they go through the Phase I studies. But assuming the data supports it, we would plan to move both compounds into evaluation in patients..

Great. Thank you very much and congrats on the quarter..

Thank you..

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

Hello. This is David Lebowitz in for Matt. You mentioned earlier in the answer to another question that it was taking about one month to get reimbursement for patients.

And I was just curious, going forward as patients start to look to obtain refills, is there any expectation for how payers might address refills? Will there be some point where they want to reevaluate?.

Yes, so it's very common for payers to have reauthorization criteria. It will, they differ from payer to payer, both in terms of the time to when they want to reassess a patient and look to reauthorize. And then also they differ in terms of the criteria.

Of the reauthorization criteria that we've seen to date, which is a relatively limited number, but of the ones that we've seen to date, the vast majority have got criteria which are effectively reflective of reimbursing to the label or if the physicians thinks that the patient has seen clinical benefit across a number of different dimensions, reflecting the fact that CF is a complicated, multi system disease..

Thanks, thanks for answering that.

And just to jump over to a different topic, there's been some data released recently from competitors on their triple combo and I know you recently at NACS presented some data, some preclinical data on yours and I was just curious if you could juxtapose yours versus theirs and make any overall comments and comparisons?.

So, David, we'd prefer to keep our comments to our own compounds. So we are very excited about them. We've provided you the HBE data. I would say that we like our position in terms of we already have two marketed medicines. We've got another corrector that is in Phase 3 development that we'd characterize very well given its stage of development.

And then with our two next generation correctors coming into the clinic, it provides us the opportunity to move quickly given that we already understand the medicines that we would combine our next gens with. I'd also point out that we did take our time in choosing the right next generation correctors and the two of them to come into the clinic.

And not only were they picked for their performance in preclinical assays with for efficacy and safety but also their pharmaceutical properties.

So we believe that we're in a very good position to move those into the clinic very shortly into their healthy studies and then next year to move them into triple combination studies and see some results in patients. So we're looking forward to that..

Thank you for answering my questions..

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

Hi. Thanks very much for taking my questions and congrats on the strong ORKAMBI launch. So obviously you have very rapid penetration. It sound like a lot of enthusiasm for ORKAMBI.

I was wondering if you could tell us if there's any sort of commonalities amongst patients who are not yet on treatment, if it's mostly administrative or reimbursement timelines or if there's any particular reasons why physicians or patients may not be choosing the drug other than patients just not having gone to their physician's office yet.

And then on VX-970, I'm interested in sort of the opportunity there.

If you could tell us a little more about the biomarkers you might use for patient selection going forward, perhaps the proportion of common solid tumors that, of patient with common solid tumors that have complete ATM loss which I think was the characteristic you saw and the complete response that was observed. Thanks..

Yeah. Brian, I'll take the first question on those patients not on treatment. I mean obviously we're delighted that we're off to a promising start with over 3,000 patients initiated, but obviously that means that there's somewhere near 5,000 or so who are not yet initiating. That's just such a large number of patients.

It's hard to say there's one reason or two reasons why they haven't started on treatment yet. They really represent all types of eligible patients with the F508del mutation.

And I just want to reiterate, we do still anticipate that the vast majority of those patients will eventually be initiated on ORKAMBI over the course of the rest of this year and into 2016. So there's not really one or two things that are holding those patients back from initiating therapy..

And hi, it's Jeff Chok (42:34). Maybe just a couple comments on your 970 question. You focused on ATM, but I would step back just a little bit, because I think in my mind, that ATM deficiency is one of mutations that actually link to disorders of DNA repair in patients who have cancer. And so, ATM is one.

Another one that we're using it as we go into our trials is mutations and deficiencies in p53, actually a more common one. And the frequency of that varies widely across tumors, so I can't give you a single number. But it certainly is observed in multiple types of cancer.

And we think that does serve as an important foothold in our understanding of the science, to tell us where to go clinically..

Thanks so much..

Thank you. And our next question comes from Mark Schoenebaum of Evercore ISI. Your line is now open..

Hi, this is Odysseas actually sitting in for Mark. A lot of the questions are already asked, so I kind of wanted to take a step back, and ask maybe just more big picture questions. Congratulations on what's a great quarter. But just sort of trying to think about competition, and perhaps specifically Galapagos.

And thinking about the development risk, I guess, just trying to think about how Vertex might see that, whether it's each of the drug at issue, or just (44:15) the ability to combine those drugs. Anyway, any thoughts on that? And then I had a question on, you mentioned reauthorization criteria.

And you mentioned clinical criteria, and I guess I just wondered if you could comment on how high you see the bar for those clinical criteria, just because it seems early to be asking those kinds of questions. And then, just based on the pipeline, and the number of products that are being moved forward, just maybe speaking to margins a little bit.

So I know you've made comments before about expenses, but now just seems like a good time to ask again..

Yeah maybe, this is Jeff Leiden, I'll start with the first one and I guess Stuart can take the second and Ian will take the third. With respect to Galapagos, just as Stuart emphasized, Ian said, we really don't comment on any of the competitor compounds or programs.

I would just reiterate what Ian said about our program, which is we like our position really for three reasons. Number one, we have two drugs in the combination, 661 and KALYDECO, that are either approved or very well characterized. So when you put a three drug combination together, we feel that's a nice position to be in.

Number two, we spent a lot of time optimizing the pharmaceutic properties of both next gen correctors and that's important as you put a three drug combination together.

And number three, we showed you the chloride data from the HBE cells with that three drug combination, which we're getting at levels which are at or north of what KALYDECO does in G551D and so far those assays have predicted quite well what we see in the clinic. So we're excited to see the first Phase 2 results. We'll start those studies next year..

And on re-authorization criteria, just to reiterate what I said. So far we've seen a limited number of plans which have published their reauthorization criteria. So we're really just talking about a small N at this stage. Our knowledge of those will increase obviously as plans publish those criteria or make those criteria known.

Of the ones that we've seen so far, they aren't really setting a really very high clinical bar to use your terminology. Most of them are essentially just ensuring that the patients continue to be within our label or show improvement across a number of clinical parameters in the opinion of the treating physician.

So, but as I say, that's on a limited basis right now because it is early for plans to be publishing reauthorization criteria..

And Odysseas, just to round out your questions, I'll just state again we're committed to driving this business forward and having high operating margins. We get to that position by revenue growth and controlling our operating expenses. We have a business and we're in an area where we can do that.

And so for us, it's execution on the launch both in the US and then in Europe, continue to reinvest for growth of the future yet still having significant operating margins..

Thank you..

Thank you. And our next question comes from Phil Nadeau of Cowen and Company. Your line is now open..

Good evening. Thanks for taking my question and congratulations on the progress. First one on European reimbursement. In the prepared remarks you noted that KALYDECO took I think between 9 and 20 months to get country by country reimbursement.

I'm curious whether you think that could go faster this time around given that you've gone back to the same payers, in some cases probably several times, with the different KALYDECO label expansions..

Yeah. Phil, thanks for the question. I won't really know until our team over in Europe begins those reimbursement discussions with the relevant authorities, and that's why I said it's really, really difficult to predict. They all have different processes. A number of them, those processes are changing.

They're not even the same process that we went through with KALYDECO. So I really can't predict with any sense of confidence or accuracy whether we're going to go faster or slower with ORKAMBI. We won't really know until we begin that process after we receive regulatory approval, which we continue to anticipate will happen later this quarter..

Okay. And then second question also on your prepared remarks. You mentioned that the reimbursement assistance team is beginning to shift to impact persistence and contact the patients.

Can you talk a little bit more about that? What exactly is involved in impacting persistence and what type of message do you find most effective?.

Yeah, thanks for the question. So obviously they do a number of things. One is to help patients who are initiating on treatment navigate the reimbursement process.

And they'll obviously need to continue to do that because whilst there are over 3,000 patients initiated, there's still a lot more patients that physicians are going to want to initiate on ORKAMBI. But for those who are now started on therapy then we have a number of programs.

And essentially it's really helping educate patients on the mode of action of ORKAMBI, how it treats the underlying cause of their disease, and providing them to the extent they want to receive educational materials and refill reminders and things of that nature. And so we tailor that to the individual patients as they desire..

Great. Thanks for taking my questions..

Thank you. And our next question comes from Tony Butler of Guggenheim. Your line is now open..

Yes. Thanks very much. Stuart, I recognize the commentary around the approval in the EU toward the end of the quarter, but if I make assumptions that as you alluded to earlier Germany's the first country to be purchasing, can you comment on the number of F508del patients in Germany? And then my second question's more scientifically oriented.

Beyond the correctors of 440 and 152, I had the impression that you may put additional correctors in, second-gen correctors into the clinic. Is that still true or did I misinterpret that? Thanks very much..

Yeah in Germany, Tony, there's about 2,500 patients who are 12 and over who are homozygous for the F508del mutation. And so assuming that our approval comes through at the end of this quarter, and that that's our labeled indication, that will be the eligible patient population in Germany..

Thank you..

And this is Jeff. I'll take the second one which was about the additional correctors, and maybe I'll broaden it out just a little bit if you don't mind. Our goal is to create the best portfolio of medicines for each one of these patient populations, and so certainly a big part of that is going to be next gen correctors.

And as I've said several times before, we have multiple, we have discovered multiple next gen correctors. These are the first two, but there are others behind them.

And assuming they pan out as they go through lead-up and tox, yes, our intent would be to put additional correctors in, particularly if they have different and interesting properties so that we can study them. But beyond that, I'd also remind you of things like the ENaC inhibitors, like gene editing.

We're really looking at a variety of modalities, and so over the next few years, you can expect to see us bring multiple compounds and frankly, multiple modalities into the clinic to try to create the best combinations..

Understood. Thank you..

Thanks..

Thank you. And our next question comes from Liisa Bayko of JMP Securities. Your line is now open..

Hi, and congratulations from me, as well. You mentioned that there were a couple of plans that are not yet covering ORKAMBI.

Can you maybe give us a sense of what percentage of lives that matter to you that represents?.

Yeah, Liisa. It's a small number of plans. It's in the single digits in terms of the number of lives that they are responsible for. And essentially, they are not reimbursing yet, and we know they're continuing to work through the process of evaluating the product, and we're sure they'll come to a formal conclusion over the next few months.

But it's at the minute, it is single digits in terms of the number of lives covered by those plans..

Thanks. That's helpful. And then just on CMS, can you walk us through the timing there and getting coverage for the Medicare/Medicaid population? Thanks..

Well in terms of payer mix, we already have had patients both in Medicare and Medicaid who have got access and have been reimbursed for ORKAMBI. The vast majority of in fact state Medicaids have already reimbursed patients. And so we already have effectively reimbursement in a number of states and through Medicare as well..

Okay.

So there's not really any gating factor there then?.

I mean, there are some Medicaid plans who are still considering the product and have decided that they are not going to cover ORKAMBI until they've come to a formal decision. So it really is on a state by state basis on Medicaid. There really isn't one answer, one decision; it really happens on a state by state basis..

Okay. Fair enough. And then just one question about the oncology portfolio. Can you maybe at all describe some of the data? I see in triple negative breast cancer patients and non-small cell lung you're going to kind of enhance maybe some of those populations and it seems like maybe you have some data there.

Could you comment at all on that? And that's my final question, thank you..

Hey, hi, it's Jeff Chodakewtiz. I think it actually goes back to the question that was asked by someone else earlier about how are we selecting the right subset of patients. And that those factors are present actually in patients with multiple kinds of tumors.

What we've done in those two small sets of patients is actually to hone in on patients who we expect or will require to have some of those kinds of mutations that we spoke about, those deficiencies in DNA repair.

And then by doing that, we think we are being able to get a very focused, relatively rapid answer to the question about how the drug will work. So that's what that represents that you're seeing in our study descriptions..

Thanks a lot..

Thank you. And our next question comes from Katherine Xu of William Blair. Your line is now open..

Hi. Good evening. I just have a few questions on the CRISPR program. How far is it from the clinic? From a scientific perspective, are there difficulties in levels of research between sorting these in pairs versus correcting the base pairs? And also why did you choose CRISPR Therapeutics? There are a few other companies with similar technologies.

And if you could comment on the IP side, that would be great as well..

So Katherine, David will take the first two questions and then I'll answer the third question once David's through it on the process we went through..

Yeah. Thanks for the question. I would say that it's still early days in this and so we really can't comment or predict exactly how long it will take. And in terms of things like the different methods of using CRISPR to modify the DNA, again that will all be subject to research we're doing.

And look forward to updating you when we have progress to report..

And to the process, on previous calls we've been asked about our business and corporate development strategy. We've always had three main approaches. One was to complement what we're doing in cystic fibrosis. Two was to be opportunistic in licensing and M&A.

And then a third area was always to broaden our scientific platform and that's what we're doing here.

We've been very good in small molecules for a long time at Vertex and with David's help on coming on board about a year ago, we were able to consider other technologies and how we may expand our scientific footprint, and this was an area that rose to the top as a priority for us.

And so we then went through the process as you usually do as there are a number of companies that have access to this technology.

We did our usual diligence process and based on the structure of the arrangement, the collaboration between people and the opportunity of fit with what we want to do at Vertex, our choice was with CRISPR Therapeutics and we're very happy to be a partner of theirs as we move forward..

So operator?.

On the IP part?.

So operator? Beg pardon..

Yeah, we don't comment on IP, Katherine. Thank you..

Well operator, it's now 6 o'clock. We will take two more questions..

Thank you. And our next question will come from the line of Ted Tenthoff of Piper Jaffray. Your line is now open..

Great. Thank you very much and my congrats on a really nice launch with ORKAMBI.

Question, just with respect to differentiation between triple therapy with the second-gen corrector and also the ENaC inhibitor, how ultimately do you see sort of patient selection there? Obviously it's going to be data driven, but is there something where maybe the ENaC inhibitors would be used in different patients? What's your general thinking along those lines?.

Yeah. Thanks for the question and you're absolutely right. It will obviously in the end be driven by the data which is why we're going to explore these in Phase 2.

But if you think about it sort of at a high level strategic, from a high level strategic standpoint, second generation correctors in a triple combination would be expected to address anybody who has a single or double delta 508 allele. so that's about 80% to 90% of all patients.

ENaC inhibitors, again theoretically and we're going to have to demonstrate through the clinic, should be useful for anybody with any mutation and the fact as you know, Parion is running an initial Phase 2 trial that's an all-comer trial. We're going to run a Phase 2 trial with ENaC plus ORKAMBI.

And based on the data there, we will be able to determine how to sort of craft these regimens for each patient subset. But that would be the theoretical expectations based on what we've seen in HBE cells.

But does that make sense?.

Yeah. Absolutely. I appreciate that color..

Sure..

Thank you. And our last question comes from the line of Brian Skorney of Robert W. Baird. Your line is now open..

Hi. This is Nina (59:48) in for Brian. Thanks for taking the questions. So I just have a question on the ORKAMBI launch.

Do you have a sense of what percentage of treatings have actually started patients on ORKAMBI? And have you seen any hurdles in terms of getting physicians to prescribe the product?.

I can't tell you exactly how many physicians have actually have a patient on ORKAMBI. What I do know is that just about every CF center in the United States has put a patient on ORKAMBI. So we are really seeing again what we anticipated, which is broad interest in using the medicine, both with physicians and with patients..

Great, and one last question. So I know you said that there has been good feedback from payers in terms of getting ORKAMBI covered. Has there been any sort of push back at all? And if so, could you give us some color around that? And that's all..

Yes. I mean I'd say the end product of our discussions has been good, and that's reflected in the fact that we have good access, the vast majority of which is to label.

Obviously there's been a lot of discussion there, but a lot of it as I said been very productive because payers I do think understand how serious a disease this is, and how this is a disease that is – this is a product which is treating the underlying cause of the disease.

And the fact that it's an orphan, if not ultra orphan indication, and so they have relatively few patients in each of their individual plans. So the discussions have been very productive and I think that's reflected in the good and broad access that we have..

Great. Thank you..

You're welcome..

So we appreciate everyone joining us for the call tonight. The investor relations team will be in the office if you have additional questions. Thank you and have a good evening..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day everyone..