Good evening. Welcome to the Vertex Full-Year and Fourth Quarter 2019 Financial Results Conference Call. This is Michael Partridge, Senior Vice President of Investor Relations for Vertex.Making prepared remarks on the call tonight, we have Dr. Jeff Leiden, Chairman and CEO; Dr.

Reshma Kewalramani, Chief Medical Officer; Stuart Arbuckle, Chief Commercial Officer; and Charlie Wagner, Chief Financial Officer. We recommend that you access the webcast slides on our website as you listen to this call.

This conference call is being recorded, and a replay will be available on our website.We will make forward-looking statements on this call that are subject to the risks and uncertainties discussed in detail in today’s press release and our filings with the Securities and Exchange Commission.

These statements, including without limitation those regarding Vertex’s marketed CF medicines, our pipeline and Vertex’s future financial performance, are based on management’s current assumptions. Actual outcomes and events could differ materially.I will now turn the call over to Dr. Jeff Leiden..

Thanks, Michael. Good evening, everyone. We saw many investors and analysts at the JPMorgan Conference two weeks ago. So I’ll spend just a few moments highlighting our 2019 achievements and what we believe sets Vertex apart for the future.2019 was a truly remarkable year for Vertex.

All parts of our business met or exceeded the goals we set at the start of the year. And as a result, we are very well-positioned to bring our CF medicines to many more people and to advance our broad pipeline in additional diseases in 2020.In cystic fibrosis, the U.S.

approval of TRIKAFTA for patients 12 and older in October, five months ahead of our PDUFA date, was the most significant milestone to date in our efforts to bring new CF medicines to all people with this disease. TRIKAFTA is a remarkable medicine that holds the potential to treat up to 90% of all people with CF.As you’ll hear from Stuart, the U.S.

launch of TRIKAFTA in patients ages 12 and older is off to a very strong start. This clear interest in TRIKAFTA across all groups of eligible patients and the early feedback from both patients and doctors is highly positive.Outside the U.S.

in 2019, we reached a number of key reimbursement agreements for our CF medicines that will allow many thousands of new patients to begin treatment with our CFTR modulators in countries, including England, France, Spain, Australia and many others throughout 2020.We are also making excellent progress advancing and broadening our pipeline beyond CF.

As we enter 2020, we are now in the clinic with multiple new medicines in five diseases outside of CF.

We continue to implement our strategy of advancing a portfolio of medicines into clinical development for each of the disease areas.Key programs include alpha-1 antitrypsin deficiency, our AAT program, where we have multiple small molecule correctors in the clinic, aimed at addressing the underlying cause of disease in both the liver and the lung.

These include VX-814, which has recently entered Phase 2 clinical development.Beta thalassemia and sickle cell disease, where we announced clinical data for two patients treated with CTX001, a one-time CRISPR/Cas9 ex vivo gene-editing therapy, which suggests that we may be able to functionally cure these diseases.FSGS, where our first small molecule aimed at halting the progression of the disease, will move into Phase 2 development in 2020.

And type 1 diabetes, where we are developing an autologous islet transplantation therapy with cells alone, and a second, with a combination of cells and a device to correct islet cell function and potentially transform the treatment of this disease.Importantly, these pipeline programs now span multiple modalities, including small molecules, where Vertex has excelled in the past, but also new approaches such as cell and genetic therapies.

For these new modalities, we’ve acquired or partnered with leading companies who have the best teams and unique expertise to manufacture and deliver transformational therapies for diseases that fit our strategy.In the business development, we completed more transactions in 2019 than in the four prior years, including our acquisitions of Semma with a leading cell therapy approach for type 1 diabetes and Exonics, the leader in gene editing for DMD and DM1.In summary, 2019 was the combination of almost a decade of focused execution against our strategy of discovering and developing transformative medicines for serious diseases in specialty areas by focusing on validated targets and predictive biomarkers that will improve the probability of clinical success.Our strategy is playing out exactly as we had planned and will position us for continued short-term and long-term growth.

The company has never been stronger or better positioned for future success in CF and beyond.Let me now turn the call over to Reshma, who will talk in more detail about the year ahead..

Thanks, Jeff. Our 2019 progress has positioned us for continued growth in 2020 and for many years to come.

We are focused on bringing our CF medicines to more people, advancing our pipeline and building financial strength to support continued investment in internal and external innovation.In 2020, we expect to gain approval for the triple combination in Europe in patients 12 years and older and to submit TRIKAFTA for approval in the U.S.

for children ages six to 11.

Beyond CF, we are advancing multiple molecules in our pipeline through late preclinical and early clinical development and are now entering a period of multiple proof-of-concept data readouts and clinical advances with potentially transformative medicines.With our AAT program, we recently initiated a Phase 2 proof-of-concept study of the small molecule corrector, VX-814 in patients with two copies of the Z mutation and expect data from the study in 2020.In APOL1-mediated FSGS, we completed a Phase 1 study of VX-147 in late 2019 and expect to initiate an open label Phase 2 proof-of-concept study in 2020 to evaluate the reduction in protein levels in the urine with VX-147.In pain, having established proof-of-concept data from NaV1.8 inhibition with VX-150 in multiple Phase 2 studies, our focus is now to find the optimal molecule or molecules to advance into mid and late-stage studies.

We are continuing to advance a portfolio of medicines into clinical development and will be advancing an additional molecule into Phase 1 development in the first-half of 2020.

We have discontinued Phase 1 development of VX-961, because it did not display optimal PK and tolerability profile.Beyond our small molecule programs, we’ve made significant progress in building and progressing a portfolio of cell and genetic therapies, in line with our research strategy, primarily through our business development activities.

We are highly encouraged by our recent clinical data for our CRISPR/Cas9 ex vivo gene-editing treatment CTX001 for beta thalassemia and sickle cell disease. Both studies continue to enroll and we expect to provide additional data for this program in 2020.I’d also like to highlight our cell therapy approach for type 1 diabetes.

This program comes to us from our acquisition of Semma Therapeutics in October of 2019. The team of scientists at Semma have cracked the biology on both the production and scale up of fully mature islet cells and has developed a novel implantable device to protect these cells from the immune system, while preserving cell health and function.

We have set an ambitious goal to progress this program into clinical development in late 2020 or early 2021.In summary, we’ve made outstanding progress in CF and multiple other diseases in 2019. And I look forward to updating you on our progress over the coming months and years.I’ll now turn the call over to Stuart..

Thanks, Reshma. I’m pleased to review with you this evening our strong commercial performance for 2019. Our full-year 2019 CF revenues were $4 billion, up from $3 billion in 2018, which represents year-over-year growth of 32%. This growth in total revenues was driven primarily by the full-year impact of the SYMDEKO launch in the U.S.

and Germany, label expansions for our CF medicines globally and the early approval and launch of TRIKAFTA in the U.S.The launch of TRIKAFTA is off to a very strong start.

Our fourth quarter total CF product revenues were approximately $1.25 billion, including TRIKAFTA revenues of $420 million, making TRIKAFTA already our top-selling medicine.I would note that our fourth quarter revenues include, as expected, launch-related stocking of approximately $100 million.

Approximately 18,000 patients are eligible for TRIKAFTA in the U.S., which represents the largest patient population eligible for one of our CF medicines at the time of approval and launch.For 6,000 of these people, this is the first time they have had a medicine to treat the underlying cause of their CF.

We are seeing strong interest from all groups of eligible patients, including new initiations, as well as patients transitioning from our other CFTR modulators.Our commercial supply, market access, patient support, marketing and field teams were ready for an early approval.

And since October, these teams have been doing a phenomenal job with CF centers and commercial and government payers. The centers and their multidisciplinary teams have done a remarkable job responding to the high-patient demand.

And while still early in the launch, we are on track to obtain broad reimbursement for TRIKAFTA in the U.S., similar to what we have seen for our other CF medicines.

Together, these factors have combined to produce the strong start to the launch.Outside the U.S., we reached multiple reimbursement agreements in 2019 in key countries, which will enable many thousands of patients to initiate treatment with certain Vertex medicines for the first time.

While TRIKAFTA will be the main driver of Vertex’s revenue growth in 2020, we also expect an increase in international revenues based on more patients initiating treatment with our medicines outside the U.S.In summary, I’m pleased that we are bringing our medicines to many more patients around the globe.And with that, I’ll now turn the call over to Charlie..

Thanks, Stuart. I will provide additional remarks this evening regarding our 2019 financial results and I will also discuss our 2020 financial guidance. All of the results and guidance I will discuss are non-GAAP.As Stuart mentioned, we had fourth quarter total CF product revenues of approximately $1.25 billion, a 45% increase compared to 2018.

Our fourth quarter 2019 combined R&D and SG&A expenses were $496 million, including the operating expenses of Exonics and Semma, compared to $400 million in the fourth quarter of 2018.

The significant growth in revenues and disciplined spending in the fourth quarter resulted in operating income of $593 million, a 70% increase compared to the fourth quarter of 2018Net income for the fourth quarter of 2019 was $444 million, compared to $337 million for the fourth quarter of 2018.

Our full-year financial results reflect a similar story of strong revenue growth and disciplined spending, resulting in exceptional operating income growth.Our total CF revenues for 2019 were $4 billion, a 32% increase over full-year 2018. Our 2019 combined R&D and SG&A expenses were $1.69 billion, compared to $1.53 billion for 2018.

Our full-year operating income was $1.79 billion for 2019, compared to $1.11 billion for 2018, a year-over-year increase of more than 60%.As our profitability and cash flow increase as a result of treating more CF patients globally, we have deliberately reinvested in both internal and external innovation to create future medicines.In 2019, we invested approximately $1.6 billion in external innovation through new acquisitions and collaborations.

Even with the significant BD activity, we ended the year with approximately $3.8 billion in cash and marketable securities, compared to $3.2 billion at the end of 2018.As we look ahead to 2020 and beyond, we expect continued increases in cash flow to provide more flexibility for additional investments to fuel our long-term growth.Now on to 2020 guidance.

Today, we’re providing 2020 financial guidance for total CF product revenues, as well as for combined non-GAAP R&D and SG&A expenses and our anticipated effective tax rate. The strong uptake of TRIKAFTA and the recent completion of reimbursement agreements outside the U.S. have positioned Vertex for continued strong revenue growth in 2020.

Our 2020 guidance for total CF product revenues is $5.1 billion to $5.3 billion, which at the midpoint, reflects approximately 30% growth over 2019.I would note a few dynamics that are reflected in our 2020 guidance.

As part of the strong launch of TRIKAFTA, that Stuart mentioned, we saw an expected launch-related inventory build of approximately $100 million in the fourth quarter that we do not expect to repeat in 2020.Also, as we move through 2020 as with all of our CFTR modulators, persistence and compliance dynamics will affect TRIKAFTA revenues.

And therefore, our experience with our other CF medicines is factored into our guidance. Lastly, we expect gross to net adjustments of 13% to 14% for 2020.Focusing in on Q1 2020, we expect our revenues to be modestly higher than Q4 2019 revenues.

This reflects the impact of the fourth quarter inventory build, as well as gross to net adjustments in the first quarter of each year that are generally higher relative to the previous quarter.We expect 2020 combined R&D and SG&A expenses of $1.95 billion to $2 billion.

The increase compared to 2019 is primarily driven by the launch of TRIKAFTA globally and the expansion of our R&D pipeline into additional diseases.

Our R&D expense growth includes increased investment to advance our programs and cell and genetic therapies, including type 1 diabetes and DMD.Now to tax guidance, where we expect our full-year non-GAAP tax rate to be 21% to 22%. The tax rate may fluctuate quarter-to-quarter with the highest rate occurring in the fourth quarter.

The vast majority of our tax provision will be non-cash expense until we fully use our net operating losses.As Jeff noted, Vertex has a unique long-term growth potential that is based on continued revenue growth in CF and an expanding pipeline.

And with continued spending discipline, we expect operating margins, earnings and cash flow to continue to increase.Now back to Jeff for a few concluding comments..

Thanks, Charlie. As this is my last quarterly call as CEO, I hope you indulge me for a couple of minutes for some final comments. First, it has been a tremendous pleasure and honor to lead Vertex for the past eight years. I always say the drug discovery and development is the ultimate team sport.

None of our successes would have happened without several incredible teams.First, I want to thank the entire Vertex team, including our senior leadership team, most of whom have been with me for the entire journey.

I’ve never seen a stronger team in my 35 years in the industry and I’m so proud and grateful for all of their work.The commitment of our outstanding senior leaders and employees to execute the Vertex strategy of serial innovation to deliver transformational medicines to patients and to grow the business is the driving force for our recent achievements, and it’s also what will differentiate us and position us for long-term success for the future.Second, I want to thank our Board of Directors and our investors for their constant support, encouragement and advice.

Even when I first became CEO and we were still losing several hundred million dollars a year, we’re trying to develop the first transformative CF medicines.And finally, and most importantly, I want to thank the entire CF community, patients, families and caregivers for their courage, their persistent encouragement and their enthusiastic participation in this amazing journey toward a cure for all patients with this devastating disease.

I look forward to continuing to work with all of you as Executive Chairman to bring more transformative medicines to patients with serious diseases who are waiting.I will now open the line to questions..

Thank you. [Operator Instructions] Our first question comes from Phil Nadeau with Cowen & Co. Your line is now open..

Good evening. Thanks for taking my question. Jeff, let me be the first to congratulate you and all that you and the Vertex team have achieved in your eight years of the CEO tenure. It’s really been quite something to watch.

Then, my question is just in terms of the numbers.First, Stuart, you mentioned really three buckets of TRIKAFTA patients, those transitioning from ORKAMBI and SYMDEKO, new patients being added to therapy, who had no option prior and the new initiations maybe among the holdouts to dropouts in other populations.

Could you give us some sense of the dynamics in those three markets in – of the $300 million in end user demand? Where do they come from?And then second, just on the inventory, it seems like $100 million of inventory is really just two to three weeks of inventory, given the current run rate.

So to be clear on your comments, it’s not that you expected inventory to come out of the channel during Q1. It’s just that there is no subsequent inventory build, given that you’re already had a kind of average run rate for inventory in the channel? Thanks..

Yes. Great. Phil, I’ll take the question on the TRIKAFTA uptake, and then Charlie can talk to the inventory. So, as you know, we had a very strong launch. There are a number of eligible patient populations.

As you might tell from the strong launch, we have had a high level of interest from all patient groups and we’ve seen uptake in all of those patient groups and we expect that to continue into 2020. And so to handle the inventory question, I’ll throw that over to Charlie..

Yes. Phil, to your question, the inventory – first of all, the inventory build in the fourth quarter was expected. And I’d say, the magnitude of the build is probably even a little bit less than what you mentioned.

But – therefore, I think it’s fair to say that, that is a – we commented that, that’s a build that won’t repeat nor do we expect it to get drawn down significantly. Inventory bounces around a couple of day to – a day or two on any given quarter, but that’s about the right level..

That’s very helpful. Thanks for my questions and congrats on the performance..

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

Hi, thanks for the question and, again, congrats on a great result. And, obviously, Jeff, you are moving and leaving them with a great position. I guess, I just wanted to ask, Stu, you made some comments just now on where the buckets were.

But maybe you could just characterize how you think about the swapping dynamic and was there parts of that number for swapping? And how do you think, what percent of swapping could happen throughout 2020, just so we can think about that?And then maybe a question for Reshma. I mean, I know that there’ll be a lot of focus on AAT next.

I know you’ve given a broad guidance on 2020. Can you just talk about the speed of that study? It’s a short study. What you’re doing there and how fast we can get that data? It just seems like a very broad timeline for 2020 data. Thank you so much..

Yes. Mike, on the uptake of TRIKAFTA. As I said, we’ve seen interest across all of the patient groups and that includes those who are currently being treated with one of our existing CFTR modulators.

Over time, where we have overlapping labels, given the superiority of the TRIKAFTA profile, we expect the vast majority of patients who are eligible for TRIKAFTA are going to switch to TRIKAFTA. Exactly how long that process will take, it’s hard to tell. Obviously, we’re early in the launch.

But in terms of the destination, the vast majority of those patients are going to transition to TRIKAFTA..

Hi, Mike. With regard to the alpha-1 antitrypsin deficiency program, I think, the one you’re referring to is VX-814, that’s the one that’s furthest ahead. It’s the one we started Phase 2 proof-of-concept dose-ranging toward the very tail-end of 2019. So actually, it’s really very early days. We’re just getting going with that study.

I’m expecting that we will have results from the program in 2020, but it’s just way too early to give you more color around that..

Okay. Thank you..

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

Thanks for taking my question and, Jeff, congrats on all that you’ve achieved at Vertex.

So firstly, could you just comment on how the 2019 TRIKAFTA launch will then form the cadence of uptake during 2020?And then secondly, as we look at the pipeline, any new thoughts around the requirements for the regulatory pathway for alpha-1 antitrypsin here regarding the need for liver biopsy or not.

And then secondly, with Type 1 diabetes, what does a proof-of-concept study look like here?.

Yes. Salveen, it’s Stuart. I’ll take the question on the 2019 and impact on 2020. So obviously, given the results we’ve announced today, off to a very, very strong start. Having said that, there are many patients. We continue to need to get onto TRIKAFTA.

So we are expecting continued growth through 2020 in terms of adding patients and that’s built into our guidance of $5.1 billion to $5.3 billion.As Charlie said, one other factor to take into account, as you think about the cadence or the shape of those revenues is the impact of persistence and compliance and how that will impact revenues.

It does have an impact although as we’ve seen with our other CFTR modulators. Our expectation is that the levels of persistence and compliance will be high with TRIKAFTA, particularly given the strong clinical profile. And then I think on the AAT and type 1, I think Reshma will take those..

Sure. So let me tackle the diabetes question first, and I’ll take AATD second. So with regard to the diabetes program, that’s the cell therapy program that we acquired through the Semma acquisition.

So, I mean, the proof-of-concept I imagine to be something you can think about more akin to sickle cell and our beta thal program versus a small molecule program.And what I mean by that is, we are going to be able to go into the clinic right into patients. It’s not going to have a healthy volunteer step.

And whether we go with the cell program alone or the cell with the device, I think, the kind of endpoints you could expect are fairly straightforward ones, glucose levels, hemoglobin A1c. Clearly, hypoglycemic episodes on the safety side will be something that we’re watching.

But I think that kind of gives you a good sense for what we’re going to be watching for.The other thing to mention is, I think that you can, again, similar to beta thal and sickle cell, I anticipate that the proof-of-concept studies are going to be a reasonable size and a very reasonable duration.With regard to the AATD program, we have not had further regulatory interactions.

And so, as I’ve commented on before, I was impressed with the October 2019 FDA conference. What the agency indicated was that they would work with each sponsor depending on their approach for what the regulatory enabling endpoint would be.

And I anticipate that the key points that we would be looking for from this program that’s ongoing is functional serum AAT levels.And as we think forward beyond that, we just need to get through the regulatory interactions.

I will remind you that the augmentation companies receive their approval based on AAT levels, that’s just the data point to look at.And the last thing I’ll say is, our approach is obviously very different than those out there and that the small molecule corrector approach holds the opportunity to treat both the liver and lung manifestations.

And so, obviously, we’re going to be talking through what those liver manifestations and what those endpoints would look like as well..

Great. Thank you..

Thank you. Our next question comes from Paul Matteis with Stifel. Your line is now open..

Great. Thank you so much for taking the questions. Just one quick question on guidance. Even with considering inventories when we just take your comments on 1Q, it looks like you’re already pretty close to annualizing at the full-year number you outlined. And so, we just wanted to get a better understanding of the dynamics that go into your guidance.

Are you just being conservative, or is there a reason that uptake could slow?And then, just second quickly on the cell therapy program in diabetes, I was just curious how do you think about a realistic clinical goal for that program? And do you feel like the bar for true commercial success is insulin independence, or are there other ways we should think about a potential benefit? Thanks so much..

Hey, Paul, this is Charlie. I’ll take the first question on guidance. And I would not characterize the guidance is conservative.

I think it’s appropriate, given what we know about the TRIKAFTA launch so far, as well as the reimbursement agreements that we signed in the fourth quarter.Again, just to touch back on the inventory topic, it’s tempting to look at the Q4 run rate and want to extrapolate from that.

But if you take the $1.25 billion back out of $100 million for the inventory build, you’re at $1.15 billion into the guidance, obviously implies significant growth over that.

And then again as we touched on – in the remarks, the impact of persistence and compliance is meaningful and will come into the revenues over the course of 2020.So once you factor those things in, we think that the guidance is absolutely appropriate.

And candidly, when you think about the $5.2 billion number at the midpoint, so $1.2 billion increase year-over-year, a 30% growth rate, it sets us up for another very strong year..

Paul, I’ll take the question on the cell therapies program and type 1 diabetes.

So if you think about the current approach to type 1 diabetes and whether you think about insulin just injection or you think about closed-loop systems or you think about really anything that’s available there, what you realize is in these over 1 million people who have this disease, neither is the glucose control particularly good, whether you look at glucose or hemoglobin A1c, nor is it particularly safe on the other side, and that’s the – to speak to the hypoglycemic episodes.Then, if you look at cadaveric transplants, that actually shows that people who have cadaveric transplants, islet cell transplants, they do very well in terms of glucose control and don’t have the deficiencies with hypoglycemia.

Now, the problem there, of course, is there just aren’t enough islets – there are not enough cadavers for transplant and then there is the issue of immunosuppression.So the real beauty in this approach and why we’re so very excited about this is Doug Melton and the Semma Group have come up with a way to not only produce, but to scale these islet cells.

And that holds the potential for really excellent glucose control like the cadaveric transplant without the hypoglycemic episodes. So that’s what the real goal here is..

Great. Thanks for the color. I appreciate it..

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

Hey, guys. Thanks for taking my question. Congrats on the quarter. And Jeff, certainly, you will be missed in the CEO seat, incredible run. I think we call that CEO might drop.

So my two questions are, I guess, when you’re thinking about in the field, what have been kind of the biggest surprises? I know you guys talked about bottlenecks and maybe potentially just so much demand, have you seen that to be the case or has it been a little better?And then my second question is, it might be a little early, but do you think the compliance and persistence are trending more like a KALYDECO, or kind of what are the puts and takes that you think about that as a dynamic in 2020? Thanks..

Yes. Alethia, thanks very much for the question. You’re right. Prior to the launch, there was a couple of potential bottlenecks as you’ve described them that we were concerned about. One was concerns that CF centers, it raised with us about the capacity constraints.

They felt they might have given 18,000 patients were going to be eligible for TRIKAFTA.I have to say, they have done a spectacular job in responding to the high-level of patient demand.

And whilst there have certainly been some bottlenecks at some centers, in general, the multidisciplinary teams have jumped, just an amazing job working to get patients initiated on the medicine.The other potential bottleneck as always with a new product launch is whether we are going to get support from payers.

And again, our teams have done a great job working with both government and commercial payers. And clearly, we wouldn’t have been able to deliver the results we have in the fourth quarter without very significant access.

So both of those bottlenecks have actually – we’ve been pleasantly surprised with how well those have turned out in Q4 and I expect that to continue in 2020.In terms of compliance and persistence, really, it’s just too early to say in the real world exactly what that is going to look like. We do expect it to be high.

We do expect it to be in the range of our other CFTR modulators, which you know is very high for both of those aspects and certainly given the profile, we’d expect it to be similar with TRIKAFTA it has been for all of the medicines. But really too early to tell exactly what it’s going to be like for this medicine in the real world..

Great. Thanks..

Thank you. Our next question comes from Whitney Ijem with Guggenheim. Your line is now open..

Hey, guys. Thanks very much for the question. I wanted to follow-up on type 1 diabetes. So it sounded like it wasn’t clear whether or not you’d be moving forward into the clinic with the naked cells or the encapsulation.

And I’m wondering if you can give us any more color on what the exact encapsulation technology or devices at this point?.

Sure. Thanks so much for the question. It’s really one of my favorite late preclinical development progress to talk about for a few reasons. But with regard to your specific question, you’re right. We have two shots on goal here, so to speak.One, development pathway involved the cells alone.

And, for example, that is attractive in a couple of different potential areas. One of them would be patients who are renal transplant recipients as an example, who are on immunosuppressive therapy anyway and they have their renal transplant because of type 1 diabetes.

So the naked cell approach or the cell alone approach there could be a nice pathway.The encapsulation is a device. The Semma Group has not only done amazing work with regard to the development and the maturation of cells and the industrial scale up, but they’ve done a really nice job with the device.

The device has to be particular, and others have tried this in the past and it’s a tough problem to solve.The device is different and I think is – really has the opportunity to succeed here for a few different reasons. It has to do with the geometry. It has to do with the material.

It needs to allow glucose and insulin to free flow, but to keep the cells in their state. And it also has to do with ensuring that the device in the cells get sufficient oxygenation and that there is in fibrosis. And the data that we have seen to date, including in large animals tells us that that’s so..

Got it. And just a quick follow-up. So we will be moving the encapsulation program forward into the clinic first, and you sort of abandoned the naked cell approach, or is it still the nearest, which will go first? Thanks..

Yes. You can think of it in terms of having two shots on goal and it’s just a matter of which one goes first. But you can think of it as two programs..

Thank you..

Operator, next question, please?.

Our next question comes from Robyn Karnauskas with SunTrust Robinson Humphrey. Your line is now open..

Hi. Thank you for taking my question and thanks Jeff for all the hard work you put in, it’s been great. So two questions. One for Charlie. First, you have cash that’s accumulating. It looks like the studies that you’re about to do may not be as expensive, they’re very tight and they maybe small at least for the next few years.

So how are you thinking about thus maximizing cash without running the risk of having lazy balance sheet? And then, Reshma, for pain, you just continued one program. What are you looking for versus the original VX-150? Thanks..

Sure, Robyn. Thanks for the question. As you point out, the business model is running very well right now and we are generating cash, which gives us flexibility. We continue to feel that the best use of our cash is to reinvest in the business, both in terms of internal innovation and also external innovation.

Again, you saw us have a very active year in 2019 with $1.6 billion on a number of deals that got us access to some great enabling technology and some programs that are a perfect fit with our research strategy.So going forward, we’ll continue to be active in business development.

To the extent that we have additional cash flow in 2020, that’s where the priority will be. I’m not going to say that we’re committing to a certain number of deals or a certain volume of cash flow.

Everything needs to be governed by the research strategy and the corporate strategy will stay disciplined, but you continue – you will continue to see us be active in 2020..

Robyn, this is Reshma. I’ll take the question about pain. So, Robyn, I would think about pain just like CF and frankly, all of our programs. The approach here in Vertex speak is first crack the biology, then pour on the chemistry. And where we are with the pain program is, we’ve cracked the biology.

And I feel confident saying that because of the VX-150 results that we saw in three Phase 2 studies, right in acute pain and neuropathic pain and in osteoporosis.So what we’re really doing now is part 2, which is pour on the chemistry.

And this is about finding, let me call is the ideal molecule, particularly in this disease state, safety and efficacy, of course, table stakes.

But what we’re really looking for is a molecule with the perfect PK, something that can be dosed once or twice a day, given that we’re talking about pain condition in this instance.We need to ensure that this medicine can be taken with food or without food.

If you’re talking about acute pain, immediately post-surgery being able to take it with our food is going to be really important. We’re also thinking about DDIs and COGS.

And so really, I guess, I would describe it to you as we’re at the stage of pouring on the chemistry and this is our search for the ideal molecule for this pain condition, or I should actually describe as conditions, we think about it as three distinct groups in there..

All right. Thank you..

Thank you. Our next question comes from Cory Kasimov with JPMorgan. Your line is now open..

Hey, good afternoon, guys. Thanks for taking the question. Congrats on a great quarter. Only you pre-announced this a couple of weeks ago, you could have made that Investor Conference a little more exciting this year. I guess, first question, I have for you is regarding AAT.

As clinical work ramps, are you seeing any broader-based efforts to help with the diagnosis rate and what kind of education can you do there to facilitate the process while in development?.

Yes. Cory, let’s take this in two parts. If you would mind, this is Reshma.

I’ll make a few comments and then I’m going to turn it over to Stuart to tell us a little bit more about the market opportunity and such.Cory, as we start our clinical trials and really start to engage with the community, which we’ve already started to do, what you realize and what you’re alluding to is absolutely true.

Unlike CF, this is a disease where there isn’t newborn screening and there isn’t 100% diagnosis.And while there is a 510 cleared CE marked assay for antigenic level, the diagnosis is not done that frequently. We are working with the community. We are engaged with the Alpha-1 Foundation.

And I do see that group providing a real good amount of education and I see an opportunity to do even more. Let me ask Stuart to comment from his vantage point..

Yes. Cory, so in terms of what we know about the market today, this estimated to be about 100,000 people with the ZZ genotype in the U.S. and the EU. Almost definitely, that’s an underestimate, but let’s just take that as a starting point.

Only a fraction of those patients are currently diagnosed, to your point, and only a fraction of those that are diagnosed are actually actively treated with the current standard of care, which is the IV augmentation therapy.So if we are able to bring to the market a product, which treats the underlying cause of the disease, which has impact on both the lung and the liver and is an oral small molecule, we think there is multiple opportunities here.

One is clearly potentially to replace some of the IV augmentation therapies. Another opportunity would be to increase the treatment rate in those patients who are already diagnosed. But we also do think there is a significant opportunity to increase the diagnosis rate.The diagnosis is not difficult to do. It’s a simple blood test.

It’s currently included within treatment guidelines that, that should be done for patients diagnosed with COPD. But I think, as so often the case, where you don’t have a solution, people don’t go looking for the problem.

And so we do anticipate that could be an increase in those diagnosis rates, if we are able to bring a better solution to the market..

Great. Thanks guys. I appreciate taking the questions..

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

Hello, this is Kostas on for Matthew. Congratulations on the quarter. Two questions from me.

The first one is, can you give us some sense for how to think about the dynamics of European revenues in 2020, please?.

Yes. I’ll take that. We were able to finalize reimbursement agreements in a number of major European countries towards the back-end of 2019.

And as we anticipated, we did not see much of a contribution of those reimbursement agreements in 2019, because even having secured those agreements, you have to work through the administrative process before patients can be initiated.We are expecting our European revenues to grow in 2020 as more patients are able to access our CFTR modulators and that’s incorporated in the $5.1 billion to $5.3 billion guidance that Charlie talked to earlier on the call..

Thank you. And my second question is on APOL1-mediated kidney disease program. You have mentioned that you are planning to use the protein urea as a clinical market.

I was wondering whether you need more key efficacy endpoints or these would suffice?.

Sure. Thanks, Kostas. This is Reshma. I’ll take that one. So for those who may not be as familiar with this one, this is the VX-147 program and this is going into patients – into the clinic in Phase 2 now actually.

This is for APOL1-mediated FSGS.So, Kostas, as you may know, the renal community, along with regulatory agencies, have for the past many years thought and discussed what the appropriate regulatory enabling endpoint might be for a homogeneous pro-generic kidney disease, that’s a mouthful.

But basically what I’m saying is that, there is a lot of support and what the idea here would be is to measure protein in the urine.

That’s a fairly simple thing to do.And when you have a disease that’s a homogeneous protein leaking disease that most people believe and this has been discussed extensively in the community that protein in the urine is the right measure for one to evaluate.

So that’s what we’re going to be evaluating in this Phase 2 study and that’s the study that is now getting under way..

Thank you very much and congratulations, again..

Thank you. Our next question comes from Liisa Bayko with JMP Securities. Your line is now open..

Hi. Wanted to also wish congratulations to the team and during the transition. Wanted to ask about the European roll out. Can you just get into a little more specifics on sort of timing of the different countries.

And what you think on ramping could look like, given that this has been sort of a new therapy that’s available on some countries, meaning, they haven’t had access to CFTR modulators in the past? Thanks..

Yes. I think, there’s really two aspects to that question, Liisa. One is the timing in different countries of the uptake of our current medicines, which are approved in Europe.

And clearly, we expect that, as I mentioned earlier, to begin now that we have reimbursement agreements in some of the major countries, UK, Spain, France, et cetera, for existing CFTR modulators.In terms of how that might play out for the triple combination, clearly, we have that submission in with the regulatory authorities.

Our expectation is for an approval in Q4 of this year and as you know, the regulatory approval is really the trigger to the beginning of reimbursement discussions. And so within our guidance for 2020, there is minimal triple combination regimen revenues included within that guidance..

Okay..

Operator, we have time for one more question..

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

Hi there, thanks for taking my questions and congratulations on the quarter and congratulations, Jeff, to on all your accomplishments.

What’s been your feedback on real-world experience with TRIKAFTA efficacy and safety? To what degree, that’s been aligning with the clinical trial experiences, anything unexpected or different there?And then secondarily, can you remind us of your plan to collect longer-term outcomes data with TRIKAFTA things like exacerbations, the timeline for updating that and how important you think that will be for full market penetration in the U.S., as well as European access? Thanks..

So in terms of the real-world experience, I say – I would say, has been very similar to what we saw in the Phase 3 program, Brian. The feedback we’ve had from physicians and patients has been almost universally positive.

And when I say positive, their experience of the level of efficacy and the impact it’s having on their lives is really inspiring.Obviously, safety is something, which needs to play out over time. But certainly, we haven’t seen anything in the real-world that has surprised us that has been different from what we saw in the Phase 3 programs.

And as you know, those studies demonstrated a very, very strong benefit risk profile.In terms of outcomes data and what data we’re going to be collecting, I’ll hand that over to Reshma..

Sure. So, Brian, you know that we – in the Phase 3 program for the FMS patients, that was the program with about 400 patients that went out to 24 weeks. We already reported on pulmonary exacerbations and it was a really large reduction of 63%. We are continuing to collect data.

So patients in both the FS study and the FMS study rolled over into an open label extension, that goes out through 96 weeks.And in addition to that, we have additional studies that we’re doing, collecting data from various registries, not only here in the U.S., but as we’ve done with our other CFTR modulators around the globe as well.

So we have more data to look forward to not only from the clinical trials program, the open label extension, but also registry data that we’re collecting and will be collecting around the globe..

Thanks very much..

Thank you..

Okay. On behalf of everyone here, thanks everybody for listening to tonight’s call. Thanks also for all the kind words. We know that there are other earnings call tonight. So we’ll let you get to them. And at the same time, the IR team is in the office and happy to talk to you if you have additional questions..

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect..