Q4 2019 Earnings Call

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<unk> full year and fourth quarter 2019 financial results Conference call. This is Michael Partridge, Senior Vice President of Investor Relations for vertex.

Second prepared remarks on the call Tonight, we have Dr., Jeff Leiden, Chairman and CEO Dr. race, Mckay, while Romani 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 is marketed CF medicines, our pipeline and Vertexs future financial performance are based on managements current assumption.

Actual outcomes and events could differ materially.

I will now turn the call over to Dr. jeffs like.

Thanks, Michael Good evening, everyone.

We saw many investors and analysts at the JP Morgan conference two weeks ago. So 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.

As a result, we're very well positioned to bring our CF medicines to many more people and to advance our broad pipeline in additional diseases in 2020.

Cystic fibrosis, the U.S. approval of trade CAFTA for patients 12, an older in October five months ahead of our PDUFA date was the most significant milestone to date and our efforts to bring new CF medicines to all people with this disease.

Hi, CAFTA 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 dry CAFTA impatient ages 12 and older is off to a very strong start.

This clear interested tray CAFTA across all groups of eligible patients in the early feedback from both patients and doctors is highly positive.

Outside the U.S. and 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 cfd, our modulators in countries, including England, France, Spain, Australia, and many others throughout 2020.

We're also making excellent progress advancing and broadening our pipeline beyond CF because we enter 2020, we're now in the clinic with multiple new medicines and 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 one antitrypsin deficiency or a T program, where we have multiple small molecule correctors in the clinic and addressing underlying cause of disease in both the liver and a lot.

These include VX, one for which has recently entered phase two clinical development.

Beta thalassemia sickle cell disease, where we announced clinical data for two patients treated with CTX 001, a onetime CRISPR casnine ex vivo gene editing therapy, which suggests that we maybe able to functionally cure these diseases.

Fscs, where first small molecule aimed at halting the progression of the disease move into phase two development in 2020 .

And type one diabetes, where we are developing an autologous transplant patient therapy with cells alone.

And the second with a combination of cells and the device the correct I would sell function and potentially transformed the treatment of this disease.

Importantly, these pipeline programs now span multiple modalities, including small molecules were vertex has excelled in the past, but also new approaches such a cell and genetic therapies.

For these new modalities, we've acquired are 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 a business development, we completed more transactions in 2019 than in the for prior years, including our acquisitions of Semih with a leading cell therapy approach for type one diabetes annex Sonics the leader in gene editing for DMD and the M.

In summary, 2019 was the combination of almost a decade of focus execution against our strategy of discovering and developing transformative medicines for serious diseases in specialty areas by focusing on validated targets and predictive my biomarkers that will improve the probability of clinical success.

Our strategy is playing out exactly as we had planned there will position us for continued short term and long term growth.

The company has never been stronger or better position for future success CF and beyond.

Ill now turn the call over duration, my 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're 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, an older and to submit try CAFTA for approval in the U.S. for children ages six to 11.

Beyond Sia, 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 medicine.

With our 80 program, we recently initiated a phase two proof of concept study the small molecule corrector VX eight one for in patients with two copies of the V. mutation and expect data from this study in 2020.

In April one mediated Fscs, we completed a phase one study of VX one for seven in late 2019 and expect to initiate an open label phase two proof of concept study in 2020 to evaluate the reduction in protein levels in the urine with VX one for seven.

In pain, having established proof of concept data from NAV 1.8 inhibition with VX 150 in multiple phase two studies, our focus is not to find the optimal molecule or molecules to advance into mid and late stage studies, we're continuing to advance a portfolio of medicines into clinical development and will be.

Advancing an additional molecule into phase one development and the first half of 2020.

We have discontinued phase one development of VX 961, because it did not displaying optimal PK and tolerability profile.

Beyond our small molecule programs, we've made significant progress in building and progressing a portfolio of cell and genetics therapies in line with our research strategy, primarily through our business development activities.

We are highly encouraged by our recent clinical data for a CRISPR casnine ex vivo gene editing treatment CTX 001 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 one diabetes. This program comes to us from our acquisition of semi therapeutics in October of 2019.

The team of scientists a semi have cracked the biology on both the production and scale up a fully mature I'll itself and has developed a novel implantable device to protect the sell from the immune system, while preserving sell health and function.

We have setting 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 and Stuart.

Thanks, Ron.

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 seemed to go launch in the U.S. in Germany.

Label expansions for our CF medicines globally, and the early approval and launch of try catheter in the U.S.

The launch of truck after is off to a very strong start.

Our fourth quarter total CF product revenues were approximately $1.25 billion, including try CAFTA revenues of $420 million, making try CAFTA already on top selling medicine.

I would note that our fourth quarter revenues include as expected launch related stocking of approximately $100 million.

Approximately 18000 patients eligible for try catheter 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 6000 of these people. This is the first time they have had a medicine to treat the underlying cause of this CF.

We are seeing strong interest from all groups of eligible patients, including new initiation as well as patients transitioning from our other cfd all modulators.

Our commercial supply market access patient support marketing and feel teams, we're 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.

While still early in the launch we are on track to obtain broad reimbursement the try capture in the U.S. similar to what we have seen for 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.

Well try cap there will be the main driver Vertexs revenue growth in 2020 . We also expect an increasing international revenues based on more patients initiating treatment with all medicines outside the U.S.

In summary, I'm pleased that we are bringing on 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 our 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 NSG in expenses were 496 million, including the operating expenses of exotic and summer 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.

70% increase compared to the fourth quarter of 2018.

Net income for the fourth quarter 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 SGN, 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 to treating more CF patients globally, we've deliberately reinvested in both internal and external innovation decreed future medicines.

In 2019, we invested approximately 1.6 billion 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 onto 2020 guidance.

Today, we're providing 2020 financial guidance for total CF product revenues as well as for combined non-GAAP , R&D and SGN, a expenses and our anticipated effective tax rate.

The strong uptake of try CAFTA and the recent completion of reimbursement agreements outside the us 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 try captive. It's Stuart mentioned, we saw unexpected 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 CFO GR modulators persistence and compliance dynamics will affect try CAFTA revenues and therefore, our experience whether 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 NSG in a expenses of 1.95 billion to 2 billion.

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

R&D expense growth includes increased investment to advance our programs in selling genetic therapies, including type one diabetes and DMT.

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 noncash 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 is this is my last quarterly call as CEO I hope, you'll 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 teens.

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 Mi 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 cereal innovation to deliver transformational medicines to patients and to grow the business. 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.

Geoffrey Christopher Meacham: 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 are 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. However, actual outcomes and events could differ materially. I will now turn the call over to Dr. Jeff Leiden.

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 well trying to develop the first transformative CF medicines.

And finally, and most importantly, I want to thank the entire CF community patience.

Hamleys and caregivers for their courage their persistent encouragement and they're 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 ask a question you will need to press star one on your telephone.

Dr. Jeff Leiden: Thanks, Michael. Good evening, everyone. We saw many investors and analysts at the J.P. Morgan 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.

Your question press the pound key please standby, while the capacity given day roster.

Our first question comes from NATO with Cowen and company. Your line is now open.

Good evening. Thanks for taking my question, Jeff Let me be to first congratulate you on all that you in the short takes team have achieved on your eight years of of the CEO tenure.

It's really been quite something to watch.

Dr. Jeff Leiden: 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. For 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. There's clear interest in Trikafta across all groups of eligible patients, and 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.

Then my questions just in terms of the numbers first Stuart you mentioned really three buckets of trick after patients those transitioning from ORKAMBI in some deco new patients being add to therapy, who had no option prior the new initiations, maybe im on the whole hold out to dropouts.

Other populations could you give us subsets of the dynamics and those three markets and of the $300 million and end user demand.

Where did that 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 in 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 your Marietta kind of average run rate for for inventory in the channel.

Thanks.

Yes, great Phil I'll take the question on the try caster uptake and then shell he can talk to the inventory so.

As you know we had a very strong.

Launch there are 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.

Dr. Jeff Leiden: We are also making excellent progress advancing and broadening our pipeline, Beyoncia. As we enter 2020, we are now in the clinic with multiple new medicines and 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.

We've seen uptake in all of those patient groups.

We expect that to continue into into 2020 and so to heavily imagery question I'll throw it over to Charlie Yeah. Phil to your question. The first of all the inventory build in the fourth quarter was expected and I'd say the magnitude of to build is probably even a little bit less than what you mentioned.

Dr. Jeff Leiden: 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 VX814, 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.

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 a day toward 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.

Yes.

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

Hi, Thanks for the question and again congrats on a on a great result, and obviously, Jeff you are moving.

Dr. Jeff Leiden: FSGS, where our first small molecule aimed at halting the progression of the disease, will move into phase two 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 therapy. 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. And in business development, we completed more transactions in 2019 than in the four prior years, including our acquisitions of Sema, with a leading cell therapy approach for type 1 diabetes, and Exonix, the leader in gene editing for DMD and DM1.

Leaving them with that we had a great position.

I guess I just wanted to ask skew you made some comments just now one on on on where the package for maybe you could just characterize.

How you think about the swapping dynamic and wash their parts of that number by swapping and how do you think what percent of swapping could happen throughout 2020, just should we can think about that and maybe a question for Rushmore I mean.

I know that there'd be a lot of focus only on 80 next I know you're getting 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 in allfast, we could get that data. It just seems like a very broad timeline for for 2020 data. Thank you so much.

Yeah, Mike on.

The uptake of try cast Rogers 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.

The time, where we have overlapping labels given the superiority of the trike. After profile. We expect the vast majority of patients who are eligible to try cap the all going to switch to try CAFTA exactly how long that process will take it is 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 transfer.

Dr. Jeff Leiden: In summary, 2019 was the culmination 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.

And to track after.

Hi, Mike with regard to the Alpha one Antitrypsin deficiency program I think the one you're referring to is VX one for that's the one that's part of that they had it's the one we started phase two proof of concept dose ranging.

Towards the very tail end of 2019, so actually it's really very early days were just getting going with that study.

Reshma Kewalramani: Thanks Geoff. 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 6 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. For example, with our AAT program, we recently initiated a Phase II proof-of-concept study of the small molecule corrector VX814 in patients with two copies of the Z mutation and expect data from the study in

I am expecting that we'll 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.

Next question comes from Salveen Richter with Goldman Sachs. Your line open.

Thanks for taking my question and then Jeff Congrats on all that you've achieved that for attacks. So firstly could you just common and how that 2019 tricastin lunch Holden formed the cadence of uptake cheering 2020 and then secondly, as we looked at the pipeline.

Any new thoughts around their requirements for the regulatory pathway for Alpha one antitrypsin here.

Regarding the need for liver biopsy or or not and then secondly with type one diabetes.

That's a proof of concepts that he looked like here.

Yes, all these stupid I'll take that question on the.

Reshma Kewalramani: In APOL1-mediated FSGS, we completed a Phase I study of VX147 in late 2019 and expect to initiate an open-label Phase II proof-of-concept study in 2020 to evaluate the reduction in protein levels in the urine with VX147. In pain, having established proof of concept data from NAV1.8 inhibition with VX150 in multiple phase two studies, our focus is now to find the optimal molecule or molecules to advance into mid We are continuing to advance a portfolio of medicines into clinical development and will be advancing an additional molecule into phase one development in the first half of 2020. However, we have discontinued phase one development of VX961 because it did not display an optimal PK and tolerability profile.

2019 and impact on 2020, so obviously given the results we've announced today off to a very very strong start.

He said that there are many patients we continue to need to get onto trike. After so we are expecting continued growth.

Three 2020 tens of adding patients and that's built into our guidance.

I want to 5.3 billion as Charlie said, one other factor to take into account as you think about the cadence. So the shape of those revenues is the the impact of persistence and compliance and how that will impact revenues.

It does have an impact although as we've seen without other CFTR modulators, our expectation is the level the persistence and compliance will be high with try CAFTA, particularly given the strong clinical profile I think on the 80 and so I want to think rational take those sure.

Reshma Kewalramani: 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 Sema Therapeutics in October of 2019. The team of scientists at Sema have cracked the biology of both the production and scale-up of fully mature islet cells and have 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.

So let me tackle the diabetes question first and I'll take a TV second so with regard to the diabetes program. That's the cell therapy program that we acquired through the summer 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 need by that is we're going to be able to go into the clinic right into patients, it's not going to have a healthy volunteers step.

Whether we go with the cell program alone or the cell with the device I think that kind of endpoints you could expect are fairly straight forward, one glucose level hemoglobin anyone C.

Clearly hypoglycemic episodes of the safety side will be something that we're watching.

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 state you couldn't again similar to beta sound sickle cell I anticipate that the proof of concept studies are going to be a reasonable I and very reasonable duration.

With regard to the Eightd program.

Stuart A. Arbuckle: Thanks Reshma. I am 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 Symdeco launch in the US and Germany, label expansions for our CF medicines globally, and the early approval and launch of Trikafta in the US. The launch of Trikafta is off to a very strong start. In the 4th quarter, total CF product revenues were approximately $1.25 billion, including revenues of $420 million for Trikafta, making it already our top-selling medicine. I would note that our fourth quarter revenues include, as expected, launch-related stocking of approximately $100 million.

We have not had further regulatory interactions and so as I commented on before I was impressed with the October 2019.

At EEI conference what the agency indicated was that.

They would work with the sponsor depending on their approach for what the regulatory enabling endpoint would be.

And I anticipate that the.

Key points that we wouldn't be looking for from this program. That's ongoing is functional serum 80 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.

We're seeing their approval based on 80 levels. That's just a data point to look at.

Last thing I'll say in our approach is obviously very different than those out there in 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.

Stuart A. Arbuckle: 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.

Thank you.

Thank you.

Next question comes from Paul Matteis at Stifel. Your line is now open.

Great. Thank you so much for taking my question.

Just one quick question on guidance, even with considering inventories when we just take your comments on one Q 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 it slow I meant 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 fix that insulin independence or are there other ways, we should think about a potential benefit. Thanks. So much.

Stuart A. Arbuckle: 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 a strong start to the launch. Outside the US, 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 am 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.

Paul This is Charlie I'll take the first question on guidance.

I characterize the guidance says conservative I think is appropriate given what we know about the Tri County, the launch so far as well as the reimbursement agreements that we sign.

The fourth quarter again, just to touch back on on the inventory topic, it's tempting to look at that the Q4 run rate and want to extrapolate from that but if you take the 1.25 billion back out to 100 million for the inventory build.

1.15 into the guidance, obviously implies significant growth over that and then again as we touched on in 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 and we think that the guidance is absolutely appropriate and.

Charles F. Wagner: 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 Exonix and Sema, compared to $400 million in the fourth quarter of 2018. The significant growth in revenues and discipline spending in the fourth quarter resulted in operating income of $593 million, a 70% increase compared to the fourth quarter of 2018. Net income for the fourth quarter of 2019 was $444 million, compared to $337 million for the fourth quarter of 2018.

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 here.

Paul I'll take that question on the.

Cell therapies program in type one diabetes. So if you think about the current approach to type one diabetes and wedding, 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 indeed over 1 million people who.

You have this disease. Neither is the glucose control, particularly good whether you look at glucose so hemoglobin a one seat nor is it particularly safe on the other side and that's the to speak to the hypoglycemic episodes.

Then if you look at kind of air transplants that actually shows that people, who have kind of air transport eyelet cell transplant. They do very well in terms of glucose control and don't have the deficiencies with hypoglycemia.

Charles F. Wagner: 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 medicine. 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.

Not a problem there of course as they just plain art enough pilots that there are not enough I'm 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.

Melting and the semi group come up with a way to not only produce but to scale.

These I live itself and that holds the potential for really excellent glucose control likes it kind of air transplants without the hypoglycemic episodes. So that's what the real goal here is.

Great. Thanks for the color appreciate it.

Our next question comes from.

Cantor Fitzgerald.

Hey, guys. Thanks for taking my question congrats from the quarter and Jeff.

Lee who will be missed in the C O C.

Adam will run I think we call that deal might drop. So my two questions are I guess, when you're thinking about in the field.

Charles F. Wagner: 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 are 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 TRIKAPTA 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 I would note a few dynamics that are reflected in our 2020 guidance. As part of the strong launch of Tricapta 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.

I've been kind of the biggest surprises I know you guys talked about bottleneck that maybe potentially with so much demand have you seen that maybe the case or Isabella better and then my second question as it might be a little early but do you think of compliance and persistent start trending more or like a kalydeco or kind of where the puts and takes that do you think about that ever done on dynamic.

Charles F. Wagner: 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 tenant adjustments of 13 to 14 percent 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 bill, 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 combined R&D and SG&A expenses of $1.95 billion to $2 billion in 2020. 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.

Charles F. Wagner: Our R&D expense growth includes increased investment to advance our programs in cell and genetic therapies, including type 1 diabetes and DMD. Now to tax guidance, where we expect our full-year non-gap tax rate to be 21 to 22 percent. 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 a non-cash expense until we fully use our net operating loss. As Geoff noted, Vertex has 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 Geoff for a few concluding comments.

Dr. Jeff Leiden: Thanks, Charlie. As this is my last quarterly call as CEO, I hope you'll 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 that drug discovery and development is the ultimate team sport. None of our successes would have happened without several incredible teams.

Thanks.

Yes, lithia, thanks, very much for that question.

You're right prior to the launch there was a couple of potential bottlenecks. As you described them that we were concerned about one was concerns that CF centers at raised with us about.

The capacity constraints. They felt they might have given 18000 patients were going to be eligible for.

I will try caster I'd have to say they have done a spectacular job and responding to the high level of patient demand whilst they have certainly been some bottlenecks in some sense as in general the multi disciplinary teams of jump just an amazing job working to get patients initiated on 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 team has done a great job working with both government and commercial payers and clearly we wouldn't have been able to deliver the results. We havent the fourth quarter without very significant access so both of those bottlenecks.

Actually we've been pleasantly surprised with how will those have turned out in Q4, and I expect that to continue and 2020 in terms of compliance and persistence really it's just too early to say in the real loyalty exactly what that is going to look like we do expect it to be high we do expect.

To be in the range of our other see STL modulators, which you know.

As is very high for both of those aspects and certainly given the profile we'd expect it to be similar with trike. After it has been for all of the medicines, but really too early to tell exactly what it is gonna be like for this mentioned in the real world.

Great. Thanks.

Thank you.

Comes from.

Yes.

Hey, guys. Thanks, very much for the question I wanted to follow up on type on that type one diabetes. So it sounded like it wasn't clear whether or not you'd be moving forward in into the clinic within make it sells 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 programs 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 out one.

Unknown Executive: 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 behind our recent achievements and is also what will differentiate us and position us for long-term success in the future. Even when I first became CEO and we were still losing several hundred million dollars a year, we were trying to develop the first transformative CF medicine.

Development pathway involves 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 immuno suppressive therapy.

Unknown Executive: 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 Chairmen to bring more transformative medicines to patients with serious diseases who are waiting. I will now open the line to questions.

Anyway, and they have their renal transplant because of type one diabetes said the naked sell approach or the cell alone approach there could be.

Nice pathway.

Capsulation he is a device.

The group has not only gotten 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.

Take killer and you know others have tried this in the past and it's a tough problem to solve the device is different and I think is.

Really had 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 there.

In their state and it also has to do with.

Ensuring that didnt device in the south get sufficient oxygenation and that there is a fibrosis and the data that we have seen to date, including a large animals tells us that fell.

Got it and just a quick follow up so will we be living encapsulation program forward into the clinic first and you sort of abandoned the negative approach or it is thought the nearest which we'll go first thanks.

Unknown Executive: Thank you. To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound. Please stand by while we compile the calendar roster. Our first question comes from Phil Nadeau with Cowan & Company. Your line is now open.

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 is two programs.

Operator next question. Please next question comes from Robin can ask us with Suntrust Robinson Humphrey.

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

Hi, Thank you for taking my question and thanks, Jeff for all the hard work you couldn't it's been great.

Unknown Executive: 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 Symdeco, new patients being added to therapy who had no option prior, and new initiations, maybe among the holdouts or dropouts in other populations. Could you give us some sense of the dynamics in those three markets and of the $300 million in end user demand? Where did that come from?

So two questions one for Charlie.

First you its cash that's accumulating it looks like the studies that you're about to do may not be less expensive, they're very tight today, maybe small.

For the key areas. So how are you thinking about that maximizing cash without waiting the rest because having lazy balance sheet and then pressed for pain. You. Just continued one program what are you looking far versus the original VX 150. Thanks.

Unknown Executive: And then second, just on 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 in your comments, it's not that you expected inventory to come out of the channel during Q1. It's just that there's no subsequent inventory build given that you're already at a kind of average run rate for inventory in the channel.

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.

Stuart A. Arbuckle: Yeah, great, Phil. I'll take the question on the Trikafta uptake, and then Charlie can talk to the infantry.

Again, you saw us have a very active year in 20 2019 with 1.6 billion on a number of deals they got to access to some some great enabling technology and some programs that are perfect fit with our research strategy. So going forward, we'll continue to the active in business development.

Stuart A. Arbuckle: 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.

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'll continue to see us the active in 2020.

Charles F. Wagner: 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 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 day or two in any given quarter, but that's about the right level.

Robin demonstration I'll take that question about pain.

Robin I would think about paying just like CF and frankly all of our program. The approach here in vertex speak his first crack the biology, then part of the chemistry, and where we are with the pot Crane program is weve cracks, the biology, and I feel confident saying that because of the VX 150 result that we saw.

Unknown Executive: That's very helpful. Thanks for my questions and congratulations on the performance. Thank you. Our next question comes from Michael Yee with Jefferies. Your line is now open.

And we phase two studies right, an acute pain in neuropathic pain and in osteoporosis. So what we're really doing now is part too which is poor on the chemistry and this is about finding let me call is the ideal molecule, particularly in this disease state safety and efficacy.

Michael J. Yee: Thanks for the question. And again, congrats on a great result.

Unknown Executive: And obviously, Geoff, you are moving and leaving them in 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 part of that number swapping? And how do you think what percent of swapping could happen throughout 2020? Just so we can think about that. And then maybe I have a question for Reshma.

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 a 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 without food is going to be really important. We're also thinking about DDR eyes, and Cogs and so really I guess I would describe to you as we're at the stage.

Reshma Kewalramani: I mean, I know that there'll be a lot of focus on AAT next. I know you're giving 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 could get that data. It just seems like a very broad timeline for 2020 data. Thank you so much.

Pouring on the chemistry and this is our search for the ideal molecules. So this pain condition.

Stuart A. Arbuckle: Yeah, 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 TRIKAFTA's profile, we expect the vast majority of patients who are eligible for TRIKAFTA are going to switch to TRIKAF Exactly how long that process will take is hard to tell. Obviously, we're early in the launch, but in terms of destination, the vast majority of those patients are going to transition to TRIKAFTA.

Or I should actually described as conditions you know, we think about it as three distinct groups in there.

Thank you.

Thank you.

Next question comes from quite Kasimov with JP Morgan. Your line is now open.

Hey, good afternoon, guys. Thanks for taking my question Congrats on a great quarter only preannounced as 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 years regarding 80 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 dare to facilitate the process while in development.

Reshma Kewalramani: Hi Mike. With regard to the Alpha-1 antitrypsin deficiency program, I think the one you're referring to is VX814. That's the one that's furthest ahead. It's the one we started Phase 2 proof-of-concept dose ranging towards the very tail end of 2019. So actually, it's really very early days. We're just getting going with that study. I am expecting that we'll have results from the program in 2020, but it's just way too early to give you more color around that. Thank you.

Yes, great let's take this in two parts. If you wouldn't mind. This is raised I'll I'll make a few comments and then I'm going to turn it over to store to tell us a little bit more about.

Market opportunity as such.

For years we.

Start our clinical trials in really start to engage with the community, which weve already started to do what you realize and what you're alluding to is absolutely true. Unlike yes. This is a disease, where there isn't newborn screening and there isn't a 100% diagnosis and while there is a.

Unknown Executive: Okay, thank you.

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

Unknown Executive: Thanks for taking my question. And Geoff, congratulations on all that you've achieved at Vertex. So firstly, could you just comment on how the 2019 Trikafta launch will inform the cadence of uptake during 2020? And then secondly, as we looked at the pipeline, you know, any new thoughts around the requirements for the regulatory pathway for Alpha-1 antitrypsin here regarding the need for liver biopsy or not? And secondly, with type 1 diabetes, what does a proof of concept study look like here?

Slide 10 cleared CE Mark asked a four antigenic level.

The diagnosis is.

Don.

That frequently.

We are working with the community we are engaged with the Alpha one our foundation and I do see backroom, providing a real good amount of education and I see an opportunity to do even more let me ask do it to comment from his vantage point.

Yes, Cory so in terms of what we know about the market today. This estimated to be about 100000 people with the ZZ Gina type in the U.S. and the you almost definitely that's an underestimate the let's just take that as a starting point only a fraction of those patients currently diagnosed to your point yes.

Stuart A. Arbuckle: Yes, Salveen and Stuart, I'll take the question on 2019 and its impact on 2020. So obviously, given the results we've announced today, off to a very, very strong start.

Stuart A. Arbuckle: 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 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 to AAT and Type 1, I think Respirin will take those.

Fraction of those that are diagnosed or actually actively treated with the current standard of care, which is the IB orientation therapies. 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 live and is an oral small molecule. We think there's multiple opportunities.

One is clearly potentially to replace some of the Ivy orientation therapies, another opportunity would be to increase the treatment rate in those patients 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 VIP, 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.

Reshma Kewalramani: Salveen, 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 SEMA acquisition. Salveen, the proof of concept I imagine to be something you can think about more akin to sickle cell and our beta-file 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.

Solution to the market.

Great. Thanks, guys appreciate the questions.

Our next question comes from Matthew Harrison of Morgan Stanley .

Open.

Hello. This is cost us on Photomask you congratulations on the quarter two questions from me if I just want knees can you give us some sense for how to think about the dynamics of Utopia that I think you're seeing 2020 . Please.

Reshma Kewalramani: And whether we go with the cell program alone or the cell and 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 gives you a good sense for what we're going to be watching for. The other thing to mention is that, again, similar to beta cell and sickle cell, I anticipate that the proof-of-concept studies are going to be of reasonable size and of very reasonable duration. With regard to the AATD program, we have not had further regulatory interaction.

Yes, so I'll take that.

We.

We're able to finalize reimbursement agreements in a number of major.

Okay and countries towards the backend though.

2019.

And as we anticipated we did not see much of the contribution of those reimbursement agreements in 2019, because even having secure 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 LCST, all modulators and that's incorporated in the 5.1 to 5.3 billion dollar guidance that Charlie talked to earlier on the coal.

Reshma Kewalramani: And so, as I've commented on before, I was impressed with the October 2019 FDA conference. What the agency indicated was that it would work with each sponsor, depending on their approach, to determine 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 are 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 a data point to look at. And the last thing I'll say is our approach is obviously very different from those out there, in 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 are and what those endpoints would look like as well.

Hello.

Thank you and my second question is on April one mediated kidney disease program. You've mentioned that you are planning to use their protein the Judy.

Clearly got market I was wondering whether you need more key efficacy endpoints ought to these would suffice.

Sure. Thanks, guys assistance racetrack I'll take that one so for those who may not be its familiar with this one this is the VX one for seven program and this is going into patients into the clinic in phase two.

Now actually.

This is for April one mediating fs, yes.

I've got this as you may know.

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 homeowner genius purchased noreck kidney disease, that's a mouthful, but basically what I'm, saying is that there's a lot of.

Unknown Executive: Thank you.

Paul Matisse: Thank you. Our next question comes from Paul Matisse with Stiefel. Your line is now open.

Support and.

What the idea here would be is to measure protein in the euro.

Unknown Executive: 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 one cue, 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 is slow? And then, just second quickly, on the self-therapy program in diabetes, I was just curious, what 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.

Fairly simple thing to do and when you have a disease. That's a homogeneous protein linking disease that most people believe and this has been discussed extensively in the community that protein in the urine is though right measure for one to evaluate so that's what we're going to be evaluating in this.

Phase two study.

Thats the study that is now getting underway.

Thank you very much and congratulations again.

Thank you.

The vehicle with JMP Securities.

Hi.

So congratulations to the team and.

Unknown Executive: Hi Paul, this is Troy. I'll take the first question on guidance. And I would not characterize the guidance as conservative. I think it's appropriate given what we know about the TriCapital 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 $100 million for the inventory bill, you're at $1.15, and so 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 revenues over the course of 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 a $1.2 billion increase year over year, a 30% growth rate, it sets us up for another very strong year.

Yes.

Wanted to ask about the European rollout until a little more specifics on.

Onset of timing with the different countries and what do you think unwrapping could look like given that.

And that sort of a new therapy, that's available in some countries, meaning they haven't had occupancy.

Modulators in the past thanks.

Yes, I think there's really two aspects to that question Lisa one is the.

Timing in different countries of the uptake of our current medicines, which are approved in Europe .

I think clearly we expect that as I had mentioned earlier to begin now that we have reimbursement agreements in some of the major countries UK, Spain, France et cetera for our existing Cfds modulators.

In terms of how that might play out for the triple combination.

Clearly we have that submission in with the regulator real 30 is our expectation is for an approval in Q4 of this year and as you know the regulatory approval is really the trigger to the the beginning of reimbursement discussions and so within our guidance for 2020 there is minimal triple combination.

Reshma Kewalramani: 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 injections, 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 to speak to the Then if you look at cadaveric transplants, that actually shows that people who have cadaveric transplants, islet cell transplants, do very well in terms of glucose control and don't have the deficiencies of hypoglycemia.

Regimen include revenues included within that guidance.

Okay. Operator, we have time for one more question.

Thank you.

No 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 track have to efficacy and safety.

What degree Thats been aligning with the clinical trial experiences anything unexpected or different there.

Reshma Kewalramani: Now the problem there, of course, is that there just plain 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 SEMA Group have come up with a way to not only produce but 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 the real goal here.

And then secondarily can you remind us of your plan to collect longer term outcomes data would try CAFTA things like exacerbations, the timeline for updating that and how important you think that will be for full market penetration the U.S. as wells European access. Thanks.

So in terms of the real World experience I said I would say has been very similar to what we saw in the the phase three program Brian .

Feedback we've had from physicians and patients has been almost universally positive and when I say positive, but their experience at the level of of efficacy in the the impact is having on their lives is really inspiring.

Unknown Executive: Great, thanks McCuller. I appreciate it.

Obviously safety is something which needs to play out over time, but certainly we haven't seen anything in the real world.

Unknown Executive: Thank you. Our next question comes from Alethea Young with Cantor Fitzgerald. Your line is now open.

In a surprise this has been different from what we saw in.

Unknown Executive: What are the puts and takes as you think about that as a dynamic in 2020? Thanks.

The phase three programs and as you know those studies demonstrated a very very strong benefit risk profile.

Terms of outcomes data and what they were going to be collecting I'll hand over to Russia sure. So Brian you know that we in the phase three program for the Fms patients that was the pay as 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%.

Stuart A. Arbuckle: Yeah, Alethea, thanks very much for the question. You're right.

Stuart A. Arbuckle: Prior to the launch, there were a couple of potential bottlenecks, as you described them, that we were concerned about. One was concerns that CF centers had raised with us about the capacity constraints they felt they might have given 18,000 patients who 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. Whilst there have certainly been some bottlenecks at some centers, in general, the multidisciplinary teams have done an amazing job working to get patients initiated on the meds. 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.

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 were doing collecting data from various registries not only here in the U.S., but as we've done with our other CFT GR modulators around the globe as well. So we have more data to look forward to not only from the clinical trial program in the open label extension.

But also registry data that we're collecting and will be collecting around the globe.

Thanks very much.

Okay.

On behalf of everyone here, thanks, everybody for listening to tonight's call. Thanks also for all kind words, we know that there are the 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 have additional question.

Stuart A. Arbuckle: 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 are very high for both of those aspects. And certainly, given the profile, we'd expect it to be similar with TRIKAFTA, as it has been for our other medicines. But really, it's too early to tell exactly what it's going to be like for this medicine in the real world.

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

[music].

Unknown Executive: Great, thanks. Thank you. Our next question comes from Whitney Adjim with Guggenheim. Your line is now open.

Whitney Adjim: 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 device is at this point.

Reshma Kewalramani: clinical development programs 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.

Reshma Kewalramani: One development pathway involves 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, for example, who are on immunosuppressive therapy anyway, and they got their renal transplant because of type 1 diabetes. So the naked cell approach or the cell alone approach could be a nice pathway. The encapsulation is a device. The SEMA group has not only done amazing work with regard to the development and 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 you know others have tried this in the past, and it's a tough problem to solve.

Reshma Kewalramani: The device is different and I think it really has the opportunity to succeed here for a few different reasons. It has to do with geometry. It has to do with the material. It needs to allow glucose and insulin to freely flow but to keep the cells in their state, and it also has to do with ensuring that the device and the cells get sufficient oxygenation and that there isn't fibrosis. The data that we have seen to date, including in large animals, tells us that that's so.

Unknown Executive: Got it. And just a quick follow-up, so will we be moving the encapsulation program forward into the clinic first, and you've sort of abandoned the naked cell approach, or is it still up in the air as to which we'll go first? Thanks. Yeah, you can think of it in terms of having two shots on goal.

Unknown Executive: Yeah, you can think of it in terms of having two shots on goal. And it's just a matter of which one goes in.

Unknown Executive: Operator, next question please.

Unknown Executive: Hi, thank you for taking my question and thanks, Geoff, for all the hard work you've put in. It's been great.

Unknown Executive: 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 that expensive. They're very tight, and they may be small, at least for the next few years.

Charles F. Wagner: So how are you thinking about best maximizing cash without running the risk of having a lazy balance sheet? And then for Reshma, for Payne, you just continued one program. What are you looking for versus the original VX150? Thanks.

Reshma Kewalramani: 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. However, 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 in 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. We'll stay disciplined, but you'll continue to see us active in 2020.

Reshma Kewalramani: 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 at Vertex is first crack the biology, then pour on the chemistry. And where we are with the PRANE program is that we've cracked the biology. And I feel confident saying that because of the VX150 results that we saw in three phase two studies, right? In acute pain, in neuropathic pain, and in osteoporosis. So what we're really doing now is part two, which is pouring the chemical on the bone.

Reshma Kewalramani: And this is about finding, let me call it, the ideal molecule, particularly in this disease state. Safety and efficacy, of course, are 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 a pain condition in this instance. We need to ensure that this medicine can be taken with or without food. If you're talking about acute pain, immediately post-surgery, being able to take it without food is gonna 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 in the chemistry, and this is our search for the ideal molecule for this pain condition, or I should actually describe it as conditions, you know; we think about it as three distinct groups in there.

Unknown Executive: All right, thank you. Thank you. Our next question comes from Corey Kasimov with JP Morgan. Your line is now open.

Geoffrey Christopher Meacham: Hey, good afternoon, guys. Thanks for taking the question. Congratulations on a great quarter only pre-announces

Unknown Executive: I guess the first question I have for you is regarding AAT. As clinical work ramps up, 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?

Unknown Executive: Yeah, Corey, let's take this in two parts. If you wouldn't mind, this is Reshma.

Reshma Kewalramani: 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. Corey, 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 CE marked assay for antigenic levels, the diagnosis is not done that frequently.

Reshma Kewalramani: We are working with the community. We are engaged with the Alpha One Foundation, and I do see that group providing a really good amount of education, and I see an opportunity to do even more. Let me ask Stuart to comment from his vantage point.

Stuart A. Arbuckle: Yeah, Corey, so in terms of what we know about the market today, there are 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.

Stuart A. Arbuckle: 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 IV augmentation therapy. So if we are able to bring to the market a product that treats the underlying cause of the disease, which has an impact on both the lung and the liver and is an oral small molecule, we think there are 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 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 is so often the case, where you don't have a solution, people don't go looking for the problem, and so we do anticipate there could be an increase in those diagnosis rates if we are able to bring a better solution to the market.

Unknown Executive: Great, thanks guys; I appreciate you taking the questions.

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

Unknown Executive: Hello, this is Costas Son on Matthew's behalf. Congratulations on the quarter. Two questions from me. The first one is, can you give us some sense of how to think about the dynamics of European revenues in 2020, please?

Stuart A. Arbuckle: Yes, I'll take that. You know, 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 from 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 to 5.3 billion dollar guidance that Charlie talked about earlier on the call.

Unknown Executive: You have mentioned that you are...

Unknown Executive: that you are planning to use the...

Unknown Executive: I was wondering whether you need more key efficacy endpoints or whether this would suffice.

Reshma Kewalramani: Sure. Thanks, Kostas. This is Reshma. I'll take that one.

Reshma Kewalramani: So, for those who may not be as familiar with this one, this is the VX147 program, and this is going into patients, into the clinic in Phase II 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 about and discussed what the appropriate regulatory-enabling endpoint might be for a homogeneous proteinuric kidney disease. That's a mouthful, but basically, what I'm saying is that there's a lot of support, and the idea here would be 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, 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 II study, and that's the study that is now getting underway.

Unknown Executive: Thank you very much, and congratulations again.

Liisa Bayko: Thank you. Our next question comes from Liisa Bayko with J&P Securities. Your line is now open.

Stuart A. Arbuckle: Hi, I wanted to also wish congratulations to the team during the transition. I wanted to ask about the European rollout. Can you just get into a little more specifics on sort of timing for the different countries and what you think that on-ramping could look like given that this is sort of a new therapy that's available in some countries, meaning they haven't had access to CFTR modulators in the past. Thanks.

Stuart A. Arbuckle: Yeah, I think there are 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 regulatory approval in Q4 of this year. And as you know, regulatory approval is really the trigger for the beginning of reimbursement discussions. And so within our guidance for 2020, there are minimal triple combination revenues included.

Unknown Executive: Operator, we have time for one more question.

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

Unknown Executive: Hi there, thanks for taking my questions and congratulations on the quarter and congratulations, Geoff, on all your accomplishments. What's been your feedback on real-world experience with Trikafta efficacy and safety? To what degree has that been aligning with the clinical trial experience? Is 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.

Stuart A. Arbuckle: So in terms of the real-world experience, I would say it 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, I mean that their experience of the level of efficacy and the impact it's having on their lives is really inspiring. Obviously, safety is something that 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.

Reshma Kewalramani: 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 FF 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 and the open-label extension but also registry data that we're collecting and will be collecting around the world. Thanks very much.

Unknown Executive: 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 calls tonight, so we'll let you go to those. And at the same time, the IR team is in the office and happy to talk to you if you have additional questions.

Unknown Executive: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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