# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Sep 30, 2013

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2013-11-07
- Accepted by EDGAR: Nov 7, 2013, 21:22 ET
- Period: 2013-09-30
- Accession: 0000875320-13-000045
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532013000045/a2013q310-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532013000045/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-07-01 to 2013-09-30 | $221.7m | us-gaap:Revenues |
| Revenue | 9 months, 2013-01-01 to 2013-09-30 | $860.8m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2013-07-01 to 2013-09-30 | $20.0m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2013-01-01 to 2013-09-30 | $75.7m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2013-07-01 to 2013-09-30 | $228.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2013-01-01 to 2013-09-30 | $669.2m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2013-07-01 to 2013-09-30 | $87.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2013-01-01 to 2013-09-30 | $287.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-07-01 to 2013-09-30 | −$134.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2013-01-01 to 2013-09-30 | −$629.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2013-07-01 to 2013-09-30 | −$751.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2013-01-01 to 2013-09-30 | −$132.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-07-01 to 2013-09-30 | −$124.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-01-01 to 2013-09-30 | −$489.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-07-01 to 2013-09-30 | −$0.54 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2013-01-01 to 2013-09-30 | −$2.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-07-01 to 2013-09-30 | −$0.54 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2013-01-01 to 2013-09-30 | −$2.20 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-07-01 to 2013-09-30 | 230,505,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2013-01-01 to 2013-09-30 | 222,764,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2013-01-01 to 2013-09-30 | −$80.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2013-01-01 to 2013-09-30 | $36.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-09-30 | $583.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-09-30 | $1.65bn | us-gaap:AssetsCurrent |
| Total assets | at 2013-09-30 | $2.58bn | us-gaap:Assets |
| Current liabilities | at 2013-09-30 | $409.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-09-30 | $1.10bn | us-gaap:Liabilities |
| Shareholders' equity | at 2013-09-30 | $1.26bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 60,227 characters.

### OVERVIEW

We are in the business of discovering, developing, manufacturing and commercializing small molecule drugs for patients with serious diseases. Our two products are: KALYDECO (ivacaftor), which is approved in the United States, Australia, Canada and Europe for the treatment of patients six years of age and older with cystic fibrosis, or CF, who have a specific genetic mutation that is referred to as the G551D mutation; and INCIVEK (telaprevir), which is approved in the United States and Canada for the treatment of adults with genotype 1 hepatitis C virus, or HCV, infection. We receive royalties from sales in Europe and other countries for telaprevir, where it is marketed as INCIVO, by our collaborator, Janssen Pharmaceutica, N.V.

Our third quarter 2013 revenues included KALYDECO net product revenues of $101.1 million and INCIVEK net product revenues of $85.6 million. As of September 30, 2013, we had cash, cash equivalents and marketable securities of $1.4 billion. Our net product revenues from sales of INCIVEK have declined rapidly over the course of 2013, including a 45% decline in INCIVEK net product revenues in the third quarter of 2013 as compared to the second quarter of 2013. We expect this trend to continue due to reduced demand for current therapies for HCV infection, the anticipated introduction of new competitive therapies in the fourth quarter of 2013 and the reduction in our promotion and support for INCIVEK as a result of the restructuring plan that we implemented in October 2013. In the future, we expect that our net product revenues will be dependent on continued sales of KALYDECO as a monotherapy, the outcomes of ongoing label-expansion programs for ivacaftor monotherapy and the Phase 3 clinical trials of ivacaftor and VX-809 (lumacaftor), and the potential introduction of one or more of our other drug candidates to the market.

We invest in scientific innovation to create transformative medicines for patients with serious diseases, with a focus on specialty markets. Our strategy is to make focused investments to invent and develop innovative drugs, while seeking to maintain a strong financial position. We are focusing most of our drug development investment on the following key programs:

*Cystic Fibrosis -* Our goal is to develop treatment regimens that will provide benefits to as many patients with CF as possible and to maximize those benefits. We are conducting Phase 3 label-expansion clinical trials and a proof-of-concept clinical trial of ivacaftor monotherapy in patients with certain mutations in their cystic fibrosis transmembrane conductance regulator, or *CFTR,* gene that were not studied in prior Phase 3 clinical trials. We have submitted a supplemental New Drug Application, or sNDA, to the U.S. Food and Drug Administration, or FDA, and a Marketing Authorization Application, or MAA, variation in the European Union for the use of ivacaftor monotherapy in patients six years of age and older with gating mutations other than the G551D mutation. We have completed enrollment in an international pivotal Phase 3 development program to evaluate combinations of ivacaftor and our investigational CFTR corrector lumacaftor for patients with two copies of the most prevalent genetic mutation that causes CF.

*HCV* - We are seeking to develop an all-oral, interferon-free treatment regimen that is 12 weeks or less in duration with a goal of providing high viral cure rates and improved tolerability, in order to be commercially competitive in the HCV market of the future. We are conducting Phase 2 clinical trials to evaluate all-oral combination treatment regimens that include our HCV nucleotide analogue VX-135 together with molecules that have potentially complementary mechanisms, such as an HCV protease inhibitor and an HCV NS5A inhibitor.

*Autoimmune Diseases* - We are evaluating our JAK3 inhibitor, VX-509, in a fully-enrolled Phase 2 clinical trial. In October 2013, we announced that this clinical trial had met its primary endpoints, which were measured after 12 weeks of treatment. We expect 24-week data from this clinical trial in early 2014.

We may seek collaborators for some of our drug candidates in order to diversify risk, broaden or accelerate or otherwise benefit a development program in an effort to fully realize the value of a drug candidate.

We plan to continue investing in our research programs and supporting scientific innovation in order to identify and develop transformative medicines. We believe that pursuing research in diverse areas allows us to balance the risks inherent in drug development and may provide the drug candidates that will form our pipeline in future years. We have on-going research programs, including in the areas of CF, cancer and multiple sclerosis.

### CF

KALYDECO (ivacaftor) is approved in the United States, Australia, Canada and the European Union for the treatment of patients with CF six years of age and older who have the G551D mutation on at least one allele of the *CFTR* gene. KALYDECO is currently available to eligible patients in the United States, England, Scotland, Northern Ireland, Wales, the Republic of Ireland, France, Germany, the Netherlands, Austria, Denmark, Sweden, Norway and Greece. We are in active discussions with relevant agencies in Australia and Canada regarding public reimbursement of KALYDECO in these countries. In October 2013, we presented data from an ongoing rollover clinical trial of patients six years of age and older who have the G551D mutation on at least one allele of the *CFTR* gene. The data from this clinical trial showed that 144 weeks of continuous treatment with KALYDECO provided durable treatment effects in lung function (FEV1), weight and other measures and a consistent safety profile to what was observed in the 48-week Phase 3 clinical trials that supported approval of KALYDECO.

We are continuing our work in CF to identify and develop treatment regimens that will provide benefits to as many patients with CF as possible and to maximize those benefits. We have multiple ongoing clinical development programs to evaluate our CF treatment regimens, and our research group is working to identify additional corrector compounds that could be included in future dual-corrector regimens in combination with ivacaftor in patients with one or two copies of the F508del mutation.

#### Ivacaftor (monotherapy)

We are conducting Phase 3 label-expansion clinical trials and a Phase 2 proof-of-concept clinical trial of ivacaftor monotherapy:

- We are evaluating ivacaftor in patients six years of age and older with CF with gating mutations other than the G551D mutation in a Phase 3 clinical trial. In July 2013, we reported that patients in this clinical trial had statistically significant improvements in their lung function (FEV1) and other measures of disease. The safety and tolerability results from this clinical trial were consistent with those observed in prior Phase 3 clinical trials of ivacaftor monotherapy in patients with CF who have the G551D mutation. We submitted an sNDA to the FDA in September 2013 and an MAA variation in the European Union in October 2013 for the use of ivacaftor monotherapy in patients with CF six years of age and older who have gating mutations other than the G551D mutation. We estimate that in North America, Europe and Australia approximately 400 patients with CF six years of age and older have at least one non-G551D gating mutation.
- We are conducting a fully-enrolled Phase 3 clinical trial evaluating ivacaftor in patients six years of age and older with CF who have the R117H mutation in the *CFTR* gene on at least one allele. We expect data from this clinical trial to be available at the end of 2013. If this clinical trial is successful, we plan to submit an sNDA to the FDA in early 2014 and an MAA variation in the European Union in the second quarter of 2014 for the use of ivacaftor monotherapy in patients with CF who are six years of age and older who have the R117H mutation in the *CFTR* gene on at least one allele. We estimate that in North America, Europe and Australia approximately 1,100 patients with CF six years of age and older have at least one copy of the R177H mutation in their *CFTR* gene. Patients diagnosed with CF who have the R117H mutation exhibit a range of severity and signs and symptoms of the disease, with an average life expectancy in the 50s.
- We are conducting a fully-enrolled Phase 3 clinical trial in which we are evaluating a pediatric formulation of ivacaftor as a treatment for children with CF two to five years of age with gating mutations in the *CFTR* gene, including the G551D mutation. We expect data from this clinical trial in the second quarter of 2014. If this clinical trial is successful, we plan to submit an sNDA in the second half of 2014. We estimate that in North America, Europe and Australia approximately 300 patients with CF two to five years of age have a gating mutation.
- We are conducting a fully-enrolled proof-of-concept Phase 2 clinical trial in which we are evaluating ivacaftor in patients with CF who have clinical evidence of residual CFTR function. We expect data from this clinical trial in the second quarter of 2014. We estimate that in North America, Europe and Australia more than 3,000 patients with CF six years of age and older have non-R117H CFTR mutations that result in residual function.

#### Lumacaftor in Combination with Ivacaftor

We have completed enrollment of patients in an international pivotal Phase 3 clinical program to evaluate combinations of lumacaftor and ivacaftor in patients with CF who have two copies of the F508del mutation in their *CFTR* gene (homozygous). We are conducting two 24-week Phase 3 clinical trials, which are referred to as TRAFFIC and TRANSPORT, that are designed to support approval of the combination of lumacaftor and ivacaftor for patients 12 years of age and older. Each Phase 3 clinical trial was designed to enroll approximately 500 patients with CF who are homozygous for the F508del mutation, for a total of approximately 1,000 patients. TRAFFIC and TRANSPORT have the same design and together are being conducted at approximately 200 clinical trial sites in North America, Europe and Australia. We expect data from TRAFFIC and TRANSPORT in mid-2014. If these clinical trials are successful, we plan to submit a New Drug Application, or NDA, to the FDA and an MAA in the European Union in the second half 2014.

We also are enrolling patients in a Phase 2 clinical trial to evaluate lumacaftor in combination with ivacaftor in children with CF six to eleven years of age who have two copies of the F508del mutation. If this Phase 2 clinical trial is successful, we plan to use the data from this clinical trial, along with data from the two Phase 3 clinical trials, for registration in the United States and European Union in patients six to eleven years of age, following registration in patients 12 years of age and older.

We recently began enrollment in an 8-week exploratory Phase 2 clinical trial of lumacaftor in combination with ivacaftor in patients with CF who are 18 years of age and older and who have one copy of the F508del mutation in their *CFTR* gene and one copy of a mutation in their *CFTR* gene that is not expected to respond to either ivacaftor or lumacaftor alone. This clinical trial will evaluate a twice-daily administration of lumacaftor (400 mg) and ivacaftor (250 mg) and is designed to provide additional safety and lung function data on the combination of ivacaftor and lumacaftor in heterozygous patients.

We estimate that in North America, Europe and Australia more than 28,000 patients with CF six years of age and older have two copies of the F508del mutation, and more than 17,000 patients with CF six years of age and older have one copy of the F508del mutation and one copy of a non-F508del mutation that is not expected to respond to ivacaftor monotherapy treatment.

#### VX-661

We recently began enrollment in a Phase 2 clinical trial to evaluate a four-week regimen of VX-661 in combination with ivacaftor in patients with CF who have one copy of the F508del mutation and one copy of the G551D mutation. The evaluation of this regimen is supported by *in vitro* data presented at the European Cystic Fibrosis Society Conference by our researchers that showed increased chloride transport in human bronchial epithelial cells with one copy of the F508del mutation and one copy of the G551D mutation, with the combination of a corrector compound and ivacaftor as compared to the use of ivacaftor alone. This clinical trial is intended to evaluate whether the addition of a corrector to treatment with KALYDECO can further enhance the clinical benefit received from KALYDECO alone in patients with the G551D and F508del mutation in their *CFTR* genes. We expect data from this clinical trial in the first quarter of 2014.

We are preparing to conduct a 12-week clinical trial of VX-661 in combination with ivacaftor to evaluate the combination in patients with CF who have two copies of the F508del following recent discussions with regulatory authorities. This clinical trial is designed to provide safety, efficacy and dose-response information to characterize VX-661 for further clinical development. We expect to begin enrollment in this clinical trial in the first quarter of 2014 pending protocol approval from regulatory agencies.

#### VX-983

Based on the emerging profiles for VX-661 and VX-983, we have prioritized VX-661 and do not intend to further develop VX-983.

#### Dual-Correctors in Combination with Ivacaftor

We have an active research program focused on identifying additional corrector compounds that could be included in future dual-corrector regimens in combination with ivacaftor in patients with one or two copies of the F508del mutation. The potential use of a dual-corrector regimen in combination with ivacaftor is supported by *in vitro* data presented at the European Cystic Fibrosis Society Conference that showed a combination of two CFTR correctors and ivacaftor increased chloride transport in human bronchial epithelial cells with one or two copies of the F50del mutation, as compared to the use of a single CFTR corrector in combination with ivacaftor. Our goal is to advance a second-generation CFTR corrector compound into clinical development by the end of 2014.

### HCV

Janssen and we currently market INCIVEK/INCIVO (telaprevir) in competition with Merck & Co., Inc.'s VICTRELIS™ (boceprevir), another HCV protease inhibitor that was approved for sale in the United States and Europe in 2011. We expect that a number of new therapies for HCV infection will become available to patients over the next several years. The most advanced competitive drug candidates are Gilead Sciences, Inc.'s, or Gilead's, sofosbuvir (GS-7977) and Janssen's simeprevir (TMC435). Gilead and Janssen have filed NDAs for sofosbuvir and simeprevir, respectively, and FDA advisory committees have unanimously recommended approval of both sofosbuvir and simeprevir. It is anticipated that each of these drug candidates will be approved as a treatment for genotype 1 HCV infection in combination with pegylated-interferon, or peg-IFN, and ribavirin, or RBV, in the fourth quarter of 2013. The top-line results reported by Gilead and Janssen from Phase 3 clinical trials suggest that the safety and efficacy profiles of sofosbuvir and simeprevir will position them, if approved, to take a significant portion of the market for HCV therapies.

We plan to compete in the HCV infection market as it shifts away from current treatment regimens (including our INCIVEK triple-combination therapy) to regimens that incorporate new drugs with improved safety, efficacy and/or tolerability, by pursuing development of all-oral, interferon-free regimens or 12 weeks or less in duration incorporating our HCV nucleotide analogue VX-135. A number of pharmaceutical companies are investigating combination regimens that incorporate one or more of an HCV protease inhibitor, an HCV nucleotide analogue, an HCV non-nucleotide polymerase inhibitor or an NS5A inhibitor. Clinical trials of these investigational combination regimens are being conducted in a wide variety of patient populations, including treatment-naïve and treatment-failure patients, and across all HCV genotypes, which respond differently to different combinations of molecules employing different mechanisms. We expect that the market for any specific HCV treatment regimen, including INCIVEK triple-combination therapy, will be affected by the introduction of new competitive drugs or drug combinations, sales from currently approved drugs, adverse information regarding the safety characteristics or efficacy of the regimen, significant new information regarding potential treatment regimens being evaluated in clinical trials and enrollment of patients in clinical trials being conducted by us or our competitors. We expect that treatment regimens that include the administration of peg-IFN by injection will command a relatively small portion of the overall market.

We are evaluating potential all-oral treatment regimens that include our HCV nucleotide analogue VX-135 in planned and ongoing Phase 2 clinical trials in order to determine which regimen or regimens appear likely to provide benefits to patients and to advance into Phase 3 clinical development. In July 2013, the FDA placed a partial clinical hold on VX-135 in the United States, which is being evaluated in a Phase 2 clinical trial in combination with RBV in patients with genotype 1 HCV infection. The partial clinical hold prevents us from evaluating a 200 mg dose of VX-135 in the United States following observation of reversible elevated liver enzymes in patients who received 400 mg of VX-135 in combination with RBV in a Phase 2 clinical trial in Europe. Further evaluation of VX-135 in the United States is subject to the resolution of the partial clinical hold. We intend to provide further data to the FDA, including sustained viral response data from the ongoing clinical trials described below of VX-135 and RBV and VX-135 and daclatasvir, through the first half of 2014.

We, in collaboration with BMS, are evaluating VX-135 in combination with daclatasvir, an NS5A replication complex inhibitor being developed by BMS, in a Phase 2 clinical trial in New Zealand. Safety and efficacy data from the first part of this clinical trial are expected to be available in early 2014 to inform future development plans for this combination regimen.

We have completed dosing of VX-135 in combination with RBV in two clinical trials that were conducted to generate safety data for VX-135 in combination with RBV and were not intended to evaluate the combination of VX-135 and RBV as a therapeutic regimen.

- We recently completed dosing of 100 mg and 200 mg of VX-135 in combination with RBV as part of a 12-week Phase 2 clinical trial in Europe. This clinical trial enrolled 10 patients with genotype 1 HCV infection in each 100 mg and 200 mg dose group, and all 20 patients completed 12 weeks of treatment. Both the 100 mg and 200 mg doses were well tolerated, no serious adverse events were reported and no liver or cardiac safety issues were identified. 70 percent and 80 percent of patients in the 100 mg and 200 mg dosing arms, respectively, had undetectable HCV RNA

levels within four weeks of initiating treatment. Sustained viral response rates 12 weeks after completion of treatment, or SVR12 rates, were 10 percent and 50 percent for the 100 mg and 200 mg groups, respectively. This clinical trial also evaluated a 400 mg dose of VX-135 in combination with RBV in 10 patients, which was discontinued following the observation of elevated liver enzymes in 3 of 10 patients in this dose group.

- We have completed dosing of 100 mg of VX-135 in combination with RBV as part of a 12-week Phase 2 clinical trial in the United States. The 100 mg dose group enrolled 10 patients with genotype 1 HCV infection. All 10 patients completed 12 weeks of treatment. The 100 mg dose was well tolerated, no serious adverse events were reported and no liver or cardiac safety issues were identified. All patients achieved undetectable HCV RNA levels during the 12-week dosing period, and 60 percent of patients had undetectable HCV RNA levels within four weeks of initiating treatment. The sustained viral response rate four weeks after completion of treatment was 10 percent.

A drug-drug interaction clinical trial of VX-135 in combination with Janssen's HCV protease inhibitor simeprevir in healthy volunteers is complete. We are discussing with Janssen the design of additional clinical trials of VX-135 in combination with simeprevir in patients with genotype 1 HCV infection.

Some of our competitors' potential all-oral treatment regimens are more advanced, including all-oral treatment regimens that are being evaluated in Phase 3 clinical trials by Gilead and Abbvie, Inc. While the development and regulatory timelines for drug candidates for the treatment of HCV infection are subject to risk and uncertainty, we believe that (i) substantial additional clinical data regarding potential all-oral treatment regimens will become available in 2013 and 2014 and (ii) it is possible that one or more all-oral treatment regimens for genotype 1 HCV infection could be commercially available as soon as late 2014. As a result, if we are successful in developing an all-oral treatment regimen or regimens that include VX-135, independently or with a collaborator, it is likely that our all-oral treatment regimen(s) would compete directly with one or more previously approved all-oral treatment regimens.

### Autoimmune Diseases

VX-509 is an investigational oral drug candidate intended to inhibit Janus kinase 3, or JAK3, which is involved in the modulation of lymphocyte that are central to autoimmune disease pathology. We are evaluating VX-509 in a double-blind, randomized, placebo-controlled 24-week Phase 2b clinical trial that enrolled and dosed 358 people with rheumatoid arthritis, or RA, who had active disease despite methotrexate treatment. Patients in the clinical trial continued to receive stable doses of methotrexate during the clinical trial. Up to 20 percent of the patients in the clinical trial could have previously been treated with a single tumor necrosis factor (TNF) inhibitor. Patients in the clinical trial were randomized to receive placebo or one of four dose regimens of VX-509 (100 mg once daily (QD), 150 mg once daily, 200 mg once daily or 100 mg given twice daily (BID)) for 24 weeks.

The primary endpoints of the clinical trial were the proportion of patients who achieved a 20 percent improvement in signs and symptoms of RA, as measured by the ACR improvement criteria, or ACR20, response at week 12 and the change from baseline in Disease Activity Score for 28 joints, or DAS28, at week 12. Additional secondary endpoints were used to evaluate the clinical activity of VX-509, including the proportion of patients who achieved 50 percent and 70 percent improvement in signs and symptoms of RA, or ACR50 and ACR70, respectively, at week 12. In all VX-509 treatment arms, the proportion of patients achieving ACR20 and ACR50 and the decrease from baseline in DAS28 were significantly greater than in placebo. The three highest dose groups showed ACR20 responses of between 58 percent and 68 percent, compared to 18 percent for placebo, and statistically significant ACR70 responses versus placebo.

In the clinical trial, adverse events led to discontinuation in 6.6 percent and 8.5 percent of patients in the VX-509 and placebo groups, respectively. Through 12 weeks, adverse event rates were 51.2 percent for the pooled VX-509 treatment group compared to 38.0 percent for those who received placebo, and the majority of adverse events observed in the clinical trial were mild to moderate. The most common adverse events in the pooled VX-509 treatment group were headache (8.0 percent), hypercholesterolemia (3.8 percent) and nasopharyngitis (3.5 percent). The safety profile of VX-509 was comparable across all treatment groups. Serious adverse events occurred in equal proportions of patients across the pooled VX-509 and placebo treatment groups (5.6 percent). Infections occurred in 22.0 percent of patients in the pooled VX-509 treatment group compared to 15.5 percent in the placebo group, and serious infections occurred in 2.8 percent of patients in the VX-509 group compared to 1.4 percent for placebo. One death, deemed unrelated to study drug, occurred in the VX-509 100 mg BID group and was due to cardiac failure. Elevations in transaminase levels and decreases in median neutrophil and lymphocyte counts were observed in the VX-509 groups and were generally mild.

The clinical trial is ongoing, and we expect 24-week data to be available in early 2014.

### Workforce Reduction

On October 29, 2013, we announced a reduction of our workforce primarily related to the support of INCIVEK following the continued and rapid decline in the number of people being treated with INCIVEK as other new medicines for the treatment of HCV infection near approval. This action resulted from our decision to focus our investment on future opportunities in cystic fibrosis and other research and development programs, including VX-135 as part of an all-oral regimen for HCV infection.

As part of this restructuring, we are eliminating approximately 370 full-time positions globally, representing approximately a 15% reduction in our workforce. The eliminated positions included the portion of our U.S. field-based sales force focused on promoting INCIVEK. Approximately 175 positions are being eliminated in Massachusetts. Following the changes, we expect to have approximately 1,800 employees worldwide, including approximately 1,300 in Massachusetts. We estimate that we will incur aggregate restructuring charges of approximately $35.0 million to $45.0 million, including $20.0 million to $25.0 million for employee severance and benefit costs, $6.0 million to $8.0 million in assets associated with this restructuring that have become impaired and $9.0 million to $12.0 million for other costs.

### Regulatory Compliance

Our marketing of pharmaceutical products, which began in 2011, is subject to extensive and complex laws and regulations. We have a corporate compliance program designed to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems and the promotion of a culture of compliance. Among other laws, regulations and standards, we are subject to various U.S. federal and state and comparable foreign laws pertaining to health care fraud and abuse, including anti-kickback and false claims statutes, and laws prohibiting the promotion of drugs for unapproved, or off-label, uses. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. False claims laws prohibit anyone from presenting for payment to third-party payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed or claims for medically unnecessary items or services. We expect to continue to devote substantial resources to maintain, administer and expand these compliance programs globally.

### RESULTS OF OPERATIONS

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $221,700 | $336,006 | $(114,306) | (34)% | $860,818 | $1,193,048 | $(332,230) | (28)% |
| Operating costs and expenses | 355,765 | 337,077 | 18,688 | 6% | 1,490,104 | 1,113,240 | 376,864 | 34% |
| Other items, net | 5,403 | (25,396) | n/a | n/a | 126,285 | (52,867) | n/a | n/a |
| Net loss (income) attributable to noncontrolling interest (Alios) | 4,530 | (31,076) | n/a | n/a | 13,688 | (57,825) | n/a | n/a |
| Net loss attributable to Vertex | $(124,132) | $(57,543) | $66,589 | 116% | $(489,313) | $(30,884) | $458,429 | 1,484% |

### Net Loss Attributable to Vertex

Net loss attributable to Vertex was $(124.1) million in the third quarter of 2013 compared to net loss attributable to Vertex of $(57.5) million in the third quarter of 2012. Our revenues decreased in the third quarter of 2013 as compared to the third quarter of 2012 due to decreased INCIVEK net product revenues partially offset by increased KALYDECO net product revenues. Our operating costs and expenses increased in the third quarter of 2013 as compared to the third quarter of 2012 due to increased research and development expenses and restructuring expenses recorded in the third quarter of 2013 related to the strategic restructuring plan adopted in October 2013, partially offset by decreased cost of product revenues and sales, general and administrative expenses.

In the nine months ended September 30, 2013, net loss attributable to Vertex was $(489.3) million as compared to net loss attributable to Vertex of $(30.9) million in the nine months ended September 30, 2012. Our revenues decreased in the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 due to decreased INCIVEK net product revenues partially offset by increased KALYDECO net product revenues and increased INCIVO royalties. Our operating costs and expenses increased from $1.1 billion in the nine months ended September 30, 2012 to $1.5 billion in the nine months ended September 30, 2013. The increase in operating costs and expenses in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was primarily due to a $412.9 million intangible asset impairment charge for VX-222 recorded in the first quarter of 2013 partially offset by a $78.0 million write-off in the second quarter of 2012 for excess and obsolete INCIVEK inventories.

Stock-based compensation expense was $31.3 million and $27.6 million in the third quarter of 2013 and 2012, respectively, and $103.9 million and $86.6 million in the nine months ended September 30, 2013 and 2012, respectively.

### Net Loss Attributable to Vertex per Diluted Share

Net loss attributable to Vertex was $(0.54) per diluted share in the third quarter of 2013 as compared to net loss attributable to Vertex of $(0.27) per diluted share in the third quarter of 2012. Net loss attributable to Vertex was $(2.20) per diluted share in the nine months ended September 30, 2013 compared to net loss attributable to Vertex of $(0.15) per diluted share in the nine months ended September 30, 2012.

### Common Shares Outstanding

Our shares of outstanding common stock increased by 16.3 million shares from 217.3 million shares on December 31, 2012 to 233.6 million shares on September 30, 2013 due to the approximately 8.3 million shares of common stock we issued in the second quarter of 2013 in connection with the conversions of our 3.35% convertible senior subordinated notes due 2015, or 2015 Notes, and the approximately 8.0 million shares of common stock we issued in the nine months ended September 30, 2013 pursuant to our employee equity programs.

### Revenues

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues, net | $186,653 | $303,501 | $(116,848) | (39)% | $708,823 | $1,052,149 | $(343,326) | (33)% |
| Royalty revenues | 27,012 | 25,586 | 1,426 | 6% | 119,705 | 98,047 | 21,658 | 22% |
| Collaborative revenues | 8,035 | 6,919 | 1,116 | 16% | 32,290 | 42,852 | (10,562) | (25)% |
| Total revenues | $221,700 | $336,006 | $(114,306) | (34)% | $860,818 | $1,193,048 | $(332,230) | (28)% |

### Product Revenues, Net

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| INCIVEK | $85,592 | $254,340 | $(168,748) | (66)% | $446,962 | $939,006 | $(492,044) | (52)% |
| KALYDECO | 101,061 | 49,161 | 51,900 | 106% | 261,861 | 113,143 | 148,718 | 131% |
| Total product revenues, net | $186,653 | $303,501 | $(116,848) | (39)% | $708,823 | $1,052,149 | $(343,326) | (33)% |

Our total net product revenues decreased in the third quarter of 2013 as compared to the third quarter of 2012 due to decreased INCIVEK net product revenues in the third quarter of 2013 as compared to the third quarter of 2012, partially offset by increased KALYDECO net product revenues in the third quarter of 2013 as compared to the third quarter of 2012. In the fourth quarter of 2013, we expect that total product revenues will be lower than the fourth quarter of 2012 due to decreased INCIVEK net product revenues.

INCIVEK net product revenues have been declining on a quarterly basis since reaching a peak in the fourth quarter of 2011 and declined by 45% in the third quarter of 2013 as compared to the second quarter of 2013. We expect our INCIVEK net product revenues to continue to decline rapidly due to reduced demand for current therapies for HCV infection, the anticipated introduction of new competitive therapies in the fourth quarter of 2013 and the reduction in our promotion and support for INCIVEK as a result of the strategic restructuring plan that we adopted in October 2013.

We began marketing KALYDECO in the United States in the first quarter of 2012 and in certain international markets in the third quarter of 2012. KALYDECO net product revenues were $101.1 million in the three months ended September 30, 2013, including $44.8 million of net product revenues from international markets. KALYDECO net product revenues increased by 2% in the third quarter of 2013 as compared to the second quarter of 2013. We believe that KALYDECO net product revenues in the fourth quarter of 2013 will be similar to KALYDECO net product revenues in the third quarter of 2013.

### Royalty Revenues

Our royalty revenues were $27.0 million and $25.6 million in the three months ended September 30, 2013 and 2012, respectively. Our royalty revenues were $119.7 million and $98.0 million in the nine months ended September 30, 2013 and 2012, respectively. Our royalty revenues from INCIVO were $21.0 million and $20.0 million in the three months ended September 30, 2013 and 2012, respectively, and $104.1 million and $80.8 million in the nine months ended September 30, 2013 and 2012, respectively. Mitsubishi Tanabe's license to market telaprevir in Japan is fully paid.

We recognized royalty revenues related to sales by GlaxoSmithKline of an HIV protease inhibitor that was discovered and developed pursuant to a collaboration with GlaxoSmithKline of $6.0 million and $15.4 million in the three and nine months ended September 30, 2013, respectively, compared to $5.6 million and $17.2 million in the three and nine months ended September 30, 2012, respectively. We sold our rights to these HIV royalties in 2008 for a one-time cash payment of $160.0 million.

### Collaborative Revenues

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Janssen | $4,520 | $2,604 | $21,042 | $11,201 |
| Mitsubishi Tanabe | — | — | — | 18,879 |
| CFFT and other | 3,515 | 4,315 | 11,248 | 12,772 |
| Total collaborative revenues | $8,035 | $6,919 | $32,290 | $42,852 |

Our collaborative revenues from Janssen relate to the amortization of an up-front payment we received in 2006, net reimbursements (payments) for telaprevir development costs and reimbursements for manufacturing services. We do not expect to earn any future milestone payments pursuant to this collaboration agreement with Janssen.

In the nine months ended September 30, 2012, we recognized collaborative revenues related to a one-time payment that we received from Mitsubishi Tanabe in 2009 and revenues related to manufacturing services we provided to Mitsubishi Tanabe through our third-party manufacturing network. We did not recognize any collaborative revenues from Mitsubishi Tanabe in the nine months ended September 30, 2013 or the three months ended September 30, 2013 and do not expect to recognize any future collaborative revenues pursuant to our collaboration agreement with Mitsubishi Tanabe.

### Operating Costs and Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of product revenues | $20,048 | $30,680 | $(10,632) | (35)% | $75,698 | $161,147 | $(85,449) | (53)% |
| Royalty expenses | 7,291 | 7,856 | (565) | (7)% | 32,315 | 31,023 | 1,292 | 4% |
| Research and development expenses | 228,624 | 200,161 | 28,463 | 14% | 669,174 | 593,076 | 76,098 | 13% |
| Sales, general and administrative expenses | 87,754 | 97,684 | (9,930) | (10)% | 287,154 | 326,344 | (39,190) | (12)% |
| Restructuring expense | 12,048 | 696 | 11,352 | 1,631% | 12,863 | 1,650 | 11,213 | 680% |
| Intangible asset impairment charge | — | — | — | n/a | 412,900 | — | 412,900 | n/a |
| Total costs and expenses | $355,765 | $337,077 | $18,688 | 6% | $1,490,104 | $1,113,240 | $376,864 | 34% |

### Cost of Product Revenues

Our cost of product revenues includes the cost of producing inventories that corresponded to product revenues for the reporting period, plus the third-party royalties payable on our net sales of INCIVEK and KALYDECO. Cost of product revenues decreased in the third quarter of 2013 as compared to the third quarter of 2012 due to decreased product revenues. Cost of product revenues decreased in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 primarily due to a $78.0 million write-off of excess and obsolete INCIVEK inventories we recognized in the second quarter of 2012.

### Royalty Expenses

Royalty expenses include third-party royalties payable upon net sales of telaprevir by our collaborators and royalty expenses related to a subroyalty payable to a third party on net sales of an HIV protease inhibitor sold by GlaxoSmithKline. Royalty expenses in the third quarter of 2013 decreased by $0.6 million, or 7%, compared to the third quarter of 2012, and increased by $1.3 million, or 4%, in the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

### Research and Development Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research expenses | $60,246 | $56,400 | $3,846 | 7% | $186,329 | $175,888 | $10,441 | 6% |
| Development expenses | 168,378 | 143,761 | 24,617 | 17% | 482,845 | 417,188 | 65,657 | 16% |
| Total research and development expenses | $228,624 | $200,161 | $28,463 | 14% | $669,174 | $593,076 | $76,098 | 13% |

Our research and development expenses include internal and external costs incurred for research and development of our drugs and drug candidates. We do not assign our internal costs, such as salary and benefits, stock-based compensation expense, laboratory supplies and other direct expenses and infrastructure costs, to individual drugs or drug candidates, because the employees within our research and development groups typically are deployed across multiple research and development programs. These internal costs are significantly greater than our external costs, such as the costs of services provided to us by clinical research organizations and other outsourced research, which we do allocate by individual program. All research and development costs for our drugs and drug candidates are expensed as incurred.

To date, we have incurred in excess of $6.1 billion in research and development expenses associated with drug discovery and development. The successful development of our drug candidates is highly uncertain and subject to a number of risks. In addition, the duration of clinical trials may vary substantially according to the type, complexity and novelty of the drug candidate and the disease indication being targeted. The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activities. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a project and are difficult to predict. Therefore, accurate and meaningful estimates of the ultimate costs to bring our drug candidates to market are not available.

In recent years, costs related to our CF and HCV programs have represented the largest portion of our development costs. Any estimates regarding development and regulatory timelines for our drug candidates are highly subjective and subject to change. In the first half of 2013, we initiated a pivotal Phase 3 clinical program to evaluate lumacaftor in combination with ivacaftor. If these clinical trials are successful, we plan to submit an NDA to the FDA and an MAA in the European Union in the second half of 2014. We cannot make a meaningful estimate when, if ever, our other clinical development programs will generate revenues and cash flows.

#### Research Expenses

*(in thousands)*

*(in thousands)*

| Research Expenses: | Three Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $20,692 | $18,714 | $1,978 | 11% | $65,287 | $57,536 | $7,751 | 13% |
| Stock-based compensation expense | 6,577 | 6,268 | 309 | 5% | 21,252 | 19,218 | 2,034 | 11% |
| Laboratory supplies and other direct expenses | 11,174 | 8,730 | 2,444 | 28% | 33,249 | 30,943 | 2,306 | 7% |
| Contractual services | 5,500 | 5,304 | 196 | 4% | 16,756 | 15,983 | 773 | 5% |
| Infrastructure costs | 16,303 | 17,384 | (1,081) | (6)% | 49,785 | 52,208 | (2,423) | (5)% |
| Total research expenses | $60,246 | $56,400 | $3,846 | 7% | $186,329 | $175,888 | $10,441 | 6% |

35

We have maintained a substantial investment in research activities resulting in a 7% increase in research expenses in the third quarter of 2013 as compared to the third quarter of 2012 and a 6% increase in research expenses in the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012. We expect to continue to invest in our research programs with a focus on identifying drug candidates for specialty markets.

#### Development Expenses

*(in thousands)*

*(in thousands)*

| Development Expenses: | Three Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $41,984 | $37,555 | $4,429 | 12% | $130,379 | $106,700 | $23,679 | 22% |
| Stock-based compensation expense | 12,646 | 11,176 | 1,470 | 13% | 43,060 | 35,207 | 7,853 | 22% |
| Laboratory supplies and other direct expenses | 11,639 | 7,953 | 3,686 | 46% | 33,166 | 27,482 | 5,684 | 21% |
| Contractual services | 66,386 | 58,500 | 7,886 | 13% | 170,224 | 157,763 | 12,461 | 8% |
| Drug supply costs | 9,773 | 1,705 | 8,068 | 473% | 25,873 | 10,681 | 15,192 | 142% |
| Infrastructure costs | 25,950 | 26,872 | (922) | (3)% | 80,143 | 79,355 | 788 | 1% |
| Total development expenses | $168,378 | $143,761 | $24,617 | 17% | $482,845 | $417,188 | $65,657 | 16% |

Our development expenses increased by $24.6 million, or 17%, in the third quarter of 2013 as compared to the third quarter of 2012, principally due to increased compensation expenses, contractual services expenses and drug supply costs. Our development expenses increased by $65.7 million, or 16%, in the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012, principally due to increased compensation expenses, contractual services expenses and drug supply costs. We expect our development expenses to increase in 2013 as compared to 2012 due to ongoing and planned clinical trials in the areas of CF, HCV infection and autoimmune diseases.

### Sales, General and Administrative Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2013 | 2012 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $87,754 | $97,684 | $(9,930) | (10)% | $287,154 | $326,344 | $(39,190) | (12)% |

Sales, general and administrative expenses decreased by 10% and 12% in the three and nine months ended September 30, 2013, respectively, as compared to the three and nine months ended September 30, 2012, primarily due to decreased INCIVEK and KALYDECO marketing expenses in the United States, partially offset by increased KALYDECO marketing expenses in international markets.

### Restructuring Expense

On October 29, 2013, we announced a reduction of our workforce. As part of this restructuring, we are eliminating approximately 370 full-time positions globally, representing approximately a 15% reduction in our workforce. We estimate that we will incur aggregate restructuring charges of approximately $35.0 million to $45.0 million, including $20.0 million to $25.0 million for employee severance and benefit costs, $6.0 million to $8.0 million in assets associated with this restructuring that have become impaired and $9.0 million to $12.0 million for other costs. We recorded $11.4 million of these restructuring charges in the third quarter of 2013. Prior to this workforce reduction, our restructuring expense primarily related to remaining lease obligations for space that we do not occupy following restructuring activities in 2003.

In the three months ended September 30, 2013 and 2012, we recorded restructuring expense of $12.0 million and $0.7 million, respectively. In the nine months ended September 30, 2013 and 2012, we recorded restructuring expense of $12.9 million and $1.7 million, respectively.

### Intangible Asset Impairment Charge

In the first quarter of 2013, we evaluated for impairment VX-222, an HCV polymerase inhibitor that we acquired through our acquisition of ViroChem Pharma Inc. in 2009. We evaluated the fair value of VX-222 from the perspective of a market participant and, based on our analysis, determined that the fair value of VX-222 was zero as of March 31, 2013. Accordingly, we recorded a $412.9 million impairment charge in the nine months ended September 30, 2013. In connection with this impairment charge, we recorded a credit of $127.6 million in our provision for income taxes, resulting in a net effect on net loss attributable to Vertex related to this impairment charge of $285.3 million in the nine months ended September 30, 2013.

### Other Items, net

### Other income (expense), net

Other income (expense), net was $4.7 million and $(6.6) million in the three and nine months ended September 30, 2013, respectively, compared to $(4.0) million and $(11.4) million in the three and nine months ended September 30, 2012, respectively. Other income (expense), net consists of interest income, interest expense and realized foreign exchange gain (loss).

### Income Taxes

In the three months ended September 30, 2013, we recorded a net benefit from income taxes of $0.8 million. This benefit from income taxes was due to a benefit from income taxes of $3.3 million attributable to noncontrolling interest (Alios) offset by a provision for income taxes of $2.6 million attributable to Vertex. In the first quarter of 2013, we determined that the fair value of VX-222 was zero, which resulted in an impairment charge of $412.9 million in the nine months ended September 30, 2013. In connection with this impairment charge, we wrote-off the associated deferred tax liability of $127.6 million as a benefit in our condensed consolidated statements of operations in the nine months ended September 30, 2013.

For the three and nine months ended September 30, 2012, we recorded a benefit from and a provision for income taxes attributable to Vertex of $0.0 million and $1.1 million, respectively, and a provision for income taxes attributable to noncontrolling interest (Alios) of $21.4 million and $40.4 million, respectively.

### Noncontrolling Interest (Alios)

The net loss (income) attributable to noncontrolling interest (Alios) recorded on our condensed consolidated statements of operations reflects Alios’ net loss for the reporting period, adjusted for any changes during the reporting period in the fair value of the contingent milestone and royalty payments payable by us to Alios BioPharma, Inc., or Alios.

A summary of net loss (income) attributable to noncontrolling interest (Alios) in the three and nine months ended September 30, 2013 and 2012 is as follows:

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Loss before provision for (benefit from) income taxes | $9,056 | $5,090 | $21,177 | $14,581 |
| Decrease (increase) in fair value of contingent milestone and royalty payments | (1,220) | (57,560) | 1,600 | (112,760) |
| Provision for (benefit from) income taxes | (3,306) | 21,394 | (9,089) | 40,354 |
| Net loss (income) attributable to noncontrolling interest (Alios) | $4,530 | $(31,076) | $13,688 | $(57,825) |

In the three and nine months ended September 30, 2013, the fair value of the contingent milestone payments and royalties payable by us to Alios related to the HCV nucleotide analogue program increased by $1.2 million and decreased by $1.6 million, respectively.

In the three and nine months ended September 30, 2012, the fair value of contingent milestone and royalty payments increased by $57.6 million and $112.8 million, respectively, primarily because we received positive clinical data from a Phase 1 clinical trial evaluating ALS-2200, now being developed as VX-135, which increased the probability that Alios would earn future payments from us under the license and collaboration agreement we entered into with Alios in June 2011.

Since June 2011, the fair value of the contingent milestone and royalty payments payable by us to Alios has increased by $183.3 million as a result of the advances in the clinical development program for VX-135. Increases in the fair value of the contingent milestone payments and royalties payable by us to Alios result in an increase in net loss attributable to Vertex (or a decrease in net income attributable to Vertex) on a dollar-for-dollar basis. If VX-135 continues to advance in clinical development, we expect to record additional increases in the fair value of these contingent milestone and royalty payments. Changes in the fair value of these contingent milestone and royalty payments and the effects of these changes on net loss were material in the periods presented and may be material in future periods.

### LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2013, we had cash, cash equivalents and marketable securities, excluding Alios’ cash and cash equivalents, of $1.4 billion, which was an increase of $101.4 million from $1.3 billion as of December 31, 2012. This increase was due to cash receipts from product sales and royalties and $242.4 million in cash we received from issuances of common stock pursuant to employee benefit plans, partially offset by cash expenditures we made during the nine months ended September 30, 2013 related to, among other things, research and development expenses and sales, general and administrative expenses, as well as $114.8 million for capital expenditures for property and equipment. In addition, in the nine months ended September 30, 2013, we began supporting $31.9 million in irrevocable stand-by letters of credit issued in support of property leases and other similar agreements with an unsecured credit facility with a one-year term. We previously had cash-collateralized these stand-by letters of credit. As a result of this credit facility, our restricted cash decreased by $31.8 million net of other activity recorded during the nine months ended September 30, 2013 and our cash and cash equivalents increased by a corresponding amount.

As of December 31, 2012, we had $400.0 million in aggregate principal amount of 2015 Notes. In addition to the $400.0 million in aggregate principal amount, which was scheduled to mature on October 1, 2015, we were scheduled to make interest payments in an aggregate amount of $33.5 million during the period from June 30, 2013 through October 1, 2015. In the second quarter of 2013, we called the 2015 Notes for redemption pursuant to a soft-call provision in the 2015 Notes that permitted us to call the 2015 Notes if the price of our common stock exceeded 130% of the conversion price over a specified period. In response to our call of the 2015 Notes for redemption, the holders of the 2015 Notes converted the 2015 Notes into 8.2 million shares of our common stock and received an additional 0.1 million shares of our common stock to compensate them for the semi-annual interest payment that would have been payable on October 1, 2013. As a result of these conversions, as of September 30, 2013, we had no remaining 2015 Notes and our future cash commitments related to the 2015 Notes had been reduced by $400.0 million in aggregate principal amount of 2015 Notes plus the associated future interest payments.

### Sources of Liquidity

We intend to rely on cash flows from product sales as our primary source of liquidity and cash flows from royalties as a secondary source of liquidity. Our cash flows from product sales have been decreasing in recent periods, and our future cash flows from product sales will be dependent on continued sales of KALYDECO as a monotherapy, the outcomes of ongoing label-expansion programs for ivacaftor monotherapy and the Phase 3 clinical trials of ivacaftor and VX-809 (lumacaftor), and the potential introduction of one or more of our other drug candidates to the market. In recent periods, we also have received significant proceeds from the issuance of common stock under our employee benefit plans, but the amount and timing of future proceeds from employee benefits plans is uncertain. Other possible sources of liquidity include commercial debt, public and private offerings of our equity and debt securities, strategic collaborative agreements that include research and/or development funding, development milestones and royalties on the sales of products, software and equipment leases, strategic sales of assets or businesses and financial transactions.

### Future Capital Requirements

We are incurring substantial expenses on our research and development programs and to commercialize KALYDECO. In addition, we have substantial facility and capital lease obligations, including leases for two buildings at Fan Pier that continue through 2028.

We expect that cash flows from KALYDECO and INCIVEK/INCIVO together with our current cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next twelve months. The adequacy of our available funds to meet our future operating and capital requirements will depend on many factors, including the amounts of future revenues generated by KALYDECO and INCIVEK/INCIVO, and the number, breadth, cost and prospects of our research and development programs.

### Financing Strategy

Although we do not have any plans to do so in the near term, we may raise additional capital through public offerings or private placements of our securities. In addition, we may raise additional capital through securing new collaborative agreements or other methods of financing. We will continue to manage our capital structure and to consider all financing opportunities, whenever they may occur, that could strengthen our long-term liquidity profile. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all.

### CONTRACTUAL COMMITMENTS AND OBLIGATIONS

Our commitments and obligations were reported in our Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission, or SEC, on March 1, 2013. There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K, except that as of September 30, 2013 none of our 2015 Notes remained outstanding and as a result our total commitments and obligations for 2013-2015 decreased by $400.0 million in aggregate principal amount of 2015 Notes plus the associated future interest payments.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are reflected in reported results for the period in which the change occurs. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. During the three months ended September 30, 2013, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on March 1, 2013.

### RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note A, "Basis of Presentation and Accounting Policies," in the accompanying notes to the condensed consolidated financial statements for a discussion of recent accounting pronouncements. There were no new accounting pronouncements adopted during the three and nine months ended September 30, 2013 that had a material effect on our financial statements.

## Market risk

As filed, 2,204 characters.

As part of our investment portfolio, we own financial instruments that are sensitive to market risks. The investment portfolio is used to preserve our capital until it is required to fund operations, including our research and development activities. None of these market risk-sensitive instruments are held for trading purposes. We do not have derivative financial instruments in our investment portfolio.

### Interest Rate Risk

We invest our cash in a variety of financial instruments, principally securities issued by the U.S. government and its agencies, investment grade corporate bonds and commercial paper, and money market funds. These investments are denominated in U.S. dollars. All of our interest-bearing securities are subject to interest rate risk and could decline in value if interest rates fluctuate. Substantially all of our investment portfolio consists of marketable securities with active secondary or resale markets to help ensure portfolio liquidity, and we have implemented guidelines limiting the term-to-maturity of our investment instruments. Due to the conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk.

### Foreign Exchange Market Risk

As a result of our foreign operations, we face exposure to movements in foreign currency exchange rates, primarily the Euro, Swiss Franc, British Pound and Canadian Dollar against the U.S. dollar. The current exposures arise primarily from cash, accounts receivable, intercompany receivables, payables and inventories, and calculations of royalties receivable from net sales denominated in foreign currencies. Both positive and negative affects to our net revenues from international product sales from movements in foreign currency exchange rates are partially mitigated by the natural, opposite affect that foreign currency exchange rates have on our international operating costs and expenses.

In the fourth quarter of 2013, we plan to implement a foreign currency management program with the objective of reducing the volatility of exchange rate fluctuations on our operating results and to increase the visibility of the foreign exchange impact on forecasted revenues.

## Controls and procedures

As filed, 1,487 characters.

### Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, as of September 30, 2013 our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

### Changes in Internal Controls Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 5,357 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on March 1, 2013. There have been no material changes from the risk factors previously disclosed in that Annual Report on Form 10-K except as set forth in Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.

### SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and, in particular, our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Part I-Item 2, contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding:

- expectations regarding the amount of, timing of and trends with respect to our revenues, costs and expenses and other gains and losses, including those related to net product revenues from sales of INCIVEK and KALYDECO and royalty revenues from net sales of INCIVO and to the intangible assets associated with the Alios collaboration;
- our expectations regarding clinical trials, development timelines and regulatory authority filings and submissions for ivacaftor, lumacaftor, VX-135, VX-509 and VX-661;
- our expectations regarding the timing of data from our clinical trials of ivacaftor monotherapy and lumacaftor in combination with ivacaftor, the possibility of using that data to support regulatory submissions and the timing of those potential submissions;
- our ability to successfully market INCIVEK and/or KALYDECO or any of our other drug candidates for which we obtain regulatory approval;
- our expectations regarding the timing and structure of clinical trials of our drugs and drug candidates, including, ivacaftor, lumacaftor, VX-135, VX-509 and VX-661, and the expected timing of our receipt of data from our ongoing and planned clinical trials;
- our intent to provide further data to the FDA, including sustained viral response data from our ongoing clinical trials of VX-135 and RBV and VX-135 and daclatasvir, through the first half of 2014;
- the data that will be generated by ongoing and planned clinical trials and the ability to use that data to advance molecules, continue development or support regulatory filings;
- our beliefs regarding the support provided by clinical trials and preclinical and nonclinical studies of our drug candidates for further investigation, clinical trials or potential use as a treatment;
- the focus of our drug development efforts and our financial and management resources and our plan to continue investing in our research and development programs and our strategy to develop our drug candidates, alone or with third party-collaborators;
- the establishment, development and maintenance of collaborative relationships;
- potential business development activities;
- our estimates regarding the charges associated with the October 2013 workforce reduction and restructuring activities;
- our ability to use our research programs to identify and develop new drug candidates to address serious diseases and significant unmet medical needs;
- our estimates regarding obligations associated with a lease of a facility in Kendall Square, Cambridge, Massachusetts; and
- our liquidity and our expectations regarding the possibility of raising additional capital.

Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many factors mentioned in this Quarterly Report on Form 10-Q will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from expected results. We also provide a cautionary discussion of risks and uncertainties under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on March 1, 2013 and was supplemented by Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, which was filed with the SEC on August 2, 2013. These are factors and uncertainties that we think could cause our actual results to differ materially from expected results. Other factors and uncertainties besides those listed there could also adversely affect us.

Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “intends,” “expects” and similar expressions are intended to identify forward-looking statements. There are a number of factors and uncertainties that could cause actual events or results to differ materially from those indicated by such forward-looking statements, many of which are beyond our control. In addition, the forward-looking statements contained herein represent our estimate only as of the date of this filing and should not be relied upon as representing our estimate as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

Filed Nov 7, 2013.
Source: SEC EDGAR, the filing index for accession 0000875320-13-000045. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.