# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Jun 30, 2014

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2014-07-31
- Accepted by EDGAR: Jul 31, 2014, 21:08 ET
- Period: 2014-06-30
- Accession: 0000875320-14-000058
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532014000058/a2014q210-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532014000058/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-04-01 to 2014-06-30 | $138.4m | us-gaap:Revenues |
| Revenue | 6 months, 2014-01-01 to 2014-06-30 | $256.9m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2014-04-01 to 2014-06-30 | $9.7m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2014-01-01 to 2014-06-30 | $18.2m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2014-04-01 to 2014-06-30 | $224.8m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2014-01-01 to 2014-06-30 | $463.7m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2014-04-01 to 2014-06-30 | $77.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2014-01-01 to 2014-06-30 | $151.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-04-01 to 2014-06-30 | −$180.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2014-01-01 to 2014-06-30 | −$397.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2014-04-01 to 2014-06-30 | $693.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2014-01-01 to 2014-06-30 | $1.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-04-01 to 2014-06-30 | −$159.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2014-01-01 to 2014-06-30 | −$391.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-04-01 to 2014-06-30 | −$0.68 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2014-01-01 to 2014-06-30 | −$1.68 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-04-01 to 2014-06-30 | −$0.68 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2014-01-01 to 2014-06-30 | −$1.68 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-04-01 to 2014-06-30 | 233,808,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2014-01-01 to 2014-06-30 | 233,353,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2014-01-01 to 2014-06-30 | −$303.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2014-01-01 to 2014-06-30 | $27.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-06-30 | $420.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-06-30 | $1.35bn | us-gaap:AssetsCurrent |
| Total assets | at 2014-06-30 | $2.12bn | us-gaap:Assets |
| Current liabilities | at 2014-06-30 | $363.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-06-30 | $945.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-06-30 | $1.17bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 56,161 characters.

### OVERVIEW

We are in the business of discovering, developing, manufacturing and commercializing small molecule drugs. We invest in scientific innovation to create transformative medicines for patients with serious diseases in specialty markets. Our business is focused on developing and commercializing therapies for the treatment of cystic fibrosis, or CF, and advancing our other research and early-stage development programs, while maintaining our financial strength.

We have marketed KALYDECO (ivacaftor) in the United States, European Union and Canada since it was approved in 2012 for the treatment of patients six years of age and older with CF who have specific genetic mutations in their cystic fibrosis transmembrane conductance regulator, or *CFTR,* gene. In June 2014, we announced positive data from two Phase 3 clinical trials, referred to as TRAFFIC and TRANSPORT, of lumacaftor, a CFTR corrector compound, in combination with ivacaftor, a CFTR potentiator compound. In TRAFFIC and TRANSPORT, we evaluated the combination regimen in patients 12 years of age and older with CF who have two copies (homozygous) of the F508del mutation in their *CFTR* gene, which is the most prevalent form of CF. We plan to submit a New Drug Application, or NDA, to United States Food and Drug Administration, or FDA, and a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, for lumacaftor in combination with ivacaftor in the fourth quarter of 2014.

### Cystic Fibrosis

Our plan is to (i) increase the number of patients eligible for treatment with ivacaftor, (ii) seek marketing approval for lumacaftor in combination with ivacaftor for the treatment of patients with CF who have two copies of the F508del mutation in their *CFTR* gene and (iii) research and develop earlier-stage compounds for the treatment of CF.

#### Ivacaftor

KALYDECO was approved in 2012 in the United States, European Union and Canada as a treatment for patients with CF six years of age and older who have the G551D mutation in their *CFTR* gene. We believe that most patients with CF six years of age and older who have the G551D mutation in the United States and Europe are being treated with KALYDECO. In June 2014, we signed a letter of intent with the pan-Canadian Pricing Alliance to enable the public reimbursement of KALYDECO for the treatment of eligible Canadians with CF six years of age and older who have the G551D mutation in their *CFTR* gene. Patients in the Canadian provinces of Ontario and Alberta are now able to receive KALYDECO under public reimbursement programs, and discussions are ongoing in the remaining Canadian provinces and territories. KALYDECO also is approved in Australia for the treatment of patients with CF six years of age and older who have the G551D mutation in their *CFTR* gene, and we are in discussions with Australia's Therapeutic Goods Administration regarding public reimbursement of KALYDECO.

In February 2014, the FDA approved KALYDECO for the treatment of patients with CF six years of age and older who have one of eight other mutations in their *CFTR* gene, which were studied in our first Phase 3 label-expansion clinical trial for ivacaftor. In July 2014, the European Commission approved KALYDECO for this patient group. In Canada, we also recently received approval for KALYDECO for the treatment of this patient group and patients with CF who have the G970R mutation in their *CFTR* gene.

We are seeking to further expand the number of patients eligible for treatment with ivacaftor by (i) evaluating ivacaftor as a potential treatment for patients with CF who have residual CFTR function, including patients with CF who have the R117H mutation in their *CFTR* gene and (ii) evaluating ivacaftor as a potential treatment for patients with CF two to five years of age with specific mutations in their *CFTR* gene.

Our Phase 3 clinical trial to evaluate ivacaftor in patients with the R117H mutation in their *CFTR* gene did not meet its primary endpoint of a statistically significant absolute change from baseline in percent predicted forced expiratory volume in one second, or ppFEV1. However, a pre-specified subgroup analysis demonstrated a statistically significant clinical benefit in patients with CF 18 years of age and older who have the R117H mutation on at least one allele. Based on these data, we submitted a supplemental New Drug Application, or sNDA, to the FDA in June 2014 and an MAA variation to the EMA in July 2014 seeking approval of KALYDECO in patients with CF 18 years of age and older who have the R117H mutation on at least one allele in their *CFTR* gene. We believe there are approximately 700 patients with CF 18 years of age or older who have the R117H mutation in their *CFTR* gene in North America, Europe and Australia.

Our Phase 3 clinical trial to evaluate ivacaftor as a treatment for children with CF two to five years of age with specific gating mutations in their *CFTR* gene, including the G551D mutation, is complete, and we expect data from this clinical trial in the third quarter of 2014. The primary endpoint of this clinical trial is safety, and secondary endpoints include pharmacokinetics, change in sweat chloride and change in weight. If this clinical trial is successful, we plan to submit an NDA and an MAA variation based on this clinical trial in the fourth quarter of 2014. We believe there are approximately 300 children with CF two to five years of age who have the mutations evaluated in this clinical trial in North America, Europe and Australia.

In the second quarter of 2014, we announced data from a two-part proof-of-concept clinical trial of ivacaftor in 24 patients with CF who have a residual function mutation. This clinical trial was the first to evaluate the use of ivacaftor in multiple residual function mutations in their *CFTR* gene. Based on the data from the clinical trial, we plan to initiate a larger Phase 3 clinical trial in patients with residual function mutations that will evaluate longer-duration treatment with ivacaftor, subject to discussions with regulatory authorities. In North America, Europe and Australia, more than 3,000 patients with CF six years of age and older have non-R117H mutations that result in residual function.

#### Lumacaftor in Combination with Ivacaftor

We are evaluating combinations of lumacaftor and ivacaftor, our most advanced investigational CFTR corrector compound. In the second quarter of 2014, we completed TRAFFIC and TRANSPORT, which were Phase 3 randomized, double-blind, placebo-controlled clinical trials of lumacaftor in combination with ivacaftor. Based on the data from TRAFFIC and TRANSPORT, we plan to submit an NDA to the FDA and an MAA to the EMA for lumacaftor in combination with ivacaftor in patients with CF 12 years of age and older who have two copies (homozygous) of the F508del mutation in their *CFTR* gene in the fourth quarter of 2014. In June 2014, the FDA granted the combination of lumacaftor and ivacaftor Orphan Drug Designation. The combination of lumacaftor and ivacaftor also recently received Orphan designation in Europe. We believe that there are more than 22,000 patients with CF 12 years of age and older who have two copies of the F508del mutation in North America, Europe and Australia.

#### TRAFFTIC and TRANSPORT

TRAFFIC and TRANSPORT evaluated patients with CF 12 years of age and older who have two copies (homozygous) of the F508del mutation in their *CFTR* gene and included two combination treatment groups and one placebo group. The combination treatment groups evaluated lumacaftor dosed at either 600 mg once daily or 400 mg every 12 hours (q12h) in combination with ivacaftor dosed at 250 mg q12h. 1,108 patients enrolled and received at least one dose of study drug in the two clinical trials. The primary endpoint of TRAFFIC and TRANSPORT was the mean absolute change from baseline in ppFEV1 at the end of the 24-week treatment period as assessed by the average change in lung function at Week 16 and at Week 24.

All four treatment arms within TRAFFIC and TRANSPORT met their primary endpoint. Additionally, statistically significant mean absolute and relative improvements in lung function were observed for all four treatment groups, both within group and versus placebo, at all time points within the clinical trials (Weeks 2, 4, 8, 16 and 24). As patients in the clinical trials continued to be treated with their standard CF medicines, improvements observed for patients in the combination treatment arms were in addition to any benefits experienced with the use of other CF medicines. The mean baseline lung function of patients was approximately 61 ppFEV1 for patients who received the combination regimen and for patients who received placebo. Detailed data from each arm of TRAFFIC and TRANSPORT are provided below:

| Change in ppFEV1 |  | TRAFFIC Trial |  |  | TRANSPORT Trial |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
| **Placebo (n=184)** | **Lumacaftor (600 mg once daily) + Ivacaftor (250 mg q12h) (n=183)** | **Lumacaftor (400 mg q12h) + Ivacaftor (250 mg q12h) (n=182)** | **Placebo (n=187)** | **Lumacaftor (600 mg once daily) + Ivacaftor (250 mg q12h) (n=185)** | **Lumacaftor (400 mg q12h) + Ivacaftor (250 mg q12h) (n=187)** |  |  |
| **Mean Absolute Change (percentage points)** | **Treatment Difference** | N/A | 4.0 (p\<0.0001) | 2.6 (p=0.0003) | N/A | 2.6 (p=0.0004) | 3.0 (p\<0.0001) |
| **Within Group** | -0.44 (p=0.4002) | 3.6 (p\<0.0001) | 2.2 (p\<0.0001) | -0.15 (p=0.7744) | 2.5 (p\<0.0001) | 2.9 (p\<0.0001) |  |
| **Mean Relative Change (%)** | **Treatment Difference** | N/A | 6.7% (p\<0.0001) | 4.3% (p=0.0006) | N/A | 4.4% (p=0.0007) | 5.3% (p\<0.0001) |
| **Within Group** | -0.34% (p=0.7113) | 6.4% (p\<0.0001) | 4.0% (p\<0.0001) | 0.0% (p=0.9983) | 4.4% (p\<0.0001) | 5.3% (p\<0.0001) |  |

Within TRAFFIC and TRANSPORT, patients who received the combination regimens experienced a 28 to 43 percent decrease in the rate of pulmonary exacerbations (events of worsening signs and symptoms of the disease requiring treatment with antibiotics) over the 24-week treatment period compared to placebo. Detailed data for all key secondary endpoints from each arm of the clinical trials are provided below:

| Key Secondary Endpoints Placebo (n=184) Lumacaftor (600 mg once daily) + Ivacaftor (250 mg q12h) (n=183) Change in Body Mass Index Treatment Difference Within Group +0.19 (p=0.0065) Change in CFQ-R Treatment Difference Within Group +1.1 (p=0.3423) | TRAFFIC Trial Lumacaftor (400 mg q12h) + Ivacaftor (250 mg q12h) (n=182) N/A +0.35 (p\<0.0001) N/A +5.0 (p\<0.0001) | Placebo (n=187) +0.16 (p=0.1122) +0.32 (p\<0.0001) +3.9 (p=0.0168) +2.6 (p=0.0295) | Lumacaftor (600 mg once daily) + Ivacaftor (250 mg q12h) (n=185) +0.13 (p=0.1938) +0.07 (p=0.2892) +1.5 (p=0.3569) +2.8 (p=0.0152) | TRANSPORT Trial Lumacaftor (400 mg q12h) + Ivacaftor (250 mg q12h) (n=187) N/A +0.48 (p\<0.0001) N/A +5.0 (p\<0.0001) | +0.41 (p\<0.0001) +0.43 (p\<0.0001) +2.2 (p=0.1651) +5.7 (p\<0.0001) | +0.36 (p=0.0001) +2.9 (p=0.0736) |
| --- | --- | --- | --- | --- | --- | ---: |
| **Patients with 5% or Greater Relative Improvement in ppFEV1%** | 22% | 46% | 37% | 23% | 46% | 41% |
| **Odds Ratio** N/A | 2.94 (p\<0.0001) | 2.06 (p=0.0023) | N/A | 2.96 (p\<0.0001) | 2.38 (p=0.0001) |  |
| **Number of Pulmonary Exacerbations** **Number of Events (rate per 48 weeks)** | 112 (1.07) | 79 (0.77) | 73 (0.71) | 139 (1.18) | 94 (0.82) | 79 (0.67) |
| **Rate Ratio** N/A | 0.72 (p=0.0491) | 0.66 (p=0.0169) | N/A | 0.69 (p=0.0116) | 0.57 (p=0.0002) |  |

The combination regimens were generally well tolerated. The most common adverse events, regardless of treatment group, were infective pulmonary exacerbation, cough, headache and increased sputum, and adverse events that occurred more frequently in patients who received the combination regimens than those who received placebo were generally respiratory in nature and included dyspnea and respiration abnormal. 4.2 percent of all patients who received combination therapy, regardless of dosing group, discontinued treatment because of adverse events compared to 1.6 percent of those who received placebo. Across TRAFFIC and TRANSPORT, elevated liver enzymes (greater than three times the upper limit of normal) were observed in 5.2 percent of patients who received combination therapy compared to 5.1 percent of those who received placebo. Seven patients who received combination therapy experienced serious adverse events related to abnormal liver function tests, compared to zero patients who received placebo. Following discontinuation or interruption of the combination treatment, liver function tests returned to baseline for six of the seven patients and the seventh patient’s liver function tests improved substantially.

#### Exploratory Clinical Trial in Patients Heterozygous for the F508del Mutation

In the third quarter of 2014, we completed a Phase 2, 8-week exploratory clinical trial of lumacaftor in combination with ivacaftor in 125 patients with CF 18 years of age and older who have one copy (heterozygous) of the F508del mutation and a second mutation in their *CFTR* gene that is not expected to respond to either ivacaftor or VX-809 alone.

The clinical trial evaluated a twice daily (q12h) combination of VX-809 (400mg) and ivacaftor (250mg) compared to placebo. The primary endpoints were safety, tolerability and mean absolute change in ppFEV1 from baseline at Day 56, and key secondary endpoints included absolute change in body mass index (BMI), absolute change in patient-reported respiratory symptoms as reported in the CF questionnaire-revised (CFQ-R) and absolute change in sweat chloride, among others.

In the clinical trial, the within-group mean absolute change in ppFEV1 for the patients who received the combination regimen was -0.62 percentage points (p=0.4550) compared to -1.23 percentage points (p=0.1287) for those who received placebo. The mean absolute treatment difference was 0.61 percentage points (p=0.5978) at day 56. The clinical trial did not meet its primary efficacy endpoint. For patients who received the combination, the mean absolute improvement in CFQ-R at day 56 was +6.48 points (p=0.0131) versus placebo. Additionally, there was a -11.03 mmol/L (p \< 0.0001) decrease in sweat chloride at day 56 for those who received the combination compared to those who received placebo. There was no increase observed in body mass index, or BMI.

Safety results from this clinical trial were consistent with the Phase 3 TRAFFIC and TRANSPORT clinical trials in patients with two copies of the F508del mutation. The combination regimen was generally well tolerated. The most common adverse events, regardless of treatment group, were respiration abnormal, infective pulmonary exacerbation, cough, increased sputum and headache, and adverse events that occurred more frequently in patients who received the combination regimen than those who received placebo were generally respiratory in nature and included dyspnea and respiration abnormal, as well as gastroesophagael reflux. 6.5 percent of patients who received combination therapy discontinued treatment because of adverse events compared to 0.0 percent of those who received placebo.

#### Ivacaftor in Combination with VX-661

We are evaluating VX-661, a second investigational CFTR corrector, in combination with ivacaftor, in Phase 2 clinical development. VX-661 was granted Orphan Drug Designation by the FDA in 2014.

In May 2014, we announced data from a Phase 2 double-blind clinical trial evaluating VX-661 in combination with KALYDECO in patients with CF 12 years of age and older who have one copy of the G551D mutation and one copy of the F508del mutation in their *CFTR* gene. In this clinical trial, VX-661 was generally well-tolerated when dosed in combination with KALYDECO, and all 18 patients completed the clinical trial. The most common adverse events in the treatment group were cough, pulmonary exacerbation, headache and upper respiratory tract infection. One serious adverse event of arthritis occurred in the VX-661 treatment arm and was deemed unrelated to VX-661 or KALYDECO.

The baseline lung function and sweat chloride levels for patients who were randomized to receive VX-661 and KALYDECO were 59.1 ppFEV1 and 52.9 mmol/L, respectively. A summary of the lung function and sweat chloride data for patients who received VX-661 in combination with KALYDECO is provided below:

| VX-661 + KALYDECO (Within-Group; n=14) | Day 0 Through Day 28 (End of VX-661 Treatment) | Day 28 to Day 56 (4 Weeks Following the End of VX-661 Treatment) |
| --- | --- | --- |
| Mean Absolute Change in Lung Function (ppFEV1) | +4.6 percentage points (p=0.012) | -3.4 percentage points (p=0.010) |
| Mean Relative Change in Lung Function (ppFEV1) | +7.3% (p=0.012) | -5.4% (p=0.008) |
| Sweat Chloride | -7.02 mmol/L (p=0.053) | +12.26 mmol/L (p=0.001) |

Additional clinical trials of longer duration and with additional patients will be required to further validate the results of this clinical trial in patients with CF who have the G551D mutation in their *CFTR* gene.

We are dosing patients in a 12-week clinical trial of VX-661 in combination with ivacaftor in patients with CF who are homozygous for the F508del mutation in their *CFTR* gene. This clinical trial is designed to evaluate safety, efficacy and pharmacokinetics to characterize VX-661 for further development.

Based on the data from the clinical trial evaluating VX-661 in combination with KALYDECO in patients who have the G551D mutation in their *CFTR* gene and pending data from the ongoing 12-week clinical trial in patients homozygous for the F508del mutation and discussions with regulatory authorities, we plan to evaluate multiple development pathways for VX-661 in combination with ivacaftor, including the potential evaluation of this combination in patients with one copy of the F508del mutation and one copy of a mutation in their *CFTR* gene known to respond to ivacaftor and in patients with CF who have two copies of the F508del mutation. Additionally, VX-661 and ivacaftor may be evaluated in combination with, or without, a next-generation corrector in patients with one copy of the F508del mutation and a mutation that is not expected to respond to ivacaftor or a first-generation corrector alone.

#### Next-generation CFTR Corrector Compounds

We also are seeking to identify and develop next-generation CFTR corrector compounds that could be evaluated in regimens combining ivacaftor with two CFTR corrector compounds. We have multiple next-generation correctors in the lead-optimization stage of research and expect to begin clinical development of a next-generation corrector in 2015.

### HCV Infection

In 2012 and 2013, we recognized most of our product revenues based on INCIVEK sales and focused a large portion of our resources on commercializing INCIVEK and seeking to develop other drug candidates for the treatment of HCV infection. Our INCIVEK net product revenues declined rapidly over the course of 2013 and represented approximately 8% of our net product revenues in the second quarter of 2014. In 2013, in response to declining sales of INCIVEK and increased competition, we reduced our focus on marketing INCIVEK, eliminating the U.S. field-based sales force that had been promoting INCIVEK. In addition, in the first quarter of 2013 and fourth quarter of 2013, we incurred intangible asset impairment charges of $412.9 million and $250.6 million, respectively, related to drug candidates for the treatment of HCV infection. In April 2014, we amended our collaboration with Alios BioPharma, Inc., or Alios, and following this amendment, we have no further obligations to continue development of VX-135. We do not plan to further develop VX-135 independently and are seeking to outlicense our rights to VX-135.

### Research and Early-Stage Development

We are engaged in a number of other research and early-stage development programs, including programs in the areas of oncology, multiple sclerosis and other serious and rare diseases. We plan to continue investing in our research programs as well as our early-stage development programs and fostering 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 drug candidates that will form our pipeline in future years.

### Drug Discovery and Development

Discovery and development of a new pharmaceutical product is a difficult and lengthy process that requires significant financial resources along with extensive technical and regulatory expertise and can take 10 to 15 years or more. Potential drug candidates are subjected to rigorous evaluations, driven in part by stringent regulatory considerations, designed to generate information concerning efficacy, side-effects, proper dosage levels and a variety of other physical and chemical characteristics that are important in determining whether a drug candidate should be approved for marketing as a pharmaceutical product. Most chemical compounds that are investigated as potential drug candidates never progress into development, and most drug candidates that do advance into development never receive marketing approval. Because our investments in drug candidates are subject to considerable risks, we closely monitor the results of our discovery research, clinical trials and nonclinical studies and frequently evaluate our drug development programs in light of new data and scientific, business and commercial insights, with the objective of balancing risk and potential. This process can result in abrupt changes in focus and priority as new information becomes available and we gain additional understanding of our ongoing programs and potential new programs as well as those of our competitors.

If we believe that data from a completed registration program support approval of a drug candidate, we submit an NDA to the FDA requesting approval to market the drug candidate in the United States and seek analogous approvals from comparable regulatory authorities in foreign jurisdictions. To obtain approval, we must, among other things, demonstrate with evidence gathered in nonclinical studies and well-controlled clinical trials that the drug candidate is safe and effective for the disease it is intended to treat and that the manufacturing facilities, processes and controls for the manufacture of the drug candidate are adequate. The FDA and foreign regulatory authorities have substantial discretion in deciding whether or not a drug candidate should be granted approval based on the benefits and risks of the drug candidate in the treatment of a particular disease, and could delay, limit or deny regulatory approval. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for the drug candidate involved will be harmed.

### Regulatory Compliance

Our marketing of pharmaceutical products 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.

### Recent Financing and Business Development Activities

#### Business Development

In June 2014, we entered into a license, development and commercialization agreement with Janssen Pharmaceuticals, Inc., or Janssen Inc., pursuant to which we granted Janssen Inc. an exclusive worldwide license to develop and commercialize VX-787 and a backup compound referred to as VX-353, for the treatment of influenza.

Pursuant to this agreement, Janssen Inc. paid us an up-front payment of $30.0 million in the third quarter of 2014. In addition, we have the potential to receive development and commercial milestone payments as well as royalties on any future product sales. Janssen Inc. is responsible for costs related to the development and commercialization of the compounds.

We are seeking to license or acquire drugs, drug candidates and other technologies that have the potential to add to our pipeline, enhance research and development programs or to provide us with new commercial opportunities. We also are planning to seek to outlicense our rights to VX-135 and VX-509, our JAK3 inhibitor, which we have evaluated as a potential treatment for patients with rheumatoid arthritis in a Phase 2 clinical trial.

#### Credit Agreement

In July 2014, we entered into a credit agreement that provides for a $300.0 million senior secured term loan. The credit agreement also provides that, subject to satisfaction of certain conditions, we may request that the lenders establish an incremental senior secured term loan facility in an aggregate amount not to exceed $200.0 million. The loan initially bears interest at a rate of 7.2% per annum but is subject to adjustment over the course of the loan and matures in July 2017. Interest is payable quarterly and on the maturity date. We are required to repay principal on the loan in installments of $15.0 million per quarter from October 1, 2015 through July 1, 2016 and in installments of $60.0 million per quarter from October 1, 2016 through the maturity date.

### RESULTS OF OPERATIONS

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $138,421 | $310,750 | $(172,329) | (55)% | $256,872 | $639,118 | $(382,246) | (60)% |
| Operating costs and expenses | $319,256 | $367,683 | $(48,427) | (13)% | $654,095 | $1,134,339 | $(480,244) | (42)% |
| Other items, net | $21,453 | $(4,779) | N/A | N/A | $5,384 | $120,882 | $(115,498) | (96)% |
| Net loss attributable to noncontrolling interest (Alios) | $— | $4,547 | $(4,547) | (100)% | $— | $9,158 | $(9,158) | (100)% |
| Net loss attributable to Vertex | $(159,382) | $(57,165) | $102,217 | 179% | $(391,839) | $(365,181) | $26,658 | 7% |

### Net Loss Attributable to Vertex

Net loss attributable to Vertex was $159.4 million in the second quarter of 2014 compared to a net loss attributable to Vertex of $57.2 million in the second quarter of 2013. Our revenues decreased in the second quarter of 2014 as compared to the second quarter of 2013 due to decreased INCIVEK net product revenues partially offset by increased KALYDECO net product revenues. Our operating costs and expenses decreased in the second quarter of 2014 as compared to the second quarter of 2013 primarily due to reductions in sales, general and administrative expenses and cost of product revenues.

Net loss attributable to Vertex was $391.8 million in the first half of 2014 compared to net loss attributable to Vertex of $365.2 million in the first half of 2013. Our revenues decreased in the first half of 2014 as compared to the first half of 2013 due to decreased INCIVEK net product revenues partially offset by increased KAYDECO net product revenues. Our operating costs and expenses decreased from $1.1 billion in the first half of 2013 to $654.1 million in the first half of 2014. The decrease in operating expenses in the first half of 2014 compared to the first half of 2013 was primarily due to a $412.9 million impairment charge related to VX-222, a non-nucleoside HCV polymerase inhibitor, we recorded in the first quarter of 2013, which was included in operating costs and expenses. In connection with this impairment charge, we recorded a benefit from income taxes of $127.6 million in the first quarter of 2013, which was included in other items, net. The net effect of the impairment charge and the benefit from income taxes was to increase net loss attributable to Vertex in the first half of 2013 by $285.3 million.

We have incurred and expect to continue to incur net losses on a quarterly basis. In order to execute our business plan and become profitable, we need to obtain approval to market lumacaftor in combination with ivacaftor on a timely basis and to effectively market this combination in the United States and international markets.

### Net Loss Attributable to Vertex per Diluted Share

Net loss attributable to Vertex was $0.68 per diluted share in the second quarter of 2014 as compared to net loss attributable to Vertex of $0.26 per diluted share in the second quarter of 2013. Net loss attributable to Vertex was $1.68 per diluted share in the first half of 2014 as compared to net loss attributable to Vertex of $1.67 per diluted share in the first half of 2013.

### Revenues

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues, net | $122,319 | $254,789 | $(132,470) | (52)% | $225,780 | $522,170 | $(296,390) | (57)% |
| Royalty revenues | 13,015 | 49,120 | (36,105) | (74)% | 23,748 | 92,693 | (68,945) | (74)% |
| Collaborative revenues | 3,087 | 6,841 | (3,754) | (55)% | 7,344 | 24,255 | (16,911) | (70)% |
| Total revenues | $138,421 | $310,750 | $(172,329) | (55)% | $256,872 | $639,118 | $(382,246) | (60)% |

### Product Revenues, Net

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| KALYDECO | $113,055 | $98,973 | $14,082 | 14% | $212,570 | $160,800 | $51,770 | 32% |
| INCIVEK | 9,264 | 155,816 | (146,552) | (94)% | 13,210 | 361,370 | (348,160) | (96)% |
| Total product revenues, net | $122,319 | $254,789 | $(132,470) | (52)% | $225,780 | $522,170 | $(296,390) | (57)% |

Our total net product revenues decreased in the second quarter and first half of 2014 as compared to the second quarter and first half of 2013 due to decreased INCIVEK net product revenues, partially offset by increased KALYDECO net product revenues.

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. The FDA approved the first label expansion for KALYDECO in the first quarter of 2014 and the European Commission approved a similar label expansion in July 2014. KALYDECO net product revenues were $113.1 million in the second quarter of 2014 including $50.0 million of net product revenues from international markets and were $212.6 million in the first half of 2014, including $93.9 million of net product revenues from international markets. The increase in KALYDECO net product revenues in the second quarter of 2014 compared to the second quarter of 2013 was primarily due to additional patients being treated with KALYDECO as a result of label-expansion. The increase in KALYDECO net product revenues in the first half of 2014 as compared to the first half of 2013 was primarily due to additional European countries beginning to provide reimbursement for KALYDECO in the second quarter of 2013. Future increases in KALYDECO net product revenues are dependent on (i) the potential for obtaining public reimbursement for the cost of KALYDECO in additional markets, and (ii) potential additional label expansions that could increase the number of patients with CF who are eligible for treatment with KALYDECO.

We plan to submit an NDA to the FDA and an MAA to the EMA for lumacaftor in combination with ivacaftor in the fourth quarter of 2014. Obtaining regulatory approval can be a lengthy, time consuming and uncertain process. Even if we are successful in obtaining marketing approval on a timely basis, we currently do not expect to recognize revenue from lumacaftor in combination with ivacaftor until at least mid-2015.

INCIVEK net product revenues have been declining over the past two years and were $9.3 million in the second quarter of 2014 and $13.2 million in the first half of 2014. In future periods, we expect INCIVEK net product revenues to continue to represent a small portion of our total net product revenues.

### Royalty Revenues

Our royalty revenues were $13.0 million and $23.7 million, respectively, in the second quarter and first half of 2014 compared to $49.1 million and $92.7 million, respectively, in the second quarter and first half of 2013. The decreased royalty revenues in the 2014 periods compared to the 2013 periods were primarily due to the amendment to our collaboration agreement with Janssen NV in the fourth quarter of 2013, under which Janssen NV's obligations to pay us royalties on net sales of INCIVO terminated, subject to the continued payment of certain third-party royalties on its net sales of INCIVO.

Since the beginning of 2014, our royalty revenues have consisted of (i) revenues related to a cash payment we received in 2008 when we sold our rights to certain HIV royalties and (ii) revenues related to certain third-party royalties payable by our collaborators on sales of HIV and HCV drugs that also result in corresponding royalty expenses.

### Collaborative Revenues

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2014 | 2013 | Six Months Ended June 30, 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: |
| Janssen NV | $1,483 | $3,144 | $2,872 | $16,522 |
| CFFT and other | 1,604 | 3,697 | 4,472 | 7,733 |
| Total collaborative revenues | $3,087 | $6,841 | $7,344 | $24,255 |

Our collaborative revenues for the second quarter and the first half of 2014 related to net reimbursements from Janssen NV for our remaining telaprevir development costs and research funding provided by CFFT. Our collaborative revenues from Janssen NV for the first half of 2013 included $10.3 million in reimbursements for manufacturing services. We do not expect to recognize significant collaborative revenues related to the Janssen NV collaboration in future periods.

In June 2014, we entered into an agreement with Janssen Inc. pursuant to which we outlicensed VX-787 to Janssen, Inc. We expect to recognize collaborative revenues related to this agreement in the second half of 2014.

### Operating Costs and Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of product revenues | $9,655 | $24,695 | $(15,040) | (61)% | $18,227 | $55,650 | $(37,423) | (67)% |
| Royalty expenses | 7,645 | 13,236 | $(5,591) | (42)% | 14,549 | 25,024 | $(10,475) | (42)% |
| Research and development expenses | 224,780 | 222,455 | $2,325 | 1% | 463,743 | 440,550 | $23,193 | 5% |
| Sales, general and administrative expenses | 77,446 | 106,521 | $(29,075) | (27)% | 151,658 | 199,400 | $(47,742) | (24)% |
| Restructuring expense (credit) | (270) | 776 | N/A | N/A | 5,918 | 815 | $5,103 | 626% |
| Intangible asset impairment charge | — | — | N/A | N/A | — | 412,900 | $(412,900) | (100)% |
| Total costs and expenses | $319,256 | $367,683 | $(48,427) | (13)% | $654,095 | $1,134,339 | $(480,244) | (42)% |

### 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 KALYDECO and INCIVEK. Cost of product revenues decreased in the second quarter of 2014 as compared to the second quarter of 2013 and in the first half of 2014 as compared to the first half of 2013 primarily due to decreased product revenues from INCIVEK. In addition, a $9.3 million commercial milestone payment payable under our agreement with CFFT was recognized in the first quarter of 2013 and is included in cost of product revenues for the first half of 2013.

### 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 second quarter of 2014 decreased by $5.6 million, or 42%, as compared to the second quarter of 2013, and decreased by $10.5 million, or 42% in the first half of 2014 as compared to the first half of 2013 as a result of decreased INCIVO sales by Janssen NV.

### Research and Development Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research expenses | $65,342 | $64,740 | $602 | 1% | $132,365 | $126,083 | $6,282 | 5% |
| Development expenses | 159,438 | 157,715 | 1,723 | 1% | 331,378 | 314,467 | 16,911 | 5% |
| Total research and development expenses | $224,780 | $222,455 | $2,325 | 1% | $463,743 | $440,550 | $23,193 | 5% |

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 $6.9 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 2014, costs related to our CF 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. We received data from a Phase 3 clinical development program evaluating lumacaftor in combination with ivacaftor in June 2014 and plan to submit an NDA to the FDA and an MAA to the EMA in the fourth quarter of 2014. Obtaining regulatory approval can be a lengthy, time consuming and uncertain process. Even if we are successful in obtaining marketing approval on a timely basis, we currently do not expect to recognize revenues from lumacaftor in combination with ivacaftor until at least mid-2015. 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 June 30, 2014 | 2013 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $20,983 | $22,935 | $(1,952) | (9)% | $41,386 | $44,595 | $(3,209) | (7)% |
| Stock-based compensation expense | 8,837 | 7,849 | 988 | 13% | 20,891 | 14,675 | 6,216 | 42% |
| Laboratory supplies and other direct expenses | 11,974 | 11,425 | 549 | 5% | 22,701 | 22,075 | 626 | 3% |
| Contractual services | 3,604 | 5,609 | (2,005) | (36)% | 6,664 | 11,256 | (4,592) | (41)% |
| Infrastructure costs | 19,944 | 16,922 | 3,022 | 18% | 40,723 | 33,482 | 7,241 | 22% |
| Total research expenses | $65,342 | $64,740 | $602 | 1% | $132,365 | $126,083 | $6,282 | 5% |

34

We maintain a substantial investment in research activities. Our research expenses in the second quarter and the first half of 2014 were consistent with our research expenses for the second quarter and the first half of 2013. Increased infrastructure costs and stock-based compensation expenses were largely offset by decreased salary and benefits and contractual services expenses in the 2014 periods as compared to the 2013 periods. 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 June 30, 2014 | 2013 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $38,772 | $45,248 | $(6,476) | (14)% | $80,734 | $88,395 | $(7,661) | (9)% |
| Stock-based compensation expense | 18,416 | 17,891 | 525 | 3% | 39,262 | 30,414 | 8,848 | 29% |
| Laboratory supplies and other direct expenses | 21,385 | 10,563 | 10,822 | 102% | 35,870 | 21,527 | 14,343 | 67% |
| Contractual services | 48,322 | 50,422 | (2,100) | (4)% | 108,058 | 104,962 | 3,096 | 3% |
| Drug supply costs | 1,557 | 5,376 | (3,819) | (71)% | 4,524 | 14,976 | (10,452) | (70)% |
| Infrastructure costs | 30,986 | 28,215 | 2,771 | 10% | 62,930 | 54,193 | 8,737 | 16% |
| Total development expenses | $159,438 | $157,715 | $1,723 | 1% | $331,378 | $314,467 | $16,911 | 5% |

Our development expenses increased by $1.7 million, or 1%, in the second quarter of 2014 as compared to the second quarter of 2013, and increased by $16.9 million, or 5%, in the first half of 2014 as compared to the first half of 2013. We expect that our development expenses will decrease in the second half of 2014 due to the completion in the first half of 2014 of our Phase 3 clinical development program for ivacaftor in combination with lumacaftor.

### Sales, General and Administrative Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2014 | 2013 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $77,446 | $106,521 | $(29,075) | (27)% | $151,658 | $199,400 | $(47,742) | (24)% |

Sales, general and administrative expenses decreased by 27% in the second quarter of 2014 as compared to the second quarter of 2013 and decreased by 24% in the first half of 2014 as compared to the first half of 2013, due primarily to decreased headcount following our October 2013 restructuring activities.

### Restructuring Expense

We recorded a restructuring credit of $0.3 million in the second quarter of 2014 as compared to restructuring expenses of $0.8 million in the second quarter of 2013 and restructuring expenses of $5.9 million in the first half of 2014 as compared to restructuring expenses of $0.8 million in the first half of 2013. Our restructuring expenses in the first half of 2014 primarily related to the relocation of our corporate headquarters to Boston, Massachusetts from Cambridge, Massachusetts. We expect to incur approximately $50 million in additional restructuring charges, primarily related to the relocation of our corporate headquarters, during the remainder of 2014.

### Intangible Asset Impairment Charge

In the first quarter of 2013, we recorded a $412.9 million impairment charge related to VX-222. In connection with this impairment charge, we recorded a credit of $127.6 million in our provision for income taxes in the first quarter of 2013. The net effect on net loss attributable to Vertex related to this impairment charge was $285.3 million in the first half of 2013. We did not record any intangible asset impairment charges in the second quarter or first half of 2014.

### Other Items

### Interest Expense, net

Interest expense, net was $15.6 million and $31.3 million in the second quarter and first half of 2014, respectively, compared to $6.6 million and $10.0 million in the second quarter and first half of 2013, respectively. The increases in interest expense, net during the 2014 periods as compared to the 2013 periods was primarily due to interest expense associated with the leases for our corporate headquarters. We expect to incur approximately $30 million of additional interest expense associated with the leases for our corporate headquarters during the second half of 2014. In addition, we expect that our interest expense, net will increase in the second half of 2014 as compared to the first half of 2014 due to approximately $10 million in interest expense that we will incur in the second half of 2014 based on the $300.0 million we borrowed in July 2014 pursuant to our credit agreement.

### Other Income (Expense), net

Other income (expense), net was $37.7 million and $38.2 million in the second quarter and first half of 2014, respectively, compared to $27 thousand and $1.2 million in the second quarter and first half of 2013, respectively. Other income (expense), net in the second quarter and first half of 2014 was primarily due to a credit of $36.7 million related to a one-time cash payment in the second quarter of 2014 from our landlord pursuant to leases for our corporate headquarters.

### Income Taxes

We recorded a net provision for income taxes of $0.7 million and $1.5 million in the second quarter and first half of 2014, respectively. In the second quarter of 2013, we recorded a net benefit from income taxes of $1.8 million. In the first half of 2013, we recorded a benefit from income taxes of $132.1 million primarily due to the impairment of VX-222. In connection with the VX-222 impairment charge, we wrote-off the associated deferred tax liability of $127.6 million as a benefit in our condensed consolidated statements of operations during the first half of 2013.

### Noncontrolling Interest (Alios)

We consolidated Alios from June 2011 through December 2013. A summary of net loss (income) attributable to noncontrolling interest (Alios) in the second quarter and first half of 2013 is as follows:

*(in thousands)*

|  | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
| --- | ---: | ---: |
| Loss before benefit from income taxes | $6,824 | $12,121 |
| Decrease in fair value of contingent milestone and royalty payments | 80 | 2,820 |
| Benefit from income taxes | (2,357) | (5,783) |
| Net loss attributable to noncontrolling interest (Alios) | $4,547 | $9,158 |

As a result of the deconsolidation of Alios in December 2013, we did not record any net loss (income) attributable to noncontrolling interest (Alios) in the second quarter and first half of 2014 and do not expect to record any net loss (income) attributable to noncontrolling interest (Alios) in future periods.

### LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2014, we had cash, cash equivalents and marketable securities of $1.22 billion, which represented a decrease of $245.9 million from $1.47 billion as of December 31, 2013. This decrease was due to cash expenditures we made during the first half of 2014 related to, among other things, research and development expenses and sales, general and administrative expenses and $39.1 million for capital expenditures, partially offset by cash receipts from product sales, royalties, a one-time cash payment of $36.7 million from our landlord pursuant to the terms of the leases for our corporate headquarters and $117.9 million in cash we received from issuances of common stock pursuant to our employee benefit plans. We expect to continue to incur losses on a quarterly basis until we can substantially increase revenues as a result of potential future regulatory approvals, the timing of which are uncertain.

### Sources of Liquidity

We intend to rely on cash flows from product sales as our primary source of liquidity. Our cash flows from product sales have been decreasing in recent periods. Our near-term cash flows from product sales will be dependent on continued sales of KALYDECO, the outcomes of our reimbursement discussions with governmental authorities in international markets and potential future regulatory approvals based on our label-expansion programs for ivacaftor. In 2015, we expect our cash flows from revenues will be dependent on our ability to obtain regulatory approval for lumacaftor in combination with ivacaftor based on data from TRAFFIC and TRANSPORT. In addition, subject to certain conditions, we may request up to an additional $200.0 million under the credit agreement we entered into in the third quarter of 2014. 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 strategic collaborative agreements that include research and/or development funding, commercial debt, public and private offerings of our equity and debt securities, development milestones and royalties on sales of products, software and equipment leases, strategic sales of assets or businesses and financial transactions.

### Future Capital Requirements

We incur substantial operating expenses to conduct research and development activities and operate our organization. In addition, we must repay the principal amount on the $300.0 million we borrowed in July 2014 as follows: $15.0 million in the second half of 2015, $105.0 million in 2016 and $180.0 million in 2017. We also have substantial facility and capital lease obligations, including leases for two buildings in Boston, Massachusetts that continue through 2028. We expect that cash flows from KALYDECO 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, potential revenues from lumacaftor in combination with ivacaftor, and the potential introduction or one or more of our other drug candidates to the market, and the number, breadth, cost and prospects of our research and development programs.

### Financing Strategy

In the third quarter of 2014, we borrowed $300.0 million pursuant to a credit agreement. In addition, subject to certain conditions, we may request that the lenders loan us up to an additional $200.0 million under the credit agreement. 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, 2013, which was filed with the Securities and Exchange Commission, or SEC, on February 11, 2014. There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K, other than the $300.0 million borrowed under the credit agreement we entered into in the third quarter of 2014.

### 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 first half of 2014, 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, 2013, which was filed with the SEC on February 11, 2014.

### 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 first half of 2014 that had a material effect on our financial statements.

In the second quarter of 2014, the Financial Accounting Standards Board issued amended guidance applicable to revenue recognition which will be effective for us for the year ending December 31, 2017. Early adoption is not permitted. The new guidance applies a more principle-based approach to recognizing revenue. The new guidance must be adopted using either a full retrospective approach for all periods presented or a modified retrospective approach. We are in process of evaluating the new guidance and determining the expected effect on our consolidated financial statements.

## Market risk

As filed, 2,279 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.

### Interest Rate Risk

We invest our cash in a variety of financial instruments, principally money market funds, securities issued by the U.S. government and its agencies, investment-grade corporate bonds and commercial paper. 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, Australian Dollar and Canadian Dollar against the U.S. dollar. The current exposures arise primarily from cash, accounts receivable, intercompany receivables, payables and inventories. 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.

We maintain a foreign currency management program with the objective of reducing the impact of exchange rate fluctuations on our operating results and forecasted revenues and expenses denominated in foreign currencies. The change in fair value of these foreign currency forward contracts included in accumulated other comprehensive loss and the gross fair value of foreign currency forward assets and liabilities included on the condensed consolidated balance sheet as of June 30, 2014 were not material.

## Controls and procedures

As filed, 1,477 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 June 30, 2014 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 June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 10,774 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on February 11, 2014. There have been no material changes from the risk factors previously disclosed in that Annual Report on Form 10-K, except that:

***Our business and future net product revenues depend heavily on the success of lumacaftor in combination with ivacaftor, which has not been approved by the FDA or the European Commission. If we are unable to obtain marketing approval or experience material delays in obtaining marketing approval for lumacaftor in combination with ivacaftor our business will be materially harmed.***

We believe that a significant portion of the value attributed to our company by investors is based on the commercial potential of lumacaftor in combination with ivacaftor. We plan to submit a New Drug Application, or NDA, in the United States and a Marketing Authorization Application, or MAA, in Europe for this potential combination regimen in the fourth quarter of 2014. Obtaining approval of an NDA or an MAA is a lengthy, expensive and uncertain process, and we may not be successful. Obtaining marketing approval for the combination of lumacaftor and ivacaftor in one country or region does not ensure that we will be able to obtain marketing approval in any other country or region.

Obtaining approval to market the combination of lumacaftor and ivacaftor will depend on many factors, including:

- whether or not the FDA and European regulatory authorities determine that the evidence gathered in well-controlled clinical trials, other clinical trials and nonclinical studies demonstrates that lumacaftor in combination with ivacaftor is safe and effective as a treatment for patients with CF 12 years of age and older who have two copies of the F508del mutation;
- whether or not the FDA and European regulatory authorities are satisfied that the manufacturing facilities, processes and controls for the combination of lumacaftor and ivacaftor are adequate, that the labeling is satisfactory and that plans for post-marketing studies, safety monitoring and risk evaluation and mitigation are sufficient; and
- the timing and nature of the FDA and European Medicines Agency, or EMA's, comments and questions regarding the NDA and MAA for the combination of lumacaftor and ivacaftor, the scheduling and recommendations of any advisory committee meeting to consider the combination of lumacaftor and ivacaftor, the time required to respond to the FDA or EMA’s comments and questions and to obtain the final labeling for the combination of lumacaftor and ivacaftor and any other delays that may be associated with the NDA and MAA review process.

Even if a product is approved, the FDA or the European Commission, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials or reporting as conditions of approval. If we experience material delays in obtaining marketing approval for the combination of lumacaftor and ivacaftor in either the United States or Europe, our future net product revenues and cash flows will be adversely effected. If we do not obtain approval to market the combination of lumacaftor and ivacaftor in the United States or Europe, our business will be materially harmed.

Additionally, even if the combination of lumacaftor and ivacaftor receives marketing approval, coverage and reimbursement may not be available and, even if it is available, the level of reimbursement may not be satisfactory. The regulations that govern pricing, coverage and reimbursement for drugs vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing approval is granted. Adverse pricing limitations or a delay in obtaining coverage and reimbursement will hinder our future net product revenues and may harm our business.

***Our indebtedness could materially and adversely affect our financial condition and the terms of our credit agreement impose restrictions on our business, reducing our operational flexibility and creating default risks.***

In July 2014, we entered into a credit agreement that provides for a $300.0 million senior secured term loan. We are required to repay principal on the loan in installments of $15.0 million per quarter from October 1, 2015 through July 1, 2016 and in installments of $60.0 million per quarter from October 1, 2016 through July 9, 2017.

Our indebtedness could have important consequences to our business, including increasing our vulnerability to general adverse financial, business, economic and industry conditions, as well as other factors that are beyond our control. Beginning in October 2015, we will be required to begin repayment of the principal amount of our indebtedness, thereby reducing the availability of future cash flows to fund working capital, capital expenditures, acquisitions, research and development efforts and other general corporate purposes.

The credit agreement requires that we maintain, on a quarterly basis, a minimum level of KALYDECO net revenues. Further, the credit agreement includes negative covenants, subject to exceptions, restricting or limiting our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, grant liens, engage in certain investment, acquisition and disposition transactions, pay dividends, repurchase capital stock and enter into transactions with affiliates. As a result, we may be restricted from engaging in business activities that may otherwise improve our business. Failure to comply with the covenants could result in an event of default that could trigger acceleration of our indebtedness, which would require us to repay all amounts owing under the credit agreement and/or our capital leases and could have a material adverse impact on our business.

Additionally, our obligations under the facilities are unconditionally guaranteed by certain of our domestic subsidiaries. All obligations under the facilities, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of our assets and the assets of all guarantors, including the pledge of all or a portion of the equity interests of certain of our subsidiaries. If we fail to satisfy our obligations under the credit agreement or are unable to obtain sufficient funds to make payments, the lenders could foreclose on our pledged collateral.

### 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:

- our 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 KALYDECO and INCIVEK;
- our expectations regarding clinical trials, development timelines and regulatory authority filings and submissions for ivacaftor, lumacaftor and VX-661, including the expected NDA and MAA filings for lumacaftor in combination with ivacaftor;
- our ability to successfully market KALYDECO, lumacaftor in combination with ivacaftor, if approved, 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 and VX-661, and the expected timing of our receipt of data from our ongoing and planned clinical trials;
- the data that will be generated by ongoing and planned clinical trials and the ability to use that data to advance compounds, 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;
- 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 ability to use our research programs to identify and develop new drug candidates to address serious diseases and significant unmet medical needs; 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, 2013, which was filed with the SEC on February 11, 2014, and above in this Item 1A of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2014. 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 Jul 31, 2014.
Source: SEC EDGAR, the filing index for accession 0000875320-14-000058. Last ingested by Listed: Nov 12, 2026, 21:33 ET. No prices; not investment advice.