# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Mar 31, 2015

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2015-05-04
- Accepted by EDGAR: May 4, 2015, 20:29 ET
- Period: 2015-03-31
- Accession: 0000875320-15-000029
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532015000029/a2015q110-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532015000029/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-01-01 to 2015-03-31 | $138.5m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2015-01-01 to 2015-03-31 | $9.4m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2015-01-01 to 2015-03-31 | $215.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2015-01-01 to 2015-03-31 | $85.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-01-01 to 2015-03-31 | −$172.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2015-01-01 to 2015-03-31 | $299.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-01-01 to 2015-03-31 | −$198.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-01-01 to 2015-03-31 | −$0.83 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-01-01 to 2015-03-31 | −$0.83 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-01-01 to 2015-03-31 | 239,493,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2015-01-01 to 2015-03-31 | −$207.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2015-01-01 to 2015-03-31 | $10.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2015-03-31 | $664.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-03-31 | $1.36bn | us-gaap:AssetsCurrent |
| Total assets | at 2015-03-31 | $2.17bn | us-gaap:Assets |
| Current liabilities | at 2015-03-31 | $302.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-03-31 | $1.17bn | us-gaap:Liabilities |
| Shareholders' equity | at 2015-03-31 | $976.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,986 characters.

### OVERVIEW

We are in the business of discovering, developing, manufacturing and commercializing small molecule drugs. We use precision medicine approaches to create transformative drugs 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 research and early-stage development programs, while maintaining our financial strength.

We have marketed KALYDECO (ivacaftor) 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 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 with CF twelve years of age and older who have two copies (homozygous) of the F508del mutation in their *CFTR* gene, which is the most prevalent form of CF. In November 2014, we submitted a New Drug Application, or NDA, to the 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. We refer to lumacaftor in combination with ivacaftor under its anticipated brand name ORKAMBI.

### Cystic Fibrosis

Our plan is to (i) continue to increase the number of patients eligible for treatment with ivacaftor, (ii) obtain marketing approval for ORKAMBI and (iii) research and develop earlier-stage compounds for the treatment of CF.

#### Ivacaftor

KALYDECO (ivacaftor) was approved in 2012 in the United States and European Union as a treatment for patients with CF six years of age and older who have the G551D mutation in their *CFTR* gene. Our KALYDECO net product revenues have been increasing over the last several years due to the increased number of patients who are being treated with KALYDECO in the United States and ex-U.S. markets as we have expanded the label for KALYDECO and completed reimbursement discussions for a portion of the patients eligible for treatment with KALYDECO in ex-U.S markets. Most recently, in March 2015, the FDA approved KALYDECO for the treatment of patients with CF two to five years of age who have one of ten mutations in their *CFTR* gene. We expect our KALYDECO net product revenues to increase further as a result of additional label expansions and as we increase the number of patients with CF for whom reimbursement is available in ex-U.S. markets.

#### Lumacaftor in Combination with Ivacaftor

In November 2014, we submitted an NDA to the FDA and an MAA to the EMA for ORKAMBI in patients with CF twelve years of age and older who are homozygous for the F508del mutation in their *CFTR* gene. These regulatory applications were based on two Phase 3 randomized, double-blind, placebo-controlled clinical trials of lumacaftor in combination with ivacaftor referred to as TRAFFIC and TRANSPORT. All four treatment arms in TRAFFIC and TRANSPORT met their primary endpoints of mean absolute improvement in percent predicted forced expiratory volume in one second, or ppFEV1, as compared to placebo.

The FDA has granted us priority review of the NDA. The FDA has scheduled a Pulmonary-Allergy Drugs Advisory Committee, or PADAC, meeting for May 12, 2015 to discuss the NDA. The target date for the FDA to complete its review of the NDA under the Prescription Drug User Fee Act, or PDUFA, is July 5, 2015. Accordingly, assuming timely approval, we expect to begin recognizing net product revenues from ORKAMBI in the United States in mid-2015. We do not expect significant net product revenues from ORKAMBI from ex-U.S. markets in 2015 due to the reimbursement discussions that will be required in these markets following its potential approval by the European Commission in the fourth quarter of 2015. We believe that there are approximately 22,000 patients with CF twelve years of age and older who are homozygous for the F508del mutation in North America, Europe and Australia, including approximately 8,500 in the United States and approximately 12,000 in Europe.

#### VX-661 in Combination with Ivacaftor

In February 2015, we initiated a Phase 3 development program for VX-661 in combination with ivacaftor in patients with CF twelve years of age and older, including patients who are homozygous for the F508del mutation in their *CFTR* gene and patients who have one copy of the F508del mutation in their *CFTR* gene (heterozygous). This program was based on safety and efficacy data from previously completed clinical trials of VX-661 alone and in combination with ivacaftor, including a

Phase 2 clinical trial of VX-661 in combination with ivacaftor in patients with CF eighteen years of age and older who are homozygous for the F508del mutation in their *CFTR* gene, for which we announced data in March 2015.

#### Next-generation CFTR Corrector Compounds

We also are seeking to identify and develop next-generation CFTR corrector compounds that could be evaluated in future dual- and/or triple-combination treatment regimens with the potential to provide additional benefits to patients with CF. 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.

### 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 and neurology. We plan to continue investing in our research programs and fostering scientific innovation in order to identify and develop transformative medicines with a focus on CF and other genetic diseases, oncology and neurology. 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.

### HCV Infection

Prior to 2014, we recognized significant net product revenues based on sales of INCIVEK (telaprevir), a product for the treatment of genotype 1 HCV infection that we marketed in North America. In October 2013, in response to declining sales of INCIVEK and increased competition, we reduced our focus on marketing INCIVEK and eliminated the U.S. field-based sales force that had been promoting INCIVEK. We have withdrawn INCIVEK from the market in the United States, and we expect to wind-down any remaining activities relating to the field of HCV infection in 2015.

In the fourth quarter of 2014, we terminated our collaboration with Alios BioPharma, Inc., or Alios, related to the development of HCV nucleotide analogues. Our financial statements reflect the activities related to Alios as discontinued operations.

### 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 priorities as new information becomes available and as 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 through the promotion of a culture of compliance. Among other laws, regulations and standards, we are subject to various U.S. federal and state laws, 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 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.

### Reimbursement

Sales of our products depend, to a large degree, on the extent to which our products will be covered by third-party payors, such as government health programs, commercial insurance and managed health care organizations. We dedicate substantial management and other resources in order to obtain and maintain appropriate levels of reimbursement for our products from third-party payors, including governmental organizations in the United States and ex-U.S. markets. If ORKAMBI is approved, in the United States, we will engage in discussions with numerous commercial insurers and managed health care organizations, along with government health programs that are typically managed by authorities in the individual states. In Europe and many other foreign countries, we will need to focus on obtaining and maintaining government reimbursement for ORKAMBI on a country-by-country basis, because in many foreign countries patients are unable to access prescription pharmaceutical products that are not reimbursed by their governments. Consistent with our experience with KALYDECO when it was first approved, we expect reimbursement discussions in ex-U.S. markets may take a significant period of time following obtaining any marketing approvals for ORKAMBI in ex-U.S. markets.

### RESULTS OF OPERATIONS

*(in thousands)*

|  | Three Months Ended March 31, 2015 | 2014 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $138,509 | $118,451 | $20,058 | 17% |
| Operating costs and expenses | 310,494 | 334,493 | (23,999) | (7)% |
| Other items, net | (26,621) | (16,415) | N/A | N/A |
| Net loss attributable to Vertex | $(198,606) | $(232,457) | $(33,851) | (15)% |

### Net Loss Attributable to Vertex

Net loss attributable to Vertex was $198.6 million in the first quarter of 2015 compared to a net loss attributable to Vertex of $232.5 million in the first quarter of 2014. Our revenues increased in the first quarter of 2015 as compared to the first quarter of 2014 due to increased KALYDECO net product revenues, partially offset by decreased royalty revenues and collaborative revenues. Our operating costs and expenses decreased in the first quarter of 2015 as compared to the first quarter of 2014 primarily due to reductions in research and development expenses, royalty expenses, and restructuring expenses, partially offset by increased sales, general and administrative expenses. We expect that our net loss attributable to Vertex in 2015 will be largely dependent on the timing of potential regulatory approval of ORKAMBI in the United States and on our ability to successfully commercialize this combination therapy following the potential approval.

### Diluted Net Loss Per Share Attributable to Vertex Common Shareholders

Diluted net loss per share attributable to Vertex common shareholders was $0.83 in the first quarter of 2015 as compared to a diluted net loss per share attributable to Vertex common shareholders of $1.00 in the first quarter of 2014.

### Revenues

*(in thousands)*

|  | Three Months Ended March 31, 2015 | 2014 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Product revenues, net | $130,875 | $103,461 | $27,414 | 26% |
| Royalty revenues | 6,792 | 10,733 | (3,941) | (37)% |
| Collaborative revenues | 842 | 4,257 | (3,415) | (80)% |
| Total revenues | $138,509 | $118,451 | $20,058 | 17% |

### Product Revenues, Net

*(in thousands)*

|  | Three Months Ended March 31, 2015 | 2014 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| KALYDECO | $130,174 | $99,515 | $30,659 | 31% |
| INCIVEK | 701 | 3,946 | (3,245) | (82)% |
| Total product revenues, net | $130,875 | $103,461 | $27,414 | 26% |

Our total net product revenues increased in the first quarter of 2015 as compared to the first quarter of 2014 due to increased KALYDECO net product revenues. KALYDECO net product revenues were $130.2 million in the first quarter of 2015, including $58.3 million of net product revenues from international markets. The increase in KALYDECO net product revenues in the first quarter of 2015, as compared to the first quarter of 2014, was primarily due to additional patients being treated with KALYDECO as we completed reimbursement discussions in various jurisdictions and increased the number of patients eligible to receive KALYDECO through multiple label expansions that were approved by regulatory authorities in the United States and Europe during 2014 and 2015. We expect further increases in KALYDECO net product revenues during the remainder of 2015 as we continue to increase the number of patients that are treated with KALYDECO.

We have withdrawn INCIVEK from the market in the United States and do not expect significant INCIVEK net product revenues in future periods.

We believe our total net product revenues for the remainder of 2015 will be dependent on the timing of potential regulatory approval of ORKAMBI in the United States and on our ability to successfully commercialize this combination therapy following the potential approval. We submitted an NDA to the FDA and an MAA to the EMA for ORKAMBI in

November 2014. The target date for the FDA to complete its review of the NDA under PDUFA is July 5, 2015. Accordingly, if approved on a timely basis, we expect to begin recognizing net product revenues from ORKAMBI in the United States in mid-2015. We do not expect significant net product revenues from ORKAMBI in 2015 from ex-U.S. markets due to the reimbursement discussions that will be required in these markets following the potential approval of ORKAMBI by the European Commission in the fourth quarter of 2015.

### Royalty Revenues

Our royalty revenues were $6.8 million in the first quarter of 2015 compared to $10.7 million in the first quarter of 2014. 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. The decreased royalty revenues in the first quarter of 2015 compared to the first quarter of 2014 were primarily due to the continued decline in net sales of INCIVO (telaprevir) by our collaborator Janssen NV.

### Collaborative Revenues

Our collaborative revenues were $0.8 million in the first quarter of 2015 as compared to $4.3 million in the first quarter of 2014. The decrease during the first quarter of 2015 was primarily attributable to the fact that we did not receive any research funding from CFFT during the first quarter of 2015, as compared to $2.9 million in research funding provided by CFFT in the first quarter of 2014.

### Operating Costs and Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2015 | 2014 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of product revenues | $9,381 | $8,572 | $809 | 9% |
| Royalty expenses | 2,926 | 6,904 | (3,978) | (58)% |
| Research and development expenses | 215,599 | 238,617 | (23,018) | (10)% |
| Sales, general and administrative expenses | 85,860 | 74,212 | 11,648 | 16% |
| Restructuring (income) expenses | (3,272) | 6,188 | N/A | N/A |
| Total costs and expenses | $310,494 | $334,493 | $(23,999) | (7)% |

### 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 our products. Pursuant to our agreement with CFFT, our tiered third-party royalties on KALYDECO, and ORKAMBI, if approved, calculated as a percentage of net sales, range from the single digits to the sub-teens. We expect our cost of product revenues to increase moving forward due to increased net product revenues, together with an expected increase in the third-party royalty rate payable to CFFT as we begin to pay royalties at the top end of the royalty range.

### Royalty Expenses

Royalty expenses include third-party royalties payable upon net sales of telaprevir by our collaborators in their territories and 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 first quarter of 2015 decreased by $4.0 million, or 58%, as compared to the first quarter of 2014 as a result of decreased INCIVO (telaprevir) sales by our collaborator Janssen NV.

### Research and Development Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2015 | 2014 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Research expenses | $65,562 | $67,023 | $(1,461) | (2)% |
| Development expenses | 150,037 | 171,594 | (21,557) | (13)% |
| Total research and development expenses | $215,599 | $238,617 | $(23,018) | (10)% |

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 allocate by individual program. All research and development costs for our drugs and drug candidates are expensed as incurred.

Since January 1, 2012, we have incurred $2.7 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 and the first quarter of 2015, costs related to our CF programs 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 November 2014, we submitted an NDA to the FDA and an MAA to the EMA for lumacaftor in combination with ivacaftor. 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 in the United States until mid-2015 and expect that it will take longer to obtain approval and third-party reimbursement for the combination therapy in ex-U.S. markets. We cannot make a meaningful estimate when, if ever, our other clinical development programs will generate revenues and cash flows.

#### Research Expenses

*(in thousands)*

| Research Expenses: | Three Months Ended March 31, 2015 | 2014 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $20,456 | $20,427 | $29 | —% |
| Stock-based compensation expense | 13,776 | 12,054 | 1,722 | 14% |
| Laboratory supplies and other direct expenses | 9,168 | 9,279 | (111) | (1)% |
| Outsourced services | 4,558 | 4,484 | 74 | 2% |
| Infrastructure costs | 17,604 | 20,779 | (3,175) | (15)% |
| Total research expenses | $65,562 | $67,023 | $(1,461) | (2)% |

We maintain a substantial investment in research activities. Our research expenses decreased modestly in the first quarter of 2015 as compared to the first quarter of 2014. We expect to continue to invest in our research programs with a focus on identifying drug candidates for specialty markets.

#### Development Expenses

*(in thousands)*

| Development Expenses: | Three Months Ended March 31, 2015 | 2014 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $42,195 | $42,011 | $184 | —% |
| Stock-based compensation expense | 24,441 | 20,846 | 3,595 | 17% |
| Laboratory supplies and other direct expenses | 6,944 | 8,634 | (1,690) | (20)% |
| Outsourced services | 50,094 | 65,192 | (15,098) | (23)% |
| Drug supply costs | 1,583 | 2,967 | (1,384) | (47)% |
| Infrastructure costs | 24,780 | 31,944 | (7,164) | (22)% |
| Total development expenses | $150,037 | $171,594 | $(21,557) | (13)% |

28

Our development expenses decreased by $21.6 million, or 13%, in the first quarter of 2015 as compared to the first quarter of 2014, primarily due to a reduction in outsourced services expenses and infrastructure costs. The decrease in outsourced services expenses in the first quarter of 2015 was largely attributable to reduced clinical trial expenses following the completion of the TRAFFIC and TRANSPORT clinical trials in the first half of 2014. We expect our development expenses for outsourced activities to increase during the balance of 2015 as compared to the first quarter of 2015 due to activities related to clinical trials we have initiated or plan to initiate in 2015, including our Phase 3 development program for VX-661 in combination with ivacaftor. The decrease in infrastructure costs in the first quarter of 2015 as compared to the first quarter of 2014 was largely attributable to costs incurred in the the first quarter of 2014 related to the relocation of our corporate headquarters in Massachusetts from Cambridge to Boston.

### Sales, General and Administrative Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2015 | 2014 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $85,860 | $74,212 | $11,648 | 16% |

Sales, general and administrative expenses increased by 16% in the first quarter of 2015 as compared to the first quarter of 2014, primarily due to increased investment in commercial support for KALYDECO and costs incurred to prepare for the potential launch of ORKAMBI.

### Restructuring Expense

We recorded restructuring credits of $3.3 million in the first quarter of 2015 as compared to restructuring expenses of $6.2 million in the first quarter of 2014. Our restructuring credits in the first quarter of 2015 were primarily related to the early termination of two leases in Cambridge, Massachusetts in connection with the relocation of our corporate headquarters to Boston, Massachusetts for which we had accrued a restructuring liability in excess of the termination fee we ultimately paid. Our restructuring expenses in the first quarter of 2014 were primarily related to cease use charges incurred for several facilities due to the relocation of our corporate headquarters.

### Other Items

### Interest Expense, Net

Interest expense, net was $21.3 million in the first quarter of 2015 compared to $15.7 million in the first quarter of 2014. The increase during the first quarter of 2015 compared to the first quarter of 2014 was primarily due to interest expense associated with the $300.0 million we borrowed in July 2014 pursuant to our credit agreement. During the remainder of 2015, we expect to incur approximately $45.1 million of interest expense associated with the leases for our corporate headquarters and approximately $16.2 million of interest expense related to the credit agreement that we entered into in July 2014.

### Other Income (Expense), Net

Other income (expense), net was $(5.1) million in the first quarter of 2015 compared to $0.5 million in the first quarter of 2014. Other income (expense), net in the first quarter of 2015 was primarily due to unrealized foreign exchange losses.

### Income Taxes

We recorded a provision for income taxes of $0.3 million and $0.8 million in the first quarter of 2015 and the first quarter of 2014, respectively, related to state income taxes and income earned in various foreign jurisdictions.

### Discontinued Operations, Net of Tax

Our loss from discontinued operations was $0.3 million in the first quarter of 2014 related to Alios BioPharma, Inc., a variable interest entity that we consolidated from June 2011 through December 2013. As of September 30, 2014, we concluded that we no longer had significant continuing involvement with Alios. As a result, the effect of the Alios collaboration is presented as discontinued operations in our condensed consolidated statements of operations.

### LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2015, we had cash, cash equivalents and marketable securities of $1.18 billion, which represented a decrease of $206 million from $1.39 billion as of December 31, 2014. This decrease was primarily due to cash expenditures we made during the three months ended March 31, 2015 related to, among other things, research and development expenses and sales, general and administrative expenses, partially offset by cash receipts from product sales and $41.6 million in cash we received from issuances of common stock pursuant to our employee benefit plans. We also incurred $15.1 million in costs for capital expenditures including payments on capital leases during the three months ended March 31, 2015. 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 our existing cash, cash equivalents and marketable securities together with cash flows from product sales as our primary source of liquidity. Our cash flows from product sales have decreased on an annual basis during each of the past two years. In the near-term, we expect cash flows from sales of KALYDECO to increase as we continue to increase the number of patients that are treated with KALYDECO. If we obtain approval on a timely basis, we expect to begin recognizing net product revenues from ORKAMBI in the United States in mid-2015. We do not expect significant net product revenues from ORKABMI in 2015 from ex-U.S. markets due to the reimbursement discussions that will be required in these markets following the potential approval of ORKAMBI by the European Commission in the fourth quarter of 2015.

We have borrowed $300.0 million under a credit agreement that we entered into in July 2014 and, subject to certain conditions, we may request up to an additional $200.0 million pursuant to that credit agreement. 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. Negative covenants in our credit agreement may prohibit or limit our ability to access these sources of liquidity.

### 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 June 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 ORKBAMI, and the potential introduction or one or more of our other drug candidates to the market, the level of our business development activities and the number, breadth, cost and prospects of our research and development programs.

### Financing Strategy

In July 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. We may raise additional capital through public offerings or private placements of our securities or securing new collaborative agreements or other methods of financing. We will continue to manage our capital structure and will 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, 2014, which was filed with the Securities and Exchange Commission, or SEC, on February 13, 2015. There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K.

### 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 March 31, 2015, 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, 2014, which was filed with the SEC on February 13, 2015.

### RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements please refer to Note A, “Nature of Business and Accounting Policies—Recent Accounting Pronouncements,” in the 2014 Annual Report on Form 10-K. There were no new accounting pronouncements adopted during the three months ended March 31, 2015 that had a material effect on our financial statements.

## Market risk

As filed, 2,280 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 March 31, 2015 were not material.

## Controls and procedures

As filed, 1,479 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 March 31, 2015 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 March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 4,331 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on February 13, 2015. There have been no material changes from the risk factors previously disclosed in that Annual Report on Form 10-K.

### 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 potential net product revenues from ORKAMBI, if approved;
- our expectations regarding clinical trials, development timelines and regulatory authority filings and submissions for ivacaftor, lumacaftor and VX-661;
- expectations regarding potential marketing approvals for ORKAMBI in the United States and ex-U.S. markets;
- our ability to successfully market KALYDECO, ORKAMBI, 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, 2014, which was filed with the SEC on February 13, 2015. 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 May 4, 2015.
Source: SEC EDGAR, the filing index for accession 0000875320-15-000029. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.