# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Jun 30, 2016

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2016-08-01
- Accepted by EDGAR: Aug 1, 2016, 20:51 ET
- Period: 2016-06-30
- Accession: 0000875320-16-000091
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532016000091/a2016q210-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532016000091/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-04-01 to 2016-06-30 | $431.6m | us-gaap:Revenues |
| Revenue | 6 months, 2016-01-01 to 2016-06-30 | $829.7m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-04-01 to 2016-06-30 | $44.2m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2016-01-01 to 2016-06-30 | $93.9m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2016-04-01 to 2016-06-30 | $271.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2016-01-01 to 2016-06-30 | $526.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2016-04-01 to 2016-06-30 | $111.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2016-01-01 to 2016-06-30 | $216.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-04-01 to 2016-06-30 | $3.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-01-01 to 2016-06-30 | −$11.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2016-04-01 to 2016-06-30 | $18.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-01-01 to 2016-06-30 | $23.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | −$64.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-01 to 2016-06-30 | −$106.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | −$0.26 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2016-01-01 to 2016-06-30 | −$0.43 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-04-01 to 2016-06-30 | −$0.26 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2016-01-01 to 2016-06-30 | −$0.43 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-04-01 to 2016-06-30 | 244,482,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-01-01 to 2016-06-30 | 244,124,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2016-01-01 to 2016-06-30 | $25.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2016-01-01 to 2016-06-30 | $27.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-06-30 | $605.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-06-30 | $1.45bn | us-gaap:AssetsCurrent |
| Total assets | at 2016-06-30 | $2.55bn | us-gaap:Assets |
| Current liabilities | at 2016-06-30 | $622.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-06-30 | $1.38bn | us-gaap:Liabilities |
| Shareholders' equity | at 2016-06-30 | $981.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,183 characters.

### OVERVIEW

We are in the business of discovering, developing, manufacturing and commercializing medicines for serious diseases. We use precision medicine approaches with the goal of creating transformative medicines for patients 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 development programs in other indications, while maintaining our financial strength. Our two marketed products are ORKAMBI and KALYDECO.

### Cystic Fibrosis

#### ORKAMBI

ORKAMBI (lumacaftor in combination with ivacaftor) was approved by the United States Food and Drug Administration, or FDA, in July 2015 and by the European Commission in November 2015, for the treatment of patients with CF twelve years of age and older who are homozygous for the F508del mutation in their cystic fibrosis transmembrane conductance regulator, or *CFTR,* gene. ORKAMBI was approved for this patient population in Canada and Australia in the first quarter of 2016. Our future ORKAMBI net product revenues in the United States will reflect the number of patients for whom treatment with ORKAMBI is initiated, the proportion of initiated patients who remain on treatment, patient compliance with the recommended treatment regimen and the level of rebates, chargebacks, discounts and other adjustments to our ORKAMBI gross product revenues. We believe that there currently are approximately 8,500 patients in the United States who are eligible for treatment with ORKAMBI. We have begun the country-by-country reimbursement approval process in ex-U.S. markets. We believe that there are approximately 12,000 patients with CF twelve years of age and older who are homozygous for the F508del mutation in Europe and approximately an aggregate of 2,500 patients with CF twelve years of age and older who are homozygous for the F508del mutation in Canada and Australia.

In May 2016, the FDA accepted our supplemental New Drug Application, or sNDA, for ORKAMBI for the treatment of patients with CF six to eleven years of age who are homozygous for the F508del mutation in their *CFTR* gene. The FDA granted our request for priority review and set the target review date of September 30, 2016. The sNDA was based upon the results of a Phase 3 clinical trial evaluating lumacaftor in combination with ivacaftor in 58 patients with CF six to eleven years of age who are homozygous for the F508del mutation in their *CFTR* gene. We have completed enrollment in a second Phase 3 clinical trial evaluating lumacaftor in combination with ivacaftor in approximately 200 patients in this same patient population. If this clinical trial is successful, we expect to submit a Marketing Authorization Application to the European Medicines Agency seeking approval of ORKAMBI in this patient population in the European Union in the first half of 2017.

We recently initiated a Phase 3 clinical trial for lumacaftor in combination with ivacaftor in patients with CF two to five years of age who are homozygous for the F508del mutation in their *CFTR* gene. The first part of the two-part clinical trial is evaluating safety and pharmacokinetics to inform dose selection for the second part of the clinical trial. The primary endpoint of the second part of the clinical trial is safety and tolerability, with multiple efficacy measurements as secondary endpoints.

#### KALYDECO

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. Since 2012, we have increased the number of patients who are being treated with KALYDECO in the United States and ex-U.S. markets by expanding the label for KALYDECO to include patients with CF who have additional mutations in their *CFTR* gene and to include patients in additional age demographics. We believe that there are approximately 4,000 patients in North America, Europe and Australia who are currently eligible for treatment with KALYDECO.

We have initiated a Phase 3 clinical trial for ivacaftor in patients with CF less than two years of age to evaluate the effect of ivacaftor on markers of CF disease in young children. The clinical trial utilizes a weight-based dose of ivacaftor granules that can be mixed in soft foods or liquids. The clinical trial is enrolling patients with one of the ten *CFTR* gene mutations for which KALYDECO is currently approved.

#### VX-661

VX-661 is an orally-administered CFTR corrector drug candidate that we are evaluating in a Phase 3 development program in combination with ivacaftor in multiple CF patient populations who have at least one copy of the F508del mutation in their *CFTR* gene. Details of the patient population and status of each of these clinical trials is as follows:

- *Two copies of the F508del in their CFTR gene*: We plan to complete enrollment in this clinical trial in August 2016 and expect data from this clinical trial to be available in the first half of 2017.
- *One copy of the F508del mutation in their CFTR gene and a second mutation in their CFTR gene that results in a gating defect in the CFTR protein*: We plan to complete enrollment in this clinical trial in late 2016 or early 2017.
- *One copy of the F508del mutation in their CFTR gene and a second mutation in their CFTR gene that results in residual CFTR function*: We expect to complete enrollment in this clinical trial in the second half of 2016.
- *One copy of the F508del mutation in their CFTR gene and a second mutation that results in minimal CFTR function*: Enrollment is complete in the first part of this clinical trial and we expect an interim futility analysis of efficacy data to be completed in the third quarter of 2016.

If supported by data from the Phase 3 clinical program, Vertex plans to submit an NDA to the FDA for VX-661 in combination with ivacaftor in the second half of 2017.

In addition to evaluating the efficacy of the combination regimen, these Phase 3 clinical trials will provide safety data on the combination of VX-661 and ivacaftor to support the planned development of a triple combination regimen that includes a next-generation corrector in combination with VX-661 and ivacaftor.

#### ENaC Inhibition

VX-371 is an investigational epithelial sodium channel, or ENaC, inhibitor, we are evaluating in a Phase 2 development program in collaboration with Parion Sciences, Inc., or Parion. Parion completed a Phase 2 clinical trial in approximately 142 patients with CF with no restriction on the mutations in their *CFTR* gene. The primary endpoint of the clinical trial was safety as compared to patients on placebo. Secondary endpoints evaluated the effect on mean absolute forced expiratory volume in one second, or FEV1 and patient-reported respiratory symptoms as reported in the CF questionnaire-revised, or CFQ-R. The clinical trial met its primary safety endpoint and data from the clinical trial showed that VX-371 was generally well tolerated. There were no statistically significant changes in FEV1 or CFQ-R for patients who received VX-371.

In the first quarter of 2016, we initiated a Phase 2a clinical trial evaluating VX-371 in approximately 150 patients on ORKAMBI, both with and without the addition of hypertonic saline, who have two copies of the F508del mutation in their *CFTR* gene. The primary endpoints of this clinical trial are safety and mean absolute change from baseline in FEV1 at day 28 as compared to patients on placebo.

*In vitro*, VX-371 showed a meaningful change in cilia beat frequency when VX-371 was used in combination with ORKAMBI in human bronchial epithelial cells with two copies of the F508del mutation, but did not show a meaningful change in cilia beat frequency when VX-371 was used alone.

#### Next-generation CFTR Corrector Compounds

We are developing two next-generation CFTR corrector compounds, VX-152 and VX-440, that we plan to evaluate as part of triple combination treatment regimens. We initiated Phase 1 clinical trials in healthy volunteers of each of VX-152 and VX-440, alone and as part of a triple combination with VX-661 and ivacaftor, in the fourth quarter of 2015. If these clinical trials are successful, we plan to initiate Phase 2 clinical development in patients with CF to evaluate one or both of VX-152 and VX-440 in triple combinations with VX-661 and ivacaftor in the second half of 2016.

#### Moderna Collaboration

In July 2016, we entered into a strategic collaboration and licensing agreement with Moderna Therapeutics, Inc., pursuant to which we are seeking to identify and develop messenger Ribonucleic Acid Therapeutics™ for the treatment of CF.

### Research and Development

We are engaged in a number of other research and mid- and early-stage development programs, including in the areas of oncology, pain and neurology.

#### Oncology

We are conducting two Phase 1/2 clinical trials of VX-970, a protein kinase inhibitor of ataxia telangiectasia and Rad3-related, or ATR, in combination with commonly used DNA-damaging chemotherapies across a range of solid tumor types, including triple-negative breast cancer and non-small cell lung cancer. We also are in Phase 1 development of VX-803, a second ATR inhibitor, alone and in combination with chemotherapy. We have initiated Phase 1 clinical development of VX-984, a third oncology drug candidate, alone and in combination with pegylated liposomal doxorubicin.

#### Pain

We are developing VX-150 and VX-241, two drug candidates for the treatment of pain. We have initiated a six-week cross-over Phase 2 proof-of-concept clinical trial to evaluate VX-150 in approximately 100 patients with symptomatic osteoarthritis of the knee. We recently completed enrollment of this clinical trial.

#### Acute Spinal Cord Injury

We are developing VX-210, a drug candidate for the treatment of acute spinal cord injury, that we exclusively licensed from BioAxone BioSciences, Inc. VX-210 is designed to inhibit a protein known as Rho that blocks neural regeneration after injury. We have initiated a Phase 2b/3 clinical trial to evaluate the efficacy and safety of VX-210 in patients with certain acute cervical spinal cord injuries.

#### Research

We plan to continue investing in our research 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 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 United States 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 are 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. In the United States, we continue to 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. Following the European Commission’s November 2015 approval of ORKAMBI in Europe, we are working to obtain 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.

### RESULTS OF OPERATIONS

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $431,608 | $166,076 | $265,532 | 160% | $829,688 | $304,585 | $525,103 | 172% |
| Operating costs and expenses | 428,255 | 337,240 | 91,015 | 27% | 840,665 | 647,734 | 192,931 | 30% |
| Other items, net | (67,878) | (17,684) | (50,194) | (284)% | (95,179) | (44,305) | $(50,874) | (115)% |
| Net loss attributable to Vertex | $(64,525) | $(188,848) | $(124,323) | (66)% | $(106,156) | $(387,454) | $(281,298) | (73)% |

### Net Loss Attributable to Vertex

Net loss attributable to Vertex was $(64.5) million in the second quarter of 2016 as compared to a net loss attributable to Vertex of $(188.8) million in the second quarter of 2015. Our revenues increased significantly in the second quarter of 2016 as compared to the second quarter of 2015 due to net product revenues from ORKAMBI, which was approved by the FDA in July 2015, and increased KALYDECO net product revenues. Our operating costs and expenses increased in the second quarter of 2016 as compared to the second quarter of 2015 primarily due to increases in research and development expenses, sales, general and administrative expenses and cost of product revenues. Other items, net in the second quarter of 2016 included an aggregate of $48.4 million in charges related to the increase in the fair value of the contingent milestone payments and royalties payable by us to Parion. In the near term, we expect net loss (income) attributable to Vertex will be dependent on expected increases in ORKAMBI net product revenues.

Net loss attributable to Vertex was $(106.2) million in the first half of 2016 as compared to a net loss attributable to Vertex of $(387.5) million in the first half of 2015. Our revenues increased significantly in the first half of 2016 as compared to the first half of 2015 due to net product revenues from ORKAMBI and increased KALYDECO net product revenues. Our operating costs and expenses increased in the first half of 2016 as compared to the first half of 2015 primarily due to increases in research and development expenses, sales, general and administrative expenses and cost of product revenues. Other items, net in the first half of 2016 included an aggregate of $57.4 million in charges related to the increase in the fair value of the contingent milestone payments and royalties payable by us to Parion.

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

Diluted net loss per share attributable to Vertex common shareholders was $(0.26) in the second quarter of 2016 as compared to a diluted net loss per share attributable to Vertex common shareholders of $(0.78) in the second quarter of 2015. Diluted net loss per share attributable to Vertex common shareholders was $(0.43) in the first half of 2016 as compared to a diluted net loss per share attributable to Vertex common shareholders of $(1.61) in the first half of 2015.

### Revenues

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues, net | $425,651 | $160,388 | $265,263 | 165% | $820,061 | $291,263 | $528,798 | 182% |
| Royalty revenues | 5,282 | 5,077 | 205 | 4% | 8,878 | 11,869 | (2,991) | (25)% |
| Collaborative revenues | 675 | 611 | 64 | 10% | 749 | 1,453 | (704) | (48)% |
| Total revenues | $431,608 | $166,076 | $265,532 | 160% | $829,688 | $304,585 | $525,103 | 172% |

### Product Revenues, Net

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| ORKAMBI | $245,496 | $— | N/A | N/A | $468,624 | $— | N/A | N/A |
| KALYDECO | 180,235 | 154,888 | 25,347 | 16% | $350,744 | $285,062 | $65,682 | 23% |
| INCIVEK | (80) | 5,500 | N/A | N/A | 693 | 6,201 | (5,508) | (89)% |
| Total product revenues, net | $425,651 | $160,388 | $265,263 | 165% | $820,061 | $291,263 | $528,798 | 182% |

30

Our total net product revenues increased in the second quarter and the first half of 2016 as compared to the second quarter and the first half of 2015 due to net product revenues from ORKAMBI, which was approved by the FDA in July 2015, and increased KALYDECO net product revenues. The FDA has set a target review date of September 30, 2016 for our sNDA for ORKAMBI for the treatment of patients with CF six to eleven years of age who are homozygous for the F508del mutation in their *CFTR* gene.

We believe that the level of our ORKAMBI revenues for the remainder of 2016 will be dependent on:

- the number of additional patients who begin treatment with ORKAMBI;
- the rate at which additional patients initiate treatment;
- the proportion of initiated patients who remain on treatment; and
- the compliance rate for patients who remain on treatment.

In the first half of 2016, revenues from additional patients who began treatment with ORKAMBI in the United States were partially offset by discontinuations by patients who had previously initiated treatment with ORKAMBI. We expect ORKAMBI net product revenues to continue to increase during the remainder of 2016. In the short term, we expect that our ex-U.S. ORKAMBI net product revenues will be primarily from Germany due to the time it will take to complete the reimbursement discussions in other European countries. In the second quarter and first half of 2016, we recognized approximately $15.9 million and $24.7 million, respectively, in ex-U.S. ORKAMBI net product revenues, which were mainly from Germany. We are also selling ORKAMBI in France pursuant to an early access program, but are not recognizing any revenues because the price is not determinable.

The increase in KALYDECO net product revenues in the second quarter and first half of 2016, as compared to the second quarter and first half of 2015, 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. In the second quarter and first half of 2016, we recognized approximately $76.9 million and $152.5 million, respectively, in ex-U.S. KALYDECO net product revenues.

We have withdrawn INCIVEK from the market in the United States. We may continue to have small adjustments to INCIVEK revenues over the next several quarters as we adjust our INCIVEK reserves for rebates, chargebacks and discounts.

### Royalty Revenues

Our royalty revenues were $5.3 million and $8.9 million in the second quarter and the first half of 2016, respectively, as compared to $5.1 million and $11.9 million in the second quarter and the first half of 2015, respectively. Our royalty revenues consist 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

Our collaborative revenues were $0.7 million and $0.7 million in the second quarter and the first half of 2016, respectively, as compared to $0.6 million and $1.5 million in the second quarter and the first half of 2015, respectively. Our collaborative revenues have historically fluctuated significantly from one period to another and may continue to fluctuate in the future.

### Operating Costs and Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of product revenues | $44,154 | $15,409 | $28,745 | 187% | $93,943 | $24,790 | $69,153 | 279% |
| Royalty expenses | 1,098 | 1,451 | (353) | (24)% | 1,958 | 4,377 | (2,419) | (55)% |
| Research and development expenses | 271,008 | 223,858 | 47,150 | 21% | 526,868 | 439,457 | 87,411 | 20% |
| Sales, general and administrative expenses | 111,652 | 94,394 | 17,258 | 18% | 216,866 | 180,254 | 36,612 | 20% |
| Restructuring expenses (income), net | 343 | 2,128 | (1,785) | (84)% | 1,030 | (1,144) | N/A | N/A |
| Total costs and expenses | $428,255 | $337,240 | $91,015 | 27% | $840,665 | $647,734 | $192,931 | 30% |

### Cost of Product Revenues

Our cost of product revenues includes the cost of producing inventories that correspond 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 Cystic Fibrosis Foundation Therapeutics Incorporated, or CFFT, our tiered third-party royalties on sales of KALYDECO and ORKAMBI, calculated as a percentage of net sales, range from the single digits to the sub-teens. Our cost of product revenues increased in the second quarter and first half of 2016 as compared to the second quarter and first half of 2015, primarily due to increased net product revenues. The increase in cost of product revenues in the first half of 2016 as compared to the first half of 2015 also reflected the second and final $13.9 million commercial milestone that was earned by CFFT in the first quarter of 2016 related to sales of ORKAMBI and that was included in cost of product revenues in the first quarter of 2016. In future periods, our cost of product revenues will not be affected by commercial milestones on ORKAMBI, with our cost of product revenues generally tracking our net product revenues.

### 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 do not include royalties we pay to CFFT on sales of KALYDECO and ORKAMBI, which instead are included in cost of product revenues. Royalty expenses in the second quarter and the first half of 2016 decreased by $0.4 million and $2.4 million, respectively, as compared to the second quarter and the first half of 2015, primarily as a result of decreased INCIVO (telaprevir) sales by our collaborator Janssen NV.

### Research and Development Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research expenses | $79,886 | $65,195 | $14,691 | 23% | $142,896 | $130,757 | $12,139 | 9% |
| Development expenses | 191,122 | 158,663 | 32,459 | 20% | 383,972 | 308,700 | 75,272 | 24% |
| Total research and development expenses | $271,008 | $223,858 | $47,150 | 21% | $526,868 | $439,457 | $87,411 | 20% |

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, 2013, we have incurred $3.3 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 2015 and the first half of 2016, 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. We cannot make a meaningful estimate when, if ever, our clinical development programs will generate revenues and cash flows.

#### Research Expenses

*(in thousands)*

*(in thousands)*

| Research Expenses: | Three Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $19,268 | $19,798 | $(530) | (3)% | $39,978 | $40,254 | $(276) | (1)% |
| Stock-based compensation expense | 13,409 | 13,081 | 328 | 3% | 24,065 | 26,857 | (2,792) | (10)% |
| Laboratory supplies and other direct expenses | 11,810 | 10,416 | 1,394 | 13% | 21,684 | 19,584 | 2,100 | 11% |
| Outsourced services and acquired research assets | 17,534 | 4,947 | 12,587 | 254% | 21,695 | 9,505 | 12,190 | 128% |
| Infrastructure costs | 17,865 | 16,953 | 912 | 5% | 35,474 | 34,557 | 917 | 3% |
| Total research expenses | $79,886 | $65,195 | $14,691 | 23% | $142,896 | $130,757 | $12,139 | 9% |

We maintain a substantial investment in research activities. Our research expenses increased by 23% in the second quarter of 2016 as compared to the second quarter of 2015 and increased by 9% in the first half of 2016 as compared to the first half of 2015. Outsourced services and acquired research assets in the second quarter of 2016 and first half of 2016 included approximately $10.0 million in expenses related to the acquisition of early-stage research assets for which there were no comparable expenses in the second quarter of 2015. We expect to continue to invest in our research programs with a focus on identifying drug candidates with the goal of creating transformative medicines.

#### Development Expenses

*(in thousands)*

*(in thousands)*

| Development Expenses: | Three Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $45,062 | $39,427 | $5,635 | 14% | $89,413 | $81,622 | $7,791 | 10% |
| Stock-based compensation expense | 27,231 | 28,551 | (1,320) | (5)% | 51,023 | 52,992 | (1,969) | (4)% |
| Laboratory supplies and other direct expenses | 13,005 | 8,473 | 4,532 | 53% | 21,255 | 15,417 | 5,838 | 38% |
| Outsourced services | 71,555 | 56,303 | 15,252 | 27% | 156,043 | 106,397 | 49,646 | 47% |
| Drug supply costs | 4,204 | 2,702 | 1,502 | 56% | 6,857 | 4,285 | 2,572 | 60% |
| Infrastructure costs | 30,065 | 23,207 | 6,858 | 30% | 59,381 | 47,987 | 11,394 | 24% |
| Total development expenses | $191,122 | $158,663 | $32,459 | 20% | $383,972 | $308,700 | $75,272 | 24% |

Our development expenses increased by $32.5 million, or 20%, in the second quarter of 2016 as compared to the second quarter of 2015 and increased by $75.3 million, or 24%, in the first half of 2016 as compared to the first half of 2015, primarily due to an increase in outsourced services related to ongoing clinical trials, including our Phase 3 development program for VX-661 in combination with ivacaftor, and an increase in infrastructure costs.

### Sales, General and Administrative Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  | Six Months Ended June 30, 2016 | 2015 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $111,652 | $94,394 | $17,258 | 18% | $216,866 | $180,254 | $36,612 | 20% |

Sales, general and administrative expenses increased by 18% in the second quarter of 2016 as compared to the second quarter of 2015 and increased by 20% in the first half of 2016 as compared to the first half of 2015, primarily due to increased investment in commercial support for ORKAMBI in ex-U.S. markets. We expect sales, general and administrative expenses during the remainder of 2016 will be similar to our sales, general and administrative expenses in the first half of 2016.

### Restructuring Expense, Net

We recorded restructuring expenses of $0.3 million and $1.0 million in the second quarter and the first half of 2016, respectively, as compared to restructuring expenses of $2.1 million in the second quarter of 2015 and restructuring credits of $1.1 million in the first half of 2015. Our restructuring expenses in the second quarter and first half of 2016 primarily relate to adjustments to our restructuring liability 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.

### Other Items

### Interest Expense, Net

Interest expense, net was $20.2 million and $40.9 million in the second quarter and the first half of 2016, respectively as compared to $21.1 million and $42.4 million in the second quarter the first half of 2015, respectively. During the remainder of 2016, we expect to incur approximately $30 million of interest expense associated with the leases for our corporate headquarters and approximately $9 million of interest expense related to our credit agreement.

### Other (Expense) Income, Net

Other (expense) income, net was an expense of $1.2 million and income of $3.2 million in the second quarter and the first half of 2016, respectively as compared to income of $1.4 million and expense of $3.7 million in the second quarter and the first half of 2015, respectively. Other (expense) income, net in each of the second quarter and first half of 2016 and the second quarter and the first half of 2015 was primarily due to foreign exchange gains and losses.

### Income Taxes

We recorded a provision for income taxes of $18.1 million and $23.6 million in the second quarter and the first half of 2016, respectively as compared to $30.1 million and $30.4 million in the second quarter and the first half of 2015, respectively. The provision for income taxes in the second quarter and first half of 2016 and 2015 was due to income tax on our VIEs, as well as state and foreign tax in various jurisdictions.

### Noncontrolling Interest (VIEs)

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

In the second quarter and the first half of 2016, the net income attributable to noncontrolling interest (VIEs) was $28.4 million and $33.9 million, respectively. In the second quarter and the first half of 2015, the net loss attributable to noncontrolling interest (VIEs) was $32.1 million and $32.2 million, respectively.

### LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2016, we had cash, cash equivalents and marketable securities of $1.07 billion, which represented an increase of $29 million from $1.04 billion as of December 31, 2015. In the first half of 2016, we largely maintained our cash, cash equivalents and marketable securities balance due to increased cash receipts in the first half of 2016 from product sales, offset by increased cash expenditures in the first half of 2016 related to, among other things, research and development expenses and sales, general and administrative expenses.

Our future cash flows will be substantially dependent on product sales of KALYDECO and ORKAMBI.

### 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. We are receiving cash flows from sales of ORKAMBI and KALYDECO from the United States and ex-U.S. markets. We expect ORKAMBI net product revenues to continue to increase during the remainder of 2016. In the short term, we expect that our ex-U.S. ORKAMBI net product revenues will be primarily from Germany due to the time it will take to complete the reimbursement discussions in other European countries.

We 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 2014 and 2015, we also received significant proceeds from the issuance of common stock under our employee benefit plans, but we have received limited proceeds from employee benefit plans in 2016 and 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 to operate our organization. Under the terms of our credit agreement, we are required to repay the principal amount on the $300.0 million we borrowed in July 2014 in installments of $75 million on each of October 1, 2016, January 1, 2017, April 1, 2017 and July 9, 2017. We also have substantial facility and capital lease obligations, including leases for two buildings in Boston, Massachusetts that continue through 2028. In addition, we have entered into certain collaboration agreements with third parties that include the funding of certain research, development and commercialization efforts with the potential for future milestone and royalty payments by us upon the achievement of pre-established developmental and regulatory targets.

We expect that cash flows from KALYDECO and ORKAMBI, together with our current cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next twelve months. The adequacy of our available funds to meet our future operating and capital requirements will depend on many factors, including the amounts of future revenues generated by KALYDECO and ORKAMBI and the potential introduction of 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 seek to refinance our credit agreement based on our current credit profile and prevailing market conditions. 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, 2015, which was filed with the Securities and Exchange Commission, or SEC, on February 16, 2016. There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K, except that on July 1, 2016, we entered into a collaboration agreement with Moderna Therapeutics, Inc., or Moderna, pursuant to which Moderna is eligible to receive development and regulatory milestones of up to $275 million, as well as tiered royalty payments on future sales.

### 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 six months ended June 30, 2016, 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, 2015, which was filed with the SEC on February 16, 2016.

### 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 2015 Annual Report on Form 10-K. There were no new accounting pronouncements adopted during the six months ended June 30, 2016 that had a material effect on our financial statements.

## Market risk

As filed, 2,036 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

As of June 30, 2016, we invest our cash in a variety of financial instruments, principally money market funds, short-term government-sponsored enterprise securities, U.S. Treasury securities, 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.

## 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, 2016 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, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 6,429 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on February 16, 2016. There have been no material changes from the risk factors previously disclosed in that Annual Report on Form 10-K, except that:

***Risk Relating to the Referendum of the United Kingdom’s Membership of the European Union.***

On June 23, 2016, the United Kingdom, or the U.K., held a referendum in which voters approved an exit from the European Union, or the E.U., commonly referred to as “Brexit.” As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s withdrawal from the E.U. A withdrawal could, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the E.U., undermine bilateral cooperation in key policy areas and significantly disrupt trade between the U.K. and the E.U. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications the withdrawal of the U.K. from the E.U. would have and how such withdrawal would affect us.

The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. The announcement of Brexit and the withdrawal of the U.K. from the E.U. may also create global economic uncertainty, which may cause third-party payors, including governmental organizations, to closely monitor their costs and reduce their spending budgets. Any of these effects of Brexit, among others, could adversely affect our business, financial condition and operating results.

### 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 ORKAMBI;
- our expectations regarding clinical trials, development timelines and regulatory authority filings and submissions for our drug candidates including, ivacaftor, lumacaftor, VX-661, VX-371 (formerly P-1037), VX-152, VX-440, VX-970, VX-803, VX-984, VX-150, VX-241 and VX-210, as well as the sNDA for ORKAMBI for the treatment of patients with CF six to eleven years of age who are homozygous for the F508del mutation in their *CFTR* gene and the NDA for VX-661 in combination with ivacaftor;
- our expectations regarding planned clinical trials for next-generation correctors based upon pre-clinical data;
- our ability to successfully market KALYDECO and ORKAMBI or any of our other drug candidates for which we obtain regulatory approval;
- our expectations regarding the timing and structure of clinical trials of our drugs and drug candidates, including ivacaftor, lumacaftor, VX-661, VX-371 (formerly P-1037), VX-152, VX-440, VX-970, VX-803, VX-984, VX-150, VX-241 and VX-210, 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;
- potential fluctuations in foreign currency exchange rates;
- 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, 2015, which was filed with the SEC on February 16, 2016. 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 Aug 1, 2016.
Source: SEC EDGAR, the filing index for accession 0000875320-16-000091. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.