# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Mar 31, 2017

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2017-04-28
- Accepted by EDGAR: Apr 28, 2017, 20:22 ET
- Period: 2017-03-31
- Accession: 0000875320-17-000030
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532017000030/a2017q110-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532017000030/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Research and development | 3 months, 2017-01-01 to 2017-03-31 | $273.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2017-01-01 to 2017-03-31 | $113.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-01-01 to 2017-03-31 | $270.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-01-01 to 2017-03-31 | $4.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-01-01 to 2017-03-31 | $247.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.99 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-01-01 to 2017-03-31 | $1.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-01-01 to 2017-03-31 | 248,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2017-01-01 to 2017-03-31 | $265.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2017-01-01 to 2017-03-31 | $11.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-03-31 | $1.00bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-03-31 | $1.87bn | us-gaap:AssetsCurrent |
| Total assets | at 2017-03-31 | $2.95bn | us-gaap:Assets |
| Current liabilities | at 2017-03-31 | $489.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-03-31 | $1.26bn | us-gaap:Liabilities |
| Shareholders' equity | at 2017-03-31 | $1.50bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,777 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 (lumacaftor in combination with ivacaftor) and KALYDECO (ivacaftor).

### Cystic Fibrosis

ORKAMBI and KALYDECO are approved to treat approximately 40% of the 75,000 CF patients in North America, Europe and Australia. ORKAMBI (lumacaftor in combination with ivacaftor) is approved as a treatment for approximately 25,000 patients who have two copies (homozygous) of the F508del mutation in their cystic fibrosis transmembrane conductance regulator, or *CFTR,* gene. KALYDECO (ivacaftor) is approved for the treatment of approximately 4,000 CF patients who have the G551D mutation or other specified mutations in their *CFTR* gene. Our goal is to develop treatment regimens that will provide benefits to as many patients with CF as possible and will enhance the benefits that currently are being provided to patients taking our medicines.

#### CF Development Programs

We have multiple development programs in the field of CF, including:

- Tezacaftor is a corrector compound 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.
- In the first quarter of 2017, we obtained positive results from two Phase 3 clinical trials that showed statistically significant improvements in lung function (percent predicted forced expiratory volume in one second, or ppFEV1) in patients with CF 12 years of age and older who have certain mutations in their CFTR gene. The 24-week EVOLVE clinical trial evaluated tezacaftor in combination with ivacaftor in patients with CF who are homozygous for the F508del mutation in their CFTR gene. This clinical trial met its primary endpoint with a mean absolute improvement in ppFEV1 through 24 weeks of 4.0 percentage points from baseline compared to placebo (p \< 0.0001). The second clinical trial, EXPAND, was an 8-week crossover clinical trial that evaluated the combination treatment in patients with CF who have one mutation that results in residual CFTR function and one F508del mutation. This clinical trial met the primary endpoints of absolute change in ppFEV1 from baseline to the average of the Week 4 and Week 8 measurements, with the tezacaftor/ivacaftor combination treatment demonstrating a mean absolute improvement of 6.8 percentage points compared to placebo (p \< 0.0001) and the ivacaftor monotherapy group demonstrating a mean absolute improvement of 4.7 percentage points compared to placebo (p \< 0.0001). Across both clinical trials, the tezacaftor/ivacaftor combination treatment was generally well tolerated. Based on these results, we plan to submit a New Drug Application, or NDA, to the U.S. Food and Drug Administration, or FDA and a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, in the third quarter of 2017.
- We expect to complete enrollment in a third Phase 3 clinical trial in the first half of 2017 evaluating tezacaftor in combination with ivacaftor in patients 12 years of age or older who have one copy of the F508del mutation and a second mutation that results in a gating mutation in the CFTR gene that has been shown to be responsive to ivacaftor alone.
- We are conducting a Phase 3 clinical trial of the tezacaftor/ivacaftor combination in patients with CF six to eleven years of age in the U.S. The clinical trial is evaluating the safety and tolerability of the tezacaftor/ivacaftor combination in children who are homozygous for the F508del mutation and in children who have one copy of the F508del mutation and a gating or residual function mutation.
- VX-152, VX-440, VX-659 and VX-445 are next-generation CFTR corrector compounds that we are evaluating as part of triple combination treatment regimens. We are conducting Phase 2 clinical trials of VX-152 and VX-440 in patients with CF and Phase 1 clinical trials of VX-659 and VX-445 in healthy volunteers and patients with CF. We expect data for three of these triple combinations in patients with CF in the second half of 2017 and for the fourth triple combination that includes VX-445 in patients with CF in early 2018. We recently amended the Phase 2 clinical

trial evaluating VX-152, which was originally designed to evaluate two weeks of triple combination dosing, to add the evaluation of four weeks of triple combination dosing.

- VX-371, an investigational epithelial sodium channel, or ENaC, inhibitor, is being evaluated in a Phase 2 development program and which we exclusively licensed from Parion Sciences, Inc., or Parion, in 2015.

### Research and Development

We are engaged in a number of other research and mid- and early-stage development programs, including in the areas of pain and neurology. We have also entered into third-party collaborations pursuant to which we are engaged in the discovery and development of nucleic acid-based therapies for a variety of diseases, including CF. We plan to continue investing in our research programs and fostering scientific innovation in order to identify and develop transformative medicines. Our current research programs include programs targeting cystic fibrosis, adrenoleukodystrophy, alpha-1 antritrypsin deficiency, sickle cell disease and polycystic kidney disease. 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.

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.

### Collaboration Arrangements

We have entered into collaborations with biotechnology and pharmaceutical companies in order to acquire rights or to license drug candidates or technologies that enhance our pipeline and/or our research capabilities. Over the last several years, we entered into collaboration agreements with:

- CRISPR Therapeutics AG, or CRISPR, pursuant to which we are collaborating on the discovery and development of potential new treatments aimed at the underlying genetic causes of human diseases using CRISPR-Cas9 gene editing technology;
- Parion, pursuant to which we are developing epithelial sodium channel, or ENaC, inhibitors for the treatment of pulmonary diseases;
- Moderna Therapeutics, Inc., or Moderna, pursuant to which we are seeking to identify and develop mRNA therapeutics for the treatment of CF; and
- BioAxone Biosciences, Inc., or BioAxone, pursuant to which we are evaluating VX-210 as a potential treatment for patients who have spinal cord injuries.

Generally, when we in-license a technology or drug candidate, we make upfront payments to the collaborator, assume the costs of the program and agree to make contingent payments, which could consist of milestone, royalty and option payments. Depending on many factors, including the structure of the collaboration, the significance of the drug candidate that we license to the collaborator’s operations and the other activities in which our collaborators are engaged, the accounting for these transactions can vary significantly. For example, the upfront payments and expenses incurred in connection with our CRISPR and Moderna collaborations are being expensed as research expenses because the collaboration represents a small portion of these collaborators overall business. CRISPR’s and Moderna’s activities unrelated to our collaborations have no effect on our consolidated financial statements. Parion and BioAxone are being accounted for as variable interest entities, or VIEs, and are included in our consolidated financial statements due to (i) the significance of the respective licensed programs to Parion and BioAxone as a whole, (ii) our power to control the significant activities under each collaboration and (iii) our obligation to absorb losses and right to receive benefits that potentially could be significant. Each of our consolidated VIEs are engaging in activities unrelated to our collaboration, including in the case of Parion, seeking to develop novel treatments for pulmonary and ocular diseases. The revenues and expenses unrelated to the programs we in-license from our VIEs are immaterial to our consolidated financial statements. In each case, the activities unrelated to our collaboration represent less than 1% of our total revenues and total expenses. Because we consolidate our VIEs, we evaluate the fair value of the contingent payments payable by us on a quarterly basis. Changes in the fair value of these contingent future payments affect net income attributable to Vertex on a dollar-for-dollar basis, with increases in the fair value of contingent payments payable by us to a VIE resulting in a decrease in net income attributable to Vertex (or an increase in net loss attributable to Vertex) and decreases in the fair value of contingent payments payable by us to a VIE resulting in an increase in net income attributable to Vertex (or decrease in net loss attributable to Vertex).

We have also out-licensed internally developed programs to collaborators who are leading the development of these programs. These outlicense arrangements include our collaboration agreements with:

- Merck KGaA, which is advancing four oncology research and development programs; and
- Janssen Pharmaceuticals, Inc. which is developing JNJ-3872 (formerly VX-787) for the treatment of influenza.

Pursuant to these outlicensing arrangements, our collaborators are responsible for the research, development and commercialization costs associated with these programs and we are entitled to receive contingent milestone and/or royalty payments. As a result, we do not expect to incur significant expenses in connection with these programs and have the potential for future collaborative and/or royalty revenues resulting from these programs.

### 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 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. In Europe and other ex-U.S. markets, 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. In the fourth quarter of 2016, we reached a pricing and reimbursement agreement for ORKAMBI with the German Federal Association of the Statutory Health Insurances. 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.

### Recent Pending Transaction

#### Concert Pharmaceuticals

In March 2017, we entered into an asset purchase agreement with Concert Pharmaceuticals, Inc. Pursuant to the agreement, we expect to acquire certain assets including CTP-656 from Concert. CTP-656 is an investigational CFTR potentiator that has the potential to be used as part of future once-daily combination regimens of CFTR modulators that treat the underlying cause of CF. As part of the agreement, we will pay Concert $160 million in cash for all worldwide development and commercialization rights to CTP-656. If CTP-656 is approved as part of a combination regimen to treat CF, Concert could receive up to an additional $90 million in milestones based on regulatory approval in the U.S. and reimbursement in the UK, Germany or France. The agreement remains subject to approval by Concert's shareholders and clearance under the Hart-Scott-Rodino Antitrust Improvements Act. Therefore, there was no accounting impact relating to this agreement during the three months ended March 31, 2017. We are in the process of evaluating the expected accounting effect of the pending transaction on our consolidated financial statements.

### RESULTS OF OPERATIONS

*(in thousands)*

|  | Three Months Ended March 31, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $714,718 | $398,080 | $316,638 | 80% |
| Operating costs and expenses | 443,876 | 412,410 | 31,466 | 8% |
| Other items, net | (23,086) | (27,301) | 4,215 | 15% |
| Net income (loss) attributable to Vertex | $247,756 | $(41,631) | $289,387 | n/a |

### Net Income (Loss) Attributable to Vertex

Net income attributable to Vertex was $247.8 million in the first quarter of 2017 as compared to a net loss attributable to Vertex of $(41.6) million in the first quarter of 2016. Our revenues increased significantly in the first quarter of 2017 as compared to the first quarter of 2016 due to $230.0 million in one-time collaborative revenues related to the strategic collaboration and license agreement we established with Merck KGaA in the first quarter of 2017 and increased ORKAMBI and KALYDECO net product revenues. Our operating costs and expenses increased in the first quarter of 2017 as compared to the first quarter of 2016 primarily due to increases in research and development expenses, sales, general and administrative expenses and restructuring expenses, partially offset by a $13.9 million commercial milestone made in the first quarter of 2016. In the near term, we expect net income (loss) attributable to Vertex will be dependent on expected increases in ORKAMBI net product revenues.

### Diluted Net Income (Loss) Per Share Attributable to Vertex Common Shareholders

Diluted net income per share attributable to Vertex common shareholders was $0.99 in the first quarter of 2017 as compared to a diluted net loss per share attributable to Vertex common shareholders of $(0.17) in the first quarter of 2016.

### Revenues

*(in thousands)*

|  | Three Months Ended March 31, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Product revenues, net | $480,622 | $394,410 | $86,212 | 22% |
| Royalty revenues | 1,551 | 3,596 | (2,045) | (57)% |
| Collaborative revenues | 232,545 | 74 | 232,471 | n/a |
| Total revenues | $714,718 | $398,080 | $316,638 | 80% |

### Product Revenues, Net

*(in thousands)*

|  | Three Months Ended March 31, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| ORKAMBI | $294,861 | $223,128 | $71,733 | 32% |
| KALYDECO | 185,715 | 170,509 | 15,206 | 9% |
| INCIVEK | 46 | 773 | (727) | (94)% |
| Total product revenues, net | $480,622 | $394,410 | $86,212 | 22% |

Our total net product revenues increased in the first quarter of 2017 as compared to the first quarter of 2016 due to increased net product revenues from ORKAMBI and KALYDECO. In the first quarter of 2017 and 2016, we recognized approximately $31.4 million and $8.8 million, respectively, in ex-U.S. ORKAMBI net product revenues. Our condensed consolidated balance sheets include $104.8 million collected as of March 31, 2017, in France related to ORKAMBI, which has not resulted in any revenues. We believe that the level of our ORKAMBI revenues during 2017 will be dependent upon whether, when and on what terms we are able to obtain reimbursement in additional ex-U.S. markets, the number and rate at which additional patients begin treatment with ORKAMBI, the proportion of initiated patients who remain on treatment and the compliance rates for patients who remain on treatment.

The increase in KALYDECO net product revenues in the first quarter of 2017 as compared to the first quarter of 2016 included approximately $9 million in one-time revenue credits in the first quarter of 2017 primarily related to the finalization of reimbursement agreements in certain European countries. In the first quarter of 2017 and 2016, we recognized approximately $84.2 million and $75.6 million, respectively, in ex-U.S. KALYDECO net product revenues.

We have withdrawn INCIVEK, which we previously marketed as a treatment for hepatitis C virus infection, 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 $1.6 million in the first quarter of 2017 as compared to $3.6 million in the first quarter of 2016. 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 $232.5 million in the first quarter of 2017 as compared to $0.1 million in the first quarter of 2016. The increase was due to revenue recognized related to the one-time upfront payment we received from Merck KGaA in the first quarter of 2017. 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)*

|  | Three Months Ended March 31, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of product revenues | $46,242 | $49,789 | $(3,547) | (7)% |
| Royalty expenses | 746 | 860 | (114) | (13)% |
| Research and development expenses | 273,563 | 255,860 | 17,703 | 7% |
| Sales, general and administrative expenses | 113,326 | 105,214 | 8,112 | 8% |
| Restructuring expenses, net | 9,999 | 687 | 9,312 | 1,355% |
| Total costs and expenses | $443,876 | $412,410 | $31,466 | 8% |

### 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 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.

In the first quarter of 2016, our cost of product revenues included a $13.9 million commercial milestone that was earned by CFFT related to sales of ORKAMBI. There are no further commercial milestones payable to CFFT. In future periods, we expect our cost of product revenues to be dependent on our net product revenues with a lower royalty rate at the beginning of each year due to the tiered royalty structure.

### Royalty Expenses

Royalty expenses include expenses related to a subroyalty payable to a third party on net sales of an HIV protease inhibitor sold by GlaxoSmithKline and third-party royalties payable upon net sales of telaprevir by our collaborators in their territories. 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.

### Research and Development Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Research expenses | $73,056 | $63,010 | $10,046 | 16% |
| Development expenses | 200,507 | 192,850 | 7,657 | 4% |
| Total research and development expenses | $273,563 | $255,860 | $17,703 | 7% |

33

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, 2014, we have incurred $3.2 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 2016 and the three months ended March 31, 2017, 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 are planning to submit an NDA and an MAA for tezacaftor in combination with ivacaftor in the third quarter of 2017. 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, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $21,533 | $20,710 | $823 | 4% |
| Stock-based compensation expense | 13,691 | 10,656 | 3,035 | 28% |
| Laboratory supplies and other direct expenses | 11,365 | 9,874 | 1,491 | 15% |
| Outsourced services | 7,337 | 4,161 | 3,176 | 76% |
| Infrastructure costs | 19,130 | 17,609 | 1,521 | 9% |
| Total research expenses | $73,056 | $63,010 | $10,046 | 16% |

We maintain a substantial investment in research activities. Our research expenses increased by 16% in the first quarter of 2017 as compared to the first quarter of 2016. 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)*

| Development Expenses: | Three Months Ended March 31, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $51,954 | $44,351 | $7,603 | 17% |
| Stock-based compensation expense | 31,146 | 23,792 | 7,354 | 31% |
| Laboratory supplies and other direct expenses | 11,030 | 8,250 | 2,780 | 34% |
| Outsourced services | 73,435 | 84,488 | (11,053) | (13)% |
| Drug supply costs | 1,949 | 2,653 | (704) | (27)% |
| Infrastructure costs | 30,993 | 29,316 | 1,677 | 6% |
| Total development expenses | $200,507 | $192,850 | $7,657 | 4% |

Our development expenses increased by 4% in the first quarter of 2017 as compared to the first quarter of 2016 due to increases in expenses related to our employees partially offset by decreases in our outsourced services expenses.

### Sales, General and Administrative Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $113,326 | $105,214 | $8,112 | 8% |

Sales, general and administrative expenses increased by 8% in the first quarter of 2017 as compared to the first quarter of 2016, primarily due to increased investment in commercial support for ORKAMBI in ex-U.S. markets.

### Restructuring Expense, Net

We recorded restructuring expenses of $10.0 million in the first quarter of 2017 as compared to restructuring expenses of $0.7 million in the first quarter of 2016. The increase in our restructuring expenses in the first quarter of 2017 primarily relate to our decision to consolidate our research activities into our Boston, Milton Park and San Diego locations and to close our research site in Canada.

### Other Items

### Interest Expense, Net

Interest expense, net was $16.8 million in the first quarter of 2017 as compared to $20.7 million in the first quarter of 2016. The decrease in interest expense, net in the first quarter of 2017 as compared to the first quarter of 2016 was primarily due to the repayment of the $300.0 million of the revolving credit facility in February 2017. During the remainder of 2017, we expect to incur approximately $45 million of interest expense associated with the leases for our corporate headquarters and our interest expense related to our revolving credit facility will be dependent on whether, and to what extent, we reborrow amounts under the existing facility.

### Other (Expense) Income, Net

Other (expense) income, net was an expense of $0.5 million in the first quarter of 2017 as compared to income of $4.4 million in the first quarter of 2016. Other (expense) income, net in each of the first quarter of 2017 and the first quarter of 2016 was primarily due to foreign exchange gains and losses.

### Income Taxes

We recorded a provision for income taxes of $4.0 million in the first quarter of 2017 as compared to $5.5 million in the first quarter of 2016. The provision for income taxes in the first quarter of 2017 was primarily related to state income tax expense in jurisdictions where there are no net operating losses as well as several foreign jurisdictions. The provision for income taxes in the first quarter of 2016 was due to income tax on our VIEs.

### Noncontrolling Interest (VIEs)

The net (income) loss 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 in the noncontrolling interest holders’ claim to net assets, including contingent milestone, royalty and option payments. A summary of net income attributable to noncontrolling interest related to our VIEs for the three months ended March 31, 2017 and 2016 is as follows:

*(in thousands)*

|  | Three Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Loss attributable to noncontrolling interest before provision for income taxes | $1,547 | $839 |
| Provision for income taxes | 391 | 3,062 |
| Increase in fair value of contingent payments | (3,730) | (9,430) |
| Net income attributable to noncontrolling interest | $(1,792) | $(5,529) |

### LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2017, we had cash, cash equivalents and marketable securities of $1.41 billion, which represented a decrease of $26 million from $1.43 billion as of December 31, 2016. In the first quarter of 2017, our cash, cash equivalents and marketable securities balance decreased due to the $300.0 million repayment of our revolving credit facility, partially offset by cash received from our collaboration with Merck KGaA in the first quarter of 2017 and cash receipts from product sales. We expect that our future cash flows will be substantially dependent on CF product sales.

### 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. Future net product revenues for ORKAMBI from ex-U.S. markets will be dependent on, among other things, the timing of and ability to complete reimbursement discussions in European countries.

In February 2017, we repaid the $300.0 million we had borrowed under our $500.0 million revolving credit facility. We may repay and reborrow amounts under the revolving credit agreement without penalty. Subject to certain conditions, we may request that the borrowing capacity under this credit agreement be increased by an additional $300.0 million.

In 2015, we also received significant proceeds from the issuance of common stock under our employee benefit plans, but we 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 entered into in October 2016, we are required to repay all outstanding principal amounts in 2021. We also have substantial facility and capital lease obligations, including leases for two buildings in Boston, Massachusetts that continue through 2028 and capital expenditures for our building under construction in San Diego, California. 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. In the first quarter of 2017, we entered into an asset purchase agreement with Concert pursuant to which we expect to make a $160.0 million payment contingent upon approval by Concert’s shareholders and clearance under the Hart-Scott-Rodino Antitrust Improvements Act.

We expect that cash flows from ORKAMBI and 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 ORKAMBI and KALYDECO 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

We have a $500.0 million revolving credit facility that we entered into in October 2016. We may repay and reborrow amounts under the revolving credit agreement without penalty. In addition, subject to certain conditions, we may request that the borrowing capacity under this credit agreement be increased by an additional $300.0 million. 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, 2016, which was filed with the Securities and Exchange Commission, or SEC, on February 23, 2017. There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K, except that:

- In February 2017, we repaid the outstanding $300 million balance of our revolving credit facility.
- In March 2017, we entered into an asset purchase agreement with Concert to acquire certain assets including CTP-656 from Concert. Upon closing, we will be required to pay Concert $160 million in cash for all worldwide development and commercialization rights to CTP-656.

### 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, 2017, 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, 2016, which was filed with the SEC on February 23, 2017.

### RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements please refer to Note A, “Basis of Presentation and Accounting Policies—Recent Accounting Pronouncements.”

## Market risk

As filed, 3,235 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 securities issued by the U.S. government and its agencies, investment-grade corporate bonds and commercial paper, and money market funds. These investments are denominated in U.S. dollars. All of our interest-bearing securities are subject to interest rate risk and could decline in value if interest rates fluctuate. Substantially all of our investment portfolio consists of marketable securities with active secondary or resale markets to help ensure portfolio liquidity, and we have implemented guidelines limiting the term-to-maturity of our investment instruments. Due to the conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk. If interest rates were to increase or decrease by 1%, the fair value of our investment portfolio would increase or decrease by an immaterial amount.

### 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 have a foreign currency management program with the objective of reducing the effect of exchange rate fluctuations on our operating results and forecasted revenues and expenses denominated in foreign currencies. We currently have hedges for Euro, British Pound and Australian Dollar. These cash flow hedges qualify for hedge accounting. As of March 31, 2017, we held foreign exchange forward contracts with notional amounts totaling $282.2 million. As of March 31, 2017, our outstanding foreign exchange forward contracts had a net fair value of $7.9 million.

Based on our foreign currency exchange rate exposures at March 31, 2017, a hypothetical 10% adverse fluctuation in exchange rates would decrease the fair value of our foreign exchange forward contracts that are designated as cash flow hedges by approximately $28.2 million at March 31, 2017. The resulting loss on these forward contracts would be offset by the gain on the underlying transactions and therefore would have minimal impact on future anticipated earnings and cash flows. Similarly, adverse fluctuations in exchange rates that would decrease the fair value of our foreign exchange forward contracts that are not designated as hedge instruments would be offset by a positive impact of the underlying monetary assets and liabilities.

## 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, 2017 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, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 9,693 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on February 23, 2017. There have been no material changes from the risk factors previously disclosed in that Annual Report on Form 10-K, except that:

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

In the first quarter of 2017, we obtained positive results from two Phase 3 clinical trials of tezacaftor in combination with ivacaftor that showed statistically significant improvements in lung function in patients with CF 12 years of age and older who have certain mutations in their *CFTR* gene. Based on these results, we plan to submit an NDA in the United States and an MAA in Europe for this potential combination regimen in the third quarter of 2017. Obtaining approval of an NDA or an MAA is a lengthy, expensive and uncertain process, and we may not be successful. Obtaining marketing approval for the combination of tezacaftor and ivacaftor in one country or region does not ensure that we will be able to obtain marketing approval in any other country or region. Obtaining approval to market the combination of tezacaftor and ivacaftor will depend on many factors, including:

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

Even if a product is approved, the FDA or the European Commission, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials or reporting as conditions of approval. If we experience material delays in obtaining marketing approval for the combination of tezacaftor and ivacaftor in either the United States or Europe, our future net product revenues and cash flows will be adversely effected. If we do not obtain approval to market the combination of tezacaftor and ivacaftor in the United States or Europe, our business will be materially harmed. Additionally, even if the combination of tezacaftor and ivacaftor receives marketing approval, coverage and reimbursement may not be available and, even if it is available, the level of reimbursement may not be satisfactory. The regulations that govern pricing, coverage and reimbursement for drugs vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing approval is granted. Adverse pricing limitations or a delay in obtaining coverage and reimbursement will hinder our future net product revenues and may harm our business.

***We may not realize the anticipated benefits of our pending acquisition of CTP-656 from Concert Pharmaceuticals, Inc.***

In March 2017, we entered into an asset purchase agreement with Concert Pharmaceuticals, Inc., or Concert, pursuant to which we expect to acquire certain assets including CTP-656, an investigational CFTR potentiator that has the potential to be used as part of future once-daily combination regimens of CFTR modulators that treat the underlying cause of CF. Acquisitions are inherently risky and we may not realize the anticipated benefits of such transaction, which involves numerous risks including:

- that we fail to successfully develop and/or integrate CTP-656 into our pipeline in order to achieve our strategic objectives;
- that we receive inadequate or unfavorable data from clinical trials evaluating the CTP-656 in combination with other CFTR modulators; and
- the potential failure of the due diligence processes to identify significant problems, liabilities or other shortcomings or challenges of CTP-656 or any of the other assets acquired from Concert, including but not limited to, problems, liabilities or other shortcomings or challenges with respect to intellectual property, product quality, safety, and other known and unknown liabilities.

In addition, the acquisition remains subject to approval by Concert's shareholders and clearance under the Hart-Scott-Rodino Antitrust Improvements Act. If we do not complete the acquisition successfully and in a timely manner, we may not realize the benefits of the acquisition or license to the extent anticipated.

### 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, timing of our receipt of data from our ongoing and planned clinical trials and regulatory authority filings and submissions for our products and drug candidates, including the planned NDA and MAA submissions for tezacaftor in combination with ivacaftor and the ongoing and planned clinical trials to evaluate our next-generation correctors;
- our ability to successfully market KALYDECO and ORKAMBI or any of our other drug candidates for which we obtain regulatory approval;
- 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;
- the potential closing of the Concert transaction;
- 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, 2016, which was filed with the SEC on February 23, 2017. 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 Apr 28, 2017.
Source: SEC EDGAR, the filing index for accession 0000875320-17-000030. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.