# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Jun 30, 2017 - Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320) - Form: 10-Q - Filed: 2017-07-28 - Accepted by EDGAR: Jul 28, 2017, 20:23 ET - Period: 2017-06-30 - Accession: 0000875320-17-000047 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532017000047/a2017q210-q.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532017000047/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2017-06-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Cost of revenue | 6 months, 2017-01-01 to 2017-06-30 | $116.8m | us-gaap:CostOfGoodsSold | | Research and development | 3 months, 2017-04-01 to 2017-06-30 | $289.5m | us-gaap:ResearchAndDevelopmentExpense | | Research and development | 6 months, 2017-01-01 to 2017-06-30 | $563.0m | us-gaap:ResearchAndDevelopmentExpense | | Selling, general and administrative | 3 months, 2017-04-01 to 2017-06-30 | $127.2m | us-gaap:SellingGeneralAndAdministrativeExpense | | Selling, general and administrative | 6 months, 2017-01-01 to 2017-06-30 | $240.6m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 3 months, 2017-04-01 to 2017-06-30 | $52.7m | us-gaap:OperatingIncomeLoss | | Operating income | 6 months, 2017-01-01 to 2017-06-30 | $323.5m | us-gaap:OperatingIncomeLoss | | Income tax | 3 months, 2017-04-01 to 2017-06-30 | $4.3m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 6 months, 2017-01-01 to 2017-06-30 | $8.3m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2017-04-01 to 2017-06-30 | $18.0m | us-gaap:NetIncomeLoss | | Net income | 6 months, 2017-01-01 to 2017-06-30 | $265.8m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | $0.07 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | $1.06 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | $0.07 | us-gaap:EarningsPerShareBasic | | Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | $1.08 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 251,635,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 250,199,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 6 months, 2017-01-01 to 2017-06-30 | $447.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $28.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2017-06-30 | $1.22bn | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2017-06-30 | $2.18bn | us-gaap:AssetsCurrent | | Total assets | at 2017-06-30 | $3.29bn | us-gaap:Assets | | Current liabilities | at 2017-06-30 | $625.4m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2017-06-30 | $1.42bn | us-gaap:Liabilities | | Shareholders' equity | at 2017-06-30 | $1.67bn | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 57,321 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. Our two marketed products are ORKAMBI (lumacaftor in combination with ivacaftor) and KALYDECO (ivacaftor) and we are currently seeking approval for tezacaftor in combination with ivacaftor, which is a two-drug combination regimen for patients with CF. In addition, we are evaluating multiple triple combination regimens in patients with CF that include one or more next-generation CFTR corrector compounds in Phase 1 and Phase 2 clinical trials. ### Cystic Fibrosis ORKAMBI and KALYDECO are approved to treat approximately 40% of the 75,000 CF patients in North America, Europe and Australia. ORKAMBI is approved as a treatment for approximately 25,000 patients who have two copies of the F508del mutation, or F508del homozygous, in their cystic fibrosis transmembrane conductance regulator, or *CFTR*, gene. KALYDECO is approved for the treatment of approximately 5,000 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. If tezacaftor in combination with ivacaftor is approved, we expect that it would provide an additional treatment option primarily to CF patients who are currently eligible for either ORKAMBI or KALYDECO. If we are able to successfully develop a triple combination regimen that includes a next-generation CFTR corrector compound, including VX-440, VX-152, VX-659 or VX-445, we believe such regimen could potentially provide benefit to all CF patients who have at least one F508del mutation in their *CFTR* gene (approximately 90% of all CF patients). This would include (i) the first treatment option that treats the underlying cause of CF for patients who have one copy of the F508del mutation in their *CFTR* gene and a second mutation in their *CFTR* gene that results in minimal CFTR function, or F508del/Min patients, and (ii) an additional treatment option to CF patients who are eligible for either ORKAMBI, KALYDECO or, if approved, tezacaftor in combination with ivacaftor. #### Tezacaftor in combination with ivacaftor In the first quarter of 2017, we obtained positive results from two Phase 3 clinical trials of tezacaftor, a corrector compound, in combination with ivacaftor. The clinical trials demonstrated that the tezacaftor/ivacaftor combination provided 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 F508del homozygous patients with CF. 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 submitted 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, for tezacaftor in combination with ivacaftor in patients with CF 12 years of age and older who are F508del homozygous or who have one copy of the F508del mutation in their *CFTR* gene and a second mutation in their *CFTR* gene that results in residual CFTR function. In addition, we have completed enrollment in a Phase 3 clinical trial evaluating tezacaftor in combination with ivacaftor in patients 12 years of age or older who have one copy of the F508del mutation in their *CFTR* gene 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 expect to receive data from this clinical trial in the second half of 2017. We also 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. #### Next-generation CFTR corrector compounds In July 2017, we obtained positive results from Phase 1 and Phase 2 clinical trials of three different triple combination regimens in patients with CF who have one copy of the F508del mutation in their *CFTR* gene and a second mutation that results in minimal CFTR function. Initial data from the Phase 2 clinical trials showed mean absolute improvements in ppFEV1 of 9.7 and 12.0 percentage points for VX-152 (200mg q12h) and VX-440 (600mg q12h), respectively, in triple combination with tezacaftor and ivacaftor. Initial data from the Phase 1 clinical trial showed mean absolute improvement in ppFEV1 of 9.6 percentage points for VX-659 in triple combination with tezacaftor and ivacaftor. Additional data on VX-152 and VX-440, as well as data from ongoing or planned Phase 2 clinical trials of VX-445 and VX-659 are expected in late 2017 or early 2018. Pending additional data from these ongoing and planned clinical trials and discussions with regulatory agencies and a steering committee of global CF experts, we plan to initiate pivotal development of one or more triple combination regimens in the first half of 2018. Further information on the data from the Phase 1 and Phase 2 clinical trials of our next-generation CFTR corrector compounds is set forth below in the section titled “*Next-Generation Clinical Trial Data.”* #### ENaC Inhibition VX-371, an investigational epithelial sodium channel, or ENaC, inhibitor,, is being evaluated in a Phase 2 development program. We exclusively licensed VX-371 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 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 is 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 approximately 1% of our total revenues and total expenses on an annual basis. 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 out-licensing 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. To date, we have reached a pricing and reimbursement agreement for ORKAMBI with several European countries, including Germany, Ireland and Italy, and remain in negotiations with several others. 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 Transaction #### Concert Pharmaceuticals In July 2017, we acquired certain CF assets, including CTP-656, from Concert Pharmaceuticals, Inc., or Concert, pursuant to an agreement that we entered into in March 2017. 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. Pursuant to the agreement, in the third quarter of 2017, we paid 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. There was no accounting impact relating to this agreement during the six months ended June 30, 2017. In the third quarter of 2017, we expect to record the $160 million payment as a research and development expense. ### Next-Generation Clinical Trial Data #### VX-440 We are evaluating VX-440 (200mg and 600mg q12h) in combination with tezacaftor and ivacaftor as part of a randomized, double-blind Phase 2 clinical trial in F508del/Min patients and in F508del homozygous patients, in each case who are 18 years of age and older. The primary objectives for the clinical trial are safety, tolerability and efficacy as assessed by mean absolute change in ppFEV1 from baseline. Secondary endpoints include change in sweat chloride and Cystic Fibrosis Questionnaire-Revised, or CFQ-R. In July 2017, we obtained initial data from this clinical trial, which is set forth below. **Overall Safety Data**: In the clinical trial, the triple combination regimen was generally well tolerated. The majority of adverse events were mild or moderate. The most common adverse events (\>10%), regardless of treatment group, were infective pulmonary exacerbation, cough, sputum increased and diarrhea. There was one discontinuation due to an adverse event in the triple combination treatment groups (elevated liver enzymes \>5x upper limit of normal in the VX-440 600mg group) and one in the control groups (respiration abnormal and sputum increased). One additional patient treated with the triple combination had elevated liver enzymes (\>8x upper limit of normal in the VX-440 600mg group), which were observed on the final day of dosing. In both patients, the elevated liver enzymes returned to normal after treatment discontinuation or completion. **4-Week Efficacy Data in F508del/Min Patients**: The first part of the clinical trial evaluated the triple combination for four weeks in 47 F508del/Min patients (11 in placebo, 18 in VX-440 200mg and 18 in VX-440 600mg). A summary of the within-group lung function and sweat chloride data is provided below: *VX-440 in F508del/Min Patients* | | | | | --- | --- | --- | | **Mean Absolute Within-Group Change From Baseline Through Day 29\*** | **Mean Absolute Within-Group Change in ppFEV1 (percentage points)** | **Mean Absolute Within-Group Change in Sweat Chloride (mmol/L)** | | Triple placebo | +1.4 (p=0.4908) | +1.6 (p=0.6800) | | VX-440 (200mg q12h) + tezacaftor (50mg q12h or 100mg QD) + ivacaftor (150mg q12h) | +10.0 (p\<0.0001) | -20.7 (p\<0.0001) | | VX-440 (600mg q12h) + tezacaftor (50mg q12h) + ivacaftor (300mg q12h) | +12.0 (p\<0.0001) | -33.1 (p\<0.0001) | | \* all p values are within group p-values based on mixed effect models; values expressed as ‘Through Day 29’ are the average of Day 15 and Day 29 measures | | | A secondary endpoint in the clinical trial measured mean absolute change in the Respiratory Domain of CFQ-R, a validated patient-reported outcome tool at Day 29. In this clinical trial, the mean absolute improvement for patients with a minimal function mutation who received the triple combination were 18.3 points (VX-440 200mg) and 20.7 points (VX-440 600mg). The improvement for those who received placebo was 2.2 points. **4-Week Efficacy Data in F508del Homozygous Patients**: The second part of the clinical trial is ongoing and aims to evaluate the addition of VX-440 for four weeks in 26 F508del homozygous patients who were already receiving the combination of tezacaftor and ivacaftor (6 in placebo and 20 in VX-440 600mg). In this part of the clinical trial, all participants received four weeks of treatment with tezacaftor and ivacaftor and were then randomized to the addition of VX-440 or placebo for four additional weeks. A summary of the within-group lung function and sweat chloride data for the triple combination treatment period, from baseline (end of the 4-week tezacaftor/ivacaftor run-in period), is provided below: *VX-440 in F508del/F508del Patients* | | | | | --- | --- | --- | | **Mean Absolute Within-Group Change From Baseline Through Day 29\*** | **Mean Absolute Within-Group Change in ppFEV1 (percentage points)** | **Mean Absolute Within-Group Change in Sweat Chloride (mmol/L)** | | Placebo + tezacaftor (100mg QD) + ivacaftor (150mg q12h) | -2.5 (p=0.2755) | +2.1 (p=0.7385) | | VX-440 (600mg q12h) + tezacaftor (50mg q12h) + ivacaftor (300mg q12h) | +9.5 (p\<0.0001) | -31.3 (p\<0.0001) | | \* all p values are within group p-values based on mixed effect models; values expressed as ‘Through Day 29’ are the average of Day 15 and Day 29 measures | | | The safety follow-up portion of the clinical trial in F508del homozygous patients is ongoing. #### VX-152 We are evaluating VX-152 (100mg, 200mg and 300mg q12h) in combination with tezacaftor and ivacaftor as part of a randomized, double-blind Phase 2 clinical trial in F508del/Min patients and in F508del homozygous patients who are 18 years of age and older. The primary objective for the clinical trial is safety and tolerability. Secondary endpoints include mean absolute change in ppFEV1 and change in sweat chloride. In July 2017, we obtained data from the 100mg and 200mg arms of the clinical trial in F508del/Min patients and from the 200mg arm in F508del homozygous patients. **Safety Data**: In the clinical trial, the triple combination regimen was generally well tolerated. The majority of adverse events were mild or moderate. The most common adverse events (\>10%), regardless of treatment group, were cough, sputum increased, infective pulmonary exacerbation, productive cough, diarrhea and fatigue. There was one discontinuation due to an adverse event in the triple combination treatment groups (pneumonia in the VX-152 200mg group) and none in the control groups. **2-Week Initial Efficacy Data in F508del/Min Patients**: In the first part of the clinical trial, the triple combination was evaluated for two weeks in 21 F508del/Min patients 18 years of age and older (5 in combined placebo, 6 in VX-152 100mg and 10 in VX-152 200mg). A summary of the initial within-group lung function and sweat chloride data (secondary endpoints) from the VX-152 100mg and 200mg dose groups is provided below. *VX-152 in F508del/Min Patients* | | | | | --- | --- | --- | | **Observed Mean Absolute Within-Group Change from Baseline at Day 15\*** | **Observed Mean Absolute Within-Group Change in ppFEV1 (percentage points)** | **Observed Mean Absolute Within-Group Change in Sweat Chloride (mmol/L)** | | Triple placebo | -0.9 (p=0.6245) | +1.0 (p=0.5659) | | VX-152 (100mg q12h) + tezacaftor (100mg QD) + ivacaftor (150mg q12h) | +5.6 (p=0.0135) | -19.6 (p=0.0004) | | VX-152 (200mg q12h) + tezacaftor (100mg QD) + ivacaftor (150mg q12h) | +9.7 (p=0.0017) | -14.1 (p=0.0219) | | \* p-values presented are within-group p-values based on 1 sample t-test; an efficacy analysis using mixed effect models will be conducted following completion of an additional cohort of patients currently being treated in the clinical trial | | | The first part of the clinical trial is ongoing to evaluate the triple combination of VX-152 (300mg q12h), tezacaftor and ivacaftor in F508del/Min patients. We expect this data to be available later in 2017. **2-Week Initial Efficacy Data in F508del Homozygous Patients**: The second part of the clinical trial is ongoing to evaluate the addition of VX-152 for two weeks in 14 F508del homozygous patients 18 years of age and older who were already receiving the combination of tezacaftor and ivacaftor (4 in placebo and 10 in VX-152 200mg). A summary of the initial within-group lung function and sweat chloride data (secondary endpoints) for the triple combination treatment period, from baseline (end of the 4-week tezacaftor/ivacaftor run-in period), is provided below: *VX-152 in F508del/F508del Patients* | | | | | --- | --- | --- | | **Observed Mean Absolute Within-Group Change from Baseline at Day 15\*** | **Observed Mean Absolute Within-Group Change in ppFEV1 (percentage points)** | **Observed Mean Absolute Within-Group Change in Sweat Chloride (mmol/L)** | | Placebo + tezacaftor (100mg QD) + ivacaftor (150mg q12h) | -1.4 (p=0.2773) | +3.4 (p=0.1212) | | VX-152 (200mg q12h) + tezacaftor (100mg QD) + ivacaftor (150mg q12h) | +7.3 (p=0.0354) | -20.9 (p=0.0010) | | \* p-values presented are within-group p-values based on 1 sample t-test; an efficacy analysis using mixed effect models will be conducted following completion of an additional cohort of patients currently being treated in the clinical trial | | | The second part of the clinical trial is ongoing to evaluate the addition of VX-152 (300mg q12h) for four weeks in F508del homozygous patients who are already receiving the combination of tezacaftor and ivacaftor. We expect this data to be available in early 2018. #### VX-659 We completed a randomized, double-blind, placebo-controlled Phase 1 clinical trial of single and multiple ascending doses of VX-659 alone and in triple combination with tezacaftor and ivacaftor in healthy volunteers. The clinical trial also evaluated the safety and tolerability of VX-659 as part of a triple combination for two weeks in 12 F508del/Min patients 18 years of age and older (3 in placebo and 9 in VX-659 120mg). In this part of the clinical trial, sweat chloride was evaluated as an additional endpoint, and the absolute change in ppFEV1 was evaluated as part of the safety analysis. In patients with CF, VX-659 was generally well tolerated in triple combination with tezacaftor and ivacaftor. The majority of adverse events were mild or moderate. The most common adverse events (\>10%), regardless of treatment group, were cough, infective pulmonary exacerbation and productive cough. There were no discontinuations due to adverse events in either group. At Day 15, there was a mean absolute improvement in ppFEV1 of +9.6 percentage points from baseline in those receiving the triple combination regimen of VX-659 (120mg q12h), tezacaftor and ivacaftor and a mean decrease in sweat chloride of -41.6 mmol/L. For those receiving placebo, there was a mean absolute decrease in ppFEV1 of -0.4 percentage points and a mean decrease in sweat chloride of 11.0 mmol/L. #### Risks associated with Next-Generation CFTR Corrector Compounds The continued development of our next-generation CFTR corrector compounds remains subject to a number of risks and uncertainties including, among other things, (i) that we could experience unforeseen delays in conducting our development programs relating to triple combination treatments and in submitting related regulatory filings, (ii) that the initial results set forth above may differ from the final results from these ongoing clinical trials and may not be predictive of results in future clinical trials, (iii) that regulatory authorities may not approve, or approve on a timely basis, triple combination treatments due to safety, efficacy or other reasons, and (iv) and other risks listed under Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K, filed with the SEC on February 23, 2017. ### RESULTS OF OPERATIONS *(in thousands)* *(in thousands)* | | Three Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | Six Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Revenues | $544,135 | $431,608 | $112,527 | 26% | $1,258,853 | $829,688 | $429,165 | 52% | | Operating costs and expenses | 491,428 | 428,255 | 63,173 | 15% | 935,304 | 840,665 | 94,639 | 11% | | Other items, net | (34,711) | (67,878) | 33,167 | 49% | (57,797) | (95,179) | 37,382 | 39% | | Net income (loss) attributable to Vertex | $17,996 | $(64,525) | $82,521 | n/a | $265,752 | $(106,156) | $371,908 | n/a | ### Net Income (Loss) Attributable to Vertex Net income attributable to Vertex was $18.0 million in the second quarter of 2017 as compared to a net loss attributable to Vertex of $(64.5) million in the second quarter of 2016. Our revenues increased in the second quarter of 2017 as compared to the second quarter of 2016 primarily due to increased ORKAMBI net product revenues. Our operating costs and expenses increased in the second quarter of 2017 as compared to the second quarter of 2016 primarily due to increases in cost of product revenues, research and development expenses and sales, general and administrative expenses. Net income attributable to Vertex was $265.8 million in the first half of 2017 as compared to a net loss attributable to Vertex of $(106.2) million in the first half of 2016. Our revenues increased significantly in the first half of 2017 as compared to the first half 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 half of 2017 as compared to the first half of 2016 primarily due to increases in cost of product revenues, research and development expenses, sales, general and administrative expenses and restructuring expenses. ### Diluted Net Income (Loss) Per Share Attributable to Vertex Common Shareholders Diluted net income per share attributable to Vertex common shareholders was $0.07 in the second quarter of 2017 as compared to a diluted net loss per share attributable to Vertex common shareholders of $(0.26) in the second quarter of 2016. Diluted net income per share attributable to Vertex common shareholders was $1.06 in the first half of 2017 as compared to a diluted net loss per share attributable to Vertex common shareholders of $(0.43) in the first half of 2016. ### Revenues *(in thousands)* *(in thousands)* | | Three Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | Six Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Product revenues, net | $513,988 | $425,651 | $88,337 | 21% | $994,610 | $820,061 | $174,549 | 21% | | Royalty revenues | 2,861 | 5,282 | (2,421) | (46)% | 4,412 | 8,878 | (4,466) | (50)% | | Collaborative revenues | 27,286 | 675 | 26,611 | n/a | 259,831 | 749 | 259,082 | n/a | | Total revenues | $544,135 | $431,608 | $112,527 | 26% | $1,258,853 | $829,688 | $429,165 | 52% | ### Product Revenues, Net *(in thousands)* *(in thousands)* | | Three Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | Six Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | ORKAMBI | $324,407 | $245,496 | $78,911 | 32% | $619,268 | $468,624 | $150,644 | 32% | | KALYDECO | 189,633 | 180,235 | 9,398 | 5% | $375,348 | $350,744 | $24,604 | 7% | | INCIVEK | (52) | (80) | 28 | 35% | (6) | 693 | (699) | n/a | | Total product revenues, net | $513,988 | $425,651 | $88,337 | 21% | $994,610 | $820,061 | $174,549 | 21% | Our total net product revenues increased in the second quarter and first half of 2017 as compared to the second quarter and first half of 2016 primarily due to increased net product revenues from ORKAMBI. In the second quarter and first half of 2017, we recognized approximately $36.3 million and $67.7 million, respectively, in ex-U.S. ORKAMBI net product revenues, as compared to $15.9 million and $24.7 million in the second quarter and first half of 2016, respectively. Our condensed consolidated balance sheets include $147.7 million collected as of June 30, 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. KALYDECO net product revenues increased in the second quarter of 2017 as compared to the second quarter of 2016 primarily due to additional patients being treated with KALYDECO as a result of label expansions. The increase in KALYDECO net product revenues in the first half of 2017 as compared to the first half 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 second quarter and first half of 2017, we recognized approximately $78.0 million and $162.2 million, respectively, in ex-U.S. KALYDECO net product revenues, as compared to $76.9 million and $152.5 million in the second quarter and first half of 2016, respectively. We have withdrawn INCIVEK, which we previously marketed as a treatment for hepatitis C virus infection, from the market in the United States. ### Royalty Revenues Our royalty revenues were $2.9 million and $4.4 million in the second quarter and first half of 2017, respectively, as compared to $5.3 million and $8.9 million in the second quarter and first half of 2016, respectively. Our royalty revenues primarily consist of revenues related to a cash payment we received in 2008 when we sold our rights to certain HIV royalties. ### Collaborative Revenues Our collaborative revenues were $27.3 million and $259.8 million in the second quarter and first half of 2017, respectively, as compared to $0.7 million and $0.7 million in the second quarter and first half of 2016, respectively. The increase in our collaborative revenues during the second quarter of 2017 as compared to the second quarter of 2016 was primarily related to a $20.0 million upfront payment received by Parion, one of our VIEs, in the second quarter of 2017 as part of a license agreement it entered into with a third party. We are not a party to such license agreement and have no economic interest in either the license or the $20.0 million upfront payment. The increase in our collaborative revenues during the first half of 2017 as compared to the first half 2016 was primarily due to revenue recognized related to the one-time upfront payment Merck KGaA paid 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)* *(in thousands)* | \` | Three Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | Six Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Cost of product revenues | $70,535 | $44,154 | $26,381 | 60% | $116,777 | $93,943 | $22,834 | 24% | | Royalty expenses | 670 | 1,098 | (428) | (39)% | 1,416 | 1,958 | (542) | (28)% | | Research and development expenses | 289,451 | 271,008 | 18,443 | 7% | 563,014 | 526,868 | 36,146 | 7% | | Sales, general and administrative expenses | 127,249 | 111,652 | 15,597 | 14% | 240,575 | 216,866 | 23,709 | 11% | | Restructuring expenses, net | 3,523 | 343 | 3,180 | n/a | 13,522 | 1,030 | 12,492 | n/a | | Total costs and expenses | $491,428 | $428,255 | $63,173 | 15% | $935,304 | $840,665 | $94,639 | 11% | ### 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. As a result of the tiered royalty rate, our cost of product revenues as a percentage of CF product revenues is lower at the beginning of each calendar year. In the second quarter of 2017, our cost of product revenues increased as compared to the second quarter of 2016 primarily due to the increased CF net product revenues and the increased third party royalty rate. In the second half of 2017, we expect our cost of product revenues as a percentage of total CF product revenues to be similar to the cost of product revenues as a percentage of total CF product revenues in the second quarter of 2017. In the first half 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. ### Royalty Expenses Royalty expenses primarily consist of 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. ### Research and Development Expenses *(in thousands)* *(in thousands)* | | Three Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | Six Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Research expenses | $77,222 | $79,886 | $(2,664) | (3)% | $150,278 | $142,896 | $7,382 | 5% | | Development expenses | 212,229 | 191,122 | 21,107 | 11% | 412,736 | 383,972 | 28,764 | 7% | | Total research and development expenses | $289,451 | $271,008 | $18,443 | 7% | $563,014 | $526,868 | $36,146 | 7% | 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 $3.5 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 first half of 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 recently submitted an NDA and an MAA for tezacaftor in combination with ivacaftor. We cannot make a meaningful estimate when, if ever, our other clinical development programs will generate revenues and cash flows. #### Research Expenses *(in thousands)* *(in thousands)* | Research Expenses: | Three Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | Six Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Salary and benefits | $19,508 | $19,268 | $240 | 1% | $41,041 | $39,978 | $1,063 | 3% | | Stock-based compensation expense | 15,034 | 13,409 | 1,625 | 12% | 28,725 | 24,065 | 4,660 | 19% | | Laboratory supplies and other direct expenses | 11,824 | 11,810 | 14 | —% | 23,189 | 21,684 | 1,505 | 7% | | Outsourced services | 12,077 | 6,534 | 5,543 | 85% | 19,414 | 10,695 | 8,719 | 82% | | Collaboration and asset acquisition payments | — | 11,000 | (11,000) | (100)% | — | 11,000 | (11,000) | (100)% | | Infrastructure costs | 18,779 | 17,865 | 914 | 5% | 37,909 | 35,474 | 2,435 | 7% | | Total research expenses | $77,222 | $79,886 | $(2,664) | (3)% | $150,278 | $142,896 | $7,382 | 5% | We maintain a substantial investment in research activities. Our research expenses decreased by 3% in the second quarter of 2017 as compared to the second quarter of 2016 and increased by 5% in the first half of 2017 as compared to the first half 2016. Collaboration and asset acquisition payments in the second quarter and first half of 2016 included $11.0 million in expenses related to the acquisition of early-stage research assets for which there were no comparable expenses in the second quarter and first half of 2017. 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, 2017 | 2016 | Increase/(Decrease) $% | | Six Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Salary and benefits | $50,680 | $45,062 | $5,618 | 12% | $102,634 | $89,413 | $13,221 | 15% | | Stock-based compensation expense | 28,798 | 27,231 | 1,567 | 6% | 59,944 | 51,023 | 8,921 | 17% | | Laboratory supplies and other direct expenses | 12,313 | 13,005 | (692) | (5)% | 23,343 | 21,255 | 2,088 | 10% | | Outsourced services | 88,855 | 71,555 | 17,300 | 24% | 162,290 | 156,043 | 6,247 | 4% | | Drug supply costs | 1,043 | 4,204 | (3,161) | (75)% | 2,992 | 6,857 | (3,865) | (56)% | | Infrastructure costs | 30,540 | 30,065 | 475 | 2% | 61,533 | 59,381 | 2,152 | 4% | | Total development expenses | $212,229 | $191,122 | $21,107 | 11% | $412,736 | $383,972 | $28,764 | 7% | Our development expenses increased by 11% in the second quarter of 2017 as compared to the second quarter of 2016 and increased by 7% in the first half 2017 as compared to the first half of 2016, primarily due to increased outsourced services expenses related to ongoing clinical trials, including trials involving our next-generation CFTR corrector compounds that we are evaluating as part of triple combination treatment regimens. In the second half of 2017, we expect our development expenses to increase as compared to the first half of 2017 due to expenses related to the advancement of our triple-combination regimens and the $160 million upfront payment to Concert that we expect to be reflected as a development expense in our condensed consolidated statement of operations in the third quarter of 2017. ### Sales, General and Administrative Expenses *(in thousands)* *(in thousands)* | | Three Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | Six Months Ended June 30, 2017 | 2016 | Increase/(Decrease) $% | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Sales, general and administrative expenses | $127,249 | $111,652 | $15,597 | 14% | $240,575 | $216,866 | $23,709 | 11% | Sales, general and administrative expenses increased by 14% in the second quarter of 2017 as compared to the second quarter of 2016 and increased by 11% in the first half 2017 as compared to the first half 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 $3.5 million and $13.5 million in the second quarter and the first half of 2017, respectively, as compared to restructuring expenses of $0.3 million and $1.0 million in the second quarter and first half of 2016, respectively. The increases in our restructuring expenses in the second quarter and first half 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 $14.7 million and $31.4 million in the second quarter and first half of 2017, respectively, as compared to $20.2 million and $40.9 million in the second quarter and first half of 2016, respectively. The decrease in interest expense, net in the second quarter and first half of 2017 as compared to the second quarter and first half 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 $30 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 $2.5 million and $3.1 million in the second quarter and first half of 2017 as compared to expense of $1.2 million in the second quarter of 2016 and income of $3.2 million in the first half of 2016. Other (expense) income, net in each of the second quarter and first half of 2017 and the second quarter and first half of 2016 was primarily due to foreign exchange gains and losses. ### Income Taxes We recorded a provision for income taxes of $4.3 million and $8.3 million in the second quarter and first half of 2017 as compared to $18.1 million and $23.6 million in the second quarter and first half of 2016. The provision for income taxes in the second quarter and first half of 2017 included approximately $7.4 million in income tax to Parion, one of our VIEs, associated with Parion’s entry into a license agreement with a third party in the second quarter of 2017. The provision for income taxes in the second quarter and first half of 2016 was primarily 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 (income) loss 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 and six months ended June 30, 2017 and 2016 is as follows: *(in thousands)* | | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 | | --- | ---: | ---: | ---: | ---: | | (Income) loss attributable to noncontrolling interest before provision for income taxes and changes in fair value of contingent payments | $(18,045) | $2,835 | $(16,498) | $3,674 | | Provision for income taxes | 8,132 | 17,511 | 8,523 | 20,573 | | Increase in fair value of contingent payments | (3,260) | (48,720) | (6,990) | (58,150) | | Net income attributable to noncontrolling interest | $(13,173) | $(28,374) | $(14,965) | $(33,903) | ### LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2017, we had cash, cash equivalents and marketable securities of $1.67 billion, which represented an increase of $234 million from $1.43 billion as of December 31, 2016. In the first half of 2017, our cash, cash equivalents and marketable securities balance increased due to cash received from our collaboration with Merck KGaA in the first quarter of 2017 and cash receipts from product sales, partially offset by the $300.0 million repayment of our revolving credit facility in the first quarter of 2017. 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 the first half of 2017, we received significant proceeds from the issuance of common stock under our employee benefit plans, but the amount and timing of future proceeds from employee benefits plans is uncertain. Other possible sources of liquidity include strategic collaborative agreements that include research and/or development funding, commercial debt, public and private offerings of our equity and debt securities, development milestones and royalties on sales of products, software and equipment leases, strategic sales of assets or businesses and financial transactions. Negative covenants in our credit agreement may prohibit or limit our ability to access these sources of liquidity. ### Future Capital Requirements We incur substantial operating expenses to conduct research and development activities and to operate our organization. Under the terms of our credit agreement entered into in October 2016, we are required to repay any 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 target and we may enter into additional business development transactions that require additional capital. For example, we paid Concert $160.0 million in the third quarter of 2017 to acquire certain CF assets including CTP-656. 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 July 2017, we acquired certain CF assets including CTP-656 from Concert pursuant to an asset purchase agreement. At closing, we paid Concert $160 million in cash for all worldwide development and commercialization rights to CTP-656 and may be required to pay up to an additional $90 million in milestones based on regulatory approval in the U.S. and reimbursement in the UK, Germany or France. ### 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, 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, 3,220 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, 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 June 30, 2017, we held foreign exchange forward contracts with notional amounts totaling $310.4 million. As of June 30, 2017, our outstanding foreign exchange forward contracts had a net fair value of $(8.5) million. Based on our foreign currency exchange rate exposures at June 30, 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 $31.0 million at June 30, 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, 1,477 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, 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 June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ## Risk factors As filed, 16,569 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 the Annual Report on Form 10-K, except that the first four risk factors set forth below shall replace the first three risk factors set forth in the Annual Report on Form 10-K and the fifth risk factor set forth below shall be added as a new risk factor. ***All of our product revenues and the vast majority of our total revenues are derived from sales of medicines for the treatment of cystic fibrosis. If we are unable to continue to increase revenues from sales of our cystic fibrosis medicines or if we do not meet the expectations of investors or public equity market analysts, our business would be materially harmed and the market price of our common stock would likely decline.*** Substantially all of our product revenues and the vast majority of our total revenues are derived from the sale of CF medicines. As a result, our future success is dependent on our ability to continue to increase revenues from sales of our CF medicines. In the near term, this will require us to maintain KALYDECO net product revenues and increase ORKAMBI net product revenues. In the medium term, this will require us to obtain approval for, and successfully commercialize, tezacaftor in combination with ivacaftor. In the longer term, this will require us to successfully develop, obtain approval for and commercialize at least one triple-combination therapy that will allow us to treat patients who have one copy of the F508del mutation in their *CFTR* gene and a second mutation in their *CFTR* gene that results in minimal CFTR function and to improve the treatment options available to patients with CF who are eligible for our current medicines. If we are unable to increase our CF product revenues or if we experience adverse developments with respect to development or commercialization of our CF medicines, our results of operations will be adversely affected and our business will be materially harmed. ***We are investing significant resources in the development of our next-generation CFTR corrector compounds in triple combinations and if we are unable to show the safety and efficacy of these compounds, experience delays in doing so or are unable to successfully commercialize at least one of these medicines, our business would be materially harmed.*** We are investing significant resources in the development of our next-generation CFTR corrector compounds, including VX-152, VX-440, VX-659 and VX-445, which we are evaluating as part of triple combination treatment regimens for the treatment of patients with CF. We believe that a significant portion of the long-term value attributed to our company by investors is based on the commercial potential of these triple-combination therapies. In July 2017, we obtained initial positive results from Phase 2 clinical trials of VX-152 and VX-440 and a Phase 1 clinical trial of VX-659. In each case, these clinical trials enrolled a limited number of patients with CF and we expect to receive additional information regarding these compounds in the second half of 2017 and early 2018. Based on these results, we expect to initiate pivotal programs to evaluate one or more of these triple combination regimens in the first half of 2018. In order to ultimately obtain approval for a triple-combination regimen, we will need to demonstrate that the compounds are safe and effective in a significantly larger number of patients than were involved in the clinical trials conducted to date. Initial results from ongoing clinical trials may differ materially from final results from such clinical trials. The results from preclinical and early clinical studies do not always accurately predict results in later, large-scale clinical trials. If the data from our ongoing or planned clinical trials or non-clinical studies of triple combination regimens including our next-generation CFTR compounds are not favorable, the FDA and comparable foreign regulatory authorities may not approve these treatment regimens and/or we may be forced to delay or terminate the development of these treatment regimens, which would have an adverse effect on our business. Even successfully completed large-scale clinical trials may not result in marketable medicines. If a triple combination that includes a next-generation CFTR corrector compounds fails to achieve its primary endpoint in clinical trials, if safety issues arise or if the results from our clinical trials are otherwise inadequate to support regulatory approval of our triple combination therapies, commercialization of that combination regimen could be delayed or halted. Even if we gain marketing approval for one or more combination therapies containing a next-generation CFTR corrector compound in a timely manner, we cannot be sure that such combination therapy will be commercially successful. In addition, since we expect that a significant portion of the patients for whom a triple combination treatment regimen would be indicated would also be eligible for our then existing medicines, a portion of the revenues from our triple combination regimens will likely displace revenues from our then marketed products reducing the overall effect of the commercialization of our triple combination regimens on our total revenues. If the anticipated or actual timing of marketing approvals for these compounds, or the market acceptance of these compounds, if approved, including treatment reimbursement levels agreed to by third-party payors, do not meet the expectations of investors or public market analysts, the market price of our common stock would likely decline. ***Our business currently depends heavily on ORKABMI and KALYDECO net product revenues and we expect to continue to depend on these revenues at least until we obtain approval for tezacaftor in combination with ivacaftor.*** Our two marketed medicines are ORKAMBI and KALYDECO, which are approved to treat patients with CF who have specific mutations in their *CFTR* gene. ORKAMBI and KALYDECO net product revenues represented approximately 49% and 30% of our total revenues in the first half of 2017, respectively, and we expect ORKAMBI and KALYDECO net product revenues to represent substantially all of our total revenues for the remainder of 2017. A majority of our net product revenues are from sales of ORKAMBI and most of our ORKAMBI net product revenues have come from the United States. We have recognized limited ex-U.S. net product revenues due to the ongoing reimbursement discussions in many ex-U.S. countries and have experienced challenges in the commercialization of ORKAMBI both in the United States and in ex-U.S. markets. Our ORKAMBI U.S. revenues have been affected by uptake, discontinuations and compliance rates. Our ORKAMBI ex-U.S. revenues have been affected by the same factors as our U.S. ORKAMBI revenues and challenges with respect to obtaining reimbursement for ORKAMBI in ex-U.S. markets. Factors that affect our ORKAMBI net product revenues include: - the rate at which patients initiate treatment of ORKAMBI, the proportion of initiated patients who remain on treatment and the compliance rate for patients who remain on treatment; - the safety and efficacy profile of ORKAMBI; - our ability to obtain reimbursement for ORKAMBI and any changes in reimbursement policies of payors and other third parties; and - legal, administrative, regulatory or legislative developments, including pricing limitations. Since the regulations that govern pricing, coverage and reimbursement for drugs vary widely from country to country, there is no assurance that coverage and reimbursement will be available outside of the United States and, even if it is available, the timing or the level of reimbursement may not be satisfactory. Adverse pricing limitations or a delay in obtaining coverage and reimbursement would decrease our future net product revenues and harm our business. If we continue to experience challenges with the commercialization of ORKAMBI or are unable to sustain KALYDECO net product revenues or if either medicine were to become subject to problems such as safety or efficacy issues, the introduction or greater acceptance of competing products, changes in reimbursement policies of payors and other third parties, or adverse legal, administrative, regulatory or legislative developments, our ability commercialization of our products would be impaired and our stock price would likely decline. ***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, or reimbursement arrangements relating to, tezacaftor in combination with ivacaftor, our business could 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 submitted an NDA in the United States and an MAA in Europe for this potential combination regimen. Obtaining approval of an NDA or an MAA is a lengthy, expensive and uncertain process, and we may not be successful. Obtaining approval depends 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 the combination regimen is safe; and - whether or not the FDA and European regulatory authorities are satisfied that the manufacturing facilities, processes and controls for the combination are adequate, that the labeling is satisfactory and that plans for post-marketing studies, safety monitoring and risk evaluation and mitigation are sufficient. 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. Even if a tezacaftor in combination with ivacaftor 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. ***We may not realize the anticipated benefits of our acquisition of CTP-656 from Concert Pharmaceuticals, Inc.*** In July 2017, we acquired certain CF assets from Concert Pharmaceuticals, Inc., or Concert, 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. ### 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 NDA and MAA submission for tezacaftor in combination with ivacaftor and the ongoing and planned clinical trials to evaluate our next-generation CFTR 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; - our post-closing integration of the assets acquired from Concert; - 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 Jul 28, 2017. Source: SEC EDGAR, the filing index for accession 0000875320-17-000047. Last ingested by Listed: Nov 11, 2026, 01:11 ET. 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