# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Sep 30, 2017

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2017-10-30
- Accepted by EDGAR: Oct 30, 2017, 21:15 ET
- Period: 2017-09-30
- Accession: 0000875320-17-000060
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532017000060/a2017q310-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532017000060/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Research and development | 3 months, 2017-07-01 to 2017-09-30 | $454.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2017-01-01 to 2017-09-30 | $1.02bn | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2017-07-01 to 2017-09-30 | $120.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2017-01-01 to 2017-09-30 | $361.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | −$326.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2017-01-01 to 2017-09-30 | −$2.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | −$125.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-01-01 to 2017-09-30 | −$117.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | −$103.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-01-01 to 2017-09-30 | $162.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | −$0.41 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2017-01-01 to 2017-09-30 | $0.64 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-07-01 to 2017-09-30 | −$0.41 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2017-01-01 to 2017-09-30 | $0.66 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-07-01 to 2017-09-30 | 250,268,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2017-01-01 to 2017-09-30 | 252,095,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2017-01-01 to 2017-09-30 | $617.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2017-01-01 to 2017-09-30 | $56.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-09-30 | $1.38bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $2.33bn | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $3.20bn | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $710.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $1.40bn | us-gaap:Liabilities |
| Shareholders' equity | at 2017-09-30 | $1.79bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 57,672 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. We currently are evaluating multiple triple combination regimens that include next-generation CFTR corrector compounds in patients with CF in Phase 2 clinical trials and plan to initiate pivotal development of one or two triple-combination regimens in the first half of 2018.

### Cystic Fibrosis

ORKAMBI and KALYDECO are collectively 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 6,000 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.

#### ORKAMBI

In October 2017, we obtained results from a 2-part open-label Phase 3 clinical trial of ORKAMBI in 60 patients with CF two to five years of age who have two copies of the F508del mutation in their CFTR gene. The clinical trial met its primary endpoint of safety, showing ORKAMBI was generally well tolerated and that there were no new safety concerns compared to prior clinical trials of ORKAMBI in patients six through eleven years of age. Secondary endpoints showed decreases in the sweat chloride and improvements in nutritional status as measured by change in weight (weight-for-age z score) and body mass index (BMI-for-age z score). Based on these results, we expect 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, line extension to the European Medicines Agency, or EMA, in the first quarter of 2018.

#### KALYDECO

We are evaluating KALYDECO in a Phase 3 clinical trial in patients with CF two years of age and younger with one of 10 gating and R117H mutations. The clinical trial will evaluate the safety of KALYDECO in this age group. We have completed enrollment in patients aged 12 to 24 months.

#### 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 NDA to the FDA and an MAA to the 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. The FDA has granted us priority review of the NDA and the target date for the FDA to complete its review of the NDA under the Prescription Drug User Fee Act, or PDUFA, is February 28, 2018. We expect the EMA to complete its review in the second half of 2018.

In October 2017, we announced top-line results from a Phase 3, randomized, double-blind, parallel group, clinical trial evaluating the combination of tezacaftor and ivacaftor in patients with CF 12 years of age and older who were already receiving ivacaftor monotherapy with one copy of the F508del mutation and one copy of a gating mutation. The clinical trial enrolled 151 patients with CF. The clinical trial did not meet its primary endpoint of absolute change in ppFEV1 from baseline through 8 weeks. For those receiving the combination of tezacaftor and ivacaftor, ppFEV1 improved by 0.5 percentage points compared to 0.2 percentage points in those receiving placebo in addition to ivacaftor (p=0.5846). Safety data from the clinical trial showed that the combination of tezacaftor and ivacaftor was generally well tolerated and were consistent with prior Phase 3 clinical trials of the tezacaftor/ivacaftor combination. Secondary endpoints were changes in sweat chloride and change in CFQ-R. Sweat chloride decreased by 5.8 mmol/L in those who received tezacaftor in combination with ivacaftor as compared to those who received placebo in addition to ivacaftor (p=0.0216). There was no change in CFQ-R in the combination group compared to the ivacaftor monotherapy group. Based on these results, we do not plan to seek regulatory approval for tezacaftor in combination with ivacaftor for these patients, the vast majority of whom are eligible for KALYDECO monotherapy.

#### 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. We amended our ongoing Phase 2 clinical trials of VX-445 and VX-659 to include additional cohorts of patients to evaluate these next-generation CFTR corrector compounds as part of a potential once-daily combination with tezacaftor and VX-561 (formerly CTP-656), the latter of which we acquired from Concert Pharmaceuticals, Inc., or Concert, in the third quarter of 2017. We expect to report additional data on our next-generation corrector program in early 2018. Pending data from these clinical trials and discussions with regulatory agencies, we plan to initiate pivotal development of one or two triple combination regimens in the first half of 2018.

#### ENaC Inhibition

VX-371 is an investigational epithelial sodium channel, or ENaC, inhibitor, that we exclusively licensed from Parion Sciences, Inc., or Parion, in 2015. In October 2017, we announced the results of a Phase 2 28-day clinical trial evaluating VX-371 + hypertonic saline versus hypertonic saline alone in 142 patients with CF 12 years of age and older who are homozygous for the F508del mutation and were already receiving ORKAMBI and continued to receive ORKAMBI throughout the clinical trial. The clinical trial did not meet its primary efficacy endpoint. In patients being treated with ORKAMBI, the addition of hypertonic saline resulted in a decrease of 0.1 percentage points ppFEV1 at day 28. In patients being treated with ORKAMBI, the addition of VX-371 + hypertonic saline resulted in an increase of 0.1 percentage points ppFEV1 at day 28. Safety data from the clinical trial showed that the addition of VX-371, with or without hypertonic saline, was generally well tolerated in patients already receiving ORKAMBI, and the safety profile was consistent with that observed in prior clinical trials of VX-371 monotherapy. Based on the results of this clinical trial, we recognized an impairment charge related to Parion’s pulmonary ENaC platform in third quarter of 2017 and deconsolidated Parion as a VIE, effective September 30, 2017.

A Phase 2 clinical trial of VX-371 monotherapy in patients with primary ciliary dyskinesia (PCD) is ongoing.

### Research and Development

We are engaged in a number of other research and mid- and early-stage development programs, including VX-150 for pain and VX-210 for acute spinal cord injury. 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 (i) the collaboration represents a small portion of the overall business of these collaborators and (ii) the licenses associated with these collaborations do not represent a business pursuant to the consolidation accounting guidance. CRISPR’s and Moderna’s activities unrelated to our collaborations have no effect on our consolidated financial statements. Parion and BioAxone have historically been accounted for as variable interest entities, or VIEs, that were 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. As of September 30, 2017, we determined that the above conditions were no longer satisfied with respect to Parion following a determination that the fair value of the ENaC inhibitors licensed from Parion had declined significantly based on the results of a Phase 2 clinical trial of VX-371 that did not meet its primary efficacy endpoint. As a result, we no longer account for Parion as a VIE and have deconsolidated Parion from our consolidated financial statements as of September 30, 2017. BioAxone continues to be accounted for as a VIE and remains included in our consolidated financial statements as of September 30, 2017.

Collaborators we account for as a VIE may engage in activities unrelated to our collaboration. The revenues and expenses unrelated to the programs we in-license from our VIEs have historically been immaterial to our consolidated financial statements. With respect to each of Parion, prior to its deconsolidation as of September 30, 2017, and BioAxone, the activities unrelated to our collaboration have represented approximately 2% of our total revenues and total expenses on an annual basis. As a result of the deconsolidation of Parion, we expect these amounts to decrease in future periods. For any consolidated 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 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 VX-561, from Concert, pursuant to an agreement that we entered into in March 2017. VX-561 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 $160.0 million in cash for all worldwide development and commercialization rights to VX-561. If VX-561 is approved as part of a combination regimen to treat CF, Concert could receive up to an additional $90.0 million in milestones based on regulatory approval in the U.S. and reimbursement in the UK, Germany or France. In the third quarter of 2017, we recorded the $160.0 million payment as a research and development expense.

### RESULTS OF OPERATIONS

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $578,165 | $413,783 | $164,382 | 40% | $1,837,018 | $1,243,471 | $593,547 | 48% |
| Operating costs and expenses | 904,208 | 432,510 | 471,698 | 109% | 1,839,512 | 1,273,175 | 566,337 | 44% |
| Other items, net | 223,091 | (20,114) | 243,205 | n/a | 165,294 | (115,293) | 280,587 | n/a |
| Net (loss) income attributable to Vertex | $(102,952) | $(38,841) | $(64,111) | n/a | $162,800 | $(144,997) | $307,797 | n/a |

### Net Income (Loss) Attributable to Vertex

Net loss attributable to Vertex was $(103.0) million in the third quarter of 2017 as compared to a net loss attributable to Vertex of $(38.8) million in the third quarter of 2016. Our revenues increased in the third quarter of 2017 as compared to the third quarter of 2016 primarily due to increased ORKAMBI and KALYDECO net product revenues. Our operating costs and expenses in the third quarter of 2017 included a $255.3 million impairment charge related to Parion’s pulmonary ENaC platform and a $160.0 million payment to Concert in connection with the acquisition of VX-561, for which there were no comparable expenses in the third quarter of 2016. The increase in operating costs and expenses in the third quarter of 2017 as compared to the third quarter of 2016 also included increases in cost of product revenues, research and development expenses and sales, general and administrative expenses. Other items, net, in the third quarter of 2017 primarily reflects an income tax benefit and certain other benefits associated with the impairment of Parion’s pulmonary ENaC platform, for which there were no comparable benefits in the third quarter of 2016.

Net income attributable to Vertex was $162.8 million in the nine months ended September 30, 2017 as compared to a net loss attributable to Vertex of $(145.0) million in the nine months ended September 30, 2016. Our revenues increased significantly in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 due to increased ORKAMBI and KALYDECO net product revenues and $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. Our operating costs and expenses in the nine months ended September 30, 2017 included a $255.3 million impairment charge related to Parion’s pulmonary ENaC platform and a $160.0 million payment to Concert in connection with the acquisition of VX-561, for which there were no comparable expenses in the nine months ended September 30, 2016. The increase in operating costs and expenses in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 also included increases in cost of product revenues, research and development expenses, sales, general and administrative expenses and restructuring expenses. Other items, net, in the nine months ended September 30, 2017 primarily reflects an income tax benefit and certain other benefits associated with the impairment of Parion’s pulmonary ENaC platform, for which there were no comparable benefits in the nine months ended September 30, 2016.

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

Diluted net loss per share attributable to Vertex common shareholders was $(0.41) in the third quarter of 2017 as compared to a diluted net loss per share attributable to Vertex common shareholders of $(0.16) in the third quarter of 2016. Diluted net income per share attributable to Vertex common shareholders was $0.64 in the nine months ended September 30, 2017 as compared to a diluted net loss per share attributable to Vertex common shareholders of $(0.59) in the nine months ended September 30, 2016.

### Revenues

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues, net | $549,642 | $409,689 | $139,953 | 34% | $1,544,252 | $1,229,750 | $314,502 | 26% |
| Royalty revenues | 2,231 | 3,835 | (1,604) | (42)% | 6,643 | 12,713 | (6,070) | (48)% |
| Collaborative revenues | 26,292 | 259 | 26,033 | n/a | 286,123 | 1,008 | 285,115 | n/a |
| Total revenues | $578,165 | $413,783 | $164,382 | 40% | $1,837,018 | $1,243,471 | $593,547 | 48% |

### Product Revenues, Net

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| ORKAMBI | $336,183 | $234,046 | $102,137 | 44% | $955,451 | $702,670 | $252,781 | 36% |
| KALYDECO | 213,461 | 175,608 | 37,853 | 22% | $588,809 | $526,352 | $62,457 | 12% |
| INCIVEK | (2) | 35 | (37) | n/a | (8) | 728 | (736) | n/a |
| Total product revenues, net | $549,642 | $409,689 | $139,953 | 34% | $1,544,252 | $1,229,750 | $314,502 | 26% |

In the third quarter and the nine months ended September 30, 2017, we recognized approximately $43.1 million and $110.9 million, respectively, in ex-U.S. ORKAMBI net product revenues, as compared to $22.8 million and $47.5 million in the third quarter and the nine months ended September 30, 2016, respectively. We believe that the level of our ORKAMBI revenues for the remainder of 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.

Under the current revenue recognition guidance applicable for the year ending December 31, 2017, we do not recognize any net product revenues on sales of products unless the price is fixed or determinable. Pursuant to new revenue recognition guidance that will become effective January 1, 2018 and is described in Note A, “Basis of Presentation and Accounting Policies” to our condensed consolidated financial statements, we will be required to make estimates of the amount of consideration that will be retained by us that will not be subject to a significant reversal in amounts recognized as net product revenues. Our condensed consolidated balance sheet includes $190.3 million collected as of September 30, 2017 in France related to ORKAMBI supplied under early access programs at the invoiced price, which has not resulted in any net product revenues because the final price is not fixed or determinable under the current guidance.

If we conclude as of December 31, 2017, that the price of the ORKAMBI supplied under the French early access programs is fixed or determinable, we would record net product revenues for all sales since the inception of these programs based on the fixed or determinable price in the fourth quarter of 2017. If the price is not fixed and determinable as of December 31, 2017, these amounts will be subject to the new guidance. In this case, amounts for prior periods will be recognized in the first quarter of 2018 as a cumulative effect adjustment to our accumulated deficit based on an estimate of the amount of consideration that we would retain that would not be subject to a significant reversal in amounts recognized.

KALYDECO net product revenues increased in the third quarter of 2017 as compared to the third 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 nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 included approximately $9 million in one-time revenue credits in the first quarter of 2017 related to the finalization of reimbursement agreements in certain European countries. In the third quarter and the nine months ended September 30, 2017, we recognized approximately $80.3 million and $242.5 million, respectively, in ex-U.S. KALYDECO net product revenues, as compared to $75.1 million and $227.6 million in the third quarter and the nine months ended September 30, 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 $2.2 million and $6.6 million in the third quarter and the nine months ended September 30, 2017, respectively, as compared to $3.8 million and $12.7 million in the third quarter and the nine months ended September 30, 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 $26.3 million and $286.1 million in the third quarter and the nine months ended September 30, 2017, respectively, as compared to $0.3 million and $1.0 million in the third quarter and the nine months ended September 30, 2016, respectively. The increase in our collaborative revenues during the third quarter of 2017 as compared to the third quarter of 2016 was primarily related to amounts received from Merck for transition activities we received pursuant to our collaboration with Merck KGaA and a $20.0 million milestone payment received by Parion in the third quarter of 2017 pursuant to 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 milestone payment. Parion was deconsolidated as a VIE as of September 30, 2017 and future payments received by Parion pursuant to this license agreement will no longer be recognized by us as collaborative revenue. The increase in our collaborative revenues during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 was primarily due to revenue recognized related to the one-time upfront payment Merck KGaA paid in the first quarter of 2017 and $40 million in upfront and milestone payments received by Parion in 2017 pursuant to its license agreement with a third party. 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 September 30, 2017 | 2016 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of product revenues | $72,186 | $53,222 | $18,964 | 36% | $188,963 | $147,165 | $41,798 | 28% |
| Royalty expenses | 688 | 855 | (167) | (20)% | 2,104 | 2,813 | (709) | (25)% |
| Research and development expenses | 454,947 | 272,370 | 182,577 | 67% | 1,017,961 | 799,238 | 218,723 | 27% |
| Sales, general and administrative expenses | 120,710 | 106,055 | 14,655 | 14% | 361,285 | 322,921 | 38,364 | 12% |
| Restructuring expenses, net | 337 | 8 | 329 | n/a | 13,859 | 1,038 | 12,821 | n/a |
| Intangible asset impairment charge | 255,340 | — | 255,340 | n/a | 255,340 | — | 255,340 | n/a |
| Total costs and expenses | $904,208 | $432,510 | $471,698 | 109% | $1,839,512 | $1,273,175 | $566,337 | 44% |

### 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 third quarter of 2017, our cost of product revenues increased as compared to the third quarter of 2016 primarily due to the increased CF net product revenues. In the fourth quarter 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 third quarter of 2017.

In the nine months ended September 30, 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 September 30, 2017 | 2016 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research expenses | $76,131 | $99,162 | $(23,031) | (23)% | $226,409 | $242,058 | $(15,649) | (6)% |
| Development expenses | 378,816 | 173,208 | 205,608 | 119% | 791,552 | 557,180 | 234,372 | 42% |
| Total research and development expenses | $454,947 | $272,370 | $182,577 | 67% | $1,017,961 | $799,238 | $218,723 | 27% |

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 $3.9 billion in research and development expenses associated with drug discovery and development. The successful development of our drug candidates is highly uncertain and subject to a number of risks. In addition, the duration of clinical trials may vary substantially according to the type, complexity and novelty of the drug candidate and the disease indication being targeted. The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activities. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a project and are difficult to predict. Therefore, accurate and meaningful estimates of the ultimate costs to bring our drug candidates to market are not available.

In 2016 and the nine months ended September 30, 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. The target date for the FDA to complete its review of the NDA under PDUFA is February 28, 2018 and we expect the EMA to complete its review of our in MAA in the second half of 2018. 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 September 30, 2017 | 2016 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $20,445 | $21,525 | $(1,080) | (5)% | $61,486 | $61,503 | $(17) | —% |
| Stock-based compensation expense | 15,641 | 14,023 | 1,618 | 12% | 44,366 | 38,088 | 6,278 | 16% |
| Laboratory supplies and other direct expenses | 10,791 | 11,726 | (935) | (8)% | 33,980 | 33,410 | 570 | 2% |
| Outsourced services | 10,230 | 10,054 | 176 | 2% | 29,644 | 20,749 | 8,895 | 43% |
| Collaboration and asset acquisition payments | 425 | 22,000 | (21,575) | (98)% | 425 | 33,000 | (32,575) | (99)% |
| Infrastructure costs | 18,599 | 19,834 | (1,235) | (6)% | 56,508 | 55,308 | 1,200 | 2% |
| Total research expenses | $76,131 | $99,162 | $(23,031) | (23)% | $226,409 | $242,058 | $(15,649) | (6)% |

We maintain a substantial investment in research activities. Our research expenses decreased by 23% in the third quarter of 2017 as compared to the third quarter of 2016 and decreased by 6% in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. Collaboration and asset acquisition payments in the third quarter of 2016 included a $20.0 million payment to Moderna for which there was no comparable expense in the third quarter of 2017. Collaboration and asset acquisition payments in the nine months ended September 30, 2016 included both the Moderna payment and $13.0 million in expenses related to the acquisition of early-stage research assets for which there were no comparable expenses in the nine months ended September 30, 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 September 30, 2017 | 2016 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $54,125 | $44,788 | $9,337 | 21% | $156,759 | $134,201 | $22,558 | 17% |
| Stock-based compensation expense | 30,545 | 25,957 | 4,588 | 18% | 90,489 | 76,980 | 13,509 | 18% |
| Laboratory supplies and other direct expenses | 10,828 | 10,784 | 44 | —% | 34,171 | 32,039 | 2,132 | 7% |
| Outsourced services | 89,637 | 60,838 | 28,799 | 47% | 251,677 | 216,881 | 34,796 | 16% |
| Collaboration and asset acquisition payments | 160,000 | — | 160,000 | n/a | 160,250 | — | 160,250 | n/a |
| Drug supply costs | 3,151 | 2,655 | 496 | 19% | 6,143 | 9,512 | (3,369) | (35)% |
| Infrastructure costs | 30,530 | 28,186 | 2,344 | 8% | 92,063 | 87,567 | 4,496 | 5% |
| Total development expenses | $378,816 | $173,208 | $205,608 | 119% | $791,552 | $557,180 | $234,372 | 42% |

Our development expenses increased by 119% in the third quarter of 2017 as compared to the third quarter of 2016 and increased by 42% in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily due the $160.0 million payment to Concert in connection with the acquisition of VX-561 in the third quarter of 2017 and 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 fourth quarter of 2017, we expect our outsourced services expenses to increase as compared to the third quarter of 2017 due to expenses related to the advancement of our triple-combination regimens.

### Sales, General and Administrative Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2017 | 2016 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $120,710 | $106,055 | $14,655 | 14% | $361,285 | $322,921 | $38,364 | 12% |

Sales, general and administrative expenses increased by 14% in the third quarter of 2017 as compared to the third quarter of 2016 and increased by 12% in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily due to increased global support for KALYDECO and ORKAMBI.

### Restructuring Expenses, Net

We recorded restructuring expenses of $0.3 million and $13.9 million in the third quarter and the nine months ended September 30, 2017, respectively, as compared to restructuring expenses of $8.0 thousand and $1.0 million in the third quarter and the nine months ended September 30, 2016, respectively. The increases in our restructuring expenses in the nine months ended September 30, 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.

### Intangible Asset Impairment Charge

In the third quarter of 2017, we recorded a $255.3 million impairment charge related to Parion’s pulmonary ENaC platform that we licensed from Parion in 2015 and a benefit from income taxes of $97.7 million related to this impairment charge attributable to Parion. There were no corresponding intangible asset impairment charges in the third quarter and the nine months ended September 30, 2016.

### Other Items

### Interest Expense, Net

Interest expense, net was $13.6 million and $45.0 million in the third quarter and the nine months ended September 30, 2017, respectively, as compared to $20.1 million and $61.0 million in the third quarter and the nine months ended September 30, 2016, respectively. The decrease in interest expense, net in the third quarter and the nine months ended September 30, 2017 as compared to the third quarter and the nine months ended September 30, 2016 was primarily due to the repayment of the $300.0 million outstanding under our revolving credit facility in February 2017. In the fourth quarter of 2017, we expect to incur approximately $15 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 (Expenses) Income, Net

Other (expense) income, net was an expense of $77.6 million and $80.6 million in the third quarter and the nine months ended September 30, 2017 as compared to expense of $0.2 million in the third quarter of 2016 and income of $3.0 million in the nine months ended September 30, 2016. Other (expense) income, net in the third quarter and the nine months ended September 30, 2017 was primarily related to the deconsolidation of Parion. Other (expense) income, net in the third quarter and the nine months ended September 30, 2016 was primarily due to foreign exchange gains and losses.

### Income Taxes

We recorded a benefit from income taxes of $125.9 million and $117.6 million in the third quarter and the nine months ended September 30, 2017 as compared to a provision for income taxes of $0.5 million and $24.1 million in the third quarter and the nine months ended September 30, 2016. The benefit from income taxes in the third quarter and the nine months ended September 30, 2017 was primarily related to a benefit of $126.2 million attributable to noncontrolling interest as a result of our impairment of Parion’s pulmonary ENaC platform and decrease in the fair value of the contingent payments payable by us to Parion. The provision for income taxes in the third quarter and the nine months ended September 30, 2016 was primarily due to income tax on our VIEs.

We continue to maintain a valuation allowance on the majority of our net operating losses and other deferred tax assets because we have a history of cumulative losses. Accordingly, we have not reported any tax benefit relating to the remaining net operating loss carryforwards (NOLs) and income tax credit carryforwards that will be utilized in future periods in these jurisdictions. Our U.S. federal net operating loss carryforwards totaled approximately $4.1 billion as of December 31, 2016. On a quarterly basis, we reassess the valuation allowance on our deferred income tax assets weighing positive and negative evidence to assess the recoverability of the deferred tax assets. Based on our recent financial performance and our future projections, we could record a reversal of all, or a portion of the valuation allowance associated with U.S. deferred tax assets in future periods. However, any such change is subject to actual performance and other considerations that may present positive or negative evidence at the time of the assessment. Our total deferred tax asset balance subject to the valuation allowance was approximately $1.7 billion at December 31, 2016.

### 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 nine months ended September 30, 2017 and 2016 is as follows:

*(in thousands)*

|  | Three Months Ended September 30, 2017 | 2016 | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Loss attributable to noncontrolling interest before (benefit from) provision for income taxes and changes in fair value of contingent payments | $238,946 | $2,406 | $222,448 | $6,080 |
| (Benefit from) provision for income taxes | (120,181) | (510) | (111,658) | 20,063 |
| Decrease (increase) in fair value of contingent payments | 69,550 | (1,200) | 62,560 | (59,350) |
| Net loss (income) attributable to noncontrolling interest | $188,315 | $696 | $173,350 | $(33,207) |

The net loss attributable to noncontrolling interest in the third quarter and nine months ended September 30, 2017 was primarily related to the $255.3 million impairment charge related to Parion’s pulmonary ENaC platform, a decrease in fair value of the contingent payments payable by us to Parion of $69.6 million and benefit from income taxes of $126.2 million related to these charges.

As of September 30, 2017, we have deconsolidated Parion.

### LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2017, we had cash, cash equivalents and marketable securities of $1.81 billion, which represented an increase of $378 million from $1.43 billion as of December 31, 2016. In the nine months ended of September 30, 2017, our cash, cash equivalents and marketable securities balance increased due to cash receipts from product sales, cash received from issuances of common stock under our employee benefit plans and cash received from our collaboration with Merck KGaA in the first quarter of 2017, partially offset by the $300.0 million repayment of our revolving credit facility in the first quarter of 2017 and the $160.0 million payment to Concert in connection with the acquisition of VX-561 in the third 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 nine months ended September 30, 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. As of September 30, 2017, we have collected approximately $190.3 million from ORKAMBI early access programs in France for which the price is not fixed or determinable. We expect we will be required to repay a portion of the collected amounts to the French government based on the difference between the invoiced price of ORKAMBI and the final price for ORKAMBI in France.

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.

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 VX-561 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 VX-561 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 nine months ended September 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, 3,448 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 cash flow hedges for the Euro, British Pound and Australian Dollar related to forecasted product revenues that qualify for hedge accounting treatment under U.S. GAAP. We do not seek hedge accounting treatment for our forward contracts related to monetary assets and liabilities that impact our operating results. As of September 30, 2017, we held foreign exchange forward contracts with notional amounts totaling $456.9 million. As of September 30, 2017, our outstanding foreign exchange forward contracts had a net fair value of $(13.1) million.

Based on our foreign currency exchange rate exposures at September 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 $34.3 million at September 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, 1,487 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 September 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 September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 16,959 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 early 2018. Based on these results, we expect to initiate pivotal programs to evaluate one or two 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 52% and 32% of our total revenues in the nine months ended September 30, 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. The target date for the FDA to complete its review of the NDA under the Prescription Drug User Fee Act is February 28, 2018. We expect the EMA to complete its review in the second half of 2018. 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 VX-561 from Concert Pharmaceuticals, Inc.***

In July 2017, we acquired certain CF assets from Concert Pharmaceuticals, Inc., or Concert, including VX-561, 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. We amended our ongoing Phase 2 clinical trials of VX-445 and VX-659 to include additional cohorts of patients to evaluate these next-generation CFTR corrector compounds in combination with tezacaftor and VX-561. 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 VX-561 into our pipeline in order to achieve our strategic objectives;
- that we receive inadequate or unfavorable data from clinical trials evaluating the VX-561 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 VX-561 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 Oct 30, 2017.
Source: SEC EDGAR, the filing index for accession 0000875320-17-000060. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.