# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Sep 30, 2018

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2018-10-25
- Accepted by EDGAR: Oct 25, 2018, 20:10 ET
- Period: 2018-09-30
- Accession: 0000875320-18-000029
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532018000029/a2018q310-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532018000029/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $784.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $2.18bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $111.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $287.3m | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2018-07-01 to 2018-09-30 | $330.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2018-01-01 to 2018-09-30 | $978.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2018-07-01 to 2018-09-30 | $137.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-01-01 to 2018-09-30 | $404.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $205.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $507.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | $8.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | $5.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | $128.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | $546.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.50 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | $2.11 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.51 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-01-01 to 2018-09-30 | $2.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 259,788,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 258,972,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | $955.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $79.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2018-01-01 to 2018-09-30 | $207.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-09-30 | $2.48bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $3.69bn | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $4.62bn | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $992.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $1.69bn | us-gaap:Liabilities |
| Shareholders' equity | at 2018-09-30 | $2.91bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,695 characters.

### OVERVIEW

We invest in scientific innovation to create transformative medicines for serious diseases. 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 diseases. Our marketed products are KALYDECO (ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and SYMDEKO (tezacaftor in combination with ivacaftor), which are collectively approved to treat approximately 45% of the 75,000 CF patients in North America, Europe and Australia.

### Cystic Fibrosis

#### Current Medicines

KALYDECO is approved for the treatment of approximately 6,000 CF patients who have the G551D mutation or other specified mutations in their cystic fibrosis transmembrane conductance regulator, or CFTR, gene. ORKAMBI is approved as a treatment for approximately 29,000 patients who have two copies of the F508del mutation, or F508del homozygous, in their *CFTR* gene. SYMDEKO was approved by the United States Food and Drug Administration, or FDA, in February 2018 for the treatment of patients with CF twelve years of age and older who are F508del homozygous or who have at least one mutation that is responsive to tezacaftor/ivacaftor and by Health Canada in June 2018 for the treatment of patients with CF twelve years of age and older who are F508del homozygous or who have other specified mutations in their *CFTR* gene. In July 2018, the European Medicines Agency, or EMA, adopted a positive opinion for tezacaftor in combination with ivacaftor, which we plan to market under the brand name SYMKEVI, and we expect to obtain approval for SYMKEVI in the European Union in the fourth quarter of 2018. SYMDEKO provides, and SYMKEVI, if approved, will provide an additional treatment option to certain CF patients who were already eligible for either KALYDEKO or ORKAMBI. We use the brand name of a product only when we refer to the product that has been approved and with respect to the indications on the approved label. Otherwise, we use the scientific (or generic) name of the applicable compound or compounds comprising a drug candidate.

We continuously seek to increase the number of patients eligible to receive our medicines through label expansions. In the third quarter of 2018, we obtained approval from the FDA for KALYDECO for patients 12 to 24 months of age and ORKAMBI for patients 2 to 5 years of age. Activities in support of our label expansion efforts include:

- In October 2018, we announced positive data from a Phase 3 clinical trial evaluating tezacaftor in combination with ivacaftor in patients with CF six to eleven years of age who are F508del homozygous or who have one copy of the F508del mutation and one residual function mutation. The clinical trial met its primary safety endpoint, and safety data showed that the combination was generally well tolerated. We plan to submit a supplemental new drug application, or sNDA, to the FDA in late 2018. To support potential approval in the European Union, an eight-week Phase 3 clinical trial is ongoing to evaluate tezacaftor in combination with ivacaftor in approximately 65 children six to eleven years of age. The primary endpoint of the clinical trial is the absolute change in the lung clearance index.
- In October 2018, we announced positive data from a Phase 3 clinical trial of ivacaftor in patients with CF six to twelve months of age. We expect to submit an sNDA to the FDA and a line extension to the EMA in late 2018.

#### Next-generation CFTR Corrector Compounds

We are conducting Phase 3 clinical trials for two next-generation corrector compounds, VX-659 and VX-445, as part of separate triple combination regimens with tezacaftor and ivacaftor. Each of the VX-659 and VX-445 Phase 3 development programs is comprised of two clinical trials. The first clinical trial in each program is enrolling approximately 360 patients with CF twelve years of age and older who have one copy of the F508del mutation in their *CFTR* gene and a second mutation that results in minimal *CFTR* function, whom we refer to as F508del/Min patients. The primary efficacy endpoint of the first clinical trial in each program is the mean absolute change from baseline in percent predicted forced expiratory volume in one second, or ppFEV1, at week four of treatment with the triple combination regimen versus placebo. The second clinical trial in each program will enroll approximately 100 F508del homozygous patients twelve years of age and older. The primary efficacy endpoint of the second clinical trial in each program is the mean absolute change from baseline in ppFEV1 at week four of treatment with the triple combination regimen compared to tezacaftor in combination with ivacaftor. We have completed enrollment in the Phase 3 clinical program for VX-659 and expect to complete enrollment of the Phase 3 clinical program for VX-445 in the fourth quarter of 2018. We expect data from the VX-659 program in late 2018 and from the VX-445 program in the first quarter of 2019. Based on the anticipated completion of enrollment for the Phase 3 programs, we expect to submit an NDA to the FDA for F508del/Min patients no later than mid-2019. We have also recently initiated Phase 3 clinical trials for both VX-659 and VX-445 in F508del/Min and F508del homozygous patients who are six to 11 years of age.

We believe the triple combination regimens we are evaluating could provide benefits to all CF patients who have at least one F508del mutation in their *CFTR* gene (approximately 90% of all CF patients). If approved, this would include (i) the first treatment option that treats the underlying cause of CF for F508del/Min patients, and (ii) an additional treatment option for patients with CF who are eligible for KALYDECO, ORKAMBI and/or SYMDEKO.

In the second quarter of 2018, we announced positive clinical data from (i) a Phase 2 clinical trial arm evaluating VX-561 in combination with ivacaftor and VX-659 and (ii) a Phase 2 clinical trial arm evaluating VX-561 in combination with ivacaftor and VX-445. Based on recent feedback from the FDA, we plan to initiate a Phase 2 clinical trial in the first half of 2019 evaluating VX-561 as a monotherapy in patients with CF who have a gating mutation.

### Research and Development

We have a number of ongoing research and development programs in other diseases that we are conducting independently or in collaboration with third parties. We recently completed enrollment in a Phase 2 proof-of-concept clinical trial evaluating VX-150 for the treatment of pain caused by small fiber neuropathy and expect data from this clinical trial in early 2019. We plan to initiate a Phase 2b dose-ranging clinical trial to evaluate VX-150 in patients with acute pain following bunionectomy surgery. The clinical trial is designed to evaluate multiple oral doses of VX-150 to potentially support pivotal development in acute pain.

We are co-developing CTX001, an investigational gene editing treatment, for the treatment of beta-thalassemia and sickle cell disease, with CRISPR Therapeutics AG, or CRISPR.

- In October 2018, the FDA lifted a clinical hold on the investigational new drug application, or IND, for CTX001 for the treatment of sickle cell disease that was submitted earlier this year. We and CRISPR expect to initiate the clinical trial in sickle cell disease by the end of 2018. The first two patients in the clinical trial will be dosed sequentially and, pending data from these initial two patients, subsequent patients can be dosed concurrently.
- Enrollment of a Phase 1/2 clinical trial evaluating CTX001 in patients with beta-thalassemia is open at multiple clinical trial sites in Europe. The first patient in this Phase 1/2 clinical trial of CTX001 has been enrolled. This Phase 1/2 clinical trial is designed to assess the safety and efficacy of CTX001 in adult transfusion-dependent non beta zero/beta zero patients with beta-thalassemia. Similar to the clinical trial in sickle cell patients, the first two patients in the clinical trial will be dosed sequentially and, pending data from these initial two patients, subsequent patients can be dosed concurrently.

We plan to continue investing in our research programs and fostering scientific innovation in order to identify and develop transformative medicines for people with serious diseases. In addition to continuing our research in cystic fibrosis, pain and hemoglobinopathies, our current internal research programs include programs targeting alpha-1 antitrypsin deficiency, or AAT, focal segmental glomerulosclerosis and polycystic kidney disease. We plan to initiate clinical development of our first molecule in AAT by the end of 2018.

To supplement our internal research programs, we seek to collaborate with biopharmaceutical and technology companies, leading academic research institutions, government laboratories, foundations and other organizations as needed to advance research in our areas of therapeutic interest and to access technologies needed to execute on our strategy. We believe that pursuing research in diverse areas allows us to balance the risks inherent in drug development and may provide drug candidates that will form our pipeline in future years.

### Drug Discovery and Development

Discovery and development of a new pharmaceutical product is a difficult and lengthy process that requires significant financial resources along with extensive technical and regulatory expertise and can take 10 to 15 years or more. Potential drug candidates are subjected to rigorous evaluations, driven in part by stringent regulatory considerations, designed to generate information concerning efficacy, side effects, proper dosage levels and a variety of other physical and chemical characteristics that are important in determining whether a drug candidate should be approved for marketing as a pharmaceutical product. Most chemical compounds that are investigated as potential drug candidates never progress into development, and most drug candidates that do advance into development never receive marketing approval. Because our investments in drug candidates are subject to considerable risks, we closely monitor the results of our discovery, research, clinical trials and nonclinical studies and frequently evaluate our drug development programs in light of new data and scientific, business and commercial insights, with the objective of balancing risk and potential. This process can result in abrupt changes in focus and priorities as new information becomes available and as we gain additional understanding of our ongoing programs and potential new programs, as well as those of our competitors.

If we believe that data from a completed registration program support approval of a drug candidate, we submit an NDA to the FDA requesting approval to market the drug candidate in the United States and seek analogous approvals from comparable regulatory authorities in jurisdictions outside the United States. 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 ex-U.S. regulatory authorities have substantial discretion in deciding whether or not a drug candidate should be granted approval based on the benefits and risks of the drug candidate in the treatment of a particular disease, and could delay, limit or deny regulatory approval. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for the drug candidate involved will be harmed.

### Regulatory Compliance

Our marketing of pharmaceutical products is subject to extensive and complex laws and regulations. We have a corporate compliance program designed to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems and through the promotion of a culture of compliance. Among other laws, regulations and standards, we are subject to various U.S. federal and state laws, and comparable laws in other jurisdictions, pertaining to health care fraud and abuse, including anti-kickback and false claims laws, 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 that is reimbursed by a state or federal program. False claims laws prohibit anyone from knowingly or willfully 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 are subject to laws and regulations that regulate the sales and marketing practices of pharmaceutical manufacturers, as well as laws such as the U.S. Foreign Corrupt Practices Act that govern our international business practices with respect to payments to government officials. 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 have worked successfully with third party payors in order to promptly obtain appropriate levels of reimbursement for our CF medicines. 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 order to provide continued access to our current medicine.

In Europe and other ex-U.S. markets, we seek government reimbursement for our medicines 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. Typically, we need to obtain country-by-country reimbursement for each new medicine and each label expansion for a current medicine. We successfully obtained reimbursement for KALYDECO in each significant ex-U.S. market within two years of approval. Since we obtained approval for ORKAMBI in 2015, we have experienced significant challenges in obtaining reimbursement for ORKAMBI in ex-U.S. markets. We continue to discuss potential reimbursement for ORKAMBI in the United Kingdom and France, which represent significant potential markets for our CF medicines. We have reached pricing and reimbursement agreements for ORKAMBI in a number of countries, including Australia, Denmark, Germany, Ireland, Sweden and Italy. We have innovative reimbursement arrangements in place in certain ex-U.S. jurisdictions, including arrangements in Ireland, Denmark and Australia that provide a pathway to access and rapid reimbursement for certain future CF medicines.

### Collaboration Arrangements and Strategic Investments

#### In-License Agreements

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, 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;
- Moderna Therapeutics, Inc., or Moderna, pursuant to which we are seeking to identify and develop messenger ribonucleic acid, or mRNA therapeutics for the treatment of CF;
- BioAxone, pursuant to which we have been evaluating VX-210 as a potential treatment for patients who have spinal cord injuries; and
- Parion Sciences, Inc., or Parion, pursuant to which we are developing epithelial sodium channel, or ENaC, inhibitors for the treatment of pulmonary diseases.

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 each of these collaborator’s overall business. CRISPR 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, and historically have been 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 the results of a Phase 2 clinical trial of VX-371 that did not meet its primary efficacy endpoint. As a result, we 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, 2018. However, based on interim data from a Phase 2b clinical trial of VX-210, the clinical trial’s data monitoring safety board, or DSMB, has recommended that we stop the clinical trial early due to futility. There were no safety concerns noted in the DSMB’s review of the data. Based on the DSMB’s recommendation and our review of the interim data, we have decided to stop clinical development of VX-210 and to terminate the Phase 2b clinical trial of VX-210. As a result of this decision, we expect to recognize a charge in the fourth quarter of 2018 attributable to noncontrolling interest related to the impairment of our VX-210 intangible asset of approximately $29.0 million, which will be partially offset by a related benefit from income taxes. We will also assess whether we continue to be the primary beneficiary of BioAxone and should continue to consolidate BioAxone’s financial statements in the fourth quarter of 2018.

A collaborator that 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 collaborations with these entities have represented approximately 2% or less 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). For additional information regarding our VIEs see Note C, “Collaborative Arrangements and Acquisitions,” and our critical accounting policies in our 2017 Annual Report on Form 10-K.

#### Out-License Agreements

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

- Janssen Pharmaceuticals, Inc., or Janssen, Inc., which is developing pimodivir (formerly VX-787) for the treatment of influenza; and
- Merck KGaA, which licensed four oncology research and development programs from us in early 2017.

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.

#### Strategic Investments

In connection with our business development activities, we have periodically made equity investments in our collaborators. As of September 30, 2018 and December 31, 2017, we held strategic equity investments in CRISPR, a public company, and certain private companies, and we may make additional strategic equity investments in the future. While we invest the majority of our cash, cash equivalents and marketable securities in instruments with low risk that meet specific credit quality standards and limit our exposure to any one issue or type of instrument, our strategic investments are maintained and managed separately from our other cash, cash equivalents and marketable securities.

Until December 31, 2017, changes in the fair value of these strategic investments were reflected on our balance sheet, but did not affect our net income until the related gains or losses were realized. As a result of new accounting guidance, effective January 1, 2018, any changes in the fair value of equity investments with readily determinable fair values (including publicly traded securities such as CRISPR) are recorded to other income (expense), net in our condensed consolidated statement of operations. For equity investments without readily determinable fair values (including private equity investments such as Moderna), each reporting period we are required to re-evaluate the carrying value of the investment, which may result in other income (expense).

In the third quarter and nine months ended September 30, 2018, we recorded within other income (expense), net an unrealized loss of $61.2 million and an unrealized gain of $85.3 million, respectively, related to changes in the fair value of our investment in CRISPR, which are included in net income attributable to Vertex. To the extent that we continue to hold strategic investments and in particular strategic investments in publicly traded companies, we will record on a quarterly basis other income (expense) related to these strategic investments. Due to the high volatility of stocks in the biotechnology industry, we expect the value of these strategic investments to fluctuate and that the increases or decreases in the fair value of these strategic investments will continue to have material impacts on our net income (expense) and our profitability under GAAP on a quarterly and/or annual basis.

### RESULTS OF OPERATIONS

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $784,535 | $578,165 | $206,370 | 36% | $2,177,491 | $1,837,018 | $340,473 | 19% |
| Operating costs and expenses | 578,886 | 904,208 | (325,322) | (36)% | 1,670,063 | 1,839,512 | (169,449) | (9)% |
| Other items, net | (76,903) | 223,091 | (299,994) | n/a | 38,941 | 165,294 | (126,353) | (76)% |
| Net income (loss) attributable to Vertex | $128,746 | $(102,952) | $231,698 | n/a | $546,369 | $162,800 | $383,569 | 236% |
| Net income (loss) per diluted share attributable to Vertex common shareholders | $0.50 | $(0.41) |  |  | $2.11 | $0.64 |  |  |
| Diluted shares used in per share calculations | 259,788 | 250,268 |  |  | 258,972 | 252,095 |  |  |

### Net Income (Loss) Attributable to Vertex

Net income attributable to Vertex was $128.7 million in the third quarter of 2018 as compared to net loss attributable to Vertex of $103.0 million in the third quarter of 2017. Net income attributable to Vertex in the third quarter of 2018 reflected increases in CF net product revenues of $232.9 million as compared to the third quarter of 2017. The decrease in operating costs and expenses in the third quarter of 2018 as compared to the third quarter of 2017 primarily reflected a one-time $255.3 million impairment charge related to Parion’s pulmonary ENaC platform recorded in the third quarter of 2017 and a one-time $160.0 million payment to Concert in the third quarter of 2017 in connection with our acquisition of VX-561. There are not comparable expenses for either expense in the third quarter of 2018. The decrease in operating costs and expenses in the third quarter of 2018 as compared to the third quarter of 2017 was partially offset by increases in cost of sales and sales, general and administrative expenses.

Net income attributable to Vertex was $546.4 million in the nine months ended September 30, 2018 as compared to net income attributable to Vertex of $162.8 million in the nine months ended September 30, 2017. Our total revenues increased in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to a $625.9 million increase in CF net product revenues, partially offset by $230.0 million in one-time collaborative revenues recorded in the first quarter of 2017 related to an upfront payment from Merck KGaA. The decrease in operating costs and expenses in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 primarily reflected a one-time $255.3 million impairment charge related to Parion’s pulmonary ENaC platform recorded in the third quarter of 2017 and a one-time $160.0 million payment to Concert in the third quarter of 2017 in connection with our acquisition of VX-561. There are not comparable expenses for either expense in the nine months ended September 30, 2018. The decrease in operating costs and expenses in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was partially offset by increases in cost of sales and sales, general and administrative expenses.

Other items, net, in the third quarter and nine months ended September 30, 2018 primarily related to an unrealized loss of $61.2 million and an unrealized gain of $85.3 million, respectively, associated with changes in the fair value of our investment in CRISPR. These unrealized gains and losses are included in other items, net due to new accounting guidance that became effective on January 1, 2018. Other items, net, in the third quarter and nine months ended September 30, 2017 primarily related to a benefit from income taxes resulting from the impairment of Parion’s pulmonary ENaC platform charge and subsequent deconsolidation of Parion attributable to noncontrolling interest that was recorded in the third quarter of 2017.

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

Diluted net income per share attributable to Vertex common shareholders was $0.50 in the third quarter of 2018 as compared to diluted net loss per share attributable to Vertex common shareholders of $0.41 in the third quarter of 2017.

Diluted net income per share attributable to Vertex common shareholders was $2.11 in the nine months ended September 30, 2018 as compared to diluted net income per share attributable to Vertex common shareholders of $0.64 in the nine months ended September 30, 2017.

### Revenues

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues, net | $782,511 | $549,642 | $232,869 | 42% | $2,170,152 | $1,544,252 | $625,900 | 41% |
| Royalty revenues | 1,238 | 2,231 | (993) | (45)% | 3,679 | 6,643 | (2,964) | (45)% |
| Collaborative revenues | 786 | 26,292 | (25,506) | (97)% | 3,660 | 286,123 | (282,463) | (99)% |
| Total revenues | $784,535 | $578,165 | $206,370 | 36% | $2,177,491 | $1,837,018 | $340,473 | 19% |

### Product Revenues, Net

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| KALYDECO | $245,733 | $213,461 | $32,272 | 15% | $748,365 | $588,809 | $159,556 | 27% |
| ORKAMBI | 281,859 | 336,183 | (54,324) | (16)% | 947,186 | 955,451 | (8,265) | (1)% |
| SYMDEKO | 254,919 | — | 254,919 | n/a | 474,601 | — | 474,601 | n/a |
| Total CF product revenues, net | $782,511 | $549,644 | $232,867 | 42% | $2,170,152 | $1,544,260 | $625,892 | 41% |

In the third quarter and nine months ended September 30, 2018, our total CF net product revenues increased by $232.9 million and $625.9 million, respectively, as compared to the third quarter and nine months ended September 30, 2017. The increase in total CF net product revenues was due to net product revenues from sales of SYMDEKO, which was approved by the FDA in February 2018, and increased KALYDECO net product revenues partially offset by decreased ORKAMBI net product revenues. We believe that our total CF net product revenues will continue to increase in the fourth quarter of 2018, largely driven by continued growth of SYMDEKO.

SYMDEKO net product revenues were $254.9 million and $474.6 million in the third quarter and nine months ended September 30, 2018, respectively. We expect SYMDEKO net product revenues to continue to increase in the fourth quarter of 2018 as additional patients initiate treatment. We believe that these additional patients will be comprised of both patients who were not previously receiving treatment with one of our CF medicines and patients who are switching from either ORKAMBI or KALYDECO to SYMDEKO. We expect the European Union to approve tezacaftor in combination with ivacaftor, which will be sold under the brand name SYMKEVI in ex-U.S. markets, in the fourth quarter of 2018, but even if approved, we do not expect to recognize significant net product revenues from sales of SYMKEVI during 2018.

KALYDECO net product revenues increased in the third quarter and nine months ended September 30, 2018 as compared to the third quarter and nine months ended September 30, 2017, primarily due to additional patients being treated with KALYDECO as we completed reimbursement discussions in various ex-U.S. jurisdictions and as we increased the number of patients eligible to receive KALYDECO through label expansions. In the third quarter and nine months ended September 30, 2018, we recognized $90.9 million and $268.7 million, respectively, in ex-U.S. KALYDECO net product revenues as compared to $80.3 million and $242.5 million in the third quarter and nine months ended September 30, 2017, respectively. We expect that net product revenues from sales of KALYDECO for the fourth quarter of 2018 will be similar to KALYDECO net product revenues from the third quarter of 2018.

The approval of SYMDEKO has had, and we expect it will continue to have, a negative effect on the U.S. net product revenues from ORKAMBI as patients switch from ORKAMBI to SYMDEKO. In the third quarter of 2018, ORKAMBI U.S. net product revenues decreased by $26.6 million as compared to the second quarter of 2018 and by $73.4 million as compared to the first quarter of 2018. Global ORKAMBI net product revenues decreased by $54.3 million and $8.3 million in the third quarter and nine months ended September 30, 2018, respectively, as compared to the third quarter and nine months ended September 30, 2017, due to a decrease in U.S. net product revenues, partially offset by an increase in ex-U.S. ORKAMBI net product revenues. In the third quarter and nine months ended September 30, 2018, we recognized approximately $73.0 million and $220.5 million, respectively, in ex-U.S. ORKAMBI net product revenues as compared to $43.1 million and $110.9 million in the third quarter and nine months ended September 30, 2017, respectively.

Our condensed consolidated balance sheet includes $324.3 million collected as of September 30, 2018 in France related to ORKAMBI supplied under early access programs at the invoiced price. Pursuant to revenue recognition guidance that became effective under GAAP on January 1, 2018, we have recognized limited net product revenues to date on sales of ORKAMBI in France due to ongoing pricing discussions regarding the reimbursement rate for ORKAMBI. Please refer to Note A, “Basis of

Presentation and Accounting Policies,” for a discussion of the application of the new revenue recognition guidance and to Note B, “Revenue Recognition,” for a discussion of our accounting treatment for our early access programs for ORKAMBI in France.

### Royalty Revenues

Our royalty revenues were $1.2 million and $3.7 million in the third quarter and nine months ended September 30, 2018, respectively, as compared to $2.2 million and $6.6 million in the third quarter and nine months ended September 30, 2017, respectively. Our royalty revenues consist of revenues related to a cash payment we received in 2008 when we sold our rights to certain HIV royalties. We expect to continue to record royalty revenues related to this payment through the first half of 2019. Other future royalty revenues will be dependent on if, and when, our collaborators, including Janssen, Inc. and Merck KGaA, are able to successfully develop drug candidates that we have outlicensed to them.

### Collaborative Revenues

Our collaborative revenues were $0.8 million and $3.7 million in the third quarter and nine months ended September 30, 2018, respectively, as compared to $26.3 million and $286.1 million in the third quarter and nine months ended September 30, 2017, respectively. The decrease in our collaborative revenues during the third quarter of 2018 as compared to the third quarter of 2017 was primarily due to a $20.0 million milestone payment earned by Parion in the third quarter of 2017 pursuant to a license agreement Parion entered into with a third party. The milestone payment was included in our condensed consolidated financial statements even though we are not a party to such license agreement and have no economic interest in either the license or the milestone payment because during that period we were consolidating Parion as a VIE. Parion was deconsolidated as a VIE as of September 30, 2017 and payments received by Parion pursuant to this license agreement after this date are not recognized by us as collaborative revenues. The decrease in our collaborative revenues during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily due to revenue recognized related to the one-time $230.0 million upfront payment earned in the first quarter of 2017 from Merck KGaA 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, 2018 | 2017 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $111,255 | $72,874 | $38,381 | 53% | $287,250 | $191,067 | $96,183 | 50% |
| Research and development expenses | 330,510 | 454,947 | (124,437) | (27)% | 978,595 | 1,017,961 | (39,366) | (4)% |
| Sales, general and administrative expenses | 137,295 | 120,710 | 16,585 | 14% | 404,406 | 361,285 | 43,121 | 12% |
| Restructuring (income) expenses | (174) | 337 | (511) | n/a | (188) | 13,859 | (14,047) | n/a |
| Intangible asset impairment charge | — | 255,340 | (255,340) | (100)% | — | 255,340 | (255,340) | (100)% |
| Total costs and expenses | $578,886 | $904,208 | $(325,322) | (36)% | $1,670,063 | $1,839,512 | $(169,449) | (9)% |

### Cost of Sales

Our cost of sales primarily consists of 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. Cost of sales also includes a small subroyalty payable to a third party related to royalty revenues that we historically classified under “Royalty Expenses.” Pursuant to our agreement with Cystic Fibrosis Foundation, our tiered third-party royalties on sales of SYMDEKO, 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, which resets annually, our cost of sales as a percentage of CF net product revenues are lower at the beginning of each calendar year.

Our cost of sales have been increasing primarily because of increased net product revenues. In the fourth quarter of 2018, we expect our cost of sales as a percentage of total CF net product revenues to be similar to the cost of sales as a percentage of total CF net product revenues in the third quarter of 2018.

### Research and Development Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research expenses | $83,701 | $76,131 | $7,570 | 10% | $247,656 | $226,409 | $21,247 | 9% |
| Development expenses | 246,809 | 378,816 | (132,007) | (35)% | 730,939 | 791,552 | (60,613) | (8)% |
| Total research and development expenses | $330,510 | $454,947 | $(124,437) | (27)% | $978,595 | $1,017,961 | $(39,366) | (4)% |

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 2015, we have incurred $4.3 billion in research and development expenses associated with drug discovery and development. The successful development of our drug candidates is highly uncertain and subject to a number of risks. In addition, the duration of clinical trials may vary substantially according to the type, complexity and novelty of the drug candidate and the disease indication being targeted. The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activities. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a project and are difficult to predict. Therefore, accurate and meaningful estimates of the ultimate costs to bring our drug candidates to market are not available.

In 2017 and the nine months ended September 30, 2018, 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 expect approval for ivacaftor in combination with tezacaftor in the European Union in the fourth quarter of 2018. If we obtain positive results from our ongoing Phase 3 clinical trials, we plan to submit an NDA to the FDA for a triple combination regimen with VX-659 or VX-445 no later than mid-2019. 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, 2018 | 2017 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $21,745 | $20,445 | $1,300 | 6% | $67,078 | $61,486 | $5,592 | 9% |
| Stock-based compensation expense | 16,462 | 15,641 | 821 | 5% | 47,503 | 44,366 | 3,137 | 7% |
| Laboratory supplies and other direct expenses | 12,312 | 10,791 | 1,521 | 14% | 37,327 | 33,980 | 3,347 | 10% |
| Outsourced services | 9,236 | 10,230 | (994) | (10)% | 28,082 | 29,644 | (1,562) | (5)% |
| Collaboration and asset acquisition payments | 1,791 | 425 | 1,366 | 321% | 4,350 | 425 | 3,925 | 924% |
| Infrastructure costs | 22,155 | 18,599 | 3,556 | 19% | 63,316 | 56,508 | 6,808 | 12% |
| Total research expenses | $83,701 | $76,131 | $7,570 | 10% | $247,656 | $226,409 | $21,247 | 9% |

We maintain a substantial investment in research activities. Our research expenses increased by 10% in the third quarter of 2018 as compared to the third quarter of 2017 and increased by 9% in the nine months ended September 30, 2018 as compared to 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 for serious diseases.

#### Development Expenses

*(in thousands)*

*(in thousands)*

| Development Expenses: | Three Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $56,417 | $54,125 | $2,292 | 4% | $167,208 | $156,759 | $10,449 | 7% |
| Stock-based compensation expense | 36,456 | 30,545 | 5,911 | 19% | 105,515 | 90,489 | 15,026 | 17% |
| Laboratory supplies and other direct expenses | 23,571 | 10,828 | 12,743 | 118% | 60,083 | 34,171 | 25,912 | 76% |
| Outsourced services | 81,321 | 89,637 | (8,316) | (9)% | 259,499 | 251,677 | 7,822 | 3% |
| Collaboration and asset acquisition payments | — | 160,000 | (160,000) | (100)% | 250 | 160,250 | (160,000) | (100)% |
| Drug supply costs | 12,301 | 3,151 | 9,150 | 290% | 32,014 | 6,143 | 25,871 | 421% |
| Infrastructure costs | 36,743 | 30,530 | 6,213 | 20% | 106,370 | 92,063 | 14,307 | 16% |
| Total development expenses | $246,809 | $378,816 | $(132,007) | (35)% | $730,939 | $791,552 | $(60,613) | (8)% |

Our development expenses decreased by 35% in the third quarter of 2018 as compared to the third quarter of 2017 and decreased by 8% in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due the $160.0 million payment to Concert in connection with the acquisition of VX-561 in the third quarter of 2017, partially offset by increased costs associated with ongoing clinical trials, including trials involving our next-generation CFTR corrector compounds that we are evaluating as part of triple combination treatment regimens.

### Sales, General and Administrative Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2018 | 2017 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $137,295 | $120,710 | $16,585 | 14% | $404,406 | $361,285 | $43,121 | 12% |

Sales, general and administrative expenses increased by 14% in the third quarter of 2018 as compared to the third quarter of 2017 and increased by 12% in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, primarily due to increased global support for KALYDECO and ORKAMBI and costs related to the launch of SYMDEKO in the United States.

### Restructuring (Income) Expenses

We recorded restructuring credits of $174 thousand in the third quarter of 2018 and restructuring credits of $188 thousand in the nine months ended September 30, 2018, as compared to restructuring expenses of $0.3 million and $13.9 million in the third quarter and nine months ended September 30, 2017, respectively. The restructuring expenses in the third quarter and nine months ended September 30, 2017 primarily related 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 three or nine months ended September 30, 2018.

### Other Items, Net

### Interest Expense, Net

Our interest expense, net relates primarily to interest expenses associated with certain of our real estate leases and outstanding debt, if any, partially offset by interest income from the investment of our cash equivalents and marketable securities. Net interest expense was $8.1 million in the third quarter of 2018 as compared to $13.6 million in the third quarter of 2017. The decrease in net interest expense in the third quarter of 2018 was primarily due to an increase in our interest income resulting from an increase in our cash equivalents and marketable securities, partially offset by additional interest expense associated with our lease in San Diego, California that we began incurring in the second quarter of 2018.

Interest expense, net was $29.3 million in the nine months ended September 30, 2018 as compared to $45.0 million in the nine months ended September 30, 2017. The decrease in net interest expense in the nine months ended September 30, 2018 was primarily due to an increase in our interest income resulting from an increase in our cash equivalents and marketable securities and a decrease in interest expense due to the repayment of $300.0 million outstanding under our revolving credit facility in February 2017, partially offset by additional interest expense associated with our lease in San Diego, California.

For the fourth quarter of 2018, we expect to incur approximately $17 million in imputed interest expenses related to our real estate leases. We expect our imputed interest expenses related to our real estate leases to decrease in 2019 as compared to 2018 based on updated guidance related to aspects of lease accounting that becomes effective in 2019. In addition to the updated accounting guidance, our future net interest expense will also be dependent on whether, and to what extent, we reborrow amounts under our credit facility and the amount of and prevailing market interest rates on our outstanding cash equivalents and marketable securities.

### Other Income (Expense), Net

Other income (expense), net was an expense of $61.0 million and income of $89.7 million in the third quarter and nine months ended September 30, 2018, respectively, as compared to expenses of $77.6 million and $80.6 million in the third quarter and nine months ended September 30, 2017, respectively. Other expense, net in the third quarter of 2018 was primarily related to a $61.2 million decrease in the fair value of our equity investment in CRISPR. Other income, net in the nine months ended September 30, 2018 was primarily related to an $85.3 million increase in the fair value of our equity investment in CRISPR. Accounting guidance, which became effective January 1, 2018, requires that changes in the fair value of our equity investments are recorded in other income (expense), net in our condensed consolidated statement of operations. In prior periods, changes in the fair value of our equity investments were not reflected in our condensed consolidated statement of operations and a gain or loss was only recognized upon a sale of the underlying securities. As a result of the new guidance, our other income (expense), net will fluctuate based on increases or decreases in the fair value of our strategic investments.

Other expense, net in the third quarter and nine months ended September 30, 2017 was primarily related to the deconsolidation of Parion.

### Income Taxes

In the third quarter of 2018, we recorded a provision for income taxes of $8.1 million as compared to a benefit from income taxes of $125.9 million in the third quarter of 2017. The provision for income taxes in the third quarter of 2018 was primarily due to $4.9 million related to our U.S. state and foreign taxes and $3.1 million related to the reversing effect of discrete items associated with stock-based compensation. The benefit from income taxes in the third quarter of 2017 related primarily to $126.2 million attributable to noncontrolling interest as a result of our impairment of Parion’s pulmonary ENaC platform and a decrease in the fair value of the contingent payments payable by us to Parion.

In the nine months ended September 30, 2018, we recorded a provision for income taxes of $5.7 million as compared to a benefit from income taxes of $117.6 million in the nine months ended September 30, 2017. The provision for income taxes in the nine months ended September 30, 2018 was primarily due to $13.4 million related to our U.S. state and foreign taxes and $6.1 million of income taxes attributable to BioAxone’s income taxes partially offset by a benefit of $13.7 million related to discrete items associated with stock-based compensation. The benefit from income taxes in the nine months ended September 30, 2017 related primarily to the amount recorded in the third quarter of 2017 for Parion’s income taxes described above.

Since the adoption of new accounting guidance in 2017, we have been recording discrete tax adjustments associated with stock-based compensation on a quarterly basis. As noted above, we have recorded a net benefit of $13.7 million related to these discrete items in the nine months ended September 30, 2018. In the fourth quarter of 2018, we expect the net benefit from income taxes recorded in the first three quarters of 2018 related to these adjustments to reverse, resulting in these discrete items having no effect on our annual provision for income taxes.

As discussed in Note M, “Income Taxes,” we continue to maintain a valuation allowance on the majority of our net operating losses and other deferred tax assets. Due to this valuation allowance, we did not record a significant provision for income taxes in the third quarter and nine months ended September 30, 2018 and 2017. We are profitable from a U.S. federal income tax perspective and have used a portion of our net operating losses to offset this income since becoming profitable. We may release all or a portion of the valuation allowance in the near-term; however, the release of the valuation allowance, as well as the exact timing and amount of such release, continue to be subject to, among other things, our level of profitability, our revenue growth, the progress of our clinical programs and expectations regarding future profitability. In the period of the release of the valuation allowance, we will recognize a significant non-cash credit to net income and we will reflect a deferred tax asset, which is currently subject to the valuation allowance, on our condensed consolidated balance sheet. Following the release, we expect to continue to utilize our net operating losses to offset income, but would begin recording a significant provision for income taxes reflecting the utilization of the deferred tax assets. The majority of this provision for income taxes would be a non-cash expense until our net operating losses are fully utilized. Our total deferred tax asset balance subject to the valuation allowance was approximately $1.6 billion at December 31, 2017.

### Noncontrolling Interest (VIEs)

The net (income) loss attributable to noncontrolling interest (VIEs) recorded on our condensed consolidated statements of operations reflects our VIE’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) loss attributable to noncontrolling interest related to our VIEs for the third quarter and nine months ended of 2018 and 2017 is as follows:

*(in thousands)*

|  | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Loss attributable to noncontrolling interest before provision for (benefit from) income taxes and changes in fair value of contingent payments | $411 | $238,946 | $1,394 | $222,448 |
| Provision for (benefit from) income taxes | 79 | (120,181) | 6,068 | (111,658) |
| (Increase) decrease in fair value of contingent payments | (200) | 69,550 | (23,100) | 62,560 |
| Net loss (income) attributable to noncontrolling interest | $290 | $188,315 | $(15,638) | $173,350 |

The net income attributable to noncontrolling interest in the nine months ended September 30, 2018 was primarily due to an increase in the fair value of contingent payments related to the expiration of our option to purchase BioAxone that increased the probability of a $10.0 million license continuation fee for VX-210 that was ultimately paid in the first quarter of 2018 and the probability that additional milestone and royalty payments related to the BioAxone Agreement would be paid, partially offset by a provision for income taxes related to this increase. The net income 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.

### LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes the components of our financial condition as of September 30, 2018 and December 31, 2017:

*(in thousands)*

|  | September 30, 2018 | December 31, 2017 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cash, cash equivalents and marketable securities | $3,055,885 | $2,088,666 | $967,219 | 46% |
| Working Capital |  |  |  |  |
| Total current assets | 3,686,611 | 2,648,963 | 1,037,648 | 39% |
| Total current liabilities | 992,508 | 807,260 | 185,248 | 23% |
| Total working capital | $2,694,103 | $1,841,703 | $852,400 | 46% |

As of September 30, 2018, we had cash, cash equivalents and marketable securities of $3.1 billion, which represented an increase of $967 million from $2.1 billion as of December 31, 2017. In the nine months ended September 30, 2018, our cash, cash equivalents and marketable securities balance increased due to cash receipts from product sales, an $85.3 million increase in the fair value of our investment in CRISPR based on an increase in the price of CRISPR’s common stock and $245.8 million of cash received from issuances of common stock under our employee benefit plans partially offset by cash expenditures to fund our operations and $207.0 million of cash used to repurchase shares of our common stock. We expect that our future cash flows will be substantially dependent on CF product sales.

As of September 30, 2018, total working capital was $2.7 billion, which represented an increase of $852 million from $1.8 billion as of December 31, 2017. The most significant items that increased total working capital in the nine months ended September 30, 2018 were $955.7 million of cash provided by operations, an $85.3 million increase in the fair value of our investment in CRISPR based on an increase in the price of CRISPR’s common stock and $245.8 million of cash received from issuances of common stock under our employee benefit plans partially offset by $207.0 million of cash used to repurchase shares of our common stock and expenditures for property and equipment of $79.8 million as well as other expenditures.

### 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 SYMDEKO, KALYDECO and ORKAMBI in the United States and ORKAMBI and KALYDECO from ex-U.S. markets. We expect approval for SYMKEVI in the European Union in the fourth quarter of 2018. Future net product revenues for ORKAMBI and, if approved, SYMKEVI, from ex-U.S. markets will be dependent on, among other things, the timing of and our ability to complete reimbursement discussions in European countries.

We may borrow up to $500.0 million pursuant to a revolving credit facility that we entered into in October 2016. 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, 2018, 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. In the nine months ended September 30, 2018, the value of our strategic investment in CRISPR increased significantly but the future value of this strategic investment is uncertain. Other possible sources of future 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. We have substantial facility and capital lease obligations, including leases for two buildings in Boston, Massachusetts that continue through 2028 and a lease in San Diego, California that continues through 2034. As of September 30, 2018, we have accrued approximately $324.3 million from ORKAMBI early access programs in France. 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 once we conclude our ongoing pricing discussions with the French government. To the extent we borrow amounts under the credit agreement we entered into in October 2016, we would be required to repay any outstanding principal amounts in 2021.

In addition, we have entered into certain collaboration agreements with third parties that include the funding of certain research, development and commercialization efforts with the potential for future milestone and royalty payments by us upon the achievement of pre-established developmental and regulatory targets and/or commercial targets and we may enter into additional business development transactions, including acquisitions, collaborations and equity investments, that require additional capital.

Our board of directors also has authorized a share repurchase program to repurchase up to $500.0 million of shares of our common stock through December 31, 2019. As of September 30, 2018, $289.0 million remained available to fund repurchases under the share repurchase program.

We expect that cash flows from SYMDEKO, KALYDECO, ORKAMBI and SYMKEVI, if approved in ex-U.S. markets, 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 SYMDEKO, KALYDECO, ORKAMBI and SYMKEVI, if approved in ex-U.S. markets, 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 may raise additional capital by borrowing under credit agreements, 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, 2017, which was filed with the Securities and Exchange Commission, or SEC, on February 15, 2018. There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are reflected in reported results for the period in which the change occurs. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. During the nine months ended September 30, 2018, 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, 2017, which we filed with the SEC on February 15, 2018, except as set forth below:

### Product Revenues - Early Access Programs

We began distributing ORKAMBI in France in 2015 through early access programs and are engaged in ongoing pricing discussions regarding the final price for ORKAMBI in France. We did not recognize any revenues from these product sales through December 31, 2017 based on accounting guidance in effect during this time because the price was not fixed or determinable. As of September 30, 2018 and December 31, 2017, our condensed consolidated balance sheet includes $324.3 million and $232.4 million, respectively, under the caption “Early access sales accrual” related to amounts accrued in France as payment for shipments of ORKAMBI under the early access programs. We expect to return the difference between the amounts collected based on the invoiced price and the final price for ORKAMBI in France to the French government.

Upon adopting ASC 606 in the first quarter of 2018, we recorded an $8.3 million cumulative effect adjustment to “Accumulated deficit” primarily related to shipments of ORKAMBI under early access programs in France. We determined the amount of the adjustment based upon (i) the status of pricing discussions in France upon adoption and (ii) our estimate of the amount of consideration we expect to retain related to ORKAMBI sales in France that occurred on or prior to December 31, 2017 that will not be subject to a significant reversal in amounts recognized. For ORKAMBI sales in France that occurred after December 31, 2017 under the early access programs, we have recognized net product revenues based on the estimate of consideration we expect to retain that will not be subject to a significant reversal in amounts recognized. If our estimate regarding the amounts we will receive for ORKAMBI supplied pursuant to these early access programs changes, we will reflect the effect of the change in estimate in net product revenues in the period in which the change in estimate occurs and will include adjustments to all prior sales of ORKAMBI under the early access programs. Depending on the final price of ORKAMBI and because the current estimate is based on the amount that will not be subject to a significant reversal in amounts recognized this adjustment could be material. For more information regarding the new guidance please see Note B, “Revenue Recognition.”

### 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, 4,827 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. We do not have derivative financial instruments in our investment portfolio.

### 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.

In October 2016, we entered into a credit agreement. Loans under the credit agreement bear interest, at our option, at either a base rate or a Eurodollar rate, in each case plus an applicable margin. The applicable margin on base rate loans ranges from 0.75% to 1.50% and the applicable margin on Eurodollar loans ranges from 1.75% to 2.50%, in each case, based on our consolidated leverage ratio (as defined in the credit agreement). We do not believe that changes in interest rates related to the credit agreement would have a material effect on our financial statements. As of September 30, 2018, we had no principal or interest outstanding. A portion of our interest expense, net in 2018 will be dependent on whether, and to what extent, we reborrow amounts under the existing facility.

### Foreign Exchange Market Risk

As a result of our foreign operations, we face exposure to movements in foreign currency exchange rates, primarily the Euro and British Pound against the U.S. Dollar. The current exposures arise primarily from cash, accounts receivable, intercompany receivables and payables, payables and accruals and inventories. Both positive and negative effects to our net revenues from international product sales from movements in exchange rates are partially mitigated by the natural, opposite effect that 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, Canadian Dollar and Australian Dollar related to a portion of our forecasted product revenues that qualify for hedge accounting treatment under U.S. GAAP. We do not seek hedge accounting treatment for our foreign currency forward contracts related to monetary assets and liabilities that impact our operating results. As of September 30, 2018, we held foreign exchange forward contracts that were designated as cash flow hedges with notional amounts totaling $467.6 million and had a net fair value of $14.0 million recorded on our condensed consolidated balance sheet.

Although not predictive in nature, we believe a hypothetical 10% threshold reflects a reasonably possible near-term change in exchange rates. Assuming that the September 30, 2018 exchange rates were to change by a hypothetical 10%, the fair value recorded on our condensed consolidated balance sheet related to our foreign exchange forward contracts that were designated as cash flow hedges as of September 30, 2018 would change by approximately $46.8 million. However, since these contracts hedge a specific portion of our forecasted product revenues denominated in certain foreign currencies, any change in the fair value of these contracts is recorded in “Accumulated other comprehensive income (loss)” on our condensed consolidated balance sheet and is reclassified to earnings in the same periods during which the underlying product revenues affect earnings. Therefore, any change in the fair value of these contracts that would result from a hypothetical 10% change in exchange rates would be entirely offset by the change in value associated with the underlying hedged product revenues resulting in no impact on our future anticipated earnings and cash flows with respect to the hedged portion of our forecasted product revenues.

## 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, 2018 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, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 4,694 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 15, 2018. There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K.

### SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and, in particular, our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Part I-Item 2, contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding:

- our expectations regarding the amount of, timing of and trends with respect to our revenues, costs and expenses and other gains and losses, including those related to CF net product revenues, the potential release of the valuation allowance on our deferred income tax assets and the anticipated effect of lease accounting changes that will become effective in 2019;
- 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 ivacaftor, lumacaftor, tezacaftor, VX-659, VX-445, VX-561, VX-150 and CTX001 and the potential approval of SYMKEVI in the European Union;
- our ability to obtain reimbursement for ORKAMBI in ex-U.S. markets and our ability to otherwise successfully market KALYDECO, ORKAMBI and SYMDEKO/SYMKEVI or any of our other drug candidates for which we obtain regulatory approval;
- our expectations regarding the timing and structure of clinical trials of our drugs and drug candidates, including ivacaftor, lumacaftor, tezacaftor, VX-659, VX-445, VX-561, VX-150 and CTX001, and the expected timing of our receipt of data from our ongoing and planned clinical trials;
- the data that will be generated by ongoing and planned clinical trials and the ability to use that data to advance compounds, continue development or support regulatory filings;
- our beliefs regarding the support provided by clinical trials and preclinical and nonclinical studies of our drug candidates for further investigation, clinical trials or potential use as a treatment;
- our plan to continue investing in our research and development programs and our strategy to develop our drug candidates, alone or with third party-collaborators;
- the establishment, development and maintenance of collaborative relationships;
- potential business development activities;
- potential fluctuations in foreign currency exchange rates;
- our ability to use our research programs to identify and develop new drug candidates to address serious diseases and significant unmet medical needs; and
- our liquidity and our expectations regarding the possibility of raising additional capital.

Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many factors mentioned in this Quarterly Report on Form 10-Q will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from expected results. We also provide a cautionary discussion of risks and uncertainties under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 15, 2018. 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 25, 2018.
Source: SEC EDGAR, the filing index for accession 0000875320-18-000029. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.