# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Mar 31, 2019

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2019-05-01
- Accepted by EDGAR: May 1, 2019, 20:37 ET
- Period: 2019-03-31
- Accession: 0000875320-19-000019
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532019000019/a2019q110-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532019000019/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-01-01 to 2019-03-31 | $858.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-01-01 to 2019-03-31 | $95.1m | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2019-01-01 to 2019-03-31 | $339.5m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2019-01-01 to 2019-03-31 | $147.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-01-01 to 2019-03-31 | $276.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2019-01-01 to 2019-03-31 | $51.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-01-01 to 2019-03-31 | $268.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-01-01 to 2019-03-31 | $1.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-01-01 to 2019-03-31 | $1.05 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-01-01 to 2019-03-31 | 260,175,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-01-01 to 2019-03-31 | $324.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-01-01 to 2019-03-31 | $18.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2019-01-01 to 2019-03-31 | $99.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-03-31 | $2.89bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-03-31 | $4.18bn | us-gaap:AssetsCurrent |
| Total assets | at 2019-03-31 | $6.54bn | us-gaap:Assets |
| Current liabilities | at 2019-03-31 | $1.11bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-03-31 | $1.82bn | us-gaap:Liabilities |
| Shareholders' equity | at 2019-03-31 | $4.72bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 46,207 characters.

### OVERVIEW

We invest in scientific innovation to create transformative medicines for people with 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 serious diseases. Our marketed products are SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and KALYDECO (ivacaftor), which are collectively approved to treat approximately half of the 75,000 CF patients in North America, Europe and Australia. Our triple combination regimens, if approved, would significantly increase the number of CF patients eligible for our products and could provide an improved treatment option for a majority of the patients currently eligible for our products. In fourth quarter of 2018 and first quarter of 2019, we reported positive data, including interim data, from the Phase 3 clinical trials evaluating the triple combinations of VX-659, tezacaftor and ivacaftor and VX-445, tezacaftor and ivacaftor in patients (i) who have a 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; and (ii) who have two copies of the *F508del* mutation, whom we refer to as F508del homozygous patients. We expect to have final 24-week data from both Phase 3 triple combination programs in the second quarter of 2019. We expect to submit a New Drug Application, or NDA, to the United States Food and Drug Administration, or FDA, in the third quarter of 2019 and a Marketing Authorization Application, or MAA, in Europe in the fourth quarter of 2019 for a triple combination regimen. We also have earlier-stage programs in pain, beta thalassemia, sickle cell disease, alpha-1 antitrypsin deficiency and focal segmental glomerulosclerosis.

### First quarter of 2019 Financial Highlights

#### Revenues

In the first quarter of 2019, our net product revenues continued to increase due to the approval of our third CF medicine, SYMDEKO/SYMKEVI, in 2018. During the remainder of 2019, we expect our net product revenues to increase due to increased revenues from SYMDEKO/SYMKEVI.

#### Expenses

In the first quarter of 2019, combined R&D and SG&A expenses increased by 10% from $440.4 million in the first quarter of 2018 to $486.5 million. In the first quarter of 2019, cost of sales was 11% of our net product revenues.

#### Balance Sheet

Increased balance sheet strength driven by earnings.

### Business Highlights

#### Cystic Fibrosis

- Announced positive data from two Phase 3 clinical trials evaluating the triple combination of VX-445, tezacaftor and ivacaftor in F508del/Min patients and F508del homozygous patients 12 years of age or older.
- Obtained approval for SYMDEKO in Australia for certain patients 12 years of age or older.
- Obtained approval for ORKAMBI in the European Union for children 2 to 5 years of age.
- Initiated Phase 2 dose-ranging clinical trial to evaluate the potentiator VX-561 as a potential once-daily monotherapy.
- Obtained approval for KALYDECO in the United States for infants 6 to \<12 months of age.
- Initiated Phase 2 clinical trial evaluating the potential once-daily triple combination of VX-121 (an additional next-generation corrector) with VX-561 and tezacaftor.

#### Expanding Pipeline

- Obtained Fast Track Designation for VX-814, our first small molecule alpha-1 antitrypsin deficiency corrector.
- Announced with CRISPR Therapeutics that the first patient has been treated with CTX001 in a Phase 1/2 clinical trial of patients with transfusion-dependent beta thalassemia.
- Announced with CRISPR Therapeutics that first patient has been enrolled in a Phase 1/2 clinical trial of patients with sickle cell disease.
- Obtained Fast Track designation for CTX001 for both transfusion-dependent beta thalassemia and sickle cell disease.

### Research

We plan to continue investing in our research programs and fostering scientific innovation in order to identify and develop transformative medicines. Our current internal research programs include programs targeting cystic fibrosis, pain, beta thalassemia, sickle cell disease, alpha-1 antitrypsin and focal segmental glomerulosclerosis. 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. To supplement our internal research programs, we 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.

### 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. 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, which 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 reimbursed 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 and as such, more than 95% of patients across the U.S. have access to our 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, to ensure that payors recognize the significant benefits that our medicines provide by treating the underlying cause of cystic fibrosis and continue to provide access to our current medicines.

In Europe and other ex-U.S. markets, we seek government reimbursement for our medicines on a country-by-country basis. This is necessary for each new medicine, as well as label expansions for our current medicines in most countries. We successfully obtained reimbursement for KALYDECO in each significant ex-U.S. market within two years of approval. We are experiencing significant challenges in obtaining reimbursement for ORKAMBI in certain ex-U.S. markets. Specifically, we have been discussing potential reimbursement for ORKAMBI in England and France, which represent significant potential markets for our CF medicines, since its approval in 2015. In other ex-U.S. markets, including Australia, Denmark, Germany, Ireland, Sweden and Italy, we have reached pricing and reimbursement agreements for ORKAMBI. In some of these countries we have innovative reimbursement arrangements that provide a pathway to access and rapid reimbursement for certain future CF medicines, including arrangements in Ireland, Denmark and Australia. SYMKEVI, which was approved in the European Union in the fourth quarter of 2018, is available in certain European countries, including Germany, Denmark and Ireland.

### 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 Therapeutics AG and its affiliates, 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;
- Arbor Biotechnologies, Inc., or Arbor, pursuant to which we are collaborating on the discovery of novel proteins, including DNA endonucleases, to advance the development of new gene-editing therapies; and
- 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.

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. In contrast certain of our collaborators, including BioAxone Biosciences, Inc., or 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 our collaborator as a whole, (ii) our power to control the significant activities of the entities under each collaboration, and (iii) our obligation to absorb losses and right to receive benefits that potentially could have been significant. In 2018, we determined that the above conditions were no longer satisfied with respect to BioAxone. As a result, we deconsolidated BioAxone from our consolidated financial statements.

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. The activities unrelated to our collaboration were not material to our financial statements during the periods that we consolidated BioAxone. As a result of the deconsolidation, we do not expect to have similar items for 2019 based on our current collaborations. In periods in which we have consolidated VIEs, we have evaluated the fair value of the contingent payments payable by us on a quarterly basis. Changes in the fair value of these contingent future payments affected 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 2018 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 out-license arrangements include our collaboration agreements with:

- Janssen Pharmaceuticals, Inc., or Janssen which is evaluating pimodivir in Phase 3 clinical trials for the treatment of influenza; and
- Merck KGaA, Darmstadt, Germany, which licensed 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 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 March 31, 2019 and December 31, 2018, we held strategic equity investments in CRISPR and Moderna, both public companies, 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 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. Any changes in the fair value of equity investments with readily determinable fair values (including publicly traded securities such as CRISPR and Moderna) 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), each reporting period we are required to re-evaluate the carrying value of the investment, which may result in other income (expense).

In the first quarter of 2019 and 2018 we recorded within other income (expense), unrealized gains of $43.6 million and $95.5 million, respectively, related to increases in the fair value of our strategic investments, which were included in our net income attributable to Vertex. To the extent that we continue to hold strategic investments, particularly strategic investments in publicly traded companies, we will record other income (expense) related to these strategic investments on a quarterly basis. 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 on a quarterly and/or annual basis.

### RESULTS OF OPERATIONS

*(in thousands)*

|  | Three Months Ended March 31, 2019 | 2018 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $858,435 | $640,799 | $217,636 | 34% |
| Operating costs and expenses | 581,627 | 511,898 | 69,729 | 14% |
| Other non-operating income, net | 43,357 | 68,703 | (25,346) | \*\* |
| Provision for (benefit from) income taxes | 51,534 | (12,659) | \*\* | \*\* |
| Net income attributable to Vertex | $268,631 | $210,263 | $58,368 | 28% |
| Net income per diluted share attributable to Vertex common shareholders | $1.03 | $0.81 |  |  |
| Diluted shares used in per share calculations | 260,175 | 258,526 |  |  |
|  |  |  | \*\* Not meaningful |  |

### Net Income Attributable to Vertex

Net income attributable to Vertex was $268.6 million in the first quarter of 2019 as compared to net income attributable to Vertex of $210.3 million in the first quarter of 2018. Our total revenues increased in the first quarter of 2019 as compared to the first quarter of 2018 due to a $219.5 million increase in net product revenues. The increase in operating costs and expenses in the first quarter of 2019 as compared to the first quarter of 2018 was primarily due to increased cost of sales, research and development expenses and sales, general and administrative expenses.

Other non-operating income, net, in the first quarter of 2019 and 2018 primarily related to total unrealized gains associated with increases in the fair value of our strategic investments.

In the first quarter of 2019, we began recording a provision for income taxes based primarily on our pre-tax income using an estimated effective tax rate that approximates statutory rates resulting in a provision for income taxes of $51.5 million. Due to our ability to offset our pre-tax income against previously benefited net operating losses the majority of our tax provision in the first quarter of 2019 is a non-cash expense. In the first quarter of 2018, we did not record a similar provision for income taxes based on our pre-tax income because we did not release our tax valuation allowance until the fourth quarter of 2018.

### Earnings Per Share

Diluted net income per share attributable to Vertex common shareholders was $1.03 in the first quarter of 2019 as compared to diluted net income per share attributable to Vertex common shareholders of $0.81 in the first quarter of 2018.

### Revenues

*(in thousands)*

|  | Three Months Ended March 31, 2019 | 2018 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Product revenues, net | $857,253 | $637,729 | $219,524 | 34% |
| Collaborative and royalty revenues | 1,182 | 3,070 | (1,888) | (61)% |
| Total revenues | $858,435 | $640,799 | $217,636 | 34% |

### Product Revenues, Net

*(in thousands)*

|  | Three Months Ended March 31, 2019 | 2018 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| SYMDEKO/SYMKEVI | $320,275 | $34,124 | $286,151 | 839% |
| ORKAMBI | 293,007 | 354,066 | (61,059) | (17)% |
| KALYDECO | 243,971 | 249,539 | (5,568) | (2)% |
| Total product revenues, net | $857,253 | $637,729 | $219,524 | 34% |

In the first quarter of 2019, our net product revenues increased by $219.5 million as compared to the first quarter of 2018. The increase in net product revenues was due to the increasing number of patients being treated with SYMDEKO/SYMKEVI, partially offset by decreased ORKAMBI and KALYDECO net product revenues due primarily to the launch of SYMDEKO in the United States. We believe that our net product revenues will increase for the remainder of 2019 due primarily to increases in SYMDEKO/SYMKEVI net product revenues. Our net product revenues also are dependent on, if, and when, we obtain additional reimbursement agreements for our medicines in ex-U.S. markets, particularly in the United Kingdom and France.

#### SYMDEKO/SYMKEVI

SYMDEKO/SYMKEVI net product revenues were $320.3 million in the first quarter of 2019 compared to $34.1 million in the first quarter of 2018. SYMDEKO was approved by the FDA in February 2018 and SYMKEVI was approved in the European Union in November 2018. In the first quarter of 2019, SYMKEVI net product revenues were $31.6 million in ex-U.S. markets. We expect SYMDEKO/SYMKEVI net product revenues to continue to increase for the remainder of 2019.

#### ORKAMBI

The approval of SYMDEKO/SYMKEVI has had a negative effect on the net product revenues from ORKAMBI, as a portion of the patients who were being treated with ORKAMBI have switched to SYMDEKO/SYMKEVI. Due primarily to patients switching from ORKAMBI to SYMDEKO in the United States, ORKAMBI net product revenues decreased by 17% in the first quarter of 2019 as compared to the first quarter of 2018. In the first quarter of 2019, ORKAMBI net product revenues were $293.0 million, including $91.2 million of net product revenues from ex-U.S. markets, compared to ORKAMBI net product revenues of $354.1 million in the first quarter of 2018, including $71.8 million of net product revenues from ex-U.S. markets. Our condensed consolidated balance sheet includes $382.7 million collected as of March 31, 2019 in France related to ORKAMBI supplied under early access programs at the invoiced price. 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 B, “Revenue Recognition,” for a discussion of our accounting treatment for our early access program for ORKAMBI in France.

#### KALYDECO

In the first quarter of 2019, KALYDECO net product revenues were $244.0 million, including $94.6 million of net product revenues from ex-U.S. markets, compared to KALYDECO net product revenues of $249.5 million in the first quarter of 2018, including $86.2 million of net product revenues from ex-U.S. markets. The decrease in the first quarter of 2019 as compared to the first quarter of 2018 was primarily due to a portion of the patients who were being treated with KALYDECO switching to SYMDEKO in the United States partially offset by additional patients being treated with KALYDECO as we completed reimbursement discussions in various ex-U.S. jurisdictions and increased the number of patients eligible to receive KALYDECO through label expansions.

### Collaborative and Royalty Revenues

Our collaborative and royalty revenues were $1.2 million in the first quarter of 2019 as compared to $3.1 million in the first quarter of 2018. Our collaborative revenues have historically fluctuated significantly from one period to another and may continue to fluctuate in the future. Our future royalty revenues will be dependent on if, and when, our collaborators, including Janssen, Inc. and Merck KGaA, Darmstadt, Germany are able to successfully develop drug candidates that we have out-licensed to them.

### Operating Costs and Expenses

*(in thousands)*

| \` | Three Months Ended March 31, 2019 | 2018 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of sales | $95,092 | $71,613 | $23,479 | 33% |
| Research and development expenses | 339,490 | 310,553 | 28,937 | 9% |
| Sales, general and administrative expenses | 147,045 | 129,808 | 17,237 | 13% |
| Restructuring income | — | (76) | 76 | \*\* |
| Total costs and expenses | $581,627 | $511,898 | $69,729 | 14% |
|  |  |  | \*\* Not Meaningful |  |

### 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. Pursuant to our agreement with the CFF, our tiered third-party royalties on sales of SYMDEKO/SYMKEVI, ORKAMBI and KALYDECO, 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 net product revenues are lower at the beginning of each calendar year.

Over the last several years, our cost of sales has been increasing primarily due to increased net product revenues. Our cost of sales as a percentage of our net product revenues was approximately 11% in each of the first quarter of 2018 and 2019. For the remainder of 2019, we expect our total cost of sales will increase due to our tiered third-party royalties and that our costs of sales as a percentage of total net product revenues will be similar to our cost of sales as a percentage of total net product revenues in 2018.

### Research and Development Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2019 | 2018 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Research expenses | $90,463 | $77,942 | $12,521 | 16% |
| Development expenses | 249,027 | 232,611 | 16,416 | 7% |
| Total research and development expenses | $339,490 | $310,553 | $28,937 | 9% |

Our research and development expenses include internal and external costs incurred for research and development of our drugs and drug candidates and expenses related to certain technology that we acquire or license through business development transactions. 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 2017, we have incurred approximately $3.1 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 2018 and the first quarter of 2019, 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. Until we have data from Phase 3 clinical trials, we cannot make a meaningful estimate regarding when, or if, a clinical development program will generate revenues and cash flows. In the fourth quarter of 2018 and first quarter of 2019, we obtained positive results from Phase 3 clinical trials evaluating triple combinations of VX-659, tezacaftor and ivacaftor and VX-445, tezacaftor and ivacaftor. We plan to submit an NDA to the U.S. FDA in the third quarter of 2019 and a MAA in Europe in the fourth quarter of 2019 for either a VX-659 triple combination regimen or a VX-445 triple combination regimen.

#### Research Expenses

*(in thousands)*

| Research Expenses: | Three Months Ended March 31, 2019 | 2018 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $24,379 | $24,088 | $291 | 1% |
| Stock-based compensation expense | 17,535 | 14,760 | 2,775 | 19% |
| Outsourced services and other direct expenses | 23,364 | 18,813 | 4,551 | 24% |
| Collaboration and asset acquisition payments | — | 308 | (308) | \*\* |
| Infrastructure costs | 25,185 | 19,973 | 5,212 | 26% |
| Total research expenses | $90,463 | $77,942 | $12,521 | 16% |
|  |  |  | \*\* Not meaningful |  |

We maintain a substantial investment in research activities. Our research expenses increased by 16% in the first quarter of 2019 as compared to the first quarter of 2018 as a result of expenses related to additional headcount in our research organization and increased infrastructure costs. In the first quarter of 2019 and 2018, “Collaboration and asset acquisition payments” were not significant; however, our research expenses have been affected, and are expected to continue to be affected, by research expenses associated with our business development activities. 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)*

| Development Expenses: | Three Months Ended March 31, 2019 | 2018 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $60,507 | $57,002 | $3,505 | 6% |
| Stock-based compensation expense | 42,180 | 33,728 | 8,452 | 25% |
| Outsourced services and other direct expenses | 89,874 | 99,192 | (9,318) | (9)% |
| Collaboration and asset acquisition payments | 5,250 | 250 | 5,000 | \*\* |
| Drug supply costs | 7,894 | 8,421 | (527) | (6)% |
| Infrastructure costs | 43,322 | 34,018 | 9,304 | 27% |
| Total development expenses | $249,027 | $232,611 | $16,416 | 7% |
|  |  |  | \*\* Not meaningful |  |

Our development expenses increased by 7% in the first quarter of 2019 as compared to the first quarter of 2018, primarily due to increased headcount to support our advancing pipeline and increased infrastructure costs partially offset by decreases in expenses related to our CF programs.

### Sales, General and Administrative Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2019 | 2018 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $147,045 | $129,808 | $17,237 | 13% |

Sales, general and administrative expenses increased by 13% in the first quarter of 2019 as compared to the first quarter of 2018, primarily due to increased global support for our medicines and incremental investment to support the potential launch of our triple combination regimen.

### Other Non-Operating Income, Net

### Interest Income

Interest income was $15.6 million in the first quarter of 2019 compared to $5.8 million in the first quarter of 2018. The increase in interest income in the first quarter of 2019 as compared to the first quarter of 2018 was primarily due to an increase in our cash equivalents and marketable securities and prevailing market interest rates. Our future interest income will be dependent on the amount of, and prevailing market interest rates on, our outstanding cash equivalents and marketable securities.

### Interest Expense

Interest expense was $14.9 million in the first quarter of 2019 compared to $16.9 million in the first quarter of 2018. The majority of our interest expense in these periods was related to imputed interest expense associated with our leased corporate headquarters in Boston and our research site in San Diego. On January 1, 2019, we adopted ASC 842, *Leases*, which resulted in a reduction in our imputed interest expense associated with these leases in the first quarter of 2019 as compared to the first quarter of 2018. We expect similar reductions in our imputed interest expense associated with these leases in the initial years subsequent to the adoption of this accounting guidance as compared to the amounts that were recorded in accordance with the previously applicable guidance. In addition to the updated accounting guidance, our future interest expense will also be dependent on whether, and to what extent, we reborrow amounts under our credit facility.

### Other Income, Net

Other income, net was income of $42.6 million in the first quarter of 2019 compared to income of $96.8 million in the first quarter of 2018. Our other income in these periods is primarily related to increases in fair value of our strategic investments. The value of these strategic investments has fluctuated significantly in the past, including decreasing significantly in the second half of 2018. In future periods, we expect our other income (expense), net to fluctuate based on increases or decreases in the fair value of our strategic investments.

### Noncontrolling Interest

The net income attributable to noncontrolling interest 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.

As of December 31, 2018, we deconsolidated BioAxone and had no noncontrolling interest in the first quarter of 2019 as a result. In the first quarter of 2018, we recorded net income attributable to noncontrolling interest of $17.0 million, which was primarily related to a $24.0 million increase in the fair value of the contingent payments payable by us to BioAxone partially offset by an associated benefit from income taxes. The increase in the fair value of contingent payments was primarily due to the expiration of an option held by us to purchase BioAxone that resulted in our election to continue our license for VX-210, which increased the probability that additional milestone and royalty payments related to the license for VX-210 would be paid.

### Income Taxes

In the first quarter of 2019, we recorded a provision for income taxes of $51.5 million as compared to a benefit from income taxes of $12.7 million in the first quarter of 2018. Our effective tax rate for the first quarter of 2019 is lower than the U.S. statutory rate primarily due to excess tax benefits related to stock-based compensation and utilization of net operating losses to offset pre-tax operating income. The change in our provision for income taxes in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to the release of our valuation allowance on the majority of our net operating losses and other deferred tax assets in the fourth quarter of 2018. Starting in first quarter of 2019, we began recording a provision for income taxes on our pre-tax income using an estimated effective tax rate that approximates statutory rates. Due to our ability to offset our pre-tax income against previously benefited net operating losses we expect the majority of our tax provision to represent a non-cash expense until our net operating losses have been fully utilized.

The benefit from income taxes in the first quarter of 2018 primarily related to a benefit from income taxes of $21.9 million for excess tax benefits associated with stock-based compensation offset by provisions for income taxes of $6.4 million attributable to noncontrolling interest and our U.S. state and foreign taxes.

### LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes the components of our financial condition as of March 31, 2019 and December 31, 2018:

*(in thousands)*

|  | March 31, 2019 | December 31, 2018 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cash, cash equivalents and marketable securities | $3,478,035 | $3,168,242 | $309,793 | 10% |
| Working Capital |  |  |  |  |
| Total current assets | 4,183,039 | 3,843,109 | 339,930 | 9% |
| Total current liabilities | (1,106,468) | (1,120,292) | (13,824) | (1)% |
| Total working capital | $3,076,571 | $2,722,817 | $353,754 | 13% |

As of March 31, 2019, total working capital was $3.1 billion, which represented an increase of $354 million from $2.7 billion as of December 31, 2018. The most significant items that increased total working capital in the first quarter of 2019 were $324.8 million of cash provided by operations, a $43.6 million increase in the fair value of our strategic investments and $63.6 million of cash received from issuances of common stock under our employee benefit plans partially offset by $99.8 million of cash used to repurchase shares of our common stock and expenditures for property and equipment of $18.0 million as well as other expenditures.

### Sources of Liquidity

As of March 31, 2019, we had cash, cash equivalents and marketable securities of $3.5 billion, which represented an increase of $310 million from $3.2 billion as of December 31, 2018. 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/SYMKEVI, ORKAMBI and KALYDECO. Future cash flows will be dependent on, among other things, the timing of and our ability to complete reimbursement discussions in European countries and, if and when, we obtain approval for a triple combination regimen.

We may borrow up to $500.0 million pursuant to a revolving credit facility that we entered into in 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 first quarter of 2019, 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. Since the beginning of 2018, the value of our strategic investment in CRISPR has fluctuated significantly on a quarterly basis. The future value of our strategic investments, including our investments in CRISPR and Moderna, 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 have significant future capital requirements, including:

- significant expected operating expenses to conduct research and development activities and to operate our organization; and
- 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.

In addition,

- As of March 31, 2019, we have accrued approximately $382.7 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.

- 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. For example, in 2018, we made $100.4 million of upfront and milestone payments related to collaborations and asset acquisitions.
- 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 January 2018, we announced a share repurchase program to repurchase up to $500.0 million of shares of our common stock through December 31, 2019. As of March 31, 2019, $52.0 million remained available to fund repurchases under the share repurchase program.

We expect that cash flows from our products 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 products, and the potential introduction of one or more of our other drug candidates to the market, including a triple combination regimen for patients with CF, 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, 2018, which was filed with the Securities and Exchange Commission, or SEC, on February 13, 2019. 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 three months ended March 31, 2019, 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, 2018, which was filed with the SEC on February 13, 2019.

### RECENT ACCOUNTING PRONOUNCEMENTS

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

## Market risk

As filed, 4,792 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 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 March 31, 2019, we had no principal or interest outstanding. A portion of our “Interest expense” in 2019 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 March 31, 2019, we held foreign exchange forward contracts that were designated as cash flow hedges with notional amounts totaling $560.9 million and had a net fair value of $19.8 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 March 31, 2019 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 March 31, 2019 would change by approximately $56.1 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” 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, 1,771 characters.

### Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, as of March 31, 2019 our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

### Changes in Internal Controls Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the three months ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We implemented and modified certain internal controls in connection with the new lease accounting standard, ASC 842, *Leases*, which we adopted effective January 1, 2019. There were no significant changes to our internal control over financial reporting due to the adoption of this standard.

## Risk factors

As filed, 4,329 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 13, 2019. 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 net product revenues;
- our expectations regarding clinical trials, development timelines and regulatory authority filings and submissions for ivacaftor, lumacaftor, tezacaftor, VX-659, VX-445, VX-150 and the timelines for regulatory filings for a triple combination regimen;
- our ability to obtain reimbursement for our medicines in ex-U.S. markets and our ability to otherwise successfully market our medicines 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 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, 2018, which was filed with the SEC on February 13, 2019. 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 May 1, 2019.
Source: SEC EDGAR, the filing index for accession 0000875320-19-000019. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.