# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Mar 31, 2020

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2020-05-01
- Accepted by EDGAR: May 1, 2020, 20:37 ET
- Period: 2020-03-31
- Accession: 0000875320-20-000019
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532020000019/a2020q110-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532020000019/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-01-01 to 2020-03-31 | $1.52bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-01-01 to 2020-03-31 | $162.5m | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2020-01-01 to 2020-03-31 | $448.5m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2020-01-01 to 2020-03-31 | $182.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-01-01 to 2020-03-31 | $720.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2020-01-01 to 2020-03-31 | $54.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-01-01 to 2020-03-31 | $602.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-01-01 to 2020-03-31 | $2.29 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-01-01 to 2020-03-31 | $2.32 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-01-01 to 2020-03-31 | 263,515,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-01-01 to 2020-03-31 | $815.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-01-01 to 2020-03-31 | $19.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2020-01-01 to 2020-03-31 | $300.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-03-31 | $3.59bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-03-31 | $5.45bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-03-31 | $8.89bn | us-gaap:Assets |
| Current liabilities | at 2020-03-31 | $1.54bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-03-31 | $2.43bn | us-gaap:Liabilities |

## Management's discussion and analysis

As filed, 42,462 characters.

### OVERVIEW

We invest in scientific innovation to create transformative medicines for people with serious diseases with a focus on specialty markets. We continue to focus on developing and commercializing therapies for the treatment of cystic fibrosis, or CF. In 2019, we obtained approval in the United States, or U.S., for and launched TRIKAFTA (elexacaftor/tezacaftor/ivacaftor and ivacaftor). We are broadening our pipeline through internal research efforts and accessing external innovation through business development transactions.

We have four approved medicines that treat the underlying cause of CF, which is a life-threatening genetic disease. In October 2019, TRIKAFTA, our triple-combination regimen, was approved by the United States Food and Drug Administration, or FDA, for the treatment of patients with CF 12 years of age or older who have at least one *F508del* mutation in the cystic fibrosis transmembrane conductance regulator, or CFTR, gene. This approval increased the number of patients eligible for our medicines in the U.S. by approximately 6,000 and provided an additional treatment option for many patients who are also eligible for one of our previously approved products. We have submitted a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, for this triple combination regimen. Our four medicines are collectively approved to treat approximately 60% of the 75,000 CF patients in North America, Europe and Australia. We are focused on obtaining approval for the triple combination in ex-U.S. markets for patients 12 years of age and older and evaluating our triple combination in younger patients with the goal of having treatments for up to 90% of patients with CF. We are also pursuing genetic therapies to address the remaining 10% of CF patients.

Our small molecule programs include programs focused on developing treatments for alpha-1 antitrypsin, or AAT, deficiency, APOL1-mediated kidney diseases and pain. We are evaluating CTX001, a genetic therapy as a potential treatment for sickle cell disease and beta thalassemia, in Phase 1/2 clinical trials in collaboration with CRISPR Therapeutics AG, or CRISPR. In 2019, through a series of strategic transactions, we acquired preclinical genetic therapy programs for Duchenne muscular dystrophy, or DMD, and myotonic dystrophy type 1, or DM1, and preclinical programs to develop cell-based therapies for type 1 diabetes, or T1D.

We are monitoring the potential impacts of the recent spread of the novel strain of the coronavirus (“COVID-19”) on our business. COVID-19 has not affected our supply chain or the demand for our medicines and we believe that we will be able to continue to supply all of our approved medicines to our patients globally. We have adjusted our business operations in response to COVID-19, with a majority of our employees working remotely, and COVID-19 has resulted in delays in certain research and development activities.

### Financial Highlights

#### Revenues

In the first quarter of 2020, our net product revenues continued to increase due to the approval of TRIKAFTA in late 2019 and uptake of our medicines medicines in ex-U.S. markets following completion of reimbursement agreements in 2019.

#### Expenses

Our combined R&D and SG&A expenses increased to $630.8 million in the first quarter of 2020 from $486.5 million in the first quarter of 2019. In the first quarter of 2020, cost of sales was 11% of our net product revenues.

#### Balance Sheet

### Business Updates

COVID-19 has not affected our supply chain and we believe that we will be able to continue to supply all of our approved medicines to our patients globally.

#### TRIKAFTA (elexacaftor/tezacaftor/ivacaftor and ivacaftor)

- The majority of the approximately 18,000 eligible patients in the United States have now initiated treatment with TRIKAFTA following its approval in October 2019.
- The MAA for the elexacaftor, tezacaftor and ivacaftor triple combination in patients 12 years of age and older with at least one *F508del* mutation that we submitted in 2019 is being reviewed by the EMA.
- We recently submitted our applications for approval of the elexacaftor, tezacaftor and ivacaftor triple combination for patients 12 years of age and older with at least one *F508del* mutation in Australia and Switzerland.
- We recently completed enrollment for a Phase 3 clinical trial evaluating the use of the elexacaftor, tezacaftor and ivacaftor triple combination in children 6 to 11 years of age with CF who have two copies of the *F508del* mutation or who have one *F508del* mutation and one minimal function mutation. If the data from this clinical trial is positive, we plan to submit a supplemental New Drug Application, or sNDA, to the FDA in the second half of 2020 for children 6 to 11 years of age with at least one *F508del* mutation, followed by regulatory submissions in other countries.

#### KALYDECO (ivacaftor)

- We recently completed the submission of an sNDA to the FDA and Type 2 variation to the EMA for the use of KALYDECO in patients four to less than six months of age.

#### Pipeline

Depending on the disease, stage of development and type of clinical trial, and to ensure patient safety and reduce the burden on the healthcare system at a time of critical need, we have temporarily paused or delayed enrollment in certain clinical trials.

- *AAT Deficiency:* We temporarily paused screening and enrollment in the Phase 2 proof-of-concept clinical trial for VX-814, our first investigational oral small molecule corrector for the treatment of alpha-1 antitrypsin, or AAT, deficiency, in patients with AAT deficiency who have two copies of the Z mutation. The Phase 2 clinical trial remains active and we continue to initiate new trial sites to enable future patient enrollment.
- *Focal Segmental Glomerulosclerosis:* We recently initiated a Phase 2 proof-of-concept clinical trial designed to evaluate the reduction in proteinuria in patients with APOL1-mediated focal segmental glomerulosclerosis, or FSGS, receiving treatment with VX-147.
- *Beta Thalassemia and Sickle Cell Disease:* We and our collaborator, CRISPR, expect to provide additional data from the two ongoing Phase 1/2 clinical trials of the investigational CRISPR/Cas9 gene-editing therapy CTX001, in patients with transfusion-dependent beta thalassemia and in patients with severe sickle cell disease in 2020.
- *T1D*: We continue to advance our cell therapy program for the treatment of T1D and expect to initiate clinical development in patients in late 2020 or early 2021.

#### External Innovation

- *Affinia Therapeutics:* In April 2020, we entered into a collaboration with Affinia Therapeutics Inc. to gain access to a novel library of AAV capsids to support our ongoing research and development efforts in genetic therapies. The goal of the collaboration will be to develop gene therapies for people affected by DMD, DM1 and CF.
- *Moderna:* Based on preclinical data generated to date, we recently extended our collaboration with Moderna, aimed at the discovery and development of messenger ribonucleic acid, or mRNA, therapeutics for the treatment of CF.

### Research

We are continuing to invest in our research programs and fostering scientific innovation in order to identify and develop transformative medicines. Our strategy is to combine transformative advances in the understanding of human disease and the science of therapeutics in order to identify and develop new medicines. 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 acquire technologies and programs and 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 generally make it illegal for a prescription drug manufacturer to knowingly and willfully solicit, offer, receive or pay any remuneration in return for or to induce the referral of business, including the purchase or prescription of a particular drug that is reimbursed by a state or federal health care 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. In addition, we are subject to various data protection and privacy laws and regulations in the U.S., E.U., Canada, Australia and other jurisdictions. 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 first three CF medicines and are working with these stakeholders to obtain reimbursement for TRIKAFTA. We plan to 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 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 experienced significant challenges in obtaining reimbursement for ORKAMBI in certain ex-U.S. markets, however, we now have obtained reimbursement for ORKAMBI or SYMKEVI in most of our significant ex-U.S. markets. In some ex-U.S. markets, including Ireland, Denmark and Australia, our reimbursement agreements include innovative arrangements that provide a pathway to access and rapid reimbursement for certain future CF medicines. We filed a MAA with the EMA for the triple combination regimen of elexacaftor, tezacaftor and ivacaftor and, if approved, we would need to seek government reimbursement on a country-by-country basis, in most European markets. In December 2019, we reached an agreement with the government in Ireland to expand the existing reimbursement agreement to include the triple combination regimen pending approval by the EMA. We continue to seek government reimbursement and label expansions for our medicines in the applicable jurisdictions.

### Strategic Transactions

#### Acquisitions

As part of our business strategy, we seek to acquire drugs, drug candidates and other technologies and businesses that have the potential to complement our ongoing research and development efforts. In 2019, we invested significantly in business development transactions designed to augment our pipeline, including the acquisition of Exonics, a privately-held company focused on creating transformative gene-editing therapies to repair mutations that cause DMD and other severe neuromuscular diseases, including DM1, and Semma, a privately-held company focused on the use of stem cell-derived human islets as a potentially curative treatment for T1D. In the Exonics acquisition, we paid approximately $245.0 million upfront to Exonics equity holders and agreed to additional payments based upon successful achievement of specified development and regulatory milestones. In the Semma acquisition, we paid approximately $950.0 million in cash to Semma equity holders. We expect to continue to identify and evaluate potential acquisitions that may be similar to or different from the transactions that we have engaged in previously.

Both of our 2019 acquisitions were accounted for as business combinations. As of the acquisition date for each transaction, the cash payments, as well as the fair value of contingent consideration for Exonics, were allocated primarily to goodwill and the fair value of several in-process research and development assets that we acquired. The fair value of contingent consideration related to Exonics was recorded as a liability and will be adjusted on a quarterly basis in the future. As a result, these acquisitions are primarily reflected in additional assets and liabilities on our condensed consolidated balance sheet. Please refer to Note C, “Acquisitions,” and our critical accounting policies, “Acquisitions,” in our 2019 Annual Report on Form 10-K for further information regarding the significant judgments and estimates related to our 2019 acquisitions.

#### Collaboration and Licensing Arrangements

We enter into arrangements with third parties, including collaboration and licensing arrangements, for the development, manufacture and commercialization of drugs, drug candidates and other technologies that have the potential to complement our ongoing research and development efforts. We expect to continue to identify and evaluate collaboration and licensing opportunities that may be similar to or different from the collaborations and licenses that we have engaged in previously.

#### 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 a number of companies, including Arbor Biotechnologies, Inc., CRISPR, Kymera Therapeutics, Inc. and Molecular Templates, Inc. Generally, when we in-license a technology or drug candidate, we make upfront payments to the collaborator, assume the costs of the program and/or agree to make contingent payments, which could consist of milestone, royalty and option payments. Most of these collaboration payments are expensed as research and development expenses; however, 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. In the first quarter of 2020 and the first quarter of 2019, our research and development expenses included $36.3 million and $5.3 million, respectively, related to upfront and milestones payments pursuant to our collaboration agreements.

#### 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 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.

Please refer to Note C, “Collaborative Arrangements,” for further information regarding our in-license agreements and out-license agreements.

### Strategic Investments

In connection with our business development activities, we have periodically made equity investments in our collaborators. As of March 31, 2020, we held strategic equity investments in several public companies, including CRISPR, and certain private companies, and we plan to 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) are recorded to other income (expense), net in our condensed consolidated statement of operations. For equity investments without readily determinable fair values including equity investments in private companies, 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 2020 and the first quarter of 2019, we recorded within other income (expense), a net loss of $44.9 million and a net gain of $43.6 million, respectively, related to changes in the fair value of our strategic investments, and from sales of certain equity investments. 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, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $1,515,107 | $858,435 | $656,672 | 76% |
| Operating costs and expenses | 794,883 | 581,627 | 213,256 | 37% |
| Income from operations | 720,224 | 276,808 | 443,416 | 160% |
| Other non-operating (expense) income, net | (62,690) | 43,357 | \*\* | \*\* |
| Provision for income taxes | 54,781 | 51,534 | 3,247 | 6% |
| Net income | $602,753 | $268,631 | $334,122 | 124% |
| Net income per diluted common share | $2.29 | $1.03 |  |  |
| Diluted shares used in per share calculations | 263,515 | 260,175 |  |  |
|  |  |  | \*\* Not meaningful |  |

### Net Income

Our net income increased in the first quarter of 2020 as compared to the first quarter of 2019 due to significant increases in our revenues partially offset by increases in our operating expenses, non-operating expense and provision for income taxes. The increase in revenues was primarily due to the U.S. approval of TRIKAFTA in the fourth quarter of 2019. Increases in operating expenses were the result of increased cost of sales consistent with increased product revenues, increased investment in research and development and increased sales, general and administrative expenses to support our business. The change in non-operating (expense) income, net was primarily related to changes in the value of our strategic investments.

### Earnings Per Share

Diluted net income per common share was $2.29 in the first quarter of 2020 as compared to diluted net income per common share of $1.03 in the first quarter of 2019.

### Revenues

*(in thousands)*

|  | Three Months Ended March 31, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Product revenues, net | $1,515,107 | $857,253 | $657,854 | 77% |
| Collaborative and royalty revenues | — | 1,182 | (1,182) | \*\* |
| Total revenues | $1,515,107 | $858,435 | $656,672 | 76% |
|  |  |  | \*\* Not meaningful |  |

### Product Revenues, Net

*(in thousands)*

|  | Three Months Ended March 31, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| TRIKAFTA | $895,233 | $— | $895,233 | \*\* |
| SYMDEKO/SYMKEVI | 173,159 | 320,275 | (147,116) | (46)% |
| ORKAMBI | 234,138 | 293,007 | (58,869) | (20)% |
| KALYDECO | 212,577 | 243,971 | (31,394) | (13)% |
| Total product revenues, net | $1,515,107 | $857,253 | $657,854 | 77% |
|  |  |  | \*\* Not meaningful |  |

In the first quarter of 2020, our net product revenues increased by $657.9 million as compared to the first quarter of 2019. The increase in total net product revenues in the first quarter of 2020 was primarily due to the launch of TRIKAFTA, which was approved in the United States in the fourth quarter of 2019. Decreases in revenues for our other products were the result of patients in the United States switching from these medicines to TRIKAFTA partially offset by label expansions and expanded access to our medicines in ex-U.S markets. In the first quarter of 2020 and 2019, our net product revenues included product revenues of $327.5 million and $217.4 million, respectively, from ex-U.S. markets. Net product revenues in the first quarter of 2020 were also positively impacted by factors that may not be repeated in future periods, including early prescription refills, advance purchasing of medicines and initial compliance and persistence rates of patients who recently initiated treatment with TRIKAFTA.

### Collaborative and Royalty Revenues

We did not record any collaborative and royalty revenues in the first quarter of 2020. Our collaborative and royalty revenues were $1.2 million in the first quarter of 2019. 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 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, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of sales | $162,497 | $95,092 | $67,405 | 71% |
| Research and development expenses | 448,528 | 339,490 | 109,038 | 32% |
| Sales, general and administrative expenses | 182,258 | 147,045 | 35,213 | 24% |
| Change in fair value of contingent consideration | 1,600 | — | 1,600 | \*\* |
| Total costs and expenses | $794,883 | $581,627 | $213,256 | 37% |
|  |  |  | \*\* 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 TRIKAFTA, SYMDEKO/SYMKEVI, KALYDECO and ORKAMBI, calculated as a percentage of net sales, range from the single digits to the sub-teens. Over the last several years, our cost of sales has been increasing 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 2019 and 2020.

### Research and Development Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Research expenses | $157,270 | $90,463 | $66,807 | 74% |
| Development expenses | 291,258 | 249,027 | 42,231 | 17% |
| Total research and development expenses | $448,528 | $339,490 | $109,038 | 32% |

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 2018, we have incurred approximately $3.6 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 2019 and the first quarter of 2020, 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.

#### Research Expenses

*(in thousands)*

| Research Expenses: | Three Months Ended March 31, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $34,269 | $24,379 | $9,890 | 41% |
| Stock-based compensation expense | 26,409 | 17,535 | 8,874 | 51% |
| Outsourced services and other direct expenses | 30,853 | 23,364 | 7,489 | 32% |
| Collaboration and asset acquisition payments | 36,250 | — | 36,250 | \*\* |
| Infrastructure costs | 29,489 | 25,185 | 4,304 | 17% |
| Total research expenses | $157,270 | $90,463 | $66,807 | 74% |
|  |  |  | \*\* Not meaningful |  |

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. Our research expenses increased by 74% in the first quarter of 2020 compared to the first quarter of 2019 primarily as a result of collaboration and asset acquisition payments for which there were no similar expenses in the first quarter of 2019 as well as increased expenses to support our cell and genetic therapy programs.

#### Development Expenses

*(in thousands)*

| Development Expenses: | Three Months Ended March 31, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $79,598 | $60,507 | $19,091 | 32% |
| Stock-based compensation expense | 46,278 | 42,180 | 4,098 | 10% |
| Outsourced services and other direct expenses | 116,433 | 97,768 | 18,665 | 19% |
| Collaboration and asset acquisition payments | — | 5,250 | (5,250) | \*\* |
| Infrastructure costs | 48,949 | 43,322 | 5,627 | 13% |
| Total development expenses | $291,258 | $249,027 | $42,231 | 17% |
|  |  |  | \*\* Not meaningful |  |

Our development expenses increased by 17% in the first quarter of 2020 as compared to the first quarter of 2019, primarily due to increased expenses related to our advancing pipeline including clinical trials, headcount and infrastructure costs.

### Sales, General and Administrative Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $182,258 | $147,045 | $35,213 | 24% |

Sales, general and administrative expenses increased by 24% in the first quarter of 2020 as compared to the first quarter of 2019, primarily due to increased global support for our medicines and incremental investment to support the launch of our triple combination regimen.

### Contingent Consideration

In the first quarter of 2020, the increase in the fair value of contingent consideration potentially payable to Exonics’ former equity holders was $1.6 million. There were no similar amounts for the first quarter of 2019.

### Other Non-Operating Income (Expense), Net

### Interest Income

Interest income decreased from $15.6 million in the first quarter of 2019 to $12.6 million in the first quarter of 2020 primarily due to 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 $14.1 million in the first quarter of 2020 as compared to $14.9 million in the first quarter of 2019. The majority of our interest expense in these periods was related to imputed interest expense associated with our leased corporate headquarters in Boston. Our future interest expense will be dependent on whether, and to what extent, we borrow amounts under our credit facility.

### Other Income (Expense), Net

Other income (expense), net was an expense of $61.1 million in the first quarter of 2020 as compared to income of $42.6 million in the first quarter of 2019. Our other income (expense), net in these periods is primarily related to changes in the fair value of our strategic investments, as well as realized gains from sales of certain investments. We expect that due to the volatility of the stock price of biotechnology companies, our other income (expense), net will fluctuate in future periods based on increases or decreases in the fair value of our strategic investments.

### Income Taxes

Our provision for income taxes in the first quarter of 2020 was $54.8 million as compared to $51.5 million in the first quarter of 2019. Our effective tax rate for the first quarter of 2020 was lower than the U.S. statutory rate primarily due to a discrete benefit related to the write off of a long-term intercompany receivable and excess tax benefits related to stock-based compensation. Our effective tax rate for the first quarter of 2019 was lower than the U.S. statutory rate primarily due to excess tax benefits related to stock-based compensation. We released our valuation allowance on the majority of our net operating losses and other deferred tax assets in the fourth quarter of 2018. Starting in 2019, we began recording a provision for income taxes on our pre-tax income using an effective tax rate approximating statutory rates. Due to our ability to offset our pre-tax income against previously benefited net operating losses, we expect a portion of our tax provision to represent a non-cash expense until our net operating losses have been fully utilized.

### LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes the components of our financial condition as of March 31, 2020 and December 31, 2019:

*(in thousands)*

|  | March 31, 2020 | December 31, 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cash, cash equivalents and marketable securities | $4,190,396 | $3,808,294 | $382,102 | 10% |
| Working Capital |  |  |  |  |
| Total current assets | 5,446,400 | 4,822,829 | 623,571 | 13% |
| Total current liabilities | (1,538,750) | (1,334,827) | 203,923 | 15% |
| Total working capital | $3,907,650 | $3,488,002 | $419,648 | 12% |

As of March 31, 2020, total working capital was $3.9 billion, which represented an increase of $420 million from $3.5 billion as of December 31, 2019. The increase in total working capital in the first quarter of 2020 was primarily related to $815.7 million of cash provided by operations partially offset by $300.0 million of cash used to repurchase our common stock pursuant to our share repurchase program that we announced in July 2019.

### Sources of Liquidity

As of March 31, 2020, we had cash, cash equivalents and marketable securities of $4.2 billion, which represented an increase of $382 million from $3.8 billion as of December 31, 2019. 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 may borrow up to $500.0 million pursuant to our revolving credit facility that we entered into in 2019. 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 $500.0 million, up to a total of $1.0 billion.

Other possible sources of future liquidity include commercial debt, public and private offerings of our equity and debt securities, 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.

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.
- We have reached an agreement with the French government and will repay a portion of the amounts we have collected under the ORKAMBI early access programs in France to the French government in 2020 based on the difference between the invoiced amount and the final amount for ORKAMBI distributed through these programs as reflected in the structure of the agreement with the French government.
- To the extent we borrow amounts under the credit agreement we entered into in 2019, we would be required to repay any outstanding principal amounts in 2024.
- As of March 31, 2020, $164.0 million remained available to fund repurchases under our 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 and do not expect COVID-19 to have an adverse affect on our liquidity. 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 our products, 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, 2019, which was filed with the Securities and Exchange Commission, or SEC, on February 13, 2020. 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 are 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, 2020, 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, 2019, which was filed with the SEC on February 13, 2020.

### 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, 4,911 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 2019, we entered into a credit agreement. Loans under the credit agreement bear interest, at our option, at either a base rate or a Eurocurrency rate, in each case plus an applicable margin. The applicable margin on base rate loans ranges from 0.125% to 0.50% and the applicable margin on Eurocurrency loans ranges from 1.125% to 1.50%, in each case, based on our consolidated leverage ratio (the ratio of our total consolidated funded indebtedness to our consolidated EBITDA for the most recently completed four fiscal quarter period). 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, 2020, we had no principal or interest outstanding. A portion of our “Interest expense” in 2020 will be dependent on whether, and to what extent, we borrow 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, 2020, we held foreign exchange forward contracts that were designated as cash flow hedges with notional amounts totaling $827.0 million and had a net fair value of $26.1 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, 2020 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, 2020 would change by approximately $82.7 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, 1,547 characters.

### Evaluation of Disclosure Controls and Procedures

Our management (under the supervision and with the participation of 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, has concluded that, based on such evaluation, as of March 31, 2020 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, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 6,856 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 13, 2020. There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K, except as noted below.

**We are subject to risks associated with the spread of the novel strain of coronavirus, or COVID-19.**

Our operations expose us to risks associated with the spread of COVID-19, which has affected the regions in which we conduct our operations and distribute medicines to patients. COVID-19 has broadly affected the global economy, resulted in significant travel and work restrictions in many regions and has put a significant strain on healthcare resources. COVID-19 is having, and we expect it will continue to have, an impact on our operations and an impact on the operations of our collaborators, third-party contractors and other entities, including governments, governmental agencies and payors, with which we interact. To date, the most significant effects on our business have been delays in certain research and development activities and the requirement that a majority of our employees work remotely. In the future, the economic impacts of the COVID-19 outbreak could affect our business directly or indirectly, including potentially affecting the net prices for our products through changes in our payor mix as a result of increased unemployment in the United States or increased pressure on healthcare costs. The effects on our research, development, manufacturing and commercialization activities, will be dependent on, among other things, the severity and duration of the COVID-19 outbreak as well as the impact of the outbreak on our third-party manufacturers, suppliers, distributors, subcontractors and customers. While the ultimate impact of COVID-19 on our business is highly uncertain, any negative impacts that materialize could materially adversely affect our operations, financial performance and stock price. Any negative impacts of COVID-19, alone or in combination with others, could exacerbate risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. The full extent to which the COVID-19 outbreak will negatively affect our operations, financial performance and stock price will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the outbreak and actions taken by governmental authorities and other third parties in response to the outbreak.

### 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 the effect of COVID-19 on, among other things, our financial performance, business and operations;
- our expectations regarding clinical trials, development timelines and regulatory authority filings and submissions for ivacaftor, lumacaftor, tezacaftor, elexacaftor, and the timelines for regulatory filings for our 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 potential future benefits of our acquisitions and collaborations;
- 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, 2019, which was filed with the SEC on February 13, 2020. 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, 2020.
Source: SEC EDGAR, the filing index for accession 0000875320-20-000019. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.