# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Sep 30, 2020

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2020-10-30
- Accepted by EDGAR: Oct 30, 2020, 16:13 ET
- Period: 2020-09-30
- Accession: 0000875320-20-000043
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000087532020000043/vrtx-20200930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000087532020000043/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $1.54bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $4.58bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $186.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2020-01-01 to 2020-09-30 | $533.2m | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2020-07-01 to 2020-09-30 | $493.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2020-01-01 to 2020-09-30 | $1.36bn | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $184.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2020-01-01 to 2020-09-30 | $558.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $672.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | $2.11bn | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $78.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $120.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $667.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | $2.11bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $2.53 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | $7.98 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $2.56 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | $8.10 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 264,079,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 264,031,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $2.76bn | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $212.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2020-01-01 to 2020-09-30 | $408.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-09-30 | $5.36bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $7.46bn | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $11.30bn | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $2.00bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-30 | $3.17bn | us-gaap:Liabilities |
| Shareholders' equity | at 2020-09-30 | $8.13bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,528 characters.

### OVERVIEW

We invest in scientific innovation to create transformative medicines for people with serious diseases with a focus on specialty markets. We have four approved medicines to treat cystic fibrosis, or CF, a life-threatening genetic disease, and are focused on expanding the number of people with CF eligible for our medicines. We are broadening our pipeline into additional disease areas through internal research efforts and accessing external innovation through business development transactions.

In October 2019, TRIKAFTA (elexacaftor/tezacaftor/ivacaftor and ivacaftor), our triple combination regimen, was approved by the U.S. Food and Drug Administration, or FDA, for the treatment of people with CF 12 years of age and older who have at least one *F508del* mutation in the cystic fibrosis transmembrane conductance regulator, or CFTR, gene. In August 2020, our triple combination regimen was approved by the European Commission for people with CF 12 years of age and older with specific mutations in their CFTR gene. We market our triple combination regimen as KAFTRIO in the European Union, or E.U. Approval of TRIKAFTA and KAFTRIO increased the number of people with CF that are eligible for our medicines by up to 16,000 and provides an additional treatment option for many people who are eligible for one of our previously approved products. Collectively, our medicines currently are approved to treat the majority of the people with CF in North America, Europe and Australia. We are evaluating our triple combination regimen in younger children with the goal of having small molecule treatments for up to 90% of people with CF. We are also pursuing genetic therapies to address the remaining 10% of people with CF.

Beyond CF, 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, or SCD, and transfusion-dependent beta thalassemia, or TDT, 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 programs to develop cell-based therapies for type 1 diabetes, or T1D, and preclinical genetic therapy programs for Duchenne muscular dystrophy, or DMD, and myotonic dystrophy type 1, or DM1.

### Financial Highlights

#### Revenues

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

#### Expenses

Our combined R&D and SG&A expenses decreased to $678.0 million in the third quarter of 2020 from $715.6 million in the third quarter of 2019. In the third quarter of 2020, cost of sales was 12% of our net product revenues.

#### Balance Sheet

### Business Updates

#### Cystic Fibrosis

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

- In August 2020, the European Commission granted marketing authorization for KAFTRIO to treat people with CF 12 years of age and older with one *F508del* mutation and one minimal function mutation, or two *F508del* mutations.
- The European Medicines Agency, or EMA, validated a Type II Variation Marketing Authorization Application, or MAA, for KAFTRIO that we believe supports an expansion of the E.U. label to people with CF who have one copy of the *F508del* mutation.
- We reported positive data from our Phase 3 clinical trial evaluating the use of our triple combination regimen 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. We plan to submit a supplemental New Drug Application, or sNDA, to the FDA for children 6 to 11 years of age with at least one *F508del* mutation in the fourth quarter of 2020.
- The FDA accepted three sNDAs for TRIKAFTA, SYMDEKO and KALYDECO. These regulatory submissions are intended to expand the labels of TRIKAFTA, SYMDEKO and KALYDECO to include people with CF who have rare CFTR mutations.
- We are initiating a Phase 3 clinical trial evaluating the use of our triple combination regimen in children two to five years of age with CF who have either two copies of the *F508del* mutation or one copy of the *F508del* mutation and one minimal function mutation.

#### SYMDEKO/SYMKEVI (tezacaftor and ivacaftor)

- The EMA’s Committee for Medicinal Products for Human Use, or CHMP, adopted a positive opinion for the label extension of SYMKEVI for the treatment of children 6 to 11 years of age with CF with two *F508del* mutations or one *F508del* mutation and certain residual function mutations.

#### KALYDECO (ivacaftor)

- In September 2020, the FDA approved KALYDECO to treat infants with CF four months of age to less than six months of age who have at least one mutation in their CFTR gene that is responsive to KALYDECO.
- The EMA’s CHMP adopted a positive opinion for the label extension of KALYDECO for the treatment of infants with CF four months of age to less than six months of age who have at least one mutation in their CFTR gene that is responsive to KALYDECO.

#### Genetic Therapies

- We entered into a new collaboration with Moderna, Inc., or Moderna, aimed at the discovery and development of lipid nanoparticles and mRNAs that can deliver gene-editing therapies to lung cells for the treatment of CF.

#### Pipeline

#### Beta Thalassemia and Sickle Cell Disease

- We and our collaborator, CRISPR, are evaluating the use of an ex-vivo CRISPR gene-editing therapy for the treatment of TDT and SCD. This approach aims to edit a patient’s hematopoietic stem cells to produce fetal hemoglobin in red blood cells, which has the potential to reduce or eliminate symptoms associated with disease.
- We and our collaborator, CRISPR, previously announced that, as of June 2020, seven patients had been dosed across the two Phase 1/2 clinical trials of the investigational CRISPR/Cas9 gene-editing therapy CTX001 and presented data at the European Hematology Association Congress from two patients with TDT and one patient with severe SCD. Additional patients have been enrolled and dosed in both TDT and SCD Phase 1/2 clinical trials. In the fourth quarter of 2020, we expect to report clinical data from additional patients treated with CTX001 and data from patients with longer follow-up.
- The EMA granted Priority Medicines designation to CTX001 for the treatment of severe SCD. CTX001 has been granted Regenerative Medicine Advanced Therapy, Fast Track, Orphan Drug and Rare Pediatric Disease designations from the FDA and Orphan Drug Designation from the European Commission for both TDT and SCD.

#### Alpha-1 Antitrypsin Deficiency

- We are focused on identifying and developing multiple drug candidates with the potential to correct the misfolding of Z-AAT protein in the liver in order to increase the levels of functional AAT in the blood. Misfolded Z-AAT protein is the root cause of AAT deficiency.
- Enrollment is ongoing in a Phase 2 proof-of-concept clinical trial for the Z-AAT corrector, VX-864. We expect data from this clinical trial in the first half of 2021.
- In October 2020, we discontinued development of VX-814 based on the safety and pharmacokinetic profile of VX-814 observed in a Phase 2 clinical trial.

#### APOL1-Mediated Kidney Diseases

- We are evaluating inhibitors of APOL1 function to reduce proteinuria in people with serious kidney disease, including focal segmental glomerulosclerosis, or FSGS.
- Enrollment is ongoing in a Phase 2 proof-of-concept clinical trial designed to evaluate the reduction of proteinuria in people with APOL1-mediated FSGS after treatment with VX-147. We expect data from this clinical trial in 2021.

#### Type 1 Diabetes

- We are developing a cell therapy designed to replace insulin-producing islet cells in patients with T1D. We are pursuing two programs for the transplant of these functional islets into patients: transplantation of islet cells alone, using immunosuppression to protect the implanted cells, and implantation of the islet cells inside a novel immunoprotective device.
- We have completed the required enabling nonclinical studies and manufacturing work to support the submission of an Investigational New Drug, or IND, application to the FDA for the first program (transplantation of islet cells alone) in the fourth quarter of 2020.

#### COVID-19

We continue to monitor the impacts of the COVID-19 global pandemic 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 patients globally. We have adjusted our business operations in response to COVID-19, with a majority of our employees continuing to work remotely. We continue to monitor local COVID-19 trends and government guidance for each of our site locations, and we have begun to re-open certain of our sites utilizing a phased, site-specific approach. To provide a safe working environment for our on-site employees, we have, among other things, limited employee numbers at our sites and increased safety measures, including enhanced cleaning and sanitation protocols, required use of personal protective equipment for all on-site employees, hand sanitation stations throughout our sites and implementation of various social distancing measures while on-site.

### Research

We continue to invest in our research programs and foster 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. For example, in October 2020, we discontinued development of VX-814 based on the safety and pharmacokinetic profile of VX-814 observed in a Phase 2 clinical trial.

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., U.K., 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 U.S. and ex-U.S. markets.

In the U.S., we have worked successfully with third party payors in order to promptly obtain appropriate levels of reimbursement for our CF medicines. 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 CF 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, but experienced significant challenges in obtaining reimbursement for ORKAMBI in certain ex-U.S. markets. With the completion of reimbursement discussions in England and France in 2019, we have reimbursement for ORKAMBI or SYMKEVI in most of our significant ex-U.S. markets. In addition, in several ex-U.S. markets, including England, Ireland, Denmark and Australia, our reimbursement agreements include innovative arrangements that provide a pathway to access and rapid reimbursement for certain future CF medicines. For example, our existing reimbursement agreements in England, Ireland, and Denmark have been expanded to include KAFTRIO. We expect to continue to focus significant resources to obtain appropriate reimbursement for our products in ex-U.S. markets.

### 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 Semma Therapeutics, Inc., or Semma, a privately-held company focused on the use of stem cell-derived human islets as a potentially curative treatment for T1D, and Exonics Therapeutics, Inc., or 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. In the Semma acquisition, we paid approximately $950.0 million in cash to Semma equity holders. 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. 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 Affinia Therapeutics Inc., Arbor Biotechnologies, Inc., CRISPR, Kymera Therapeutics, Inc., Moderna, 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 in-licensed drug candidate 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 nine months ended September 30, 2020 and 2019, our research and development expenses included $143.3 million and $261.6 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 agreement with 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 September 30, 2020, we held strategic equity investments in public companies 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) 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 nine months ended September 30, 2020 and 2019, we recorded within other income (expense), net gains of $140.9 million and $68.9 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 increased volatility of the global markets, including as a result of COVID-19, and 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, except percentages and per share amounts)*

|  | Three Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $1,538,271 | $949,828 | $588,443 | 62% | $4,577,863 | $2,749,556 | $1,828,307 | 66% |
| Operating costs and expenses | 866,030 | 850,495 | 15,535 | 2% | 2,467,365 | 2,103,455 | 363,910 | 17% |
| Income from operations | 672,241 | 99,333 | 572,908 | 577% | 2,110,498 | 646,101 | 1,464,397 | 227% |
| Other non-operating income (expense), net | 73,630 | (28,667) | 102,297 | \*\* | 117,677 | 71,868 | 45,809 | 64% |
| Provision for income taxes | 78,437 | 13,148 | 65,289 | 497% | 120,718 | 124,393 | (3,675) | (3)% |
| Net income | $667,434 | $57,518 | $609,916 | 1,060% | $2,107,457 | $593,576 | $1,513,881 | 255% |
| Net income per diluted common share | $2.53 | $0.22 |  |  | $7.98 | $2.28 |  |  |
| Diluted shares used in per share calculations | 264,079 | 260,473 |  |  | 264,031 | 260,182 |  |  |
|  |  |  |  |  |  |  | \*\* Not meaningful |  |

### Net Income

Our net income increased in the third quarter of 2020 as compared to the third quarter of 2019 primarily due to increased revenues resulting from the U.S. approval of TRIKAFTA in the fourth quarter of 2019 and continued uptake of our medicines in ex-U.S. markets. Our net income in the third quarter of 2020 as compared to the third quarter of 2019 also increased due to an increase in the fair value of our strategic investments and decreased collaborative research and development payments, partially offset by increased cost of sales consistent with increased product revenues, increased sales, general and administrative expenses to support our business and an increased provision for income taxes due to our increasing profitability.

Our net income increased in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 primarily due to increased revenues partially offset by increased operating costs and expenses. The increased revenues were primarily due to the U.S. approval of TRIKAFTA in the fourth quarter of 2019 and continued uptake of our medicines in ex-U.S. markets. The increased operating expenses were primarily due to 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.

### Revenues

*(in thousands, except percentages)*

|  | Three Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues, net | $1,536,271 | $949,828 | $586,443 | 62% | $4,575,863 | $2,747,461 | $1,828,402 | 67% |
| Collaborative and royalty revenues | 2,000 | — | 2,000 | \*\* | 2,000 | 2,095 | (95) | (5)% |
| Total revenues | $1,538,271 | $949,828 | $588,443 | 62% | $4,577,863 | $2,749,556 | $1,828,307 | 66% |
|  |  |  |  |  |  |  | \*\* Not meaningful |  |

### Product Revenues, Net

*(in thousands, except percentages)*

|  | Three Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| TRIKAFTA/KAFTRIO | $960,308 | $— | $960,308 | \*\* | $2,773,256 | $— | $2,773,256 | \*\* |
| SYMDEKO/SYMKEVI | 156,178 | 403,714 | (247,536) | (61)% | 501,066 | 1,085,821 | (584,755) | (54)% |
| ORKAMBI | 225,919 | 296,711 | (70,792) | (24)% | 692,038 | 906,159 | (214,121) | (24)% |
| KALYDECO | 193,866 | 249,403 | (55,537) | (22)% | 609,503 | 755,481 | (145,978) | (19)% |
| Total product revenues, net | $1,536,271 | $949,828 | $586,443 | 62% | $4,575,863 | $2,747,461 | $1,828,402 | 67% |
|  |  |  |  |  |  |  | \*\* Not meaningful |  |

In the third quarter and nine months ended September 30, 2020, our net product revenues increased by $586.4 million and $1.83 billion, respectively, as compared to the third quarter and nine months ended September 30, 2019. The increase in total net product revenues in the third quarter of 2020 and nine months ended September 30, 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 third quarter and nine months ended September 30, 2020, our net product revenues included $313.7 million and $955.4 million, respectively, from ex-U.S. markets. In the third quarter and nine months ended September 30, 2019, our net product revenues included $239.5 million and $697.6 million, respectively, from ex-U.S. markets. In the third quarter of 2020, KAFTRIO was approved in the E.U., which we anticipate will positively affect our net product revenues in the future.

### Collaborative and Royalty Revenues

Our collaborative and royalty revenues were $2.0 million in the third quarter and nine months ended September 30, 2020, respectively. We did not record any collaborative and royalty revenues in the third quarter of 2019. In the nine months ended September 30, 2019, our collaborative and royalty revenues were $2.1 million. 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 Merck KGaA, Darmstadt, Germany, are able to successfully develop drug candidates that we have out-licensed to them.

### Operating Costs and Expenses

*(in thousands, except percentages)*

| \` | Three Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of sales | $186,182 | $131,914 | $54,268 | 41% | $533,199 | $362,746 | $170,453 | 47% |
| Research and development expenses | 493,497 | 555,948 | (62,451) | (11)% | 1,362,953 | 1,274,529 | 88,424 | 7% |
| Sales, general and administrative expenses | 184,551 | 159,674 | 24,877 | 16% | 558,613 | 463,221 | 95,392 | 21% |
| Change in fair value of contingent consideration | 1,800 | 2,959 | (1,159) | (39)% | 12,600 | 2,959 | 9,641 | 326% |
| Total costs and expenses | $866,030 | $850,495 | $15,535 | 2% | $2,467,365 | $2,103,455 | $363,910 | 17% |

31

### 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/KAFTRIO, SYMDEKO/SYMKEVI, KALYDECO and ORKAMBI, calculated as a percentage of net sales, range from the single digits to the sub-teens, with royalties on sales of TRIKAFTA/KAFTRIO slightly lower than for our other products. 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 12% and 14% in the third quarter of 2020 and 2019, respectively. Our cost of sales as a percentage of our net product revenues was approximately 12% and 13% in the nine months ended September 30, 2020 and 2019, respectively.

### Research and Development Expenses

*(in thousands, except percentages)*

|  | Three Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research expenses | $186,152 | $302,418 | $(116,266) | (38)% | $477,560 | $537,509 | $(59,949) | (11)% |
| Development expenses | 307,345 | 253,530 | 53,815 | 21% | 885,393 | 737,020 | 148,373 | 20% |
| Total research and development expenses | $493,497 | $555,948 | $(62,451) | (11)% | $1,362,953 | $1,274,529 | $88,424 | 7% |

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 $4.5 billion in research and development expenses associated with drug discovery and development. The successful development of our drug candidates is highly uncertain and subject to a number of risks. In addition, the duration of clinical trials may vary substantially according to the type, complexity and novelty of the drug candidate and the disease indication being targeted. The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activities. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a project and are difficult to predict. Therefore, accurate and meaningful estimates of the ultimate costs to bring our drug candidates to market are not available.

In 2019 and the nine months ended September 30, 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, except percentages)*

| Research Expenses: | Three Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $32,145 | $33,767 | $(1,622) | (5)% | $97,513 | $80,644 | $16,869 | 21% |
| Stock-based compensation expense | 15,301 | 16,170 | (869) | (5)% | 68,206 | 50,843 | 17,363 | 34% |
| Outsourced services and other direct expenses | 27,911 | 27,721 | 190 | 1% | 79,837 | 78,707 | 1,130 | 1% |
| Collaborative payments | 80,050 | 198,979 | (118,929) | (60)% | 143,300 | 251,179 | (107,879) | (43)% |
| Infrastructure costs | 30,745 | 25,781 | 4,964 | 19% | 88,704 | 76,136 | 12,568 | 17% |
| Total research expenses | $186,152 | $302,418 | $(116,266) | (38)% | $477,560 | $537,509 | $(59,949) | (11)% |

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 decreased by 38% in the third quarter of 2020 as compared to the third quarter of 2019 primarily due to a decrease in collaborative payments. Our research expenses decreased by 11% in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily due to a decrease in collaborative payments partially offset by increased expenses to support our cell and genetic therapy programs.

#### Development Expenses

*(in thousands, except percentages)*

| Development Expenses: | Three Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $73,698 | $59,552 | $14,146 | 24% | $221,828 | $178,254 | $43,574 | 24% |
| Stock-based compensation expense | 45,469 | 36,334 | 9,135 | 25% | 135,526 | 117,008 | 18,518 | 16% |
| Outsourced services and other direct expenses | 133,595 | 107,439 | 26,156 | 24% | 374,926 | 298,908 | 76,018 | 25% |
| Collaborative payments | — | 5,000 | (5,000) | \*\* | — | 10,440 | (10,440) | \*\* |
| Infrastructure costs | 54,583 | 45,205 | 9,378 | 21% | 153,113 | 132,410 | 20,703 | 16% |
| Total development expenses | $307,345 | $253,530 | $53,815 | 21% | $885,393 | $737,020 | $148,373 | 20% |
|  |  |  |  |  |  |  | \*\* Not meaningful |  |

Our development expenses increased by 21% in the third quarter of 2020 as compared to the third quarter of 2019 and increased by 20% in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily due to increased expenses related to our diverse pipeline, including clinical trials, headcount and infrastructure costs.

### Sales, General and Administrative Expenses

*(in thousands, except percentages)*

|  | Three Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  | Nine Months Ended September 30, 2020 | 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $184,551 | $159,674 | $24,877 | 16% | $558,613 | $463,221 | $95,392 | 21% |

Sales, general and administrative expenses increased by 16% in the third quarter of 2020 as compared to the third quarter of 2019 and increased by 21% in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily due to increased global support for our medicines, including incremental investment to support the launch of our triple combination regimen and increased support for our CF pipeline products and other disease areas.

### Contingent Consideration

In the third quarter and nine months ended September 30, 2020, the increase in the fair value of contingent consideration potentially payable to Exonics’ former equity holders was $1.8 million and $12.6 million, respectively. In each of the third quarter and nine months ended September 30, 2019, the increase in the fair value of contingent consideration potentially payable to Exonics’ former equity holders was $3.0 million.

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

### Interest Income

Interest income decreased from $17.6 million and $51.3 million in the third quarter and nine months ended September 30, 2019, respectively, to $3.1 million and $19.9 million in the third quarter and nine months ended September 30, 2020, respectively, primarily due to a decrease in 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 $13.9 million and $41.9 million in the third quarter and nine months ended September 30, 2020, respectively, as compared to $14.5 million and $44.3 million in the third quarter and nine months ended September 30, 2019, respectively. 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 facilities.

### Other Income (Expense), Net

Other income (expense), net was income of $84.4 million and $139.6 million in the third quarter and nine months ended September 30, 2020, respectively, as compared to an expense of $31.7 million and income of $64.8 million in the third quarter and nine months ended September 30, 2019, respectively. Our other income (expense), net in these periods was 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 was $78.4 million and $120.7 million in the third quarter and nine months ended September 30, 2020, respectively, as compared to $13.1 million and $124.4 million in the third quarter and nine months ended September 30, 2019, respectively. Our effective tax rate for the nine months ended September 30, 2020 was lower than the U.S. statutory rate primarily due to (i) discrete tax benefits associated with the $209.0 million transfer of intellectual property rights to the United Kingdom, the write-off of a long-term intercompany receivable, and an increase in the United Kingdom’s corporate tax rate; and (ii) excess tax benefits related to stock-based compensation. Our effective tax rate for the nine months ended September 30, 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. We expect to utilize our remaining previously benefited U.S. net operating losses in 2020. As a result, a larger portion of our tax provision will represent a cash tax payable in future periods.

### LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes the components of our financial condition as of September 30, 2020 and December 31, 2019:

*(in thousands)*

|  | September 30, 2020 | December 31, 2019 | Increase/(Decrease) $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cash, cash equivalents and marketable securities | $6,151,058 | $3,808,294 | $2,342,764 | 62% |
| Working Capital |  |  |  |  |
| Total current assets | 7,458,456 | 4,822,829 | 2,635,627 | 55% |
| Total current liabilities | (2,004,026) | (1,334,827) | 669,199 | 50% |
| Total working capital | $5,454,430 | $3,488,002 | $1,966,428 | 56% |

As of September 30, 2020, total working capital was $5.5 billion, which represented an increase of $2.0 billion from $3.5 billion as of December 31, 2019. The increase in total working capital in the nine months ended September 30, 2020 was primarily related to $2.8 billion of cash provided by operations partially offset by $408.0 million of cash used to repurchase our common stock pursuant to the share repurchase program that we announced in July 2019 and expenditures for property and equipment of $212.1 million.

### Sources of Liquidity

As of September 30, 2020, we had cash, cash equivalents and marketable securities of $6.2 billion, which represented an increase of $2.3 billion 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 a total of $2.5 billion pursuant to two revolving credit facilities. We may repay and reborrow amounts under these revolving credit agreements without penalty. Subject to certain conditions, we may request that the borrowing capacity for each of the credit agreements be increased by an additional $500.0 million, for a total of $3.5 billion collectively.

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.

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.
- In 2019, we reached an agreement with the French government and agreed to repay a portion of the amounts we have collected under the ORKAMBI early access programs in France to the French government in the fourth quarter of 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 agreements we entered into in 2019 and 2020, we would be required to repay any outstanding principal amounts in 2024 or 2022, respectively.
- As of September 30, 2020, $56.0 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 effect 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 nine months ended September 30, 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, 5,658 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. 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, including potential fluctuations as a result of COVID-19. 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.

We entered into a credit agreement in each of 2019 and 2020. Loans under these credit agreements bear interest, at our option, at either a base rate or a Eurocurrency rate, in each case plus an applicable margin 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). Pursuant to the credit agreement that we entered into in 2019, the applicable margin on base rate loans ranges from 0.125% to 0.500% and the applicable margin on Eurocurrency loans ranges from 1.125% to 1.500%. Pursuant to the credit agreement that we entered into in 2020, the applicable margin on base rate loans ranges from 0.500% to 0.875% and the applicable margin on Eurocurrency loans ranges from 1.500% to 1.875%. We do not believe that changes in interest rates related to either credit agreement would have a material effect on our financial statements. As of September 30, 2020, we had no principal or interest outstanding under either of our existing credit facilities. A portion of our “Interest expense” in the fourth quarter of 2020 will be dependent on whether, and to what extent, we borrow amounts under these existing facilities.

### 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. Fluctuations in the global markets, including as a result of COVID-19, may have a positive or negative effect on our foreign exchange rate exposure. The current exposures arise primarily from cash, accounts receivable, intercompany receivables and payables, payables and accruals and inventories. Both positive and negative effects to our net revenues from international product sales from movements in exchange rates are partially mitigated by the natural, opposite effect that exchange rates have on our international operating costs and expenses.

We have a foreign currency management program with the objective of reducing the effect of exchange rate fluctuations on our operating results and forecasted revenues and expenses denominated in foreign currencies. We currently have cash flow hedges for the Euro, British Pound, Canadian Dollar and Australian Dollar related to a portion of our forecasted product revenues that qualify for hedge accounting treatment under U.S. GAAP. We do not seek hedge accounting treatment for our foreign currency forward contracts related to monetary assets and liabilities that impact our operating results. As of September 30, 2020, we held foreign exchange forward contracts that were designated as cash flow hedges with notional amounts totaling $966.6 million representing a net liability at fair value of $32.1 million on our condensed consolidated balance sheet.

Although not predictive in nature, we believe a hypothetical 10% threshold reflects a reasonably possible near-term change in exchange rates. Assuming that the September 30, 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 September 30, 2020 would change by approximately $96.7 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 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.

### Equity Price Risk

Information required by this section is incorporated by reference from the discussion in the “Strategic Investments” section of this Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

## Controls and procedures

As filed, 1,555 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 September 30, 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 September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 8,544 characters.

Information regarding risk factors appears in Part I, Item 1A. “Risk Factors” 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 discussed in Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which was filed with the SEC on May 1, 2020 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, which was filed with the SEC on July 31, 2020 and is being updated below.

### We are subject to risks associated with the spread of COVID-19.

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 has had, 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 effect on our business operations has been the requirement that a majority of our employees work remotely. We have re-initiated enrollment and dosing in all of our ongoing clinical trials and initiated new clinical trials despite some earlier temporary pauses to enrollment and dosing caused by COVID-19.

We continue to monitor local COVID-19 trends and government guidance for each of our site locations and have begun to re-open certain of our sites utilizing a phased, site-specific approach. There can be no assurance that these re-openings will continue or that, due to additional waves of increased infections, updated government guidance or other considerations, we will not be required to temporarily close or ramp-down sites that had re-opened or to pause enrollment and dosing at clinical trial sites. Any site closure or pause of a clinical trial could harm our operations and delay the development of our product candidates.

In the future, the economic impacts of the COVID-19 pandemic 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 pandemic, and any worsening of the global economic environment as a result thereof, as well as the impact of the pandemic 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 other 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 pandemic 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 pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

### 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 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 financial performance, including 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, liquidity, business and operations, including manufacturing, supply chain, research and development activities and pipeline programs;
- our expectations regarding clinical trials, development timelines, regulatory authority filings, submissions and potential approvals and label expansions for ivacaftor, lumacaftor, tezacaftor, elexacaftor, and any combination regimen;
- our ability to obtain reimbursement for our medicines in the U.S. and ex-U.S. markets and our ability to launch, commercialize and 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, drug candidates and other pipeline programs 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 and other pipeline programs for further investigation, clinical trials or potential use as a treatment;
- our expectations regarding the potential benefits and commercial potential of our product candidates, including the potential approach to treating specific diseases;
- our plan to continue investing in our research and development programs, including anticipated timelines for our programs, and our strategy to develop our pipeline programs, alone or with third party-collaborators;
- the potential future benefits of our acquisitions and collaborations;
- the establishment, development and maintenance of collaborative relationships, including potential milestone payments or other obligations;
- potential business development activities, including the identification of potential collaborative partners or acquisition targets;
- potential fluctuations in foreign currency exchange rates;
- our expectations regarding our provision for or benefit from income taxes and the utilization of our deferred tax assets, including the impact of the Coronavirus Aid, Relief and Economic Security Act;
- 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. There are a number of assumptions, risks, and uncertainties, known or unknown, which could cause actual events or results to differ materially from those indicated by our forward-looking statements, including the risks and uncertainties described 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, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which was filed with the SEC on May 1, 2020, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, which was filed with the SEC on July 31, 2020 and in this Quarterly Report on Form 10-Q. 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,” “could,” “may,” “potential,” “will,” “estimate” and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained herein represent our estimate only as of the date of this filing and should not be relied upon as representing our estimate as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

Filed Oct 30, 2020.
Source: SEC EDGAR, the filing index for accession 0000875320-20-000043. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.