# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Jun 30, 2009 - Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320) - Form: 10-Q - Filed: 2009-08-10 - Accepted by EDGAR: Aug 10, 2009, 20:21 ET - Period: 2009-06-30 - Accession: 0001047469-09-007495 - Inline XBRL: no - Main document: https://www.sec.gov/Archives/edgar/data/875320/000104746909007495/a2194024z10-q.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000104746909007495/ ## Management's discussion and analysis As filed, 71,791 characters. ### Overview We are in the business of discovering, developing and commercializing small molecule drugs for the treatment of serious diseases. Telaprevir, our lead drug candidate, is an oral hepatitis C protease inhibitor and one of the most advanced of a new class of antiviral treatments in clinical development that targets hepatitis C virus, or HCV, infection. Telaprevir is being evaluated in a fully-enrolled registration program focused on treatment-naïve and treatment-failure patients with genotype 1 HCV. We currently intend to submit a new drug application, or NDA, for telaprevir in the United States in the second half of 2010, assuming the successful completion of the registration program. We also are developing, among other compounds, VX-770 and VX-809, drug candidates for the treatment of patients with cystic fibrosis, or CF. In the second quarter of 2009, we began a registration program for VX-770 that focuses on CF patients with the G551D mutation in the gene responsible for CF. We intend to continue investing in our research programs with the goal of adding to our pipeline drug candidates designed to address significant unmet medical needs and provide substantial benefits to patients. #### Business Focus Over the next several years, we expect to focus a substantial portion of our resources on the development and commercialization of telaprevir. Our clinical development program is designed to support registration by us of telaprevir in North America for treatment-naïve and treatment-failure patients with genotype 1 HCV, and by our collaborators, Janssen Pharmaceutica, N.V., a Johnson & Johnson company, and Mitsubishi Tanabe Pharma Corp., in international markets. In the second quarter of 2009, we initiated a registration program for VX-770 focused on patients with CF who have the G551D mutation. We also expect to continue the development of VX-809, an investigational CFTR corrector compound that is being evaluated in a Phase 2a clinical trial in patients with CF. As a result, we expect that over the next several years we will need to substantially increase resources focused on the development of our CF drug candidates. We plan to leverage the infrastructure that we are building in preparation for the launch of telaprevir to support the potential launch of VX-770. In addition to the registration programs for telaprevir and VX-770, we plan to continue investing in our research and early development programs and to develop selected drug candidates that emerge from those programs, alone or with third-party collaborators. Using our drug discovery capability, which integrates biology, pharmacology, biophysics, chemistry, automation and information technologies in a coordinated manner, we have identified, among other drug candidates: telaprevir; VX-813 and VX-985, two additional HCV protease inhibitors; VX-770 and VX-809; and VX-509 and VX-467, novel Janus Kinase 3, or JAK3, inhibitors that target immune-mediated inflammatory diseases. Our acquisition of ViroChem Pharma Inc., or ViroChem, in March 2009 for $100.0 million in cash plus 10.7 million shares of our common stock, represents a significant investment in order to acquire drug candidates that are in Phase 1 clinical development and could potentially be used to treat HCV infection in combination with telaprevir. In order to realize benefits from this acquisition, we will need to invest significant resources in the development of these potential combination therapies. #### Drug Discovery and Clinical Development Discovery and development of a new pharmaceutical product is a lengthy and resource-intensive process, which may take 10 to 15 years or more. Throughout this entire process, potential drug candidates are subjected to rigorous evaluation, 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. The toxicity characteristics and profile of drug candidates at varying dose levels administered for varying periods of time also are monitored and evaluated during the nonclinical and clinical development process. Most chemical compounds that are investigated as potential drug candidates never progress into formal development, and most drug candidates that do advance into formal development never become commercial products. A drug candidate's failure to progress or advance may be the result of any one or more of a wide range of adverse experimental outcomes including, for example, the lack of sufficient efficacy against the disease target, the lack of acceptable absorption characteristics or other physical properties, difficulties in developing a cost-effective manufacturing or formulation method, or the discovery of toxicities or side-effects that are unacceptable for the disease indication being treated or that adversely affect the competitive commercial profile of the drug candidate. Designing and coordinating large-scale clinical trials to determine the efficacy and safety of drug candidates and to support the submission of an NDA requires significant financial resources, along with extensive technical and regulatory expertise and infrastructure. Prior to commencing a late-stage clinical trial of any drug candidate, we must work collaboratively with regulatory authorities, including the United States Food and Drug Administration, or FDA, in order to identify the specific scientific issues that need to be addressed by the clinical trials in order to support continued development and approval of the drug candidate. These discussions with regulatory authorities typically occur over a period of months and can result in significant changes to planned clinical trial designs or timelines. In addition, even after agreement with respect to a clinical trial design has been reached, regulatory authorities may request additional clinical trials or changes to existing clinical trial protocols. If the data from our ongoing clinical trials or nonclinical studies regarding the safety or efficacy of our drug candidates are not favorable, we may be forced to delay or terminate the clinical development program, which, particularly in the case of telaprevir, would materially harm our business. Further, even if we obtain marketing approvals from the FDA and comparable foreign regulatory authorities in a timely manner, we cannot be sure that the drug will be commercially successful. Our investments are subject to the considerable risk that one or more of our drug candidates will not progress to product registration due to a wide range of adverse experimental outcomes. We monitor the results of our clinical trials, discovery research and our nonclinical studies and frequently evaluate our portfolio investments in light of new data and scientific, business and commercial insights with the objective of balancing risk and potential. This process can result in relatively abrupt changes in focus and priority as new information becomes available and is analyzed and we gain additional insights into ongoing programs and potential new programs. Although we believe that our development activities and the clinical trial data we have obtained to date have reduced the risks associated with obtaining marketing approval for telaprevir, we cannot be sure that our development of telaprevir will lead successfully to regulatory approval of telaprevir on a timely basis, or at all, or that obtaining regulatory approval will lead to commercial success of telaprevir. With respect to our other drug candidates, we have more limited data from clinical trials and nonclinical studies and as a result it is difficult to predict which, if any, of these drug candidates will result in pharmaceuticals products. #### Drug Candidates ### HCV #### Telaprevir Telaprevir, our oral HCV protease inhibitor, is being investigated in a registration program focused on patients with genotype 1 HCV that includes ADVANCE and ILLUMINATE, which are Phase 3 clinical trials in treatment-naïve patients, and REALIZE, which is a Phase 3 clinical trial in treatment-failure patients. Enrollment in ADVANCE, ILLUMINATE and REALIZE was completed in October 2008, January 2009 and February 2009, respectively. Telaprevir dosing is complete in all three of these Phase 3 clinical trials. We expect to have sustained viral response, or SVR, data from the ADVANCE and ILLUMINATE clinical trials in the first half of 2010 and SVR data from the REALIZE clinical trial in mid-2010. We currently intend to submit an NDA for telaprevir in the second half of 2010, assuming the successful completion of our ongoing registration program. In addition to the clinical trials in our registration program, our collaborators and we are conducting several additional clinical trials, including trials evaluating twice-daily dosing of telaprevir and the use of telaprevir for treatment of patients with other HCV genotypes. We expect to present SVR data from the clinical trial evaluating twice-daily dosing of telaprevir at the Annual Meeting of the American Association for the Study of Liver Diseases that begins in October 2009. We have completed three Phase 2b clinical trials of telaprevir-based combination therapy in patients with genotype 1 HCV, which enrolled an aggregate of approximately 580 treatment-naïve patients and 440 patients who did not achieve an SVR with a previous treatment with pegylated-interferon, or peg-IFN, and ribavirin, or RBV. The SVR rates on an intent-to-treat basis of the patients in the 24-week telaprevir-based treatment arms and the control arms of PROVE 1 and PROVE 2, the two Phase 2b clinical trials that evaluated treatment-naïve patients, are set forth in the table below: | 24-week telaprevir-based treatment arm: | PROVE 1 | PROVE 2 | | --- | ---: | ---: | | telaprevir in combination with peg-IFN and RBV for 12 weeks, followed by peg-IFN and RBV alone for 12 weeks | 61% | 69% | | **48-week control arm:** | | | | 48 weeks of therapy with peg-IFN and RBV | 41% | 46% | The SVR rates of the patients on an intent-to-treat basis in the 24-week telaprevir-based triple-therapy treatment arm, the 48-week telaprevir-based treatment arm and the control arm of PROVE 3, the Phase 2b clinical trial that evaluated treatment-failure patients, are set forth in the table below: | | Non-responders | Relapsers | Breakthroughs | Total | | --- | --- | --- | --- | --- | | **24-week telaprevir-based triple-therapy treatment arm:** | | | | | | telaprevir in combination with peg-IFN and RBV for 12 weeks, followed by peg-IFN and RBV alone for 12 weeks | 39% (n=66) | 69% (n=42) | 57% (n=7) | 51% (n=115) | | **48-week telaprevir-based treatment arm:** | | | | | | telaprevir in combination with peg-IFN and RBV for 24 weeks, followed by peg-IFN and RBV alone for 24 weeks | 38% (n=64) | 76% (n=41) | 50% (n=8) | 52% (n=113) | | **48-week control arm:** | | | | | | 48 weeks of therapy with peg-IFN and RBV | 9% (n=68) | 20% (n=41) | 40% (n=5) | 14% (n=114) | The adverse event profile of telaprevir generally has been consistent across our Phase 2 clinical trials, which have principally involved clinical trial sites in North America and Europe. Safety data from our Phase 2 clinical trials indicated that the most common adverse events, regardless of treatment assignment, were fatigue, rash, headache and nausea. The most common adverse events reported more frequently in patients receiving telaprevir than in the control arms were gastrointestinal events, skin events—rash and pruritus—and anemia. There have been reports of severe rashes in clinical trials involving telaprevir-based treatments, including several reports from the clinical trials being conducted by Mitsubishi Tanabe in Japan, where telaprevir has advanced into Phase 3 clinical trials in combination with peg-IFN and RBV. Rash resulted in treatment discontinuations in the telaprevir-based treatment arms in approximately 7% of patients in PROVE 1 and PROVE 2 and 5% of patients in PROVE 3. Other adverse events reported in our Phase 2 clinical trials generally were similar in type and frequency to those seen with peg-IFN and RBV treatment. The successful development and commercialization of telaprevir is critical to the success of our business as currently conducted. While we are devoting significant resources, time and attention to the development, potential regulatory approval and a successful commercial launch of telaprevir, all of these efforts involve significant scientific and execution risks and can be adversely affected by events, such as competitive activities, adverse trial results and regulatory actions, outside of our direct control. #### HCV Polymerase Inhibitors HCV polymerase inhibitors, including our HCV polymerase inhibitors VX-222 (formerly VCH-222) and VX-759 (formerly VCH-759), are direct-acting antivirals that inhibit the ability of the hepatitis C virus to replicate through a mechanism that is distinct from HCV protease inhibitors such as telaprevir. VX-222 and VX-759 were evaluated by ViroChem in Phase 1 clinical trials. In a Phase 1 viral kinetic clinical trial involving five treatment-naïve patients with genotype 1 HCV infection, VX-222 dosed at 750 mg twice daily resulted in a median 3.7 log10 decrease in HCV RNA—equivalent to a 5,000-fold reduction in virus in the blood—at the end of three days of dosing. The results were consistent from patient to patient, and across HCV genotype 1 subtypes. In clinical evaluations of VX-222 to date, no serious adverse events have been observed. VX-222 has completed 28-day non-clinical toxicology studies in two species. In the second quarter of 2009, we initiated a multi-dose viral kinetic clinical trial to evaluate the antiviral activity, safety, tolerability and pharmacokinetics of VX-222 in patients with genotype 1 HCV infection. There currently are no ongoing clinical trials of VX-759. The ongoing clinical trial of VX-222 will evaluate the antiviral activity of VX-222 dosed as monotherapy for three days in approximately 32 treatment-naïve patients. We expect to complete this clinical trial in the third quarter of 2009. We anticipate initiating a drug-drug interaction clinical trial of VX-222 and telaprevir in healthy volunteers in the third quarter of 2009. We plan to begin a combination clinical trial of telaprevir with VX-222 in patients with genotype 1 HCV as early as the fourth quarter of 2009 and expect to have data from this clinical trial in the first half of 2010. ### Cystic Fibrosis #### VX-770 In May 2009, we initiated a registration program, referred to as ENDEAVOR, for VX-770, which is an investigational cystic fibrosis transmembrane conductance regulator, or CFTR, potentiator that targets the defective CFTR protein that causes CF. The VX-770 registration program will focus on patients with the G551D mutation, which is present in approximately 4% of the CF population in the United States. ENDEAVOR will consist of three clinical trials. The primary clinical trial, which is referred to as STRIVE, is a Phase 3 clinical trial of VX-770 in patients 12 years and older with the G551D mutation on at least one of the patient's two *CFTR* genes, or alleles. This randomized, placebo-controlled, double-blind, parallel-group clinical trial is designed to enroll a minimum of 80 patients who will receive either VX-770 or placebo for 48 weeks. In the trial, VX-770 will be dosed as a single 150 mg tablet twice daily. The primary endpoint for the STRIVE clinical trial is absolute change from baseline in percent predicted forced expiratory volume in one second, or FEV1, the lung function test most commonly used to monitor CF disease progression, through week 24. Additional FEV1 measurements will be taken through 48 weeks as a secondary endpoint. Additional secondary endpoints, including sweat chloride, will be measured to evaluate the effect of VX-770 on improving the function of the defective CFTR protein. The STRIVE clinical trial is currently open to patient enrollment, and we expect STRIVE to be fully enrolled in the first quarter of 2010. The second clinical trial, which is referred to as ENVISION, is a Phase 3 clinical trial of VX-770 in patients between 6 to 11 years of age with the G551D mutation on at least one allele. ENVISION is a two-part, randomized, placebo-controlled, double-blind, parallel-group clinical trial of VX-770. Part 1 of ENVISION will be a single-dose pharmacokinetic clinical trial that is expected to enroll approximately 10 patients. Following an analysis of data from Part 1, Part 2 of the ENVISION trial is expected to enroll approximately 30 patients who will receive either VX-770 or placebo for 48 weeks. The primary endpoint of the trial is absolute change from baseline in percent predicted FEV1 through week 24. Secondary endpoints, including sweat chloride, will be measured to evaluate the effect of VX-770 on improving the function of the defective CFTR protein. Part 1 of the ENVISION clinical trial is opened to patient enrollment. The third clinical trial, which is referred to as DISCOVER, will be a Phase 2 exploratory clinical trial of VX-770 in patients with CF who are 12 years and older and homozygous for the F508del mutation. This randomized, placebo-controlled, double-blind, parallel-group clinical trial is expected to enroll approximately 120 patients who will receive either VX-770 or placebo for 16 weeks. In DISCOVER, VX-770 will be dosed as a single 150 mg tablet twice daily. The primary endpoints of the DISCOVER clinical trial are safety as well as absolute change from baseline in percent predicted FEV1 through week 16. Additional secondary endpoints, including sweat chloride, will be measured to evaluate the effect of VX-770 on improving the function of the defective CFTR protein. We expect to initiate the DISCOVER clinical trial in the third quarter of 2009. In October 2008, we completed a Phase 2a clinical trial of VX-770 in 39 patients with CF with the G551D mutation. Patients in the Phase 2a clinical trial received VX-770 over 14-day and 28-day dosing periods. The primary endpoint for this clinical trial was safety, and no serious adverse events attributable to VX-770 were observed. The promising lung function data from this Phase 2a clinical trial, as measured by improvements in FEV1, and the observed changes in biomarkers that seek to measure the activity of the CFTR protein, were used to design the ENDEAVOR registration program. #### VX-809 We have conducted Phase 1 clinical trials of VX-809 in healthy volunteers and an escalating single-dose pharmacokinetics and safety clinical trial of VX-809 in patients with CF who carry the F508del mutation on at least one allele. In the first quarter of 2009, we initiated a Phase 2a clinical trial primarily designed to evaluate the safety and tolerability of multiple doses of VX-809 in patients with CF. In addition to assessing safety, the trial will evaluate the effect of VX-809 on measures of CFTR function and whether VX-809 has an effect on FEV1. The trial is expected to enroll approximately 90 patients homozygous for the F508del mutation in the *CFTR* gene, the most common mutation in CF patients. We expect to complete this clinical trial in early 2010. ### Immune-mediated Inflammatory Disease VX-509 is a novel oral JAK3 inhibitor that we believe has the potential to be used in multiple immune-mediated inflammatory disease, or IMID, indications. We have completed the Phase 1 clinical trials of VX-509, including a Phase 1 single and multiple, 14-day, dose-ranging clinical trial of VX-509 in healthy volunteers. The safety data from the 14-day dose-ranging clinical trial of VX-509 supported further development. In addition, VX-509 showed a dose-dependent and reversible reduction in PSTAT-5, a specific biomarker of JAK3 activity, and a high degree of selectivity for JAK3 over JAK2. These data were consistent with data from *in vitro* studies that indicated that VX-509 was highly selective for JAK3 compared to certain other JAK and non-JAK kinases in cell-based assays. We may seek to license VX-509 and/or VX-467 to a corporate collaborator in order to fund and support other research and development investments. #### Corporate Collaborations Corporate collaborations have been and will continue to be an important component of our business strategy. Under our agreement with Janssen, we have retained exclusive commercial rights to telaprevir in North America, and we are leading the global clinical development program. Janssen agreed to be responsible for 50% of the drug development costs under the development program for telaprevir in North America and the Janssen territories, to pay us contingent milestone payments based on successful development, approval and launch of telaprevir, to be responsible for the commercialization of telaprevir outside of North America and the Far East and to pay us royalties on any sales of telaprevir in its territories. The principal remaining milestones under our agreement with Janssen relate to marketing authorization for telaprevir from the European Medicines Evaluation Agency and the launch of telaprevir in the European Union. These milestones include $100.0 million related to regulatory submission and approval and $150.0 million related to launch of telaprevir. We anticipate, based on projected development and commercial timelines for telaprevir, and assuming successful development, that these milestones will be earned prior to April 2012. In July 2009, we announced our intention to explore the sale of our rights to these milestone payments. We also have a collaboration with Mitsubishi Tanabe with respect to the development of telaprevir in Japan and other countries in the Far East. Mitsubishi Tanabe is conducting Phase 3 registration trials in Japan of telaprevir in combination with peg-IFN and RBV, in approximately 300 patients with genotype 1 HCV. This registration program is expected to be fully enrolled in the third quarter of 2009, and SVR data from these clinical trials is expected to be available in 2010. On July 30, 2009, we amended our license, development and commercialization agreement with Mitsubishi Tanabe. Under the amended agreement, we expect to receive $105.0 million in the third quarter of 2009, and will be eligible to receive further contingent milestone payments in lieu of royalties, which if realized would range between $15.0 million and $65.0 million. The amended agreement provides to Mitsubishi Tanabe a fully-paid license to commercialize telaprevir as part of a combination regimen with peg-IFN and RBV to treat HCV in Japan and the Far East, as well as rights to manufacture telaprevir for sale in Japan and the Far East. Our drug candidate pipeline also includes Aurora kinase inhibitors that are being investigated by Merck & Co., Inc. for oncology indications. In the second quarter of 2008, Merck initiated a Phase 1 clinical trial of MK-5108 (VX-689) alone and in combination with docetaxel in patients with advanced and/or refractory tumors. In the third quarter of 2008, Merck selected additional Aurora kinase inhibitors for potential development. We will not have the resources for some time to develop and commercialize all drug candidates for which we have rights, and therefore we will need to rely on corporate collaborations for the development and commercialization of some or all of our new drug candidates. Historically, we have been successful in initiating and concluding productive collaborations, but we will need to continue to do so in the future, even though economic and competitive conditions may be different than in the past. #### Acquisition of ViroChem Pharma Inc. In March 2009, we acquired ViroChem, a privately-held Canadian biotechnology company, for $100.0 million in cash plus 10.7 million shares of our common stock. ViroChem was in the business of discovering and developing drug candidates for the treatment of HCV and HIV infection, including VX-222 and VX-759, which were two HCV polymerase inhibitors and ViroChem's two lead drug candidates. We are planning on pursuing potential combination therapies for the treatment of HCV infection. After acquiring ViroChem, we restructured its operations in order to focus ViroChem's research and development activities on drug candidates for the treatment of HCV infection. ViroChem currently has approximately 35 employees and leases a research facility in Laval, Canada. The expenses associated with continuing the research and development activities at our new research site in Canada are not expected to be significant in comparison to the costs and expenses related to our other ongoing research and development activities. We currently are evaluating ViroChem's non-HCV programs and may seek to license rights to ViroChem's other assets to a third-party collaborator. #### Financing Strategy At June 30, 2009, we had $754.4 million of cash, cash equivalents and marketable securities, which was a decrease of $77.7 million from $832.1 million at December 31, 2008. This decrease was a result of cash used to fund our operations during the first half of 2009 and the $100.0 million of cash used in our acquisition of ViroChem in March 2009 partially offset by net proceeds of $313.3 million from the sale in February 2009 of 10.0 million shares of our common stock. We have incurred losses from our inception and expect to continue to incur losses at least until we obtain approval for and successfully commercialize a product, if we ever do. Therefore, we are dependent in large part on our continued ability to raise significant funding to finance our research and development operations, to create a commercial infrastructure, and to meet our overhead costs and long-term contractual commitments and obligations. To date, we have secured funds principally through capital market transactions, strategic collaborative agreements, proceeds from the disposition of assets, investment income and the issuance of common stock under our employee benefit plans. We expect that we will need additional capital in order to complete the development and commercialization of telaprevir while at the same time continuing the development of our other drug candidates, including VX-770. We may raise additional capital from public offerings or private placements of our securities or other methods of financing. We cannot be sure that any such financing opportunities will be available on acceptable terms, if at all. If adequate funds are not available on acceptable terms, or at all, we may be required to curtail significantly or discontinue one or more of our research, drug discovery or development programs, including clinical trials, incur significant cash exit costs, or attempt to obtain funds through arrangements with collaborators or others that may require that we relinquish rights to certain of our technologies or drug candidates. As part of our strategy for managing our capital structure, we have from time to time adjusted the amount and maturity of our debt obligations through new issues, privately negotiated transactions and market purchases, depending on market conditions and our perceived needs at the time. For example, in the second quarter of 2009, we exchanged 6.6 million shares of newly-issued common stock for $143.5 million in aggregate principal amount of our 4.75% convertible senior subordinated notes due 2013, or 2013 Notes, plus accrued interest. We expect to continue pursuing a general financial strategy that may lead us to undertake one or more additional transactions with respect to our outstanding debt obligations, and the amounts involved in any such transactions, individually or in the aggregate, may be material. Any such transactions may or may not be similar to transactions in which we have engaged in the past. ### Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the 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 they become known. 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. There were no material changes during the six months ended June 30, 2009 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2008. We have added a critical accounting policy regarding business combinations as a result of our acquisition of ViroChem in March 2009 and have supplemented our critical accounting policy regarding up-front license fees. #### Business Combinations In March 2009, we acquired ViroChem for $100.0 million in cash and common stock with a fair market value of $290.6 million. Under Financial Accounting Standards Board ("FASB") Statement No. 141 (Revised 2007), "Business Combinations" ("SFAS 141(R)"), which became effective on January 1, 2009, we assign the value of the consideration transferred to acquire a business to the tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. For purposes of the condensed consolidated balance sheet, we allocated the purchase price for ViroChem to the net tangible assets and intangible assets. The difference between the purchase price and the fair value of assets acquired and liabilities assumed was allocated to goodwill. This goodwill relates to the potential synergies from the possible development of combination therapies involving telaprevir and the acquired drug candidates. The allocations recorded on our condensed consolidated balance sheet included $525.9 million of intangible assets related to in-process research and development and a $162.5 million deferred tax liability. The intangible assets are in-process research and development assets relating to the drug candidates being developed by ViroChem, primarily VX-222 and VX-759, each of which was in Phase 1 clinical development at the date of acquisition. VX-222 and VX-759 had estimated fair values of $412.9 million and $105.8 million, respectively. In addition, we considered ViroChem's other clinical drug candidates and determined that VCH-286, ViroChem's lead HIV drug candidate, had an estimated fair value of $7.2 million, based on development costs through the acquisition date, and that the other clinical drug candidates had no fair value because the clinical and non-clinical data for those drug candidates did not support further development as of the acquisition date. We also considered ViroChem's preclinical programs and other technologies and determined that because of uncertainties related to the safety, efficacy and commercial viability of the potential drug candidates, market participants would not ascribe value to these assets. We assess the fair value of assets, including intangible assets such as in-process research and development, using a variety of methods including present-value models that are based upon multiple probability-weighted scenarios involving the development and potential commercialization of the acquired drug candidates. The present-value models used to estimate the fair values of VX-222 and VX-759 reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including the probability of completing in-process research and development projects, which requires successfully completing clinical trials and obtaining regulatory approval for marketing of the associated drug candidate; estimates regarding the timing of and the expected costs to complete in-process research and development projects; estimates of future cash flows from potential product sales; and appropriate discount rates. The fair value of VX-222 and VX-759 was based on the estimated fair value that would be ascribed to each of these compounds by a market participant that acquired both compounds in a single transaction. The probability of advancing VX-222 and VX-759 through various phases of development reflects the understanding among market participants that most drug candidates that enter Phase 2 clinical trials are not ultimately approved. While on the date of acquisition each of the HCV polymerase inhibitors was at a similar stage of development, we attributed a significantly higher value to VX-222 than to VX-759 because the clinical and non-clinical data regarding VX-222 was significantly more promising than the clinical and non-clinical data regarding VX-759. In addition, we determined that a market participant would not be likely to continue development of VX-759 unless future data from clinical trials or non-clinical studies of VX-222 resulted in a delay or discontinuation of the VX-222 development program. Finally, while the duration and cost of non-clinical studies and clinical trials may vary significantly over the life of a project and are difficult to predict, a market participant would assume that it would take several years to complete each phase of clinical trials for a drug candidate for the treatment of patients with HCV and that future cash flows, if any, would not be generated until a drug candidate had completed all required phases of clinical trials and had obtained regulatory approval. The risk-adjusted discount rate for each of these projects is approximately 28%. Initially, the in-process research and development assets are recorded at fair value and accounted for as indefinite-lived intangible assets in accordance with FASB Statement No. 142, "Goodwill and Other Intangible Assets," as amended by SFAS 141(R). These assets will be maintained on our condensed consolidated balance sheets until either the research and development project underlying them is completed or the assets become impaired. If a project is completed, the carrying value of the related intangible asset would be amortized over the remaining estimated life of the asset. If a project becomes impaired or is abandoned, the carrying value of the related intangible asset would be written down to its fair value and an impairment charge would be taken in the period in which the impairment occurs. In order to complete an acquired research and development project, the related drug candidate will need to be evaluated in later-stage clinical trials, which are subject to all of the risks and uncertainties associated with the development of pharmaceutical products. If the fair value of any of these drug candidates, and in particular VX-222, becomes impaired as the result of unfavorable safety or efficacy data from any ongoing or future clinical trial or because of any other information regarding the prospects of successfully developing or commercializing the drug candidate, we could incur significant charges in the period in which the impairment occurs. These intangible assets will be tested for impairment on an annual basis during the fourth quarter, or earlier if impairment indicators are present. Post-acquisition research and development expenses related to the in-process research and development projects will be expensed as incurred. #### Up-front License Fees We recognize revenues from nonrefundable, up-front license fees related to collaboration agreements, including the $165.0 million we received from Janssen in 2006, on a straight-line basis over the contracted or estimated period of performance. The period of performance over which the revenues are recognized is typically the period over which the research and/or development is expected to occur. As a result, we often are required to make estimates regarding drug development and commercialization timelines for compounds being developed pursuant to a collaboration agreement. Because the drug development process is lengthy and our collaboration agreements typically cover activities over several years, this approach often has resulted in the deferral of significant amounts of revenue into future periods. In addition, we periodically evaluate our estimates in light of changes and anticipated changes in the development plans for our drug candidates and because of the many risks and uncertainties associated with the development of drug candidates, our estimates regarding the period of performance have changed in the past and may change in the future. Our estimates regarding the period of performance under the Janssen collaboration agreement were adjusted in 2007 as a result of changes in the global development plan for telaprevir. This adjustment was made on a prospective basis beginning in the period in which the change was identified and resulted in a decrease in the amount of revenues we were recognizing from the Janssen collaboration by $2.6 million per fiscal quarter after the adjustment. Any future adjustment in our estimates of the period of performance under our collaborations could result in substantial changes to the period over which the revenues from an up-front license fee related to each such collaboration are recognized. If we adjusted our estimates as of July 1, 2009 to increase the period of performance under the Janssen agreement by one year, it would result in a decrease in the amount of deferred revenues we recognize from our Janssen collaboration of approximately $1.1 million per fiscal quarter beginning in the third quarter of 2009. ### Results of Operations—Three and Six Months Ended June 30, 2009 Compared with Three and Six Months Ended June 30, 2008 *(in thousands)* *(in thousands)* | | Three Months Ended June 30, Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Six Months Ended June 30, | | | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Revenues | $19,064 | $69,409 | $(50,345) | (73)% | $43,043 | $111,084 | $(68,041) | (61)% | | Costs and expenses | 176,231 | 160,890 | 15,341 | 10% | 362,103 | 301,301 | 60,802 | 20% | | Other income (expense) | (14,130) | 160 | (14,290) | n/a | (14,909) | 2,742 | (17,651) | n/a | | Net loss | $(171,297) | $(91,321) | $79,976 | 88% | $(333,969) | $(187,475) | $146,494 | 78% | #### Net Loss In the second quarter of 2009 as compared to the second quarter of 2008, our net loss increased by $80.0 million, or 88%. In the first half of 2009 as compared to the first half of 2008, our net loss increased by $146.5 million, or 78%. The increases in net loss in the second quarter and first half of 2009 as compared to the comparable periods in 2008 were the result of significant increases in costs and expenses combined with significant decreases in our revenues. Our lower revenues were primarily the result of a $45.0 million milestone payment that we recognized in the second quarter of 2008 and a $10.0 million milestone payment that we recognized in the first quarter of 2008 for which there were no corresponding milestone payments in the first half of 2009. The increased expenses included increased operating expenses related to the increased size of our workforce and to our late-stage clinical programs and increased stock-based compensation expense and restructuring expense. In addition, in the second quarter of 2009, we had a $12.3 million non-cash expense on the exchange of a portion of the 2013 Notes into our common stock and in the first half of 2009 we had $7.8 million of acquisition-related expenses from our acquisition of ViroChem and additional expenses related to our CEO transition. #### Net Loss per Share Our net loss for the three months ended June 30, 2009 was $0.99 per basic and diluted common share compared to $0.66 per basic and diluted common share for the three months ended June 30, 2008. Our net loss for the six months ended June 30, 2009 was $2.03 per basic and diluted common share compared to $1.37 per basic and diluted common share for the six months ended June 30, 2008. The increases in net loss per common share in the three and six months ended June 30, 2009 compared to the comparable periods in 2008 were the result of the increased net losses for the periods in 2009 partially offset by increases in the basic and diluted weighted-average number of common shares outstanding in 2009. The increases in the weighted-average number of common shares outstanding in 2009 were primarily the result of the equity offerings in February 2008, September 2008 and February 2009 and our acquisition of ViroChem in March 2009. Our basic and diluted weighted-average number of common shares outstanding increased from 138.7 million in the three months ended June 30, 2008 to 172.6 million in the three months ended June 30, 2009 and from 136.6 million in the six months ended June 30, 2008 to 164.3 million in the six months ended June 30, 2009. #### Stock-based Compensation, Restructuring and Acquisition-related Expenses and Note Exchange The comparison of our costs and expenses in the 2009 periods and the 2008 periods is affected by increases in our stock-based compensation expense and our restructuring expense as well as expenses related to our acquisition of ViroChem in March 2009, the CEO transition that began in February 2009 and the exchange of a portion of the 2013 Notes into our common stock in June 2009. Our costs and expenses in the three and six months ended June 30, 2009 and 2008 included: *(in thousands)* | | Three Months Ended June 30, 2009 | 2008 | Six Months Ended June 30, 2009 | 2008 | | --- | ---: | ---: | ---: | ---: | | Stock-based compensation expense | $26,585 | $16,593 | $48,862 | $29,665 | | Restructuring expense | 1,107 | 1,168 | 3,509 | 1,798 | | Acquisition-related expenses | — | — | 7,793 | — | | Loss on exchange of a portion of the 2013 Notes | 12,294 | — | 12,294 | — | ### Revenues *(in thousands)* *(in thousands)* | | Three Months Ended June 30, Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Six Months Ended June 30, | | | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Royalty revenues | $5,917 | $9,741 | $(3,824) | (39)% | $12,057 | $20,592 | $(8,535) | (41)% | | Collaborative and other research and development revenues | 13,147 | 59,668 | (46,521) | (78)% | 30,986 | 90,492 | (59,506) | (66)% | | Total revenues | $19,064 | $69,409 | $(50,345) | (73)% | $43,043 | $111,084 | $(68,041) | (61)% | Our total revenues in recent periods have consisted primarily of collaborative and other research and development revenues. On a quarterly basis our collaborative and other research and development revenues have fluctuated significantly based on the timing of recognition of significant milestone payments and the level of reimbursement we have received under our collaboration agreements for our development programs. ### Collaborative and Other Research and Development Revenues The table presented below is a summary of revenues from collaborative arrangements for the three and six months ended June 30, 2009 and 2008: *(in thousands)* | | Three Months Ended June 30, 2009 | 2008 | Six Months Ended June 30, 2009 | 2008 | | --- | ---: | ---: | ---: | ---: | | Janssen | $12,790 | $57,958 | $29,925 | $83,486 | | Other | 357 | 1,710 | 1,061 | 7,006 | | Total collaborative and other research and development revenues | $13,147 | $59,668 | $30,986 | $90,492 | Our revenues from the Janssen collaboration in each period consist of: development milestone payments, if any, recognized in the period; net reimbursements from Janssen for development costs of telaprevir; and an amortized portion of the $165.0 million up-front payment. The $45.2 million, or 78%, decrease in our revenues from Janssen in the second quarter of 2009 compared to the second quarter of 2008 and the $53.6 million, or 64%, decrease in our revenues from Janssen in the six months ended June 30, 2009 compared to the six months ended June 30, 2008 were primarily the result of a decrease in milestone payments from our Janssen collaboration. We recognized a $45.0 million milestone payment in the second quarter of 2008 and a total of $55.0 million in milestone payments in the first half of 2008 for which there were no corresponding milestone payments in 2009. During the second half of 2009, we expect to continue to recognize revenue from net reimbursements from Janssen for telaprevir development costs and an amortized portion of the $165.0 million up-front payment. The principal remaining milestones under our agreement with Janssen relate to marketing authorization for telaprevir from the European Medicines Evaluation Agency and the launch of telaprevir in the European Union. These milestones include $100.0 million related to regulatory filing and approval and $150.0 million related to launch of telaprevir. We have announced our intention to explore the sale of our rights to these milestones, which we anticipate, based on projected development and commercial timelines for telaprevir, and assuming successful development, will be earned prior to April 2012. Our revenues from our other collaborative arrangements decreased in the three months ended June 30, 2009 compared to the three months ended June 30, 2008 and decreased significantly in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. On July 30, 2009, we entered into an amendment to our license, development and commercialization agreement with Mitsubishi Tanabe that provides for a $105.0 million payment in connection with the execution of the amendment. We expect that we will begin recognizing revenues related to this payment commencing in the third quarter of 2009, and that as a result our total collaborative and other research and development revenues will increase in the second half of 2009 as compared to the first half of 2009. ### Royalty Revenues Our royalty revenues relate to sales of the HIV protease inhibitors Lexiva/Telzir and Agenerase by GlaxoSmithKline. Until May 30, 2008, these royalty revenues were based on actual and estimated worldwide net sales of Lexiva/Telzir and Agenerase. On May 30, 2008, we sold our right to receive future royalties from GlaxoSmithKline with respect to these HIV protease inhibitors, excluding the portion allocated to pay a subroyalty on these net sales to a third party, in return for a one-time cash payment of $160.0 million. We deferred the recognition of $155.1 million of revenues from this sale. We are recognizing these deferred revenues over the term of our agreement with GlaxoSmithKline under the units-of-revenue method. We will also continue to recognize royalty revenues equal to the amount of the third-party subroyalty and an offsetting royalty expense for the third-party subroyalty payment. The $3.8 million, or 39%, decrease in royalty revenues in the three months ended June 30, 2009 compared to three months ended June 30, 2008 and the $8.5 million, or 41%, decrease in royalty revenues in the six months ended June 30, 2009 compared to six months ended June 30, 2008 resulted primarily from this sale of our future HIV royalties in the second quarter of 2008. In 2009, we expect that we will recognize as royalty revenues a portion of the remaining deferred revenues from the sale of our HIV royalty stream plus the full amount of the third-party subroyalty. ### Costs and Expenses *(in thousands)* *(in thousands)* | | Three Months Ended June 30, Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Six Months Ended June 30, | | | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Royalty expenses | $3,267 | $3,701 | $(434) | (12)% | $6,843 | $7,277 | $(434) | (6)% | | Research and development expenses | 139,331 | 129,573 | 9,758 | 8% | 282,912 | 245,846 | 37,066 | 15% | | Sales, general and administrative expenses | 32,526 | 26,448 | 6,078 | 23% | 61,046 | 46,380 | 14,666 | 32% | | Restructuring expense | 1,107 | 1,168 | (61) | (5)% | 3,509 | 1,798 | 1,711 | 95% | | Acquisition-related expenses | — | — | — | n/a | 7,793 | — | 7,793 | n/a | | Total costs and expenses | $176,231 | $160,890 | $15,341 | 10% | $362,103 | $301,301 | $60,802 | 20% | Our costs and expenses primarily relate to our research and development expenses and our sales, general and administrative expenses. Our research and development expenses fluctuate on a quarterly basis due to the timing of expenses relating to our clinical trials, and in particular our clinical trials of telaprevir. ### Research and Development Expenses *(in thousands)* *(in thousands)* | | Three Months Ended June 30, Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Six Months Ended June 30, | | | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Research expenses | $44,852 | $41,962 | $2,890 | 7% | $86,755 | $81,815 | $4,940 | 6% | | Development expenses | 94,479 | 87,611 | 6,868 | 8% | 196,157 | 164,031 | 32,126 | 20% | | Total research and development expenses | $139,331 | $129,573 | $9,758 | 8% | $282,912 | $245,846 | $37,066 | 15% | The $9.8 million and $37.1 million increases in our total research and development expenses in the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008 were primarily the result of increases in expenses related to our workforce. Our research and development expenses include internal and external costs incurred for our drug candidates, including telaprevir and VX-770. We do not assign to individual drug candidates our internal costs such as salary and benefits, stock-based compensation expense, laboratory supplies and infrastructure costs because the employees within our research and development groups are typically 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 do allocate by individual drug program. All research and development costs for our drug candidates are expensed as incurred. To date, we have incurred in excess of $3.1 billion in research and development expenses associated with drug discovery and development. The successful development of our drug candidates is highly uncertain and subject to a number of risks. In addition, the duration of clinical trials may vary substantially according to the type, complexity and novelty of the drug candidate. 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 activity. 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. Our lead drug candidate telaprevir represents the largest portion of our development costs for our clinical drug candidates. Based on the completion of enrollment of our Phase 3 clinical trials of telaprevir in February 2009, we anticipate that our ongoing Phase 3 clinical trials will be completed in mid 2010, but that development costs associated with other clinical trials of telaprevir may continue after the completion of the registration trials. If we are able to successfully commercialize telaprevir in accordance with current development timelines, we anticipate revenues and cash flows from the sales of telaprevir to commence in 2011. Our other drug candidates are less advanced and as a result any estimates regarding development timelines for these drug candidates are highly subjective and subject to change, and we cannot at this time make a meaningful estimate when, if ever, these drug candidates, including the drug candidates we acquired from ViroChem, will generate revenues and cash flows. #### Research Expenses *(in thousands)* *(in thousands)* | Research Expenses: | Three Months Ended June 30, Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Six Months Ended June 30, | | | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Salary and benefits | $15,549 | $13,559 | $1,990 | 15% | $30,120 | $26,915 | $3,205 | 12% | | Stock-based compensation expense | 7,252 | 5,042 | 2,210 | 44% | 13,605 | 9,628 | 3,977 | 41% | | Laboratory supplies and other direct expenses | 7,668 | 6,182 | 1,486 | 24% | 14,283 | 12,328 | 1,955 | 16% | | Contractual services | 1,372 | 2,417 | (1,045) | (43)% | 2,346 | 4,549 | (2,203) | (48)% | | Infrastructure costs | 13,011 | 14,762 | (1,751) | (12)% | 26,401 | 28,395 | (1,994) | (7)% | | Total research expenses | $44,852 | $41,962 | $2,890 | 7% | $86,755 | $81,815 | $4,940 | 6% | The $2.9 million and $4.9 million increases in total research expenses in the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008, were primarily the result of increased expenses related to our workforce partially offset by decreased contractual services and infrastructure costs. #### Development Expenses *(in thousands)* *(in thousands)* | Development Expenses: | Three Months Ended June 30, Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Six Months Ended June 30, | | | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Salary and benefits | $23,406 | $18,544 | $4,862 | 26% | $46,436 | $36,156 | $10,280 | 28% | | Stock-based compensation expense | 13,290 | 8,217 | 5,073 | 62% | 24,289 | 14,341 | 9,948 | 69% | | Laboratory supplies and other direct expenses | 7,242 | 8,275 | (1,033) | (12)% | 13,823 | 15,201 | (1,378) | (9)% | | Contractual services | 28,492 | 28,776 | (284) | (1)% | 63,177 | 53,586 | 9,591 | 18% | | Commercial supply investment in telaprevir | 3,448 | 4,496 | (1,048) | (23)% | 10,111 | 8,807 | 1,304 | 15% | | Infrastructure costs | 18,601 | 19,303 | (702) | (4)% | 38,321 | 35,940 | 2,381 | 7% | | Total development expenses | $94,479 | $87,611 | $6,868 | 8% | $196,157 | $164,031 | $32,126 | 20% | Our development expenses increased in the three and six months ended June 30, 2009 compared to the same periods in 2008 primarily as a result of increased expenses related to our workforce. The number of employees in our development group increased by approximately 20% from the second quarter of 2008 to the second quarter of 2009 and by approximately 22% from the first half of 2008 to the first half of 2009. Our contractual services expenses, which fluctuate significantly from quarter to quarter based on the timing of activities related to our clinical trials, decreased slightly in the second quarter of 2009 compared to the second quarter of 2008, but were higher in the first half of 2009 as compared to the first half of 2008 due to the timing of expenses related to our telaprevir clinical trials. ### Sales, General and Administrative Expenses *(in thousands)* *(in thousands)* | | Three Months Ended June 30, Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Increase/ (Decrease) $ 2009 | Increase/ (Decrease) % 2008 | Six Months Ended June 30, | | | | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Sales, general and administrative expenses | $32,526 | $26,448 | $6,078 | 23% | $61,046 | $46,380 | $14,666 | 32% | The increases in sales, general and administrative expenses in the three and six months ended June 30, 2009 compared to the same periods in 2008 are the result of increased headcount as we advanced our drug candidates, particularly telaprevir, into late-stage development. In the three months ended June 30, 2009 and 2008, our sales, general and administrative expenses included $6.0 million and $3.3 million, respectively, of stock-based compensation expense. In the six months ended June 30, 2009 and 2008, our sales, general and administrative expenses included $11.0 million and $5.7 million, respectively, of stock-based compensation expense. ### Royalty Expenses Royalty expenses decreased slightly in the three and six months ended June 30, 2009 as compared to the three and six months ended June 30, 2008. Royalty expenses primarily relate to a subroyalty payable to a third party on net sales of Lexiva/Telzir and Agenerase. The subroyalty results in both a royalty expense and corresponding royalty revenues. We expect to continue to recognize this subroyalty as an expense in future periods. ### Restructuring Expense We recorded restructuring expense of $1.1 million for the three months ended June 30, 2009 compared to $1.2 million for the three months ended June 30, 2008. We recorded restructuring expense of $3.5 million for the six months ended June 30, 2009 compared to $1.8 million for the six months ended June 30, 2008. The restructuring expense in all periods includes imputed interest cost related to the restructuring liability associated with our Kendall Square lease. The increase in restructuring expense for the six months ended June 30, 2009 compared to the six months ended June 30, 2008 was primarily the result of a revision, in the first quarter of 2009, of certain key estimates and assumptions about facility operating costs for the remaining period of the lease commitment, for which there was no corresponding revision in the six months ended June 30, 2008. The lease restructuring liability was $34.1 million as of June 30, 2009. We review our estimates and assumptions with respect to the Kendall Square lease on at least a quarterly basis, and will make whatever modifications we believe are necessary to reflect any changed circumstances, based on our best judgment, until the termination of the lease. Our estimates have changed in the past, and may change in the future, resulting in additional adjustments to the estimate of the liability, and the effect of any such adjustments could be material. ### Acquisition-related Expenses We incurred $7.8 million of expenses in the six months ended June 30, 2009, all in the first quarter, in connection with our acquisition of ViroChem, including $5.7 million in transaction expenses and $2.1 million related to a restructuring of ViroChem's operations that we undertook in March 2009 in order to focus ViroChem's activities on its HCV assets. We did not have corresponding acquisition-related expenses in the six months ended June 30, 2008. ### Non-operating Items—Other Income (Expense) Interest income decreased by $2.5 million, or 63%, to $1.5 million for the three months ended June 30, 2009 from $4.0 million for the three months ended June 30, 2008. Interest income decreased by $4.4 million, or 52%, to $4.1 million for the six months ended June 30, 2009 from $8.5 million for the six months ended June 30, 2008. The decrease was a result of lower portfolio yields during the 2009 period as compared to the 2008 period. Our cash, cash equivalents and marketable securities yielded approximately 1% on an annual basis in the second quarter of 2009 compared to approximately 2% on an annual basis in the second quarter of 2008. Interest expense decreased by $0.5 million, or 13%, to $3.3 million for the three months ended June 30, 2009 from $3.8 million for the three months ended June 30, 2008. Interest expense was $6.7 million and $5.7 million, respectively, for the six months ended June 30, 2009 and June 30, 2008. We recorded interest expense of $2.1 million on the $143.5 million in aggregate principal amount of 2013 Notes that were exchanged in June 2009 through the date on which we entered into the exchange agreements with respect to such 2013 Notes. Our outstanding principal amount of 2013 Notes decreased from $287.5 million on March 31, 2009 to $144.0 million on June 30, 2009. As a result, we expect that interest expense will decrease significantly in the second half of 2009 as compared to the second half of 2008. In the three months ended June 30, 2009, we incurred a non-cash charge of $12.3 million in connection with the exchange of $143.5 million in aggregate principal amount of the 2013 Notes for 6.6 million newly-issued shares of our common stock. The charge related to the additional approximately 400,000 shares of common stock that we issued in excess of the number of shares of common stock into which such 2013 Notes were convertible prior to the exchange. ### Liquidity and Capital Resources We have incurred operating losses since our inception and have financed our operations principally through public and private offerings of our equity and debt securities, strategic collaborative agreements that include research and/or development funding, development milestones and royalties on the sales of products, strategic sales of assets or businesses, investment income and proceeds from the issuance of common stock under our employee benefit plans. We expect that we will require additional capital in order to commercialize telaprevir and continue our planned activities in other areas. At June 30, 2009, we had cash, cash equivalents and marketable securities of $754.4 million, which was a decrease of $77.7 million from $832.1 million at December 31, 2008. The decrease was the result of cash expenditures we made in the six months ended June 30, 2009 related to, among other things, research and development expenses and sales, general and administrative expenses, $100.0 million in cash that we paid for ViroChem, and the timing of payments to our vendors. These cash expenditures were largely offset by the $313.3 million of net proceeds from the offering of common stock that we completed in February 2009. In addition, we received payments from our collaborators and $16.6 million from the issuance of common stock under our employee benefits plans. Capital expenditures for property and equipment during the six months ended June 30, 2009 were $11.2 million. During the three months ended June 30, 2009, we reduced the aggregate principal amount of our 2013 Notes outstanding from $287.5 million to $144.0 million. The 2013 Notes bear interest at the rate of 4.75% per annum, and we are required to make semi-annual interest payments on the outstanding principal balance of the 2013 Notes on February 15 and August 15 of each year. The 2013 Notes will mature on February 15, 2013. The 2013 Notes are convertible, at the option of the holder, into our common stock at a price equal to approximately $23.14 per share, subject to adjustment. On or after February 15, 2010, we may redeem the 2013 Notes at our option, in whole or in part, at the redemption prices stated in the indenture related to the 2013 Notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Our accrued restructuring expense of $34.1 million at June 30, 2009 relates to the portion of the facility that we lease in Kendall Square that we do not intend to occupy and includes other related lease obligations, recorded at net present value. In the six months ended June 30, 2009, we made cash payments of $7.8 million against the accrued expense and received $4.2 million in sublease rental payments. During the second half of 2009, we expect to make additional cash payments of $7.5 million against the accrued expense and receive $4.2 million in sublease rental payments. We expect to continue to make significant investments in our development pipeline, particularly in clinical trials of telaprevir, in our effort to prepare for potential registration, regulatory approval and commercial launch of telaprevir, and in clinical trials for our other drug candidates, including VX-770. We also expect to maintain our substantial investment in research. As a result, we expect to incur future losses on a quarterly and annual basis. The adequacy of our available funds to meet our future operating and capital requirements will depend on many factors, including the number, breadth and prospects of our discovery and development programs, the costs and timing of obtaining regulatory approvals for any of our drug candidates and our decisions regarding manufacturing and commercial investments. We believe that our current cash, cash equivalents and marketable securities, in addition to amounts we expect to receive from our collaborators under existing contractual obligations, will be sufficient to fund our operations for at least the next twelve months. We expect that we will need additional capital in order to complete the development and commercialization of telaprevir and to continue the development of our other drug candidates, including VX-770. We may raise additional capital through public offerings or private placements of our securities, securing new collaborative agreements, or other methods of financing. Any such capital transactions may or may not be similar to transactions in which we have engaged in the past. We also will continue to manage our capital structure and 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. If adequate funds are not available, we may be required to curtail significantly or discontinue one or more of our research, drug discovery or development programs or attempt to obtain funds through arrangements that may require us to relinquish rights to certain of our technologies or drug candidates. ### Contractual Commitments and Obligations Our commitments and obligations were reported in our Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission, or SEC, on February 17, 2009. There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K, except that as a result of the exchanges of $143.5 million of our outstanding 2013 Notes for 6.6 million newly-issued shares of our common stock in June 2009, the principal amount on the 2013 Notes that we are obligated to repay in 2013 has been reduced to $144.0 million from $287.5 million. In addition, the interest payment on the 2013 Notes that we are obligated to make in August 2009 is reduced from $6.8 million to $3.4 million, and the interest payments we are obligated to make in 2010, 2011, 2012 and 2013 have been reduced by $6.8 million, $6.8 million, $6.8 million and $3.4 million, respectively. ### Recent Accounting Pronouncements In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"). SFAS 167 requires a qualitative approach to identifying a controlling financial interest in a variable interest entity ("VIE"), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. SFAS 167 is effective for us on January 1, 2010. We are evaluating the effect of the pending adoption of SFAS 167 on our condensed consolidated financial statements. In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140" ("SFAS 166"). SFAS 166 amends FASB Statement No. 140 to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement in transferred financial assets. The recognition and measurement provisions of this statement shall be applied to transfers that occur on or after January 1, 2010, the effective date of SFAS 166 for us. We are evaluating the effect of the pending adoption of SFAS 167 on our condensed consolidated financial statements. In April 2009, the FASB issued three FASB Staff Positions ("FSP"s) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP No. FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," establishes a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings instead of other comprehensive income. FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," expands the fair value disclosures required for all financial instruments within the scope of FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments," to interim periods. All of these FSPs became effective for us on April 1, 2009. FSP No. FAS 157-4, FSP No. FAS 115-2 and FAS 124-2, and FSP No. FAS 107-1 and APB 28-1 did not have an effect on our condensed consolidated financial statements. In April 2009, the FASB issued FSP No. FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies," which amends SFAS 141(R) by establishing a model to account for certain pre-acquisition contingencies. In November 2008, the FASB ratified Emerging Issues Task Force ("EITF") Issue No. 08-7, "Accounting for Defensive Intangible Assets" ("EITF 08-7"). EITF 08-7 applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. FSP No. FAS 141(R)-1 and EITF 08-7 became effective on January 1, 2009. The implementation of FSP No. FAS 141(R)-1 and EITF 08-7 did not have an effect on our condensed consolidated financial statements. ## Market risk As filed, 1,194 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 United States government and its agencies, investment grade commercial paper and money market funds. These investments are denominated in United States 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. ## Controls and procedures As filed, 1,650 characters. Our annual meeting of stockholders was held on May 14, 2009. Our stockholders elected Roger W. Brimblecombe and Bruce I. Sachs to serve on our board of directors until the annual meeting of stockholders to be held in 2012. The tabulation of votes with respect to the election of such directors is as follows: | | For | Withheld | | --- | ---: | ---: | | Roger W. Brimblecombe | 144,019,962 | 1,875,621 | | Bruce I. Sachs | 144,069,795 | 1,825,788 | Following the meeting, our board of directors consisted of Joshua S. Boger, Roger W. Brimblecombe, Stuart J.M. Collinson, Eugene H. Cordes, Matthew W. Emmens (Chair), Bruce I. Sachs, Charles A. Sanders, and Elaine S. Ullian. On July 6, 2009, our board of directors appointed Jeffrey M. Leiden and Dennis L. Winger to our board of directors. In addition, our stockholders approved (i) amendments to our Amended and Restated 2006 Stock and Option Plan to increase the number of shares of common stock authorized for issuance thereunder by 7,700,000 and increase the number of shares a participant may receive in any calendar year thereunder by 100,000, and (ii) the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2009. The tabulation of votes with respect to these two proposals was as follows: | | For | Against | Abstain | Broker Non-Votes | | --- | ---: | ---: | ---: | ---: | | Amendments to Our Amended and Restated 2006 Stock and Option Plan | 78,790,465 | 51,154,625 | 35,153 | 15,735,340 | | Ratification of Our Independent Registered Public Accounting Firm | 145,395,086 | 458,266 | 42,231 | 0 | ## Risk factors As filed, 5,384 characters. Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the SEC on February 17, 2009, as updated by our Quarterly Report on Form 10-Q for the three months ended March 31, 2009, which was filed with the SEC on May 11, 2009. There have been no material changes from the risk factors previously disclosed in the Form 10-K as updated by the Form 10-Q. ### 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 clinical trials, development timelines and regulatory authority filings for telaprevir, VX-770, VX-809, VX-222 and other drug candidates under development by us and our collaborators including our intention to submit an NDA for telaprevir in the United States in the second half of 2010; our expectations regarding the number of patients that will be evaluated, the trial design that will be utilized, and the expected date by which SVR data, interim data and/or final data will be available and/or publicly announced for our ADVANCE, REALIZE and ILLUMINATE trials, the other ongoing or planned clinical trials of telaprevir, the ENDEAVOR registration program for VX-770, including the STRIVE, ENVISION and DISCOVER trials, the Phase 2a clinical trials of VX-809, the Phase 1 clinical trial of VX-222, and the clinical trials being conducted by our collaborators of drug candidates for the treatment of cancer; expectations regarding the amount of, timing of and trends with respect to our revenues and costs and expenses; the data that will be generated by ongoing and planned clinical trials, and the ability to use that data for the design and initiation of further clinical trials and to support regulatory filings, including potentially applications for marketing approval for telaprevir and VX-770; our ability to potentially register telaprevir for marketing across a range of genotypes and patient populations; our plan to begin clinical evaluation of novel combination regimens of telaprevir with VX-222 as early as the fourth quarter of 2009; our expectations regarding the future market demand and medical need for telaprevir and our other drug candidates; 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 of those drug candidates; our ability to successfully market telaprevir and VX-770 if we are able to obtain regulatory approval; the focus of our drug development efforts and our financial and management resources and our plan to invest significant resources in telaprevir and our other drug candidates; the establishment, development and maintenance of collaborative relationships; potential business development activities, including with respect to our JAK3 program and our telaprevir milestones; our ability to use our research programs to identify and develop new drug candidates to address serious diseases and significant unmet medical needs; our estimates regarding obligations associated with a lease of a facility in Kendall Square, Cambridge, Massachusetts; and our liquidity and our expectations regarding our needs for and ability to raise additional capital. Without limiting the foregoing, the words "believes," "anticipates," "plans," "intends," "expects" and similar expressions are intended to identify forward-looking statements. 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 we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion 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, 2008, which was filed with the SEC on February 17, 2009, and updated and supplemented by "Part II—Item 1A—Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, which was filed with the SEC on May 11, 2009. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed could also adversely affect us. 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 Aug 10, 2009. Source: SEC EDGAR, the filing index for accession 0001047469-09-007495. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.