# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Mar 31, 2010

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2010-05-03
- Accepted by EDGAR: May 3, 2010, 20:33 ET
- Period: 2010-03-31
- Accession: 0001047469-10-004633
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000104746910004633/a2198073z10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000104746910004633/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2010-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2010-01-01 to 2010-03-31 | $22.4m | us-gaap:Revenues |
| Research and development | 3 months, 2010-01-01 to 2010-03-31 | $143.0m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2010-01-01 to 2010-03-31 | $35.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2010-01-01 to 2010-03-31 | −$160.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2010-01-01 to 2010-03-31 | $4.0m | us-gaap:InterestExpense |
| Diluted EPS | 3 months, 2010-01-01 to 2010-03-31 | −$0.83 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2010-01-01 to 2010-03-31 | −$0.83 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2010-01-01 to 2010-03-31 | 198,935,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2010-01-01 to 2010-03-31 | −$196.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2010-01-01 to 2010-03-31 | $3.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2010-03-31 | $396.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2010-03-31 | $1.13bn | us-gaap:AssetsCurrent |
| Total assets | at 2010-03-31 | $1.77bn | us-gaap:Assets |
| Current liabilities | at 2010-03-31 | $211.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2010-03-31 | $779.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2010-03-31 | $990.6m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 45,778 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 being evaluated in a registration program focused on treatment-naïve and treatment-failure patients with genotype 1 hepatitis C virus, or HCV, infection. We expect to receive final data from the telaprevir registration program in the second and third quarters of 2010. Assuming a successful outcome of the registration program, we intend to submit a new drug application, or NDA, for telaprevir in the United States in the second half of 2010. If we are able to obtain marketing approval for telaprevir in accordance with our current development and regulatory timelines, we expect to initiate sales of telaprevir in the United States in 2011. We are pursuing a number of other clinical development programs, including a registration program for VX-770, the lead drug candidate in our cystic fibrosis, or CF, program. We plan to continue investing in our research and development programs and to develop selected drug candidates that emerge from those programs, alone or with third-party collaborators.

#### Business Focus

Over the last several years, we have invested significant financial and management resources in the late-stage development of telaprevir and in strengthening our pipeline of drug candidates, through research and development activities and the acquisition of ViroChem Pharma Inc., or ViroChem. To fund these investments, we have raised significant capital through sales of common stock and convertible debt and other financial transactions. In order to execute our business plan and achieve profitability, we will need to complete the development of telaprevir on a timely basis and effectively commercialize telaprevir in the United States, where we have retained marketing rights to telaprevir.

Over the next several years, we believe that in addition to telaprevir we will need to further investigate other potential therapies for the treatment of HCV infection and to research, develop and commercialize additional drug candidates in other therapeutic areas with significant unmet needs. As a result, we are committed to advancing the other clinical drug candidates in our pipeline and investing in our preclinical research programs. In HCV, we are planning to evaluate telaprevir in combination with VX-222, an investigational polymerase inhibitor that we obtained in 2009 through our acquisition of ViroChem, in a Phase 2a clinical trial. The objective of our ongoing clinical trials of HCV drug candidates and our earlier-stage activities with respect to potential additional and combination treatments for HCV infection is to significantly improve the treatment options for genotype 1 HCV infection. The most advanced of our other drug candidates is VX-770, which we are evaluating in a registration program that focuses on patients with CF who have the G551D mutation in the gene responsible for CF. We also are planning on evaluating VX-770 in combination with VX-809 in a Phase 2a clinical trial in patients with the most common mutation in the gene responsible for CF and plan to conduct additional dosing-ranging activities for VX-809. In addition, we have initiated a Phase 2a clinical trial of VX-509 in patients with moderate-to-severe rheumatoid arthritis and a Phase 2a clinical trial of VX-765 in patients with treatment-resistant epilepsy.

#### Drug Discovery and Clinical Development

Discovery and development of a new pharmaceutical product is a difficult and lengthy process that requires significant financial resources along with extensive technical and regulatory expertise and can take 10 to 15 years or more. 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 targeted or that adversely affect the competitive commercial profile of the drug candidate.

Throughout the development process for a 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 in the clinical trials to support continued development and approval of the drug candidate. If the data from our ongoing clinical trials or nonclinical studies regarding the safety or efficacy of a drug candidate are not favorable or regulatory authorities request additional clinical trials or changes to existing clinical trial protocols, we may be forced to delay or terminate the clinical development program for that drug candidate, which, particularly in the case of telaprevir, could materially harm our business.

Because our investments are subject to considerable risks, we closely 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 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 regarding telaprevir have reduced the risks associated with obtaining regulatory approval, we cannot be sure that our development of telaprevir will lead to regulatory approval of telaprevir or that such approval, if obtained, will occur in 2011. With respect to our other drug candidates, including VX-770, 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 ultimately will result in pharmaceutical products.

#### Recent Developments in Clinical Programs

### Telaprevir NDA

We have three ongoing clinical trials of telaprevir, which are referred to as the ADVANCE, REALIZE and ILLUMINATE clinical trials. We expect to receive sustained viral response, or SVR, data from the ADVANCE clinical trial in the second quarter of 2010 and from the REALIZE and ILLUMINATE clinical trials in the third quarter of 2010. We plan to submit our NDA for telaprevir on a rolling basis and expect to begin submitting portions of the NDA, including the chemistry, manufacturing and controls (CMC) package and the nonclinical package, during the summer of 2010. Assuming a successful outcome of the registration program, we intend to complete the NDA submission for telaprevir in the second half of 2010 with clinical data from Phase 3 trials in both treatment-naïve and treatment-failure patients with genotype 1 HCV infection.

### 107 Clinical Trial of Telaprevir

In April 2010, in connection with the annual meeting of the European Association for the Study of the Liver (EASL), we announced final results from a Phase 2 clinical trial of telaprevir, referred to as the 107 Trial, which enrolled 117 patients who did not achieve an SVR in the control arms of our Phase 2b clinical trials of telaprevir. 59% of patients overall who received a telaprevir-based combination regimen in the 107 Trial achieved an SVR. In the 107 Trial, ten patients, or 9%, discontinued all therapy due to adverse events, with rash being the most common reason for discontinuation.

### Phase 1b Clinical Trial of VX-222

In connection with the presentations at EASL, we also announced data from a Phase 1b clinical trial of VX-222. The Phase 1b clinical trial of VX-222 was a double-blind, randomized placebo-controlled, dose-ranging clinical trial designed to evaluate the safety, tolerability, pharmacokinetics and effect on viral kinetics of four dose levels of VX-222 in a total of 32 patients with genotype 1 HCV infection. In the Phase 1b clinical trial, treatment with VX-222 for three days resulted in a greater than 3 log10 reduction in HCV RNA levels across all four of the VX-222 dose groups. No serious adverse events or treatment discontinuations were reported over the three-day dosing period. Mild-to-moderate diarrhea was the most common adverse event reported.

### Initiation of HCV Combination Clinical Trial

In March 2010, we announced plans to initiate the first clinical trial evaluating telaprevir dosed in combination with VX-222. This randomized, parallel-group, dose-ranging trial is designed to evaluate the safety and antiviral activity, including SVR rates, of multiple 12-week response-guided combination regimens with telaprevir and VX-222. This clinical trial initially will include two clinical trial arms in which telaprevir and VX-222 are dosed in combination with pegylated-interferon, or peg-IFN, and ribavirin, or RBV, and two clinical trial arms in which telaprevir and VX-222 will be dosed in combination with each other. Patients who achieve undetectable HCV RNA levels at weeks 2 and 8 will stop all treatment after 12 weeks, while patients who do not meet those criteria will receive 12 or 24 weeks of treatment with peg-IFN and RBV after the initial 12 week dosing period. The trial is expected to enroll approximately 100 treatment-naïve patients with genotype 1 HCV infection at multiple clinical trial sites, the majority of which will be located in the United States. The primary endpoint of this clinical trial is to assess the safety and tolerability of telaprevir/VX-222-based combination therapy. A secondary endpoint of this clinical trial is to assess the proportion of patients in each clinical trial arm who achieve an SVR. We expect to obtain interim clinical data, including safety and viral kinetic data, from this trial in the second half of 2010.

#### Commercialization

We plan to market telaprevir in North America, if and when it is approved for sale. Over the past several years, we have expanded our commercial organization with a focus on building our understanding of the HCV market, developing our commercial strategy for the potential launch of telaprevir, and planning the infrastructure necessary to support future commercial activities. In the period prior to the anticipated launch of telaprevir, we expect to expand our commercial organization to an even more significant extent. This expansion will include implementation of internal systems and infrastructure in order to support commercial sales, incorporation of appropriate compliance policies and procedures, establishment of patient-focused programs and hiring a sales force to promote telaprevir, if approved, to health care providers. We are assembling a group of executives with broad experience in marketing, sales, distribution and cost reimbursement of drugs. We will continue to build our commercial infrastructure by hiring a sales management team followed by a commercial sales force in the United States. Successful development and commercialization of any of our other drug candidates may require further expansion of our commercial capabilities in North America and potentially in other locations if we retain and pursue our current worldwide rights to these drug candidates.

#### Manufacturing

We will require a supply of telaprevir for sale in North America and a supply of VX-770 for sale worldwide if we are successful in obtaining marketing approval for either or both of these drug candidates. We rely on an international network of third parties to manufacture and distribute our drug candidates for clinical trials, and we expect that we will continue to rely on third parties for the foreseeable future to meet our commercial supply needs for any of our drug candidates that are approved for sale. Third-party contract manufacturers, including some in Asia, supply us with raw materials, and contract manufacturers in the European Union and the United States convert these raw materials into drug substance, and convert the drug substance into final dosage form. Establishing and managing this global supply chain requires a significant financial commitment and the creation and maintenance of numerous third-party relationships. Although we attempt to effectively manage the business relationships with companies in our supply chain, we do not have complete control over their activities.

#### Corporate Collaborations and Business Development Activities

Corporate collaborations have been and will continue to be an important component of our business strategy. Historically, we have not had the resources to develop and commercialize all of the drug candidates that we have identified or for which we have rights. Therefore, we have relied on collaborations with third parties for the development and commercialization of some or all of our drug candidates. We have been successful in initiating productive collaborations with Janssen Pharmaceutica, N.V., or Janssen, and Mitsubishi Tanabe Pharma Corporation, or Mitsubishi Tanabe, relating to telaprevir, and our collaboration with Cystic Fibrosis Foundation Therapeutics Incorporated contributed to the discovery of VX-770 and VX-809. Our early collaboration with GlaxoSmithKline plc resulted in two marketed drugs for the treatment of HIV infection. Collaborations continue to be an important part of our strategy going forward, although the structure and scope of available collaborative opportunities has changed in the past and may change in the future based on prevailing economic and competitive conditions. Business development opportunities have provided us with drug candidates and important research resources that have contributed to a number of the drug candidates in our current development pipeline. In 2009, we acquired ViroChem in order to obtain rights to its drug candidates for the treatment of HCV infection. In the future, we may seek to license or acquire drugs, drug candidates and other technologies that have the potential to strengthen our pipeline, drug discovery platform or commercial opportunities.

#### Financing Strategy

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 have been dependent in large part on our 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, investment income and the issuance of common stock under our employee benefit plans. We have from time to time transferred to third parties future financial rights under certain of our collaborations in exchange for one-time cash payments.

We expect that we will incur substantial expenses in order to complete the development and commercialization of telaprevir while at the same time continuing to pursue diversified research and development efforts for our other drug candidates and to build our other capabilities. For these purposes, we may raise additional capital in order to maintain adequate working capital and cash reserves. We expect in any case that we would need to raise additional capital if the development of telaprevir is materially delayed. We may raise additional capital from public offerings or private placements of our securities or through other methods of financing. We cannot be sure that financing opportunities will be available on acceptable terms, if at all. If adequate funds are not available on acceptable terms, we may be required to significantly curtail or discontinue one or more of our research 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 drug candidates.

### Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are reflected in reported results for the period in which 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. During the three months ended March 31, 2010, 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, 2009.

### Results of Operations—Three Months Ended March 31, 2010 Compared with Three Months Ended March 31, 2009

*(in thousands)*

|  | Three Months Ended March 31, Increase/ (Decrease) $ 2010 | Increase/ (Decrease) % 2009 |  |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $22,429 | $23,979 | $(1,550) | (6)% |
| Operating costs and expenses | 182,711 | 185,872 | (3,161) | (2)% |
| Net interest expense | 3,500 | 779 | 2,721 | 349% |
| Other loss | 1,489 | — | 1,489 | n/a |
| Net loss | $165,271 | $162,672 | $2,599 | 2% |

#### Net Loss

Our net loss in the first quarter of 2010 increased by $2.6 million, or 2%, as compared to our net loss in the first quarter of 2009. A decrease in our revenues and increases in our net interest expense and certain other non-operating expenses were partially offset by a small decrease in our operating costs and expenses. The small decrease in our operating costs and expenses was primarily the result of lower restructuring expense in the 2010 period compared to the 2009 period and the acquisition-related expense of $7.8 million that we incurred in the first quarter of 2009, for which there was no corresponding expense in the first quarter of 2010.

#### Net Loss per Share

Our net loss for the three months ended March 31, 2010 was $0.83 per basic and diluted common share compared to $1.04 per basic and diluted common share for the three months ended March 31, 2009. This decrease in net loss per common share for the first quarter of 2010 compared to the first quarter of 2009 was the result of an increase in the basic and diluted weighted-average number of common shares outstanding from 155.9 million to 198.9 million. The increase in the number of common shares outstanding resulted primarily from the equity offerings we completed in February 2009 and December 2009, the ViroChem acquisition in March 2009 and the exchanges of our 4.75% convertible senior subordinated notes due 2013, or 2013 Notes, into common stock during 2009.

#### Stock-based Compensation and Certain Other Expenses

The comparison of our costs and expenses during the first quarter of 2010 and 2009 reflects a decrease in our stock-based compensation expense and our restructuring expense and in expenses related to our acquisition of ViroChem, along with incremental expenses incurred in the first quarter of 2010 related to the financial transactions we completed in September 2009. The decrease in our stock-based compensation expense resulted principally from expenses related to our CEO transition that were incurred in the first quarter of 2009 for which there were no corresponding expenses in the first quarter of 2010. The September 2009 financial transaction-related expenses principally relate to interest expenses on the secured notes due 2012, or 2012 Notes, we issued in one of the September 2009 financial transactions and to adjustments to the fair value of the derivatives associated with the September 2009 financial transactions. Our costs and expenses in the first quarter of 2010 and first quarter of 2009 included the following:

*(in thousands)*

|  | Three Months Ended March 31, 2010 | 2009 |
| --- | ---: | ---: |
| Stock-based compensation expense | $19,333 | $22,277 |
| Restructuring expense | 780 | 2,402 |
| Acquisition-related expenses | — | 7,793 |
| September 2009 financial transaction-related expenses | 5,072 | — |

### Revenues

*(in thousands)*

|  | Three Months Ended March 31, Increase/ (Decrease) $ 2010 | Increase/ (Decrease) % 2009 |  |  |
| --- | ---: | ---: | ---: | ---: |
| Royalty revenues | $6,407 | $6,140 | $267 | 4% |
| Collaborative revenues | 16,022 | 17,839 | (1,817) | (10)% |
| Total revenues | $22,429 | $23,979 | $(1,550) | (6)% |

Our total revenues in recent periods have consisted primarily of collaborative revenues, which have fluctuated significantly on a quarterly basis due to the timing of recognition of significant milestone payments, the amendment of our collaborative agreement with Mitsubishi Tanabe, which resulted in an additional up-front payment that is being recognized over time, and the level of reimbursement we have received for our development programs. During the remainder of 2010, we expect to continue to recognize deferred revenues currently reflected on our condensed consolidated balance sheet and additional revenues from our collaborative relationships and other sources. We do not expect to have any product revenues from the sale of telaprevir in 2010. If we are able to successfully commercialize telaprevir in accordance with current development timelines, product revenues from the sales of telaprevir would commence in 2011.

### Collaborative Revenues

The table presented below is a summary of revenues from our collaborative arrangements for the three months ended March 31, 2010 and 2009:

*(in thousands)*

|  | Three Months Ended March 31, 2010 | 2009 |
| --- | ---: | ---: |
| Janssen | $6,464 | $17,135 |
| Mitsubishi Tanabe | 9,558 | 181 |
| Other | — | 523 |
| Total collaborative revenues | $16,022 | $17,839 |

Our revenues from the Janssen collaboration in each period consist of:

net reimbursements from Janssen for development costs of telaprevir;

specified manufacturing services, if any, we provided to Janssen in the period;

an amortized portion of the $165.0 million up-front payment received from Janssen in 2006; and

development milestone payments, if any, recognized in the period.

Amounts that Janssen pays us for reimbursement of our telaprevir clinical development expenses, after we offset reimbursement amounts owed by us to Janssen for reimbursements of Janssen's telaprevir clinical development expenses, are recorded as revenues.

The $10.7 million, or 62%, decrease in our revenues from Janssen in the first quarter of 2010 compared to the first quarter of 2009 was primarily the result of decreased net reimbursable expenses as we near the completion of our registration program for telaprevir. In addition, we adjusted our estimates regarding the period of performance under the Janssen agreement in the first quarter of 2010, as a result of changes in the global development plan for telaprevir, which contemplates the conduct of certain development activities in the post-approval period if telaprevir is approved for marketing. This adjustment, together with a similar adjustment that we made in the third quarter of 2009, resulted in our recognizing $3.1 million in collaborative revenues related to the up-front payment in the first quarter of 2010 as compared to $5.6 million in the first quarter of 2009. We did not achieve any development milestones under the Janssen collaboration in 2009 or the first quarter of 2010. In the third quarter of 2009, we entered into two financial transactions related to $250.0 million in potential future milestone payments related to the regulatory filing with and approval of telaprevir by the European Medicines Evaluation Agency, and the launch of telaprevir in the European Union. If Janssen is able to successfully commercialize telaprevir in accordance with current development timelines, we anticipate these milestones will be earned prior to April 2012. We expect that, when and if earned, these milestones will result in collaborative revenues of $250.0 million. The proceeds from the first $155.0 million would be used to redeem our 2012 Notes and the remaining $95.0 million would be paid by Janssen to the purchaser of $95.0 million of these milestones.

In the first quarter of 2010, the majority of our collaborative revenues related to our collaboration with Mitsubishi Tanabe. In the third quarter of 2009, we entered into an amendment to our license, development and commercialization agreement with Mitsubishi Tanabe that provided for a $105.0 million payment in connection with the execution of the amendment. We initially classified this payment as deferred revenues and are recognizing it over our expected period of performance. In the first quarter of 2010, we recognized a total of $9.6 million of revenues from Mitsubishi Tanabe related to the up-front payment. During the remainder of 2010, we expect to continue to recognize revenues related to the up-front payment and to begin to receive additional revenue related to specific manufacturing services that we agreed to provide Mitsubishi Tanabe.

### Royalty Revenues

Our royalty revenues relate to sales of the HIV protease inhibitors Lexiva/Telzir and Agenerase by GlaxoSmithKline. In 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 to a third party, in return for a one-time cash payment of $160.0 million. We are recognizing revenues from this transaction on a deferred basis over the term of our agreement with GlaxoSmithKline under the units-of-revenue method. We will 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.

Our royalty revenues increased by $0.3 million, or 4%, in the first quarter of 2010 compared to the first quarter of 2009. In 2010, 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)*

|  | Three Months Ended March 31, Increase/ (Decrease) $ 2010 | Increase/ (Decrease) % 2009 |  |  |
| --- | ---: | ---: | ---: | ---: |
| Research and development expenses | $143,012 | $143,581 | $(569) | (0)% |
| Sales, general and administrative expenses | 35,552 | 28,520 | 7,032 | 25% |
| Royalty expenses | 3,367 | 3,576 | (209) | (6)% |
| Restructuring expense | 780 | 2,402 | (1,622) | (68)% |
| Acquisition-related expenses | — | 7,793 | (7,793) | (100)% |
| Total costs and expenses | $182,711 | $185,872 | $(3,161) | (2)% |

Our operating 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 activities related to the development of clinical drug candidates. Our sales, general and administrative expenses generally have been increasing as we expand our commercial capabilities in preparation for the potential commercial launch of telaprevir.

### Research and Development Expenses

*(in thousands)*

|  | Three Months Ended March 31, Increase/ (Decrease) $ 2010 | Increase/ (Decrease) % 2009 |  |  |
| --- | ---: | ---: | ---: | ---: |
| Research expenses | $45,954 | $41,903 | $4,051 | 10% |
| Development expenses | 97,058 | 101,678 | (4,620) | (5)% |
| Total research and development expenses | $143,012 | $143,581 | (569) | (0)% |

Our total research and development expenses in the first quarter of 2010 were consistent with our total research and development expenses in the first quarter of 2009, as increases in research expenses were offset by decreases in our development expenses. Our research and development expenses include internal and external costs incurred for our drug candidates, including telaprevir and VX-770. We do not assign our internal costs, such as salary and benefits, stock-based compensation expense, laboratory supplies and infrastructure costs, to individual 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 do allocate by individual drug development program. All research and development costs for our drug candidates are expensed as incurred.

To date, we have incurred in excess of $3.5 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 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.

Over the past several years, telaprevir has represented the largest portion of the development costs for our clinical drug candidates. We anticipate that our ongoing Phase 3 clinical trials of telaprevir will be completed in the second and third quarters of 2010, but that development costs associated with other clinical trials of telaprevir may continue after the completion of the telaprevir 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. If our registration program for VX-770 is successful and completed on the timeline that we currently anticipate, we could submit an NDA for VX-770 in the second half of 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)*

| Research Expenses: | Three Months Ended March 31, Increase/ (Decrease) $ 2010 | Increase/ (Decrease) % 2009 |  |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $16,485 | $14,571 | $1,914 | 13% |
| Stock-based compensation expense | 5,648 | 6,353 | (705) | (11)% |
| Laboratory supplies and other direct expenses | 7,700 | 6,615 | 1,085 | 16% |
| Contractual services | 2,938 | 974 | 1,964 | 202% |
| Infrastructure costs | 13,183 | 13,390 | (207) | (2)% |
| Total research expenses | $45,954 | $41,903 | $4,051 | 10% |

Our research expenses primarily are related to expenses for our workforce and generally are not dependent on the timing of clinical development activities. Over the past few years we have maintained a relatively level investment in research activities, with fluctuations from time to time in various categories of expenses resulting in increases to our total research expenses. The $4.1 million increase in total research expenses in the three months ended March 31, 2010 compared to the same period in 2009 was primarily a result of an increased number of employees in our research organization. We expect to continue to invest in our research programs in an effort to continue identifying additional drug candidates.

#### Development Expenses

*(in thousands)*

| Development Expenses: | Three Months Ended March 31, Increase/ (Decrease) $ 2010 | Increase/ (Decrease) % 2009 |  |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $24,987 | $23,030 | $1,957 | 8% |
| Stock-based compensation expense | 8,672 | 10,999 | (2,327) | (21)% |
| Laboratory supplies and other direct expenses | 6,233 | 6,581 | (348) | (5)% |
| Contractual services | 22,221 | 34,674 | (12,453) | (36)% |
| Commercial supply investment | 16,475 | 6,674 | 9,801 | 147% |
| Infrastructure costs | 18,470 | 19,720 | (1,250) | (6)% |
| Total development expenses | $97,058 | $101,678 | $(4,620) | (5)% |

Our development expenses decreased by $4.6 million, or 5%, in the first quarter of 2010 as compared to the first quarter of 2009. This decrease in our development expenses was primarily the result of significantly lower contractual services expenses as a result of the reduction in expenses related to the registration program for telaprevir. The decreased contractual services expenses were largely offset by our increased investment in commercial supply.

### Sales, General and Administrative Expenses

*(in thousands)*

|  | Three Months Ended March 31, Increase/ (Decrease) $ 2010 | Increase/ (Decrease) % 2009 |  |  |
| --- | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $35,552 | $28,520 | $7,032 | 25% |

The increase in sales, general and administrative expenses in the first quarter of 2010 compared to the first quarter of 2009 is the result of increased headcount and external costs as we advance our drug candidates, particularly telaprevir, into late-stage development. In the first quarter of 2010 and 2009, our sales, general and administrative expenses included $5.0 million and $4.9 million, respectively, of stock-based compensation expense.

### Royalty Expenses

Royalty expenses decreased by $0.2 million, or 6%, in the first quarter of 2010 as compared to the first quarter of 2009. Royalty expenses primarily relate to a subroyalty payable to a third party on net sales of Lexiva/Telzir. 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 $0.8 million for the three months ended March 31, 2010 compared to $2.4 million for the three months ended March 31, 2009. The restructuring expense in all periods included imputed interest cost related to the restructuring liability associated with our Kendall Square lease. The decrease in restructuring expense for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 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 three months ended March 31, 2010. The lease restructuring liability was $33.3 million as of March 31, 2010.

We review our estimates and assumptions with respect to the Kendall Square lease at least on 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 first quarter of 2009 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 first quarter of 2010.

### Non-operating Items

### Interest Income

Interest income decreased by $2.1 million, or 82%, to $0.5 million for the three months ended March 31, 2010 from $2.6 million for the three months ended March 31, 2009. The decrease was a result of lower portfolio yields during the 2010 period as compared to the 2009 period. Our cash, cash equivalents and marketable securities yielded approximately 0% on an annual basis in the first quarter of 2010 compared to approximately 1% on an annual basis in the first quarter of 2009.

### Interest Expense

Interest expense increased by $0.6 million, or 17%, to $4.0 million in the first quarter of 2010 from $3.4 million in the first quarter of 2009. This increase was the result of interest expenses related to the 2012 Notes that we issued in September 2009, partially offset by a decrease in interest expenses related to our 2013 Notes from $3.2 million in the first quarter of 2009 to $0.3 million in the first quarter of 2010. During the remainder of 2010, we will not have any interest expense related to our 2013 Notes, the remainder of which were converted into common stock in the first quarter of 2010, but we expect that we will continue to incur interest expenses related to our 2012 Notes.

### Change in Fair Value of Derivative Instruments

In the first quarter of 2010, we recorded losses of $1.5 million in connection with the embedded and free-standing derivatives associated with our September 2009 financial transactions. These losses primarily are based on a time-value-of-money adjustment to the estimated fair value of the free-standing derivative. We expect to continue to record losses and/or gains related to these derivatives during the remainder of 2010.

### 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, financial transactions, investment income and proceeds from the issuance of common stock under our employee benefit plans. We expect that we will incur substantial expenses in order to complete the development and commercialization of telaprevir while at the same time continuing to pursue diversified research and development efforts for our other drug candidates and to build our other capabilities. For these purposes, we may raise additional capital in order to maintain adequate working capital and cash reserves. We expect we would need to raise additional capital if the development of telaprevir were materially delayed.

At March 31, 2010, we had cash, cash equivalents and marketable securities of $1.1 billion, which was a decrease of $192.2 million from $1.3 billion at December 31, 2009. The decrease was primarily the result of cash expenditures we made in the first quarter of 2010 related to, among other things, research and development expenses and sales, general and administrative expenses. Capital expenditures for property and equipment during the first quarter of 2010 were $3.1 million.

As a result of a financial transaction entered into in September 2009, we had $155.0 million in aggregate principal amount of 2012 Notes outstanding on March 31, 2010. The 2012 Notes mature on October 31, 2012, subject to earlier mandatory redemption as specified milestone events under our collaboration with Janssen are achieved prior to October 31, 2012. In addition, in September 2009, we sold our rights to receive an additional $95.0 million of potential future milestone payments that we expect to receive from Janssen for the launch of telaprevir in the European Union. As a result of these transactions, the $250.0 million of potential milestone payments from Janssen related to the filing, approval and launch of telaprevir in the European Union, if and when earned, will not provide us with liquidity in the future except to the extent that they fund redemption of $155.0 million in principal amount of our 2012 Notes.

Our accrued restructuring expense of $33.3 million at March 31, 2010 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 first quarter of 2010, we made cash payments of $3.7 million against the accrued expense and received $2.2 million in sublease rental payments. During the last nine months of 2010, we expect to make additional cash payments of $11.2 million against the accrued expense and to receive $6.4 million in sublease rental payments.

We expect to continue to make significant investments in our development pipeline, particularly for clinical trials of telaprevir and VX-770, in our effort to prepare for potential registration, regulatory approval and commercial launch of telaprevir and VX-770, and in clinical trials for our other drug candidates, including VX-222, VX-809, VX-509 and VX-765. 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 at least until we obtain marketing approval and successfully commercialize a product. 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 will be sufficient to fund our operations for at least the next twelve months. We may raise additional capital in order to maintain adequate working capital and cash reserves to continue our diversified research, discovery and development efforts 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 will continue to manage our capital structure and to 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, 2009, which was filed with the Securities and Exchange Commission, or SEC, on February 19, 2010. 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 anticipated, the holders of our remaining 2013 Notes converted those 2013 Notes into 1.4 million shares of our common stock in the first quarter of 2010.

### Recent Accounting Pronouncements

Refer to Note P, "Recent Accounting Pronouncements," in the accompanying notes to the condensed consolidated financial statements for a discussion of recent accounting pronouncements.

## Market risk

As filed, 1,207 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 corporate bonds and notes and money market instruments. 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, 1,467 characters.

### Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, as of March 31, 2010 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 first quarter of 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 5,354 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on February 19, 2010. There have been no material changes from the risk factors previously disclosed in that Annual Report on Form 10-K.

### SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

our expectations regarding clinical trials, development timelines and regulatory authority filings and submissions for telaprevir, VX-770, VX-222, VX-809, VX-509, VX-765 and other drug candidates under development by us and our collaborators, including our intention to complete the NDA submission for telaprevir in the United States in the second half of 2010 and to begin submitting portions of our NDA for telaprevir in the summer of 2010, and the possibility that we could submit an NDA for VX-770 in the second half of 2011;

our expectations regarding the expected date by which SVR data will be available and/or publicly announced for our ADVANCE, REALIZE and ILLUMINATE trials, and our expectations regarding the timing and structure of clinical trials of our other drug candidates, including VX-770, VX-222, VX-509 and VX-765 and combinations of telaprevir and VX-222 and VX-770 and VX-809;

expectations regarding the amount of, timing of and trends with respect to our revenues, costs and expenses and other gains and losses, including those related to the intangible assets associated with the ViroChem acquisition and to the liabilities we recorded in connection with the financial transactions that we entered into in September 2009;

our belief that if we are able to successfully commercialize telaprevir in accordance with current development timelines, we will begin receiving revenues from the sale of telaprevir in 2011;

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 potential applications for marketing approval for telaprevir and VX-770;

the possibility that we will evaluate combination regimens of VX-770 and VX-809 in patients with CF;

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 or any of our other drug candidates 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;

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, 2009, which was filed with the SEC on February 19, 2010, and updated and supplemented by "Part II—Item 1A—Risk Factors" of this Quarterly Report on Form 10-Q. 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 May 3, 2010.
Source: SEC EDGAR, the filing index for accession 0001047469-10-004633. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.