# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Mar 31, 2011

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2011-05-06
- Accepted by EDGAR: May 6, 2011, 20:18 ET
- Period: 2011-03-31
- Accession: 0001047469-11-004721
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000104746911004721/a2203470z10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000104746911004721/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-01-01 to 2011-03-31 | $73.7m | us-gaap:Revenues |
| Research and development | 3 months, 2011-01-01 to 2011-03-31 | $158.6m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2011-01-01 to 2011-03-31 | $71.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2011-01-01 to 2011-03-31 | −$159.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-01-01 to 2011-03-31 | $12.0m | us-gaap:InterestExpense |
| Diluted EPS | 3 months, 2011-01-01 to 2011-03-31 | −$0.87 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-01-01 to 2011-03-31 | −$0.87 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-01-01 to 2011-03-31 | 202,329,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2011-01-01 to 2011-03-31 | −$186.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2011-01-01 to 2011-03-31 | $4.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2011-03-31 | $446.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-03-31 | $873.0m | us-gaap:AssetsCurrent |
| Total assets | at 2011-03-31 | $1.54bn | us-gaap:Assets |
| Current liabilities | at 2011-03-31 | $416.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-03-31 | $1.15bn | us-gaap:Liabilities |
| Long-term debt | at 2011-03-31 | $105.0m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2011-03-31 | $391.7m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 49,491 characters.

### Overview

We are in the business of discovering, developing and commercializing small molecule drugs for the treatment of serious diseases. In November 2010, we submitted a new drug application, or NDA, requesting approval to market telaprevir in the United States for the treatment of patients with chronic hepatitis C virus, or HCV, infection. We expect to obtain approval for and initiate sales of telaprevir in the United States in 2011. In the first quarter of 2011, we announced positive results from the Phase 3 clinical trials of VX-770, the lead drug candidate in our cystic fibrosis, or CF, program. We expect to submit an NDA in the United States and a marketing authorization application, or MAA, in the European Union for VX-770 in the second half of 2011. We plan to continue investing in our research and development programs and to develop and commercialize selected drug candidates that emerge from those programs, alone or with third-party collaborators.

#### Business Focus

We are focused on obtaining approval for and commercializing telaprevir in the United States, while continuing to advance our other drug candidates and invest in our research programs. In January 2011, we received priority review designation for the telaprevir NDA from the United States Food and Drug Administration, or FDA, which established an anticipated timeframe for the FDA to review the telaprevir NDA that ends on May 23, 2011. On April 28, 2011, the FDA's Antiviral Drugs Advisory Committee, which provides non-binding recommendations for consideration by the FDA, voted unanimously (18-0) to recommend that the FDA approve telaprevir. The FDA's regulatory review process for the telaprevir NDA includes, among other things, a detailed review by the FDA of the data and information contained in the NDA, meetings and frequent communications between us and representatives of the FDA, and FDA inspections, including inspections of clinical trial sites and third-party facilities used to manufacture telaprevir. If applicable regulatory criteria are not satisfied, the FDA could refuse to approve or delay the approval of the telaprevir NDA. If we are successful in obtaining approval for telaprevir within the anticipated timeframe, we expect to begin marketing telaprevir in the United States in mid-2011. Our collaborator, Janssen Pharmaceutica, N.V., or Janssen, is responsible for the commercialization of telaprevir in its territories, including the European Union, and is obligated to pay us royalties on its net sales of telaprevir. Janssen obtained accelerated assessment for its MAA for telaprevir from the European Medicines Agency, or EMA, in December 2010 and is seeking to obtain approval for and launch telaprevir in the European Union in the second half of 2011.

In order to execute our business plan and achieve profitability, we need to obtain approval for telaprevir in a timely manner and successfully commercialize telaprevir in the United States. We expect that we will incur substantial expenses in this effort, while at the same time we plan to continue diversified research and development efforts for our other drug candidates and to expand our organization. We may seek to borrow working capital if such financing is available to us. Although we have no plans to do so in the near term, we may raise additional capital from public offerings or private placements of our securities, from new collaborative agreements or through other methods of financing, particularly if approval of telaprevir is delayed or commercialization takes longer than expected. 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, which could involve significant cash exit costs, or attempt to obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain of our drug candidates.

Successful commercialization of telaprevir if it is approved will require: effective marketing, distribution and pricing strategies; infrastructure to support commercial sales; appropriate and sustained levels of drug product inventory of telaprevir and the third-party drug products to be administered with telaprevir; company-wide processes and systems to support compliance with applicable laws and regulations and post-marketing safety evaluations; and an effective sales force and managed markets organization to promote telaprevir to health care providers and payors. For longer-term success we also will need to ensure that a significant portion of the HCV-infected population that currently is undiagnosed is diagnosed and treated. Recently, we significantly expanded our commercial organization in the United States, hiring an experienced management team and approximately 175 field-based employees, preparing our initial marketing strategies, and designing and implementing the infrastructure required to support commercial sales of telaprevir in the United States. We believe that our commercial organization is prepared for the potential commercial launch of telaprevir in the United States. We also are seeking to obtain Canadian regulatory approval for telaprevir in the second half of 2011 and have started building the commercial infrastructure that will be required to market telaprevir in Canada. We expect that the market for the treatment of patients with HCV infection will be highly competitive and may initially include boceprevir, an HCV protease inhibitor that is being evaluated by the FDA concurrently with telaprevir.

In addition to telaprevir and VX-770, we have ongoing Phase 2 clinical programs involving drug candidates intended for the treatment of HCV infection, CF, rheumatoid arthritis and epilepsy. We believe that our longer-term success will depend on our ability to continue to generate and develop innovative compounds. To that end, we expect to continue to focus on research programs directed toward the identification of new drug candidates for the treatment of serious diseases.

#### Recent Developments

### Telaprevir

On April 28, 2011, the Antiviral Drugs Advisory Committee to the FDA voted unanimously (18-0) to recommend that the FDA approve telaprevir for treatment of treatment-naive and treatment-experienced patients with genotype 1 chronic HCV infection in combination with pegylated-interferon, or peg-IFN, and ribavirin, or RBV. On April 27, 2011, the Antiviral Drugs Advisory Committee to the FDA recommended approval of Merck & Co, Inc.'s HCV protease inhibitor boceprevir for treatment of patients with genotype 1 chronic HCV infection in combination with peg-IFN and RBV. The Antiviral Drugs Advisory Committee's recommendations are not binding on the FDA. We intend to use INCIVEK™ as the trade name for telaprevir in the United States, if approved.

### VX-770

We are evaluating VX-770 in two Phase 3 clinical trials, which are referred to as STRIVE and ENVISION, in patients with CF who have a G551D mutation. STRIVE was designed to evaluate patients 12 years of age and older and ENVISION was designed to evaluate children 6 to 11 years of age. In these randomized, placebo-controlled, double-blind, parallel-group clinical trials, patients receive either VX-770 or placebo for 48 weeks. The STRIVE clinical trial is complete and all patients in ENVISION have completed at least 24 weeks of treatment with VX-770 or placebo. The primary efficacy endpoint for these trials is mean absolute change from baseline compared to placebo in percent predicted FEV1, which is a test used to evaluate lung function. The following FEV1 data was observed in STRIVE and ENVISION:

| Clinical Trial | Measurement | Week 24 | Week 48 |
| --- | --- | --- | --- |
| STRIVE (162 patients) | Mean Absolute Improvement in FEV1 Compared to Placebo | 10.6% (p\<0.0001) | 10.5% (p\<0.0001) |
| ENVISION (52 patients) | Mean Absolute Improvement in FEV1 Compared to Placebo | 12.5% (p\<0.0001) | Data Expected Mid-2011 |

30

Significant improvements in secondary endpoints, including weight gain and a reduction in sweat chloride levels, were observed in the VX-770 treatment arms in STRIVE through week 48 and in ENVISION through week 24. The baseline sweat chloride levels for the treatment groups in STRIVE and ENVISION were approximately 100 mmol/L. Patients with CF typically have elevated sweat chloride levels in excess of 60 mmol/L, while normal values are less than 40 mmol/L. In STRIVE and ENVISION through week 48 and week 24, respectively, mean sweat chloride levels for patients treated with VX-770 were below 60 mmol/L. Significant decreases in sweat chloride were not observed among those in the placebo groups.

In STRIVE, adverse events that were 5 percent greater among those treated with VX-770 compared to placebo were headache, upper respiratory tract infections, nasal congestion, rash, dizziness and bacteria in the sputum. The most commonly reported serious adverse events included: pulmonary exacerbation, 13% in the VX-770 treatment arm compared to 33% in the placebo arm; and bloody cough, 1% in the VX-770 treatment arm and 5% in the placebo arm. Discontinuations through 48 weeks due to adverse events were 1% in the VX-770 treatment arm compared to 5% in the placebo arm.

In ENVISION, the most commonly reported adverse events through week 24 were respiratory in nature and comparable between patients receiving VX-770 and patients in the placebo arm. The most commonly reported adverse events included cough, headache, pulmonary exacerbation, throat pain, and vomiting. Pulmonary exacerbations were uncommon in ENVISION regardless of treatment arm. There were no discontinuations due to adverse events in either treatment arm of the clinical trial through 24 weeks. The ENVISION safety and efficacy evaluations are ongoing and will continue through the 48-week period during which patients will receive VX-770 or placebo.

### VX-222

In March 2011, we announced interim data from an ongoing Phase 2a clinical trial in patients with genotype 1 HCV designed to evaluate response-guided combination treatment regimens of telaprevir and VX-222. The primary endpoint of this trial is safety and tolerability and secondary endpoints are on-treatment antiviral activity and the proportion of people in each treatment arm who achieve a sustained viral response. This trial originally included two treatment arms of patients examining two-drug treatment regimens consisting of telaprevir and VX-222 and two treatment arms of patients examining four-drug treatment regimens consisting of telaprevir, VX-222, peg-IFN and RBV. In the fourth quarter of 2010, we discontinued both of the two-drug treatment arms because patients in those arms met a pre-defined stopping rule related to viral breakthrough. In the first quarter of 2011, we added a treatment arm to the clinical trial to evaluate an all-oral, three-drug regimen of VX-222, telaprevir and RBV in patients with genotype 1b HCV infection.

Preliminary safety data from the 106 patients enrolled in this clinical trial showed the most frequent adverse events observed were mild gastrointestinal symptoms, including diarrhea, nausea and vomiting, and mild fatigue. Based on the preliminary safety data, there were two serious adverse events considered by the investigators to be potentially related to study medication: one patient discontinued due to acute renal failure, which resolved after study medications were discontinued, and one patient discontinued due to anemia. There were four additional treatment discontinuations, consisting of one serious adverse event considered by the investigator to be unrelated to the study medication, two attributable to rash and one attributable to a car accident.

The interim analysis included an analysis of available on-treatment antiviral activity data from the two four-drug treatment arms. Of the patients receiving four-drug treatment regimens, 27 of 30 patients, or 90%, who received the higher dose of VX-222 and 24 of 29 patients, or 83%, who received the lower dose of VX-222 had undetectable HCV levels after 12 weeks of treatment. In the treatment arm receiving the higher dose of VX-222, 15 of 30 patients, or 50%, were undetectable at both week 2 and week 8 and were eligible to stop all treatment after 12 weeks. In the treatment arm receiving the lower dose of VX-222, 11 of 29 patients, or 38%, were undetectable at both week 2 and week 8 and were eligible to stop all treatment after 12 weeks. No viral breakthrough was observed through week 12 among patients receiving the four-drug combinations. Sustained viral response data from the patients in this Phase 2a clinical trial is not yet available.

### VX-765

In the first quarter of 2011, we announced results from a Phase 2a clinical trial of VX-765 that enrolled 60 patients with treatment-resistant partial onset epilepsy, which is a type of epilepsy in which seizures start in a specific part of the brain. The primary endpoint of this clinical trial was safety and tolerability, and results showed a similar safety profile for VX-765 compared to placebo. Secondary endpoints and additional analyses evaluated the clinical activity of VX-765, and we believe the results support the initiation of a larger and longer-duration Phase 2b clinical trial of VX-765. We expect to begin this clinical trial as early as the fourth quarter of 2011.

### Collaboration with Cystic Fibrosis Foundation Therapeutics Incorporated

In April 2011, we expanded our collaboration with Cystic Fibrosis Foundation Therapeutics Incorporated, or CFFT. Under the expanded collaboration, CFFT will provide up to $75.0 million in financial support over approximately five years for development activities for VX-661, a second corrector compound discovered under the collaboration, and additional research and development activities directed at discovering new corrector compounds. We retain the rights to develop and commercialize VX-770, VX-809, VX-661 and any other compounds discovered during the course of the research collaboration with CFFT. We will pay royalties to CFFT on the net sales of any approved drugs discovered in the collaboration.

#### Drug Development and Commercialization

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. 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 achieve marketing approval. Because our investments are subject to considerable risks, we closely monitor the results of our discovery research, clinical trials and nonclinical studies, and frequently evaluate our drug development programs in light of new data and scientific, business and commercial insights, with the objective of balancing risk and potential. This process can result in relatively abrupt changes in focus and priority as new information becomes available and we gain additional understanding of our ongoing programs and potential new programs.

If we complete a registration program for a drug candidate and believe the data support approval of the drug candidate, we generally would submit an NDA to the FDA requesting approval to market the drug candidate in the United States. We or our collaborators also generally would seek analogous approvals from comparable regulatory authorities in foreign jurisdictions. To obtain approval, we must, among other things, demonstrate with evidence gathered in nonclinical studies and well-controlled clinical trials that the drug candidate is safe and effective for the disease it is intended to treat and that the manufacturing facilities, processes and controls for the manufacture of the drug candidate are adequate. The FDA and foreign regulatory authorities will have substantial discretion in deciding whether or not a drug candidate should be granted approval based on the benefits and risks of the drug candidate in the treatment of a particular disease, and could delay, limit or deny regulatory approval. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for the drug candidate involved will be harmed.

We believe that by focusing on serious diseases and innovative drugs that have the potential to provide significant advantages over existing therapies, we can increase the likelihood that our drug candidates, if approved, will be commercially successful. We believe that telaprevir will have a commercially competitive profile and that there is a significant group of patients with genotype 1 HCV infection that may be willing to seek treatment with a telaprevir-based treatment regimen. VX-770, if approved, would be the first drug designed to treat the underlying cause of CF in any patient population. However, we cannot accurately predict the product revenues that will be generated if telaprevir and/or VX-770 receive regulatory approval, and we may need to adjust our business plan as we obtain additional information regarding our actual product revenues. Even drugs that achieve initial market acceptance may then be rendered obsolete or noncompetitive by the introduction of additional therapies, expiration of intellectual property protections or introduction of generic competition. Approved drugs continue to be subject, among other things, to numerous regulatory risks, post-approval safety monitoring and risks related to supply chain disruptions.

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 China, 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.

We have not marketed pharmaceutical products before, and prior to 2010 we had a relatively small commercial organization. As a result, in the past many of the regulations related to the marketing of pharmaceutical products have had limited applicability to our business. As we have expanded our commercial organization, we have focused on implementing a comprehensive compliance program to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems and by promoting a culture of compliance. Among other laws, regulations and standards, we are subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback and false claims statutes. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. False claims laws prohibit anyone from presenting for payment to third-party payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. In 2011, we expect to continue to devote substantial resources to maintain and administer these compliance programs.

#### Corporate Collaborations and Business Development Activities

Corporate collaborations have been and will continue to be an important component of our business strategy. 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. For example, VX-770, VX-809 and VX-661 were discovered in our ongoing collaboration with CFFT, and telaprevir was discovered during a collaboration, now ended, with Eli

Lilly and Company. We have agreed to pay Eli Lilly a low single-digit royalty calculated as a percentage of net sales of telaprevir. Under our agreement with CFFT we expect to pay tiered royalties ranging from the high single digits to the sub-teens, calculated as a percentage of annual net sales of VX-770. We expect to pay the royalty to Eli Lilly during the term of the patents covering the composition-of-matter of telaprevir, which are scheduled to expire in the United States in 2025 and in Japan in 2021. Janssen is responsible for this royalty payment in its territories. In the future, we may seek to license or acquire drugs, drug candidates and other technologies that have the potential to strengthen our development pipeline, drug discovery platform or commercial opportunities.

### Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are reflected in reported results for the period in which the change occurs. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. During the three months ended March 31, 2011, 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, 2010.

### Results of Operations—Three Months Ended March 31, 2011 Compared with Three Months Ended March 31, 2010

*(in thousands)*

|  | Three Months Ended March 31, 2011 | 2010 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $73,662 | $22,429 | $51,233 | 228% |
| Operating costs and expenses | 233,561 | 182,711 | 50,850 | 28% |
| Non-operating expenses | 16,197 | 4,989 | 11,208 | 225% |
| Net loss | $176,096 | $165,271 | $10,825 | 7% |

#### Net Loss

Our net loss in the first quarter of 2011 increased by $10.8 million, or 7%, as compared to our net loss in the first quarter of 2010. Significant increases in our operating costs and expenses and non-operating expenses in the first quarter of 2011 compared to the first quarter of 2010 were largely offset by an increase in revenues due to the recognition of $50.0 million in milestone revenues under our collaboration agreement with Janssen in the first quarter of 2011.

#### Net Loss per Share

Our net loss for the three months ended March 31, 2011 was $0.87 per basic and diluted common share compared to $0.83 per basic and diluted common share for the three months ended March 31, 2010. This increase in net loss per common share for the first quarter of 2011 compared to the first quarter of 2010 was the result of an increase in our net loss partially offset by a small increase in the basic and diluted weighted-average number of common shares outstanding from 198.9 million to 202.3 million.

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

The comparison of our costs and expenses during the first quarters of 2011 and 2010 reflects changes in our levels of stock-based compensation expense and expense related to our September 2009 financial transactions. Our stock-based compensation expense has increased due to the expansion of our workforce and increased expenses related to equity awards that include performance-based accelerated vesting provisions. The stock-based compensation expense related to the equity awards with performance-based accelerators has increased principally due to the positive data that we have obtained from our registration programs for telaprevir and VX-770 beginning in the second quarter of 2010. In the three months ended March 31, 2011 and 2010, we incurred $13.5 million and $5.1 million, respectively, in non-cash expenses related to financial transactions that we completed in September 2009.

Our costs and expenses in the three months ended March 31, 2011 and 2010 included the following:

*(in thousands)*

|  | Three Months Ended March 31, 2011 | 2010 |
| --- | ---: | ---: |
| Stock-based compensation expense | $27,879 | $19,333 |
| Restructuring expense | 760 | 780 |
| September 2009 financial transaction-related expenses | 13,532 | 5,072 |

### Revenues

*(in thousands)*

|  | Three Months Ended March 31, 2011 | 2010 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Royalty revenues | $6,061 | $6,407 | $(346) | (5)% |
| Collaborative revenues | 67,601 | 16,022 | 51,579 | 322% |
| Total revenues | $73,662 | $22,429 | $51,233 | 228% |

Our total revenues in recent periods have consisted primarily of collaborative revenues, which have fluctuated significantly on a quarterly basis. This variability has been due to, among other things: the timing of recognition of significant milestone revenues; the variable level of net reimbursement we have received in the telaprevir development program from Janssen; and revenues from services we provided to our telaprevir collaborators through our third-party manufacturing network. If we are successful in obtaining approval for telaprevir by May 23, 2011, the FDA's target date to review our NDA submission, we expect to begin recognizing product revenues from sales of telaprevir in the United States in mid-2011.

### Collaborative Revenues

The table presented below is a summary of revenues from our collaborative arrangements for the three months ended March 31, 2011 and 2010:

*(in thousands)*

|  | Three Months Ended March 31, 2011 | 2010 |
| --- | ---: | ---: |
| Janssen | $56,116 | $6,464 |
| Mitsubishi Tanabe | 11,485 | 9,558 |
| Total collaborative revenues | $67,601 | $16,022 |

We recognized $50.0 million in milestone revenues under our collaboration agreement with Janssen in the first quarter of 2011 related to the acceptance of the filing of the MAA for telaprevir. The $50.0 milestone payment was applied toward the redemption of $50.0 million of 2012 Notes as required pursuant to the terms of the 2012 Notes. In the remainder of 2011, it is possible that we will achieve one or more of the additional $200.0 million in potential Janssen milestone payments related to the approval and launch of telaprevir in the European Union. We are obligated to apply the proceeds from the next $105.0 million of these milestone payments toward the redemption of the remaining $105.0 million of 2012 Notes. The final $95.0 million in milestone payments related to the potential launch of telaprevir in the European Union are to be paid by Janssen directly to the purchaser of these milestone payments.

In each of the three months ended March 31, 2011 and 2010, we recognized $9.6 million of deferred revenues from Mitsubishi Tanabe related to a one-time payment of $105.0 million that we received in 2009. We expect to continue recognizing $9.6 million of deferred revenues each quarter from the one-time payment of $105.0 million through the first quarter of 2012.

### Royalty Revenues

Our royalty revenues relate to sales by GlaxoSmithKline plc of HIV protease inhibitors that were discovered and developed pursuant to our collaboration with 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 on these net sales to a third party, in return for a one-time cash payment. We deferred the recognition of revenues from this sale and are recognizing these deferred revenues over the term of our agreement with GlaxoSmithKline under the units-of-revenue method. We recognize additional royalty revenues equal to the amount of a third-party subroyalty and an offsetting royalty expense for the third-party subroyalty payment.

If Janssen is successful in obtaining approval for telaprevir, it will pay us royalties on sales of telaprevir in Janssen's territories. Janssen has obtained accelerated assessment for its MAA for telaprevir and is seeking to obtain approval for and launch telaprevir in the European Union in the second half of 2011. We will not receive any royalties from Mitsubishi Tanabe on sales of telaprevir in its territories.

### Costs and Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2011 | 2010 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Research and development expenses | $158,612 | $143,012 | $15,600 | 11% |
| Sales, general and administrative expenses | 71,523 | 35,552 | 35,971 | 101% |
| Royalty expenses | 2,666 | 3,367 | (701) | (21)% |
| Restructuring expense | 760 | 780 | (20) | (3)% |
| Total costs and expenses | $233,561 | $182,711 | $50,850 | 28% |

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 have been increasing due to the expanding scope of activities related to the development of and regulatory submissions for our clinical drug candidates. Our sales, general and administrative expenses have been increasing substantially as we increase our headcount and expand our capabilities in preparation for the potential commercial launch of telaprevir.

### Research and Development Expenses

*(in thousands)*

|  | Three Months Ended March 31, 2011 | 2010 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Research expenses | $51,371 | $45,954 | $5,417 | 12% |
| Development expenses | 107,241 | 97,058 | 10,183 | 10% |
| Total research and development expenses | $158,612 | $143,012 | $15,600 | 11% |

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 $4.1 billion in research and development expenses associated with drug discovery and development. The successful development of our drug candidates is highly uncertain and subject to a number of risks. In addition, the duration of clinical trials may vary substantially according to the type, complexity and novelty of the drug candidate and the disease indication being targeted. The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development 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 last several years costs related to telaprevir have represented the largest portion of the development costs for our clinical drug candidates. We have completed the registration program for telaprevir, but expect to continue to incur telaprevir development costs in connection with seeking regulatory approval for telaprevir and conducting additional clinical trials. We expect to begin generating revenues and cash flows from sales of telaprevir in mid-2011. In addition, we are planning to submit an NDA and an MAA for VX-770 in the second half of 2011. Our other drug candidates are less advanced and, as a result, any estimates regarding development and regulatory timelines for these drug candidates are highly subjective and subject to change. We cannot 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) $ 2011 | Increase/ (Decrease) % 2010 |  |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $17,952 | $16,485 | $1,467 | 9% |
| Stock-based compensation expense | 6,255 | 5,648 | 607 | 11% |
| Laboratory supplies and other direct expenses | 7,789 | 7,700 | 89 | 1% |
| Contractual services | 3,014 | 2,938 | 76 | 3% |
| Infrastructure costs | 16,361 | 13,183 | 3,178 | 24% |
| Total research expenses | $51,371 | $45,954 | $5,417 | 12% |

We have maintained a substantial investment in research activities with changes in various categories of expense resulting in a 12% increase in research expenses in the first quarter of 2011 as compared to the first quarter of 2010. We expect to continue to invest in our research programs in an effort to identify additional drug candidates.

#### Development Expenses

*(in thousands)*

| Development Expenses: | Three Months Ended March 31, Increase/ (Decrease) $ 2011 | Increase/ (Decrease) % 2010 |  |  |
| --- | ---: | ---: | ---: | ---: |
| Salary and benefits | $29,784 | $24,987 | $4,797 | 19% |
| Stock-based compensation expense | 12,294 | 8,672 | 3,622 | 42% |
| Laboratory supplies and other direct expenses | 7,349 | 6,233 | 1,116 | 18% |
| Contractual services | 28,491 | 22,221 | 6,270 | 28% |
| Commercial supply costs | 5,714 | 16,475 | (10,761) | (65)% |
| Infrastructure costs | 23,609 | 18,470 | 5,139 | 28% |
| Total development expenses | $107,241 | $97,058 | $10,183 | 10% |

In the first quarter of 2010, our commercial supply costs included both costs of raw materials and work in process that we were producing for the potential commercial launch of telaprevir and costs of manufacturing services that we provided our collaborators through our third-party manufacturing network. On January 1, 2011, we began to capitalize our telaprevir inventory, which resulted in a $10.8 million decrease in the commercial supply costs in the first quarter of 2011 as compared to the first quarter of 2010.

Our development expenses, excluding our commercial supply costs, increased by $20.9 million, or 26%, in the first quarter of 2011 as compared to the first quarter of 2010 primarily as a result of increased workforce expenses and increased contractual services expenses. The increased workforce expenses were largely attributable to hiring additional employees in our medical affairs and safety groups in preparation for the potential commercial launch of telaprevir.

### Sales, General and Administrative Expenses

*(in thousands)*

|  | Three Months Ended March 31, Increase/ (Decrease) $ 2011 | Increase/ (Decrease) % 2010 |  |  |
| --- | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $71,523 | $35,552 | $35,971 | 101% |

Sales, general and administrative expenses increased substantially in the first quarter of 2011 as compared to the first quarter of 2010 primarily as a result of a $30.5 million, or 293%, increase in expenses incurred by our commercial organization, which are classified as sales expenses. These sales expenses include salary and benefits for our sales force and managed market organization, the majority of whom were hired in the second half of 2010, and market research and other third-party expenses incurred as we prepare to launch telaprevir. We expect that these sales expenses will continue to increase during the remainder of 2011.

### Royalty Expenses

Royalty expenses decreased by $0.7 million, or 21%, in the first quarter of 2011 as compared to the first quarter of 2010. Royalty expenses primarily relate to a subroyalty payable to a third party on net sales of the HIV protease inhibitors that were discovered and developed under our collaboration with GlaxoSmithKline plc. The subroyalty expense offsets a corresponding amount of royalty revenues. We expect to continue to recognize this subroyalty as an expense in future periods.

### Restructuring Expense

As of March 31, 2011, our lease restructuring liability was $28.8 million. In each of the three months ended March 31, 2011 and 2010, we recorded restructuring expense of $0.8 million and made cash payments of $3.7 million against the accrued expense and received $2.2 million in sublease rental payments. During the remaining three quarters of 2011, we expect to make additional cash payments of $11.1 million against the accrued expense and to receive $7.1 million in sublease rental payments.

### Non-operating Items

### Interest Income

Interest income increased by $0.9 million to $1.4 million for the three months ended March 31, 2011 from $0.5 million for the three months ended March 31, 2010. The increase was a result of slightly higher portfolio yields during the 2011 period as compared to the 2010 period. Our cash, cash equivalents and marketable securities yielded less than 0.5% on an annual basis in the first quarter of 2011.

### Interest Expense

Interest expense increased by $8.0 million, or 203%, to $12.0 million in the first quarter of 2011 from $4.0 million in the first quarter of 2010. The increase was the result of increased interest expense related to the 2012 Notes that we issued in September 2009 and to the 3.35% convertible senior subordinated notes due 2015, or 2015 Notes, we issued in September 2010. In the remaining three quarters of 2011, we expect that we will incur approximately $10.0 million in interest expense related to the 2015 Notes and that we will continue to incur imputed interest expense related to our 2012 Notes.

### Change in Fair Value of Derivative Instruments

In the three months ended March 31, 2011 and 2010, we recorded charges of $5.6 million and $1.5 million, respectively, in connection with the embedded and free-standing derivatives associated with our September 2009 financial transactions. The charges in the first quarter of 2011 were primarily due to increasing the probability of achieving the milestones under the Janssen collaboration agreement based on the EMA acceptance of the MAA for telaprevir in the first quarter of 2011. The charges in the first quarter of 2010 were primarily based on a time-value-of-money adjustment to the estimated fair value of the free-standing derivative. If Janssen obtains approval for and launches telaprevir in the European Union, we expect that we will incur $23.0 million in additional non-cash charges related to the September 2009 financial transactions. We expect a portion of these charges to be reflected as a change in the fair value of derivative instruments and a portion of these charges to be reflected as interest expense.

### Liquidity and Capital Resources

We have incurred operating losses since our inception and these operating losses have been increasing over the past several years. We 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 expense in order to seek approval for and commercialize telaprevir and VX-770 while at the same time continuing to pursue diversified research and development efforts for our other drug candidates. We expect to begin to receive cash flows from sales of telaprevir in mid-2011.

At March 31, 2011, we had cash, cash equivalents and marketable securities of $823.5 million, which was a decrease of $208.0 million from $1.0 billion at December 31, 2010. The decrease was primarily the result of cash expenditures we made in the first quarter of 2011 related to, among other things, research and development expenses and sales, general and administrative expenses, partially offset by $33.6 million in cash received from issuances of common stock from employee benefit plans in the first quarter of 2011. Capital expenditures for property and equipment during the three months ended March 31, 2011 were $4.9 million.

We had $105.0 million in 2012 Notes outstanding on March 31, 2011, which was a decrease of $50.0 million from $155.0 million on December 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 the first quarter of 2011, we redeemed $50.0 million of 2012 Notes with the proceeds of a milestone payment we received from Janssen. In September 2009, we also 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 $200.0 million of remaining potential milestone payments from Janssen related to the approval and launch of telaprevir in the European Union, if and when earned, will not provide us with liquidity except to the extent that they fund the redemption of $105.0 million of our 2012 Notes.

At March 31, 2011, we had outstanding $400.0 million in aggregate principal amount of 2015 Notes. The 2015 Notes bear interest at the rate of 3.35% per annum, and we are required to make semi-annual interest payments on the outstanding principal balance of the 2015 Notes on April 1 and October 1 of each year, beginning on April 1, 2011. The 2015 Notes will mature on October 1, 2015.

The 2015 Notes are convertible, at the option of the holder, into our common stock at a price equal to approximately $48.83 per share, subject to adjustment. In January 2011, we entered into a credit agreement that provides for a $100.0 million revolving credit facility.

We expect to continue to make significant investments in our development pipeline, particularly 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. We also expect to continue to make a substantial investment in drug discovery research. The adequacy of our available funds to meet our future operating and capital requirements will depend on many factors, including the timing of regulatory approvals for our late-stage drug candidates, the timing and amounts of product revenues generated by any drug that is approved, the number, breadth, cost and prospects of our discovery and development programs, 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. If we meet our expectations for approval and sales of telaprevir, we believe we will begin generating earnings as a cashflow positive company during 2012. We may seek to borrow working capital if such financing is available to us. Our existing $100.0 million credit facility is initially unsecured, but is subject to a number of affirmative and negative covenants, including a liquidity covenant that requires us to maintain cash, cash equivalents and marketable securities of more than $400.0 million in domestic accounts. If we breach any of these covenants and it results in an event of default, upon the event of default the lender would obtain a security interest in cash, cash equivalents and marketable securities having a margined value of $100.0 million, which would be transferred to an account controlled by the lender. The credit agreement terminates on July 6, 2012. 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. 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. Although we do not have any plans to do so in the near term, 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 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, 2010, which was filed with the Securities and Exchange Commission, or SEC, on February 17, 2011. There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K, except that:

We redeemed $50.0 million in 2012 Notes in the first quarter of 2011 with the proceeds of a milestone payment from Janssen.

In the second quarter of 2011, we agreed to lease approximately 1.1 million square feet of office and laboratory space in two buildings to be built in Boston, Massachusetts. We expect the leases will commence upon completion of the buildings scheduled for late 2013 and will extend for 15 years from the lease commencement date. The leases will terminate automatically if we do not obtain approval to market telaprevir in the United States by December 31, 2011. Pursuant to the leases, we will pay an average of approximately $72.5 million per year in aggregate rent, exclusive of operating expenses, for both buildings during the initial 15 year term of the leases.

### Recent Accounting Pronouncements

Refer to Note B, "Accounting Policies—Recent Accounting Pronouncements," in the accompanying notes to the condensed consolidated financial statements. There were no new accounting pronouncements adopted during the three months ended March 31, 2011 that had a material impact on our financial statements.

## Market risk

As filed, 1,201 characters.

As part of our investment portfolio, we own financial instruments that are sensitive to market risk. 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 short maturities of these instruments, we do not believe that we have material exposure to interest rate risk.

## Controls and procedures

As filed, 2,339 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, 2011 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

We began capitalizing telaprevir inventories on January 1, 2011. This accounting for our inventories is material to our financial position as of March 31, 2011 and results of operations for the three months ended March 31, 2011 and we believe the internal controls and procedures relating to the accounting for our telaprevir inventories have a material effect on our internal control over financial reporting. See Note H, "Inventories," to our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for further details regarding our capitalized inventories.

We have expanded our Section 404 compliance program under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations under this act to include controls with respect to our inventories. Except for the controls related to our accounting for inventories, 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 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 5,441 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the SEC on February 17, 2011. 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 VX-661, including our expectations regarding regulatory authorities' timelines for review of our NDA submission for telaprevir in the United States, our New Drug Submission for telaprevir in Canada, and Janssen's MAA for telaprevir in the European Union, and the possibility that we could submit an NDA and an MAA for VX-770 in the second half of 2011;

our belief that if we are successful in obtaining approval for telaprevir by the May 23, 2011 target date for the FDA to complete its review, we would be able to begin marketing telaprevir in the United States in mid-2011;

our statement regarding the possibility that we could begin generating earnings as a cashflow positive company in 2012;

our ability to successfully market telaprevir and VX-770 or any of our other drug candidates if we are able to obtain regulatory approval;

our expectations regarding the timing and structure of clinical trials of our drug candidates, including telaprevir, VX-770, VX-222, VX-509, VX-765 and VX-661 and combinations of telaprevir with VX-222 and VX-770 with VX-809, and the timing of our receipt of additional data from ENVISION and of data from our other clinical trials;

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 potential product revenues and royalty revenues from sales of telaprevir, to potential milestone payments from Janssen, to the intangible assets associated with the ViroChem acquisition and to the liabilities we recorded in connection with the September 2009 financial transactions;

the data that will be generated by ongoing and planned clinical trials and the ability to use that data to support regulatory filings, including potential applications for marketing approval for VX-770;

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;

the focus of our drug development efforts and our financial and management resources and our plan to continue investing in our research and development programs and to develop and commercialize selected drug candidates that emerge from those programs, alone or with third-party collaborators;

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;

statements regarding our leases of buildings to be built in Boston, Massachusetts;

our estimates regarding obligations associated with a lease of a facility in Kendall Square, Cambridge, Massachusetts; and

our liquidity and our expectations regarding the possibility of raising 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, 2010, which was filed with the SEC on February 17, 2011, 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 6, 2011.
Source: SEC EDGAR, the filing index for accession 0001047469-11-004721. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.