# Vertex Pharmaceuticals Inc / Ma: Form 10-Q for the period ended Jun 30, 2012

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2012-08-08
- Accepted by EDGAR: Aug 8, 2012, 20:31 ET
- Period: 2012-06-30
- Accession: 0001047469-12-007979
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000104746912007979/a2210334z10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000104746912007979/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-04-01 to 2012-06-30 | $418.3m | us-gaap:Revenues |
| Revenue | 6 months, 2012-01-01 to 2012-06-30 | $857.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2012-04-01 to 2012-06-30 | $104.5m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2012-01-01 to 2012-06-30 | $130.5m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2012-04-01 to 2012-06-30 | $196.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2012-01-01 to 2012-06-30 | $392.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2012-04-01 to 2012-06-30 | $117.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2012-01-01 to 2012-06-30 | $228.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-04-01 to 2012-06-30 | −$10.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2012-01-01 to 2012-06-30 | $80.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-04-01 to 2012-06-30 | $4.2m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2012-01-01 to 2012-06-30 | $8.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-04-01 to 2012-06-30 | $20.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2012-01-01 to 2012-06-30 | $20.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-04-01 to 2012-06-30 | −$64.9m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2012-01-01 to 2012-06-30 | $26.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-04-01 to 2012-06-30 | −$0.31 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2012-01-01 to 2012-06-30 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-04-01 to 2012-06-30 | −$0.31 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2012-01-01 to 2012-06-30 | $0.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-04-01 to 2012-06-30 | 211,344,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2012-01-01 to 2012-06-30 | 212,957,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 6 months, 2012-01-01 to 2012-06-30 | $21.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-06-30 | $454.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-06-30 | $1.59bn | us-gaap:AssetsCurrent |
| Total assets | at 2012-06-30 | $2.60bn | us-gaap:Assets |
| Current liabilities | at 2012-06-30 | $379.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-06-30 | $1.36bn | us-gaap:Liabilities |
| Shareholders' equity | at 2012-06-30 | $1.04bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 60,354 characters.

### Overview

We are in the business of discovering, developing, manufacturing and commercializing small molecule drugs for the treatment of serious diseases. Our two products are INCIVEK™ (telaprevir), which is approved in the United States and Canada for the treatment of adults with genotype 1 hepatitis C virus, or HCV, infection, and KALYDECO™ (ivacaftor), which is approved in the United States and European Union for the treatment of patients six years of age or older with cystic fibrosis, or CF, who have a specific mutation that is referred to as the G551D mutation. Our collaborator, Janssen Pharmaceutica, N.V., or Janssen, markets telaprevir in Europe and its other territories under the brand name INCIVO™, and our collaborator, Mitsubishi Tanabe Pharma Corporation, or Mitsubishi Tanabe, markets telaprevir in Japan under the brand name TELAVIC™. We obtained approval to market KALYDECO in the United States in January 2012 and in the European Union in July 2012.

As of June 30, 2012, we had cash, cash equivalents and marketable securities, excluding Alios' cash and cash equivalents, of $1.2 billion. In the first and second quarters of 2012, we had net product revenues of $375.4 million and $373.3 million, respectively. Our net product revenues from INCIVEK and KALYDECO were $327.7 million and $45.5 million, respectively, in the second quarter of 2012. The slight decrease in total net product revenues in the second quarter of 2012 as compared to the first quarter of 2012 was the result of a decrease in INCIVEK net product revenues offset by an increase in KALYDECO net product revenues. We expect these trends to continue with KALYDECO revenues increasing as a result of its recent approval in the European Union and INCIVEK revenues decreasing in future periods. Although our net product revenues in the second quarter of 2012 were similar to our net product revenues in the first quarter of 2012, we incurred a net loss attributable to us in the second quarter of 2012 of $(64.9) million as compared to net income attributable to us in the first quarter of 2012 of $91.6 million because we incurred two significant charges in the second quarter of 2012. These charges were $78.0 million related to excess and obsolete INCIVEK inventories, and $56.2 million related to an increase in the fair market value of our liabilities pursuant to our Alios collaboration due to positive clinical data we received from a Phase 1 clinical trial evaluating ALS-2200.

We believe that our long-term success will depend on our ability to continue to generate and develop innovative molecules for the treatment of serious diseases. We have ongoing clinical programs involving drug candidates intended for the treatment of HCV infection, CF, rheumatoid arthritis, epilepsy and influenza. Our HCV clinical programs are focused on fulfilling INCIVEK post-marketing commitments to regulatory agencies and on developing all-oral, interferon-free combinations of HCV drugs and drug candidates that have the potential to further improve treatment options available to patients with HCV infection. In July 2012, we announced positive data from a Phase 1 clinical trial evaluating ALS-2200's activity against genotype 1 HCV infection over a seven-day dosing period. In this clinical trial, there was a median 4.54 log10 reduction in HCV RNA levels in eight treatment-naïve patients after seven days of dosing with 200 mg of ALS-2200 once daily. ALS-2200 was well-tolerated and no patients discontinued due to adverse events. Based on these results, we plan to initiate Phase 2 clinical trials in 2012 to evaluate 12-week all-oral regimens including ALS-2200 in patients with genotype 1 HCV infection, pending discussions with regulatory agencies. In our CF program, we are investigating the use of KALYDECO as a monotherapy in additional populations of patients with CF, and combinations of KALYDECO and our other CF drug candidates, with the goal of expanding the group of patients with CF who can benefit from our medicines. In June 2012, we announced final data from Part 2 of a Phase 2 clinical trial of VX-809 in combination with KALYDECO. We plan to initiate a pivotal clinical program to evaluate KALYDECO in combination with VX-809 in CF patients with two copies of the F508del mutation in the cystic fibrosis transmembrane conductance regulatory, or *CFTR, g*ene, pending discussions with regulatory agencies. We expect to continue investing in research programs directed toward the identification of new drug candidates and to develop and commercialize selected drug candidates that emerge from those programs, alone or with third-party collaborators.

#### Competition

#### HCV

The field of HCV infection treatment is highly competitive and characterized by rapid technological advances. We and Janssen are competing with Merck & Co., Inc.'s VICTRELIS™ (boceprevir), another HCV protease inhibitor that was approved for sale in the United States and Europe in 2011. Increased competition from currently approved drugs, the introduction of new competitive drugs or drug combinations, adverse information regarding the safety characteristics or efficacy of the drug, significant new information regarding potential future treatment regimens that are being evaluated in clinical trials or enrollment by patients in clinical trials being conducted by us or our competitors could result in abrupt shifts in the HCV market. Several of our competitors are conducting Phase 3 clinical trials evaluating their drug candidates for the treatment of genotype 1 HCV infection. For example, Janssen is evaluating an HCV protease inhibitor, TMC-435, in combination with pegylated-interferon, or peg-IFN, and ribavirin in Phase 3 clinical trials that were initiated in early 2011, and Gilead Sciences, Inc., or Gilead, initiated a Phase 3 clinical trial in June 2012 to evaluate its HCV nucleotide analogue, GS-7977, in combination with peg-IFN and ribavirin. We believe that final data from these Phase 3 clinical trials may become available within the next twelve months and that, if approved, these drugs will compete directly with INCIVEK.

We, along with a number of our competitors, are pursuing development programs involving all-oral combinations of HCV drugs and drug candidates with the goal of developing improved treatment regimens for HCV infection that could render current and future treatment regimens that include the administration of peg-IFN by injection uncompetitive. In particular, we and our competitors, Abbott Laboratories, Bristol-Myers Squibb Company and Gilead, are actively pursuing development of all-oral combination treatment regimens to treat HCV infection. To date, potential all-oral combination treatment regimens have been evaluated in Phase 2 clinical trials involving relatively small numbers of patients. However, we expect that one or more of our competitors may begin registration programs evaluating potential all-oral combination regimens for the treatment of genotype 1 HCV infection in the second half of 2012. While the development and regulatory timelines for these drug candidates are subject to risk and uncertainty, we believe that substantial additional clinical data regarding these drug candidates and potential all-oral treatment regimens will become available in 2012 and 2013 and that one or more all-oral treatment regimens could be commercially available as early as 2014.

#### CF

KALYDECO (ivacaftor) is approved in the United States and the European Union for the treatment of patients with CF six years of age or older who have the G551D mutation on at least one allele of the *CFTR* gene. We are focused on continuing our launch of KALYDECO in the United States and launching KALYDECO in Europe. KALYDECO has received Priority Review from the Therapeutic Product Directorate of Health Canada, and we have submitted a marketing authorization application for KALYDECO to the Therapeutic Goods Administration of Australia. We recently initiated two Phase 3 clinical trials to evaluate KALYDECO as a monotherapy in CF patients with mutations other than the G551D mutation, and are planning a Phase 3 clinical trial of KALYDECO as a monotherapy in CF patients two to five years of age who have a gating mutation in the *CFTR* gene. If these clinical trials are successful, we expect we would obtain approval for the use of KALYDECO in additional populations in 2013 or later.

We are aware of several companies that are engaged in researching and/or developing treatments for CF, including Genzyme Corporation, which has a research program directed at identifying CFTR corrector compounds. We believe that the programs that could result in drugs that are directly competitive with KALYDECO or the combination treatment regimens that we are developing are several years behind our programs.

In addition to the factors described above, approved drugs continue to be subject to, among other things, numerous regulatory risks, post-approval safety monitoring and risks related to supply chain disruptions.

#### Drug 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. Potential drug candidates are subjected to rigorous evaluations, driven in part by stringent regulatory considerations, designed to generate information concerning efficacy, side-effects, proper dosage levels and a variety of other physical and chemical characteristics that are important in determining whether a drug candidate should be approved for marketing as a pharmaceutical product. Most chemical compounds that are investigated as potential drug candidates never progress into development, and most drug candidates that do advance into development never receive marketing approval. We cannot predict whether or not we will encounter problems with any of our completed, ongoing or planned clinical trials that could cause us or regulatory authorities to delay or suspend the clinical trial. Because our investments in drug candidates are subject to considerable risks, we closely monitor the results of our discovery research, clinical trials and nonclinical studies, and frequently evaluate our drug development programs in light of new data and scientific, business and commercial insights, with the objective of balancing risk and potential. This process can result in 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, as well as our competitors' programs.

If we believe the data from a completed registration program support approval of a drug candidate, we submit a New Drug Application, or NDA, to the United States Food and Drug Administration, or FDA, requesting approval to market the drug candidate in the United States. We also may seek analogous approvals from comparable regulatory authorities in foreign jurisdictions, such as a marketing authorization in the European Union. 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 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.

#### Drug Supply and INCIVEK Inventory Write-down

We rely on an international network of third parties to manufacture and distribute our products and for supplies of compounds for clinical trials, and we expect that we will continue to rely on third parties to provide these manufacturing services for the foreseeable future. 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 believe we effectively manage the business relationships with companies in our supply chain, we do not have complete control over their activities. Also, we have limited flexibility to adjust our supply of INCIVEK in response to changes in demand, due to the significant lead times required to manufacture INCIVEK.

In the second quarter of 2012, following a periodic assessment of the recoverability of capitalized costs, we recorded within cost of product revenues a $78.0 million charge for excess and obsolete INCIVEK inventories. Periodic assessments of the recoverability of capitalized costs involve significant estimates and judgments on the part of management. The charge and corresponding inventory write-down were based on our analysis of our INCIVEK inventory levels in relation to our commercial outlook for INCIVEK. As part of the analysis, we considered, among other factors, (i) recent decreases in demand for INCIVEK and our expectation the demand will decrease further in the second half of 2012, (ii) the potential development by us and our competitors of other drugs and combination treatments for HCV infection, (iii) positive results released in the second quarter of 2012 from Phase 2 clinical trials of drug candidates being developed by our competitors and (iv) the recent initiation by our competitors of a number of additional Phase 2 and Phase 3 clinical trials of drug candidates for the treatment of HCV infection. We will continue to evaluate our INCIVEK inventories on a quarterly basis, and future changes in the outlook for commercial sales of INCIVEK, including changes due to future developments with respect to demand for INCIVEK or the advancement or approval of other drugs or combination treatments for HCV infection, could result in additional inventory write-downs and related charges in future periods.

#### Regulatory Compliance

Our marketing of pharmaceutical products, which began in May 2011, is subject to extensive and complex laws and regulations. We have a corporate compliance program designed to promote a culture of compliance and to actively identify, prevent and mitigate risk. Among other laws, regulations and standards, we are subject to various U.S. federal and state laws and comparable foreign laws pertaining to health care fraud and abuse, including anti-kickback and false claims statutes, and laws prohibiting the promotion of drugs for unapproved, or off-label, uses. 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. We expect to continue to devote substantial resources to maintain, administer and expand these compliance programs globally.

#### Recent Developments

### CF

#### KALYDECO—Phase 3 Clinical Trials of KALYDECO Monotherapy

In June 2012, we initiated a Phase 3 clinical trial to evaluate KALYDECO monotherapy in patients six years of age and older who have the R117H mutation on at least one allele of the *CFTR* gene. In July 2012, we initiated a Phase 3 clinical trial to evaluate KALYDECO monotherapy in patients six years of age and older with non-G551D gating mutations in the *CFTR* gene. In the second half of 2012, we plan to initiate a Phase 3 clinical trial to evaluate KALYDECO monotherapy in patients ages two to five years old with a gating mutation on at least one allele of the *CFTR* gene.

#### VX-809/KALYDECO—Phase 2 Clinical Trial

In June 2012, we announced the final data from Part 2 of a Phase 2 clinical trial of VX-809 and KALYDECO. This part of the clinical trial enrolled 109 people with CF ages 18 years and older with one (heterozygous) or two (homozygous) copies of the F508del mutation in the *CFTR* gene, who were divided into five treatment groups of approximately 20 patients each. Three groups of homozygous patients were randomized to receive VX-809 alone (200mg, 400mg or 600mg) for 28 days and then in combination with KALYDECO (250mg) for an additional 28 days. One group of heterozygous patients received VX-809 alone (600mg) for 28 days and then in combination with KALYDECO (250mg) for an additional 28 days. The placebo group included both homozygous and heterozygous patients.

The data from this Phase 2 clinical trial of VX-809 and KALYDECO showed statistically significant improvements in lung function, percent predicted forced expiratory volume in one second, or FEV1, in each of the homozygous treatment groups compared to placebo from Day 28 to Day 56. The greatest improvements in lung function were observed in patients who received 600mg of VX-809, the highest dose evaluated in this clinical trial, in combination with KALYDECO. Most adverse events observed during the 56-day clinical trial were mild to moderate in severity across all treatment groups and similar between treatment and placebo groups. We are preparing to initiate a pivotal clinical trial program, which is expected to evaluate VX-809 (600mg) in combination with KALYDECO (250mg) in homozygous patients and begin in early 2013, pending discussions with regulatory agencies.

#### Lung Function

Homozygous patients treated with the highest dose of VX-809 (600mg) in combination with KALYDECO from Day 28 to Day 56 experienced a mean absolute improvement in lung function of 8.6 percentage points compared to placebo (p\<0.001) and a mean absolute improvement of 6.1 percentage points within group (p\<0.001). The following table sets forth the mean absolute change in percent predicted FEV1 for homozygous patients who received the highest dose of VX-809 and patients for the placebo treatment arm:

|  | Day 0 to Day 28 | Day 28 to Day 56 |
| --- | --- | --- |
| Placebo, including homozygous and heterozygous patients, within group | -0.9 (p=0.54) | -2.5 (p=0.08) |
| VX-809 alone (600mg; QD) for 28 days followed by the addition of KALYDECO (250mg, q12h) for 28 days within group | -2.9 (p=0.07) | +6.1 (p\<0.001) |
| VX-809 alone (600mg; QD) for 28 days followed by the addition of KALYDECO (250mg, q12h) for 28 days compared to placebo | -2.0 (p=0.36) | +8.6 (p\<0.001) |

The following table sets forth the percentage of patients who received the highest dose of VX-809 and percentage of patients in the placebo group who experienced absolute improvements in lung function of 5 percentage points or more and 10 percentage points or more during the periods from Day 0 to Day 28 and from Day 28 to Day 56:

|  | Day 0 to Day 28 |  | Day 28 to Day 56 |  |
| --- | --- | --- | --- | --- |
|  | **Placebo** | **VX-809 (600mg) monotherapy** | **Placebo** | **VX-809 (600mg) and KALYDECO (250mg)** |
| ³ 5 percentage point absolute improvement FEV1 | 13.0% (3/23) | 10.0% (2/20) | 9.5% (2/21) | 55.0% (11/20) |
| ³ 10 percentage point absolute improvement FEV1 | 4.3% (1/23) | 5.0% (1/20) | 0.0% (0/21) | 25.0% (5/20) |

From Day 0 to Day 56, patients receiving VX-809 (600mg) and KALYDECO experienced a mean absolute improvement in lung function of 6.7 percentage points compared to placebo (p=0.002) and a 3.4 percentage point improvement within group (p=0.03). Patients receiving placebo experienced a mean absolute decline in lung function of 3.3 percentage points (p=0.03) over the same time period.

#### Sweat Chloride

The two primary endpoints in this clinical trial were safety and change in sweat chloride from Day 28 to Day 56 compared to placebo. Although not a clinically validated endpoint, a reduction in sweat chloride is considered to be a biomarker of improved CFTR function in the skin. There was no decrease in sweat chloride among those receiving placebo from Day 0 to Day 28 or from Day 28 to Day 56. In homozygous patients treated with 600mg of VX-809 alone for 28 days, there was a statistically significant mean decrease in sweat chloride of 6.4 mmol/L compared to placebo (p=0.01). In these patients, an additional mean decrease in sweat chloride of 3.7 mmol/L compared to placebo was observed with combination treatment between Day 28 and Day 56, which was not statistically significant.

A statistically significant reduction in sweat chloride was observed from Day 0 to Day 28 in homozygous patients treated with VX-809 (200mg, 400mg) alone compared to patients who received placebo, and additional reductions in sweat chloride were observed with the combination treatment between Day 28 and Day 56, but these reductions were not statistically significant.

#### Heterozygous patients

In heterozygous patients who received 600mg of VX-809 in combination with KALYDECO, there was a mean absolute improvement in lung function from Day 28 to Day 56 compared to placebo. This improvement in lung function was smaller than the improvement seen in homozygous patients receiving 600mg of VX-809 in combination with KALYDECO. Based on these data, we plan to conduct additional clinical studies of VX-809 and KALYDECO in heterozygous patients.

#### Safety

VX-809 was generally well tolerated alone and in combination with KALYDECO. The most common adverse events were pulmonary in nature. Most adverse events were mild to moderate in severity and similar between treatment and placebo groups. The rate of serious adverse events was also similar between treatment and placebo groups.

#### VX-661/KALYDECO

A Phase 2 clinical trial of VX-661, a second CFTR corrector being evaluated in combination with KALYDECO for patients with CF homozygous for the F508del mutation, is ongoing, with final data expected in 2013.

### HCV

#### Alios Nucleotide Analogues

In July 2012, we announced positive results from a Phase 1 clinical trial that evaluated the safety and tolerability of single ascending doses of ALS-2200 in healthy volunteers, and the safety, tolerability and effects on viral kinetics of multiple ascending doses of ALS-2200 in treatment-naïve patients with genotype 1 HCV infection. In this clinical trial, patients with HCV infection dosed with ALS-2200 had a dose-dependent, consistent and rapid decline in HCV RNA levels. In the treatment group in which patients with genotype 1 HCV infection received seven days of dosing with 200 mg of ALS-2200 once daily, there was a median 4.54 log10 reduction in HCV RNA levels at the end of the dosing period. The results from each of the dose groups in this clinical trial are included in the following table:

| Dose Group | Number of Patients(1) | Median Baseline HCV RNA levels (Log10 IU/mL) (Min, Max) | Median Change From Baseline After 3 Days of Treatment (Log10 IU/mL) (Min, Max) | Median Change From Baseline After 7 Days of Treatment (Log10 IU/mL) (Min, Max) |
| --- | ---: | ---: | ---: | ---: |
| **Placebo** | 8 | 6.30 | 0.13 | 0.11 |
|  |  | (5.70, 6.90) | (-0.34, 1.22) | (-0.28, 0.66) |
| ALS-2200 alone (15mg; once |  | 6.11 | -0.49 | -0.97 |
| daily) for seven days | 8 | (5.46, 7.00) | (-0.20, -0.99) | (-0.17, -1.59) |
| ALS-2200 alone (50mg; once |  | 6.19 | -1.83 | -3.02 |
| daily) for seven days | 8 | (5.73, 7.21) | (-1.41, -2.20) | (-2.21, -3.57) |
| ALS-2200 alone (100mg; once |  | 6.49 | -2.60 | -3.95 |
| daily) for seven days(2) | 8 | (5.67, 7.00) | (-1.81, -3.78) | (-3.39, -4.51) |
| ALS-2200 alone (200mg; once |  | 6.18 | -3.85 | -4.54 |
| daily) for seven days(3) | 8 | (5.66, 6.72) | (-2.87, -4.17) | (-3.81, -5.08) |

(1)

Of the patients with HCV infection in the ALS-2200 treatment groups, two had genotype 1a HCV infection, 29 had genotype 1b HCV infection and one patient's HCV genotype 1 subtype was not able to be determined.

(2)

One patient had an HCV RNA level below the limit of detection (Roche COBAS Taqman HCV test, Version 2) during the clinical trial.

(3)

Four patients had HCV RNA levels below the limit of quantification (\<LOQ = \< 25 IU/mL) during the clinical trial.

In this clinical trial, ALS-2200 was well-tolerated. There were no serious adverse events observed in patients dosed with ALS-2200 and no patients discontinued due to adverse events.

Based on these results, we plan to initiate Phase 2 clinical trials in 2012 to evaluate 12-week all-oral regimens incorporating ALS-2200 in patients with genotype 1 HCV infection, pending discussions with regulatory agencies. We expect these Phase 2 clinical trials to include a clinical trial evaluating ALS-2200 in combination with INCIVEK and a clinical trial evaluating ALS-2200 in combination with ribavirin.

We also are conducting a Phase 1 clinical trial to evaluate the safety, tolerability and effects on viral kinetics of ALS-2158, a second HCV nucleotide analogue that we are developing in collaboration with Alios. Data from this Phase 1 clinical trial are expected in the next few months.

#### INCIVEK

We have an ongoing pivotal clinical trial evaluating whether treatment with INCIVEK can be effectively reduced to twice-daily (BID) dosing instead of three-times-daily dosing. We expect to obtain data from this clinical trial in the second half of 2012 and, if supported by the data, plan to submit this revised dosing schedule to the FDA as part of a supplemental NDA. To fulfill post-marketing commitments, we also have several additional clinical trials ongoing to evaluate patients co-infected with HCV and HIV, patients with recurrent HCV infection following a liver transplant and African American patients who were not cured with a prior treatment of peg-IFN and ribavirin.

#### VX-222

In June 2012, we initiated a Phase 2 clinical trial that is expected to enroll approximately 60 patients with genotype 1a HCV infection. This clinical trial is evaluating an all-oral treatment regimen of INCIVEK, VX-222 and ribavirin with treatment regimens as short as 12 weeks.

### Rheumatoid Arthritis

We are enrolling patients with moderate to severe rheumatoid arthritis in a Phase 2b clinical trial evaluating once-daily and twice-daily doses of VX-509 over a six-month dosing period. We expect to enroll approximately 350 patients in this clinical trial. VX-509 is being evaluated in combination with methotrexate, a commonly prescribed disease-modifying antirheumatic drug that frequently is used in combination with other rheumatoid arthritis drugs. We also are preparing to initiate additional clinical trials of VX-509 in other immune-mediated inflammatory diseases beginning in early 2013.

### Influenza

We expect data in the second half of 2012 from an ongoing Phase 2 clinical trial of VX-787 that is expected to enroll approximately 140 healthy volunteers who are being infected with live influenza virus as part of this clinical trial. We are evaluating VX-787 as a potential treatment for influenza A, including recent H1 (pandemic) and H5 (avian) influenza strains.

### Results of Operations—Three and Six Months Ended June 30, 2012 Compared with Three and Six Months Ended June 30, 2011

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Six Months Ended June 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $418,305 | $114,424 | $303,881 | 266% | $857,042 | $188,086 | $668,956 | 356% |
| Operating costs and expenses | 429,075 | 280,314 | 148,761 | 53% | 776,163 | 513,875 | 262,288 | 51% |
| Other loss, net | 23,698 | 33,428 | (9,730) | (29)% | 27,471 | 49,625 | (22,154) | (45)% |
| Net income (loss) attributable to noncontrolling interest (Alios) | 30,463 | (25,249) | n/a | n/a | 26,749 | (25,249) | n/a | n/a |
| Net income (loss) attributable to Vertex | $(64,931) | $(174,069) | $(109,138) | (63)% | $26,659 | $(350,165) | n/a | n/a |

### Net Income (Loss) Attributable to Vertex

In the second quarter of 2012, we had a net loss attributable to Vertex of $(64.9) million as compared to a net loss attributable to Vertex of $(174.1) million in the second quarter of 2011. Our total revenues increased significantly in the second quarter of 2012 compared to the second quarter of 2011 due to a $298.7 million increase in our net product revenues and a $23.5 million increase in our royalty revenues, partially offset by an $18.3 million decrease in our collaborative revenues. Our operating costs and expenses increased from $280.3 million, including $31.9 million of stock-based compensation expense, in the second quarter of 2011 to $429.1 million, including $31.4 million of stock-based compensation expense, in the second quarter of 2012. The increase in operating expenses was primarily due to a $99.1 million increase in cost of product revenues, a $22.9 million increase in research and development expenses and a $20.9 million increase in sales, general and administrative expenses. The cost of product revenues increased in the second quarter of 2012 as compared to the same period in 2011 because of the increase in net product revenues of $298.7 million and because we recorded a $78.0 million charge in the second quarter of 2012 for excess and obsolete INCIVEK inventories. In addition, the $56.2 million increase in the fair value of the contingent milestone payments and royalties payable by us to Alios increased the net loss attributable to Vertex in the second quarter of 2012 dollar-for-dollar. The fair value of these contingent milestone and royalty payments increased because the positive data from a Phase 1 clinical trial of ALS-2200 made it more likely that these payments will become due from us to Alios.

In the six months ended June 30, 2012, we had net income attributable to Vertex of $26.7 million as compared to a net loss attributable to Vertex of $(350.2) million in the six months ended June 30, 2011. Our total revenues increased significantly in the first half of 2012 compared to the first half of 2011 due to a $674.1 million increase in our net product revenues and a $56.4 million increase in our royalty revenues, partially offset by a $61.5 million decrease in our collaborative revenues. Our operating costs and expenses increased from $513.9 million, including $59.8 million of stock-based compensation expense, in the first half of 2011 to $776.2 million, including $59.1 million of stock-based compensation expense, in the first half of 2012. The increase in operating expenses was primarily due to a $125.1 million increase in cost of product revenues, which included the $78.0 million charge in the second quarter of 2012 for excess and obsolete INCIVEK inventories, as well as a $60.7 million increase in research and development expenses and a $60.5 million increase in sales, general and administrative expenses. In addition, a $55.2 million increase in the fair value of the contingent milestones and royalties payable by us to Alios decreased the net income attributable to Vertex in the first half of 2012 dollar-for-dollar.

### Net Income (Loss) Attributable to Vertex per Diluted Share

Net loss attributable to Vertex was $(0.31) and $(0.85), respectively, per diluted share in the three months ended June 30, 2012 and 2011. Net income attributable to Vertex was $0.12 per diluted share in the six months ended June 30, 2012 compared to a net loss attributable to Vertex of $(1.72) per diluted share in the six months ended June 30, 2011. The $78.0 million charge in the second quarter of 2012 for excess and obsolete INCIVEK inventories affected net income (loss) attributable to Vertex per diluted share, net of tax, by $0.36 for the three and six months ended June 30, 2012, resulting in a net loss attributable to Vertex per diluted share in the second quarter of 2012 and reducing net income attributable to Vertex per diluted share in the first half of 2012.

### Revenues

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Six Months Ended June 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues, net | $373,273 | $74,535 | $298,738 | 401% | $748,648 | $74,535 | $674,113 | 904% |
| Royalty revenues | 33,480 | 10,010 | 23,470 | 234% | 72,461 | 16,071 | 56,390 | 351% |
| Collaborative revenues | 11,552 | 29,879 | (18,327) | (61)% | 35,933 | 97,480 | (61,547) | (63)% |
| Total revenues | $418,305 | $114,424 | $303,881 | 266% | $857,042 | $188,086 | $668,956 | 356% |

### Product Revenues, Net

*(in thousands)*

| Product revenues, net | Three Months Ended June 30, 2012 | 2011 | Six Months Ended June 30, 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: |
| INCIVEK | $327,739 | $74,535 | $684,666 | $74,535 |
| KALYDECO | 45,534 | — | 63,982 | — |
| Total product revenues, net | $373,273 | $74,535 | $748,648 | $74,535 |

Our net product revenues in three and six months ended June 30, 2012 increased substantially from our net product revenues in the three and six months ended June 30, 2011. Revenues in the 2012 periods included revenues from both INCIVEK, which was approved by the FDA in May 2011, and KALYDECO, which was approved by the FDA in January 2012. Our net product revenues in the comparable periods in 2011 consisted of net product revenues for INCIVEK for the period from its approval on May 23, 2011 through June 30, 2011.

Our net product revenues of $373.3 million in the second quarter of 2012 were slightly less than our net product revenues of $375.4 million in the first quarter of 2012, as a $27.1 million increase in net product revenues from KALYDECO was offset by a $29.2 million decrease in net product revenues from INCIVEK. The decrease in INCIVEK net product revenues was the result of lower sales volumes partially offset by a seven percent increase in the wholesale acquisition price of INCIVEK in the United States that became effective on April 1, 2012. We expect that INCIVEK net product revenues will decrease in the second half of 2012 in comparison to the first half of 2012 due to competitive pressures, and that this decrease will be partially offset by an expected increase in KALYDECO net product revenues.

### Royalty Revenues

The increases in our royalty revenues in the second quarter and first half of 2012 as compared to the comparable periods in 2011 were due to royalty revenues recognized from sales of INCIVO by Janssen. INCIVO was approved in the European Union in September 2011, and we recognized $28.0 million and $60.9 million, respectively, of royalty revenues from Janssen in the second quarter and first half of 2012. Royalty revenues from Janssen decreased by $4.9 million from $32.9 million in the first quarter of 2012 to $28.0 million in the second quarter of 2012. Mitsubishi Tanabe's license to market telaprevir in Japan is fully paid.

We recognized royalty revenues related to sales by GlaxoSmithKline plc of Lexiva/Telzir, an HIV protease inhibitor that was discovered and developed pursuant to our collaboration with GlaxoSmithKline, of $5.5 million and $7.5 million, respectively, in the second quarter of 2012 and 2011, and $11.6 million and $13.5 million, respectively, in the first half of 2012 and 2011. We sold our rights to these HIV royalties in 2008 for a one-time cash payment of $160.0 million.

### Collaborative Revenues

Our collaborative revenues have fluctuated significantly on an annual and quarterly basis. This variability has been due to, among other things, (i) the achievement of significant milestone revenues in 2011, (ii) the April 2011 amendment to our collaboration agreement with the Cystic Fibrosis Foundation Therapeutics Incorporated, or CFFT, which began providing us additional research and development support in April 2011 and (iii) variable revenues we received for providing services to Janssen and Mitsubishi Tanabe through our third-party manufacturing network.

The following table summarizes our collaborative revenues for the three and six months ended June 30, 2012 and 2011:

*(in thousands)*

| Collaborative revenues: | Three Months Ended June 30, 2012 | 2011 | Six Months Ended June 30, 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: |
| Janssen | $2,180 | $9,058 | $8,597 | $65,174 |
| Mitsubishi Tanabe | 4,845 | 14,873 | 18,879 | 26,358 |
| CFFT | 4,527 | 5,948 | 8,457 | 5,948 |
| Total collaborative revenues | $11,552 | $29,879 | $35,933 | $97,480 |

Our Janssen collaborative revenues decreased in the second quarter of 2012 as compared to the second quarter of 2011 primarily due to a decrease in revenues from manufacturing services we provided to Janssen through our third-party manufacturing network. Our collaborative revenues from Janssen decreased significantly in the first half of 2012 as compared to the first half of 2011 because we recognized $50.0 million in milestone revenues under our collaboration agreement with Janssen in the first half of 2011 for which there were no comparable milestone revenues in the first half of 2012. We do not expect to earn any future milestone payments pursuant to our collaboration agreement with Janssen.

In the second quarter of 2012, we recognized the final $3.2 million of deferred revenues related to a one-time payment of $105.0 million that we received in 2009 from Mitsubishi Tanabe. From the fourth quarter of 2009 through the first quarter of 2012, we recognized $9.6 million in collaborative revenues each quarter related to this one-time payment. We do not expect to recognize any future collaborative revenues pursuant to our collaboration agreement with Mitsubishi Tanabe.

### Operating Costs and Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Six Months Ended June 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of product revenues | $104,549 | $5,404 | $99,145 | 1,835% | $130,467 | $5,404 | $125,063 | 2,314% |
| Royalty expenses | 9,874 | 3,902 | 5,972 | 153% | 23,167 | 6,568 | 16,599 | 253% |
| Research and development expenses | 196,544 | 173,604 | 22,940 | 13% | 392,915 | 332,216 | 60,699 | 18% |
| Sales, general and administrative expenses | 117,514 | 96,663 | 20,851 | 22% | 228,660 | 168,186 | 60,474 | 36% |
| Restructuring expense | 594 | 741 | (147) | (20)% | 954 | 1,501 | (547) | (36)% |
| Total costs and expenses | $429,075 | $280,314 | $148,761 | 53% | $776,163 | $513,875 | $262,288 | 51% |

### Cost of Product Revenues

Our cost of product revenues includes in each period the cost of producing inventories that corresponds to product revenues for the reporting period, plus the third-party royalties payable on our net sales of INCIVEK and KALYDECO. Most of the manufacturing costs of INCIVEK and KALYDECO sold in the periods presented were expensed as research and development expenses in prior periods. In the second quarter of 2012, we recorded within cost of product revenues a $78.0 million charge for excess and obsolete INCIVEK inventories, which included an accrual for estimated expenses related to our non-cancelable purchase commitments.

### Royalty Expenses

Royalty expenses include third-party royalties payable on net sales of telaprevir by our collaborators and a subroyalty payable to a third party on net sales of Lexiva/Telzir, an HIV protease inhibitor sold by GlaxoSmithKline. Royalty expenses in the three and six months ended June 30, 2012 increased compared to the three and six months ended June 30, 2011 because of the third-party royalties payable on net sales of INCIVO by Janssen.

### Research and Development Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2012 | 2011 | Increase $% | Increase | Six Months Ended June 30, 2012 | 2011 | Increase $% | Increase |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research expenses | $58,495 | $51,733 | $6,762 | 13% | $119,488 | $103,104 | $16,384 | 16% |
| Development expenses | 138,049 | 121,871 | 16,178 | 13% | 273,427 | 229,112 | 44,315 | 19% |
| Total research and development expenses | $196,544 | $173,604 | $22,940 | 13% | $392,915 | $332,216 | $60,699 | 18% |

Our research and development expenses include internal and external costs incurred for research and development of our drugs and drug candidates. We do not assign our internal costs, such as salary and benefits, stock-based compensation expense, laboratory supplies and other direct expenses, and infrastructure costs, to individual drugs or drug candidates, because the employees within our research and development groups typically are deployed across multiple research and development programs. These internal costs are significantly greater than our external costs, such as the costs of services provided to us by clinical research organizations and other outsourced research, which we do allocate by individual program. All research and development costs for our drugs and drug candidates are expensed as incurred.

To date, we have incurred in excess of $5.1 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 activities. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a project and are difficult to predict. Therefore, accurate and meaningful estimates of the ultimate costs to bring our drug candidates to market are not available.

In recent periods, costs related to our HCV and CF programs have represented the largest portion of our development costs. We expect to continue to incur development costs related to the conduct of additional clinical trials to support potential supplemental applications for telaprevir and ivacaftor. If our clinical trials of VX-222 are successful, we could submit an NDA for an all-oral regimen for the treatment of genotype 1 HCV infection as early as the end of 2014. We plan to evaluate a number of additional potential all-oral combination treatment regimens that would include INCIVEK, VX-222, ALS-2200, ALS-2158 and/or ribavirin in order to identify which all-oral combination treatment regimen or regimens to evaluate in Phase 3 clinical trials. Our drug candidates are still in early and mid-stage clinical development 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 VX-222 and those we in-licensed from Alios, will generate revenues and cash flows.

#### Research Expenses

*(in thousands)*

*(in thousands)*

| Research Expenses: | Three Months Ended June 30, 2012 | 2011 | Increase $% | Increase | Six Months Ended June 30, 2012 | 2011 | Increase $% | Increase |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $19,007 | $17,798 | $1,209 | 7% | $38,822 | $35,750 | $3,072 | 9% |
| Stock-based compensation expense | 6,714 | 6,634 | 80 | 1% | 12,950 | 12,889 | 61 | 0% |
| Laboratory supplies and other direct expenses | 10,300 | 8,258 | 2,042 | 25% | 22,213 | 16,047 | 6,166 | 38% |
| Contractual services | 5,119 | 2,730 | 2,389 | 88% | 10,679 | 5,744 | 4,935 | 86% |
| Infrastructure costs | 17,355 | 16,313 | 1,042 | 6% | 34,824 | 32,674 | 2,150 | 7% |
| Total research expenses | $58,495 | $51,733 | $6,762 | 13% | $119,488 | $103,104 | $16,384 | 16% |

We have maintained a substantial investment in research activities, with increases in each category of research expense in the second quarter and first half of 2012 as compared to the second quarter and first half of 2011. A portion of the increases in research expenses in the 2012 periods as compared to the 2011 periods is attributable to increased expenses incurred by Alios that are consolidated into our research expenses, but that are not reimburseable by us under our collaboration agreement with Alios. These research expenses incurred by Alios increased by $2.8 million and $6.7 million, respectively, in the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011. We expect to continue to invest in our research programs in an effort to identify additional drug candidates.

#### Development Expenses

*(in thousands)*

*(in thousands)*

| Development Expenses: | Three Months Ended June 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Six Months Ended June 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $35,040 | $31,504 | $3,536 | 11% | $69,145 | $61,288 | $7,857 | 13% |
| Stock-based compensation expense | 13,063 | 13,819 | (756) | (5)% | 24,031 | 26,113 | (2,082) | (8)% |
| Laboratory supplies and other direct expenses | 9,968 | 8,391 | 1,577 | 19% | 19,529 | 15,740 | 3,789 | 24% |
| Contractual services | 52,174 | 35,316 | 16,858 | 48% | 99,263 | 63,807 | 35,456 | 56% |
| Drug supply costs | 954 | 9,680 | (8,726) | (90)% | 8,976 | 15,394 | (6,418) | (42)% |
| Infrastructure costs | 26,850 | 23,161 | 3,689 | 16% | 52,483 | 46,770 | 5,713 | 12% |
| Total development expenses | $138,049 | $121,871 | $16,178 | 13% | $273,427 | $229,112 | $44,315 | 19% |

Our development expenses increased by $16.2 million, or 13%, in the second quarter of 2012 as compared to the second quarter of 2011, and by $44.3 million, or 19%, in the first half of 2012 as compared to the first half of 2011, primarily as a result of increased contractual services expenses related to our ongoing and planned clinical trials.

### Sales, General and Administrative Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended June 30, 2012 | 2011 | Increase $% | Increase | Six Months Ended June 30, 2012 | 2011 | Increase $% | Increase |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $117,514 | $96,663 | $20,851 | 22% | $228,660 | $168,186 | $60,474 | 36% |

Sales, general and administrative expenses increased substantially in the second quarter and first half of 2012 as compared to the second quarter and first half of 2011, primarily as a result of increases in workforce and commercial expenses associated with marketing INCIVEK and KALYDECO.

### Restructuring Expense

As of June 30, 2012, our lease restructuring liability was $24.8 million. In the three months ended June 30, 2012 and 2011, we recorded restructuring expense of $0.6 million and $0.7 million, respectively, and in the six months ended June 30, 2012 and 2011, we recorded restructuring expense of $1.0 million and $1.5 million, respectively. In the three and six months ended June 30, 2012, we made cash payments of $3.7 million and $7.4 million, respectively, against the accrued expense and received $2.5 million and $5.0 million, respectively, in sublease rental payments. During the remainder of 2012, we expect to make additional cash payments of $7.4 million against the accrued expense and to receive $5.0 million in sublease rental payments.

### Non-operating Items

### Interest Income

Interest income increased by $0.4 million to $0.6 million for the second quarter of 2012 from $0.2 million for the second quarter of 2011 and decreased by $0.7 million to $0.9 million for the first half of 2012 from $1.6 million for the first half of 2011. Our cash, cash equivalents and marketable securities yielded less than 0.5% on an annual basis in the second quarter of 2012 and first half of 2012.

### Interest Expense

Interest expense decreased by $2.8 million, or 40%, to $4.2 million in the second quarter of 2012 from $7.0 million in the second quarter of 2011, and by $10.7 million, or 56%, to $8.3 million in first half of 2012 from $19.0 million in the first half of 2011. The decrease was the result of decreased interest expense related to our secured notes due 2012, which were redeemed in 2011. During the second half of 2012, we expect that we will incur approximately $7 million in interest expense related to our convertible senior subordinated notes due 2015, or 2015 Notes.

### Change in Fair Value of Derivative Instruments

In the three and six months ended June 30, 2011, we recorded charges of $2.2 million and $7.8 million, respectively, in connection with the embedded and free-standing derivatives associated with our September 2009 financial transactions. In 2011, the contingent milestone payments that were the subject of the September 2009 financial transactions were earned in full. We did not incur any charges related to the September 2009 financial transactions in the first half of 2012 and will not incur any charges related to these financial transactions in future periods.

### Provision for Income Taxes

In the three months ended June 30, 2012, we recorded a benefit from income taxes attributable to Vertex of $1.2 million. In the six months ended June 30, 2012, we recorded a provision for income taxes attributable to Vertex of $1.1 million. These were due to state income taxes.

In the three and six months ended June 30, 2012, provisions for income taxes attributable to noncontrolling interest (Alios) of $21.2 million and $19.0 million, respectively, were recorded. In the three and six months ended June 30, 2011, we recorded a provision for income taxes attributable to noncontrolling interest (Alios) of $24.4 million related to the estimated income tax effect on Alios of our $60.0 million up-front payment to Alios. We have no liability for taxes payable by Alios, and the portion of the income tax provision related to Alios has been allocated to noncontrolling interest (Alios).

### Noncontrolling Interest (Alios)

The net income (loss) attributable to noncontrolling interest (Alios) recorded on our condensed consolidated statements of operations reflects Alios' net income (loss) for the reporting period, as adjusted for changes during the reporting period in the fair value of the contingent milestone payments and royalties payable by us to Alios. The following table summarizes the net income (loss) attributable to noncontrolling interest (Alios) in the three and six months ended June 30, 2012 and 2011:

*(in thousands)*

|  | Three Months Ended June 30, 2012 | 2011 | Six Months Ended June 30, 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $(34,468) | $(199,318) | $53,408 | $(375,414) |
| Summary of net income (loss) attributable to noncontrolling interest (Alios): |  |  |  |  |
| Operating costs and expenses | $(4,646) | $(801) | $(9,732) | $(801) |
| Other income (expense) | 179 | — | 241 | — |
| Change in fair value of contingent milestone and royalty payments | 56,170 | — | 55,200 | — |
| Provision for income taxes | (21,240) | (24,448) | (18,960) | (24,448) |
| Net income (loss) attributable to noncontrolling interest (Alios) | $30,463 | $(25,249) | $26,749 | $(25,249) |
| Net income (loss) attributable to Vertex | $(64,931) | $(174,069) | $26,659 | $(350,165) |

46

In the three months ended June 30, 2012, the fair value of contingent milestone and royalty payments increased by $56.2 million primarily because positive data we received from a Phase 1 clinical trial evaluating ALS-2200 made it more likely that these payments will become due from us to Alios. This increase in fair value of these contingent milestone and royalty payments resulted in a corresponding increase in net loss attributable to Vertex in the second quarter of 2012 and a decrease in the net income attributable to Vertex in the first half of 2012. If the Alios HCV nucleotide analogues continue to advance in clinical development, we expect to record additional increases in the fair value of the contingent milestone and royalty payments. Any such increase will reduce net income attributable to Vertex in the period of the adjustment, and any such reduction may be material.

### LIQUIDITY AND CAPITAL RESOURCES

We began operating as a cash flow positive company in the second half of 2011. As of June 30, 2012, we had cash, cash equivalents and marketable securities, excluding Alios' cash and cash equivalents, of $1.2 billion, which was an increase of $254.4 million from $968.9 million as of December 31, 2011. This increase principally was due to cash receipts from product and royalty revenues and approximately $158 million from issuances of common stock from employee benefit plans in the six months ended June 30, 2012, partially offset by cash expenditures we made in the six months ended June 30, 2012 related to, among other things, research and development expenses, sales, general and administrative expenses and milestone payments to Alios.

#### Sources of Liquidity

We intend to rely on cash flows from product sales as our primary source of liquidity and cash flows from royalties as a secondary source of liquidity. We also generate proceeds from the issuance of common stock under our employee benefit plans. Other possible sources of liquidity include commercial debt, 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 and financial transactions. Our credit facility expired in July 2012.

#### Future Capital Requirements

We are incurring substantial expenses to commercialize INCIVEK and KALYDECO, while at the same time continuing diversified research and development efforts for our drugs and drug candidates. We may in the future require capital to repay the $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. The 2015 Notes will mature on October 1, 2015 and 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, and can be called by us at any time on or after October 1, 2013. In addition, we have substantial lease obligations that will continue through 2028.

Since the third quarter of 2011, our cash flows from INCIVEK/INCIVO and KALYDECO have exceeded our operating expenses, and we expect our cash flows from INCIVEK/INCIVO and KALYDECO together with our current cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next twelve months. The adequacy of our available funds to meet our future operating and capital requirements will depend on many factors, including the amounts of future revenues generated by INCIVEK/INCIVO and KALYDECO, and the number, breadth, cost and prospects of our discovery and development programs.

#### Financing Strategy

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. 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. 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. Any capital transaction related to our outstanding debt obligations may or may not be similar to transactions in which we have engaged in the past. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all.

### CONTRACTUAL COMMITMENTS AND OBLIGATIONS

Our commitments and obligations were reported in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission, or SEC, on February 22, 2012. There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations 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 June 30, 2012, 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, 2011, which was filed with the SEC on February 22, 2012.

### RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note A, "Basis of Presentation and Accounting Policies—Recent Accounting Pronouncements," in the accompanying notes to the condensed consolidated financial statements. In the first quarter of 2012, we retrospectively adopted amended guidance issued in June 2011 by the Financial Accounting Standards Board that resulted in two separate, but consecutive, statements of operations and comprehensive income (loss) that affected the presentation of our condensed consolidated financial statements. There were no new accounting pronouncements adopted during the three months ended June 30, 2012 that had a material effect on our financial statements.

## Market risk

As filed, 2,147 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 U.S. government and its agencies, investment grade corporate bonds and commercial paper, and money market funds. These investments are denominated in U.S. dollars. All of our interest-bearing securities are subject to interest rate risk, and could decline in value if interest rates fluctuate. Substantially all of our investment portfolio consists of marketable securities with active secondary or resale markets to help ensure portfolio liquidity, and we have implemented guidelines limiting the term-to-maturity of our investment instruments. Due to the conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk.

### Foreign Exchange Market Risk

As a result of our foreign operations, we face exposure to movements in foreign currency exchange rates, primarily the Euro, Swiss Franc, British Pound and Canadian Dollar against the U.S. dollar. The current exposures arise primarily from cash, accounts receivable, intercompany receivables and payables, and calculations of royalties receivable from net sales denominated in foreign currencies. Both positive and negative impacts to our international product sales from movements in foreign currency exchange rates are partially mitigated by the natural, opposite impact that foreign currency exchange rates have on our international operating expenses.

We are considering a foreign currency management program with the objective of reducing the volatility of exchange rate fluctuations on our operating results and to increase the predictability of the foreign exchange impact on forecasted revenues and expenses.

## Controls and procedures

As filed, 1,477 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 June 30, 2012 our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

### Changes in Internal Controls Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the three months ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 6,639 characters.

Information regarding risk factors appears in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC on February 22, 2012 as supplemented by Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, which was filed with the SEC on May 10, 2012. There have been no material changes from the risk factors previously disclosed in that Annual Report on Form 10-K as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, except:

***In the second quarter of 2012, we recorded a $78.0 million charge for excess and obsolete INCIVEK inventories, and future adverse changes in the outlook for commercial sales of INCIVEK could result in additional inventory write-downs and related charges.***

In the second quarter of 2012, we recorded a $78.0 million charge for excess and obsolete INCIVEK inventories. The charge was based on an analysis of our INCIVEK inventory levels in relation to our commercial outlook for INCIVEK. As part of the analysis, we considered, among other factors, (i) recent decreases in demand for INCIVEK and our expectation the demand will decrease further in the second half of 2012, (ii) the potential development by us and our competitors of other drugs and combination treatments for HCV infection, (iii) positive results released in the second quarter of 2012 from Phase 2 clinical trials of drug candidates being developed by our competitors and (iv) the recent initiation by our competitors of a number of additional Phase 2 and Phase 3 clinical trials of drug candidates for the treatment of HCV infection. We will continue to evaluate our INCIVEK inventories on a quarterly basis, and future adverse changes in the outlook for commercial sales of INCIVEK, including changes due to future developments with respect to demand for INCIVEK or the advancement or approval of other drugs or combination treatments for HCV infection, could result in additional inventory write-downs and related charges in future periods, which could be material.

### 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:

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 product revenues from sales of INCIVEK and KALYDECO and royalty revenues from sales of INCIVO and to the intangible assets associated with the ViroChem acquisition and the Alios collaboration;

our expectations regarding development timelines and regulatory authority filings and submissions for VX-222, ALS-2158, ALS-2200, VX-809, VX-661, VX-509 and VX-787;

our plans to initiate a pivotal program to evaluate VX-809 in combination with KALYDECO, a Phase 3 clinical trial of KALYDECO in patients who are two to five years old and Phase 2 clinical trials of ALS-2200;

our ability to successfully market INCIVEK and/or KALYDECO or any of our drug candidates if we obtain regulatory approval;

our expectations regarding the timing and structure of clinical trials of our drugs and drug candidates, including INCIVEK, KALYDECO, VX-222, ALS-2158, ALS-2200, VX-809, VX-661,

VX-509 and VX-787, and the expected timing of our receipt of data from our and our collaborators' ongoing and planned clinical trials;

the data that will be generated by ongoing and planned clinical trials and the ability to use that data to support regulatory filings, as well as the expected timing of such regulatory filings and resulting potential approvals;

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 diversified 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;

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, 2011, which was filed with the SEC on February 22, 2012, and updated and supplemented by "Part II—Item 1A—Risk Factors" of our Quarterly Report on Form 10-Q for the three months ended March 31, 2012 and 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 Aug 8, 2012.
Source: SEC EDGAR, the filing index for accession 0001047469-12-007979. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.