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

- Company: [Vertex Pharmaceuticals Inc / Ma](/companies/vrtx.md) (CIK 875320)
- Form: 10-Q
- Filed: 2012-11-06
- Accepted by EDGAR: Nov 6, 2012, 21:32 ET
- Period: 2012-09-30
- Accession: 0001047469-12-010125
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/875320/000104746912010125/a2211595z10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/875320/000104746912010125/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-01 to 2012-09-30 | $336.0m | us-gaap:Revenues |
| Revenue | 9 months, 2012-01-01 to 2012-09-30 | $1.19bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2012-07-01 to 2012-09-30 | $30.7m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2012-01-01 to 2012-09-30 | $161.1m | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2012-07-01 to 2012-09-30 | $200.2m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2012-01-01 to 2012-09-30 | $593.1m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2012-07-01 to 2012-09-30 | $97.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2012-01-01 to 2012-09-30 | $326.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-07-01 to 2012-09-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2012-01-01 to 2012-09-30 | $79.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-07-01 to 2012-09-30 | $4.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2012-01-01 to 2012-09-30 | $12.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-07-01 to 2012-09-30 | $21.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-01-01 to 2012-09-30 | $41.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-07-01 to 2012-09-30 | −$57.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2012-01-01 to 2012-09-30 | −$30.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-07-01 to 2012-09-30 | −$0.27 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2012-01-01 to 2012-09-30 | −$0.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-07-01 to 2012-09-30 | −$0.27 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2012-01-01 to 2012-09-30 | −$0.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-07-01 to 2012-09-30 | 213,767,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2012-01-01 to 2012-09-30 | 211,053,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 9 months, 2012-01-01 to 2012-09-30 | $43.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-09-30 | $436.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-09-30 | $1.63bn | us-gaap:AssetsCurrent |
| Total assets | at 2012-09-30 | $2.72bn | us-gaap:Assets |
| Current liabilities | at 2012-09-30 | $406.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-09-30 | $1.45bn | us-gaap:Liabilities |
| Shareholders' equity | at 2012-09-30 | $1.03bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 52,673 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. We obtained approval to market KALYDECO in the United States in January 2012 and in the European Union in July 2012. 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™.

As of September 30, 2012, we had cash, cash equivalents and marketable securities, excluding Alios' cash and cash equivalents, of $1.3 billion. Our net product revenues decreased from $373.3 million in the second quarter of 2012 to $303.5 million in the third quarter of 2012 due to decreased INCIVEK net product revenues partially offset by a small 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.

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 and influenza. Our HCV clinical programs are focused 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 and fulfilling INCIVEK post-marketing commitments to regulatory agencies. We plan to evaluate multiple all-oral treatment regimens incorporating our HCV nucleotide analogue VX-135 (formerly referred to as ALS-2200), including combinations of VX-135 with GlaxoSmithKline plc's, or GlaxoSmithKline's, investigational HCV NS5A inhibitor GSK2336805 and VX-135 with Janssen Pharmaceuticals, Inc.'s investigational HCV protease inhibitor simeprevir (TMC435). In our CF program, we are investigating the use of ivacaftor as a monotherapy in additional populations of patients with CF, and combinations of ivacaftor and our other CF drug candidates, with the goal of expanding the group of patients with CF who can benefit from our medicines. We also plan to initiate a pivotal clinical program to evaluate ivacaftor in combination with VX-809 in CF patients with two copies of the F508del mutation in the cystic fibrosis transmembrane conductance regulator, or *CFTR,* gene, pending discussions with regulatory agencies. We expect to continue investing in research programs directed toward identifying 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. 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 uncompetitive current and future treatment regimens that include the administration of pegylated-interferon, or peg-IFN, by injection. To date, potential all-oral combination treatment regimens have been evaluated in Phase 2 clinical trials involving relatively small numbers of patients.

Several of our competitors are conducting Phase 3 clinical trials evaluating their drug candidates for the treatment of genotype 1 HCV infection, including clinical trials evaluating all-oral combinations and combinations that include peg-IFN. Gilead Sciences, Inc., or Gilead, is evaluating its HCV nucleotide analogue, GS-7977, in Phase 3 clinical trials, both in combination with peg-IFN and ribavirin and as part of an all-oral combination regimen. In October 2012, Abbott Laboratories initiated its first Phase 3 clinical trial to evaluate an all-oral combination of its HCV drug candidates. Janssen is evaluating simeprevir (TMC435) in combination with peg-IFN and ribavirin in Phase 3 clinical trials that were initiated in early 2011. In addition, many other competitors are evaluating drug candidates for the treatment of HCV infection, which are at various stages of development. While the development and regulatory timelines for drug candidates for the treatment of HCV infection are subject to risk and uncertainty and the effects of the advancement of these competitive treatment regimens are difficult to predict, we believe that (i) substantial additional clinical data regarding these drug candidates and potential all-oral treatment regimens will become available in late 2012 and in 2013, (ii) one or more of these drug candidates could be approved in the second half of 2013 or early 2014 and (iii) 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. Following approval in the European Union, we are working with national health authorities to arrange for reimbursement so that we will be able to provide KALYDECO to eligible patients in Europe. Ivacaftor has received Priority Review from the Therapeutic Product Directorate of Health Canada, and we have submitted a marketing authorization application for ivacaftor to the Therapeutic Goods Administration of Australia. We recently initiated two Phase 3 clinical trials to evaluate ivacaftor as a monotherapy in CF patients with mutations other than the G551D mutation, and a Phase 3 clinical trial of ivacaftor 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 ivacaftor 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 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) decreases in demand for INCIVEK and our expectation that demand would 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 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 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 North America in 2011 and in the European Union in the third quarter of 2012, 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

### HCV

#### VX-135

We are planning to evaluate VX-135 in multiple all-oral treatment regimens for patients with genotype 1 HCV infection:

In October 2012, we entered two separate, non-exclusive collaborations with GlaxoSmithKline and Janssen Pharmaceuticals, Inc. GlaxoSmithKline and we plan to evaluate VX-135 in combination with GlaxoSmithKline's investigational NS5A inhibitor GSK2336805 in a Phase 2 clinical trial expected to be initiated in early 2013, pending discussions with regulatory authorities. Janssen and we plan to evaluate VX-135 in combination with Janssen's investigational protease inhibitor simeprevir (TMC435). Janssen will conduct a drug-drug interaction trial with VX-135 and simeprevir to support the planned initiation of a Phase 2 clinical trial in early 2013, pending discussions with regulatory authorities. We will jointly fund development costs associated with each collaboration, and no further clinical development activities are covered under either agreement beyond the planned Phase 2 clinical trials.

We plan to conduct Phase 2 clinical trials to evaluate VX-135 in combination with ribavirin and VX-135 in combination with telaprevir. We expect to initiate the clinical trial to evaluate VX-135 and ribavirin by the end of 2012, followed by the clinical trial to evaluate VX-135 in combination with telaprevir in early 2013.

#### ALS-2158

In September 2012, we announced the results of a Phase 1 clinical trial to evaluate the safety, tolerability and effects on viral kinetics of ALS-2158, the second HCV nucleotide analogue that we were developing in collaboration with Alios. Data from this clinical trial showed that seven days of dosing with up to 900 mg of ALS-2158 was well-tolerated in patients with genotype 1 HCV infection, but that there was insufficient antiviral activity to warrant proceeding with further clinical development.

#### Telaprevir

Janssen recently completed a clinical trial evaluating twice-daily dosing for telaprevir. The results from this clinical trial demonstrated that twice-daily dosing of telaprevir in combination with peg-IFN and ribavirin resulted in similar sustained virological response rates to dosing with telaprevir every eight hours in combination with peg-IFN and ribavirin, which is the currently approved dosing regimen. Adverse events were generally similar between both arms of the clinical trial and consistent with previous clinical trials of telaprevir in combination with peg-IFN and ribavirin. We plan to submit data supporting this new twice-daily dosing regimen to the United States Food and Drug Administration in 2013 for potential inclusion in the telaprevir label in the United States.

### Cystic Fibrosis

#### Ivacaftor

We are conducting four clinical trials to evaluate ivacaftor as a monotherapy in patients with CF:

In July 2012, we initiated a Phase 3 clinical trial to evaluate ivacaftor in patients with CF six years of age or older who have at least one copy of the R117H mutation in the *CFTR* gene and a Phase 3 clinical trial of patients with CF six years of age or older who have at least one non-G551D gating mutation in the *CFTR* gene. We recently initiated a Phase 3 clinical trial to evaluate ivacaftor in patients with CF two to five years of age who have a gating mutation in the *CFTR* gene, with enrollment targeted to begin by the end of 2012.

We are conducting a Phase 2 clinical trial to evaluate the safety and efficacy of ivacaftor as a monotherapy in patients 12 years of age or older who have clinical evidence of residual CFTR function.

#### VX-809/Ivacaftor

Based on data from the second part of an ongoing Phase 2 clinical trial and pending discussions with regulatory agencies, we are preparing to initiate in early 2013 a pivotal clinical trial program to evaluate VX-809 in combination with ivacaftor in patients with two copies of the F508del mutation in the *CFTR* gene. A third part of the ongoing Phase 2 clinical trial is evaluating the pharmacokinetics, safety and tolerability of a twice-daily combination of VX-809 and ivacaftor. The third part of the ongoing Phase 2 clinical trial is fully-enrolled, and we expect to use data from the third part of the clinical trial to support the pivotal program for VX-809 and ivacaftor.

#### VX-661/Ivacaftor

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

### 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 in 2013.

### Influenza

We expect to receive final data in the fourth quarter 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 H1N1 (pandemic) and H5N1 (avian) influenza strains.

### Epilepsy

In the third quarter of 2012, we ended clinical development of VX-765.

### Results of Operations—Three and Nine Months Ended September 30, 2012 Compared with Three and Nine Months Ended September 30, 2011

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $336,006 | $659,200 | $(323,194) | (49)% | $1,193,048 | $847,286 | $345,762 | 41% |
| Operating costs and expenses | 337,077 | 443,493 | (106,416) | (24)% | 1,113,240 | 957,368 | 155,872 | 16% |
| Other income (loss), net | (25,396) | 12,745 | n/a | n/a | (52,867) | (36,880) | 15,987 | 43% |
| Net loss (income) attributable to noncontrolling interest (Alios) | (31,076) | (7,342) | 23,734 | 323% | (57,825) | 17,907 | n/a | n/a |
| Net income (loss) attributable to Vertex | $(57,543) | $221,110 | n/a | n/a | $(30,884) | $(129,055) | $(98,171) | (76)% |

### Net Income (Loss) Attributable to Vertex

In the third quarter of 2012, we had a net loss attributable to Vertex of $(57.5) million as compared to net income attributable to Vertex of $221.1 million in the third quarter of 2011. Our total revenues decreased in the third quarter of 2012 compared to the third quarter of 2011 from $659.2 million to $336.0 million due to a $116.1 million decrease in our net product revenues and a $224.1 million decrease in our collaborative revenues. Our operating costs and expenses decreased from $443.5 million, including $29.4 million of stock-based compensation expense, in the third quarter of 2011 to $337.1 million, including $27.6 million of stock-based compensation expense, in the third quarter of 2012. The decrease in operating costs and expenses in the third quarter of 2012 compared to the third quarter of 2011 was primarily due to an intangible asset impairment charge of $105.8 million recorded in the third quarter of 2011 for which there was no corresponding charge in the third quarter of 2012. Each reporting period we estimate the fair value of the contingent milestone payments and royalties payable by us to Alios. Any increase in the fair value of these contingent milestone and royalty payments results in a decrease in net income attributable to Vertex (or an increase in net loss attributable to Vertex) on a dollar-for-dollar basis. In the three months ended September 30, 2012 and 2011, the fair value of these contingent milestone and royalty payments increased by $57.6 million and $17.5 million, respectively.

In the nine months ended September 30, 2012, we had a net loss attributable to Vertex of $(30.9) million as compared to a net loss attributable to Vertex of $(129.1) million in the nine months ended September 30, 2011. Our total revenues increased in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 due to a $558.0 million increase in our net product revenues and a $73.4 million increase in our royalty revenues, partially offset by a $285.7 million decrease in our collaborative revenues. Our operating costs and expenses increased from $957.4 million, including $89.2 million of stock-based compensation expense, in the nine months ended September 30, 2011 to $1.1 billion, including $86.6 million of stock-based compensation expense, in the nine months ended September 30, 2012. The increase in operating costs and expenses was primarily due to a $120.5 million increase in cost of product revenues, which included a $78.0 million charge in the second quarter of 2012 for excess and obsolete INCIVEK inventories, as well as a $71.8 million increase in research and development expenses, a $47.5 million increase in sales, general and administrative expenses, and a $21.3 million increase in royalty expenses, partially offset by an intangible asset impairment charge of $105.8 million recorded in third quarter of 2011. Any increase in the fair value of the contingent milestone payments and royalties payable by us to Alios results in a decrease in net income attributable to Vertex (or an increase in net loss attributable to Vertex) on a dollar-for-dollar basis. In the nine months ended September 30, 2012 and 2011, the fair value of these contingent milestone and royalty payments increased by $112.8 million and $17.5 million, respectively.

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

Net loss attributable to Vertex was $(0.27) per diluted share in the third quarter of 2012, compared to net income attributable to Vertex of $1.02 per diluted share in the third quarter of 2011. Net loss attributable to Vertex was $(0.15) and $(0.63), respectively, per diluted share in the nine months ended September 30, 2012 and 2011.

### Revenues

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Product revenues, net | $303,501 | $419,595 | $(116,094) | (28)% | $1,052,149 | $494,130 | $558,019 | 113% |
| Royalty revenues | 25,586 | 8,539 | 17,047 | 200% | 98,047 | 24,610 | 73,437 | 298% |
| Collaborative revenues | 6,919 | 231,066 | (224,147) | (97)% | 42,852 | 328,546 | (285,694) | (87)% |
| Total revenues | $336,006 | $659,200 | $(323,194) | (49)% | $1,193,048 | $847,286 | $345,762 | 41% |

### Product Revenues, Net

*(in thousands)*

| Product revenues, net | Three Months Ended September 30, 2012 | 2011 | Nine Months Ended September 30, 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: |
| INCIVEK | $254,340 | $419,595 | $939,006 | $494,130 |
| KALYDECO | 49,161 | — | 113,143 | — |
| Total product revenues, net | $303,501 | $419,595 | $1,052,149 | $494,130 |

Our net product revenues in the third quarter of 2012 decreased from our net product revenues in third quarter of 2011 due to a $165.3 million decrease in INCIVEK net product revenues partially offset by a $49.2 million increase in KALYDECO net product revenues.

Our net product revenues in the nine months ended September 30, 2012 increased from our net product revenues in the nine months ended September 30, 2011. Revenues in the nine months ended September 30, 2012 included revenues from both INCIVEK, which we began marketing in the United States in the second quarter of 2011, and KALYDECO, which we began marketing in the United States in the first quarter of 2012 and in certain countries in the European Union in the third quarter of 2012. Our net product revenues in the comparable period in 2011 consisted of net product revenues from INCIVEK for the period from its approval on May 23, 2011 through September 30, 2011.

Our net product revenues decreased by $69.8 million from $373.3 million in the second quarter of 2012 to $303.5 million in the third quarter of 2012, due to a $73.4 million decrease in net product revenues from INCIVEK partially offset by a $3.6 million increase in net product revenues from KALYDECO. We expect that INCIVEK net product revenues will continue to decrease due to competitive pressures, and that these decreases will be partially offset by expected increases in KALYDECO net product revenues.

### Royalty Revenues

The increases in our royalty revenues in the three and nine months ended September 30, 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 $20.0 million and $80.8 million, respectively, of royalty revenues from Janssen in the three and nine months ended September 30, 2012. Royalty revenues from Janssen decreased by $8.0 million from $28.0 million in the second quarter of 2012 to $20.0 million in the third quarter of 2012. INCIVO faces competitive pressures similar to those facing INCIVEK, and we expect that INCIVO royalty revenues will continue to decline in future periods. Mitsubishi Tanabe's license to market telaprevir in Japan is fully paid.

We recognized royalty revenues related to sales by GlaxoSmithKline of Lexiva/Telzir, an HIV protease inhibitor that was discovered and developed pursuant to our collaboration with GlaxoSmithKline, of $5.6 million and $7.3 million, respectively, in the three months ended September 30, 2012 and 2011, and $17.2 million and $20.8 million, respectively, in the nine months ended September 30, 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 nine months ended September 30, 2012 and 2011:

*(in thousands)*

| Collaborative revenues: | Three Months Ended September 30, 2012 | 2011 | Nine Months Ended September 30, 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: |
| Janssen | $2,604 | $207,720 | $11,201 | $272,894 |
| Mitsubishi Tanabe | — | 19,500 | 18,879 | 45,858 |
| CFFT | 4,315 | 3,846 | 12,772 | 9,794 |
| Total collaborative revenues | $6,919 | $231,066 | $42,852 | $328,546 |

Our collaborative revenues from Janssen decreased significantly in the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011 because we recognized $200.0 million and $250.0 million, respectively, in the three and nine months ended September 30, 2011, in milestone revenues under our collaboration agreement with Janssen, for which there were no comparable milestone revenues in the three and nine months ended September 30, 2012. We do not expect to earn any future milestone payments pursuant to this 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 did not recognize any collaborative revenues from Mitsubishi Tanabe in the third quarter of 2012 and 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 September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of product revenues | $30,680 | $35,285 | $(4,605) | (13)% | $161,147 | $40,689 | $120,458 | 296% |
| Royalty expenses | 7,856 | 3,121 | 4,735 | 152% | 31,023 | 9,689 | 21,334 | 220% |
| Research and development expenses | 200,161 | 189,052 | 11,109 | 6% | 593,076 | 521,268 | 71,808 | 14% |
| Sales, general and administrative expenses | 97,684 | 110,654 | (12,970) | (12)% | 326,344 | 278,840 | 47,504 | 17% |
| Restructuring expense (credit) | 696 | (419) | n/a | n/a | 1,650 | 1,082 | 568 | 53% |
| Intangible asset impairment charge | — | 105,800 | (105,800) | (100)% | — | 105,800 | (105,800) | (100)% |
| Total costs and expenses | $337,077 | $443,493 | $(106,416) | (24)% | $1,113,240 | $957,368 | $155,872 | 16% |

### 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. Our cost of product revenues decreased in the third quarter of 2012 compared to the third quarter of 2011 as a result of lower net product revenues partially offset by the cost of a commercial milestone earned by CFFT in the third quarter of 2012. In the second quarter of 2012, we recorded within cost of product revenues a $78.0 million charge for excess and obsolete INCIVEK inventories. We evaluate our INCIVEK inventories on a quarterly basis, and future changes in the outlook for commercial sales of INCIVEK could result in additional inventory write-downs in future periods, which would be recorded as part of cost of product revenues.

### Royalty Expenses

Royalty expenses include third-party royalties payable by us 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 nine months ended September 30, 2012 increased compared to the three and nine months ended September 30, 2011 primarily because of an increase in the third-party royalties payable on net sales of INCIVO by Janssen.

### Research and Development Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research expenses | $56,400 | $57,444 | $(1,044) | (2)% | $175,888 | $160,548 | $15,340 | 10% |
| Development expenses | 143,761 | 131,608 | 12,153 | 9% | 417,188 | 360,720 | 56,468 | 16% |
| Total research and development expenses | $200,161 | $189,052 | $11,109 | 6% | $593,076 | $521,268 | $71,808 | 14% |

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 $5.3 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. We plan to evaluate a number of additional potential all-oral combination treatment regimens that could include VX-135, telaprevir, VX-222 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-135 and VX-222, will generate revenues and cash flows.

#### Research Expenses

*(in thousands)*

*(in thousands)*

| Research Expenses: | Three Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $18,714 | $21,016 | $(2,302) | (11)% | $57,536 | $56,766 | $770 | 1% |
| Stock-based compensation expense | 6,268 | 6,841 | (573) | (8)% | 19,218 | 19,730 | (512) | (3)% |
| Laboratory supplies and other direct expenses | 8,730 | 8,932 | (202) | (2)% | 30,943 | 24,979 | 5,964 | 24% |
| Contractual services | 5,304 | 3,236 | 2,068 | 64% | 15,983 | 8,980 | 7,003 | 78% |
| Infrastructure costs | 17,384 | 17,419 | (35) | (0)% | 52,208 | 50,093 | 2,115 | 4% |
| Total research expenses | $56,400 | $57,444 | $(1,044) | (2)% | $175,888 | $160,548 | $15,340 | 10% |

We have maintained a substantial investment in research activities, with a small decrease in research expenses in the third quarter of 2012 as compared to the third quarter of 2011 and a 10% increase in research expenses in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. Our research expenses include expenses incurred by Alios that are not reimbursable by us under our collaboration agreement with Alios. These research expenses incurred by Alios increased by $0.1 million and $6.8 million, respectively, in the three and nine months ended September 30, 2012 compared to the three and nine months ended September 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 September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salary and benefits | $37,555 | $32,559 | $4,996 | 15% | $106,700 | $93,847 | $12,853 | 14% |
| Stock-based compensation expense | 11,176 | 11,811 | (635) | (5)% | 35,207 | 37,924 | (2,717) | (7)% |
| Laboratory supplies and other direct expenses | 7,953 | 9,405 | (1,452) | (15)% | 27,482 | 25,145 | 2,337 | 9% |
| Contractual services | 58,500 | 37,939 | 20,561 | 54% | 157,763 | 101,746 | 56,017 | 55% |
| Drug supply costs | 1,705 | 14,623 | (12,918) | (88)% | 10,681 | 30,017 | (19,336) | (64)% |
| Infrastructure costs | 26,872 | 25,271 | 1,601 | 6% | 79,355 | 72,041 | 7,314 | 10% |
| Total development expenses | $143,761 | $131,608 | $12,153 | 9% | $417,188 | $360,720 | $56,468 | 16% |

Our development expenses increased by $12.2 million, or 9%, in the third quarter of 2012 as compared to the third quarter of 2011, and by $56.5 million, or 16%, in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily as a result of increased contractual services expenses related to our ongoing and planned clinical trials to evaluate ivacaftor, VX-135, VX-787 and VX-809.

### Sales, General and Administrative Expenses

*(in thousands)*

*(in thousands)*

|  | Three Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) | Nine Months Ended September 30, 2012 | 2011 | Increase/ (Decrease) $% | Increase/ (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales, general and administrative expenses | $97,684 | $110,654 | $(12,970) | (12)% | $326,344 | $278,840 | $47,504 | 17% |

Sales, general and administrative expenses decreased in the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, primarily as a result of decreased sales and marketing expenses.

Sales, general and administrative expenses increased in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, primarily as a result of increases in workforce and commercial expenses associated with marketing INCIVEK and KALYDECO.

### Restructuring Expense (Credit)

As of September 30, 2012, our lease restructuring liability was $24.2 million. In the three months ended September 30, 2012 and 2011, we recorded restructuring expense (credit) of $0.7 million and $(0.4) million, respectively, and in the nine months ended September 30, 2012 and 2011, we recorded restructuring expense of $1.7 million and $1.1 million, respectively. In the three and nine months ended September 30, 2012, we made cash payments of $3.7 million and $11.1 million, respectively, against the accrued expense and received $2.4 million and $7.3 million, respectively, in sublease rental payments. During the fourth quarter of 2012, we expect to make additional cash payments of $3.7 million against the accrued expense and to receive $2.7 million in sublease rental payments.

### Intangible Asset Impairment Charge

In the third quarter of 2011, we recorded an impairment charge of $105.8 million related to VX-759, an HCV polymerase inhibitor that we acquired through our acquisition of ViroChem Pharma Inc. in 2009. VX-759 was a back-up to VX-222. In connection with this impairment charge, we recorded a benefit from income taxes of $32.7 million resulting in a net effect on our income (loss) related to this impairment charge of $73.1 million in the three and nine months ended September 30, 2011. There were no comparable charges in the three or nine months ended September 30, 2012.

### Non-operating Items

### Interest Income

Interest income increased by $0.4 million to $0.5 million for the third quarter of 2012 from $0.1 million for the third quarter of 2011 and decreased by $0.2 million to $1.4 million for the nine months ended September 30, 2012 from $1.7 million for the nine months ended September 30, 2011. Our cash, cash equivalents and marketable securities yielded less than 0.5% on an annual basis in the three and nine months ended September 30, 2012.

### Interest Expense

Interest expense decreased by $2.5 million to $4.6 million in the third quarter of 2012 from $7.1 million in the third quarter of 2011, and by $13.2 million to $12.9 million in the nine months ended September 30, 2012 from $26.0 million in the nine months ended September 30, 2011. The decrease was the result of decreased interest expense related to our secured notes due 2012, which were redeemed in 2011. During the fourth quarter of 2012, we expect that we will incur approximately $3 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 nine months ended September 30, 2011, we recorded charges of $8.1 million and $15.9 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 nine months ended September 30, 2012 and will not incur any charges related to these financial transactions in future periods.

### Provision for (Benefit from) Income Taxes

In the third quarter of 2012, we recorded a benefit from income taxes attributable to Vertex of $39,000. In the nine months ended September 30, 2012, we recorded a provision for income taxes attributable to Vertex of $1.1 million. These amounts reflect state tax planning implemented during the respective periods. In the three and nine months ended September 30, 2011, we recorded a benefit from income taxes attributable to Vertex of $32.7 million related to the impairment of VX-759.

In the three and nine months ended September 30, 2012, we recorded a provision for income taxes attributable to noncontrolling interest (Alios) of $21.4 million and $40.4 million, respectively, primarily due to the changes in fair value of contingent milestone and royalty payments payable by us to Alios. In the three months ended September 30, 2011, we recorded a provision for income taxes attributable to noncontrolling interest (Alios) of $4.9 million primarily due to the change in fair value of contingent milestone and royalty payments. In the nine months ended September 30, 2011, we recorded a provision for income taxes attributable to noncontrolling interest (Alios) of $29.3 million primarily due to the estimated income tax effect on Alios of our $60.0 million up-front payment to Alios in the second quarter of 2011. 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 loss (income) attributable to noncontrolling interest (Alios) recorded on our condensed consolidated statements of operations reflects Alios' net loss (income) 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 loss (income) attributable to noncontrolling interest (Alios) in the three and nine months ended September 30, 2012 and 2011:

*(in thousands)*

|  | Three Months Ended September 30, 2012 | 2011 | Nine Months Ended September 30, 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $(26,467) | $228,452 | $26,941 | $(146,962) |
| Summary of net loss (income) attributable to noncontrolling interest (Alios): |  |  |  |  |
| Operating costs and expenses | $4,624 | $5,258 | $14,356 | $6,059 |
| Other expense (income) | 466 | — | 225 | — |
| Decrease (increase) in fair value of contingent milestone and royalty payments | (57,560) | (17,450) | (112,760) | (17,450) |
| Provision for income taxes | 21,394 | 4,850 | 40,354 | 29,298 |
| Net loss (income) attributable to noncontrolling interest (Alios) | $(31,076) | $(7,342) | $(57,825) | $17,907 |
| Net income (loss) attributable to Vertex | $(57,543) | $221,110 | $(30,884) | $(129,055) |

45

In the three and nine months ended September 30, 2012, the fair value of contingent milestone payments and royalties payable by us to Alios increased by $57.6 million and $112.8 million, respectively, as a result of the positive data from a Phase 1 clinical trial evaluating VX-135. In both the three and nine months ended September 30, 2011, the fair value of contingent milestone payments and royalties payable by us to Alios increased by $17.5 million as a result of the advancement of VX-135 and ALS-2158 in the third quarter of 2011.

Increases in the fair value of the contingent milestone payments and royalties payable by us to Alios result in a decrease in net income attributable to Vertex (or an increase in net loss attributable to Vertex) on a dollar-for-dollar basis. If VX-135 continues to advance in clinical development, we expect to record additional increases in the fair value of these contingent milestone and royalty payments. Changes in the fair value of these contingent milestone and royalty payments and the effects of these changes on net income (loss) attributable to Vertex were material in the three and nine months ended September 30, 2012 and 2011 and may be material in future periods.

### LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2012, we had cash, cash equivalents and marketable securities, excluding Alios' cash and cash equivalents, of $1.3 billion, which was an increase of $329.6 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 $175 million from issuances of common stock from employee benefit plans in the nine months ended September 30, 2012, partially offset by cash expenditures we made in the nine months ended September 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 to pursue 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.

We expect that 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 September 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 September 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, 1,487 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 September 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 September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 6,469 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 and Item 1A of our Quarterly Report for the quarter ended June 30, 2012, which was filed with the SEC on August 8, 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 Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012 except:

### We could be negatively affected by securities class action complaints.

On September 6, 2012, a purported securities class action lawsuit was commenced in the United States District Court for the District of Massachusetts under the caption *City of Bristol Pension Fund v. Vertex Pharmaceuticals Incorporated, et al.*, naming as defendants us and certain of our officers and directors. The lawsuit alleges that we made material misrepresentations and/or omissions of material fact in our public disclosures during the period from May 7, 2012 through June 28, 2012, all in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The plaintiffs seek unspecified damages on behalf of the putative class, unspecified injunctive relief and an award of costs and expenses, including attorney's fees. We believe that this action is without merit and intend to defend it vigorously. This action will take time and money to defend and may distract us from more productive activities. No assurance can be provided that we will be successful in defending this claim or that insurance proceeds will be sufficient to cover any liability under such claims.

### 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 telaprevir, VX-222, VX-135, ivacaftor, VX-809, VX-661, VX-509 and VX-787;

our plan to initiate a pivotal program to evaluate VX-809 in combination with ivacaftor and our plans to intiate clinical trials of VX-135 (including in combination with GSK2336805, TMC435, ribavirin and telaprevir).

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 telaprevir, ivacaftor, VX-222, VX-135, 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 Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 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 Nov 6, 2012.
Source: SEC EDGAR, the filing index for accession 0001047469-12-010125. Last ingested by Listed: Nov 6, 2026, 12:56 ET. No prices; not investment advice.