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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM    TO   
Commission file number 000-19319
____________________________________________
Vertex Pharmaceuticals Incorporated
(Exact name of registrant as specified in its charter)

Massachusetts
(State or other jurisdiction of
incorporation or organization)
50 Northern Avenue, Boston, Massachusetts
(Address of principal executive offices)
 

04-3039129
(I.R.S. Employer
Identification No.)
02210
(Zip Code)

Registrant’s telephone number, including area code (617341-6100
    
____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $0.01 Par Value Per Share
 
VRTX
 
The Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01 per share
257,035,443
Outstanding at July 26, 2019
 


Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2019

TABLE OF CONTENTS
 
 
Page
 
 
Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2019 and 2018
 
Condensed Consolidated Balance Sheets - June 30, 2019 and December 31, 2018
 
Condensed Consolidated Statements of Shareholders' Equity and Noncontrolling Interest - Three and Six Months Ended June 30, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2019 and 2018
 
 
“We,” “us,” “Vertex” and the “Company” as used in this Quarterly Report on Form 10-Q refer to Vertex Pharmaceuticals Incorporated, a Massachusetts corporation, and its subsidiaries.
“Vertex,” “KALYDECO®,” “ORKAMBI®,” “SYMDEKO®” and “SYMKEVI®” are registered trademarks of Vertex. Other brands, names and trademarks contained in this Quarterly Report on Form 10-Q are the property of their respective owners.
We use the brand name for our products when we refer to the product that has been approved and with respect to the indications on the approved label. Otherwise, including in discussions of our cystic fibrosis development programs, we refer to our compounds by their scientific (or generic) name or VX developmental designation.



Table of Contents

Part I. Financial Information
Item 1.  Financial Statements

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Product revenues, net
$
940,380

 
$
749,912

 
$
1,797,633

 
$
1,387,641

Collaborative and royalty revenues
913

 
2,245

 
2,095

 
5,315

Total revenues
941,293

 
752,157

 
1,799,728

 
1,392,956

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
135,740

 
104,382

 
230,832

 
175,995

Research and development expenses
379,091

 
337,532

 
718,581

 
648,085

Sales, general and administrative expenses
156,502

 
137,303

 
303,547

 
267,111

Restructuring expense (income)

 
62

 

 
(14
)
Total costs and expenses
671,333

 
579,279

 
1,252,960

 
1,091,177

Income from operations
269,960

 
172,878

 
546,768

 
301,779

Interest income
18,076

 
8,049

 
33,691

 
13,838

Interest expense
(14,837
)
 
(18,155
)
 
(29,705
)
 
(35,041
)
Other income, net
53,939

 
53,819

 
96,549

 
150,657

Income before provision for (benefit from) income taxes
327,138

 
216,591

 
647,303

 
431,233

Provision for (benefit from) income taxes
59,711

 
10,341

 
111,245

 
(2,318
)
Net income
267,427

 
206,250

 
536,058

 
433,551

Loss (income) attributable to noncontrolling interest

 
1,110

 

 
(15,928
)
Net income attributable to Vertex
$
267,427

 
$
207,360

 
$
536,058

 
$
417,623

 
 
 
 
 
 
 
 
Amounts per share attributable to Vertex common shareholders:
 
 
 
 
 
 
 
Net income:
 
 
 
 
 
 
 
Basic
$
1.04

 
$
0.82

 
$
2.09

 
$
1.65

Diluted
$
1.03

 
$
0.80

 
$
2.06

 
$
1.61

Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
256,154

 
254,135

 
255,941

 
253,685

Diluted
259,822

 
258,584

 
260,015

 
258,557

The accompanying notes are an integral part of these condensed consolidated financial statements.


2

Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
267,427

 
$
206,250

 
$
536,058

 
$
433,551

Changes in other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized holding gains (losses) on marketable securities, net
451

 
373

 
1,047

 
(87
)
Unrealized (losses) gains on foreign currency forward contracts, net of tax of $1.8 million, $0.2 million, $3.3 million and $0.5 million, respectively
(5,776
)
 
25,895

 
(5,998
)
 
25,033

Foreign currency translation adjustment
(3,876
)
 
8,870

 
1,091

 
6,141

Total changes in other comprehensive (loss) income
(9,201
)
 
35,138

 
(3,860
)
 
31,087

Comprehensive income
258,226

 
241,388

 
532,198

 
464,638

Comprehensive loss (income) attributable to noncontrolling interest

 
1,110

 

 
(15,928
)
Comprehensive income attributable to Vertex
$
258,226

 
$
242,498

 
$
532,198

 
$
448,710

The accompanying notes are an integral part of these condensed consolidated financial statements.


3

Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except per share amounts)
 
June 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,294,684

 
$
2,650,134

Marketable securities
656,538

 
518,108

Accounts receivable, net
464,900

 
409,688

Inventories
143,017

 
124,360

Prepaid expenses and other current assets
151,829

 
140,819

Total current assets
4,710,968

 
3,843,109

Property and equipment, net
731,131

 
812,005

Goodwill
50,384

 
50,384

Deferred tax assets
1,425,191

 
1,499,672

Operating lease assets
58,031

 

Other assets
57,766

 
40,728

Total assets
$
7,033,471

 
$
6,245,898

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
77,045

 
$
110,987

Accrued expenses
1,069,072

 
958,899

Other current liabilities
113,103

 
50,406

Total current liabilities
1,259,220

 
1,120,292

Long-term finance lease liabilities
551,530

 
581,550

Long-term operating lease liabilities
60,433

 

Long-term advance from collaborator
84,309

 
82,573

Other long-term liabilities
8,014

 
26,280

Total liabilities
1,963,506

 
1,810,695

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 1,000 shares authorized; none issued and outstanding

 

Common stock, $0.01 par value; 500,000 shares authorized, 256,671 and 255,172 shares issued and outstanding, respectively
2,565

 
2,546

Additional paid-in capital
7,564,331

 
7,421,476

Accumulated other comprehensive (loss) income
(3,201
)
 
659

Accumulated deficit
(2,493,730
)
 
(2,989,478
)
Total shareholders’ equity
5,069,965

 
4,435,203

Total liabilities and shareholders’ equity
$
7,033,471

 
$
6,245,898


The accompanying notes are an integral part of these condensed consolidated financial statements.


4

Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Shareholders’ Equity and Noncontrolling Interest
(unaudited)
(in thousands)
 
Three Months Ended
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive (Loss) Income
 
Accumulated Deficit
 
Total Vertex
Shareholders’ Equity
 
Noncontrolling
Interest
 
Total
Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balance at March 31, 2018
254,868

 
$
2,541

 
$
7,314,369

 
$
(39,743
)
 
$
(4,876,111
)
 
$
2,401,056

 
$
29,765

 
$
2,430,821

Other comprehensive income, net of tax

 

 

 
35,138

 

 
35,138

 

 
35,138

Net income (loss)

 

 

 

 
207,360

 
207,360

 
(1,110
)
 
206,250

Repurchase of common stock
(701
)
 
(7
)
 
(107,776
)
 

 

 
(107,783
)
 

 
(107,783
)
Issuance of common stock under benefit plans
716

 
8

 
67,933

 

 

 
67,941

 

 
67,941

Stock-based compensation expense

 

 
82,516

 

 

 
82,516

 

 
82,516

Balance at June 30, 2018
254,883

 
$
2,542

 
$
7,357,042

 
$
(4,605
)
 
$
(4,668,751
)
 
$
2,686,228

 
$
28,655

 
$
2,714,883

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
256,351

 
$
2,561

 
$
7,475,909

 
$
6,000

 
$
(2,761,157
)
 
$
4,723,313

 
$

 
$
4,723,313

Other comprehensive loss, net of tax

 

 

 
(9,201
)
 

 
(9,201
)
 

 
(9,201
)
Net income

 

 

 

 
267,427

 
267,427

 

 
267,427

Repurchases of common stock
(296
)
 
(3
)
 
(52,007
)
 

 

 
(52,010
)
 

 
(52,010
)
Issuance of common stock under benefit plans
616

 
7

 
50,494

 

 

 
50,501

 

 
50,501

Stock-based compensation expense

 

 
89,935

 

 

 
89,935

 

 
89,935

Balance at June 30, 2019
256,671

 
$
2,565

 
$
7,564,331

 
$
(3,201
)
 
$
(2,493,730
)
 
$
5,069,965

 
$

 
$
5,069,965

 
Six Months Ended
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive (Loss) Income
 
Accumulated Deficit
 
Total Vertex
Shareholders’ Equity
 
Noncontrolling
Interest
 
Total
Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2017
253,253

 
$
2,512

 
$
7,157,362

 
$
(11,572
)
 
$
(5,119,723
)
 
$
2,028,579

 
$
13,727

 
$
2,042,306

Cumulative effect adjustment for adoption of new accounting guidance

 

 

 
(24,120
)
 
33,349

 
9,229

 

 
9,229

Other comprehensive income, net of tax

 

 

 
31,087

 

 
31,087

 

 
31,087

Net income

 

 

 

 
417,623

 
417,623

 
15,928

 
433,551

Repurchase of common stock
(768
)
 
(8
)
 
(119,026
)
 

 

 
(119,034
)
 

 
(119,034
)
Issuance of common stock under benefit plans
2,398

 
38

 
157,589

 

 

 
157,627

 

 
157,627

Stock-based compensation expense

 

 
161,117

 

 

 
161,117

 

 
161,117

Other VIE activity

 

 

 

 

 

 
(1,000
)
 
(1,000
)
Balance at June 30, 2018
254,883

 
$
2,542

 
$
7,357,042

 
$
(4,605
)
 
$
(4,668,751
)
 
$
2,686,228

 
$
28,655

 
$
2,714,883

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
255,172

 
$
2,546

 
$
7,421,476

 
$
659

 
$
(2,989,478
)
 
$
4,435,203

 
$

 
$
4,435,203

Cumulative effect adjustment for adoption of new accounting guidance

 

 

 

 
(40,310
)
 
(40,310
)
 

 
(40,310
)
Other comprehensive loss, net of tax

 

 

 
(3,860
)
 

 
(3,860
)
 

 
(3,860
)
Net income

 

 

 

 
536,058

 
536,058

 

 
536,058

Repurchases of common stock
(860
)
 
(9
)
 
(155,840
)
 

 

 
(155,849
)
 

 
(155,849
)
Issuance of common stock under benefit plans
2,359

 
28

 
114,517

 

 

 
114,545

 

 
114,545

Stock-based compensation expense

 

 
184,178

 

 

 
184,178

 

 
184,178

Balance at June 30, 2019
256,671

 
$
2,565

 
$
7,564,331

 
$
(3,201
)
 
$
(2,493,730
)
 
$
5,069,965

 
$

 
$
5,069,965

The accompanying notes are an integral part of these condensed consolidated financial statements.


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Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
536,058

 
$
433,551

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
183,478

 
160,572

Depreciation expense
54,838

 
34,402

Write-downs of inventories to net realizable value
7,042

 
6,928

Deferred income taxes
87,358

 
3,516

Unrealized gain on equity securities
(100,078
)
 
(149,376
)
Other non-cash items, net
(1,036
)
 
10,014

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(55,870
)
 
(88,166
)
Inventories
(25,174
)
 
(9,366
)
Prepaid expenses and other assets
(17,580
)
 
33,408

Accounts payable
(28,074
)
 
12,229

Accrued expenses
113,968

 
101,074

Other liabilities
33,603

 
25,574

Net cash provided by operating activities
788,533

 
574,360

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(263,636
)
 
(202,002
)
Maturities of available-for-sale debt securities
228,707

 
171,028

Expenditures for property and equipment
(34,399
)
 
(58,891
)
Investment in equity securities
(20,000
)
 
(21,500
)
Net cash used in investing activities
(89,328
)
 
(111,365
)
Cash flows from financing activities:
 
 
 
Issuances of common stock under benefit plans
114,092

 
144,837

Repurchases of common stock
(155,849
)
 
(115,033
)
Payments on finance leases
(18,926
)
 

Advance from collaborator
7,500

 
5,000

Repayments of advanced funding
(2,823
)
 
(2,412
)
Proceeds related to capital lease and construction financing lease obligations
1,002

 
9,566

Payments on capital lease and construction financing lease obligations

 
(14,061
)
Other financing activities

 
(149
)
Net cash (used in) provided by financing activities
(55,004
)
 
27,748

Effect of changes in exchange rates on cash
(808
)
 
(4,201
)
Net increase in cash and cash equivalents
643,393

 
486,542

Cash, cash equivalents and restricted cash—beginning of period
2,658,253

 
1,667,526

Cash, cash equivalents and restricted cash—end of period
$
3,301,646

 
$
2,154,068

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
27,109

 
$
33,444

Cash paid for income taxes
$
10,902

 
$
7,069

Capitalization of costs related to construction financing lease obligation
$

 
$
5,176

Issuances of common stock from employee benefit plans receivable
$
539

 
$
13,634

Accrued share repurchase liability
$

 
$
4,001

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)


A. Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Vertex Pharmaceuticals Incorporated (“Vertex” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The condensed consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries. The Company's condensed consolidated financial statements for the interim period ended June 30, 2018 also include the financial results of BioAxone Biosciences, Inc. (“BioAxone”), a variable interest entity (“VIE”) that the Company consolidated from 2014 through December 31, 2018. All material intercompany balances and transactions have been eliminated. The Company operates in one segment, pharmaceuticals. The Company has reclassified certain items from the prior year’s condensed consolidated financial statements to conform to the current year’s presentation.
Certain information and footnote disclosures normally included in the Company’s 2018 Annual Report on Form 10-K have been condensed or omitted. These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods ended June 30, 2019 and 2018.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2018, which are contained in the 2018 Annual Report on Form 10-K.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the amounts of revenues and expenses during the reported periods. Significant estimates in these condensed consolidated financial statements have been made in connection with the calculation of revenues, research and development expenses, goodwill, deferred tax asset valuation allowances and the provision for or benefit from income taxes. The Company bases its estimates on historical experience and various other assumptions, including in certain circumstances future projections that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
Recently Adopted Accounting Standards
Leases
In 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), which amends a number of aspects of lease accounting and requires entities to recognize right-of-use assets and liabilities on the balance sheet. ASC 842 became effective on January 1, 2019. The Company has finalized its review of its portfolio of existing leases and current accounting policies and has concluded that the amended guidance results in the recognition of additional assets and corresponding liabilities on its balance sheets. The Company also has finalized changes to its controls to address the adoption and ongoing lease accounting and related disclosure requirements of the new standard.
Until December 31, 2018, the Company applied build-to-suit accounting and was the deemed owner of its leased corporate headquarters in Boston and research site in San Diego, for which it was recognizing depreciation expense over the buildings’ useful lives and imputed interest on the corresponding construction financing lease obligations. Under the amended guidance that became effective January 1, 2019, the Company accounts for these buildings as finance leases, resulting in increased depreciation expense over the respective lease terms of approximately 15 years, which are significantly shorter than the buildings’ useful lives of 40 years. The Company also expects a reduction in its imputed interest expense in the initial years of each finance lease term. In 2019, the Company expects an increase in operating expenses of approximately $26 million and a decrease in interest expense of approximately $13 million due to this change.


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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which offered a transition option to entities adopting ASC 842. Under ASU 2018-11, entities could elect to apply ASC 842 using a modified-retrospective adoption approach resulting in a cumulative effect adjustment to accumulated deficit at the beginning of the year in which the new lease standard is adopted, rather than adjustments to the earliest comparative period presented in their financial statements. The Company adopted ASC 842 using the modified-retrospective method. As of January 1, 2019, the Company recorded a cumulative effect adjustment to increase its “Accumulated deficit” by $40.3 million related to the adjustments to its build-to-suit leases described in the previous paragraph.
The Company elected the package of transition practical expedients for leases that commenced prior to January 1, 2019, allowing it not to reassess (i) whether any expired or existing contracts contain leases, (ii) the lease classification for any expired or existing leases and (iii) the initial indirect costs for any existing leases.
Additionally, the Company recorded, upon adoption of ASC 842 on January 1, 2019, operating lease assets of $61.7 million and corresponding liabilities of $71.9 million related to its real estate leases that are not treated as finance leases under ASC 842. The difference between these assets and liabilities is primarily attributable to prepaid or accrued lease payments. The Company also reclassified amounts that were recorded as “Capital lease obligations, current portion” and “Capital lease obligations, excluding current portion” as of December 31, 2018 to “Other current liabilities” and “Long-term finance lease liabilities,” respectively, on January 1, 2019. These adjustments had no impact on the Company’s condensed consolidated statement of operations and had no impact on the Company’s accumulated deficit.
The cumulative effect of applying ASC 842 on the Company’s condensed consolidated balance sheet as of January 1, 2019 was as follows:
 
Balance as of
 
 
 
Balance as of
 
December 31, 2018 ^
 
Adjustments
 
January 1, 2019
Assets
(in thousands)
Prepaid expenses and other current assets
$
140,819

 
$
(2,930
)
 
$
137,889

Property and equipment, net
812,005

 
(53,920
)
 
758,085

Deferred tax assets
1,499,672

 
11,236

 
1,510,908

Operating lease assets

 
61,674

 
61,674

Total assets
$
6,245,898

 
$
16,060

 
$
6,261,958

Liabilities and Shareholders’ Equity
 
 
 
 
 
Capital lease obligations, current portion
$
9,817

 
$
(9,817
)
 
$

Other current liabilities
40,589

 
34,304

 
74,893

Capital lease obligations, excluding current portion
19,658

 
(19,658
)
 

Construction financing lease obligation, excluding current portion
561,892

 
(561,892
)
 

Long-term finance lease liabilities

 
569,487

 
569,487

Long-term operating lease liabilities

 
64,849

 
64,849

Other long-term liabilities
26,280

 
(20,903
)
 
5,377

Accumulated deficit
(2,989,478
)
 
(40,310
)
 
(3,029,788
)
Total liabilities and shareholders’ equity
$
6,245,898

 
$
16,060

 
$
6,261,958

^ As reported in the Company’s 2018 Annual Report on Form 10-K.

Please refer to Note K, “Leases,” for further information regarding the Company’s leases as well as certain disclosures required by ASC 842.
Derivatives and Hedging
In 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) (“ASU 2017-12”), which helps simplify certain aspects of hedge accounting and enables entities to more accurately present their risk management activities in their financial statements. ASU 2017-12 became effective January 1, 2019. The adoption of ASU 2017-12 did not have a significant effect on the Company’s condensed consolidated financial statements.


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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

Recently Issued Accounting Standards
Internal-Use Software
In 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements.  ASU 2018-15 is effective on January 1, 2020. Early adoption is permitted. The Company currently is evaluating the impact the adoption of ASU 2018-15 may have on its condensed consolidated financial statements.
Fair Value Measurement
In 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements. ASU 2018-13 is effective on January 1, 2020. Early adoption is permitted. The Company currently is evaluating the impact the adoption of ASU 2018-13 may have on its disclosures.
Credit Losses
In 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities in unrealized loss positions, ASU 2016-13 requires allowances to be recorded instead of reducing the amortized cost of the investment. ASU 2016-13 is effective on January 1, 2020. Early adoption is permitted. The Company currently is evaluating the impact the adoption of ASU 2016-13 may have on its condensed consolidated financial statements.
For a discussion of other recent accounting pronouncements please refer to Note A, “Nature of Business and Accounting Policies—Recent Accounting Pronouncements,” in the 2018 Annual Report on Form 10-K.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note A, “Nature of Business and Accounting Policies,” in its 2018 Annual Report on Form 10-K. The Company is disclosing changes in its accounting policies related to guidance that became effective January 1, 2019 in this Quarterly Report on Form 10-Q. Specifically, the Company has included its policy pursuant to its adoption of ASC 842 below.
Leases
At the inception of an arrangement, the Company determines whether the arrangement contains a lease. If a lease is identified in an arrangement, the Company recognizes a right-of-use asset and liability on its balance sheet and determines whether the lease should be classified as a finance or operating lease. The Company does not recognize assets or liabilities for leases with lease terms of less than 12 months.
A lease qualifies as a finance lease if any of the following criteria are met at the inception of the lease: (i) there is a transfer of ownership of the leased asset to the Company by the end of the lease term, (ii) the Company holds an option to purchase the leased asset that it is reasonably certain to exercise, (iii) the lease term is for a major part of the remaining economic life of the leased asset, (iv) the present value of the sum of lease payments equals or exceeds substantially all of the fair value of the leased asset, or (v) the nature of the leased asset is specialized to the point that it is expected to provide the lessor no alternative use at the end of the lease term. All other leases are recorded as operating leases.
Finance and operating lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term using the discount rate implicit in the lease. If the rate implicit is not readily determinable, the Company utilizes its incremental borrowing rate at the lease commencement date. Operating lease assets are further adjusted for prepaid or accrued lease payments. Operating lease payments are expensed using the straight-line method as an operating expense over the lease term. Finance lease assets are amortized to depreciation expense using the


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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

straight-line method over the shorter of the useful life of the related asset or the lease term. Finance lease payments are bifurcated into (i) a portion that is recorded as imputed interest expense and (ii) a portion that reduces the finance liability associated with the lease.
The Company does not separate lease and non-lease components when determining which lease payments to include in the calculation of its lease assets and liabilities. Variable lease payments are expensed as incurred. If a lease includes an option to extend or terminate the lease, the Company reflects the option in the lease term if it is reasonably certain it will exercise the option.
Finance leases are recorded in “Property and equipment, net,” “Other current liabilities” and “Long-term finance lease liabilities” on the Company’s condensed consolidated balance sheet. Operating leases are recorded in “Operating lease assets,” “Other current liabilities” and “Long-term operating lease liabilities” on the Company’s condensed consolidated balance sheet.
B.
Revenue Recognition
Disaggregation of Revenue
Revenues by Product
Product revenues, net consisted of the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
 
 
 
 
SYMDEKO/SYMKEVI
$
361,832

 
$
185,558

 
$
682,107

 
$
219,682

ORKAMBI
316,441

 
311,261

 
609,448

 
665,327

KALYDECO
262,107

 
253,093

 
506,078

 
502,632

Total product revenues, net
$
940,380

 
$
749,912

 
$
1,797,633

 
$
1,387,641


Revenues by Geographic Location
Net product revenues are attributed to countries based on the location of the customer. Collaborative and royalty revenues are attributed to countries based on the location of the Company’s subsidiary associated with the collaborative arrangement related to such revenues. Total revenues from external customers and collaborators by geographic region consisted of the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
 
 
 
 
United States
$
700,618

 
$
584,811

 
$
1,341,721

 
$
1,067,478

Outside of the United States
 
 
 
 
 
 
 
Europe
180,196

 
135,914

 
347,947

 
267,809

Other
60,479

 
31,432

 
110,060

 
57,669

Total revenues outside of the United States
240,675

 
167,346

 
458,007

 
325,478

Total revenues
$
941,293

 
$
752,157

 
$
1,799,728

 
$
1,392,956


In the three and six months ended June 30, 2019 and 2018, revenues attributable to Germany contributed the largest amount to the Company’s European revenues.
French Early Access Programs
In 2015, the Company began distributing ORKAMBI through early access programs in France and it continues to be engaged in ongoing discussions regarding the price for ORKAMBI in France. The Company expects that the difference


10

Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

between the amounts it has collected to date based on the invoiced price and the agreed-upon price for ORKAMBI in France will be returned to the French government.
Pursuant to the revenue recognition accounting guidance that was applicable until December 31, 2017, the Company’s ORKAMBI net product revenues for 2015, 2016 and 2017 did not include any net product revenues from sales of ORKAMBI in France because the price was not fixed or determinable at the time of delivery. Upon adopting ASU 2014-09, Revenues from Contracts with Customers (Topic 606), in the first quarter of 2018, the Company began recognizing net product revenues in France based on a transaction price that reflects its estimate of consideration it expects to retain that will not be subject to a significant reversal in amounts recognized. The Company’s refund liability representing the difference between the amounts the Company has collected from the French government and the transaction price is classified as “Accrued expenses” on the Company’s condensed consolidated balance sheets. If the Company’s estimate regarding the amounts it will receive for ORKAMBI supplied pursuant to these early access programs changes, the Company will reflect the effect of the change in estimate in “Product revenues, net” in the period in which the change in estimate occurs.
Contract Liabilities
The Company recorded contract liabilities of $60.2 million and $24.9 million as of June 30, 2019 and December 31, 2018, respectively, related to annual contracts with government-owned and supported customers in international markets that limit the amount of annual reimbursement the Company can receive. Upon exceeding the annual reimbursement amount, products are provided free of charge, which is a material right. These contracts include upfront payments and fees.  The Company defers a portion of the consideration received for shipments made up to the annual reimbursement limit as “Other current liabilities.” The deferred amount is recognized as revenue when the free products are shipped. The Company’s product revenue contracts include performance obligations that are one year or less.
In the majority of international markets in which the Company has a contract with an annual reimbursement limit, the annual period associated with the contract is the same as the Company’s fiscal year, resulting in no contract liability balance at the end of the year and no revenues recognized in the current year related to performance obligations satisfied in previous years. Several of the Company’s contract liabilities relate to contracts with annual reimbursement limits in international markets in which the annual period associated with the contract is not the same as the Company’s fiscal year. In these markets, the Company recognizes revenues related to performance obligations satisfied in previous years; however, these amounts are not material to the Company’s financial statements and do not relate to any performance obligations that were satisfied more than 12 months prior to the beginning of the current year.
C.
Collaborative Arrangements and Acquisitions
The Company has entered into numerous agreements pursuant to which it collaborates with third parties on research, development and commercialization programs, including in-license and out-license agreements and acquisitions.
Certain of the Company’s in-license and out-license agreements that had a significant impact on its financial statements for the three and six months ended June 30, 2019 and 2018, or were new during the three and six months ended June 30, 2019, are described below. Additional in-license and out-license agreements were described in Note B, “Collaborative Arrangements and Acquisitions,” of the Company’s 2018 Annual Report on Form 10-K.
In-license Agreements
The Company has entered into a number of license agreements in order to advance and obtain access to technologies and services related to its research and early-development activities. The Company is generally required to make an upfront payment upon execution of the license agreement; development, regulatory and commercialization milestones payments upon the achievement of certain product research, development and commercialization objectives; and royalty payments on future sales, if any, of commercial products resulting from the collaboration.
Pursuant to the terms of its in-license agreements, the Company’s collaborators lead the discovery efforts and the Company leads all preclinical, development and commercialization activities associated with the advancement of any drug candidates and funds all expenses unless otherwise described below.


11

Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

The Company typically can terminate its in-license agreements by providing advance notice to its collaborators; the required length of notice is dependent on whether any product developed under the license agreement has received marketing approval. The Company’s license agreements may be terminated by either party for a material breach by the other, subject to notice and cure provisions. Unless earlier terminated, these license agreements generally remain in effect until the date on which the royalty term and all payment obligations with respect to all products in all countries have expired.
CRISPR Therapeutics AG
In 2015, the Company entered into a strategic collaboration, option and license agreement (the “CRISPR Agreement”) with CRISPR Therapeutics AG and its affiliates (“CRISPR”) to collaborate on the discovery and development of potential new treatments aimed at the underlying genetic causes of human diseases using CRISPR-Cas9 gene-editing technology. The Company has the exclusive right to license certain CRISPR-Cas9-based targets. In connection with the CRISPR Agreement, the Company made an upfront payment to CRISPR of $75.0 million and an investment in CRISPR’s stock. The Company has also made several subsequent investments in CRISPR’s common stock, which has resulted in CRISPR becoming a related party of the Company. Please refer to Note F, “Marketable Securities and Equity Investments,” for further information regarding the Company’s investment in CRISPR’s common stock.
For targets that the Company elects to license, other than hemoglobinopathy treatments, the Company leads all development and global commercialization activities. For each target that the Company elects to license, other than hemoglobinopathy targets, CRISPR has the potential to receive up to $420.0 million in development, regulatory and commercial milestones as well as royalties on net product sales. As part of the collaboration, the Company and CRISPR share equally all development costs and potential worldwide revenues related to potential hemoglobinopathy treatments, including treatments for beta thalassemia and sickle cell disease.
In 2017, the Company entered into a co-development and co-commercialization agreement with CRISPR pursuant to the terms of the CRISPR Agreement, under which the Company and CRISPR are co-developing and will co-commercialize CTX001 (the “CTX001 Co-Co Agreement”) for the treatment of hemoglobinopathy, including treatments for sickle cell disease and beta thalassemia. The Company concluded that the CTX001 Co-Co Agreement is a cost-sharing arrangement, which results in the net impact of the arrangement being recorded in “Research and development expenses” in its condensed consolidated statements of operations. During the three and six months ended June 30, 2019 , the net expense related to the CTX001 Co-Co Agreement was $7.5 million and $14.6 million, respectively. During the three and six months ended June 30, 2018 , the net expense related to the CTX001 Co-Co Agreement was $5.2 million and $8.9 million, respectively.
In June 2019, the Company entered into a strategic collaboration and license agreement (“the CRISPR DMD/DM1 Agreement”) with CRISPR, which became effective in July 2019 upon the expiration of the waiting period under the Hart-Scott Rodino Antitrust Improvements Act (“the HSR Act”). Pursuant to this agreement, Vertex received an exclusive worldwide license to CRISPR’s existing and future intellectual property for duchenne muscular dystrophy (“DMD”) and myotonic dystrophy type 1 (“DM1”). In July 2019, the Company remitted to CRISPR an upfront payment of $175.0 million, which it expects to record in “Research and development expenses” in the third quarter of 2019. CRISPR has the potential to receive up to $825.0 million in research, development, regulatory and commercial milestones for the DMD and DM1 programs as well as royalties on net product sales. CRISPR has the option to co-develop and co-commercialize all DM1 products globally and forego the milestones and royalties associated with the DM1 program. The Company will fund all expenses associated with the collaboration except for research costs for specified guide RNA research conducted by CRISPR, which the Company and CRISPR will share equally.
Kymera Therapeutics
In May 2019, the Company entered into a strategic research and development collaboration agreement (the “Kymera Agreement”) with Kymera Therapeutics (“Kymera”) to advance small molecule protein degraders against multiple targets. Pursuant to the Kymera Agreement, Kymera’s proprietary platform technology is being applied in the collaboration activities in exchange for an upfront payment of $50.0 million. The Company has the exclusive right to license up to six protein targets, for each of which Kymera may receive up to $170.0 million in payments, including development, regulatory and commercial milestones as well as royalties on net product sales.


12

Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

In addition to the upfront payment, the Company purchased $20.0 million of Kymera’s preferred stock. The Company determined that the fair value of its investment in Kymera’s preferred stock approximated $20.0 million and classified the investment, which does not have a readily determinable fair value, in “Other assets.”
The Company determined that substantially all of the fair value of the Kymera Agreement was attributable to an in-process research and development asset and no substantive processes were acquired that would constitute a business. The Company concluded that it did not have any alternative future use for the acquired in-process research and development asset and recorded the $50.0 million upfront payment to “Research and development expenses.”
BioAxone Biosciences, Inc.
The Company has licensed rights to certain drug candidates from these third-party collaborators, which has resulted in the consolidation of certain third-parties’ financial statements into the Company’s condensed consolidated financial statements as VIEs for certain periods of time. As of December 31, 2018, and continuing through the second quarter of 2019, the Company had no consolidated VIEs reflected in its financial statements.
In 2014, the Company entered into a license and collaboration agreement (the “BioAxone Agreement”) with BioAxone, which resulted in the consolidation of BioAxone as a VIE beginning in October 2014. The Company deconsolidated BioAxone as of December 31, 2018 because it determined that it no longer was the primary beneficiary of BioAxone as it no longer had the power to direct the significant activities of BioAxone. Please refer to Note B, “Collaborative Arrangements and Acquisitions,” in the Company’s 2018 Annual Report on Form 10-K for further information on the deconsolidation of BioAxone.
In the six months ended June 30, 2018, the Company recorded net income attributable to noncontrolling interest of $15.9 million, which was primarily related to a $24.0 million increase in the fair value of the contingent payments payable by Vertex to BioAxone in the first quarter of 2018 due to (i) the expiration of an option held by the Company to purchase BioAxone in the first quarter of 2018 that increased the probability of a $10.0 million license continuation fee for VX-210 (which was ultimately paid in the first quarter of 2018) and (ii) the probability that additional milestone and royalty payments related to the BioAxone Agreement would be paid. Net income attributable to noncontrolling interest also included a $6.0 million provision for income taxes during the six months ended June 30, 2018 that was primarily related to the increase in the fair value of the contingent payments. The net loss attributable to noncontrolling interest in the three months ended June 30, 2018 was $1.1 million.
Acquisitions
Exonics Therapeutics
In June 2019, the Company entered into an agreement to acquire Exonics Therapeutics (“Exonics”), a privately held biotechnology company focused on creating transformative gene-editing therapies to repair mutations that cause DMD and other severe neuromuscular diseases, including DM1. In July 2019, the acquisition closed upon, among other things, the satisfaction of customary closing conditions and the expiration of the waiting period under the HSR Act, resulting in no financial statement impact during the three and six months ended June 30, 2019. At closing, the Company acquired all outstanding shares of Exonics and made an upfront payment of approximately $245.0 million with approximately $70.0 million in deferred payments, subject to customary closing adjustments. Exonics’ equity holders may receive an additional $728.0 million upon the successful achievement of specified development and regulatory milestones for the DMD and DM1 programs. The Company will finalize the accounting treatment for the acquisition in the third quarter of 2019.
Out-license agreements
The Company has entered into licensing agreements pursuant to which it has out-licensed rights to certain drug candidates to third-party collaborators. Pursuant to these out-license agreements, the Company’s collaborators become responsible for all costs related to the continued development of such drug candidates and obtain development and commercialization rights to these drug candidates. Depending on the terms of the agreements, the Company’s collaborators may be required to make upfront payments, milestone payments upon the achievement of certain product research and development objectives and may also be required to pay royalties on future sales, if any, of commercial products resulting


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VERTEX PHARMACEUTICALS INCORPORATED