Collaborative Arrangements

Janssen Pharmaceutica NV

In 2006, the Company entered into a collaboration agreement with Janssen (the "2006 Janssen Agreement") for the development, manufacture and commercialization of telaprevir, which Janssen began marketing under the brand name INCIVO in certain of its territories in September 2011. Under the collaboration agreement, Janssen has exclusive rights to commercialize telaprevir in its territories including Europe, South America, the Middle East, Africa and Australia. In November 2013, the Company and Janssen amended the collaboration agreement (the "2013 Janssen Amendment," as amended the "Janssen Agreement").

Janssen made a $165.0 million up-front license payment to the Company in 2006. The Company amortized the up-front license payment over the Company’s estimated period of performance under the Janssen Agreement through November 2013. As of November 2013, the effective date of the 2013 Janssen Amendment, there was $32.1 million remaining in deferred revenues related to this up-front license payment.

In addition to the up-front license payment, Janssen made contingent milestone payments for successful development, approval and launch of telaprevir as a product in its territories. At the inception of the 2006 Janssen Agreement, the Company determined that all of the contingent milestones were substantive and would result in revenues in the period in which the milestone was achieved. The Company earned $350.0 million of these contingent milestone payments, including a $50.0 million milestone payment earned in the first quarter of 2011 in connection with the European Medicines Agency’s acceptance of the marketing authorization application for INCIVO and an aggregate of $200.0 million in milestone payments earned in the third quarter of 2011 related to the approval of INCIVO by the European Commission and the launch of INCIVO in the European Union. The Company will not receive any further milestone payments under the Janssen Agreement.

Under the Janssen Agreement, each party incurs internal and external reimbursable expenses and is reimbursed by the other party for 50% of these expenses. The Company recognized the full amount of the reimbursable costs it incurred as research and development expenses on its consolidated statements of operations. The Company recognized, including in 2013, the amounts Janssen was obligated to pay the Company with respect to reimbursable expenses, net of reimbursable expenses incurred by Janssen, as collaborative revenues. During 2012 and 2011, Janssen incurred more reimbursable costs than the Company, and the net amounts payable by the Company to reimburse Janssen were recorded as a reduction of collaborative revenues. Each of the parties were responsible for drug supply in its territories. Until December 31, 2013, the Company provided Janssen certain services through the Company’s third-party manufacturing network for telaprevir.

Janssen paid the Company a tiered royalty averaging in the mid-20% range as a percentage of net sales of INCIVO in Janssen’s territories through the fourth quarter of 2013. In addition, Janssen is responsible for certain third-party royalties on net sales of INCIVO in its territories.

Pursuant to the 2013 Janssen Amendment, (i) Janssen made a payment of $152.0 million to the Company in the fourth quarter of 2013; (ii) Janssen's obligations to pay the Company royalties on net sales of INCIVO (telaprevir) terminated after the fourth quarter of 2013; and (iii) Janssen received a fully-paid license to commercialize INCIVO in its territories, subject to the continued payment of certain third-party royalties on its net sales of INCIVO. The Company and Janssen continue to perform activities related to the telaprevir development program.

The Company determined the 2013 Janssen Amendment was a material modification to the 2006 Janssen Agreement because there was a material change to the consideration and deliverables under the agreement and determined that there is one undelivered element under the agreement, as amended, which is the continuation of certain telaprevir development activities. The Company recognized $182.4 million of collaborative revenues pursuant to the Janssen Agreement in the fourth quarter of 2013. This amount was primarily attributable to (i) the residual consideration received from Janssen, including the $152.0 million fourth quarter 2013 payment and the remaining deferred revenues related to the 2006 up-front payment less (ii) the best estimate of selling price for the remaining telaprevir development activities. As of December 31, 2013, the remaining deferred revenue balance related to the Janssen collaboration was $5.0 million and will be recognized as collaborative revenues as telaprevir development program activities are completed.

The agreement will continue in effect until the expiration of Janssen’s third-party royalty obligations, which expire on a country-by-country basis on the later of (a) the last-to-expire patent covering INCIVO or (b) the last required payment by Janssen to the Company pursuant to the agreement. In the European Union, the Company has a patent covering the composition-of-matter of INCIVO that expires in 2026.

During the three years ended December 31, 2013, the Company recognized the following revenues attributable to the Janssen collaboration:



	2013		2012			2011
	(in thousands)
Royalty revenues	$	130,724	$	117,592		$	20,289
Collaborative revenues:
Up-front and amendment payments revenues	$	190,345	$	12,428		$	12,428
Milestone revenues	—		—			250,000
Net reimbursement (payment) for telaprevir development costs	2,793		(3,507		)	(8,418		)
Reimbursement for manufacturing services	10,299		7,257			20,383
Total collaborative revenues attributable to the Janssen collaboration	$	203,437	$	16,178		$	274,393
Total revenues attributable to the Janssen collaboration	$	334,161	$	133,770		$	294,682

Mitsubishi Tanabe Pharma Corporation

The Company has a collaboration agreement (the “MTPC Agreement”) with Mitsubishi Tanabe Pharma Corporation ("Mitsubishi Tanabe") pursuant to which Mitsubishi Tanabe has a fully-paid license to manufacture and commercialize TELAVIC (the brand name under which Mitsubishi Tanabe is marketing telaprevir) in Japan and other specified countries in Asia. In September 2011, Mitsubishi Tanabe obtained approval to market TELAVIC in Japan.

The parties entered into the MTPC Agreement in 2004 and amended it in 2009. Pursuant to the MTPC Agreement, Mitsubishi Tanabe provided financial and other support for the development and commercialization of telaprevir, made a $105.0 million payment in connection with the 2009 amendment of the collaboration agreement and made a $65.0 million commercial milestone payment recognized as collaborative revenues in the fourth quarter of 2011. There are no further payments under this collaboration agreement. Mitsubishi Tanabe is responsible for its own development and manufacturing costs in its territory.

Mitsubishi Tanabe may terminate the MTPC Agreement at any time without cause upon 60 days’ prior written notice to the Company. The MTPC Agreement also may be terminated by either party for a material breach by the other, subject to notice and cure provisions. Unless earlier terminated, the MTPC Agreement will continue in effect until the expiration of the last-to-expire patent covering telaprevir in Mitsubishi Tanabe's territories. In Japan, the Company has a patent covering the composition-of-matter of telaprevir that expires in 2021.

The $105.0 million payment that the Company received in the third quarter of 2009 in connection with the amendment to the MTPC Agreement was a nonrefundable, up-front license fee, and revenues related to the 2009 payment were recognized on a straight-line basis over the period of performance of the Company’s obligations under the amended agreement. The final deferred revenues related to the 2009 up-front license payment were recognized in April 2012. In connection with the amendment to the MTPC Agreement, the Company supplied manufacturing services to Mitsubishi Tanabe, until April 2012, through the Company’s third-party manufacturing network for telaprevir.

The Company did not record any collaborative revenues attributable to the MTPC Agreement in 2013. The table below sets forth the total collaborative revenues attributable to the MTPC Agreement for 2012 or 2011:



	2012		2011
	(in thousands)
Amortized portion of up-front payments	$	12,744	$	38,232
Milestone revenues	485		68,515
Payments for manufacturing services	5,650		14,928
Total collaborative revenues attributable to the Mitsubishi Tanabe collaboration	$	18,879	$	121,675

Cystic Fibrosis Foundation Therapeutics Incorporated

In April 2011, the Company entered into an amendment (the “April 2011 Amendment”) to its existing collaboration agreement with Cystic Fibrosis Foundation Therapeutics Incorporated (“CFFT”) pursuant to which CFFT agreed to provide financial support for (i) development activities for VX-661, a corrector compound discovered under the collaboration, and (ii) additional research and development activities directed at discovering new corrector compounds.

The Company entered into the original collaboration agreement with CFFT in 2004 and amended it several times prior to 2011 to, among other things, provide partial funding for its cystic fibrosis drug discovery and development efforts. In 2006, the Company received a $1.5 million milestone payment from CFFT. There are no additional milestones payable by CFFT to the Company pursuant to the collaboration agreement, as amended. Under the April 2011 Amendment, CFFT agreed to provide the Company with up to $75.0 million in funding over approximately 5 years for corrector-compound research and development activities. The Company retains the right to develop and commercialize KALYDECO (ivacaftor), VX-809, VX-661 and any other compounds discovered during the course of the research collaboration with CFFT. The Company recognized collaborative revenues from this collaboration of $14.3 million, $17.0 million and $13.7 million, respectively, in 2013, 2012 and 2011.

In the original agreement, as amended prior to the April 2011 Amendment, the Company agreed to pay CFFT tiered royalties calculated as a percentage, ranging from single digits to sub-teens, of annual net sales of any approved drugs discovered during the research term that ended in 2008, including KALYDECO, lumacaftor and VX-661. The April 2011 Amendment provides for a tiered royalty in the same range on net sales of corrector compounds discovered during the research term that began in 2011. In each of the third quarter of 2012 and the first quarter of 2013, CFFT earned a commercial milestone payment of $9.3 million from the Company upon achievement of certain sales levels for KALYDECO. These milestones were reflected in the Company's cost of product revenues. There are no additional commercial milestone payments payable by the Company to CFFT related to sales levels for KALYDECO. The Company also is obligated to make a total of two one-time commercial milestone payments upon achievement of certain sales levels for corrector compounds such as lumacaftor or VX-661.

The Company began marketing KALYDECO in the United States in the first quarter of 2012 and began marketing KALYDECO in certain countries in the European Union in the third quarter of 2012. The Company has royalty obligations to CFFT for each compound commercialized pursuant to this collaboration until the expiration of patents covering that compound. The Company has patents in the United States and European Union covering the composition-of-matter of ivacaftor that expire in 2027 and 2025, respectively, subject to potential patent life extensions. The Company has patent applications in the United States and European Union covering the composition-of-matter of lumacaftor that expire in 2026, subject to potential patent life extensions. CFFT may terminate its funding obligations under the collaboration, as amended, in certain circumstances, in which case there will be a proportional adjustment to the royalty rates and commercial milestone payments for certain corrector compounds. The collaboration also may be terminated by either party for a material breach by the other, subject to notice and cure provisions.

Alios BioPharma, Inc.

License and Collaboration Agreement

In June 2011, the Company entered into a license and collaboration agreement (the “Alios Agreement”) with Alios, a privately-held biotechnology company. The Company and Alios are collaborating on the research, development and commercialization of an HCV nucleotide analogue discovered by Alios, ALS-2200 (now formulated as VX-135), which is designed to act on the HCV polymerase.

Under the terms of the Alios Agreement, the Company received exclusive worldwide rights to ALS-2200 (VX-135) and ALS-2158, a second HCV nucleotide analogue discovered by Alios that was developed pursuant to the Alios agreement through the third quarter of 2012. Alios and the Company began clinical development of ALS-2200 (VX-135) and ALS-2158 in December 2011. The Company is responsible for all costs related to development, commercialization and manufacturing of each compound licensed to the Company pursuant to the Alios Agreement and provided funding to Alios to conduct the Phase 1 clinical trials for ALS-2200 and ALS-2158. In addition, the Company provided funding for a research program, which ended in 2013, directed to the discovery of additional HCV nucleotide analogues that act on the HCV polymerase.

Upon entering into the Alios Agreement, the Company paid Alios a $60.0 million up-front payment. As of December 31, 2013, Alios had earned an aggregate of $60.0 million in development milestone payments pursuant to the Alios Agreement. The Alios Agreement provides for development milestone payments to Alios of up to an additional $312.5 million if VX-135 is approved and commercialized. In addition, Alios is eligible to receive commercial milestone payments of up to $750.0 million, as well as tiered royalties on net sales of VX-135.

The Company may terminate the Alios Agreement (i) upon 30 days’ notice to Alios if the Company ceases development after VX-135 has experienced a technical failure and/or (ii) upon 60 days’ notice to Alios at any time after the Company completes Phase 2a clinical trials. The Alios Agreement also may be terminated by either party for a material breach by the other, and by Alios for the Company’s inactivity or if the Company challenges certain Alios patents, in each case subject to notice and cure provisions. Unless earlier terminated, the Alios Agreement will continue in effect until the expiration of the Company’s royalty obligations, which expire on a country-by-country basis on the later of (a) the date the last-to-expire patent covering a licensed product expires or (b) 10 years after the first commercial sale in the country.

Alios is continuing to operate as a separate entity, is engaged in other programs directed at developing novel drugs that are not covered by the Alios Agreement and maintains ownership of the underlying patent rights that are licensed to the Company pursuant to the Alios Agreement. Under applicable accounting guidance, the Company determined that Alios was a VIE, its license to VX-135 and ALS-2158 was a variable interest in Alios, that Alios was a business and that the Company was Alios’ primary beneficiary for the period from June 13, 2011 through December 31, 2013. The Company based these determinations on, among other factors, the significance to Alios of the licensed compounds and on the Company’s power, through the joint steering committee for the licensed compounds established under the Alios Agreement, to direct the activities that most significantly affect the economic performance of Alios.

Accordingly, the Company consolidated Alios’ financial statements with the Company’s consolidated financial statements from June 13, 2011 through December 31, 2013. However, the Company’s interests in Alios were limited to those accorded to the Company in the Alios Agreement. In particular, the Company did not acquire any equity interest in Alios, any interest in Alios’ cash and cash equivalents or any control over Alios’ activities that do not relate to the Alios Agreement. Alios does not have any right to the Company’s assets except as provided in the Alios Agreement.

As of December 31, 2013, the Company determined that it no longer had a variable interest in Alios as a whole and did not possess the power to direct the activities that most significantly affect the economic performance of Alios based on, among other factors, the decline in significance to Alios of the licensed HCV nucleotide analogue program. A full impairment charge of $250.6 million related to the Alios collaboration and a benefit for income taxes of $102.1 million was recorded attributable to Alios. The Company deconsolidated Alios based on this conclusion as of December 31, 2013. The deconsolidation resulted in a gain of $68.2 million recorded in other income (expense), net attributable to Vertex in the consolidated statement of operations for the year ended December 31, 2013. The gain of $68.2 million was approximately the difference between (i) losses the Company recorded in 2011 and 2012 based on increases in the fair value of contingent milestone and royalty payments payable by the Company to Alios and (ii) the aggregate of $120.0 million in up-front and milestone payments that the Company has made to Alios to date pursuant to the Alios Agreement.

The Company continues to have significant continuing involvement with Alios due to the Alios Agreement; therefore, the deconsolidation of Alios is not presented as discontinued operations in the Company's consolidated financial statements as of December 31, 2013. The Company will evaluate whether it continues to have significant continuing involvement with Alios for a period of one year from the December 31, 2013 deconsolidation date.

Please refer to Note J, "Intangible Assets and Goodwill," for further information regarding the impairment of the HCV nucleotide analogue program.

Noncontrolling Interest (Alios)

Prior to the deconsolidation, the Company recorded noncontrolling interest (Alios) on two lines on its consolidated balance sheets. The noncontrolling interest (Alios) was reflected on two separate lines because Alios has both common shareholders and preferred shareholders that are entitled to redemption rights in certain circumstances. The Company recorded net loss (income) attributable to noncontrolling interest (Alios) on its consolidated statements of operations, reflecting Alios' net loss (income) for the reporting period, adjusted for changes in the fair value of contingent milestone payments and royalties payable by the Company to Alios, which was evaluated each reporting period. A summary of net loss (income) attributable to noncontrolling interest (Alios) for the three years ended December 31, 2013 is as follows:



	2013			2012			2011
	(in thousands)
Loss before provision for (benefit from) income taxes	$	283,747		$	20,044		$	9,536
Decrease (increase) in fair value of contingent milestone and royalty payments	124,920			(114,970		)	(69,950		)
Provision for (benefit from) income taxes	(166,145		)	39,029			48,809
Net loss (income) attributable to noncontrolling interest (Alios)	$	242,522		$	(55,897	)	$	(11,605	)

In 2012 and 2011, the fair value of the contingent milestone payments and royalties payable by Vertex to Alios related to the in-licensed HCV nucleotide analogue program increased by $115.0 million and $70.0 million, respectively, due to the advancement of the Company's HCV nucleotide program, including the positive data the Company received in 2012 from a Phase 1 clinical trial that evaluated ALS-2200. As of December 31, 2013, the Company concluded that the fair value of the contingent milestone and royalty payments was zero. This determination was based on, among other factors, (a) safety, tolerability and efficacy data from a Phase 2a clinical trial of VX-135 in combination with daclatasvir that the Company received in late December 2013 and analyzed and announced in January 2014, (b) the continuing partial clinical hold on VX-135 by the U.S. Food and Drug Administration ("FDA"), (c) a review of the existing and emerging data regarding all-oral regimens for HCV infection being developed by the Company's competitors, and (d) the risks associated with establishing collaborations for the potential late-stage development of a combination regimen containing VX-135 and drug candidates controlled by third parties.

The Company used present-value models to determine the estimated fair value of the contingent milestone and royalty payments until it deconsolidated Alios, based on assumptions regarding the probability of achieving the relevant milestones, estimates regarding the time to develop drug candidates, estimates of future product sales and the appropriate discount and tax rates. The Company based its estimate of the probability of achieving the relevant milestones on industry data for similar assets and its own experience. The discount rates used in the valuation model represented a measure of credit risk associated with settling the liability. Significant judgment was used in determining the appropriateness of these assumptions at each reporting period.

Alios Balance Sheet Information

The Company included items related to Alios on the Company's consolidated balance sheet as of December 31, 2012. Due to the deconsolidation of Alios as of December 31, 2013, these items were not included on the Company's consolidated balance sheet as of December 31, 2013. The following table summaries items related to the Alios included on the Company's consolidated balance sheet as of December 31, 2012.



	As of December 31, 2012
		(in thousands)
Restricted cash and cash equivalents (Alios)		$	69,983
Prepaid expenses and other current assets		$	672
Property and equipment, net		$	1,728
Intangible assets		$	250,600
Other assets		$	861
Accounts payable		$	1,054
Accrued expenses		$	6,099
Income taxes payable (Alios)		$	715
Deferred tax liability		$	152,781
Other liabilities, excluding current portion		$	910
Redeemable noncontrolling interest (Alios)		$	38,530
Noncontrolling interest (Alios)		$	196,672

As of December 31, 2012, the Company recorded Alios’ cash and cash equivalents as restricted cash and cash equivalents (Alios) because (i) the Company did not have any interest in or control over Alios’ cash and cash equivalents and (ii) the Alios Agreement did not provide for these assets to be used for the development of the assets that the Company licenses from Alios pursuant to the Alios Agreement. Assets recorded as a result of consolidating Alios’ financial condition into the Company’s consolidated balance sheet did not represent additional assets that could have been used to satisfy claims against the Company’s general assets.