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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 SEPTEMBER 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
257,149,588
Outstanding at October 18, 2019
 


Table of Contents

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

TABLE OF CONTENTS
 
 
Page
 
 
Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Balance Sheets - September 30, 2019 and December 31, 2018
 
Condensed Consolidated Statements of Shareholders' Equity and Noncontrolling Interest - Three and Nine Months Ended September 30, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 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. The trademark for “TRIKAFTATM” is pending in the United States and registered in the European Union. 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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Product revenues, net
$
949,828

 
$
782,511

 
$
2,747,461

 
$
2,170,152

Collaborative and royalty revenues

 
2,024

 
2,095

 
7,339

Total revenues
949,828

 
784,535

 
2,749,556

 
2,177,491

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
131,914

 
111,255

 
362,746

 
287,250

Research and development expenses
555,948

 
330,510

 
1,274,529

 
978,595

Sales, general and administrative expenses
159,674

 
137,295

 
463,221

 
404,406

Change in fair value of contingent consideration
2,959

 

 
2,959

 

Restructuring income

 
(174
)
 

 
(188
)
Total costs and expenses
850,495

 
578,886

 
2,103,455

 
1,670,063

Income from operations
99,333

 
205,649

 
646,101

 
507,428

Interest income
17,628

 
10,543

 
51,319

 
24,381

Interest expense
(14,548
)
 
(18,686
)
 
(44,253
)
 
(53,727
)
Other (expense) income, net
(31,747
)
 
(60,995
)
 
64,802

 
89,662

Income before provision for income taxes
70,666

 
136,511

 
717,969

 
567,744

Provision for income taxes
13,148

 
8,055

 
124,393

 
5,737

Net income
57,518

 
128,456

 
593,576

 
562,007

Loss (income) attributable to noncontrolling interest

 
290

 

 
(15,638
)
Net income attributable to Vertex
$
57,518

 
$
128,746

 
$
593,576

 
$
546,369

 
 
 
 
 
 
 
 
Amounts per share attributable to Vertex common shareholders:
 
 
 
 
 
 
 
Net income:
 
 
 
 
 
 
 
Basic
$
0.22

 
$
0.51

 
$
2.32

 
$
2.15

Diluted
$
0.22

 
$
0.50

 
$
2.28

 
$
2.11

Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
256,946

 
254,905

 
256,289

 
254,096

Diluted
260,473

 
259,788

 
260,182

 
258,972

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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
57,518

 
$
128,456

 
$
593,576

 
$
562,007

Changes in other comprehensive income:
 
 
 
 
 
 
 
Unrealized holding gains on marketable securities, net
64

 
224

 
1,111

 
137

Unrealized gains on foreign currency forward contracts, net of tax of $2.2 million, zero, $5.5 million and $0.5 million, respectively
12,812

 
4,029

 
6,814

 
29,062

Foreign currency translation adjustment
9,172

 
659

 
10,263

 
6,800

Total changes in other comprehensive income
22,048

 
4,912

 
18,188

 
35,999

Comprehensive income
79,566

 
133,368

 
611,764

 
598,006

Comprehensive loss (income) attributable to noncontrolling interest

 
290

 

 
(15,638
)
Comprehensive income attributable to Vertex
$
79,566

 
$
133,658

 
$
611,764

 
$
582,368

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)
 
September 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,397,941

 
$
2,650,134

Marketable securities
598,390

 
518,108

Accounts receivable, net
443,315

 
409,688

Inventories
162,306

 
124,360

Prepaid expenses and other current assets
175,142

 
140,819

Total current assets
4,777,094

 
3,843,109

Property and equipment, net
733,509

 
812,005

Goodwill
447,525

 
50,384

Deferred tax assets
1,415,511

 
1,499,672

Operating lease assets
60,929

 

Other assets
79,985

 
40,728

Total assets
$
7,514,553

 
$
6,245,898

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
92,528

 
$
110,987

Accrued expenses
1,173,783

 
958,899

Other current liabilities
122,583

 
50,406

Total current liabilities
1,388,894

 
1,120,292

Long-term finance lease liabilities
541,561

 
581,550

Long-term operating lease liabilities
62,978

 

Long-term advance from collaborator
85,084

 
82,573

Long-term contingent consideration
175,000

 

Other long-term liabilities
7,642

 
26,280

Total liabilities
2,261,159

 
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, 257,265 and 255,172 shares issued and outstanding, respectively
2,571

 
2,546

Additional paid-in capital
7,668,188

 
7,421,476

Accumulated other comprehensive income
18,847

 
659

Accumulated deficit
(2,436,212
)
 
(2,989,478
)
Total shareholders’ equity
5,253,394

 
4,435,203

Total liabilities and shareholders’ equity
$
7,514,553

 
$
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 June 30, 2018
254,883

 
$
2,542

 
$
7,357,042

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

 
$
28,655

 
$
2,714,883

Other comprehensive income, net of tax

 

 

 
4,912

 

 
4,912

 

 
4,912

Net income (loss)

 

 

 

 
128,746

 
128,746

 
(290
)
 
128,456

Repurchase of common stock
(515
)
 
(5
)
 
(91,999
)
 

 

 
(92,004
)
 

 
(92,004
)
Issuance of common stock under benefit plans
1,243

 
14

 
92,779

 

 

 
92,793

 

 
92,793

Stock-based compensation expense

 

 
85,441

 

 

 
85,441

 

 
85,441

Balance at September 30, 2018
255,611

 
$
2,551

 
$
7,443,263

 
$
307

 
$
(4,540,005
)
 
$
2,906,116

 
$
28,365

 
$
2,934,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2019
256,671

 
$
2,565

 
$
7,564,331

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

 
$

 
$
5,069,965

Other comprehensive income, net of tax

 

 

 
22,048

 

 
22,048

 

 
22,048

Net income

 

 

 

 
57,518

 
57,518

 

 
57,518

Repurchases of common stock
(71
)
 

 
(12,105
)
 

 

 
(12,105
)
 

 
(12,105
)
Issuance of common stock under benefit plans
665

 
6

 
30,006

 

 

 
30,012

 

 
30,012

Stock-based compensation expense

 

 
85,956

 

 

 
85,956

 

 
85,956

Balance at September 30, 2019
257,265

 
$
2,571

 
$
7,668,188

 
$
18,847

 
$
(2,436,212
)
 
$
5,253,394

 
$

 
$
5,253,394

 
Nine 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

 

 

 
35,999

 

 
35,999

 

 
35,999

Net income

 

 

 

 
546,369

 
546,369

 
15,638

 
562,007

Repurchase of common stock
(1,283
)
 
(13
)
 
(211,025
)
 

 

 
(211,038
)
 

 
(211,038
)
Issuance of common stock under benefit plans
3,641

 
52

 
250,368

 

 

 
250,420

 

 
250,420

Stock-based compensation expense

 

 
246,558

 

 

 
246,558

 

 
246,558

Other VIE activity

 

 

 

 

 

 
(1,000
)
 
(1,000
)
Balance at September 30, 2018
255,611

 
$
2,551

 
$
7,443,263

 
$
307

 
$
(4,540,005
)
 
$
2,906,116

 
$
28,365

 
$
2,934,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 income, net of tax

 

 

 
18,188

 

 
18,188

 

 
18,188

Net income

 

 

 

 
593,576

 
593,576

 

 
593,576

Repurchases of common stock
(931
)
 
(9
)
 
(167,945
)
 

 

 
(167,954
)
 

 
(167,954
)
Issuance of common stock under benefit plans
3,024

 
34

 
144,523

 

 

 
144,557

 

 
144,557

Stock-based compensation expense

 

 
270,134

 

 

 
270,134

 

 
270,134

Balance at September 30, 2019
257,265

 
$
2,571

 
$
7,668,188

 
$
18,847

 
$
(2,436,212
)
 
$
5,253,394

 
$

 
$
5,253,394

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)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
593,576

 
$
562,007

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
268,898

 
246,104

Depreciation expense
80,685

 
53,594

Change in fair value of contingent consideration
2,959

 

Write-downs of inventories to net realizable value
8,650

 
13,089

Deferred income taxes
94,175

 
3,595

Unrealized gains on equity securities
(68,862
)
 
(88,217
)
Other non-cash items, net
(12,674
)
 
10,701

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(41,444
)
 
(75,167
)
Inventories
(45,280
)
 
(24,461
)
Prepaid expenses and other assets
(23,709
)
 
31,797

Accounts payable
(12,210
)
 
23,023

Accrued expenses
255,699

 
167,647

Other liabilities
22,859

 
31,996

Net cash provided by operating activities
1,123,322

 
955,708

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(381,739
)
 
(329,367
)
Maturities of available-for-sale debt securities
375,145

 
308,406

Payment to acquire business, net of cash acquired
(245,824
)
 

Expenditures for property and equipment
(58,690
)
 
(79,803
)
Investment in equity securities
(27,219
)
 
(60,490
)
Net cash used in investing activities
(338,327
)
 
(161,254
)
Cash flows from financing activities:
 
 
 
Issuances of common stock under benefit plans
144,630

 
245,754

Repurchases of common stock
(155,953
)
 
(207,038
)
Payments on finance leases
(28,879
)
 

Advance from collaborator
10,000

 
7,500

Repayments of advanced funding
(4,316
)
 
(3,714
)
Proceeds related to capital lease and construction financing lease obligations
1,002

 
12,983

Payments on capital lease and construction financing lease obligations

 
(24,658
)
Other financing activities
(1,132
)
 
(1,000
)
Net cash (used in) provided by financing activities
(34,648
)
 
29,827

Effect of changes in exchange rates on cash
(4,009
)
 
(4,756
)
Net increase in cash and cash equivalents
746,338

 
819,525

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

 
1,667,526

Cash, cash equivalents and restricted cash—end of period
$
3,404,591

 
$
2,487,051

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
41,704

 
$
50,017

Cash paid for income taxes
$
22,838

 
$
10,316

Capitalization of costs related to construction financing lease obligation
$

 
$
3,389

Issuances of common stock from employee benefit plans receivable
$
13

 
$
5,509

Accrued share repurchase liability
$
12,001

 
$
4,000

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 September 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 September 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 Company’s 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, intangible assets, deferred tax asset valuation allowances, fair value of contingent consideration and the provision for 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.


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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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Table of Contents
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 Company’s 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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Table of Contents
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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
SYMDEKO/SYMKEVI
$
403,714

 
$
254,919

 
$
1,085,821

 
$
474,601

ORKAMBI
296,711

 
281,859

 
906,159

 
947,186

KALYDECO
249,403

 
245,733

 
755,481

 
748,365

Total product revenues, net
$
949,828

 
$
782,511

 
$
2,747,461

 
$
2,170,152


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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
United States
$
710,323

 
$
620,485

 
$
2,052,044

 
$
1,687,963

Outside of the United States
 
 
 
 
 
 
 
Europe
184,845

 
132,876

 
532,809

 
400,685

Other
54,660

 
31,174

 
164,703

 
88,843

Total revenues outside of the United States
239,505

 
164,050

 
697,512

 
489,528

Total revenues
$
949,828

 
$
784,535

 
$
2,749,556

 
$
2,177,491


In the three and nine months ended September 30, 2019 and 2018, revenues attributable to Germany contributed the largest amount to the Company’s European revenues.


10

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

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 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 $50.2 million and $24.9 million as of September 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. In addition, the Company periodically engages in acquisitions of entities and/or assets.
The Company’s in-license and out-license agreements and acquisitions that had a significant impact on its financial statements for the three and nine months ended September 30, 2019 and 2018, or were new during the three and nine months ended September 30, 2019, are described below. Additional in-license and out-license agreements and acquisitions 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.


11

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

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.
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 had the exclusive right to license certain CRISPR-Cas9-based targets. In the fourth quarter of 2019, the Company paid an aggregate of $30.0 million in connection with its election to exclusively license three CRISPR-Cas9-based targets, including cystic fibrosis, pursuant to the CRISPR Agreement. For these three targets, the Company leads all development and global commercialization activities and CRISPR has the potential to receive up to an additional $410.0 million in development, regulatory and commercial milestones as well as royalties on net product sales.
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. 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. 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 nine months ended September 30, 2019, the net expense related to the CTX001 Co-Co Agreement was $7.7 million and $22.3 million, respectively. During the three and nine months ended September 30, 2018, the net expense related to the CTX001 Co-Co Agreement was $5.2 million and $14.1 million, respectively.
In June 2019, the Company entered into a separate strategic collaboration and license agreement (the “CRISPR DMD/DM1 Agreement”) with CRISPR, which became effective in July 2019. 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”) and the Company made an upfront payment of $