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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 MARCH 31, 2020
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
259,276,709
Outstanding at April 24, 2020
 


Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020

TABLE OF CONTENTS
 
 
Page
 
 
Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2020 and 2019
 
Condensed Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2020 and 2019
 
Condensed Consolidated Balance Sheets - March 31, 2020 and December 31, 2019
 
Condensed Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, 2020 and 2019
 
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2020 and 2019
 
Item 5.
Other Information.
 
“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®,” “SYMKEVI®” and “TRIKAFTA®” 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 March 31,
 
2020
 
2019
Revenues:
 
 
 
Product revenues, net
$
1,515,107

 
$
857,253

Collaborative and royalty revenues

 
1,182

Total revenues
1,515,107

 
858,435

Costs and expenses:
 
 
 
Cost of sales
162,497

 
95,092

Research and development expenses
448,528

 
339,490

Sales, general and administrative expenses
182,258

 
147,045

Change in fair value of contingent consideration
1,600

 

Total costs and expenses
794,883

 
581,627

Income from operations
720,224

 
276,808

Interest income
12,576

 
15,615

Interest expense
(14,136
)
 
(14,868
)
Other (expense) income, net
(61,130
)
 
42,610

Income before provision for income taxes
657,534

 
320,165

Provision for income taxes
54,781

 
51,534

Net income
$
602,753

 
$
268,631

 
 
 
 
Net income per common share:
 
 
 
Basic
$
2.32

 
$
1.05

Diluted
$
2.29

 
$
1.03

Shares used in per share calculations:
 
 
 
Basic
259,815

 
255,695

Diluted
263,515

 
260,175

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


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VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Net income
$
602,753

 
$
268,631

Changes in other comprehensive income:
 
 
 
Unrealized holding (losses) gains on marketable securities, net
(764
)
 
596

Unrealized gains (losses) on foreign currency forward contracts, net of tax of $(5.0) million and $1.5 million, respectively
18,782

 
(222
)
Foreign currency translation adjustment
(2,662
)
 
4,967

Total changes in other comprehensive income
15,356

 
5,341

Comprehensive income
$
618,109

 
$
273,972

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


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VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except per share amounts)
 
March 31,
 
December 31,
 
2020
 
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,593,412

 
$
3,109,322

Marketable securities
596,984

 
698,972

Accounts receivable, net
845,269

 
633,518

Inventories
187,087

 
167,502

Prepaid expenses and other current assets
223,648

 
213,515

Total current assets
5,446,400

 
4,822,829

Property and equipment, net
736,303

 
745,080

Goodwill
1,002,158

 
1,002,158

Intangible assets
400,000

 
400,000

Deferred tax assets
1,147,705

 
1,190,815

Other assets
160,635

 
157,583

Total assets
$
8,893,201

 
$
8,318,465

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
100,703

 
$
87,610

Accrued expenses
1,258,271

 
1,116,912

Other current liabilities
179,776

 
130,305

Total current liabilities
1,538,750

 
1,334,827

Long-term finance lease liabilities
532,952

 
538,576

Long-term contingent consideration
178,100

 
176,500

Other long-term liabilities
181,745

 
183,318

Total liabilities
2,431,547

 
2,233,221

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, 259,079 and 258,993 shares issued and outstanding, respectively
2,591

 
2,589

Additional paid-in capital
7,695,905

 
7,937,606

Accumulated other comprehensive income (loss)
13,383

 
(1,973
)
Accumulated deficit
(1,250,225
)
 
(1,852,978
)
Total shareholders’ equity
6,461,654

 
6,085,244

Total liabilities and shareholders’ equity
$
8,893,201

 
$
8,318,465


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


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VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Shareholders’ Equity
(unaudited)
(in thousands)
 
Three Months Ended
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total
Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018
255,172

 
$
2,546

 
$
7,421,476

 
$
659

 
$
(2,989,478
)
 
$
4,435,203

Cumulative effect adjustment for adoption of new accounting guidance

 

 

 

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

 

 

 
5,341

 

 
5,341

Net income

 

 

 

 
268,631

 
268,631

Repurchase of common stock
(537
)
 
(6
)
 
(98,001
)
 

 

 
(98,007
)
Common stock withheld for employee tax obligations
(27
)
 

 
(5,832
)
 

 

 
(5,832
)
Issuance of common stock under benefit plans
1,743

 
21

 
64,023

 

 

 
64,044

Stock-based compensation expense

 

 
94,243

 

 

 
94,243

Balance at March 31, 2019
256,351

 
$
2,561

 
$
7,475,909

 
$
6,000

 
$
(2,761,157
)
 
$
4,723,313

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
258,993

 
$
2,589

 
$
7,937,606

 
$
(1,973
)
 
$
(1,852,978
)
 
$
6,085,244

Other comprehensive income, net of tax

 

 

 
15,356

 

 
15,356

Net income

 

 

 

 
602,753

 
602,753

Repurchase of common stock
(1,404
)
 
(14
)
 
(300,012
)
 

 

 
(300,026
)
Common stock withheld for employee tax obligations
(575
)
 
(6
)
 
(136,161
)
 
 
 
 
 
(136,167
)
Issuance of common stock under benefit plans
2,065

 
22

 
77,572

 

 

 
77,594

Stock-based compensation expense

 

 
116,900

 

 

 
116,900

Balance at March 31, 2020
259,079

 
$
2,591

 
$
7,695,905

 
$
13,383

 
$
(1,250,225
)
 
$
6,461,654

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


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VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
602,753

 
$
268,631

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
115,706

 
93,791

Depreciation expense
26,821

 
27,140

Increase in fair value of contingent consideration
1,600

 

Deferred income taxes
36,705

 
43,425

Losses (gains) on equity securities
44,870

 
(43,551
)
Other non-cash items, net
9,668

 
(2,431
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(223,672
)
 
(30,136
)
Inventories
(27,450
)
 
(13,139
)
Prepaid expenses and other assets
2,790

 
7,941

Accounts payable
14,285

 
(24,145
)
Accrued expenses
153,814

 
(27,279
)
Other liabilities
57,808

 
24,537

Net cash provided by operating activities
815,698

 
324,784

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(75,265
)
 
(128,215
)
Maturities of available-for-sale debt securities
60,145

 
107,118

Sale of equity securities
72,036

 

Expenditures for property and equipment
(19,450
)
 
(18,041
)
Investment in equity securities
(5,800
)
 

Net cash provided by (used in) investing activities
31,666

 
(39,138
)
Cash flows from financing activities:
 
 
 
Issuances of common stock under benefit plans
79,597

 
63,620

Repurchases of common stock
(300,026
)
 
(94,007
)
Payments in connection with common stock withheld for employee tax obligations
(136,167
)
 
(5,832
)
Payments on finance leases
(10,287
)
 
(9,385
)
Proceeds related to finance leases
5,833

 

Advance from collaborator
2,500

 
5,000

Repayments of advanced funding
(880
)
 
(1,385
)
Net cash used in financing activities
(359,430
)
 
(41,989
)
Effect of changes in exchange rates on cash
(6,651
)
 
(378
)
Net increase in cash and cash equivalents
481,283

 
243,279

Cash, cash equivalents and restricted cash—beginning of period
3,120,681

 
2,658,253

Cash, cash equivalents and restricted cash—end of period
$
3,601,964

 
$
2,901,532

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
13,771

 
$
13,148

Cash paid for income taxes
$
5,845

 
$
1,835

Issuances of common stock from employee benefit plans receivable
$
817

 
$
510

Accrued share repurchase liability
$

 
$
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. 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 2019 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 March 31, 2020 and 2019.
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, 2019, which are contained in the Company’s 2019 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 (i) determining the transaction price of revenues and (ii) accounting for intangible assets and contingent consideration. 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
On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”) using the modified-retrospective method, which amended a number of aspects of lease accounting and required the Company to recognize right-of-use assets and liabilities on the balance sheet. As of January 1, 2019, the Company recorded a cumulative effect adjustment to increase its “Accumulated deficit” by $40.3 million, which related to its leases that were accounted for as build-to-suit leases under the previous accounting guidance.
Internal-Use Software
In 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 became effective on January 1, 2020. The adoption of ASU 2018-15 resulted in an insignificant amount of additional assets recorded on the Company’s condensed consolidated balance sheet.
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


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

value measurements. ASU 2018-13 became effective on January 1, 2020. The adoption of ASU 2018-13 resulted in additional disclosures related to the Company’s Level 3 inputs. Please refer to Note E, “Fair Value Measurements,” for further information.
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 became effective on January 1, 2020. The adoption of ASU 2016-13 did not have a significant impact on its condensed consolidated financial statements.
Recently Issued Accounting Standards
Income Taxes
In 2019, the FASB issued ASU 2019-12Income Taxes (Topic 740) (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 is effective on January 1, 2021. The Company is evaluating the impact the adoption of ASU 2019-12 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,” in the Company’s 2019 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 2019 Annual Report on Form 10-K.
B.
Revenue Recognition
Disaggregation of Revenue
Revenues by Product
Product revenues, net consisted of the following:
 
Three Months Ended March 31,
 
2020
 
2019
 
(in thousands)
TRIKAFTA
$
895,233

 
$

SYMDEKO/SYMKEVI
173,159

 
320,275

ORKAMBI
234,138

 
293,007

KALYDECO
212,577

 
243,971

Total product revenues, net*
$
1,515,107

 
$
857,253


* The preceding table does not include collaborative and royalty revenues.


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

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 March 31,
 
2020
 
2019
 
(in thousands)
United States
$
1,187,588

 
$
641,104

Outside of the United States
 
 
 
Europe
257,391

 
167,751

Other
70,128

 
49,580

Total revenues outside of the United States
327,519

 
217,331

Total revenues
$
1,515,107

 
$
858,435


Contract Liabilities
The Company recorded contract liabilities of $76.3 million and $62.3 million as of March 31, 2020 and December 31, 2019, 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 a portion of “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.
The Company’s contract liabilities at the end of each fiscal year 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 revenues 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
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.
The Company’s in-license and out-license agreements that had a significant impact on its financial statements for the three months ended March 31, 2020 and 2019, or were new during the three months ended March 31, 2020, are described below. Additional in-license and out-license agreements were described in Note B, “Collaborative Arrangements,” of the Company’s 2019 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 typically 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.


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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 had the exclusive right to license certain CRISPR-Cas9-based targets. In the fourth quarter of 2019, the Company elected to exclusively license three CRISPR-Cas9-based targets, including cystic fibrosis, pursuant to the CRISPR Agreement. For each of the three targets that the Company elected to license, 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 hemoglobinopathies, 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. 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 months ended March 31, 2020 and 2019, the net expense related to the CTX001 Co-Co Agreement was $9.3 million and $7.0 million, respectively.
In July 2019, the Company entered into a separate strategic collaboration and license agreement (the “CRISPR DMD/DM1 Agreement”) with CRISPR. Pursuant to this agreement, the Company 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 the first quarter of 2020, the Company recorded $25.0 million to “Research and development expenses” related to a pre-clinical milestone earned by CRISPR under the CRISPR DMD/DM1 Agreement. CRISPR has the potential to receive up to an additional $800.0 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 funds all expenses associated with the collaboration except for research costs for specified guide RNA research conducted by CRISPR, which the Company and CRISPR share equally.
Please refer to Note F, “Marketable Securities and Equity Investments,” for further information regarding the Company’s investment in CRISPR’s common stock.
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 from the collaboration. The termination provisions associated with these collaborations are generally the same as those described above related to the Company’s in-license agreements. None of the Company’s out-license agreements had a significant impact on the Company’s condensed consolidated statement of operations during the three months ended March 31, 2020 and 2019.


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

Cystic Fibrosis Foundation
The Company has a research, development and commercialization agreement that was originally entered into in 2004 with Cystic Fibrosis Foundation (“CFF”), as successor in interest to the Cystic Fibrosis Foundation Therapeutics, Inc. This agreement was most recently amended in 2016. Pursuant to the agreement, as amended, the Company agreed to pay royalties ranging from low-single digits to mid-single digits on potential sales of certain compounds first synthesized and/or tested between March 1, 2014 and August 31, 2016, including elexacaftor, and tiered royalties ranging from single digits to sub-teens on covered compounds first synthesized and/or tested during a research term on or before February 28, 2014, including KALYDECO (ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor). For combination products, such as ORKAMBI, SYMDEKO/SYMKEVI and TRIKAFTA (elexacaftor, tezacaftor, and ivacaftor), sales are allocated equally to each of the active pharmaceutical ingredients in the combination product.
D.
Earnings Per Share
Basic net income per common share is based upon the weighted-average number of common shares outstanding. Diluted net income per common share utilizing the treasury method is based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period when the effect is dilutive.
The following table sets forth the computation of basic and diluted net income per common share for the periods ended:
 
Three Months Ended March 31,
 
2020
 
2019
 
(in thousands, except per share amounts)
Net income
$
602,753

 
$
268,631

 
 
 
 
Basic weighted-average common shares outstanding
259,815

 
255,695

Effect of potentially dilutive securities:
 
 
 
Stock options
1,868

 
2,585

Restricted stock and restricted stock units (including PSUs)
1,801

 
1,870

Employee stock purchase program
31

 
25

Diluted weighted-average common shares outstanding
263,515

 
260,175

 
 
 
 
Basic net income per common share
$
2.32

 
$
1.05

Diluted net income per common share
$
2.29

 
$
1.03


The Company did not include the securities in the following table in the computation of the net income per common share because the effect would have been anti-dilutive during each period:
 
Three Months Ended March 31,
 
2020
 
2019
 
(in thousands)
Stock options
879

 
2,837

Unvested restricted stock and restricted stock units (including PSUs)
430

 
6


E.
Fair Value Measurements
The fair value of the Company’s financial assets and liabilities reflects the Company’s estimate of amounts that it would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from sources independent from the Company) and to minimize the use of unobservable inputs (the Company’s assumptions about how market


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

participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Level 1:
Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3:
Unobservable inputs based on the Company’s assessment of the assumptions that market participants would use in pricing the asset or liability.
The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument. The Company maintains strategic investments separately from the investment policy that governs its other cash, cash equivalents and marketable securities as described in “Note F, “Marketable Securities and Equity Investments.” As of March 31, 2020, the Company’s investments were in money market funds, corporate debt securities, commercial paper, government-sponsored enterprise securities and corporate equity securities. Additionally, the Company utilizes foreign currency forward contracts intended to mitigate the effect of changes in foreign exchange rates on its condensed consolidated statement of operations.
As of March 31, 2020, the Company’s financial assets and liabilities that were subject to fair value measurements were valued using both observable and unobservable inputs. The Company’s financial assets valued based on Level 1 inputs consisted of money market funds, government-sponsored enterprise securities and corporate equity securities. The Company’s financial assets and liabilities valued based on Level 2 inputs consisted of certain corporate equity securities as described below, corporate debt securities, commercial paper, which consisted of investments in highly-rated investment-grade corporations, and foreign currency forward contracts with reputable and creditworthy counterparties. As discussed further below, the Company’s financial liabilities valued based on Level 3 inputs consisted of acquisition-related contingent milestones. During the three months ended March 31, 2020 and 2019, the Company did not record any other-than-temporary impairment charges related to its financial assets.


12

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

The following tables set forth the Company’s financial assets and liabilities subject to fair value measurements (and does not include $1.8 billion and $2.3 billion of cash as of March 31, 2020 and December 31, 2019, respectively):
 
Fair Value Measurements as of March 31, 2020
 
 
 
Fair Value Hierarchy
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial instruments carried at fair value (asset positions):
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,736,913

 
$
1,736,913

 
$

 
$

Commercial paper
30,700

 

 
30,700

 

Marketable securities:
 
 
 
 
 
 
 
Corporate equity securities
165,178

 
145,465

 
19,713

 

Government-sponsored enterprise securities
7,791

 
7,791

 

 

Corporate debt securities
305,051

 

 
305,051

 

Commercial paper
118,964

 

 
118,964

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
25,434

 

 
25,434

 

Other assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
1,798

 

 
1,798

 

Total financial assets
$
2,391,829


$
1,890,169

 
$
501,660

 
$

Financial instruments carried at fair value (liability positions):
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(459
)
 
$

 
$
(459
)
 
$

Long-term contingent consideration
(178,100
)
 

 

 
(178,100
)
Other long-term liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
(637
)
 

 
(637
)
 

Total financial liabilities
$
(179,196
)
 
$

 
$
(1,096
)
 
$
(178,100
)



13

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

 
Fair Value Measurements as of December 31, 2019
 
 
 
Fair Value Hierarchy
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial instruments carried at fair value (asset positions):
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
791,039

 
$
791,039

 
$

 
$

Corporate debt securities
6,070

 

 
6,070

 

Commercial paper
29,472

 

 
29,472

 

Marketable securities:
 
 
 
 
 
 
 
Corporate equity securities
282,084

 
261,797

 
20,287

 

Government-sponsored enterprise securities
12,733

 
12,733

 

 

Corporate debt securities
301,799

 

 
301,799

 

Commercial paper
102,356

 

 
102,356

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
9,725

 

 
9,725

 

Total financial assets
$
1,535,278

 
$
1,065,569

 
$
469,709

 
$

Financial instruments carried at fair value (liability positions):
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(5,533
)
 
$

 
$
(5,533
)
 
$

Long-term contingent consideration
(176,500
)
 

 

 
(176,500
)
Other long-term liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
(1,821
)
 

 
(1,821
)
 

Total financial liabilities
$
(183,854
)
 
$

 
$
(7,354
)
 
$
(176,500
)

Please refer to Note F, “Marketable Securities and Equity Investments,” for the carrying amount and related unrealized gains (losses) by type of investment.
Fair Value of Corporate Equity Securities
The Company maintains strategic investments in corporate equity securities separately from the investment policy that governs its other cash, cash equivalents and marketable securities. The Company classifies its investments in publicly traded companies as “Marketable securities” on its condensed consolidated balance sheets. Generally, the Company’s investments in the common stock of these publicly traded companies are valued based on Level 1 inputs because they have readily determinable fair values. However, certain of the Company’s investments in publicly traded companies have been or continue to be valued based on Level 2 inputs due to transfer restrictions associated with these investments. Please refer to Note F, “Marketable Securities and Equity Investments,” for further information on these investments.
Fair Value of Contingent Consideration
The Company’s contingent consideration liabilities, which are related to $678.3 million of development and regulatory milestones potentially payable to Exonics’ former equity holders, are classified as Level 3 within the valuation hierarchy. The Company bases its estimates of the probability of achieving the milestones relevant to the fair value of contingent payments on industry data attributable to rare diseases. The discount rates used in the valuation model for contingent payments, which were between 1.8% and 3.1%, represent a measure of credit risk and market risk associated with settling the liabilities. Significant judgment is used in determining the appropriateness of these assumptions at each reporting period. Due to the uncertainties associated with development and commercialization of a drug candidate in the pharmaceutical industry, the Company's estimates regarding the fair value of contingent consideration will change in the future, resulting in adjustments to the fair value of the Company’s contingent consideration liabilities, and the effect of any such adjustments could be material.


14

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

The following table represents a rollforward of the fair value of the Company’s contingent consideration liabilities:
 
Three Months Ended March 31, 2020
 
(in thousands)
Balance at December 31, 2019
$
176,500

Increase in fair value of contingent payments
1,600

Balance at March 31, 2020
$
178,100


The “Increase in fair value of contingent payments” in the table above was due to changes in market interest rates and the time value of money.
F.
Marketable Securities and Equity Investments
A summary of the Company’s cash equivalents and marketable securities, which are recorded at fair value (and do not include $1.8 billion and $2.3 billion of cash as of March 31, 2020 and December 31, 2019, respectively), is shown below:
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
As of March 31, 2020
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,736,913

 
$

 
$

 
$
1,736,913

Commercial paper
30,700

 
4

 
(4
)
 
30,700

Total cash equivalents
1,767,613

 
4

 
(4
)
 
1,767,613

Marketable securities:
 
 
 
 
 
 
 
Government-sponsored enterprise securities
7,717

 
74

 

 
7,791

Corporate debt securities
305,808

 
255

 
(1,012
)
 
305,051

Commercial paper
118,542

 
426

 
(4
)
 
118,964

Total marketable debt securities
432,067

 
755

 
(1,016
)
 
431,806

Corporate equity securities
87,096

 
78,082

 

 
165,178

Total marketable securities
$
519,163

 
$
78,837

 
$
(1,016
)
 
$
596,984

 
 
 
 
 
 
 
 
As of December 31, 2019
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
791,039

 
$

 
$

 
$
791,039

Corporate debt securities
6,070

 

 

 
6,070

Commercial paper
29,470

 
3

 
(1
)
 
29,472

Total cash equivalents
826,579

 
3

 
(1
)
 
826,581

Marketable securities:
 
 
 
 
 
 
 
Government-sponsored enterprise securities
12,689

 
44

 

 
12,733

Corporate debt securities
301,458


391

 
(50
)
 
301,799

Commercial paper
102,240

 
121

 
(5
)
 
102,356

Total marketable debt securities
416,387

 
556

 
(55
)
 
416,888

Corporate equity securities
113,829

 
168,255

 

 
282,084

Total marketable securities
$
530,216

 
$
168,811

 
$
(55
)
 
$
698,972




15

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

Available-for-sale debt securities were classified on the Company's condensed consolidated balance sheets at fair value as follows:
 
As of March 31, 2020
 
As of December 31, 2019
 
(in thousands)
Cash and cash equivalents
$
1,767,613

 
$
826,581

Marketable securities
431,806

 
416,888

Total
$
2,199,419

 
$
1,243,469


Available-for-sale debt securities by contractual maturity were as follows:
 
As of March 31, 2020
 
As of December 31, 2019
 
(in thousands)
Matures within one year
$
2,157,586

 
$
1,137,942

Matures after one year through five years
41,833

 
105,527

Total
$
2,199,419

 
$
1,243,469


The Company has a limited number of available-for-sale debt securities in insignificant loss positions as of March 31, 2020, which it does not intend to sell and has concluded it will not be required to sell before recovery of the amortized costs for the investments at maturity. The Company did not record any charges for other-than-temporary declines in the fair value of available-for-sale debt securities or gross realized gains or losses in the three months ended March 31, 2020 and 2019.
As of March 31, 2020 and December 31, 2019, the total fair value of the Company’s strategic investments in the common stock of publicly traded companies, which was primarily related to its investment in CRISPR, was $165.2 million and $282.1 million, respectively, and was classified as “Marketable securities” on its condensed consolidated balance sheets.
The Company records changes in the fair value of its investments in corporate equity securities, which are primarily attributable to its investment in CRISPR, to “Other (expense) income, net” on its condensed consolidated statements of operations. During the three months ended March 31, 2020 and 2019, the Company recorded a net unrealized loss of $39.4 million and a net unrealized gain of $43.6 million, respectively, on corporate equity securities held at the conclusion of each period. During the three months ended March 31, 2020, the Company received proceeds of $72.0 million related to sales of CRISPR’s common stock, which had an original weighted-average cost basis of $26.7 million. There were no sales of CRISPR’s common stock during the three months ended March 31, 2019.
As of March 31, 2020, the carrying value of the Company’s equity investments without readily determinable fair values, which are recorded in “Other assets” on its condensed consolidated balance sheets, was $46.6 million.


16

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

G.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component:
 
 
 
Unrealized Holding Gains (Losses), Net of Tax
 
 
 
Foreign Currency Translation Adjustment
 
On Available-For-Sale Debt Securities
 
On Foreign Currency Forward Contracts
 
Total
 
(in thousands)
Balance at December 31, 2019
$
(895
)
 
$
503

 
$
(1,581
)
 
$
(1,973
)
Other comprehensive (loss) income before reclassifications
(2,662
)
 
(764
)
 
25,772

 
22,346

Amounts reclassified from accumulated other comprehensive income (loss)

 

 
(6,990
)
 
(6,990
)
Net current period other comprehensive (loss) income
(2,662
)
 
(764
)
 
18,782

 
15,356

Balance at March 31, 2020
$
(3,557
)
 
$
(261
)
 
$
17,201

 
$
13,383

 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
(11,227
)
 
$
(536
)
 
$
12,422

 
$
659

Other comprehensive income before reclassifications
4,967

 
596

 
5,126