DEF 14A 1 lvrt2018_def14a.htm VERTEX PHARMACEUTICALS INC - DEF 14A VERTEX PHARMACEUTICALS INCORPORATED - DEF 14A

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

 

         
 

Filed by the Registrant Filed by a Party other than the Registrant
   
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Definitive Proxy Statement
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Soliciting Material under §240.14a-12

 

 

 

VERTEX PHARMACEUTICALS INCORPORATED

 

(Name of Registrant as Specified In Its Charter)

   
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2018 PROXY STATEMENT
VERTEX PHARMACEUTICALS INCORPORATED

 

Notice of Annual Meeting of Shareholders to be held on May 17, 2018

 

 

 

Dear Shareholders:

 

Since 2012 we have consistently executed on our strategy of investing in scientific innovation to create transformative medicines for people with serious diseases – a strategy that we believe will both maximize benefits for patients and generate long-term value for shareholders. In 2017, we saw this strategy pay off in remarkable ways for Vertex, for the eligible patients who benefit from our medicines, and for the long-term shareholders who believe in our company.

 

During the last year, we reached thousands of additional patients with our approved cystic fibrosis (CF) medicines and accelerated the progression of our CF pipeline with the possibility to treat up to 90% of all patients with this devastating disease. As we treated more patients, we exceeded expectations for revenue growth, became profitable, and expanded our operating margins and increased our cash flow. We also advanced our promising non-CF pipeline for important new diseases including, pain, sickle cell disease, and alpha-1 anti-trypsin deficiency. We are proud of these accomplishments, but we realize that with them comes even more responsibility to continue to innovate to produce more new medicines for patients and value for shareholders. As we exit 2017, we believe we are better positioned than ever to meet these obligations and grow our company for many years to come.

 

During the last six years, we have taken Vertex from a market capitalization of less than $10 billion in early 2012 to over $40 billion in early 2018, creating significant value for our shareholders. We created this value by executing on a clear and focused vision that balanced shorter-term goals – advancing our late-stage pipeline, increasing revenues and managing operating expenses – with goals directed at the long-term trajectory of the company, including enhancing our organizational capabilities, continuing to invest in research, and exploring promising new therapeutic approaches.

 

We believe we are one of a small number of biotechnology companies that has demonstrated the capacity to serially innovate in multiple disease areas. Not only have we brought four internally discovered and developed medicines for serious diseases to the market, but we also have established a pipeline of potentially transformative medicines that are in clinical development. This pipeline includes: next-generation triple-combination regimens that we are advancing into pivotal development, which have the potential to provide highly effective treatments for up to 90% of patients with CF; selective sodium channel inhibitors, the most advanced of which is currently in Phase 2 development, that we have shown have the potential to provide a non-opioid alternative for the relief of pain; and a potential novel treatment for influenza A infection that our collaborator advanced into pivotal development in late 2017. We continue to apply the lessons we have learned in CF about the importance of validated targets, predictive biomarkers, and efficient regulatory pathways to guide our research efforts as we develop additional drug candidates for serious diseases such as beta-thalassemia and sickle cell disease using CRISPR/Cas9 gene editing technology and alpha-1 anti-trypsin deficiency and polycystic kidney disease using other innovative approaches.

 

We are proud of the evolution of Vertex over the last several years and are excited about future opportunities to develop additional transformative medicines that could profoundly affect the lives of patients suffering from serious diseases. As we enter 2018, we are now a financially strong global biotechnology company well positioned to continue to grow revenues and deliver expanding operating margins, while investing in research and development to maintain and strengthen our position as one of the most innovative companies in the industry. We thank you for continuing to support us on this important journey.

 

Sincerely,

 

 

 

Jeffrey M. Leiden, M.D., Ph.D.

Chairman, Chief Executive Officer and President

 

 

 

Notice of Annual Meeting of Shareholders

 

Thursday, May 17, 2018

9:30 a.m.

50 Northern Avenue
Boston, Massachusetts 02210

 

Dear Shareholders:

 

You are invited to attend Vertex Pharmaceuticals Incorporated’s 2018 Annual Meeting of Shareholders. At the meeting, shareholders will vote:

 

  to elect the three director nominees that are set forth in the attached proxy statement to one year terms expiring in 2019;
     
  to approve amendments to our Restated Articles of Organization and Amended and Restated By-laws that eliminate supermajority provisions;
     
  to approve an amendment and restatement of our 2013 Stock and Option Plan, that, among other things, increases the number of shares authorized for issuance under this plan by 8.0 million shares;
     
  to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm for 2018;
     
  to approve our named executive officers’ compensation in an advisory vote; and
     
  on two proposals submitted by our shareholders, if properly presented at the meeting.

 

Shareholders also will transact any other business that may properly come before the annual meeting or any adjournment or postponement of the annual meeting.

 

RECORD DATE:

 

You can vote if you were a shareholder of record on March 29, 2018.

 

Your vote matters. Whether or not you plan to attend the annual meeting, please ensure that your shares are represented by voting, signing, dating and returning your proxy in the enclosed envelope, which requires no postage if mailed in the United States.

 

April 17 , 2018

 

By Order of the Board of Directors

 

 

 

Michael J. LaCascia

Secretary

 

  IMPORTANT NOTICE REGARDING AVAILABILITY OF PROXY MATERIALS. This proxy statement and the enclosed proxy card are first being mailed or furnished to our shareholders on or about April 18 , 2018. This proxy statement and our Annual Report on Form 10-K for the year ended December 31, 2017 are available to holders of record of our common stock at www.envisionreports.com/vrtx and to beneficial holders of our common stock at www.edocumentview.com/vrtx.

 

SUMMARY INFORMATION

 

By any measure, 2017 was a remarkable year for Vertex as we continue to execute on our strategy of investing in scientific innovation to create transformative medicines for people with serious diseases. With near-30 percent growth in cystic fibrosis (CF) revenues and disciplined management of our operating expenses, we have established a foundation of financial strength to fuel our innovation engine and growth for the future. In CF, we continue to develop new and better medicines to treat more people with this devastating disease, and, with the announcement of the start of our triple combination regimen trials, we are more confident than ever that we will be able to treat up to 90 percent of people with CF in the near future. Outside of CF, we have made significant progress in advancing our research and development efforts in other serious diseases, including pain, alpha-1 anti-trypsin deficiency and, with our partner CRISPR, sickle cell disease. With these advances, we have enhanced our proven track record of serially innovating for patients waiting for new therapies. As we enter 2018, we are financially strong and well positioned to grow revenues, deliver expanding operating margins, and deliver long-term shareholder value.

 

Financial Performance

 

Our CF medicines, KALYDECO, ORKAMBI and SYMDEKO, which took more than 15 years to discover and develop, are now transforming the lives of eligible patients around the globe and driving our financial performance. In 2017, we increased our revenues, managed our operating expenses and established sustainable profitability on a GAAP and Non-GAAP basis for the first time.

 

We exceeded our CF net product revenue guidance by $265 million, or 14% ($2.17 billion as compared to the mid-point of our initial guidance of $1.9 billion)
   
Our CF net product revenues increased to $2.17 billion, up 29% as compared to 2016, and we are positioned to further increase CF net product revenues by an additional 25% in 2018
   
We increased our net cash position by approximately $950 million, or 84%, to approximately $2.1 billion, and we expect to continue generating substantial cash flows in 2018
   
We went from a GAAP net loss of $112 million in 2016 to GAAP net income of $263 million in 2017
   
Our non-GAAP net income increased to $495 million, up $283 million, or 134%, from 2016, driven by our increased net product revenues (a reconciliation of non-GAAP net income is provided in Appendix D)

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    5

 

CF Pipeline

 

Advances in our pipeline and our strategic execution have moved us closer to our goal of delivering highly-effective treatments to all patients with CF. In January 2012, KALYDECO was first approved to treat approximately 1,000 patients with the G551D mutation. Since then, we have followed a focused strategy of developing new medicines for CF and expanding the number of patients eligible for our medicines, and today 34,000 patients around the world are eligible to receive one of our approved CF medicines.

 

 

Since the beginning of 2017, we:

 

Obtained positive Phase 3 data for SYMDEKO (tezacaftor in combination with ivacaftor) in early 2017
   
Achieved approval for SYMDEKO in the United States in February 2018
   
Applied for European regulatory approval of tezacaftor in combination with ivacaftor in July 2017 with approval expected in the second half of 2018
   
Obtained authorization to market ORKAMBI in the European Union for patients 6-11 in January 2018
   
Received approvals to market KALYDECO for approximately 1,500 additional CF patients in the United States with residual function mutations in 2017
   
Obtained positive Phase 3 data for KALYDECO for patients 1 to 2 years of age in December 2017
   
Obtained highly-positive Phase 2 data for four triple combination regimens, each of which contained different next-generation correctors in combination with tezacaftor and ivacaftor, from mid-2017 through early 2018
   
Accelerated initiation of the Phase 3 development program for VX-659 in combination with tezacaftor and ivacaftor, which started in February 2018
   
Positioned ourselves to initiate a Phase 3 clinical development program for VX-445 in a triple combination regimen in mid-2018

 

 

 

With the start of our triple combination regimen Phase 3 clinical trials, we believe we are well-positioned to treat up to 90% of CF patients with medicines that target the underlying cause of their disease.

 

VERTEX PHARMACEUTICALS INCORPORATED 2018 Proxy Statement    6

 

Non-CF Pipeline

 

Over the last decade, we have demonstrated an ability to serially discover and develop multiple groundbreaking medicines in different diseases. In 2017, we and our collaborators continued our serial innovation, advancing promising non-CF programs for important diseases, including pain, sickle cell disease, alpha-1 anti-trypsin deficiency, polycystic kidney disease and influenza. Specifically, since the beginning of 2017, we have:

 

Obtained the first clinical proof-of-concept from a Phase 2 clinical trial evaluating a selective NaV1.8 inhibitor as a potential treatment for chronic pain in January 2017 (VX-150 is our lead non-opioid NaV1.8 inhibitor)
   
Obtained clinical proof-of-concept from a second Phase 2 clinical trial of VX-150 as a potential treatment for acute pain in February 2018
   
Initiated a Phase 1 clinical trial of VX-128, a second non-opioid sodium channel inhibitor, in December 2017
   
Executed a co-development and co-commercialization agreement with CRISPR Therapeutics AG for beta-thalassemia and sickle cell disease
   
Advanced through pre-clinical development CTX001 for beta-thalassemia and sickle cell disease pursuant to our collaboration with CRISPR Therapeutics AG. We expect to initiate Phase 1/2 clinical trials in 2018 to evaluate CTX001, which will be the first, or one of the first, clinical trials to evaluate a potential CRISPR/Cas9 drug candidate.
   
Advanced our research program for alpha-1 anti-trypsin deficiency into late-stage pre-clinical development
   
Janssen Pharmaceuticals, our collaborator, initiated Phase 3 development of pimodivir as a potential treatment for influenza
   
Successfully outlicensed our oncology programs to Merck KGaA, Darmstadt, Germany

 

 

 

Increased Shareholder Value

 

Driven by our exceptional financial performance and our pipeline success in 2017:

 

Our stock price increased by more than 100% from $73.67 per share to $149.86 per share
   
We were the third best performing stock among the approximately 500 mid- and large-cap companies that make up the S&P 500 index

 

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    7

 

Although our performance in 2017 was remarkable, biotechnology companies are best measured over the longer-term, as opposed to in one-year increments. As result of executing on a clear and focused vision that balanced short-term and long-term goals, we have taken Vertex from a market capitalization of less than $10 billion in early 2012 to over $40 billion in early 2018, creating significant value for our shareholders.

 

The following chart shows our total shareholder return during the 1-year, 3-year and 5-year periods ending December 31, 2017 compared to the following members of our peer group: Alexion, Regeneron, Biomarin, Gilead, Celgene and Biogen. These peers are the companies we consider most similar to our company based on their business models (see page 54).

 

 

The following chart shows our total shareholder return from the beginning of 2012 when KALYDECO was first approved through February 2018.

 

 

2017 Compensation Decisions and Pay-for Performance

 

Our board of directors and management development and compensation committee, or MDCC, reviewed our compensation programs and made the following key decisions:

 

We maintained the same compensation program design that we implemented in 2016, which we believe closely ties pay with performance and has contributed to our short- and long-term successes
   

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    8

 
The company’s exceptional performance in 2017, as described above, resulted in a leading rating (a company rating of 148 out of a potential 150) for 2017 and annual cash bonuses near the high end of the range for 2017, commensurate with this performance
   
Our CEO’s salary has been unchanged at $1.3 million since 2014 and is aligned with the median CEO pay of our peer companies
   
We continued our utilization of a mix of equity that consists of performance stock units that vest solely upon achievement of rigorous performance goals, stock options that only have value if our stock price appreciates and time-vesting restricted stock units that reward stock price appreciation but also serve as a retention tool

 

Corporate Responsibility

 

Giving and Access. Giving is in our DNA here at Vertex. In 2017, we made a 10-year, $500 million corporate giving commitment that extended and expanded our existing programs focused on four areas:
   
  supporting patients
     
  promoting science, technology, engineering, arts and math (STEAM) education
     
  developing young physicians and scientists
     
  strengthening our local communities
     
Diversity and Inclusion. Our commitment to diversity and inclusion on our board and in our workforce is ingrained in our culture. Four of our nine directors are diverse on a gender and/or ethnic basis, and 63% of our critical hires at the vice president or above level were diverse on a gender/ethnic basis in 2017.
   
Sustainability. We are committed to sustainability. Our facilities are designed to limit our environmental impact, and we encourage our employees to operate and commute in a sustainable manner through benefit programs and operational initiatives that have resulted in approximately 50% of our employees in Boston commuting using public transportation.

 

Shareholder Engagement

 

In 2017, we received support from 83% of our shareholders on our say-on-pay proposal, and we believe all of our ten largest shareholders supported this proposal. We believe this support is consistent with our long-term shareholders’ understanding of our business model and the long-term value we are creating. We plan on continuing a high level of engagement with our shareholders regarding executive compensation and other matters important to our shareholders. In 2017, we held discussions regarding executive compensation and other matters with shareholders representing approximately 75% of our outstanding stock.

 

Corporate Governance Highlights

 

We are committed to maintaining strong corporate governance practices that promote the long-term interests of our shareholders and strengthen board and management accountability.

 

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    9

 

In addition, in February 2018, our board of directors approved, subject to shareholder approval, an amendment to our Restated Articles of Organization and an amendment and restatement of our By-Laws, which will result in the removal of the voting requirements in our charter and by-laws that call for greater than a simple majority vote.

 

This proposed amendment to our Restated Articles of Organization and the amendment and restatement of our By-Laws will be voted on at the 2018 annual shareholders meeting and are in response to the results of a shareholder proposal at our 2017 annual meeting.

 

Voting Matters    
         
Item 1:       FOR
Election of Directors for One Year Term Expiring in 2019   all Nominees
         
Item 2:       FOR
Approval of Amendments to Charter and By-laws    
         
Item 3:       FOR
Approval of Amendment and Restatement of 2013 Stock and Option Plan    
         
Item 4:       FOR
Ratify Selection of Independent Auditor for 2018    
         
Item 5:       FOR
Approve, on an Advisory Basis, Our Named Executive Officer Compensation    
         
Item 6:       AGAINST
Shareholder Proposal Regarding Report on Drug Pricing    
         
Item 7:       AGAINST
Shareholder Proposal Regarding Lobbying Report    

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    10

 

Table of Contents

 

FREQUENTLY ASKED QUESTIONS REGARDING THE ANNUAL MEETING 13
   
ITEM 1: ELECTION OF DIRECTORS 16
   
Board Structure and Composition 16
Shareholder-Recommended Director Candidates 17
Majority Vote Standard 18
Director Nominees 19
Continuing Directors 20
   
CORPORATE GOVERNANCE AND RISK MANAGEMENT 23
   
Independence, Chair and Co-Lead Independent Directors 23
Board Committees 23
Risk Management 23
Code of Conduct 24
Board Attendance, Committee Meetings and Committee Membership 24
Public Policy and Engagement 26
   
DIRECTOR COMPENSATION 27
   
Non-Employee Director Compensation Program 27
Non-Employee Director Stock Ownership Guidelines 28
   
CORPORATE RESPONSIBILITY AND SUSTAINABILITY 29
   
Giving and Access 29
Diversity and Inclusion 30
Sustainability 30
   
ITEM 2: AMENDMENTS TO OUR CHARTER AND BY-LAWS 31
   
ITEM 3: AMENDMENT AND RESTATEMENT OF 2013 STOCK AND OPTION PLAN 32
   
Summary of the Amended and Restated 2013 Stock and Option Plan 33
Equity Compensation Plan Information 37
   
ITEM 4: RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 38
   
AUDIT AND FINANCE COMMITTEE REPORT 40
   
ITEM 5: ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION 41
   
ITEM 6: SHAREHOLDER PROPOSAL REGARDING REPORT ON DRUG PRICING 42
   
ITEM 7:    SHAREHOLDER PROPOSAL REGARDING LOBBYING 44
     
COMPENSATION DISCUSSION AND ANALYSIS 45

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    11

 
Letter from MDCC to Shareholders 45
Executive Summary 46
Detailed Discussion and Analysis 52
   
MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE REPORT 67
   
COMPENSATION AND EQUITY TABLES 68
   
Summary Compensation Table 68
CEO Pay Ratio 69
Option Exercises and Stock Vested for 2017 70
Grants of Plan-Based Awards During 2017 71
Outstanding Equity Awards at Fiscal Year-End for 2017 72
   
SUMMARY OF TERMINATION AND CHANGE OF CONTROL BENEFITS 75
   
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS 77
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 81
   
OTHER INFORMATION 83
   
Other Matters 83
Shareholder Proposals for the 2019 Annual Meeting and Nominations for Director 83
Shareholder Communications to the Board 83
Householding of Annual Meeting Materials 84
Solicitation 84
Availability of Materials 84
Forward Looking Statements 84
   
APPENDIX A    AMENDMENT TO RESTATED ARTICLES OF ORGANIZATION 85
   
APPENDIX B AMENDED AND RESTATED BY-LAWS OF VERTEX PHARMACEUTICALS INCORPORATED 87
   
APPENDIX C AMENDED AND RESTATED 2013 STOCK AND OPTION PLAN 96
   
APPENDIX D NON-GAAP FINANCIAL MEASURES 106

 

PROXY STATEMENT

 

This proxy statement, with the enclosed proxy card, is being furnished to shareholders of Vertex Pharmaceuticals Incorporated in connection with the solicitation by our board of directors of proxies to be voted at our 2018 annual meeting of shareholders and at any postponements or adjournments thereof. The annual meeting will be held on Thursday, May 17, 2018, at 9:30 a.m. at our headquarters, which are located at 50 Northern Avenue, Boston, Massachusetts.

 

This proxy statement and the enclosed proxy card are first being mailed or otherwise furnished to our shareholders on or about April 18 , 2018. Our 2017 Annual Report on Form 10-K and other materials regarding our company are being mailed to the shareholders with this proxy statement, but are not part of this proxy statement.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    12

 

FREQUENTLY ASKED QUESTIONS REGARDING THE ANNUAL MEETING

 

What is the Purpose of the Annual Meeting?

 

At the annual meeting, shareholders will act upon the matters outlined in the Notice of Annual Meeting of Shareholders. These include:

 

The election of directors;
   
The approval of amendments to our charter and by-laws to eliminate supermajority provisions;
   
The approval of the amendment and restatement of our 2013 Stock and Option Plan to, among other things, increase the number of shares available under the plan by 8.0 million shares;
   
The ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm;
   
The approval, on an advisory basis, of the compensation program for our named executive officers;
   
A shareholder proposal requesting that we prepare a report on the risks to us of rising drug prices; and
   
A shareholder proposal requesting that we prepare a report on our policies and activities with respect to lobbying.

 

Management, members of our board and representatives of Ernst & Young LLP are expected to attend the annual meeting and be available to respond to questions from shareholders.

 

What is a Proxy?

 

It is your legal designation of another person to vote the stock you own in the manner you direct. That other person is called a proxy. If you designate someone as your proxy in a written document, that document also is called a proxy or a proxy card. The board of directors has designated Jeffrey M. Leiden, Ian F. Smith, Michael Parini and Michael J. LaCascia to serve as proxies at the annual meeting.

 

What is a Proxy Statement?

 

It is a document that provides certain information about a company and matters to be voted upon at a meeting of shareholders. The rules of the SEC and other applicable laws require us to give you, as a shareholder, the information in this proxy statement and certain other information when we are soliciting your vote.

 

What is the Difference between a Shareholder of Record and a Shareholder Who Holds Stock in Street Name?

 

Shareholders of Record. If your shares are registered in your name with our transfer agent, Computershare, you are a shareholder of record with respect to those shares, and these proxy materials were sent directly to you by Computershare.

 

Street Name Holders. If you hold your shares in an account at a bank or broker, then you are the beneficial owner of shares held in “street name.” The proxy materials were forwarded to you by your bank or broker, who is considered the shareholder of record for purposes of voting at the annual meeting. As a beneficial owner, you have the right to direct your bank or broker how to vote the shares held in your account.

 

How Many Shares Must be Represented in Order to Hold the Annual Meeting?

 

In order for us to conduct the annual meeting, holders of a majority of the shares entitled to vote as of the close of business on the record date must be present in person or by proxy. This constitutes a quorum. If you are a shareholder of record, your shares are counted as present if you properly return a proxy card or voting instruction form by mail or if you attend the annual meeting and vote in person. If you are the beneficial owner of shares held in “street name,” you must follow the instructions of your bank or broker in order to direct them how to vote the shares held in your account. Abstentions and broker non-votes will be counted as present for purposes of establishing a quorum. If a quorum is not present, we will adjourn the annual meeting until a quorum is obtained.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    13

 

How Can I Vote at the Annual Meeting if I Own Shares in Street Name?

 

If you are a street name holder, you may not vote your shares at the annual meeting unless you obtain a legal proxy from your bank or broker. A legal proxy is a bank’s or broker’s authorization for you to vote the shares it holds in its name on your behalf.

 

What is the Record Date and What Does it Mean?

 

The record date for the annual meeting is March 29, 2018 and was established by our board of directors. On the record date, there were 254,879,018 shares of our common stock outstanding, each of which is entitled to one vote on each matter properly brought before the annual meeting. Owners of record of common stock at the close of business on the record date are entitled to:

 

receive notice of the annual meeting; and
   
vote at the annual meeting and any adjournment or postponement of the annual meeting.

 

If I Submit a Proxy, May I Later Revoke it and/or Change my Vote?

 

Shareholders may revoke a proxy and/or change their vote prior to the completion of voting at the annual meeting by:

 

signing another proxy card with a later date and delivering it to our Secretary, Michael J. LaCascia, at 50 Northern Avenue, Boston, Massachusetts 02210, before the annual meeting; or
   
voting at the annual meeting, if you are a shareholder of record or hold your shares in street name and have obtained a legal proxy from your bank or broker.

 

What if I do not Specify a Choice for a Matter when Returning a Proxy?

 

Shareholders should specify their choice for each matter following the directions described on their proxy card. If no specific instructions are given, proxies that are signed and returned will be voted:

 

FOR the election of all director nominees;
   
FOR the amendments to our charter and by-laws to eliminate supermajority provisions;
   
FOR the amendment and restatement of our 2013 Stock and Option plan to, among other things, increase the number of shares available for issuance by 8.0 million shares;
   
FOR ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2018;
   
FOR our compensation program for our named executive officers;
   
AGAINST the shareholder proposal requesting that we prepare a report on the risks to us of rising drug prices; and
   
AGAINST the shareholder proposal requesting that we prepare a report on our policies and activities with respect to lobbying.

 

Are My Shares Voted if I do not Provide a Proxy?

 

If you are a shareholder of record and do not provide a proxy, you must attend the annual meeting in order to vote. If you hold shares through an account with a bank or broker, your shares may be voted by the bank or broker if you do not provide voting instructions. Banks and brokers have the authority under applicable rules to vote shares on routine matters for which their customers do not provide voting instructions. The ratification of Ernst & Young LLP as our independent registered public accounting firm is considered a routine matter. Each of the other proposals, including the election of directors, the approval of the amendments to our charter and by-laws, the approval of the amendment and restatement of our 2013 Stock and Option Plan, the advisory vote with respect to our executive compensation program and the two shareholder proposals are not considered routine, and banks and brokers cannot vote shares without instruction on those matters. Shares that banks and brokers are not authorized to vote on those matters are counted as “broker non-votes” and will have no effect on the results of those votes (other than for Item 2, where “broker non-votes” will have the same effect as votes against the proposal).

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    14

 

What Vote is Required to Approve Each Proposal and How are Votes Counted?

 

Item 1: Election of Directors

 

To be elected, the number of votes cast “FOR” a director nominee in an uncontested election must exceed the number of votes cast “AGAINST” that nominee. Abstentions are not counted for purposes of electing directors. Our Corporate Governance Principles contain procedures to be followed in the event that one or more directors do not receive a majority of the votes cast “FOR” his or her election.

 

Item 2: Approval of the Amendments to our Restated Articles of Organization and By-laws

 

To be approved, this proposal must receive an affirmative vote from shareholders present in person or represented by proxy at the annual meeting representing at least 80% of our outstanding shares of common stock as of the record date. Abstentions and broker non-votes will have the same effect on the result of this vote as votes against the proposal.

 

Item 3: Approval of the Amendment and Restatement of our 2013 Stock and Option Plan

 

To be approved, this proposal must receive an affirmative vote from shareholders present in person or represented by proxy at the annual meeting representing a majority of the votes cast on the proposal. Abstentions will have no effect on the results of this vote.

 

Item 4: Ratification of the Appointment of Independent Registered Public Accounting Firm

 

To be approved, this proposal must receive an affirmative vote from shareholders present in person or represented by proxy at the annual meeting representing a majority of the votes cast on the proposal. Abstentions will have no effect on the results of this vote.

 

Item 5: Advisory Vote to Approve Named Executive Officer Compensation

 

To be approved, this proposal must receive an affirmative vote from shareholders present in person or represented by proxy at the annual meeting representing a majority of the votes cast on the proposal. Abstentions will have no effect on the results of this vote.

 

Item 6: Shareholder Proposal Requesting that we Prepare a Report on the Risks to us of Rising Drug Prices

 

To be approved, this proposal must receive an affirmative vote from shareholders present in person or represented by proxy at the annual meeting representing a majority of the votes cast on the proposal. Abstentions will have no effect on the results of this vote.

 

Item 7: Shareholder Proposal Requesting that we Prepare a Report on our Policies and Activities With Respect to Lobbying

 

To be approved, this proposal must receive an affirmative vote from shareholders present in person or represented by proxy at the annual meeting representing a majority of the votes cast on the proposal. Abstentions will have no effect on the results of this vote.

 

Where Can I Find More Information About My Voting Rights as a Shareholder?

 

The SEC has an informational website that provides shareholders with general information about how to cast their vote and why voting should be an important consideration for shareholders. You may access that website at sec.gov/spotlight/proxymatters.shtml.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    15

 
Item 1 Election of Directors

 

Our board of directors has nominated Sangeeta N. Bhatia, Jeffrey M. Leiden, and Bruce I. Sachs for election at our 2018 annual meeting of shareholders to hold office until our 2019 annual meeting of shareholders.

 

Our board of directors is our company’s ultimate decision-making body, except with respect to those matters reserved to the shareholders. Our board selects our senior management team, which in turn is responsible for the day-to-day operations of our company. Our board acts as an advisor and counselor to senior management and oversees its performance.

 

In 2017, we amended our charter and by-laws to phase out our staggered board. Our board currently consists of directors divided into three classes, with terms ending at the 2018, 2019 and 2020 annual meeting of shareholders, respectively. The amendments provide that each class of our directors will continue through their current terms; however, commencing with this year’s annual meeting of shareholders, each director nominee will stand for election or re-election, as applicable, for a one year term. Sangeeta N. Bhatia, Jeffrey M. Leiden, and Bruce I. Sachs, our current Class II Directors, have been nominated by our board for election at the 2018 annual meeting of shareholders for one-year terms that will expire at the 2019 annual meeting of shareholders. Each of the nominees has agreed to be named in this proxy statement and to serve if elected. We believe that all of the nominees will be able and willing to serve if elected. However, if any nominee should become unable for any reason or unwilling to serve, proxies may be voted for another person nominated as a substitute by our board, or our board may reduce the number of directors.

 

Board Structure and Composition

 

The corporate governance and nominating committee of our board of directors is responsible for recommending the composition and structure of our board and for developing criteria for board membership. This committee regularly reviews director competencies, qualities and experiences, with the goal of ensuring that our board is comprised of a team of directors who function collegially and effectively and who are able to apply their experience toward meaningful contributions to general corporate strategy and oversight of corporate performance, risk management, organizational development and succession planning.

 

Our by-laws provide that the size of our board may range between three and eleven members. We currently have nine members on our board. Our corporate governance and nominating committee may seek additional director candidates who meet the criteria below in order to complement the qualifications and experience of our existing board members. Our corporate governance and nominating committee may engage a search firm to recommend candidates who satisfy the criteria.

 

Director Criteria, Qualifications and Experience; Diversity

 

The corporate governance and nominating committee seeks to recommend for nomination directors of stature who have a substantive knowledge of our business and industry or who can bring to the board specific and valuable strategic or management capabilities acquired in other industries. The committee expects each of our directors to have proven leadership, sound judgment, integrity and a commitment to the success of our company. We also seek personal qualities that foster a respectful environment in which our directors listen to one another and are engaged and constructive. These goals for our board composition presuppose a diverse range of viewpoints, experiences and specific expertise. The corporate governance and nominating committee considers a nominee’s personal characteristics and business experience relative to those of our existing board members, including the type of prior management experience, levels of expertise relevant to our business and its growth stage, prior board service, reputation in the business community, personal characteristics such as gender and race and other factors that the committee believes to be important. When considering whether or not to re-nominate a director for board service, the corporate governance and nominating committee also considers whether the potential nominee has served as a member of the board for more than 20 years and whether the potential nominee is over 72 years of age. At this time, our commitment to diversity is demonstrated by the composition of our board, which includes three women and two ethnically diverse individuals.

 

The key experience, qualifications, attributes and skills brought by our directors to our board that are important to our business include:

 

Leadership Experience. We believe that directors who have held significant leadership positions over extended periods of time provide our company with special insights. These directors generally have a practical understanding of organizational processes and strategy that is valuable during periods of organizational change and growth.
   
Industry Knowledge. We seek directors with substantive knowledge of the healthcare and biotechnology industries to successfully advise and oversee the strategic development and direction of our company.
   
Financial Expertise. We believe that an understanding of finance is important for members of our board, and our budgeting processes and financial and strategic transactions require our directors to be financially knowledgeable.
   
International Perspective. We have significant operations outside the United States and value directors with experience in the operation of complex multinational organizations.
   
Public Policy and Regulation. We operate in a highly-regulated industry and seek directors who have experience in public policy and the regulation of medicines.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    16

 
Academic Experience or Technological Background. As a biotechnology company that seeks to develop transformative medicines for patients with serious diseases, we look for directors with backgrounds in academia, science and technology and, in particular, the research and development of pharmaceutical products.
   
Commitment to Company Values and Goals. We seek directors who are committed to our company and its values and goals and who value the contributions that can be provided by individuals who believe in our company and its prospects for success.

 

Specifically, our continuing directors and our director nominees have the following background and experience:

 

    Leadership   Industry
Knowledge
  Finance
Expertise
  International
Perspective
  Public Policy/
Regulation
  Academia/
Technology
  Values
Sangeeta Bhatia                    
Alan Garber                
Terrence C. Kearney                    
Yuchun Lee                  
Jeffrey M. Leiden              
Margaret G. McGlynn                
Bruce I. Sachs                  
Elaine S. Ullian                  
William D. Young                

 

Below we highlight the composition of our continuing directors and our director nominees.

 

 

Shareholder-Recommended Director Candidates

 

The corporate governance and nominating committee will consider director candidates recommended by shareholders using the same criteria for director selection described above under Director Criteria, Qualifications and Experience; Diversity. Shareholders recommending candidates for consideration should submit any pertinent information regarding the candidate, including biographical information and a statement by the proposed candidate that he or she is willing to serve if nominated and elected, by mail to our corporate secretary at our offices at 50 Northern Avenue, Boston, Massachusetts 02210. If a shareholder wishes to nominate a candidate to be considered for election as a director at the 2019 annual meeting of shareholders using the procedures set forth in our by-laws, the shareholder must follow the procedures described in Other Information—Shareholder Proposals for the 2019 Annual Meeting and Nominations for Director on page 83 of this proxy statement.

 

Our by-laws provide for proxy access, a process that allows qualifying shareholders to nominate a director candidate for consideration at an annual meeting of shareholders and have such candidate be included in our proxy materials for the applicable shareholder meeting. The key elements of our proxy access by-law are as follows:

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    17

 
Provision   Requirement
Ownership Threshold and Holding Period   Available to shareholders owning 3% or more of our shares continuously for at least 3 years.
Number of Board Seats   Total number of proxy access nominees is capped at 20% of the existing board seats (or the closest whole number below 20%), with a minimum of two.
Aggregation Limits   20-shareholder limit on the number of shareholders who can aggregate their shares to satisfy the 3% ownership requirement.
Proxy Fights   Proxy access nominees will not be included in the proxy materials if we receive notice that a shareholder intends to nominate a candidate who is not to be included in our proxy materials.
Future Ineligibility   Proxy access nominees who fail to receive at least 10% of the votes cast “for” such nominee may not be re-nominated as a proxy access nominee for the next two annual meetings.

 

The above table is only a summary of our proxy access by-law and is qualified in its entirety by our by-laws, which is set forth in Exhibit 3.1 of a Quarterly Report that we filed with the SEC on July 28, 2017. A shareholder who wishes to nominate a proxy access nominee to be considered for election as a director at the 2019 annual meeting of shareholders must follow the procedures set forth in our by-laws as well as those described in Other Information—Shareholder Proposals for the 2019 Annual Meeting and Nominations for Director on page 83 of this proxy statement.

 

Majority Vote Standard

 

Our by-laws provide for a majority vote standard for uncontested elections of our directors. Under our by-laws, director nominees in an uncontested election who receive more votes cast “for” such director nominee than “against” such director nominee are elected. Our board’s policy is that any nominee for director in an uncontested election who receives a greater number of votes “against” than votes “for” the nominee’s election shall promptly tender his or her resignation to the chair of our board following certification of the shareholder vote. Our corporate governance and nominating committee will promptly consider the tendered resignation. Based on all factors it deems in its discretion to be relevant, the committee will recommend that our board either accept or reject the resignation and may recommend that the board adopt measures designed to address any issues perceived to underlie the election results. Our board will then act on the corporate governance and nominating committee’s recommendation. We will promptly disclose our board’s decision, including, if applicable, the reasons for rejecting the tendered resignation. Any director whose resignation is being considered under this policy will not participate in the corporate governance and nominating committee or board considerations, recommendations or actions with respect to the tendered resignation.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    18

 

Director Nominees

 

Class II Directors— Present Terms Expiring in 2018 and Proposed Terms to Expire in 2019

 

Sangeeta N. Bhatia, M.D., Ph.D.  
   
Age: 49 Committee Assignments:
Director Since: 2015   Chair – Science and Technology Committee
    Member – Corporate Governance and Nominating Committee

 

Dr. Bhatia is a professor at the Massachusetts Institute of Technology, where she currently serves as the John J. and Dorothy Wilson Professor of Health Sciences & Technology/Electrical Engineering & Computer Science. Prior to joining the Massachusetts Institute of Technology in 2005, Dr. Bhatia was a professor of bioengineering and medicine at the University of California at San Diego from 1998 through 2005. Dr. Bhatia also is an investigator for the Howard Hughes Medical Institute, a member of the Department of Medicine at Brigham and Women’s Hospital, a member of the Broad Institute and a member of the Koch Institute for Integrative Cancer Research. Dr. Bhatia holds an Sc.B. in biomedical engineering from Brown University, an S.M. and Ph.D. in Mechanical Engineering from the Massachusetts Institute of Technology and an M.D. from Harvard Medical School.

 

Skills and Qualifications: Dr. Bhatia is a leading academic scientist and medical researcher. Her extensive experience in the field of biomedical engineering and in-depth understanding on the use of advanced technologies in medical research provides valuable insights to our board of directors, including with respect to our key research and development initiatives.

 

Jeffrey M. Leiden, M.D., Ph.D.  
   
Age: 62 Committee Assignments:
Director Since: 2009   Chairman, Chief Executive Officer and President

 

Dr. Leiden is our Chairman, Chief Executive Officer and President. He has held the positions of Chief Executive Officer and President since February 2012 after joining us as CEO Designee in December 2011. He has been a member of our Board of Directors since July 2009, the Chairman of our Board of Directors since May 2012, and served as our lead independent director from October 2010 through December 2011. Dr. Leiden was a Managing Director at Clarus Ventures, a life sciences venture capital firm, from 2006 through January 2012. Dr. Leiden was President and Chief Operating Officer of Abbott Laboratories, Pharmaceuticals Products Group, and a member of the Board of Directors of Abbott Laboratories from 2001 to 2006. From 1987 to 2000, Dr. Leiden held several academic appointments, including the Rawson Professor of Medicine and Pathology and Chief of Cardiology and Director of the Cardiovascular Research Institute at the University of Chicago, the Elkan R. Blout Professor of Biological Sciences at the Harvard School of Public Health, and Professor of Medicine at Harvard Medical School. He is an elected member of both the American Academy of Arts and Sciences and the Institute of Medicine of the National Academy of Sciences. Dr. Leiden is a senior advisor to Clarus Ventures. Dr. Leiden serves as a director of Quest Diagnostics Inc., a medical diagnostics company, and Massachusetts Mutual Life Insurance Company, a mutual insurance company. Dr. Leiden was a director and the non-executive Vice Chairman of the board of Shire plc, a specialty biopharmaceutical company, from 2006 to January 2012. Dr. Leiden received his M.D., Ph.D. and B.A. degrees from the University of Chicago.

 

Skills and Qualifications: Dr. Leiden possesses strong leadership qualities, demonstrated through his service as a senior executive in the pharmaceutical industry and as a life sciences venture capitalist, and has extensive knowledge of the science underlying drug discovery and development through his experiences as a distinguished physician, scientist and teacher. As our CEO and as a former senior executive at Abbott Laboratories he brings a global perspective to our business and public policy issues facing our company. He also provides our board of directors with in-depth knowledge of our company through the day-to-day leadership of our executives.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    19

 
Bruce I. Sachs  
   
Age: 58 Committee Assignments:
Director Since: 1998   Chair – Management Development and Compensation Committee
Co-lead Independent Director   Member – Audit and Finance Committee

 

Mr. Sachs is a General Partner at Charles River Ventures, a venture capital firm he joined in 1999. From 1998 to 1999, he served as Executive Vice President and General Manager of Ascend Communications, Inc. From 1997 until 1998, Mr. Sachs served as President and Chief Executive Officer of Stratus Computer, Inc. From 1995 to 1997, he served as Executive Vice President and General Manager of the Internet Telecom Business Group at Bay Networks, Inc. From 1993 to 1995, he served as President and Chief Executive Officer of Xylogics, Inc. Mr. Sachs holds a B.S.E.E. in electrical engineering from Bucknell University, an M.E.E. in electrical engineering from Cornell University, and an M.B.A. from Northeastern University.

 

Skills and Qualifications: Mr. Sachs brings strong business judgment honed through his experience developing business strategy as a senior executive and in venture capital, to our board of directors. Mr. Sachs has a deep understanding of our business and the global business environment along with expertise in the technology that supports our infrastructure and operations. In addition, Mr. Sachs has extensive business leadership experience, including service as a CEO at a technology company, as well as financial expertise.

 

Board Recommendation

 

In each of the director nominee and continuing director biographies, we highlight the specific experience, qualifications, attributes, and skills that led the board of directors to conclude that the director nominee or continuing director should serve on our board at this time.

 

Our board of directors recommends that shareholders vote FOR each of the nominees.

 

Continuing Directors

 

Class III Directors — Terms to Expire in 2019

 

Terrence C. Kearney  
   
Age: 63 Committee Assignments:
Director Since: 2011   Chair – Audit and Finance Committee
    Member – Management Development and Compensation Committee

 

Mr. Kearney served as the Chief Operating Officer of Hospira, Inc., a specialty pharmaceutical and medication delivery company, from April 2006 to January 2011. From April 2004 to April 2006, he served as Hospira’s Senior Vice President, Finance, and Chief Financial Officer, and he served as Acting Chief Financial Officer through August 2006. Mr. Kearney served as Vice President and Treasurer of Abbott Laboratories from 2001 to April 2004. From 1996 to 2001, Mr. Kearney was Divisional Vice President and Controller for Abbott’s International Division. Mr. Kearney serves as a member of the Board of Directors at Acceleron Pharma Inc., a biopharmaceutical company, and AveXis, Inc., a gene therapy company, and served as a member of the Board of Directors at Innoviva, Inc. (formerly known as Theravance, Inc.), a royalty management company, until April 2016. He received his B.S. in biology from the University of Illinois and his M.B.A. from the University of Denver.

 

Skills and Qualifications: Mr. Kearney’s corporate leadership experience, industry knowledge and financial expertise make him a valuable contributor to our board of directors. He has a practical perspective on the management of global pharmaceutical operations, including commercial, manufacturing and research and development activities, and financial management strategies. He is an “audit committee financial expert” with particular experience in matters faced by the audit committee of a company with pharmaceutical product revenues and related expenses.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    20

 
Yuchun Lee  
   
Age: 52 Committee Assignments:
Director Since: 2012   Member – Audit and Finance Committee
    Member – Science and Technology Committee

 

Mr. Lee is an Executive in Residence (XIR) and Partner of General Catalyst Partners, a venture capital firm, which he joined in April of 2013. Mr. Lee also serves as the Chief Executive Officer of Allego Inc. and Executive Chairman of Clarabridge. Mr. Lee was the Vice President of IBM’s Enterprise Marketing Management Group from November 2010 through January 2013. Mr. Lee co-founded Unica Corporation, a provider of software and services used to automate marketing processes, in 1992, and was Unica’s President and/or Chief Executive Officer from 1992 through November 2010, when Unica was acquired by IBM. From 1989 to 1992, Mr. Lee was a senior consultant at Digital Equipment Corporation, a supplier of general computing technology and consulting services. Mr. Lee holds a B.S. and an M.S. in electrical engineering and computer science from the Massachusetts Institute of Technology and an M.B.A. from Babson College.

 

Skills and Qualifications: Mr. Lee’s expertise in marketing processes and customer engagement and business and financial experience make him a valuable contributor to our board of directors. Mr. Lee is an innovator who founded and managed the growth of a successful technology company and gained further leadership experience while serving as an executive at IBM. Mr. Lee’s experiences outside of the biopharmaceutical sector provide the board with an important perspective on the issues facing the company.

 

Elaine S. Ullian  
   
Age: 70 Committee Assignments:
Director Since: 1997   Chair – Corporate Governance and Nominating Committee
Co-lead Independent Director   Member – Management Development and Compensation Committee

 

Ms. Ullian served as President and Chief Executive Officer of Boston Medical Center, a private, not-for-profit, 626-bed, academic medical center with a community-based focus, from 1996 through January 2010. From 1994 to 1996, she served as President and Chief Executive Officer of Boston University Medical Center Hospital. From 1987 to 1994, Ms. Ullian served as President and Chief Executive Officer of Faulkner Hospital. She also serves as a director of Thermo Fisher Scientific Inc. and Hologic, Inc. Ms. Ullian holds a B.A. in political science from Tufts University and an M.P.H. from the University of Michigan.

 

Skills and Qualifications: Ms. Ullian brings significant leadership experience acquired as the CEO of large health care providers to our board of directors. The knowledge she obtained serving as an executive, together with her extensive experience serving on the boards of directors of multiple public companies in the healthcare field, provide her with the expertise required to serve as one of our co-lead independent directors and as the chair of our corporate governance and nominating committee. She also provides the board with insight into public policy matters, including the perspective of providers, payors and patients, for whom our products are intended.

 

Class I Directors — Terms to Expire in 2020

 

Margaret G. McGlynn  
   
Age: 58 Committee Assignments:
Director Since: 2011   Member – Science and Technology Committee
    Member – Corporate Governance and Nominating Committee

 

Ms. McGlynn served as the President and Chief Executive Officer of the International AIDS Vaccine Initiative, a global not-for-profit organization whose mission is to ensure the development of safe, effective and accessible HIV vaccines for use throughout the world, from July 2011 until September 2015. Ms. McGlynn served as President, Vaccines and Infectious Diseases of Merck & Co., Inc. from 2005 until 2009. Ms. McGlynn joined Merck in 1983 and served in a variety of marketing, sales and managed care roles. Ms. McGlynn serves as a member of the Board of Directors for Air Products and Chemicals, Inc., a company specializing in gases and chemicals for industrial uses, and Amicus Therapeutics, Inc., a biopharmaceutical company. She is also a member of the National Industrial Advisory Committee at the University at Buffalo School of Pharmacy and Pharmaceutical Sciences. Ms. McGlynn holds a B.S. in Pharmacy and an M.B.A. in Marketing from the State University of New York at Buffalo.

 

Skills and Qualifications: Ms. McGlynn’s leadership experience and industry knowledge make her a valuable contributor to our board of directors. Her service as an executive at Merck and her service on the board of Amicus Therapeutics and the board and audit committee of Air Products and Chemicals, Inc. give her a practical understanding of organizational practices valuable to a company at our stage of growth. Her experience in the development and commercialization of products across several therapeutic areas, and in her board roles and advocacy in rare diseases, provides her with a valuable understanding of the scientific, public policy, regulatory and marketplace issues we face in the drug development and commercialization process.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    21

 
William D. Young  
   
Age: 73 Committee Assignments:
Director Since: 2014   Member – Corporate Governance and Nominating Committee
    Member – Management Development and Compensation Committee

 

Mr. Young is a Venture Partner at Clarus Ventures, a life sciences venture capital firm, which he joined in 2010. Prior to Clarus Ventures, Mr. Young served from 1999 until June 2009 as the Chairman and Chief Executive Officer of Monogram Biosciences, Inc., a biotechnology company acquired by Laboratory Corporation of America in June 2009. From 1980 to 1999, Mr. Young was employed at Genentech, Inc. in positions of increasing responsibility, including as Chief Operating Officer from 1997 to 1999, where he was responsible for all product development, manufacturing and commercial functions. Prior to joining Genentech, Mr. Young was with Eli Lilly & Co. for 14 years. Mr. Young currently serves as the Chairman of the Board of Directors of NanoString Technologies, Inc., and as a member of the Board of Directors of Theravance BioPharma Inc. Mr. Young retired from BioMarin Pharmaceutical Inc.’s Board of Directors in November 2015 and from Biogen’s Board of Directors in June 2014. Mr. Young holds a B.S. in Chemical Engineering from Purdue University, an M.B.A. from Indiana University and an Honorary Doctorate in Engineering from Purdue University. Mr. Young was elected to the National Academy of Engineering in 1993 for his contributions to biotechnology.

 

Skills and Qualifications: Mr. Young is a valuable contributor to our board of directors due to the in-depth knowledge of the biotechnology industry that he acquired through his extensive experience as both a CEO and board member at numerous pharmaceutical and biotechnology organizations and as a venture capitalist focused on the life sciences industry. Mr. Young’s strong leadership qualities, global industry knowledge and financial expertise provide him with the background to work collaboratively with both management and fellow board members in order to address issues facing our company.

 

Alan Garber, M.D., Ph.D.  
   
Age: 62 Committee Assignments:
Director Since: 2017   Member – Science and Technology Committee

 

Dr. Garber is Provost of Harvard University and the Mallinckrodt Professor of Health Care Policy at Harvard Medical School, a Professor of Economics in the Faculty of Arts and Sciences, Professor of Public Policy in the Harvard Kennedy School of Government, and Professor in the Department of Health Policy and Management in the Harvard T.H. Chan School of Public Health. From 1998 until he joined Harvard in 2011, he was the Henry J. Kaiser Jr. Professor, a Professor of Medicine, and a Professor (by courtesy) of Economics, Health Research and Policy, and of Economics in the Graduate School of Business at Stanford University. Dr. Garber is a member of the National Academy of Medicine, the American Society of Clinical Investigation, the Association of American Physicians, the American Academy for Arts and Sciences, and the Board on Science, Technology, and Economic Policy at the National Academies. He is a Fellow of the American Association for the Advancement of Science, the American College of Physicians, and the Royal College of Physicians. Dr. Garber is also a Research Associate with the National Bureau of Economic Research and served as founding Director of its Health Care Program for nineteen years. He has also served as a member of the National Advisory Council on Aging at the National Institutes of Health, as a member of the Board of Health Advisers of the Congressional Budget Office and as Chair of the Medicare Evidence Development and Coverage Advisory Committee at the Centers for Medicare and Medicaid Services. Dr. Garber has been a member of the Board of Directors of Exelixis, Inc., a biopharmaceutical company, since 2005. Dr. Garber holds an A.B. summa cum laude, an A.M. and a Ph.D., all in Economics, from Harvard University, and an M.D. with research honors from Stanford University.

 

Skills and Qualifications: Dr. Garber brings extensive leadership experience and knowledge regarding science, medicine and the healthcare industry and in particular healthcare economics to our board of directors. The insights he has developed as an expert in health care policy and as an advisor to government agencies provides our board important perspectives on the issues facing our company.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    22

 

CORPORATE GOVERNANCE AND RISK MANAGEMENT

 

We are committed to good corporate governance and integrity in our business dealings. Our governance practices are documented in our Statement of Corporate Governance Principles, which addresses the role and composition of our board of directors and the functioning of the board and its committees. You can find our governance documents, including our Statement of Corporate Governance Principles, charters for each committee of the board and our Code of Conduct, on our website www.vrtx.com under “Investors—Corporate Governance—Governance Documents.”

 

Independence, Chair and Co-lead Independent Directors

 

Our board of directors has determined that eight of our nine directors qualify as “independent” under the definition of that term adopted by The Nasdaq Stock Market LLC, or NASDAQ. These directors include Dr. Bhatia, Dr. Garber, Mr. Kearney, Mr. Lee, Ms. McGlynn, Mr. Sachs, Ms. Ullian and Mr. Young. Our independent directors meet in executive session at each regularly scheduled board meeting.

 

Dr. Leiden, our president and chief executive officer, serves as the chairman of our board. Our employment agreement with Dr. Leiden provides that he will serve as the chairman of our board through March 31, 2020. In addition, we have two co-lead independent directors who are elected by the independent directors. Each of the board committees is chaired by one of our independent directors.

 

Our board believes that strong, independent board leadership is a critical aspect of effective corporate governance, and our corporate governance principles require that if the chair is not an independent director, then the independent directors elect a lead independent director. Since December 2011, Mr. Sachs and Ms. Ullian have served as our co-lead independent directors. We believe this structure provides our board independent leadership, while providing the benefit of having our chief executive officer, the individual with primary responsibility for managing our day-to-day operations, chair regular board meetings as we discuss key business and strategic issues. Combined with the co-lead independent directors and experienced and independent committee chairs, this structure provides strong independent oversight of management.

 

Our co-lead independent directors’ responsibilities include:

 

calling and leading regular and special meetings of the independent directors;
   
serving as a liaison between our executive officers and the independent directors;
   
reviewing the planned dates for regularly scheduled board meetings and the primary agenda items for each meeting; and
   
reviewing with the chair of each board committee agenda items that fall within the scope of the responsibilities of that committee.

 

Board Committees

 

Our board of directors has established various committees, each of which has a written charter, to assist in discharging its duties: the audit and finance committee, the corporate governance and nominating committee, the MDCC and the science and technology committee. Each member of the audit and finance committee, corporate governance and nominating committee and MDCC is an independent director as that term is defined by the SEC and NASDAQ. The primary responsibilities of each of the committees are set forth below, and the committee memberships are provided in the table appearing on page 24 of this proxy statement.

 

Each of the committees has the authority, as its members deem appropriate, to engage legal counsel or other experts or consultants in order to assist the committee in carrying out its responsibilities.

 

Risk Management

 

Our board of directors discharges its overall responsibility to oversee risk management with a focus on our most significant risks. We face considerable risk related to the commercialization of our approved products, including regulatory risk with respect to our promotional activities and competition from approved drugs and investigational drug candidates that may have product profiles superior to our approved products. We continue to invest significant resources in research programs and clinical development programs as part of our strategy to develop transformative medicines for patients with serious diseases. With respect to each of our drug development and commercialization programs, we face considerable risk that the program will not ultimately result in a commercially successful pharmaceutical product. Our board and its committees monitor and manage the strategic, compliance and operational risks related to KALYDECO, ORKAMBI, SYMDEKO and our research and development programs through regular board and committee discussions that include presentations to the board and its committees by our executive officers as well as during in-depth short- and long-term strategic reviews held at least annually.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    23

 

For certain specific risk types, our board has delegated oversight responsibility to board committees as follows:

 

Our audit and finance committee oversees our policies and programs related to our financial and accounting systems, accounting policies and investment strategies, internal audit function and cybersecurity. The audit and finance committee also is responsible for addressing risks arising from related party transactions.
   
Our MDCC oversees risks associated with our compensation policies, management resources and structure, and management development and selection processes.
   
Our corporate governance and nominating committee oversees risks related to the company’s governance structure.
   
Our science and technology committee oversees risks related to our research and development investments.
   
Our MDCC and corporate governance and nominating committee work together to oversee CEO succession planning.

 

Code of Conduct

 

We have adopted a Code of Conduct that applies to all of our directors and employees, including our chief executive officer and chief financial and accounting officers. Our Code of Conduct is available on our website www.vrtx.com under “Investors—Corporate Governance—Governance Documents.” Disclosure regarding any amendments to, or waivers from, provisions of the Code of Conduct that apply to our directors or principal executive, financial or accounting officers will be posted on our website or included in a Current Report on Form 8-K within four business days following the date of the amendment or waiver.

 

Board Attendance, Committee Meetings and Committee Membership

 

Director(1)   Independence   Board   Audit
and
Finance
  Corporate
Governance and
Nominating
  Management
Development and
Compensation
  Science
and
Technology
  2017
Attendance at
Meetings(2)
Sangeeta N. Bhatia                   91%
Alan Garber                     100%
Terrence C. Kearney                   100%
Yuchun Lee                   96%
Jeffrey M. Leiden                         100%
Margaret G. McGlynn                 100%
Bruce I. Sachs                   100%
Elaine S. Ullian                   100%
William D. Young                   91%
2017 Meetings       11   9   5   7   5    
= Member
= Chair
= Co-lead
(1) We encourage each of our directors to attend shareholder meetings, and each of our directors attended our 2017 annual meeting of shareholders.
(2) Includes meetings of the board of directors and meetings of each committee of the board while the director served on such committee.

 

Audit and Finance Committee

 

The primary purposes of the audit and finance committee are to:

 

appoint, oversee and replace, if necessary, our independent registered public accounting firm;
   
assist our board of directors in fulfilling its responsibility for oversight of our accounting and financial reporting processes;
   
review and make recommendations to our board concerning our financial structure and financing strategy;
   
oversee our policies and programs related to our financial and accounting systems and cybersecurity programs; and
   
oversee our internal audit function.

 

Our independent registered public accounting firm reports directly to, and is held accountable by, our audit and finance committee in connection with the audit of our annual financial statements and related services.

 

Mr. Kearney, the chair of our audit and finance committee, is our “audit committee financial expert” as that term is defined in applicable regulations of the SEC. In addition, each of the other members of the audit and finance committee is qualified to serve as an audit committee financial expert under the SEC’s rules.

 

The report of the audit and finance committee appears on page 40 of this proxy statement.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    24

 

Our audit and finance committee reviews and, if appropriate, recommends for approval or ratification by our board, all transactions with related persons that are required to be disclosed by us pursuant to Item 404(a) of Regulation S-K promulgated by the SEC, except for transactions, if any, related to the employment of executive officers, which would be recommended for approval by the MDCC. Our policies and procedures with respect to transactions with related persons are governed by our written Related Party Transaction Policy. Pursuant to this policy, related party transactions include transactions, arrangements or relationships in which our company is a participant, the amount involved exceeds $120,000, and one of our executive officers, directors, director nominees or 5% shareholders or their immediate family members, whom we refer to as related persons, has a direct or indirect material interest, except where disclosure of such transaction would not be required pursuant to Item 404(a) of Regulation S-K. As appropriate for the circumstances, our audit and finance committee will review and consider the related person’s interest in the related party transaction and such other factors as it deems appropriate. Since January 1, 2017, we have not entered into any transactions disclosable pursuant to Item 404(a) of Regulation S-K.

 

Corporate Governance and Nominating Committee

 

The corporate governance and nominating committee:

 

assists our board of directors in developing and implementing our corporate governance principles;
recommends the size and composition of our board and its committees;
develops and recommends to our board an annual self-evaluation process to assess the effectiveness of our board and oversees this process;
reviews and recommends, with the advice of the MDCC, non-employee director compensation on an annual basis;
identifies qualified individuals to become members of our board;
recommends director nominations to the full board; and
assists the board in external recruiting and evaluating potential candidates for the CEO position.

 

Management Development and Compensation Committee

 

The primary purposes of the MDCC are to oversee the discharge of our board of directors’ responsibilities relating to:

 

compensating and developing our executives (and assisting the corporate governance and nominating committee with respect to director compensation);
recommending to our board (i) ratings for the company performance against company goals for the prior year and (ii) goals and weighting of goals for the next year;
assisting the board in evaluating potential internal candidates for the CEO position; and
reviewing and approving our benefit and equity compensation plans.

 

The MDCC has the authority to delegate any of its responsibilities to individual members to the extent deemed appropriate by the MDCC in its sole discretion, but subject always to the general oversight of the board.

 

See Compensation Discussion and Analysis—Detailed Discussion below for a discussion of the MDCC’s role in overseeing executive compensation.

 

The report of the MDCC appears on page 67 of this proxy statement.

 

Science and Technology Committee

 

Our science and technology committee discharges our board of directors’ responsibilities relating to the oversight of our investment in pharmaceutical research and development. In furtherance of that oversight function, the science and technology committee:

 

reviews and assesses our current and planned research and development programs and technology initiatives from a scientific perspective;
assesses the capabilities of our key scientific personnel and the depth and breadth of our scientific resources; and
provides strategic advice to our board regarding emerging science and technology issues and trends.

 

Compensation Committee Interlocks and Insider Participation

 

Mr. Kearney, Mr. Sachs, Ms. Ullian and Mr. Young served on the MDCC during 2017. Each member of the MDCC was an independent director while serving on the MDCC. No member of our board of directors who was a member of our MDCC at any time during 2017 has ever been one of our employees or officers. No member of our board who was a member of our MDCC at any time during 2017 has ever been a party to a transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K prior to becoming a member of our MDCC. During 2017, none of our executive officers served as a member of the board of directors or compensation committee of the board of directors, or performed the equivalent functions, of any entity that has one or more executive officers serving as a member of our board or the MDCC.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    25

 

Public Policy and Engagement

 

The biotechnology industry is a highly-regulated industry, and it is important to our business, our patients and our shareholders that we engage compliantly on public policy issues. This includes providing advocacy for healthcare innovation and patient access to care. We engage with various policy makers to help promote an environment in which we can continue to innovate and develop transformative medicines for the benefit of patients with serious diseases.

 

We meet all federal, state and local laws and reporting requirements governing corporate political contributions. We file quarterly reports on our federal lobbying activity in compliance with the Honest Leadership and Open Government Act of 2007. These reports are available to the public at https://soprweb.senate.gov/index.cfm?event=selectfields.

 

Vertex is a member of a number of industry and trade groups, including the Biotechnology Industry Association. These organizations represent the biotechnology industry and/or businesses more broadly in engaging with policy makers on issues that affect our business. Our governmental affairs executives evaluate our participation in these organizations regularly to ensure that they are broadly aligned with our business objectives, but we do not always agree with positions taken by these organizations and/or its members.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    26

 

DIRECTOR COMPENSATION

 

Non-Employee Director Compensation Program

 

We have designed and implemented our compensation program for our non-employee directors to attract, motivate and retain individuals who are committed to our values and goals and who have the expertise and experience that we need to achieve those goals.

 

The compensation program for our non-employee directors is:

 

Compensation Elements       
Cash        
Annual Cash Retainer     $100,000 
Annual Committee Chair Retainer  Audit and Finance Committee  $30,000 
   Management Development and Compensation Committee  $25,000 
   Corporate Governance and Nominating Committee  $20,000 
   Science and Technology Committee  $20,000 
Committee Membership Retainer        
   Audit and Finance Committee  $15,000 
   Management Development and Compensation Committee  $12,500 
   Corporate Governance and Nominating Committee  $10,000 
   Science and Technology Committee  $10,000 
Annual Co-Lead Independent Director Retainer     $40,000 
Equity        
Initial Equity Grant  A $475,000 value-based award, comprised of:     
     $200,000 in options vesting quarterly over four years from the date of grant
     $275,000 in restricted stock units vesting annually over three years from the date of grant
Annual Equity Retainer  On June 1 of each year, a $475,000 value-based award, comprised of: 
     $200,000 in options that are fully-vested upon grant     
     $275,000 in restricted stock units vesting in full on the first anniversary of the date of grant

 

Each of our non-employee directors is eligible to defer the cash and restricted stock portion of his/her compensation set forth above and elect to receive deferred stock units that are paid out in common stock upon the earliest to occur of (i) termination of the non-employee director’s service on our board of directors, (ii) a change of control and (iii) the non-employee directors disability or death.

 

Our non-employee directors also are reimbursed for their business-related expenses incurred in connection with attendance at board and committee meetings and related activities. Our only employee director, Dr. Leiden, receives no separate compensation for his service in such capacity.

 

We annually review the compensation program for our non-employee directors. In 2017, based on a market assessment of the board compensation at our peer companies, we modified the non-employee director compensation program to (i) reduce the overall compensation payable to our non-employee directors and (ii) adjust the cash versus equity allocation of the compensation.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    27

 

2017 Summary Compensation

 

Director  Fees Earned or
Paid in Cash
   Stock
Units(1)
   Option
Awards(1)
   Total 
Sangeeta N. Bhatia  $113,700   $275,053   $275,075   $663,828 
Joshua Boger (2)  $43,058   $275,053   $275,075   $593,186 
Alan Garber (3)  $53,503   $275,117   $275,150   $603,770 
Terrence C. Kearney  $125,000   $275,053   $275,075   $675,128 
Yuchun Lee  $110,000   $275,053   $275,075   $660,128 
Margaret G. McGlynn  $103,700   $275,053   $275,075   $653,828 
Bruce I. Sachs (4)  $165,000   $275,053   $275,075   $715,128 
Elaine S. Ullian  $155,000   $275,053   $275,075   $705,128 
William D. Young  $105,000   $275,053   $275,075   $655,128 
(1) The amounts set forth under the captions “Stock Units” and “Option Awards” in the table above represent the grant-date fair value for financial statement reporting purposes of the equity awards granted during 2017. Our methodology, including underlying estimates and assumptions, for calculating these values is set forth in Note N to our consolidated financial statements included in our 2017 Annual Report on Form 10-K, filed with the SEC on February 15, 2018.
(2) Dr. Boger retired from our board of directors on June 8, 2017.
(3) Dr. Garber joined our board on June 8, 2017.
(4) Mr. Sachs elected to defer his quarterly cash retainers, which were paid in deferred stock units, on each of the quarterly payment dates occurring on the 15th of the month following the quarter end. The fair market value of each deferred stock unit on each of those dates were $114.58, $130.15, $155.44 and $157.50.

 

2017 Equity Grants

 

Grant  Date  Shares   Exercise
Price
   Grant-Date
Fair Value
 
Annual Non-Employee Director Option Grants  June 1, 2017   5,295   $125.71   $275,075 
Annual Non-Employee Director Stock Unit Grants  June 1, 2017   2,188    N/A   $275,053 
Initial Option Grant to Dr. Garber  June 8, 2017   5,320   $125.11   $275,150 
Initial Restricted Stock Unit Grant to Dr. Garber  June 8, 2017   2,199    N/A   $275,117 

 

Outstanding Equity

 

As of December 31, 2017, our non-employee directors had outstanding restricted stock units, deferred stock units and stock options to purchase our common stock as follows:

 

Director   Outstanding
Restricted Stock Units
  Outstanding Deferred
Stock Units
  Exercisable
Options
  Total
Outstanding
Options
Sangeeta N. Bhatia   2,188     24,045   35,295
Alan Garber   2,199     665   5,320
Terrence C. Kearney   2,188     72,743   72,743
Yuchun Lee   2,188     95,702   95,702
Margaret G. McGlynn   2,188     92,368   92,368
Bruce I. Sachs   2,188   5,858   132,368   132,368
Elaine S. Ullian   2,188     79,868   79,868
William D. Young   2,188     78,618   82,368

 

Non-Employee Director Stock Ownership Guidelines

 

We have stock ownership guidelines for our non-employee directors pursuant to which our non-employee directors should, within five years of becoming subject to the guidelines, achieve ownership of shares of our common stock with a value equal to at least three times the annual cash retainer.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    28

 

CORPORATE RESPONSIBILITY AND SUSTAINABILITY

 

During the last three years, we have significantly expanded our long-standing commitments to philanthropic giving, diversity and inclusion and global sustainability.

 

Giving and Access

 

Giving is in our DNA here at Vertex. In 2017, we made a global 10-year, $500 million corporate giving commitment focused on four areas:

 

patients, including enabling access to our medicines
   
expanding our commitment to science, technology, engineering, arts and math (STEAM) education--$50 million of this commitment is dedicated to STEAM education, particularly for underserved communities and women
   
developing young physicians and scientists
   
strengthening our local communities, including fostering the innovation ecosystem and supporting youth health and wellness

 

This corporate giving initiative extends and expands our long-term commitment to patients with serious diseases and our community, continuing programs to provide access to our medicines and extending and expanding our collaboration with the Boston Public Schools. Through this collaboration, high school students have ongoing access to Vertex’s 3,000 square foot learning lab established in 2014 and mentoring and internship opportunities with Vertex scientists. In addition, we have established an extensive internship program for college students and fellowship programs for graduate students and postdoctoral scientists. We also annually grant full four-year scholarships to the University of Massachusetts.

 

As part of this commitment, we established The Vertex Foundation, a 501(c)(3) organization and long-term source of charitable giving, with an initial commitment of $10 million. The Vertex Foundation supports, among other initiatives, a dollar-for-dollar employee matching gift program to magnify the impact of employees’ donations to qualified non-profit organizations.

 

In addition, we encourage our employees to participate in community service activities. For example, our employees provide thousands of volunteer hours through, among other activities, participation in our global day of service (volunteering at dozens of nonprofit organizations and schools in our community), leading activities in our learning laboratory, and pro bono activities conducted by members of our legal and compliance group.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    29

 
Diversity and Inclusion

 

Diversity and inclusion is deeply ingrained in our culture. We believe that in an inclusive workforce each employee brings diverse perspectives and strengths, and that embracing those strengths and celebrating those differences is essential to our success. Our commitment to gender and ethnic diversity is reflected at the board level and within our workforce and our hiring and promotion policies.

 

Four of our nine board members are diverse based on gender and/or ethnicity. This includes three female board members, and we are pleased to have been recognized by 2020 Women on Boards, a non-profit organization that is focused on educating corporate stakeholders on the importance of board diversity.

 

On a global basis, our employees are evenly split between men and women. In the United States, approximately 30% of our workforce is racially/ethnically diverse. As of the beginning of 2018, 38% of our senior employees (VP and above) were women and 18% of senior employees in the United States were racially/ethnically diverse.

 

 

In 2017:

 

63% of our critical hires at the vice president and above levels were diverse on a gender or ethnic basis
   
37% of new hires in the United States were ethnically diverse
   
65% of promotions were diverse on a gender or ethnic basis

 

We are also committed to fostering diversity and inclusion through support of our employee-led resource networks (ERNs) that foster connectivity and collaboration across our organization and provide mentoring, career development, community outreach and cultural awareness opportunities. Our current ERNs are: IWILL (Inspiring Women in Leadership and Learning), VIBE (Vertex Includes Boundless Ethnicities), and Vertex Pride (providing an opportunity to engage with the LGBT community).

 

2017 marked the first annual Diversity Week at Vertex, which included activities focused on advancing, promoting, engaging and celebrating diversity. Activities included speakers, unconscious bias training, communication and diversity workshops, ERN sponsored activities and other special events designed to increase employee awareness and engagement with respect to this critical issue.

 

Sustainability

 

We at Vertex are committed to sustainability. We seek to limit our environmental impact and have implemented a number of programs in an effort to operate our business in a sustainable manner.

 

In designing our major facilities around the world, we have focused on energy efficiency. This is demonstrated by our corporate headquarters in Boston, Massachusetts, which was completed in 2014 and achieved a LEED Gold certification. In 2015, our UK Paddington office was awarded BREEAM “Excellent Status” for sustainability, and our new research facility in San Diego is being constructed in accordance with LEED Gold standards. In addition, in 2016, we committed to reducing the greenhouse gas emissions at our corporate headquarters by a further 35% by 2020, pursuant to Greenovate Boston Mayor’s Carbon Cup.

 

We promote energy efficiency through our employee benefits, which include a generous subsidy for employees who take public transportation, as well as programs promoting commuting using alternative means such as biking. As a result, approximately 50% of our Boston headquarters employees commute using public transportation.

 

In addition, we have implemented a recycling and composting program at multiple locations. At our corporate headquarters, these efforts have reduced waste and has converted 80% of the waste from our cafeteria into compost.

 

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Item 2 Amendments to our Charter and By-laws

 

We are requesting that our shareholders approve (i) an amendment to our Restated Articles of Organization and (ii) our Amended and Restated By-Laws that would eliminate supermajority voting requirements.

 

Our Restated Articles of Organization and Amended and Restated By-Laws each currently require the affirmative vote of 80% of the voting power of the then outstanding shares of common stock to amend certain provisions relating to (1) the number, election and terms of our board of directors, (2) director nominations, (3) newly-created directorships and vacancies and (4) removal of directors.

 

At our 2017 annual meeting of shareholders, our shareholders approved a non-binding shareholder proposal requesting that we take each necessary step to eliminate each voting requirement in our charter and by-laws that called for greater than a simple majority vote. After the 2017 annual meeting of shareholders, we continued our engagement with our shareholders and monitored corporate governance trends and in February 2018 our board approved, subject to shareholder approval, an amendment to our Restated Articles of Organization and Amended and Restated By-Laws that eliminate the supermajority vote requirements. If approved by shareholders, all items in our Restated Articles of Organization and Amended and Restated By-Laws will be subject to amendment by a simple majority vote of shareholders, unless a greater vote threshold is required by applicable law.

 

The full text of the proposed amendment to our Restated Articles of Organization and the Amended and Restated By-Laws that would become effective upon shareholder approval of this proposal and filing the Restated Articles of Organization with The Commonwealth of Massachusetts are attached to this proxy statement as Appendix A and Appendix B, with additions of text indicated by underlining and deletions of text indicated by strike-outs.

 

Our board of directors recommends a vote FOR the approval of (i) the amendments to our restated articles of organization and (ii) our amended and restated by-laws. The affirmative vote by the holders of 80% of the shares outstanding as of the record date in person or by proxy on this matter is required for the approval of this proposal.

 

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Item 3 Amendment and Restatement of 2013 Stock and Option Plan

 

Our board of directors believes that our broad-based equity compensation program is essential to attract, retain and motivate people with the necessary talent and experience and to provide additional incentive to achieve our short- and long-term business objectives. We are requesting that our shareholders approve an amendment and restatement of our 2013 Stock and Option Plan, or 2013 Plan, which would increase the number of shares available for issuance under the 2013 Plan by 8.0 million shares.

 

On April 2, 2018, our board of directors amended and restated our 2013 Plan, subject to shareholder approval, to, among other things, increase the number of shares of common stock authorized for issuance under the 2013 Plan by 8.0 million shares.

 

Our 2013 Plan utilizes “fungible” shares, with stock options counting as one share against the total authorized shares and full value awards, such as restricted stock or restricted stock units, counting as 1.66 shares against the total authorized shares. We adopted this fungible share plan to provide flexibility in the types of awards we grant under our equity compensation program, while appropriately accounting for the difference between stock options and full value awards. Over the last several years, we have implemented changes in our equity compensation program for our employees, executives and our board that have significantly reduced dilution from our employee equity awards while maintaining a broad-based equity program. We believe that our equity compensation program has been fundamental to our success over the last several years and that the amendment and restatement of the 2013 Plan, which authorizes the issuance of additional shares subject to the 2013 Plan, is necessary in order to support our equity compensation program going forward.

 

Maintenance of Broad-Based Equity Program While Reducing Dilution

 

Since our inception, we have compensated all eligible employees using a mix of cash and equity. The broad-based nature of our equity compensation program is an important element of our overall employee compensation program and reflects our philosophy that it is important for all of our employees to approach their jobs with a long-term commitment and perspective. Over the last several years, we have modified our equity compensation programs. These modifications are consistent with modifications other biotechnology companies have made as they matured from development-stage companies to commercial-stage companies with a strong financial profile. As a result of these changes, we granted on an absolute basis equity awards representing 41% fewer shares of common stock in 2017 as compared to 2012 and reduced our “burn rate” from 3.6% in 2012 to 1.8% in 2017.

 

    2012
Equity
Awards
  2013
Equity
Awards
  2014
Equity
Awards
  2015
Equity
Awards
  2016
Equity
Awards
  2017
Equity
Awards
  % Change
2012 v 2017
Total Shares Granted Subject to Equity Awards   7,525,000   6,276,000   5,629,000   5,035,000   4,887,000   4,470,000   (41)%
Burn Rate(1)   3.6%   2.8%   2.4%   2.1%   2.0%   1.8%    
Awards Canceled, Forfeited or Expired   1,644,000   2,622,000   1,628,000   1,573,000   928,000   1,107,000    
Net Dilution   5,881,000   3,654,000   4,001,000   3,462,000   3,959,000   3,363,000    
Net Burn Rate   2.8%   1.6%   1.7%   1.4%   1.6%   1.3%    
(1) “Burn rate” is defined as the number of equity awards granted in a specific year divided by the basic weighted average number of shares outstanding during that year.

 

We currently expect that we will grant fewer options in 2018 than in 2017. As a result, although the MDCC and board retains discretion with respect to equity grants, we expect that, consistent with the last several years, there will be a small further decline in the dilution to our shareholders from our equity compensation program in 2018 as compared to 2017.

 

Key Provisions of our 2013 Plan

 

The 2013 Plan includes a number of provisions designed to serve shareholders’ interests and facilitate effective corporate governance, including the following:

 

Fungible Shares: Options and other awards granted at a purchase price of 100% of the fair market value of a share of our common stock on the date of grant count against the number of shares authorized under our 2013 Plan at a rate of one share for each share granted. Any restricted stock, restricted stock units or other “full value” awards granted under the 2013 Plan count against the number of shares authorized for issuance under our 2013 Plan at a rate of 1.66 shares for each share granted.
   
No Stock Option Re-pricing/Exchange: Except in connection with specific corporate transactions (including stock dividends, stock splits, consolidations, mergers, recapitalizations and reorganizations), the 2013 Plan does not permit (i) the amendment of stock options or stock appreciation rights granted under the 2013 Plan to provide an exercise price that is lower than the then-current price per share of such outstanding option or stock appreciation right, (ii) the cancellation of any outstanding option or stock appreciation right (whether or not granted under the 2013 Plan) and the grant in substitution therefor of any award under the 2013 Plan covering the same or a different number of shares of common stock and having

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    32

 

an exercise price per share lower than the then-current exercise price per share of the cancelled option or stock appreciation right or (iii) the cancellation in exchange for a cash payment of any outstanding option or stock appreciation right with an exercise price per share above the then-current fair market value of our common stock without shareholder approval.

 

No Discounted Stock Options or SARs: Stock options and stock appreciation rights cannot be granted with an exercise price less than the fair market value on the date of grant.
   
No “Evergreen” Provision: The 2013 Plan does not contain an “evergreen” or similar provision. The 2013 Plan fixes the number of shares available for future grants and does not provide for any increase based on increases in the number of outstanding shares of common stock.
   
No Reload Rights: Stock options granted under the 2013 Plan do not contain provisions entitling participants to automatic grants of additional stock options in connection with the exercise of the original option.
   
Limitation on Re-use of Shares: Shares that are delivered to, or withheld by, the company under an award may not be reissued under the 2013 Plan. Shares may be delivered or withheld in connection with the exercise of stock options or the payment of required withholding taxes.
   
Limitations on Dividend Payments: No dividends or dividend equivalents will be paid with respect to shares subject to stock options or stock appreciation rights unless and until such awards have vested and been exercised in accordance with their terms. Any dividends or dividend equivalents paid with respect to shares underlying stock rights other than stock options or stock appreciation rights will be subject to the same vesting terms otherwise applicable to the award
   
Independent Committee: As it relates to our employees, the 2013 Plan is administered by the MDCC, which consists of “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, “non-employee directors” within the meaning of Rule 16b-3 of the Exchange Act and “independent directors” as defined by NASDAQ.

 

Existing Plans

 

As of February 28, 2018, options to purchase (i) an aggregate of 7,876,791 shares having a weighted-average exercise price of $114.94 per share and a weighted-average term before expiration of 8.23 years were outstanding under our 2013 Plan, and (ii) an aggregate of 2,416,691 shares having a weighted-average exercise price of $62.85 per share and a weighted-average term before expiration of 4.28 years were outstanding under our Amended and Restated 2006 Stock and Option Plan, or 2006 Plan. Also, on February 28, 2018, there were outstanding an aggregate of 4,089,535 unvested shares of restricted stock and restricted stock units granted under our 2013 Plan and 87,111 unvested shares of restricted stock and restricted stock units granted under our 2006 Plan.

 

We may grant additional awards under our 2013 Plan. We are not able to grant additional awards under our 2006 Plan. As of February 28, 2018, there were 7,663,273 shares remaining available for award under our 2013 Plan. In addition, any shares of common stock subject to awards outstanding under the 2006 Plan which expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by us at their original issuance price pursuant to a contractual repurchase right, will become available for issuance under the 2013 Plan.

 

Submission of 2013 Plan

 

We are submitting the amendment to our 2013 Plan to our shareholders as required under applicable rules of NASDAQ and to ensure (i) favorable federal income tax treatment under Section 422 of the Code, for any grants of incentive stock options that we may make under our 2013 Plan and (ii) continued eligibility under Rule  162(m) of the Code, to the extent applicable, for a federal income tax deduction with respect to compensation earned in respect of certain awards granted under our 2013 Plan prior to December 22, 2017.

 

Summary of the Amended and Restated 2013 Stock and Option Plan

 

A summary of the principal features of our 2013 Plan is set forth below. A copy of our 2013 Plan, as amended and restated and in the form that would become effective upon shareholder approval of this proposal, is attached to this proxy statement as Appendix C.

 

Administration and Eligibility for Participation

 

The 2013 Plan is administered by our board of directors or any committee to which it delegates all or a part of its administrative responsibilities under the 2013 Plan. Our board has delegated the administration of the 2013 Plan to the MDCC. Subject to the provisions of the 2013 Plan, our board, or an authorized committee of our board, determines the persons to whom awards under the 2013 Plan will be granted, the number of shares to be covered by each award, the exercise price per share and the manner of exercise, the terms and

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    33

 

conditions upon which awards are granted, whether to accelerate the vesting or extend the date of exercise of any installment of any award and how to interpret the provisions of the 2013 Plan. Awards may be granted under the 2013 Plan to our employees, including officers and directors who are employees, and to our consultants, advisors and non-employee directors. As of March 31, 2018, we and our subsidiaries had approximately 2,327 employees and eight non-employee directors eligible to participate in the 2013 Plan. The number of consultants and advisors eligible for awards under our 2013 Plan varies from time to time. No participant may be granted awards in any calendar year for more than 1,000,000 shares, subject to adjustment for stock splits and similar recapitalizations.

 

Description of Awards

 

The 2013 Plan provides for the award of stock options, stock grants, and other stock-based awards. Any restricted stock grants, restricted stock units or other “full value” awards granted under the 2013 Plan will count against the number of shares authorized for issuance under the 2013 Plan at a rate of 1.66 shares for each share granted. Shares of common stock reserved for such awards granted under the 2013 Plan that lapse or are canceled or forfeited are added back to the share reserve at a rate of 1.66 shares for each share that lapses or is canceled or forfeited. Shares of common stock issued pursuant to restricted stock agreements and restricted stock unit awards may be purchased by employees for nominal value. If we were to permit shares of common stock to be delivered to us to pay the exercise price of a stock option or to be withheld to fund the payment of taxes, those shares would not be added back to the share reserve available for future awards. No option or stock appreciation right may be granted with a term exceeding ten years from the date of grant.

 

Stock Options

 

Stock options provide award recipients with the right, subject to the terms and conditions that are specified in connection with the option grant, to purchase a specified number of shares of our common stock at a specified exercise price. Stock options granted under the 2013 Plan may be awarded as either non-qualified stock options or as incentive stock options within the meaning of Section 422 of the Code, referred to as ISOs, however only employees may receive ISOs. The maximum value of shares of common stock—determined at the time of grant—that may be subject to ISOs that become exercisable by an employee in any one year is limited to $100,000. Since 2003, we have only granted non-qualified stock options under our equity plans.

 

Stock options granted under the 2013 Plan may not be granted with an exercise price that is less than the fair market value of our common stock on the date of grant, which is defined under the 2013 Plan as the average of the highest and lowest quoted selling prices on such date. ISOs may not be granted with an exercise price that is less than 110% of fair market value in the case of employees or officers holding 10% or more of our voting stock. ISOs granted to an employee or officer holding 10% or more of our voting stock must expire not more than five years from the date of grant.

 

Stock options granted under the 2013 Plan can only be exercised by the optionholder and are not transferable except by the laws of descent and distribution or pursuant to domestic relations orders or Title I of the Employee Retirement Income Security Act or as otherwise determined by the MDCC, provided such transfer is not for value.

 

The 2013 Plan provides for stock option grants to non-employee directors under our director compensation program. In addition to any other stock rights as may be determined by our board of directors each non-employee director serving in office on June 1 of any year is granted, pursuant to our equity plans, a fully vested non-qualified option to purchase a specified number of shares determined from time to time by our board.

 

The 2013 Plan permits the MDCC to determine the manner of payment of the exercise price of options. Such methods include payment by cash or check, or, at the discretion of the MDCC, by means of a broker assisted “cashless exercise,” delivery to us of shares of our common stock, any combination of such methods or any other lawful means approved by the MDCC, other than delivery of a promissory note.

 

Stock Grants

 

A stock grant is an award of shares of common stock. Stock grants may be issued subject to restrictions on transfer and vesting requirements, as determined by the board or an authorized committee of the board. Vesting requirements may take the form of our lapsing right to repurchase the stock from the award recipient, based on either continued employment for specified time periods or on the attainment of specified business performance goals set by our board or the committee of our board. Subject to the transfer restrictions and our repurchase rights, if any, the grantee will have all rights with respect to unvested shares of common stock issued under a stock grant as are possessed by our other shareholders, including all voting and dividend rights, provided that dividends, if any, with respect to unvested shares shall accrue and be payable only upon the vesting of such shares.

 

Stock-Based Awards

 

The 2013 Plan provides that the MDCC may grant other stock-based awards, including restricted stock units, share grants based upon specified conditions, the grant of securities convertible into shares, or the grant of stock appreciation rights, or phantom stock awards, in each case upon terms and conditions established by the MDCC.

 

Performance Awards

 

Under the 2013 Plan, we have the discretionary authority to structure one or more awards so that the shares of common stock subject to those particular awards will not vest unless certain pre-established objective performance goals are achieved, in order to, with respect to awards made before December 22, 2017, qualify such awards as performance-based compensation that will not be subject to the $1,000,000 limitation imposed by Section 162(m) of the Code, to the extent applicable, on the income tax deductibility of the compensation paid to specified executive officers. Such objective goals may be based on one or more of the following criteria: (i) revenue targets or revenue growth; (ii) achievement of specified milestones in the discovery, development or regulatory approval of

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    34

 

one or more of our drug candidates; (iii) achievement of specified milestones in the commercialization of one or more of our products; (iv) achievement of specified milestones in the manufacturing of one or more of our products; (v) cost reduction or other expense control targets; (vi) personal management objectives; (vii) stock price (including, but not limited to, growth measures); (viii) total shareholder return; (ix) income per share; (x) operating efficiency measures; (xi) operating margin; (xii) gross margin; (xiii) return measures (including, but not limited to, return on assets, capital, equity or sales); (xiv) net or total revenue levels; (xv) productivity ratios; (xvi) operating income; (xvii) net operating profit; (xviii) net earnings or net income (before or after taxes); (xix)  cash flow (including, but not limited to, operating cash flow, free cash flow and cash flow return on capital); (xx) earnings or operating income before interest, taxes, depreciation, amortization and/or stock-based compensation expense; (xxi) mergers, acquisitions or divestitures objectives; (xxii)  market share; (xxiii)  customer satisfaction; (xxiv) working capital targets; (xxv) budget objectives and (xxvi) achievement of other balance sheet or statements of operations objectives.

 

Each objective performance measure that is a financial measure may be determined pursuant to generally accepted accounting principles (GAAP) or on a non-GAAP basis. Such objective performance measures may reflect absolute entity or business unit performance or a relative comparison to the performance of a peer group of entities, an index or indices or other external measure of the selected performance criteria, and may be absolute in their terms or measured against or in relationship to other companies comparably, similarly or otherwise situated. The objective performance measures and any targets with respect thereto need not be based on an increase, a positive or improved result or the avoidance of loss. Such performance measures: (1) may vary by participant and may be different for different awards; (2) may be particular to a participant or the department, branch, line of business, subsidiary or other unit in which the participant works and may cover such performance period as may be specified by us; and (3) shall be set within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m) of the Code, to the extent applicable.

 

We may specify that such performance measures shall be adjusted to exclude or provide for appropriate adjustment for one or more of the following items: (A) asset impairments or write-downs; (B) litigation and governmental investigation expenses and judgments, verdicts or claim settlements; (C) the effect of changes in tax law, accounting principles or other laws, regulations or provisions affecting reported results; (D) the effect of exchange rates for non-US dollar denominated net sales or goals based on operating profit, earnings or income; (E) accruals for reorganization and restructuring programs; (F) any non-GAAP adjustments as described in our earnings releases or in the management’s discussion and analysis of financial condition and results of operations appearing in our periodic reports; (G) items of income, gain, loss or expense attributable to the operations of any business acquired by us, any parent or subsidiary or of any joint venture established by us or any parent or subsidiary; (H) costs and expenses incurred in connection with mergers and acquisitions; (I) items of income, gain, loss or expense attributable to one or more business operations divested by us, or any parent or subsidiary or the gain or loss realized upon the sale of any such divested business or the assets thereof; or (J) the effect of any change in the outstanding shares of common stock effected by reason of a stock split, stock dividend, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change or any distributions to our shareholders other than regular cash dividends.

 

Notwithstanding any provision of the 2013 Plan, with respect to any award that is intended to qualify as performance-based compensation, we may adjust downwards, but not upwards, the number of shares payable pursuant to such award, and we may not waive the achievement of the applicable performance measures except in the case of the death or disability of the participant or a change in control of our company or as otherwise provided by the MDCC.

 

We shall have the power to impose such other restrictions on performance awards as we may deem necessary or appropriate to ensure that such awards satisfy all requirements for performance-based compensation.

 

The foregoing references in this “Performance Awards” section to Section 162(m) of the Code refer to such Code section as in effect prior to December 22, 2017, including the regulations thereunder and other applicable Internal Revenue Service guidance, whether promulgated or issued before or after December 22, 2017.

 

It is the intent of the Company that the amendment and restatement of the 2013 Plan not constitute a “material modification” of the Plan or awards granted under it prior to May 17, 2018 (the effective date of the amendment and restatement of the 2013 Plan), in each case within the meaning of Section 162(m) of the Code. However, there can be no guarantee that awards made before December 22, 2017 under the 2013 Plan will be deductible as qualified performance-based compensation under Section 162(m) of the Code. In addition, the MDCC has and will continue to have authority to pay or provide compensation (including under the 2013 Plan) that is not deductible under Section 162(m) of the Code in order to maintain a competitive compensation program and provide compensation that will attract and retain highly qualified executives.

 

Adjustments in the Event of Stock Dividends, Stock Splits, Recapitalizations or Reorganizations

 

The number of shares subject to stock rights and other terms applicable to such rights will be equitably adjusted if we issue a stock dividend, or in the event of a stock split, recapitalization or reorganization. In addition, in the event of certain consolidations or acquisitions or a sale of substantially all of our assets, either (i) the MDCC or the entity assuming our obligations under the 2013 Plan shall make appropriate provision for the continuation of all outstanding stock rights under the 2013 Plan or grant replacement stock rights on an equitable basis as determined by the MDCC or the relevant entity, or (ii) if there is no assumption or replacement, the vesting of all outstanding and unvested stock rights under the 2013 Plan will be accelerated and such stock rights will become fully exercisable immediately prior to such consolidation, acquisition or sale.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    35

 

Effective Date, Amendment and Expiration

 

The 2013 Plan became effective on May 8, 2013 and was previously amended and restated effective as of June 4, 2015 and June 8, 2017. The amendment and restatement of our 2013 Plan will be effective, subject to shareholder approval, on May 17, 2018. The 2013 Plan will terminate on April 12, 2027. Our board of directors may terminate or amend the 2013 Plan at any time, subject to shareholder approval under certain circumstances as provided in the 2013 Plan. No amendment or termination of the 2013 Plan will adversely and materially affect the rights provided in any award made under the 2013 Plan prior to the plan amendment or termination. Neither our board nor the administrator has the authority to reduce the exercise price of any stock option after the date of grant, except in the case of an equitable adjustment required under the 2013 Plan. No award may be made under the 2013 Plan after the plan expiration date. Awards made prior to expiration of the 2013 Plan may extend beyond the plan expiration date.

 

U.S. Federal Income Tax Consequences

 

The discussion of federal income tax consequences that follows is based on an analysis of the Code as currently in effect, existing law, judicial decisions and administrative regulations and rulings, all of which are subject to change, and is applicable to optionees who are U.S. taxpayers.

 

Non-Qualified Options

 

Options that are designated as non-qualified options are not intended to qualify for treatment under Section 422 of the Code. Options otherwise qualifying as ISOs, to the extent the aggregate fair market value of shares with respect to which such options are first exercisable by an individual in any calendar year exceeds $100,000, also will be treated as options that are not ISOs.

 

A non-qualified option ordinarily will not result in income to the optionee or a deduction for us for tax purposes at the time of grant. Instead, the optionee will recognize compensation income at the time of exercise of a non-qualified option in an amount equal to the excess of the fair market value of the shares at the time of exercise over the option exercise price. Any compensation income may be subject to withholding taxes, and a deduction may then be allowable to us in an amount equal to the optionee’s compensation income.

 

An optionee’s initial basis in shares so acquired will be the amount paid on exercise of the non-qualified option plus the amount of any corresponding compensation income. Any gain or loss as a result of a subsequent disposition of the shares so acquired will be capital gain or loss.

 

Incentive Stock Options

 

ISOs are intended to qualify for treatment under Section 422 of the Code. An ISO does not result in taxable income to the optionee or a deduction for us at the time it is granted or exercised, provided that the optionee does not dispose of the shares acquired pursuant to the option either within two years after the date of grant of the option or within one year after the shares are issued, referred to as the ISO holding period. However, the difference between the fair market value of the shares on the date of exercise and the option exercise price will be an item of tax preference that is included in alternative minimum taxable income. Upon disposition of the shares after the expiration of the ISO holding period, the optionee generally will recognize long-term capital gain or loss based on the difference between the disposition proceeds and the option exercise price paid for the shares. If the shares are disposed of prior to the expiration of the ISO holding period, the optionee generally will recognize taxable compensation, and we will have a corresponding deduction, in the year of the disposition, equal to the excess of the fair market value of the shares on the date of exercise of the option over the option exercise price. Any additional gain realized on the disposition normally will constitute capital gain. If the amount realized upon such a disqualifying disposition is less than fair market value of the shares on the date of exercise, the amount of compensation income will be limited to the excess of the amount realized over the optionee’s adjusted basis in the shares.

 

Stock Grants

 

With respect to stock grants that result in the issuance of shares that are either not restricted as to transferability or not subject to a substantial risk of forfeiture, the grantee must generally recognize ordinary income equal to the fair market value of shares received. Thus, deferral of the time of issuance generally will result in the deferral of the time the grantee will be liable for income taxes with respect to such issuance. We generally will be entitled to a deduction in an amount equal to the ordinary income recognized by the grantee.

 

With respect to stock grants involving the issuance of shares that are restricted as to transferability and subject to a substantial risk of forfeiture, the grantee generally must recognize ordinary income equal to the fair market value of the shares received at the time the shares become transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. A grantee may elect to be taxed at the time of receipt of shares rather than upon lapse of restrictions on transferability or substantial risk of forfeiture, but if the grantee subsequently forfeits such shares, the grantee would not be entitled to any tax deduction, including as a capital loss, for the value of the shares on which the grantee previously paid tax. The grantee must file any such election with the Internal Revenue Service within 30 days of the receipt of the shares. We generally will be entitled to a deduction in an amount equal to the ordinary income recognized by the grantee.

 

The granting of awards under the 2013 Plan is discretionary and we cannot now determine the number or type of awards to be granted in the future to any particular person or group. For further information on awards to non-employee directors, see the section “Non-Employee Director Compensation Program” beginning on page 27 of this proxy statement.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    36

 

The following table sets forth, as to our named executive officers and the other individuals and groups indicated, the number of shares of our common stock subject to option grants made under the 2013 Plan from May 8, 2013 through March 29, 2018.

 

Name   Position   Number of Shares
Underlying Options
Granted
Named Executive Officers        
Jeffrey M. Leiden   Chairman, President & Chief Executive Officer   816,372
David Altshuler   EVP & Chief Scientific Officer   139,579
Thomas Graney   SVP & Chief Financial Officer   10,436
Michael Parini   EVP & Chief Legal and Administrative Officer   158,844
Amit Sachdev   EVP & Chief Regulatory Officer   235,526
Ian F. Smith   EVP & Chief Operating Officer   255,113
All current executive officers as a group (9 persons)   2,179,813
Director Nominees        
Sangeeta N. Bhatia       42,368
Jeffrey M. Leiden       816,372
Bruce I. Sachs       57,368
All non-employee board members, including nominees, as a group (8 persons)   401,896
All employees, including current officers who are not executive officers, as a group   9,818,901

 

On March 29, 2018, the last reported sale price of our common stock on NASDAQ was $162.98 per share.

 

Our board of directors recommends a vote FOR the approval of the amendment and restatement of our 2013 stock and option plan, that, among other things, increases the number of shares authorized for issuance under this plan by 8.0 million shares. The affirmative vote by the holders of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

 

Equity Compensation Plan Information

 

As of February 28, 2018, there were 7,663,273 shares remaining available for award under our 2013 Plan. Under our 2013 Plan, all awards may be granted as full value awards but count as 1.66 shares for each full value share awarded.

 

As of February 28, 2018, under our equity plans:

 

Stock options covering 10,293,482 shares of our common stock, with a weighted average exercise price of $102.71 and a weighted average remaining term of 7.30 years, were outstanding; and
   
unvested restricted stock awards or units covering 4,176,646 shares of our common stock were outstanding.

 

The following table provides aggregate information with respect to all of our equity compensation plans in effect as of December 31, 2017. We are required under applicable SEC rules to disclose in this table the number of shares remaining available for issuance under our equity plans as of December 31, 2017. Accordingly, the figures in the table below do not reflect the equity grants made to our employees under our 2013 Stock and Option Plan, or 2013 Plan, since December 31, 2017.

 

Plan Category   Number of
Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights(2)
  Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
  Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(excluding securities
reflected in first column)
Equity Compensation Plans Approved by Shareholders(1)   9,767,326   $  91.57   11,427,114
Equity Compensation Plans Not Approved by Shareholders      
TOTAL   9,767,326       11,427,114
(1) These plans consist of our 2013 Plan, 2006 Stock and Option Plan and our Employee Stock Purchase Plan.
(2) Does not include restricted stock awards or units covering 3,724,165 shares of our common stock outstanding as of December 31, 2017.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    37

 
Item 4 Ratification of the Appointment of Independent Registered Public Accounting Firm

 

Engagement of Ernst & Young LLP

 

Our audit and finance committee is responsible for the appointment, compensation and oversight of our independent registered public accounting firm. Ernst  & Young LLP has been our independent registered public accounting firm since 2005, and we believe that the selection of Ernst & Young LLP as our independent registered accounting firm for the year ending December 31, 2018 is in the best interest of our company and our shareholders.

 

In determining whether to reappoint our independent registered public accounting firm, our audit and finance committee undertakes an annual formal evaluation of the independent registered public accounting firm, during which it considers the quality of its discussions with and the performance of the lead audit partner, the audit team assigned to our account, the potential impact of changing our independent registered public accounting firm, the overall strength and reputation of the firm and issues pertaining to auditor independence, including fees that our independent registered public accounting firm receives for non-audit services.

 

Each year, our audit and finance committee, together with Ian F. Smith, our executive vice president and chief operating officer, Thomas Graney, our senior vice president and chief financial officer, and Paul Silva, our senior vice president and controller, review the selection of our lead audit partner from Ernst & Young LLP. The review considers several factors, including sound judgment, industry knowledge and experience managing audits of complex companies with substantial international operations. After undertaking such review, we decided to retain the same lead audit partner from Ernst & Young LLP for the 2018 audit. In accordance with applicable requirements, we are required to change our lead audit partner ever five years.

 

Representatives of Ernst & Young LLP are expected to attend the annual meeting, will have the opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions from shareholders.

 

Effect of Vote

 

We are not required to have shareholders ratify the selection of Ernst & Young LLP. If our shareholders do not ratify the selection, our audit and finance committee will reconsider the selection of Ernst & Young LLP for the ensuing year, but may determine that continued retention of Ernst & Young LLP is in our company’s and our shareholders’ best interests. Even if the appointment is ratified, the audit and finance committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in our company’s and our shareholders’ best interests.

 

Independent Registered Public Accounting Firm Fees

 

The audit and finance committee works with our management in order to negotiate appropriate fees with Ernst & Young LLP and is ultimately responsible for approving those fees. The following is a summary and description of fees for services provided by Ernst & Young LLP in 2017 and 2016.

 

Service  2017   2016
Audit fees  $2,818,000   $2,671,000
Audit-related fees   24,000    0
Tax fees   2,587,000    2,282,000
All other fees   3,000    3,000
TOTAL  $5,432,000   $4,956,000

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    38

 

“Audit fees” represented the aggregate fees for professional services rendered for the audit of our annual consolidated financial statements, and our internal controls over financial reporting, for the reviews of the consolidated financial statements included in our Form 10-Q filings for each fiscal quarter, for statutory audits of our international operations and providing consents with respect to registration statements.

 

“Audit-related fees” consisted principally of fees for accounting consultations.

 

“Tax fees” consisted of fees related to tax compliance, worldwide tax planning and tax advice. The tax fees for 2017 and 2016 consisted of:

 

tax compliance and preparation fees, including the preparation of original and amended tax returns and refund claims, and tax payment planning of $1,857,000 and $1,219,000, respectively; and
   
tax advice and planning fees of $730,000 and $1,063,000, respectively.

 

“All other fees” consisted of licensing fees paid to Ernst & Young LLP for access to its proprietary accounting research database.

 

Audit and Finance Committee Pre-Approval Policies and Procedures

 

Our audit and finance committee has established a policy to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm. Prior to the engagement of the firm for each year’s audit, management submits to our audit and finance committee for approval a description of services expected to be rendered during that year for each of the following four categories of services and a budget for those services in the aggregate.

 

Audit services include audit work performed in the preparation of financial statements, as well as work that generally only our independent registered public accounting firm can reasonably be expected to provide, including comfort letters, statutory audits, consents and attestation services.
   
Audit-related services are for assurance and related services that traditionally are performed by the independent registered public accounting firm, including due diligence related to mergers and acquisitions, employee benefit plan audits, special procedures required to meet certain regulatory requirements and consultation regarding financial accounting and/or reporting standards.
   
Tax services include all services performed by the independent registered public accounting firm’s tax personnel except those services specifically related to the audit of our financial statements, and include fees in the areas of tax compliance, tax planning and tax advice.
   
All other fees are those associated with services not captured in the three preceding categories.

 

Prior to the engagement of our independent registered public accounting firm, our audit and finance committee pre-approves these services by category of service. The fees are budgeted and our audit and finance committee requires the independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval. In those instances, our audit and finance committee requires that we obtain its specific pre-approval for these services.

 

The audit and finance committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report any pre-approval decisions to our audit and finance committee at its next scheduled meeting.

 

All of the services set forth above in the categories “audit-related fees,” “tax fees” and “all other fees” were pre-approved and none were approved by our audit and finance committee pursuant to Rule 2-01(c)(7)(i)(C), which relates to the approval of a de minimis amount of non-audit services after the fact but before completion of the audit.

 

Our board of directors recommends that you vote FOR ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2018. The affirmative vote by the holders of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    39

 

AUDIT AND FINANCE COMMITTEE REPORT

 

The Audit and Finance Committee of the Board of Directors (the “Audit Committee”) of Vertex Pharmaceuticals Incorporated (the “Company”), which consists entirely of directors who meet the independence and experience requirements of the Securities and Exchange Commission and The Nasdaq Stock Market LLC, has furnished the following report:

 

The Audit Committee assists the Company’s Board of Directors in overseeing and monitoring the integrity of the Company’s financial reporting process, compliance with legal and regulatory requirements related to financial reporting and the quality of internal controls and external audit processes. The Audit Committee’s roles and responsibilities are set forth in a written charter, which is available on the Company’s website www.vrtx.com under “Investors—Corporate Governance—Governance Documents.” Among its duties, the Audit Committee is responsible for recommending to the Company’s Board of Directors that the Company’s financial statements be included in the Company’s Annual Report on Form  10-K. As a basis for that recommendation, the Audit Committee engaged in the following activities. First, the Audit Committee discussed with Ernst & Young LLP (“Ernst & Young”), the Company’s independent registered public accounting firm for 2017, those matters that Ernst & Young is required to communicate to and discuss with the Audit Committee by the Public Company Accounting Oversight Board (United States) Auditing Standard No. 16, Communications with Audit Committees, which included information regarding the scope and results of the audit. These communications and discussions are intended to assist the Audit Committee in overseeing the financial reporting and disclosure process. Second, the Audit Committee discussed with Ernst & Young the firm’s independence, and received from Ernst & Young the written disclosures and the letter concerning independence as required by Public Company Accounting Oversight Board Ethics and Independence Rule 3526 (Communication with Audit Committees Concerning Independence). This discussion and disclosure informed the Audit Committee of Ernst & Young’s relationships with the Company and was designed to assist the Audit Committee in considering Ernst & Young’s independence. Finally, the Audit Committee reviewed and discussed, with Ernst & Young and with the Company’s management, the Company’s audited consolidated balance sheet as of December 31, 2017, and the Company’s consolidated statements of operations, comprehensive income (loss), shareholders’ equity and noncontrolling interest, and cash flows for the year ended December 31, 2017, including the notes thereto.

 

Management of the Company is responsible for the consolidated financial statements and reporting process, including: establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule  13a-15(e)); establishing and maintaining internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)); evaluating the effectiveness of disclosure controls and procedures; evaluating the effectiveness of internal control over financial reporting; and evaluating any change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. The independent registered public accounting firm is responsible for expressing an opinion on the conformity of these consolidated financial statements with accounting principles generally accepted in the United States, as well as expressing an opinion on the effectiveness of internal control over financial reporting.

 

During 2017, management tested and evaluated the Company’s system of internal control over financial reporting in response to the requirements set forth in Section  404 of the Sarbanes-Oxley Act of 2002 and related regulations. At the conclusion of the process, management provided the Audit Committee with a report on the effectiveness of the Company’s internal control over financial reporting, which the Audit Committee reviewed. The Audit Committee also reviewed the report of management contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission, as well as Ernst & Young’s Reports of Independent Registered Public Accounting Firm included in the Company’s Annual Report on Form 10-K. The latter reports relate to Ernst & Young’s audit of (i) the consolidated financial statements and (ii) the effectiveness of internal control over financial reporting.

 

Based on (i) discussions with Ernst & Young concerning the audit and the consolidated financial statements, (ii) the independence discussions, (iii) discussions with the Company’s management concerning the consolidated financial statements, and (iv) such other matters deemed relevant and appropriate by the Audit Committee, the Audit Committee recommended to the Company’s Board of Directors that the consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. This report is provided by the following independent directors, who comprise the Audit Committee:

 

Terrence C. Kearney (Chair)

 

Yuchun Lee

 

Bruce I. Sachs

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    40

 
Item 5 Advisory Vote to Approve Named Executive Officer Compensation

 

Our compensation program is designed to attract, retain and motivate talented and experienced individuals across all areas of our business and to align the interests of our executive officers with the interests of our shareholders as we seek to create value through the discovery, development and commercialization of transformative medicines.

 

In 2017, we received support from 83% of our shareholders on our say-on-pay proposal, and we believe all of our ten largest shareholders supported this proposal. We believe this support is consistent with our long-term shareholders’ understanding of our business model and the long-term value we are creating. We plan on continuing a high level of engagement with our shareholders regarding executive compensation. In 2017, we held discussions regarding executive compensation with shareholders representing approximately 75% of our outstanding stock.

 

Our focus is and continues to be maintaining the strong link between our compensation programs and our ability to continue to develop transformative medicines while delivering sustained company performance, with approximately 90% of our NEO compensation linked to performance. Our board of directors and MDCC reviewed our compensation programs and made the following key decisions with respect to 2017 compensation:

 

We maintained the same compensation program that we implemented in 2016, which we believe closely ties pay with performance and has contributed to our short- and long-term successes
   
The company’s exceptional performance in 2017, resulted in a leading rating (a company rating of 148 out of a potential 150) for 2017 and annual cash bonuses near the high end of the range for 2017, commensurate with this performance
   
Our CEO’s salary has been unchanged at $1.3 million since 2014 and is aligned with the median CEO pay of our peer companies
   
We continued utilization of a mix of equity that consists of performance stock units that vest solely upon achievement of rigorous performance goals, stock options that only have value if our stock price appreciates and time-vesting restricted stock units that reward stock price appreciation but also serve as a retention tool

 

Our executive compensation program, including our performance and the compensation earned by our named executive officers, is discussed in greater detail in the Compensation Discussion and Analysis section beginning on page 45 of this proxy statement. In that section, we discuss our executive compensation program and policies and explain the compensation decisions relating to our named executive officers for 2017, which resulted in significant decreases in the amounts reported in comparison to prior years. Our focus remains on maintaining the strong link between our compensation programs and our ability to continue to develop transformative medicines while delivering sustained revenues and earnings growth.

 

Based upon a vote of shareholders at the 2017 annual meeting of shareholders, following our board’s recommendation for an annual advisory vote to approve executive compensation, we are presenting the following proposal, which gives you as a shareholder the opportunity to endorse or not endorse our 2017 executive compensation program by voting for or against the following resolution:

 

RESOLVED, that the shareholders approve, on an advisory basis, the compensation of our named executive officers, as disclosed in the Compensation Discussion and Analysis section, the Compensation and Equity Tables and the related narrative executive compensation disclosures contained in this proxy statement.

 

While the vote on this resolution is advisory in nature, and therefore will not bind us to take any particular action, our MDCC and board intend to consider carefully the shareholder vote resulting from the proposal in making future decisions regarding our executive compensation program.

 

Our board of directors recommends that you vote FOR the approval of the resolution set forth above. The affirmative vote by the holders of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    41

 
Item 6 Shareholder Proposal Regarding Report on Drug Pricing

 

We expect the following shareholder proposal will be presented for consideration at the 2018 annual meeting of shareholders. Our board of directors recommends a vote AGAINST the shareholder proposal for the reasons set forth following the proposal.

 

THE SHAREHOLDER PROPOSAL

 

Trinity Health, 766 Brady Avenue, Apartment 635, Bronx, NY 10462, the owner of at least $2,000 worth of shares of our common stock as of December 5, 2017 and the Sisters of the Humility of Mary, Villa Maria Community Center, Villa Maria, Pennsylvania 16155, the owner of 190 shares of our common stock as of December 27, 2017, have given notice that one or both of them intends to present for action at the 2018 annual meeting of shareholders the following resolution:

 

RESOLVED that shareholders of Vertex Pharmaceuticals (“Vertex”) ask the Board of Directors to report to shareholders by December 31, 2018, at reasonable cost and omitting confidential or proprietary information, on the risks to Vertex from rising pressure to contain U.S. prescription drug prices, including the likelihood and potential impact of those risks as applied to Vertex, the steps Vertex is taking to mitigate or manage those risks and the Board’s oversight role. The report should address risks created by payer cost-effectiveness analysis, patient access concerns, outcomes-based pricing, and price sensitivity of prescribers, payers and patients.

 

SUPPORTING STATEMENT

 

Prescription drug pricing is an urgent and high-visibility public policy issue. National media outlets tell stories of patients delaying treatment or ending up homeless due to drug costs. (E.g., http://www.npr.org/sections/health-shots/2017/03/15/520110742/as-drug-costs-soar-people-delay-or-skip-cancer-treatments; https://www.consumerreports.org/drugs/cure-for-high-drug-prices/) Outrage greeted Turing Pharmaceuticals’ massive increase in the price of an older AIDS drug and Mylan’s skyrocketing EpiPen price tag. (http://money.cnn.com/2016/08/25/news/economy/daraprim-aids-drug-high-price/index.html)

 

In a 2017 Kaiser Family Foundation poll, “lowering the cost of prescription drugs” was identified as a top health care priority for the President and Congress by over 60% of Democrats and Republicans, and 58% of independents. (https://www.kff.org/report-section/kaiser-health-tracking-poll-late-april-2017-the-future-of-the-aca-and-health-care-the-budget-rx-drugs/) In October 2017, California began requiring companies to notify regulators when they intend to raise the price of a drug by 16% or more over two years and explain why the increase is necessary. (http://www.npr.org/sections/health-shots/2017/10/04/551013546/california-bill-would-compel-drugmakers-to-justify-price-hikes)

 

In July, Vertex increased the price of its combination drug Orkambi by five percent, costing $273,000 before discounts. (https://www.bizjournals.com/boston/news/2017/07/13/vertex-inks-another-reimbursement-deal-in-europe.html) Some business analysts have noted that the pricing practices of rare disease drug manufacturers may be facing more pushback as some payers are limiting coverage of high-cost medicines from other pharmaceutical companies.

 

As an example, the Toronto Globe and Mail reported that the “Canadian Agency for Drugs and Technologies has recommended, on two occasions, against public funding for Orkambi, saying there is not enough evidence of a significant clinical benefit weighed against the cost of the twice-a-day tablet regime”. (https://www.theglobeandmail.com/news/british-columbia/provinces-reject-price-negotiations-for-orkambi-cystic-fibrosis-drug/article37069868/)

 

The disclosure requested by this Proposal will allow shareholders to better assess the risks created by Vertex’s pricing strategy in the current environment. We urge shareholders to vote for this proposal.

 

YOUR COMPANY’S RESPONSE

 

Our board of directors recommends a vote AGAINST the shareholder proposal requesting a report on the risks to our company from rising pressure to contain U.S. prescription drug prices.

 

We are committed to creating transformative drugs for patients with serious diseases, and we believe that each of our approved products is an excellent example of the benefit that we can deliver to patients, providers and families of those affected by CF. Our goal is to ensure access to our medicines, return value to our shareholders and fuel the development of additional transformative medicines for the future.

 

KALYDECO, ORKAMBI and SYMDEKO are the only medicines that address the underlying cause of CF and KALYDECO and ORKAMBI have shown broad and sustained systemic benefits to patients with CF. The price of our products reflects many factors, including the relative benefit it provides to patients, the substantial time and cost it took to develop, the small number of patients eligible for treatment with each product and our ongoing commitment to invest in additional medicines for patients with CF and other diseases. The price balances the need for patient access, while garnering a fair return for our shareholders and ensuring sufficient investment in the discovery and development of future transformative medicines.

 

As part of our commitment to providing patients with access to our medicines, we have a comprehensive product support program that includes financial assistance for eligible patients. We provide one-on-one support to help patients with health insurance understand and navigate their health plans and the majority of our patients incur low out of pockets costs. Additionally, we provide co-pay assistance for eligible commercially insured patients that enroll in our product support program.  For patients without health insurance who meet certain income and other eligibility criteria, we provide products for no charge.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    42

 

We are in a high risk/high return industry. A very small percentage of the potential medicines investigated by biotechnology companies make it through the arduous research, development and regulatory process to be approved for patient use by the FDA, and only a small percentage of these approved medicines bring in enough revenue to recoup the average cost of development. As a result, the very few drug candidates that receive FDA approval and become commercially successful must support the entire research and development enterprise. Since our incorporation in 1989, the vast majority of our expenses have been related to our research and development efforts, with a small portion of our expenses allocated to sales and marketing. We have spent approximately $11 billion for research and development for drug candidates for the treatment of CF, as well as several other disease areas, including HCV infection and HIV infection.

 

With respect to specific disclosure of the risks intended to be captured in the report requested by the proponent, we believe we have made adequate reference in our periodic reports under the Securities Exchange Act of 1934, as amended. For example, our annual report on Form 10-K, filed with the SEC on February 15, 2018, includes prominent risk factors referencing these risks, including a risk factor entitled “Government and other third-party payors seek to contain costs of health care through legislative and other means. If they fail to provide coverage and adequate reimbursement rates for our products, our revenues will be harmed.”

 

As such, we believe proponent’s requested report will not benefit our shareholders and will divert the time and attention of management and the board from our strategic initiatives and operations.

 

For all of the above reasons our board of directors recommends that you vote AGAINST the shareholder proposal regarding a report on drug pricing. The affirmative vote by the holders of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    43

 
Item 7 Shareholder Proposal Regarding Lobbying

 

We expect the following shareholder proposal will be presented for consideration at the 2018 annual meeting of shareholders. Our board of directors recommends a vote AGAINST the shareholder proposal for the reasons set forth following the proposal.

 

THE SHAREHOLDER PROPOSAL

 

Friends Fiduciary Corporation, 1650 Arch Street, Suite 1904, Philadelphia, Pennsylvania 19103, an owner of at least 600 shares of our common stock as of December 13, 2017 has given notice that it intends to present for action at the 2018 annual meeting of shareholders the following resolution:

 

WHEREAS, we believe in full disclosure of our company’s direct and indirect lobbying activities and expenditures to assess whether Vertex’s lobbying is consistent with its expressed goals and in the best interests of shareholders.

 

RESOLVED, the shareholders of Vertex Pharmaceuticals Incorporated (“Vertex”) request the preparation of a report, updated annually, disclosing:

 

1. Company policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying communications.
   
2. Payments by Vertex used for (a) direct or indirect lobbying or (b) grassroots lobbying communications, in each case including the amount of the payment and the recipient.
   
3. Vertex’s membership in and payments to any tax-exempt organization that writes and endorses model legislation.
   
4. Description of the decision making process and oversight by management and the Board for making payments described in section 2 and 3 above.

 

For purposes of this proposal, a “grassroots lobbying communication” is a communication directed to the general public that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to the legislation or regulation. “Indirect lobbying” is lobbying engaged in by a trade association or other organization of which Vertex is a member.

 

Both “direct and indirect lobbying” and “grassroots lobbying communications” include efforts at the local, state and federal levels.

 

The report shall be presented to the Audit Committee or other relevant oversight committees and posted on Vertex’s website.

 

SUPPORTING STATEMENT

 

We encourage transparency in the use of corporate funds to influence legislation and regulation, both directly and indirectly. Vertex spent $2.7 million in 2015 and 2016 on federal lobbying (opensecrets.org). This figure does not include lobbying expenditures to influence legislation in states, where Vertex also lobbies but disclosure is uneven or absent. For example, Vertex had 120 lobbyists in 35 states in 2016 (http://www.followthemoney.org/), and spent $306,346 on lobbying in California in 2015 and 2016. Vertex’s lobbying on drug prices in Canada has attracted media attention (“Why One Expensive Drug Could Get B.C. OK, But Not Another,” Times Colonist, November 24, 2017), as has its federal lobbying (“Drugmakers Dramatically Boosted Lobbying Spending in Trump’s First Quarter,” Salon, April 22, 2017).

 

Vertex is listed as a member of the Biotechnology Innovation Organization, which spent $17.58 million on lobbying in 2015  and  2016. Vertex does not disclose its trade association memberships, nor payments and the portions used for lobbying.

 

Transparent reporting would reveal whether company assets are being used for objectives contrary to Vertex’s long-term interests. We are concerned that Vertex’s lack of lobbying disclosures, including lobbying done indirectly by trade associations and other organizations, and any potential negative publicity for opposing drug price initiatives, may present reputational risks for Vertex.

 

YOUR COMPANY’ RESPONSE

 

Our board of directors recommends a vote AGAINST the shareholder proposal to prepare a report on our policies and activities with respect to lobbying.

 

We engage with public policymakers, where legal and appropriate, when we believe it will serve the best interests of our company, our shareholders, employees, patients and other stakeholders. The associations and coalitions to which we belong perform many valuable functions. Lobbying is not the primary focus of these entities, but it is an element of their role, and a portion of the dues that we and other members pay to such organizations may be partially used, in their sole discretion, to engage in certain lobbying activities. We do not direct how these funds are used. Accordingly, our board believes that additional disclosures regarding payments to these trade associations would not necessarily present an accurate reflection of our positions on certain public policy issues.

 

Our board acknowledges the interests of shareholders in information about our participation in the political process. However, our board believes that the proposal’s additional detailed reporting obligation would be duplicative of existing disclosures and that it would impose an unnecessary administrative burden and expense on the company when sufficient disclosure already exists.

 

For all of the above reasons our board of directors recommends that you vote AGAINST the shareholder proposal regarding a report on lobbying activities. The affirmative vote by the holders of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    44

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Letter from Management Development and Compensation Committee to Our Shareholders

 

Dear Fellow Shareholder,

 

The Management Development and Compensation Committee’s stewardship of Vertex’s compensation programs is guided by Vertex’s mission of developing transformative medicines for people with serious diseases and by so doing, creating superior value for our shareholders. Toward that end, we have designed the company’s compensation programs to closely align management’s incentives with Vertex’s strategic long- and short-term goals and with the interests of Vertex’s shareholders. This alignment has contributed to Vertex’s accomplishments over the last several years as it has increased its revenues significantly each year, built its financial strength, advanced its pipeline and continued to execute its business strategy. These accomplishments have been recognized by the company’s shareholders and have been reflected in the increasing value that the company’s shareholders have attributed to the company. Vertex’s market capitalization has increased by more than 400% from approximately $7 billion in early 2012 to more than $40 billion in early 2018. In 2017, Vertex was the number three performing stock on the S&P 500.

 

We take seriously our role in the governance of compensation programs and the importance of attracting and retaining critical executive talent as the company continues to expand and operate in an increasingly complex industry. The success of the company and the execution of Vertex’s business strategy over the last several years has depended upon the stability and operational excellence of our senior executive team. We also carefully consider and incorporate the views expressed by the company’s shareholders into our thinking, transitioning Vertex’s equity program from a share-based program to a value-based approach in 2016, based on the progression of the company and input from shareholders.

 

In 2017, Vertex had a remarkable year as it became profitable, continued to increase revenues, managed operating expenses and advanced numerous programs as potential treatments for both CF and non-CF diseases, positioning itself for continued growth. This success in 2017 reflects both the company’s exceptional execution in 2017 and the overall corporate strategy that the company’s core management team has championed since 2012.

 

As a result of these exceptional accomplishments, our executives received higher cash bonuses for 2017 performance than they received for 2016 performance. In addition, our executives received above target payouts on the performance stock unit awards granted in early 2017 that were tied to Vertex CF product revenues. We believe these outcomes are aligned with our commitment to linking pay to performance. Looking ahead, we will continue to focus on maintaining the strong link between Vertex’s compensation programs and its long- and short-term strategic objectives. Central to these objectives and continuing to develop transformative medicines to treat serious diseases while delivering sustained revenues and earnings growth is our ability to attract and retain a stable and highly-functioning senior executive team.

 

Sincerely,

 

Bruce I. Sachs (Chair)

 

Terrence C. Kearney

 

Elaine S. Ullian

 

William D. Young

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    45

 

Executive Summary

 

By any measure, 2017 was a remarkable year for Vertex as we continue to execute on our strategy of investing in cystic fibrosis scientific innovation to create transformative medicines for people with serious diseases. With near-30 percent growth in revenues and disciplined management of our operating expenses, we have established a foundation of financial strength to fuel our innovation engine and growth for the future. In CF, we continue to develop new and better medicines to treat more people with this devastating disease, and, with the announcement of the start of our triple combination regimen trials, are more confident than ever that we will be able to treat up to 90 percent of people with CF in the near future. Outside of CF, we have made significant progress in advancing our research and development efforts in other serious diseases, including pain, alpha-1 anti-trypsin deficiency and, with our partner CRISPR, sickle cell disease. With these advances, we have enhanced our proven track record of serially innovating for patients waiting for new therapies. As we enter 2018, we are financially strong and well positioned to grow revenues, deliver expanding operating margins, and deliver long-term shareholder value.

 

Financial Performance

 

Our CF medicines, KALYDECO, ORKAMBI and SYMDEKO, which took more than 15 years to discover and develop, are now transforming the lives of eligible patients around the globe and driving our financial performance. In 2017, we increased our revenues, managed our operating expenses and established sustainable profitability on a GAAP and Non-GAAP basis for the first time.

 

We exceeded our CF net product revenue guidance by $265 million,  or 14% ($2.17 billion as compared to the mid-point of our CF net product revenue guidance of $1.9 billion)
   
Our CF net product revenues increased to $2.17 billion, up 29% as compared to 2016, and we are positioned to further increase CF net product revenues by an additional 25% in 2018
   
We increased our net cash position by approximately $950 million, or 84%, to approximately $2.1 billion, and we expect to continue generating substantial cash flows in 2018
   
We went from a GAAP net loss of $112 million in 2016 to GAAP net income of $263 million in 2017
   
Our non-GAAP net income increased to $495 million, up $283 million, or 134%, from 2016, driven by our increased net product revenues (a reconciliation of non-GAAP net income is provided in Appendix D)

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    46

 

CF Pipeline

 

Advances in our pipeline and our strategic execution have moved us closer to our goal of delivering highly-effective treatments to all patients with CF. In January 2012, KALYDECO was first approved to treat approximately 1,000 patients with the G551D mutation. Since then, we have followed a focused strategy of developing new medicines for CF and expanding the number of patients eligible for our medicines, and today 34,000 patients around the world are eligible to receive one of our approved CF medicines.

 

 

Since the beginning of 2017, we:

 

Obtained positive Phase 3 data for SYMDEKO (tezacaftor in combination with ivacaftor) in early 2017
   
Achieved approval for SYMDEKO in the United States in February 2018
   
Applied for European regulatory approval of tezacaftor in combination with ivacaftor in July 2017 with approval expected in the second half of 2018
   
Obtained authorization to market ORKAMBI in the European Union for patients 6-11 years of age in January 2018
   
Received approvals to market KALYDECO for approximately 1,500 additional CF patients in the United States with residual function mutations in May 2017 and August 2017
   
Obtained positive Phase 3 data for KALYDECO for patients 1 to 2 years of age in December 2017
   
Obtained highly-positive Phase 2 data for four triple combination regimens, each of which contained different next-generation correctors in combination with tezacaftor and ivacaftor, from mid-2017 through early 2018
   
Accelerated initiation of the Phase 3 development program for VX-659 in combination with tezacaftor and ivacaftor, which started in February 2018
   
Positioned ourselves to initiate a Phase 3 clinical development program for VX-445 in a triple combination regimen in mid-2018

 

 

With the start of our triple combination regimen Phase 3 clinical trials, we believe we are well-positioned to treat up to 90% of CF patients with medicines that target the underlying cause of their disease.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    47

 

Non-CF Pipeline

 

Over the last decade, we have demonstrated an ability to serially discover and develop multiple groundbreaking medicines in different diseases. In 2017, we and our collaborators have continued our serial innovation, advancing promising non-CF programs for important diseases, including pain, sickle cell disease, alpha-1 anti-trypsin deficiency, polycystic kidney disease and influenza. Specifically, since the beginning of 2017, we have:

 

Obtained the first clinical proof-of-concept from a Phase 2 clinical trial evaluating a NaV1.8 inhibitor as a potential treatment for chronic pain in January 2017 (VX-150 is our lead non-opioid NaV1.8 inhibitor)
   
Obtained clinical proof-of-concept from a second Phase 2 clinical trial of VX-150 as a potential treatment for acute pain in February 2018
   
Initiated a Phase 1 clinical trial of VX-128, a second non-opioid sodium channel inhibitor, in December 2017
   
Executed a co-development and co-commercialization agreement with CRISPR Therapeutics AG for beta-thalassemia and sickle cell disease
   
Advanced through pre-clinical development CTX001 for beta-thalassemia and sickle cell disease pursuant to our collaboration with CRISPR Therapeutics AG. We expect to initiate Phase 1/2 clinical trials in 2018 to evaluate CTX001, which will be the first, or one of the first, clinical trials to evaluate a potential CRISPR/Cas9 drug candidate.
   
Advanced our research program for alpha-1 anti-trypsin deficiency into late-stage pre-clinical development
   
Janssen Pharmaceuticals, our collaborator, initiated Phase 3 development of pimodivir as a potential treatment for influenza
   
Successfully outlicensed our oncology programs to Merck KGaA, Darmstadt, Germany

 

 

Increased Shareholder Value

 

Driven by our exceptional financial performance and our pipeline success in 2017:

 

Our stock price increased by more than 100% from $73.67 per share to $149.86 per share
   
We were the third best performing stock among the approximately 500 mid- and large-cap companies that make up the S&P 500 index

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    48

 

Although our performance in 2017 was remarkable, biotechnology companies are best measured over the longer-term, as opposed to in one year increments. As result of executing on a clear and focused vision that balanced short-term and long-term goals, we have taken Vertex from a market capitalization of less than $10 billion in early 2012 when KALYDECO was first approved to over $40 billion in early 2018, creating significant value for our shareholders.

 

The following chart shows our total shareholder return during the 1-year, 3-year and 5-year periods ending December 31, 2017 compared to the following members of our peer group: Alexion, Regeneron, Biomarin, Gilead, Celgene and Biogen. These peers are the companies we consider most similar to our company based on their business model (see page 54).

 

 

The following chart shows our total shareholder return from the beginning of 2012 when KALYDECO was first approved through February 2018.

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    49

 

Value Creation and Business Model

 

We are committed to creating value while utilizing a business model that focuses our investment on research and development and limits our operating expenses. As a result of this strategy, over the last six years the number of our employees has grown by approximately 15% from 2,000 to 2,300, while our market capitalization has increased more than five fold. The following chart shows our market capitalization per employee compared to our Peer Group.

 

 

 

Key Compensation Decisions

 

Our focus has been and continues to be on maintaining the strong link between our compensation programs and our ability to continue to develop transformative medicines while delivering sustained company performance. Our compensation program is highly performance-based with approximately 90% of our NEO compensation tied to performance. Retention of our talented core of executives is likewise critical, as their outstanding performance over the last six years has led to the advancement of the company and the significant shareholder value that has been created.

 

The key recent decisions that our MDCC and board of directors made are as follows:

 

Program Design: We maintained the same compensation program that we implemented in 2016, which we believe closely ties pay with performance and has contributed to our short- and long-term successes.
   
Base Salary: Our CEO’s salary has been unchanged at $1.3 million since 2014. His annual salary is aligned with the median CEO pay of our Peer Group. In 2017, we evaluated and increased the base salary of two of our other executive officers by 7% to 9% based on a review of base salaries of peers and in recognition of their roles and contributions to the company.
   
Annual Cash Bonus: The company’s exceptional performance in 2017, as described above, resulted in a leading rating (a company rating of 148 out of a potential 150) for 2017 and annual cash bonuses near the high end of the range for 2017, commensurate with this performance.

 

Long-Term Equity Program:
   
  We continued utilization of a mix of equity that consists of performance stock units that vest solely upon achievement of rigorous performance goals, stock options that only have value if our stock price appreciates and time-vesting restricted stock units that reward stock price appreciation but also serve as a retention tool.
     
  In early 2017, the MDCC established financial and non-financial metrics for the PSUs, with payout earned based on achievement of these metrics. 50% of the PSUs were tied to CF net product revenues in 2017, while the remaining 50% are tied to specific clinical and research milestones over a three-year period.
     
  In February 2018, the MDCC certified our 2017 CF net product revenue (which exceeded the mid-point of our CF net product revenue guidance by more than $250 million) at the maximum level of performance established at the beginning of 2017, resulting in 200% of the target shares for our 2017 financial PSU being earned, with vesting in three equal installments in February 2018, 2019 and 2020. By comparison, in February 2017, the MDCC certified a payout of 66.5% of the target shares for our 2016 financial PSUs.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    50

 

2016 Program Changes

 

In 2016, we substantially changed our equity compensation program, which decreased the value of compensation provided in the form of stock options, reduced the value of compensation delivered in the form of time-vested restricted stock, and introduced PSUs. As a result of these changes, the grant date fair-value of our named executive officers’ total equity compensation under the annual program decreased by approximately 40% in each of 2018, 2017 and 2016 as compared to 2015 as set forth in the chart below, which sets forth the fair value of equity compensation received by Dr. Leiden, our chief executive officer and president, and Mr. Smith, our chief operating officer. The values provided for 2018 are based on equity grants made in February 2018 based on 2017 performance.

 

 

 

The values of equity-based awards are based on our methodology for determining the grant-date fair value, including underlying assumptions for calculating these values as set forth in Note N to our consolidated financial statements included in our 2017 Annual Report on Form 10-K.

 

Dilution

 

Since our inception, we have compensated all eligible employees using a mix of cash and equity. The broad-based nature of our equity compensation program is an important element of our overall employee compensation program and reflects our philosophy that it is important for all of our employees to approach their jobs with a long-term commitment and perspective. Over the last several years, we have modified our equity compensation programs. These modifications are consistent with modifications other biotechnology companies have made as they matured from development-stage companies to commercial-stage companies with a strong financial profile. As a result of these changes, we granted on an absolute basis equity awards representing 41% fewer shares of common stock in 2017 as compared to 2012 and reduced our “burn rate” by approximately 50% from 3.6% in 2012 to 1.8% in 2017.

 

   2012
Equity
Awards
  2013
Equity
Awards
  2014
Equity
Awards
  2015
Equity
Awards
  2016
Equity
Awards
  2017
Equity
Awards
  % Change
2012 v 2017
Total Shares Subject to Equity Awards  7,525,000  6,276,000  5,629,000  5,035,000  4,887,000  4,470,000  (41)%
Burn Rate(1)  3.6%  2.8%  2.4%  2.1%  2.0%  1.8%   
Awards Canceled, Forfeited or Expired  1,644,000  2,622,000  1,628,000  1,573,000  928,000  1,107,000   
Net Dilution  5,881,000  3,654,000  4,001,000  3,462,000  3,959,000  3,363,000   
Net Burn Rate  2.8%  1.6%  1.7%  1.4%  1.6%  1.3%   

 

(1) “Burn rate” is defined as the number of equity awards granted in a specific year divided by the basic weighted average number of shares outstanding during that year.

 

Say-on-Pay

 

In 2017, we received support from 83% of our shareholders on our say-on-pay proposal, and we believe all of our ten largest shareholders supported this proposal. We believe this support is consistent with our long-term shareholders’ understanding of our business model and the long-term value we are creating. We maintain a high level of engagement and plan on continuing a high level of engagement with our shareholders regarding executive compensation. In 2017, we held discussions regarding executive compensation with shareholders representing approximately 75% of our outstanding stock.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    51

 

Compensation Governance Practices

 

We continue to implement and maintain leading practices in our compensation program, shareholder outreach and related areas.

 

What We Do   What We Don’t Do
Caps on awards   No executive perquisites
Multiple performance factors   No supplemental pension benefits for executives
Range of awards; not all or nothing   No single-trigger vesting in connection with a change-in-control for equity awards
Compensation recoupment (clawback) policy   No hedging or pledging or speculative transactions in our securities by directors and executive officers
Balance of Short- and Long-term Incentives (through annual cash bonuses and equity awards)   No re-pricing of equity awards without shareholder approval
Anti-hedging policy   No payment of dividends on unvested performance shares or units
Executive and Non-Employee Director Stock Ownership Guidelines  
Policy against gross-ups    
Independent compensation consultant    
Robust shareholder outreach    

 

Compensation Philosophy and Compensation Decision-Making Process

 

This section discusses the principles underlying our policies and decisions with respect to the compensation of our “named executive officers” and all material factors we believe are relevant to an analysis of these policies and decisions. Our named executive officers for 2017 consist of: (i) our president and chief executive officer; (ii) our chief financial officer; (iii) our chief operating officer, who was our chief financial officer for a portion of 2017; and (iv) our other three most highly compensated employees who were serving as executive officers on December 31, 2017.

 

Detailed Discussion and Analysis

 

Our named executive officers, or NEOs, for 2017 were:

 

Name   Position
Jeffrey M. Leiden   Chairman, Chief Executive Officer and President
David M. Altshuler   Executive Vice President, Global Research and Chief Scientific Officer
Thomas Graney   Senior Vice President and Chief Financial Officer
Michael Parini   Executive Vice President and Chief Legal and Administrative Officer
Amit Sachdev   Executive Vice President and Chief Regulatory Officer
Ian F. Smith   Executive Vice President and Chief Operating Officer

 

Compensation Philosophy

 

Our MDCC regularly reviews the elements of the individual compensation packages for our CEO and executive officers to achieve the following primary objectives:

 

attract, retain and motivate talented and experienced individuals across all areas of our business;
   
align the interests of our executive officers with the interests of our shareholders as we seek to create value through the discovery, development and commercialization of transformative medicines; and
   
ensure that the vast majority of compensation is performance-based.

 

Our NEOs have had long and varied careers and possess experiences and skills that make them extremely valuable members of our executive team and to our company as a whole. They have been instrumental in building Vertex into the company it is today, with a leadership position in the treatment of CF, a CF pipeline and non-CF pipeline that have been significantly advanced over the last several years, increasing revenues, and an established strong financial profile, all of which positions Vertex to achieve its strategic objectives in future years.

 

Our MDCC and our board of directors seek to connect the achievement of our strategic objectives with our compensation program in a number of ways, including through detailed and measurable company goals that underlie our annual cash bonuses and the performance goals that are included in our equity awards. Our company goals involve a mix of goals relating to revenues from our current products, achievement

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    52

 

of research and development objectives, our organizational capability and maintenance of our financial strength. These objectives are selected specifically because they are considered by our board to be objective milestones that our company must achieve if it is to maintain its significant revenue growth and sustain and increase profitability. Our MDCC and board expects to continue to seek to balance the use of financial metrics and research and development goals in order to motivate our executive team to increase revenues and manage operating expenses, while providing appropriate incentives for our management to continue to make appropriate investments in our business.

 

In determining compensation, we consider compensation paid to similar companies as reference points, but do not strictly benchmark or target compensation at any particular level. Rather, the MDCC retains flexibility to structure compensation based on good governance practices and our objectives of building our company and creating shareholder value.

 

Compensation Decision-Making Process

 

Role of MDCC and Chief Executive Officer in Setting Executive Compensation

 

The MDCC has responsibility for overseeing the design, development and implementation of the compensation program for our chief executive officer and other NEOs. The MDCC evaluates the performance of our chief executive officer and the performance of the other executive officers. Our chief executive officer and our human resources group, assist the MDCC in evaluating the performance of our other executive officers, including the named executive officers other than the chief executive officer. Our chief executive officer does not make any recommendations to the MDCC regarding his own compensation and does not participate in portions of MDCC meetings or meetings of the board of directors when his compensation is discussed and determined.

 

The members of the MDCC, each of whom is an independent director, together with the other independent directors, make final compensation decisions for the CEO’s and other executive officers’ compensation levels based on these assessments.

 

Role of Compensation Consultant

 

The MDCC (i) is directly responsible for the appointment and oversight of its compensation consultants, (ii) has the authority to determine the fees that we pay for services provided by such compensation consultants and (iii) prior to engaging any compensation consultant, considers applicable factors potentially affecting the independence of the compensation consultant, including the factors set forth in Nasdaq Marketplace Rule 5605(d)(3).

 

Annually, the MDCC has engaged a compensation consultant to conduct an analysis of all elements of compensation paid to our executive officers, including our NEOs, compared to similar elements paid to similarly situated executives at companies in our peer group and to provide a written report and presentation of findings at the meeting of the MDCC that occurs in July each year. In 2017, the MDCC selected Pearl Meyer to conduct and present this analysis to the MDCC.

 

Pearl Meyer only provides, and is compensated for, advice provided to us at the direction of the MDCC. The MDCC considered the following information provided to it by Pearl Meyer:

 

Pearl Meyer’s policies and procedures designed to prevent conflicts of interest;
   
that fees paid by us to Pearl Meyer represent less than 1% of Pearl Meyer’s total annual revenues;
   
the absence of business and personal relationships between the compensation consultant and the MDCC or any of our executive officers; and
   
that Pearl Meyer’s partners, consultants and employees who provide services to the MDCC, and their immediate family members, do not own shares of our common stock.

 

Based on these, and other factors considered by the MDCC, the MDCC determined that Pearl Meyer’s work did not raise a conflict of interest.

 

Use of Peer Group Companies

 

In order to make judgments about elements of executive compensation on a competitive basis, the MDCC and our board of directors considers information about the compensation practices of a representative group of companies with whom we compete for executive talent, or Peer Group. We conduct a detailed analysis to select companies for this Peer Group on the basis of similarity and complexity of business model. Selecting a peer group for our company is difficult because of the limited number of companies that are at a similar stage of development and our level of revenues. As a result, we use a mix of quantitative and qualitative factors in order to establish our peers, including the following:

 

Factor Considered   What We Look For
Similar industry   Biotechnology or pharmaceutical industry
Importance of medicines to patients and society   Transformative medicines for serious diseases; therapeutics for unmet needs
Recognized focus on innovation   Breakthrough Therapy designations, priority review and/or other markers indicating unmet need
Global operations   Significant operations outside the U.S.
Commercial operations   Marketing and selling approved medicines
Significant R&D investment   Greater than $1B or 25% of revenue
Number of employees   Greater than 750 employees
Market capitalization and significance to broader economy   Market cap at least ¼ our size and/or inclusion on S&P 500 or NASDAQ 100
Labor market competitor   Companies we compete with for executive talent
Companies that use Vertex as a peer   Inclusion of Vertex in proxy reported peer group

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    53

 

We consider revenue but it is not a factor we emphasize because we do not believe revenue adequately reflects business model similarity or complexity in the biotechnology industry. A company with similar revenues may not have global or commercial operations like we have nor may it focus on innovative therapies, but rather on generic medicines, which we believe results in a different business model requiring less research and development investment. Moreover, companies with similar revenues may not focus on innovative therapies such as those designated as Breakthrough Therapies by the FDA, a designation which can expedite the development and review of medicines that are intended to treat serious conditions where preliminary clinical evidence indicates that the medicine may demonstrate substantial improvement over available therapy. As a result, we believe the factors listed above provide a better way to assess similarity versus a reliance on the combination of revenue and industry. We also note that it is unlikely for companies to align on all the factors listed above, so we look for companies meeting a majority of the criteria although we place greater weight on companies focused on innovation and importance of medicines to patients and society as we believe these are the key drivers of our business model. We also focus on market capitalization over revenue because we believe it is a better indicator of the complexity of a company’s business model in our industry. On a regular basis, we review and revise the list of companies with the goal of maintaining a group of comparators comprised of at least twelve companies.

 

As a result of this analysis, and on the basis of the criteria listed above, the MDCC selected the following comparator companies for 2017, which were the same comparator companies that were used in 2016.

 

The Core Peers are the peers we consider most similar to us in terms of business model.

 

2017 Peer Companies
Core Peers Alexion Pharmaceuticals, Inc.
Biogen Inc.
Biomarin Pharmaceuticals Inc.
Celgene Corporation
Gilead Sciences, Inc.
Regeneron Pharmaceuticals, Inc.
Other Peers Abbvie Inc.
Alkermes plc
Amgen Inc.
Jazz Pharmaceuticals plc
Incyte Corporation
Shire plc
United Therapeutics Corporation

 

We believe, based on our discussions with major shareholders, that the Peer Group identified by our MDCC is consistent with our shareholders’ views of our relevant peers in the biotechnology industry. In addition, the Peer Group companies have many of the business model characteristics that we seek in comparator companies as set forth in the following table.

 

Company            Innovative and Importance of Medicines       
Information  R&D Expense(1)  Operational Focus   Orphan/  Breakthrough  Innovative  Uses  Market Position 
Company  Industry  $
(millions)
  % of
Revenue
  Global   Commercial  Unmet
Clinical Need
  Therapy
Designations(2)
  Drugs in Last
7 Years(3)
  Vertex
as Peer
  Nasdaq 100  S&P 500 
AbbVie  Biotech  $ 4,982  18%        4  4         
Alexion  Biotech  $ 878  25%        1  2       
Alkermes  Biotech  $ 413  46%        0  1         
Amgen  Biotech  $ 3,562  16%        1  5        
Biogen  Biotech  $ 2,254  22%        0  4       
BioMarin  Biotech  $ 611  46%        1  2        
Celgene  Biotech  $ 4,295  33%        0  4        
Gilead  Biotech  $ 3,512  13%        4  7        
Incyte  Biotech  $ 1,345  88%        0  2       
Jazz  Biotech  $ 198  12%        0  2         
Regeneron  Biotech  $ 2,075  38%        2  4       
Shire  Pharma  $ 1,743  11%        0  4         
United Therapeutics  Biotech  $ 265  15%        0  3         
Vertex  Biotech  $ 1,327  53%        5  4        
(1) R&D Expense and R&D Expense as a % of Revenue reflects the trailing data for the most recent four quarters as of 12/31/2017 per the S&P Capital IQ database.
(2) Per Center for Drug Evaluation and Research (CDER) Breakthrough Therapy Approvals report, which lists approvals for breakthrough therapy designated drugs.
(3) Innovative drugs in the last seven years include: VIEKIRA PAK, IMBRUVICA, VENCLEXTA and MAVYRET (Abbvie), STRENSIQ and KANUMA (Alexion), ARISTADA (Alkermes), BLINCYTO, XGEVA, PROLIA, KYPROLIS and PARSABIV (Amgen), TECFIDERA, ALPROLIX, SPINRAZA and ELOCTATE (Biogen), BRINEURA and VIMIZIM (BioMarin),IDHIFA, POMALYST, ABRAXANE and OTEZLA (Celgene), YESCARTA, SOVALDI, HARVONI, VEMLIDY, CAYSTON, ZYDELIG and BIKTARVY (Gilead), JAKAFI and OLUMIANT (Incyte), VYXEOS and DEFITELIO (Jazz), DUPIXENT, PRALUENT, EYLEA and ZALTRAP (Regeneron), MYDAYIS, FIRAZYR, NATPARA and GATTEX (Shire) and REMODULIN, ORENITRAM and UNITUXIN (United Therapeutics).

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    54

 

We do not strictly benchmark to a particular level of compensation relative to compensation levels at the Peer Group companies, but rather make a judgment about where each executive should fall in comparison with executives with similar responsibilities at the Peer Group companies. We believe this should mitigate concerns regarding our Peer Group including companies that have significantly higher revenues than our current revenues. The MDCC looks at Peer Group information to confirm that our compensation levels are competitive with those of the Peer Group companies and consistent with our compensation philosophy. In addition, the MDCC reviews broader industry specific executive compensation surveys published by Radford, Mercer SIRS and Willis Towers Watson, but does not make any material compensation decisions based on any particular company participants in such surveys.

 

Elements of Annual Compensation

 

Our practice is to target total direct compensation including base salary, annual cash incentives targets, and long-term incentive targets at market competitive levels depending upon the NEOs responsibilities, expertise and experience. Our executive compensation program uses a mix of long-term equity compensation awards in the form of stock options and performance restricted stock unit awards and time-based restricted stock units to incent and reward those individuals who make the greatest contribution to our company performance over time. For the NEOs, this means compensation is primarily in the form of equity and directly tied to changes in shareholder value over time.

 

Each year we review the balance of elements of our executive compensation program to ensure that they are appropriately designed in light of our goals to align the program with our shareholders’ interests, the competitive environment and our business strategy.

 

Compensation Program

 

As shown in the following charts, our compensation program places an emphasis on performance-linked compensation.

 

 

 

The charts above represent the actual values, and exclude the compensation of Mr. Graney, who joined the company in mid-2017.

 

Performance-Linked Value-Based Program

 

We have a performance-linked program that is consistent with programs implemented by our peers and allows us to attract, retain and motivate talented and experienced individuals across all areas of our business. We focus on performance-linked elements as follows:

 

Compensation Element Performance-Link
Annual Cash Bonus Annual bonus dependent on company performance factors and individual performance
     
  Potential range of bonus 0% to 225% of target bonus
     
Performance Restricted Stock Unit Awards 50% of PSUs with range of shares issued 0% to 200% of target based on one year financial metric (vesting annually over 3 years)
     
  50% of PSUs with range of shares issued 0% to 200% of target based on three-year non-financial metric (cliff-vesting after three years)
     
  Value of awards are fixed as percentage of target at grant and realized value varies based on increases or decreases in stock price
     
Stock Options Grant date value of options granted based on individual performance
     
  Value of awards tied to potential increases in share price with no value to executive unless share price increases
     
Time-Based Restricted Stock Unit Awards Value of shares granted based on individual performance from 0% to 150%
     
  Value of awards increases or decreases based on increases or decreases in stock price

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    55

 

More specifically:

 

Performance Stock Units. Our NEOs receive 35% of their annual target equity compensation in the form of PSUs. The PSUs vest, if at all, based half on financial goals and half on non-financial goals. The potential range of shares issuable pursuant to the performance stock unit awards range from 0% to 200% of the target shares based on financial and non-financial measures. For grants made over the last three years, fifty percent of PSUs that could be earned have a one-year performance period with the amount earned dependent upon Vertex’s CF net product revenue performance and with vesting of the earned shares in three equal installments over a three-year period. The MDCC selected a one-year performance period because of the difficulty in forecasting financial metrics at our stage of growth beyond a one-year period. During the last three years, the remaining 50% of PSUs that could be earned have a three-year performance period with the amount earned dependent upon the achievement of multiple clinical development milestones (i.e., advancement of CF and non-CF therapies in the clinic) and with the earned shares cliff vesting at the end of the three-year performance period. The MDCC selected revenue and clinical development milestones because shareholders and analysts rely heavily on these metrics to understand the underlying condition and the performance of our business. In addition, achievement of these metrics would indicate successful execution toward our long-term strategic objectives of expanding our CF franchise and diversifying our product portfolio.
   
Stock Options. Our NEOs receive 30% of their annual target equity value in the form of stock options that vest over a four-year period. We use stock option awards because we believe stock options are performance-based and provide alignment with shareholders as executives are rewarded for corporate performance only if the stock price appreciates.
   
Time-based Stock Units. Our NEOs receive 35% of their annual target equity compensation in the form of restricted stock units that vest over a three-year period. We believe that with a majority of the annual long-term incentive award at risk based on our successful execution of our strategic objectives and on stock price appreciation, it is important to have a smaller portion of the annual award focused on retaining our key executive talent. As a result, we believe time-based restricted stock units encourage retention while also providing immediate alignment with our shareholders.

 

Base Salary

 

The MDCC recommends base salaries for each of our executive officers based on multiple factors, including a competitive market analysis on a position-by-position basis. Annually, the MDCC reviews tables showing a comparison of each executive’s prior year base salary and cash bonus opportunity, measured at the target level, to salaries and cash bonuses reported for executives with similar responsibilities at comparable companies. We do not strictly benchmark to a particular level of compensation relative to compensation levels at the Peer Group companies, but rather make a judgment about where each executive should fall in comparison with executives with similar responsibilities at the Peer Group companies, taking into account the executive’s general level of experience and capability, the significance of his or her job responsibilities to the achievement of our business strategy and company goals, and general performance over time, including demonstration of the values and desirable behaviors under our Values Into Practice Program. On the basis of that information, including compensation at Peer Group companies, and taking into consideration the executive’s base salary for the previous year, the MDCC recommends an appropriate salary for each executive officer, subject to final approval by our independent directors. Our current base salaries for our named executive officers approximate the median base salaries for peer counterparts at companies in our Peer Group.

 

In July 2017, our board of directors increased Dr. Altshuler’s base salary from $575,000 to $625,000 and Mr. Parini’s base salary from $675,000 to $725,000 after a review of the base salaries of peers and in recognition of their role and contributions to the company. In mid-2017, Mr. Graney joined our organization and his compensation arrangement was the result of negotiations between us and Mr. Graney.

 

Name  2017
Base Salary
  2018
Base Salary
  Peer Ranking
(Percentile)
  % Change
2017 v 2018
Jeffrey M. Leiden  $ 1,300,000  $ 1,300,000  65th  0%
David Altshuler  $ 575,000  $ 625,000  40th  9%
Thomas Graney  $ 550,000  $ 550,000  25th  0%
Michael Parini  $ 675,000  $ 725,000  45th  7%
Amit Sachdev  $ 540,750  $ 540,750  70th  0%
Ian F. Smith  $ 850,000  $ 850,000  55th  0%

 

Company and Individual Ratings

 

Two of the principal elements of our executive compensation program - annual cash bonus and annual equity awards - are awarded in amounts determined on the basis of annual company and individual performance ratings.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    56

 

Overview of Company Performance Rating & Achievement in 2017

 

At the beginning of each year, our board of directors, in consultation with our CEO, establishes company-wide goals for that year. Our performance against these goals is the most important factor considered by our board in assessing our corporate performance, but our board considers additional accomplishments and shortcomings and may increase or decrease the performance scores (although the company score may not exceed 150). Although the directors discuss and analyze our performance as a group, each director makes his or her own judgment about specific performance factors and accomplishment of the goals in reaching a conclusion.

 

For 2017, the board set company goals and assigned relative weights that reflected our operational, strategic and financial objectives for the year and the importance of these goals to our long-term goals of revenue growth and increasing profitability. Our 2017 weighted goals and the year-end score achieved by the company and assigned by the board are set forth in the following table:

 

Goal(s)   Maximum
Score
  Actual 2017
Performance Score
Marketed and Approval-Stage Products   60   50
   Increase ORKAMBI net product revenues through compliant marketing practices        
   Increase KALYDECO net product revenues through compliant marketing practices        
Pipeline Growth   55   55
   Achieve proof of concept data for one or more triple combination therapies in F508del/Min patients        
   File regulatory applications for the approval of tezacaftor in combination with ivacaftor        
   Advance next-generation CFTR correctors        
   Advance multiple non-CF development and research programs        
Organizational Development and Capability   20   20
   Fill critical positions with superior and diverse talent to support business growth        
   Improve infrastructure to support expanding business        
   Continue to ensure a strong compliance mindset and enterprise-wide risk management program        
Financial Strength   15   15
   Increase revenues and manage operating expenses        
Additional Accomplishments and Shortcomings (see page 58 of this proxy statement)       8
TOTAL   150   148

 

Our 2017 company performance score was 148 out of a potential of 150. Our 2018 company performance will be evaluated against the broad categories set forth above putting slightly more emphasis on Financial Strength (20 points in 2018 compared to 15 points in 2017) and slightly less on Organizational Development and Capability (15 points in 2018 compared to 20 points in 2017). These changes were made to align our annual incentive plan with our business goals for 2018.

 

Detailed Discussion of Company Performance Rating Factors and Achievements

 

Goals - Marketed and Approval-Stage Products

 

In 2017, total CF net product revenues of $2.17 billion exceeded the mid-point of our initial total CF net product revenue guidance by $265 million, or 14% ($2.17 billion actual as compared to initial guidance of $1.9 billion). This represented an increase in total CF net product revenues of 29% compared to total CF net product revenues in 2016. We expect additional increases in CF net product revenues in 2018.

 

ORKAMBI. In 2017, we exceeded the mid-point of our initial ORKAMBI net product revenue guidance by $121 million ($1.32 billion actual as compared to initial guidance of $1.1 billion to $1.3 billion) based on the strong performance of ORKAMBI in the United States, which more than offset weaker performance of ORKAMBI in Europe. ORKAMBI net product revenues increased by 35% from $980 million in 2016 to $1.32 billion in 2017.

 

KALYDECO. In 2017, we exceeded the mid-point of our initial KALYDECO net product revenue guidance by $145 million ($845 million actual as compared to initial guidance of $690 million to $710 million) as we continued to expand the number of patients eligible for KALYDECO, including through multiple label expansions providing CF patients in the United States with residual function mutations access to KALYDECO. KALYDECO net product revenues increased by 20% from $703 million in 2016 to $845 million in 2017.

 

For marketed and approval-stage products goals, our board assigned the company a score of 50 out of 60, due to our achieving our goals with respect to total CF net product revenues including exceeding our goals with respect to both ORKAMBI and KALYDECO net product revenues, which more than offset weaker than expected performance of ORKAMBI in Europe.

 

Goals - Pipeline Growth (Late and Early-Stage)

 

In 2017, we made significant progress that moved us closer to achieving our goal of delivering highly effective medicines to all patients with CF. Specifically, we:

 

Obtained positive Phase 3 data for tezacaftor in combination with ivacaftor in early 2017
   
Positioned ourselves to achieve approval for SYMDEKO in the United States in February 2018

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    57

 
Applied for European regulatory approval of tezacaftor in combination with ivacaftor in July 2017 with approval expected in the second half of 2018
   
Positioned ourselves to obtain authorization to market ORKAMBI in the European Union for patients 6-11 in January 2018
   
Received approvals to market KALYDECO for approximately 1,500 additional CF patients in the United States with residual function mutations in 2017
   
Obtained positive Phase 3 data for KALYDECO for patients 1 to 2 years of age in December 2017
   
Obtained highly-positive Phase 2 data for four triple combination regimens, each of which contained different next-generation correctors, in combination with tezacaftor and ivacaftor
   
Accelerated initiation of Phase 3 development program for VX-659 in combination with tezacaftor and ivacaftor to February 2018
   
Positioned ourselves to initiate a Phase 3 clinical development program for VX-445 in a triple combination regimen in mid-2018

 

In 2017, we advanced promising programs in a variety of disease. Specifically, we:

 

Obtained the first proof-of-concept from a Phase 2 clinical trial evaluating a NaV1.8 inhibitor as a potential treatment for chronic pain in January 2017 (VX-150 is our lead non-opioid NaV1.8 inhibitor)
   
Initiated a Phase 1 clinical trial of VX-128, a second non-opioid sodium channel inhibitor, in December 2017
   
Executed a co-development and co-commercialization agreement with CRISPR Therapeutics AG
   
Advanced CTX001, which is one of the first gene editing programs to utilize CRISPR/Cas9, and is being developed pursuant to our collaboration with CRISPR Therapeutics AG, through pre-clinical development to enable expected Phase 1/2 clinical trials in 2018
   
Advanced our research program for alpha-1 anti-trypsin deficiency into late-stage pre-clinical development
   
Janssen Pharmaceuticals, our collaborator, initiated Phase 3 development of pimodivir as a potential treatment for influenza
   
Successfully outlicensed our oncology programs to Merck KGaA, Darmstadt, Germany

 

On the basis of the accomplishments in advancing our research and development programs and, in particular, the advancement of next-generation correctors allowing us to begin Phase 3 development of our next-generation triple combination regimens in early 2018, our board assigned the company a score of 55 out of 55 for our pipeline growth goal.

 

Goals - Organizational Development and Capability

 

Talent and expertise. Strengthened our organizational capabilities by attracting, developing and retaining the key talent necessary to operate our business, including filling 16 of 17 critical hires with superior talent and expanding our leadership and management training programs. During 2017, we continued to focus on diversity in our hiring and 63% of our critical hires at the vice president or above level were diverse on a gender/ethnic basis.

 

Systems. Continued improvement of infrastructure to support an increasingly complex organization, including enhancing policies, software platforms and business processes. In 2017, we installed a financial management platform providing significant improvements in our consolidation and reporting processes, launched a global customer relationship management platform and selected and began implementation of an enterprise-wide learning management system.

 

Compliance. Continued to promote effective governance, communication and training to support our company-wide compliance and risk management programs.

 

To reflect the improvements to our organizational structure, processes and systems achieved in 2017, our board assigned the company a score of 20 out of 20 for our organizational development and capability goals.

 

Goals - Financial Strength

 

We exceeded all of our financial strength goals in 2017. We increased revenues and managed our operating expenses allowing us to strengthen our balance sheet and end 2017 with cash, cash equivalents and marketable securities of $2.1 billion while decreasing the amount of outstanding debt under our revolving credit agreement from $300.0 million to zero.

 

As a result of our success in increasing our financial strength by managing our operating expenses and securing a strong cash position, our board assigned the company a score of 15 out of 15 for our financial strength goals.

 

Additional Factors (accomplishments and/or shortcomings)

 

In connection with determining our 2017 company rating, our board of directors made positive and negative adjustments based on factors not anticipated in the company’s original goals. The positive adjustments were primarily related to our success in accelerating the development of our next-generation corrector program by almost a year, our successful business development activities, including our acquisition of Concert Pharmaceuticals, Inc. and advancing our collaboration with CRISPR, and the exceptional performance of our U.S. commercial team. These additional accomplishments were partially offset by delays we experienced in our clinical trial of tezacaftor in combination with ivacaftor in gating patients and delays in implementing our leadership development program. Overall, the board of directors increased our company rating by eleven points for positive additional accomplishments, which was offset by a three point downward adjustment related to additional negative factors, which resulted in an overall positive net eight point adjustment.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    58

 

2017 Individual Performance Ratings - Overview

 

The MDCC evaluates executives’ individual performance on a “results-based, values-tempered” basis, which takes into account not only “what” was accomplished, but “how” it was accomplished. The results-based component evaluates the executive officer’s performance in his or her individual role and as a leader of our company in achieving our objectives. The possible individual results-based performance ratings are “not building,” “building,” “strong” or “leading. “The values-tempered component of the individual evaluations builds upon our company core values: “uncompromising commitment to patients;” “innovation is our lifeblood;” “fearless pursuit of excellence” and “we wins” and are based on whether the decisions made by the executives were consistent with these values and what is in the best interests of the company in the long term. Under our Values Into Practice program, we expect all employees to demonstrate our company core values in all aspects of job performance. We further expect that our executives will be stewards of our core values, and the performance ratings assigned to them incorporate our board’s assessment of the strength of their leadership with respect to, and demonstration of, values-based behavior. This evaluation results in ratings of “not demonstrating,” “living the values” or “exemplary demonstration. “The possible individual performance ratings under this program are as set forth in the following table:

 

 

 

The 2017 results-based rating recommendation for each NEO, other than our CEO, is the combined result of the MDCC members’ observations and a review of the executive’s role in the accomplishment of the corporate goals and recommendations provided to the MDCC by our chief executive officer made on the basis of his independent assessment of each executive officer’s performance. The MDCC and Dr. Leiden discussed the recommendations at length, on both an individual-by-individual basis, and on a comparative basis. Upon completion of these discussions, the MDCC finalized its recommendation for the results-based rating for each executive, taking into account Dr. Leiden’s recommendations, factors considered in the discussions and the opinions of MDCC members based on the executive’s contributions and the MDCC members’ interactions with the executive. When considering the more subjective values-based rating, the MDCC also discussed Dr. Leiden’s recommendations, giving Dr. Leiden’s recommendations greater weight when determining the values-based rating than when determining the results-based rating, because the values-based rating is pertinent to the executive’s daily interactions in carrying out his or her duties. Furthermore, the MDCC believes that, in his role as CEO, Dr. Leiden had greater visibility than the MDCC members into the quality of these interactions. Taking into account all of the factors raised in the discussion and the assigned individual performance rating, the MDCC assigns an individual performance factor for each NEO within the ranges set forth above. While the individual ratings are not 100% objective, we view them as critical factors indicative of management success and crucial to achieving the more objective goals discussed above.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    59

 

2017 Actual Individual Ratings for Named Executive Officers

 

Dr. Jeffrey Leiden  2017 Rating:  Leading Exemplary
Chairman, President and CEO  2018 Salary:  $1,300,000
   2017 Bonus:  $3,463,200
   LTI Equity Grants (Feb 2018):  $14,000,000

 

On the basis of the MDCC’s recommendation, our independent directors rated Dr. Leiden’s overall performance for 2017 as “leading exemplary” with an individual performance factor of 150%. The performance rating for Dr. Leiden combined a “leading” results-based rating with an “exemplary demonstration” values-based rating. The rating derived principally from his leadership of our executive team as we executed our strategy for 2017, which included:

 

The over-achievement of our financial goals by significantly increasing total CF net product revenues, significantly strengthening our balance sheet, expanding our operating margins, and returning us to profitability
   
The advancement of our CF programs, and in particular the acceleration of our next-generation corrector programs by almost a year, the multiple label expansion for KALYDECO and progress toward approval of SYMDEKO
   
The advancement of our non-CF programs, and in particular our novel pain compounds and our gene editing programs
   
The excellent performance of our research organization in advancing multiple programs toward the clinic, including in pain, alpha-1 anti-trypsin deficiency and sickle-cell disease
   
Leadership in determining our corporate strategy and executing our business goals, accelerating key programs and promptly addressing strategic challenges
   
Mentoring, developing and retaining our outstanding senior leadership team
   
Enhancing Vertex’s corporate reputation through, among other activities, patient engagement, corporate giving and diversity and inclusion initiatives
   
Coordinating, as the chair of our board, clear, open and constructive communication between our board and management regarding key business and strategic issues
   
Exhibiting outstanding personal and leadership qualities and embodying Vertex’s core values in enabling the successful stewardship of our company over the last year

 

Dr. David M. Altshuler  2017 Rating:  Leading
EVP, Global Research and Chief Scientific Officer  2018 Salary:  $625,000
   2017 Bonus:  $638,250
   LTI Equity Grants (Feb 2018):  $3,750,000

 

The MDCC recommended and the board adopted an overall rating of “leading” for Dr.  Altshuler based on a results-based rating of “strong” and a values-based rating of “exemplary” with an individual performance factor of 138%. Dr. Altshuler’s rating derived from his leadership of the research organization, including the following:

 

Implementing a research strategy that augments our strength in identification of small molecule drugs by focusing research on validated targets addressing the underlying cause of disease and utilizing lab assays designed to predict clinical efficacy
   
Advancing multiple research programs, including:
   
  CTX001, an investigational gene editing treatment, that we are co-developing with CRISPR Therapeutics AG for beta-thalassemia and sickle cell disease
   
  VX-128, a non-opioid sodium channel inhibitor, that entered Phase 1 clinical trials in late 2017
   
  Advancing multiple additional next-generation CFTR correctors into late-stage research
   
Advancing our collaborations in nucleic acid therapies with CRISPR and Moderna
   
Leading the efforts to identify new medicines by combining transformative insights into the causal human biology of serious diseases with innovative approaches to therapeutics, including with respect to our programs in alpha-1 anti-trypsin deficiency and polycystic kidney disease

 

Thomas Graney  2017 Rating:  Strong
SVP, Chief Financial Officer  2018 Salary:  $550,000
   2017 Bonus:  $110,392
   LTI Equity Grants (Feb 2018):  $2,000,000

 

The MDCC recommended and the board adopted an overall rating of “strong” for Mr. Graney, who joined us in September 2017, based on a results-based rating of “strong” and a values-based rating of “living the values” with an individual performance factor of 100%. Mr. Graney’s rating derived from:

 

Assuming responsibility for the finance and accounting organizations
   
Leading a strategic review of our investments in ex-U.S. markets
   
Leadership roles in various business development projects

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    60

 
Michael Parini  2017 Rating:  Leading
EVP, Chief Legal and Administrative Officer  2018 Salary:  $725,000
   2017 Bonus:  $788,655
   LTI Equity Grants (Feb 2018):  $3,750,000

 

The MDCC recommended and the board adopted an overall rating of “leading” for Mr. Parini based on a results-based rating of “strong” and a values-based rating of “exemplary demonstration” with an individual performance factor of 147%. Mr. Parini’s rating derived from:

 

Assuming responsibility for several key functions, including the human resources, quality and corporate communications groups in addition to continuing his stewardship of the legal and compliance department
   
Expanding and enhancing our human resources and corporate communications functions
   
Leading our recruiting efforts, which resulted in us filling 16 of 17 critical positions
   
Leading the successful communication of numerous key clinical and regulatory milestones
   
Leading several important corporate initiatives, including the establishment of our 10-year, $500 million corporate giving commitment and the advancement of our diversity and inclusion efforts
   
Overseeing successful efforts to complete the acquisition of VX-561, a deuterated version of ivacaftor, from Concert Pharmaceuticals following a second request issued by the Federal Trade Commission
   
Resolving several legal cases on terms favorable to the company

 

Amit Sachdev  2017 Rating:  Leading/Exemplary
EVP, Chief Regulatory Officer  2018 Salary:  $540,750
   2017 Bonus:  $600,233
   LTI Equity Grants (Feb 2018):  $4,500,000

 

The MDCC recommended and the board adopted an overall rating of “leading exemplary” for Mr. Sachdev based on a results-based rating of “leading” and a values-based rating of “exemplary demonstration” with an individual performance factor of 150%. Mr. Sachdev’s rating derived principally from his leadership of the regulatory and governmental affairs organizations with respect to the following:

 

Leading the global regulatory group as they efficiently and successfully pursued multiple approvals for our medicines in U.S. and ex-U.S. markets
   
Successfully implementing the U.S. and European regulatory strategies for tezacaftor in combination with ivacaftor resulting in U.S. approval of SYMDEKO in February 2018 and positioning us for approval of tezacaftor in combination with ivacaftor in Europe in the second half of 2018
   
Obtaining approval for KALYDECO as a treatment for patients with residual function mutations in the United States based on a novel approach to broadening the label based on in vitro data and supported by more than five years of real-world clinical data that demonstrate KALYDECO’s strong safety and efficacy profile

 

Ian Smith  2017 Rating:  Leading
EVP, Chief Operating Officer  2018 Salary:  $850,000
   2017 Bonus:  $1,339,770
   LTI Equity Grants (Feb 2018):  $3,750,000

 

The MDCC recommended and the board adopted a “leading” rating for Mr.  Smith based on a results-based rating of “strong” and a values-based rating of “exemplary demonstration” with an individual performance factor of 142%. Mr. Smith’s rating was due to his overall contributions to the execution of our strategy. More specifically, Mr. Smith was responsible for:

 

Successfully managing many important functions, including our finance/accounting, business development, information systems and investor relations groups
   
Managing operating expenses, which together with increased CF net product revenues, allowed us to end 2017 with cash, cash equivalents and marketable securities of $2.1 billion while decreasing the amount outstanding on our revolving credit agreement from $300.0 million to zero
   
Successfully overseeing the construction of our new San Diego research facility
   
Leading our business development group to a successful year, including:
   
  Acquiring VX-561 from Concert Pharmaceuticals, Inc.
   
  Executing a co-development and co-commercialization agreement with CRISPR Therapeutics AG for CTX001
   
  Outlicensing our oncology programs to Merck KGaA for $230 million upfront and potential future royalties
   
Implementing information technology and infrastructure systems to support our rapid growth

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    61

 

Annual Cash Bonus

 

The cash bonus for each executive (referred to in the Summary Compensation Table on page 68 of this proxy statement as “Non-Equity Incentive Plan Compensation”) is calculated by multiplying the executive officer’s target bonus by both the company performance factor and the individual performance factor, in accordance with the following formula in 2017:

 

Target Cash Bonus x Performance Factors = Cash Bonus
Base Salary x Individual
Incentive Target
(expressed as
a percentage
of base salary)
x Company Performance
Factor
(expressed as a
percentage of the
target bonus)
x Individual Performance
Factor
(expressed as a
percentage of the
target bonus)
= Annual
Cash
Bonus
Award
    45% to 120%
based on role
  0%-150%   0-150%    

 

The individual incentive targets were established, and are reviewed annually, by the MDCC based on available data about Peer Group company compensation. Dr. Leiden’s individual incentive target of 120% has remained unchanged since 2012. Mr. Smith’s individual incentive target was increased from 50% to 75% in 2016 when he was promoted to Chief Operating Officer. The individual incentive targets for Dr. Altshuler, Mr. Parini and Mr. Sachdev are 50%. The individual incentive target for Mr. Graney is 45%. The resulting target annual bonuses approximate the median target annual bonuses for comparable executives at peer companies.

 

Company performance factors are determined annually and range from 0% to 150%. The possible individual ratings and corresponding individual performance factor ranges for our executive officers in 2017 are set forth in the table below:

 

Individual Rating Individual
Performance Factor
Not Building 0%
Building 50%-80%
Strong 80%-120%
Leading 120%-150%
Leading/Exemplary 140%-150%

 

On the basis of the factors described above, our independent directors approved, upon the MDCC’s recommendation, individual performance factors and annual bonus awards for each of the NEO on account of 2017 performance, as set forth in the table below.

 

Name  2017
Target
Bonus
    Company
Performance
Factor
   Individual
Performance
Factor
    Proration
Factor
     2017
Performance
Cash Bonus
Jeffrey M. Leiden  $1,560,000    x  148%   x 150%   x   100%  =  $3,463,200
David Altshuler  $312,500    x  148%   x 138%   x 100%  =  $638,250
Thomas Graney  $247,500    x  148%   x 100%   x 30%  =  $110,392
Michael Parini  $362,500    x  148%   x 147%   x 100%  =  $788,655
Amit Sachdev  $270,375    x  148%   x 150%   x 100%  =  $600,233
Ian F. Smith  $637,500    x  148%   x 142%   x 100%  =  $1,339,770

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    62

 

Annual Equity Awards

 

Value-Based Guidelines for Annual NEO Equity Grants

 

Under our program our NEOs were eligible for awards with the following target values based on 2017 performance:

 

    Not Building   Building   Strong   Leading   Leading/Exemplary
CEO   $   $5,500,000   $11,000,000   $12,500,000   $14,000,000
EVP   $   $1,500,000   $3,000,000   $3,750,000   $4,500,000
SVP   $   $1,000,000   $2,000,000   $2,500,000   $3,000,000

 

The number of shares subject to the time-vested restricted stock units and performance stock units is based on the fair value of our common stock on the date of grant. The number of shares subject to the stock options is based on an estimate of the fair value of the stock options pursuant to the Black-Scholes option pricing model based on information available as of the grant date.

 

February 2018 Grants Based on 2017 Performance

 

In February 2018, our independent directors approved, upon the MDCC’s recommendation, individual performance factors and equity awards for 2017 performance for each of the NEOs, as set forth in the table below.

 

Name  Individual
Performance
Rating
  Performance-
Based RSU
(35%)
   Options
(30%)
   Time-based
RSU
(35%)
   Total Equity
Value
Jeffrey M. Leiden  Leading Exemplary  $4,900,000   $4,200,000   $4,900,000   $14,000,000
David Altshuler  Leading  $1,312,500   $1,125,000   $1,312,500   $3,750,000
Thomas Graney  Strong  $700,000   $600,000   $700,000   $2,000,000
Michael Parini  Leading  $1,312,500   $1,125,000   $1,312,500   $3,750,000
Amit Sachdev  Leading Exemplary  $1,575,000   $1,350,000   $1,575,000   $4,500,000
Ian F. Smith  Leading  $1,312,500   $1,125,000   $1,312,500   $3,750,000

 

(1) Estimates for value of equity-based awards granted in February 2018 for 2017 performance are based on our methodology for determining the grant-date fair value, including underlying assumptions for calculating these values as set forth in Note N to our consolidated financial statements included in our 2017 Annual Report on Form 10-K and are subject to adjustment.

 

The terms of the equity granted in 2018 are as follows:

 

Stock Options. Stock options are granted at fair market value on the date of grant and vest over four years.
   
Performance Stock Units. The PSUs vest, if at all, based half on financial and half on non-financial goals. The potential range of shares issuable pursuant to the performance stock unit awards range from 0% to 200% of the target shares based on financial and non-financial measures. Fifty percent of PSUs that could be earned have a one-year performance period with the amount actually earned dependent upon Vertex’s net product revenue performance and with vesting of the earned shares in three equal installments over a three-year period. The remaining 50% of PSUs that could be earned have a three-year performance period with the amount actually earned dependent upon the achievement of multiple clinical development milestones (i.e., advancement of CF and non-CF therapies in the clinic) and with the earned shares cliff vesting at the end of the three-year performance period.
   
Time-based Stock Units. The time-based restricted stock units vest over a three-year period, subject to continued service.

 

Performance Units Company Target and Results Table

 

We have granted one-year financial based performance restricted stock unit awards and three-year non-financial based restricted stock unit awards each year since 2016.

 

The final performance multipliers for the 2016 and 2017 financial-based performance restricted stock unit awards were determined by the MDCC and applied to the target units granted to determine the actual units earned and eligible to vest. The following chart shows the pre-established financial goals and the actual results for the financial-based performance restricted stock unit awards granted in 2016 and 2017:

 

Award Year  Company Goal  Threshold Target  Max  Results   Payout
2016  2016 CF Net Product Revenues  $ 1.65 billion $ 1.75 billion  $ 1.90 billion  $ 1.68 billion  66.5%
2017  2017 CF Net Product Revenues  $ 1.50 billion $ 1.70 to 1.85 billion  $ 2.05 billion  $2.17 billion  200.0%

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    63

 

Consistent with our philosophy of aligning compensation with performance:

 

In 2016, a year in which we achieved or exceeded our goals with respect to KALYDECO net product revenues, but missed our goals with respect to ORKAMBI net product revenues, the payouts on our one-year financial restricted stock unit awards were significantly below target and nearly fell below the threshold levels at which point there would have been no payout on those awards; and
   
In 2017, a year in which we substantially exceeded our KALYDECO net product revenues and ORKAMBI net product revenues expectations and exceeded the high end of our CF net product revenues guidance by more than $100 million, the payout on our one-year financial PSU awards achieved the maximum level.

 

The performance multiple for the 2016 and 2017 non-financial based performance restricted stock unit awards will be determined in the first quarter of 2019 and 2020, respectively, based on performance over the relevant three-year performance period. The non-financial goals contained in our 3-year performance restricted stock unit awards are not disclosed for competitive reasons and because the relevant performance periods are ongoing.

 

Other Compensation Arrangements

 

Benefits

 

Our executives are eligible to participate in all benefit programs on the terms made generally available to our employees, including medical insurance, dental insurance, payment of life insurance premiums, disability coverage, equity programs, including a career employment/retirement provision, and participation in our employee stock purchase plan. We have a defined contribution—a 401(k)—plan, in which our NEOs are eligible to participate. We make matching contributions to the 401(k) plan. The formula for determining the amount of our matching contributions is the same for our NEOs as for our other employees (and are subject to the same statutory maximum), but the actual contributions made to the accounts of our NEOs generally are at the top end of the range, due to the executives’ higher salaries and correspondingly higher cash contribution levels. We do not provide any other retirement benefits to our executive officers.

 

Employment Agreements and Post-Termination Compensation and Benefits

 

The initial compensation terms for newly hired members of our executive team are the result of negotiations between us, in consultation with the MDCC and our board of directors, and the executive being recruited. In general, each newly hired executive team member enters into an employment agreement and a change of control agreement and is awarded a stock option grant and/or a restricted stock unit award, and in some cases a cash sign-on bonus, reimbursement of moving expenses, and other benefits. We also enter into employment and change of control agreements with executives who are promoted to our executive team, on the basis of standard terms and conditions that have been recommended by our MDCC and approved by our board for such circumstances. We have entered into agreements providing for severance and change of control payments with each of the members of our executive team, including all of the NEOs, because we believe that they are a fair and effective way to allow our executives to maintain focus on our business in the face of market and other volatility in our industry.

 

In general, each employment arrangement provides for cash severance and continuation of certain employee benefits in the event that an executive’s employment is terminated by us without cause or is terminated by the executive for good reason. We use a “double trigger” with respect to benefits that are to be provided in connection with a change of control. A change of control does not itself trigger benefits; rather, benefits are paid only if the employment of the executive is terminated by us other than for cause, death or disability, or by the executive for good reason, during a specified period before or after a change of control. We believe a “double trigger” benefit maximizes shareholder value because it prevents a windfall to executives in the event of a change of control in which the executive retains significant responsibility as defined in his or her individual agreement, while still providing our executives appropriate incentives to cooperate in negotiating any change of control that may put their jobs at risk.

 

In addition to the benefits that only accrue in connection with a change of control, our agreements with our executive officers provide benefits if we terminate their employment with us without cause or they terminate their employment with us for good reason, as such terms are defined in the applicable agreement with the executive officer. A further discussion of the terms and projected payments under each of our agreements with our named executive officers is set forth below under the heading Employment Contracts and Change of Control Arrangements.

 

Tax Considerations

 

We would like our compensation program to be reasonably cost and tax effective. To the extent consistent with our other goals, we seek to preserve corporate tax deductions, while maintaining the flexibility to approve compensation arrangements that we believe are in the best interests of the company and our shareholders. The approach does not always result in full tax deductibility.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    64

 

Compensation Practices

 

Equity Grant Practices

 

The exercise price for each stock option awarded to our executive officers under our equity compensation program is equal to the fair market value of our common stock on the date of grant, which under our equity plans is the average of the high and low price for our common stock on the date of grant. Our board of directors generally grants annual equity awards to named executive officers at a board meeting scheduled in advance for early February. Scheduling decisions are made without regard to anticipated earnings or other major announcements by the company.

 

Newly hired employees, including executive officers, are sometimes granted options and/or restricted stock units effective on the first day of employment, with the options having an exercise price set at the average of the high and low price for our common stock on the employment start date. The employees’ start dates are scheduled without regard to anticipated earnings or other major announcements by the company.

 

In the past, the MDCC has recommended that our board make an additional, off-cycle equity award to an executive officer or group of officers in order to achieve one or more of the objectives of our executive compensation program. Supplemental grants have been made on an ad hoc basis, when warranted in the judgment of the MDCC and our board. No such supplemental grants of equity compensation were made in 2017. Our MDCC and board do not currently anticipate making supplemental grants in 2018, but retain the discretion to do so if warranted in their judgment.

 

Compensation Recoupment (“Clawback”) Policy

 

We have adopted a recoupment or clawback policy providing that, if our board of directors determines that an executive officer engaged in fraud or intentional misconduct that resulted in an incorrect determination that an incentive compensation performance goal had been achieved, the board may take appropriate action to recover from such executive officer any compensation that resulted from such determination. The board may require repayment for any bonus, equity or incentive compensation awarded to an executive officer who engaged in the fraud or intentional misconduct to the extent it was based on such incorrect determination.

 

Stock Ownership Guidelines

 

We have stock ownership guidelines for our chief executive officer and NEOs and guidelines for our non-employee directors, as discussed in Non-Employee Director Stock Ownership Guidelines on page 28 of this proxy statement. The guidelines for our CEO and Executive Vice Presidents are set forth in the following table:

 

Employee Minimum Shareholding Requirement
Chief Executive Officer 6X base salary or 150K shares of our common stock
Executive Vice Presidents 4X base salary

 

Individual holdings, and holdings of immediate family members, of (a) common stock, including unvested restricted stock, (b) restricted stock units and (c) shares held through our 401(k) plan count toward meeting these guidelines. Our chief executive officer and our executive vice presidents currently satisfy the individual holding requirements.

 

Anti-Hedging and Pledging Policy

 

We prohibit all of our directors and employees, including our named executive officers, from (i) short selling or hedging our securities, (ii) purchasing or selling derivative securities based on our securities and (iii) pledging our securities.

 

Risk Mitigation

 

Our MDCC reviews the risks and rewards associated with our compensation programs. The programs are designed with features that mitigate risk without diminishing the incentive nature of the compensation. We believe our compensation programs encourage and reward prudent business judgment and appropriate risk-taking over the short term and the long term. Our MDCC regularly evaluates the risks involved with our compensation programs and does not believe that any of our compensation programs create risks that are reasonably likely to have a material adverse effect on our company.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    65

 

We believe that our annual cash bonus and long-term equity compensation programs, which account for most of our executive officers’ compensation, contain appropriate risk mitigation factors, as summarized below:

 

What We Do What We Don’t Do
Caps on awards No executive perquisites
Multiple performance factors No supplemental pension benefits for executives
Range of awards; not all or nothing No single-trigger vesting in connection with a change-in-control for equity awards
Compensation recoupment (clawback) policy No hedging or pledging or speculative transactions in our securities
  by directors and executive officers
Balance of Short- and Long-term Incentives (through annual cash bonuses and equity awards) No re-pricing of equity awards without shareholder approval
Anti-hedging policy No payment of dividends on unvested performance shares or units
Executive and Non-Employee Director Stock Ownership Guidelines
Policy against gross-ups  
Independent compensation consultant  
Robust shareholder outreach  

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    66

 

MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE REPORT

 

The Management Development and Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed that analysis with management. Based on its review and its discussions with management, the Management Development and Compensation Committee recommended to Vertex’s Board of Directors that the Compensation Discussion and Analysis be included in Vertex’s proxy statement for its 2018 annual meeting of shareholders and incorporated by reference into Vertex’s Annual Report on Form 10-K for the year ended December 31, 2017. This report is provided by the following directors who comprise the Management Development and Compensation Committee:

 

Bruce I. Sachs (Chair)

Terrence C. Kearney

Elaine S. Ullian

William D. Young

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    67

 

COMPENSATION AND EQUITY TABLES

 

Summary Compensation Table

 

The following table provides summary information concerning compensation earned by: (i) our president and chief executive officer; (ii) our chief financial officer; (iii) our chief operating officer, who was our chief financial officer for a portion of 2017; and (iv) our other three most highly compensated employees who were serving as executive officers on December 31, 2017. We refer to these officers collectively as our named executive officers.

 

Name and
Principal Position
  Year   Salary   Bonus   Stock
Awards
   Option
Awards
   Non-Equity
Incentive Plan
Compensation
   All Other
Compensation
   Total 
Jeffrey M. Leiden   2017   $1,300,000   $   $8,750,114   $3,700,877        $3,463,200          $13,110   $17,227,301 
Chairman, President & CEO   2016   $1,300,000   $   $9,800,076   $4,060,397   $2,246,400   $12,885   $17,419,758 
    2015   $1,297,692   $   $7,038,885   $16,286,939   $3,463,200   $13,110   $28,099,826 
David Altshuler   2017   $596,731   $   $3,150,020   $1,332,316   $638,250   $13,110   $5,730,427 
EVP & Chief Scientific Officer   2016   $561,442   $   $2,625,152   $1,087,620   $500,250   $12,885   $4,787,349 
   2015   $528,846   $250,000   $9,078,750   $1,964,534   $552,628   $13,110   $12,387,868 
Thomas Graney   2017   $154,423   $150,000   $1,500,140   $   $110,392   $12,445   $1,927,400 
SVP & Chief Financial Officer                                        
Michael Parini   2017   $694,519   $   $3,150,020   $1,332,316   $788,655   $13,110   $5,978,620 
EVP & Chief Legal and   2016   $517,846   $250,000   $1,689,672   $4,731,100   $499,867   $41,779   $7,730,264 
Administrative Officer                                        
Amit Sachdev   2017   $540,750   $   $2,625,016   $1,110,263   $600,233   $10,001   $4,886,263 
EVP & Chief Regulatory Officer   2016   $540,750   $   $3,150,148   $1,305,144   $438,007   $960   $5,435,009 
Ian F. Smith   2017   $848,077   $   $2,625,016   $1,110,263   $1,339,770   $13,110   $5,936,236 
EVP & Chief Operating Officer   2016   $750,000   $   $3,150,148   $1,305,144   $562,500   $12,885   $5,780,677 
   2015   $701,796   $   $2,258,991   $5,199,586   $832,500   $13,110   $9,005,983 

 

Bonus

 

Pursuant to applicable SEC rules, the annual cash bonuses earned by our named executive officers are set forth under the caption “Non-Equity Incentive Plan Compensation.” Other bonuses, such as sign-on bonuses, are listed separately under the caption “Bonus.”

 

Stock Awards and Options Awards

 

Pursuant to applicable SEC rules, the grant-date fair values of the equity awards granted in February 2017 for 2016 performance are included in 2017 compensation. Equity awards granted in February 2018 for 2017 performance are not reflected in the Summary Compensation Table above and will be included as 2018 compensation in next year’s proxy statement. The amounts set forth under the captions “Stock Awards” and “Option Awards” in the table above represent the grant-date fair value of awards granted during the applicable fiscal year. Our methodology for determining the grant-date fair value, including underlying estimates and assumptions for calculating these values, is set forth in Note N to our consolidated financial statements included in our 2017 Annual Report on Form 10-K filed with the SEC on February 15, 2018.

 

The “Stock Awards” for 2017 consist of performance stock unit, or PSU, awards and time-vested restricted stock unit awards granted in February 2017 and a sign-on equity grant for Mr.  Graney in September 2017. The “Stock Awards” for 2016 consist of PSU awards and time-vested restricted stock unit awards granted in February 2016 and a sign-on equity grant for Mr. Parini in January 2016. The “Stock Awards” for 2015 consist of performance-accelerated restricted stock, or PARS, awards granted in February 2015 and a sign-on equity grant for Dr. Altshuler in February 2015.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    68

 

Non-Equity Incentive Plan Compensation—Annual Cash Bonus

 

The amounts set forth under the caption “Non-Equity Incentive Plan Compensation” in the table above represent annual cash bonuses for 2017, 2016 and 2015 performance, each of which was paid in the first quarter of the subsequent year. The cash bonus awards to the named executive officers for 2017 performance were determined as follows:

 

Name   Base Salary   Individual
Incentive
Target
      2017
Target
Bonus
  Company
Performance
Factor
  Individual
Performance
Factor
  Proration
Factor
      2017
Performance
Cash Bonus
 
Jeffrey M. Leiden   $ 1,300,000   x 120%   =   $ 1,560,000   x 148%   x 150%   x 100%   =   $ 3,463,200  
David Altshuler   $ 625,000   x 50%   =   $ 312,500   x 148%   x 138%   x 100%   =   $ 638,250  
Thomas Graney   $ 550,000   x 45%   =   $ 247,500   x 148%   x 100%   x 30%   =   $ 110,392  
Michael Parini   $ 725,000   x 50%   =   $ 362,500   x 148%   x 147%   x 100%   =   $ 788,655  
Amit Sachdev   $ 540,750   x 50%   =   $ 270,375   x 148%   x 150%   x 100%   =   $ 600,233  
Ian F. Smith   $ 850,000   x 75%   =   $ 637,500   x 148%   x 142%   x 100%   =   $ 1,339,770  

 

All Other Compensation

 

The amounts set forth under the caption “All Other Compensation” in the table for 2017 consist of:

 

Name  401(k)
Match
   Life Insurance
Premiums
   Total 
Jeffrey M. Leiden  $12,150   $960   $13,110 
David Altshuler  $12,150   $960   $13,110 
Thomas Graney  $12,150   $295   $12,445 
Michael Parini  $12,150   $960   $13,110 
Amit Sachdev  $9,041   $960   $10,001 
Ian F. Smith  $12,150   $960   $13,110 

 

CEO Pay Ratio

 

The overall structure of our compensation and benefits programs are broadly similar across our organization, including a broad-based equity program pursuant to which all full-time employees receive equity, with differences reflecting the level of responsibility of the employees.

 

In 2017:

 

The ratio of our CEO total compensation for Dr. Leiden to our median employee’s total compensation was 81:1
   
Dr. Leiden’s total compensation equaled $17.2 million
   
The total compensation for Vertex’s median employee equaled $211,511

 

The 2017 compensation for our CEO and median employee were calculated using the same methodology required by the SEC for reporting named executive officer compensation in the Summary Compensation Table.

 

Methodology

 

Our measure of compensation for the median employee was consistently applied and includes:

 

Base salary (including any local allowances)
   
Incentive pay (including cash bonuses, sales incentives and other variable pay programs)
   
Grant date fair value of equity awards
   
Any other cash awards or payments

 

We included all Vertex employees on October 1, 2017 located in five countries for the purposes of determining the median employee, which represented 95% of our employees globally (2,208 of our 2,323 employees global employees). As of October 1, 2017, we had 1,882 U.S. employees. We excluded 115 employees from 13 countries (Canada, France, Italy, Netherlands, Spain, Ireland, Sweden, Austria, Brazil, Denmark, Greece, Belgium and Portugal) under the SEC’s de minimis exception.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    69

 

We used the following material assumptions in applying our methodology:

 

Annualized Pay. Base pay was annualized for employees who worked a partial year.
   
Reasonable Estimates. Variable pay programs are a significant component of our pay for performance philosophy. Reasonable estimates were used for employees whose participation in our annual cash incentives/bonuses and long-term incentives/equity awards were limited by their date of hire; provided that (i) no estimate was used for annual cash incentives/bonuses if an employee received any form of cash award upon hire and (ii) no estimate was used for long-term incentives/equity awards if an employee received an equity award upon hire.
   
Foreign Exchange Rates. Foreign currencies were converted into U.S. dollars using the average monthly rates for the 12 month measurement period.

 

Option Exercises and Stock Vested for 2017

 

The following table sets forth the value realized by our named executive officers from options to purchase common stock exercised by the named executive officers during 2017 and shares of stock that vested during 2017. The value realized per share for options is based on the difference between the exercise price and the fair market value of the shares of common stock on the date the options were exercised. The value realized on vesting of stock awards is based on the fair market value of the shares on the vesting date.

 

   Option Awards   Stock Awards 
Name  Number of Shares
Acquired on
Exercise
   Value Realized
on Exercise
   Number of Shares
Acquired on
Vesting
   Value Realized
on Vesting
 
Jeffrey M. Leiden   482,572   $48,715,169    181,154   $25,009,344 
David Altshuler   45,775   $3,201,515    6,403   $568,330 
Thomas Graney      $    2,391   $360,348 
Michael Parini   17,614   $1,215,588    3,450   $290,835 
Amit Sachdev   131,000   $8,996,220    56,309   $8,090,519 
Ian F. Smith   239,013   $18,549,751    93,034   $13,644,357 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    70

 

Grants of Plan-Based Awards During 2017

 

The following table provides information with respect to grants of awards to each of our named executive officers during 2017. Pursuant to SEC rules, (i) the threshold, target and maximum amounts payable pursuant to our 2017 annual cash bonus program are set forth in columns three through five, (ii) the threshold, target and maximum number of shares that could vest pursuant to PSUs granted in 2017 are set forth in columns six through eight, (iii) the number of shares granted pursuant to other restricted stock unit awards in 2017, including a sign-on equity grant for Mr. Graney, is set forth in column nine and (iv) the number of shares subject to option awards granted in 2017 is set forth in column ten.

 

       Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
   Estimated Future Payouts
Under Equity Incentive Plan
Awards (shares)
   All Other
Stock
Awards:
Number of
Shares of
Stock or
   All Other
Option
Awards:
Number of
Securities
Underlying
   Exercise
or Base
Price of
Option
   Closing
Price of
Stock on
   Grant-Date
Fair Value
of Stock
and Option
 
Name  Grant Date   Threshold
($)
   Target
($)
   Maximum
($)
   Threshold
(#)
   Target
(#)
   Maximum
(#)
   Units
(#)
   Options
(#)
   Awards
($/Sh)
   Grant Date
($/Sh)
   Awards
($)
 
Jeffrey M. Leiden       $0   $1,560,000   $3,510,000                                         
    2/3/2017                   0    25,284    50,568                       $2,187,572 
    2/3/2017                   0    25,283    50,566                       $2,187,485 
    2/3/2017                                  50,567                  $4,375,057 
    2/3/2017                                       103,550   $86.52   $86.73   $3,700,877 
David Altshuler       $0   $312,500   $703,125                                         
    2/3/2017                   0    9,102    18,204                       $787,505 
    2/3/2017                   0    9,102    18,204                       $787,505 
    2/3/2017                                  18,204                  $1,575,010 
    2/3/2017                                       37,278   $86.52   $86.73   $1,332,316 
Thomas Graney       $0   $74,589   $167,825                                         
    9/13/2017                                  9,566                  $1,500,140 
Michael Parini       $0   $362,500   $815,625                                         
    2/3/2017                   0    9,102    18,204                       $787,505 
    2/3/2017                   0    9,102    18,204                       $787,505 
    2/3/2017                                  18,204                  $1,575,010 
    2/3/2017                                       37,278   $86.52   $86.73   $1,332,316 
Amit Sachdev       $0   $270,375   $608,344                                         
    2/3/2017                   0    7,585    15,170                       $656,254 
    2/3/2017                   0    7,585    15,170                       $656,254 
    2/3/2017                                  15,170                  $1,312,508 
    2/3/2017                                       31,065   $86.52   $86.73   $1,110,263 
Ian F. Smith       $0   $637,500   $1,434,375                                         
    2/3/2017                   0    7,585    15,170                       $656,254 
    2/3/2017                   0    7,585    15,170                       $656,254 
    2/3/2017                                  15,170                  $1,312,508 
    2/3/2017                                       31,065   $86.52   $86.73   $1,110,263 

 

Annual Cash Bonus. The amounts in the “Estimated Possible Payouts Under Non-Equity Incentive Plan Awards” column represent the minimum threshold, target and maximum amounts that our named executive officers were eligible for pursuant to our 2017 annual cash bonus program. The amounts for Mr. Graney, who joined our company in September 2017, reflect the pro rata portion of the amount of his potential annual cash bonus in 2017. Actual amounts paid to each of the named executive officers under this program for 2017 performance are set forth in the Summary Compensation Table above.

 

PSU. The amounts in the “Estimated Future Payouts Under Equity Incentive Plan Awards” column represent the minimum threshold, target and maximum amounts that could vest pursuant to PSUs granted in 2017. These awards vest if, and only if, performance objectives are achieved, as described in the footnotes to the table Outstanding Equity Awards at Fiscal Year-End for 2017 below.

 

Time-Based Restricted Stock Units. The amounts in the “All Other Stock Awards: Number of Shares of Stock or Units” column represent the number of time-based restricted stock units granted to the named executive officers in 2017 and a sign-on equity grant for Mr. Graney in September 2017. The number of time-based restricted stock units to these named executive officers were made in February 2017 on account of the executives’ performances in 2016.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    71

 

Options. In accordance with our stock and option plans, the exercise prices for the stock options granted to our named executive officers during 2017 were equal to the average of the high and the low prices of our common stock on the grant date. As a result, in 2017, the exercise prices of options granted to our named executive officers were lower than the grant-date closing price for the February 3, 2017 grants. In the future, we expect that options will continue to be granted with exercise prices equal to the average of the high and low prices of our common stock on the grant date, and that as a result the exercise prices are likely to be different from the closing price of our common stock on the grant date. Each stock option set forth in the table above was granted subject to vesting in 16 quarterly installments during the first four years of its ten-year term.

 

Outstanding Equity Awards at Fiscal Year-End for 2017

 

The following table provides information with respect to outstanding equity awards held by each of our named executive officers on December 31, 2017, based on the closing price of $149.86 per share of our common stock on December 29, 2017:

 

   Option Awards    Stock Awards
Name  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(shares)(1)
   Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(shares)(1)
   Option
Exercise
Price
(per share)
   Option
Expiration
Date(2)
  Number
of Shares
or Units of
Stock That
Have Not
Vested
(shares)
    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
   Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That
Have Not Vested
(shares)
    Equity Incentive
Plan Awards:
Market or Payout
Value of Unearned
Shares, Units
or Other Rights
That Have Not
Vested
 
Jeffrey M. Leiden   Restricted Stock                                    
                      32,250(2)   $4,832,985            
    Time-based RSU                                    
                      35,878(3)   $5,376,677            
                      50,567(4)   $7,577,971            
   Performance-based RSU                                    
                      11,930(5)   $1,787,830            
                                 26,908(6)   $4,032,433 
                                 25,284(7)   $3,789,060 
                                 25,283(8)   $3,788,910 
    Stock Options                                    
    55,313    0   $45.11   2/4/2023                      
    44,250    0   $48.74   7/24/2022                      
    199,687    13,313   $77.31   2/4/2024                      
    106,500    0   $83.36   7/29/2023                      
    19,415    84,135   $86.52   2/2/2027                      
    46,933    60,343   $91.05   2/1/2026                      
    86,531    19,969   $96.87   7/14/2024                      
    146,437    66,563   $109.14   2/2/2025                      
    59,906    46,594   $131.89   7/20/2025                      
David Altshuler   Restricted Stock                                    
                      75,000(9)   $11,239,500           
    Time-based RSU                                    
                      9,611(3)   $1,440,304            
                      18,204(4)   $2,728,051            
   Performance-based RSU                                    
                      3,196(5)   $478,953            
                                 7,208(6)   $1,080,191 
                                 9,102(7)   $1,364,026 
                                 9,102(8)   $1,364,026 
    Stock Options                                    
    6,989    30,289   $86.52   2/2/2027                      
    1,796    16,164   $91.05   2/1/2026                      
    19,125    14,875   $131.89   7/20/2025                      
Thomas Graney   Time-based RSU                                    
                      7,175(10)   $1,075,246            

 

VERTEX PHARMACEUTICALS INCORPORATED - 2018 Proxy Statement    72

 
   Option Awards   Stock Awards
Name  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(shares)(1)
   Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(shares)(1)
   Option
Exercise
Price
(per share)
   Option
Expiration
Date(2)
  Number
of Shares
or Units of
Stock That
Have Not
Vested
(shares)
    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
   Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That
Have Not Vested
(shares)
    Equity Incentive
Plan Awards:
Market or Payout
Value of Unearned
Shares, Units
or Other Rights
That Have Not
Vested
 
Michael Parini   Restricted Stock                                    
                      10,350(11)   $1,551,051            
    Time-based RSU                                    
                      18,204(5)   $2,728,051            
   Performance-based RSU                                    
                                 9,102(7)   $1,364,026 
                                 9,102(8)   $1,364,026 
    Stock Options