DEF 14A 1 lvrt2019_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

 

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VERTEX PHARMACEUTICALS INCORPORATED

 

(Name of Registrant as Specified In Its Charter)

 

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Dear Shareholders:

 

Since 2012 we have executed on our strategy of investing in scientific innovation to create transformative medicines for people with serious diseases - a strategy we believe maximizes benefits for patients and generates long-term value for shareholders. By all measures, 2018 was an extraordinary year for Vertex, as we accelerated our Phase 3 triple combination programs in cystic fibrosis, advanced and expanded our pipeline into disease areas outside of CF and delivered exceptional performance for our shareholders. Over the longer term, the successful execution of our strategy has caused Vertex to grow from a market capitalization of approximately $7 billion in early 2012 to over $45 billion in early 2019.

 

In CF, we are on the brink of delivering a triple combination regimen that will provide superior benefit to the vast majority of CF patients, bringing us closer to our goal of creating highly effective treatments for all patients with CF. In 2018, we accelerated the clinical development of two triple combination regimens -initiating Phase 3 development in early 2018 and obtaining positive Phase 3 clinical data from both of these programs by early 2019. Based upon this data, we are on track to submit an NDA in the United States for a triple combination regimen in the third quarter of 2019, followed soon thereafter by regulatory submissions in the European Union and other jurisdictions. We believe that in 2020, just four years after the initial discovery of VX-445 and VX-659, we will begin delivering a triple combination regimen to CF patients, including many who have been waiting years for the first treatment for the underlying cause of their disease and others who are eligible for our current medicines but could benefit from improved treatment options.

 

Beyond CF, we expanded our pipeline by advancing multiple programs into the clinic and obtaining important data from ongoing trials. In late 2018, we initiated a clinical trial for our first drug candidate with the potential to treat alpha-1 antitrypsin deficiency, a genetic disorder that results in life-shortening complications in the lung and liver. In pain, we have generated compelling Phase 2 data in three different pain types - acute pain, musculoskeletal pain and neuropathic pain - with VX-150, a non-opioid drug candidate that inhibits NaV1.8. In collaboration with CRISPR Therapeutics, we also initiated clinical trials to evaluate CTX001, a CRISPR/Cas9 gene editing therapy, as a potential treatment for sickle cell disease and beta thalassemia. In addition to these drug candidates, we expect that we will advance additional compounds into the clinic in 2019, including potential additional compounds targeting pain and alpha-1 antitrypsin deficiency and our first compound targeting focal segmental glomerulosclerosis, a serious kidney disease. This rapid expansion of our pipeline is the result of a research strategy that applies the lessons we learned in CF regarding the importance of: validated targets that address causal human biology; predictive lab assays and clinical biomarkers that give us an early indication of clinical efficacy; rapid paths to regulatory approval; and a focus on transformative medicines regardless of modality.

 

Our ability to bring our CF medicines to many more patients resulted in $3.0 billion in total CF revenues in 2018, a 40% increase as compared to 2017, and we expect product revenues to continue to increase in 2019 and beyond. Our revenue growth, together with disciplined operating expense management, has created significant positive cash flows and expanding operating income, all while allowing us to continue investing in innovation to generate additional transformational medicines.

 

While we are gratified that our accomplishments have been reflected in our business performance, we are proudest of the way that our medicines are positively impacting the lives of patients with CF. There is no more meaningful statement of the power of transformative medicines than their ability to change the way patients think about themselves and their future.

 

Sincerely,

 

 

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

Chairman, Chief Executive Officer and President

 

 

Notice of Annual Meeting of Shareholders

 

Wednesday, June 5, 2019

9:30 a.m.

50 Northern Avenue

Boston, Massachusetts 02210

 

Dear Shareholders:

 

You are invited to attend Vertex Pharmaceuticals Incorporated’s 2019 Annual Meeting of Shareholders. At the meeting, shareholders will vote:

 

  to elect the six director nominees that are set forth in the attached proxy statement to one year terms expiring in 2020;
  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 5.0 million shares;
  to approve an amendment and restatement of our Employee Stock Purchase Plan that, among other things, increases the number of shares authorized for issuance under this plan by 2.0 million shares;
  to ratify the selection of Ernst & Young LLP as our independent registered public accounting firm for 2019;
  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 April 10, 2019.

 

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 26, 2019

 

By Order of the Board of Directors

 

 

Sabrina Yohai

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 29, 2019. This proxy statement and our Annual Report on Form 10-K for the year ended December 31, 2018 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

 

By all measures, 2018 was an extraordinary year for Vertex, as we continued to execute on our strategy of investing in scientific innovation to create transformative medicines for people with serious diseases. In 2018, we obtained approval for and launched SYMDEKO/SYMKEVI, our third medicine for CF, and accelerated the development of our triple combination regimens, which we believe will allow us to treat the vast majority of patients with CF and will provide an improved treatment option for many patients currently taking our medicines. Outside of CF, we advanced our Phase 2 clinical program in pain, initiated our first clinical trial of a potential medicine for alpha-1 anti-trypsin deficiency and the first clinical trial for CTX001, which we are co-developing with CRISPR Therapeutics, as a potential treatment for beta thalassemia and sickle cell disease. Our exceptional performance in 2018 included 40% growth in total product revenues and increasing cash flows. As we enter 2019, we are on track to deliver more new transformative medicines for patients thereby increasing revenues, expanding operating income and creating long-term shareholder value.

 

Financial Performance

 

Our CF medicines, KALYDECO, ORKAMBI and SYMDEKO/SYMKEVI, are transforming the lives of eligible patients around the globe and driving our financial performance.

 

Our CF net product revenues increased to $3.04 billion in 2018, up 40% as compared to 2017
We exceeded our initial CF net product revenue guidance in 2018 by $313 million ($3.04 billion as compared to the mid-point of our initial guidance of $2.73 billion)
Our GAAP net income increased to $2.1 billion in 2018 from GAAP net income of $263 million in 2017
Our non-GAAP net income increased to $1.1 billion in 2018, up $564  million, or 114%, from 2017, driven by our increased net product revenues (a reconciliation of non-GAAP net income is provided in Appendix C)
We increased our net cash position by approximately $1.1 billion in 2018, to approximately $3.2 billion
In 2019, we expect to further increase CF product revenues by approximately 15% and to continue generating substantial cash flows
Beyond 2019, our CF net product revenues and operating income are positioned for substantial further growth if we are successful in obtaining approval for a triple combination regimen

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 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 in the United States. Since then, we have followed a focused strategy of developing new medicines for CF: expanding the number of patients eligible for our medicines and seeking improved treatment options for all patients. We believe our triple combination regimens will provide the first treatment for the underlying cause of CF for patients with the F508del mutation and a mutation that results in minimal function in the defective CFTR protein (referred to as F508del/Min patients) as well as an improved treatment option (greater efficacy) for the vast majority of CF patients currently using our medicines.

 

 

CF Medicines

 

Since the beginning of 2018, we have:

 

Obtained approval for SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor) in the United States in early 2018 and in the European Union in late 2018
Successfully launched SYMDEKO in the United States
Obtained regulatory approvals and advanced clinical trials designed to provide younger children access to our CF medicines
Entered into innovative long-term access agreements in ex-U.S markets, including Australia, Denmark, Israel, Luxembourg and Sweden

 

Triple Combinations Regimens

 

Since the beginning of 2018, we have:

 

Accelerated our Phase 3 development program for triple combination regimens
Announced positive data from two Phase 3 clinical trials evaluating the triple combination of VX-659, tezacaftor and ivacaftor in F508del/Min patients and F508del homozygous patients 12 years of age or older
Announced positive data from two Phase 3 clinical trials evaluating the triple combination of VX-445, tezacaftor and ivacaftor in F508del/Min patients and F508del homozygous patients 12 years of age or older
Positioned ourselves to submit for one triple combination regimen — an NDA in the United States in the third quarter of 2019 and an MAA in the European Union in the fourth quarter of 2019
Initiated a Phase 1 clinical trial to evaluate VX-121, an additional next-generation CFTR corrector

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    6

 

Non-CF Pipeline

 

Over the last decade, we have demonstrated an ability to serially discover and develop multiple transformative medicines for serious diseases. In 2018, we and our collaborators continued our serial innovation, advancing promising non-CF programs for important diseases. Specifically, since the beginning of 2018, we have:

 

Initiated a Phase 1 clinical trial for a novel drug candidate for alpha-1 antitrypsin deficiency
Initiated Phase 1/2 clinical trials of CTX001, an investigational gene-editing treatment that we are evaluating as a potential treatment for beta-thalassemia and sickle cell disease
Obtained clinical proof-of-concept from Phase 2 clinical trials evaluating VX-150, a selective non-opioid NaV1.8 inhibitor, as a potential treatment for pain
Advanced our research program for focal segmental glomerulosclerosis into late-stage preclinical development
Janssen Pharmaceuticals, our collaborator, is conducting Phase 3 development of pimodivir as a potential treatment for influenza

 

   
*   We are co-developing CTX001 with CRISPR Therapeutics
**  We have outlicensed pimodivir to Janssen Pharmaceuticals and M6620 to Merck KGaA

 

Increased Shareholder Value

 

Driven by our exceptional performance and our pipeline success, our stock price increased by 11% from $149.86 per share to $165.71 per share in 2018. In 2018, our total shareholder return was positive 10.6% as compared to negative total shareholder returns for the Nasdaq Biotechnology Index, or NBI, and the S&P 500 index.

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    7

 

Although we were pleased with our performance in 2018, biotechnology companies are best measured over the long term and in comparison with their peers, as opposed to in one-year increments and in isolation. The following chart shows our total shareholder return during the 1-year, 3-year and 5-year periods ending December 31, 2018 compared to the NBI and 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 pages 51 and 52).

 

 

2018 Compensation Decisions and Pay-for Performance

 

In 2018, we received support from 96% of our shareholders on our say-on-pay proposal. We believe this support is consistent with our shareholders’ understanding of our business model and the long-term value we are creating. In 2018, 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 closely ties pay with performance and has contributed to our short- and long-term successes
The company’s exceptional performance in 2018 resulted in a leading rating (a company rating of 148.5 out of a potential 150) for 2018 and annual cash bonuses near the high end of the range for 2018, commensurate with the performance described above
Our CEO’s salary has been unchanged at $1.3 million since 2014 and is aligned with the median CEO base salary of our peer companies. We increased the base salaries of certain of our other named executive officers by approximately 7% based on a comparative analysis with our peer group
We increased our target equity grants by $1.0 million for our CEO and $500,000 for our executive vice presidents based on a market analysis of our peer group
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 long-term retention tool

 

Corporate Social Responsibility

 

Vertex has grown into a leading global biotechnology company that serially innovates to bring transformative medicines to people with serious diseases around the world. As we’ve grown, so too has our commitment to corporate social responsibility. As a reflection of that commitment, Barron’s included Vertex on Barron’s 100 Most Sustainable Companies list.

 

Community. In 2018, Vertex and its employees supported more than 1,100 nonprofit organizations in 13 countries through Vertex Volunteers and The Vertex Foundation’s Matching Gift Program. The Vertex Foundation, a long-term source of charitable giving that was established in 2017, seeks to improve the lives of people with serious diseases and in its communities through education, innovation, and health. These efforts are part of our 10-year, $500 million corporate giving commitment.
Workplace. Our commitment to diversity and inclusion on our board and in our workforce is ingrained in our culture. Five of our ten directors are diverse on a gender and/or ethnic basis. 51% of our global workforce and 38% of our leadership are women. We have been recognized for these efforts, ranking fifth among 1,000 companies in Forbes’ 2019 Best Employers for Diversity list.
Environment. We are committed to sustainability, with strong local efforts reducing our environmental impact. Vertex’s facilities in Boston and San Diego are LEED Gold certified, and we are on track to reduce emissions by 35% by 2020 at our Boston site (over a 2015 baseline). We are building on these efforts and working to establish long-term environmental targets.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    8

 

Corporate Governance

 

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 - 2019 Proxy Statement    9

 
Voting Matters    
     
Item 1:   FOR
Election of Directors for One Year Term Expiring in 2020   all Nominees
     
Item 2:   FOR
Approval of Amendment and Restatement of 2013 Stock and Option Plan    
     
Item 3:   FOR
Approval of Amendment to Employee Stock Purchase Plan    
     
Item 4:   FOR
Ratify Selection of Independent Auditor for 2019    
     
Item 5:   FOR
Approve, on an Advisory Basis, Our Named Executive Officer Compensation    
     
Item 6:   AGAINST
Shareholder Proposal Regarding Report Relating to Drug Pricing and Executive Compensation    
     
Item 7:   AGAINST
Shareholder Proposal Regarding Lobbying Report    

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    10

 

Table of Contents

 

ITEM 1: ELECTION OF DIRECTORS 13
     
Board Structure and Composition 13
Shareholder-Recommended Director Candidates 15
Majority Vote Standard 15
Director Nominees 16
Continuing Directors — Terms to Expire in 2020 18
   
CORPORATE GOVERNANCE AND RISK MANAGEMENT 20
   
Independence, Chair and Co-Lead Independent Directors 20
Board Committees 20
Risk Management 20
Code of Conduct 21
Board Attendance, Committee Meetings and Committee Membership 21
Public Policy and Engagement 23
   
DIRECTOR COMPENSATION 24
   
CORPORATE SOCIAL RESPONSIBILITY 26
   
Community 26
Workplace 26
Environment 27
   
ITEM 2:  AMENDMENT AND RESTATEMENT OF 2013 STOCK AND OPTION PLAN 28
   
Summary of the Amended and Restated 2013 Stock and Option Plan 29
Equity Compensation Plan Information 34
   
ITEM 3: AMENDMENT AND RESTATEMENT OF ESPP 35
     
Summary of Employee Stock Purchase Plan 35
   
ITEM 4: RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 37
     
Engagement of Ernst & Young LLP 37
Effect of Vote 37
Independent Registered Public Accounting Firm Fees 37
Audit and Finance Committee Pre-Approval Policies and Procedures 38
   
AUDIT AND FINANCE COMMITTEE REPORT 39
   
ITEM 5: ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION 40
     
ITEM 6: SHAREHOLDER PROPOSAL REGARDING DRUG PRICING 41
     
ITEM 7: SHAREHOLDER PROPOSAL REGARDING LOBBYING 43

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    11

 
COMPENSATION DISCUSSION AND ANALYSIS 44
   
Overview   45
Detailed Discussion and Analysis 50
   
MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE REPORT 64
   
COMPENSATION AND EQUITY TABLES 65
   
Summary Compensation Table 65
Grants of Plan-Based Awards During 2018 67
Option Exercises and Stock Vested for 2018 68
Outstanding Equity Awards at Fiscal Year-End for 2018 69
   
SUMMARY OF TERMINATION AND CHANGE OF CONTROL BENEFITS 72
   
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS 74
   
PAY RATIO   77
     
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 78
   
Section 16(a) Beneficial Ownership Reporting Compliance 79
   
OTHER INFORMATION 80
   
Other Matters   80
Shareholder Proposals for the 2020 Annual Meeting and Nominations for Director 80
Shareholder Communications to the Board 80
Householding of Annual Meeting Materials 81
Solicitation   81
Availability of Materials 81
Forward Looking Statements 81
   
FREQUENTLY ASKED QUESTIONS REGARDING THE ANNUAL MEETING 82
   
APPENDIX A: AMENDED AND RESTATED 2013 STOCK AND OPTION PLAN 85
     
APPENDIX B: VERTEX PHARMACEUTICALS INCORPORATED EMPLOYEE STOCK PURCHASE PLAN 96
     
APPENDIX C: NON-GAAP FINANCIAL MEASURES 101

 

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 2019 annual meeting of shareholders and at any postponements or adjournments thereof. The annual meeting will be held on Wednesday, June 5, 2019, 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 29, 2019. Our 2018 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 - 2019 Proxy Statement    12

 
Item 1 Election of Directors

 

Our board of directors has nominated Sangeeta Bhatia, Lloyd Carney, Terrence Kearney, Yuchun Lee, Jeffrey Leiden, and Bruce Sachs for election at our 2019 annual meeting of shareholders to hold office until our 2020 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. Six members of our board of directors will be up for election at our 2019 annual meeting of shareholders and all of our board members will be up for election at our 2020 annual meeting of shareholders. Sangeeta Bhatia, Lloyd Carney, Terrence Kearney, Yuchun Lee, Jeffrey Leiden, and Bruce Sachs have been nominated by our board for election at the 2019 annual meeting of shareholders for one-year terms that will expire at the 2020 annual meeting of shareholders. Elaine Ullian, a current director, is not standing for re-election 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 or unwilling to serve for any reason, 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 ten members on our board and expect to have nine members of our board following the 2019 annual meeting of shareholders. 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. It also seeks personal qualities that foster a respectful environment in which our directors listen to one another and hold engaged and constructive discussions. 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. Our commitment to diversity is demonstrated by the composition of our board, which includes three women and three ethnically diverse individuals.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    13

 

The follow table and charts provide information regarding our director nominees, each of whom is a continuing director, and Elaine Ullian, who is not seeking reelection at our 2019 annual meeting of shareholders.

 

  Bhatia Carney Garber Kearney Lee Leiden McGlynn Sachs Ullian Young
Leadership Experience. We believe that directors who have held significant leadership positions over extended periods of time provide our company with special insights.
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.            
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.
Independence Y Y Y Y Y N Y Y Y Y
Age 50 57 63 64 53 63 59 59 71 74
Tenure on Board 3 0 1 7 6 9 7 20 21 4
Gender F M M M M M F M F M
Ethnic Diversity              

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    14

 

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 2020 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 2020 Annual Meeting and Nominations for Director on page 80 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:

 

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 are set forth in Exhibit 3.1 of a Quarterly Report on Form 10-Q 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 2020 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 2020 Annual Meeting and Nominations for Director on page 80 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 - 2019 Proxy Statement    15

 

Director Nominees

 

Present Terms Expiring in 2019 and Proposed Terms to Expire in 2020

 

Sangeeta Bhatia, M.D., Ph.D.

 

Age: 50 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, or MIT, where she currently serves as the John J. and Dorothy Wilson Professor of Health Sciences & Technology/Electrical Engineering & Computer Science. For the 2018 year, Dr. Bhatia was on sabbatical from MIT while she served as a co-founder of Glympse Bio, a private company focused on developing in vivo sensing technology dedicated to disease monitoring. Prior to joining MIT 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 a Sc.B. in biomedical engineering from Brown University, an S.M. and Ph.D. in Mechanical Engineering from MIT 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.

 

Lloyd Carney

 

Age: 57 Committee Assignments:
Director Since: 2019 Expected to Join – Audit and Finance Committee

 

Mr. Carney is the Chairman and Chief Executive Officer of ChaSerg Technology Acquisition Corp., a technology acquisition company. He was the Chief Executive Officer of Brocade Communications Systems Inc., or Brocade, a global supplier of networking hardware and software, from January 2013 until 2017, when it was acquired by Broadcom. Prior to Brocade, he served as Chief Executive Officer of Xsigo Systems, a cloud-based infrastructure solutions provider, until its acquisition by Oracle. He has also served as the Chief Executive Officer and Chairman of Micromuse Inc., a software solutions provider for business and service assurance, until its acquisition by IBM. Earlier in his career he had held senior leadership roles at Juniper Networks, Inc., Nortel Networks Inc., and Bay Networks, Inc. He currently sits on the board of directors at Visa Inc. and Nuance Communications, Inc. He holds a Bachelor of Science degree in Electrical Engineering Technology from Wentworth Institute, a Master of Science degree in Applied Business Management from Lesley College, and an Honorary Doctorate degree in Engineering from Wentworth Institute.

 

Skills and Qualifications: Mr. Carney brings strong business judgment, honed through his time as a senior executive and board member of multiple global technology companies, to our board of directors. Mr. Carney has extensive corporate leadership experience, including service as the CEO of several technology companies, as well as financial expertise.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    16

 

Terrence Kearney

 

Age: 64 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. He served as a member of the Board of Directors of Innovia (formerly known as Theravance, Inc.), a royalty management company, from October 2014 through April 2016, and as member of the Board of Directors of AveXis, Inc., a gene therapy company, from January 2016 until its acquisition in May 2018. Mr. Kearney has been a member of the Board of Directors of Levo Therapeutics, Inc., a biotechnology company focused on developing treatments for Prader-Willi Syndrome, since 2018. 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.

 

Yuchun Lee

 

Age: 53 Committee Assignments:
Director Since: 2012 Member – Audit and Finance Committee
  Member – Science and Technology Committee

 

Mr. Lee serves as an Executive in Residence and Partner of General Catalyst Partners, a venture capital firm, positions he has held since April of 2013. Mr. Lee also serves as the Chief Executive Officer of Allego, Inc. and is Executive Chairman of Clarabridge, Inc. 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.

 

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

 

Age: 63 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 serves as a director of Quest Diagnostics Inc., a medical diagnostics company, and Massachusetts Mutual Life Insurance Company, an 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 - 2019 Proxy Statement    17

 

Bruce Sachs

 

Age: 59 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 — Terms to Expire in 2020

 

Alan Garber, M.D., Ph.D.

 

Age: 63 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, and the American Academy for Arts and Sciences. 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 also has 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 - 2019 Proxy Statement    18

 

Margaret McGlynn

 

Age: 59 Committee Assignments:
Director Since: 2011 Member – Science and Technology Committee
  Member – Corporate Governance and Nominating Committee

 

Ms. McGlynn retired from Merck & Co. in 2009, where she served as President, Vaccines and Infectious Diseases and as President, Hospital and Specialty Products. During her 26 year career at Merck, she also held various leadership roles in the U.S. and globally in marketing, sales, managed care and business development. Following her retirement, 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 2011 until 2015. 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.

 

William Young

 

Age: 74 Committee Assignments:
Director Since: 2014 Member – Corporate Governance and Nominating Committee
  Member – Management Development and Compensation Committee

 

Mr. Young is a Senior Advisor with Blackstone Life Sciences (which acquired Clarus Ventures in 2018). Mr. Young joined Clarus Ventures, a life sciences venture capital firm, 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 as Biogen’s Chairman of the Board 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.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    19

 

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 nine of our ten directors qualify as “independent” under the definition of that term adopted by The Nasdaq Stock Market LLC, or Nasdaq. Our independent directors are Dr. Bhatia, Mr. Carney, Dr. Garber, Mr. Kearney, Mr. Lee, Ms. McGlynn, Mr. Sachs and Mr. Young and Ms. Ullian, who is not seeking re-election at our 2019 annual meeting of shareholders. Our independent directors meet in executive session without management 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, or audit committee, the corporate governance and nominating committee, or CGNC, the MDCC and the science and technology committee, or S&T committee. Each member of the audit committee, CGNC 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 21 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 our medicines 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 - 2019 Proxy Statement    20

 

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

 

Our audit 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 CGNC oversees risks related to the company’s governance structure.
Our S&T 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

 

The following table sets information regarding the members of our board of directors. We expect that in June 2019, (i) Lloyd Carney, who joined our board in February 2019, will join the audit and finance committee, and (ii) we will make additional changes to our committee memberships resulting from Elaine Ullian’s retirement from our board of directors.

 

Director(1)   Independence   Board   Audit
Committee
  CGNC   MDCC   S&T Committee   2018
Attendance at
Meetings(2)
Sangeeta N. Bhatia                   93%
Lloyd Carney                       n/a
Alan Garber                     100%
Terrence C. Kearney                   100%
Yuchun Lee                   95%
Jeffrey M. Leiden                         100%
Margaret G. McGlynn                   100%
Bruce I. Sachs                   100%
Elaine S. Ullian                   100%
William D. Young                   89%
2018 Meetings       7   9   5   7   3    

 

= Member
= Chair
= Co-lead
(1) We invite each of our directors to attend shareholder meetings, and our chairman and two co-lead independent directors attended our 2018 annual shareholders meeting.
(2) Includes meetings of the board of directors and meetings of each committee of the board while the director served on such committee. Mr. Carney joined our board in February 2019.

 

Audit and Finance Committee

 

The primary purposes of the audit committee are to:

 

appoint, oversee and, if necessary, replace, 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.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    21

 

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

 

Mr. Kearney, the chair of our audit 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 committee is qualified to serve as an audit committee financial expert under the SEC’s rules.

 

The report of the audit committee appears on page 39 of this proxy statement.

 

Our audit 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 committee will review and consider the related person’s interest in the related party transaction and such other factors as it deems appropriate. In 2018, we had one transaction disclosable pursuant to Item 404(a) of Regulation S-K, pursuant to which we obtained software services from Allego Inc., where Yuchun Lee, a member of our board of directors, serves as CEO. The transaction involved no payments directly to Mr. Lee and payments of approximately $123,000 to Allego, Inc. The audit committee approved the transaction as the transactions were entered into at arm’s length and comparable to those that would be provided to other unrelated entities in the marketplace.

 

Corporate Governance and Nominating Committee

 

The CGNC:

 

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 64 of this proxy statement.

 

Science and Technology Committee

 

Our S&T 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 S&T 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.

 

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Compensation Committee Interlocks and Insider Participation

 

Mr. Kearney, Mr. Sachs, Ms. Ullian and Mr. Young served on the MDCC during 2018. 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 2018 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 2018 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 2018, 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.

 

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.

 

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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 $400,000 value-based award in restricted stock units vesting after 12 months
Annual Equity Retainer  On June 1 of each year, a $400,000 value-based award, which the directors can elect to receive in the form of:
     options that are fully-vested upon grant;
     restricted stock units that vests on the first anniversary of the date of grant; or
     a mix of options and restricted stock units

 

Each of our non-employee directors is eligible to defer 50% or 100% of 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 the second half of 2018, 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 value of the equity compensation to our directors from $475,000 to $400,000 and (ii) allow the directors to choose whether to receive their equity grants in the form of restricted stock units or stock options.

 

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2018 Summary Compensation

 

Director  Fees Earned or
Paid in Cash
   Stock
Awards(1)
   Option
Awards(1)
   Total 
Sangeeta N. Bhatia  $    130,000   $    275,085   $    200,230   $    605,315 
Alan Garber  $110,000   $275,085   $200,230   $585,315 
Terrence C. Kearney  $142,500   $275,085   $200,230   $617,815 
Yuchun Lee  $125,000   $275,085   $200,230   $600,315 
Margaret G. McGlynn  $120,000   $275,085   $200,230   $595,315 
Bruce I. Sachs(2)  $180,000   $275,085   $200,230   $655,315 
Elaine S. Ullian  $172,500   $275,085   $200,230   $647,815 
William D. Young  $122,500   $275,085   $200,230   $597,815 

 

(1) The amounts set forth under the captions “Stock Awards” and “Option Awards” in the table above represent the grant-date fair value for financial statement reporting purposes of the equity awards granted during 2018. 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 2018 Annual Report on Form 10-K, filed with the SEC on February 13, 2019.
(2) 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 in an amount equal to the dollar value of the cash amount that would have been paid on such date divided by the fair market value of a share of common stock on each such date. The per share fair market values of our common stock on each of those dates was $160.89, $180.97, $179.29 and $184.90.

 

2018 Equity Grants

 

Grant  Date  Shares   Exercise
Price
   Grant-Date
Fair Value
 
Annual Non-Employee Director Option Grants  June 1, 2018   3,229   $    152.74   $    200,230 
Annual Non-Employee Director Restricted Stock Unit Grants  June 1, 2018   1,801    N/A   $    275,085 

 

Outstanding Equity

 

As of December 31, 2018, 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   1,801     17,203   20,953
Alan Garber   3,451     5,224   8,549
Terrence C. Kearney   1,801     75,972   75,972
Yuchun Lee   1,801     98,931   98,931
Margaret G. McGlynn   1,801   2,188   65,597   65,597
Bruce I. Sachs   1,801   9,087   125,597   125,597
Elaine S. Ullian   1,801     83,097   83,097
William D. Young   1,801     85,597   85,597

 

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 five times the annual cash retainer.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    25

 

CORPORATE SOCIAL RESPONSIBILITY

 

Vertex has grown into a leading global biotechnology company that repeatedly innovates to bring transformative medicines to people with serious diseases around the world. As we have grown, so too has our commitment to corporate social responsibility. We are pleased by the recognition we have received, such as our inclusion on Barron’s 100 Most Sustainable Companies list.

 

  Community

 

At Vertex, giving back is in our DNA. In 2018, Vertex and its employees supported more than 1,100 nonprofit organizations in 13 countries through Vertex Volunteers and The Vertex Foundation Matching Gift Program. These efforts are part of our 10-year, $500 million corporate giving commitment announced in 2017.

 

The Vertex Foundation, a nonprofit 501(c)(3) foundation established in 2017, is a long-term source of charitable giving. It seeks to improve the lives of people with serious diseases and in our communities through education, innovation, and health.

 

Our corporate giving extends and expands our long-term commitment to patients with serious diseases and our communities, including a focus on science, technology, engineering, arts and math (STEAM) education. Our collaboration with the Boston Public Schools provides access to our 3,000 square foot Learning Lab to 1,500 students annually. In 2018, we expanded this commitment and opened a Learning Lab in our research site in San Diego, reaching 450 students in its first months. In addition, students may participate in mentoring and internship opportunities with Vertex scientists. We also annually grant full four-year scholarships to the University of Massachusetts and provide 85 scholarships to people with cystic fibrosis or their family members who are pursuing two-year, four-year or graduate degrees.

 

We encourage our employees to participate in community service activities through Vertex Volunteers program. In 2018, we celebrated our 10th annual Day of Service with more than 1,000 employees in 13 countries collectively volunteering over 3,500 hours in their local communities in a single day. Throughout the year, Vertex Volunteers enables employees to volunteer in their local communities, such as pro bono activities conducted by members of our legal and compliance group and activities arranged through our Employee Resource Networks.

 

  Workplace

 

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 and to driving innovation. We are pleased to rank #5 among 1,000 companies in Forbes 2019 Best Employers for Diversity List. In 2018, for the ninth consecutive year, Vertex ranked in the top 10 of Science Magazine’s Top Employer List, in addition to other local workplace recognitions.

 

Five of our ten 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 nearly evenly split between men and women. In the United States, approximately 30% of our workforce and 39% of new hires are racially/ethnically diverse. As of the end of 2018, 38% of our global leadership (VP and above) were women and 19% of U.S. leadership were racially/ethnically diverse.

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    26

 
  Environment

 

We are committed to limiting our environmental impacts and to operating our business in a sustainable manner.

 

Strong local efforts are reducing our environmental impacts. Vertex is on track to reduce greenhouse gas emissions by 35% by 2020 at our Boston office (over a 2015 baseline). Vertex’s research facility in Oxford, UK uses 100% renewable energy sources for its electricity and gas. At our research site in San Diego, we divert 15,000 pounds of cardboard and glass annually through a unique solvent distribution system. In addition, our facilities in Boston and in San Diego are LEED Gold certified and our office in London achieved a BREEAM rating of excellent.

 

We promote energy efficiency outside of our buildings, too. Employees are encouraged to use public transportation to commute to work and we offer a subsidy for them to do so. Approximately 50% of employees in Boston and 86% of employees in London commute using public transportation. In San Diego, our efforts to encourage more sustainable commuting methods achieved the highest recognition from the San Diego Association of Government’s iCommute program, one of only 17 companies to achieve the platinum level.

 

Building on these local sustainability efforts, we plan to establish global, long-term environmental goals by the end of 2019, including an absolute reduction in greenhouse gas emissions. We plan to report progress against the goals annually and participate in CDP Climate Change survey beginning in 2020.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    27

 
Item 2 Amendment and Restatement of 2013 Stock and Option Plan

 

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. Accordingly, 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 5.0 million shares.

 

On April 9, 2019, 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 5.0 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 42% fewer shares of common stock in 2018 as compared to 2012 and reduced our “burn rate” from 3.6% in 2012 to 1.7% in 2018.

 

    2012
Equity
Awards
  2013
Equity
Awards
  2014
Equity
Awards
  2015
Equity
Awards
  2016
Equity
Awards
  2017
Equity
Awards
  2018
Equity
Awards
 

% Change

2012 v 2018

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   4,391,000   (42)%
Gross Burn Rate(1)   3.6%   2.8%   2.4%   2.1%   2.0%   1.8%   1.7%    
Awards Canceled, Forfeited or Expired   1,644,000   2,622,000   1,628,000   1,573,000   928,000   1,107,000   826,000    
Net Dilution   5,881,000   3,654,000   4,001,000   3,462,000   3,959,000   3,363,000   3,565,000    
Net Burn Rate   2.8%   1.6%   1.7%   1.4%   1.6%   1.3%   1.4%    

 

(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.

 

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 granted at fair market value on the grant date, and any other awards that we may in the future grant at a purchase price of 100% of the fair market value of a share of our common stock on the date of grant such as stock appreciation rights, count against the number of shares authorized under our 2013 Plan at a rate of one share for each share granted. Any restricted stock units, restricted stock 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 an exercise price per share lower than the then-current exercise price per share of the

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    28

 

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 March 31, 2019, options to purchase (i) an aggregate of 7,331,667 shares having a weighted-average exercise price of $134.89 per share and a weighted-average term before expiration of 7.93 years were outstanding under our 2013 Plan, and (ii) an aggregate of 1,370,072 shares having a weighted-average exercise price of $66.40 per share and a weighted-average term before expiration of 3.84 years were outstanding under our Amended and Restated 2006 Stock and Option Plan, or 2006 Plan. Also on March 31, 2019, there were outstanding an aggregate of 3,995,866 unvested shares of restricted stock and restricted stock units granted under our 2013 Plan and zero 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 March 31, 2019, there were 11,670,561 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 A.

 

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 conditions upon which awards are granted, whether to accelerate the vesting or extend the date of exercise of

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    29

 

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, 2019, we and our subsidiaries had approximately 2,600 employees and nine 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 option holder 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

 

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milestones in the discovery, development or regulatory approval of 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 June 5, 2019 (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.

 

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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, June 8, 2017, May 17, 2018 and October 16, 2018. The amendment and restatement of our 2013 Plan will be effective, subject to shareholder approval, on June 5, 2019. 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 24 of this proxy statement.

 

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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 31, 2019.

 

Name   Position   Number of Shares
Underlying Options
Granted
Named Executive Officers        
Jeffrey M. Leiden   Chairman, President & Chief Executive Officer   889,019
Stuart A. Arbuckle   EVP & Chief Commercial Officer   273,926
Michael Parini   EVP & Chief Legal and Administrative Officer   179,699
Amit Sachdev   EVP & Chief Regulatory Officer   260,552
Jeff Chodakewitz   Former EVP & Chief Medical Officer   216,921
Thomas Graney   Former SVP & Chief Financial Officer   10,436
Ian F. Smith   Former EVP & Chief Operating Officer   255,113
All executive officers as a group (10 persons)       2,405,705
Director Nominees        
Sangeeta N. Bhatia       45,597
Lloyd Carney      
Terrence C. Kearney       55,597
Yuchun Lee       55,597
Jeffrey M. Leiden       889,019
Bruce I. Sachs       60,597
All non-employee board members, including nominees, as a group (9 persons)       427,728
All employees, including current officers who are not executive officers, as a group       11,513,878

 

On March 29, 2019, the last reported sale price of our common stock on Nasdaq was $183.95 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 5.0 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.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    33

 

Equity Compensation Plan Information

 

As of March 31, 2019, there were 11,670,561 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 March 31, 2019, under our equity plans:

 

Stock options covering 8,701,739 shares of our common stock, with a weighted average exercise price of $124.11 and a weighted average remaining term of 7.28 years, were outstanding; and
unvested restricted stock awards or units covering 3,995,866 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, 2018. 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, 2018. 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, 2018.

 

Plan Category   Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Restricted Stock
Units and Rights
  Weighted-Average
Exercise Price of
Outstanding Options
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)   12,026,549 (2)  111.46 (3)  15,139,962 (4) 
Equity Compensation Plans Not Approved by Shareholders        
TOTAL   12,026,549       15,139,962  

 

(1) These plans consist of our 2013 Plan, our 2006 Stock and Option Plan (“2006 Plan”) and our Employee Stock Purchase Plan. No further shares of common stock will be issued or distributed under the 2006 Stock and Option Plan.
   
(2) Represents the number of underlying shares of common stock associated with outstanding options, restricted stock units, performance stock units, and deferred stock units granted under stockholder approved plans, as of December 31, 2018, and includes 6,799,082 options granted under the 2013 Plan, 2,698,193 restricted stock units granted under the 2013 Plan, 758,866 PSUs (assuming the maximum number of PSUs will be earned) granted under the 2013 Plan, 16,678 deferred stock units attributable to compensation deferred by non-employee directors participating in the Director Plan and distributable in the form of shares of common stock under the 2013 Plan (and which are treated as outstanding “stock rights” under the 2013 Plan), 1,751,821 options granted under the 2006 Plan, and 1,909 restricted stock units granted under the 2006 Plan. Does not include 479,552 shares of restricted stock outstanding as of December 31, 2018.
   
(3) Represents the weighted-average exercise price of options outstanding under the 2013 Plan and 2006 Plan. See note (2) above with respect to restricted stock units, PSUs and deferred stock units (credited under the Director Plan) outstanding under the 2013 Plan. The weighted-average exercise price does not take these awards into account.
   
(4) Represents the number of shares available for future issuance under stockholder approved equity compensation plans and is comprised of 14,737,360 shares available for future issuance under the 2013 Plan and 402,602 shares available for future issuance under the Employee Stock Purchase Plan, including shares to be purchased at the end of the current offering period ending May 15, 2019.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    34

 
Item 3 Amendment and Restatement of ESPP

 

Our board of directors believes that our employee stock purchase plan provides an important employee benefit that helps us attract and retain employees and encourage their participation in and commitment to our business and financial success. We are requesting that our shareholders approve an increase in the number of authorized shares under our Employee Stock Purchase Plan of 2.0 million shares.

 

The Vertex Pharmaceuticals Incorporated Employee Stock Purchase Plan, or ESPP, was adopted by our board of directors in 1992, and has been approved by the shareholders. Under the ESPP, eligible employees have the right to purchase our common stock through payroll deductions, on a tax-favored basis in compliance with Section 423 of the Code. As of March 31, 2019, approximately 2,600 employees were eligible to participate in the ESPP and there were 402,602 shares available for future issuances under the ESPP.

 

The ESPP does not contain an “evergreen” provision or similar provision that increases the number of shares available for future grants.

 

In April 2019, our board of directors amended our ESPP, subject to shareholder approval, by increasing the number of shares of common stock authorized for issuance under the ESPP by 2.0 million shares.

 

Summary of Employee Stock Purchase Plan

 

The ESPP is administered by the MDCC, which has the power to construe and interpret the ESPP and to determine all questions that arise under the ESPP. A copy of the ESPP, as proposed to be amended, is attached to this proxy statement as Appendix B.

 

Because participation in the ESPP is voluntary and employees may withdraw from the ESPP at any time during a purchase period without penalty, the benefits to be received by any particular person or group are not determinable by us at this time.

 

Individuals are eligible to participate in the ESPP if they are employed on an offering date, they are regularly employed by us for more than 20 hours a week and for more than five months in a calendar year and they do not own five percent or more of our outstanding common stock. If we receive requests from employees to purchase more than the number of shares available during any offering, the available shares will be allocated on a pro rata basis to subscribing employees.

 

An eligible employee authorizes payroll deductions in an amount not less than 1% nor greater than 15% of his or her “eligible earnings” (i.e., regular base pay, not including overtime pay, bonuses, employee benefit plans or other additional payments) for each full payroll period in the offering period.

 

We make two offerings to purchase common stock under the ESPP each year, one on May 15 and one on November 15. The ESPP provides that each offering period extends either for twelve months, or, if an employee so elects within the 30-day period prior to the six-month anniversary of the offering date, for six months. Each twelve-month offering period consists of two six-month purchase periods.

 

The price at which an employee may purchase common stock under the ESPP is 85% of the lower of (i) the average of the highest and lowest quoted selling prices of the common stock on the day an offering period commences, and (ii) the average of the highest and lowest quoted selling prices on the day the purchase period ends.

 

If a participating employee voluntarily resigns or is terminated by us prior to the last day of an offering period, the employee receives a refund of contributions made through their last date of employment.

 

Our board of directors may at any time terminate or amend the ESPP. However, our board may not amend the ESPP if any such amendment would increase the number of shares of common stock reserved under the ESPP without approval of our shareholders or take such other action that would cause the ESPP to not comply with Section 423 of the Code.

 

Summary of U.S. Federal Income Tax Consequences

 

The following is a summary of some of the material federal income tax consequences associated with the grant and exercise of awards under the ESPP under current federal tax laws and certain other tax considerations associated with awards under the ESPP. The summary does not address tax rates or non-U.S., state or local tax consequences, nor does it address employment tax or other federal tax consequences except as noted.

 

The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code. Assuming that the ESPP is and remains so qualified, no taxable income will be recognized by a participant until the sale or other disposition of the shares purchased under the ESPP.

 

If shares acquired under the ESPP are disposed of more than two years after the first day of the applicable offering period and more than one year after the purchase date, or if the participant dies while holding such shares, the participant (or his or her estate) will recognize ordinary income for the gain amount up to 15% of the value of the shares at the start of the applicable offering period. Any additional gain, or any loss, recognized on the disposition will be treated as a long-term capital gain or loss.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    35

 

If shares acquired under the ESPP are disposed of within the two years following the start of the applicable offering period or within one year after the purchase date, the participant will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the purchase date over the purchase price. Any additional gain, or any loss, recognized will be treated as a short-term or long-term capital gain or loss depending on how long the participant had held the shares.

 

The Company is not entitled to a deduction for amounts taxed as ordinary income or capital gain to a participant except to the extent of ordinary income recognized upon a sale or disposition of shares prior to the expiration of the holding periods described above.

 

Our board of directors recommends a vote FOR the approval of the amendment of our employee stock purchase plan, that, among other things, increases the number of shares authorized for issuance under this plan by 2.0 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.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    36

 
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, 2019 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 management, 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 2019 audit. In accordance with applicable requirements, we are required to change our lead audit partner every 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 2018 and 2017.

 

Service  2018  2017
Audit fees  $    3,433,000   $    2,818,000
Audit-related fees   0   24,000
Tax fees   2,790,000   2,587,000
All other fees   3,000   3,000
TOTAL   $    6,226,000   $    5,432,000

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    37

 

“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 2018 and 2017 consisted of:

 

tax compliance and preparation fees, including the preparation of original and amended tax returns and refund claims, and tax payment planning of $1,785,000 and $1,857,000, respectively; and
tax advice and planning fees of $1,005,000 and $730,000, 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) of Regulation S-X, 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, 2019. 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 - 2019 Proxy Statement    38

 

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 2018, 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, 2018, 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, 2018, 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 2018, 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, 2018 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, 2018. 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 2019 Proxy Statement    39

 
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 2018, we received support from 96% of our shareholders on our say-on-pay proposal. We believe this support is consistent with our 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.

 

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 named executive officer compensation linked to performance. Our board of directors and MDCC reviewed our compensation programs and made the following key decisions with respect to 2018 compensation:

 

We maintained the same compensation program design that we implemented in 2016, which closely ties pay with performance and has contributed to our short- and long-term successes
The company’s exceptional performance in 2018, as described in more detail in our Compensation Discussion and Analysis beginning on page 44 of this proxy statement, resulted in a leading rating (a company rating of 148.5 out of a potential 150) for 2018 and annual cash bonuses near the high end of the range for 2018
Our CEO’s base salary has been unchanged at $1.3 million since 2014 and is aligned with the median CEO base salary of our peer companies. We increased the base salaries of certain of our other named executive officers by approximately 7% based on a comparative analysis with our industry peer group
We increased our target equity grants by $1.0 million for our CEO and $500,000 for our executive vice presidents based on a market analysis of our peer group
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 long-term 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 44 of this proxy statement. 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 a previous 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 2018 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 - 2019 Proxy Statement    40

 
Item 6 Shareholder Proposal Regarding Drug Pricing

 

We expect the following shareholder proposal will be presented for consideration at the 2019 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 11, 2018, has given notice that they intend to present for action at the 2019 annual meeting of shareholders the following resolution:

 

RESOLVED that shareholders of Vertex Pharmaceuticals Incorporated (“Vertex”) urge the Management Development and Compensation Committee (the “Committee”) to report annually to shareholders on the extent to which risks related to public concern over drug pricing strategies are integrated into Vertex’s incentive compensation policies, plans and programs (together “arrangements”) for senior executives. The report should include, but need not be limited to, discussion of whether (i) incentive compensation arrangements reward, or not penalize, senior executives for adopting pricing strategies, or making and honoring commitments about pricing, that incorporate public concern regarding prescription drug prices; and (ii) such concern is taken into account when setting financial targets for incentive compensation arrangements.

 

SUPPORTING STATEMENT

 

As long-term investors, we believe that senior executive compensation arrangements should reward the creation of sustainable long-term value. To that end, it is important that those arrangements align with company strategy and encourage responsible risk management.

 

A key risk facing drug companies is the increased criticism from the public and actions that legislators and regulators are taking regarding pharmaceutical prices. A March 2018 Kaiser Family Foundation poll found that 52% of respondents ranked lower drug prices as a “top priority” for the President and Congress. The White House released a “Blueprint” for lowering drug prices in May 2018. The NY Times reported that as of August 2018, twenty-four states have passed 37 bills this year to curb rising prescription drug costs. (https://www.nytimes.com/2018/08/18/us/politics/states-drug-costs.html).

 

Recent news articles identify pricing pressures that Vertex is facing. Officials from New York State’s Medicaid program have said that the cystic fibrosis drug Orkambi is not worth its price, a case “that is being closely watched around the country.” (https://www.nytimes.com/2018/06/24/health/drug-prices-orkambi-new-york-.html) As part of a two-year dispute between Vertex and the UK’s National Health Service over Orkambi cost-effectiveness, a committee of the House of Commons has requested to see documents the Company supplied to the government related to price and evidence supporting the drug’s benefit. (https://pharmaphorum.com/news/vertex-told-to-reveal-cf-drug-price-as-mps-begin).

 

We are concerned that the incentive compensation arrangements applicable to Vertex’s senior executives may not encourage them to take actions that result in lower short-term financial performance even when those actions may be in Vertex’s best long-term financial interests. Vesting for half of the performance share units Vertex’s named executive officers earn depends on one-year net product revenue goals, and for 2017, revenue growth for two of Vertex’s cystic fibrosis drugs was the most heavily weighted factor in the quantitative portion of the annual bonus formula. “Increase revenues and manage operating expenses” was another 2017 annual bonus quantitative factor. (2018 Proxy Statement, at 56-57).

 

The disclosure we request would allow shareholders to better assess the extent to which compensation arrangements encourage senior executives to responsibly manage risks relating to drug pricing and contribute to long-term value creation. We urge shareholders to vote for this Proposal.

 

YOUR COMPANY’S RESPONSE

 

Our board of directors recommends a vote AGAINST the shareholder proposal requesting an annual report on the extent to which risks related to public concern over drug pricing strategies are integrated into compensation arrangements for senior executives.

 

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/SYMKEVI 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 - 2019 Proxy Statement    41

 

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 $12 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 13, 2019, 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 the 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 annual reporting on the extent to which risks related to public concern over drug pricing strategies are integrated into compensation arrangements for senior executives. 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 - 2019 Proxy Statement    42

 
Item 7 Shareholder Proposal Regarding Lobbying

 

We expect the following shareholder proposal will be presented for consideration at the 2019 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 $2,000 worth of shares of our common stock as of December 18, 2018 has given notice that it intends to present for action at the 2019 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 over $3 million in 2016 and 2017 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 2017 (http://www.followthemoney.org/), and has spent over $310,000 on lobbying in California in 2016-2017. Vertex’s lobbying has drawn media attention (“Is Big Pharma Getting ‘Patient Advocates’ to Do Its Lobbying Work?” The Daily Beast, April 6, 2018), (“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 $18.62 million on lobbying in 2016 and 2017. 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’S 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. We routinely provide comprehensive information regarding our lobbying activities to comply with applicable federal and state disclosure regulations, including filing quarterly reports on our federal lobbying activity in compliance with the Honest Leadership and Open Government Act of 2007. 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 - 2019 Proxy Statement    43

 

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. We believe that 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 500% from approximately $7 billion in early 2012 to more than $45 billion in early 2019.

 

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.

 

In 2018, Vertex had a remarkable year as it accelerated the development of our triple-combination regimens for CF, advanced numerous other research and development programs positioning itself for continued growth and increased revenues, operating income and cash flows. This success in 2018 reflects both the company’s exceptional execution in 2018 and the overall corporate strategy that the company’s core management team has championed since 2012.

 

As a result, our executives received above-target cash bonuses and payouts on performance stock unit awards based both on one-year business and financial goals and three-year research and development goals. 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 highly-functioning executive team.

 

Sincerely,

 

Bruce I. Sachs (Chair)

 

Terrence C. Kearney

 

Elaine S. Ullian

 

William D. Young

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    44

 

Overview

 

By all measures, 2018 was an extraordinary year for Vertex as we continued to execute on our strategy of investing in scientific innovation to create transformative medicines for people with serious diseases. In 2018, we obtained approval for and launched SYMDEKO/SYMKEVI, our third medicine for CF, and accelerated the development of our triple combination regimens, which we believe will allow us to treat the vast majority of patients with CF and will provide an improved treatment option to many patients currently taking our medicines. Outside of CF, we advanced our Phase 2 clinical program in pain, initiated our first clinical trial of a potential medicine for alpha-1 anti-trypsin deficiency and the first clinical trial for CTX001, which we are co-developing with CRISPR Therapeutics, as a potential treatment for beta thalassemia and sickle cell disease. Our exceptional performance in 2018 included 40% growth in total product revenues and increasing cash flows. As we enter 2019, we are on track to deliver more new transformative medicines for patients thereby increasing revenues, expanding operating income and creating long-term shareholder value.

 

Financial Performance

 

Our CF medicines, KALYDECO, ORKAMBI and SYMDEKO/SYMKEVI, are now transforming the lives of eligible patients around the globe and driving our financial performance.

 

Our CF net product revenues increased to $3.04 billion in 2018, up 40% as compared to 2017
We exceeded our initial CF net product revenue guidance in 2018 by $313 million ($3.04 billion as compared to the mid-point of our initial guidance of $2.73 billion)
Our GAAP net income increased to $2.1 billion in 2018 from GAAP net income of $263 million in 2017
Our non-GAAP net income increased to $1.1 billion in 2018, up $564 million, or 114%, from 2017, driven by our increased net product revenues (a reconciliation of non-GAAP net income is provided in Appendix C)
We increased our net cash position by approximately $1.1 billion in 2018, to approximately $3.2 billion
In 2019, we expect to further increase CF product revenues by approximately 15% and to continue generating substantial cash flows
Beyond 2019, our CF net product revenues and operating income are positioned for substantial further growth if we are successful in obtaining approval for a triple combination regimen

 

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    45

 

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 in the United States. Since then, we have followed a focused strategy of developing new medicines for CF: expanding the number of patients eligible for our medicines and seeking improved treatment options for all patients. We believe our triple combination regimens will provide the first treatment for the underlying cause of CF for patients with the F508del mutation and a mutation that provides minimal function (referred to as F508del/Min patients) as well as an improved treatment option (greater efficacy) for the vast majority of CF patients currently using our medicines.

 

 

CF Medicines

 

Since the beginning of 2018, we have:

 

Obtained approval for SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor) in the United States in early 2018 and in the European Union in late 2018
Successfully launched SYMDEKO in the United States
Obtained regulatory approvals and advanced clinical trials designed to provide younger children access to our CF medicines
Entered into innovative long-term access agreements in ex-U.S markets, including Australia, Denmark, Israel, Luxembourg and Sweden

 

Triple Combinations Regimens

 

Since the beginning of 2018, we have:

 

Accelerated our Phase 3 development program for triple combination regimens
Announced positive data from two Phase 3 clinical trials evaluating the triple combination of VX-659, tezacaftor and ivacaftor in F508del/Min patients and F508del homozygous patients 12 years of age or older
Announced positive data from two Phase 3 clinical trials evaluating the triple combination of VX-445, tezacaftor and ivacaftor in F508del/Min patients and F508del homozygous patients 12 years of age or older
Positioned ourselves to file for one triple combination regimen — an NDA in the United States in the third quarter of 2019 and an MAA in the European Union in the fourth quarter of 2019
Initiated a Phase 1 clinical trial to evaluate VX-121, an additional next-generation CFTR corrector

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    46

 

Non-CF Pipeline

 

Over the last decade, we have demonstrated an ability to serially discover and develop multiple transformative medicines for serious diseases. In 2018, we and our collaborators continued our serial innovation, advancing promising non-CF programs for important diseases. Specifically, since the beginning of 2018, we have:

 

Initiated a Phase 1 clinical trial for a novel drug candidate for alpha-1 antitrypsin deficiency
Initiated Phase 1/2 clinical trials of CTX001, an investigational gene-editing treatment that we are evaluating as a potential treatment for beta-thalassemia and sickle cell disease
Obtained clinical proof-of-concept from Phase 2 clinical trials evaluating VX-150, a selective non-opioid NaV1.8 inhibitor, as a potential treatment for pain
Advanced our research program for focal segmental glomerulosclerosis into late-stage preclinical development
Janssen Pharmaceuticals, our collaborator, is conducting Phase 3 development of pimodivir as a potential treatment for influenza

 

   
*   We are co-developing CTX001 with CRISPR Therapeutics
**  We have outlicensed pimodivir to Janssen Pharmaceuticals and M6620 to Merck KGaA

 

Increased Shareholder Value

 

Driven by our financial performance and our pipeline success, our stock price increased by 11% from $149.86 per share to $165.71 per share in from December 31, 2017 to December 31, 2018. In 2018, our total shareholder return was positive 10.6% as compared to negative total shareholder returns for the Nasdaq Biotechnology Index, or NBI, and the S&P 500 index.

 

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    47

 

We were pleased with our performance in 2018; however, the performance of biotechnology companies like ours is best measured over the long term and in comparison with their peers, rather than in one-year increments and in isolation. The following chart shows our total shareholder return during the 1-year, 3-year and 5-year periods ending December 31, 2018 compared to the NBI and 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 pages 51 and 52).

 

 

The following chart shows our total shareholder return from the beginning of 2012, when KALYDECO was first approved, through February 2019 relative to the S&P 500 and the NBI.

 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    48

 

2018 Compensation Decisions and Pay-for Performance

 

In 2018, we received support from 96% of our shareholders on our say-on-pay 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. 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 executives is critical, as their outstanding performance over the last seven years has led to the advancement of the company and the significant shareholder value that has been created.

 

In 2018, our board of directors and management development and compensation committee, or MDCC, reviewed our compensation programs and made the following key decisions:

 

Program Design: 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.
Base Salary: Our CEO’s salary has been unchanged at $1.3 million since 2014 and is aligned with the median CEO base salary of our peer companies. We increased the base salaries of certain of our other named executive officers by approximately 7% based on a comparative analysis with companies in our peer group.
Annual Cash Bonus: The company’s exceptional performance in 2018, as described above, resulted in a leading rating (a company rating of 148.5 out of a potential 150) for 2018 and annual cash bonuses near the high end of the range for 2018, 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.
  We increased our target equity grants by $1.0 million for our CEO and $500,000 for our executive vice presidents based on a market analysis with companies in our peer group.
  In early 2018, the MDCC established financial and non-financial metrics for the PSUs, with payouts earned based on achievement of these metrics. 50% of the PSUs were tied to CF net product revenues in 2018, while the remaining 50% are tied to specific clinical and research milestones over a three-year period.

 

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
Executive and Non-Employee Director Stock Ownership Guidelines No payment of dividends on unvested performance shares or units
No gross-ups  
Independent compensation consultant  
Robust shareholder outreach  

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    49

 

Detailed Discussion and Analysis

 

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 (or “NEOs”) for 2018 are listed below. Our NEOs for 2018 include certain former executive officers as required by SEC rules, and the following discussion includes information relating to the compensation of these former executive officers for the prior fiscal year. However, general references below to “our NEOs” relate solely to our continuing NEOs and should be interpreted accordingly.

 

Name Position
Jeffrey M. Leiden Chairman, Chief Executive Officer and President
Stuart A. Arbuckle Executive Vice President, Chief Commercial Officer
Michael Parini Executive Vice President and Chief Legal and Administrative Officer
Amit Sachdev Executive Vice President and Chief Regulatory Officer
Jeff Chodakewitz Former Executive Vice President, Global Medicines Development and Medical Affairs and Chief Medical Officer
Thomas Graney Former Senior Vice President and Chief Financial Officer
Ian F. Smith Former Executive Vice President and Chief Operating Officer and Interim Chief Financial 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;
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; and
ensure that the vast majority of compensation is performance-based.

 

Our executive officers 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 advanced significantly over the last several years, increased revenues, and an established strong financial profile. All of these factors position 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 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 measurable milestones that our company must achieve if it is to maintain its significant revenue growth 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 executive officers. The MDCC evaluates the performance of our chief executive officer and 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 the 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).

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    50

 

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 2018, the MDCC selected Pearl Meyer as its compensation consultant 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

 

Although we consider revenue as a factor, we do not emphasize it, as we do not believe it is an adequate reflection of whether companies have a similar business model or complexity particularly at our stage of maturity. A company with similar revenues may not have global or commercial operations like we have, or it may focus on generic medicines rather than innovative therapies; either of these factors would result in a different business model that required a relatively smaller investment in research and development. 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 2018, which were the same comparator companies that were used in 2017.

 

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

 

  2018 Peer Companies
Core Peers Alexion Pharmaceuticals, Inc.
Biogen Inc.
BioMarin Pharmaceutical 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

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    51

 

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/
Unmet
Clinical Need
  Breakthrough
Therapy
Designations(2)
 

Innovative

Drugs in Last
8 Years(3)

  Uses
Vertex
as Peer
  Market Position
Company   Industry   $
(millions)
  % of
Revenue
  Global   Commercial           Nasdaq 100   S&P 500
AbbVie   Biotech   $ 10,753   33%         6   5          
Alexion   Biotech   $ 1,913   46%         1   3      
Alkermes   Biotech   $ 425   39%         0   1          
Amgen   Biotech   $ 3,737   16%         1   6        
Biogen   Biotech   $ 2,710   20%         0   4      
BioMarin   Biotech   $ 696   47%         1   3        
Celgene   Biotech   $ 5,673   37%         0   4      
Gilead   Biotech   $ 5,018   23%         4   7        
Incyte   Biotech   $ 1,208   64%         0   2      
Jazz   Pharma   $ 428   23%         0   2          
Regeneron   Biotech   $ 2,186   33%         3   5      
Shire   Biotech   $ 1,695   11%         0   5            
United Therapeutics   Biotech   $ 358   22%         0   3          
Vertex   Biotech   $ 1,445   47%         7   4        

 

(1) R&D Expense (including certain expenses related to intangible assets) and R&D Expense as a % of Revenue reflect the trailing data for the most recent four quarters as of December 31, 2018 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 eight years include: VIEKIRA PAK, IMBRUVICA, VENCLEXTA, ORILISSA and MAVYRET (Abbvie), STRENSIQ, ULTOMIRIS and KANUMA (Alexion), ARISTADA (Alkermes), AIMOVIG, BLINCYTO, XGEVA, PROLIA, KYPROLIS and PARSABIV (Amgen), TECFIDERA, ALPROLIX, SPINRAZA and ELOCTATE (Biogen), BRINEURA, PALYNZIQ 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, LIBTAYO, PRALUENT, EYLEA and ZALTRAP (Regeneron), MYDAYIS, TAKHYZRO, FIRAZYR, NATPARA and GATTEX (Shire) and REMODULIN, ORENITRAM and UNITUXIN (United Therapeutics).

 

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.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    52

 

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 NEO’s 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, with approximately 90% of our NEO compensation tied to performance.

 

 

 

The charts above represent the actual values, and exclude the compensation of former executive officers.

 

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
Equity Awards Grant date value of equity awards based on individual performance
Performance Stock Unit Awards 50% of PSUs with range of shares issued 0% to 200% of target based on one year financial metric (vesting in installments)
  50% of PSUs with range of shares issued 0% to 200% of target based on three-year non-financial metrics (cliff-vesting)
Stock Options Value of awards increases or decreases based on increases or decreases in stock price
  Value of awards tied to potential increases in share price with no value to executive unless share price increases
Time-Based Restricted Stock Units 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

 

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 (to date, CF net product revenue goals over a one-year period) and half on non-financial goals (to date, multiple clinical milestones over a three year period). The potential shares issuable pursuant to the performance stock unit awards range from 0% to 200% of the target shares with the number of shares actually issued based on financial and non-financial measures. 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. 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 time-based restricted stock units. 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.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    53

 

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.

 

Dr. Leiden’s base salary has been $1,300,000 since 2014. In 2018, we increased Mr. Arbuckle’s base salary from $700,000 to $750,000 and Mr. Parini’s base salary from $725,000 to $775,000 after a review of the base salaries of peers and in recognition of their role and contributions to the company. Dr. Chodakewitz, Mr. Graney and Mr. Smith’s, our former executive officers, base salaries were $618,000, $550,000 and $850,000 respectively.

 

Name  2019 Base
Salary
   Approximate
Peer Ranking
(Percentile)(1)
Jeffrey M. Leiden  $    1,300,000   60th
Stuart A. Arbuckle  $750,000   40th
Michael Parini  $775,000   60th
Amit Sachdev  $540,750   >75th

 

(1) Peer rankings based on salary information from 2017.

 

Company and Individual Ratings

 

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

 

Overview of Company Performance Rating & Achievement in 2018

 

At the beginning of each year, our board of directors, in consultation with our CEO, establishes company-wide goals for that year. While our performance against these goals is the most important factor considered by our board in assessing our corporate performance, 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 2018, 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 revenue goals for marketed and approval stage products were designed to incentivize increasing access to our medicines through approvals of new transformative medicines, label-expansions for our existing medicines and negotiating reimbursement agreements in ex-U.S. markets and were not set, achieved through or dependent upon, price increases. Our pipeline goals and our budgets were established with the expectation that we would reinvest the majority of our revenues into research and development for additional transformative medicines. As a result, our research and development expenses have represented over 70% of our operating expenses over the last five years. Our 2018 weighted goals and the year-end score achieved by the company and assigned by the board are set forth in the following table:

 

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Goal(s)   Maximum
Score
  Actual 2018
Performance Score
Marketed and Approval-Stage Products   60   60
  Achieve CF net product revenue goals through compliant marketing practices, including U.S. and ex-U.S. revenue goals        
  Successfully launch SYMDEKO through compliant marketing practices        
Pipeline Growth   55   50.5
  Accelerate pivotal development of triple-combination programs        
  Obtain approval for SYMDEKO in the U.S. and SYMKEVI in the E.U        
  Obtain label-expansions in U.S. and E.U. for CF medicines        
  Advance non-CF development programs, including Phase 2 clinical trials of VX-150 and Phase 1 clinical trials in multiple diseases        
  Advance multiple research programs, including CF and non-CF programs        
Organizational Development and Capability   15   14
  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   20   20
  Increase cash flows and manage operating expenses        
Additional Accomplishments and Shortcomings, Net (see page 56 of this proxy statement)       4
  Additional Accomplishments       +7
  Additional Shortcomings       -3
TOTAL   150   148.5

 

Our 2018 company performance score was 148.5 out of a potential of 150. Our 2019 company performance will be evaluated against the broad categories set forth above, with slightly more emphasis on Pipeline Growth (60 points in 2019 compared to 55 points in 2018) and slightly less on Marketed and Approval-Stage Products (55 points in 2019 compared to 60 points in 2018). These changes were made to align our annual incentive plan with our business goals for 2019.

 

Detailed Discussion of Company Performance Rating Factors and Achievements

 

Goals - Marketed and Approval-Stage Products

 

In 2018, CF net product revenues increased to $3.04 billion, up 40% as compared to 2017. Our CF net product revenues exceeded the mid-point of our initial CF net product revenue guidance by $313 million ($3.04 billion actual as compared to the mid-point of our initial guidance of $2.73 billion). We expect additional increases in CF net product revenues in 2019.

 

SYMDEKO/SYMKEVI

 

We obtained approval and began marketing SYMDEKO in the first quarter of 2018 and obtained approval for SYMKEVI in late 2018. The successful launch of SYMDEKO in the United States, which resulted in $769 million in SYMDEKO/SYMKEVI net product revenues, was critical to our exceeding our total CF net product revenue goals.

 

ORKAMBI

 

In 2018, we continued to have strong ORKAMBI net product revenues as the result of label expansions and increased access in ex-U.S. markets. As expected, our total ORKAMBI net product revenues were slightly lower in 2018 as compared to 2017 due to patients switching from ORKAMBI to SYMDEKO.

 

KALYDECO

 

In 2018, our KALYDECO net product revenue reached $1.0 billion, an increase of 19%, as we continued to expand the number of patients receiving KALYDECO.

 

For marketed and approval-stage products goals, our board assigned the company a score of 60 out of 60, due to our exceeding our goals with respect to total CF net product revenues, including achieving our goals with respect to each of our CF medicines.

 

Goals - Pipeline Growth (Late and Early-Stage)

 

In 2018, 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 approval for SYMDEKO in first quarter of 2018 and SYMKEVI in the fourth quarter of 2018
Accelerated our Phase 3 development programs for triple combination regimens, which were initiated in the first half of 2018:

 

  Obtained positive Phase 3 data from two Phase 3 clinical trials evaluating the triple combination of VX-659, tezacaftor and ivacaftor in the fourth quarter of 2018

 

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  Positioned ourselves to obtain positive Phase 3 data from two clinical trials evaluating the triple combination of VX-445, tezacaftor and ivacaftor in early 2019
  Based on the data from these clinical trials, we are positioned to file an NDA in the United States in the third quarter of 2019 and an MAA in the European Union in the fourth quarter of 2019 for a triple combination regimen

 

Obtained regulatory approvals and advanced clinical trials designed to provide younger children access to our CF medicines
Advanced additional next-generation correctors into Phase 1 clinical trials

 

Additionally, in 2018, we made significant progress toward meeting our goal of diversifying our portfolio as we advanced promising programs in a variety of diseases. Specifically, we:

 

Obtained proof-of-concept from Phase 2 clinical trials evaluating VX-150, a selective non-opioid NaV1.8 inhibitor, as a potential treatment for acute and neuropathic pain
Initiated a Phase 1 clinical trial for a novel drug candidate for alpha-1 antitrypsin deficiency
Initiated clinical trials of CTX001, an investigational gene-editing treatment that we are evaluating as a potential treatment for beta-thalassemia and sickle cell disease
Advanced our research program for focal segmental glomerulosclerosis into late-stage preclinical development
Established a collaboration with Arbor Biotechnologies to enhance our ongoing efforts to develop innovative gene-editing therapies for a range of serious diseases

 

While our overall performance with respect to pipeline goals was excellent, we experienced a delay compared to our goals in connection with incorporating VX-561 (deuterated ivacaftor) into our CF program and a slight delay in the timing of our approval for SYMKEVI in the European Union.

 

On the basis of the accomplishments in advancing our research and development programs and, in particular, the acceleration of our Phase  3 development of triple combination regimens and the advancement of multiple non-CF programs our board assigned the company a score of 50.5 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 11 of 12 critical hires with superior and diverse talent.

 

Systems and Infrastructure

 

Continued improvement of infrastructure to support an increasingly complex organization, including enhancing policies, software platforms and business processes. Successfully completed transition to new research facility in San Diego.

 

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 2018, our board assigned the company a score of 14 out of 15 for our organizational development and capability goals.

 

Goals - Financial Strength

 

We exceeded all of our financial goals in 2018. Our combined R&D and SG&A expenses for 2018 were within the guidance we provided at the beginning of 2018. Our operating income increased by 415% as compared to 2017. Our increased cash flows were achieved while managing our operating expenses allowing us to strengthen our balance sheet and end 2018 with cash, cash equivalents and marketable securities of $3.2 billion.

 

As a result of our success in increasing our financial strength by managing our operating expenses and increasing cash flows, our board assigned the company a score of 20 out of 20 for our financial strength goals.

 

Additional Factors (accomplishments and/or shortcomings)

 

In connection with determining our 2018 company rating, our board of directors made positive and negative adjustments based on factors not anticipated when the company’s original goals for 2018 were established. The positive adjustments were primarily related to our success in commercializing our CF medicines, obtaining orphan drug designations for SYMKEVI and our triple combination regimens in the European Union and the exceptional performance of our research organization. These additional accomplishments were partially offset by delays we experienced in our CRISPR program as a result of a clinical hold that was placed on the program in early 2018 and released in the fourth quarter of 2018 and delays in obtaining reimbursement for ORKAMBI in ex-U.S. markets. Overall, the board of directors increased our company rating by seven 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 four point adjustment.

 

2018 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

 

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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 2018 results-based rating recommendation for each NEO, other than our CEO, is the combined result of the MDCC members’ own observations and a review of the executive’s role in the accomplishment of the corporate goals and recommendations, the latter of which is provided to the MDCC by our chief executive officer and is made on the basis of his independent assessment of each executive officer’s performance. The MDCC and Dr. Leiden discussed each recommendation at length, on both an individual and comparative basis. Upon completion of these discussions, the MDCC finalized its recommendation for the results-based rating for each executive. The final recommendations took into account Dr. Leiden’s recommendations, the opinions of MDCC members (based on the executive’s contributions and the MDCC members’ interactions with the executive), as well as other factors. The MDCC gave Dr. Leiden’s recommendations greater weight when determining the values-based rating than when determining the results-based rating, as 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. The results-based and values-based evaluations for our CEO are based on a similar assessment of individual performance by our MDCC and independent directors.

 

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2018 Actual Individual Ratings For Named Executive Officers

 

Dr. Jeffrey Leiden  2018 Rating:  Leading Exemplary 
Chairman, President and CEO  2019 Salary:  $1,300,000 
   2018 Bonus:  $3,440,151 
   LTI Equity Grants (Feb 2019):  $    15,240,000 

 

On the basis of the MDCC’s recommendation, our independent directors rated Dr. Leiden’s overall performance for 2018 as “leading exemplary,” with an individual performance factor of 148.5%. 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 2018, which included:

 

Leadership in executing our corporate strategy, which for the last eight years has maintained its focus on developing transformative medicines for serious diseases, and achieving our business goals
The advancement of our CF programs, in particular the acceleration of our triple combination programs to position us for the expected filing of an NDA in the third quarter of 2019 and an MAA in the fourth quarter of 2019
The advancement of our non-CF clinical development pipeline, including advancing Phase 2 clinical development of VX-150 and initiating the first clinical trials for CTX001
The excellent performance of our internal research organization in advancing multiple programs, including in cystic fibrosis, alpha-1 anti-trypsin deficiency and focal segmental glomerulosclerosis
The over-achievement of our financial goals including significantly increasing CF net product revenues, significantly strengthening our balance sheet, expanding our operating margins, and increasing operating income
Significantly expanding the company’s expertise in various therapeutic modalities through internal research, recruiting and collaborations
Recruiting, mentoring and developing 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

 

Stuart A. Arbuckle  2018 Rating:  Leading Exemplary 
EVP, Chief Commercial Officer  2019 Salary:  $750,000 
   2018 Bonus:  $824,175 
   LTI Equity Grants (Feb 2019):  $    5,250,000 

 

The MDCC recommended and the board adopted an overall rating of “leading exemplary” for Mr. Arbuckle based on a results-based rating of “leading” and a values-based rating of “exemplary demonstration” with an individual performance factor of 148%. Mr. Arbuckle’s rating derived from his leadership of the commercial organization, including the following:

 

The exceptional performance of our commercial organization, which delivered CF net product revenues of $3.04 Billion in 2018, up 40% compared to 2017
The successful U.S. launch of SYMDEKO for patients 12 years of age and older in 2018, which had a significant effect on our overall financial performance in 2018
Successful launches of KALYDECO for patients 12 to 24 months of age and ORKAMBI for patients two to five years of age
Leading successful reimbursement discussions that provided access to patients eligible for our approved medicines in a number of Ex-U.S. markets, including Australia, Denmark, Israel, Luxembourg and Sweden
The successful launch of ORKAMBI in Australia
Leading the successful transition of our international leadership team as we continued to expand our international operations

 

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Michael Parini  2018 Rating:  Leading 
EVP, Chief Legal and Administrative Officer  2019 Salary:  $775,000 
   2018 Bonus:  $834,384 
   LTI Equity Grants (Feb 2019):  $    4,375,000 

 

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 145%. Mr. Parini’s rating derived from his leadership of the legal, compliance, human resources, corporate communications and quality groups with respect to the following:

 

Leading a highly successful year for the legal department, supporting key business development, regulatory and reimbursement initiatives
Expanding and enhancing our human resources function
Spearheading our recruiting efforts, which resulted in us filling 11 of 12 critical positions
Leading the successful communication of numerous key clinical and regulatory milestones
Leading several important corporate initiatives, including the establishment of The Vertex Foundation and the advancement of our diversity and inclusion efforts

 

Amit Sachdev  2018 Rating:  Leading Exemplary 
EVP, Chief Regulatory Officer  2019 Salary:  $540,750 
   2018 Bonus:  $602,261 
   LTI Equity Grants (Feb 2019):  $    5,250,000 

 

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:

 

Building and leading the global regulatory group as they efficiently and successfully obtained multiple approvals for our medicines in U.S. and ex-U.S. markets, including:

 

  SYMDEKO for patients 12 years of age and older in the United States;
  SYMKEVI for patients 12 years of age and older in the European Union
  KALYDECO for patients 12 to 24 months of age
  ORKAMBI for patients 2 years to 5 years of age
Supporting the advancement of multiple development programs, including the triple combination regimens for CF and obtaining the release of the clinical hold on CTX001 allowing us to initiate the clinical trials in the United States
Obtaining multiple regulatory designations, including Orphan Drug Designation in the European Union for multiple CF treatment regimens and Breakthrough Drug Designation in the United States for VX-150 in pain

 

Former Executive Officers

 

Dr. Chodakewitz served as our Chief Medical Officer and Executive Vice President, Global Medicines Development and Medical Affairs through March 31, 2018, and remained as a senior advisor to the company through his retirement in February 2019. He received a leading rating for his 2018 performance, which included leading the development organization during the first part of the year and enabling a smooth transition for Dr. Reshma Kewalramani, who became our Chief Medical Officer and Executive Vice President, Global Medicines Development and Medical Affairs in April 2018. He received a bonus of $550,638 and an equity grant with a fair market value of $4,375,000 in February 2019.

 

Mr. Graney served as our Senior Vice President and Chief Financial Officer until December 13, 2018 and remained as an employee through February 2019. He received a bonus of $367,538 and did not receive an equity grant in February 2019.

 

Mr. Smith served as our Executive Vice President and Chief Operating Officer until January 23, 2019 and our interim Chief Financial Officer from December 13, 2018 through January 23, 2019. We terminated Mr. Smith’s employment as a result of personal behavior that violated our code of conduct and values. This termination was unrelated to our financial and business performance. Mr. Smith did not receive a bonus or an equity award for 2018 performance.

 

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Annual Cash Bonus

 

The cash bonus for each executive (referred to in the Summary Compensation Table on page 65 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 2018:

 

Target Cash Bonus × Performance Factors = Cash Bonus
Base Salary × Individual
Incentive Target
(expressed as
a percentage
of base salary)
× Company Performance
Factor
(expressed as a
percentage of the
target bonus)
× Individual Performance
Factor
(expressed as a
percentage of the
target bonus)
= Annual
Cash
Bonus
Award
    45%- 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. The individual incentive target for each other current NEO is 50% and was unchanged during 2018. 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 2018 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 NEOs on account of 2018 performance, as set forth in the table below.

 

 

Name   2018
Target
Bonus
  Company
Performance
Factor
  Individual
Performance
Factor
      2018
Performance
Cash Bonus
Jeffrey M. Leiden   $     1,560,000          x     148.5%             x     148.5%   =       $     3,440,151
Stuart A. Arbuckle   $ 375,000   x 148.5%   x 148%   =   $ 824,175
Michael Parini   $ 387,500   x 148.5%   x 145%   =   $ 834,384
Amit Sachdev   $ 270,375   x 148.5%   x 150%   =   $ 602,261
Jeffrey Chodakewitz   $ 309,000   x 148.5%   x 120%   =   $ 550,638
Thomas Graney   $ 247,500   x 148.5%   x 100%   =   $ 367,538
Ian F. Smith   $ 637,500   x 148.5%   x —%   =   $

 

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 2018 performance:

 

    Not Building   Building   Strong   Leading   Leading/Exemplary 
 CEO   $    —   $    6,000,000   $    12,000,000   $    13,620,000            $    15,240,000 
 EVP   $   $1,750,000   $3,500,000   $4,375,000   $5,250,000 

 

During 2018, the MDCC increased our target value for annual equity grants by $1.0 million for our CEO and $500,000 for each of our executive vice presidents based on a market analysis. 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.

 

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February 2019 Grants Based on 2018 Performance

 

In February 2019, our independent directors approved, upon the MDCC’s recommendation, individual performance factors and equity awards for 2018 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  $    5,334,000   $    4,572,000   $    5,334,000   $    15,240,000 
Stuart A. Arbuckle  Leading Exemplary  $1,837,500   $1,575,000   $1,837,500   $5,250,000 
Michael Parini  Leading  $1,531,250   $1,312,500   $1,531,250   $4,375,000 
Amit Sachdev  Leading Exemplary  $1,837,500   $1,575,000   $1,837,500   $5,250,000 
Jeffrey Chodakewitz  Leading  $1,531,250   $1,312,500   $1,531,250   $4,375,000 

 

(1) Estimates for value of equity-based awards granted in February 2019 for 2018 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 2018 Annual Report on Form 10-K and are subject to adjustment. Mr. Smith and Mr. Graney did not receive equity awards in 2019.

 

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 our 2018 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 with a payout of 200% in February 2019. The following chart shows the pre-established financial goals and the actual results for the financial-based performance restricted stock unit awards granted in 2018:

 

Award Year  Company Goal  Threshold  Target  Max  Results  Payout
2018  2018 CF Net Product Revenues  $   2.65 billion  $ 2.73 to $2.75 billion   $   2.85 billion   $   3.04 billion   200.0%

 

Consistent with our philosophy of aligning compensation with performance:

 

In 2018, a year in which we substantially exceeded our CF net product revenue expectations and exceeded the high end of our CF net product revenues guidance by nearly $200 million, the payout on our one-year financial PSU awards achieved the maximum level. The performance goals for the 2016 non-financial based performance restricted stock unit awards were established in February 2016 and our performance against these goals was determined in the first quarter of 2019. There were three non-financial goals and achievement of one goal would have resulted in a 50% payout, achievement of two goals would have resulted in a 100% payout and achievement of three goals resulted in a payout of 200%.

 

Award Year   Company Goal   Results
2016   CF Portfolio - Initiation of Phase 2B clinical trial for a next-generation corrector   Achieved
    Initiation of a non-CFTR modulator pivotal clinical trial including outlicensed compounds   Achieved
    Initiation of first-in-human clinical trials for at least 3 new drug candidates   Achieved

 

The performance multiples for the 2017 and 2018 non-financial based performance restricted stock awards will be determined in the first quarter of 2020 and 2021, respectively, based on performance over the relevant three-year performance period. The non-financial goals contained in our three-year performance restricted stock unit awards for 2017 and 2018 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 of our benefit plans and 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 and eligibility for matching contributions, subject to an annual $25,000 limit, to qualified charitable organizations pursuant to the Vertex Foundation Matching Gift Program. 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. Other than the retirement provision under our equity program available to all employees, we do not provide any retirement benefits to our executive officers.

 

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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 hired. 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.

 

We offer a company-wide program that provides for accelerated vesting of equity awards held by qualified retirement-eligible participants. All of the equity awards granted since 2014 to our employees, including our NEOs, contain a retirement vesting provision, under which a “qualified” participant who experiences a termination of service other than for cause will receive accelerated vesting of an additional number of shares underlying the award, equal to the sum of (x) 50% plus 10% for each year of service in excess of five full years of service multiplied by (y) the number of unvested shares subject to the award. A “qualified” participant is a participant who is at least age 55 and has completed at least five full years of service or whose age plus full years of service is 65 or greater and who, has completed a mandatory transitional period of employment with the company following notice of his or her planned termination of service.

 

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 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.

 

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. We did not make any supplemental grants of equity compensation in 2018.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    62

 

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 25 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 150,000 shares of our common stock
Executive Vice Presidents   4X base salary

 

Individual holdings, and holdings of immediate family members, of (a) common stock, (b) unvested 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.

 

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
Executive and Non-Employee Director Stock Ownership Guidelines   No payment of dividends on unvested performance shares or units
No gross-ups    
Independent compensation consultant    

 

VERTEX PHARMACEUTICALS INCORPORATED 2019 Proxy Statement    63

 

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 2019 annual meeting of shareholders and incorporated by reference into Vertex’s Annual Report on Form 10-K for the year ended December 31, 2018. 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 - 2019 Proxy Statement    64

 

COMPENSATION AND EQUITY TABLES

 

Summary Compensation Table

 

The following table provides summary information concerning compensation each of our NEOs for 2018, 2017 and 2016.

 

Name and
Principal Position
  Year   Salary   Bonus   Stock
Awards(1)
   Option
Awards(1)
   Non-Equity
Incentive Plan
Compensation
   All Other
Compensation
   Total 
Jeffrey M. Leiden   2018   $1,300,000   $   $9,800,288   $4,243,973            $3,440,151            $14,735   $18,799,147 
Chairman, President & CEO   2017   $1,300,000   $   $8,750,114   $3,700,877   $3,463,200   $13,110   $17,227,301 
    2016   $1,300,000   $   $9,800,076   $4,060,397   $2,246,400   $12,885   $17,419,758 
Stuart A. Arbuckle   2018   $721,923   $   $2,625,244   $1,136,785   $824,175   $38,965   $5,347,092 
EVP & Chief Commercial Officer   2017   $700,000   $   $2,100,013   $888,210   $699,300   $13,110   $4,400,633 
    2016   $672,885   $   $3,150,148   $1,305,144   $420,000   $12,885   $5,561,062 
Michael Parini   2018   $746,923   $   $2,625,244   $1,136,785   $834,384   $29,000   $5,372,336 
EVP & Chief Legal and   2017   $694,519   $   $3,150,020   $1,332,316   $788,655   $13,110   $5,978,620 
Administrative Officer   2016   $517,846   $250,000   $1,689,672   $4,731,100   $499,867   $41,779   $7,730,264 
Amit Sachdev   2018   $540,750   $   $3,150,448   $1,364,130   $602,261   $20,672   $5,678,261 
EVP & Chief Regulatory Officer   2017   $540,750   $   $2,625,016   $1,110,263   $600,233   $10,001   $4,886,263 
    2016   $540,750   $   $3,150,148   $1,305,144   $438,007   $960   $5,435,009 
Jeffrey Chodakewitz(2)   2018   $618,000   $   $3,150,448   $1,364,130   $550,638   $13,780   $5,696,996 
Former EVP & Chief Medical Officer                                        
Thomas Graney(2)(3)   2018   $550,000   $   $1,400,130   $606,332   $367,538   $13,685   $2,937,685 
Former SVP & Chief Financial Officer   2017   $154,423   $150,000   $1,500,140   $   $110,392   $12,445   $1,927,400 
Ian F. Smith(3)   2018   $850,000   $   $2,625,244   $1,136,785   $   $14,105   $4,626,134 
Former EVP & Chief Operating   2017   $848,077   $   $2,625,016   $1,110,263   $1,339,770   $13,110   $5,936,236 
and Interim Chief Financial Officer   2016   $750,000   $   $3,150,148   $1,305,144   $562,500   $12,885   $5,780,677 
(1) Pursuant to applicable SEC rules the grant-date fair values of the equity awards granted in February 2018 for 2017 performance are included in 2018 compensation. Equity awards granted in February 2019 to Dr. Leiden, Mr. Arbuckle, Mr. Parini, Mr. Sachdev and Mr. Chodakewitz for 2018 performance are not reflected in the Summary Compensation Table above and the value of those awards for our 2019 named executive officers will be reflected in the Summary Compensation Table for next year’s proxy.
(2) Dr. Chodakewitz was one of our executive vice presidents during 2016 and 2017, but was not a named executive officer. Mr. Graney was an employee from the third quarter of 2017 through the first quarter of 2019.
(3) Mr. Graney and Mr. Smith did not receive equity awards in 2019.

 

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

 

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 2018 Annual Report on Form 10-K filed with the SEC on February 13, 2019.

 

The “Stock Awards” for 2018 consist of performance stock unit, or PSU, awards and time-vested restricted stock unit awards granted in February 2018. The “Stock Awards” for 2017 consist of 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.

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    65

 

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 2018, 2017 and 2016 performance, each of which was paid in the first quarter of the subsequent year. The cash bonus awards to the named executive officers for 2018 performance were determined as follows:

 

Name  Base Salary   Individual
Incentive
Target
     2018
Target
Bonus
  Company
Performance
Factor
  Individual
Performance
Factor
     2018
Performance
Cash Bonus
 
Jeffrey M. Leiden  $   1,300,000   x 120%  =  $1,560,000  x 148.5%  x 148.5%  =  $   3,440,151 
Stuart A. Arbuckle  $750,000   x 50%  =  $375,000  x 148.5%  x 148%  =  $824,175 
Michael Parini  $775,000   x 50%  =  $387,500  x 148.5%  x 145%  =  $834,384 
Amit Sachdev  $540,750   x 50%  =  $270,375  x 148.5%  x 150%  =  $602,261 
Jeffery Chodakewitz  $618,000   x 50%  =  $309,000  x 148.5%  x 120%  =  $550,638 
Thomas Graney  $550,000   x 45%  =  $247,500  x 148.5%  x 100%  =  $367,538 
Ian F. Smith  $850,000   x 75%  =  $637,500  x 148.5%  x —%  =  $ 

 

All Other Compensation

 

The amounts set forth under the caption “All Other Compensation” in the table for 2018 consist of:

 

Name  401(k)
Match
   Life Insurance
Premiums
   Matching Gift
Program
   Total 
Jeffrey M. Leiden  $12,375   $    2,360   $   $14,735 
Stuart A. Arbuckle  $12,375   $1,590   $    25,000   $    38,965 
Michael Parini  $12,375   $1,625   $15,000   $29,000 
Amit Sachdev  $12,375   $1,297   $7,000   $20,672 
Jeffery Chodakewitz  $12,375   $1,405   $   $13,780 
Thomas Graney  $12,375   $1,310   $   $13,685 
Ian F. Smith  $12,375   $1,730   $   $14,105 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    66

 

Grants of Plan-Based Awards During 2018

 

The following table provides information with respect to grants of awards to each of our named executive officers during 2018. Pursuant to SEC rules, (i) the threshold, target and maximum amounts payable pursuant to our 2018 annual cash bonus program are set forth in columns under “Estimated Possible Payouts under Non-Equity Incentive Plan Awards”, (ii) the threshold, target and maximum number of shares that could vest pursuant to PSUs granted in 2018 are set forth in columns under “Estimated Future Payouts under Equity Incentive Plan Awards”, (iii) the number of shares granted pursuant to other restricted stock unit awards in 2018 is set forth under “All Other Stock Awards: Number of Shares of Stock or Units” and (iv) the number of shares subject to option awards granted in 2018 is set forth under “All Other Option Awards: Number of Securities Underlying Options”.

 

        Estimated Possible 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                                         
    2/6/2018                        15,749    31,498                          $    2,450,072 
    2/6/2018                        15,749    31,498                       $2,450,072 
    2/6/2018                                   31,498                  $4,900,144 
     2/6/2018                                        73,046         $ 155.57         $ 159.27   $4,243,973 
Stuart A. Arbuckle         $0   $375,000   $843,750                                         
    2/6/2018                        4,219    8,438                       $656,350 
    2/6/2018                        4,219    8,438                       $656,350 
    2/6/2018                                   8,437                  $1,312,544 
     2/6/2018                                        19,566   $155.57   $159.27   $1,136,785 
Michael Parini         $0   $387,500   $871,875                                         
    2/6/2018                        4,219    8,438                       $656,350 
    2/6/2018                        4,219    8,438                       $656,350 
    2/6/2018                                   8,437                  $1,312,544 
     2/6/2018                                        19,566   $155.57   $159.27   $1,136,785 
Amit Sachdev         $0   $270,375   $608,344                                         
    2/6/2018                        5,063    10,126                       $787,651 
    2/6/2018                        5,063    10,126                       $787,651 
    2/6/2018                                   10,125                  $1,575,146 
     2/6/2018                                        23,479   $155.57   $159.27   $1,364,130 
Jeffrey Chodakewitz         $0   $309,000   $695,250                                         
    2/6/2018                        5,063    10,126                       $787,651 
    2/6/2018                        5,063    10,126                       $787,651 
    2/6/2018                                   10,125                  $1,575,146 
     2/6/2018                                        23,479   $155.57   $159.27   $1,364,130 
Thomas Graney         $0   $247,500   $556,875                                         
    2/6/2018                        2,250    4,500                       $350,033 
    2/6/2018                        2,250    4,500                       $350,033 
    2/6/2018                                   4,500                  $700,065 
     2/6/2018                                        10,436   $155.57   $159.27   $606,332 
Ian F. Smith         $0   $637,500   $1,434,375                                         
    2/6/2018                        4,219    8,438                       $656,350 
    2/6/2018                        4,219    8,438                       $656,350 
    2/6/2018                                   8,437                  $1,312,544 
     2/6/2018                                        19,566   $155.57   $159.27   $1,136,785 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    67

 

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 2018 annual cash bonus program. Actual amounts paid to each of the named executive officers under this program for 2018 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 2018. 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 2018 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, which vest annual over three years, granted to the named executive officers in 2018. The number of time-based restricted stock units to these named executive officers were made in February 2018 on account of the executives’ performances in 2017.

 

Options. In accordance with our stock and option plans, the exercise prices for the stock options granted to our named executive officers during 2018 were equal to the average of the high and the low prices of our common stock on the grant date. As a result, in 2018, the exercise prices of options granted to our named executive officers were lower than the grant-date closing price for the February 6, 2018 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.

 

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

 

Each NEO has entered into an employment agreement with the company, which provides the executives the right to participate in all of the company’s compensation and benefits plans and equity programs, as described in Compensation Discussion & Analysis.

 

Option Exercises and Stock Vested for 2018

 

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 2018 and shares of stock that vested during 2018. 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 of common stock 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   206,063   $    19,140,830    57,616   $    8,666,360 
Stuart A. Arbuckle   66,303   $4,453,708    15,773   $2,372,498 
Michael Parini   64,570   $3,282,042    15,586   $2,400,095 
Amit Sachdev   113,545   $9,019,823    17,796   $2,676,797 
Jeffery Chodakewitz   68,651   $4,162,882    16,867   $2,575,379 
Thomas Graney      $    2,392   $458,331 
Ian F. Smith   101,143   $5,159,315    17,796   $2,676,797 

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    68

 

Outstanding Equity Awards at Fiscal Year-End for 2018

 

The following table provides information with respect to outstanding equity awards held by each of our named executive officers on December 31, 2018, based on the closing price of $165.71 per share of our common stock on December 31, 2018:

 

   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
  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)           $  5,344,148           
    Time-based RSU                                  
                      17,939(3)   $2,972,672           
                      33,712(4)   $5,586,416           
                      31,498(5)   $5,219,534           
    Performance-based RSU                                  
                      5,964(6)   $988,294           
                      33,712(7)   $5,586,416           
                      26,908(8)   $4,458,925           
                      15,749(9)   $2,609,767           
                                25,283(10)                   $  4,189,646 
                                15,749(11)   $2,609,767 
    Stock Options                                  
    213,000   0   $77.31    2/4/2024                    
    45,303   58,247   $86.52    2/2/2027                    
    73,752   33,524   $91.05    2/1/2026                    
    106,500   0   $96.87    7/14/2024                    
    199,687   13,313   $109.14    2/2/2025                    
    86,531   19,969   $131.89    7/20/2025                    
    13,696   59,350   $155.57    2/5/2028                    
Stuart A. Arbuckle   Restricted Stock                                  
                      10,350(2)   $1,715,099           
    Time-based RSU                                  
                      5,767(3)   $955,650           
                      8,091(4)   $1,340,760           
                      8,437(5)   $1,398,095           
    Performance-based RSU                                  
                      1,917(6)   $317,666           
                      8,092(7)   $1,340,925           
                      8,649(8)   $1,433,226           
                      4,219(9)   $699,130           
                                6,068(10)   $1,005,528 
                                4,219(11)   $699,130 
    Stock Options                                  
    0   13,980   $86.52    2/2/2027                    
    0   10,776   $91.05    2/1/2026                    
    0   4,250   $109.14    2/2/2025                    
    0   6,375   $131.89    7/20/2025                    
    3,668   15,898   $155.57    2/5/2028                    
Michael Parini   Restricted Stock                                  
                      6,900(12)   $1,143,399           
    Time-based RSU                                  
                      12,136(4)   $2,011,057           
                      8,437(5)   $1,398,095           
    Performance-based RSU                                  
                      12,136(7)   $2,011,057           
                      4,219(9)   $699,130           

 

VERTEX PHARMACEUTICALS INCORPORATED - 2019 Proxy Statement    69

 
   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
  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
 
                                9,102(10)   $1,508,292 
                                4,219(11)   $699,130 
    Stock Options                                  
    0    20,969   $86.52   2/2/2027                    
    0    14,875   $90.29   7/11/2026                    
    0    21,250   $122.45   1/3/2026                    
    3,668    15,898   $155.57   2/5/2028                    
Amit Sachdev   Restricted Stock                                  
                      8,625(2)   $1,429,249           
    Time-based RSU                                  
                      5,767(3)   $955,650           
                      10,114(4)   $1,675,991           
                      10,125(5)   $1,677,814           
    Performance-based RSU                                  
                      1,917(6)   $317,666           
                      10,114(7)   $1,675,991           
                      8,649(8)   $1,433,226           
                      5,063(9)   $838,990           
                                7,585(10)   $1,256,910 
                                5,063(11)   $838,990 
    Stock Options                                  
    0    17,475   $86.52   2/2/2027                    
    1    10,776   $91.05   2/1/2026                    
    53,906    3,594   $109.14   2/2/2025                    
    27,625    6,375   $131.89   7/20/2025                    
    4,402    19,077   $155.57   2/5/2028                    
Jeffrey                                      
Chodakewitz   Restricted Stock                                  
                      8,625(2)   $1,429,249           
    Time-based RSU                                  
                      4,806(3)   $796,402           
                      8,091(4)   $1,340,760           
                      10,125(5)   $1,677,814           
    Performance-based RSU