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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM              TO             
Commission file number 000-19319
____________________________________________
Vertex Pharmaceuticals Incorporated
(Exact name of registrant as specified in its charter)
Massachusetts
04-3039129
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
50 Northern Avenue, Boston, Massachusetts
02210
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (617) 341-6100
____________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o 
Smaller reporting company o
 
 
 
 
Emerging growth company o
                                       
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01 per share
255,558,035
Class
Outstanding at October 19, 2018
 


Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS
 
 
Page
 
 
 
Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2018 and 2017
 
Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2018 and 2017
 
Condensed Consolidated Balance Sheets - September 30, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Shareholders' Equity and Noncontrolling Interest - Nine Months Ended September 30, 2018 and 2017
 
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2018 and 2017
 
 
 
“We,” “us,” “Vertex” and the “Company” as used in this Quarterly Report on Form 10-Q refer to Vertex Pharmaceuticals Incorporated, a Massachusetts corporation, and its subsidiaries.
“Vertex,” “KALYDECO®,” “ORKAMBI®,” “SYMDEKO®” and “SYMKEVI®” are registered trademarks of Vertex. Other brands, names and trademarks contained in this Quarterly Report on Form 10-Q are the property of their respective owners.

Table of Contents

Part I. Financial Information
Item 1.    Financial Statements

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Product revenues, net
$
782,511

 
$
549,642

 
$
2,170,152

 
$
1,544,252

Royalty revenues
1,238

 
2,231

 
3,679

 
6,643

Collaborative revenues
786

 
26,292

 
3,660

 
286,123

Total revenues
784,535

 
578,165

 
2,177,491

 
1,837,018

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
111,255

 
72,874

 
287,250

 
191,067

Research and development expenses
330,510

 
454,947

 
978,595

 
1,017,961

Sales, general and administrative expenses
137,295

 
120,710

 
404,406

 
361,285

Restructuring (income) expenses
(174
)
 
337

 
(188
)
 
13,859

Intangible asset impairment charge
—

 
255,340

 
—

 
255,340

Total costs and expenses
578,886

 
904,208

 
1,670,063

 
1,839,512

Income (loss) from operations
205,649

 
(326,043
)
 
507,428

 
(2,494
)
Interest expense, net
(8,143
)
 
(13,574
)
 
(29,346
)
 
(45,003
)
Other (expense) income, net
(60,995
)
 
(77,553
)
 
89,662

 
(80,634
)
Income (loss) before provision for (benefit from) income taxes
136,511

 
(417,170
)
 
567,744

 
(128,131
)
Provision for (benefit from) income taxes
8,055

 
(125,903
)
 
5,737

 
(117,581
)
Net income (loss)
128,456

 
(291,267
)
 
562,007

 
(10,550
)
Loss (income) attributable to noncontrolling interest
290

 
188,315

 
(15,638
)
 
173,350

Net income (loss) attributable to Vertex
$
128,746

 
$
(102,952
)
 
$
546,369

 
$
162,800

 
 
 
 
 
 
 
 
Amounts per share attributable to Vertex common shareholders:
 
 
 
 
 
 
 
Net income (loss):
 
 
 
 
 
 
 
Basic
$
0.51

 
$
(0.41
)
 
$
2.15

 
$
0.66

Diluted
$
0.50

 
$
(0.41
)
 
$
2.11

 
$
0.64

Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
254,905

 
250,268

 
254,096

 
247,963

Diluted
259,788

 
250,268

 
258,972

 
252,095

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


2
Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
128,456

 
$
(291,267
)
 
$
562,007

 
$
(10,550
)
Changes in other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized holding gains (losses) on marketable securities, net
224

 
5,961

 
137

 
(7,786
)
Unrealized gains (losses) on foreign currency forward contracts, net of tax of zero, $0.9 million, $0.5 million and $2.9 million, respectively
4,029

 
(5,453
)
 
29,062

 
(27,379
)
Foreign currency translation adjustment
659

 
(3,884
)
 
6,800

 
(11,137
)
Total changes in other comprehensive income (loss)
4,912

 
(3,376
)
 
35,999

 
(46,302
)
Comprehensive income (loss)
133,368

 
(294,643
)
 
598,006

 
(56,852
)
Comprehensive loss (income) attributable to noncontrolling interest
290

 
188,315

 
(15,638
)
 
173,350

Comprehensive income (loss) attributable to Vertex
$
133,658

 
$
(106,328
)
 
$
582,368

 
$
116,498

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


3
Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
 
September 30,
 
December 31,
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,478,302

 
$
1,665,412

Marketable securities
577,583

 
423,254

Restricted cash and cash equivalents (VIE)
8,143

 
1,489

Accounts receivable, net
379,755

 
281,343

Inventories
124,150

 
111,830

Prepaid expenses and other current assets
118,678

 
165,635

Total current assets
3,686,611

 
2,648,963

Property and equipment, net
808,352

 
789,437

Intangible assets
29,000

 
29,000

Goodwill
50,384

 
50,384

Other assets
46,493

 
28,230

Total assets
$
4,620,840

 
$
3,546,014

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
92,149

 
$
73,994

Accrued expenses
504,240

 
443,961

Capital lease obligations, current portion
11,511

 
22,531

Early access sales accrual
324,251

 
232,401

Other liabilities, current portion
60,357

 
34,373

Total current liabilities
992,508

 
807,260

Capital lease obligations, excluding current portion
15,141

 
20,496

Deferred tax liability
9,414

 
6,341

Construction financing lease obligation, excluding current portion
561,389

 
563,406

Advance from collaborator, excluding current portion
81,610

 
78,431

Other liabilities, excluding current portion
26,297

 
27,774

Total liabilities
1,686,359

 
1,503,708

Commitments and contingencies


 


Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding
—

 
—

Common stock, $0.01 par value; 500,000,000 shares authorized, 255,610,812 and 253,253,362 shares issued and outstanding, respectively
2,551

 
2,512

Additional paid-in capital
7,443,263

 
7,157,362

Accumulated other comprehensive income (loss)
307

 
(11,572
)
Accumulated deficit
(4,540,005
)
 
(5,119,723
)
Total Vertex shareholders’ equity
2,906,116

 
2,028,579

Noncontrolling interest
28,365

 
13,727

Total shareholders’ equity
2,934,481

 
2,042,306

Total liabilities and shareholders’ equity
$
4,620,840

 
$
3,546,014

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


4
Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Shareholders’ Equity and Noncontrolling Interest
(unaudited)
(in thousands)
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total Vertex
Shareholders’ Equity
 
Noncontrolling
Interest
 
Total
Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2016
248,301

 
$
2,450

 
$
6,506,795

 
$
21,173

 
$
(5,373,836
)
 
$
1,156,582

 
$
181,609

 
$
1,338,191

Cumulative effect adjustment for adoption of new accounting guidance
—

 
—

 
9,371

 
—

 
(9,371
)
 
—

 
—

 
—

Other comprehensive loss, net of tax
—

 
—

 
—

 
(46,302
)
 
—

 
(46,302
)
 
—

 
(46,302
)
Net income
—

 
—

 
—

 
—

 
162,800

 
162,800

 
(173,350
)
 
(10,550
)
Issuance of common stock under benefit plans
4,382

 
50

 
298,956

 
—

 
—

 
299,006

 
33

 
299,039

Stock-based compensation expense
—

 
—

 
218,991

 
—

 
—

 
218,991

 
—

 
218,991

VIE noncontrolling interest upon deconsolidation
—

 
—

 
—

 
—

 
—

 
—

 
3,910

 
3,910

Other VIE activity
—

 
—

 
—

 
—

 
—

 
—

 
(35
)
 
(35
)
Balance at September 30, 2017
252,683

 
$
2,500

 
$
7,034,113

 
$
(25,129
)
 
$
(5,220,407
)
 
$
1,791,077

 
$
12,167

 
$
1,803,244

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
253,253

 
$
2,512

 
$
7,157,362

 
$
(11,572
)
 
$
(5,119,723
)
 
$
2,028,579

 
$
13,727

 
$
2,042,306

Cumulative effect adjustment for adoption of new accounting guidance
—

 
—

 
—

 
(24,120
)
 
33,349

 
9,229

 
—

 
9,229

Other comprehensive income, net of tax
—

 
—

 
—

 
35,999

 
—

 
35,999

 
—

 
35,999

Net income
—

 
—

 
—

 
—

 
546,369

 
546,369

 
15,638

 
562,007

Repurchases of common stock
(1,283
)
 
(13
)
 
(211,025
)
 
—

 
—

 
(211,038
)
 
—

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

 
52

 
250,368

 
—

 
—

 
250,420

 
—

 
250,420

Stock-based compensation expense
—

 
—

 
246,558

 
—

 
—

 
246,558

 
—

 
246,558

Other VIE activity
—

 
—

 
—

 
—

 
—

 
—

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

 
$
2,551

 
$
7,443,263

 
$
307

 
$
(4,540,005
)
 
$
2,906,116

 
$
28,365

 
$
2,934,481

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



5
Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
562,007

 
$
(10,550
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
246,104

 
216,990

Depreciation expense
53,594

 
44,965

Write-downs of inventories to net realizable value
13,089

 
11,138

Deferred income taxes
3,595

 
(113,969
)
Unrealized gain on equity securities
(88,217
)
 
—

Intangible asset impairment charge
—

 
255,340

Acquired in-process research and development
—

 
160,000

Deconsolidation of VIE
—

 
76,644

Other non-cash items, net
10,701

 
(2,841
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(75,167
)
 
(60,165
)
Inventories
(24,461
)
 
(30,226
)
Prepaid expenses and other assets
31,797

 
(84,296
)
Accounts payable
23,023

 
6,925

Accrued expenses and other liabilities
199,643

 
147,476

Net cash provided by operating activities
955,708

 
617,431

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(329,367
)
 
(431,653
)
Maturities of available-for-sale debt securities
308,406

 
247,149

Expenditures for property and equipment
(79,803
)
 
(56,437
)
Decrease in “Restricted cash and cash equivalents (VIE)” due to deconsolidation
—

 
(61,602
)
Investment in equity securities
(60,490
)
 
—

Purchase of in-process research and development
—

 
(160,000
)
Net cash used in investing activities
(161,254
)
 
(462,543
)
Cash flows from financing activities:
 
 
 
Issuances of common stock under benefit plans
245,754

 
298,205

Repurchase of common stock
(207,038
)
 
—

Payments on revolving credit facility
—

 
(300,000
)
Advance from collaborator
7,500

 
10,000

Payments on capital lease obligations
(19,792
)
 
(14,188
)
Proceeds from capital lease financing
3,417

 
—

Proceeds related to construction financing lease obligation
9,566

 
4,700

Payments on construction financing lease obligation
(4,866
)
 
(412
)
Repayments of advanced funding
(3,714
)
 
(3,132
)
Other financing activities
(1,000
)
 
—

Net cash provided by (used in) financing activities
29,827

 
(4,827
)
Effect of changes in exchange rates on cash
(4,756
)
 
5,001

Net increase in cash and cash equivalents
819,525

 
155,062

Cash, cash equivalents and restricted cash—beginning of period
1,667,526

 
1,231,707

Cash, cash equivalents and restricted cash—end of period
$
2,487,051

 
$
1,386,769

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
50,017

 
$
51,990

Cash paid for income taxes
$
10,316

 
$
4,154

Capitalization of costs related to construction financing lease obligation
$
3,389

 
$
33,827

Issuances of common stock from employee benefit plans receivable
$
5,509

 
$
868

Accrued share repurchase liability
$
4,000

 
$
—

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

6
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)


A. Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Vertex Pharmaceuticals Incorporated (“Vertex” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The condensed consolidated financial statements reflect the operations of (i) the Company, (ii) its wholly-owned subsidiaries and (iii) consolidated variable interest entities (VIEs). All material intercompany balances and transactions have been eliminated. The Company operates in one segment, pharmaceuticals. As of September 30, 2017, the Company deconsolidated Parion Sciences, Inc. (“Parion”), a VIE the Company had consolidated since 2015. The Company's condensed consolidated statement of operations for the interim period ended September 30, 2018 excludes Parion. Please refer to Note B, “Collaborative Arrangements and Acquisitions,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 that was filed with the Securities and Exchange Commission (the “SEC”) on February 15, 2018 (the “2017 Annual Report on Form 10-K”) for further information regarding the deconsolidation of Parion.
Certain information and footnote disclosures normally included in the Company’s 2017 Annual Report on Form 10-K have been condensed or omitted. These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods ended September 30, 2018 and 2017.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2017, which are contained in the 2017 Annual Report on Form 10-K.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the amounts of revenues and expenses during the reported periods. Significant estimates in these condensed consolidated financial statements have been made in connection with the calculation of revenues, inventories, research and development expenses, stock-based compensation expense, the fair value of intangible assets, goodwill, contingent consideration, noncontrolling interest, the consolidation and deconsolidation of VIEs, leases, the fair value of cash flow hedges, deferred tax asset valuation allowances and the provision for or benefit from income taxes. The Company bases its estimates on historical experience and various other assumptions, including in certain circumstances future projections that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
Recently Adopted Accounting Standards
Revenue Recognition
In 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenues from Contracts with Customers (Topic 606) (“ASC 606”). The new guidance became effective January 1, 2018. ASC 606 applies a more principles-based approach to recognizing revenue. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that an entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted ASC 606 on January 1, 2018 using the modified-retrospective adoption method for all contracts that were not completed as of the date of adoption. Under the modified-retrospective method, the Company recognized the cumulative effect of applying the standard within “Accumulated deficit” on its condensed consolidated balance sheet as of January 1, 2018.
For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under


7
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

the adoption rules.
Based on the Company’s review of existing customer contracts as of January 1, 2018, it concluded that the only significant impact that the adoption of ASC 606 had on its financial statements relates to shipments of ORKAMBI under early access programs in France. Prior to the adoption of ASC 606, the Company did not recognize revenue on the proceeds received from sales of ORKAMBI under early access programs in France because the price was not fixed or determinable based on the status of ongoing pricing discussions. As of January 1, 2018, the Company recorded a cumulative effect adjustment to its accumulated deficit of $8.3 million related to the adoption of ASC 606, which primarily represented the Company’s estimated amount of consideration it expects to retain related to these shipments that will not be subject to a significant reversal in amounts recognized, net of costs previously deferred related to these shipments. Please refer to Note B, “Revenue Recognition,” for further information.
The Company concluded that the remaining $6.9 million that was recorded as deferred revenue as of December 31, 2017 related to the Company’s 2008 sale of its HIV protease inhibitor royalty stream is not subject to ASC 606 because it was initially accounted for pursuant to ASC 470, Debt, which is not under the scope of ASC 606. The Company will continue to recognize the payment received as royalty revenues over the expected life of the collaboration agreement with GlaxoSmithKline plc based on the units-of-revenue method.
The cumulative effect of applying ASC 606 to the Company’s contracts with customers that were not completed as of January 1, 2018 was as follows:
 
Balance as of
 
 
 
Balance as of
 
December 31, 2017
 
Adjustments
 
January 1, 2018
Assets
(in thousands)
Accounts receivable, net
$
281,343

 
$
29,881

 
$
311,224

Inventories
111,830

 
(90
)
 
111,740

Prepaid expenses and other current assets
165,635

 
(17,166
)
 
148,469

Total assets
$
3,546,014

 
$
12,625

 
$
3,558,639

Liabilities and Shareholders’ Equity
 
 
 
 


Accrued expenses
$
443,961

 
$
8,586

 
$
452,547

Early access sales accrual
232,401

 
(7,273
)
 
225,128

Other liabilities, current portion
34,373

 
2,083

 
36,456

Accumulated other comprehensive loss
(11,572
)
 
949

 
(10,623
)
Accumulated deficit
(5,119,723
)
 
8,280

 
(5,111,443
)
Total liabilities and shareholders’ equity
$
3,546,014

 
$
12,625

 
$
3,558,639



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

The impact of adoption on the Company’s condensed consolidated balance sheet as of September 30, 2018 was as follows:
 
As of September 30, 2018
 
As Reported
under ASC 606
 
Balances
without Adoption of ASC 606
 
Effect of Change
Higher/(Lower)
Assets
(in thousands)
Accounts receivable, net
$
379,755

 
$
345,180

 
$
34,575

Inventories
124,150

 
124,245

 
(95
)
Prepaid expenses and other current assets
118,678

 
143,826

 
(25,148
)
Total assets
$
4,620,840

 
$
4,611,508

 
$
9,332

Liabilities and Shareholders’ Equity
 
 


 


Accrued expenses
$
504,240

 
$
515,880

 
$
(11,640
)
Early access sales accrual
324,251

 
342,136

 
(17,885
)
Other liabilities, current portion
60,357

 
38,950

 
21,407

Accumulated other comprehensive income
307

 
186

 
121

Accumulated deficit
(4,540,005
)
 
(4,557,334
)
 
17,329

Total liabilities and shareholders’ equity
$
4,620,840

 
$
4,611,508

 
$
9,332

The impact of adoption on the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2018 was as follows:
 
Three Months Ended September 30, 2018
 
As Reported
under ASC 606
 
Balances
without Adoption of ASC 606
 
Effect of Change
Higher/(Lower)
 
(in thousands)
Product revenues, net
$
782,511

 
$
777,117

 
$
5,394

Cost of sales
111,255

 
109,533

 
1,722

Income from operations
205,649

 
201,977

 
3,672

Net income attributable to Vertex
$
128,746

 
$
125,074

 
$
3,672

 
 
 
 
 
 
Amounts per share attributable to Vertex common shareholders:
 
 
 
 
 
Net income:
 
 
 
 
 
Basic
$
0.51

 
$
0.49

 
$
0.02

Diluted
$
0.50

 
$
0.48

 
$
0.02

 
Nine Months Ended September 30, 2018
 
As Reported
under ASC 606
 
Balances
without Adoption of ASC 606
 
Effect of Change
Higher/(Lower)
 
(in thousands)
Product revenues, net
$
2,170,152

 
$
2,156,156

 
$
13,996

Cost of sales
287,250

 
282,303

 
4,947

Income from operations
507,428

 
498,379

 
9,049

Net income attributable to Vertex
$
546,369

 
$
537,320

 
$
9,049

 
 
 
 
 
 
Amounts per share attributable to Vertex common shareholders:
 
 
 
 
 
Net income:
 
 
 
 
 
Basic
$
2.15

 
$
2.11

 
$
0.04

Diluted
$
2.11

 
$
2.07

 
$
0.04



9
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

ASC 606 did not have an aggregate impact on the Company’s net cash provided by operating activities, but resulted in offsetting changes in certain assets and liabilities presented within net cash provided by operating activities in the Company’s condensed consolidated statement of cash flows.
Equity Investments
In 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which amended guidance related to the recording of financial assets and financial liabilities. Under the amended guidance, equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of an investee) are measured at fair value with changes in fair value recognized in net income (loss). However, an entity has the option to measure equity investments without readily determinable fair values at (i) fair value or (ii) cost adjusted for changes in observable prices minus impairment. Changes in measurement under either alternative are recognized in net income (loss). The amended guidance became effective January 1, 2018 and required the modified-retrospective adoption approach. As of January 1, 2018, the Company held publicly traded equity investments and equity investments accounted for under the cost method. As a result, in the first quarter of 2018, the Company recorded a $25.1 million cumulative effect adjustment to “Accumulated deficit” related to its publicly traded equity investments equal to the unrealized gain, net of tax, that was recorded in “Accumulated other comprehensive income (loss)” as of December 31, 2017. The adoption of ASU 2016-01 had no effect on the Company’s equity investments accounted for under the cost method because the original cost basis of these investments was recorded on the Company’s condensed consolidated balance sheet as of December 31, 2017. In the three and nine months ended September 30, 2018, the Company recorded expense of $61.2 million and income of $88.2 million, respectively, to “Other (expense) income, net,” in its condensed consolidated statement of operations related to the change in fair value of its equity investments.
Stock-Based Compensation
In 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718) (“ASU 2017-09”) related to the scope of stock option modification accounting to reduce diversity in practice and provide clarity regarding existing guidance. The new accounting guidance was effective January 1, 2018. The Company does not expect the adoption of ASU 2017-09 to have a significant effect on its condensed consolidated financial statements in future periods and had no effect in the three and nine months ended September 30, 2018.
Goodwill
In 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350) (“ASU 2017-04”) related to measurements of goodwill. The amended guidance modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value, which eliminates Step 2 from the goodwill impairment test. An entity would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to the related reporting unit. The new accounting guidance is required for annual or interim goodwill impairment tests conducted after January 1, 2020. The Company early adopted this new guidance and will utilize this approach for annual and interim goodwill impairment tests conducted after January 1, 2018. The Company does not expect the adoption of this guidance to have a significant effect on its condensed consolidated financial statements.
Intra-Entity Transfers
In 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which removes the previous exception in GAAP prohibiting an entity from recognizing current and deferred income tax expenses or benefits related to the transfer of assets, other than inventory, within the consolidated entity. The exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. The amended guidance became effective January 1, 2018. In the first quarter of 2018, upon adoption of ASU 2016-16, the Company recorded a deferred tax asset and corresponding full valuation allowance of $204.7 million equal to the unamortized cost of intellectual property rights transferred to the United Kingdom in 2014 multiplied by an appropriate statutory rate. There was no cumulative effect adjustment to “Accumulated deficit” using the modified-retrospective adoption approach.


10
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

Cash Flows - Restricted Cash
In 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash (“ASU 2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash. Therefore, amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts shown on the statement of cash flows.  The amended guidance became effective January 1, 2018 and is effective on a retrospective basis. The cash, cash equivalents and restricted cash at the beginning and ending of each period presented in the Company’s condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017 consisted of the following:
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Beginning of period
 
End of period
 
Beginning of period
 
End of period
 
(in thousands)
Cash and cash equivalents
$
1,665,412

 
$
2,478,302

 
$
1,183,945

 
$
1,384,966

Restricted cash and cash equivalents (VIE)
1,489

 
8,143

 
47,762

 
1,803

Prepaid expenses and other current assets
625

 
606

 
—

 
—

Cash, cash equivalents and restricted cash per statement of cash flows
$
1,667,526

 
$
2,487,051

 
$
1,231,707

 
$
1,386,769

The Company’s restricted cash is classified in “Prepaid expenses and other current assets” in its condensed consolidated balance sheets. The Company has recorded its VIE’s cash and cash equivalents as “Restricted cash and cash equivalents (VIE)” because (i) the Company does not have any interest in or control over BioAxone’s cash and cash equivalents and (ii) the Company’s agreement with BioAxone does not provide for BioAxone’s cash and cash equivalents to be used for the development of the asset that the Company licensed from BioAxone.
Recently Issued Accounting Standards
Internal-Use Software
In 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements.  The new guidance is effective for the Company on January 1, 2020. Early adoption is permitted. The Company currently is evaluating the impact the adoption of ASU 2018-15 will have on its condensed consolidated financial statements.
Fair Value Measurement
In 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements. The new guidance is effective for the Company on January 1, 2020. Early adoption is permitted. The Company currently is evaluating the impact the adoption of ASU 2018-13 may have on its disclosures.

Derivatives and Hedging
In 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) (“ASU 2017-12”), which helps simplify certain aspects of hedge accounting and enables entities to more accurately present their risk management activities in their financial statements. The new guidance is effective for the Company on January 1, 2019. The Company does not expect the adoption of ASU 2017-12 to have a significant effect on its condensed consolidated financial statements.
Leases
In 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which amends a number of aspects of lease accounting and requires entities to recognize on the balance sheet right-of-use assets and liabilities for leases with lease terms of more than 12 months. ASU 2016-02 requires a modified-retrospective adoption approach. The new guidance is effective


11
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

for the Company on January 1, 2019. The Company’s project team has reviewed its portfolio of existing leases and current accounting policies to identify and assess the potential differences that would result from applying the requirements of the new standard. The Company anticipates that the amended guidance will result in the recognition of additional right of use assets and corresponding liabilities on its condensed consolidated balance sheets. As discussed in Note K, “Long-term Obligations,” the Company currently applies build-to-suit accounting and is the deemed owner of its leased corporate headquarters in Boston and research site in San Diego, for which it is recognizing depreciation expense over the buildings’ useful lives and imputed interest on the corresponding construction financing lease obligations. Under the amended guidance, the Company expects to account for these buildings as financing leases, resulting in increased depreciation expense over the respective lease terms, which are significantly shorter than the buildings’ useful lives. The Company also expects a reduction in its imputed interest expense in the initial years of each financing lease term. The Company is in the process of quantifying the amount of financing and operating leases, corresponding liabilities and the cumulative effect adjustment to “Accumulated deficit” that will be recorded upon adoption of the amended guidance. The Company is also in the process of implementing appropriate changes to its controls to support lease accounting and related disclosures under the new standard.
For a discussion of other recent accounting pronouncements please refer to Note A, “Nature of Business and Accounting Policies—Recent Accounting Pronouncements,” in the 2017 Annual Report on Form 10-K.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note A, “Nature of Business and Accounting Policies,” in the 2017 Annual Report on Form 10-K. The Company is disclosing changes in its accounting policies related to guidance that became effective January 1, 2018 in this Quarterly Report on Form 10-Q. Specifically, the Company has included below its updated revenue recognition policy pursuant to its adoption of ASC 606 in Note B, “Revenue Recognition,” and its policy related to marketable and equity securities.
Marketable and Equity Securities
Effective January 1, 2018, the Company measures publicly traded corporate equity investments that have readily available prices at fair value, with changes in fair value recognized in “Other (expense) income, net,” each reporting period.
Effective January 1, 2018, the Company records privately issued corporate equity investments that do not have readily determinable fair values at cost, and adjusts for changes in observable prices minus impairment. Each reporting period, the Company adjusts the carrying value of these investments if it observes that additional shares have been issued in an orderly transaction between market participants resulting in a price increase or decrease per share. Additionally, each reporting period the Company reviews these investments for impairment considering all available information to conclude whether an impairment exists. Changes in measurement for all corporate equity investments are recognized in “Other (expense) income, net.”
B.
Revenue Recognition
Pursuant to ASC 606, the Company recognizes revenue when a customer obtains control of promised goods or services. The Company records the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. 
The Company only applies the five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services that it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations it must deliver and which of these performance obligations are distinct. The Company recognizes as revenue the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied. Generally, the Company's performance obligations are transferred to customers at a point in time, typically upon delivery.


12
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

Product Revenues, Net
The Company sells its products principally to a limited number of specialty pharmacy and specialty distributors in the United States, which account for the largest portion of its total revenues, and makes international sales primarily to specialty distributors and retail chains, as well as hospitals and clinics, many of which are government-owned or supported (collectively, its “Customers”). The Company’s Customers in the United States subsequently resell the products to patients and health care providers. In accordance with ASC 606, the Company recognizes net revenues from product sales when the Customers obtain control of the Company’s products, which typically occurs upon delivery to the Customer. The Company’s payment terms are approximately 30 days in the United States and consistent with prevailing practice in international markets.
Revenues from product sales are recorded at the net sales price, or “transaction price,” which includes estimates of variable consideration that result from (a) trade allowances, which include invoice discounts for prompt payment and Customer fees, (b) government and private payor rebates, chargebacks, discounts and fees and (c) costs of co-pay assistance programs for patients, as well as other incentives for certain indirect customers. Reserves are established for the estimates of variable consideration based on the amounts earned or to be claimed on the related sales. The reserves are classified as reductions to “Accounts receivable, net” if payable to a Customer or “Accrued expenses” if payable to a third-party.  Where appropriate, the Company utilizes the expected value method to determine the appropriate amount for estimates of variable consideration based on factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.  The amount of variable consideration that is included in the transaction price may be constrained and is included in net product revenues only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.  Actual amounts of consideration ultimately received may differ from the Company’s estimates.  If actual results vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Allowances: The Company generally provides invoice discounts on product sales to its Customers for prompt payment and pays fees for distribution services, such as fees for certain data that Customers provide to the Company. The Company estimates that, based on its experience, its Customers will earn these discounts and fees, and deducts the full amount of these discounts and fees from its gross product revenues and accounts receivable at the time such revenues are recognized.
Rebates, Chargebacks, Discounts and Fees: The Company contracts with government agencies (its “Third-party Payors”) so that products will be eligible for purchase by, or partial or full reimbursement from, such Third-party Payors. The Company estimates the rebates, chargebacks, discounts and fees it will provide to Third-party Payors and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. For each product, the Company estimates the aggregate rebates, chargebacks and discounts that it will provide to Third-party Payors based upon (i) the Company’s contracts with these Third-party Payors, (ii) the government-mandated discounts and fees applicable to government-funded programs, (iii) information obtained from the Company’s Customers and other third-party data regarding the payor mix for such product and (iv) historical experience.
Other Incentives: Other incentives that the Company offers include co-pay mitigation rebates provided by the Company to commercially insured patients who have coverage and who reside in states that permit co-pay mitigation programs. Based upon the terms of the Company’s co-pay mitigation programs, the Company estimates average co-pay mitigation amounts for each of its products in order to establish appropriate accruals.
The Company makes significant estimates and judgments that materially affect its recognition of net product revenues. The Company adjusts its estimated rebates, chargebacks and discounts based on new information, including information regarding actual rebates, chargebacks and discounts for its products, as it becomes available. Claims by third-party payors for rebates, chargebacks and discounts frequently are submitted to the Company significantly after the related sales, potentially resulting in adjustments in the period in which the new information becomes known. The Company’s credits to revenue related to prior period sales have not been significant and primarily related to U.S. rebates, chargebacks and discounts.


13
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

The Company excludes taxes collected from Customers relating to product sales and remitted to governmental authorities from revenues.
French Early Access Programs
Pursuant to ASC 605, Revenue Recognition, which was applicable until December 31, 2017, the Company only recognized revenues from product sales if it determined that the price was fixed or determinable at the time of delivery. If the Company determined that the price was not fixed or determinable, it deferred the recognition of revenues. If the Company was able to determine that the price was fixed or determinable, it recognized the net product revenues associated with the units.
The Company began distributing ORKAMBI through early access programs in France during the fourth quarter of 2015 and is engaged in ongoing pricing discussions regarding the final price for ORKAMBI in France. The Company’s ORKAMBI net product revenues for 2017, 2016 and 2015 did not include any net product revenues from sales of ORKAMBI in France because the price was not fixed or determinable. The Company expects that the difference between the amounts collected based on the invoiced price and the final price for ORKAMBI in France will be returned to the French government.
As of September 30, 2018 and December 31, 2017, the Company’s condensed consolidated balance sheets included $324.3 million and $232.4 million, respectively, classified as “Early access sales accrual” related to amounts collected in France as payment for shipments of ORKAMBI under the early access programs, which is considered to be a refund liability pursuant to ASC 606.
Upon adopting ASC 606 in the first quarter of 2018, the Company recorded an $8.3 million cumulative effect adjustment to “Accumulated deficit” primarily related to shipments of ORKAMBI under early access programs in France. The Company determined the amount of the adjustment based upon (i) the status of pricing discussions in France upon adoption, (ii) the Company’s estimate of the amount of consideration it expects to retain related to ORKAMBI sales in France that occurred on or prior to December 31, 2017 that will not be subject to a significant reversal in amounts recognized and (iii) recognition of costs previously deferred related to the ORKAMBI sales in France. For ORKAMBI sales in France that occurred after December 31, 2017 under the early access programs, the Company has recognized net product revenues based on the estimate of consideration it expects to retain that will not be subject to a significant reversal in amounts recognized.
If the Company’s estimate regarding the amounts it will receive for ORKAMBI supplied pursuant to these early access programs changes, the Company will reflect the effect of the change in estimate in net product revenues in the period in which the change in estimate occurs and will include adjustments to all prior sales of ORKAMBI under the early access programs.
Collaborative Revenues
The Company recognizes collaborative revenues generated through collaborative research, development and/or commercialization agreements. The terms of these agreements typically include payment to the Company related to one or more of the following: nonrefundable, upfront license fees; development and commercial milestones; funding of research and/or development activities; and royalties on net sales of licensed products. Each type of payments results in collaborative revenues except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues. Revenue is recognized upon satisfaction of a performance obligation by transferring control of a good or service to the collaborator.
For each collaborative research, development and/or commercialization agreement that results in revenue, the Company identifies all material performance obligations, which may include a license to intellectual property and know-how, research and development activities and/or transition activities. In order to determine the transaction price, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimate of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a


14
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.
Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction price is generally allocated to each separate performance obligation on a relative standalone selling price basis. In order to account for these agreements, the Company must develop assumptions that require judgment to determine the standalone selling price, which may include (i) the probability of obtaining marketing approval for the drug candidate, (ii) estimates regarding the timing of and the expected costs to develop and commercialize the drug candidate, (iii) estimates of future cash flows from potential product sales with respect to the drug candidate and (iv) appropriate discount and tax rates. Standalone selling prices used to perform the initial allocation are not updated after contract inception. The Company does not include a financing component to its estimated transaction price at contract inception unless it estimates that certain performance obligations will not be satisfied within one year.
Upfront License Fees: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in an arrangement, the Company recognizes revenue from the related nonrefundable, upfront license fees based on the relative standalone selling price prescribed to the license compared to the total selling price of the arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license.  For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company applies an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees.  The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Development and Regulatory Milestone Payments: Depending on facts and circumstances, the Company may conclude that it is appropriate to include certain milestones in the estimated transaction price or that it is appropriate to fully constrain the milestones. A milestone payment is included in the transaction price in the reporting period that the Company concludes that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods. The Company may record revenues from certain milestones in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. The Company records a corresponding contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. These milestones remain fully constrained until the Company concludes that their achievement is probable and that recognition of the related revenue will not result in a significant reversal in amounts recognized in future periods. The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period and adjusts its estimate of the overall transaction price, including the amount of collaborative revenue that it has recorded, if necessary.  
Research and Development Activities/Transition Services: If the Company is entitled to reimbursement from its collaborators for specified research and development expenses, the Company accounts for the related services that it provides as separate performance obligations if it determines that these services represent a material right. The Company also determines whether the reimbursement of research and development expenses should be accounted for as collaborative revenues or an offset to research and development expenses in accordance with provisions of gross or net revenue presentation. The Company recognizes the corresponding revenues or records the corresponding offset to research and development expenses as it satisfies the related performance obligations.
Sales-based Milestone and Royalty Payments: The Company’s collaborators may be required to pay the Company sales-based milestones or royalties on future sales of commercial products.  The Company recognizes revenues related to sales-based milestone and royalties upon the later to occur of (i) achievement of the collaborator’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license to the Company’s intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.


15
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

Contract Liabilities
The following table summarizes changes in the Company’s contract liabilities for the nine months ended September 30, 2018:
 
Balance at January 1, 2018 (ASC 606 adoption)
 
Additions
 
Deductions
 
Balance at September 30, 2018
 
(in thousands)
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
Contract liabilities:
 
 
 
 
 
 
 
Other liabilities, current portion
$
1,654

 
$
54,724

 
$
(16,608
)
 
$
39,770

The Company’s contract liabilities relate to contracts with government-owned and supported customers in international markets that limit the amount of annual reimbursement the Company can receive. Upon exceeding the annual reimbursement amount, products are provided free of charge, which is a material right pursuant to ASC 606. These contracts, which are classified as “Other liabilities, current portion,” include upfront payments and fees.  The Company defers a portion of the consideration received for shipments made up to the annual reimbursement limit, and the deferred amount is recognized as revenue when the free products are shipped. The Company’s product revenue contracts include performance obligations that are one year or less.
During the nine months ended September 30, 2018, the Company did not recognize any revenues related to its contract liability balance as of January 1, 2018 or revenues related to performance obligations satisfied in previous periods.
Disaggregation of Revenue
Revenues by Product
Product revenues, net consisted of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018 (as reported under ASC 606)
 
2017 (as reported under ASC 605)
 
2018 (as reported under ASC 606)
 
2017 (as reported under ASC 605)
 
(in thousands)
KALYDECO
$
245,733

 
$
213,461

 
$
748,365

 
$
588,809

ORKAMBI
281,859

 
336,183

 
947,186

 
955,451

SYMDEKO
254,919

 
—

 
474,601

 
—

Other
—

 
(2
)
 
—

 
(8
)
Total product revenues, net
$
782,511

 
$
549,642

 
$
2,170,152

 
$
1,544,252



16
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

Revenues by Geographic Location
Net product revenues are attributed to countries based on the location of the Customer. Collaborative and royalty revenues are attributed to countries based on the location of the Company’s subsidiary associated with the collaborative arrangement related to such revenues. Total revenues from external customers and collaborators by geographic region consisted of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018 (as reported under ASC 606)
 
2017 (as reported under ASC 605)
 
2018 (as reported under ASC 606)
 
2017 (as reported under ASC 605)
 
(in thousands)
United States
$
620,485

 
$
454,736

 
$
1,687,963

 
$
1,483,666

Outside of the United States
 
 
 
 
 
 
 
Europe
132,876

 
94,057

 
400,685

 
278,407

Other
31,174

 
29,372

 
88,843

 
74,945

Total revenues outside of the United States
164,050

 
123,429

 
489,528

 
353,352

Total revenues
$
784,535

 
$
578,165

 
$
2,177,491

 
$
1,837,018

In the three and nine months ended September 30, 2018 and 2017, revenues attributable to Germany and the United Kingdom contributed the largest amounts to the Company’s European revenues.
C.
Collaborative Arrangements and Acquisitions
Cystic Fibrosis Foundation
The Company has a research, development and commercialization agreement that was originally entered into in 2004 with Cystic Fibrosis Foundation (“CFF”), as successor in interest to the Cystic Fibrosis Foundation Therapeutics, Inc. This agreement was most recently amended in 2016 (the “2016 Amendment”). Pursuant to the agreement, as amended, the Company has agreed to pay royalties ranging from low-single digits to mid-single digits on potential sales of certain compounds first synthesized and/or tested between March 1, 2014 and August 31, 2016, including VX-659 and VX-445, and tiered royalties ranging from single digits to sub-teens on any approved drugs first synthesized and/or tested during a research term on or before February 28, 2014, including KALYDECO (ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor). For combination products, such as ORKAMBI and SYMDEKO, sales are allocated equally to each of the active pharmaceutical ingredients in the combination product. The Company previously made certain commercial milestone payments under the agreement but there are no remaining commercial milestone payments payable by the Company to CFF pursuant to the agreement.
Pursuant to the 2016 Amendment, the Company received an upfront payment of $75.0 million and is receiving development funding from CFF of up to $6.0 million annually. The upfront payment plus any future development funding represent a form of financing pursuant to ASC 730, Research and Development, and thus the amounts are recorded as a liability on the condensed consolidated balance sheet, primarily reflected in “Advance from collaborator, excluding current portion”. The liability is reduced over the estimated royalty term of the agreement. Reductions in the liability are reflected as an offset to “Cost of sales” and as “Interest expense, net”.
The Company began marketing KALYDECO in 2012 and began marketing ORKAMBI in 2015. The Company received approval for SYMDEKO in the United States in February 2018 and the Company expects to obtain approval for SYMKEVI in the European Union in the fourth quarter of 2018. The Company has royalty obligations to CFF for ivacaftor, lumacaftor and tezacaftor until the expiration of patents covering those compounds. The Company has patents in the United States and European Union covering the composition-of-matter of ivacaftor that expire in 2027 and 2025, respectively, subject to potential patent extension. The Company has patents in the United States and European Union covering the composition-of-matter of lumacaftor that expire in 2030 and 2026, respectively, subject to potential extension. The Company has patents in the United States and European Union covering the composition-of-matter of tezacaftor that expire in 2027 and 2028, respectively, subject to potential extension.


17
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

CRISPR Therapeutics AG
In 2015, the Company entered into a strategic collaboration, option and license agreement (the “CRISPR Agreement”) with CRISPR Therapeutics AG and its affiliates (“CRISPR”) to collaborate on the discovery and development of potential new treatments aimed at the underlying genetic causes of human diseases using CRISPR-Cas9 gene editing technology. The Company has the exclusive right to license up to six CRISPR-Cas9-based targets, including targets for the potential treatment of sickle cell disease. In connection with the CRISPR Agreement, the Company made an upfront payment to CRISPR of $75.0 million and a $30.0 million investment in CRISPR pursuant to a convertible loan agreement that subsequently converted into common shares of CRISPR and was recorded on the Company’s condensed consolidated balance sheet. The Company has made several additional investments in CRISPR’s common shares, including investments totaling $46.9 million in 2018. As of September 30, 2018, the Company recorded the fair value of its investment in CRISPR common shares of $207.0 million in “Marketable securities” on its condensed consolidated balance sheet.
The Company funds all of the discovery activities conducted pursuant to the CRISPR Agreement. For targets that the Company elects to license, other than hemoglobinopathy treatments, the Company would lead all development and global commercialization activities. For each target that the Company elects to license, other than hemoglobinopathy targets, CRISPR has the potential to receive up to $420.0 million in development, regulatory and commercial milestones and royalties on net product sales. As part of the collaboration, the Company and CRISPR share equally all development costs and potential worldwide revenues related to potential hemoglobinopathy treatments, including treatments for beta-thalassemia and sickle cell disease.
The Company may terminate the CRISPR Agreement upon 90 days’ notice to CRISPR prior to any product receiving marketing approval or upon 270 days’ notice after a product has received marketing approval. The CRISPR Agreement also may be terminated by either party for a material breach by the other, subject to notice and cure provisions. Unless earlier terminated, the CRISPR Agreement will continue in effect until the expiration of the Company’s payment obligations under the CRISPR Agreement.
In the fourth quarter of 2017, the Company entered into a co-development and co-commercialization agreement with CRISPR pursuant to the terms of the CRISPR Agreement, under which the Company and CRISPR will co-develop and co-commercialize CTX001 (the “CTX001 Co-Co Agreement”) for the treatment of hemoglobinopathy, including treatments for sickle cell disease and beta-thalassemia. The Company concluded that the CTX001 Co-Co Agreement is a cost-sharing arrangement, which results in the net impact of the arrangement being recorded within “Research and development expenses” in its condensed consolidated statements of operations. During the three and nine months ended September 30, 2018, the net expense related to the CTX001 Co-Co Agreement was $5.2 million and $14.1 million, respectively.
Merck KGaA
In January 2017, the Company entered into a strategic collaboration and license agreement (the “Merck KGaA Agreement”) with Merck KGaA, Darmstadt, Germany (“Merck KGaA”). Pursuant to the Merck KGaA Agreement, the Company granted Merck KGaA an exclusive worldwide license to research, develop and commercialize four oncology research and development programs. Under the Merck KGaA Agreement, the Company granted Merck KGaA exclusive, worldwide rights to two clinical-stage programs targeting DNA damage repair: its ataxia telangiectasia and Rad3-related protein inhibitor program, including VX-970 and VX-803, and its DNA-dependent protein kinase inhibitor program, including VX-984. In addition, the Company granted Merck KGaA exclusive, worldwide rights to two pre-clinical programs.
The Merck KGaA Agreement provided for an upfront payment from Merck KGaA to the Company of $230.0 million. A portion of the upfront payment that was remitted to the German tax authorities in 2017 was refunded to the Company in February 2018. In addition to the upfront payment, the Company will receive tiered royalties on potential sales of licensed products, calculated as a percentage of net sales, that range from (i) mid-single digits to mid-twenties for clinical-stage programs and (ii) mid-single digits to high single digits for the pre-clinical research programs. Merck KGaA has assumed full responsibility for development and commercialization costs for all programs.
The Company evaluated the deliverables, primarily consisting of a license to the four programs and the obligation to complete certain fully-reimbursable research and development and transition activities as directed by Merck KGaA, pursuant to the Merck KGaA Agreement, under the multiple element arrangement accounting guidance that was applicable in 2017.


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

The Company concluded that the license had stand-alone value from the research and development and transition activities based on the resources and know-how possessed by Merck KGaA, and thus concluded that there are two units of accounting in the arrangement. The Company determined the relative selling price of the units of accounting based on the Company’s best estimate of selling price. The Company utilized key assumptions to determine the best estimate of selling price for the license, which included future potential net sales of licensed products, development timelines, reimbursement rates for personnel costs, discount rates, and estimated third-party development costs. The Company utilized a discounted cash flow model to determine its best estimate of selling price for the license and determined the best estimate of selling price for the research and development and transition activities based on what it would sell the services for separately. Given the significance of the best estimate of selling price for the license as compared to the best estimate of selling price for the research and development and transition services, reasonable changes in the assumptions used in the discounted cash flow model would not have a significant impact on the relative selling price allocation. Based on this analysis, the Company recognized the $230.0 million upfront payment upon delivery of the license as well as research and development and transition activities during the first quarter of 2017. The Company records the reimbursement for the research and development and transition activities in its condensed consolidated statements of operations as collaborative revenue primarily due to the fact that it is the primary obligor in the arrangement. As of December 31, 2017, the Company’s activities related to research and development and transition activities under the Merck KGaA Agreement were substantially complete.
Merck KGaA may terminate the Merck KGaA Agreement or any individual program by providing 90 days’ notice, or, in the case of termination of a program with a product that has received marketing approval, 180 days’ notice. The Merck KGaA Agreement also may be terminated by either party for a material breach by the other party, subject to notice and cure provisions. Unless earlier terminated, the Merck KGaA Agreement will continue in effect until the date on which the royalty term and all payment obligations with respect to all products in all countries have expired.
Variable Interest Entities (VIEs)
The Company has entered into several agreements pursuant to which it has licensed rights to certain drug candidates from third-party collaborators, resulting in the consolidation of the third parties’ financial statements into the Company’s condensed consolidated financial statements as VIEs. In order to account for the fair value of the contingent payments, which could consist of milestone, royalty and option payments, related to these collaborations under GAAP, the Company uses present-value models based on assumptions regarding the probability of achieving the relevant milestones, estimates regarding the timing of achieving the milestones, estimates of future product sales and the appropriate discount rates. The Company bases its estimates of the probability of achieving the relevant milestones on industry data for similar assets and its own experience. The discount rates used in the valuation model represent a measure of credit risk and market risk associated with settling the liabilities. Significant judgment is used in determining the appropriateness of these assumptions at each reporting period. Changes in these assumptions could have a material effect on the fair value of the contingent payments. The following collaborations have been reflected in the Company’s financial statements as consolidated VIEs for portions or all of the periods presented:
Parion Sciences, Inc.
In 2015, the Company entered into a strategic collaboration and license agreement (the “Parion Agreement”) with Parion to collaborate with Parion to develop investigational epithelial sodium channel (“ENaC”) inhibitors, including VX-371 (formerly P-1037) and VX-551 (formerly P-1055), for the potential treatment of CF and all other pulmonary diseases.  The Company is responsible for all costs, subject to certain exceptions, related to development and commercialization of the compounds.
Pursuant to the Parion Agreement, the Company has worldwide development and commercial rights to Parion’s lead investigational ENaC inhibitors, VX-371 and VX-551, for the potential treatment of CF and all other pulmonary diseases and has the option to select additional compounds discovered in Parion’s research program.  To date Parion received $85.0 million in upfront and milestone payments under the Parion Agreement. Parion has the potential to receive up to an additional (i) $485.0 million in development and regulatory milestone payments for development of ENaC inhibitors in CF, including $360.0 million related to global filing and approval milestones, (ii) $370.0 million in development and regulatory milestones for VX-371 and VX-551 in non-CF pulmonary indications and (iii) $230.0 million in development and regulatory milestones should the Company elect to develop an additional ENaC inhibitor from Parion’s research program. The


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

Company agreed to pay Parion tiered royalties that range from the low double digits to mid-teens as a percentage of potential sales of licensed products.
The Company may terminate the Parion Agreement upon 90 days’ notice to Parion prior to any licensed product receiving marketing approval or upon 180 days’ notice after a licensed product has received marketing approval. If the Company experiences a change of control prior to the initiation of the first Phase 3 clinical trial for a licensed product, Parion may terminate the Parion Agreement upon 30 days’ notice, subject to the Company’s right to receive specified royalties on any subsequent commercialization of licensed products. The Parion Agreement also may be terminated by either party for a material breach by the other, subject to notice and cure provisions. Unless earlier terminated, the Parion Agreement will continue in effect until the expiration of the Company’s royalty obligations, which expire on a country-by-country basis on the later of (i) the date the last-to-expire patent covering a licensed product expires or (ii) ten years after the first commercial sale in the country.
Following execution of the Parion Agreement, the Company determined that it had a variable interest in Parion via the Parion Agreement, and that the variable interest represented a variable interest in Parion as a whole because the fair value of the ENaC inhibitors represented more than half of the total fair value of Parion’s assets. The Company also concluded that it was the primary beneficiary as it had the power to direct the activities that most significantly affect the economic performance of Parion and that it had the obligation to absorb losses and right to receive benefits that potentially could be significant to Parion.  Accordingly, the Company consolidated Parion's financial statements beginning in June 2015. Notwithstanding the applicable accounting treatment, the Company's interests in Parion have been and continue to be limited to those accorded to the Company in the Parion Agreement.
As of September 30, 2017, the Company determined that the fair value of Parion’s pulmonary ENaC platform had declined significantly based on data received in September 2017 from a Phase 2 clinical trial of VX-371 that did not meet its primary efficacy endpoint. After evaluating the results of the clinical trial and based on the decrease in the fair value of Parion’s pulmonary ENaC platform relative to Parion’s other activities, the Company determined that it was no longer the primary beneficiary of Parion as it no longer had the power to direct the significant activities of Parion. Accordingly, the Company deconsolidated Parion as of September 30, 2017. Please refer to Note B, “Collaborative Arrangements and Acquisitions,” in the 2017 Annual Report on Form 10-K for further information regarding the deconsolidation of Parion.
BioAxone Biosciences, Inc.
In 2014, the Company entered into a license and collaboration agreement (the “BioAxone Agreement”) with BioAxone Biosciences, Inc. (“BioAxone”), which resulted in the consolidation of BioAxone as a VIE beginning on October 1, 2014. The Company recorded an in-process research and development intangible asset of $29.0 million for VX-210 and a corresponding deferred tax liability of $11.3 million attributable to BioAxone. The Company made an initial payment to BioAxone of $10.0 million in 2014. In the first quarter of 2018, the Company’s option to purchase BioAxone expired and the Company paid a $10.0 million license continuation fee to BioAxone. As of September 30, 2018, BioAxone had the potential to receive up to $80.0 million in milestones, including development and regulatory milestone payments. As of September 30, 2018, the Company continues to conclude that it is the primary beneficiary of BioAxone and continues to consolidate BioAxone as a VIE.
As further discussed in Note P, “Subsequent Event,” in the fourth quarter of 2018, the Company will determine whether it continues to be the primary beneficiary of BioAxone and should continue to consolidate BioAxone as a VIE based on its October 2018 announcement that it will terminate its Phase 2b clinical trial of VX-210.


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

Aggregate VIE Financial Information
An aggregate summary of net income attributable to noncontrolling interest related to the Company’s VIEs for the three and nine months ended September 30, 2018 and 2017 is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Loss attributable to noncontrolling interest before provision for (benefit from) income taxes and changes in fair value of contingent payments
$
411

 
$
238,946

 
$
1,394

 
$
222,448

Provision for (benefit from) income taxes
79

 
(120,181
)
 
6,068

 
(111,658
)
(Increase) decrease in fair value of contingent payments
(200
)
 
69,550

 
(23,100
)
 
62,560

Net loss (income) attributable to noncontrolling interest
$
290

 
$
188,315

 
$
(15,638
)
 
$
173,350

The increase in the noncontrolling interest holders’ claim to net assets with respect to the fair value of the contingent payments for the nine months ended September 30, 2018 was primarily due to the expiration of the Company’s option to purchase BioAxone in the first quarter of 2018 that increased the probability of a $10.0 million license continuation fee for VX-210 (which was ultimately paid in the first quarter of 2018) and the probability that additional milestone and royalty payments related to the BioAxone Agreement would be paid. The increase in the noncontrolling interest holders’ claim to net assets with respect to the fair value of the contingent payments for the three months ended September 30, 2018 was primarily due to changes in the time value of money. The decreases in the noncontrolling interest holders’ claim to net assets with respect to the fair value of the contingent payments for the three and nine months ended September 30, 2017 were primarily due to the decrease in the fair value of Parion’s pulmonary ENaC platform described above. The fair value of the contingent payments payable by the Company to BioAxone was $32.0 million and $18.9 million as of September 30, 2018 and December 31, 2017, respectively. During the three and nine months ended September 30, 2018 and 2017, the (increases) and decreases in the fair value of the contingent payments related to the Company’s VIEs were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Parion
$
—

 
$
69,550

 
$
—

 
$
63,460

BioAxone
(200
)
 
—

 
(23,100
)
 
(900
)
Significant amounts related to the Company’s consolidation of BioAxone as a VIE included in the Company’s condensed consolidated balance sheets as of the dates set forth in the table below were as follows:
 
September 30, 2018
 
December 31, 2017
 
(in thousands)
Restricted cash and cash equivalents (VIE)
$
8,143

 
$
1,489

Intangible assets
29,000

 
29,000

Deferred tax liability
9,414

 
4,756

Noncontrolling interest
28,365

 
13,727

The Company has recorded BioAxone’s cash and cash equivalents as “Restricted cash and cash equivalents (VIE)” because (i) the Company does not have any interest in or control over BioAxone’s cash and cash equivalents and (ii) the Company’s agreement with BioAxone does not provide for BioAxone’s cash and cash equivalents to be used for the development of the asset that the Company licensed from BioAxone. Assets recorded as a result of consolidating BioAxone’s financial condition into the Company’s balance sheets do not represent additional assets that could be used to satisfy claims against the Company’s general assets.


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

Other Collaborations
The Company has entered into various agreements pursuant to which it collaborates with third parties, including inlicensing and outlicensing arrangements. Although the Company does not consider any of these arrangements to be material, the most notable of these arrangements are described below.
Moderna Therapeutics, Inc.
In 2016, the Company entered into a strategic collaboration and licensing agreement (the “Moderna Agreement”) with Moderna Therapeutics, Inc. (“Moderna”), pursuant to which the parties are seeking to identify and develop messenger Ribonucleic Acid (“mRNA”) therapeutics for the treatment of CF. In connection with the Moderna Agreement, the Company made an upfront payment to Moderna of $20.0 million and a $20.0 million investment in Moderna pursuant to a convertible promissory note that converted into preferred stock in 2016. Moderna has the potential to receive future development and regulatory milestones of up to $275.0 million, including $220.0 million in approval and reimbursement milestones, as well as tiered royalty payments on future sales.
Under the terms of the Moderna Agreement, Moderna leads discovery efforts and the Company leads all preclinical, development and commercialization activities associated with the advancement of mRNA Therapeutics that result from this collaboration and will fund all expenses related to the collaboration.
The Company may terminate the Moderna Agreement by providing advance notice to Moderna, with the required length of notice dependent on whether any product developed under the Moderna Agreement has received marketing approval. The Moderna Agreement also may be terminated by either party for a material breach by the other, subject to notice and cure provisions. Unless earlier terminated, the Moderna Agreement will continue in effect until the expiration of the Company’s payment obligations under the Moderna Agreement.
Janssen Pharmaceuticals, Inc.
In 2014, the Company entered into an agreement (the “Janssen Agreement”) with Janssen Pharmaceuticals, Inc. (“Janssen”). Pursuant to the agreement, Janssen has an exclusive worldwide license to develop and commercialize certain drug candidates for the treatment of influenza, including pimodivir (formerly VX-787). The Company received non-refundable payments of $35.0 million from Janssen in 2014 and recognized a $25.0 million milestone in the fourth quarter of 2017. The milestone, which was achieved based on the Phase 3 clinical trial Janssen initiated in the fourth quarter of 2017, was collected in the first quarter of 2018. The Company has the potential to receive additional regulatory and commercial milestone payments as well as royalties on future product sales, if any. Janssen is responsible for costs related to the development and commercialization of the compounds. Janssen may terminate the Janssen Agreement, subject to certain exceptions, upon six months’ notice.
Asset Acquisition
Concert Pharmaceuticals
In July 2017, the Company acquired certain CF assets including VX-561 (formerly CTP-656) (the “Concert Assets”) from Concert Pharmaceuticals Inc. (“Concert”) pursuant to an asset purchase agreement that was entered into in March 2017 (the “Concert Agreement”). VX-561 is an investigational CFTR potentiator that has the potential to be used as part of combination regimens of CFTR modulators to treat CF. Pursuant to the Concert Agreement, Vertex paid Concert $160.0 million in cash for the Concert Assets. If VX-561 is approved as part of a combination regimen to treat CF, Concert could receive up to an additional $90.0 million in milestones based on regulatory approval in the United States and reimbursement in the United Kingdom, Germany or France. The Company determined that substantially all of the fair value of the Concert Agreement was attributable to a single in-process research and development asset, VX-561, which did not constitute a business. The Company concluded that it did not have any alternative future use for the acquired in-process research and development asset. Thus, the Company recorded the $160.0 million upfront payment to “Research and Development Expenses” in the third quarter of 2017. The total cost of the transaction was $165.1 million including $5.1 million of transaction costs that were recorded to “Sales, general and administrative expenses”. If the Company achieves regulatory


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

approval and reimbursement milestones, the Company will record the value of the milestone as an intangible asset and will begin amortizing the asset in cost of sales in the period that the relevant milestone is achieved.
D.
Earnings Per Share
Basic net income (loss) per share attributable to Vertex common shareholders is based upon the weighted-average number of common shares outstanding during the period, excluding restricted stock, restricted stock units and performance-based restricted stock units, or “PSUs,” that have been issued but are not yet vested. Diluted net income per share attributable to Vertex common shareholders is based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period when the effect is dilutive.
The following table sets forth the computation of basic and diluted net income (loss) per share for the periods ended:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except per share amounts)
Basic net income (loss) attributable to Vertex per common share calculation:
 
 
 
 
 
 
 
Net income (loss) attributable to Vertex common shareholders
$
128,746

 
$
(102,952
)
 
$
546,369

 
$
162,800

Less: Undistributed earnings allocated to participating securities
(14
)
 
—

 
(161
)
 
(203
)
Net income (loss) attributable to Vertex common shareholders—basic
$
128,732

 
$
(102,952
)
 
$
546,208

 
$
162,597

 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
254,905

 
250,268

 
254,096

 
247,963

Basic net income (loss) attributable to Vertex per common share
$
0.51

 
$
(0.41
)
 
$
2.15

 
$
0.66

 
 
 
 
 
 
 
 
Diluted net income (loss) attributable to Vertex per common share calculation:
 
 
 
 
 
 
 
Net income (loss) attributable to Vertex common shareholders
$
128,746

 
$
(102,952
)
 
$
546,369

 
$
162,800

Less: Undistributed earnings allocated to participating securities
(13
)
 
—

 
(158
)
 
(200
)
Net income (loss) attributable to Vertex common shareholders—diluted
$
128,733

 
$
(102,952
)
 
$
546,211

 
$
162,600

 
 
 
 
 
 
 
 
Weighted-average shares used to compute basic net income (loss) per common share
254,905

 
250,268

 
254,096

 
247,963

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Stock options
2,962

 
—

 
2,990

 
2,700

Restricted stock and restricted stock units (including PSUs)
1,896

 
—

 
1,866

 
1,204

Employee stock purchase program
25

 
—

 
20

 
228

Weighted-average shares used to compute diluted net income (loss) per common share
259,788

 
250,268

 
258,972

 
252,095

Diluted net income (loss) attributable to Vertex per common share
$
0.50

 
$
(0.41
)
 
$
2.11

 
$
0.64



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

The Company did not include the securities in the following table in the computation of the net income (loss) per share attributable to Vertex common shareholders calculations because the effect would have been anti-dilutive during each period:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Stock options
2,572

 
10,278

 
2,152

 
3,904

Unvested restricted stock and restricted stock units (including PSUs)
1

 
4,241

 
4

 
281

E.
Fair Value Measurements
The fair value of the Company’s financial assets and liabilities reflects the Company’s estimate of amounts that it would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from sources independent from the Company) and to minimize the use of unobservable inputs (the Company’s assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Level 1:
Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3:
Unobservable inputs based on the Company’s assessment of the assumptions that market participants would use in pricing the asset or liability.
The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument. As of September 30, 2018, the Company’s investments were primarily in money market funds, U.S. Treasury securities, government-sponsored enterprise securities, corporate equity securities, corporate debt securities and commercial paper. Additionally, the Company utilizes foreign currency forward contracts intended to mitigate the effect of changes in foreign exchange rates on its condensed consolidated statement of operations.
As of September 30, 2018, all of the Company’s financial assets and liabilities that were subject to fair value measurements were valued using observable inputs. The Company’s financial assets valued based on Level 1 inputs consisted of money market funds, U.S. Treasury securities, government-sponsored enterprise securities and corporate equity securities. The Company’s financial assets and liabilities valued based on Level 2 inputs consisted of corporate debt securities and commercial paper, which consisted of investments in highly-rated investment-grade corporations, and foreign currency forward contracts with reputable and creditworthy counterparties. During the three and nine months ended September 30, 2018 and 2017, the Company did not record any other-than-temporary impairment charges related to its financial assets.


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

The following table sets forth the Company’s financial assets and liabilities (excluding VIE cash and cash equivalents) subject to fair value measurements:
 
Fair Value Measurements as of September 30, 2018
 
 
 
Fair Value Hierarchy
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial instruments carried at fair value (asset position):
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,070,166

 
$
1,070,166

 
$
—

 
$
—

U.S. Treasury securities
5,979

 
5,979

 
—

 
—

Government-sponsored enterprise securities
2,498

 
2,498

 
—

 
—

Corporate debt securities
7,572

 
—

 
7,572

 
—

Commercial paper
33,352

 
—

 
33,352

 
—

Marketable securities:
 
 
 
 
 
 
 
Corporate equity securities
207,036

 
207,036

 
—

 
—

U.S. Treasury securities
6,043

 
6,043

 
—

 
—

Government-sponsored enterprise securities
6,462

 
6,462

 
—

 
—

Corporate debt securities
218,082

 
—

 
218,082

 
—

Commercial paper
139,960

 
—

 
139,960

 
—

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
13,903

 
—

 
13,903

 
—

Other assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
713

 
—

 
713

 
—

Total financial assets
$
1,711,766


$
1,298,184

 
$
413,582

 
$
—

Financial instruments carried at fair value (liability position):
 
 
 
 
 
 
 
Other liabilities, current portion:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(505
)
 
$
—

 
$
(505
)
 
$
—

Other liabilities, excluding current portion:
 
 
 
 
 
 
 
Foreign currency forward contracts
(66
)
 
—

 
(66
)
 
—

Total financial liabilities
$
(571
)
 
$
—

 
$
(571
)
 
$
—



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

 
Fair Value Measurements as of December 31, 2017
 
 
 
Fair Value Hierarchy
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial instruments carried at fair value (asset position):
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
614,951

 
$
614,951

 
$
—

 
$
—

Government-sponsored enterprise securities
12,678

 
12,678

 
—

 
—

Commercial paper
57,357

 
—

 
57,357

 
—

Marketable securities:
 
 
 
 
 
 
 
Corporate equity securities
74,821

 
74,821

 
—

 
—

Government-sponsored enterprise securities
2,303

 
2,303

 
—

 
—

Corporate debt securities
265,867

 
—

 
265,867

 
—

Commercial paper
80,263

 
—

 
80,263

 
—

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
13

 
—

 
13

 
—

Total financial assets
$
1,108,253

 
$
704,753

 
$
403,500

 
$
—

Financial instruments carried at fair value (liability position):
 
 
 
 
 
 
 
Other liabilities, current portion:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(13,642
)
 
$
—

 
$
(13,642
)
 
$
—

Other liabilities, excluding current portion:
 
 
 
 
 
 
 
Foreign currency forward contracts
(866
)
 
—

 
(866
)
 
—

Total financial liabilities
$
(14,508
)
 
$
—

 
$
(14,508
)
 
$
—

Please refer to Note F, “Marketable Securities and Equity Investments,” for the carrying amount and related unrealized gains (losses) by type of the Company’s financial assets and liabilities.
The Company’s VIE invested in cash equivalents consisting of U.S. Treasury securities of $5.0 million as of September 30, 2018, which are valued based on Level 1 inputs. These cash equivalents are not included in the table above. The Company’s noncontrolling interest related to the Company’s VIE includes the fair value of the contingent payments, which could consist of milestone, royalty and option payments, which are valued based on Level 3 inputs. Please refer to Note C, “Collaborative Arrangements and Acquisitions,” for further information.
F.
Marketable Securities and Equity Investments
Pursuant to the adoption of ASU 2016-01 on January 1, 2018, the Company began recording changes in the fair value of its investments in corporate equity securities (except those accounted for under the equity method of accounting or those that result in consolidation of an investee) to “Other (expense) income, net” in the Company’s condensed consolidated statements of operations. Prior to its adoption of ASU 2016-01, the Company recorded changes in the fair value of its investments in corporate equity securities to “Accumulated other comprehensive income (loss)” on its condensed consolidated balance sheet until the related gains or losses were realized. The Company continues to record unrealized gains (losses) on available-for-sale debt securities as a component of accumulated other comprehensive income (loss) until such gains and losses are realized.


26
Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

A summary of the Company’s cash equivalents and marketable securities is shown below:
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
As of September 30, 2018
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,070,166

 
$
—

 
$
—

 
$
1,070,166

U.S. Treasury securities
5,980

 
—

 
(1
)
 
5,979

Government-sponsored enterprise securities
2,498

 
—

 
—

 
2,498

Corporate debt securities
7,573

 
—

 
(1
)
 
7,572

Commercial paper
33,361

 
—

 
(9
)
 
33,352

Total cash equivalents
1,119,578

 
—

 
(11
)
 
1,119,567

Marketable securities:
 
 
 
 
 
 
 
U.S. Treasury securities (matures within 1 year)
6,044

 
—

 
(1
)
 
6,043

Government-sponsored enterprise securities (matures within 1 year)
4,982

 
—

 
—

 
4,982

Government-sponsored enterprise securities (matures after 1 year through 5 years)
1,481

 
—

 
(1
)
 
1,480

Corporate debt securities (matures within 1 year)
179,738

 
5

 
(319
)
 
179,424

Corporate debt securities (matures after 1 year through 5 years)
38,702

 
—

 
(44
)
 
38,658

Commercial paper (matures within 1 year)
140,046

 
—

 
(86
)
 
139,960

Total marketable debt securities
370,993

 
5

 
(451
)
 
370,547

Corporate equity securities
90,133

 
116,903

 
—

 
207,036

Total marketable securities
$
461,126

 
$
116,908

 
$
(451
)
 
$
577,583

 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
614,951

 
$
—

 
$
—

 
$
614,951

Government-sponsored enterprise securities
12,679

 
—

 
(1
)
 
12,678

Commercial paper
57,371

 
—

 
(14
)
 
57,357

Total cash equivalents
685,001

 
—

 
(15
)
 
684,986

Marketable securities:
 
 
 
 
 
 
 
Government-sponsored enterprise securities (matures within 1 year)
2,304

 
—

 
(1
)
 
2,303

Corporate debt securities (matures within 1 year)
215,639

 
—

 
(363
)
 
215,276

Corporate debt securities (matures after 1 year through 5 years)
50,697

 
—

 
(106
)
 
50,591

Commercial paper (matures within 1 year)
80,372

 
—

 
(109
)
 
80,263

Total marketable debt securities
349,012

 
—

 
(579
)
 
348,433

Available-for-sale corporate equity securities
43,213

 
31,608

 
—

 
74,821

Total marketable securities
$
392,225

 
$
31,608

 
$
(579
)
 
$
423,254

Available-for-sale debt securities were recorded in the Company's condensed consolidated balance sheets as follows:
 
As of September 30, 2018
 
As of December 31, 2017
 
(in thousands)
Cash and cash equivalents
$
1,119,567

 
$
684,986