UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, ~~2020~~2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission file number 000-19319

Vertex Pharmaceuticals Incorporated

(Exact name of registrant as specified in its charter)

Massachusetts

(State or other jurisdiction of
incorporation or organization)

50 Northern Avenue,, Boston,, Massachusetts

(Address of principal executive offices)

04-3039129

(I.R.S. Employer
Identification No.)

02210

(Zip Code)

Registrant’s telephone number, including area code (~~617~~) (617) 341-6100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.01 Par Value Per Share

VRTX

The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Common Stock, par value $0.01 per share	~~259,276,709~~258,865,671	Outstanding at April ~~24, 2020~~22, 2021

Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, ~~2020~~2021

TABLE OF CONTENTS



		Page
Part I. Financial Information
Item 1.			Financial Statements	2
			Condensed Consolidated Financial Statements (unaudited)	2
			Condensed Consolidated Statements of Operations - Three Months Ended March 31, ~~2020~~2021 and ~~2019~~2020	2
			Condensed Consolidated Statements of Comprehensive Income - Three Months Ended March 31, ~~2020~~2021 and ~~2019~~2020	3
			Condensed Consolidated Balance Sheets - March 31, ~~2020~~2021 and December 31, ~~2019~~2020	4
			Condensed Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, ~~2020~~2021 and ~~2019~~2020	5
			Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, ~~2020~~2021 and ~~2019~~2020	6
			Notes to Condensed Consolidated Financial Statements	7
Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations	2522
Item 3.			Quantitative and Qualitative Disclosures About Market Risk	3433
Item 4.			Controls and Procedures	3533
Part II. Other Information
Item 1.			Legal Proceedings	3533
Item 1A.			Risk Factors	34
Item ~~1A.~~2.			~~Risk Factors~~	35
~~Item 2.~~	Unregistered Sales of Equity Securities and Use of Proceeds	3735
~~Item 5.~~	~~Other Information.~~	37
Item 6.5.			~~Exhibits~~Other Information	3835
~~Signatures~~Item 6.			Exhibits	3936
Signatures				37

“We,” “us,” “Vertex” and the “Company” as used in this Quarterly Report on Form 10-Q refer to Vertex Pharmaceuticals Incorporated, a Massachusetts corporation, and its subsidiaries.

“Vertex,” “KALYDECO^®,” “ORKAMBI^®,” “SYMDEKO^®,” “SYMKEVI^®” and “TRIKAFTA^®” are registered trademarks of Vertex. The trademark for “KAFTRIOTM” is pending in the United States and registered in the European Union. Other brands, names and trademarks contained in this Quarterly Report on Form 10-Q are the property of their respective owners.

We use the brand name for our products when we refer to the product that has been approved and with respect to the indications on the approved label. Otherwise, including in discussions of our cystic fibrosis development programs, we refer to our compounds by their scientific (or generic) name or VX developmental designation.

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

VERTEX PHARMACEUTICALS INCORPORATED

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended March 31,							Three Months Ended March 31,
	2020			2019					2021		2020
Revenues:							Revenues:
Product revenues, net	$	1,515,107		$	857,253		Product revenues, net		$	1,723,305	$	1,515,107
Collaborative and royalty revenues	—			1,182
Other revenues							Other revenues		1,000		0
Total revenues	1,515,107			858,435			Total revenues		1,724,305		1,515,107
Costs and expenses:							Costs and expenses:
Cost of sales	162,497			95,092			Cost of sales		192,329		162,497
Research and development expenses	448,528			339,490			Research and development expenses		455,973		448,528
Sales, general and administrative expenses	182,258			147,045			Sales, general and administrative expenses		192,077		182,258
Change in fair value of contingent consideration	1,600			—			Change in fair value of contingent consideration		(3,900)		1,600
Total costs and expenses	794,883			581,627			Total costs and expenses		836,479		794,883
Income from operations	720,224			276,808			Income from operations		887,826		720,224
Interest income	12,576			15,615			Interest income		1,465		12,576
Interest expense	(14,136		)	(14,868		)	Interest expense		(15,678)		(14,136)
Other (expense) income, net	(61,130		)	42,610
Other expense, net							Other expense, net		(52,653)		(61,130)
Income before provision for income taxes	657,534			320,165			Income before provision for income taxes		820,960		657,534
Provision for income taxes	54,781			51,534			Provision for income taxes		167,822		54,781
Net income	$	602,753		$	268,631		Net income		$	653,138	$	602,753

Net income per common share:							Net income per common share:
Basic	$	2.32		$	1.05		Basic		$	2.52	$	2.32
Diluted	$	2.29		$	1.03		Diluted		$	2.49	$	2.29
Shares used in per share calculations:							Shares used in per share calculations:
Basic	259,815			255,695			Basic		259,369		259,815
Diluted	263,515			260,175			Diluted		261,916		263,515

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

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VERTEX PHARMACEUTICALS INCORPORATED

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(in thousands)

Three Months Ended March 31,
2020 2019
Net income $ 602,753
$ 268,631
Changes in other comprehensive income:
Unrealized holding (losses) gains on marketable securities, net (764 ) 596
Unrealized gains (losses) on foreign currency forward contracts, net of tax of $(5.0) million and $1.5 million, respectively 18,782
(222 )
Foreign currency translation adjustment (2,662 ) 4,967
Total changes in other comprehensive income 15,356
5,341
Comprehensive income $ 618,109
$ 273,972


	Three Months Ended March 31,
		2021		2020
Net income		$	653,138	$	602,753
Other comprehensive income:
Unrealized holding losses on marketable securities, net		(218)		(764)
Unrealized gains on foreign currency forward contracts, net of tax of $(9.3) million and $(5.0) million, respectively		33,966		18,782
Foreign currency translation adjustment		1,430		(2,662)
Total other comprehensive income		35,178		15,356
Comprehensive income		$	688,316	$	618,109

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

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VERTEX PHARMACEUTICALS INCORPORATED

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except per share amounts)

March 31, December 31,
2020 2019
Assets
Current assets:
Cash and cash equivalents $ 3,593,412
$ 3,109,322
Marketable securities 596,984
698,972
Accounts receivable, net 845,269
633,518
Inventories 187,087
167,502
Prepaid expenses and other current assets 223,648
213,515
Total current assets 5,446,400
4,822,829
Property and equipment, net 736,303
745,080
Goodwill 1,002,158
1,002,158
Intangible assets 400,000
400,000
Deferred tax assets 1,147,705
1,190,815
Other assets 160,635
157,583
Total assets $ 8,893,201
$ 8,318,465
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $ 100,703
$ 87,610
Accrued expenses 1,258,271
1,116,912
Other current liabilities 179,776
130,305
Total current liabilities 1,538,750
1,334,827
Long-term finance lease liabilities 532,952
538,576
Long-term contingent consideration 178,100
176,500
Other long-term liabilities 181,745
183,318
Total liabilities 2,431,547
2,233,221
Commitments and contingencies —
—
Shareholders’ equity:
Preferred stock, $0.01 par value; 1,000 shares authorized; none issued and outstanding —
—
Common stock, $0.01 par value; 500,000 shares authorized, 259,079 and 258,993 shares issued and outstanding, respectively 2,591
2,589
Additional paid-in capital 7,695,905
7,937,606
Accumulated other comprehensive income (loss) 13,383
(1,973 )
Accumulated deficit (1,250,225 ) (1,852,978 )
Total shareholders’ equity 6,461,654
6,085,244
Total liabilities and shareholders’ equity $ 8,893,201
$ 8,318,465


	March 31,		December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	6,304,330	$	5,988,187
Marketable securities	619,638		670,710
Accounts receivable, net	977,551		885,352
Inventories	298,863		280,777
Prepaid expenses and other current assets	338,925		308,353
Total current assets	8,539,307		8,133,379
Property and equipment, net	986,123		958,534
Goodwill	1,002,158		1,002,158
Intangible assets	400,000		400,000
Deferred tax assets	815,890		882,779
Operating lease assets	322,319		325,564
Other assets	49,262		49,394
Total assets	$	12,115,059	$	11,751,808
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	127,839	$	155,139
Accrued expenses	1,532,037		1,404,971
Other current liabilities	284,174		317,423
Total current liabilities	1,944,050		1,877,533
Long-term finance lease liabilities	530,330		539,042
Long-term operating lease liabilities	368,467		350,463
Long-term contingent consideration	185,700		189,600
Other long-term liabilities	106,258		108,355
Total liabilities	3,134,805		3,064,993
Commitments and contingencies	0		0
Shareholders’ equity:
Preferred stock, $0.01 par value; 1,000 shares authorized; NaN issued and outstanding	0		0
Common stock, $0.01 par value; 500,000 shares authorized, 258,829 and 259,890 shares issued and outstanding, respectively	2,588		2,599
Additional paid-in capital	7,499,161		7,894,027
Accumulated other comprehensive loss	(33,302)		(68,480)
Retained earnings	1,511,807		858,669
Total shareholders’ equity	8,980,254		8,686,815
Total liabilities and shareholders’ equity	$	12,115,059	$	11,751,808

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

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VERTEX PHARMACEUTICALS INCORPORATED

Condensed Consolidated Statements of Shareholders’ Equity

(unaudited)

(in thousands)


	Three Months Ended
	Common Stock					Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit			Total Shareholders’ Equity
	Shares		Amount
Balance at December 31, 2018	255,172		$	2,546					$				7,421,476								$	659	$	(2,989,478	)		$	4,435,203
Cumulative effect adjustment for adoption of new accounting guidance	—		—			—				—				(40,310		)	(40,310		)
Other comprehensive income, net of tax	—		—			—				5,341				—			5,341
Net income	—		—			—				—				268,631			268,631
Repurchase of common stock	(537	)	(6		)	(98,001		)		—				—			(98,007		)
Common stock withheld for employee tax obligations	(27	)	—			(5,832		)		—				—			(5,832		)
Issuance of common stock under benefit plans	1,743		21			64,023				—				—			64,044
Stock-based compensation expense	—		—			94,243				—				—			94,243
Balance at March 31, 2019	256,351		$	2,561		$	7,475,909			$	6,000			$	(2,761,157	)	$	4,723,313

																						Three Months Ended
																						Common Stock							Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Total Shareholders’ Equity
																						Shares				Amount
Balance at December 31, 2019	258,993		$	2,589		$	7,937,606			$	(1,973	)		$	(1,852,978	)	$	6,085,244		Balance at December 31, 2019		258,993				$	2,589				$	7,937,606			$	(1,973)	$	(1,852,978)	$	6,085,244
Other comprehensive income, net of tax	—		—			—				15,356				—			15,356			Other comprehensive income, net of tax		—				—			—				15,356		—		15,356
Net income	—		—			—				—				602,753			602,753			Net income		—				—			—				—		602,753		602,753
Repurchase of common stock	(1,404	)	(14		)	(300,012		)		—				—			(300,026		)	Repurchase of common stock		(1,404)				(14)			(300,012)				—		—		(300,026)
Common stock withheld for employee tax obligations	(575	)	(6		)	(136,161		)									(136,167		)	Common stock withheld for employee tax obligations		(575)				(6)			(136,161)				—		—		(136,167)
Issuance of common stock under benefit plans	2,065		22			77,572				—				—			77,594			Issuance of common stock under benefit plans		2,065				22			77,572				—		—		77,594
Stock-based compensation expense	—		—			116,900				—				—			116,900			Stock-based compensation expense		—				—			116,900				—		—		116,900
Balance at March 31, 2020	259,079		$	2,591		$	7,695,905			$	13,383			$	(1,250,225	)	$	6,461,654		Balance at March 31, 2020		259,079				$	2,591		$	7,695,905			$	13,383	$	(1,250,225)	$	6,461,654

Balance at December 31, 2020																				Balance at December 31, 2020		259,890				$	2,599		$	7,894,027			$	(68,480)	$	858,669	$	8,686,815
Other comprehensive income, net of tax																				Other comprehensive income, net of tax		—				—			—				35,178		—		35,178
Net income																				Net income		—				—			—				—		653,138		653,138
Repurchase of common stock																				Repurchase of common stock		(1,989)				(20)			(424,932)				—		—		(424,952)
Common stock withheld for employee tax obligations																				Common stock withheld for employee tax obligations		(472)				(5)			(102,135)				—		—		(102,140)
Issuance of common stock under benefit plans																				Issuance of common stock under benefit plans		1,400				14			15,164				—		—		15,178
Stock-based compensation expense																				Stock-based compensation expense		—				—			117,037				—		—		117,037
Balance at March 31, 2021																				Balance at March 31, 2021		258,829				$	2,588		$	7,499,161			$	(33,302)	$	1,511,807	$	8,980,254

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

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VERTEX PHARMACEUTICALS INCORPORATED

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Three Months Ended March 31,							Three Months Ended March 31,
	2020			2019				2021		2020
Cash flows from operating activities:							Cash flows from operating activities:
Net income	$	602,753		$	268,631		Net income	$	653,138	$	602,753
Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	115,706			93,791			Stock-based compensation expense	115,174		115,706
Depreciation expense	26,821			27,140			Depreciation expense	28,834		26,821
Increase in fair value of contingent consideration	1,600			—
(Decrease) increase in fair value of contingent consideration							(Decrease) increase in fair value of contingent consideration	(3,900)		1,600
Deferred income taxes	36,705			43,425			Deferred income taxes	57,043		36,705
Losses (gains) on equity securities	44,870			(43,551		)
Losses on equity securities							Losses on equity securities	52,295		44,870
Other non-cash items, net	9,668			(2,431		)	Other non-cash items, net	2,332		9,668
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accounts receivable, net	(223,672		)	(30,136		)	Accounts receivable, net	(98,373)		(223,672)
Inventories	(27,450		)	(13,139		)	Inventories	(22,785)		(27,450)
Prepaid expenses and other assets	2,790			7,941			Prepaid expenses and other assets	(13,319)		2,790
Accounts payable	14,285			(24,145		)	Accounts payable	(10,644)		14,285
Accrued expenses	153,814			(27,279		)	Accrued expenses	152,983		153,814
Other liabilities	57,808			24,537			Other liabilities	8,277		57,808
Net cash provided by operating activities	815,698			324,784			Net cash provided by operating activities	921,055		815,698
Cash flows from investing activities:							Cash flows from investing activities:
Purchases of available-for-sale debt securities	(75,265		)	(128,215		)	Purchases of available-for-sale debt securities	(121,455)		(75,265)
Maturities of available-for-sale debt securities	60,145			107,118			Maturities of available-for-sale debt securities	118,072		60,145
Sale of equity securities	72,036			—			Sale of equity securities	0		72,036
Expenditures for property and equipment	(19,450		)	(18,041		)
Purchases of property and equipment							Purchases of property and equipment	(70,926)		(19,450)
Investment in equity securities	(5,800		)	—			Investment in equity securities	0		(5,800)
Net cash provided by (used in) investing activities	31,666			(39,138		)
Net cash (used in) provided by investing activities							Net cash (used in) provided by investing activities	(74,309)		31,666
Cash flows from financing activities:							Cash flows from financing activities:
Issuances of common stock under benefit plans	79,597			63,620			Issuances of common stock under benefit plans	15,559		79,597
Repurchases of common stock	(300,026		)	(94,007		)	Repurchases of common stock	(424,952)		(300,026)
Payments in connection with common stock withheld for employee tax obligations	(136,167		)	(5,832		)	Payments in connection with common stock withheld for employee tax obligations	(102,140)		(136,167)
Payments on finance leases	(10,287		)	(9,385		)	Payments on finance leases	(12,233)		(10,287)
Proceeds related to finance leases	5,833			—
Advance from collaborator	2,500			5,000
Repayments of advanced funding	(880		)	(1,385		)
Proceeds from finance leases							Proceeds from finance leases	3,632		5,833
Other financing activities							Other financing activities	1,480		1,620
Net cash used in financing activities	(359,430		)	(41,989		)	Net cash used in financing activities	(518,654)		(359,430)
Effect of changes in exchange rates on cash	(6,651		)	(378		)	Effect of changes in exchange rates on cash	(4,030)		(6,651)
Net increase in cash and cash equivalents	481,283			243,279
Net increase in cash, cash equivalents and restricted cash							Net increase in cash, cash equivalents and restricted cash	324,062		481,283
Cash, cash equivalents and restricted cash—beginning of period	3,120,681			2,658,253			Cash, cash equivalents and restricted cash—beginning of period	5,988,845		3,120,681
Cash, cash equivalents and restricted cash—end of period	$	3,601,964		$	2,901,532		Cash, cash equivalents and restricted cash—end of period	$	6,312,907	$	3,601,964

Supplemental disclosure of cash flow information:							Supplemental disclosure of cash flow information:
Cash paid for interest	$	13,771		$	13,148		Cash paid for interest	$	14,534	$	13,771
Cash paid for income taxes	$	5,845		$	1,835		Cash paid for income taxes	$	10,691	$	5,845
Issuances of common stock from employee benefit plans receivable	$	817		$	510
Accrued share repurchase liability	$	—		$	4,000

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

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements

(unaudited)

A.Basis of Presentation and Accounting Policies


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 (“U.S. GAAP”).

The condensed consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. The Company operates in 1 segment, pharmaceuticals. The Company has reclassified certain items from the prior year’s condensed consolidated financial statements to conform to the current year’s presentation.

Certain information and footnote disclosures normally included in the Company’s ~~2019~~ Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”) have been condensed or omitted. These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods ended March 31, ~~2020~~2021 and ~~2019.~~2020.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, ~~2019,~~2020, which are contained in the Company’s ~~2019~~2020 Annual Report on Form 10-K.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the amounts of revenues and expenses during the reported periods. Significant estimates in these condensed consolidated financial statements have been made in connection with (i) determining the transaction price of revenues and (ii) accounting for intangible assets and contingent consideration. The Company bases its estimates on historical experience and various other assumptions, including in certain circumstances future projections that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.

Recently Adopted ~~Accounting Standards~~

~~Leases~~

~~On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) 842,~~ ~~Leases~~ ~~(“ASC 842”) using the modified-retrospective method, which amended a number of aspects of lease accounting~~ and ~~required the Company to recognize right-of-use assets and liabilities on the balance sheet. As of January 1, 2019, the Company recorded a cumulative effect adjustment to increase its “Accumulated deficit” by $40.3 million, which related to its leases that were accounted for as build-to-suit leases under the previous accounting guidance.~~

~~Internal-Use Software~~

~~In 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15,~~ ~~Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~ (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 became effective on January 1, 2020. The adoption of ASU 2018-15 resulted in an insignificant amount of additional assets recorded on the Company’s condensed consolidated balance sheet.

~~Fair Value Measurement~~

~~In 2018, the FASB issued ASU 2018-13,~~ ~~Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement~~ ~~(“ASU 2018-13”), which modifies the disclosure requirements for fair~~

~~Table of Contents~~

~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

value measurements. ASU 2018-13 became effective on January 1, 2020. The adoption of ASU 2018-13 resulted in additional disclosures related to the Company’s Level 3 inputs. Please refer to Note E, “Fair Value Measurements,” for further information.

~~Credit Losses~~

~~In 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~ (“ASU 2016-13”), which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities in unrealized loss positions, ASU 2016-13 requires allowances to be recorded instead of reducing the amortized cost of the investment. ASU 2016-13 became effective on January 1, 2020. The adoption of ASU 2016-13 did not have a significant impact on its condensed consolidated financial statements.

~~Recently~~ Issued Accounting Standards

Income Taxes

In 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 isbecame effective on January 1, 2021. The ~~Company is evaluating the impact the~~ adoption of ASU 2019-12 ~~may~~did not have a significant impact on ~~its~~the Company’s condensed consolidated financial statements.

For a discussion of other recent accounting pronouncements please refer to Note A, “Nature of Business and Accounting Policies,” in the Company’s ~~2019~~2020 Annual Report on Form 10-K.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note A, “Nature of Business and Accounting Policies,” in its ~~2019~~2020 Annual Report on Form 10-K.

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B.	~~Revenue Recognition~~

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

B.Revenue Recognition

Disaggregation of Revenue

Revenues by Product

Product revenues, net consisted of the following:

Three Months Ended March 31,
2020 2019
(in thousands)
TRIKAFTA $ 895,233
$ —
SYMDEKO/SYMKEVI 173,159
320,275
ORKAMBI 234,138
293,007
KALYDECO 212,577
243,971
Total product revenues, net^*
$ 1,515,107
$ 857,253


	Three Months Ended March 31,
		2021		2020
		(in thousands)
TRIKAFTA/KAFTRIO		$	1,193,217	$	895,233
SYMDEKO/SYMKEVI		125,049		173,159
ORKAMBI		218,697		234,138
KALYDECO		186,342		212,577
Total product revenues, net		$	1,723,305	$	1,515,107

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

~~Table of Contents~~

~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Product Revenues by Geographic Location

~~Net~~Total net product revenues ~~are attributed to countries~~by geographic region, 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 regioncustomer, consisted of the following:

Three Months Ended March 31,
2020 2019
(in thousands)
United States $ 1,187,588
$ 641,104
Outside of the United States
Europe 257,391
167,751
Other 70,128
49,580
Total revenues outside of the United States 327,519
217,331
Total revenues $ 1,515,107
$ 858,435


	Three Months Ended March 31,
		2021		2020
		(in thousands)
United States		$	1,253,433	$	1,187,588
Outside of the United States
Europe		404,969		257,391
Other		64,903		70,128
Total product revenues outside of the United States		469,872		327,519
Total product revenues, net		$	1,723,305	$	1,515,107

Contract Liabilities

The Company ~~recorded~~had contract liabilities of ~~$76.3~~$181.2 million and ~~$62.3~~$191.5 million as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, related to annual contracts with government-owned and supported customers in international markets that limit the amount of annual reimbursement the Company can receive. Upon exceeding the annual reimbursement amount, products are provided free of charge, which is a material right. These contracts include upfront payments and fees. The Company defers a portion of the consideration received for shipments made up to the annual reimbursement limit as a portion of “~~Other~~“Other current ~~liabilities~~.liabilities.” The deferred amount is recognized as revenue when the free products are shipped. The Company’s product revenue contracts include performance obligations that are one year or less.

The Company’s contract liabilities at the end of each fiscal year relate to contracts with annual reimbursement limits in international markets in which the annual period associated with the contract is not the same as the Company’s fiscal year. In these markets, the Company recognizes revenues related to performance obligations satisfied in previous years; however, these revenues do not relate to any performance obligations that were satisfied more than 12 months prior to the beginning of the current year.


C.	~~Collaborative Arrangements~~

C.Collaborative Arrangements

The Company has entered into numerous agreements pursuant to which it collaborates with third parties on research, development and commercialization programs, including in-license and out-license agreements.

The Company’s in-license and out-license agreements that had a significant impact on its financial statements for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, or were new or otherwise revised during the three months ended March 31, ~~2020,~~

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

2021, are described below. Additional in-license and out-license agreements were described in Note B, “Collaborative Arrangements,” of the Company’s ~~2019~~2020 Annual Report on Form 10-K.

In-license Agreements

The Company has entered into a number of license agreements in order to advance and obtain access to technologies and services related to its research and early-development activities. The Company is generally required to make an upfront payment upon execution of the license agreement; development, regulatory and commercialization milestones payments upon the achievement of certain product research, development and commercialization objectives; and royalty payments on future sales, if any, of commercial products resulting from the collaboration.

Pursuant to the terms of its in-license agreements, the Company’s collaborators typically lead the discovery efforts and the Company leads all preclinical, development and commercialization activities associated with the advancement of any drug candidates and funds all expenses.

~~Table of Contents~~

~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The Company typically can terminate its in-license agreements by providing advance notice to its collaborators; the required length of notice is dependent on whether any product developed under the license agreement has received marketing approval. The Company’s license agreements may be terminated by either party for a material breach by the other, subject to notice and cure provisions. Unless earlier terminated, these license agreements generally remain in effect until the date on which the royalty term and all payment obligations with respect to all products in all countries have expired.

CRISPR Therapeutics AG - CRISPR-Cas9 Gene-editing Therapies

In 2015, the Company entered into a strategic collaboration, option and license agreement (the “CRISPR Agreement”) with CRISPR Therapeutics AG and its affiliates (“CRISPR”) to collaborate on the discovery and development of potential new treatments aimed at the underlying genetic causes of human diseases using CRISPR-Cas9 gene-editing technology. The Company had the exclusive right to license certain ~~CRISPR-Cas9-based~~ targets. In ~~the fourth quarter of~~ 2019, the Company elected to exclusively license 3 ~~CRISPR-Cas9-based~~ targets, including cystic fibrosis, pursuant to the CRISPR Agreement. For each of the 3 targets that the Company elected to license, CRISPR has the potential to receive up to an additional $410.0 million in development, regulatory and commercial milestones as well as royalties on net product sales.

In 2017, the Company entered into a ~~co-development~~joint development and ~~co-commercialization~~commercialization agreement with CRISPR pursuant to the terms of the CRISPR Agreement (the “Original CTX001 JDCA”), under which the Company and CRISPR are co-developing and ~~will~~preparing to co-commercialize CTX001 ~~(the “CTX001 Co-Co Agreement”)~~ for the treatment of hemoglobinopathies, including treatments for sickle cell disease and beta thalassemia. ~~As part of the collaboration, the Company and CRISPR share equally all development costs and potential worldwide revenues related to potential hemoglobinopathy treatments.~~ The Company concluded that the Original CTX001 ~~Co-Co Agreement~~JDCA is a cost-sharing arrangement, which results in the net impact of the arrangement being recorded in “Research and development expenses” in its condensed consolidated statements of operations. During the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, the net expense related to the Original CTX001 ~~Co-Co Agreement~~JDCA was ~~$9.3~~$20.0 million and ~~$7.0~~$9.3 million, respectively.

In ~~July 2019,~~April 2021, the Company ~~entered into a separate strategic~~and CRISPR amended and restated the Original CTX001 JDCA (the “A&R JDCA”), pursuant to which the parties agreed to, among other things, (a) adjust the governance structure for the collaboration and adjust the responsibilities of each party thereunder; (b) adjust the allocation of net profits and net losses between the parties; and (c) exclusively license ~~agreement (the “CRISPR DMD/DM1 Agreement”) with CRISPR. Pursuant~~(subject to ~~this agreement,~~CRISPR’s reserved rights to conduct certain activities) certain intellectual property rights to the Company ~~received an exclusive worldwide license~~relating to the products that may be researched, developed, manufactured and commercialized under such agreement. The closing of the transaction contemplated under the A&R JDCA is subject to certain conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and any other required antitrust clearance.

After the effective date of the closing of the transaction (the “Effective Date”), the Company will lead global development, manufacturing and commercialization of CTX001, with support from CRISPR. Subject to the terms and conditions of the A&R JDCA, the Company will have the right to conduct all research, development, manufacturing and commercialization activities relating to the product candidates and products under the A&R JDCA (including CTX001) throughout the world subject to CRISPR’s ~~existing~~reserved right to conduct certain activities.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

In connection with the closing of the transaction contemplated by the A&R JDCA, the Company will pay a $900.0 million upfront payment to CRISPR and ~~future intellectual property for duchenne muscular dystrophy (“DMD”) and myotonic dystrophy type 1 (“DM1”). In~~an additional one-time $200.0 million milestone payment upon receipt of the first marketing approval of CTX001 from the U.S. Food or Drug Administration or the European Commission. The Company and CRISPR will continue to share equally all net profits and net losses incurred under the A&R JDCA through June 30, 2021, subject to adjustment based on the timing of antitrust clearance. Beginning July 1, 2021 (or the first day of the calendar quarter ~~of 2020,~~in which antitrust clearance occurs), with respect to CTX001, the net profits and net losses incurred pursuant to the A&R JDCA will be allocated 60% to the Company ~~recorded $25.0~~and 40% to CRISPR, while all other product candidate and products will continue to have net profits and net losses shared equally. The Company expects to record the $900.0 million upfront payment to “Research and development expenses” ~~related to a pre-clinical milestone earned~~upon closing of the transaction contemplated by ~~CRISPR under~~ the CRISPR DMD/DM1 Agreement. CRISPR has the potential to receive up to an additional $800.0 million in research, development, regulatory and commercial milestones for the DMD and DM1 programs as well as royalties on net product sales. CRISPR has the option to co-develop and co-commercialize all DM1 products globally and forego the milestones and royalties associated with the DM1 program. The Company funds all expenses associated with the collaboration except for research costs for specified guide RNA research conducted by CRISPR, which the Company and CRISPR share equally.

~~Please refer to Note F, “Marketable Securities and Equity Investments,” for further information regarding the Company’s investment in CRISPR’s common stock.~~A&R JDCA.

Out-license Agreements

The Company has entered into licensing agreements pursuant to which it has out-licensed rights to certain drug candidates to third-party collaborators. Pursuant to these out-license agreements, the Company’s collaborators become responsible for all costs related to the continued development of such drug candidates and obtain development and commercialization rights to these drug candidates. Depending on the terms of the agreements, the Company’s collaborators may be required to make upfront payments, milestone payments upon the achievement of certain product research and development objectives ~~and~~and may also be required to pay royalties on future sales, if any, of commercial products resulting from the collaboration. The termination provisions associated with these collaborations are generally the same as those described above related to the Company’s in-license agreements. None of the Company’s out-license agreements had a significant impact on the Company’s condensed consolidated statement of operations during the three months ended March 31, ~~2020~~2021 and ~~2019.~~

~~Table of Contents~~2020.

~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Cystic Fibrosis Foundation

The Company has a research, development and commercialization agreement that was originally entered into in 2004 with the Cystic Fibrosis Foundation, ~~(“CFF”),~~ as successor in interest to the Cystic Fibrosis Foundation Therapeutics, Inc. This agreement was most recently amended in 2016. Pursuant to the agreement, as amended, the Company agreed to pay royalties ranging from low-single digits to mid-single digits on potential sales of certain compounds first synthesized and/or tested between March 1, 2014 and August 31, 2016, including elexacaftor, and tiered royalties ranging from single digits to sub-teens on covered compounds first synthesized and/or tested during a research term on or before February 28, 2014, including KALYDECO (ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor). For combination products, such as ORKAMBI, SYMDEKO/SYMKEVI and ~~TRIKAFTA (elexacaftor, tezacaftor,~~TRIKAFTA/KAFTRIO (elexacaftor/tezacaftor/ivacaftor and ivacaftor), sales are allocated equally to each of the active pharmaceutical ingredients in the combination product.


D.	~~Earnings Per Share~~

D.Earnings Per Share

Basic net income per common share is based upon the weighted-average number of common shares ~~outstanding.~~outstanding during the period. Diluted net income per common share utilizing the ~~treasury~~treasury-stock method is based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period when the effect is dilutive.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

The following table sets forth the computation of basic and diluted net income per common share for the periods ended:

Three Months Ended March 31,
2020 2019
(in thousands, except per share amounts)
Net income $ 602,753
$ 268,631

Basic weighted-average common shares outstanding 259,815
255,695
Effect of potentially dilutive securities:
Stock options 1,868
2,585
Restricted stock and restricted stock units (including PSUs) 1,801
1,870
Employee stock purchase program 31
25
Diluted weighted-average common shares outstanding 263,515
260,175

Basic net income per common share $ 2.32
$ 1.05
Diluted net income per common share $ 2.29
$ 1.03


	Three Months Ended March 31,
		2021		2020
		(in thousands, except per share amounts)
Net income		$	653,138	$	602,753

Basic weighted-average common shares outstanding		259,369		259,815
Effect of potentially dilutive securities:
Stock options		1,263		1,868
Restricted stock units (including PSUs)		1,276		1,801
Employee stock purchase program		8		31
Diluted weighted-average common shares outstanding		261,916		263,515

Basic net income per common share		$	2.52	$	2.32
Diluted net income per common share		$	2.49	$	2.29

The Company did not include the securities in the following table in the computation of the net income per common share because the effect would have been anti-dilutive during each period:


	Three Months Ended March 31,
		2021	2020
		(in thousands)
Stock options		356	879
Unvested restricted stock units (including PSUs)		712	430

Three Months Ended March 31,
2020 2019
(in thousands)
Stock options 879
2,837
Unvested restricted stock and restricted stock units (including PSUs) 430
6

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

E.Fair Value Measurements

~~Table of Contents~~

~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~participants would price assets and liabilities).~~ The following fair value hierarchy is used to classify assets and liabilities based on ~~the~~ observable inputs and unobservable inputs used in order to determine the fair value of the Company’s financial assets and liabilities:



Level 1:			Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:			Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3:			Unobservable inputs based on the Company’s assessment of the assumptions that market participants would use in pricing the asset or liability.

The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument. The Company maintains strategic investments separately from the investment policy that governs its other cash, cash equivalents and marketable securities as described in ~~“Note~~Note F, “Marketable Securities and Equity Investments.” ~~As of March 31, 2020, the Company’s investments were in money market funds, corporate debt securities, commercial paper, government-sponsored enterprise securities and corporate equity securities.~~ Additionally, the Company utilizes foreign currency forward contracts intended to mitigate the effect of changes in foreign exchange rates on its condensed consolidated statement of operations.

As of March 31, 2020, the Company’s financial assets and liabilities that were subject to fair value measurements were valued using both observable and unobservable inputs. The Company’s financial assets valued based on Level 1 inputs consisted of money market funds, government-sponsored enterprise securities and corporate equity securities. The Company’s financial assets and liabilities valued based on Level 2 inputs consisted of certain corporate equity securities as described below, corporate debt securities, commercial paper, which consisted of investments in highly-rated investment-grade corporations, and foreign currency forward contracts with reputable and creditworthy counterparties. As discussed further below, the Company’s financial liabilities valued based on Level 3 inputs consisted of acquisition-related contingent milestones. During the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, 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 tables set forth the Company’s financial assets and liabilities subject to fair value measurements by level within the fair value hierarchy (and does not include ~~$1.8~~$2.4 billion and ~~$2.3~~$2.8 billion of cash as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively):

Fair Value Measurements as of March 31, 2020
Fair Value Hierarchy
Total Level 1 Level 2 Level 3
(in thousands)
Financial instruments carried at fair value (asset positions):
Cash equivalents:
Money market funds $ 1,736,913
$ 1,736,913
$ —
$ —
Commercial paper 30,700
—
30,700
—
Marketable securities:
Corporate equity securities 165,178
145,465
19,713
—
Government-sponsored enterprise securities 7,791
7,791
—
—
Corporate debt securities 305,051
—
305,051
—
Commercial paper 118,964
—
118,964
—
Prepaid expenses and other current assets:
Foreign currency forward contracts 25,434
—
25,434
—
Other assets:
Foreign currency forward contracts 1,798
—
1,798
—
Total financial assets $ 2,391,829

$ 1,890,169
$ 501,660
$ —
Financial instruments carried at fair value (liability positions):
Other current liabilities:
Foreign currency forward contracts $ (459 ) $ —
$ (459 ) $ —
Long-term contingent consideration (178,100 ) —
—
(178,100 )
Other long-term liabilities:
Foreign currency forward contracts (637 ) —
(637 ) —
Total financial liabilities $ (179,196 ) $ —
$ (1,096 ) $ (178,100 )

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~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Fair Value Measurements as of December 31, 2019
Fair Value Hierarchy
Total Level 1 Level 2 Level 3
(in thousands)
Financial instruments carried at fair value (asset positions):
Cash equivalents:
Money market funds $ 791,039
$ 791,039
$ —
$ —
Corporate debt securities 6,070
—
6,070
—
Commercial paper 29,472
—
29,472
—
Marketable securities:
Corporate equity securities 282,084
261,797
20,287
—
Government-sponsored enterprise securities 12,733
12,733
—
—
Corporate debt securities 301,799
—
301,799
—
Commercial paper 102,356
—
102,356
—
Prepaid expenses and other current assets:
Foreign currency forward contracts 9,725
—
9,725
—
Total financial assets $ 1,535,278
$ 1,065,569
$ 469,709
$ —
Financial instruments carried at fair value (liability positions):
Other current liabilities:
Foreign currency forward contracts $ (5,533 ) $ —
$ (5,533 ) $ —
Long-term contingent consideration (176,500 ) —
—
(176,500 )
Other long-term liabilities:
Foreign currency forward contracts (1,821 ) —
(1,821 ) —
Total financial liabilities $ (183,854 ) $ —
$ (7,354 ) $ (176,500 )


	As of March 31, 2021								As of December 31, 2020
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	(in thousands)
Financial instruments carried at fair value (asset positions):
Cash equivalents:
Money market funds	$	3,890,303	$	3,890,303	$	0	$	0	$	3,141,053	$	3,141,053	$	0	$	0
Marketable securities:
Corporate equity securities	143,486		143,486		0		0		195,781		15,650		180,131		0
Government-sponsored enterprise securities	62,362		62,362		0		0		80,063		80,063		0		0
Corporate debt securities	155,716		0		155,716		0		231,598		0		231,598		0
Commercial paper	258,074		0		258,074		0		163,268		0		163,268		0
Prepaid expenses and other current assets:
Foreign currency forward contracts	7,039		0		7,039		0		0		0		0		0
Other assets:
Foreign currency forward contracts	1,944		0		1,944		0		0		0		0		0
Total financial assets	$	4,518,924	$	4,096,151	$	422,773	$	0	$	3,811,763	$	3,236,766	$	574,997	$	0

Financial instruments carried at fair value (liability positions):
Other current liabilities:
Foreign currency forward contracts	$	(28,743)	$	0	$	(28,743)	$	0	$	(59,184)	$	0	$	(59,184)	$	0
Long-term contingent consideration	(185,700)		0		0		(185,700)		(189,600)		0		0		(189,600)
Other long-term liabilities:
Foreign currency forward contracts	(433)		0		(433)		0		(4,283)		0		(4,283)		0
Total financial liabilities	$	(214,876)	$	0	$	(29,176)	$	(185,700)	$	(253,067)	$	0	$	(63,467)	$	(189,600)

Please refer to Note F, “Marketable Securities and Equity Investments,” for the carrying amount and related unrealized gains (losses) by type of investment.

Fair Value of Corporate Equity Securities

~~The Company maintains strategic investments in corporate equity securities separately from the investment policy that governs its other cash, cash equivalents and marketable securities.~~ The Company classifies its investments in publicly traded ~~companies~~corporate equity securities as “~~Marketable securities~~”“Marketable securities” on its condensed consolidated balance sheets. Generally, the Company’s investments in the common stock of these publicly traded companies are valued based on Level 1 inputs because they have readily determinable fair values. However, certain of the Company’s investments in publicly traded companies have been or continue to be valued based on Level 2 inputs due to transfer restrictions associated with these investments. Please refer to Note F, “Marketable Securities and Equity Investments,” for further information on these investments.

Fair Value of Contingent Consideration

In 2019, the Company acquired Exonics Therapeutics, Inc. (“Exonics”), a privately-held company focused on creating transformative gene-editing therapies to repair mutations that cause DMD and other severe neuromuscular diseases, including DM1. The Company’s Level 3 contingent consideration liabilities ~~which~~ are related to $678.3 million of development and regulatory milestones potentially payable to Exonics’ former equity ~~holders, are classified as Level 3 within the valuation hierarchy.~~holders. The Company bases its estimates of the probability of achieving the milestones relevant to the fair value of contingent payments on industry data attributable to rare diseases. The discount rates used in the valuation model for contingent payments, which were between ~~1.8%~~0.6% and ~~3.1%,~~2.4% as of March 31, 2021, represent a measure of credit risk and market risk associated with settling the liabilities. Significant judgment is used in determining the appropriateness of these assumptions at each reporting period. Due to the uncertainties associated with development and commercialization of a drug ~~candidate~~candidates in the pharmaceutical industry and the ~~Company's~~effects of

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

changes in other assumptions including discount rates, the Company expects its estimates regarding the fair value of contingent consideration ~~will~~to change in the future, resulting in adjustments to the fair value of the Company’s contingent consideration liabilities, and the effect of any such adjustments could be material.

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~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The following table represents a rollforward of the fair value of the Company’s contingent consideration liabilities:

Three Months Ended March 31, 2020
(in thousands)
Balance at December 31, 2019 $ 176,500
Increase in fair value of contingent payments 1,600
Balance at March 31, 2020 $ 178,100

~~The “Increase in fair value of contingent payments” in the table above was due to changes in market interest rates and the time value of money.~~


F.	~~Marketable Securities and Equity Investments~~Three Months Ended March 31, 2021
	(in thousands)
Balance at December 31, 2020	$	189,600
Decrease in fair value of contingent payments	(3,900)
Balance at March 31, 2021	$	185,700

F.Marketable Securities and Equity Investments

A summary of the Company’s cash equivalents and marketable securities, which are recorded at fair value (and do not include ~~$1.8~~$2.4 billion and ~~$2.3~~$2.8 billion of cash as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively), is shown below:

Amortized Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(in thousands)
As of March 31, 2020
Cash equivalents:
Money market funds $ 1,736,913
$ —
$ —
$ 1,736,913
Commercial paper 30,700
4
(4 ) 30,700
Total cash equivalents 1,767,613
4
(4 ) 1,767,613
Marketable securities:
Government-sponsored enterprise securities 7,717
74
—
7,791
Corporate debt securities 305,808
255
(1,012 ) 305,051
Commercial paper 118,542
426
(4 ) 118,964
Total marketable debt securities 432,067
755
(1,016 ) 431,806
Corporate equity securities 87,096
78,082
—
165,178
Total marketable securities $ 519,163
$ 78,837
$ (1,016 ) $ 596,984

As of December 31, 2019
Cash equivalents:
Money market funds $ 791,039
$ —
$ —
$ 791,039
Corporate debt securities 6,070
—
—
6,070
Commercial paper 29,470
3
(1 ) 29,472
Total cash equivalents 826,579
3
(1 ) 826,581
Marketable securities:
Government-sponsored enterprise securities 12,689
44
—
12,733
Corporate debt securities 301,458

391
(50 ) 301,799
Commercial paper 102,240
121
(5 ) 102,356
Total marketable debt securities 416,387
556
(55 ) 416,888
Corporate equity securities 113,829
168,255
—
282,084
Total marketable securities $ 530,216
$ 168,811
$ (55 ) $ 698,972

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~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~


	As of March 31, 2021								As of December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Cash equivalents:
Money market funds	$	3,890,303	$	0	$	0	$	3,890,303	$	3,141,053	$	0	$	0	$	3,141,053
Total cash equivalents	$	3,890,303	$	0	$	0	$	3,890,303	$	3,141,053	$	0	$	0	$	3,141,053
Marketable securities:
Government-sponsored enterprise securities	$	62,332	$	30	$	0	$	62,362	$	80,046	$	17	$	0	$	80,063
Corporate debt securities	155,636		126		(46)		155,716		231,263		377		(42)		231,598
Commercial paper	258,068		27		(21)		258,074		163,286		19		(37)		163,268
Total marketable debt securities	476,036		183		(67)		476,152		474,595		413		(79)		474,929
Corporate equity securities	51,427		92,059		0		143,486		51,427		144,354		0		195,781
Total marketable securities	$	527,463	$	92,242	$	(67)	$	619,638	$	526,022	$	144,767	$	(79)	$	670,710

Available-for-sale debt securities were classified on the Company's condensed consolidated balance sheets at fair value as follows:

As of March 31, 2020 As of December 31, 2019
(in thousands)
Cash and cash equivalents $ 1,767,613
$ 826,581
Marketable securities 431,806
416,888
Total $ 2,199,419
$ 1,243,469


	As of March 31, 2021		As of December 31, 2020
	(in thousands)
Cash and cash equivalents	$	3,890,303	$	3,141,053
Marketable securities	476,152		474,929
Total	$	4,366,455	$	3,615,982

Available-for-sale debt securities by contractual maturity were as follows:

As of March 31, 2020 As of December 31, 2019
(in thousands)
Matures within one year $ 2,157,586
$ 1,137,942
Matures after one year through five years 41,833
105,527
Total $ 2,199,419
$ 1,243,469


	As of March 31, 2021		As of December 31, 2020
	(in thousands)
Matures within one year	$	4,358,433	$	3,526,185
Matures after one year through five years	8,022		89,797
Total	$	4,366,455	$	3,615,982

The Company has a limited number of available-for-sale debt securities in insignificant loss positions as of March 31, ~~2020,~~2021, which it does not intend to sell and has concluded it will not be required to sell before recovery of the amortized costs

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

for the investments at maturity. The Company did 0t record any charges for other-than-temporary declines in the fair value of available-for-sale debt securities or gross realized gains or losses in the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.

As of March 31, 2020 and December 31, 2019, the total fair value of the Company’s strategic investments in the common stock of publicly traded companies, which was primarily related to its investment in CRISPR, was $165.2 million and $282.1 million, respectively, and was classified as “~~Marketable securities” on its condensed consolidated balance sheets.~~

The Company records changes in the fair value of its investments in corporate equity securities ~~which are primarily attributable~~ to ~~its investment in CRISPR, to “Other (expense) income, net~~”“Other expense, net” on its condensed consolidated statements of operations. During the three months ended March 31, 2021 and 2020, ~~and 2019,~~ the ~~Company recorded a~~Company’s net unrealized ~~loss of $39.4 million and a net unrealized gain of $43.6 million, respectively,~~losses on corporate equity securities held at the conclusion of each ~~period.~~ period were as follows:


	Three Months Ended March 31,
		2021		2020
		(in thousands)
Net unrealized losses		$	(52,295)	$	(39,440)

During the three months ended March 31, 2020, the Company received proceeds of $72.0 million related to ~~sales~~the sale of ~~CRISPR’s~~the common stock of publicly traded companies, which had ana total original weighted-average cost basis of $26.7 million. There were no0 sales of ~~CRISPR’s~~the common stock of publicly traded companies during the three months ended March 31, ~~2019.~~2021.

As of March 31, ~~2020,~~2021, the carrying value of the Company’s equity investments without readily determinable fair values, which are recorded in “~~Other assets~~”“Other assets” on its condensed consolidated balance sheets, was ~~$46.6~~$20.8 million.

G.Accumulated Other Comprehensive Income (Loss)

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~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~


G.	~~Accumulated Other Comprehensive Income (Loss)~~

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:


	Foreign Currency Translation Adjustment		Unrealized Holding Gains (Losses), Net of Tax				Total
			On Available-For-Sale Debt Securities		On Foreign Currency Forward Contracts
	(in thousands)
Balance at December 31, 2020	$	(15,678)	$	334	$	(53,136)	$	(68,480)
Other comprehensive income (loss) before reclassifications	1,430		(218)		21,019		22,231
Amounts reclassified from accumulated other comprehensive income (loss)	0		0		12,947		12,947
Net current period other comprehensive income (loss)	1,430		(218)		33,966		35,178
Balance at March 31, 2021	$	(14,248)	$	116	$	(19,170)	$	(33,302)

Balance at December 31, 2019	$	(895)	$	503	$	(1,581)	$	(1,973)
Other comprehensive (loss) income before reclassifications	(2,662)		(764)		25,772		22,346
Amounts reclassified from accumulated other comprehensive income (loss)	0		0		(6,990)		(6,990)
Net current period other comprehensive (loss) income	(2,662)		(764)		18,782		15,356
Balance at March 31, 2020	$	(3,557)	$	(261)	$	17,201	$	13,383

Unrealized Holding Gains (Losses), Net of Tax
Foreign Currency Translation Adjustment On Available-For-Sale Debt Securities On Foreign Currency Forward Contracts Total
(in thousands)
Balance at December 31, 2019 $ (895 ) $ 503
$ (1,581 ) $ (1,973 )
Other comprehensive (loss) income before reclassifications (2,662 ) (764 ) 25,772
22,346
Amounts reclassified from accumulated other comprehensive income (loss) —
—
(6,990 ) (6,990 )
Net current period other comprehensive (loss) income (2,662 ) (764 ) 18,782
15,356
Balance at March 31, 2020 $ (3,557 ) $ (261 ) $ 17,201
$ 13,383

Balance at December 31, 2018 $ (11,227 ) $ (536 ) $ 12,422
$ 659
Other comprehensive income before reclassifications 4,967
596
5,126
10,689
Amounts reclassified from accumulated other comprehensive income —
—
(5,348 ) (5,348 )
Net current period other comprehensive income (loss) 4,967
596
(222 ) 5,341
Balance at March 31, 2019 $ (6,260 ) $ 60
$ 12,200
$ 6,000

Foreign currency forward contracts - Designated as hedging instruments

The Company maintains a hedging program intended to mitigate the effect of changes in foreign exchange rates for a portion of the Company’s forecasted product revenues denominated in certain foreign currencies. The program includes foreign currency forward contracts that are designated as cash flow hedges under U.S. GAAP having contractual durations from one to eighteen months. The Company recognizes realized gains and losses for the effective portion of such contracts in “Product revenues, net” in its condensed consolidated statements of operations in the same period that it recognizes the product revenues that were impacted by the hedged foreign exchange rate changes.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

The Company formally documents the relationship between foreign currency forward contracts (hedging instruments) and forecasted product revenues (hedged items), as well as the Company’s risk management objective and strategy for undertaking various hedging activities, which includes matching all foreign currency forward contracts that are designated as cash flow hedges to forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the foreign currency forward contracts are highly effective in offsetting changes in cash flows of hedged items on a prospective and retrospective basis. If the Company were to determine that a (i) foreign currency forward contract is not highly effective as a cash flow hedge, (ii) foreign currency forward contract has ceased to be a highly effective hedge or (iii) forecasted transaction is no longer probable of occurring, the Company would discontinue hedge accounting treatment prospectively. The Company measures effectiveness based on the change in fair value of the forward contracts and the fair value of the hypothetical foreign currency forward contracts with terms that match the critical terms of the risk being hedged. As of March 31, ~~2020,~~2021, all hedges were determined to be highly effective.

The Company considers the impact of its counterparties’ credit risk on the fair value of the foreign currency forward contracts. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, credit risk did not change the fair value of the Company’s foreign currency forward contracts.

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~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The following table summarizes the notional amount in U.S. dollars of the Company’s outstanding foreign currency forward contracts designated as cash flow hedges under U.S. GAAP:

As of March 31, 2020 As of December 31, 2019
Foreign Currency (in thousands)
Euro $ 581,764
$ 501,197
British pound sterling 124,160
87,032
Australian dollar 74,643
89,705
Canadian dollar 46,390
50,452
Total foreign currency forward contracts $ 826,957
$ 728,386


	As of March 31, 2021		As of December 31, 2020
Foreign Currency	(in thousands)
Euro	$	892,995	$	745,099
British pound sterling	250,528		160,427
Australian dollar	100,733		99,922
Canadian dollar	80,122		86,468
Total foreign currency forward contracts	$	1,324,378	$	1,091,916

Foreign currency forward contracts - Not designated as hedging instruments

The Company also enters into foreign currency forward contracts with contractual maturities of less than one month, ~~that~~which are designed to mitigate the effect of changes in foreign exchange rates on monetary assets and liabilities, including intercompany balances. These contracts are not designated as hedging instruments under U.S. GAAP. The Company recognizes realized gains and losses for such contracts in “~~Other (expense) income, net~~”“Other expense, net” in its condensed consolidated statements of operations each period. As of March 31, ~~2020,~~2021, the notional amount of the Company’s outstanding foreign currency forward contracts where hedge accounting under U.S. GAAP is not applied was ~~$522.2~~$386.7 million.

During the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, the Company recognized the following related to foreign currency forward contacts in its condensed consolidated statements of operations:


	Three Months Ended March 31,
		2021		2020
		(in thousands)
Designated as hedging instruments - Reclassified from AOCI
Product revenues, net		$	(16,518)	$	8,922
Not designated as hedging instruments
Other expense, net		$	(7,997)	$	(16,229)

Total reported in the Condensed Consolidated Statement of Operations
Product revenues, net		$	1,723,305	$	1,515,107
Other expense, net		$	(52,653)	$	(61,130)

Three Months Ended March 31,
2020 2019
(in thousands)
Designated as hedging instruments - Reclassified from AOCI
Product revenues, net $ 8,922
$ 6,839
Not designated as hedging instruments
Other (expense) income, net $ 16,229
$ 3,151

Total reported in the Condensed Consolidated Statement of Operations
Product revenues, net $ 1,515,107
$ 857,253
Other (expense) income, net $ (61,130 ) $ 42,610

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

The following table summarizes the fair value of the Company’s outstanding foreign currency forward contracts designated as cash flow hedges under U.S. GAAP included on its condensed consolidated balance sheets:


As of March 31, 2021
Assets			Liabilities
Classification	Fair Value		Classification	Fair Value
(in thousands)
Prepaid expenses and other current assets	$	7,039	Other current liabilities	$	(28,743)
Other assets	1,944		Other long-term liabilities	(433)
Total assets	$	8,983	Total liabilities	$	(29,176)

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~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

As of December 31, 2019
Assets Liabilities
Classification Fair Value Classification Fair Value
(in thousands)
Prepaid expenses and other current assets $ 9,725
Other current liabilities $ (5,533 )
Other assets —
Other long-term liabilities (1,821 )
Total assets $ 9,725
Total liabilities $ (7,354 )

As of March 31, ~~2020,~~2021, the Company expects the amounts that are related to foreign exchange forward contracts designated as cash flow hedges under U.S. GAAP recorded in “~~Prepaid~~“Prepaid expenses and other current ~~assets~~”assets” and “~~Other~~“Other current ~~liabilities~~”liabilities” to be reclassified to earnings within twelve months.

The following table summarizes the potential effect of offsetting derivatives by type of financial instrument designated as cash flow hedges under U.S. GAAP on the Company’s condensed consolidated balance sheets:


	As of March 31, 2021
	Gross Amounts Recognized		Gross Amounts Offset		Gross Amounts Presented		Gross Amounts Not Offset		Legal Offset
Foreign currency forward contracts	(in thousands)
Total assets	$	8,983	$	0	$	8,983	$	(8,983)	$	0
Total liabilities	(29,176)		0		(29,176)		8,983		(20,193)

As of December 31, 2019
Gross Amounts Recognized Gross Amounts Offset Gross Amounts Presented Gross Amounts Not Offset Legal Offset
Foreign currency forward contracts (in thousands)
Total assets $ 9,725
$ —
$ 9,725
$ (7,354 ) $ 2,371
Total liabilities (7,354 ) —
(7,354 ) 7,354
—

Inventories consisted of the following:


	As of March 31, 2021		As of December 31, 2020
	(in thousands)
Raw materials	$	44,921	$	46,232
Work-in-process	170,721		161,324
Finished goods	83,221		73,221
Total	$	298,863	$	280,777

As of March 31, 2020 As of December 31, 2019
(in thousands)
Raw materials $ 24,835
$ 26,247
Work-in-process 117,427
107,021
Finished goods 44,825
34,234
Total $ 187,087
$ 167,502

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements

(unaudited)

J.Stock-based Compensation Expense and Share Repurchase Programs


J.	~~Stock-based Compensation Expense and Share Repurchase Programs~~

Stock-based compensation expense

During the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, the Company recognized the following stock-based compensation expense:

Three Months Ended March 31,
2020 2019
(in thousands)
Stock-based compensation expense by type of award:
Restricted stock and restricted stock units (including PSUs) $ 97,149
$ 63,510
Stock options 17,266
28,156
ESPP share issuances 2,485
2,577
Stock-based compensation expense related to inventories (1,194 ) (452 )
Total stock-based compensation expense included in costs and expenses $ 115,706
$ 93,791

Stock-based compensation expense by line item:

Cost of sales $ 1,361
$ 1,338
Research and development expenses 72,687
59,715
Sales, general and administrative expenses 41,658
32,738
Total stock-based compensation expense included in costs and expenses 115,706
93,791
Income tax effect (64,246 ) (39,524 )
Total stock-based compensation expense, net of tax $ 51,460
$ 54,267

The following table sets forth the Company’s unrecognized stock-based compensation expense as of March 31, 2020, by type of award and the weighted-average period over which that expense is expected to be recognized:

As of March 31, 2020
Unrecognized Expense Weighted-average
Recognition Period
(in thousands) (in years)
Type of award:
Restricted stock and restricted stock units (including PSUs) $ 550,095
2.27
Stock options $ 109,086
2.33
ESPP share issuances $ 2,238
0.40

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~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~The following table summarizes information about stock options outstanding and exercisable as of March 31, 2020:~~

Options Outstanding Options Exercisable
Range of Exercise Prices Number
Outstanding Weighted-average
Remaining
Contractual Life Weighted-average
Exercise Price Number
Exercisable Weighted-average
Exercise Price
(in thousands) (in years) (per share) (in thousands) (per share)
$29.07–$40.00 81
1.47 $ 37.70
81
$ 37.70
$40.01–$60.00 224
2.41 $ 49.15
224
$ 49.15
$60.01–$80.00 116
4.03 $ 74.89
112
$ 74.89
$80.01–$100.00 1,393
5.99 $ 89.44
1,085
$ 90.01
$100.01–$120.00 182
4.88 $ 109.25
180
$ 109.18
$120.01–$140.00 402
5.44 $ 129.59
400
$ 129.61
$140.01–$160.00 954
7.86 $ 155.50
436
$ 155.41
$160.01–$180.00 669
8.24 $ 168.21
245
$ 165.11
$180.01–$189.38 1,498
8.65 $ 185.44
440
$ 185.31
Total 5,519
6.98 $ 137.34
3,203
$ 119.05


	Three Months Ended March 31,
		2021		2020
		(in thousands)
Stock-based compensation expense by type of award:
Restricted stock units (including PSUs) and restricted stock		$	100,826	$	97,149
Stock options		10,596		17,266
ESPP share issuances		5,615		2,485
Stock-based compensation expense related to inventories		(1,863)		(1,194)
Total stock-based compensation expense included in costs and expenses		$	115,174	$	115,706

Stock-based compensation expense by line item:
Cost of sales		$	1,431	$	1,361
Research and development expenses		72,802		72,687
Sales, general and administrative expenses		40,941		41,658
Total stock-based compensation expense included in costs and expenses		115,174		115,706
Income tax effect		(31,251)		(64,246)
Total stock-based compensation expense, net of tax		$	83,923	$	51,460

Share repurchase programs

~~During 2018,~~In 2019, the Company’s Board of Directors approved a share repurchase program (the ~~“2018~~“2019 Share Repurchase Program”), pursuant to which the Company repurchased $500.0 million of its common stock in 2018 and 2019. During the three months ended March 31, 2019, the Company repurchased 537,018 of its common stock under the share repurchase program for an aggregate of $98.0 million including commissions and fees. As of June 30, 2019, the Company had repurchased the entire $500.0 million it was authorized to repurchase of its common stock under the 2018 Share Repurchase Program.

During 2019, the Company’s Board of Directors approved a new share repurchase program (the “2019 Share Repurchase Program”), pursuant to which the Company is authorized to repurchase up to $500.0 million of its common stock between August 1, 2019 and ~~December 31,~~ 2020. ~~The Company expects to fund further repurchases of its common stock through a combination of cash on hand and cash generated by operations.~~ During the three months ended March 31, 2020, the Company repurchased 1,403,868 shares of its common stock under the 2019 Share Repurchase Program for an aggregate of $300.0 million.

In November 2020, the Company’s Board of Directors approved a new share repurchase program (the “2020 Share Repurchase Program”), pursuant to which the Company was authorized to repurchase up to $500.0 million ~~including commissions and fees.~~of its common stock by December 31, 2022. During the three months ended March 31, 2021, the Company repurchased 1,988,941 shares of its common stock under the 2020 Share Repurchase Program for an aggregate of $424.9 million. As of March 31, ~~2020, there~~2021, the Company had repurchased the entire $500.0 million it was ~~a total~~authorized to repurchase of ~~$164.0 million remaining for repurchases~~its common stock under the ~~2019~~2020 Share Repurchase Program.

Under the 2019 Share Repurchase Programs, the Company is authorized to purchase shares from time to time through open market or privately negotiated transactions. Such purchases are made pursuant to Rule 10b5-1 plans or other means as determined by the Company’s management and in accordance with the requirements of the SEC.


K.	~~Income Taxes~~

K.Income Taxes

The Company is subject to U.S. federal, state, and foreign income taxes. For the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, the Company recorded provisions for income taxes of $167.8 million and $54.8 million, ~~and $51.5 million,~~ respectively.

The Company’s effective tax rate of 20% for the three months ended March 31, 2021 was lower than the U.S. statutory rate primarily due to excess tax benefits related to stock-based compensation. The Company’s effective tax rate of 8% for the three months ended March 31, 2020 was lower than the U.S. statutory rate primarily due to a discrete benefit related to the write-off of a long-term intercompany receivable and excess tax benefits related to stock-based compensation. ~~The Company’s effective tax rate for the three months ended March 31, 2019 was lower than the U.S. statutory rate primarily due to excess tax benefits related to stock-based compensation.~~

The Company released its valuation allowance on the majority of its net operating losses and other deferred tax assets as of December 31, 2018. Starting in 2019, the Company began recording a provision for income taxes on its pre-tax income using an effective tax rate approximating statutory rates. Due to the Company's ability to offset its pre-tax income against

~~Table of Contents~~

~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~previously benefited net operating losses, it expects a portion of its tax provision to represent a non-cash expense until its net operating losses have been fully utilized.~~

~~The Company maintained a valuation allowance of $205.2 million related primarily to U.S. state and foreign tax attributes as of December 31, 2019.~~ On a periodic basis, the Company reassesses any valuation allowances that it maintains on its deferred tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets.

~~In March~~As of December 31, 2020, the ~~Coronavirus Aid, Relief~~Company maintained a valuation allowance of $213.8 million related primarily to U.S. state and ~~Economic Security~~foreign tax attributes.

Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

As part of the Tax Cut and Jobs Act (“of 2017, the ~~CARES Act”~~Company is subject to a territorial tax system in which the requirement is to establish an accounting policy in providing for tax on Global Intangible Low Taxed Income (“GILTI”) ~~was signed into law. The CARES Act includes provisions relating to several aspects of corporate income taxes.~~earned by certain foreign subsidiaries. The Company ~~does not currently expect~~has elected to treat the ~~CARES Act to have~~impact of GILTI as a ~~significant impact on~~current tax expense in its provision for income ~~taxes; however, it will continue to monitor the provisions of the CARES Act in relation to its operations.~~taxes.

The Company has reviewed the tax positions taken, or to be taken, in its tax returns for all tax years currently open to examination by a taxing authority. Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the benefits recognized in the consolidated financial statements. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had ~~$43.0~~$81.8 million and ~~$33.9~~$75.8 million, respectively, of ~~gross~~net unrecognized tax benefits, which would affect the Company’s tax rate if recognized. The Company does not expect that its unrecognized tax benefits will materially ~~increase~~change within the next twelve months. The Company accrues interest and penalties related to unrecognized tax benefits as a component of its provision for income taxes. ~~As of March 31, 2020, no significant interest or penalties were accrued.~~ The Company did not recognize any material interest or penalties related to uncertain tax positions during the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.

As of March 31, ~~2020,~~2021, foreign earnings, which were not significant, have been retained by foreign subsidiaries for indefinite reinvestment. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company could be subject to withholding taxes payable to the various foreign countries.

The Company files U.S. federal income tax returns and income tax returns in various state, local and foreign jurisdictions. The Company is no longer subject to any tax assessment from an income tax examination in the ~~United States~~U.S. or any other major taxing jurisdiction for years before 2011, except where the Company has net operating losses or tax credit carryforwards that originate before 2011. The Company has various income tax audits ongoing at any time throughout the world. ~~No significant adjustments have been reported for any jurisdiction under audit.~~


L.	~~Commitments and Contingencies~~

L.Commitments and Contingencies

Revolving Credit ~~Facility~~Facilities

~~In September 2019, the~~The Company and certain of its subsidiaries have entered into ~~a Credit Agreement~~2 credit agreements (the ~~“2019 Credit Agreement”~~“Credit Agreements”) with Bank of America, N.A., as administrative agent and the lenders referred to ~~therein.~~therein (the “Lenders”). The ~~2019~~ Credit ~~Agreement provides for a $500.0 million unsecured revolving facility, which was~~Agreements were not drawn upon at ~~closing.~~closing and the Company has not drawn upon them to date. Amounts drawn pursuant to the ~~2019~~ Credit ~~Agreement,~~Agreements, if any, ~~may~~will be used ~~to finance the Company’s working capital needs, and~~ for general corporate ~~or other lawful~~ purposes. The Company had no borrowings outstanding under the 2019 Credit Agreement as of March 31, 2020 and December 31, 2019. The 2019 Credit Agreement also provides that, subject to satisfaction of certain conditions, the Company may request that the borrowing capacity under the 2019 Credit Agreement be increased by an additional $500.0 million. The 2019 Credit Agreement, which matures on September 17, 2024, supersedes the Company’s credit agreement entered into in 2016 with Bank of America, N.A serving in the same capacity. Additionally, the 2019 Credit Agreement provides a sublimit of $50.0 million for letters of credit.

~~Direct costs related to the 2019 Credit Agreement, which were not material to the Company’s financial statements, were deferred and will be recorded over the term of the 2019 Credit Agreement.~~

Any amounts borrowed under the ~~2019~~ Credit ~~Agreement~~Agreements will bear interest, at the Company’s option, at either a base rate or a Eurocurrency rate, in each case plus an applicable ~~margin. Under the 2019 Credit Agreement, the applicable margins on base rate loans range from 0.125% to 0.50% and the applicable margins on Eurocurrency loans range from 1.125% to 1.50%, in each case~~margin based on the Company’s consolidated leverage ratio (the ratio of the Company’s total consolidated funded indebtedness to the Company’s consolidated EBITDA for the most recently completed four fiscal quarter period).

In September 2019, the Company and certain of its subsidiaries entered into a $500.0 million unsecured revolving facility (the “2019 Credit Agreement”) with the Lenders, which matures on September 17, 2024. Under the 2019 Credit Agreement, the applicable margins on base rate loans range from 0.125% to 0.500% and the applicable margins on Eurocurrency loans range from 1.125% to 1.500%. The 2019 Credit Agreement provides a sublimit of $50.0 million for letters of credit.

In September 2020, the Company and certain of its subsidiaries entered into a $2.0 billion unsecured revolving facility (the “2020 Credit Agreement”) with the Lenders, which matures on September 18, 2022. Under the 2020 Credit Agreement, the applicable margins on base rate loans range from 0.500% to 0.875% and the applicable margins on Eurocurrency loans range from 1.500% to 1.875%. The 2020 Credit Agreement does not support letters of credit.

~~Table~~Subject to satisfaction of ~~Contents~~

~~VERTEX PHARMACEUTICALS INCORPORATED~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

certain conditions, the Company may request that the borrowing capacity for each of the Credit Agreements be increased by an additional $500.0 million. Any amounts borrowed pursuant to the ~~2019~~ Credit ~~Agreement~~Agreements are guaranteed by certain of the Company’s existing and future domestic subsidiaries, subject to certain exceptions.

The ~~2019~~ Credit ~~Agreement contains~~Agreements contain customary representations and warranties and affirmative and negative covenants, including financial covenants to maintain ~~(i)~~(x) subject to certain limited exceptions, a consolidated leverage ratio of 3.50 to 1.00, subject to an increase to 4.00 to 1.00 following a material acquisition and ~~(ii)~~(y) a consolidated interest coverage ratio ~~(the ratio~~of

Table of ~~the Company’s consolidated EBITDA~~Contents

VERTEX PHARMACEUTICALS INCORPORATED

Notes to ~~its consolidated interest expenses for the most recently completed four fiscal quarter period) of~~ Condensed Consolidated Financial Statements (unaudited)

2.50 to 1.00, in each case measured on a quarterly basis. As of March 31, 2021, the Company was in compliance with the covenants described above. The ~~2019~~ Credit ~~Agreement~~Agreements also ~~contains~~contain customary events of default. In the case of a continuing event of default, the administrative agent would be entitled to exercise various remedies, including the acceleration of amounts due under outstanding loans. As

Direct costs related to the Credit Agreements, which were not material to the Company’s financial statements, were deferred and recorded over the term of ~~March 31, 2020,~~ the ~~Company was in compliance with the covenants described above.~~Credit Agreements.

Guaranties and Indemnifications

As permitted under Massachusetts law, the Company’s Articles of Organization and By-laws provide that the Company will indemnify certain of its officers and directors for certain claims asserted against them in connection with their service as an officer or director. The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited. However, the Company has purchased directors’ and officers’ liability insurance policies that could reduce its monetary exposure and enable it to recover a portion of any future amounts paid. NaN indemnification claims currently are outstanding, and the Company believes the estimated fair value of these indemnification arrangements is minimal.

The Company customarily agrees in the ordinary course of its business to indemnification provisions in agreements with clinical trial investigators and sites in its drug development programs, sponsored research agreements with academic and not-for-profit institutions, various comparable agreements involving parties performing services for the Company and its real estate leases. The Company also customarily agrees to certain indemnification provisions in its drug discovery, development and commercialization collaboration agreements. With respect to the Company’s clinical trials and sponsored research agreements, these indemnification provisions typically apply to any claim asserted against the investigator or the investigator’s institution relating to personal injury or property damage, violations of law or certain breaches of the Company’s contractual obligations arising out of the research or clinical testing of the Company’s compounds or drug candidates. With respect to lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Company’s contractual obligations. The indemnification provisions appearing in the Company’s collaboration agreements are similar to those for the other agreements discussed above, but in addition provide some limited indemnification for its collaborator in the event of third-party claims alleging infringement of intellectual property rights. In each of the cases above, the indemnification obligation generally survives the termination of the agreement for some extended period, although the Company believes the obligation typically has the most relevance during the contract term and for a short period of time thereafter. The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited. The Company has purchased insurance policies covering personal injury, property damage and general liability that reduce its exposure for indemnification and would enable it in many cases to recover all or a portion of any future amounts paid. The Company has never paid any material amounts to defend lawsuits or settle claims related to these indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements is minimal.

Other Contingencies

The Company has certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a reserve for contingent liabilities when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. There were no0 material contingent liabilities accrued as of March 31, ~~2020~~2021 or December 31, ~~2019.~~2020.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements

(unaudited)

M.Additional Cash Flow Information


M.	~~Additional Cash Flow Information~~

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 consisted of the following:


	Three Months Ended March 31,									Three Months Ended March 31,
	2020				2019					2021				2020
	Beginning of period		End of period		Beginning of period		End of period			Beginning of period		End of period		Beginning of period		End of period
	(in thousands)									(in thousands)
Cash and cash equivalents	$	3,109,322	$	3,593,412	$	2,650,134	$	2,893,885	Cash and cash equivalents	$	5,988,187	$	6,304,330	$	3,109,322	$	3,593,412
Prepaid expenses and other current assets	8,004		8,552		4,910		6,250		Prepaid expenses and other current assets	658		8,577		8,004		8,552
Other assets	3,355		—		3,209		1,397		Other assets	0		0		3,355		0
Cash, cash equivalents and restricted cash per statement of cash flows	$	3,120,681	$	3,601,964	$	2,658,253	$	2,901,532
Cash, cash equivalents and restricted cash per condensed consolidated statement of cash flows									Cash, cash equivalents and restricted cash per condensed consolidated statement of cash flows	$	5,988,845	$	6,312,907	$	3,120,681	$	3,601,964

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We invest in scientific innovation to create transformative medicines for people with serious diseases with a focus on specialty markets. We ~~continue~~have four approved medicines to ~~focus on developing and commercializing therapies for the treatment of~~treat cystic fibrosis, or ~~CF. In 2019, we obtained~~CF, a life-threatening genetic disease, and are focused on increasing the number of people with CF eligible and able to receive our current medicines through label expansions, approval ~~in the United States, or U.S., for~~of new medicines and ~~launched TRIKAFTA (elexacaftor/tezacaftor/ivacaftor and ivacaftor).~~expanded reimbursement. We are broadening our pipeline into additional disease areas through internal research efforts and accessing external innovation through business development transactions.

~~We have four approved medicines that treat the underlying cause of CF, which is a life-threatening genetic disease. In October 2019, TRIKAFTA, our triple-combination~~Our triple combination regimen, TRIKAFTA/KAFTRIO, was approved byin 2019 in the United States, ~~Food~~or U.S., and ~~Drug Administration, or FDA, for the treatment of patients with CF 12 years of age or older who have at least one~~ ~~F508del~~ ~~mutation~~in 2020 in the ~~cystic fibrosis transmembrane conductance regulator,~~European Union, or ~~CFTR, gene. This approval increased the number of patients eligible for~~E.U. Collectively, our medicines in the U.S. by approximately 6,000 and provided an additional treatment option for many patients who are also eligible for one of our previously approved products. We have submitted a Marketing Authorization Application, or MAA, to the European Medicines Agency, or EMA, for this triple combination regimen. Our four medicines are ~~collectively~~ approved to treat ~~approximately 60%~~the majority of the ~~75,000~~approximately 83,000 people with CF ~~patients~~ in North America, Europe and Australia. We are ~~focused on obtaining approval for the triple combination in ex-U.S. markets for patients 12 years of age and older and~~ evaluating our ~~triple combination~~medicines in additional patient populations, including younger ~~patients~~children, with the goal of having small molecule treatments for up to 90% of ~~patients~~people with CF. We are also pursuing genetic therapies to address the remaining 10% of people with CF.

Beyond CF, ~~patients.~~

~~Our~~we continue to research and develop small molecule ~~programs include programs focused on developing treatments~~drug candidates for the treatment of serious diseases, including alpha-1 antitrypsin, or AAT, deficiency, APOL1-mediated kidney diseases and pain. We are also focused on developing cell and genetic therapies for various diseases in our pipeline, including sickle cell disease, or SCD, beta thalassemia, type 1 diabetes, or T1D, Duchenne muscular dystrophy, or DMD, myotonic dystrophy, or DM1, and CF. We are evaluating CTX001, a genetic therapy, as a potential treatment for ~~sickle cell disease~~SCD and transfusion-dependent beta thalassemia, or TDT, the most severe form of beta thalassemia, in Phase 1/2 clinical trials in collaboration with CRISPR Therapeutics AG, or CRISPR. In ~~2019, through a series of strategic transactions,~~T1D, we ~~acquired preclinical genetic therapy~~are pursuing two programs for ~~Duchenne muscular dystrophy, or DMD,~~the transplant of functional islets into patients: transplantation of islet cells alone, using immunosuppression to protect the implanted cells, and ~~myotonic dystrophy type 1, or DM1,~~implantation of the islet cells inside a novel immunoprotective device.

Financial Highlights

Revenues

In the first quarter of 2021, our net product revenues continued to increase due to the uptake of KAFTRIO in Europe and ~~preclinical programs~~continued performance of TRIKAFTA in the U.S.

Expenses

Our total R&D and SG&A expenses increased to ~~develop cell-based therapies for type 1 diabetes, or T1D.~~$648.1 million in the first quarter of 2021 as compared to $630.8 million in the first quarter of 2020. In the first quarter of 2021, cost of sales was approximately 11% of our net product revenues.

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Business Updates

Cystic Fibrosis

We expect to continue to grow our CF business by increasing the number of people with CF eligible and able to receive our medicines.

Since the beginning of 2021, we have made the following progress with respect to our CF business.

•The Australian Therapeutic Goods Administration approved the use of TRIKAFTA (elexacaftor/tezacaftor/ivacaftor and ivacaftor) for people with CF 12 years of age and older who have at least one F508del mutation.

•We filed our post-marketing application with the European Medicines Agency, or EMA, for the expanded indication of KAFTRIO (elexacaftor/tezacaftor/ivacaftor and ivacaftor)to include children with CF 6 to 11 years of age.

•TRIKAFTA/KAFTRIO is now approved and reimbursed or accessible in 12 countries outside the U.S., including Denmark, Germany, Ireland, Israel, Switzerland and the countries within the UK.

Pipeline

We continue to advance a pipeline of potentially transformative small molecule, cell and genetic therapies aimed at serious diseases. Since the beginning of 2021, we have made the following progress in activities supporting these efforts.

Beta Thalassemia and Sickle Cell Disease

•We and our collaborator, CRISPR, are ~~monitoring~~evaluating the use of a non-viral ex vivo CRISPR gene-editing therapy for the treatment of TDT and SCD. This approach aims to edit a person’s hematopoietic stem cells to produce fetal hemoglobin in red blood cells, which has the potential to reduce or eliminate symptoms associated with the diseases.

•To date, more than 30 patients have been dosed in the clinical trials to evaluate CTX001 as a potential one-time curative therapy for people with severe SCD and TDT. Enrollment and dosing are ongoing in these clinical trials, and we expect to complete enrollment in 2021.

•In April, the EMA granted Priority Medicines Designation to CTX001 for TDT.

Alpha-1 Antitrypsin Deficiency

•We are evaluating multiple compounds with the potential to correct the misfolding of Z-AAT protein in the liver, in order to increase the systemic levels of functional AAT. Misfolded Z-AAT protein is the root cause of AAT deficiency and our small molecule corrector program targets both the liver and lung manifestations of the disease.

•Patients enrolled in the Phase 2 proof-of-concept clinical trial for the Z-AAT corrector, VX-864, have completed the 28-day dosing period. This clinical trial includes a 28-day safety follow-up period that is ongoing. We expect results from this clinical trial in the second quarter of 2021.

APOL1-Mediated Kidney Diseases

•We are evaluating the potential of inhibitors of APOL1 function in people with APOL1-mediated kidney diseases, including focal segmental glomerulosclerosis, or FSGS.

•Enrollment is ongoing in a Phase 2 proof-of-concept clinical trial designed to evaluate the reduction in proteinuria in people with APOL1-mediated FSGS after treatment with VX-147. We expect results from this clinical trial in the second half 2021.

Type 1 Diabetes

•We are evaluating a cell therapy designed to replace insulin-producing islet cells in people with T1D. We are pursuing two programs for the transplant of these fully-differentiated functional islets into patients: transplantation of islet cells alone, using immunosuppression to protect the implanted cells, and implantation of the islet cells inside a novel immunoprotective device.

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•In March, the U.S. Food and Drug Administration, or FDA, granted Fast Track Designation and we initiated a Phase 1/2 clinical trial evaluating VX-880, our islet cells alone program. This clinical trial involves an infusion of fully differentiated, functional islet cells, and chronic administration of concomitant immunosuppressive therapy, to protect the islet cells from immune rejection.

Pain

•We are evaluating selective small molecule inhibitors of NaV1.8, a genetically validated, novel target for the treatment of pain, with the goal of preventing pain signals traveling from the sensory nerves to the central nervous system. We have previously demonstrated clinical proof-of-concept with a small molecule investigational treatment targeting NaV1.8, VX-150, in multiple pain indications including acute pain, neuropathic pain and musculoskeletal pain.

•Our selective NaV1.8 inhibitor, VX-548, demonstrated favorable safety, tolerability and pharmacokinetic profiles in Phase 1 clinical trials. In these clinical trials, the molecule exhibited a favorable profile at doses considerably lower than those required with our previous NaV1.8 inhibitors.

•We expect to advance VX-548 into Phase 2 proof-of-concept clinical trials for acute pain in the second half of 2021.

Investments in External Innovation

•In April, we amended our collaboration with CRISPR for the CTX001 programs in TDT and SCD. Under the terms of the revised collaboration agreement, we will lead worldwide development, manufacturing and commercialization of CTX001. Under the revised collaboration agreement, 60% of the net profits and net losses for CTX001 will be allocated to us and 40% of the net profits and net losses for CTX001 will be allocated to CRISPR. In connection with the closing of the transaction, we will pay a $900.0 million upfront payment to CRISPR and an additional one-time $200.0 million milestone payment upon regulatory approval of CTX001.

•In April, we entered into a research collaboration with Obsidian Therapeutics, Inc., or Obsidian, aimed at the discovery of novel therapies that regulate gene-editing for the treatment of serious diseases. This collaboration enables us to leverage Obsidian’s cytoDRiVE® platform technology to discover gene-editing medicines whose therapeutic activity can be precisely controlled using small molecules.

COVID-19

We continue to monitor the impacts of the ~~recent spread of the novel strain of the coronavirus (“COVID-19”)~~COVID-19 global pandemic on our business. COVID-19 has not affected our supply chain or the demand for our medicines, and we believe that we will be able to continue to supply all of our approved medicines to ~~our~~ patients globally. We have adjusted our business operations in response to COVID-19, with a majority of our employees ~~working remotely,~~continuing to work remotely. We continue to monitor local COVID-19 trends and ~~COVID-19 has resulted in delays in certain research and development activities.~~

~~Financial Highlights~~

~~Revenues~~

~~In the first quarter of 2020, our net product revenues continued to increase due to the approval of TRIKAFTA in late 2019 and uptake~~government guidance for each of our ~~medicines medicines in ex-U.S. markets following completion of reimbursement agreements in 2019.~~

~~Expenses~~

~~Our combined R&D~~site locations, and ~~SG&A expenses increased~~are utilizing a phased, site-specific approach to ~~$630.8 million in the first quarter of 2020 from $486.5 million in the first quarter of 2019. In the first quarter of 2020, cost of sales was 11% of~~assess employee access to our ~~net product revenues.~~

~~Balance Sheet~~

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~~Business Updates~~

~~COVID-19 has not affected our supply chain and we believe that we will be able to continue to supply~~sites. Currently, all of our ~~approved medicines~~research and manufacturing sites are open to essential employees, as permitted by local laws. To provide a safe working environment for our ~~patients globally.~~

~~TRIKAFTA (elexacaftor/tezacaftor/ivacaftor~~on-site employees, we have, among other things, limited employee numbers at our open sites and ~~ivacaftor)~~

~~The majority of the approximately 18,000 eligible patients~~increased safety measures, including at home and on-site testing in the ~~United States have now initiated treatment with TRIKAFTA following its approval in October 2019.~~


•	~~The MAA for the elexacaftor, tezacaftor and ivacaftor triple combination in patients 12 years of age and older with at least one~~ ~~F508del~~ ~~mutation that we submitted in 2019 is being reviewed by the EMA.~~


•	~~We recently submitted our applications for approval of the elexacaftor, tezacaftor and ivacaftor triple combination for patients 12 years of age and older with at least one~~ ~~F508del~~ ~~mutation in Australia and Switzerland.~~

•

We recently completed enrollment for a Phase 3 clinical trial evaluating the use of the elexacaftor, tezacaftor and ivacaftor triple combination in children 6 to 11 years of age with CF who have two copies of the ~~F508del~~ ~~mutation or who have one~~ ~~F508del~~ mutation and one minimal function mutation. If the data from this clinical trial is positive, we plan to submit a supplemental New Drug Application, or sNDA, to the FDA in the second half of 2020 for children 6 to 11 years of age with at least one ~~F508del~~ ~~mutation, followed by regulatory submissions in other countries.~~

~~KALYDECO (ivacaftor)~~

~~We recently completed the submission of an sNDA to the FDA~~U.S., enhanced cleaning and ~~Type 2 variation to the EMA for the~~sanitation protocols, required use of ~~KALYDECO in patients four to less than six months~~personal protective equipment for all on-site employees, hand sanitation stations throughout our open sites and implementation of ~~age.~~

~~Pipeline~~

Depending on the disease, stage of development and type of clinical trial, and to ensure patient safety and reduce the burden on the healthcare system at a time of critical need, we have temporarily paused or delayed enrollment in certain clinical trials.

•

~~AAT Deficiency:~~ We temporarily paused screening and enrollment in the Phase 2 proof-of-concept clinical trial for VX-814, our first investigational oral small molecule corrector for the treatment of alpha-1 antitrypsin, or AAT, deficiency, in patients with AAT deficiency who have two copies of the Z mutation. The Phase 2 clinical trial remains active and we continue to initiate new trial sites to enable future patient enrollment.


•	~~Focal Segmental Glomerulosclerosis:~~ We recently initiated a Phase 2 proof-of-concept clinical trial designed to evaluate the reduction in proteinuria in patients with APOL1-mediated focal segmental glomerulosclerosis, or FSGS, receiving treatment with VX-147.


•	~~Beta Thalassemia and Sickle Cell Disease:~~ We and our collaborator, CRISPR, expect to provide additional data from the two ongoing Phase 1/2 clinical trials of the investigational CRISPR/Cas9 gene-editing therapy CTX001, in patients with transfusion-dependent beta thalassemia and in patients with severe sickle cell disease in 2020.


•	~~T1D: We continue to advance our cell therapy program for the treatment of T1D and expect to initiate clinical development in patients in late 2020 or early 2021.~~

~~External Innovation~~


•	~~Affinia Therapeutics:~~ In April 2020, we entered into a collaboration with Affinia Therapeutics Inc. to gain access to a novel library of AAV capsids to support our ongoing research and development efforts in genetic therapies. The goal of the collaboration will be to develop gene therapies for people affected by DMD, DM1 and CF.


•	~~Moderna:~~ Based on preclinical data generated to date, we recently extended our collaboration with Moderna, aimed at the discovery and development of messenger ribonucleic acid, or mRNA, therapeutics for the treatment of CF.

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various social distancing measures while on-site.

Research

We ~~are continuing~~continue to invest in our research programs and ~~fostering~~foster scientific innovation in order to identify and develop transformative medicines. Our strategy is to combine transformative advances in the understanding of human disease and the science of therapeutics in order to identify and develop new medicines. We believe that pursuing research in diverse areas allows us to balance the risks inherent in drug development and may provide drug candidates that will form our pipeline in future years. To supplement our internal research programs, we acquire technologies and programs and collaborate with biopharmaceutical and technology companies, leading academic research institutions, government laboratories, foundations and other organizations, as needed, to advance research in our areas of therapeutic interest and to access technologies needed to execute on our strategy.

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Drug Discovery and Development

Discovery and development of a new pharmaceutical product is a difficult and lengthy process that requires significant financial resources along with extensive technical and regulatory expertise. Potential drug candidates are subjected to rigorous evaluations, driven in part by stringent regulatory considerations, designed to generate information concerning efficacy, side effects, proper dosage levels and a variety of other physical and chemical characteristics that are important in determining whether a drug candidate should be approved for marketing as a pharmaceutical product. Most chemical compounds that are investigated as potential drug candidates never progress into development, and most drug candidates that do advance into development never receive marketing approval. ~~Because our~~Our investments in drug candidates are subject to considerable ~~risks, we~~risks. We closely monitor the results of our discovery, research, clinical trials and nonclinical studies and frequently evaluate our drug development programs in light of new data and scientific, business and commercial insights, with the objective of balancing risk and potential. This process can result in ~~abrupt~~rapid changes in focus and priorities as new information becomes available and as we gain additional understanding of our ongoing programs and potential new programs, as well as those of our competitors. For example, in 2020, we discontinued development of VX-814, a drug candidate for the treatment of AAT deficiency, based on the safety and pharmacokinetic profile of VX-814 observed in a Phase 2 clinical trial.

If we believe that data from a completed registration program support approval of a drug candidate, we submit an NDA or BLA to the FDA requesting approval to market the drug candidate in the ~~United States~~U.S. and seek analogous approvals from comparable regulatory authorities in jurisdictions outside the ~~United States.~~U.S. To obtain approval, we must, among other things, demonstrate with evidence gathered in nonclinical studies and well-controlled clinical trials that the drug candidate is safe and effective for the disease it is intended to treat and that the manufacturing facilities, processes and controls for the manufacture of the drug candidate are adequate. The FDA and ex-U.S. regulatory authorities have substantial discretion in deciding whether or not a drug candidate should be granted approval based on the benefits and risks of the drug candidate in the treatment of a particular disease, and could delay, limit or deny regulatory approval. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for the drug candidate involved will be harmed.

Regulatory Compliance

Our marketing of pharmaceutical products is subject to extensive and complex laws and regulations. We have a corporate compliance program designed to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems and through the promotion of a culture of compliance. Among other laws, regulations and standards, we are subject to various U.S. federal and state laws, and comparable laws in other jurisdictions, pertaining to health care fraud and abuse, including anti-kickback and false claims laws, and laws prohibiting the promotion of drugs for unapproved or off-label uses. Anti-kickback laws generally make it illegal for a prescription drug manufacturer to knowingly and willfully solicit, offer, receive or pay any remuneration in return for or to induce the referral of business, including the purchase or prescription of a particular drug that is reimbursed by a state or federal health care program. False claims laws prohibit anyone from knowingly or willfully presenting for payment to third-party payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. We are subject to laws and regulations that regulate the sales and marketing practices of pharmaceutical manufacturers, as well as laws such as the U.S. Foreign Corrupt Practices Act, which govern our international business practices with respect to payments to government officials. In addition, we are subject to various data protection and privacy laws and regulations in the U.S., E.U., U.K., Canada, Australia and other jurisdictions. We expect to continue to devote substantial resources to maintain, administer and expand these compliance programs globally.

Reimbursement

Sales of our products depend, to a large degree, on the extent to which our products are reimbursed by third-party payors, such as government health programs, commercial insurance and managed health care organizations. We dedicate substantial management and other resources in order to obtain and maintain appropriate levels of reimbursement for our products from third-party payors, including governmental organizations in the ~~United States~~U.S. and ex-U.S. markets.

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In the ~~United States,~~U.S., we have worked successfully with third party payors in order to promptly obtain appropriate levels of reimbursement for our ~~first three~~ CF ~~medicines and are working with these stakeholders to obtain reimbursement for TRIKAFTA.~~medicines. We plan to continue to engage in discussions with numerous commercial insurers and managed health care organizations, along with government health programs that are typically managed by authorities in the

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individual states, to ensure that payors recognize the significant benefits that our medicines provide by treating the underlying cause of ~~cystic fibrosis~~CF and continue to provide access to our medicines.

In Europe and other ex-U.S. markets, we seek government reimbursement for our medicines on a country-by-country basis. This is necessary for each new medicine, as well as for label expansions for our current ~~medicines in most countries.~~medicines. We successfully obtained reimbursement for KALYDECO in each significant ex-U.S. market within two years of ~~approval. We~~approval, but experienced significant challenges in obtaining reimbursement for ORKAMBI in certain ex-U.S. ~~markets, however,~~markets. With the completion of reimbursement discussions in England and France in 2019, we ~~now~~ have ~~obtained~~ reimbursement for ORKAMBI or SYMKEVI in most of our significant ex-U.S. markets. In ~~some~~addition, in several ex-U.S. markets, including England, Ireland, Denmark and Australia, our reimbursement agreements include innovative arrangements that provide a pathway to access and rapid reimbursement for certain future CF medicines. We filed a MAA with the EMA for the triple combination regimen of elexacaftor, tezacaftor and ivacaftor and, if approved, we would need to seek government reimbursement on a country-by-country basis, in most European markets. In December 2019, we reached an agreement with the government in Ireland to expand theFor example, our existing reimbursement ~~agreement~~agreements in England, Ireland, and Denmark have been expanded to include ~~the triple combination regimen pending approval by the EMA.~~KAFTRIO. We expect to continue to ~~seek government~~focus significant resources to obtain appropriate reimbursement ~~and label expansions~~ for our ~~medicines~~products in ~~the applicable jurisdictions.~~ex-U.S. markets.

Strategic Transactions

Acquisitions

As part of our business strategy, we seek to acquire drugs, drug candidates and other technologies and businesses that have the potential to complement our ongoing research and development efforts. In 2019, we invested significantly in business development transactions designed to augment our pipeline, including the acquisition of Semma Therapeutics, Inc., or Semma, a privately-held company focused on the use of stem cell-derived human islets as a potentially curative treatment for T1D, and Exonics Therapeutics, Inc., or Exonics, a privately-held company focused on creating transformative gene-editing therapies to repair mutations that cause DMD and other severe neuromuscular diseases, including DM1, and Semma, a privately-held company focused on the use of stem cell-derived human islets as a potentially curative treatment for T1D. In the Exonics acquisition, we paid approximately $245.0 million upfront to Exonics equity holders and agreed to additional payments based upon successful achievement of specified development and regulatory milestones. In the Semma acquisition, we paid approximately $950.0 million in cash to Semma equity holders.DM1. We expect to continue to identify and evaluate potential acquisitions ~~that~~and may ~~be similar to~~include larger transactions or ~~different from the transactions that we have engaged in previously.~~

Both of our 2019 acquisitions were accounted for as business combinations. As of the acquisition date for each transaction, the cash payments, as well as the fair value of contingent consideration for Exonics, were allocated primarily to goodwill and the fair value of several in-process research and development assets that we acquired. The fair value of contingent consideration related to Exonics was recorded as a liability and will be adjusted on a quarterly basis in the future. As a result, these acquisitions are primarily reflected in additional assets and liabilities on our condensed consolidated balance sheet. Please refer to Note C, “Acquisitions,” and our critical accounting policies, “Acquisitions,” in our 2019 Annual Report on Form 10-K for further information regarding the significant judgments and estimates related to our 2019 acquisitions.later-stage assets.

Collaboration and Licensing Arrangements

We enter into arrangements with third parties, including collaboration and licensing arrangements, for the development, manufacture and commercialization of drugs, drug candidates and other technologies that have the potential to complement our ongoing research and development efforts. We expect to continue to identify and evaluate collaboration and licensing opportunities that may be similar to or different from the collaborations and licenses that we have engaged in previously.

In-License Agreements

We have entered into collaborations with biotechnology and pharmaceutical companies in order to acquire rights or to license drug candidates or technologies that enhance our pipeline and/or our research capabilities. Over the last several years, we entered into collaboration agreements with a number of companies, including Affinia Therapeutics, Inc., Arbor Biotechnologies, Inc., CRISPR, Kymera Therapeutics, Inc., Moderna, Inc., Molecular Templates, Inc., Obsidian, and ~~Molecular Templates,~~Skyhawk Therapeutics, Inc. Generally, when we in-license a technology or drug candidate, we make upfront payments to the collaborator, assume the costs of the program and/or agree to make contingent payments, which could consist of milestone, royalty and option payments. Most of these collaboration payments are expensed as research and development expenses; however, depending on many factors, including the structure of the collaboration, the significance of the in-licensed drug candidate ~~that we license~~ to the collaborator’s operations and the other activities in which our collaborators are engaged, the accounting for these transactions can vary significantly. In the first quarter of 2021 and 2020, ~~and the first quarter of 2019,~~

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our research and development expenses included ~~$36.3~~$1.7 million and ~~$5.3~~$36.3 million, respectively, related to upfront and milestones payments pursuant to our collaboration agreements.

Joint Development and Commercialization Agreement with CRISPR

In 2017, we entered into a joint development and commercialization agreement, or JDCA, with CRISPR pursuant to which we are co-developing and preparing to co-commercialize CTX001 for TDT and SCD. This JDCA was entered into following our exercise of an option to co-develop and co-commercialize the hemoglobinopathies program that was contained in the collaboration agreement that we entered into with CRISPR in 2015.

In April 2021, we and CRISPR entered into an amended and restated joint development and commercialization agreement, or A&R JDCA. Under the terms of the A&R JDCA, we will lead worldwide development, manufacturing and commercialization of CTX001. Additionally, 60% of the net profits and net losses for CTX001 will be allocated to us and

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40% of the net profits and net losses for CTX001 will be allocated to CRISPR. In connection with the closing of the transaction, we will pay a $900.0 million upfront payment to CRISPR and an additional one-time $200.0 million milestone payment upon regulatory approval of CTX001. The closing of the transaction contemplated by the A&R JDCA is subject to certain conditions including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and any other required antitrust clearance. We expect to record the $900.0 million upfront payment to “Research and development expenses” upon closing of the transaction contemplated by the A&R JDCA.

Out-License Agreements

We also have out-licensed internally developed programs to collaborators who are leading the development of these programs. These out-license arrangements include our ~~agreements~~agreement with ~~Janssen Pharmaceuticals, Inc., or Janssen, which is evaluating pimodivir in Phase 3 clinical trials for the treatment of influenza; and~~ Merck KGaA, Darmstadt, Germany, which licensed oncology research and development programs from us in early 2017. Pursuant to these out-licensing arrangements, our collaborators are responsible for the research, development and commercialization costs associated with these programs, and we are entitled to receive contingent milestone and/or royalty payments. As a result, we do not expect to incur significant expenses in connection with these programs and have the potential for future collaborative and royalty revenues resulting from these programs.

Please refer to Note C, “Collaborative Arrangements,” for further information regarding our in-license agreements and out-license agreements.

Strategic Investments

In connection with our business development activities, we have periodically made equity investments in our collaborators. As of March 31, ~~2020,~~2021, we held strategic equity investments in ~~several~~ public companies ~~including CRISPR,~~ and certain private companies, and we plan to make additional strategic equity investments in the future. While we invest the majority of our cash, cash equivalents and marketable securities in instruments that meet specific credit quality standards and limit our exposure to any one issue or type of instrument, our strategic investments are maintained and managed separately from our other cash, cash equivalents and marketable securities. Any changes in the fair value of equity investments with readily determinable fair values (including publicly traded ~~securities such as CRISPR)~~securities) are recorded to other income (expense), net in our condensed consolidated statement of operations. For equity investments without readily determinable fair values including equity investments in private companies, each reporting period we are required to re-evaluate the carrying value of the investment, which may result in other income (expense).

In the first quarter of ~~2020~~2021 and ~~the first quarter of 2019,~~2020, we recorded within other income (expense), ~~a net loss~~losses of ~~$44.9~~$52.3 million and ~~a net gain of $43.6~~$44.9 million, respectively, related to changes in the fair value of our strategic investments, and from sales of certain equity investments. As of March 31, 2021, the fair value of our investments in publicly traded companies was $143.5 million. To the extent that we continue to hold strategic investments, particularly strategic investments in publicly traded companies, we will record other income (expense) related to these strategic investments on a quarterly basis. Due to the increased volatility of the global markets, including as a result of COVID-19, and the high volatility of stocks in the biotechnology industry, we expect the value of these strategic investments to fluctuate and that the increases or decreases in the fair value of these strategic investments will continue to have material impacts on our net income (expense) and our profitability on a quarterly and/or annual basis.

Table of Contents

RESULTS OF OPERATIONS


	Three Months Ended March 31,					Increase/(Decrease)					Three Months Ended March 31,			Increase/(Decrease)
	2020			2019		$		%						2021		2020		$		%
	(in thousands)													(in thousands, except percentages and per share amounts)
Revenues	$	1,515,107		$	858,435	$	656,672	76	%	Revenues				$	1,724,305	$	1,515,107	$	209,198	14	%
Operating costs and expenses	794,883			581,627		213,256		37	%	Operating costs and expenses				836,479		794,883		41,596		5	%
Income from operations	720,224			276,808		443,416		160	%	Income from operations				887,826		720,224		167,602		23	%
Other non-operating (expense) income, net	(62,690		)	43,357		**		**
Other non-operating expense, net										Other non-operating expense, net				(66,866)		(62,690)		(4,176)		7	%
Provision for income taxes	54,781			51,534		3,247		6	%	Provision for income taxes				167,822		54,781		113,041		206	%
Net income	$	602,753		$	268,631	$	334,122	124	%	Net income				$	653,138	$	602,753	$	50,385	8	%

Net income per diluted common share	$	2.29		$	1.03					Net income per diluted common share		$	2.49	$	2.29
Diluted shares used in per share calculations	263,515			260,175						Diluted shares used in per share calculations				261,916		263,515

						** Not meaningful

Net Income

Our net income increased in the first quarter of ~~2020~~2021 as compared to the first quarter of ~~2019 due to significant increases in our revenues partially offset by increases in our operating expenses, non-operating expense and provision for income taxes. The increase in revenues was~~2020 primarily due to increased revenues resulting from the ~~U.S. approval~~uptake of KAFTRIO in Europe and continued performance of TRIKAFTA in the ~~fourth quarter of 2019. Increases in~~U.S. Our increased revenues were partially offset by increased operating costs and expenses, ~~were the~~primarily as a result of increased cost of sales consistent with increased product revenues, ~~increased investment in research~~ and ~~development and increased sales, general and administrative expenses to support our business. The change in non-operating (expense) income, net was primarily related to changes~~an increase in the ~~value~~provision for income taxes. The increase in our provision for income taxes was the result of our ~~strategic investments.~~

~~Earnings Per Share~~

~~Diluted net income per common share was $2.29~~increased profitability and a discrete tax benefit recognized in the first quarter of 2020 ~~as compared to diluted net income per common share of $1.03~~for which there was no corresponding benefit in the first quarter of ~~2019.~~2021.

Revenues


	Three Months Ended March 31,				Increase/(Decrease)						Three Months Ended March 31,	Increase/(Decrease)
	2020		2019		$			%				2021		2020		$		%
	(in thousands)											(in thousands, except percentages)
Product revenues, net	$	1,515,107	$	857,253	$	657,854		77	%	Product revenues, net		$	1,723,305	$	1,515,107	$	208,198	14	%
Collaborative and royalty revenues	—		1,182		(1,182		)	**
Other revenues										Other revenues		1,000		—		1,000		**
Total revenues	$	1,515,107	$	858,435	$	656,672		76	%	Total revenues		$	1,724,305	$	1,515,107	$	209,198	14	%

					** Not meaningful											** Not meaningful

Product Revenues, Net


											Three Months Ended March 31,	Increase/(Decrease)
	Three Months Ended March 31,				Increase/(Decrease)							2021		2020		$		%
	2020		2019		$			%				(in thousands, except percentages)
	(in thousands)
TRIKAFTA	$	895,233	$	—	$	895,233		**
TRIKAFTA/KAFTRIO										TRIKAFTA/KAFTRIO		$	1,193,217	$	895,233	$	297,984	33	%
SYMDEKO/SYMKEVI	173,159		320,275		(147,116		)	(46	)%	SYMDEKO/SYMKEVI		125,049		173,159		(48,110)		(28)	%
ORKAMBI	234,138		293,007		(58,869		)	(20	)%	ORKAMBI		218,697		234,138		(15,441)		(7)	%
KALYDECO	212,577		243,971		(31,394		)	(13	)%	KALYDECO		186,342		212,577		(26,235)		(12)	%
Total product revenues, net	$	1,515,107	$	857,253	$	657,854		77	%	Total product revenues, net		$	1,723,305	$	1,515,107	$	208,198	14	%

					** Not meaningful

In the first quarter of ~~2020,~~2021, our net product revenues increased by ~~$657.9~~$208.2 million as compared to the first quarter of ~~2019.~~2020. The increase in ~~total~~our net product revenues in the first quarter of ~~2020~~2021 was primarily due to the ~~launch~~uptake of ~~TRIKAFTA,~~KAFTRIO, which was approved in ~~the United States~~Europe in the ~~fourth~~third quarter of ~~2019.~~2020, and the continued performance of TRIKAFTA in the U.S. Decreases in revenues for our products other ~~products~~than TRIKAFTA/KAFTRIO were primarily the result of patients ~~in the United States~~ switching from these medicines to ~~TRIKAFTA partially offset by label expansions and expanded access to our medicines in ex-U.S markets.~~TRIKAFTA/KAFTRIO. In the first quarter of ~~2020~~2021 and ~~2019,~~2020, our net product revenues included

~~product revenues of $327.5~~ $469.9 million and ~~$217.4~~$327.5 million, respectively, from ex-U.S. markets. ~~Net product~~

Our other revenues were $1.0 million related to a collaborative milestone that we earned in the first quarter of 2020 were also positively impacted by factors that may not be repeated in future periods, including early prescription refills, advance purchasing of medicines and initial compliance and persistence rates of patients who recently initiated treatment with TRIKAFTA.

2021. We did not record any ~~collaborative and royalty~~other revenues in the first quarter of 2020. Our ~~collaborative and royalty revenues were $1.2 million in the first quarter of 2019. Our collaborative~~other revenues have historically fluctuated significantly from one period to another based on our collaborative out-license activities, and may continue to fluctuate in the future. Our

future royalty revenues will be dependent on if, and when, our collaborators ~~including Janssen and Merck KGaA, Darmstadt, Germany~~ are able to successfully develop drug candidates that we have out-licensed to them.

Operating Costs and Expenses

Our cost of sales primarily consists of third-party royalties payable on our net sales of our products as well as the cost of producing inventories that corresponded to product revenues for the reporting ~~period, plus the third-party royalties payable on our net sales of our products.~~period. Pursuant to our agreement with the Cystic Fibrosis Foundation, or CFF, our tiered third-party royalties on sales of ~~TRIKAFTA,~~TRIKAFTA/KAFTRIO, SYMDEKO/SYMKEVI, KALYDECO and ORKAMBI, calculated as a percentage of net sales, range from the single digits to the ~~sub-teens.~~sub-teens, with royalties on sales of TRIKAFTA/KAFTRIO slightly lower than for our other products. Over the last several years, our cost of sales has been increasing due to increased net product revenues. Our cost of sales as a percentage of our net product revenues was approximately 11% in each of the first quarter of ~~2019~~2021 and ~~2020.~~2020, respectively.

Research and Development Expenses

Our research and development expenses include internal and external costs incurred for research and development of our drugs and drug candidates and expenses related to certain technology that we acquire or license through business development transactions. We do not assign our internal costs, such as salary and benefits, stock-based compensation expense, laboratory supplies and other direct expenses and infrastructure costs, to individual drugs or drug candidates, because the employees within our research and development groups typically are deployed across multiple research and development programs. These internal costs are significantly greater than our external costs, such as the costs of services provided to us by clinical research organizations and other outsourced research, which we allocate by individual program. All research and development costs for our drugs and drug candidates are expensed as incurred.

Since January ~~2018,~~2019, we have incurred approximately ~~$3.6~~$4.0 billion in research and development expenses associated with drug discovery and development. The successful development of our drug candidates is highly uncertain and subject to a number of risks. In addition, the duration of clinical trials may vary substantially according to the type, complexity and novelty of the drug candidate and the disease indication being targeted. The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to

discontinuation or redirection of development activities. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a project and are difficult to predict. Therefore, accurate and meaningful estimates of the ultimate costs to bring our drug candidates to market are not available.

In ~~2019~~2020 and the first quarter of ~~2020,~~2021, costs related to our CF programs represented the largest portion of our development costs. Any estimates regarding development and regulatory timelines for our drug candidates are highly subjective and

subject to change. Until we have data from Phase 3 clinical trials, we cannot make a meaningful estimate regarding when, or if, a clinical development program will generate revenues and cash flows.

We expect to continue to invest in our research programs with a focus on ~~identifying drug candidates with the goal of~~ creating transformative medicines for serious diseases. Our research expenses ~~increased by 74%~~have historically fluctuated, and are expected to continue to fluctuate, from one period to another due to upfront and milestone payments related to our business development activities that are reflected in the ~~first quarter of 2020 compared to~~preceding table as collaborative payments. Our research expenses, excluding these collaborative payments, have been increasing over the ~~first quarter of 2019 primarily~~last several years as ~~a result of collaboration~~we have invested in our pipeline and ~~asset acquisition payments for which there were no similar expenses in the first quarter of 2019 as well as increased expenses to support~~expanded our cell and genetic therapy ~~programs.~~capabilities.

Development Expenses

Our development expenses increased by ~~17%~~12% in the first quarter of ~~2020~~2021 as compared to the first quarter of ~~2019,~~2020, primarily due to increased expenses related to our ~~advancing~~diversifying pipeline, including clinical trials, headcount and infrastructure costs. Upon closing of the transaction contemplated by the A&R JDCA, we expect to record our $900.0 million upfront payment to CRISPR as a development expense.

Sales, General and Administrative Expenses

Three Months Ended March 31, Increase/(Decrease)
2020 2019 $ %
(in thousands)
Sales, general and administrative expenses $ 182,258
$ 147,045
$ 35,213
24 %


	Three Months Ended March 31,	Increase/(Decrease)
		2021		2020		$		%
		(in thousands, except percentages)
Sales, general and administrative expenses		$	192,077	$	182,258	$	9,819	5	%

Sales, general and administrative expenses increased by ~~24%~~5% in the first quarter of ~~2020~~2021 as compared to the first quarter of ~~2019,~~2020, primarily due to ~~increased global support for our medicines and~~the incremental investment to support the ~~launch~~commercialization of our ~~triple combination regimen.~~

medicines and increased support for our CF pipeline products and other disease areas.

Contingent Consideration

~~In the first quarter of 2020, the increase in the~~The fair value of contingent consideration potentially payable to Exonics’ former equity holders ~~was $1.6 million. There were no similar amounts for~~decreased $3.9 million in the first quarter of ~~2019.~~2021 and increased $1.6 million in the first quarter of 2020.

Other Non-Operating Income (Expense), Net

Interest income decreased from ~~$15.6 million in the first quarter of 2019 to~~ $12.6 million in the first quarter of 2020 to $1.5 million in the first quarter of 2021 primarily due to a decrease in prevailing market interest ~~rates.~~rates despite an increase in our cash equivalents and available-for-sale debt securities. Our future interest income will be dependent on the amount of, and prevailing market interest rates on, our outstanding cash equivalents and ~~marketable~~available-for-sale debt securities.

Interest expense was $15.7 million in the first quarter of 2021 as compared to $14.1 million in the first quarter of ~~2020 as compared to $14.9 million in the first quarter of 2019.~~2020. The majority of our interest expense in these periods was related to imputed interest expense associated with our leased corporate headquarters in Boston. Our future interest expense will be dependent on whether, and to what extent, we borrow amounts under our credit ~~facility.~~facilities.

Other Income (Expense), Net

~~Other~~We recorded expenses of $52.7 million and $61.1 million to other income (expense), net ~~was an expense of $61.1 million~~ in the first quarter of 2021 and 2020, ~~as compared to income of $42.6 million in the first quarter of 2019.~~respectively. Our other income (expense), net in these periods iswas primarily related to changes in the fair value of our strategic ~~investments, as well as realized gains from sales of certain~~ investments. We expect that due to the volatility of the stock price of biotechnology companies, our other income (expense), net will fluctuate in future periods based on increases or decreases in the fair value of our strategic investments.

Our provision for income taxes ~~in the first quarter of 2020~~ was ~~$54.8~~$167.8 million ~~as compared to $51.5~~and $54.8 million in the first quarter of ~~2019.~~2021 and 2020, respectively. Our effective tax rate of 20% for the first quarter of 2021 was lower than the U.S. statutory rate primarily due to excess tax benefits related to stock-based compensation. Our effective tax rate of 8% for the first quarter of 2020 was lower than the U.S. statutory rate primarily due to a discrete benefit related to the write off of a long-term intercompany receivable and excess tax benefits related to stock-based compensation. Our effective tax rate for the first quarter of 2019 was lower than the U.S. statutory rate primarily due to excess tax benefits related to stock-based compensation. We released our valuation allowance on the majority of our net operating losses and other deferred tax assets in the fourth quarter of 2018. Starting in 2019, we began recording a provision for income taxes on our pre-tax income using an effective tax rate approximating statutory rates. Due to our ability to offset our pre-tax income against previously benefited net operating losses, we expect a portion of our tax provision to represent a non-cash expense until our net operating losses have been fully utilized.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes the components of our financial condition as of March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:

As of March 31, ~~2020,~~2021, total working capital was ~~$3.9~~$6.6 billion, which represented an increase of ~~$420~~$339 million from ~~$3.5~~$6.3 billion as of December 31, ~~2019.~~2020. The increase in total working capital in the first quarter of ~~2020~~2021 was primarily related to ~~$815.7~~$921.1 million of cash provided by operations partially offset by ~~$300.0~~$425.0 million of cash used to repurchase our common stock pursuant to our share repurchase program ~~that we announced in July 2019.~~and expenditures for property and equipment of $70.9 million.

Sources of Liquidity

As of March 31, ~~2020,~~2021, we had cash, cash equivalents and marketable securities of ~~$4.2~~$6.9 billion, which represented an increase of ~~$382~~$265.1 million from ~~$3.8~~$6.7 billion as of December 31, ~~2019.~~2020. We intend to rely on our existing cash, cash equivalents and marketable securities together with cash flows from product sales as our primary source of liquidity.

We may borrow up to ~~$500.0 million~~a total of $2.5 billion pursuant to ~~our~~two revolving credit ~~facility that we entered into in 2019.~~facilities. We may repay and reborrow amounts under ~~the~~these revolving credit ~~agreement~~agreements without penalty. Subject to certain conditions, we may request that the

borrowing capacity ~~under this~~for each of the credit ~~agreement~~agreements be increased by an additional $500.0 million, ~~up to~~for a total of ~~$1.0 billion.~~$3.5 billion collectively.

Other possible sources of future liquidity include commercial debt, public and private offerings of our equity and debt securities, strategic sales of assets or businesses and financial transactions. Negative covenants in our credit agreement may prohibit or limit our ability to access these sources of liquidity. As of March 31, 2021, we were in compliance with these covenants.

Future Capital Requirements

We have significant future capital requirements, including:

•significant expected operating expenses to conduct research and development activities and to operate our organization; and

•substantial facility and ~~capital~~finance lease ~~obligations, including leases for two buildings in Boston, Massachusetts that continue through 2028.~~obligations.

•We have entered into certain collaboration agreements with third parties that include the funding of certain research, development and commercialization ~~efforts with~~efforts. Certain of our business development transactions, including collaborations and acquisitions, include the potential for future milestone and royalty payments by us upon the achievement of pre-established developmental and regulatory targets and/or commercial ~~targets, and we~~targets. We may enter into additional business development transactions, including acquisitions, collaborations and equity investments, that require additional capital.

We have reached an agreement with the French government and will repay a portion of the amounts we have collected under the ORKAMBI early access programs in France to the French government in 2020 based on the difference between the invoiced amount and the final amount for ORKAMBI distributed through these programs as reflected in the structure of the agreement with the French government.

As•Upon closing of ~~March 31, 2020, $164.0~~the transaction contemplated by the A&R JDCA, we will pay a $900.0 million ~~remained available~~upfront payment to ~~fund repurchases under our share repurchase program.~~CRISPR.

We expect that cash flows from our products together with our current cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next twelve months and do not expect COVID-19 to have an adverse ~~affect~~effect on our liquidity. The adequacy of our available funds to meet our future operating and capital requirements will depend on many factors, including the amounts of future revenues generated by our products, and the potential introduction of one or more of our other drug candidates to the market, the level of our business development activities and the number, breadth, cost and prospects of our research and development programs.

We may raise additional capital by borrowing under credit agreements, through public offerings or private placements of our securities or securing new collaborative agreements or other methods of financing. We will continue to manage our capital structure and will consider all financing opportunities, whenever they may occur, that could strengthen our long-term liquidity profile. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all.

CONTRACTUAL COMMITMENTS AND OBLIGATIONS

Our commitments and obligations were reported in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, which was filed with the Securities and Exchange Commission, or SEC, on February ~~13, 2020. There~~11, 2021. Except for the following, there have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form ~~10-K.~~10-K:

•Upon closing of the transaction contemplated by the A&R JDCA, we will pay a $900.0 million upfront payment to CRISPR, and CRISPR may earn an additional one-time $200.0 million milestone payment upon receipt of the first marketing approval of CTX001 from the FDA or the European Commission.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the ~~United States.~~U.S. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are reflected in reported results for the period in which the change occurs. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. During the three months ended March 31, ~~2020,~~2021, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, which was filed with the SEC on February ~~13, 2020.~~11, 2021.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements, please refer to Note A, “Basis of Presentation and Accounting Policies.”

Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~As part~~Information required by this item is incorporated by reference from the discussion in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our investment portfolio, we own financial instruments that are sensitive to market risks. The investment portfolio is used to preserve our capital until it is required to fund operations, including our research and development activities. None of these market risk-sensitive instruments are held for trading purposes. We do not have derivative financial instruments in our investment portfolio.

We invest our cash in a variety of financial instruments, principally securities issued by the U.S. government and its agencies, investment-grade corporate bonds and commercial paper, and money market funds. These investments are denominated in U.S. Dollars. All of our interest-bearing securities are subject to interest rate risk and could decline in value if interest rates fluctuate. Substantially all of our investment portfolio consists of marketable securities with active secondary or resale markets to help ensure portfolio liquidity, and we have implemented guidelines limiting the term-to-maturity of our investment instruments. Due to the conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk. If interest rates were to increase or decrease by 1%, the fair value of our investment portfolio would increase or decrease by an immaterial amount.

In 2019, we entered into a credit agreement. Loans under the credit agreement bear interest, at our option, at either a base rate or a Eurocurrency rate, in each case plus an applicable margin. The applicable marginAnnual Report on base rate loans ranges from 0.125% to 0.50% and the applicable margin on Eurocurrency loans ranges from 1.125% to 1.50%, in each case, based on our consolidated leverage ratio (the ratio of our total consolidated funded indebtedness to our consolidated EBITDAForm 10-K for the most recently completed four fiscal quarter period). We do not believe that changes in interest rates related to the credit agreement would have a material effect on our financial statements. As of Marchyear ended December 31, 2020, ~~we had no principal or interest outstanding. A portion of our “Interest expense” in 2020 will be dependent on whether, and to what extent, we borrow amounts under the existing facility.~~

As a result of our foreign operations, we face exposure to movements in foreign currency exchange rates, primarily the Euro and British Pound against the U.S. Dollar. The current exposures arise primarily from cash, accounts receivable,

intercompany receivables and payables, payables and accruals and inventories. Both positive and negative effects to our net revenues from international product sales from movements in exchange rates are partially mitigated by the natural, opposite effect that exchange rates have on our international operating costs and expenses.

~~We have a foreign currency management program~~which was filed with the ~~objective of reducing the effect of exchange rate fluctuations~~SEC on our operating results and forecasted revenues and expenses denominated in foreign currencies. We currently have cash flow hedges for the Euro, British Pound, Canadian Dollar and Australian Dollar related to a portion of our forecasted product revenues that qualify for hedge accounting treatment under U.S. GAAP. We do not seek hedge accounting treatment for our foreign currency forward contracts related to monetary assets and liabilities that impact our operating results. As of March 31, 2020, we held foreign exchange forward contracts that were designated as cash flow hedges with notional amounts totaling $827.0 million and had a net fair value of $26.1 million recorded on our condensed consolidated balance sheet.February 11, 2021.

Although not predictive in nature, we believe a hypothetical 10% threshold reflects a reasonably possible near-term change in exchange rates. Assuming that the March 31, 2020 exchange rates were to change by a hypothetical 10%, the fair value recorded on our condensed consolidated balance sheet related to our foreign exchange forward contracts that were designated as cash flow hedges as of March 31, 2020 would change by approximately $82.7 million. However, since these contracts hedge a specific portion of our forecasted product revenues denominated in certain foreign currencies, any change in the fair value of these contracts is recorded in “Accumulated other comprehensive income (loss) ” on our condensed consolidated balance sheet and is reclassified to earnings in the same periods during which the underlying product revenues affect earnings. Therefore, any change in the fair value of these contracts that would result from a hypothetical 10% change in exchange rates would be entirely offset by the change in value associated with the underlying hedged product revenues resulting in no impact on our future anticipated earnings and cash flows with respect to the hedged portion of our forecasted product revenues.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management (under the supervision and with the participation of our chief executive officer and chief financial officer), after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q, has concluded that, based on such evaluation, as of March 31, ~~2020~~2021 our disclosure controls and procedures were effective and designed to provide reasonable assurance that the information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Controls Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the three months ended March 31, ~~2020~~2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

We are not currently subject to any material legal proceedings.

Item 1A. Risk Factors

Information regarding risk factors appears in Part I, Item 1A1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, which was filed with the SEC on February ~~13, 2020.~~11, 2021. There have been no material changes from the risk factors previously disclosed in the Annual Report on Form ~~10-K, except as noted below.~~

Our operations expose us to risks associated with the spread of COVID-19, which has affected the regions in which we conduct our operations and distribute medicines to patients. COVID-19 has broadly affected the global economy, resulted in significant travel and work restrictions in many regions and has put a significant strain on healthcare resources. COVID-19 is having, and we expect it will continue to have, an impact on our operations and an impact on the operations of our collaborators, third-party contractors and other entities, including governments, governmental agencies and payors, with which we interact. To date, the most significant effects on our business have been delays in certain research and development activities and the requirement that a majority of our employees work remotely. In the future, the economic impacts of the COVID-19 outbreak could affect our business directly or indirectly, including potentially affecting the net prices for our products through changes in our payor mix as a result of increased unemployment in the United States or increased pressure on healthcare costs. The effects on our research, development, manufacturing and commercialization activities, will be dependent on, among other things, the severity and duration of the COVID-19 outbreak as well as the impact of the outbreak on our third-party manufacturers, suppliers, distributors, subcontractors and customers. While the ultimate impact of COVID-19 on our business is highly uncertain, any negative impacts that materialize could materially adversely affect our operations, financial performance and stock price. Any negative impacts of COVID-19, alone or in combination with others, could exacerbate risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. The full extent to which the COVID-19 outbreak will negatively affect our operations, financial performance and stock price will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the outbreak and actions taken by governmental authorities and other third parties in response to the outbreak.10-K.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and, in particular, our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Part ~~I-Item~~I, Item 2, contain ~~or incorporate~~ a number of forward-looking statements. Forward-looking statements ~~within the meaning~~are not purely historical and may be accompanied by words such as “anticipates,” “may,” “forecasts,” “expects,” “intends,” “plans,” “potentially,” “believes,” “seeks,” “estimates,” and other words and terms of ~~Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including~~similar meaning. Such statements ~~regarding:~~may relate to:

•our expectations regarding the amount of, timing of, and trends with respect to our financial performance, including revenues, costs and expenses and other gains and losses, including those related to net product revenues;

•our expectations regarding the effect of COVID-19 on, among other things, our financial performance, liquidity, business and ~~operations;~~operations, including manufacturing, supply chain, research and development activities and pipeline programs;

•our expectations regarding clinical trials, development timelines, ~~and~~ regulatory authority filings, submissions and ~~submissions~~potential approvals and label expansions for ivacaftor, lumacaftor, tezacaftor, elexacaftor, and ~~the timelines for regulatory filings for our triple~~any combination regimen;

•our ability to obtain reimbursement for our medicines in the U.S. and ex-U.S. markets and our ability to ~~otherwise successfully~~launch, commercialize and market our medicines or any of our other drug candidates for which we obtain regulatory approval;

•our expectations regarding the timing and structure of clinical trials of our drugs, ~~and~~ drug candidates and other pipeline programs and the expected timing of our receipt of data from our ongoing and planned clinical trials;

•the data that will be generated by ongoing and planned clinical trials and the ability to use that data to advance compounds, continue development or support regulatory filings;

•our beliefs regarding the support provided by clinical trials and preclinical and nonclinical studies of our drug candidates and other pipeline programs for further investigation, clinical trials or potential use as a treatment;

•our beliefs regarding the number of people with CF and those potentially eligible for our medicines;

•our expectations regarding the potential benefits and commercial potential of our product candidates, including the potential approach to treating specific diseases;

•our plan to continue investing in our research and development programs, including anticipated timelines for our programs, and our strategy to develop our ~~drug candidates,~~pipeline programs, alone or with third party-collaborators;

•the potential future benefits of our acquisitions and ~~collaborations;~~collaborations, including our CTX001 collaboration with CRISPR;

•the establishment, development and maintenance of collaborative ~~relationships;~~relationships, including potential milestone payments or other obligations;

•potential business development ~~activities;~~activities, including the identification of potential collaborative partners or acquisition targets;

•the timing of the potential closing of the transaction contemplated by the A&R JDCA, including satisfaction of closing conditions, and the future activities of the parties pursuant to the A&R JDCA;

•our expectation that we will record the $900.0 million upfront payment to CRISPR as a research and development expense upon the closing of the transaction contemplated by the A&R JDCA;

•potential fluctuations in foreign currency exchange rates;

•our expectations regarding our provision for or benefit from income taxes and the utilization of our deferred tax assets, including the impact of the Coronavirus Aid, Relief and Economic Security Act;

•our ability to use our research programs to identify and develop new drug candidates to address serious diseases and significant unmet medical needs; and

•our liquidity and our expectations regarding the possibility of raising additional capital.

~~Any~~Forward-looking statements are subject to certain risks, uncertainties, or ~~all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out~~other factors that are difficult to ~~be wrong. They can be affected by inaccurate assumptions~~predict and could cause actual events or by known or unknown risks and uncertainties. Many factors mentioned in this Quarterly Report on Form 10-Q will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results ~~may vary~~to differ materially from ~~expected results. We also provide a cautionary discussion of~~those indicated in any such statements.These risks, uncertainties, and ~~uncertainties under~~other factors include, but are not limited to, those described in our “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, which was filed with the SEC on February ~~13, 2020. These are factors~~11, 2021, and ~~uncertainties that we think could cause~~those described from time to time in our ~~actual results to differ materially from expected results. Other factors~~future reports filed with the Securities and ~~uncertainties besides those listed there could also adversely affect us.~~Exchange Commission.

Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “intends,” “expects” and similar expressions are intended to identify forward-looking statements. There are a number of factors and uncertainties that could cause actual events or results to differ materially from those indicated byAny such forward-looking statements ~~many~~are made on the basis of ~~which are beyond~~ our ~~control. In addition, the forward-looking statements contained herein represent our estimate only~~views and assumptions as of the date of ~~this~~the filing and ~~should~~are not ~~be relied upon~~estimates of future performance. Except as ~~representing our estimate as of any subsequent date. While~~required by law, we ~~may elect to update these forward-looking statements at some point in the future, we specifically disclaim any~~undertake no obligation to ~~do so~~publicly update any forward-looking statements. The reader is cautioned not to ~~reflect actual results, changes in assumptions or changes in other factors affecting~~place undue reliance on any such ~~forward-looking~~ statements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Repurchases of Equity Securities

In ~~July 2019, we~~November 2020, our Board of Directors approved a share repurchase program (the ~~“2019~~“2020 Share Repurchase Program”), pursuant to which we ~~are~~were authorized to repurchase up to $500.0 million of our common stock ~~between August 1, 2019 and~~by December 31, ~~2020.~~2022. As of March 31, 2021, we had repurchased the entire $500.0 million of common stock that was authorized under the 2020 Share Repurchase Program. The table set forth below shows repurchases of securities by us during the three months ended March 31, ~~2020, including shares repurchased~~2021 under our ~~2019~~2020 Share Repurchase Program.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1)
January 1, 2021 to January 31, 2021	—	$	—	—	$	424,912,410
February 1, 2021 to February 28, 2021	1,988,941	$	213.64	1,988,941	$	—
March 1, 2021 to March 31, 2021	—	$	—	—	$	—
Total	1,988,941	$	213.64	1,988,941	$	—

Item 5. Other Information

On April 28, 2020, our board of directors amended and restated our by-laws to permit the holding of virtual meetings of shareholders on an online platform. The foregoing description is qualified by reference to our amended and restated by-laws, which are filed as Exhibit 3.2 to this Quarterly Report on Form 10-Q.

~~On April 28, 2020,~~As previously announced, Paul Silva, our Senior Vice President and ~~Corporate Controller and our Principal~~Chief Accounting Officer, ~~informed us he plans to retire~~retired from the Company on April 30, 2021.

Effective May 1, 2021, Kristen Ambrose, 45, will become our Chief Accounting Officer. Ms. Ambrose has been our Senior Vice President, Accounting, Tax, Treasury, Strategic Sourcing and Corporate Services since March 2021. From February 2003 until she joined the Company, Ms. Ambrose held roles of increasing responsibility at Boston Scientific Corporation, a medical device company, most recently as Vice President of Finance and Controller of the Global Endoscopy Division from July 2019 to March 2021 and as Vice President of Global Internal Audit from February 2017 to June 2019.

Table of Contents

Prior to Boston Scientific Corporation, Ms. Ambrose served as an accountant at Ernst & Young LLP. She received her B.S. from the University of Virginia and is a Certified Public Accountant.

Item 6. Exhibits



Exhibit Number		Exhibit Description
~~3.2~~		~~Amended and Restated By-Laws of Vertex Pharmaceuticals Incorporated.~~
~~10.1~~31.1		~~Employment Agreement, dated as of April 1, 2020, between Vertex Pharmaceuticals Incorporated and Dr. Jeffrey M. Leiden~~ (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 1, 2020).*
~~31.1~~	Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer and the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation
101.LAB		XBRL Taxonomy Extension Labels
101.PRE		XBRL Taxonomy Extension Presentation
101.DEF		XBRL Taxonomy Extension Definition
104		* Management contract, compensatory plan or agreement.Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

3836

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Vertex Pharmaceuticals Incorporated

		~~Vertex Pharmaceuticals Incorporated~~

~~May 1, 2020~~April 30, 2021	By:		/s/ Charles F. Wagner, Jr.
				Charles F. Wagner, Jr.
				Executive Vice President, Chief Financial Officer (principal financial officer and duly authorized officer)

3937



	Fair Value Measurements as of March 31, 2020
				Fair Value Hierarchy
	Total			Level 1		Level 2			Level 3
	(in thousands)
Financial instruments carried at fair value (asset positions):
Cash equivalents:
Money market funds	$	1,736,913		$	1,736,913	$	—		$	—
Commercial paper	30,700			—		30,700			—
Marketable securities:
Corporate equity securities	165,178			145,465		19,713			—
Government-sponsored enterprise securities	7,791			7,791		—			—
Corporate debt securities	305,051			—		305,051			—
Commercial paper	118,964			—		118,964			—
Prepaid expenses and other current assets:
Foreign currency forward contracts	25,434			—		25,434			—
Other assets:
Foreign currency forward contracts	1,798			—		1,798			—
Total financial assets	$	2,391,829		$	1,890,169	$	501,660		$	—
Financial instruments carried at fair value (liability positions):
Other current liabilities:
Foreign currency forward contracts	$	(459	)	$	—	$	(459	)	$	—
Long-term contingent consideration	(178,100		)	—		—			(178,100		)
Other long-term liabilities:
Foreign currency forward contracts	(637		)	—		(637		)	—
Total financial liabilities	$	(179,196	)	$	—	$	(1,096	)	$	(178,100	)



	Three Months Ended March 31, 2020
	(in thousands)
Balance at December 31, 2019	$	176,500
Increase in fair value of contingent payments	1,600
Balance at March 31, 2020	$	178,100



	As of March 31, 2020		As of December 31, 2019
	(in thousands)
Cash and cash equivalents	$	1,767,613	$	826,581
Marketable securities	431,806		416,888
Total	$	2,199,419	$	1,243,469



	As of March 31, 2020
	Unrecognized Expense		Weighted-average Recognition Period
	(in thousands)		(in years)
Type of award:
Restricted stock and restricted stock units (including PSUs)	$	550,095	2.27
Stock options	$	109,086	2.33
ESPP share issuances	$	2,238	0.40



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted-average Remaining Contractual Life	Weighted-average Exercise Price		Number Exercisable	Weighted-average Exercise Price
	(in thousands)	(in years)	(per share)		(in thousands)	(per share)
$29.07–$40.00	81	1.47	$	37.70	81	$	37.70
$40.01–$60.00	224	2.41	$	49.15	224	$	49.15
$60.01–$80.00	116	4.03	$	74.89	112	$	74.89
$80.01–$100.00	1,393	5.99	$	89.44	1,085	$	90.01
$100.01–$120.00	182	4.88	$	109.25	180	$	109.18
$120.01–$140.00	402	5.44	$	129.59	400	$	129.61
$140.01–$160.00	954	7.86	$	155.50	436	$	155.41
$160.01–$180.00	669	8.24	$	168.21	245	$	165.11
$180.01–$189.38	1,498	8.65	$	185.44	440	$	185.31
Total	5,519	6.98	$	137.34	3,203	$	119.05