Vertex Pharmaceuticals
VERTEX PHARMACEUTICALS INC / MA (Form: 10-Q, Received: 08/04/2015 16:27:13)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                 TO               
Commission file number 000-19319
____________________________________________
Vertex Pharmaceuticals Incorporated
(Exact name of registrant as specified in its charter)
Massachusetts
04-3039129
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
50 Northern Avenue, Boston, Massachusetts
02210
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (617) 341-6100
____________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o  
Smaller reporting company  o
 
                                       (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No  x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01 per share
244,655,527
Class
Outstanding at July 24, 2015

 


Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2015

TABLE OF CONTENTS
 
 
Page
 
 
 
Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2015 and 2014
 
Condensed Consolidated Statements of Comprehensive Loss - Three and Six Months Ended June 30, 2015 and 2014
 
Condensed Consolidated Balance Sheets - June 30, 2015 and December 31, 2014
 
Condensed Consolidated Statements of Shareholders' Equity and Noncontrolling Interest - Six Months Ended June 30, 2015 and 2014
 
Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2015 and 2014
 
 
 
“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®” and “ORKAMBI™” are registered trademarks of Vertex. Other brands, names and trademarks contained in this Quarterly Report on Form 10-Q are the property of their respective owners.



Table of Contents

Part I. Financial Information
Item 1.    Financial Statements
VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Product revenues, net
$
160,388

 
$
122,319

 
$
291,263

 
$
225,780

Royalty revenues
5,077

 
13,015

 
11,869

 
23,748

Collaborative revenues
611

 
3,087

 
1,453

 
7,344

Total revenues
166,076

 
138,421

 
304,585

 
256,872

Costs and expenses:
 
 
 
 
 
 
 
Cost of product revenues
15,409

 
9,655

 
24,790

 
18,227

Royalty expenses
1,451

 
7,645

 
4,377

 
14,549

Research and development expenses
223,858

 
224,487

 
439,457

 
463,104

Sales, general and administrative expenses
94,394

 
77,446

 
180,254

 
151,658

Restructuring expenses (income)
2,128

 
(270
)
 
(1,144
)
 
5,918

Total costs and expenses
337,240

 
318,963

 
647,734

 
653,456

Loss from operations
(171,164
)
 
(180,542
)
 
(343,149
)
 
(396,584
)
Interest expense, net
(21,111
)
 
(15,585
)
 
(42,418
)
 
(31,302
)
Other income (expenses), net
1,414

 
37,731

 
(3,699
)
 
38,182

Loss from continuing operations before provision for income taxes
(190,861
)
 
(158,396
)
 
(389,266
)
 
(389,704
)
Provision for income taxes
30,131

 
693

 
30,430

 
1,496

Loss from continuing operations
(220,992
)
 
(159,089
)
 
(419,696
)
 
(391,200
)
Loss from discontinued operations, net of tax benefit of $0

 
(293
)
 

 
(639
)
Net loss
(220,992
)
 
(159,382
)
 
(419,696
)
 
(391,839
)
Loss attributable to noncontrolling interest
32,144

 

 
32,242

 

Net loss attributable to Vertex
$
(188,848
)
 
$
(159,382
)
 
$
(387,454
)
 
$
(391,839
)
 
 
 
 
 
 
 
 
Amounts attributable to Vertex:
 
 
 
 
 
 
 
Loss from continuing operations
(188,848
)
 
(159,089
)
 
(387,454
)
 
(391,200
)
Loss from discontinued operations

 
(293
)
 

 
(639
)
Net loss attributable to Vertex
(188,848
)
 
(159,382
)
 
(387,454
)
 
(391,839
)
 
 
 
 
 
 
 
 
Amounts per share attributable to Vertex common shareholders:
 
 
 
 
 
 
 
Net loss from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.78
)
 
$
(0.68
)
 
$
(1.61
)
 
$
(1.68
)
Diluted
$
(0.78
)
 
$
(0.68
)
 
$
(1.61
)
 
$
(1.68
)
Net loss from discontinued operations:
 
 
 
 
 
 
 
Basic
$

 
$

 
$

 
$

Diluted
$

 
$

 
$

 
$

Net loss:
 
 
 
 
 
 
 
Basic
$
(0.78
)
 
$
(0.68
)
 
$
(1.61
)
 
$
(1.68
)
Diluted
$
(0.78
)
 
$
(0.68
)
 
$
(1.61
)
 
$
(1.68
)
Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
240,757

 
233,808

 
240,129

 
233,353

Diluted
240,757

 
233,808

 
240,129

 
233,353

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


2

Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Comprehensive Loss
(unaudited)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(220,992
)
 
$
(159,382
)
 
$
(419,696
)
 
$
(391,839
)
Changes in other comprehensive loss:
 
 
 
 
 
 
 
Unrealized holding (losses) gains on marketable securities
(46
)
 
82

 
130

 
55

Unrealized losses on foreign currency forward contracts
(4,280
)
 
(89
)
 
(3,974
)
 
(125
)
Foreign currency translation adjustment
1,828

 
281

 
1,220

 
353

Total changes in other comprehensive loss
(2,498
)
 
274

 
(2,624
)
 
283

Comprehensive loss
(223,490
)
 
(159,108
)
 
(422,320
)
 
(391,556
)
Comprehensive loss attributable to noncontrolling interest
32,144

 

 
32,242

 

Comprehensive loss attributable to Vertex
$
(191,346
)
 
$
(159,108
)
 
$
(390,078
)
 
$
(391,556
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


3

Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
 
June 30,
 
December 31,
 
2015
 
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
870,543

 
$
625,259

Marketable securities, available for sale
145,907

 
761,847

Restricted cash and cash equivalents (VIE)
88,318

 
8,418

Accounts receivable, net
94,519

 
75,964

Inventories
42,113

 
30,848

Prepaid expenses and other current assets
53,289

 
44,175

Total current assets
1,294,689

 
1,546,511

Property and equipment, net
713,378

 
715,812

Intangible assets
284,340

 
29,000

Goodwill
50,384

 
39,915

Restricted cash
22,146

 
176

Other assets
9,136

 
3,265

Total assets
$
2,374,073

 
$
2,334,679

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
72,703

 
$
71,194

Accrued expenses
206,030

 
209,676

Deferred revenues, current portion
14,930

 
17,468

Accrued restructuring expenses, current portion
10,166

 
33,107

Capital lease obligations, current portion
13,921

 
17,806

Senior secured term loan, current portion
42,873

 
14,206

Other liabilities, current portion
13,200

 
4,797

Total current liabilities
373,823

 
368,254

Deferred revenues, excluding current portion
21,019

 
27,808

Accrued restructuring expenses, excluding current portion
9,677

 
12,748

Capital lease obligations, excluding current portion
42,900

 
39,293

Deferred tax liability
112,413

 
15,044

Fan Pier lease obligation, excluding current portion
472,834

 
473,073

Senior secured term loan, excluding current portion
251,939

 
280,569

Other liabilities, excluding current portion
41,252

 
21,707

Total liabilities
1,325,857

 
1,238,496

Commitments and contingencies


 


Shareholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding at June 30, 2015 and December 31, 2014

 

Common stock, $0.01 par value; 500,000,000 and 300,000,000 shares authorized at June 30, 2015 and December 31, 2014, respectively; 244,341,701 and 241,764,398 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively
2,406

 
2,385

Additional paid-in capital
5,987,169

 
5,777,154

Accumulated other comprehensive (loss) income
(1,707
)
 
917

Accumulated deficit
(5,092,904
)
 
(4,705,450
)
Total Vertex shareholders' equity
894,964

 
1,075,006

Noncontrolling interest
153,252

 
21,177

Total shareholders’ equity
1,048,216

 
1,096,183

Total liabilities and shareholders’ equity
$
2,374,073

 
$
2,334,679

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


4

Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Shareholders’ Equity and Noncontrolling Interest
(unaudited)
(in thousands)
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total Vertex
Shareholders’ Equity
 
Noncontrolling
Interest
 
Total
Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2013
233,789

 
$
2,320

 
$
5,321,286

 
$
(306
)
 
$
(3,966,895
)
 
$
1,356,405

 
$

 
$
1,356,405

Other comprehensive income, net of tax
 
 
 
 
 
 
283

 
 
 
283

 
 
 
283

Net loss
 
 
 
 
 
 
 
 
(391,839
)
 
(391,839
)
 

 
(391,839
)
Issuance of common stock under benefit plans
3,542

 
27

 
117,920

 
 
 
 
 
117,947

 
 
 
117,947

Stock-based compensation
 
 
 
 
89,473

 
 
 
 
 
89,473

 
 
 
89,473

Balance at June 30, 2014
237,331

 
$
2,347

 
$
5,528,679

 
$
(23
)
 
$
(4,358,734
)
 
$
1,172,269

 
$

 
$
1,172,269

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
241,764

 
$
2,385

 
$
5,777,154

 
$
917

 
$
(4,705,450
)
 
$
1,075,006

 
$
21,177

 
$
1,096,183

Other comprehensive loss, net of tax
 
 
 
 
 
 
(2,624
)
 
 
 
(2,624
)
 
 
 
(2,624
)
Net loss
 
 
 
 
 
 
 
 
(387,454
)
 
(387,454
)
 
(32,242
)
 
(419,696
)
Issuance of common stock under benefit plans
2,578

 
21

 
87,333

 
 
 
 
 
87,354

 
 
 
87,354

Stock-based compensation
 
 
 
 
122,682

 
 
 
 
 
122,682

 
 
 
122,682

Noncontrolling interest upon consolidation
 
 
 
 
 
 
 
 
 
 

 
164,317

 
164,317

Balance at June 30, 2015
244,342

 
$
2,406

 
$
5,987,169

 
$
(1,707
)
 
$
(5,092,904
)
 
$
894,964

 
$
153,252

 
$
1,048,216

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


5

Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(419,696
)
 
$
(391,839
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization expense
30,428

 
29,960

Stock-based compensation expense
120,645

 
89,024

Deferred income taxes
6,346

 

Other non-cash items, net
6,045

 
22

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(21,197
)
 
2,518

Inventories
(9,426
)
 
1,194

Prepaid expenses and other assets
(15,397
)
 
(17,538
)
Accounts payable
(3,033
)
 
7,671

Accrued expenses and other liabilities
38,206

 
(9,459
)
Accrued restructuring expense
(26,012
)
 
(9,369
)
Deferred revenues
(9,303
)
 
(5,866
)
Net cash used in operating activities
(302,394
)
 
(303,682
)
Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(125,655
)
 
(703,977
)
Sales and maturities of marketable securities
741,725

 
801,206

Payment for acquisition of variable interest entity
(80,000
)
 

Expenditures for property and equipment
(23,978
)
 
(27,227
)
(Increase) decrease in restricted cash and cash equivalents
(21,975
)
 
1

Decrease in restricted cash and cash equivalents (VIE)
2,277

 

Decrease (increase) in other assets
87

 
(528
)
Net cash provided by investing activities
492,481

 
69,475

Cash flows from financing activities:
 
 
 
Issuances of common stock under benefit plans
87,850

 
117,947

Payments on capital lease obligations
(14,441
)
 
(11,884
)
Proceeds from capital lease financing
13,386

 

Payments on Fan Pier lease obligation
(30,292
)
 
(30,292
)
Payments returned related to Fan Pier lease obligation

 
8,050

Net cash provided by financing activities
56,503

 
83,821

Effect of changes in exchange rates on cash
(1,306
)
 
1,645

Net increase (decrease) in cash and cash equivalents
245,284

 
(148,741
)
Cash and cash equivalents—beginning of period
625,259

 
569,299

Cash and cash equivalents—end of period
$
870,543

 
$
420,558

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
12,777

 
$
31,933

Cash paid for income taxes
$
1,022

 
$
798

Capitalization of costs related to Fan Pier lease obligation
$

 
$
25,564

Assets acquired under capital lease
$

 
$
8,985

Issuances of common stock exercises from employee benefit plans receivable
$
166

 
$

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

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


A. Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Vertex Pharmaceuticals Incorporated ("Vertex" or the "Company") in accordance with accounting principles generally accepted in the United States of America ("GAAP").
The condensed consolidated financial statements reflect the operations of (i) the Company, (ii) its wholly-owned subsidiaries and (iii) consolidated variable interest entities (VIEs). All material intercompany balances and transactions have been eliminated. The Company operates in one segment, pharmaceuticals.

Certain information and footnote disclosures normally included in the Company's annual financial statements 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 June 30, 2015 and 2014 .
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, 2014 , which are contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 that was filed with the Securities and Exchange Commission (the “SEC”) on February 13, 2015 (the "2014 Annual Report on Form 10-K").
Use of Estimates and Summary of Significant Accounting Policies
The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the amounts of revenues and expenses during the reported periods. Significant estimates in these condensed consolidated financial statements have been made in connection with the calculation of revenues, inventories, research and development expenses, stock-based compensation expense, restructuring expense, the fair value of intangible assets, goodwill, noncontrolling interest, the consolidation of VIEs, leases and the provision for or benefit from income taxes. The Company bases its estimates on historical experience and various other assumptions, including in certain circumstances future projections that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
The Company's significant accounting policies are described in Note A, "Nature of Business and Accounting Policies," in the 2014 Annual Report on Form 10-K.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements please refer to Note A, “Nature of Business and Accounting Policies—Recent Accounting Pronouncements,” in the 2014 Annual Report on Form 10-K. The Company did not adopt any new accounting pronouncements during the six months ended June 30, 2015 that had a material effect on its condensed consolidated financial statements.
B.
Product Revenues, Net
The Company sells its products principally to a limited number of specialty pharmacy providers and selected regional wholesalers in North America as well as government-owned and supported customers in international markets (collectively, its “Customers”). The Company's Customers in North America subsequently resell the products to patients and health care providers. The Company recognizes net revenues from product sales upon delivery to the Customer as long as (i) there is persuasive evidence that an arrangement exists between the Company and the Customer, (ii) collectibility is reasonably assured and (iii) the price is fixed or determinable.


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

In order to conclude that the price is fixed or determinable, the Company must be able to (i) calculate its gross product revenues from sales to Customers and (ii) reasonably estimate its net product revenues upon delivery to its Customer's locations. The Company calculates gross product revenues based on the price that the Company charges its Customers. The Company estimates its net product revenues by deducting from its gross product revenues (a) trade allowances, such as invoice discounts for prompt payment and Customer fees, (b) estimated government and private payor rebates, chargebacks and discounts, (c) estimated reserves for expected product returns and (d) estimated costs of incentives offered to certain indirect customers, including patients. The Company makes significant estimates and judgments that materially affect the Company's recognition of net product revenues. In certain instances, the Company may be unable to reasonably conclude that the price is fixed or determinable at the time of delivery, in which case it defers the recognition of revenues. Once the Company is able to determine that the price is fixed or determinable, it recognizes the revenues associated with the units in which revenue recognition was deferred.
The following table summarizes activity in each of the product revenue allowance and reserve categories for the six months ended June 30, 2015 :
 
Trade
Allowances
 
Rebates,
Chargebacks
and Discounts
 
Product
Returns
 
Other
Incentives
 
Total
 
(in thousands)
Balance at December 31, 2014
$
1,463

 
$
29,102

 
$
4,713

 
$
745

 
$
36,023

Provision related to current period sales
2,865

 
20,305

 
181

 
1,251

 
24,602

Adjustments related to prior period sales
(86
)
 
(5,958
)
 
(975
)
 
(235
)
 
(7,254
)
Credits/payments made
(2,985
)
 
(13,654
)
 
(3,194
)
 
(1,105
)
 
(20,938
)
Balance at June 30, 2015
$
1,257

 
$
29,795

 
$
725

 
$
656

 
$
32,433

C.
Collaborative Arrangements
Cystic Fibrosis Foundation Therapeutics Incorporated
In April 2011, the Company entered into an amendment (the “April 2011 Amendment”) to its existing collaboration agreement with Cystic Fibrosis Foundation Therapeutics Incorporated (“CFFT”) pursuant to which CFFT agreed to provide financial support for (i) development activities for VX-661, a compound that targets the processing and trafficking defect of the F508del CFTR proteins discovered under the collaboration, and (ii) additional research and development activities directed at discovering new compounds targeting the processing and trafficking defect of the F508del protein.
Under the April 2011 Amendment, CFFT agreed to provide the Company with up to $75.0 million in funding over approximately five years for research and development activities. The Company retains the right to develop and commercialize KALYDECO (ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor), lumacaftor, VX-661 and any other compounds discovered during the course of the research collaboration with CFFT. The Company recognized no collaborative revenues from this collaboration during the three and six months ended June 30, 2015 and $1.6 million and $4.5 million of collaborative revenues from this collaboration during the three and six months ended June 30, 2014 , respectively.
In the original agreement, as amended prior to the April 2011 Amendment, the Company agreed to pay CFFT tiered royalties calculated as a percentage, ranging from single digits to sub-teens, of annual net sales of any approved drugs discovered during the research term that ended in 2008, including KALYDECO, ORKAMBI, lumacaftor and VX-661. The April 2011 Amendment provides for a tiered royalty in the same range on net sales of compounds targeting the processing and trafficking defect of F508del CFTR proteins discovered during the research term that began in 2011 and ended in February 2014. In each of the third quarter of 2012 and the first quarter of 2013, CFFT earned a commercial milestone payment of $9.3 million from the Company upon achievement of certain sales levels for KALYDECO. These milestones were reflected in the Company's cost of product revenues. There are no additional commercial milestone payments payable by the Company to CFFT related to sales levels for KALYDECO. The Company also is obligated to make up to two one-time commercial milestone payments to CFFT upon achievement of certain sales levels for ORKAMBI.


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

The Company began marketing KALYDECO in the United States and certain countries in the European Union in 2012 and began marketing ORKAMBI in the United States in July 2015. The Company has royalty obligations to CFFT for each compound commercialized pursuant to this collaboration until the expiration of patents covering that compound. The Company has patents in the United States and European Union covering the composition-of-matter of ivacaftor that expire in 2027 and 2025, respectively, subject to potential patent life extensions. The Company has patents in the United States and European Union covering the composition-of-matter of lumacaftor that expire in 2030 and 2026, respectively, subject to potential patent life extensions. CFFT may terminate its funding obligations under the collaboration, as amended, in certain circumstances, in which case there will be a proportional adjustment to the royalty rates and commercial milestone payments for certain compounds. The collaboration also may be terminated by either party for a material breach by the other, subject to notice and cure provisions.
Janssen Pharmaceutica NV
The Company has a collaboration agreement (the “Janssen HCV Agreement”) with Janssen Pharmaceutica NV (“Janssen NV”) for the development, manufacture and commercialization of telaprevir, which Janssen NV began marketing under the brand name INCIVO in certain of its territories in September 2011. Pursuant to the Janssen HCV Agreement, as amended, Janssen NV has a fully-paid license to manufacture and commercialize INCIVO in its territories including Europe, South America, the Middle East, Africa and Australia, subject to the payment of third-party royalties on net sales of INCIVO. In addition to the collaborative revenues, the Company recorded royalty revenues and corresponding royalty expenses related to third-party royalties that Janssen NV remains responsible for based on INCIVO net sales.
During the three and six months ended June 30, 2015 and 2014 , the Company recognized the following revenues attributable to the Janssen NV collaboration:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Royalty revenues (INCIVO)
$
59

 
$
5,698

 
$
1,584

 
$
10,633

Collaborative revenues (telaprevir)
537

 
1,483

 
1,179

 
2,872

  Total revenues attributable to the Janssen NV collaboration
$
596

 
$
7,181

 
$
2,763

 
$
13,505

Variable Interest Entities
The Company has entered into several agreements pursuant to which it has licensed rights to certain drug candidates from third-party collaborators, which has resulted in the consolidation of the third parties' financial statements into the Company's condensed consolidated financial statements as VIEs. In order to account for the fair value of the contingent milestone and royalty payments related to these collaborations under GAAP, the Company uses present-value models based on assumptions regarding the probability of achieving the relevant milestones, estimates regarding the time to develop the drug candidates, estimates of future product sales and the appropriate discount rates. The Company bases its estimate of the probability of achieving the relevant milestones on industry data for similar assets and its own experience. The discount rates used in the valuation model represent a measure of credit risk and market risk associated with settling the liabilities. Significant judgment is used in determining the appropriateness of these assumptions at each reporting period. Changes in these assumptions could have a material effect on the fair value of the contingent milestone and royalty payments. The following collaborations are, or were previously, reflected in the Company's financial statements for being consolidated as VIEs:
Parion Sciences, Inc.
License and Collaboration Agreement

On June 4, 2015, the Company entered into a strategic collaboration and license agreement (the "Parion Agreement") with Parion Sciences, Inc. (“Parion”).  Pursuant to the agreement, the Company is collaborating with Parion to develop investigational epithelial sodium channel (“ENaC”) inhibitors, including VX-371 (formerly P-1037) and P-1055, for the


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

potential treatment of cystic fibrosis, or CF, and other pulmonary diseases.  The Company is leading development activities for VX-371 and P-1055 in CF and other pulmonary diseases and is responsible for all costs, subject to certain exceptions, related to development and commercialization of the compounds.

Pursuant to the Parion Agreement, the Company has worldwide development and commercial rights to Parion’s lead investigational ENaC inhibitors, VX-371 and P-1055, for the potential treatment of CF and all other pulmonary diseases and has the option to select additional compounds discovered in Parion’s research program.  Parion received an $80.0 million up-front payment and has the potential to receive up to an additional (i) $490.0 million in development and regulatory milestone payments for development of ENaC inhibitors in CF, including $360.0 million related to global filing and approval milestones, (ii) $370.0 million in development and regulatory milestones for VX-371 and P-1055 in non-CF pulmonary indications and (iii)  $230.0 million in development and regulatory milestones should the Company elect to develop an additional ENaC inhibitor from Parion’s research program. The Company has agreed to pay Parion tiered royalties that range from the low double digits to mid-teens as a percentage of potential sales of licensed products.

The Company may terminate the Parion Agreement upon 90 days’ notice to Parion prior to any licensed product receiving marketing approval or upon 180 days’ notice after such point. Parion may terminate upon 30 days’ notice if the Comapny experiences a change of control prior to the initiation of the first Phase 3 clinical trial for a licensed product, subject to the Company's right to receive specified royalties on any subsequent commercialization of licensed products. The Parion Agreement also may be terminated by either party for a material breach by the other, subject to notice and cure provisions. Unless earlier terminated, the agreement will continue in effect until the expiration of the Company's royalty obligations, which expire on a country-by-country basis on the later of (i) the date the last-to-expire patent covering a licensed product expires or (ii)  ten years after the first commercial sale in the country.

The Company determined that Parion is a VIE based on, among other factors, the significance to Parion of the ENaC inhibitors licensed to the Company pursuant to the Parion Agreement and on the Company's power to direct the activities that most significantly impact the economic performance of Parion.  Accordingly, the Company consolidated Parion's financial statements beginning on June 4, 2015. However, the Company's interests in Parion are limited to those accorded to the Company in the Parion Agreement. In particular, the Company did not acquire any equity interest in Parion, any interest in Parion's cash and cash equivalents or any control over Parion's activities that do not relate to the Parion Agreement.
Consideration for the Parion Agreement

The Company determined that the fair value of the consideration from the Company to Parion was $255.3 million as of June 4, 2015, which consisted of (i) an $80.0 million up-front payment, (ii) the estimated fair value of the contingent research and development milestones potentially payable by the Company to Parion and (iii) the estimated fair value of potential royalty payments payable by the Company to Parion. The Company valued the contingent milestone and royalty payments using (a) discount rates ranging from 4.1% to 5.9% for the development milestones and (b) a discount rate of 6.6% for royalties. The consideration paid and the preliminary fair value of the contingent milestone and royalty payments payable by the Company pursuant to the agreement are set forth in the table below:
 
June 4, 2015
 
(in thousands)
Up-front payment
$
80,000

Fair value of contingent milestone and royalty payments
175,340

Total
$
255,340

Preliminary Allocation of Assets and Liabilities

For the purposes of the condensed consolidated balance sheets at June 4, 2015 and June 30, 2015, the Company preliminarily allocated the total consideration, which is comprised of the up-front payment and the fair value of the contingent milestone and royalty payments, intangible assets, goodwill, deferred tax liability, net and net other assets and liabilities.



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

The Company recorded $255.3 million of intangible assets on the Company's condensed consolidated balance sheet for Parion's in-process research and development assets. These in-process research and development assets relate to Parion's pulmonary ENaC platform, including the intellectual property related to VX-371 and P-1055, that are licensed by the Company from Parion. The difference between the preliminary fair value of the consideration and the fair value of Parion's assets (including the fair value of intangible assets) and liabilities was allocated to goodwill.

The following table summarizes the preliminary fair values of the assets and liabilities recorded on the effective date of the agreement:
 
June 4, 2015
 
(in thousands)
Intangible assets
$
255,340

Goodwill
10,468

Deferred tax liability
(91,023
)
Net other assets (liabilities)
(10,468
)
Net assets attributable to noncontrolling interests
$
164,317

BioAxone Biosciences, Inc.
In October 2014, the Company entered into a license and collaboration agreement (the “BioAxone Agreement”) with BioAxone Biosciences, Inc. (“BioAxone”), a privately-held biotechnology company, which resulted in the consolidation of BioAxone as a VIE beginning on October 1, 2014. The Company paid BioAxone initial payments of $10.0 million in the fourth quarter of 2014.
BioAxone has the potential to receive up to $90.0 million in milestones and fees, including development, regulatory and milestone payments and a license continuation fee. In addition, BioAxone would receive royalties and commercial milestones on future net product sales of VX-210, if any. The Company holds an option to purchase BioAxone at a predetermined price. The option expires on the earliest of (a) the day the FDA accepts the Biologics License Application submission for VX-210, (b) the day the Company elects to continue the license instead of exercising the option to purchase BioAxone and (c) March 15, 2018, subject to the Company’s option to extend this date by one year.
Alios BioPharma, Inc.
In 2011, the Company entered into a license and collaboration agreement (the “Alios Agreement”) with Alios BioPharma, Inc. (“Alios”), a privately-held biotechnology company, which resulted in the consolidation of Alios as a VIE through December 31, 2013. Pursuant to the Alios Agreement, the Company and Alios collaborated on the research, development and commercialization of HCV nucleotide analogues discovered by Alios through April 2014. In December 2014, the Alios Agreement terminated in accordance with its terms pursuant to a termination notice delivered by the Company in October 2014. As of September 30, 2014, the Company concluded that it no longer had significant continuing involvement with Alios due to its intent and ability to terminate the Alios Agreement, among other factors; therefore, the operations of Alios are presented as discontinued operations in these condensed consolidated financial statements .
Aggregate VIE Financial Information

The Company did not have any consolidated VIEs for the three and six months ended June 30, 2014. An aggregate summary of net loss attributable to noncontrolling interest related to the Company's VIEs for the three and six months ended June 30, 2015 is as follows:


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

 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
 
(in thousands)
Loss attributable to noncontrolling interest before provision for income taxes
$
(1,293
)
 
$
(1,579
)
Income tax provision
(29,653
)
 
(29,590
)
Decrease in fair value of contingent milestone and royalty payments
(1,198
)
 
(1,073
)
Net loss attributable to noncontrolling interest
$
(32,144
)
 
$
(32,242
)

During the three and six months ended June 30, 2015 , the fair value of the contingent milestone and royalty payments related to the BioAxone collaboration increased by $0.4 million and $0.5 million , respectively. During the three months ended June 30, 2015 , the fair value of the contingent milestone and royalty payments related to the Parion collaboration decreased by $1.6 million . The changes in the fair value of the contingent milestone and royalty payments was primarily due to the changes in market interest rates. As of June 30, 2015 , the fair value of the contingent milestone and royalty payments related to the BioAxone collaboration and the Parion collaboration was $27.6 million and $173.7 million , respectively.

The following summarizes items related to the Company's VIEs included in the Company's condensed consolidated balance sheets as of the dates set forth in the table:
 
June 30, 2015
 
December 31, 2014
 
(in thousands)
Restricted cash and cash equivalents (VIE)
$
88,318

 
$
8,418

Prepaid expenses and other current assets
895

 
268

Intangible assets
284,340

 
29,000

Goodwill
19,391

 
8,923

Other assets
508

 
42

Accounts payable
823

 
189

Accrued expenses and other current liabilities
34,254

 
3,891

Deferred tax liability, net
108,913

 
11,544

Other liabilities
6,068

 
300

Noncontrolling interest
153,252

 
21,177


The Company has recorded the VIEs' cash and cash equivalents as restricted cash and cash equivalents (VIE) because (i) the Company does not have any interest in or control over the VIEs' cash and cash equivalents and (ii) the Company's agreements with each VIE do not provide for the VIEs' cash and cash equivalents to be used for the development of the assets that the Company licensed from the applicable VIE. Assets recorded as a result of consolidating our VIEs' financial condition into the Company's balance sheet do not represent additional assets that could be used to satisfy claims against the Company's general assets.
Outlicense Arrangements
In the ordinary course of the Company's business, the Company has entered into various agreements pursuant to which it has outlicensed rights to certain drug candidates to third-party collaborators. Although the Company does not consider any of these outlicense arrangements to be material, the most notable of these outlicense arrangements is described below. Pursuant to these outlicense arrangements, our collaborators are responsible for all costs related to the continued development of such drug candidates. Depending on the terms of the arrangements, the Company's collaborators may be required to make upfront payments, milestone payments upon the achievement of certain product research and development objectives and/or pay royalties on future sales, if any, of commercial products resulting from the collaboration.



12

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

Janssen Pharmaceuticals, Inc.
In June 2014, the Company entered into an agreement (the “Janssen Influenza Agreement”) with Janssen Pharmaceuticals, Inc. (“Janssen Inc.”), which was amended in October 2014 to clarify certain roles and responsibilities of the parties.

Pursuant to the Janssen Influenza Agreement, Janssen Inc. has an exclusive worldwide license to develop and commercialize certain drug candidates for the treatment of influenza, including VX-787. The Company received non-refundable payments of $35.0 million from Janssen Inc. in 2014, which were recorded as collaborative revenue. The Company has the potential to receive development, regulatory and commercial milestone payments as well as royalties on future product sales, if any.
Janssen Inc. is responsible for costs related to the development and commercialization of the compounds. During the three and six months ended June 30, 2015 , the Company recorded reimbursement for these development activities of $7.1 million and $14.7 million , respectively. During the three and six months ended June 30, 2014 , the Company recorded no reimbursement for these development activities. The reimbursements are recorded as a reduction to development expense in the Company's condensed consolidated statements of operations primarily due to the fact that Janssen Inc. directs the activities and selects the suppliers associated with these activities. Janssen Inc. may terminate the Janssen Influenza Agreement, subject to certain exceptions, upon six months' notice.
D.
Earnings Per Share
Basic net loss per share attributable to Vertex common shareholders is based upon the weighted-average number of common shares outstanding during the period, excluding restricted stock and restricted stock units that have been issued but are not yet vested. Diluted net loss per share attributable to Vertex common shareholders is based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period when the effect is dilutive.
The Company did not include the securities described in the following table in the computation of the net loss from continuing operations per share attributable to Vertex common shareholder calculations because the effect would have been anti-dilutive during each period:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Stock options
11,933

 
14,549

 
11,933

 
14,549

Unvested restricted stock and restricted stock units
3,355

 
2,584

 
3,355

 
2,584

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


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

Level 1:
Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3:
Unobservable inputs based on the Company’s assessment of the assumptions that market participants would use in pricing the asset or liability.
The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument. As of June 30, 2015 , the Company’s investments were in money market funds, corporate debt securities and commercial paper.
As of June 30, 2015 , all of the Company’s financial assets that were subject to fair value measurements were valued using observable inputs. The Company’s financial assets valued based on Level 1 inputs consisted of money market funds. The Company’s financial assets valued based on Level 2 inputs consisted of corporate debt securities and commercial paper, which consist of investments in highly-rated investment-grade corporations.
The following table sets forth the Company’s financial assets and liabilities subject to fair value measurements:
 
Fair Value Measurements as of June 30, 2015
 
 
 
Fair Value Hierarchy
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Financial assets carried at fair value:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
518,084

 
$
518,084

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
120,408

 

 
120,408

 

Commercial paper
25,499

 

 
25,499

 

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
1,087

 

 
1,087

 

Total financial assets
$
665,078

 
$
518,084

 
$
146,994

 
$

Financial liabilities carried at fair value:
 
 
 
 
 
 
 
Other liabilities, current portion:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(2,737
)
 
$

 
$
(2,737
)
 
$

Other liabilities, excluding current portion:
 
 
 
 
 
 
 
Foreign currency forward contracts
(313
)
 

 
(313
)
 

Total financial liabilities
$
(3,050
)
 
$

 
$
(3,050
)
 
$

The Company's VIEs invested in cash equivalents consisting of money market funds of $84.4 million as of June 30, 2015 , which are valued based on Level 1 inputs. These cash equivalents are not included in the table above. The Company’s noncontrolling interest related to VIEs includes the fair value of the contingent milestone and royalty payments , which are valued based on Level 3 inputs. Please refer to Note C, “Collaborative Arrangements,” for further information.
As of June 30, 2015 , the fair value and carrying value of the Company's Term Loan was $294.8 million . The fair value of the Company's Term Loan was estimated based on Level 3 inputs computed using the effective interest rate of the Term Loan. The effective interest rate considers the timing and amount of estimated future interest payments. Please refer to Note K, "Long-term Obligations" for further information regarding the Company's Term Loan.


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

F.
Marketable Securities
A summary of the Company’s cash, cash equivalents and marketable securities is shown below:
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
As of June 30, 2015
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and money market funds
$
870,543

 
$

 
$

 
$
870,543

Total cash and cash equivalents
$
870,543

 
$

 
$

 
$
870,543

Marketable securities:
 
 
 
 
 
 
 
Commercial paper (due within 1 year)
$
25,470

 
$
29

 
$

 
$
25,499

Corporate debt securities (due within 1 year)
120,430

 
12

 
(34
)
 
120,408

Total marketable securities
$
145,900

 
$
41

 
$
(34
)
 
$
145,907

Total cash, cash equivalents and marketable securities
$
1,016,443

 
$
41

 
$
(34
)
 
$
1,016,450

 
 
 
 
 
 
 
 
As of December 31, 2014
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and money market funds
$
625,259

 
$

 
$

 
$
625,259

Total cash and cash equivalents
$
625,259

 
$

 
$

 
$
625,259

Marketable securities:
 
 
 
 
 
 
 
Government-sponsored enterprise securities (due within 1 year)
$
463,788

 
$
14

 
$
(52
)
 
$
463,750

Commercial paper (due within 1 year)
51,674

 
72

 

 
51,746

Corporate debt securities (due within 1 year)
196,065

 
2

 
(66
)
 
196,001

Corporate debt securities (due after 1 year through 5 years)
50,443

 

 
(93
)
 
50,350

Total marketable securities
$
761,970

 
$
88

 
$
(211
)
 
$
761,847

Total cash, cash equivalents and marketable securities
$
1,387,229

 
$
88

 
$
(211
)
 
$
1,387,106

The Company has a limited number of marketable securities in insignificant loss positions as of June 30, 2015 , which the Company does not intend to sell and has concluded it will not be required to sell before recovery of the amortized costs for the investment at maturity. There were no charges recorded for other-than-temporary declines in fair value of marketable securities nor gross realized gains or losses recognized in the three and six months ended June 30, 2015 and 2014 .
G.
Accumulated Other Comprehensive (Loss) Income
A summary of the Company's changes in accumulated other comprehensive (loss) income by component is shown below:
 
Foreign Currency Translation Adjustment
 
Unrealized Holding Gains (Losses) on Marketable Securities
 
Unrealized Gains (Losses) on Foreign Currency Forward Contracts
 
Total
 
(in thousands)
Balance at December 31, 2014
$
(971
)
 
$
(123
)
 
$
2,011

 
$
917

Other comprehensive (loss) income before reclassifications
1,220

 
130

 
(1,370
)
 
(20
)
Amounts reclassified from accumulated other comprehensive loss

 

 
(2,604
)
 
(2,604
)
Net current period other comprehensive (loss) income
$
1,220

 
$
130

 
$
(3,974
)
 
$
(2,624
)
Balance at June 30, 2015
$
249

 
$
7

 
$
(1,963
)
 
$
(1,707
)


15

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

 
Foreign Currency Translation Adjustment
 
Unrealized Holding Gains on Marketable Securities
 
Unrealized Losses on Foreign Currency Forward Contracts
 
Total
 
(in thousands)
Balance at December 31, 2013
$
(325
)
 
$
42

 
$
(23
)
 
$
(306
)
Other comprehensive income (loss) before reclassifications
353

 
55

 
(108
)
 
300

Amounts reclassified from accumulated other comprehensive loss

 

 
(17
)
 
(17
)
Net current period other comprehensive income (loss)
$
353

 
$
55

 
$
(125
)
 
$
283

Balance at June 30, 2014
$
28

 
$
97

 
$
(148
)
 
$
(23
)
H.
Hedging
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 GAAP having contractual durations from one to eighteen months. To date, the existence of operational sites in countries outside the United States has decreased the degree to which the Company has sought to hedge its revenues in certain foreign currencies.
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 determines 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 June 30, 2015 , all hedges were determined to be highly effective and the Company has not recorded any ineffectiveness related to the hedging program.
The following table summarizes the notional amount of the Company’s outstanding foreign currency forward contracts designated as cash flow hedges:
 
As of June 30, 2015
 
As of December 31, 2014
Foreign Currency
(in thousands)
Euro
$
102,796

 
$
20,209

British pound sterling
82,960

 
13,515

Australian dollar
25,993

 

Total foreign currency forward contracts
$
211,749

 
$
33,724

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


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

As of June 30, 2015
Assets
 
Liabilities
Classification
 
Fair Value
 
Classification
 
Fair Value
(in thousands)
Prepaid and other current assets
 
$
1,087

 
Other liabilities, current portion
 
$
(2,737
)
Other assets
 

 
Other liabilities, excluding current portion
 
(313
)
Total assets
 
$
1,087

 
Total liabilities
 
$
(3,050
)
As of December 31, 2014
Assets
 
Liabilities
Classification
 
Fair Value
 
Classification
 
Fair Value
(in thousands)
Prepaid and other current assets
 
$
2,011

 
Other liabilities, current portion
 
$

Total assets
 
$
2,011

 
Total liabilities
 
$

The following table summarizes the potential effect of offsetting derivatives by type of financial instrument on the Company's condensed consolidated balance sheets:
 
As of June 30, 2015
 
Gross Amounts Recognized
 
Gross Amounts Offset
 
Gross Amount Presented
 
Gross Amount Not Offset
 
Legal Offset
Foreign currency forward contracts
(in thousands)
Total assets
$
1,087

 
$

 
$
1,087

 
$
(1,087
)
 
$

Total liabilities
$
(3,050
)
 
$

 
$
(3,050
)
 
$
1,087

 
$
(1,963
)
 
As of December 31, 2014
 
Gross Amounts Recognized
 
Gross Amounts Offset
 
Gross Amount Presented
 
Gross Amount Not Offset
 
Legal Offset
Foreign currency forward contracts
(in thousands)
Total assets
$
2,011

 
$

 
$
2,011

 
$

 
$
2,011

I. Inventories
Inventories consisted of the following:
 
As of June 30, 2015
 
As of December 31, 2014
 
(in thousands)
Raw materials
$
8,147

 
$
8,506

Work-in-process
30,989

 
20,508

Finished goods
2,977

 
1,834

Total
$
42,113

 
$
30,848



17

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

J. Intangible Assets and Goodwill
Intangible Assets
As of June 30, 2015 , in-process research and development intangible assets of $284.3 million were recorded on the Company's condensed consolidated balance sheet. The increase of $255.3 million as compared to the $29.0 million recorded as of December 31, 2014 is due to the Company's collaboration with Parion.
In June 2015, in connection with entering into the Parion Agreement, the Company recorded an in-process research and development intangible asset of $255.3 million based on the Company’s estimate of the fair value of Parion’s lead investigational ENaC inhibitors, including VX-371 and P-1055, that were licensed by the Company from Parion. The Company aggregated the fair value of the ENaC inhibitors into a single intangible asset because the phase, nature and risks of development as well as the amount and timing of benefits associated with the assets were similar. In October 2014, the Company recorded an in-process research and development intangible asset of $29.0 million based on the Company’s estimate of the fair value of VX-210, a drug candidate for patients with spinal cord injuries that was licensed by the Company from BioAxone. The Company used discount rates of 7.1% and 7.5% in the present-value models to estimate the fair values of the ENaC inhibitors and VX-210 intangible assets, respectively.
The Company also conducted an evaluation of Parion and BioAxone's other programs at the effective date of the Parion Agreement and BioAxone Agreement, respectively, and determined that market participants would not have ascribed value to those programs because of the stage of development of the assets in each program and uncertainties related to the potential clinical development and commercialization of the programs.
Goodwill
As of June 30, 2015 , goodwill of $50.4 million was recorded on the Company's condensed consolidated balance sheet. The Company allocated $10.5 million to goodwill related to the Parion Agreement during the six months ended June 30, 2015 . This goodwill relates to the potential synergies between licensed drug candidates and the Company's CF drugs and drug candidates.  None of the goodwill related to the Parion Agreement is expected to be deductible for income tax purposes. As of December 31, 2014 , $39.9 million of goodwill was recorded on the Company’s consolidated balance sheet.
K. Long-term Obligations
Fan Pier Leases
In 2011, the Company entered into two lease agreements, pursuant to which the Company leases approximately 1.1 million square feet of office and laboratory space in two buildings (the “Buildings”) at Fan Pier in Boston, Massachusetts (the “Fan Pier Leases”). The Company commenced lease payments in December 2013, and will make lease payments pursuant to the Fan Pier Leases through December 2028. The Company has an option to extend the term of the Fan Pier Leases for an additional ten years .
Because the Company was involved in the construction project and determined that the Fan Pier Leases did not meet the criteria for “sale-leaseback” treatment upon completion of the Buildings, the Company recorded project construction costs incurred by the landlord as an asset and a related financing obligation during the construction period and began depreciating the asset and incurring interest expense related to the financing obligation in 2013. The Company bifurcates its lease payments pursuant to the Fan Pier Leases into (i) a portion that is allocated to the Buildings and (ii) a portion that is allocated to the land on which the Buildings were constructed. The portion of the lease obligations allocated to the land is treated as an operating lease that commenced in 2011.
Property and equipment, net, included $508.9 million and $515.0 million as of June 30, 2015 and December 31, 2014 , respectively, related to construction costs for the Buildings. The carrying value of the Company's lease agreement liability for the Buildings was $473.2 million and $473.4 million as of June 30, 2015 and December 31, 2014 , respectively.


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

Term Loan
On July 9, 2014, the Company entered into a credit agreement with the lenders party thereto, and Macquarie US Trading LLC ("Macquarie"), as administrative agent. The credit agreement provides for a $300.0 million senior secured term loan ("Term Loan"). The credit agreement also provides that, subject to satisfaction of certain conditions, the Company may request that the lenders establish an incremental senior secured term loan facility in an aggregate amount not to exceed $200.0 million . The Term Loan initially bore interest at a rate of 7.2% per annum, which will be reduced to 6.2% per annum based on the FDA's approval of ORKAMBI. The Term Loan will bear interest at a rate of LIBOR plus 5.0% per annum during the third year of the term.
The maturity date of all loans under the facilities is July 9, 2017. Interest is payable quarterly and on the maturity date. The Company is required to repay principal on the Term Loan in installments of $15.0 million per quarter from October 1, 2015 through July 1, 2016 and in installments of $60.0 million per quarter from October 1, 2016 through the maturity date. The Company may prepay the Term Loan, in whole or in part, at any time; provided that prepayments prior to the July 9, 2016 are subject to a make-whole premium to ensure Macquarie receives approximately the present value of two years of interest payments over the life of the loan.
The Company's obligations under the facilities are unconditionally guaranteed by certain of its domestic subsidiaries. All obligations under the facilities, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the Company's assets and the assets of all guarantors, including the pledge of all or a portion of the equity interests of certain of its subsidiaries.
The credit agreement requires that the Company maintain, on a quarterly basis, a minimum level of KALYDECO net revenues. Further, the credit agreement includes negative covenants, subject to exceptions, restricting or limiting the Company's ability and the ability of its subsidiaries to, among other things, incur additional indebtedness, grant liens, engage in certain investment, acquisition and disposition transactions, pay dividends, repurchase capital stock and enter into transactions with affiliates. The credit agreement also contains customary representations and warranties, affirmative covenants and events of default, including payment defaults, breach of representations and warranties, covenant defaults and cross defaults. If an event of default occurs, the administrative agent would be entitled to take various actions, including the acceleration of amounts due under outstanding loans. There have been no events of default as of or during the period ended June 30, 2015 .
Based on the Company's evaluation of the Term Loan, the Company determined that the Term Loan contains several embedded derivatives. These embedded derivatives are clearly and closely related to the host instrument because they relate to the Company's credit risk; therefore, they do not require bifurcation from the host instrument, the Term Loan.
The Company incurred $5.3 million in fees paid to Macquarie that were recorded as a discount on the Term Loan and are being recorded as interest expense using the effective interest method over the term of the loan in the Company’s condensed consolidated statements of operations . As of June 30, 2015 , the unamortized discount associated with the Term Loan that was embedded in the senior secured term loan caption on the Company’s condensed consolidated balance sheet was $5.2 million .
L. Stock-based Compensation Expense
The Company issues stock options, restricted stock and restricted stock units with service conditions, which are generally the vesting periods of the awards. The Company also has issued, to certain members of senior management, restricted stock and restricted stock units that vest upon the earlier of the satisfaction of (i) a performance condition or (ii) a service condition and stock options that vest upon the earlier of the satisfaction of (a) performance conditions or (b) a service condition. In addition, the Company issued pursuant to a retention program restricted stock awards to certain members of senior management that will vest upon the satisfaction of both (i) a performance condition and (ii) a service condition. The Company also issues shares pursuant to an employee stock purchase plan ("ESPP").
In the second quarter of 2015, the Company’s shareholders approved an amendment and restatement of the 2013 Stock and Option Plan that, among other things, increased the number of shares of common stock available for issuance under the


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

plan by 7,800,000 shares, plus the number of shares that remained available for issuance under our 2006 Stock and Option Plan, which rolled-over into the 2013 Stock and Option Plan.
During the three and six months ended June 30, 2015 and 2014 , the Company recognized the following stock-based compensation expense included in loss from continuing operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Stock-based compensation expense by type of award:
 
 
 
 
 
 
 
Stock options
$
37,687

 
$
26,985

 
$
66,646

 
$
52,112

Restricted stock and restricted stock units
24,902

 
14,020

 
52,071

 
33,013

ESPP share issuances
1,825

 
1,681

 
3,965

 
4,348

Less stock-based compensation expense capitalized to inventories
(1,153
)
 
(242
)
 
(2,037
)
 
(449
)
Total stock-based compensation included in costs and expenses
$
63,261

 
$
42,444

 
$
120,645

 
$
89,024

 
 
 
 
 
 
 


Stock-based compensation expense by line item:
 
 
 
 
 
 
 
Research and development expenses
$
41,632

 
$
27,253

 
$
79,849

 
$
60,153

Sales, general and administrative expenses
21,629

 
15,191

 
40,796

 
28,871

Total stock-based compensation included in costs and expenses
$
63,261

 
$
42,444

 
$
120,645

 
$
89,024

The following table sets forth the Company's unrecognized stock-based compensation expense, net of estimated forfeitures, by type of award and the weighted-average period over which that expense is expected to be recognized:
 
As of June 30, 2015
 
Unrecognized Expense,
Net of
Estimated Forfeitures
 
Weighted-average
Recognition
Period
 
(in thousands)
 
(in years)
Type of award:
 
 
 
Stock options
$
169,671

 
2.22
Restricted stock and restricted stock units
$
175,285

 
2.73
ESPP share issuances
$
3,953

 
0.59


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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 at June 30, 2015 :
 
 
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)
$17.16–$20.00
 
147

 
2.52
 
$
18.87

 
147

 
$
18.87

$20.01–$40.00
 
2,888

 
4.04
 
$
34.82

 
2,534

 
$
34.60

$40.01–$60.00
 
3,015

 
7.12
 
$
48.32

 
1,534

 
$
49.67

$60.01–$80.00
 
1,705

 
8.60
 
$
75.99

 
539

 
$
74.93

$80.01–$100.00
 
2,108

 
8.57
 
$
90.22

 
621

 
$
86.72

$100.01–$120.00
 
1,868

 
9.58
 
$
109.24

 
113

 
$
109.25

$120.01–$127.54
 
202

 
9.92
 
$
127.31

 
165

 
$
127.54

Total
 
11,933

 
7.22
 
$
66.92

 
5,653

 
$
52.06

M. Other Arrangements
Sale of HIV Protease Inhibitor Royalty Stream
In 2008, the Company sold to a third party its rights to receive royalty payments from GlaxoSmithKline plc, net of royalty amounts to be earned by and due to a third party, for a one-time cash payment of $160.0 million . These royalty payments relate to net sales of HIV protease inhibitors, which had been developed pursuant to a collaboration agreement between the Company and GlaxoSmithKline plc. As of June 30, 2015 , the Company had $35.4 million in deferred revenues related to the one-time cash payment, which it is recognizing over the life of the collaboration agreement with GlaxoSmithKline plc based on the units-of-revenue method. In addition, the Company continues to recognize royalty revenues equal to the amount of the third-party subroyalty and an offsetting royalty expense for the third-party subroyalty payment.
Other income (expense), net
In April 2014, the Company received a one-time cash payment of $36.7 million from its landlord pursuant to the Fan Pier Leases.  This payment related to bonds issued pursuant to an Infrastructure Development Assistance Agreement between The Commonwealth of Massachusetts and the Company’s landlord.  The bonds were issued in connection with the landlord’s contribution to infrastructure improvements and also were dependent upon employment levels at the Company through the bond issuance date.  The Company accounted for the cash payment as a government grant as it was provided in part related to the Company’s employment level in Massachusetts. Such grants are recognized as income in the period in which the conditions of the grant are met and there is reasonable assurance that the grant will be received, provided it is not subject to refund. In the second quarter of 2014, the Company recorded $36.7 million as a credit to other income (expense), net in its consolidated statements of operations because the Company’s employment obligations related to these funds were satisfied as of the date of issuance of the bonds and the payment received was not subject to refund.
N. Income Taxes
The Company is subject to U.S. federal, state, and foreign income taxes. For the three and six months ended June 30, 2015 , the Company recorded a provision for income taxes of $30.1 million and $30.4 million , respectively. The provision for income taxes recorded in the three and six months ended June 30, 2015 included $29.7 million related to the estimated income tax effect on Parion of the Company's $80.0 million up-front payment to Parion in June 2015. The Company has no liability for taxes payable by Parion and the income tax provision and related liability have been allocated to noncontrolling interest (VIE). For the three and six months ended June 30, 2014 , the Company recorded a provision for income taxes of $0.7 million and $1.5 million , respectively, related to state income taxes and income earned in various foreign jurisdictions.
As of June 30, 2015 and December 31, 2014 , the Company had unrecognized tax benefits of $0.9 million . The Company recognizes interest and penalties related to income taxes as a component of income tax expense. As of June 30, 2015 , no interest and penalties have been accrued. The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company did not recognize any material interest or penalties related to uncertain tax positions as of June 30, 2015 and December 31, 2014 . In 2015, it is reasonably possible that the Company will reduce the balance of its unrecognized tax benefits by approximately $0.5 million due to the application of statute of limitations and settlements with taxing authorities, all of which would reduce the Company’s effective tax rate.
The Company continues to maintain a valuation allowance against certain deferred tax assets where it is more likely than not that the deferred tax asset will not be realized because of its extended history of annual losses.
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 before 2010 or any other major taxing jurisdiction for years before 2009, except where the Company has net operating losses or tax credit carryforwards that originated before 2009. The Company currently is under examination by the Internal Revenue Service, Pennsylvania, Delaware, New York and Texas for the year ended December 31, 2011. No adjustments have been reported. The Company is not under examination by any other jurisdictions for any tax year. The Company concluded audits with Massachusetts and Revenue Quebec during 2015 and the Canada Revenue Agency and Revenue Quebec during 2014 with no material adjustments.


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

The Company currently intends to reinvest the total amount of its unremitted earnings. At June 30, 2015 , foreign earnings, which were not significant, have been retained indefinitely by foreign subsidiary companies for reinvestment; therefore, no provision has been made for income taxes that would be payable upon the distribution of such earnings, and it would not be practicable to determine the amount of the related unrecognized deferred income tax liability. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to U.S. federal income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.
O. Restructuring Liabilities
2003 Kendall Restructuring
In 2003, the Company adopted a plan to restructure its operations to coincide with its increasing internal emphasis on advancing drug candidates through clinical development to commercialization. The restructuring liability relates to specialized laboratory and office space that is leased to the Company pursuant to a 15 -year lease that terminates in 2018. The Company has not used more than 50% of this space since it adopted the plan to restructure its operations in 2003. This unused laboratory and office space currently is subleased to third parties.
The activities related to the restructuring liability for the three and six months ended June 30, 2015 and 2014 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Liability, beginning of the period
$
9,506

 
$
18,324

 
$
11,596

 
$
19,115

Cash payments
(2,584
)
 
(3,960
)
 
(6,569
)
 
(7,822
)
Cash received from subleases
2,799

 
2,689

 
5,275

 
5,378

Restructuring expense (income)
203

 
(2,117
)
 
(378
)
 
(1,735
)
Liability, end of the period
$
9,924

 
$
14,936

 
$
9,924

 
$
14,936


Fan Pier Move Restructuring
In connection with the relocation of its Massachusetts operations to Fan Pier in Boston, Massachusetts, which commenced in 2013, the Company is incurring restructuring charges related to its remaining lease obligations at its facilities in Cambridge, Massachusetts. The majority of these restructuring charges were recorded in the third quarter of 2014 upon decommissioning three facilities in Cambridge. During the first quarter of 2015, the Company terminated two of these lease agreements resulting in a credit to restructuring expense equal to the difference between the Company’s estimated future cash flows related to its lease obligations for these facilities and the termination payment paid to the Company’s landlord on the effective date of the termination. The third major facility included in this restructuring activity is 120,000 square feet of the Kendall Square Facility that the Company continued to use for its operations following its 2003 Kendall Restructuring . The rentable square footage in this portion of the Kendall Square Facility was subleased to a third party in February 2015. The Company will continue to incur charges through April 2018 related to the difference between the Company’s estimated future cash flows related to this portion of the Kendall Square Facility , which include an estimate for sublease income to be received from the Company's sublessee and its actual cash flows. The Company discounted the estimated cash flows related to this restructuring activity at a discount rate of 9% .
The activities related to the restructuring liability for the three and six months ended June 30, 2015 and 2014 were as follows:


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Liability, beginning of the period
$
11,137

 
$
3,722

 
$
33,390

 
$
797

Cash payments
(3,095
)
 
(2,143
)
 
(22,351
)
 
(4,377
)
Restructuring expense (income)
975

 
1,677

 
(2,022
)
 
6,836

Liability, end of the period
$
9,017

 
$
3,256

 
$
9,017

 
$
3,256

Other Restructuring Activities
The Company has incurred several other restructuring activities that are unrelated to its 2003 Kendall Restructuring and the Fan Pier Move Restructuring . In October 2013, the Company adopted a restructuring plan that included (i) a workforce reduction primarily related to the commercial support of INCIVEK following the continued and rapid decline in the number of patients being treated with INCIVEK as new medicines for the treatment of HCV infection neared approval and (ii) the write-off of certain assets. This action resulted from the Company's decision to focus its investment on future opportunities in cystic fibrosis and other research and development programs.
The activities related to the Company's other restructuring liabilities for the three and six months ended June 30, 2015 and 2014 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Liability, beginning of the period
$
845

 
$
1,821

 
$
869

 
$
8,441

Cash payments
(893
)
 
(1,199
)
 
(1,223
)
 
(8,466
)
Restructuring expense
950

 
170

 
1,256

 
817

Liability, end of the period
$
902

 
$
792

 
$
902

 
$
792

P. Commitments and Contingencies
Financing Arrangements
As of June 30, 2015 , the Company had irrevocable stand-by letters of credit outstanding that were issued in connection with property leases and other similar agreements totaling $21.9 million that are cash collateralized. The cash used to support these letters of credit is included in restricted cash, as of June 30, 2015 , on the Company's condensed consolidated balance sheet.
Litigation
On May 28, 2014, a purported shareholder class action Local No. 8 IBEW Retirement Plan & Trust v. Vertex Pharmaceuticals Incorporated, et al. was filed in the United States District Court for the District of Massachusetts, naming the Company and certain of the Company's current and former officers and directors as defendants. The lawsuit alleged that the Company made material misrepresentations and/or omissions of material fact in the Company's disclosures during the period from May 7, 2012 through May 29, 2012, all in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The purported class consists of all persons (excluding defendants) who purchased the Company’s common stock between May 7, 2012 and May 29, 2012. The plaintiffs seek unspecified monetary damages, costs and attorneys’ fees as well as disgorgement of the proceeds from certain individual defendants’ sales of the Company’s stock. On October 8, 2014, the Court approved Local No. 8 IBEW Retirement Fund as lead plaintiff, and Scott and Scott LLP as lead counsel for the plaintiff and the putative class. On February 23, 2015, the Company filed a reply to the plaintiffs’ opposition to its motion to dismiss.  The court heard oral argument on the motion to dismiss on March 6, 2015 and took the motion under advisement. The Company believes the claims to be without merit and intends to vigorously defend the litigation. As of June 30, 2015 , the Company has not recorded any reserves for this purported class action.


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

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. No 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 no material contingent liabilities accrued as of June 30, 2015 or December 31, 2014 .


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Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We are in the business of discovering, developing, manufacturing and commercializing medicines for serious diseases. We use precision medicine approaches with the goal of creating transformative medicines for patients in specialty markets. Our business is focused on developing and commercializing therapies for the treatment of cystic fibrosis, or CF, and advancing our research and early-stage development programs in other indications, while maintaining our financial strength.
We market KALYDECO (ivacaftor) for the treatment of certain patients with CF who have specific genetic mutations in their cystic fibrosis transmembrane conductance regulator, or CFTR , gene. In July 2015, ORKAMBI (lumacaftor in combination with ivacaftor) was approved by the United States Food and Drug Administration, or FDA, as a treatment for patients with CF twelve years of age and older who have two copies (homozygous) of the F508del mutation in their CFTR gene, which is the most prevalent form of CF. We also are seeking approval to market lumacaftor in combination with ivacaftor for this patient population in Europe, Canada and Australia.
Cystic Fibrosis
Ivacaftor
KALYDECO was approved in 2012 in the United States and European Union as a treatment for patients with CF six years of age and older who have the G551D mutation in their CFTR gene. Our KALYDECO net product revenues have been increasing over the last several years due to the increased number of patients who are being treated with KALYDECO in the United States and ex-U.S. markets as we have expanded the label for KALYDECO and obtained reimbursement for additional patients eligible for treatment with KALYDECO in ex-U.S markets.
Lumacaftor in Combination with Ivacaftor
In July 2015, the FDA approved ORKAMBI for the treatment of patients with CF twelve years of age and older who are homozygous for the F508del mutation in their CFTR gene. We have begun marketing ORKAMBI in the United States and will recognize our first net product revenues from ORKAMBI in the third quarter of 2015. We have established a wholesale acquisition cost for ORKAMBI in the United States of $259,000 on an annual basis. Our future ORKAMBI net product revenues in the United States will reflect the number of patients for whom ORKAMBI is prescribed, the level of rebates, chargebacks, discounts and other adjustments to our ORKAMBI gross product revenues and patient adherence to the recommended treatment regimen. We believe that there currently are approximately 8,500 patients in the United States who are eligible for treatment with ORKAMBI.
We submitted a Marketing Authorization Application, or MAA, for ORKAMBI for the treatment of patients with CF twelve years of age and older who are homozygous for the F508del mutation in their CFTR gene to the European Medicines Agency, or EMA, in November 2014. We do not expect significant net product revenues from ORKAMBI from ex-U.S. markets in 2015 due to the reimbursement discussions that will be required in these markets following its potential approval by the European Commission in the fourth quarter of 2015. We believe that there are approximately 12,000 patients with CF twelve years of age and older who are homozygous for the F508del mutation in Europe.
We are currently conducting two Phase 3 clinical trials to evaluate lumacaftor in combination with ivacaftor for the treatment of patients with CF six to eleven years of age who are homozygous for the F508del mutation in their CFTR gene. The first clinical trial will evaluate approximately 50 patients in the United States to support potential FDA approval in patients with CF six to eleven years of age. The primary endpoint of the first six-month clinical trial is safety. This clinical trial is fully enrolled and if this trial is successful, we plan to submit a supplemental New Drug Application to the FDA in the first half of 2016. In the European Union, a clinical trial with a primary endpoint evaluating efficacy will be required to support approval of lumacaftor in combination with ivacaftor for patients with CF six to eleven years of age who are homozygous for the F508del mutation in their CFTR gene. We recently initiated a second clinical trial to evaluate lumacaftor in combination with ivacaftor in approximately 200 patients within this patient population. The primary endpoint of this second clinical trial is absolute change in lung clearance index.
VX-661 in Combination with Ivacaftor
In the first quarter of 2015, we initiated a Phase 3 development program for VX-661 in combination with ivacaftor in multiple CF patient populations who have at least one copy of the F508del mutation. We have initiated four clinical trials as part of this Phase 3 development program as follows:


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Two Copies of the F508del Mutation . A Phase 3 clinical trial evaluating the combination of VX-661 and ivacaftor in patients with CF twelve years of age and older who have two copies of the F508del mutation in their CFTR gene. Enrollment of approximately 500 patients in this clinical trial in North America and Europe is ongoing.
One Copy of the F508del Mutation and a Second Mutation That Results in a Gating Defect in the CFTR Protein . A Phase 3 clinical trial evaluating the combination of VX-661 and ivacaftor in patients with CF who have one copy of the F508del mutation in their CFTR gene and a second mutation in their CFTR gene that results in a gating defect in the CFTR protein. Enrollment of approximately 200 patients in this clinical trial in North America and Europe is ongoing.
One Copy of the F508del Mutation and a Second Mutation That Results in Residual CFTR Function. A Phase 3 clinical trial evaluating the combination of VX-661 and ivacaftor in patients with CF who have one copy of the F508del mutation in their CFTR gene and a second mutation in their CFTR gene that results in residual CFTR function. This clinical trial also will evaluate ivacaftor dosed without VX-661. Enrollment of approximately 300 patients in this clinical trial in North America and Europe is ongoing.
One Copy of the F508del Mutation and A Second Mutation That Results in Minimal CFTR Function. We have initiated a Phase 3 clinical trial evaluating the combination of VX-661 and ivacaftor in patients who have one copy of the F508del mutation in their CFTR gene and a second mutation in their CFTR gene that results in minimal CFTR function. The clinical trial will enroll approximately 150 patients and expansion of the clinical trial to an additional approximately 150 patients will depend on an interim futility analysis of efficacy data from the initial approximately 150 patients.
ENaC Inhibition
In June 2015, we entered into