Document
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 MARCH 31, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM              TO             
Commission file number 000-19319
____________________________________________
Vertex Pharmaceuticals Incorporated
(Exact name of registrant as specified in its charter)
Massachusetts
04-3039129
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
50 Northern Avenue, Boston, Massachusetts
02210
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (617) 341-6100
____________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o 
Smaller reporting company o
 
 
 
 
Emerging growth company o
                                       
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01 per share
256,121,360
Class
Outstanding at April 24, 2019
 



Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019

TABLE OF CONTENTS
 
 
Page
 
 
Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2019 and 2018
 
Condensed Consolidated Balance Sheets - March 31, 2019 and December 31, 2018
 
Condensed Consolidated Statements of Shareholders' Equity and Noncontrolling Interest - Three Months Ended March 31, 2019 and 2018
 
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 and 2018
 
 
“We,” “us,” “Vertex” and the “Company” as used in this Quarterly Report on Form 10-Q refer to Vertex Pharmaceuticals Incorporated, a Massachusetts corporation, and its subsidiaries.
“Vertex,” “KALYDECO®,” “ORKAMBI®,” “SYMDEKO®” and “SYMKEVI®” are registered trademarks of Vertex. Other brands, names and trademarks contained in this Quarterly Report on Form 10-Q are the property of their respective owners.
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,
 
2019
 
2018
Revenues:
 
 
 
Product revenues, net
$
857,253

 
$
637,729

Collaborative and royalty revenues
1,182

 
3,070

Total revenues
858,435

 
640,799

Costs and expenses:
 
 
 
Cost of sales
95,092

 
71,613

Research and development expenses
339,490

 
310,553

Sales, general and administrative expenses
147,045

 
129,808

Restructuring income

 
(76
)
Total costs and expenses
581,627

 
511,898

Income from operations
276,808

 
128,901

Interest income
15,615

 
5,789

Interest expense
(14,868
)
 
(16,886
)
Other income, net
42,610

 
96,838

Income before provision for (benefit from) income taxes
320,165

 
214,642

Provision for (benefit from) income taxes
51,534

 
(12,659
)
Net income
268,631

 
227,301

Income attributable to noncontrolling interest

 
(17,038
)
Net income attributable to Vertex
$
268,631

 
$
210,263

 
 
 
 
Amounts per share attributable to Vertex common shareholders:
 
 
 
Net income:
 
 
 
Basic
$
1.05

 
$
0.83

Diluted
$
1.03

 
$
0.81

Shares used in per share calculations:
 
 
 
Basic
255,695

 
253,231

Diluted
260,175

 
258,526

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


2

Table of Contents

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
268,631

 
$
227,301

Changes in other comprehensive income (loss):
 
 
 
Unrealized holding gains (losses) on marketable securities, net
596

 
(460
)
Unrealized losses on foreign currency forward contracts, net of tax of $1.5 million and $0.3 million, respectively
(222
)
 
(862
)
Foreign currency translation adjustment
4,967

 
(2,729
)
Total changes in other comprehensive income (loss)
5,341

 
(4,051
)
Comprehensive income
273,972

 
223,250

Comprehensive income attributable to noncontrolling interest

 
(17,038
)
Comprehensive income attributable to Vertex
$
273,972

 
$
206,212

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 per share amounts)
 
March 31,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,893,885

 
$
2,650,134

Marketable securities
584,150

 
518,108

Accounts receivable, net
438,297

 
409,688

Inventories
136,698

 
124,360

Prepaid expenses and other current assets
130,009

 
140,819

Total current assets
4,183,039

 
3,843,109

Property and equipment, net
742,559

 
812,005

Goodwill
50,384

 
50,384

Deferred tax assets
1,467,518

 
1,499,672

Operating lease assets
60,573

 

Other assets
39,041

 
40,728

Total assets
$
6,543,114

 
$
6,245,898

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
82,262

 
$
110,987

Accrued expenses
532,745

 
604,495

Early access sales accrual
382,703

 
354,404

Other current liabilities
108,758

 
50,406

Total current liabilities
1,106,468

 
1,120,292

Long-term finance lease liabilities
560,381

 
581,550

Long-term operating lease liabilities
63,484

 

Long-term advance from collaborator
83,471

 
82,573

Other long-term liabilities
5,997

 
26,280

Total liabilities
1,819,801

 
1,810,695

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, 256,351 and 255,172 shares issued and outstanding, respectively
2,561

 
2,546

Additional paid-in capital
7,475,909

 
7,421,476

Accumulated other comprehensive income
6,000

 
659

Accumulated deficit
(2,761,157
)
 
(2,989,478
)
Total shareholders’ equity
4,723,313

 
4,435,203

Total liabilities and shareholders’ equity
$
6,543,114

 
$
6,245,898

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 (Loss) Income
 
Accumulated Deficit
 
Total Vertex
Shareholders’ Equity
 
Noncontrolling
Interest
 
Total
Shareholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2017
253,253

 
$
2,512

 
$
7,157,362

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

 
$
13,727

 
$
2,042,306

Cumulative effect adjustment for adoption of new accounting guidance

 

 

 
(24,120
)
 
33,349

 
9,229

 

 
9,229

Other comprehensive loss, net of tax

 

 

 
(4,051
)
 

 
(4,051
)
 

 
(4,051
)
Net income

 

 

 

 
210,263

 
210,263

 
17,038

 
227,301

Repurchase of common stock
(67
)
 
(1
)
 
(11,250
)
 

 

 
(11,251
)
 

 
(11,251
)
Issuance of common stock under benefit plans
1,682

 
30

 
89,656

 

 

 
89,686

 

 
89,686

Stock-based compensation expense

 

 
78,601

 

 

 
78,601

 

 
78,601

Other VIE activity

 

 

 

 

 

 
(1,000
)
 
(1,000
)
Balance at March 31, 2018
254,868

 
$
2,541

 
$
7,314,369

 
$
(39,743
)
 
$
(4,876,111
)
 
$
2,401,056

 
$
29,765

 
$
2,430,821

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
255,172

 
$
2,546

 
$
7,421,476

 
$
659

 
$
(2,989,478
)
 
$
4,435,203

 
$

 
$
4,435,203

Cumulative effect adjustment for adoption of new accounting guidance

 

 

 

 
(40,310
)
 
(40,310
)
 

 
(40,310
)
Other comprehensive income, net of tax

 

 

 
5,341

 

 
5,341

 

 
5,341

Net income

 

 

 

 
268,631

 
268,631

 

 
268,631

Repurchases of common stock
(564
)
 
(6
)
 
(103,833
)
 

 

 
(103,839
)
 

 
(103,839
)
Issuance of common stock under benefit plans
1,743

 
21

 
64,023

 

 

 
64,044

 

 
64,044

Stock-based compensation expense

 

 
94,243

 

 

 
94,243

 

 
94,243

Balance at March 31, 2019
256,351

 
$
2,561

 
$
7,475,909

 
$
6,000

 
$
(2,761,157
)
 
$
4,723,313

 
$

 
$
4,723,313

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)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
268,631

 
$
227,301

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
93,791

 
78,136

Depreciation expense
27,140

 
16,343

Write-downs of inventories to net realizable value
1,270

 
3,619

Deferred income taxes
43,425

 
3,587

Unrealized gain on equity securities
(43,551
)
 
(95,458
)
Other non-cash items, net
(3,701
)
 
5,827

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(30,136
)
 
(13,473
)
Inventories
(13,139
)
 
(8,208
)
Prepaid expenses and other assets
7,941

 
25,482

Accounts payable
(24,145
)
 
2,154

Accrued expenses and other liabilities
(38,425
)
 
(31,469
)
Early access sales accrual
35,683

 
38,816

Net cash provided by operating activities
324,784

 
252,657

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(128,215
)
 
(38,653
)
Maturities of available-for-sale debt securities
107,118

 
94,365

Expenditures for property and equipment
(18,041
)
 
(29,279
)
Investment in equity securities

 
(21,500
)
Net cash (used in) provided by investing activities
(39,138
)
 
4,933

Cash flows from financing activities:
 
 
 
Issuances of common stock under benefit plans
63,620

 
88,403

Repurchase of common stock
(99,839
)
 
(10,000
)
Advance from collaborator
5,000

 
2,500

Payments on capital lease and construction financing lease obligations

 
(9,331
)
Payments on finance leases
(9,385
)
 

Proceeds related to construction financing lease obligation

 
9,566

Repayments of advanced funding
(1,385
)
 
(1,182
)
Other financing activities

 
(1,000
)
Net cash (used in) provided by financing activities
(41,989
)
 
78,956

Effect of changes in exchange rates on cash
(378
)
 
1,656

Net increase in cash and cash equivalents
243,279

 
338,202

Cash, cash equivalents and restricted cash—beginning of period
2,658,253

 
1,667,526

Cash, cash equivalents and restricted cash—end of period
$
2,901,532

 
$
2,005,728

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
13,148

 
$
16,825

Cash paid for income taxes
$
1,835

 
$
1,897

Capitalization of costs related to construction financing lease obligation
$

 
$
3,716

Issuances of common stock from employee benefit plans receivable
$
510

 
$
2,124

Accrued share repurchase liability
$
4,000

 
$

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

6

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


A. Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Vertex Pharmaceuticals Incorporated (“Vertex” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The condensed consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries. The Company's condensed consolidated financial statements for the interim period ended March 31, 2018 also include the financial results of BioAxone Biosciences, Inc. (“BioAxone”), a variable interest entity (“VIE”) that the Company consolidated from 2014 through December 31, 2018. All material intercompany balances and transactions have been eliminated. The Company operates in one 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 2018 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, 2019 and 2018.
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, 2018, which are contained in the 2018 Annual Report on Form 10-K.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the amounts of revenues and expenses during the reported periods. Significant estimates in these condensed consolidated financial statements have been made in connection with the calculation of revenues, research and development expenses, goodwill, deferred tax asset valuation allowances and the provision for or benefit from income taxes. The Company bases its estimates on historical experience and various other assumptions, including in certain circumstances future projections that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
Recently Adopted Accounting Standards
Leases
In 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), which amends a number of aspects of lease accounting and requires entities to recognize right-of-use assets and liabilities on the balance sheet. ASC 842 became effective on January 1, 2019. The Company has finalized its review of its portfolio of existing leases and current accounting policies and has concluded that the amended guidance results in the recognition of additional assets and corresponding liabilities on its balance sheets. The Company also has finalized changes to its controls to address the adoption and ongoing lease accounting and related disclosure requirements of the new standard.
Until December 31, 2018, the Company applied build-to-suit accounting and was the deemed owner of its leased corporate headquarters in Boston and research site in San Diego, for which it was recognizing depreciation expense over the buildings’ useful lives and imputed interest on the corresponding construction financing lease obligations. Under the amended guidance that became effective January 1, 2019, the Company accounts for these buildings as finance leases, resulting in increased depreciation expense over the respective lease terms of 15-16 years, which are significantly shorter than the buildings’ useful lives of 40 years. The Company also expects a reduction in its imputed interest expense in the initial years of each finance lease term. In 2019, the Company expects an increase in operating expenses of approximately $26 million and a decrease in interest expense of approximately $13 million due to this change.


7

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

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which offered a transition option to entities adopting ASC 842. Under ASU 2018-11, entities could elect to apply ASC 842 using a modified-retrospective adoption approach resulting in a cumulative effect adjustment to accumulated deficit at the beginning of the year in which the new lease standard is adopted, rather than adjustments to the earliest comparative period presented in their financial statements. The Company adopted ASC 842 using the modified-retrospective method. As of January 1, 2019, the Company recorded a cumulative effect adjustment to increase its “Accumulated deficit” by $40.3 million related to the adjustments to its build-to-suit leases described in the previous paragraph.
The Company elected the package of transition practical expedients for leases that commenced prior to January 1, 2019, allowing it not to reassess (i) whether any expired or existing contracts contain leases, (ii) the lease classification for any expired or existing leases and (iii) the initial indirect costs for any existing leases.
Additionally, the Company recorded, upon adoption of ASC 842 on January 1, 2019, operating lease assets of $61.7 million and corresponding liabilities of $71.9 million related to its real estate leases that are not treated as finance leases under ASC 842. The difference between these assets and liabilities is primarily attributable to prepaid or accrued lease payments. The Company also reclassified amounts that were recorded as “Capital lease obligations, current portion” and “Capital lease obligations, excluding current portion” as of December 31, 2018 to “Other current liabilities” and “Long-term finance lease liabilities,” respectively, on January 1, 2019. These adjustments had no impact on the Company’s condensed consolidated statement of operations and had no impact on the Company’s accumulated deficit.
The cumulative effect of applying ASC 842 on the Company’s condensed consolidated balance sheet as of January 1, 2019 was as follows:
 
Balance as of
 
 
 
Balance as of
 
December 31, 2018 ^
 
Adjustments
 
January 1, 2019
Assets
(in thousands)
Prepaid expenses and other current assets
$
140,819

 
$
(2,930
)
 
$
137,889

Property and equipment, net
812,005

 
(53,920
)
 
758,085

Deferred tax assets
1,499,672

 
11,236

 
1,510,908

Operating lease assets

 
61,674

 
61,674

Total assets
$
6,245,898

 
$
16,060

 
$
6,261,958

Liabilities and Shareholders’ Equity
 
 
 
 
 
Capital lease obligations, current portion
$
9,817

 
$
(9,817
)
 
$

Other current liabilities
40,589

 
34,304

 
74,893

Capital lease obligations, excluding current portion
19,658

 
(19,658
)
 

Construction financing lease obligation, excluding current portion
561,892

 
(561,892
)
 

Long-term finance lease liabilities

 
569,487

 
569,487

Long-term operating lease liabilities

 
64,849

 
64,849

Other long-term liabilities
26,280

 
(20,903
)
 
5,377

Accumulated deficit
(2,989,478
)
 
(40,310
)
 
(3,029,788
)
Total liabilities and shareholders’ equity
$
6,245,898

 
$
16,060

 
$
6,261,958

^ As reported in the Company’s 2018 Annual Report on Form 10-K.
Please refer to Note K, “Leases,” for further information regarding the Company’s leases as well as certain disclosures required by ASC 842.
Derivatives and Hedging
In 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) (“ASU 2017-12”), which helps simplify certain aspects of hedge accounting and enables entities to more accurately present their risk management activities in their financial statements. ASU 2017-12 became effective January 1, 2019. The adoption of ASU 2017-12 did not have a significant effect on the Company’s condensed consolidated financial statements.


8

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

Recently Issued Accounting Standards
Internal-Use Software
In 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements.  ASU 2018-15 is effective on January 1, 2020. Early adoption is permitted. The Company currently is evaluating the impact the adoption of ASU 2018-15 may have on its condensed consolidated financial statements.
Fair Value Measurement
In 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements. ASU 2018-13 is effective on January 1, 2020. Early adoption is permitted. The Company currently is evaluating the impact the adoption of ASU 2018-13 may have on its disclosures.
For a discussion of other recent accounting pronouncements please refer to Note A, “Nature of Business and Accounting Policies—Recent Accounting Pronouncements,” in the 2018 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 2018 Annual Report on Form 10-K. The Company is disclosing changes in its accounting policies related to guidance that became effective January 1, 2019 in this Quarterly Report on Form 10-Q. Specifically, the Company has included its policy pursuant to its adoption of ASC 842 below.
Leases
At the inception of an arrangement, the Company determines whether the arrangement contains a lease. If a lease is identified in an arrangement, the Company recognizes a right-of-use asset and liability on its balance sheet and determines whether the lease should be classified as a finance or operating lease. The Company does not recognize assets or liabilities for leases with lease terms of less than 12 months.
A lease qualifies as a finance lease if any of the following criteria are met at the inception of the lease: (i) there is a transfer of ownership of the leased asset to the Company by the end of the lease term, (ii) the Company holds an option to purchase the leased asset that it is reasonably certain to exercise, (iii) the lease term is for a major part of the remaining economic life of the leased asset, (iv) the present value of the sum of lease payments equals or exceeds substantially all of the fair value of the leased asset, or (v) the nature of the leased asset is specialized to the point that it is expected to provide the lessor no alternative use at the end of the lease term. All other leases are recorded as operating leases.
Finance and operating lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term using the discount rate implicit in the lease. If the rate implicit is not readily determinable, the Company utilizes its incremental borrowing rate at the lease commencement date. Operating lease assets are further adjusted for prepaid or accrued lease payments. Operating lease payments are expensed using the straight-line method as an operating expense over the lease term. Finance lease assets are amortized to depreciation expense using the straight-line method over the shorter of the useful life of the related asset or the lease term. Finance lease payments are bifurcated into (i) a portion that is recorded as imputed interest expense and (ii) a portion that reduces the finance liability associated with the lease.
The Company does not separate lease and non-lease components when determining which lease payments to include in the calculation of its lease assets and liabilities. Variable lease payments are expensed as incurred. If a lease includes an option to extend or terminate the lease, the Company reflects the option in the lease term if it is reasonably certain it will exercise the option.


9

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

Finance leases are recorded in “Property and equipment, net,” “Other current liabilities” and “Long-term finance lease liabilities” on the Company’s condensed consolidated balance sheet. Operating leases are recorded in “Operating lease assets,” “Other current liabilities” and “Long-term operating lease liabilities” on the Company’s condensed consolidated balance sheet.
B.
Revenue Recognition
Disaggregation of Revenue
Revenues by Product
Product revenues, net consisted of the following:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
SYMDEKO/SYMKEVI
$
320,275

 
$
34,124

ORKAMBI
293,007

 
354,066

KALYDECO
243,971

 
249,539

Total product revenues, net
$
857,253

 
$
637,729

Revenues by Geographic Location
Net product revenues are attributed to countries based on the location of the customer. Collaborative and royalty revenues are attributed to countries based on the location of the Company’s subsidiary associated with the collaborative arrangement related to such revenues. Total revenues from external customers and collaborators by geographic region consisted of the following:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
United States
$
641,104

 
$
482,667

Outside of the United States
 
 
 
Europe
167,751

 
131,895

Other
49,580

 
26,237

Total revenues outside of the United States
217,331

 
158,132

Total revenues
$
858,435

 
$
640,799

In the three months ended March 31, 2019 and 2018, revenues attributable to Germany contributed the largest amount to the Company’s European revenues.
French Early Access Programs
In 2015, the Company began distributing ORKAMBI through early access programs in France and continues to be engaged in ongoing pricing discussions regarding the final price for ORKAMBI in France. The Company expects that the difference between the amounts it has collected to date based on the invoiced price and the final negotiated price for ORKAMBI in France will be returned to the French government.
Pursuant to the revenue recognition accounting guidance that was applicable until December 31, 2017, the Company’s ORKAMBI net product revenues for 2015, 2016 and 2017 did not include any net product revenues from sales of ORKAMBI in France because the price was not fixed and determinable at the time of delivery. Upon adopting ASU 2014-09, Revenues from Contracts with Customers (Topic 606), in the first quarter of 2018, the Company began recognizing net product revenues on a portion of its current period sales based on its estimate of consideration it expects to retain that will not be subject to a significant reversal in amounts recognized. If the Company’s estimate regarding the amounts it will receive for


10

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

ORKAMBI supplied pursuant to these early access programs changes, the Company will reflect the effect of the change in estimate in “Product revenues, net” in the period in which the change in estimate occurs.
As of March 31, 2019 and December 31, 2018, the Company’s condensed consolidated balance sheets included an “Early access sales accrual” of $382.7 million and $354.4 million, respectively, which was primarily related to the amount it may be required to return to the French government related to ORKAMBI early access programs, which is considered to be a refund liability.
Contract Liabilities
The Company recorded contract liabilities of $51.4 million and $24.9 million as of March 31, 2019 and December 31, 2018, 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, which are classified as “Other current liabilities,” include upfront payments and fees.  The Company defers a portion of the consideration received for shipments made up to the annual reimbursement limit, and the deferred amount is recognized as revenue when the free products are shipped. The Company’s product revenue contracts include performance obligations that are one year or less.
Several of the Company’s contract liabilities 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 the majority of international markets in which the Company has a contract with an annual reimbursement limit, the annual period associated with the contract is the same as the Company’s fiscal year, resulting in no contract liability balance at the end of the year and no revenues recognized in the current year related to performance obligations satisfied in previous years. For the international markets in which the periods associated with these annual contracts are not the same as the Company’s fiscal year, the Company recognizes revenues related to performance obligations satisfied in previous years; however, these amounts are not material to the Company’s financial statements and 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 and Acquisitions
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 and asset acquisitions.
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 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 unless otherwise described below.
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
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


11

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

Company has the exclusive right to license up to six CRISPR-Cas9-based targets, including targets for the potential treatment of sickle cell disease. In connection with the CRISPR Agreement, the Company made an upfront payment to CRISPR of $75.0 million and an investment in CRISPR’s stock. The Company has also made several subsequent investments in CRISPR’s common stock, which has resulted in CRISPR becoming a related party of the Company. Please refer to Note F, “Marketable Securities and Equity Investments,” for further information regarding the Company’s investment in CRISPR’s common stock.
The Company funds all the discovery activities conducted pursuant to the CRISPR Agreement. For targets that the Company elects to license, other than hemoglobinopathy treatments, the Company would lead all development and global commercialization activities. For each target that the Company elects to license, other than hemoglobinopathy targets, CRISPR has the potential to receive up to $420.0 million in development, regulatory and commercial milestones as well as royalties on net product sales. As part of the collaboration, the Company and CRISPR share equally all development costs and potential worldwide revenues related to potential hemoglobinopathy treatments, including treatments for beta thalassemia and sickle cell disease.
In 2017, the Company entered into a co-development and co-commercialization agreement with CRISPR pursuant to the terms of the CRISPR Agreement, under which the Company and CRISPR are co-developing and will co-commercialize CTX001 (the “CTX001 Co-Co Agreement”) for the treatment of hemoglobinopathy, including treatments for sickle cell disease and beta thalassemia. The Company concluded that the CTX001 Co-Co Agreement is a cost-sharing arrangement, which results in the net impact of the arrangement being recorded in “Research and development expenses” in its condensed consolidated statements of operations. During the three months ended March 31, 2019 and 2018, the net expense related to the CTX001 Co-Co Agreement was $7.0 million and $3.6 million, respectively.
Other In-license Agreements
In 2016, the Company entered into a strategic collaboration and licensing agreement with Moderna Therapeutics, Inc. (“Moderna”), pursuant to which the parties are seeking to identify and develop messenger ribonucleic acid, or mRNA, therapeutics for the treatment of CF. The Company made an upfront payment to Moderna of $20.0 million and an investment in Moderna’s preferred stock, which converted to common stock when Moderna became a publicly traded company in December 2018. Moderna has the potential to receive future development and regulatory milestones of up to $275.0 million, as well as royalties on net product sales. Please refer to Note F, “Marketable Securities and Equity Investments,” for further information regarding the Company’s investment in Moderna’s common stock.
In December 2018, the Company entered into a strategic collaboration and licensing agreement (the “Arbor Agreement”) with Arbor Biotechnologies, Inc. (“Arbor”) focused on the discovery of novel proteins, including DNA endonucleases, to advance the development of new gene-editing therapies. Pursuant to the Arbor Agreement, Arbor’s platform technology is being applied in the collaboration activities for up to five Vertex disease areas in exchange for an upfront payment of $30.0 million. In addition, the Company received a convertible promissory note that matures in 2023 for an additional $15.0 million payment. For each product identified by the collaboration, Arbor has the potential to receive up to $337.5 million in development, regulatory and commercial milestones as well as royalties on net product sales.
The Company determined that the fair value of the convertible promissory note approximated its contractual value upon agreement execution and classifies the convertible note in “Other assets” at amortized cost. The Company determined that substantially all of the fair value of the Arbor Agreement was attributable to an in-process research and development asset and no substantive processes were acquired that would constitute a business. The Company concluded that it did not have any alternative future use for the acquired in-process research and development asset and recorded the $30.0 million upfront payment to “Research and development expenses.”
In 2015, the Company entered into a strategic collaboration and license agreement with Parion Sciences, Inc. (“Parion”) focused on the development of investigational epithelial sodium channel (“ENaC”) inhibitors for the potential treatment of CF and all other pulmonary diseases.  Parion received a $5.0 million milestone that was recorded as “Research and development expenses” in the three months ended March 31, 2019 and has the potential to receive additional development and regulatory milestones related to the ENaC inhibitors.


12

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

Variable Interest Entities (VIEs)
The Company has licensed rights to certain drug candidates from these third-party collaborators, which has resulted in the consolidation of certain third-parties’ financial statements into the Company’s condensed consolidated financial statements as VIEs for certain periods of time. As of December 31, 2018, and continuing through the first quarter of 2019, the Company had no consolidated VIEs reflected in its financial statements.
BioAxone Biosciences, Inc.
In 2014, the Company entered into a license and collaboration agreement (the “BioAxone Agreement”) with BioAxone, which resulted in the consolidation of BioAxone as a VIE beginning in October 2014. The Company made an initial payment to BioAxone of $10.0 million in 2014.
In the three months ended March 31, 2018, the Company recorded net income attributable to noncontrolling interest of $17.0 million, which was primarily related to a $24.0 million increase in the fair value of the contingent payments payable by Vertex to BioAxone due to (i) the expiration of an option held by the Company to purchase BioAxone in the first quarter of 2018 that increased the probability of a $10.0 million license continuation fee for VX-210 (which was ultimately paid in the first quarter of 2018) and (ii) the probability that additional milestone and royalty payments related to the BioAxone Agreement would be paid. Net income attributable to noncontrolling interest also included a $6.4 million benefit from income taxes during the three months ended March 31, 2018 that was primarily related to the increase in the fair value of the contingent payments.
In October 2018, the Company announced it would stop clinical development of VX-210 and terminate the Phase 2b clinical trial of VX-210 based on the recommendation of the clinical trial’s Data Safety Monitoring Board and the Company’s review of interim data from the clinical trial. In December 2018, the Company notified BioAxone of its intent to terminate the BioAxone Agreement and executed a release that immediately allowed BioAxone to control development of its neurological programs other than VX-210 without the Company’s consent. As a result, the Company deconsolidated BioAxone as of December 31, 2018 because it determined that it no longer was the primary beneficiary of BioAxone as it no longer had the power to direct the significant activities of BioAxone. The net impact of the deconsolidation was not material to the Company’s condensed consolidated statement of operations.
Asset Acquisition
Concert Pharmaceuticals
In 2017, the Company acquired certain CF assets including VX-561 (the “Concert Assets”) from Concert Pharmaceuticals Inc. (“Concert”) pursuant to an asset purchase agreement (the “Concert Agreement”). VX-561 is an investigational CFTR potentiator that has the potential to be used as part of combination regimens of CFTR modulators to treat CF. Pursuant to the Concert Agreement, Vertex paid Concert $160.0 million in cash for the Concert Assets, which was recorded to “Research and development expenses” in 2017. If VX-561 is approved as part of a combination regimen to treat CF, Concert could receive up to an additional $90.0 million in milestones based on regulatory approval in the United States and reimbursement in the United Kingdom, Germany or France.
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 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.


13

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

Merck KGaA, Darmstadt, Germany
In January 2017, the Company entered into a strategic collaboration and license agreement (the “Oncology Agreement”) with Merck KGaA, Darmstadt, Germany (the “Licensee”). Pursuant to the Oncology Agreement, the Company granted the Licensee an exclusive worldwide license to research, develop and commercialize four oncology research and development programs including two clinical-stage programs targeting DNA damage repair: its ataxia telangiectasia and Rad3-related protein kinase inhibitor program, or ATR program, including VX-970 and VX-803, and its DNA-dependent protein kinase inhibitor program, or DNA-PK program, including VX-984. In addition, the Company granted the Licensee exclusive, worldwide rights to two pre-clinical programs. The Company recorded the $230.0 million upfront payment related to the Oncology Agreement as “Collaborative and royalty revenues” upon delivery of the license in 2017. The Company’s activities related to the Oncology Agreement were substantially complete in 2017.
In December 2018, the Company entered into an agreement with Merck KGaA, Darmstadt, Germany (the “DNA-PK Agreement”) whereby the Company licensed the two lead Vertex DNA-PK compounds from its DNA-PK program for use in the field of gene integration for six specific indications. In exchange for this exclusive worldwide license to research, develop and commercialize the DNA-PK program for the specified indications within the field of gene integration, the Company made an upfront payment of $65.0 million. Merck KGaA, Darmstadt, Germany has the potential to receive additional milestones, primarily related to approval and reimbursement in various markets, as well as royalties on net product sales.
The Company evaluated the DNA-PK Agreement and concluded it represents a modification of the Oncology Agreement pursuant to ASC 606. As of December 2018, when the Company entered into the DNA-PK Agreement, the Company had completed its obligations under the Oncology Agreement, but the Oncology Agreement was an open contract pursuant to ASC 606 since the Company could receive future royalty payments from the commercialization of the licensed programs under the Oncology Agreement.
In applying ASC 606, the Company determined that the license granted under the DNA-PK Agreement is distinct from the license granted by the Company under the Oncology Agreement since the license to the two lead Vertex DNA-PK compounds is capable of being distinct as the Company is able to benefit from the license via its ability to internally develop and commercialize the two lead Vertex DNA-PK compounds in the six named indications in the field of gene-editing, and the license is not dependent on Merck KGaA, Darmstadt, Germany providing any specialized services to the Company. In addition, the license to the two lead Vertex DNA-PK compounds granted to the Company under the DNA-PK Agreement is distinct from the license granted by the Company under the Oncology Agreement as the rights conveyed in the licenses differ and both parties have the ability to commercially benefit from the licenses on their own. Furthermore, the consideration attributable to the license of the two lead Vertex DNA-PK compounds represents fair value. Therefore, the Company determined it should account for the DNA-PK Agreement as a separate agreement.
The Company determined that substantially all of the fair value of the DNA-PK Agreement was attributable to a single in-process research and development asset that did not constitute a business. The Company concluded that it did not have any alternative future use for the acquired in-process research and development asset and recorded the $65.0 million payment to “Research and development expenses” accordingly.
Janssen Pharmaceuticals, Inc.
In 2014, the Company entered into an agreement with Janssen Pharmaceuticals, Inc. (“Janssen”). Pursuant to the agreement, Janssen has an exclusive worldwide license to develop and commercialize certain drug candidates for the treatment of influenza, including pimodivir. The Company has received upfront and milestone payments of $60.0 million from Janssen to date. The most recent milestone was earned based on Janssen’s initiation of a Phase 3 clinical trial in 2017.
Cystic Fibrosis Foundation
The Company has a research, development and commercialization agreement that was originally entered into in 2004 with Cystic Fibrosis Foundation (“CFF”), as successor in interest to the Cystic Fibrosis Foundation Therapeutics, Inc. This agreement was most recently amended in 2016 (the “2016 Amendment”). Pursuant to the agreement, as amended, the Company agreed to pay royalties ranging from low-single digits to mid-single digits on potential sales of certain compounds


14

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

first synthesized and/or tested between March 1, 2014 and August 31, 2016, including VX-659 and VX-445, and tiered royalties ranging from single digits to sub-teens on any approved drugs first synthesized and/or tested during a research term on or before February 28, 2014, including KALYDECO (ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor). For combination products, such as ORKAMBI and SYMDEKO, sales are allocated equally to each of the active pharmaceutical ingredients in the combination product. There are no remaining commercial milestone payments payable by the Company to CFF pursuant to the agreement.
Pursuant to the 2016 Amendment, the Company received an upfront payment of $75.0 million and is receiving development funding from CFF of up to $6.0 million annually. The Company concluded that the upfront payment plus any future development funding represent a form of financing pursuant to ASC 730 and thus records the amounts as a liability on the condensed consolidated balance sheet, primarily reflected in “Long-term advance from collaborator.” The Company reduces this liability over the estimated royalty term of the agreement and reflects the reductions as an offset to “Cost of sales” and as “Interest expense.”
The Company has royalty obligations to CFF for ivacaftor, lumacaftor and tezacaftor until the expiration of patents covering those compounds. The Company has patents in the United States and European Union covering the composition-of-matter of ivacaftor that expire in 2027 and 2025, respectively, subject to potential patent extension. The Company has patents in the United States and European Union covering the composition-of-matter of lumacaftor that expire in 2030 and 2026, respectively, subject to potential extension. The Company has patents in the United States and European Union covering the composition-of-matter of tezacaftor that expire in 2027 and 2028, respectively, subject to potential extension.
D.
Earnings Per Share
Basic net income per share attributable to Vertex common shareholders is based upon the weighted-average number of common shares outstanding during the period, excluding restricted stock, restricted stock units and performance-based restricted stock units, or “PSUs,” that have been issued but are not yet vested. Diluted net income per share attributable to Vertex common shareholders is based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period when the effect is dilutive.


15

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

The following table sets forth the computation of basic and diluted net income per share for the periods ended:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands, except per share amounts)
Basic net income attributable to Vertex per common share calculation:
 
 
 
Net income attributable to Vertex common shareholders
$
268,631

 
$
210,263

Less: Undistributed earnings allocated to participating securities

 
(99
)
Net income attributable to Vertex common shareholders—basic
$
268,631

 
$
210,164

 
 
 
 
Basic weighted-average common shares outstanding
255,695

 
253,231

Basic net income attributable to Vertex per common share
$
1.05

 
$
0.83

 
 
 
 
Diluted net income attributable to Vertex per common share calculation:
 
 
 
Net income attributable to Vertex common shareholders
$
268,631

 
$
210,263

Less: Undistributed earnings allocated to participating securities

 
(97
)
Net income attributable to Vertex common shareholders—diluted
$
268,631

 
$
210,166

 
 
 
 
Weighted-average shares used to compute basic net income per common share
255,695

 
253,231

Effect of potentially dilutive securities:
 
 
 
Stock options
2,585

 
3,248

Restricted stock and restricted stock units (including PSUs)
1,870

 
2,013

Employee stock purchase program
25

 
34

Weighted-average shares used to compute diluted net income per common share
260,175

 
258,526

Diluted net income attributable to Vertex per common share
$
1.03

 
$
0.81

The Company did not include the securities in the following table in the computation of the net income per share attributable to Vertex common shareholders calculations because the effect would have been anti-dilutive during each period:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Stock options
2,837

 
1,633

Unvested restricted stock and restricted stock units (including PSUs)
6

 
4

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:


16

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. The Company maintains strategic investments separately from the investment policy that governs its other cash, cash equivalents and marketable securities as described in “Note F, “Marketable Securities and Equity Investments.” As of March 31, 2019, the Company’s investments were in money market funds, U.S. Treasury securities, government-sponsored enterprise securities, corporate debt securities, commercial paper 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, 2019, all of the Company’s financial assets and liabilities that were subject to fair value measurements were valued using observable inputs. The Company’s financial assets valued based on Level 1 inputs consisted of money market funds, U.S. Treasury securities, government-sponsored enterprise securities and corporate equity securities. The Company’s financial assets and liabilities valued based on Level 2 inputs consisted of 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. In 2018, Moderna became a publicly traded company. The Company has valued its investment in Moderna based on Level 2 inputs due to transfer restrictions subsequent to Moderna’s initial public offering lasting until December 2019. The reduction in fair value recorded on the Company’s condensed consolidated balance sheet related to this transfer restriction is not material to its financial statements. During the three months ended March 31, 2019 and 2018, the Company did not record any other-than-temporary impairment charges related to its financial assets.


17

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

The following table sets forth the Company’s financial assets and liabilities subject to fair value measurements (and does not include $1.5 billion and $1.4 billion of cash as of March 31, 2019 and December 31, 2018, respectively):
 
Fair Value Measurements as of March 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
$
1,354,656

 
$
1,354,656

 
$

 
$

U.S. Treasury securities
5,996

 
5,996

 

 

Government-sponsored enterprise securities
11,786

 
11,786

 

 

Corporate debt securities
4,519

 

 
4,519

 

Commercial paper
35,955

 

 
35,955

 

Marketable securities:
 
 
 
 
 
 
 
Corporate equity securities
210,874

 
192,207

 
18,667

 

Government-sponsored enterprise securities
15,181

 
15,181

 

 

Corporate debt securities
231,572

 

 
231,572

 

Commercial paper
126,523

 

 
126,523

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
19,210

 

 
19,210

 

Other assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
973

 

 
973

 

Total financial assets
$
2,017,245


$
1,579,826

 
$
437,419

 
$

Financial instruments carried at fair value (liability positions):
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(310
)
 
$

 
$
(310
)
 
$

Other long-term liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
(68
)
 

 
(68
)
 

Total financial liabilities
$
(378
)
 
$

 
$
(378
)
 
$



18

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

 
Fair Value Measurements as of December 31, 2018
 
 
 
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
$
1,226,603

 
$
1,226,603

 
$

 
$

U.S. Treasury securities
5,966

 
5,966

 

 

Government-sponsored enterprise securities
7,123

 
7,123

 

 

Commercial paper
58,268

 

 
58,268

 

Marketable securities:
 
 
 
 
 
 
 
Corporate equity securities
167,323

 
153,733

 
13,590

 

U.S. Treasury securities
6,026

 
6,026

 

 

Government-sponsored enterprise securities
10,704

 
10,704

 

 

Corporate debt securities
233,665

 

 
233,665

 

Commercial paper
100,390

 

 
100,390

 

Prepaid expenses and other current assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
19,023

 

 
19,023

 

Other assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
1,514

 

 
1,514

 

Total financial assets
$
1,836,605

 
$
1,410,155

 
$
426,450

 
$

Financial instruments carried at fair value (liability positions):
 
 
 
 
 
 
 
Other current liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
(340
)
 
$

 
$
(340
)
 
$

Other long-term liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
(108
)
 

 
(108
)
 

Total financial liabilities
$
(448
)
 
$

 
$
(448
)
 
$

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


19

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

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 $1.5 billion and $1.4 billion of cash as of March 31, 2019 and December 31, 2018, respectively), is shown below:
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
As of March 31, 2019
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,354,656

 
$

 
$

 
$
1,354,656

U.S. Treasury securities
5,996

 

 

 
5,996

Government-sponsored enterprise securities
11,787

 

 
(1
)
 
11,786

Corporate debt securities
4,519

 

 

 
4,519

Commercial paper
35,959

 

 
(4
)
 
35,955

Total cash equivalents
1,412,917

 

 
(5
)
 
1,412,912

Marketable securities:
 
 
 
 
 
 
 
Government-sponsored enterprise securities
15,180

 
2

 
(1
)
 
15,181

Corporate debt securities
231,516

 
88

 
(32
)
 
231,572

Commercial paper
126,515

 
34

 
(26
)
 
126,523

Total marketable debt securities
373,211

 
124

 
(59
)
 
373,276

Corporate equity securities
133,157

 
79,093

 
(1,376
)
 
210,874

Total marketable securities
$
506,368

 
$
79,217

 
$
(1,435
)
 
$
584,150

 
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
1,226,603

 
$

 
$

 
$
1,226,603

U.S. Treasury securities
5,967

 

 
(1
)
 
5,966

Government-sponsored enterprise securities
7,124

 

 
(1
)
 
7,123

Commercial paper
58,271

 

 
(3
)
 
58,268

Total cash equivalents
1,297,965

 

 
(5
)
 
1,297,960

Marketable securities:
 
 
 
 
 
 
 
U.S. Treasury securities
6,026

 

 

 
6,026

Government-sponsored enterprise securities
10,704

 

 

 
10,704

Corporate debt securities
234,088


27

 
(450
)
 
233,665

Commercial paper
100,498

 

 
(108
)
 
100,390

Total marketable debt securities
351,316

 
27

 
(558
)
 
350,785

Corporate equity securities
133,157

 
40,619

 
(6,453
)
 
167,323

Total marketable securities
$
484,473

 
$
40,646

 
$
(7,011
)
 
$
518,108

Available-for-sale debt securities were recorded in the Company's condensed consolidated balance sheets at fair value as follows:
 
As of March 31, 2019
 
As of December 31, 2018
 
(in thousands)
Cash and cash equivalents
$
1,412,912

 
$
1,297,960

Marketable securities
373,276

 
350,785

Total
$
1,786,188

 
$
1,648,745



20

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

Available-for-sale debt securities by contractual maturity were as follows:
 
As of March 31, 2019
 
As of December 31, 2018
 
(in thousands)
Matures within one year
$
1,775,571

 
$
1,647,500

Matures after one year through five years
10,617

 
1,245

Total
$
1,786,188

 
$
1,648,745

The Company has a limited number of available-for-sale debt securities in insignificant loss positions as of March 31, 2019, which it does not intend to sell and has concluded it will not be required to sell before recovery of the amortized costs for the investments at maturity. The Company did not 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, 2019 and 2018.
The Company maintains strategic investments separately from the investment policy that governs its other cash, cash equivalents and marketable securities. The Company’s investments in the common stock of publicly traded companies, CRISPR and Moderna as of March 31, 2019 and December 31, 2018, respectively, have readily determinable fair values and are recorded in “Marketable securities” on its condensed consolidated balance sheets. As of March 31, 2019 and December 31, 2018, the total fair value of the Company’s strategic investments in the common stock of publicly traded companies, was $210.9 million and $167.3 million, respectively. During the three months ended March 31, 2019 and 2018, the Company recorded unrealized gains of $43.6 million and $95.5 million, respectively, primarily related to increases in the fair value of its investment in CRISPR.
As of March 31, 2019, the carrying value of the Company’s equity investments without readily determinable fair values, which are recorded in “Other assets” on its condensed consolidated balance sheets, was $13.6 million.
G.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive (loss) income by component:
 
 
 
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, 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



21

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

 
 
 
Unrealized Holding Gains (Losses), Net of Tax
 
 
 
Foreign Currency Translation Adjustment
 
On Available-For-Sale Debt Securities
 
On Equity Securities
 
On Foreign Currency Forward Contracts
 
Total
 
(in thousands)
Balance at December 31, 2017
$
(21,031
)
 
$
(594
)
 
$
25,069

 
$
(15,016
)
 
$
(11,572
)
Other comprehensive loss before reclassifications
(2,729
)
 
(460
)
 

 
(7,639
)
 
(10,828
)
Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 
6,777

 
6,777

Net current period other comprehensive loss
(2,729
)
 
(460
)
 

 
(862
)
 
(4,051
)
Amounts reclassified to accumulated deficit pursuant to adoption of new accounting standard
949

 

 
(25,069
)
 

 
(24,120
)
Balance at March 31, 2018
$
(22,811
)
 
$
(1,054
)
 
$

 
$
(15,878
)
 
$
(39,743
)
H.
Hedging
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 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.
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. 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, 2019, 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, 2019 and December 31, 2018, credit risk did not change the fair value of the Company’s foreign currency forward contracts.


22

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

The following table summarizes the notional amount of the Company’s outstanding foreign currency forward contracts designated as cash flow hedges under GAAP:
 
As of March 31, 2019
 
As of December 31, 2018
Foreign Currency
(in thousands)
Euro
$
373,264

 
$
335,179

British pound sterling
76,685

 
73,460

Australian dollar
70,889

 
52,820

Canadian dollar
40,089

 
43,759

Total foreign currency forward contracts
$
560,927

 
$
505,218

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, 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 GAAP. The Company recognizes realized gains and losses for such contracts in “Other income, net” in its condensed consolidated statements of operations each period. As of March 31, 2019, the notional amount of the Company’s outstanding foreign currency forward contracts where hedge accounting under GAAP is not applied was $220.9 million.
During the three months ended March 31, 2019 and 2018, the Company recognized the following related to foreign currency forward contacts in its condensed consolidated statements of operations:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Designated as hedging instruments - Reclassified from AOCI
 
 
 
Product revenues, net
$
6,839

 
$
(6,485
)
Not designated as hedging instruments
 
 
 
Other income, net
$
3,151

 
$
1,539

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 its condensed consolidated balance sheets:
As of March 31, 2019
Assets
 
Liabilities
Classification
 
Fair Value
 
Classification
 
Fair Value
(in thousands)
Prepaid expenses and other current assets
 
$
19,210

 
Other current liabilities
 
$
(310
)
Other assets
 
973

 
Other long-term liabilities
 
(68
)
Total assets
 
$
20,183

 
Total liabilities
 
$
(378
)
As of December 31, 2018
Assets
 
Liabilities
Classification
 
Fair Value
 
Classification
 
Fair Value
(in thousands)
Prepaid expenses and other current assets
 
$
19,023

 
Other current liabilities
 
$
(340
)
Other assets
 
1,514

 
Other long-term liabilities
 
(108
)
Total assets
 
$
20,537

 
Total liabilities
 
$
(448
)


23

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

As of March 31, 2019, the Company expects amounts that are related to foreign exchange forward contracts designated as cash flow hedges under GAAP recorded in “Prepaid expenses and other current assets” and “Other current 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 GAAP on the Company’s condensed consolidated balance sheets:
 
As of March 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
$
20,183

 
$

 
$
20,183

 
$
(378
)
 
$
19,805

Total liabilities
$
(378
)
 
$

 
$
(378
)
 
$
378

 
$

 
As of December 31, 2018
 
Gross Amounts Recognized
 
Gross Amounts Offset
 
Gross Amounts Presented
 
Gross Amounts Not Offset
 
Legal Offset
Foreign currency forward contracts
(in thousands)
Total assets
$
20,537

 
$

 
$
20,537

 
$
(448
)
 
$
20,089

Total liabilities
$
(448
)
 
$

 
$
(448
)
 
$
448

 
$

I. Inventories
Inventories consisted of the following:
 
As of March 31, 2019
 
As of December 31, 2018
 
(in thousands)
Raw materials
$
11,649

 
$
9,677

Work-in-process
80,529

 
87,944

Finished goods
44,520

 
26,739

Total
$
136,698

 
$
124,360

J. Revolving Credit Facility
In October 2016, the Company entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent and the lenders referred to therein. The Credit Agreement provides for a $500.0 million revolving facility, $300.0 million of which was drawn at closing (the “Loans”) and was repaid in February 2017. The Credit Agreement also provides that, subject to satisfaction of certain conditions, the Company may request that the borrowing capacity under the Credit Agreement be increased by an additional $300.0 million. The Credit Agreement matures on October 13, 2021.
The Loans will bear interest, at the Company’s option, at either a base rate or a Eurodollar rate, in each case plus an applicable margin. Under the Credit Agreement, the applicable margins on base rate loans range from 0.75% to 1.50% and the applicable margins on Eurodollar loans range from 1.75% to 2.50%, in each case based on the Company’s consolidated leverage ratio (the ratio of the Company’s total consolidated debt to the Company’s trailing twelve-month EBITDA).
The Loans are guaranteed by certain of the Company’s domestic subsidiaries and secured by substantially all of the Company’s assets and the assets of the Company’s domestic subsidiaries (excluding intellectual property, owned and leased real property and certain other excluded property) and by the equity interests of the Company’s subsidiaries, subject to certain exceptions. Under the terms of the Credit Agreement, the Company must maintain, subject to certain limited exceptions, a consolidated leverage ratio of 3.00 to 1.00 and consolidated EBITDA of at least $200.0 million, in each case measured on a quarterly basis.


24

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

The Credit Agreement contains customary representations and warranties and usual and customary affirmative and negative covenants. The Credit Agreement also contains 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.
K. Leases
Finance Leases
The Company’s finance lease assets and liabilities primarily relate to its corporate headquarters in Boston and research site in San Diego (the “Buildings”). These Buildings are classified as finance leases because the present value of the sum of the lease payments associated with the Buildings exceeds substantially all of the fair value of the Buildings. The Company also has outstanding finance leases for equipment.  
Prior to the adoption of ASC 842 on January 1, 2019, the Company was deemed for accounting purposes to be the owner of the Buildings during their construction periods and recorded project construction costs incurred by its landlords. Upon completion of the Buildings, the Company determined that the underlying leases did not meet the criteria for “sale-leaseback” treatment. Accordingly, the Company depreciated the Buildings over 40 years and recorded interest expense associated with the financing obligations for the Buildings. The Company bifurcated the lease payments pursuant to the Buildings into (i) a portion that was 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 was treated as an operating lease.
Pursuant to ASC 842, the Company adjusted the amounts recorded on its condensed consolidated balance sheet as of January 1, 2019 for the Buildings to reflect the present value of the lease payments over the remaining lease term related to the Buildings. The finance lease assets associated with the Buildings are amortized to depreciation expense using the straight-line method over the remaining lease term, which is significantly shorter than the Buildings’ useful lives. The Company continues to record interest expense associated with the finance lease liabilities for the Buildings.
Corporate Headquarters
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 in Boston, Massachusetts for a term of 15 years. Base rent payments commenced in December 2013, and will continue through December 2028. The Company utilizes this initial period as its lease term. The Company has an option to extend the lease terms for an additional ten years.
San Diego Lease
In 2015, the Company entered into a lease agreement pursuant to which the Company leases approximately 170,000 square feet of office and laboratory space in San Diego, California for a term of 16 years. Base rent payments will commence in the second quarter of 2019, and will continue through May 2034. The Company utilizes this initial period as its lease term. The Company has an option to extend the lease term for up to two additional five-year terms. The Company placed this building in service in the second quarter of 2018.
Operating Leases
The Company’s operating leases relate to its real estate leases that are not classified as finance leases.


25

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

Aggregate Lease Information Related to the Application of ASC 842
The following information is disclosed in accordance with ASC 842, which became effective January 1, 2019. The components of lease cost recorded in the Company’s condensed consolidated statement of operations were as follows:
 
Three Months Ended March 31, 2019
 
(in thousands)
Operating lease cost
$
2,639

Finance lease cost
 
Amortization of leased assets
12,365

Interest on lease liabilities
13,449

Variable lease cost
6,762

Sublease income
(1,484
)
Net lease cost
$
33,731

The Company’s variable lease cost during the three months ended March 31, 2019 primarily related to operating expenses, taxes and insurance associated with its finance leases. The Company’s sublease income during the three months ended March 31, 2019 primarily related to subleases for an insignificant portion of the Company’s corporate headquarters.
The Company’s leases are included on its condensed consolidated balance sheets as follows:
 
As of March 31, 2019
 
As of December 31, 2018 ^
 
(in thousands)
Finance leases
 
 
 
Property and equipment, net
$
473,129

 
$
640,952

Total finance lease assets
$
473,129

 
$
640,952

 
 
 
 
Capital lease obligations, current portion
$

 
$
9,817

Other current liabilities
35,725

 
5,271

Capital lease obligations, excluding current portion

 
19,658

Construction financing lease obligation, excluding current portion

 
561,892

Long-term finance lease liabilities
560,381

 

Total finance lease liabilities
$
596,106

 
$
596,638

 
 
 
 
Operating leases
 
 
 
Operating lease assets
$
60,573

 
$

Total operating lease assets
$
60,573

 
$

 
 
 
 
Other current liabilities
$
7,520

 
$

Long-term operating lease liabilities
63,484

 

Total operating lease liabilities
$
71,004

 
$

^ As reported in the Company’s 2018 Annual Report on Form 10-K.
Maturities of the Company’s finance and operating lease liabilities in accordance with ASC 842 as of March 31, 2019 were as follows:


26

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

Year
 
Finance Leases
 
Operating Leases
 
Total
 
 
(in thousands)
Remainder of 2019
 
$
61,339

 
$
7,331

 
$
68,670

2020
 
88,998

 
10,366

 
99,364

2021
 
87,365

 
8,658

 
96,023

2022
 
85,016

 
8,233

 
93,249

2023
 
84,092

 
8,151

 
92,243

Thereafter
 
512,804

 
46,212

 
559,016

Total lease payments
 
919,614

 
88,951

 
1,008,565

Less: amount representing interest
 
(323,508
)
 
(17,947
)
 
(341,455
)
Present value of lease liabilities
 
$
596,106

 
$
71,004

 
$
667,110

The weighted-average remaining lease terms and discount rates related to the Company’s leases were as follows:
 
Three Months Ended March 31, 2019
Weighted-average remaining lease term (in years)
 
Finance leases
10.45

Operating leases
10.91

 
 
Weighted-average discount rate
 
Finance leases
9.11
%
Operating leases
4.05
%
Please refer to Note O, “Additional Cash Flow Information,” for cash flow impact of the Company’s leases.
Additional Lease Information Related to the Application of ASC 840
The following information is disclosed in accordance with ASC 840, Leases (Topic 840) (“ASC 840”), which was applicable until December 31, 2018. As of December 31, 2018, future minimum commitments under the Company’s real estate leases with initial terms of more than one year were as follows:
Year
 
Fan Pier
Leases
 
San Diego
Lease
 
Other
Leases
 
Total Lease
Commitments
 
 
(in thousands)
2019
 
$
66,540

 
$
5,324

 
$
13,207

 
$
85,071

2020
 
72,589

 
9,127

 
14,270

 
95,986

2021
 
72,589

 
9,127

 
12,529

 
94,245

2022
 
72,589

 
9,127

 
12,045

 
93,761

2023
 
72,589

 
9,530

 
11,952

 
94,071

Thereafter
 
389,855

 
119,864

 
65,472

 
575,191

Total minimum lease payments
 
$
746,751

 
$
162,099

 
$
129,475

 
$
1,038,325

As of December 31, 2018, the Company’s total sublease income to be received related to its facility leases was $6.2 million. During the three months ended March 31, 2018, rental expense was $4.6 million.


27

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

As of December 31, 2018, the Company had outstanding capital leases totaling gross property and equipment of $94.8 million and accumulated depreciation of $34.0 million. The capital leases, which were related to equipment and leasehold improvements, bore interest at rates ranging from less than 1% to 6% per year. The Company’s capital lease amortization was included in depreciation expense during the three months ended March 31, 2018. The following table set forth the Company’s future minimum payments due under capital leases as of December 31, 2018:
Year
 
(in thousands)
2019
 
$
10,770

2020
 
7,282

2021
 
5,649

2022
 
3,300

2023
 
1,974

Thereafter
 
3,085

Total payments
 
32,060

Less: amount representing interest
 
(2,585
)
Present value of payments
 
$
29,475

L. Stock-based Compensation Expense and Share Repurchase
Stock-based compensation expense
During the three months ended March 31, 2019 and 2018, the Company recognized the following stock-based compensation expense:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in thousands)
Stock-based compensation expense by type of award:
 
 
 
Restricted stock and restricted stock units (including PSUs)
$
63,510

 
$
50,418

Stock options
28,156

 
26,055

ESPP share issuances
2,577

 
2,128

Stock-based compensation expense related to inventories
(452
)
 
(465
)
Total stock-based compensation included in costs and expenses
$
93,791

 
$
78,136

 
 
 
 
Stock-based compensation expense by line item:
 
 


Cost of sales
$
1,338

 
$
813

Research and development expenses
59,715

 
48,488

Sales, general and administrative expenses
32,738