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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM    TO   
Commission file number 000-19319
____________________________________________
Vertex Pharmaceuticals Incorporated
(Exact name of registrant as specified in its charter)

Massachusetts
(State or other jurisdiction of incorporation or organization)

50 Northern Avenue, Boston, Massachusetts
(Address of principal executive offices)

04-3039129
(I.R.S. Employer Identification No.)

02210
(Zip Code)

Registrant’s telephone number, including area code (617341-6100
____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.01 Par Value Per Share
VRTX
The Nasdaq Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01 per share
260,037,894
Outstanding at October 23, 2020


Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS
Page
Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2020 and 2019
Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2020 and 2019
Condensed Consolidated Balance Sheets - September 30, 2020 and December 31, 2019
Condensed Consolidated Statements of Shareholders' Equity - Three and Nine Months Ended September 30, 2020 and 2019
Condensed Consolidated Statements of Cash Flows - Three and Nine Months Ended September 30, 2020 and 2019
Item 1A.
“We,” “us,” “Vertex” and the “Company” as used in this Quarterly Report on Form 10-Q refer to Vertex Pharmaceuticals Incorporated, a Massachusetts corporation, and its subsidiaries.
“Vertex,” “KALYDECO®,” “ORKAMBI®,” “SYMDEKO®,” “SYMKEVI®” and “TRIKAFTA®” are registered trademarks of Vertex. The trademark for “KAFTRIOTM” is pending in the United States and registered in the European Union. Other brands, names and trademarks contained in this Quarterly Report on Form 10-Q are the property of their respective owners.
We use the brand name for our products when we refer to the product that has been approved and with respect to the indications on the approved label. Otherwise, including in discussions of our cystic fibrosis development programs, we refer to our compounds by their scientific (or generic) name or VX developmental designation.



Table of Contents
Part I. Financial Information

Item 1.  Financial Statements

VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share amounts)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues:
Product revenues, net
$1,536,271 $949,828 $4,575,863 $2,747,461 
Collaborative and royalty revenues
2,000  2,000 2,095 
Total revenues
1,538,271 949,828 4,577,863 2,749,556 
Costs and expenses:
Cost of sales
186,182 131,914 533,199 362,746 
Research and development expenses
493,497 555,948 1,362,953 1,274,529 
Sales, general and administrative expenses
184,551 159,674 558,613 463,221 
Change in fair value of contingent consideration
1,800 2,959 12,600 2,959 
Total costs and expenses
866,030 850,495 2,467,365 2,103,455 
Income from operations
672,241 99,333 2,110,498 646,101 
Interest income
3,100 17,628 19,919 51,319 
Interest expense
(13,856)(14,548)(41,863)(44,253)
Other income (expense), net
84,386 (31,747)139,621 64,802 
Income before provision for income taxes
745,871 70,666 2,228,175 717,969 
Provision for income taxes
78,437 13,148 120,718 124,393 
Net income
$667,434 $57,518 $2,107,457 $593,576 
Net income per common share:
Basic
$2.56 $0.22 $8.10 $2.32 
Diluted
$2.53 $0.22 $7.98 $2.28 
Shares used in per share calculations:
Basic
260,392 256,946 260,313 256,289 
Diluted
264,079 260,473 264,031 260,182 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents
VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net income
$667,434 $57,518 $2,107,457 $593,576 
Other comprehensive (loss) income:
Unrealized holding (losses) gains on marketable securities, net(1,132)64 818 1,111 
Unrealized (losses) gains on foreign currency forward contracts, net of tax of $7.6 million, $2.2 million, $7.3 million and $5.5 million, respectively
(26,313)12,812 (27,211)6,814 
Foreign currency translation adjustment
584 9,172 (12,616)10,263 
Total other comprehensive (loss) income(26,861)22,048 (39,009)18,188 
Comprehensive income$640,573 $79,566 $2,068,448 $611,764 
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)
September 30,December 31,
20202019
Assets
Current assets:
Cash and cash equivalents
$5,358,087 $3,109,322 
Marketable securities
792,971 698,972 
Accounts receivable, net
791,917 633,518 
Inventories
245,460 167,502 
Prepaid expenses and other current assets
270,021 213,515 
Total current assets
7,458,456 4,822,829 
Property and equipment, net
920,913 745,080 
Goodwill
1,002,158 1,002,158 
Intangible assets
400,000 400,000 
Deferred tax assets
1,147,816 1,190,815 
Other assets
372,290 157,583 
Total assets
$11,301,633 $8,318,465 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
$107,786 $87,610 
Accrued expenses
1,703,699 1,116,912 
Other current liabilities
192,541 130,305 
Total current liabilities
2,004,026 1,334,827 
Long-term finance lease liabilities
546,514 538,576 
Long-term contingent consideration
189,100 176,500 
Other long-term liabilities
428,520 183,318 
Total liabilities
3,168,160 2,233,221 
Commitments and contingencies
  
Shareholders’ equity:
Preferred stock, $0.01 par value; 1,000 shares authorized; none issued and outstanding
  
Common stock, $0.01 par value; 500,000 shares authorized, 260,174 and 258,993 shares issued and outstanding, respectively
2,601 2,589 
Additional paid-in capital
7,917,375 7,937,606 
Accumulated other comprehensive loss(40,982)(1,973)
Retained earnings (accumulated deficit)
254,479 (1,852,978)
Total shareholders’ equity
8,133,473 6,085,244 
Total liabilities and shareholders’ equity
$11,301,633 $8,318,465 
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
(unaudited)
(in thousands)
Three Months Ended
Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Retained Earnings (Accumulated Deficit)Total Shareholders’ Equity
SharesAmount
Balance at June 30, 2019256,671 $2,565 $7,564,331 $(3,201)$(2,493,730)$5,069,965 
Other comprehensive income, net of tax— — — 22,048 — 22,048 
Net income— — — — 57,518 57,518 
Repurchase of common stock(71)— (12,001)— — (12,001)
Common stock withheld for employee tax obligations
— — (104)— — (104)
Issuance of common stock under benefit plans665 6 30,006 — — 30,012 
Stock-based compensation expense
— — 85,956 — — 85,956 
Balance at September 30, 2019257,265 $2,571 $7,668,188 $18,847 $(2,436,212)$5,253,394 
Balance at June 30, 2020260,124 $2,601 $7,943,717 $(14,121)$(412,955)$7,519,242 
Other comprehensive loss, net of tax— — — (26,861)— (26,861)
Net income— — — — 667,434 667,434 
Repurchase of common stock(403)(4)(108,003)— — (108,007)
Common stock withheld for employee tax obligations
(141)(1)(40,527)— — (40,528)
Issuance of common stock under benefit plans594 5 21,699 — — 21,704 
Stock-based compensation expense
— — 100,489 — — 100,489 
Balance at September 30, 2020260,174 $2,601 $7,917,375 $(40,982)$254,479 $8,133,473 
Nine Months Ended
Common Stock
Additional
Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Accumulated Deficit)
Total
Shareholders’ Equity
Shares
Amount
Balance at December 31, 2018255,172 $2,546 $7,421,476 $659 $(2,989,478)$4,435,203 
Cumulative effect adjustment for adoption of new accounting guidance
— — — — (40,310)(40,310)
Other comprehensive income, net of tax
— — — 18,188 — 18,188 
Net income
— — — — 593,576 593,576 
Repurchase of common stock(904)(9)(162,009)— — (162,018)
Common stock withheld for employee tax obligations
(27)— (5,936)— — (5,936)
Issuance of common stock under benefit plans3,024 34 144,523 — — 144,557 
Stock-based compensation expense
— — 270,134 — — 270,134 
Balance at September 30, 2019257,265 $2,571 $7,668,188 $18,847 $(2,436,212)$5,253,394 
Balance at December 31, 2019258,993 $2,589 $7,937,606 $(1,973)$(1,852,978)$6,085,244 
Other comprehensive loss, net of tax— — — (39,009)— (39,009)
Net income
— — — — 2,107,457 2,107,457 
Repurchase of common stock(1,807)(18)(408,015)— — (408,033)
Common stock withheld for employee tax obligations
(727)(7)(179,768)(179,775)
Issuance of common stock under benefit plans3,715 37 232,042 — — 232,079 
Stock-based compensation expense
— — 335,510 — — 335,510 
Balance at September 30, 2020260,174 $2,601 $7,917,375 $(40,982)$254,479 $8,133,473 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Nine Months Ended September 30,
20202019
Cash flows from operating activities:
Net income
$2,107,457 $593,576 
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense
332,434 268,898 
Depreciation expense
80,160 80,685 
Increase in fair value of contingent consideration12,600 2,959 
Deferred income taxes
65,110 94,175 
Gains on equity securities(140,866)(68,862)
Other non-cash items, net
52,371 (4,024)
Changes in operating assets and liabilities:
Accounts receivable, net
(151,191)(41,444)
Inventories
(94,907)(45,280)
Prepaid expenses and other assets
(264,909)(23,709)
Accounts payable
16,153 (12,210)
Accrued expenses
451,084 255,699 
Other liabilities
296,477 22,859 
Net cash provided by operating activities
2,761,973 1,123,322 
Cash flows from investing activities:
Purchases of available-for-sale debt securities
(246,937)(381,739)
Maturities of available-for-sale debt securities
184,419 375,145 
Sale of equity securities
149,595  
Payment to acquire business, net of cash acquired (245,824)
Expenditures for property and equipment
(212,109)(58,690)
Investment in equity securities
(19,327)(27,219)
Net cash used in investing activities
(144,359)(338,327)
Cash flows from financing activities:
Issuances of common stock under benefit plans
234,854 144,630 
Repurchases of common stock
(408,033)(150,017)
Payments in connection with common stock withheld for employee tax obligations
(179,775)(5,936)
Payments on finance leases
(31,378)(28,879)
Proceeds related to finance leases
8,642 1,002 
Advance from collaborator
5,000 10,000 
Repayments of advanced funding
(2,741)(4,316)
Other financing activities(6,658)

(1,132)
Net cash used in financing activities
(380,089)(34,648)
Effect of changes in exchange rates on cash
2,779 (4,009)
Net increase in cash and cash equivalents
2,240,304 746,338 
Cash, cash equivalents and restricted cash—beginning of period
3,120,681 2,658,253 
Cash, cash equivalents and restricted cash—end of period
$5,360,985 $3,404,591 
Supplemental disclosure of cash flow information:
Cash paid for interest
$40,769 $41,704 
Cash paid for income taxes
$81,684 $22,838 
Issuances of common stock from employee benefit plans receivable
$45 $13 
Accrued share repurchase liability
$ $12,001 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)

A.Basis of Presentation and Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared by Vertex Pharmaceuticals Incorporated (“Vertex” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The condensed consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. The Company operates in 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Annual Report on Form 10-K”) have been condensed or omitted. These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods ended September 30, 2020 and 2019.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2019, which are contained in the Company’s 2019 Annual Report on Form 10-K.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the amounts of revenues and expenses during the reported periods. Significant estimates in these condensed consolidated financial statements have been made in connection with (i) determining the transaction price of revenues and (ii) accounting for intangible assets and contingent consideration. The Company bases its estimates on historical experience and various other assumptions, including in certain circumstances future projections that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
Recently Adopted Accounting Standards
Leases
On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”) using the modified-retrospective method, which amended a number of aspects of lease accounting and required the Company to recognize right-of-use assets and liabilities on the balance sheet. As of January 1, 2019, the Company recorded a cumulative effect adjustment to increase its “Accumulated deficit” by $40.3 million, which related to its leases that were accounted for as build-to-suit leases under the previous accounting guidance.
Internal-Use Software
In 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 became effective on January 1, 2020. The adoption of ASU 2018-15 resulted in an insignificant amount of additional assets recorded on the Company’s condensed consolidated balance sheet.

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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 became effective on January 1, 2020. The adoption of ASU 2018-13 resulted in additional disclosures related to the Company’s Level 3 inputs. Please refer to Note E, “Fair Value Measurements,” for further information.
Credit Losses
In 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires entities to record expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities in unrealized loss positions, ASU 2016-13 requires allowances to be recorded instead of reducing the amortized cost of the investment. ASU 2016-13 became effective on January 1, 2020. The adoption of ASU 2016-13 did not have a significant impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Standards
Income Taxes
In 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 is effective on January 1, 2021. The Company is evaluating the impact the adoption of ASU 2019-12 may have on its condensed consolidated financial statements.
For a discussion of other recent accounting pronouncements please refer to Note A, “Nature of Business and Accounting Policies,” in the Company’s 2019 Annual Report on Form 10-K.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note A, “Nature of Business and Accounting Policies,” in its 2019 Annual Report on Form 10-K.

B.Revenue Recognition
Disaggregation of Revenue
Revenues by Product
Product revenues, net consisted of the following:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(in thousands)
TRIKAFTA/KAFTRIO$960,308 $ $2,773,256 $ 
SYMDEKO/SYMKEVI156,178 403,714 501,066 1,085,821 
ORKAMBI225,919 296,711 692,038 906,159 
KALYDECO193,866 249,403 609,503 755,481 
Total product revenues, net*
$1,536,271 $949,828 $4,575,863 $2,747,461 
* The preceding table does not include collaborative and royalty revenues.

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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)
Revenues by Geographic Location
Net product revenues are attributed to countries based on the location of the customer. Collaborative and royalty revenues outside of the United States are attributed to countries based on the location of the Company’s subsidiary associated with the collaborative arrangement related to such revenues. Total revenues from external customers and collaborators by geographic region consisted of the following:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(in thousands)
United States
$1,224,565 $710,323 $3,622,467 $2,052,044 
Outside of the United States
Europe
251,366 184,845 766,438 532,809 
Other
62,340 54,660 188,958 164,703 
Total revenues outside of the United States
313,706 239,505 955,396 697,512 
Total revenues
$1,538,271 $949,828 $4,577,863 $2,749,556 
Contract Liabilities
The Company had contract liabilities of $94.8 million and $62.3 million as of September 30, 2020 and December 31, 2019, respectively, related to annual contracts with government-owned and supported customers in international markets that limit the amount of annual reimbursement the Company can receive. Upon exceeding the annual reimbursement amount, products are provided free of charge, which is a material right. These contracts include upfront payments and fees. The Company defers a portion of the consideration received for shipments made up to the annual reimbursement limit as a portion of “Other current liabilities.” The deferred amount is recognized as revenue when the free products are shipped. The Company’s product revenue contracts include performance obligations that are one year or less.
The Company’s contract liabilities at the end of each fiscal year relate to contracts with annual reimbursement limits in international markets in which the annual period associated with the contract is not the same as the Company’s fiscal year. In these markets, the Company recognizes revenues related to performance obligations satisfied in previous years; however, these revenues do not relate to any performance obligations that were satisfied more than 12 months prior to the beginning of the current year.

C.Collaborative Arrangements
The Company has entered into numerous agreements pursuant to which it collaborates with third parties on research, development and commercialization programs, including in-license and out-license agreements.
The Company’s in-license and out-license agreements that had a significant impact on its financial statements for the three and nine months ended September 30, 2020 and 2019, or were new or otherwise revised during the three and nine months ended September 30, 2020, are described below. Additional in-license and out-license agreements were described in Note B, “Collaborative Arrangements,” of the Company’s 2019 Annual Report on Form 10-K.
In-license Agreements
The Company has entered into a number of license agreements in order to advance and obtain access to technologies and services related to its research and early-development activities. The Company is generally required to make an upfront payment upon execution of the license agreement; development, regulatory and commercialization milestones payments upon the achievement of certain product research, development and commercialization objectives; and royalty payments on future sales, if any, of commercial products resulting from the collaboration.

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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)
Pursuant to the terms of its in-license agreements, the Company’s collaborators typically lead the discovery efforts and the Company leads all preclinical, development and commercialization activities associated with the advancement of any drug candidates and funds all expenses.
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 Company had the exclusive right to license certain targets. In the fourth quarter of 2019, the Company elected to exclusively license three targets, including cystic fibrosis, pursuant to the CRISPR Agreement. For each of the three targets that the Company elected to license, CRISPR has the potential to receive up to an additional $410.0 million in development, regulatory and commercial milestones as well as royalties on net product sales.
In 2017, the Company entered into a co-development 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 hemoglobinopathies, including treatments for sickle cell disease and beta thalassemia. As part of the collaboration, the Company and CRISPR share equally all development costs and potential worldwide revenues related to potential hemoglobinopathy treatments. The Company concluded that the 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 and nine months ended September 30, 2020, the net expense related to the CTX001 Co-Co Agreement was $14.3 million and $33.4 million, respectively. During the three and nine months ended September 30, 2019, the net expense related to the CTX001 Co-Co Agreement was $7.7 million and $22.3 million, respectively.
In July 2019, the Company entered into a separate strategic collaboration and license agreement (the “CRISPR DMD/DM1 Agreement”) with CRISPR. Pursuant to this agreement, the Company received an exclusive worldwide license to CRISPR’s existing and future intellectual property for Duchenne muscular dystrophy (“DMD”) and myotonic dystrophy type 1 (“DM1”) and the Company made an upfront payment of $175.0 million to CRISPR. The Company concluded that it did not have any alternative future use for the acquired in-process research and development and recorded the upfront payment to “Research and development expenses” in the third quarter of 2019. In the first quarter of 2020, the Company recorded $25.0 million to “Research and development expenses” related to a pre-clinical milestone earned by CRISPR under the CRISPR DMD/DM1 Agreement. CRISPR has the potential to receive up to an additional $800.0 million in research, development, regulatory and commercial milestones for the DMD and DM1 programs as well as royalties on net product sales. CRISPR has the option to co-develop and co-commercialize all DM1 products globally and forego the milestones and royalties associated with the DM1 program. The Company funds all expenses associated with the collaboration except for research costs for specified guide RNA research conducted by CRISPR, which the Company and CRISPR share equally.
Moderna, Inc.
In 2016, the Company entered into a strategic collaboration and licensing agreement with Moderna, Inc. (“Moderna”), pursuant to which the parties are seeking to identify and develop messenger Ribonucleic Acid (“mRNA”) therapeutics for the treatment of cystic fibrosis.
In September 2020, the Company entered into a new strategic collaboration and licensing agreement with Moderna (the “2020 Moderna Agreement”) aimed at the discovery and development of lipid nanoparticles and mRNAs that can deliver gene-editing therapies to lung cells for the treatment of cystic fibrosis. Pursuant to the 2020 Moderna Agreement, Moderna received an upfront payment of $75.0 million and is eligible to receive up to $380.0 million in development, regulatory and commercial milestones as well as royalties on net product sales. The Company determined that substantially all of the fair

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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)
value of the 2020 Moderna Agreement was attributable to in-process research and development 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 and recorded the upfront payment to “Research and development expenses” in the third quarter of 2020.
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. None of the Company’s out-license agreements had a significant impact on the Company’s condensed consolidated statement of operations during the three and nine months ended September 30, 2020 and 2019.
Janssen Pharmaceuticals, Inc.
In the third quarter of 2020, Janssen Pharmaceuticals, Inc. (“Janssen”) exercised its right to terminate its exclusive worldwide license from the Company to develop and commercialize certain drug candidates for the treatment of influenza, based on Phase 3 clinical trial results for pimodivir. Janssen had been developing pimodivir since 2014.
Cystic Fibrosis Foundation
The Company has a research, development and commercialization agreement that was originally entered into in 2004 with the Cystic Fibrosis Foundation (“CFF”), as successor in interest to the Cystic Fibrosis Foundation Therapeutics, Inc. This agreement was most recently amended in 2016. Pursuant to the agreement, as amended, the Company agreed to pay royalties ranging from low-single digits to mid-single digits on potential sales of certain compounds first synthesized and/or tested between March 1, 2014 and August 31, 2016, including elexacaftor, and tiered royalties ranging from single digits to sub-teens on covered compounds first synthesized and/or tested during a research term on or before February 28, 2014, including KALYDECO (ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor). For combination products, such as ORKAMBI, SYMDEKO/SYMKEVI and TRIKAFTA/KAFTRIO (elexacaftor/tezacaftor/ivacaftor and ivacaftor), sales are allocated equally to each of the active pharmaceutical ingredients in the combination product.

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

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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table sets forth the computation of basic and diluted net income per common share for the periods ended:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(in thousands, except per share amounts)
Net income
$667,434 $57,518 $2,107,457 $593,576 
Basic weighted-average common shares outstanding
260,392 256,946 260,313 256,289 
Effect of potentially dilutive securities:
 Stock options1,887 2,080 1,936 2,297 
 Restricted stock and restricted stock units (including PSUs)
1,788 1,434 1,765 1,582 
 Employee stock purchase program
12 13 17 14 
Diluted weighted-average common shares outstanding
264,079 260,473 264,031 260,182 
Basic net income per common share
$2.56 $0.22 $8.10 $2.32 
Diluted net income per common share
$2.53 $0.22 $7.98 $2.28 
The Company did not include the securities in the following table in the computation of the net income per common share because the effect would have been anti-dilutive during each period:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(in thousands)
Stock options
23 3,303 303 3,116 
Unvested restricted stock and restricted stock units (including PSUs)
252 13 229 7 

E.Fair Value Measurements
The following fair value hierarchy is used to classify assets and liabilities based on observable inputs and unobservable inputs used in order to determine the fair value of the Company’s financial assets and liabilities:
Level 1:
Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3:
Unobservable inputs based on the Company’s assessment of the assumptions that market participants would use in pricing the asset or liability.
The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument. The Company maintains strategic investments separately from the investment policy that governs its other cash, cash equivalents and marketable securities as described in Note F, “Marketable Securities and Equity Investments.” 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.
During the three and nine months ended September 30, 2020 and 2019, the Company did not record any other-than-temporary impairment charges related to its financial assets.

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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following tables set forth the Company’s financial assets and liabilities subject to fair value measurements by level within the fair value hierarchy (and does not include $2.2 billion and $2.3 billion of cash as of September 30, 2020 and December 31, 2019, respectively):
As of September 30, 2020As of December 31, 2019
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
(in thousands)
Financial instruments carried at fair value (asset positions):
Cash equivalents:
Money market funds
$3,130,364 $3,130,364 $ $ $791,039 $791,039 $ $ 
Corporate debt securities
    6,070  6,070  
Commercial paper
5,001  5,001  29,472  29,472  
Marketable securities:
Corporate equity securities312,682 216,142 96,540  282,084 261,797 20,287  
Government-sponsored enterprise securities
91,283 91,283   12,733 12,733   
Corporate debt securities
276,610  276,610  301,799  301,799  
Commercial paper
112,396  112,396  102,356  102,356  
Prepaid expenses and other current assets:
Foreign currency forward contracts
673  673  9,725  9,725  
Total financial assets
$3,929,009 $3,437,789 $491,220 $ $1,535,278 $1,065,569 $469,709 $ 
Financial instruments carried at fair value (liability positions):
Other current liabilities:
Foreign currency forward contracts
$(29,554)$ $(29,554)$ $(5,533)$ $(5,533)$ 
Long-term contingent consideration
(189,100)  (189,100)(176,500)  (176,500)
Other long-term liabilities:
Foreign currency forward contracts
(3,254) (3,254) (1,821) (1,821) 
Total financial liabilities
$(221,908)$ $(32,808)$(189,100)$(183,854)$ $(7,354)$(176,500)
Please refer to Note F, “Marketable Securities and Equity Investments,” for the carrying amount and related unrealized gains (losses) by type of investment.
Fair Value of Corporate Equity Securities
The Company maintains strategic investments in corporate equity securities separately from the investment policy that governs its other cash, cash equivalents and marketable securities. The Company classifies its investments in publicly traded companies as “Marketable securities” on its condensed consolidated balance sheets. Generally, the Company’s investments in the common stock of these publicly traded companies are valued based on Level 1 inputs because they have readily determinable fair values. However, certain of the Company’s investments in publicly traded companies have been or continue to be valued based on Level 2 inputs due to transfer restrictions associated with these investments. Please refer to Note F, “Marketable Securities and Equity Investments,” for further information on these investments.
Fair Value of Contingent Consideration
In 2019, the Company acquired Exonics Therapeutics, Inc. (“Exonics”), a privately-held company focused on creating transformative gene-editing therapies to repair mutations that cause DMD and other severe neuromuscular diseases, including DM1. The Company’s Level 3 contingent consideration liabilities are related to $678.3 million of development and regulatory milestones potentially payable to Exonics’ former equity holders. The Company bases its estimates of the probability of achieving the milestones relevant to the fair value of contingent payments on industry data attributable to rare diseases. The discount rates used in the valuation model for contingent payments, which were between 0.6% and 1.9% as of September 30, 2020, represent a measure of credit risk and market risk associated with settling the liabilities. Significant judgment is used in determining the appropriateness of these assumptions at each reporting period. Due to the uncertainties

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VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements
(unaudited)
associated with development and commercialization of drug candidates in the pharmaceutical industry and the effects of changes in other assumptions including discount rates, the Company expects its estimates regarding the fair value of contingent consideration to change in the future, resulting in adjustments to the fair value of the Company’s contingent consideration liabilities, and the effect of any such adjustments could be material.
The following table represents a rollforward of the fair value of the Company’s contingent consideration liabilities:
Nine Months Ended September 30, 2020
(in thousands)
Balance at December 31, 2019$176,500 
Increase in fair value of contingent payments
12,600 
Balance at September 30, 2020$189,100 
The “Increase in fair value of contingent payments” in the table above was primarily due to changes in market interest rates.
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 $2.2 billion and $2.3 billion of cash as of September 30, 2020 and December 31, 2019, respectively), is shown below:
As of September 30, 2020As of December 31, 2019
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(in thousands)
Cash equivalents:
Money market funds
$3,130,364 $ $ $3,130,364 $791,039 $ $