VERTEX PHARMACEUTICALS INCORPORATED 
OVERVIEW
We invest in scientific innovation to create transformative medicines for people with serious diseases with a focus on specialty markets. We have four approved medicines to treat cystic fibrosis, or CF, a life-threatening genetic disease, and are focused on increasing the number of people with CF eligible and able to receive our medicines through label expansions, approval of new medicines, and expanded reimbursement. We are broadening our pipeline into additional disease areas through internal research efforts and accessing external innovation through business development transactions. Our triple combination regimen, TRIKAFTA/KAFTRIO, was approved in 2019 inthe United States , orU.S. , and in 2020 in theEuropean Union , or E.U. Collectively, our four medicines are approved to treat the majority of the approximately 83,000 people with CF inNorth America ,Europe andAustralia . We are evaluating our medicines in additional patient populations, including younger children, with the goal of having small molecule treatments for up to 90% of people with CF. We are also pursuing genetic therapies to address the remaining 10% of people with CF. Beyond CF, we continue to research and develop small molecule drug candidates for the treatment of serious diseases, including alpha-1 antitrypsin, or AAT, deficiency, APOL1-mediated kidney diseases and pain. We are also focused on developing cell and genetic therapies for various diseases in our pipeline, including sickle cell disease, or SCD, beta thalassemia, type 1 diabetes, or T1D, Duchenne muscular dystrophy, or DMD, myotonic dystrophy, or DM1, and CF. We are evaluating CTX001, a genetic therapy, as a potential treatment for SCD and transfusion-dependent beta thalassemia, or TDT, the most severe form of beta thalassemia, in collaboration with CRISPR Therapeutics AG, or CRISPR. In T1D, we are pursuing two programs for the transplant of functional islets into patients: transplantation of islet cells alone, using immunosuppression to protect the implanted cells, and implantation of the islet cells inside a novel immunoprotective device. Financial Highlights Revenues Cash
In the second quarter of 2021, our net product Our cash, cash equivalent and marketable revenues continued to increase due to the
securities increased to $6.71 billion as of June
uptake of KAFTRIO in Europe and continued 30, 2021 as compared to $6.66 billion as of
performance of TRIKAFTA in the U.S. December 31, 2020 primarily due to our net
product revenues and profitability, offset by the
$900 million payment to CRISPR and repurchases of
our common stock in the first quarter of 2021.
Expenses
Our total R&D and SG&A expenses increased to
$1.60 billion in the second quarter of 2021 as
compared to $612.7 million in the second
quarter of 2020 primarily due to a $900 million
upfront payment we made to CRISPR in connection
with an amendment to our CTX001 collaboration.
In the second quarter of 2021, cost of sales
was 12.7% of our net product revenues.
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Business Updates
Cystic Fibrosis Marketed Products
We expect to continue to grow our CF business by increasing the number of people
with CF eligible and able to receive our medicines. Recent progress in our CF
business is included below.
•In June, the U.S. Food and Drug Administration , or the FDA, approved the use of
TRIKAFTA (elexacaftor/tezacaftor/ivacaftor and ivacaftor) for children with CF 6
to 11 years of age who have at least one F508del mutation or at least one
mutation that is responsive to TRIKAFTA.
•In June, Health Canada granted marketing authorization for TRIKAFTA for people
with CF 12 years of age and older who have at least one F508del mutation.
•TRIKAFTA/KAFTRIO is now approved and reimbursed or accessible in more than 15
countries outside the U.S. , including Italy and France .
Pipeline
We continue to advance a pipeline of potentially transformative small molecule
and cell and genetic therapies aimed at treating serious diseases. Recent and
anticipated progress in activities supporting these efforts is included below.
Cystic Fibrosis
•We plan to initiate a Phase 3 development program for the next-in-class,
once-daily triple combination of VX-121, tezacaftor and VX-561 in the second
half of 2021. Clinical and preclinical data suggest that this triple combination
has the potential to provide enhanced benefit for people with CF who have the
F508del mutation on at least one allele.
•Our Phase 3 program will consist of two 48-week clinical trials, which will
evaluate the safety and efficacy of the new combination relative to TRIKAFTA in
a total of 800 people with CF. Both clinical trials will measure the
regulatory-enabling endpoint of absolute change in ppFEV1, a measure of lung
function, that will be analyzed for non-inferiority to TRIKAFTA. The clinical
trials also are designed to assess the absolute change from baseline in ppFEV1
and sweat chloride for superiority to TRIKAFTA.
Beta Thalassemia and Sickle Cell Disease
•We and our collaborator, CRISPR, are evaluating the use of a non-viral ex vivo
CRISPR gene-editing therapy, CTX001, for the treatment of TDT and SCD. This
approach aims to edit a person's hematopoietic stem cells to produce fetal
hemoglobin in red blood cells, which has the potential to reduce or eliminate
symptoms associated with the diseases.
•In the second quarter of 2021, we amended the collaboration for CTX001 and in
connection this amendment, we made a $900 million upfront payment to CRISPR.
Pursuant to the amended collaboration, we now lead global development,
manufacturing and commercialization of CTX001, with support from CRISPR.
•In June, data from 22 people with at least three months of follow-up after
CTX001 infusion were presented at the European Hematology Association Annual
Meeting and continued to support the profile of CTX001 as a one-time functional
cure for people with TDT and SCD, showing consistent and durable benefit with
longer term data from a larger population of people.
•Enrollment and dosing are ongoing in the clinical trials evaluating CTX001, and
more than 45 people have been dosed across the program. We expect to achieve
target enrollment in both clinical trials in the third quarter of 2021, with
regulatory filings possible in the next 18 to 24 months.
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APOL1-Mediated Kidney Diseases
•We are evaluating the potential of inhibitors of APOL1 function to treat people
with APOL1-mediated kidney diseases.
•Enrollment is ongoing in a Phase 2 proof-of-concept clinical trial designed to
evaluate the reduction in proteinuria in people with APOL1-mediated focal
segmental glomerulosclerosis after treatment with VX-147.
•We expect data from this clinical trial in the second half of 2021.
Pain
•NaV1.8 is a genetically and pharmacologically validated novel target for the
treatment of pain. We previously have demonstrated clinical proof-of-concept
with a small molecule investigational treatment targeting NaV1.8 in multiple
pain indications including acute pain, neuropathic pain and musculoskeletal
pain. Our approach is to selectively inhibit NaV1.8 using small molecules with
the objective of creating a new class of medicines that have the potential to
provide superior relief of acute pain without the limitations of opioids,
including their addictive potential. VX-548 is the most recent molecule to enter
clinical development from our portfolio of NaV1.8 inhibitors.
•In July, we announced the initiation of our VX-548 Phase 2 acute pain program.
The proof-of-concept clinical trial for acute pain following bunionectomy
surgery is open for enrollment. We also expect to initiate a Phase 2 clinical
trial evaluating VX-548 for acute pain following abdominoplasty surgery in the
third quarter of 2021.
•We expect data from the bunionectomy clinical trial by early 2022.
Type 1 Diabetes
•We are evaluating a cell therapy designed to replace insulin-producing islet
cells in people with T1D. We are pursuing two programs for the transplant of
stem cell-derived, fully differentiated, insulin-producing islet cells into
patients: transplantation of islet cells alone, using immunosuppression to
protect the implanted cells, and implantation of the islet cells inside a novel
immunoprotective device.
•Our Phase 1/2 clinical trial evaluating VX-880, our islet cells alone program,
is ongoing in people with T1D. This clinical trial involves an infusion of fully
differentiated, functional islet cells, and chronic administration of
concomitant immunosuppressive therapy, to protect the islet cells from immune
rejection. The first person in this clinical trial was dosed, and we expect
initial data from this clinical trial in 2022.
Alpha-1 Antitrypsin Deficiency
•We are evaluating multiple compounds with the potential to correct the
misfolding of Z-AAT protein in the liver, in order to increase the systemic
levels of functional AAT. Misfolded Z-AAT protein is the root cause of AAT
deficiency and our small molecule corrector program targets both the liver and
lung manifestations of the disease.
•In June, we announced that we had achieved our primary endpoint and established
proof of mechanism in a Phase 2 clinical trial evaluating our Z-AAT corrector,
VX-864. However, because the magnitude of treatment effect was unlikely to
translate into substantial clinical benefit, we decided not to advance VX-864
into late-stage development.
•We plan to advance one or more novel small molecule Z-AAT correctors into the
clinic in 2022.
COVID-19
We continue to monitor the impacts of the COVID-19 global pandemic on our
business. COVID-19 has not affected our supply chain or the demand for our
medicines, and we believe that we will be able to continue to supply all of our
approved medicines to patients globally. We adjusted our business operations in
response to COVID-19 and have continued to monitor local COVID-19 trends and
government guidance for each of our site locations. We are utilizing a phased,
site-specific approach to assess and permit employee access to our sites.
Currently, our sites are open to certain employees where appropriate and
permitted by local laws and guidelines.
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Research
We continue to invest in our research programs and foster scientific innovation
in order to identify and develop transformative medicines. Our strategy is to
combine transformative advances in the understanding of human disease and the
science of therapeutics in order to identify and develop new medicines. We
believe that pursuing research in diverse areas allows us to balance the risks
inherent in drug development and may provide drug candidates that will form our
pipeline in future years. To supplement our internal research programs, we
acquire technologies and programs and collaborate with biopharmaceutical and
technology companies, leading academic research institutions, government
laboratories, foundations and other organizations, as needed, to advance
research in our areas of therapeutic interest and to access technologies needed
to execute on our strategy.
Drug Discovery and Development
Discovery and development of a new pharmaceutical product is a difficult and
lengthy process that requires significant financial resources along with
extensive technical and regulatory expertise. Potential drug candidates are
subjected to rigorous evaluations, driven in part by stringent regulatory
considerations, designed to generate information concerning efficacy, side
effects, proper dosage levels and a variety of other physical and chemical
characteristics that are important in determining whether a drug candidate
should be approved for marketing as a pharmaceutical product. Most chemical
compounds that are investigated as potential drug candidates never progress into
development, and most drug candidates that do advance into development never
receive marketing approval. Our investments in drug candidates are subject to
considerable risks. We closely monitor the results of our discovery, research,
clinical trials and nonclinical studies and frequently evaluate our drug
development programs in light of new data and scientific, business and
commercial insights, with the objective of balancing risk and potential. This
process can result in rapid changes in focus and priorities as new information
becomes available and as we gain additional understanding of our ongoing
programs and potential new programs, as well as those of our competitors. For
example, in June 2021 , we decided not to progress VX-864, a drug candidate for
the treatment of AAT deficiency, into late-stage development based on data
obtained from a Phase 2 clinical trial.
If we believe that data from a completed registration program support approval
of a drug candidate, we submit an NDA or BLA to the FDA requesting approval to
market the drug candidate in the U.S. and seek analogous approvals from
comparable regulatory authorities in jurisdictions outside the U.S. To obtain
approval, we must, among other things, demonstrate with evidence gathered in
nonclinical studies and well-controlled clinical trials that the drug candidate
is safe and effective for the disease it is intended to treat and that the
manufacturing facilities, processes and controls for the manufacture of the drug
candidate are adequate. The FDA and ex-U.S. regulatory authorities have
substantial discretion in deciding whether or not a drug candidate should be
granted approval based on the benefits and risks of the drug candidate in the
treatment of a particular disease, and could delay, limit or deny regulatory
approval. If regulatory delays are significant or regulatory approval is limited
or denied altogether, our financial results and the commercial prospects for the
drug candidate involved will be harmed.
Regulatory Compliance
Our marketing of pharmaceutical products is subject to extensive and complex
laws and regulations. We have a corporate compliance program designed to
actively identify, prevent and mitigate risk through the implementation of
compliance policies and systems and through the promotion of a culture of
compliance. Among other laws, regulations and standards, we are subject to
various U.S. federal and state laws, and comparable laws in other jurisdictions,
pertaining to health care fraud and abuse, including anti-kickback and false
claims laws, and laws prohibiting the promotion of drugs for unapproved or
off-label uses. Anti-kickback laws generally make it illegal for a prescription
drug manufacturer to knowingly and willfully solicit, offer, receive or pay any
remuneration in return for or to induce the referral of business, including the
purchase or prescription of a particular drug that is reimbursed by a state or
federal health care program. False claims laws prohibit anyone from knowingly or
willfully presenting for payment to third-party payors, including Medicare and
Medicaid, claims for reimbursed drugs or services that are false or fraudulent,
claims for items or services not provided as claimed, or claims for medically
unnecessary items or services. We are subject to laws and regulations that
regulate the sales and marketing practices of pharmaceutical manufacturers, as
well as laws such as the U.S. Foreign Corrupt Practices Act, which govern our
international business practices with respect to payments to government
officials. In addition, we are subject to various data protection and privacy
laws and regulations in the U.S. , E.U., U.K. , Canada , Australia and other
jurisdictions.
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We expect to continue to devote substantial resources to maintain, administer
and expand these compliance programs globally.
Reimbursement
Sales of our products depend, to a large degree, on the extent to which our
products are reimbursed by third-party payors, such as government health
programs, commercial insurance and managed health care organizations. We
dedicate substantial management and other resources in order to obtain and
maintain appropriate levels of reimbursement for our products from third-party
payors, including governmental organizations in the U.S. and ex-U.S. markets.
In the U.S. , we have worked successfully with third party payors in order to
promptly obtain appropriate levels of reimbursement for our CF medicines. We
plan to continue to engage in discussions with numerous commercial insurers and
managed health care organizations, along with government health programs that
are typically managed by authorities in the individual states, to ensure that
payors recognize the significant benefits that our medicines provide by treating
the underlying cause of CF and continue to provide access to our medicines.
In Europe and other ex-U.S. markets, we seek government reimbursement for our
medicines on a country-by-country basis. This is necessary for each new
medicine, as well as for label expansions for our current medicines. We
successfully obtained reimbursement for KALYDECO in each significant ex-U.S.
market within two years of approval, but experienced significant challenges in
obtaining reimbursement for ORKAMBI in certain ex-U.S. markets. With the
completion of reimbursement discussions in England and France in 2019, we have
reimbursement for ORKAMBI or SYMKEVI in most of our significant ex-U.S. markets.
In addition, in several ex-U.S. markets, including England , Ireland , Denmark and
Australia , our reimbursement agreements include innovative arrangements that
provide a pathway to access and rapid reimbursement for certain future CF
medicines. For example, our existing reimbursement agreements in England ,
Ireland , and Denmark have been expanded to include KAFTRIO. Additionally, we
have entered into new reimbursement agreements for our medicines throughout
Europe , including Italy and France . We expect to continue to focus significant
resources to obtain appropriate reimbursement for our products in ex-U.S.
markets.
Strategic Transactions
Acquisitions
As part of our business strategy, we seek to acquire drugs, drug candidates and
other technologies and businesses that have the potential to complement our
ongoing research and development efforts. In 2019, we invested significantly in
business development transactions designed to augment our pipeline, including
the acquisition of Semma Therapeutics, Inc. , or Semma, a privately-held company
focused on the use of stem cell-derived human islets as a potentially curative
treatment for T1D, and Exonics Therapeutics, Inc. , or Exonics, a privately-held
company focused on creating transformative gene-editing therapies to repair
mutations that cause DMD and other severe neuromuscular diseases, including DM1.
We expect to continue to identify and evaluate potential acquisitions and may
include larger transactions or later-stage assets.
Collaboration and Licensing Arrangements
We enter into arrangements with third parties, including collaboration and
licensing arrangements, for the development, manufacture and commercialization
of drugs, drug candidates and other technologies that have the potential to
complement our ongoing research and development efforts. We expect to continue
to identify and evaluate collaboration and licensing opportunities that may be
similar to or different from the collaborations and licenses that we have
engaged in previously.
In-License Agreements
We have entered into collaborations with biotechnology and pharmaceutical
companies in order to acquire rights or to license drug candidates or
technologies that enhance our pipeline and/or our research capabilities. Over
the last several years, we entered into collaboration agreements with a number
of companies, including Affinia Therapeutics, Inc. , Arbor Biotechnologies, Inc. ,
CRISPR, Kymera Therapeutics, Inc., Moderna, Inc., Molecular Templates, Inc.,
Obsidian Therapeutics, Inc. , and Skyhawk Therapeutics, Inc. Generally, when we
in-license a technology or drug candidate, we make upfront payments to the
collaborator, assume the costs of the program and/or agree to make contingent
payments, which could consist of milestone, royalty and option payments. Most of
these collaboration payments are expensed as research and development expenses;
however, depending on many factors, including the structure of the
collaboration, the significance of the in-licensed drug candidate to the
collaborator's operations and the other activities in which our collaborators
are engaged,
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the accounting for these transactions can vary significantly. In the first half
of 2021 and 2020, our research and development expenses included $960.1 million
and $63.3 million , respectively, related to upfront and milestones payments
pursuant to our collaboration agreements. In the first half of 2021, these
payments were primarily related to the $900.0 million upfront payment we made to
CRISPR.
Joint Development and Commercialization Agreement with CRISPR
In 2017, we entered into a joint development and commercialization agreement, or
JDCA, with CRISPR pursuant to which we are developing and preparing to
commercialize CTX001 for TDT and SCD. This JDCA was entered into following our
exercise of an option to co-develop and co-commercialize the hemoglobinopathies
program that was contained in the collaboration agreement that we entered into
with CRISPR in 2015.
In April 2021 , we and CRISPR entered into an amended and restated joint
development and commercialization agreement, or the A&R JDCA. In June 2021 , we
made a $900.0 million upfront payment to CRISPR in connection with the closing
of the transactions contemplated by the A&R JDCA, which we recorded to research
and development expenses. Under the terms of the A&R JDCA, we are leading
worldwide development, manufacturing and commercialization of CTX001.
Additionally, 60% of the net profits and net losses for CTX001 will be allocated
to us and 40% of the net profits and net losses for CTX001 will be allocated to
CRISPR. CRISPR may earn an additional one-time $200.0 million milestone payment
upon regulatory approval of CTX001.
Out-License Agreements
We also have out-licensed internally developed programs to collaborators who are
leading the development of these programs. These out-license arrangements
include our agreement with Merck KGaA, Darmstadt, Germany , which licensed
oncology research and development programs from us in early 2017. Pursuant to
these out-licensing arrangements, our collaborators are responsible for the
research, development and commercialization costs associated with these
programs, and we are entitled to receive contingent milestone and/or royalty
payments. As a result, we do not expect to incur significant expenses in
connection with these programs and have the potential for future collaborative
and royalty revenues resulting from these programs.
Please refer to Note C, "Collaborative Arrangements," for further information
regarding our in-license agreements and out-license agreements.
Strategic Investments
In connection with our business development activities, we have periodically
made equity investments in our collaborators. As of June 30, 2021 , we held
strategic equity investments in public companies and certain private companies,
and we plan to make additional strategic equity investments in the future. While
we invest the majority of our cash, cash equivalents and marketable securities
in instruments that meet specific credit quality standards and limit our
exposure to any one issue or type of instrument, our strategic investments are
maintained and managed separately from our other cash, cash equivalents and
marketable securities. Any changes in the fair value of equity investments with
readily determinable fair values (including publicly traded securities) are
recorded to other income (expense), net in our condensed consolidated statement
of operations.
In the first half of 2021 and 2020, we recorded within other income (expense),
losses of $41.7 million and gains of $65.1 million , respectively, related to
changes in the fair value of our strategic investments, and from sales of
certain equity investments. As of June 30, 2021 , the fair value of our
investments in publicly traded companies was $154.1 million . To the extent that
we continue to hold strategic investments, particularly strategic investments in
publicly traded companies, we will record other income (expense) related to
these strategic investments on a quarterly basis. Due to the volatility of the
global markets, including as a result of COVID-19, and the high volatility of
stocks in the biotechnology industry, we expect the value of these strategic
investments to fluctuate and that the increases or decreases in the fair value
of these strategic investments will continue to have material impacts on our net
income (expense) and our profitability on a quarterly and/or annual basis.
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RESULTS OF OPERATIONS
Three Months Ended June 30 , Increase/(Decrease) Six Months Ended June 30 , Increase/(Decrease)
2021 2020 $ % 2021 2020 $ %
(in thousands, except percentages and per share amounts)
Revenues $ 1,793,370 $ 1,524,485 $ 268,885 18% $ 3,517,675 $ 3,039,592 $ 478,083 16%
Operating costs and expenses 1,831,331 806,452 1,024,879 127% 2,667,810 1,601,335 1,066,475 67%
(Loss) income from operations (37,961) 718,033 (755,994) ** 849,865 1,438,257 (588,392)
(41)%
Other non-operating (expense) income, net (6,294) 106,737 (113,031) ** (73,160) 44,047 (117,207) ** (Benefit from) provision for income taxes (111,179) (12,500) (98,679) 789% 56,643 42,281 14,362 34% Net income$ 66,924 $ 837,270 $ (770,346) (92)%$ 720,062 $ 1,440,023 $ (719,961) (50)% Net income per diluted common share $ 0.26$ 3.18 $ 2.75$ 5.46 Diluted shares used in per share calculations 261,020 263,403 261,468 263,746 ** Not meaningful Net Income Our net income decreased in the second quarter and first half of 2021 as compared to the second quarter and first half of 2020 primarily due to the$900.0 million upfront payment we made to CRISPR in the second quarter of 2021 in connection with the amendment of our CTX001 collaboration. Changes in the fair value of our strategic investments also decreased our net income in the second quarter and first half of 2021 as compared to the second quarter and first half of 2020. These decreases to our net income were partially offset by increased revenues resulting from the uptake of KAFTRIO inEurope and continued performance of TRIKAFTA in theU.S. Our decreased net income in the second quarter of 2021 as compared to the second quarter of 2020 was also partially offset by a larger benefit from income taxes. 28 -------------------------------------------------------------------------------- Table of Contents Revenues Three Months EndedJune 30 , Increase/(Decrease) Six Months EndedJune 30 , Increase/(Decrease) 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Product revenues, net$ 1,793,370 $ 1,524,485 $ 268,885 18%$ 3,516,675 $ 3,039,592 $ 477,083 16% Other revenues - - - N/A 1,000 - 1,000 ** Total revenues$ 1,793,370 $ 1,524,485 $ 268,885 18%$ 3,517,675 $ 3,039,592 $ 478,083 16% ** Not meaningful Product Revenues, Net Three Months EndedJune 30 , Increase/(Decrease) Six Months EndedJune 30 , Increase/(Decrease) 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) TRIKAFTA/KAFTRIO$ 1,255,611 $ 917,715 $ 337,896 37%$ 2,448,828 $ 1,812,948 $ 635,880 35% SYMDEKO/SYMKEVI 133,505 171,729 (38,224) (22)% 258,554 344,888 (86,334) (25)% ORKAMBI 220,966 231,981 (11,015) (5)% 439,663 466,119 (26,456) (6)% KALYDECO 183,288 203,060 (19,772) (10)% 369,630 415,637 (46,007) (11)% Total product revenues, net$ 1,793,370 $ 1,524,485 $ 268,885 18%$ 3,516,675 $ 3,039,592 $ 477,083 16% In the second quarter and first half of 2021, our net product revenues increased by$268.9 million and$477.1 million , respectively, as compared to the second quarter and first half of 2020. The increase in our net product revenues in the second quarter and first half of 2021 was primarily due to the uptake of KAFTRIO, which was approved inEurope in the third quarter of 2020, and the continued performance of TRIKAFTA in theU.S. Decreases in revenues for our products other than TRIKAFTA/KAFTRIO were primarily the result of patients switching from these medicines to TRIKAFTA/KAFTRIO. In the second quarter and first half of 2021, our net product revenues included$536.5 million and$1.01 billion , respectively, from ex-U.S. markets. In the second quarter and first half of 2020, our net product revenues included$314.2 million and$641.7 million , respectively, from ex-U.S. markets. Other Revenues Our other revenues were$1.0 million related to a collaborative milestone that we earned in the first half of 2021. We did not record any other revenues in the first half of 2020. Our other revenues have historically fluctuated significantly from one period to another based on our collaborative out-license activities, and may continue to fluctuate in the future. Our future royalty revenues will be dependent on if, and when, our collaborators are able to successfully develop drug candidates that we have out-licensed to them. 29 -------------------------------------------------------------------------------- Table of Contents Operating Costs and Expenses ` Three Months EndedJune 30 , Increase/(Decrease) Six Months EndedJune 30 , Increase/(Decrease) 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Cost of sales$ 227,972 $ 184,520 $ 43,452 24%$ 420,301 $ 347,017 $ 73,284 21% Research and development expenses 1,407,090 420,928 986,162 234% 1,863,063 869,456 993,607
114%
Selling, general and administrative expenses 194,669 191,804 2,865 1% 386,746 374,062 12,684 3% Change in fair value of contingent consideration 1,600 9,200 (7,600) (83)% (2,300) 10,800 (13,100) ** Total costs and expenses$ 1,831,331 $ 806,452 $ 1,024,879 127%$ 2,667,810 $ 1,601,335 $ 1,066,475 67% ** Not meaningful Cost of Sales Our cost of sales primarily consists of third-party royalties payable on our net sales of our products as well as the cost of producing inventories that corresponded to product revenues for the reporting period. Pursuant to our agreement with theCystic Fibrosis Foundation our tiered third-party royalties on sales of TRIKAFTA/KAFTRIO, SYMDEKO/SYMKEVI, KALYDECO and ORKAMBI, calculated as a percentage of net sales, range from the single digits to the sub-teens, with royalties on sales of TRIKAFTA/KAFTRIO slightly lower than for our other products. Over the last several years, our cost of sales has been increasing due to increased net product revenues. Our cost of sales as a percentage of our net product revenues was 12.7% and 12.1% in the second quarter of 2021 and 2020, respectively. Our cost of sales as a percentage of our net product revenues was 12.0% and 11.4% in the first half of 2021 and 2020, respectively. Research and Development Expenses Three Months EndedJune 30 , Increase/(Decrease) Six Months EndedJune 30 , Increase/(Decrease) 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Research expenses$ 147,984 $ 134,138 $ 13,846 10%$ 277,732 $ 291,408 $ (13,676) (5)% Development expenses 1,259,106 286,790 972,316 339% 1,585,331 578,048 1,007,283 174% Total research and development expenses$ 1,407,090 $ 420,928 $ 986,162 234%$ 1,863,063 $ 869,456 $ 993,607 114% Our research and development expenses include internal and external costs incurred for research and development of our drugs and drug candidates and expenses related to certain technology that we acquire or license through business development transactions. We do not assign our internal costs, such as salary and benefits, stock-based compensation expense, laboratory supplies and other direct expenses and infrastructure costs, to individual drugs or drug candidates, because the employees within our research and development groups typically are deployed across multiple research and development programs. These internal costs are significantly greater than our external costs excluding collaborative upfront and milestone payments, such as the costs of services provided to us by clinical research organizations and other outsourced research, which we allocate by individual program. All research and development costs for our drugs and drug candidates are expensed as incurred. SinceJanuary 2019 , we have incurred approximately$5.4 billion in research and development expenses associated with drug discovery and development. The successful development of our drug candidates is highly uncertain and subject to a number of risks. In addition, the duration of clinical trials may vary substantially according to the type, complexity and novelty of the drug candidate and the disease indication being targeted. The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to 30 -------------------------------------------------------------------------------- Table of Contents discontinuation or redirection of development activities. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a project and are difficult to predict. Therefore, accurate and meaningful estimates of the ultimate costs to bring our drug candidates to market are not available. In 2020 and the first half of 2021, costs related to our CF programs represented the largest portion of our development costs, excluding the$900.0 million upfront payment to CRISPR. Any estimates regarding development and regulatory timelines for our drug candidates are highly subjective and subject to change. Until we have data from Phase 3 clinical trials, we cannot make a meaningful estimate regarding when, or if, a clinical development program will generate revenues and cash flows. Research Expenses Three Months EndedJune 30 , Increase/(Decrease) Six Months EndedJune 30 , Increase/(Decrease) 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Research Expenses: Salary and benefits$ 33,152 $ 31,099 $ 2,053 7%$ 67,894 $ 65,368 $ 2,526 4% Stock-based compensation expense 17,971 26,496 (8,525) (32)% 38,973 52,905 (13,932) (26)% Outsourced services and other direct expenses 39,016 21,073 17,943 85% 79,122 51,926 27,196 52% Collaborative payments 25,750 27,000 (1,250) (5)% 27,400 63,250 (35,850) (57)% Infrastructure costs 32,095 28,470 3,625 13% 64,343 57,959 6,384 11% Total research expenses$ 147,984 $ 134,138 $ 13,846 10%$ 277,732 $ 291,408 $ (13,676) (5)% We expect to continue to invest in our research programs with a focus on creating transformative medicines for serious diseases. Our research expenses have historically fluctuated, and are expected to continue to fluctuate, from one period to another due to upfront and milestone payments related to our business development activities that are reflected in the preceding table as collaborative payments. Our research expenses, excluding these collaborative payments, have been increasing over the last several years as we have invested in our pipeline and expanded our cell and genetic therapy capabilities. Development Expenses Three Months EndedJune 30 , Increase/(Decrease) Six Months EndedJune 30 , Increase/(Decrease) 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Development Expenses: Salary and benefits $ 79,075$ 68,532 $ 10,543 15%$ 163,605 $ 148,130 $ 15,475 10% Stock-based compensation expense 44,644 43,779 865 2% 96,444 90,057 6,387 7% Outsourced services and other direct expenses 144,002 124,898 19,104 15% 276,814 241,331 35,483 15% Collaborative payments 932,650 - 932,650 ** 932,650 - 932,650 ** Infrastructure costs 58,735 49,581 9,154 18% 115,818 98,530 17,288 18% Total development expenses$ 1,259,106 $ 286,790 $ 972,316 339%$ 1,585,331 $ 578,048 $ 1,007,283 174% ** Not meaningful Our development expenses increased by$972.3 million in the second quarter of 2021 as compared to second quarter of 2020 and increased by$1.0 billion in the first half of 2021 as compared to the first half of 2020, primarily due to the$900.0 31 -------------------------------------------------------------------------------- Table of Contents million upfront payment to CRISPR, that is included in the preceding table under collaborative payments, and increased expenses related to our diversifying pipeline, including clinical trials, headcount and infrastructure costs. Sales, General and Administrative Expenses Three Months Ended June 30, Increase/(Decrease) Six Months Ended June 30, Increase/(Decrease) 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Sales, general and administrative expenses$ 194,669 $ 191,804 $ 2,865 1%$ 386,746 $ 374,062 $ 12,684 3% Sales, general and administrative expenses increased by 1% in the second quarter of 2021 as compared to second quarter of 2020 and increased by 3% in the first half of 2021 as compared to the first half of 2020, primarily due to the continued investment to support the commercialization of our medicines and increased support for our CF pipeline products and other disease areas. Contingent Consideration The fair value of contingent consideration potentially payable to Exonics' former equity holders increased$1.6 million and decreased$2.3 million in the second quarter and first half of 2021, respectively. The fair value of contingent consideration increased by$9.2 million and$10.8 million in the second quarter and first half of 2020, respectively. Other Non-Operating Income (Expense), Net Interest Income Interest income decreased from$4.2 million and$16.8 million in the second quarter and first half of 2020, respectively, to$1.1 million and$2.6 million in the second quarter and first half of 2021, respectively primarily due to a decrease in prevailing market interest rates despite an increase in our cash equivalents and available-for-sale debt securities. Our future interest income will be dependent on the amount of, and prevailing market interest rates on, our outstanding cash equivalents and available-for-sale debt securities. Interest Expense Interest expense was$15.5 million and$31.2 million in the second quarter and first half of 2021, respectively, as compared to$13.9 million and$28.0 million in the second quarter and first half of 2020, respectively. The majority of our interest expense in these periods was related to imputed interest expense associated with our leased corporate headquarters inBoston . Our future interest expense will be dependent on whether, and to what extent, we borrow amounts under our credit facilities. Other Income (Expense), Net Other income (expense), net was income of$8.1 million and expense of$44.6 million in the second quarter and first half of 2021, respectively, as compared to income of$116.4 million and$55.2 million in the second quarter and first half of 2020, respectively. Our other income (expense), net in these periods was primarily related to changes in the fair value of our strategic investments. We expect that due to the volatility of the stock price of biotechnology companies, our other income (expense), net will fluctuate in future periods based on increases or decreases in the fair value of our strategic investments. Income Taxes We recorded a benefit from income taxes of$111.2 million and a provision for income taxes of$56.6 million in the second quarter and first half of 2021, respectively, as compared to a benefit from income taxes of$12.5 million and a provision for income taxes of$42.3 million in the second quarter and first half of 2020, respectively. Our effective tax rate of 7% for the first half of 2021 was lower than theU.S. statutory rate primarily due to a$99.7 million discrete tax benefit associated with an increase in theU.K.'s corporate tax rate effective inApril 2023 . Our effective tax rate of 3% for the first half of 2020 was lower than theU.S. statutory rate primarily due to a discrete tax benefit of$187.0 million associated with the transfer of intellectual property rights to theU.K. in the second quarter of 2020, a discrete benefit related to the write off 32 -------------------------------------------------------------------------------- Table of Contents of a long-term intercompany receivable in the first quarter of 2020 and excess tax benefits related to stock-based compensation. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the components of our financial condition as ofJune 30, 2021 andDecember 31, 2020 : June 30, December 31, Increase/(Decrease) 2021 2020 $ % (in thousands) Cash, cash equivalents and marketable securities$ 6,707,993 $ 6,658,897 $ 49,096 1% Working Capital Total current assets 8,457,514 8,133,379 324,135 4% Total current liabilities (1,836,448) (1,877,533) (41,085) (2)% Total working capital$ 6,621,066 $ 6,255,846 $ 365,220 6% As ofJune 30, 2021 , total working capital was$6.6 billion , which represented an increase of$365 million from$6.3 billion as ofDecember 31, 2020 . The increase in total working capital in the first half of 2021 was primarily related to$721.3 million of cash provided by operations, which was net of our$900 million payment to CRISPR, partially offset by$425.0 million of cash used in the first quarter of 2021 to repurchase our common stock pursuant to a share repurchase program approved by our Board of Directors inNovember 2020 and expenditures for property and equipment of$120.8 million . Sources of Liquidity As ofJune 30, 2021 , we had cash, cash equivalents and marketable securities of$6.71 billion , which represented an increase of$49 million from$6.66 billion as ofDecember 31, 2020 . We intend to rely on our existing cash, cash equivalents and marketable securities together with cash flows from product sales as our primary source of liquidity. We may borrow up to a total of$2.5 billion pursuant to two revolving credit facilities. We may repay and reborrow amounts under these revolving credit agreements without penalty. Subject to certain conditions, we may request that the borrowing capacity for each of the credit agreements be increased by an additional$500.0 million , for a total of$3.5 billion collectively. Other possible sources of future liquidity include commercial debt, public and private offerings of our equity and debt securities, strategic sales of assets or businesses and financial transactions. Negative covenants in our credit agreement may prohibit or limit our ability to access these sources of liquidity. As ofJune 30, 2021 , we were in compliance with these covenants. Future Capital Requirements We have significant future capital requirements, including: •significant expected operating expenses to conduct research and development activities and to operate our organization; and •substantial facility and finance lease obligations. In addition: •We have entered into certain collaboration agreements with third parties that include the funding of certain research, development and commercialization efforts. Certain of our business development transactions, including collaborations and acquisitions, include the potential for future milestone and royalty payments by us upon the achievement of pre-established developmental and regulatory targets and/or commercial targets. We may enter into additional business development transactions, including acquisitions, collaborations and equity investments, that require additional capital. 33
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Table of Contents •To the extent we borrow amounts under the credit agreements we entered into in 2020 and 2019, we would be required to repay any outstanding principal amounts in 2022 or 2024, respectively. •We have$1.5 billion available under a new share repurchase program approved by our Board of Directors onJune 23, 2021 . We expect that cash flows from our products together with our current cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next twelve months. The adequacy of our available funds to meet our future operating and capital requirements will depend on many factors, including the amounts of future revenues generated by our products, and the potential introduction of one or more of our other drug candidates to the market, the level of our business development activities and the number, breadth, cost and prospects of our research and development programs. Financing Strategy We may raise additional capital by borrowing under credit agreements, through public offerings or private placements of our securities or securing new collaborative agreements or other methods of financing. We will continue to manage our capital structure and will consider all financing opportunities, whenever they may occur, that could strengthen our long-term liquidity profile. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all. CONTRACTUAL COMMITMENTS AND OBLIGATIONS Our commitments and obligations were reported in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSecurities and Exchange Commission , orSEC , onFebruary 11, 2021 . There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in theU.S. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are reflected in reported results for the period in which the change occurs. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. During the six months endedJune 30, 2021 , there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSEC onFebruary 11, 2021 . RECENT ACCOUNTING PRONOUNCEMENTS For a discussion of recent accounting pronouncements, please refer to Note A, "Basis of Presentation and Accounting Policies."
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