Item 16. FORM 10-K SUMMARY

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			Vertex Pharmaceuticals Incorporated
February 11, 2021			By:			/s/ Reshma Kewalramani
						Reshma Kewalramani Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

						Name												Title															Date
/s/ Reshma Kewalramani
Reshma Kewalramani												President, Chief Executive Officer and Director (Principal Executive Officer)															February 11, 2021
/s/ Charles F. Wagner, Jr.
Charles F. Wagner, Jr.												Executive Vice President and Chief Financial Officer (Principal Financial Officer)															February 11, 2021
/s/ Paul M. Silva
Paul M. Silva												Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)															February 11, 2021
/s/Jeffrey M. Leiden
Jeffrey M. Leiden												Executive Chairman															February 11, 2021
/s/ Sangeeta N. Bhatia
Sangeeta N. Bhatia												Director															February 11, 2021
/s/ Lloyd Carney
Lloyd Carney												Director															February 11, 2021
/s/ Alan Garber
Alan Garber												Director															February 11, 2021
/s/ Terrence C. Kearney
Terrence C. Kearney												Director															February 11, 2021
/s/ Yuchun Lee
Yuchun Lee												Director															February 11, 2021
/s/ Margaret G. McGlynn
Margaret G. McGlynn												Director															February 11, 2021
/s/ Diana McKenzie
Diana McKenzie												Director															February 11, 2021
/s/ Bruce I. Sachs
Bruce I. Sachs												Director															February 11, 2021

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Vertex Pharmaceuticals Incorporated

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Vertex Pharmaceuticals Incorporated (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders’ equity and noncontrolling interest, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 11, 2021, expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

ASU No. 2016-02

As discussed in Note A to the consolidated financial statements, the Company changed its method for lease accounting as a result of the adoption of ASU No. 2016-02, Leases (Topic 842), and the related amendments effective January 1, 2019.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

F-1

						Revenue recognition - Payor Mix Impact on Measuring Variable Consideration
Description of the Matter						As discussed in Note A to the Company’s consolidated financial statements, the Company records product sales at the net sales price, or “transaction price,” which requires the Company to make several significant estimates regarding the net sales price. The most significant estimates relate to government rebates, chargebacks, discounts and fees, collectively rebates. Due to the delay in receipt of claims by third-party payors, the Company estimates the percentage of prescriptions that will be covered by each third-party payor, which is referred to as the payor mix. Rebate accruals inclusive of estimated amounts due for claims not yet received or processed are recorded within accrued expenses on the Company’s consolidated balance sheet. Auditing the measurement of the Company’s net product revenues was especially complex and judgmental due to the significant estimation required in determining the amount of consideration that will be collected net of estimates for payor rebates. In particular, the net sales price is affected by assumptions in payor behavior such as changes in payor mix, payor collections, current customer contractual requirements, and experience with ultimate collection from third-party payors.
How We Addressed the Matter in Our Audit						We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s revenue recognition process, including controls over the underlying assumptions and inputs used by management to estimate amounts due to third-party payors and the completeness and accuracy of the data used in the estimates. We also tested the Company’s controls to assess the completeness and accuracy of the current and historical data that supports the estimate. Our audit procedures to test the Company’s recognition of net product revenues included, among others, assessing the methodology used to determine the estimate and testing the significant assumptions and the underlying data used by the Company in its analysis, which included historical claims data. To assess the payor mix assumptions we tested contracted rates, historical claims and payment data and related trends, and other relevant factors. We also assessed the historical accuracy of the Company’s estimates of third-party payor rebates.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2005.

Boston, Massachusetts

February 11, 2021

F-2

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Statements of Operations

(in thousands, except per share amounts)

			Year Ended December 31,
			2020						2019						2018
Revenues:
Product revenues, net			$	6,202,783					$	4,160,726					$	3,038,325
Collaborative and royalty revenues			2,900						2,095						9,272
Total revenues			6,205,683						4,162,821						3,047,597
Costs and expenses:
Cost of sales			736,300						547,758						409,539
Research and development expenses			1,829,537						1,754,540						1,416,476
Sales, general and administrative expenses			770,456						658,498						557,616
Change in fair value of contingent consideration			13,100						4,459						—
Restructuring income			—						—						(184)
Intangible asset impairment charge			—						—						29,000
Total costs and expenses			3,349,393						2,965,255						2,412,447
Income from operations			2,856,290						1,197,566						635,150
Interest income			22,239						63,678						38,352
Interest expense			(58,151)						(58,502)						(72,471)
Other income (expense), net			296,420						192,177						(790)
Income before provision for (benefit from) income taxes			3,116,798						1,394,919						600,241
Provision for (benefit from) income taxes			405,151						218,109						(1,486,862)
Net income			2,711,647						1,176,810						2,087,103
Loss attributable to noncontrolling interest			—						—						9,793
Net income attributable to Vertex			$	2,711,647					$	1,176,810					$	2,096,896
Amounts per share attributable to Vertex common shareholders:
Net income:
Basic			$	10.44					$	4.58					$	8.24
Diluted			$	10.29					$	4.51					$	8.09
Shares used in per share calculations:
Basic			259,841						256,728						254,292
Diluted			263,396						260,673						259,185

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

F-3

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Statements of Comprehensive Income

(in thousands)

			Year ended December 31,
			2020						2019						2018
Net income			$	2,711,647					$	1,176,810					$	2,087,103
Changes in other comprehensive income:
Unrealized holding (losses) gains on marketable securities, net			(169)						1,039						58
Unrealized (losses) gains on foreign currency forward contracts, net of tax of $14.3 million, $7.0 million and $(7.1) million, respectively			(51,555)						(14,003)						27,438
Foreign currency translation adjustment			(14,783)						10,332						8,855
Total other comprehensive (loss) income			(66,507)						(2,632)						36,351
Comprehensive income			2,645,140						1,174,178						2,123,454
Comprehensive loss attributable to noncontrolling interest			—						—						9,793
Comprehensive income attributable to Vertex			$	2,645,140					$	1,174,178					$	2,133,247

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

F-4

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

			December 31,
			2020						2019
Assets
Current assets:
Cash and cash equivalents			$	5,988,187					$	3,109,322
Marketable securities			670,710						698,972
Accounts receivable, net			885,352						633,518
Inventories			280,777						167,502
Prepaid expenses and other current assets			308,353						213,515
Total current assets			8,133,379						4,822,829
Property and equipment, net			958,534						745,080
Goodwill			1,002,158						1,002,158
Intangible assets			400,000						400,000
Deferred tax assets			882,779						1,190,815
Operating lease assets			325,564						88,202
Other assets			49,394						69,381
Total assets			$	11,751,808					$	8,318,465
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable			$	155,139					$	87,610
Accrued expenses			1,404,971						1,116,912
Other current liabilities			317,423						130,305
Total current liabilities			1,877,533						1,334,827
Long-term finance lease liabilities			539,042						538,576
Long-term operating lease liabilities			350,463						84,292
Long-term contingent consideration			189,600						176,500
Other long-term liabilities			108,355						99,026
Total liabilities			3,064,993						2,233,221
Commitments and contingencies			—						—
Shareholders’ equity:
Preferred stock, $0.01 par value; 1,000 shares authorized; none issued and outstanding			—						—
Common stock, $0.01 par value; 500,000 shares authorized, 259,890 and 258,993 shares issued and outstanding, respectively			2,599						2,589
Additional paid-in capital			7,894,027						7,937,606
Accumulated other comprehensive loss			(68,480)						(1,973)
Retained earnings (accumulated deficit)			858,669						(1,852,978)
Total shareholders’ equity			8,686,815						6,085,244
Total liabilities and shareholders’ equity			$	11,751,808					$	8,318,465

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

F-5

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Statements of Shareholders’ Equity and Noncontrolling Interest

(in thousands)

			Common Stock												Additional Paid-in Capital						Accumulated Other Comprehensive Income (Loss)						Retained Earnings (Accumulated Deficit)						Total Vertex Shareholders’ Equity						Noncontrolling Interest						Total Shareholders’ Equity
			Shares						Amount
Balance, 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 income, net of tax			—						—						—						36,351						—						36,351						—						36,351
Net income (loss)			—						—						—						—						2,096,896						2,096,896						(9,793)						2,087,103
Repurchases of common stock			(2,094)						(21)						(350,022)						—						—						(350,043)						—						(350,043)
Issuance of common stock under benefit plans			4,013						55						288,480						—						—						288,535						—						288,535
Stock-based compensation expense			—						—						325,656						—						—						325,656						—						325,656
VIE noncontrolling interest upon deconsolidation			—						—						—						—						—						—						(3,540)						(3,540)
Other VIE activity			—						—						—						—						—						—						(394)						(394)
Balance, 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 loss, net of tax			—						—						—						(2,632)						—						(2,632)						—						(2,632)
Net income			—						—						—						—						1,176,810						1,176,810						—						1,176,810
Repurchases of common stock			(1,046)						(10)						(186,010)						—						—						(186,020)						—						(186,020)
Common stock withheld for employee tax obligations			(28)						—						(5,995)						—						—						(5,995)						—						(5,995)
Issuance of common stock under benefit plans			4,895						53						345,926						—						—						345,979						—						345,979
Stock-based compensation expense			—						—						362,209						—						—						362,209						—						362,209
Balance, December 31, 2019			258,993						$	2,589					$	7,937,606					$	(1,973)					$	(1,852,978)					$	6,085,244					$	—					$	6,085,244
Other comprehensive loss, net of tax			—						—						—						(66,507)						—						(66,507)						—						(66,507)
Net income			—						—						—						—						2,711,647						2,711,647						—						2,711,647
Repurchases of common stock			(2,405)						(24)						(539,112)						—						—						(539,136)						—						(539,136)
Common stock withheld for employee tax obligations			(804)						(8)						(200,263)						—						—						(200,271)						—						(200,271)
Issuance of common stock under benefit plans			4,106						42						262,726						—						—						262,768						—						262,768
Stock-based compensation expense			—						—						433,070						—						—						433,070						—						433,070
Balance, December 31, 2020			259,890						$	2,599					$	7,894,027					$	(68,480)					$	858,669					$	8,686,815					$	—					$	8,686,815

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

F-6

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Statements of Cash Flows

(in thousands)

			Year Ended December 31,
			2020						2019						2018
Cash flows from operating activities:
Net income			$	2,711,647					$	1,176,810					$	2,087,103
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense			429,461						360,489						325,047
Depreciation expense			109,515						106,941						72,420
Deferred income taxes (including benefit from valuation allowance release in 2018)			277,341						167,387						(1,512,325)
Gains on equity securities			(311,937)						(197,597)						(2,558)
Increase in fair value of contingent consideration			13,100						4,459						—
Intangible asset impairment charge			—						—						29,000
Other non-cash items, net			78,832						16,942						33,579
Changes in operating assets and liabilities:
Accounts receivable, net			(223,444)						(225,587)						(108,152)
Inventories			(132,014)						(64,047)						(31,965)
Prepaid expenses and other assets			(297,562)						35,440						16,684
Accounts payable			51,276						(22,785)						36,554
Accrued expenses			122,198						172,881						302,755
Other liabilities			425,092						37,997						22,144
Net cash provided by operating activities			3,253,505						1,569,330						1,270,286
Cash flows from investing activities:
Payments to acquire businesses, net of cash acquired			—						(1,154,212)						—
Purchases of available-for-sale debt securities			(431,396)						(537,196)						(431,918)
Maturities of available-for-sale debt securities			372,342						475,924						431,576
Sale of equity securities			437,567						94,936						—
Purchases of property and equipment			(259,798)						(75,451)						(95,449)
Investment in equity securities			(19,327)						(39,319)						(83,471)
Investment in note receivable			—						—						(15,000)
Decrease in restricted cash due to deconsolidation of VIE			—						—						(7,896)
Net cash provided by (used in) investing activities			99,388						(1,235,318)						(202,158)
Cash flows from financing activities:
Issuances of common stock under benefit plans			264,946						343,244						289,293
Repurchases of common stock			(539,136)						(186,020)						(350,043)
Payments in connection with common stock withheld for employee tax obligations			(200,271)						(5,995)						—
Payments on finance leases *			(42,275)						(39,185)						(33,388)
Proceeds from finance leases *			13,251						10,046						20,840
Other financing activities			(1,796)						4,683						2,079
Net cash (used in) provided by financing activities			(505,281)						126,773						(71,219)
Effect of changes in exchange rates on cash			20,552						1,643						(6,182)
Net increase in cash, cash equivalents and restricted cash			2,868,164						462,428						990,727
Cash, cash equivalents and restricted cash—beginning of period			3,120,681						2,658,253						1,667,526
Cash, cash equivalents and restricted cash—end of period			$	5,988,845					$	3,120,681					$	2,658,253
Supplemental disclosure of cash flow information:
Cash paid for interest			$	54,520					$	55,554					$	66,458
Cash paid for income taxes			$	191,776					$	24,730					$	12,402
Capitalization of costs related to construction financing lease obligation *			$	—					$	—					$	3,389
Issuances of common stock from employee benefit plans receivable			$	642					$	2,820					$	86
* For the year ended December 31, 2018, amounts are related to the Company’s capital leases and construction financing lease obligations pursuant to ASC 840, Leases, which was applicable until December 31, 2018.

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

F-7

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements

**A.**Nature of Business and Accounting Policies

Business

Vertex Pharmaceuticals Incorporated (“Vertex” or the “Company”) invests in scientific innovation to create transformative medicines for serious diseases. The Company’s business is focused on developing and commercializing therapies for the treatment of cystic fibrosis (“CF”) and advancing research and development programs in other indications. The Company’s marketed products are TRIKAFTA/KAFTRIO (elexacaftor/tezacaftor/ivacaftor and ivacaftor), SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and KALYDECO (ivacaftor), which are approved to treat people with CF who have specific mutations in their cystic fibrosis transmembrane conductance regulator (“CFTR”) gene.

As of December 31, 2020, the Company had cash, cash equivalents and marketable securities of $6.7 billion. The Company expects that cash flows from the sales of its products, together with its cash, cash equivalents and marketable securities, will be sufficient to fund its operations for at least the next twelve months.

The Company is subject to risks common to companies in its industry including, but not limited to, the dependence on revenues from its CF products, competition, uncertainty about clinical trial outcomes and regulatory approvals, uncertainties relating to pharmaceutical pricing and reimbursement, uncertainty related to international expansion, uncertain protection of proprietary technology, the need to comply with government regulations, share price volatility, dependence on collaborative relationships and potential product liability.

Basis of Presentation

The accompanying consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), reflect the operations of (i) the Company, (ii) its wholly-owned subsidiaries and (iii) a consolidated variable interest entity (“VIE”). In 2018, the Company deconsolidated BioAxone Biosciences, Inc. (“BioAxone”), a VIE the Company had consolidated since 2014. As of December 31, 2020 and 2019, the Company did not have any consolidated VIEs. All material intercompany balances and transactions have been eliminated. The Company operates in one segment, pharmaceuticals. Please refer to Note Q, “Segment Information,” for enterprise-wide disclosures regarding the Company’s revenues, major customers and long-lived assets by geographic area. The Company has reclassified certain items from the prior year’s consolidated financial statements to conform to the current year’s presentation.

Use of Estimates

The preparation of 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 consolidated financial statements, and the amounts of revenues and expenses during the reported periods. Significant estimates in these consolidated financial statements have been made in connection with (i) determining the transaction price of revenues, (ii) accounting for acquisitions, including intangible assets, goodwill and contingent consideration and (iii) evaluating deferred tax asset valuation allowances and the provision for 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.

F-8

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Revenue Recognition

The Company recognizes revenue when a customer obtains control of promised goods or services. The Company records the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

The Company only applies the five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services that it transfers to the customer. Once a contract is determined to be within the scope of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”) at contract inception, the Company reviews the contract to determine which performance obligations it must deliver and which of these performance obligations are distinct. The Company recognizes as revenue the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customers at a point in time, typically upon delivery.

Product Revenues, Net

The Company sells its products principally to a limited number of specialty pharmacy and specialty distributors in the United States (“U.S.”), which account for the largest portion of its total revenues, and makes international sales primarily to specialty distributors and retail chains, as well as hospitals and clinics, many of which are government-owned or supported (collectively, its “Customers”). The Company’s Customers in the U.S. subsequently resell the products to patients and health care providers. The Company recognizes net product revenues from sales when the Customers obtain control of the Company’s products, which typically occurs upon delivery to the Customer. The Company’s payment terms are approximately 30 days in the U.S. and consistent with prevailing practice in international markets.

Revenues from product sales are recorded at the net sales price, or “transaction price,” which includes estimates of variable consideration that result from (a) invoice discounts for prompt payment and distribution fees, (b) government and private payor rebates, chargebacks, discounts and fees and (c) costs of co-pay assistance programs for patients, as well as other incentives for certain indirect customers. Reserves are established for the estimates of variable consideration based on the amounts earned or to be claimed on the related sales. The reserves are classified as reductions to “Accounts receivable, net” if payable to a Customer or “Accrued expenses” if payable to a third-party. Where appropriate, the Company utilizes the expected value method to determine the appropriate amount for estimates of variable consideration based on factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. The amount of variable consideration that is included in the transaction price may be constrained and is included in net product revenues only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.

Invoice Discounts and Distribution Fees: The Company generally provides invoice discounts on product sales to its Customers for prompt payment and pays fees for distribution services, such as fees for certain data that Customers provide to the Company. The Company estimates that, based on its experience, its Customers will earn these discounts and fees, and deducts the full amount of these discounts and fees from its gross product revenues and accounts receivable at the time such revenues are recognized.

Rebates, Chargebacks, Discounts and Fees: The Company contracts with government agencies (its “Third-party Payors”) so that products will be eligible for purchase by, or partial or full reimbursement from, such Third-party Payors. The Company estimates the rebates, chargebacks, discounts and fees it will provide to Third-party Payors and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized. For each product, the Company estimates the aggregate rebates, chargebacks and discounts that it will provide to Third-party Payors based upon (i) the Company’s contracts with these Third-party Payors, (ii) the government-mandated discounts and fees

F-9

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

applicable to government-funded programs, (iii) information obtained from the Company’s Customers and other third-party data regarding the payor mix for such product and (iv) historical experience.

Other Incentives: Other incentives that the Company offers include co-pay mitigation rebates provided by the Company to commercially insured patients who have coverage and who reside in states that permit co-pay mitigation programs. Based upon the terms of the Company’s co-pay mitigation programs, the Company estimates average co-pay mitigation amounts for each of its products in order to establish appropriate accruals.

The Company makes significant estimates and judgments that materially affect its recognition of net product revenues. The Company adjusts its estimated rebates, chargebacks and discounts based on new information, including information regarding actual rebates, chargebacks and discounts for its products, as it becomes available. Claims by third-party payors for rebates, chargebacks and discounts frequently are submitted to the Company significantly after the related sales, potentially resulting in adjustments in the period in which the new information becomes known. The Company’s credits to product revenue related to prior period sales have not been significant and primarily related to rebates and discounts.

The Company excludes taxes collected from Customers relating to product sales and remitted to governmental authorities from revenues.

Contract Liabilities

The Company recorded contract liabilities of $191.5 million and $62.3 million as of December 31, 2020 and 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. During the years ended December 31, 2020, 2019 and 2018, the Company recorded $62.3 million, $24.9 million and $1.7 million, respectively, of revenues that were recorded as contract liabilities at the beginning of the year.

French Early Access Programs

In 2015, the Company began distributing ORKAMBI through early access programs in France and remained engaged in reimbursement discussions with the French government until November 2019, when the Company reached an agreement with the French government for ORKAMBI, including ORKAMBI distributed through early access programs. From the time the Company began distributing ORKAMBI through early access programs in France, it expected the difference between the amounts collected based on the invoiced amount and the final amount for ORKAMBI distributed through early access programs would be returned to the French government. As a result, the Company had classified a refund liability related to the early access programs in France within “Accrued expenses” on its consolidated balance sheets.

From the first quarter of 2018 through the third quarter of 2019, the Company recognized net product revenues for ORKAMBI sales in France under the early access programs based on a transaction price that reflected the Company’s estimate of consideration it expected to retain that would not be subject to a significant reversal in amounts recognized. When determining if variable consideration should be constrained, the Company considers whether there are factors outside its control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue.

Upon reaching an agreement with the French government for ORKAMBI, including ORKAMBI distributed through early access programs in November 2019, the Company updated the transaction price to reflect the final amount for ORKAMBI distributed through early access programs. As a result, the Company recognized net product revenues of

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

$155.8 million related to prior period ORKAMBI early access program sales in the fourth quarter of 2019 because the updated transaction price for ORKAMBI distributed through these programs exceeded the Company’s previous estimate of the consideration it expected to retain that would not be subject to a significant reversal in amounts recognized. The Company paid the final amount due to the French government in 2020.

Collaborative and Royalty Revenues

The Company has not recorded significant collaborative and royalty revenues during the three years ended December 31, 2020; however, in future periods, it may recognize collaborative revenues generated through collaborative research, development and/or commercialization agreements. The terms of these agreements typically include payment to the Company related to one or more of the following: nonrefundable, upfront license fees; development and commercial milestones; funding of research and/or development activities; and royalties on net sales of licensed products. Revenue is recognized upon satisfaction of a performance obligation by transferring control of a good or service to the collaborator.

For each collaborative research, development and/or commercialization agreement that results in revenue, the Company identifies all material performance obligations, which may include a license to intellectual property and know-how, research and development activities and/or transition activities. In order to determine the transaction price, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimate of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.

Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction price is generally allocated to each separate performance obligation on a relative standalone selling price basis. In order to account for these agreements, the Company must develop assumptions that require judgment to determine the standalone selling price, which may include (i) the probability of obtaining marketing approval for the drug candidate, (ii) estimates regarding the timing of and the expected costs to develop and commercialize the drug candidate, (iii) estimates of future cash flows from potential product sales with respect to the drug candidate and (iv) appropriate discount and tax rates. Standalone selling prices used to perform the initial allocation are not updated after contract inception. The Company does not include a financing component to its estimated transaction price at contract inception unless it estimates that certain performance obligations will not be satisfied within one year.

Upfront License Fees: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in an arrangement, the Company recognizes revenue from the related nonrefundable, upfront license fees based on the relative standalone selling price prescribed to the license compared to the total selling price of the arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company applies an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

F-11

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Development and Regulatory Milestone Payments: Depending on facts and circumstances, the Company may conclude that it is appropriate to include certain milestones in the estimated transaction price or that it is appropriate to fully constrain the milestones. A milestone payment is included in the transaction price in the reporting period that the Company concludes that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods. This may result in revenues from certain milestones and a corresponding contract asset being recorded in a reporting period before the milestone is achieved. Milestone payments that have not been included in the transaction price to date are fully constrained until the Company concludes that their achievement is probable and that recognition of the related revenue will not result in a significant reversal in amounts recognized in future periods. The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period and adjusts its estimate of the overall transaction price, including the amount of collaborative revenue that it has recorded, if necessary.

Research and Development Activities/Transition Services: If the Company is entitled to reimbursement from its collaborators for specified research and development expenses, it accounts for the related services that it provides as separate performance obligations if it determines that these services represent a material right. The Company also determines whether the reimbursement of research and development expenses should be accounted for as collaborative revenues or an offset to research and development expenses in accordance with the provisions of gross or net revenue presentation. The Company recognizes the corresponding revenues or records the corresponding offset to research and development expenses as it satisfies the related performance obligations.

Sales-based Milestone and Royalty Payments: The Company’s collaborators may be required to pay the Company sales-based milestones or royalties on future sales of commercial products. The Company recognizes revenues related to sales-based milestone and royalties upon the later to occur of (i) achievement of the collaborator’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license to the Company’s intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of money market funds and marketable securities. The Company places these investments with highly rated financial institutions, and, by policy, limits the amounts of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits. The Company also maintains a foreign currency hedging program that includes foreign currency forward contracts with several counterparties. The Company has not experienced any credit losses related to these financial instruments and does not believe it is exposed to any significant credit risk related to these instruments.

The Company also is subject to credit risk from its accounts receivable related to its product sales and collaborators. The Company evaluates the creditworthiness of each of its customers and has determined that all of its material customers are creditworthy. To date, the Company has not experienced significant losses with respect to the collection of its accounts receivable. The Company believes that its allowances, which are not significant to its consolidated financial statements, are adequate at December 31, 2020. Please refer to Note Q, “Segment Information,” for further information.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

Marketable Securities

As of December 31, 2020, the Company’s marketable securities consisted of investments in available-for-sale debt securities and corporate equity securities with readily determinable fair values. The Company classifies marketable securities available to fund current operations as current assets on its consolidated balance sheets. Marketable securities are classified as long-term assets on the consolidated balance sheets if (i) they have been in an unrealized loss position for longer than one year and (ii) the Company has the ability and intent to hold them (a) until the carrying value is recovered and (b) such holding

F-12

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

period may be longer than one year. The Company’s marketable securities are stated at fair value. The fair value of these securities is based on quoted prices for identical or similar assets.

The Company records unrealized gains (losses) on available-for-sale debt securities as a component of “Accumulated other comprehensive loss,” which is a separate component of shareholders’ equity on its consolidated balance sheet, until such gains and losses are realized. Realized gains and losses, if any, are determined using the specific identification method.

The Company records changes in the fair value of its investments in corporate equity securities to “Other income (expense), net” in its consolidated statements of operations. Realized gains and losses, which are also included in “Other income (expense), net,” are determined on an original weighted-average cost basis.

The Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) as of January 1, 2020, which did not have a significant impact on its consolidated financial statements. For available-for-sale debt securities in unrealized loss positions, ASU 2016-13 requires the Company to record an allowance for credit losses using an expected loss model, which replaces the incurred loss model required under the previous guidance. A credit loss is limited to the amount by which the amortized cost of an investment exceeds its fair value. A previously recognized credit loss may be decreased in subsequent periods if the Company’s estimate of fair value for the investment increases. To determine whether to record a credit loss, the Company considers issuer specific credit ratings and historical losses as well as current economic conditions and its expectations for future economic conditions.

Accounts Receivable

The Company deducts invoice discounts for prompt payment and fees for distribution services from its accounts receivable based on its experience that the Company’s Customers will earn these discounts and fees. The Company’s estimates for its allowance for credit losses, which has not been significant to date, is determined based on existing contractual payment terms, historical payment patterns, current economic conditions and the Company’s expectation for future economic conditions.

Stock-based Compensation Expense

The Company expenses the fair value of employee restricted stock units and other forms of stock-based employee compensation over the associated employee service period on a straight-line basis. Stock-based compensation expense is determined based on the fair value of the award at the grant date and is adjusted each period to reflect actual forfeitures and the outcomes of certain performance conditions.

For awards with performance conditions in which the award does not vest unless the performance condition is met, the Company recognizes expense if, and to the extent that, the Company estimates that achievement of the performance condition is probable. If the Company concludes that vesting is probable, it recognizes expense from the date it reaches this conclusion through the estimated vesting date.

The Company provides to employees who have rendered a certain number of years of service to the Company and meet certain age requirements, partial or full acceleration of vesting of these equity awards, subject to certain conditions including a notification period, upon a termination of employment other than for cause. Approximately 5% of the Company’s employees were eligible for partial or full acceleration of any of their equity awards as of December 31, 2020. The Company recognizes stock-based compensation expense related to these awards over a service period reflecting qualified employees’ eligibility for partial or full acceleration of vesting.

Research and Development Expenses

The Company expenses as incurred all research and development expenses, including amounts funded by research and development collaborations. The Company capitalizes nonrefundable advance payments made by the Company for research and development activities and expenses the payments as the related goods are delivered or the related services are performed.

F-13

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Research and development expenses are comprised of costs incurred by the Company in performing research and development activities, including salary and benefits; stock-based compensation expense; outsourced services and other direct expenses, including clinical trial and pharmaceutical development costs; collaborative payments; and infrastructure costs, including facilities costs and depreciation expense.

Inventories

The Company values its inventories at the lower-of-cost or net realizable value. The Company determines the cost of its inventories, which includes amounts related to materials and manufacturing overhead, on a first-in, first-out basis. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and writes down any excess and obsolete inventories to their net realizable value in the period in which the impairment is first identified. Shipping and handling costs incurred for inventory purchases are capitalized and recorded upon sale in “Cost of sales” in the consolidated statements of operations. Shipping and handling costs incurred for product shipments are recorded as incurred in “Cost of sales” in the consolidated statements of operations.

The Company capitalizes inventories produced in preparation for initiating sales of a drug candidate when the related drug candidate is considered to have a high likelihood of regulatory approval and the related costs are expected to be recoverable through sales of the inventories. In determining whether or not to capitalize such inventories, the Company evaluates, among other factors, information regarding the drug candidate’s safety and efficacy, the status of regulatory submissions and communications with regulatory authorities and the outlook for commercial sales, including the existence of current or anticipated competitive drugs and the availability of reimbursement. In addition, the Company evaluates risks associated with manufacturing the drug candidate and the remaining shelf-life of the inventories.

Property and Equipment

Property and equipment are recorded at cost, net of accumulated depreciation. Depreciation expense is recorded using the straight-line method over the estimated useful life of the related asset generally as follows:

Description						Estimated Useful Life
Buildings and improvements						15 to 40 years
Furniture and equipment						7 to 10 years
Leasehold improvements; assets under finance leases						The shorter of the useful life of the assets or the estimated remaining term of the associated lease
Computers and software						3 to 5 years

Maintenance and repairs to an asset that do not improve or extend its life are charged to operations. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the Company’s consolidated statements of operations. The Company performs an assessment of the fair value of the assets if indicators of impairment are identified during a reporting period and records the assets at the lower of the net book value or the fair value of the assets.

The Company capitalizes internal costs incurred to develop software for internal use during the application development stage. Amortization of capitalized internally developed software costs is recorded in depreciation expense over the useful life of the related asset.

Leases

The Company adopted ASU 2016-02, Leases (Topic 842) (“ASC 842”), as of January 1, 2019. Under ASC 842, the Company determines whether the arrangement contains a lease at the inception of an arrangement. If a lease is identified in an arrangement, the Company recognizes a right-of-use asset and liability on its consolidated 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

F-14

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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.

Finance leases are recorded in “Property and equipment, net,” “Other current liabilities” and “Long-term finance lease liabilities” and operating leases are recorded in “Operating lease assets,” “Other current liabilities” and “Long-term operating lease liabilities” on the Company’s consolidated balance sheet.

In 2018, prior to the adoption of ASC 842 on January 1, 2019, 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.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the income tax bases of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. On a periodic basis, the Company reassesses the valuation allowance on its deferred income tax assets weighing positive and negative evidence to assess the recoverability of its deferred tax assets. The Company includes, among other things, its recent financial performance and its future projections in this periodic assessment.

The Company records liabilities related to uncertain tax positions by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company does not believe any such uncertain tax positions currently pending will have a material adverse effect on its consolidated financial statements.

Variable Interest Entities

The Company reviews each collaboration agreement pursuant to which it licenses assets owned by a collaborator in order to determine whether or not it has a variable interest via the license agreement with the collaborator and if the variable interest is a variable interest in the collaborator as a whole. In assessing whether the Company has a variable interest in the collaborator as a whole, the Company considers and makes judgments regarding the purpose and design of the entity, the value of the licensed assets to the collaborator, the value of the collaborator’s total assets and the significant activities of the collaborator. If the Company has a variable interest in the collaborator as a whole, the Company assesses whether or not the Company is the primary beneficiary of that VIE based on a number of factors, including (i) which party has the power to direct the activities that most significantly affect the VIE’s economic performance, (ii) the parties’ contractual rights and responsibilities pursuant to the collaboration agreement and (iii) which party has the obligation to absorb losses of or the right to receive benefits from the VIE that could be significant to the VIE. If the Company determines it is the primary beneficiary of a VIE at the onset of the collaboration agreement, the collaboration is treated as a business combination and the Company consolidates the financial statements of the VIE into the Company’s consolidated financial statements. On a quarterly basis,

F-15

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

the Company evaluates whether it continues to be the primary beneficiary of any consolidated VIEs. If the Company determines that it is no longer the primary beneficiary of a consolidated VIE, or no longer has a variable interest in the VIE, it deconsolidates the VIE in the period that the determination is made.

Fair Value of In-process Research and Development Assets and Contingent Payments

The present-value models the Company uses to estimate the fair values of in-process research and development assets and contingent payments pursuant to collaborations and acquisitions incorporate significant assumptions.

The Company’s discounted cash flow models pertaining to in-process research and development assets include: (i) assumptions regarding the probability of obtaining marketing approval for a drug candidate; (ii) the timing of and the expected costs to develop and commercialize a drug candidate; (iii) estimates of future cash flows from potential product sales with respect to a drug candidate; and (iv) appropriate discount and tax rates.

The Company bases its estimates of the probability of achieving the milestones relevant to the fair value of contingent payments, which could include milestone, royalty and option payments, on industry data. Estimates included in the discounted cash flow models pertaining to contingent payments also include: (i) estimate regarding the timing of the relevant development and commercial milestones and royalties, (ii) and appropriate discount rates. Please refer to Note D, “Fair Value Measurements,” for further information.

In-process Research and Development Assets

The Company records the fair value of in-process research and development assets as of the transaction date of a business combination. Each of these assets is accounted for as an indefinite-lived intangible asset and is maintained on the Company’s consolidated balance sheet until either the project underlying it is completed or the asset becomes impaired. If the asset becomes impaired or is abandoned, the carrying value of the related intangible asset is written down to its fair value, and an impairment charge is recorded in the period in which the impairment occurs. If a project is completed, the carrying value of the related intangible asset is amortized as a part of “Cost of sales” over the remaining estimated life of the asset beginning in the period in which the project is completed. In-process research and development assets are tested for impairment on an annual basis as of October 1, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist.

In-process research and development that is acquired in a transaction that does not qualify as a business combination under U.S. GAAP and that does not have an alternative future use is recorded to “Research and development expenses” in the period in which it is acquired.

Goodwill

The difference between the purchase price and the fair value of assets acquired and liabilities assumed in a business combination is allocated to goodwill. Goodwill is evaluated for impairment on an annual basis as of October 1, and more frequently if indicators are present or changes in circumstances suggest that impairment may exist. As noted in Basis of Presentation above, the Company has one operating segment, pharmaceuticals, which is its only reporting unit.

Deconsolidation

Upon the occurrence of certain events and on a regular basis, the Company evaluates whether it no longer has a controlling interest in its subsidiaries, including consolidated VIEs. If the Company determines it no longer has a controlling interest, the subsidiary is deconsolidated. The Company records a gain or loss on deconsolidation based on the difference on the deconsolidation date between (i) the aggregate of (a) the fair value of any consideration received, (b) the fair value of any retained noncontrolling investment in the former subsidiary and (c) the carrying amount of any noncontrolling interest in the subsidiary being deconsolidated, less (ii) the carrying amount of the former subsidiary’s assets and liabilities.

Discontinued Operations

The Company assesses whether a deconsolidation is required to be presented as discontinued operations in its consolidated financial statements on the deconsolidation date. This assessment is based on whether or not the deconsolidation

F-16

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

represents a strategic shift that has or will have a major effect on the Company’s operations or financial results. If the Company determines that a deconsolidation requires presentation as a discontinued operation on the deconsolidation date, or at any point during the one year period following such date, it will present the former subsidiary as a discontinued operation in current and comparative period financial statements.

Embedded Derivatives

Embedded derivatives are required to be bifurcated from the host instruments and recorded at fair value if the derivatives are not clearly and closely related to the host instruments on the date of issuance. The Company did not have any material embedded derivatives that required bifurcation recorded on its consolidated balance sheets as of December 31, 2020 and 2019, respectively.

Hedging Activities

The Company recognizes the fair value of hedging instruments that are designated and qualify as hedging instruments pursuant to U.S. GAAP, foreign currency forward contracts, as either assets or liabilities on the consolidated balance sheets. Changes in the fair value of these instruments are recorded each period in “Accumulated other comprehensive loss” as unrealized gains and losses until the forecasted underlying transaction occurs. Unrealized gains and losses on these foreign currency forward contracts are included in “Prepaid expenses and other current assets” or “Other assets,” and “Other current liabilities” or “Other long-term liabilities,” respectively, on the Company’s consolidated balance sheets depending on the remaining period until their contractual maturity. Realized gains and losses for the effective portion of such contracts are recognized in “Product revenues, net” in the consolidated statement of operations in the same period that it recognizes the product revenues that were impacted by the hedged foreign exchange rate changes. The Company classifies the cash flows from hedging instruments in the same category as the cash flows from the hedged items.

Certain of the Company’s hedging instruments are subject to master netting arrangements to reduce the risk arising from such transactions with its counterparties. The Company presents unrealized gains and losses on its foreign currency forward contracts on a gross basis within its consolidated balance sheets.

The Company also enters into foreign currency forward contracts with contractual maturities of less than one month 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 pursuant to U.S. GAAP. Realized gains and losses for such contracts are recognized in “Other income (expense), net” in the consolidated statement of operations each period.

Restructuring Expenses

The Company records costs and liabilities associated with exit and disposal activities based on estimates of fair value in the period the liabilities are incurred. The Company’s exit and disposal activities have primarily been associated with the Company’s facilities, but also have included the termination of employees in some cases. The Company’s initial estimate of its liabilities for net ongoing costs associated with its facility obligations are recorded at fair value on the cease use date. On a quarterly basis, the Company evaluates and adjusts these liabilities as appropriate for changes in circumstances. Changes to the Company’s estimate of these liabilities are recorded as additional restructuring expenses (credits). These costs are included in “Restructuring expense (income)” on the Company’s consolidated statements of operations.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss), which includes foreign currency translation adjustments and unrealized gains and losses on foreign currency forward contracts and certain marketable securities. For purposes of comprehensive income disclosures, the Company records provisions for or benefits from income taxes related to the unrealized gains and losses on foreign currency forward contracts and certain marketable securities. The Company does not record provisions for or benefits from income taxes related to the cumulative translation adjustment, as the Company intends to permanently reinvest undistributed earnings in its foreign subsidiaries.

F-17

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Foreign Currency Translation and Transactions

The majority of the Company’s operations occur in entities that have the U.S. dollar denominated as their functional currency. The assets and liabilities of the Company’s entities with functional currencies other than the U.S. dollar are translated into U.S. dollars at rates of exchange in effect at the end of the year. Revenue and expense amounts for these entities are translated using the average exchange rates for the period. Net unrealized gains and losses resulting from foreign currency translation are included in “Accumulated other comprehensive loss.” Net foreign currency exchange transaction losses, which are included in “Other income (expense), net” on the Company’s consolidated statement of operations, were $16.1 million, $5.2 million and $1.1 million for 2020, 2019 and 2018, respectively. These net foreign currency exchange losses are presented net of the impact of the foreign currency forward contracts designed to mitigate their effect on the Company’s consolidated statement of operations.

Net Income Per Share Attributable to Vertex Common Shareholders

Basic and diluted net income per share attributable to Vertex common shareholders are presented in conformity with the two-class method required for participating securities. Shares of unvested restricted stock granted under the Company’s Amended and Restated 2006 Stock and Option Plan had the non-forfeitable right to receive dividends on an equal basis with other outstanding common stock. As a result, these unvested shares of restricted stock were considered participating securities under the two-class method. In 2020 and 2019, the Company did not have a significant amount of restricted stock outstanding under this plan: therefore, the two-class method did not impact its basic and diluted net income per share attributable to Vertex common shareholders for the years ended December 31, 2020 and 2019.

Under the two-class method, earnings are allocated to (i) Vertex common shares, excluding unvested restricted stock, and (ii) participating securities, based on their respective weighted-average shares outstanding for the period. Potentially dilutive shares result from the assumed exercise of outstanding stock options (the proceeds of which are then assumed to have been used to repurchase outstanding stock using the treasury-stock method).

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 that had been issued but had not yet vested, if any. 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.

Recently Adopted Accounting Standards

Internal-Use Software

In 2018, the Financial Accounting Standards Board (“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 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 consolidated balance sheet.

Fair Value Measurement

In 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements. ASU 2018-13 became effective on January 1, 2020. The Company adoption of ASU 2018-13 resulted in additional disclosures related to the Company’s Level 3 inputs. Please refer to Note D, “Fair Value Measurements,” for further information.

Credit Losses

In 2016, the FASB issued 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

F-18

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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 consolidated financial statements.

Leases

On January 1, 2019, the Company adopted ASC 842 using the modified-retrospective method. 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 approximately 15 years, which are significantly shorter than the buildings’ useful lives of 40 years. The amended guidance also results in a reduction in imputed interest expense in the initial years of each finance lease term. 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. Please refer to “Leases” above for further information.

Revenue Recognition

On January 1, 2018, the Company adopted ASC 606, using the modified retrospective adoption method for all contracts that were not completed as of the date of adoption. Based on the Company’s review of existing customer contracts as of January 1, 2018, the Company concluded that the only significant impact that the adoption of ASC 606 had on its consolidated financial statements related to shipments of ORKAMBI under early access programs in France. Prior to the adoption of ASC 606, the Company did not recognize revenue on the proceeds received from sales of ORKAMBI under early access programs in France because the price was not fixed or determinable based on the status of ongoing pricing discussions. As of January 1, 2018, the Company recorded a cumulative effect adjustment to its accumulated deficit of $8.3 million related to the adoption of ASC 606, which primarily represented the Company’s estimated amount of consideration it expected to retain related to these shipments that would not be subject to a significant reversal in amounts recognized, net of costs previously deferred related to these shipments.

Equity Investments

On January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), using the required modified-retrospective adoption method. Under ASU 2016-01, equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of an investee) are measured at fair value with changes in fair value recognized in net income. As of January 1, 2018, the Company held publicly traded equity investments and equity investments accounted for under the cost method. As a result, in 2018, the Company recorded a $25.1 million cumulative effect adjustment to “Accumulated deficit” related to its publicly traded equity investments equal to the unrealized gain, net of tax, that was recorded in “Accumulated other comprehensive loss” as of December 31, 2017.

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 was effective on January 1, 2021. The Company does not expect the adoption of ASU 2019-12 to have a significant impact on its consolidated financial statements.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**B.**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.

In-license Agreements

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

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

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 paid an aggregate of $30.0 million to exclusively license three CRISPR-Cas9-based targets, including CF, pursuant to the CRISPR Agreement. The Company recorded the $30.0 million total option payment to “Research and development expenses” in the fourth quarter of 2019. 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 consolidated statements of operations. During the years ended December 31, 2020, 2019 and 2018, the net expense related to the CTX001 Co-Co Agreement was $50.6 million, $30.1 million and $19.7 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 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

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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.

Kymera Therapeutics Inc.

In May 2019, the Company entered into a strategic research and development collaboration agreement with Kymera Therapeutics Inc. (“Kymera”) to advance small molecule protein degraders against multiple targets. Kymera’s proprietary platform technology is being applied in the collaboration activities in exchange for an upfront payment of $50.0 million. The Company has the exclusive right to license up to six protein targets, for each of which Kymera may receive up to $170.0 million in payments, including development, regulatory and commercial milestones as well as royalties on net product sales. In addition to the upfront payment, the Company purchased $20.0 million of Kymera’s preferred stock. The Company determined that the fair value of its investment in Kymera’s preferred stock, which did not have a readily determinable fair value, approximated $20.0 million. The preferred stock converted to common stock when Kymera became a publicly traded company in 2020.

The Company determined that substantially all of the fair value of the Kymera collaboration 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 $50.0 million upfront payment to “Research and development expenses” in 2019.

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 CF.

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 CF. 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 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.

Other In-License Agreements

In addition to the collaborative arrangements described above, the Company has entered into additional in-license agreements that it does not consider to be individually significant to its consolidated financial statements. In addition to the payments described above, the Company recorded upfront, option and milestone payments totaling $84.6 million in 2020, $63.3 million in 2019 and $46.9 million in 2018 to “Research and development expenses” which included a $40.0 million upfront payment to Skyhawk Therapeutics, Inc. (“Skyhawk”) in 2020.

For Skyhawk and several other in-license agreements that are not individually significant to the Company’s consolidated financial statements, the Company determined that substantially all of the fair value of each individual 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 associated with the agreements and recorded the related portion of the upfront payments to “Research and development expenses.” Please refer to Note D, “Fair Value Measurements,” and Note E, “Marketable Securities and Equity Investments,” for further information regarding the Company’s investments in its collaborators.

Variable Interest Entities (VIEs)

The Company licensed rights to certain drug candidates from these third-party collaborators, which has resulted in the consolidation of the third-parties’ financial statements into the Company’s consolidated financial statements as VIEs for

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

certain periods of time. Most recently, the Company deconsolidated the financial statements of BioAxone from its consolidated financial statements as of December 31, 2018. The Company has not consolidated a VIE into its financial statements since December 31, 2018.

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.

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. 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 of this decision, the Company recorded a $29.0 million impairment charge related to VX-210 that was attributable to noncontrolling interest.

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 consolidated statement of operations. The Company’s net loss attributable to noncontrolling interest for the year ended December 31, 2018 was $9.8 million.

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.

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 Oncology Agreement provided for an upfront payment from the Licensee to the Company of $230.0 million, which was recorded as “Collaborative and royalty revenues,” under the multiple element arrangement accounting guidance that was applicable in 2017. All of the Company’s activities related to the Oncology Agreement were substantially complete as of December 31, 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

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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 and recorded the $65.0 million payment to “Research and development expenses” in 2018 accordingly.

Janssen Pharmaceuticals, Inc.

In 2014, the Company entered into an agreement with Janssen Pharmaceuticals, Inc. (“Janssen”). In the third quarter of 2020, Janssen exercised its right to terminate its exclusive worldwide license to develop and commercialize certain drug candidates for the treatment of influenza, based on Phase 3 clinical trial results for pimodivir.

Cystic Fibrosis Foundation

The Company has a research, development and commercialization agreement that was originally entered into in 2004 with the Cystic Fibrosis Foundation, 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.

**C.**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. Diluted net income per share attributable to Vertex common shareholders utilizing the treasury-stock method is based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average common equivalent shares outstanding during the period when the effect is dilutive.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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

			2020						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			$	2,711,647					$	1,176,810					$	2,096,896
Less: Undistributed earnings allocated to participating securities			—						—						(501)
Net income attributable to Vertex common shareholders—basic			$	2,711,647					$	1,176,810					$	2,096,395
Basic weighted-average common shares outstanding			259,841						256,728						254,292
Basic net income attributable to Vertex per common share			$	10.44					$	4.58					$	8.24
Diluted net income attributable to Vertex per common share calculation:
Net income attributable to Vertex common shareholders			$	2,711,647					$	1,176,810					$	2,096,896
Less: Undistributed earnings allocated to participating securities			—						—						(492)
Net income attributable to Vertex common shareholders—diluted			$	2,711,647					$	1,176,810					$	2,096,404
Weighted-average shares used to compute basic net income per common share			259,841						256,728						254,292
Effect of potentially dilutive securities:
Stock options			1,801						2,231						2,913
Restricted stock units (including PSUs) and restricted stock			1,741						1,700						1,963
Employee stock purchase program			13						14						17
Weighted-average shares used to compute diluted net income per common share			263,396						260,673						259,185
Diluted net income attributable to Vertex per common share			$	10.29					$	4.51					$	8.09

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.

			2020						2019						2018
			(in thousands)
Stock options			312						2,833						2,217
Unvested restricted stock units (including PSUs) and restricted stock			257						6						5

**D.**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 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.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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 E, “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 consolidated statement of operations.

During the three years ended December 31, 2020, the Company did not record any other-than-temporary impairment charges related to its financial assets.

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 $2.8 billion and $2.3 billion of cash as of December 31, 2020 and 2019, respectively):

			As of December 31, 2020																								As of December 31, 2019
									Fair Value Hierarchy																								Fair Value Hierarchy
			Total						Level 1						Level 2						Level 3						Total						Level 1						Level 2						Level 3
			(in thousands)
Financial instruments carried at fair value (asset position):
Cash equivalents:
Money market funds			$	3,141,053					$	3,141,053					$	—					$	—					$	791,039					$	791,039					$	—					$	—
Corporate debt securities			—						—						—						—						6,070						—						6,070						—
Commercial paper			—						—						—						—						29,472						—						29,472						—
Marketable securities:
Corporate equity securities			195,781						15,650						180,131						—						282,084						261,797						20,287						—
Government-sponsored enterprise securities			80,063						80,063						—						—						12,733						12,733						—						—
Corporate debt securities			231,598						—						231,598						—						301,799						—						301,799						—
Commercial paper			163,268						—						163,268						—						102,356						—						102,356						—
Prepaid expenses and other current assets:
Foreign currency forward contracts			—						—						—						—						9,725						—						9,725						—
Total financial assets			$	3,811,763					$	3,236,766					$	574,997					$	—					$	1,535,278					$	1,065,569					$	469,709					$	—
Financial instruments carried at fair value (liability position):
Other current liabilities:
Foreign currency forward contracts			$	(59,184)					$	—					$	(59,184)					$	—					$	(5,533)					$	—					$	(5,533)					$	—
Long-term contingent consideration			(189,600)						—						—						(189,600)						(176,500)						—						—						(176,500)
Other long-term liabilities:
Foreign currency forward contracts			(4,283)						—						(4,283)						—						(1,821)						—						(1,821)						—
Total financial liabilities			$	(253,067)					$	—					$	(63,467)					$	(189,600)					$	(183,854)					$	—					$	(7,354)					$	(176,500)

Please refer to Note E, “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 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. During the year ended December 31, 2020, the Company transferred the fair value of one of its strategic investments in a publicly traded company from Level 2 to

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Level 1 upon the expiration of transfer restrictions associated with this investment. Please refer to Note E, “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 0.4% and 1.9% as of December 31, 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 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:

			Year Ended December 31, 2020
			(in thousands)
Balance at December 31, 2019			$	176,500
Increase in fair value of contingent payments			13,100
Balance at December 31, 2020			$	189,600

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

**E.**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 $2.8 billion and $2.3 billion of cash as of December 31, 2020 and 2019, respectively), is shown below:

			As of December 31, 2020																								As 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			$	3,141,053					$	—					$	—					$	3,141,053					$	791,039					$	—					$	—					$	791,039
Corporate debt securities			—						—						—						—						6,070						—						—						6,070
Commercial paper			—						—						—						—						29,470						3						(1)						29,472
Total cash equivalents			$	3,141,053					$	—					$	—					$	3,141,053					$	826,579					$	3					$	(1)					$	826,581
Marketable securities:
Government-sponsored enterprise securities			$	80,046					$	17					$	—					$	80,063					$	12,689					$	44					$	—					$	12,733
Corporate debt securities			231,263						377						(42)						231,598						301,458						391						(50)						301,799
Commercial paper			163,286						19						(37)						163,268						102,240						121						(5)						102,356
Total marketable debt securities			474,595						413						(79)						474,929						416,387						556						(55)						416,888
Corporate equity securities			51,427						144,354						—						195,781						113,829						168,255						—						282,084
Total marketable securities			$	526,022					$	144,767					$	(79)					$	670,710					$	530,216					$	168,811					$	(55)					$	698,972

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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

			December 31,
			2020						2019
			(in thousands)
Cash and cash equivalents			$	3,141,053					$	826,581
Marketable securities			474,929						416,888
Total			$	3,615,982					$	1,243,469

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

			December 31,
			2020						2019
			(in thousands)
Matures within one year			$	3,526,185					$	1,137,942
Matures after one year through five years			89,797						105,527
Total			$	3,615,982					$	1,243,469

The Company has a limited number of available-for-sale debt securities in insignificant loss positions as of December 31, 2020, 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 2020, 2019 or 2018.

The Company records changes in the fair value of its investments in corporate equity securities to “Other income (expense), net” in the Company’s consolidated statements of operations. During the three years ended December 31, 2020, the Company’s net unrealized gains on corporate equity securities held at the conclusion of each period were as follows:

			2020						2019						2018
			(in thousands)
Net unrealized gains			$	136,167					$	143,175					$	2,558

During the years ended December 31, 2020 and 2019, the Company sold the common stock of publicly traded companies, which were primarily sales of its investment in CRISPR, resulting in the following:

			2020						2019
			(in thousands)
Proceeds received			$	437,567					$	94,936
Weighted-average cost basis			$	103,332					$	29,825

During the year ended December 31, 2018, the Company did not sell any common stock of publicly traded companies.

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

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**F.**Accumulated Other Comprehensive Income (Loss)

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

									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 as of December 31, 2017			$	(21,031)					$	(594)					$	25,069					$	(15,016)					$	(11,572)
Other comprehensive income before reclassifications			8,855						58						—						25,664						34,577
Amounts reclassified from accumulated other comprehensive income (loss)			—						—						—						1,774						1,774
Net current period other comprehensive income			8,855						58						—						27,438						36,351
Amounts reclassified to accumulated deficit pursuant to adoption of new accounting standard			949						—						(25,069)						—						(24,120)
Balance as of December 31, 2018			$	(11,227)					$	(536)					$	—					$	12,422					$	659
Other comprehensive income before reclassifications			10,332						1,039						—						11,513						22,884
Amounts reclassified from accumulated other comprehensive income (loss)			—						—						—						(25,516)						(25,516)
Net current period other comprehensive income (loss)			10,332						1,039						—						(14,003)						(2,632)
Balance as of December 31, 2019			$	(895)					$	503					$	—					$	(1,581)					$	(1,973)
Other comprehensive loss before reclassifications			(14,783)						(169)						—						(54,467)						(69,419)
Amounts reclassified from accumulated other comprehensive income (loss)			—						—						—						2,912						2,912
Net current period other comprehensive loss			(14,783)						(169)						—						(51,555)						(66,507)
Balance as of December 31, 2020			$	(15,678)					$	334					$	—					$	(53,136)					$	(68,480)

**G.**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 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 on a prospective and retrospective basis. If the Company were to determine that a (i) foreign currency forward contract is not highly effective as a cash flow hedge, (ii) foreign currency forward contract has ceased to be a highly effective hedge or (iii) forecasted transaction is no longer probable of occurring, the Company would discontinue hedge accounting treatment prospectively. The Company measures effectiveness based on the change in fair value of the forward contracts and the fair value of the hypothetical foreign currency forward contracts with terms that match the critical terms of the risk being hedged. As of December 31, 2020, all hedges were determined to be highly effective.

F-28

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Prior to the adoption of ASU 2017-12 on January 1, 2019, the Company did not record any ineffectiveness related to its foreign currency forward contracts that were designated as hedging instruments in the year ended December 31, 2018. ASU 2017-12 eliminated the requirement to separately measure and report hedge ineffectiveness.

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

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

			As of December 31,
			2020						2019
Foreign Currency			(in thousands)
Euro			$	745,099					$	501,197
British pound sterling			160,427						87,032
Australian dollar			99,922						89,705
Canadian dollar			86,468						50,452
Total foreign currency forward contracts			$	1,091,916					$	728,386

Foreign currency forward contracts - Not designated as hedging instruments

The Company also enters into foreign currency forward contracts with contractual maturities of less than one month that are designed to mitigate the effect of changes in foreign exchange rates on monetary assets and liabilities, including intercompany balances. These contracts are not designated as hedging instruments under U.S. GAAP. The Company recognizes realized gains and losses for such contracts in “Other income (expense), net” in its consolidated statements of operations each period. As of December 31, 2020, the notional amount of the Company’s outstanding foreign currency forward contracts where hedge accounting under U.S. GAAP is not applied was $198.9 million.

During the three years ended December 31, 2020, the Company recognized the following related to foreign currency forward contacts in its consolidated statements of operations:

			December 31,
			2020						2019						2018
			(in thousands)
Designated as hedging instruments - Reclassified from AOCI
Product revenues, net			$	(3,714)					$	32,546					$	(1,252)
Not designated as hedging instruments
Other income (expense), net			$	22,113					$	(4,838)					$	(623)
Total reported in the Consolidated Statement of Operations
Product revenues, net			$	6,202,783					$	4,160,726					$	3,038,325
Other income (expense), net			$	296,420					$	192,177					$	(790)

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

As of December 31, 2020
Assets												Liabilities
Classification						Fair Value						Classification						Fair Value
(in thousands)
Prepaid expenses and other current assets						$	—					Other current liabilities						$	(59,184)
Other assets						—						Other long-term liabilities						(4,283)
Total assets						$	—					Total liabilities						$	(63,467)

F-29

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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

As of December 31, 2020, the Company expects amounts that are related to foreign exchange forward contracts designated as cash flow hedges under U.S. 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 U.S. GAAP on the Company’s consolidated balance sheets:

			As of December 31, 2020
			Gross Amounts Recognized						Gross Amounts Offset						Gross Amounts Presented						Gross Amounts Not Offset						Legal Offset
Foreign currency forward contracts			(in thousands)
Total assets			$	—					$	—					$	—					$	—					$	—
Total liabilities			(63,467)						—						(63,467)						—						(63,467)

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

**H.**Inventories

Inventories consisted of the following:

			As of December 31,
			2020						2019
			(in thousands)
Raw materials			$	46,232					$	26,247
Work-in-process			161,324						107,021
Finished goods			73,221						34,234
Total			$	280,777					$	167,502

F-30

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**I.**Property and Equipment

Property and equipment, net consisted of the following:

			As of December 31,
			2020						2019
			(in thousands)
Buildings and improvements			$	876,091					$	713,412
Furniture and equipment			346,698						317,567
Leasehold improvements			234,585						175,769
Computers and software			258,612						230,872
Land			33,128						—
Total property and equipment, gross			1,749,114						1,437,620
Less: accumulated depreciation			(790,580)						(692,540)
Total property and equipment, net			$	958,534					$	745,080

The Company recorded depreciation expense of $109.5 million, $106.9 million and $72.4 million in 2020, 2019 and 2018, respectively. The Company’s finance lease amortization is included in depreciation expense.

In the third quarter of 2020, the Company purchased its continuous manufacturing facility located near its corporate headquarters in Boston, Massachusetts from its former landlord for $155.3 million in cash. The Company’s December 31, 2020 consolidated balance sheet reflects the following: (i) classification of the building within “Property and equipment, net” with a 40 year useful life, (ii) derecognition of the previously recorded insignificant right-of-use asset and operating lease liability for the facility and (iii) a finance lease for the land on which the facility is constructed.

**J.**Intangible Assets and Goodwill

Intangible Assets

As of December 31, 2020 and 2019, the Company had $400.0 million of in-process research and development intangible assets classified as “Intangible assets” on its consolidated balance sheet. In 2019, the Company recorded $387.0 million and $13.0 million of in-process research and development intangible assets related to its acquisitions of Semma Therapeutics, Inc. (“Semma”) and Exonics, respectively. In 2018, the Company recorded an intangible asset impairment charge of $29.0 million related to VX-210 that was licensed from BioAxone in 2014. Please refer to Note B, “Collaborative Arrangements,” for further information regarding the events and circumstances associated with this impairment charge.

Goodwill

As of December 31, 2020 and December 31, 2019, goodwill of $1.00 billion was recorded on the Company’s consolidated balance sheet. During 2019, the Company recorded goodwill of $554.6 million and $397.1 million related to its acquisitions of Semma and Exonics, respectively.

F-31

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**K.**Additional Balance Sheet Detail

Accrued expenses consisted of the following:

			As of December 31,
			2020						2019
			(in thousands)
Product revenue accruals			$	781,903					$	641,368
Payroll and benefits			169,387						159,464
Research, development and commercial contract costs			136,704						105,663
Royalty payable			165,404						98,578
Tax related accruals			104,173						72,293
Other			47,400						39,546
Total			$	1,404,971					$	1,116,912

Other current liabilities consisted of the following:

			As of December 31,
			2020						2019
			(in thousands)
Contract liabilities			$	191,519					$	62,332
Fair value of cash flow hedges			59,184						5,533
Finance lease liabilities			42,434						38,794
Other			24,286						23,646
Total			$	317,423					$	130,305

The cash, cash equivalents and restricted cash balances at the beginning and ending of each period presented in the Company’s consolidated statements of cash flows consisted of the following:

			As of December 31,
			2020						2019						2018						2017
			(in thousands)
Cash and cash equivalents			$	5,988,187					$	3,109,322					$	2,650,134					$	1,665,412
Prepaid expenses and other current assets			658						8,004						4,910						2,114
Other assets			—						3,355						3,209						—
Cash, cash equivalents and restricted cash per consolidated statement of cash flows			$	5,988,845					$	3,120,681					$	2,658,253					$	1,667,526

The Company’s restricted cash, if any, is included in “Prepaid expenses and other current assets” and “Other assets” on its consolidated balance sheets.

**L.**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 and land.

Pursuant to ASC 842, which was adopted on January 1, 2019, the Company’s finance lease assets are amortized to depreciation expense using the straight-line method over the remaining lease term; and the Company records imputed interest expense associated with its finance lease liabilities. In 2018, prior to the adoption of ASC 842, the Company applied build-to-

F-32

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

suit accounting and was deemed for accounting purposes to be the owner of the Buildings, for which it recognized depreciation expense over the Buildings 40 years useful lives and imputed interest expense on the corresponding financing lease obligations.

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 term 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 commenced 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 into 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.

Cell and Genetic Therapies Lease

In 2019, the Company entered into an agreement to lease approximately 269,000 square feet of office and laboratory space near its corporate headquarters in Boston, Massachusetts. The lease agreement includes an initial term of 15 years plus a period to install leasehold improvements, with an option to extend the lease term for up to two additional ten-year periods. Base rent payments will commence in the fourth quarter of 2021. The Company has utilized the initial period, which commenced in the third quarter of 2020 upon occupation of the building, as its lease term. As of December 31, 2020, the Company recorded a right-of-use asset of $253.5 million and an operating lease liability of $286.6 million related to the lease agreement on its consolidated balance sheet.

Please refer to the Company’s accounting policy, Leases, in Note A, “Nature of Business and Accounting Policies,” for further information on the accounting treatment for the Company’s finance and operating leases.

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 consolidated statement of operations were as follows:

			2020						2019
Operating lease cost			$	23,128					$	11,972
Finance lease cost
Amortization of leased assets			51,223						49,778
Interest on lease liabilities			50,188						52,839
Variable lease cost			30,776						27,997
Sublease income			(4,021)						(6,391)
Net lease cost			$	151,294					$	136,195

The Company’s variable lease cost during 2020 and 2019 primarily related to operating expenses, taxes and insurance associated with its finance leases. The Company’s sublease income during 2020 and 2019 primarily related to subleases for an insignificant portion of the Company’s corporate headquarters.

F-33

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

The Company’s leases are included on its consolidated balance sheets as follows:

			As of December 31,
			2020						2019
			(in thousands)
Finance leases
Property and equipment, net			$	431,193					$	445,336
Total finance lease assets			$	431,193					$	445,336
Other current liabilities			$	42,434					$	38,795
Long-term finance lease liabilities			539,042						538,576
Total finance lease liabilities			$	581,476					$	577,371
Operating leases
Operating lease assets			$	325,564					$	88,202
Total operating lease assets			$	325,564					$	88,202
Other current liabilities			$	10,521					$	11,504
Long-term operating lease liabilities			350,463						84,292
Total operating lease liabilities			$	360,984					$	95,796

Maturities of the Company’s finance and operating lease liabilities as of December 31, 2020 were as follows:

Year						Finance Leases						Operating Leases						Total
						(in thousands)
2021						$	85,470					$	15,266					$	100,736
2022						90,020						34,119						124,139
2023						88,185						34,663						122,848
2024						93,434						34,113						127,547
2025						93,421						31,564						124,985
Thereafter						416,455						320,684						737,139
Total lease payments						866,985						470,409						1,337,394
Less: tenant allowance						—						(36,051)						(36,051)
Less: amount representing interest						(285,509)						(73,374)						(358,883)
Present value of lease liabilities						$	581,476					$	360,984					$	942,460

The weighted-average remaining lease terms and discount rates related to the Company’s leases were as follows:

			As of December 31,
			2020						2019
Weighted-average remaining lease term (in years)
Finance leases			11.58						9.74
Operating leases			14.10						9.70
Weighted-average discount rate
Finance leases			8.36		%				9.04		%
Operating leases			2.28		%				3.75		%

F-34

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Supplemental cash flow information related to the Company’s leases was as follows:

			2020						2019
			(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases			$	16,254					$	10,650
Operating cash flows from finance leases			$	48,908					$	50,527
Financing cash flows from finance leases			$	42,275					$	39,185
Right-of-use assets obtained in exchange for lease obligations
Operating leases *			$	293,604					$	34,605
Finance leases			$	33,128					$	—
* 2019 includes $33.7 million acquired in 2019 pursuant to the Company’s acquisitions of Semma and Exonics.

Additional Lease Information Related to the Application of ASC 840

Rental expense was $17.3 million during the year ended December 31, 2018, which is disclosed in accordance with ASC 840, Leases (Topic 840), which was applicable during the year ended December 31, 2018.

M. Common Stock, Preferred Stock and Equity Plans

Common Stock and Preferred Stock

The Company is authorized to issue 500,000,000 shares of common stock. Holders of common stock are entitled to one vote per share. Holders of common stock are entitled to receive dividends, if and when declared by the Company’s Board of Directors, and to share ratably in the Company’s assets legally available for distribution to the Company’s shareholders in the event of liquidation. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The holders of common stock do not have cumulative voting rights.

The Company is authorized to issue 1,000,000 shares of preferred stock in one or more series and to fix the powers, designations, preferences and relative participating, option or other rights thereof, including dividend rights, conversion rights, voting rights, redemption terms, liquidation preferences and the number of shares constituting any series, without any further vote or action by the Company’s shareholders. As of December 31, 2020 and 2019, the Company had no shares of preferred stock issued or outstanding.

Share Repurchase Programs

During 2018, the Company’s Board of Directors approved a share repurchase program (the “2018 Share Repurchase Program”), pursuant to which the Company was authorized to repurchase up to $500.0 million of its common stock between February 1, 2018 and December 31, 2019. During the years ended December 31, 2019 and 2018, the Company repurchased 832,186 and 2,093,891 shares, respectively, of its common stock under the 2018 Share Repurchase Program for an aggregate of $150.0 million and $350.0 million, respectively, including commissions and fees. As of June 30, 2019, the Company had repurchased the entire $500.0 million it was authorized to repurchase of its common stock under the 2018 Share Repurchase Program.

In July 2019, the Company’s Board of Directors approved a second share repurchase program (the “2019 Share Repurchase Program”), pursuant to which the Company was authorized to repurchase up to $500.0 million of its common stock between August 1, 2019 and December 31, 2020. During the years ended December 31, 2020 and 2019, the Company repurchased 2,058,962 and 213,548 shares, respectively, of its common stock under the 2019 Share Repurchase Program for an aggregate of $464.0 million and $36.0 million, respectively, including commissions and fees. As of December 31, 2020, the Company had repurchased the entire $500.0 million it was authorized to repurchase of its common stock under the 2019 Share Repurchase Program.

In November 2020, the Company’s Board of Directors approved a third share repurchase program (the “2020 Share Repurchase Program”), pursuant to which the Company is authorized to repurchase up to $500.0 million of its common stock

F-35

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

by December 31, 2022. In the fourth quarter of 2020, the Company repurchased 345,897 shares of its common stock under the 2020 Share Repurchase Program for an aggregate of $75.1 million including commissions and fees. The Company expects to fund further repurchases of its common stock through a combination of cash on hand and cash generated by operations. As of December 31, 2020, there was a total of $424.9 million remaining for repurchases of its common stock under the 2020 Share Repurchase Program.

Under the 2020 Share Repurchase Program, the Company is authorized to purchase shares from time to time through open market or privately negotiated transactions. Such purchases are made pursuant to Rule 10b5-1 plans or other means as determined by the Company’s management and in accordance with the requirements of the SEC.

Stock and Option Plans

The purpose of each of the Company’s stock and option plans is to attract, retain and motivate its employees, consultants and directors. Awards granted under these plans can be nonstatutory stock options (“NSOs”), incentive stock options (“ISOs”), restricted stock units (“RSUs”) including performance-based RSUs (“PSUs”), restricted stock (“RSs”), or other equity-based awards, as specified in the individual plans.

Shares issued under all of the Company’s plans are funded through the issuance of new shares. The following table contains information about the Company’s equity plans:

																		As of December 31, 2020
Title of Plan						Group Eligible						Type of Award Granted						Awards Outstanding						Additional Awards Authorized for Grant
2013 Stock and Option Plan						Employees, Non-employee Directors and Consultants						NSO, RS, RSU and PSU						7,231,859						13,385,321
2006 Stock and Option Plan						Employees, Non-employee Directors and Consultants						NSO, RS and RSU						383,818						—
												Total						7,615,677						13,385,321

All options granted under the Company’s 2013 Stock and Option Plan (“2013 Plan”) and 2006 Stock and Option Plan (“2006 Plan”) were granted with an exercise price equal to the fair value of the underlying common stock on the date of grant. As of December 31, 2020, the stock and option plan under which the Company is authorized to make new equity awards is the Company’s 2013 Plan. Under the 2013 Plan, no stock options can be awarded with an exercise price less than the fair market value on the date of grant. In 2019 and 2018, the Company’s shareholders approved increases in the number of shares authorized for issuance pursuant to the 2013 Stock and Option Plan of (i) 5,000,000 shares in 2019 and (ii) 8,000,000 shares in 2018.

During the three years ended December 31, 2020, grants to current employees and directors primarily had a grant date that was the same as the date the award was approved by the Company’s Board of Directors. During the three years ended December 31, 2020, for grants to new employees and directors, the date of grant for awards was the employee’s first day of employment or the date the director was elected to the Company’s Board of Directors. All options awarded under the Company’s stock and option plans expire not more than 10 years from the grant date.

F-36

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Stock Options

The following table summarizes information related to the outstanding and exercisable options during the year ended December 31, 2020:

			Stock Options						Weighted-average Exercise Price						Weighted-average Remaining Contractual Life						Aggregate Intrinsic Value
			(in thousands)						(per share)						(in years)						(in thousands)
Outstanding at December 31, 2019			6,272						$	134.92
Granted			23						$	286.27
Exercised			(1,883)						$	121.42
Forfeited			(174)						$	165.39
Expired			—						$	—
Outstanding at December 31, 2020			4,238						$	140.47					6.34						$	397,211
Exercisable at December 31, 2020			2,894						$	125.83					5.73						$	313,936

The aggregate intrinsic value in the table above represents the total pre-tax amount, net of exercise price, that would have been received by option holders if all option holders had exercised all options with an exercise price lower than the market price on the last business day of 2020, which was $233.91 based on the average of the high and low price of the Company’s common stock on that date.

The total intrinsic value (the amount by which the fair market value exceeded the exercise price) of stock options exercised during 2020, 2019 and 2018 was $255.0 million, $325.9 million and $258.2 million, respectively. The total cash received by the Company as a result of employee stock option exercises during 2020, 2019 and 2018 was $228.2 million, $317.8 million and $263.4 million, respectively.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2020:

						Options Outstanding																		Options Exercisable
Range of Exercise Prices						Number Outstanding						Weighted-average Remaining Contractual Life						Weighted-average Exercise Price						Number Exercisable						Weighted-average Exercise Price
						(in thousands)						(in years)						(per share)						(in thousands)						(per share)
$36.28–$40.00						60						0.85						$	38.06					60						$	38.06
$40.01–$60.00						154						1.73						$	47.07					154						$	47.07
$60.01–$80.00						97						3.25						$	74.53					97						$	74.54
$80.01–$100.00						991						5.34						$	88.93					937						$	89.07
$100.01–$120.00						127						4.07						$	109.24					127						$	109.22
$120.01–$140.00						271						4.71						$	129.49					270						$	129.50
$140.01–$160.00						715						7.05						$	155.49					415						$	155.42
$160.01–$180.00						578						7.47						$	168.40					312						$	166.01
$180.01–$200.00						1,222						7.85						$	185.31					499						$	184.92
$200.01–$286.27						23						9.42						$	286.27					23						$	286.27
Total						4,238						6.34						$	140.47					2,894						$	125.83

F-37

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Restricted Stock Units (excluding PSUs) and Restricted Stock

The following table summarizes the restricted stock unit and restricted stock activity of the Company during the year ended December 31, 2020:

			Restricted Stock Units (excluding PSUs)												Restricted Stock
			Number of Shares						Weighted-average Grant-date Fair Value						Number of Units						Weighted-average Grant-date Fair Value
			(in thousands)						(per share)						(in thousands)						(per share)
Unvested at December 31, 2019			3,131						$	163.61					92						$	91.97
Granted			1,244						$	258.45					—						$	—
Vested			(1,443)						$	159.10					(92)						$	91.97
Cancelled			(210)						$	193.84					—						$	—
Unvested at December 31, 2020			2,722						$	206.99					—						$	—

The total fair value of restricted stock units that vested during 2020, 2019 and 2018 (measured on the date of vesting) was $370.3 million, $178.2 million and $104.8 million, respectively. The total fair value of restricted stock that vested during 2020, 2019 and 2018 (measured on the date of vesting) was $21.4 million, $70.7 million and $114.5 million, respectively.

Performance-based RSUs (PSUs)

The potential range of shares issuable pursuant to the Company’s PSU awards range from 0% to 200% of the target shares based on financial and non-financial measures. Fifty percent of PSUs that could be earned have a one-year performance period with the amount actually earned dependent upon the Company’s financial performance and with vesting of the earned shares in three equal installments over a three-year period. The remaining 50% of PSUs that could be earned have a three-year performance period with the amount actually earned dependent upon the achievement of multiple clinical development milestones and with the earned shares cliff vesting at the end of the three-year performance period.

The following table summarizes the PSU activity of the Company during the year ended December 31, 2020:

			Performance-Based RSU
			Number of Units						Weighted-average Grant-date Fair Value
			(in thousands)						(per share)
Unvested at December 31, 2019 (1)			734						$	143.21
Granted (2)			547						$	241.38
Vested			(577)						$	114.11
Cancelled			(48)						$	194.46
Unvested at December 31, 2020			656						$	202.06
(1) “Unvested” represents the Company’s PSUs at target to the extent performance has not been certified plus the actual number of shares that continue to be subject to service conditions for which the performance has been achieved and certified.
(2) “Granted” represents (i) the target number of shares issuable for grants during 2020 and (ii) any change in the number of shares issuable pursuant to outstanding PSUs based on performance certification during 2020.

The total fair value of PSUs that vested during 2020, 2019 and 2018 (measured on the date of vesting) was $138.5 million, $73.3 million and $23.2 million, respectively.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (the “ESPP”). The ESPP permits eligible employees to enroll in a twelve-month offering period comprising two six-month purchase periods. Participants may purchase shares of the Company’s common stock, through payroll deductions, at a price equal to 85% of the fair market value of the common stock on the first day of the applicable twelve-month offering period, or the last day of the applicable six-month purchase period,

F-38

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

whichever is lower. Purchase dates under the ESPP occur on or about May 14 and November 14 of each year. As of December 31, 2020, there were 1,996,321 shares of common stock authorized for issuance pursuant to the ESPP.

In 2020, the following shares were issued to employees under the ESPP:

			Year Ended December 31, 2020
			(in thousands, except per share amount)
Number of shares			203,055
Average price paid per share			$	167.93

Employee Benefits

The Company has a 401(k) retirement plan (the “Vertex 401(k) Plan”) in which substantially all of its permanent U.S. employees are eligible to participate. Participants may contribute up to 60% of their annual compensation to the Vertex 401(k) Plan, subject to statutory limitations. The Company may declare discretionary matching contributions to the Vertex 401(k) Plan. The Company pays matching contributions in the form of cash. For the years ended December 31, 2020, 2019 and 2018, the Company contributed approximately $19.2 million, $15.8 million and $13.9 million to the plan, respectively.

**N.**Stock-based Compensation Expense

The Company recognizes share-based payments to employees as compensation expense using the fair value method. The fair value of stock options and shares purchased pursuant to the ESPP is calculated using the Black-Scholes option pricing model. The fair value of restricted stock units, including PSUs, and restricted stock is based on the intrinsic value on the date of grant. Stock-based compensation, measured at the grant date based on the fair value of the award, is typically recognized as expense ratably over the requisite service period.

The effect of stock-based compensation expense during the three years ended December 31, 2020 was as follows:

			2020						2019						2018
			(in thousands)
Stock-based compensation expense by line item:
Cost of sales			$	5,579					$	5,575					$	4,543
Research and development expenses			262,690						224,558						203,112
Sales, general and administrative expenses			161,192						130,356						117,392
Total stock-based compensation expense included in costs and expenses			429,461						360,489						325,047
Income tax effect			(146,959)						(124,225)						—
Total stock-based compensation included in costs and expenses, net of tax			$	282,502					$	236,264					$	325,047

The Company maintained a valuation allowance on the majority of its NOLs and other deferred tax assets until December 31, 2018. Therefore, there was no “Income tax effect” of stock-based compensation expense for the year ended December 31, 2018.

The stock-based compensation expense by type of award during the three years ended December 31, 2020 was as follows:

			2020						2019						2018
			(in thousands)
Stock-based compensation expense by type of award:
Restricted stock units (including PSUs) and restricted stock			$	360,364					$	254,276					$	207,845
Stock options			59,722						96,737						107,854
ESPP share issuances			12,984						11,196						9,933
Stock-based compensation expense related to inventories			(3,609)						(1,720)						(585)
Total stock-based compensation expense included in costs and expenses			$	429,461					$	360,489					$	325,047

F-39

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

The Company capitalizes stock-based compensation expense to inventories, all of which is attributable to employees who support the Company’s manufacturing operations for the Company’s products.

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

			As of December 31, 2020
			Unrecognized Expense						Weighted-average Recognition Period
			(in thousands)						(in years)
Type of award:
Restricted stock units (including PSUs) and restricted stock			$	401,100					1.88
Stock options			$	62,392					1.77
ESPP share issuances			$	11,333					0.59

Stock Options

In each of the three years ended December 31, 2020, the Company issued stock options to its non-employee directors. In 2019 and 2018, the Company issued stock options with service conditions, which were generally the vesting periods of the awards, to its employees. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options at the grant date. The Black-Scholes option pricing model uses the option exercise price as well as estimates and assumptions related to the expected price volatility of the Company’s stock, the rate of return on risk-free investments, the expected period during which the options will be outstanding, and the expected dividend yield for the Company’s stock to estimate the fair value of a stock option on the grant date. The options granted during 2020, 2019 and 2018 had a weighted-average grant-date fair value per share of $88.37, $61.32 and $60.83, respectively.

The fair value of each option granted during 2020, 2019 and 2018 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

			2020						2019						2018
Stock options granted			22,636						1,520,743						2,297,328
Expected stock price volatility			35.87%						36.99%						40.50%
Risk-free interest rate			0.43%						2.32%						2.61%
Expected term of options (in years)			4.67						4.27						4.55
Expected annual dividends			—						—						—

The weighted-average valuation assumptions were determined as follows:

• Expected stock price volatility: Expected stock price volatility is calculated using the trailing one-month average of daily implied volatilities prior to the grant date. Implied volatility is based on options to purchase the Company’s stock with remaining terms of greater than one year that are regularly traded in the market.

• Risk-free interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected option term.

• Expected term of options: The expected term of options represents the period of time options are expected to be outstanding. The Company uses historical data to estimate employee exercise and post-vest termination behavior. The Company believes that all groups of employees exhibit similar exercise and post-vest termination behavior and therefore does not stratify employees into multiple groups in determining the expected term of options.

• Expected annual dividends: The estimate for annual dividends is $0.00 because the Company has not historically paid, and does not intend for the foreseeable future to pay, a dividend.

F-40

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Restricted Stock Units and Performance-based Restricted Stock Units

The Company awards restricted stock units with service conditions, which are generally the vesting periods of the awards. As of December 31, 2020, the Company did not have any unvested restricted stock awards remaining, which it awarded until 2016.

The Company grants PSUs to certain members of senior management. Half of the PSUs contain financial goals as the performance metric and the other half contain non-financial goals. A target number of shares is established for each award, however the actual number of shares that are issued when an award vests may range from zero to 200% of the target amount depending upon the level of achievement of the applicable performance metric. The financial-based PSUs vest in three equal installments over a three-year period and are expensed ratably over that same period based upon an assessment of the likely level of achievement. The non-financial based PSUs cliff vest at the end of the three-year performance period and are expensed on a straight-line basis over that same period based upon an assessment of the likely level of achievement.

Employee Stock Purchase Plan

The weighted-average fair value of each purchase right granted during 2020, 2019 and 2018 was $65.88, $47.79 and $44.04, respectively. The following table reflects the weighted-average assumptions used in the Black-Scholes option pricing model for 2020, 2019 and 2018:

			2020						2019						2018
Expected stock price volatility			37.70%						33.43%						36.51%
Risk-free interest rate			0.11%						2.08%						2.36%
Expected term (in years)			0.71						0.74						0.75
Expected annual dividends			—						—						—

The expected stock price volatility for ESPP offerings is based on implied volatility. The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term. The expected term represents purchases and purchase periods that take place within the offering period. The expected annual dividends estimate is $0.00 because the Company has not historically paid, and does not for the foreseeable future intend to pay, a dividend.

**O.**Income Taxes

The components of income before provision for (benefit from) income taxes during the three years ended December 31, 2020 consisted of the following:

			2020						2019						2018
			(in thousands)
United States			$	2,885,423					$	1,263,379					$	812,086
Foreign			231,375						131,540						(211,845)
Income before provision for (benefit from) income taxes			$	3,116,798					$	1,394,919					$	600,241

F-41

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

The components of the provision for (benefit from) income taxes during the three years ended December 31, 2020 consisted of the following:

			2020						2019						2018
			(in thousands)
Current taxes:
Federal			$	71,377					$	—					$	772
Foreign			37,582						37,194						15,600
State			18,851						13,528						9,018
Total current taxes			127,810						50,722						25,390
Deferred taxes:
Federal			510,220						184,312						(1,105,053)
Foreign			(239,579)						(24,797)						(364,919)
State			6,700						7,872						(42,280)
Total deferred taxes			277,341						167,387						(1,512,252)
Provision for (benefit from) income taxes			$	405,151					$	218,109					$	(1,486,862)

A reconciliation of the provision for (benefit from) income taxes as computed by applying the U.S. federal statutory rate of 21% for the three years ended December 31, 2020 to the provision for (benefit from) income taxes is as follows:

			2020						2019						2018
			(in thousands)
Income before provision for (benefit from) income taxes			$	3,116,798					$	1,394,919					$	600,241
Expected provision for income taxes			654,528						292,933						126,051
State taxes, net of federal benefit			18,596						8,478						8,680
Foreign income tax rate differential			5,433						6,178						23,427
Tax credits			(55,824)						(59,459)						(52,629)
Benefit from income taxes attributable to valuation allowances			17,384						(2,672)						(1,563,169)
Tax rate change			(37,688)						—						—
Stock compensation (benefit), shortfalls and cancellations			(70,628)						(56,324)						(49,044)
Officer’s compensation			13,079						10,666						8,310
Long-term intercompany receivable write-off			(53,821)						—						—
Deconsolidation of VIE			—						—						(9,390)
Uncertain tax positions			39,808						14,070						15,431
Inter-entity transfer of intellectual property rights			(209,000)						—						—
U.S. deemed dividend			71,727						79						64
Other			11,557						4,160						5,407
Provision for (benefit from) income taxes			$	405,151					$	218,109					$	(1,486,862)

The Company is subject to U.S. federal, state, and foreign income taxes. The Company’s provision for income taxes during the years ended December 31, 2020 and 2019, has increased compared to historical amounts due to the release of the Company’s valuation allowance on the majority of its net operating losses (“NOLs”) and other deferred tax assets as of December 31, 2018. Starting in 2019, the Company began recording a provision for income taxes approximating the statutory rates on its pre-tax income. The Company’s effective tax rate of 13% for 2020 was lower than the U.S. statutory rate primarily due to (i) discrete tax benefits associated with an intra-entity transfer of intellectual property rights to the United Kingdom (“U.K.”), the write-off of a long-term intercompany receivable, and an increase in the U.K.’s corporate tax rate; and (ii) excess tax benefits related to stock-based compensation. The impact of these items was partially offset by a U.S. deemed dividend. The Company’s effective tax rate of 16% for 2019 was lower than the U.S. statutory rate primarily due to excess tax benefits related to stock-based compensation and research and development tax credits. The Company utilized substantially all of its remaining previously benefited U.S. NOLs in 2020. As a result, a larger portion of the Company’s tax provision will represent a cash tax payable in future periods.

F-42

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

In the second quarter of 2020, the Company completed an intra-entity transfer of intellectual property rights to the U.K., resulting in a deferred tax benefit of $209.0 million. The Company expects to be able to utilize the deferred tax asset resulting from the intra-entity transfer.

In 2018, the change in the “Benefit from income taxes attributable to valuation allowances” was primarily related to the release of the Company’s valuation allowances on the majority of its NOLs and other deferred tax assets related to the U.S. and the U.K. The Company released these valuation allowances after determining it was more likely than not that its deferred tax assets would be realized in the future based on positive evidence, including significant cumulative consolidated and U.S. income over the three years ended December 31, 2018, revenue growth, clinical trial data from the Company’s triple combination regimens, competitor clinical progress and expectations regarding future profitability, and negative evidence, including the potential impact of competition on the Company’s projections and cumulative losses in one of the jurisdictions.

Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred taxes were as follows:

			As of December 31,
			2020						2019
			(in thousands)
Deferred tax assets:
Net operating loss			$	140,563					$	512,256
Tax credit carryforwards			406,120						549,543
Intangible assets			507,484						275,290
Deferred revenues			20,962						18,833
Stock-based compensation			89,203						85,199
Accrued expenses			47,326						44,367
Finance lease liabilities			118,749						119,160
Operating lease assets			65,046						13,114
Other			987						8,596
Gross deferred tax assets			1,396,440						1,626,358
Valuation allowance			(213,750)						(205,192)
Total deferred tax assets			1,182,690						1,421,166
Deferred tax liabilities:
Property and equipment			(116,955)						(101,235)
Acquired intangibles			(87,025)						(87,160)
Unrealized gain			(17,553)						(28,838)
Operating lease liabilities			(63,310)						(13,118)
Other			(15,068)						—
Net deferred tax assets			$	882,779					$	1,190,815

On a periodic basis, the Company reassesses the valuation allowance on its deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. As of December 31, 2020, the Company maintained a valuation allowance of $213.8 million related primarily to U.S. state and foreign tax attributes.

As of December 31, 2020, the Company had NOL carryforwards of $97.4 million, which are subject to annual utilization limitations, and tax credits of $249.2 million for U.S. federal income tax purposes. As of December 31, 2020, the Company had NOL carryforwards of $708.2 million and tax credits of $179.1 million for U.S. state income tax purposes. The U.S. federal NOLs may be carried forward indefinitely, with the exception of $29.1 million that will begin to expire in 2030. The state NOL carryforwards and tax credits expire at various dates through 2040 and may be used to offset future state income tax liabilities. As of December 31, 2020, the Company had foreign net operating loss carryforwards of $521.6 million, including $10.6 million that were subject to expiration at various dates through 2040 and $511.0 million that had an indefinite carryforward period.

F-43

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Unrecognized tax benefits during the three years ended December 31, 2020 were as follows:

			2020						2019						2018
			(in thousands)
Balance at beginning of the period			$	33,920					$	19,549					$	3,814
Increases related to current period tax positions			26,653						14,407						9,704
Increases related to prior period tax positions			26,732						598						6,031
Decreases related to prior period tax positions			—						(156)						—
Settlement with tax authorities			—						(478)						—
Statute of limitations expiration			(657)						—						—
Balance at end of period			$	86,648					$	33,920					$	19,549

As of December 31, 2020, the Company has classified $48.1 million and $38.5 million of its unrecognized tax benefits as credits to “Deferred tax assets” and “Accrued expenses,” respectively, on its consolidated balance sheet.

The Company has reviewed the tax positions taken, or to be taken, in its tax returns for all tax years currently open to examination by a taxing authority. Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the benefits recognized in the consolidated financial statements. As of December 31, 2020, 2019 and 2018, the Company had $75.8 million, $33.9 million and $19.5 million, respectively, of net unrecognized tax benefits, which would affect the Company’s tax rate if recognized. The Company does not expect that its unrecognized tax benefits will materially change within the next twelve months. The Company accrues interest and penalties related to unrecognized tax benefits as a component of its “Provision for (benefit from) income taxes.” The Company did not recognize any material interest or penalties related to uncertain tax positions during the three years ended December 31, 2020.

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act includes provisions relating to several aspects of corporate income taxes. The CARES Act did not have a significant impact on the Company’s provision for income taxes.

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

The Company files U.S. federal income tax returns and income tax returns in various state, local and foreign jurisdictions. The Company is no longer subject to any tax assessment from an income tax examination in the U.S. or any other major taxing jurisdiction for years before 2011, except where the Company has NOLs or tax credit carryforwards that originate before 2011. The Company has various income tax audits ongoing at any time throughout the world.

**P.**Commitments and Contingencies

Revolving Credit Facilities

The Company and certain of its subsidiaries have entered into two credit agreements (the “Credit Agreements”) with Bank of America, N.A., as administrative agent and the lenders referred to therein (the “Lenders”). The Credit Agreements were not drawn upon at closing and the Company has not drawn upon them to date. Amounts drawn pursuant to the Credit Agreements, if any, will be used for general corporate purposes. Any amounts borrowed under the Credit Agreements will bear interest, at the Company’s option, at either a base rate or a Eurocurrency rate, in each case plus an applicable margin based on the Company’s consolidated leverage ratio (the ratio of the Company’s total consolidated funded indebtedness to the Company’s consolidated EBITDA for the most recently completed four fiscal quarter period).

In September 2019, the Company and certain of its subsidiaries entered into a $500.0 million unsecured revolving facility (the “2019 Credit Agreement”) with the Lenders, which matures on September 17, 2024. The 2019 Credit Agreement superseded the Company’s credit agreement entered into in 2016 with Bank of America, N.A serving in the same capacity. Under the 2019 Credit Agreement, the applicable margins on base rate loans range from 0.125% to 0.500% and the

F-44

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

applicable margins on Eurocurrency loans range from 1.125% to 1.500%. The 2019 Credit Agreement provides a sublimit of $50.0 million for letters of credit.

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

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

The Credit Agreements contain customary representations and warranties and affirmative and negative covenants, including financial covenants to maintain (x) subject to certain limited exceptions, a consolidated leverage ratio of 3.50 to 1.00, subject to an increase to 4.00 to 1.00 following a material acquisition and (y) a consolidated interest coverage ratio of 2.50 to 1.00, in each case measured on a quarterly basis. As of December 31, 2020, the Company was in compliance with the covenants described above. The Credit Agreements also contain customary events of default. In the case of a continuing event of default, the administrative agent would be entitled to exercise various remedies, including the acceleration of amounts due under outstanding loans.

Direct costs related to the Credit Agreements, which were not material to the Company’s financial statements, were deferred and recorded over the term of the Credit Agreements.

Guaranties and Indemnifications

As permitted under Massachusetts law, the Company’s Articles of Organization and By-laws provide that the Company will indemnify certain of its officers and directors for certain claims asserted against them in connection with their service as an officer or director. The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited. However, the Company has purchased directors’ and officers’ liability insurance policies that could reduce its monetary exposure and enable it to recover a portion of any future amounts paid. No indemnification claims currently are outstanding, and the Company believes the estimated fair value of these indemnification arrangements is minimal.

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

F-45

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Other Contingencies

The Company has certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a reserve for contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. There were no material contingent liabilities accrued as of December 31, 2020 or 2019.

**Q.**Segment Information

Segment reporting is prepared on the same basis that the Company’s chief executive officer, who is the Company’s chief operating decision maker, manages the business, makes operating decisions and assesses performance. The Company operates in one segment, pharmaceuticals. Enterprise-wide disclosures about revenues, significant customers, and property and equipment, net by location are presented below.

Revenues by Product

Product revenues, net consisted of the following:

			2020						2019						2018
			(in thousands)
TRIKAFTA/KAFTRIO			$	3,863,824					$	420,105					$	—
SYMDEKO/SYMKEVI			628,577						1,417,668						768,657
ORKAMBI			907,512						1,331,891						1,262,166
KALYDECO			802,870						991,062						1,007,502
Total product revenues, net			$	6,202,783					$	4,160,726					$	3,038,325

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:

			2020						2019						2018
			(in thousands)
United States			$	4,829,282					$	3,062,555					$	2,365,079
Outside of the United States
Europe			1,126,460						885,762						543,179
Other			249,941						214,504						139,339
Total revenues outside of the United States			1,376,401						1,100,266						682,518
Total revenues			$	6,205,683					$	4,162,821					$	3,047,597

F-46

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Significant Customers

Gross product revenues and accounts receivable from each of the Company’s customers who individually accounted for 10% or more of total gross product revenues and/or 10% or more of total accounts receivable consisted of the following:

			Percent of Total Gross Product Revenues																		Percent of Accounts Receivable
			Year Ended December 31,																		As of December 31,
			2020						2019						2018						2020						2019
McKesson Corporation			20		%				17		%				14		%				14		%				22		%
Accredo/Curascript			15		%				14		%				14		%				10		%				15		%
Walgreen Co.			14		%				15		%				20		%				10		%				14		%
Lloyds Pharmacy*			<10%						<10%						<10%						19		%				<10%
*A wholly-owned subsidiary of McKesson Corporation in the U.K.

Long-lived Assets by Location

Long-lived assets by location consisted of the following:

			As of December 31,
			2020						2019
			(in thousands)
United States			$	1,207,748					$	768,572
Outside of the United States
United Kingdom			61,462						57,383
Other			14,888						7,327
Total long-lived assets outside of the United States			76,350						64,710
Total long-lived assets			$	1,284,098					$	833,282

F-47

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**R.**Quarterly Financial Data (unaudited)

The following tables set forth the Company’s quarterly financial data for the two years ended December 31, 2020:

			Three Months Ended
			March 31, 2020						June 30, 2020						September 30, 2020						December 31, 2020
			(in thousands, except per share amounts)
Revenues:
Product revenues, net			$	1,515,107					$	1,524,485					$	1,536,271					$	1,626,920
Collaborative and royalty revenues			—						—						2,000						900
Total revenues			1,515,107						1,524,485						1,538,271						1,627,820
Costs and expenses:
Cost of sales			162,497						184,520						186,182						203,101
Research and development expenses (1)			448,528						420,928						493,497						466,584
Sales, general and administrative expenses			182,258						191,804						184,551						211,843
Change in fair value of contingent consideration			1,600						9,200						1,800						500
Total costs and expenses			794,883						806,452						866,030						882,028
Income from operations			720,224						718,033						672,241						745,792
Interest income			12,576						4,243						3,100						2,320
Interest expense			(14,136)						(13,871)						(13,856)						(16,288)
Other (expense) income, net (2)			(61,130)						116,365						84,386						156,799
Income before provision for income taxes			657,534						824,770						745,871						888,623
Provision for (benefit from) income taxes (3)			54,781						(12,500)						78,437						284,433
Net income attributable to Vertex			$	602,753					$	837,270					$	667,434					$	604,190
Amounts per share attributable to Vertex common shareholders:
Net income:
Basic			$	2.32					$	3.22					$	2.56					$	2.32
Diluted			$	2.29					$	3.18					$	2.53					$	2.30
Shares used in per share calculations:
Basic			259,815						259,637						260,392						260,038
Diluted			263,515						263,403						264,079						263,106

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

			Three Months Ended
			March 31, 2019						June 30, 2019						September 30, 2019						December 31, 2019
			(in thousands, except per share amounts)
Revenues:
Product revenues, net (4)			$	857,253					$	940,380					$	949,828					$	1,413,265
Collaborative and royalty revenues			1,182						913						—						—
Total revenues			858,435						941,293						949,828						1,413,265
Costs and expenses:
Cost of sales			95,092						135,740						131,914						185,012
Research and development expenses (1)			339,490						379,091						555,948						480,011
Sales, general and administrative expenses			147,045						156,502						159,674						195,277
Change in fair value of contingent consideration			—						—						2,959						1,500
Total costs and expenses			581,627						671,333						850,495						861,800
Income from operations			276,808						269,960						99,333						551,465
Interest income			15,615						18,076						17,628						12,359
Interest expense			(14,868)						(14,837)						(14,548)						(14,249)
Other income (expense), net (2)			42,610						53,939						(31,747)						127,375
Income before provision for income taxes			320,165						327,138						70,666						676,950
Provision for income taxes			51,534						59,711						13,148						93,716
Net income attributable to Vertex			$	268,631					$	267,427					$	57,518					$	583,234
Amounts per share attributable to Vertex common shareholders:
Net income:
Basic			$	1.05					$	1.04					$	0.22					$	2.26
Diluted			$	1.03					$	1.03					$	0.22					$	2.23
Shares used in per share calculations:
Basic			255,695						256,154						256,946						258,003
Diluted			260,175						259,822						260,473						262,108

1.The Company incurred research and development expenses of $75.0 million related to its 2020 Moderna Agreement in the third quarter of 2020 and $175.0 million related to its CRISPR DMD/DM1 Agreement in the third quarter of 2019. See Note B, “Collaborative Arrangements.”

2.In 2020 and 2019, “Other income (expense), net” was primarily related to changes in the fair value of the Company’s investments in corporate equity securities, and from sales of certain corporate equity securities. See Note E, “Marketable Securities and Equity Investments.”

3.In the second quarter of 2020, the Company completed an intra-entity transfer of intellectual property rights to the U.K., resulting in a deferred tax benefit of $209.0 million. See Note O, “Income Taxes.”

4.In the fourth quarter of 2019, the Company updated its transaction price and recognized net product revenues of $155.8 million related to prior period ORKAMBI sales upon reaching a reimbursement agreement with the French government for ORKAMBI, including ORKAMBI distributed through early access programs. See Note A, “Nature of Business and Accounting Policies.”

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