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 9, 2022			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 9, 2022
/s/ Charles F. Wagner, Jr.
Charles F. Wagner, Jr.												Executive Vice President and Chief Financial Officer (Principal Financial Officer)															February 9, 2022
/s/ Kristen C. Ambrose
Kristen C. Ambrose												Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)															February 9, 2022
/s/Jeffrey M. Leiden
Jeffrey M. Leiden												Executive Chairman															February 9, 2022
/s/ Sangeeta N. Bhatia
Sangeeta N. Bhatia												Director															February 9, 2022
/s/ Lloyd Carney
Lloyd Carney												Director															February 9, 2022
/s/ Alan Garber
Alan Garber												Director															February 9, 2022
/s/ Terrence C. Kearney
Terrence C. Kearney												Director															February 9, 2022
/s/ Yuchun Lee
Yuchun Lee												Director															February 9, 2022
/s/ Margaret G. McGlynn
Margaret G. McGlynn												Director															February 9, 2022
/s/ Diana McKenzie
Diana McKenzie												Director															February 9, 2022
/s/ Bruce I. Sachs
Bruce I. Sachs												Director															February 9, 2022

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors 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, 2021 and 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 9, 2022, expressed an unqualified opinion thereon.

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 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 9, 2022

F-2

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Statements of Operations

(in millions, except per share amounts)

			Year Ended December 31,
			2021						2020						2019
Revenues:
Product revenues, net			$	7,573.4					$	6,202.8					$	4,160.7
Other revenues			1.0						2.9						2.1
Total revenues			7,574.4						6,205.7						4,162.8
Costs and expenses:
Cost of sales			904.2						736.3						547.8
Research and development expenses			3,051.1						1,829.5						1,754.5
Selling, general and administrative expenses			840.1						770.5						658.5
Change in fair value of contingent consideration			(3.1)						13.1						4.5
Total costs and expenses			4,792.3						3,349.4						2,965.3
Income from operations			2,782.1						2,856.3						1,197.5
Interest income			4.9						22.2						63.7
Interest expense			(61.5)						(58.2)						(58.5)
Other income, net			4.9						296.6						192.2
Income before provision for income taxes			2,730.4						3,116.9						1,394.9
Provision for income taxes			388.3						405.2						218.1
Net income			$	2,342.1					$	2,711.7					$	1,176.8
Net income per common share:
Basic			$	9.09					$	10.44					$	4.58
Diluted			$	9.01					$	10.29					$	4.51
Shares used in per share calculations:
Basic			257.7						259.8						256.7
Diluted			259.9						263.4						260.7

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

F-3

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Statements of Comprehensive Income

(in millions)

			Year ended December 31,
			2021						2020						2019
Net income			$	2,342.1					$	2,711.7					$	1,176.8
Other comprehensive income:
Unrealized holding (losses) gains on marketable securities, net			(0.8)						(0.2)						1.0
Unrealized gains (losses) on foreign currency forward contracts, net of tax of $(21.8), $14.3 and $7.0, respectively			83.2						(51.6)						(14.0)
Foreign currency translation adjustment			2.0						(14.7)						10.3
Total other comprehensive income (loss)			84.4						(66.5)						(2.7)
Comprehensive income			$	2,426.5					$	2,645.2					$	1,174.1

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

F-4

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Balance Sheets

(in millions, exce****pt share data)

			December 31,
			2021						2020
Assets
Current assets:
Cash and cash equivalents			$	6,795.0					$	5,988.2
Marketable securities			729.9						670.7
Accounts receivable, net			1,136.8						885.4
Inventories			353.1						280.8
Prepaid expenses and other current assets			545.8						308.3
Total current assets			9,560.6						8,133.4
Property and equipment, net			1,094.1						958.5
Goodwill			1,002.2						1,002.2
Intangible assets			400.0						400.0
Deferred tax assets			934.5						882.8
Operating lease assets			330.3						325.6
Other assets			110.8						49.3
Total assets			$	13,432.5					$	11,751.8
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable			$	195.0					$	155.1
Accrued expenses			1,678.6						1,405.0
Other current liabilities			268.4						317.4
Total current liabilities			2,142.0						1,877.5
Long-term finance lease liabilities			509.8						539.0
Long-term operating lease liabilities			377.4						350.5
Long-term contingent consideration			186.5						189.6
Other long-term liabilities			116.8						108.4
Total liabilities			3,332.5						3,065.0
Commitments and contingencies			—						—
Shareholders’ equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding			—						—
Common stock, $0.01 par value; 500,000,000 shares authorized, 254,479,046 and 259,889,549 shares issued and outstanding, respectively			2.5						2.6
Additional paid-in capital			6,880.8						7,894.0
Accumulated other comprehensive income (loss)			15.9						(68.5)
Retained earnings			3,200.8						858.7
Total shareholders’ equity			10,100.0						8,686.8
Total liabilities and shareholders’ equity			$	13,432.5					$	11,751.8

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

F-5

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Statements of Shareholders’ Equity

(in millions)

			Common Stock												Additional Paid-in Capital						Accumulated Other Comprehensive Income (Loss)						Retained Earnings (Accumulated Deficit)						Total Shareholders’ Equity
			Shares						Amount
Balance, December 31, 2018			255.2						$	2.5					$	7,421.5					$	0.7					$	(2,989.5)					$	4,435.2
Cumulative effect adjustment for adoption of new accounting guidance			—						—						—						—						(40.3)						(40.3)
Other comprehensive loss, net of tax			—						—						—						(2.7)						—						(2.7)
Net income			—						—						—						—						1,176.8						1,176.8
Repurchases of common stock			(1.0)						0.0						(186.0)						—						—						(186.0)
Common stock withheld for employee tax obligations			—						—						(6.0)						—						—						(6.0)
Issuance of common stock under benefit plans			4.8						0.1						345.9						—						—						346.0
Stock-based compensation expense			—						—						362.2						—						—						362.2
Balance, December 31, 2019			259.0						$	2.6					$	7,937.6					$	(2.0)					$	(1,853.0)					$	6,085.2
Other comprehensive loss, net of tax			—						—						—						(66.5)						—						(66.5)
Net income			—						—						—						—						2,711.7						2,711.7
Repurchases of common stock			(2.4)						0.0						(539.1)						—						—						(539.1)
Common stock withheld for employee tax obligations			(0.8)						0.0						(200.3)						—						—						(200.3)
Issuance of common stock under benefit plans			4.1						0.0						262.7						—						—						262.7
Stock-based compensation expense			—						—						433.1						—						—						433.1
Balance, December 31, 2020			259.9						$	2.6					$	7,894.0					$	(68.5)					$	858.7					$	8,686.8
Other comprehensive income, net of tax			—						—						—						84.4						—						84.4
Net income			—						—						—						—						2,342.1						2,342.1
Repurchases of common stock			(7.3)						(0.1)						(1,425.3)						—						—						(1,425.4)
Common stock withheld for employee tax obligations			(0.6)						0.0						(135.9)						—						—						(135.9)
Issuance of common stock under benefit plans			2.5						0.0						102.5						—						—						102.5
Stock-based compensation expense			—						—						445.5						—						—						445.5
Balance, December 31, 2021			254.5						$	2.5					$	6,880.8					$	15.9					$	3,200.8					$	10,100.0

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

F-6

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Statements of Cash Flows

(in millions)

			Year Ended December 31,
			2021						2020						2019
Cash flows from operating activities:
Net income			$	2,342.1					$	2,711.7					$	1,176.8
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense			441.4						429.5						360.5
Depreciation expense			125.6						109.5						106.9
Deferred income taxes			(154.6)						277.3						167.4
Gains on equity securities			(17.1)						(311.9)						(197.6)
(Decrease) increase in fair value of contingent consideration			(3.1)						13.1						4.5
Other non-cash items, net			14.4						78.7						16.9
Changes in operating assets and liabilities:
Accounts receivable, net			(274.7)						(223.4)						(225.6)
Inventories			(92.8)						(132.0)						(64.0)
Prepaid expenses and other assets			(91.8)						(297.6)						35.4
Accounts payable			31.9						51.3						(22.8)
Accrued expenses			305.4						122.2						172.9
Other liabilities			16.8						425.1						38.0
Net cash provided by operating activities			2,643.5						3,253.5						1,569.3
Cash flows from investing activities:
Payments to acquire businesses, net of cash acquired			—						—						(1,154.2)
Purchases of available-for-sale debt securities			(528.2)						(431.4)						(537.2)
Maturities of available-for-sale debt securities			499.3						372.3						475.9
Sale of equity securities			—						437.6						94.9
Purchases of property and equipment			(235.0)						(259.8)						(75.4)
Investment in equity securities and notes receivable			(77.0)						(19.3)						(39.3)
Net cash (used in) provided by investing activities			(340.9)						99.4						(1,235.3)
Cash flows from financing activities:
Issuances of common stock under benefit plans			102.0						264.9						343.2
Repurchases of common stock			(1,425.4)						(539.1)						(186.0)
Payments in connection with common stock withheld for employee tax obligations			(135.9)						(200.3)						(6.0)
Payments on finance leases			(47.0)						(42.3)						(39.2)
Proceeds from finance leases			22.6						13.3						10.0
Other financing activities			5.7						(1.8)						4.8
Net cash (used in) provided by financing activities			(1,478.0)						(505.3)						126.8
Effect of changes in exchange rates on cash			(13.4)						20.6						1.6
Net increase in cash, cash equivalents and restricted cash			811.2						2,868.2						462.4
Cash, cash equivalents and restricted cash—beginning of period			5,988.9						3,120.7						2,658.3
Cash, cash equivalents and restricted cash—end of period			$	6,800.1					$	5,988.9					$	3,120.7
Supplemental disclosure of cash flow information:
Cash paid for interest			$	56.3					$	54.5					$	55.6
Cash paid for income taxes			$	476.3					$	191.8					$	24.7

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,” “we,” “us” or “our”) is global biotechnology company that invests in scientific innovation to create transformative medicines for people with serious diseases with a focus on specialty markets. We have multiple approved medicines that treat the underlying cause of cystic fibrosis (“CF”), a life-threatening genetic disease, and we have several ongoing clinical and research programs to advance and extend treatment of CF. Beyond CF, we have a pipeline of investigational therapies in other serious diseases where we are leveraging insight into causal human biology, including sickle cell disease, beta thalassemia, APOL1-mediated kidney disease, type 1 diabetes, pain, alpha-1 antitrypsin deficiency, and muscular dystrophies.

Our marketed CF medicines are TRIKAFTA/KAFTRIO (elexacaftor/tezacaftor/ivacaftor and ivacaftor), SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and KALYDECO (ivacaftor).

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 Vertex and our wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. We operate in one segment, pharmaceuticals. Please refer to Note Q, “Segment Information,” for enterprise-wide disclosures regarding our revenues, major customers and long-lived assets by geographic area.

Use of Estimates

The preparation of consolidated financial statements in accordance with U.S. GAAP requires us 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 our consolidated financial statements, and the amounts of revenues and expenses during the reported periods. We base our estimates on historical experience and various other assumptions, including in certain circumstances future projections that we believe 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.

Revenue Recognition

We recognize revenue when a customer obtains control of promised goods or services. We record the amount of revenue that reflects the consideration that we expect to receive in exchange for those goods or services. We apply 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) we satisfy each performance obligation.

We only apply the five-step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services that we transfer 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, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize 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, our performance obligations are transferred to customers at a point in time, typically upon delivery.

Product Revenues, Net

We sell our 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 our total revenues. We make international sales primarily to specialty

F-8

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

distributors and retail chains, as well as hospitals and clinics, many of which are government-owned or supported. Our customers in the U.S. subsequently resell the products to patients and health care providers. We recognize net product revenues from sales when our customers obtain control of our products, which typically occurs upon delivery to our customers. Our 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, we utilize the expected value method to determine the appropriate amount for estimates of variable consideration based on factors such as our 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 our estimates. If actual results vary from our estimates, we adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Invoice Discounts and Distribution Fees: We generally provide invoice discounts on product sales to our customers for prompt payment and pays fees for distribution services, such as fees for certain data that customers provide to us. We estimate that, based on our experience, our customers will earn these discounts and fees, and deduct the full amount of these discounts and fees from our gross product revenues and accounts receivable at the time such revenues are recognized.

Rebates, Chargebacks, Discounts and Fees: We contract with government agencies (our “Third-party Payors”) so that products will be eligible for purchase by, or partial or full reimbursement from, such Third-party Payors. We estimate the rebates, chargebacks, discounts and fees we will provide to Third-party Payors and deduct these estimated amounts from our gross product revenues at the time the revenues are recognized. For each product, we estimate the aggregate rebates, chargebacks and discounts that we will provide to Third-party Payors based upon (i) our contracts with these Third-party Payors, (ii) the government-mandated discounts and fees applicable to government-funded programs, (iii) information obtained from our customers and other third-party data regarding the payor mix for such product and (iv) historical experience.

Other Incentives: Other incentives that we offer include co-pay mitigation rebates that we provide to commercially insured patients who have coverage and who reside in states that permit co-pay mitigation programs. Based upon the terms of our co-pay mitigation programs, we estimate average co-pay mitigation amounts for each of our products in order to establish appropriate accruals.

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

We exclude taxes collected from customers relating to product sales and remitted to governmental authorities from revenues.

Contract Liabilities

We recorded contract liabilities of $171.7 million and $191.5 million as of December 31, 2021 and 2020, respectively, related to annual contracts with government-owned and supported customers in international markets that limit the amount of annual reimbursement we can receive. Upon exceeding the annual reimbursement amount, products are provided free of

F-9

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

charge, which is a material right. These contracts include upfront payments and fees. We defer 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. Our product revenue contracts include performance obligations that are one year or less.

Our 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 our fiscal year. In these markets we recognize 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, 2021, 2020 and 2019, we recorded $191.5 million, $62.3 million and $24.9 million, respectively, of revenues that were recorded as contract liabilities at the beginning of the year.

French Early Access Programs

In 2015, we began distributing ORKAMBI through early access programs in France and remained engaged in reimbursement discussions with the French government until November 2019, when we reached an agreement with the French government for ORKAMBI, including ORKAMBI distributed through early access programs. From the time we began distributing ORKAMBI through early access programs in France, we 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.

Through the third quarter of 2019, we recognized net product revenues for ORKAMBI sales in France under the early access programs based on a transaction price that reflected our estimate of consideration we expected to retain that would not be subject to a significant reversal in amounts recognized. When determining if variable consideration should be constrained, we consider whether there are factors outside our control that could result in a significant reversal of revenue. In making these assessments, we consider 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, we updated the transaction price to reflect the final amount for ORKAMBI distributed through early access programs. As a result, we recognized net product revenues of $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 our previous estimate of the consideration we expected to retain that would not be subject to a significant reversal in amounts recognized. We paid the final amount due to the French government in 2020.

Other Revenues

We have not recorded significant revenues other than our product revenues during the three years ended December 31, 2021; however, in future periods, we may recognize collaborative revenues generated through collaborative research, development and/or commercialization agreements 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 our collaborator.

For each collaborative research, development, and/or commercialization agreement that results in revenue, we identify all material performance obligations and determine the transaction price by estimating the amount of variable consideration at the outset of the contract. We constrain (reduce) 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.

Once the estimated transaction price is established, amounts are allocated to each separate performance obligation that has been identified on a relative standalone selling price basis.

Upfront License Fees: If we determine that a license to our intellectual property is distinct from the other performance obligations identified in an arrangement, we recognize 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

F-10

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

the arrangement. We recognize revenue when the license is transferred to our collaborator and our collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, we utilize 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, we apply an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Development and Regulatory Milestone Payments: Depending on facts and circumstances, we may include certain milestones in the estimated transaction price or fully constrain the milestones. We include a milestone payment in the transaction price in the reporting period 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 us recognizing revenues from certain milestones and a corresponding contract asset in a reporting period before the milestone is achieved. We fully constrain milestone payments that have not been included in the transaction price to date until we conclude 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. We re-evaluate the probability of achievement of such development milestones and any related constraint each reporting period and adjust our estimate of the overall transaction price, including the amount of collaborative revenue that we have recorded, if necessary.

Research and Development Activities/Transition Services: If we are entitled to reimbursement from our collaborators for specified research and development expenses, we account for the related services as separate performance obligations if these services represent a material right. We also determine whether to account for the reimbursement of research and development expenses as collaborative revenues or an offset to research and development expenses in accordance with the provisions of gross or net revenue presentation. We recognize the corresponding revenues or record the corresponding offset to research and development expenses as we satisfy the related performance obligations.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentration of credit risk consist principally of money market funds and marketable securities. We place these investments with highly rated financial institutions, and, by policy, limit the amount of credit exposure to any one financial institution. These amounts at times may exceed federally insured limits. We also maintain a foreign currency hedging program that includes foreign currency forward contracts with several counterparties. We have not experienced any credit losses related to these financial instruments and do not believe we are exposed to any significant credit risk related to these instruments.

We are also subject to credit risk from our accounts receivable related to our product sales and collaborators. We evaluate the creditworthiness of each of our customers and have determined that all our material customers are creditworthy. To date, we have not experienced significant losses with respect to the collection of our accounts receivable. We believe that our allowances, which are not significant to our consolidated financial statements, are adequate at December 31, 2021. Please refer to Note Q, “Segment Information,” for further information.

Cash and Cash Equivalents

We consider 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, 2021, our marketable securities consisted of investments in available-for-sale debt securities and corporate equity securities with readily determinable fair values. We classify marketable securities available to fund current operations as current assets on our consolidated balance sheets. Marketable securities are classified as long-term assets on our consolidated balance sheets if (i) they have been in an unrealized loss position for longer than one year and (ii) we have the ability and intent to hold them (a) until the carrying value is recovered and (b) such holding period may be longer than one year. Our marketable securities are stated at fair value. The fair value of these securities is based on quoted prices for

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identical or similar assets.

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

We record changes in the fair value of our investments in corporate equity securities to “Other income, net” in our consolidated statements of operations. Realized gains and losses, which are also included in “Other income, net,” are determined on an original weighted-average cost basis.

We 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 our consolidated financial statements. For available-for-sale debt securities in unrealized loss positions, ASU 2016-13 requires us 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 our estimate of fair value for the investment increases. To determine whether to record a credit loss, we consider issuer specific credit ratings and historical losses as well as current economic conditions and our expectations for future economic conditions.

Accounts Receivable

We deduct invoice discounts for prompt payment and fees for distribution services from our accounts receivable based on our experience that our customers will earn these discounts and fees. Our estimates for our 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 our expectation for future economic conditions.

Stock-based Compensation Expense

We expense 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, we recognize expense if, and to the extent that, we estimate that achievement of the performance condition is probable. If we conclude that vesting is probable, we recognize expense from the date we reach this conclusion through the estimated vesting date.

We provide to employees who have rendered a certain number of years of service to Vertex 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 our employees were eligible for partial or full acceleration of any of their equity awards as of December 31, 2021. We recognize stock-based compensation expense related to these awards over a service period reflecting qualified employees’ eligibility for partial or full acceleration of vesting.

Please refer to Note N, “Stock-based Compensation Expense,” for tables displaying our stock-based compensation expense by type of award and by line item within our consolidated statements of operations.

Research and Development Expenses

Research and development expenses are comprised of costs we incur 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. We recognize research and development expenses as incurred. We capitalize nonrefundable advance payments we make for research and development activities and expense the payments as the related goods are

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delivered or the related services are performed.

Inventories

We value our inventories at the lower-of-cost or net realizable value. We determine the cost of our inventories, which include amounts related to materials and manufacturing overhead, on a first-in, first-out basis. We perform an assessment of the recoverability of our capitalized inventory during each reporting period and write 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 our consolidated statements of operations. Shipping and handling costs incurred for product shipments are recorded as incurred in “Cost of sales” in our consolidated statements of operations.

We capitalize inventories produced in preparation for initiating sales of a product candidate when the related product 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 to capitalize such inventories, we evaluate, among other factors, information regarding the product 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, we evaluate risks associated with manufacturing the product 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 our consolidated statements of operations. We perform an assessment of the fair value of the assets if indicators of impairment are identified during a reporting period and record the assets at the lower of the net book value or the fair value of the assets.

We capitalize 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

We determine whether an arrangement contains a lease at inception. If a lease is identified in an arrangement, we recognize a right-of-use asset and liability on our consolidated balance sheet and determine whether the lease should be classified as a finance or operating lease. We do 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 Vertex by the end of the lease term, (ii) we hold an option to purchase the leased asset that we are reasonably certain to exercise, (iii) the lease term is for a major part of the remaining economic life of the leased asset, (iv) the present value of the sum of lease payments equals or exceeds substantially all of the fair value of the leased asset, or (v) the nature of the leased asset is specialized to the point that it is expected to provide the lessor no

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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, we utilize our 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.

We do not separate lease and non-lease components when determining which lease payments to include in the calculation of our lease assets and liabilities. Variable lease payments are expensed as incurred. If a lease includes an option to extend or terminate the lease, we reflect the option in the lease term if it is reasonably certain we 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 our consolidated balance sheet.

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, we reassess the valuation allowance on our deferred income tax assets weighing positive and negative evidence to assess the recoverability of our deferred tax assets. We include, among other things, our recent financial performance and our future projections in this periodic assessment.

We record 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. We evaluate our uncertain tax positions on a quarterly basis and consider various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in our tax returns, and changes in facts or circumstances related to a tax position. We adjust our liabilities to reflect any subsequent changes in the relevant facts and circumstances surrounding the uncertain positions. We accrue interest and penalties related to unrecognized tax benefits as a component of our “Provision for income taxes.”

As part of the U.S. Tax Cut and Jobs Act of 2017, we are subject to a territorial tax system, under which we must establish an accounting policy to provide for tax on Global Intangible Low Taxed Income (“GILTI”) earned by certain foreign subsidiaries. We have elected to treat the impact of GILTI as a current tax expense in our “Provision for income taxes.”

Variable Interest Entities

We review each collaboration agreement pursuant to which we license assets owned by a collaborator in order to determine whether or not we have a variable interest via the license agreement with our collaborator and if the variable interest is a variable interest in our collaborator as a whole and whether or not we are the primary beneficiary of that variable interest entity (“VIE”). If we determine we are the primary beneficiary of a VIE at the onset of our collaboration agreement, the collaboration is treated as a business combination and we consolidate the financial statements of the VIE into our consolidated financial statements until we are no longer the primary beneficiary of the consolidated VIE, or no longer have a variable interest in the VIE. As of December 31, 2021 and 2020, we did not have any consolidated VIEs.

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

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

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

We base our 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. We record any increases or decreases in the fair value of our contingent payments as charges or credits to “Change in fair value of contingent consideration” in our consolidated statement of operations. Please refer to Note D, “Fair Value Measurements,” for further information.

In-process Research and Development Assets

We record 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 our consolidated balance sheet until either the underlying project 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, we have one operating segment, pharmaceuticals, which is our only reporting unit.

Hedging Activities

We recognize 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 our consolidated balance sheets. Changes in the fair value of these instruments are recorded each period in “Accumulated other comprehensive income (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 our 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 our consolidated statement of operations in the same period that we recognize the product revenues that were impacted by the hedged foreign exchange rate changes. We classify the cash flows from hedging instruments in the same category as the cash flows from the hedged items.

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

We also enter 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

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contracts are recognized in “Other income, net” in our consolidated statement of operations each period.

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, we record provisions for or benefits from income taxes related to the unrealized gains and losses on foreign currency forward contracts and certain marketable securities. We do not record provisions for or benefits from income taxes related to our cumulative translation adjustment, as we intend to permanently reinvest undistributed earnings in our foreign subsidiaries.

Foreign Currency Translation and Transactions

The majority of our operations occur in entities that have the U.S. dollar denominated as their functional currency. The assets and liabilities of our entities with functional currencies other than the U.S. dollar are translated into U.S. dollars at exchange rates 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 income (loss).” Net foreign currency exchange transaction losses, which are included in “Other income, net” on our consolidated statement of operations, were $13.9 million, $16.1 million and $5.2 million for 2021, 2020 and 2019, 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 our consolidated statement of operations.

Share Repurchase Programs

Repurchases of our common stock are recorded as reductions to “Common Stock” and “Additional paid-in capital” pursuant to our established accounting policy. Repurchases in excess of the par value will be recorded as reductions to “Retained earnings” in the event that “Additional paid-in capital” is reduced to zero.

Net Income Per Common Share

Basic net income per common share is based upon the weighted-average number of common shares outstanding during the period. Diluted net income per common share 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. Potentially dilutive shares result from the assumed exercise of outstanding stock options and assumed vesting of restricted stock units (including performance-based restricted stock units) (the proceeds of which are then assumed to have been used to repurchase outstanding stock using the treasury-stock method).

Recently Adopted Accounting Standards

Income Taxes

In 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 became effective on January 1, 2021. The adoption of ASU 2019-12 did not have a significant impact on our consolidated financial statements.

Internal-Use Software

In 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 became effective on January 1, 2020. The adoption of ASU 2018-15 resulted in an insignificant amount of additional assets recorded on our 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

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value measurements. ASU 2018-13 became effective on January 1, 2020. The adoption of ASU 2018-13 resulted in additional disclosures related to our 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 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 our consolidated financial statements.

Leases

On January 1, 2019, we adopted ASC 842 using the modified-retrospective method. Until December 31, 2018, we applied build-to-suit accounting and were the deemed owner of our leased corporate headquarters in Boston and research site in San Diego. Under the amended guidance that became effective January 1, 2019, we account for these buildings as finance leases. As of January 1, 2019, we recorded a cumulative effect adjustment to increase our “Accumulated deficit” by $40.3 million to reflect our build-to-suit leases as finance leases pursuant to ASC 842.

Recently Issued Accounting Standards

We do not expect any recently issued accounting standards to have a significant impact on our consolidated financial statements.

**B.**Collaborative and Other Arrangements

We have entered into numerous agreements pursuant to which we collaborate with third parties on research, development and commercialization programs, including in-license and out-license agreements or acquire assets. Our “Research and development expenses” included $1.1 billion, $184.6 million and $318.3 million related to upfront and milestone payments pursuant to our in-license agreements and asset acquisitions in 2021, 2020 and 2019, respectively.

In-license Agreements

We have entered into a number of in-license agreements in order to advance and obtain access to technologies and services related to our research and early-development activities. We are generally required to make an upfront payment upon execution of our license agreements; 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 our collaborations.

Pursuant to the terms of our in-license agreements, our collaborators typically lead the discovery efforts and we lead all preclinical, development and commercialization activities associated with the advancement of any product candidates and fund all expenses.

We typically can terminate our in-license agreements by providing advance notice to our collaborators; the required length of notice is dependent on whether any product developed under the license agreement has received marketing approval. Our 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

CRISPR-Cas9 Gene-editing Therapies

In 2015, we 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

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treatments aimed at the underlying genetic causes of human diseases using CRISPR-Cas9 gene-editing technology. We had the exclusive right to license certain targets. In 2019, we paid an aggregate of $30.0 million to exclusively license three targets, including CF, pursuant to the CRISPR Agreement. We recorded the $30.0 million total option payment to “Research and development expenses.” For each of the three targets that we 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, we entered into a joint development and commercialization agreement with CRISPR pursuant to the terms of the CRISPR Agreement (the “Original CTX001 JDCA”), under which we and CRISPR were co-developing and preparing to co-commercialize CTX001 for the treatment of hemoglobinopathies, including treatments for sickle cell disease and transfusion-dependent beta thalassemia.

In the second quarter of 2021, we and CRISPR amended and restated the Original CTX001 JDCA (the “A&R JDCA”), pursuant to which the parties agreed to, among other things, (a) adjust the governance structure for the collaboration and adjust the responsibilities of each party thereunder; (b) adjust the allocation of net profits and net losses between the parties; and (c) exclusively license (subject to CRISPR’s reserved rights to conduct certain activities) certain intellectual property rights to us relating to the products that may be researched, developed, manufactured and commercialized under such agreement.

Pursuant to the A&R JDCA, we are now leading global development, manufacturing and commercialization of CTX001, with support from CRISPR. Subject to the terms and conditions of the A&R JDCA, we also have the right to conduct all research, development, manufacturing and commercialization activities relating to the product candidates and products under the A&R JDCA (including CTX001) throughout the world subject to CRISPR’s reserved right to conduct certain activities.

In connection with the A&R JDCA, we made a $900.0 million upfront payment to CRISPR in the second quarter of 2021. We concluded that we did not have any alternative future use for the acquired in-process research and development and recorded this upfront payment to “Research and development expenses.” CRISPR has the potential to receive an additional one-time $200.0 million milestone payment upon receipt of the first marketing approval of CTX001 from the U.S. Food and Drug Administration or the European Commission.

We and CRISPR shared equally all expenses incurred under the Original CTX001 JDCA. On July 1, 2021, with respect to CTX001, the net profits and net losses incurred pursuant to the A&R JDCA began to be allocated 60% to us and 40% to CRISPR, while all other product candidates and products continue to have net profits and net losses shared equally between the parties. We concluded that the Original CTX001 JDCA and the A&R JDCA are cost-sharing arrangements, which result in the net impact of the arrangements being recorded in “Research and development expenses” in our consolidated statements of operations. During the three years ended December 31, 2021, we recognized the following amounts in total related to these agreements:

			2021						2020						2019
			(in millions)
Total research and development expenses incurred under the Original CTX001 JDCA and A&R JDCA			$	230.4					$	101.2					$	60.3
Vertex’s share recognized in “Research and development expenses” in consolidated statements of operations			129.0						50.6						30.1

Duchenne Muscular Dystrophy and Myotonic Dystrophy Type 1

In 2019, we entered into a separate strategic collaboration and license agreement (the “CRISPR DMD/DM1 Agreement”) with CRISPR. Pursuant to this agreement, we 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 we made an upfront payment of $175.0 million to CRISPR. We concluded that we 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.” We recorded $12.5 million and $25.0 million to “Research and development expenses” in 2021 and 2020, respectively, related to pre-clinical milestones earned by CRISPR under the CRISPR DMD/DM1 Agreement. CRISPR has the potential to receive up to an additional $787.5 million in research, development, regulatory and commercial milestones for the DMD and

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DM1 programs as well as royalties on net product sales. CRISPR has the option to co-develop and co-commercialize all DM1 products globally and forego the milestones and royalties associated with the DM1 program. We fund all expenses associated with the collaboration.

Kymera Therapeutics Inc.

In 2019, we 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. We have 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. We 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. We concluded that we 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 addition to the upfront payment, we purchased $20.0 million of Kymera’s preferred stock that converted to common stock when Kymera became a publicly traded company in 2020.

Moderna, Inc.

In 2016, we 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 2020, we 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, we paid Moderna an upfront payment of $75.0 million and Moderna is eligible to receive up to $380.0 million in development, regulatory and commercial milestones as well as royalties on net product sales. We determined that substantially all 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. We concluded that we 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.”

Additional In-License Agreements and Other Arrangements

In 2016, we entered into a strategic collaboration and license agreement with ApoLo1 Bio, LLC (“ApoLo1”) related to our drug discovery efforts in APOL1-mediated kidney disease. In 2021, based on positive results from a Phase 2 proof-of-concept study of VX-147 in patients with APOL1-mediated focal segmental glomerulosclerosis, we paid ApoLo1 a $15.0 million milestone and exercised our $60.0 million option to buy-out all future development milestones, regulatory milestones and future royalties on net product sales. We recorded these payments to “Research and development expenses” because we concluded that we did not have any alternative future use for the acquired in-process research and development.

In addition to the collaborative arrangements described above, we recorded upfront, option and milestone payments totaling $125.8 million in 2021, $84.6 million in 2020 and $63.3 million in 2019 to “Research and development expenses” related to additional in-license agreements and other business development transactions that we do not consider to be individually significant to our consolidated financial statements. These payments included upfront payments of $31.0 million to Mammoth Biosciences, Inc. (“Mammoth”) and $25.0 million to Arbor Biotechnologies, Inc. (“Arbor”) in 2021, $40.0 million to Skyhawk Therapeutics, Inc. (“Skyhawk”) in 2020, and $25.9 million to Molecular Templates, Inc. (“Molecular”) in 2019.

For Mammoth, Arbor, Skyhawk, Molecular and several other in-license agreements that are not individually significant to our consolidated financial statements, we determined that substantially all 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. We concluded that we did not have any alternative future use for the acquired in-process research and development

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associated with the agreements and recorded the upfront payments for these agreements 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 our investments in our collaborators.

Out-license Agreements

We have entered into licensing agreements pursuant to which we have out-licensed rights to certain product candidates to third-party collaborators. Pursuant to these out-license agreements, our collaborators become responsible for all costs related to the continued development of such product candidates and obtain development and commercialization rights to these product candidates. Depending on the terms of the agreements, our 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 our in-license agreements.

Merck KGaA, Darmstadt, Germany

In 2017, we entered into a strategic collaboration and license agreement (the “Oncology Agreement”) with Merck KGaA, Darmstadt, Germany (the “Licensee”). Pursuant to the Oncology Agreement, we 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: our ataxia telangiectasia and Rad3-related protein kinase inhibitor program, or ATR program, including VX-970 and VX-803, and our DNA-dependent protein kinase inhibitor program, or DNA-PK program, including VX-984. In addition, we granted the Licensee exclusive, worldwide rights to two pre-clinical programs.

In 2018, we entered into an agreement with Merck KGaA, Darmstadt, Germany (the “DNA-PK Agreement”) whereby we licensed the two lead Vertex DNA-PK compounds from our DNA-PK program for use in the field of gene integration for six specific indications. 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.

Cystic Fibrosis Foundation

We have 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, we 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. We record our royalties payable to the Cystic Fibrosis Foundation to “Cost of sales.”

F-20

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**C.**Earnings Per Share

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

			2021						2020						2019
			(in millions, except per share amounts)
Net income			$	2,342.1					$	2,711.7					$	1,176.8
Basic weighted-average common shares outstanding			257.7						259.8						256.7
Effect of potentially dilutive securities:
Stock options			1.1						1.8						2.2
Restricted stock units (including PSUs)			1.1						1.7						1.7
Employee stock purchase program			0.0						0.1						0.1
Diluted weighted-average common shares outstanding			259.9						263.4						260.7
Basic net income per common share			$	9.09					$	10.44					$	4.58
Diluted net income per common share			$	9.01					$	10.29					$	4.51

We did not include the securities in the following table in the computation of the diluted net income per common share because the effect would have been anti-dilutive during each period:

			2021						2020						2019
			(in millions)
Stock options			0.7						0.3						2.8
Unvested restricted stock units (including PSUs)			0.4						0.3						—

**D.**Fair Value Measurements

The following fair value hierarchy is used to classify assets and liabilities based on observable inputs and unobservable inputs used in order to determine the fair value of our 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 our assessment of the assumptions that market participants would use in pricing the asset or liability.

Our investment strategy is focused on capital preservation. We invest in instruments that meet the credit quality standards outlined in our investment policy, which also limits the amount of credit exposure to any one issue or type of instrument. We maintain strategic investments separately from the investment policy that governs our other cash, cash equivalents and marketable securities as described in Note E, “Marketable Securities and Equity Investments.” Additionally, we utilize foreign currency forward contracts intended to mitigate the effect of changes in foreign exchange rates on our consolidated statement of operations.

During the three years ended December 31, 2021, we did not record any other-than-temporary impairment charges related to our financial assets.

F-21

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

The following tables set forth our financial assets and liabilities subject to fair value measurements by level within the fair value hierarchy (and does not include $3.3 billion and $2.8 billion of cash as of December 31, 2021 and 2020, respectively):

			As of December 31, 2021																								As of December 31, 2020
									Fair Value Hierarchy																								Fair Value Hierarchy
			Total						Level 1						Level 2						Level 3						Total						Level 1						Level 2						Level 3
			(in millions)
Financial instruments carried at fair value (asset position):
Cash equivalents:
Money market funds			$	3,478.1					$	3,478.1					$	—					$	—					$	3,141.1					$	3,141.1					$	—					$	—
Marketable securities:
Corporate equity securities			230.9						230.9						—						—						195.8						15.7						180.1						—
U.S. Treasury securities			86.4						86.4						—						—						—						—						—						—
Government-sponsored enterprise securities			69.0						69.0						—						—						80.0						80.0						—						—
Corporate debt securities			90.9						—						90.9						—						231.6						—						231.6						—
Commercial paper			252.7						—						252.7						—						163.3						—						163.3						—
Prepaid expenses and other current assets:
Foreign currency forward contracts			44.5						—						44.5						—						—						—						—						—
Other assets:
Foreign currency forward contracts			2.0						—						2.0						—						—						—						—						—
Total financial assets			$	4,254.5					$	3,864.4					$	390.1					$	—					$	3,811.8					$	3,236.8					$	575.0					$	—
Financial instruments carried at fair value (liability position):
Other current liabilities:
Foreign currency forward contracts			$	(5.6)					$	—					$	(5.6)					$	—					$	(59.2)					$	—					$	(59.2)					$	—
Long-term contingent consideration			(186.5)						—						—						(186.5)						(189.6)						—						—						(189.6)
Other long-term liabilities:
Foreign currency forward contracts			(2.7)						—						(2.7)						—						(4.3)						—						(4.3)						—
Total financial liabilities			$	(194.8)					$	—					$	(8.3)					$	(186.5)					$	(253.1)					$	—					$	(63.5)					$	(189.6)

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

We classify our investments in publicly traded corporate equity securities as “Marketable securities” on our consolidated balance sheets. Generally, our investments in the common stock of publicly traded companies are valued based on Level 1 inputs because they have readily determinable fair values. However, certain of our investments in publicly traded companies have been or continue to be valued based on Level 2 inputs due to transfer restrictions associated with these investments. Please refer to Note E, “Marketable Securities and Equity Investments,” for further information on these investments.

Fair Value of Contingent Consideration

In 2019, we 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. Our Level 3 contingent consideration liabilities are related to $678.3 million of development and regulatory milestones potentially payable to Exonics’ former equity holders. We base our 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 0.9% and 2.3% as of December 31, 2021, 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 product candidates in the pharmaceutical industry and the effects of changes in other assumptions

F-22

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

including discount rates, we expect our estimates regarding the fair value of contingent consideration to change in the future, resulting in adjustments to the fair value of our contingent consideration liabilities, and the effect of any such adjustments could be material.

The following table represents a rollforward of the fair value of our contingent consideration liabilities:

			Year Ended December 31, 2021
			(in millions)
Balance at December 31, 2020			$	189.6
Decrease in fair value of contingent payments			(3.1)
Balance at December 31, 2021			$	186.5

**E.**Marketable Securities and Equity Investments

A summary of our cash equivalents and marketable securities, which are recorded at fair value (and do not include $3.3 billion and $2.8 billion of cash as of December 31, 2021 and 2020, respectively), is shown below:

			As of December 31, 2021																								As of December 31, 2020
			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value						Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
			(in millions)
Cash equivalents:
Money market funds			$	3,478.1					$	—					$	—					$	3,478.1					$	3,141.1					$	—					$	—					$	3,141.1
Marketable securities:
U.S. Treasury securities			$	86.6					$	—					$	(0.2)					$	86.4					$	—					$	—					$	—					$	—
Government-sponsored enterprise securities			69.0						—						—						69.0						80.0						—						—						80.0
Corporate debt securities			91.1						—						(0.2)						90.9						231.3						0.4						(0.1)						231.6
Commercial paper			252.8						—						(0.1)						252.7						163.3						—						—						163.3
Total marketable debt securities			499.5						—						(0.5)						499.0						474.6						0.4						(0.1)						474.9
Corporate equity securities			69.4						167.1						(5.6)						230.9						51.4						144.4						—						195.8
Total marketable securities			$	568.9					$	167.1					$	(6.1)					$	729.9					$	526.0					$	144.8					$	(0.1)					$	670.7

Available-for-sale debt securities were classified on our consolidated balance sheets at fair value as follows:

			December 31,
			2021						2020
			(in millions)
Cash and cash equivalents			$	3,478.1					$	3,141.1
Marketable securities			499.0						474.9
Total			$	3,977.1					$	3,616.0

F-23

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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

			December 31,
			2021						2020
			(in millions)
Matures within one year			$	3,912.3					$	3,526.2
Matures after one year through five years			64.8						89.8
Total			$	3,977.1					$	3,616.0

We have a limited number of available-for-sale debt securities in insignificant loss positions as of December 31, 2021, which we do not intend to sell and have concluded we will not be required to sell before recovery of the amortized costs for the investments at maturity. We 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 2021, 2020 or 2019.

We record changes in the fair value of our investments in corporate equity securities to “Other income, net” in our consolidated statements of operations. During the three years ended December 31, 2021, our net unrealized gains on corporate equity securities held at the conclusion of each period were as follows:

			2021						2020						2019
			(in millions)
Net unrealized gains			$	17.1					$	136.2					$	143.2

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

			2020						2019
			(in millions)
Proceeds received			$	437.6					$	94.9
Weighted-average cost basis			$	103.3					$	29.8

During the year ended December 31, 2021, we did not sell any common stock of publicly traded companies.

As of December 31, 2021, the carrying value of our equity investments without readily determinable fair values, which are recorded in “Other assets” on our consolidated balance sheets, was $85.8 million.

F-24

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 Foreign Currency Forward Contracts						Total
			(in millions)
Balance as of December 31, 2018			$	(11.2)					$	(0.5)					$	12.4					$	0.7
Other comprehensive income before reclassifications			10.3						1.0						11.5						22.8
Amounts reclassified from accumulated other comprehensive income (loss)			—						—						(25.5)						(25.5)
Net current period other comprehensive income (loss)			10.3						1.0						(14.0)						(2.7)
Balance as of December 31, 2019			$	(0.9)					$	0.5					$	(1.6)					$	(2.0)
Other comprehensive loss before reclassifications			(14.7)						(0.2)						(54.5)						(69.4)
Amounts reclassified from accumulated other comprehensive income (loss)			—						—						2.9						2.9
Net current period other comprehensive loss			(14.7)						(0.2)						(51.6)						(66.5)
Balance as of December 31, 2020			$	(15.6)					$	0.3					$	(53.2)					$	(68.5)
Other comprehensive income (loss) before reclassifications			2.0						(0.8)						59.7						60.9
Amounts reclassified from accumulated other comprehensive income (loss)			—						—						23.5						23.5
Net current period other comprehensive income (loss)			2.0						(0.8)						83.2						84.4
Balance as of December 31, 2021			$	(13.6)					$	(0.5)					$	30.0					$	15.9

**G.**Hedging

Foreign currency forward contracts - Designated as hedging instruments

We maintain a hedging program intended to mitigate the effect of changes in foreign exchange rates for a portion of our forecasted product revenues denominated in certain foreign currencies. The program includes foreign currency forward contracts that are designated as cash flow hedges under U.S. GAAP having contractual durations from one to eighteen months. We recognize realized gains and losses for the effective portion of such contracts in “Product revenues, net” in our consolidated statements of operations in the same period that we recognize the product revenues that were impacted by the hedged foreign exchange rate changes.

We formally document the relationship between foreign currency forward contracts (hedging instruments) and forecasted product revenues (hedged items), as well as our 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. We also formally assess, 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 we 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, we would discontinue hedge accounting treatment prospectively. We measure 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, 2021, all hedges were determined to be highly effective.

F-25

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

We consider the impact of our counterparties’ credit risk on the fair value of the foreign currency forward contracts. As of December 31, 2021 and December 31, 2020, credit risk did not change the fair value of our foreign currency forward contracts.

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

			As of December 31,
			2021						2020
Foreign Currency			(in millions)
Euro			$	1,364.5					$	745.1
British pound sterling			287.7						160.4
Australian dollar			96.3						99.9
Canadian dollar			89.9						86.5
Swiss Franc			54.1						—
Total foreign currency forward contracts			$	1,892.5					$	1,091.9

Foreign currency forward contracts - Not designated as hedging instruments

We also enter into foreign currency forward contracts with contractual maturities of less than one month, which are designed to mitigate the effect of changes in foreign exchange rates on monetary assets and liabilities, including intercompany balances. These contracts are not designated as hedging instruments under U.S. GAAP. We recognize realized gains and losses for such contracts in “Other income, net” in our consolidated statements of operations each period. As of December 31, 2021, the notional amount of our outstanding foreign currency forward contracts where hedge accounting under U.S. GAAP is not applied was $580.7 million.

During the three years ended December 31, 2021, we recognized the following related to foreign currency forward contracts in our consolidated statements of operations:

			December 31,
			2021						2020						2019
			(in millions)
Designated as hedging instruments - Reclassified from AOCI
Product revenues, net			$	(30.0)					$	(3.7)					$	32.5
Not designated as hedging instruments
Other income, net			$	(18.6)					$	22.1					$	(4.8)
Total reported in the Consolidated Statement of Operations
Product revenues, net			$	7,573.4					$	6,202.8					$	4,160.7
Other income, net			$	4.9					$	296.6					$	192.2

F-26

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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

As of December 31, 2021
Assets												Liabilities
Classification						Fair Value						Classification						Fair Value
(in millions)
Prepaid expenses and other current assets						$	44.5					Other current liabilities						$	(5.6)
Other assets						2.0						Other long-term liabilities						(2.7)
Total assets						$	46.5					Total liabilities						$	(8.3)

As of December 31, 2020
Assets												Liabilities
Classification						Fair Value						Classification						Fair Value
(in millions)
Prepaid expenses and other current assets						$	—					Other current liabilities						$	(59.2)
Other assets						—						Other long-term liabilities						(4.3)
Total assets						$	—					Total liabilities						$	(63.5)

As of December 31, 2021, we expect the 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.

As discussed in Note A, “Note A, “Nature of Business and Accounting Policies,” we present the fair value of our foreign currency forward contracts on a gross basis within our consolidated balance sheets. 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 our consolidated balance sheets:

			As of December 31, 2021
			Gross Amounts Recognized						Gross Amounts Offset						Gross Amounts Presented						Gross Amounts Not Offset						Legal Offset
Foreign currency forward contracts			(in millions)
Total assets			$	46.5					$	—					$	46.5					$	(8.3)					$	38.2
Total liabilities			(8.3)						—						(8.3)						8.3						—

			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 millions)
Total assets			$	—					$	—					$	—					$	—					$	—
Total liabilities			(63.5)						—						(63.5)						—						(63.5)

F-27

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**H.**Inventories

Inventories consisted of the following:

			As of December 31,
			2021						2020
			(in millions)
Raw materials			$	42.4					$	46.2
Work-in-process			224.0						161.3
Finished goods			86.7						73.3
Total			$	353.1					$	280.8

**I.**Property and Equipment

Property and equipment, net consisted of the following:

			As of December 31,
			2021						2020
			(in millions)
Buildings and improvements			$	892.5					$	876.1
Furniture and equipment			407.3						346.7
Leasehold improvements			363.5						234.6
Computers and software			293.7						258.6
Land			33.1						33.1
Total property and equipment, gross			1,990.1						1,749.1
Less: accumulated depreciation			(896.0)						(790.6)
Total property and equipment, net			$	1,094.1					$	958.5

We recorded depreciation expense of $125.6 million, $109.5 million and $106.9 million in 2021, 2020 and 2019, respectively, which includes our finance lease amortization.

**J.**Intangible Assets and Goodwill

Intangible Assets

As of December 31, 2021 and 2020, we had $400.0 million of in-process research and development intangible assets classified as “Intangible assets” on our consolidated balance sheets. In 2019, we recorded $387.0 million and $13.0 million of in-process research and development intangible assets related to our acquisitions of Semma Therapeutics, Inc. (“Semma”) and Exonics, respectively.

Goodwill

As of December 31, 2021 and 2020, goodwill of $1.0 billion was recorded on our consolidated balance sheets. During 2019, we recorded goodwill of $554.6 million and $397.1 million related to our acquisitions of Semma and Exonics, respectively.

F-28

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**K.**Additional Balance Sheet Detail

Prepaid expenses and other current assets consisted of the following:

			As of December 31,
			2021						2020
			(in millions)
Tax related prepaid and receivables			$	358.6					$	228.6
Other			187.2						79.7
Total			$	545.8					$	308.3

Accrued expenses consisted of the following:

			As of December 31,
			2021						2020
			(in millions)
Product revenue accruals			$	847.4					$	781.9
Payroll and benefits			191.3						169.4
Research, development and commercial contract costs			171.6						136.7
Royalty payable			200.4						165.4
Tax related accruals			211.3						104.2
Other			56.6						47.4
Total			$	1,678.6					$	1,405.0

Other current liabilities consisted of the following:

			As of December 31,
			2021						2020
			(in millions)
Contract liabilities			$	171.7					$	191.5
Finance lease liabilities			46.9						42.4
Fair value of cash flow hedges			5.6						59.2
Other			44.2						24.3
Total			$	268.4					$	317.4

F-29

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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

			As of December 31,
			2021						2020						2019						2018
			(in millions)
Cash and cash equivalents			$	6,795.0					$	5,988.2					$	3,109.3					$	2,650.1
Prepaid expenses and other current assets			5.1						0.7						8.0						4.9
Other assets			—						—						3.4						3.3
Cash, cash equivalents and restricted cash per consolidated statement of cash flows			$	6,800.1					$	5,988.9					$	3,120.7					$	2,658.3

Our restricted cash, if any, is included in “Prepaid expenses and other current assets” and “Other assets” on our consolidated balance sheets.

**L.**Leases

Finance Leases

Our finance lease assets and liabilities primarily relate to our 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. We also have outstanding finance leases for equipment and land.

Corporate Headquarters

In 2011, we entered into two lease agreements, pursuant to which we lease 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. We utilize this initial period as our lease term. We have an option to extend the lease term for an additional ten years.

San Diego Lease

In 2015, we entered into a lease agreement pursuant to which we lease 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. We utilize this initial period as our lease term. We have an option to extend the lease term for up to two additional five-year terms.

Operating Leases

Our operating leases relate to our real estate leases that are not classified as finance leases.

Innovation Square Lease

In 2019, we entered into an agreement to lease approximately 269,000 square feet of office and laboratory space near our 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 commenced in 2021. We have utilized the initial period, which commenced in the third quarter of 2020 upon occupation of the building, as our lease term.

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

F-30

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Aggregate Lease Information

The components of lease cost recorded in our consolidated statement of operations were as follows:

			2021						2020						2019
			(in millions)
Operating lease cost			$	33.9					$	23.1					$	12.0
Finance lease cost
Amortization of leased assets			51.9						51.2						49.8
Interest on lease liabilities			47.4						50.2						52.8
Variable lease cost			33.6						30.8						28.0
Sublease income			(0.4)						(4.0)						(6.4)
Net lease cost			$	166.4					$	151.3					$	136.2

Our variable lease cost during 2021, 2020 and 2019 primarily related to operating expenses, taxes and insurance associated with our finance leases.

Our leases are included on our consolidated balance sheets as follows:

			As of December 31,
			2021						2020
			(in millions)
Finance leases
Property and equipment, net			$	400.1					$	431.2
Total finance lease assets			$	400.1					$	431.2
Other current liabilities			$	46.9					$	42.5
Long-term finance lease liabilities			509.8						539.0
Total finance lease liabilities			$	556.7					$	581.5
Operating leases
Operating lease assets			$	330.3					$	325.6
Total operating lease assets			$	330.3					$	325.6
Other current liabilities			$	33.3					$	10.5
Long-term operating lease liabilities			377.4						350.5
Total operating lease liabilities			$	410.7					$	361.0

F-31

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Maturities of our finance and operating lease liabilities as of December 31, 2021 were as follows:

Year						Finance Leases						Operating Leases						Total
						(in millions)
2022						$	87.9					$	41.9					$	129.8
2023						93.2						42.0						135.2
2024						97.6						38.6						136.2
2025						95.9						35.7						131.6
2026						94.2						33.7						127.9
Thereafter						327.4						290.3						617.7
Total lease payments						796.2						482.2						1,278.4
Less: tenant allowance						—						(6.5)						(6.5)
Less: amount representing interest						(239.5)						(65.0)						(304.5)
Present value of lease liabilities						$	556.7					$	410.7					$	967.4

The weighted-average remaining lease terms and discount rates related to our leases were as follows:

			As of December 31,
			2021						2020
Weighted-average remaining lease term (in years)
Finance leases			10.73						11.58
Operating leases			12.81						14.10
Weighted-average discount rate
Finance leases			8.11		%				8.36		%
Operating leases			2.19		%				2.28		%

Supplemental cash flow information related to our leases was as follows:

			2021						2020						2019
			(in millions)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases			$	21.5					$	16.3					$	10.7
Operating cash flows from finance leases			$	46.2					$	48.9					$	50.5
Financing cash flows from finance leases			$	47.0					$	42.3					$	39.2
Right-of-use assets obtained in exchange for lease obligations
Operating leases			$	36.3					$	293.6					$	34.6
Finance leases			$	—					$	33.1					$	—

F-32

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**M.**Common Stock, Preferred Stock and Equity Plans

Common Stock and Preferred Stock

We are authorized to issue 500.0 million 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 our Board of Directors, and to share ratably in our assets legally available for distribution to our 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.

We are authorized to issue 1.0 million 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 our shareholders. As of December 31, 2021 and 2020, we had no shares of preferred stock issued or outstanding.

Share Repurchase Programs

In 2018, our Board of Directors approved a share repurchase program (the “2018 Share Repurchase Program”), pursuant to which we repurchased $500.0 million of our common stock in 2018 and 2019. During the year ended December 31, 2019, we repurchased 0.8 million shares of our common stock under the 2018 Share Repurchase Program for an aggregate of $150.0 million.

In July 2019, our Board of Directors approved a second share repurchase program (the “2019 Share Repurchase Program”), pursuant to which we repurchased $500.0 million of our common stock in 2019 and 2020. During the years ended December 31, 2020 and 2019, we repurchased 2.1 million and 0.2 million shares, respectively, of our common stock under the 2019 Share Repurchase Program for an aggregate of $464.0 million and $36.0 million, respectively.

In November 2020, our Board of Directors approved a third share repurchase program (the “2020 Share Repurchase Program”), pursuant to which we repurchased $500.0 million of our common stock in 2020 and 2021. During the years ended December 31, 2021 and 2020, we repurchased 2.0 million and 0.3 million shares, respectively, of our common stock under the 2020 Share Repurchase Program for an aggregate of $424.9 million and $75.1 million, respectively.

In June 2021, our Board of Directors approved a fourth share repurchase program (the “2021 Share Repurchase Program”), pursuant to which we are authorized to repurchase up to $1.5 billion of our common stock by December 31, 2022. During the year ended December 31, 2021, we repurchased 5.3 million shares of our common stock under the 2021 Share Repurchase Program for an aggregate of $1.0 billion. We expect to fund further repurchases of our common stock through a combination of cash on hand and cash generated by operations. As of December 31, 2021, $499.7 million remained authorized for repurchases of common stock under the 2021 Share Repurchase Program.

Repurchases of our common stock are recorded as reductions to “Common stock” and “Additional paid-in capital.”

Stock and Option Plans

The purpose of each of our stock and option plans is to attract, retain and motivate our 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.

F-33

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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

																		As of December 31, 2021
Title of Plan						Group Eligible						Type of Award Granted						Awards Outstanding						Additional Awards Authorized for Grant
																		(in thousands)
2013 Stock and Option Plan						Employees, Non-employee Directors and Consultants						NSO, RS, RSU and PSU						7,306						9,558
2006 Stock and Option Plan						Employees, Non-employee Directors and Consultants						NSO, RS and RSU						292						—
												Total						7,598						9,558

All options granted under our 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, 2021, we are only authorized to make new equity awards under our 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, our shareholders approved an increase in the number of shares authorized for issuance pursuant to the 2013 Stock and Option Plan of 5.0 million shares.

During the three years ended December 31, 2021, grants to current employees and directors primarily had a grant date that was the same as the date the award was approved by our Board of Directors. During the three years ended December 31, 2021, 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 our Board of Directors. All options awarded under our stock and option plans expire not more than 10 years from the grant date.

Stock Options

The following table summarizes information related to the outstanding and exercisable options during the year ended December 31, 2021:

			Stock Options						Weighted-average Exercise Price						Weighted-average Remaining Contractual Life						Aggregate Intrinsic Value
			(in thousands)						(per share)						(in years)						(in millions)
Outstanding at December 31, 2020			4,238						$	140.47
Granted			27						$	217.20
Exercised			(518)						$	125.78
Forfeited			(136)						$	177.28
Expired			—						$	—
Outstanding at December 31, 2021			3,611						$	141.76					5.42						$	288.6
Exercisable at December 31, 2021			3,149						$	136.13					5.19						$	269.6

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 2021, which was $221.27 based on the average of the high and low price of our common stock on that date.

F-34

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

The total intrinsic value (the amount by which the fair market value exceeded the exercise price) of stock options exercised during 2021, 2020 and 2019 was $43.0 million, $255.0 million and $325.9 million, respectively. The total cash we received as a result of employee stock option exercises during 2021, 2020 and 2019 was $64.2 million, $228.2 million and $317.8 million, respectively.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2021:

						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–$100.00						1,085						3.70						$	82.14					1,085						$	82.14
$100.01–$150.00						362						3.56						$	123.15					362						$	123.15
$150.01–$200.00						2,114						6.53						$	173.03					1,652						$	171.04
$200.01–$286.27						50						8.92						$	248.51					50						$	248.51
Total						3,611						5.42						$	141.76					3,149						$	136.13

Restricted Stock Units (excluding PSUs) and Restricted Stock

The following table summarizes our restricted stock unit activity during the year ended December 31, 2021:

			Restricted Stock Units (excluding PSUs)
			Number of Shares						Weighted-average Grant-date Fair Value
			(in thousands)						(per share)
Unvested at December 31, 2020			2,722						$	206.99
Granted			1,927						$	208.48
Vested			(1,331)						$	193.29
Cancelled			(409)						$	214.68
Unvested at December 31, 2021			2,909						$	213.17

The total fair value of restricted stock units that vested during 2021, 2020 and 2019 (measured on the date of vesting) was $281.1 million, $370.3 million and $178.2 million, respectively. The total fair value of restricted stock that vested during 2020 and 2019 (measured on the date of vesting) was $21.4 million and $70.7 million, respectively. We have not granted any restricted stock since 2016, therefore, we did not have any restricted stock vest in 2021.

Performance-based RSUs (PSUs)

The potential range of shares issuable pursuant to our 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 our 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.

F-35

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

The following table summarizes our PSU activity during the year ended December 31, 2021:

			Performance-Based RSU
			Number of Units						Weighted-average Grant-date Fair Value
			(in thousands)						(per share)
Unvested at December 31, 2020 (1)			656						$	202.06
Granted (2)			954						$	212.44
Vested			(431)						$	183.94
Cancelled			(101)						$	214.72
Unvested at December 31, 2021			1,078						$	215.85
(1) “Unvested” represents our 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 2021 and (ii) any change in the number of shares issuable pursuant to outstanding PSUs based on performance certification during 2021.

The total fair value of PSUs that vested during 2021, 2020 and 2019 (measured on the date of vesting) was $92.2 million, $138.5 million and $73.3 million, respectively.

Employee Stock Purchase Plan

We have 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 our 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, whichever is lower. Purchase dates under the ESPP occur on or about May 14 and November 14 of each year. As of December 31, 2021, there were 1.8 million shares of common stock authorized for issuance pursuant to the ESPP.

In 2021, the following shares were issued to employees under the ESPP:

			Year Ended December 31, 2021
Number of shares (in thousands)			219
Average price paid per share			$	171.57

Employee Benefits

We have a 401(k) retirement plan (the “Vertex 401(k) Plan”) in which substantially all of our 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. We may declare discretionary matching contributions to the Vertex 401(k) Plan. We pay matching contributions in the form of cash. For the years ended December 31, 2021, 2020 and 2019, we contributed approximately $21.8 million, $19.2 million and $15.8 million to the plan, respectively.

**N.**Stock-based Compensation Expense

We recognize 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, 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.

F-36

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

The effect of stock-based compensation expense during the three years ended December 31, 2021 was as follows:

			2021						2020						2019
			(in millions)
Stock-based compensation expense by line item:
Cost of sales			$	6.3					$	5.6					$	5.6
Research and development expenses			268.3						262.7						224.6
Selling, general and administrative expenses			166.8						161.2						130.3
Total stock-based compensation expense included in costs and expenses			441.4						429.5						360.5
Income tax effect			(82.9)						(147.0)						(124.2)
Total stock-based compensation included in costs and expenses, net of tax			$	358.5					$	282.5					$	236.3

The stock-based compensation expense by type of award during the three years ended December 31, 2021 was as follows:

			2021						2020						2019
			(in millions)
Stock-based compensation expense by type of award:
Restricted stock units (including PSUs)			$	384.3					$	360.4					$	254.3
Stock options			36.8						59.7						96.7
ESPP share issuances			24.4						13.0						11.2
Stock-based compensation expense related to inventories			(4.1)						(3.6)						(1.7)
Total stock-based compensation expense included in costs and expenses			$	441.4					$	429.5					$	360.5

We capitalize a portion of our stock-based compensation expense to inventories, all of which is attributable to employees who support the manufacturing of our products.

The following table sets forth our unrecognized stock-based compensation expense as of December 31, 2021, by type of award and the weighted-average period over which that expense is expected to be recognized:

			As of December 31, 2021
			Unrecognized Expense						Weighted-average Recognition Period
			(in millions)						(in years)
Type of award:
Restricted stock units (including PSUs)			$	423.3					1.91
Stock options			19.1						1.09
ESPP share issuances			12.6						0.54
Total unrecognized stock-based compensation expense			$	455.0

Stock Options

In each of the three years ended December 31, 2021, we issued stock options to our non-employee directors. In 2019, we issued stock options with service conditions, which were generally the vesting periods of the awards, to our employees. We use 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 our 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 our stock to estimate the fair value of a stock option on the grant date. The

F-37

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

options granted during 2021, 2020 and 2019 had a weighted-average grant-date fair value per share of $65.94, $88.37 and $61.32, respectively.

The fair value of each option granted during 2021, 2020 and 2019 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

			2021						2020						2019
Stock options granted			27,302						22,636						1,520,743
Expected stock price volatility			35.03%						35.87%						36.99%
Risk-free interest rate			0.86%						0.43%						2.32%
Expected term of options (in years)			4.50						4.67						4.27
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 our stock with remaining terms of greater than one year that are regularly traded in the market.

• Risk-free interest rate: We base 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. We use historical data to estimate employee exercise and post-vest termination behavior. We believe that all groups of employees exhibit similar exercise and post-vest termination behavior and therefore do 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 we have not historically paid, and do not intend for the foreseeable future to pay, a dividend.

Restricted Stock Units and Performance-based Restricted Stock Units

We award restricted stock units with service conditions, which are generally the vesting periods of the awards.

We grant 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.

F-38

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Employee Stock Purchase Plan

The weighted-average fair value of each purchase right granted during 2021, 2020 and 2019 was $51.71, $65.88 and $47.79, respectively. The following table reflects the weighted-average assumptions used in the Black-Scholes option pricing model for 2021, 2020 and 2019:

			2021						2020						2019
Expected stock price volatility			34.06%						37.70%						33.43%
Risk-free interest rate			0.05%						0.11%						2.08%
Expected term (in years)			0.69						0.71						0.74
Expected annual dividends			—						—						—

The weighted-average assumptions used in our Black-Scholes option pricing model were determined utilizing calculations similar to those described under Stock Options above.

**O.**Income Taxes

We are subject to U.S. federal, state, and foreign income taxes. The components of income before provision for income taxes during the three years ended December 31, 2021, consisted of the following:

			2021						2020						2019
			(in millions)
United States			$	2,030.7					$	2,885.4					$	1,263.4
Foreign			699.7						231.5						131.5
Income before provision for income taxes			$	2,730.4					$	3,116.9					$	1,394.9

The components of the provision for income taxes during the three years ended December 31, 2021, consisted of the following:

			2021						2020						2019
			(in millions)
Current taxes:
Federal			$	374.9					$	71.4					$	—
Foreign			141.5						37.6						37.2
State			26.5						18.9						13.5
Total current taxes			542.9						127.9						50.7
Deferred taxes:
Federal			(36.9)						510.2						184.3
Foreign			(98.4)						(239.6)						(24.8)
State			(19.3)						6.7						7.9
Total deferred taxes			(154.6)						277.3						167.4
Provision for income taxes			$	388.3					$	405.2					$	218.1

F-39

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

A reconciliation between the U.S. federal statutory rate of 21% and our effective tax rate is as follows:

			2021						2020						2019
Federal statutory tax rate			21.0		%				21.0		%				21.0		%
State taxes, net of federal benefit			0.8		%				0.6		%				0.6		%
Foreign income tax rate differential			(0.3)		%				0.2		%				0.4		%
Tax credits			(6.4)		%				(1.8)		%				(4.3)		%
Tax rate change			(3.5)		%				(1.2)		%				—		%
Stock compensation (benefit), shortfalls and cancellations			0.0		%				(2.3)		%				(4.0)		%
Long-term intercompany receivable write-off			—		%				(1.7)		%				—		%
Uncertain tax positions			2.0		%				1.3		%				1.0		%
Inter-entity transfer of intellectual property rights			—		%				(6.7)		%				—		%
U.S. tax on foreign earnings, net of credits			0.7		%				2.7		%				—		%
Other			(0.1)		%				0.9		%				0.9		%
Effective tax rate			14.2		%				13.0		%				15.6		%

Our 14% effective tax rate for 2021 was lower than the U.S. statutory rate primarily due to discrete tax benefits of (i) $94.8 million associated with an increase in the United Kingdom’s (“U.K.”) corporate tax rate from 19% to 25%, which was enacted in June 2021 and will become effective in April 2023, and (ii) $44.1 million resulting from an R&D tax credit study that we completed in 2021.

Our 13% effective tax rate for 2020 was lower than the U.S. statutory rate primarily due to (i) a discrete tax benefit of $209.0 million associated with an intra-entity transfer of intellectual property rights to our U.K. entity, (ii) a discrete tax benefit associated with the write-off of a long-term intercompany receivable, (iii) a discrete tax benefit associated with an increase in the U.K.’s corporate tax rate from 17% to 19%, which was enacted and became effective in July 2020, and (iv) excess tax benefits related to stock-based compensation. The impact of these items was partially offset by U.S. income tax on foreign earnings.

Our 16% effective tax rate 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.

F-40

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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,
			2021						2020
			(in millions)
Deferred tax assets:
Net operating loss			$	106.6					$	140.6
Tax credit carryforwards			202.4						406.1
Intangible assets			802.8						507.5
Stock-based compensation			94.6						89.2
Accrued expenses			48.6						47.3
Finance lease liabilities			103.4						118.7
Operating lease assets			81.1						65.0
Other			41.7						22.1
Gross deferred tax assets			1,481.2						1,396.5
Valuation allowance			(220.4)						(213.8)
Total deferred tax assets			1,260.8						1,182.7
Deferred tax liabilities:
Property and equipment			(118.2)						(117.0)
Acquired intangibles			(87.0)						(87.0)
Operating lease liabilities			(64.8)						(63.3)
Other			(56.3)						(32.6)
Total deferred tax liabilities			(326.3)						(299.9)
Net deferred tax assets			$	934.5					$	882.8

On a periodic basis, we reassess the valuation allowance on our deferred income tax assets, weighing positive and negative evidence to assess the recoverability of our deferred tax assets. As of December 31, 2021, we maintained a valuation allowance of $220.4 million related primarily to U.S. state tax attributes.

As of December 31, 2021, we had net operating loss (“NOL”) carryforwards of $29.8 million and tax credit carryforwards of $4.1 million, which are subject to annual utilization limitations for U.S. federal income tax purposes. As of December 31, 2021, we had NOL carryforwards of $616.3 million and tax credit carryforwards of $237.2 million for U.S. state income tax purposes. In 2030, $26.0 million of our U.S. federal NOLs will begin to expire, while the remaining portion may be carried forward indefinitely. The state NOL and tax credit carryforwards expire at various dates through 2041 and may be used to offset future state income tax liabilities. As of December 31, 2021, we had foreign NOL carryforwards of $292.5 million and foreign tax credit carryforwards of $22.2 million. The foreign NOL carryforwards may be carried forward indefinitely, with the exception of $44.3 million that will expire at various dates through 2040. The foreign tax credit carryforwards will begin to expire in 2024.

F-41

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Unrecognized tax benefits during the three years ended December 31, 2021 were as follows:

			2021						2020						2019
			(in millions)
Balance at beginning of the period			$	86.6					$	33.9					$	19.5
Increases related to current period tax positions			42.0						26.7						14.5
Increases related to prior period tax positions			19.9						26.7						0.6
Decreases related to prior period tax positions			—						—						(0.2)
Settlement with tax authorities			—						—						(0.5)
Statute of limitations expiration			(1.3)						(0.7)						—
Balance at end of period			$	147.2					$	86.6					$	33.9

As of December 31, 2021, we have classified $14.4 million and $132.8 million of our unrecognized tax benefits as credits to “Deferred tax assets” and “Accrued expenses,” respectively, on our consolidated balance sheet.

We have reviewed the tax positions taken, or to be taken, in our 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 our consolidated financial statements. As of December 31, 2021, 2020 and 2019, we had $129.5 million, $75.8 million and $33.9 million, respectively, of net unrecognized tax benefits, which would affect our tax rate if recognized. We do not expect that our unrecognized tax benefits will materially change within the next twelve months. We did not recognize any material interest or penalties related to uncertain tax positions during the three years ended December 31, 2021.

As of December 31, 2021, foreign earnings have been retained by our foreign subsidiaries for indefinite reinvestment. Upon repatriation of those earnings, in the form of dividends or otherwise, we could be subject to U.S. federal withholding taxes payable to various foreign countries and income taxes in certain states. We are permanently reinvested for book/tax basis differences. These permanently reinvested basis differences could reverse if we sell our foreign subsidiaries or various other events, none of which were considered probable as of December 31, 2021. The tax liabilities described above would not be material to our consolidated financial statements.

We file U.S. federal income tax returns and income tax returns in various state, local and foreign jurisdictions. We have various income tax audits ongoing at any time throughout the world. Except for jurisdictions where we have NOLs or tax credit carryforwards, we are no longer subject to any tax assessment from tax authorities for years prior to 2018.

**P.**Commitments and Contingencies

Revolving Credit Facilities

Vertex 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 we have 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 our option, at either a base rate or a Eurocurrency rate, in each case plus an applicable margin based on our consolidated leverage ratio (the ratio of our total consolidated funded indebtedness to our consolidated EBITDA for the most recently completed four fiscal quarter period).

In September 2019, Vertex 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. Under the 2019 Credit Agreement, the applicable margins on base rate loans range from 0.125% to 0.500% and the 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, Vertex and certain of its subsidiaries entered into a $2.0 billion unsecured revolving facility (the

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

“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 letters of credit.

Subject to satisfaction of certain conditions, we 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 our 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, 2021, we were 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 are recorded over the term of the Credit Agreements and were not material to our financial statements.

Guaranties and Indemnifications

As permitted under Massachusetts law, our Articles of Organization and By-laws provide that we will indemnify certain of our 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 we could be required to make under these indemnification provisions is unlimited. However, we have purchased directors’ and officers’ liability insurance policies that could reduce our monetary exposure and enable us to recover a portion of any future amounts paid. No indemnification claims currently are outstanding, and we believe the estimated fair value of these indemnification arrangements is minimal.

We customarily agree in the ordinary course of our business to indemnification provisions in agreements with clinical trial investigators and sites in our drug development programs, sponsored research agreements with academic and not-for-profit institutions, various comparable agreements involving parties performing services for us, and our real estate leases. We also customarily agree to certain indemnification provisions in our drug discovery, development and commercialization collaboration agreements. With respect to our 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 our contractual obligations arising out of the research or clinical testing of our compounds or product 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 us, to violations of law by us or to certain breaches of our contractual obligations. The indemnification provisions appearing in our collaboration agreements are similar to those for the other agreements discussed above, but in addition provide some limited indemnification for our 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 we believe 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 we could be required to make under these provisions is generally unlimited. We have purchased insurance policies covering personal injury, property damage and general liability that reduce our exposure for indemnification and would enable us in many cases to recover all or a portion of any future amounts paid. We have never paid any material amounts to defend lawsuits or settle claims related to these indemnification provisions. Accordingly, we believe the estimated fair value of these indemnification arrangements is minimal.

Other Contingencies

We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue a reserve for contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. Other than our contingent consideration liabilities discussed in Note D, “Fair Value Measurements,” there were no material contingent liabilities accrued as of December 31, 2021 or 2020.

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Notes to Consolidated Financial Statements (Continued)

**Q.**Segment Information

Segment reporting is prepared on the same basis that our chief executive officer, who is our chief operating decision maker, manages the business, makes operating decisions and assesses performance. We operate 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:

			2021						2020						2019
			(in millions)
TRIKAFTA/KAFTRIO			$	5,697.2					$	3,863.8					$	420.1
SYMDEKO/SYMKEVI			420.4						628.6						1,417.7
ORKAMBI			771.6						907.5						1,331.9
KALYDECO			684.2						802.9						991.0
Total product revenues, net			$	7,573.4					$	6,202.8					$	4,160.7

Product Revenues by Geographic Location

Net product revenues are attributed to countries based on the location of the customer and consisted of the following:

			2021						2020						2019
			(in millions)
United States			$	5,287.3					$	4,826.4					$	3,060.3
Outside of the United States
Europe			1,972.9						1,126.5						885.9
Other			313.2						249.9						214.5
Total product revenues outside of the United States			2,286.1						1,376.4						1,100.4
Total product revenues, net			$	7,573.4					$	6,202.8					$	4,160.7

Significant Customers

Gross product revenues and accounts receivable from each of our 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,
			2021						2020						2019						2021						2020
McKesson Corporation			22		%				20		%				17		%				21		%				14		%
Accredo/Curascript			12		%				15		%				14		%				10		%				10		%
Walgreen Co.			10		%				14		%				15		%				<10 %						10		%
Lloyds Pharmacy*			<10%						<10%						<10%						15		%				19		%
*A wholly-owned subsidiary of McKesson Corporation in the U.K.

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Notes to Consolidated Financial Statements (Continued)

Long-lived Assets by Location

Long-lived assets by location consisted of the following:

			As of December 31,
			2021						2020
			(in millions)
United States			$	1,348.1					$	1,207.7
Outside of the United States
United Kingdom			60.9						61.5
Other			15.4						14.9
Total long-lived assets outside of the United States			76.3						76.4
Total long-lived assets			$	1,424.4					$	1,284.1

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