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 10, 2023			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 10, 2023
/s/ Charles F. Wagner, Jr.
Charles F. Wagner, Jr.												Executive Vice President and Chief Financial Officer (Principal Financial Officer)															February 10, 2023
/s/ Kristen C. Ambrose
Kristen C. Ambrose												Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)															February 10, 2023
/s/Jeffrey M. Leiden
Jeffrey M. Leiden												Executive Chairman															February 10, 2023
/s/ Sangeeta N. Bhatia
Sangeeta N. Bhatia												Director															February 10, 2023
/s/ Lloyd Carney
Lloyd Carney												Director															February 10, 2023
/s/ Alan Garber
Alan Garber												Director															February 10, 2023
/s/ Terrence C. Kearney
Terrence C. Kearney												Director															February 10, 2023
/s/ Yuchun Lee
Yuchun Lee												Director															February 10, 2023
/s/ Margaret G. McGlynn
Margaret G. McGlynn												Director															February 10, 2023
/s/ Diana McKenzie
Diana McKenzie												Director															February 10, 2023
/s/ Bruce I. Sachs
Bruce I. Sachs												Director															February 10, 2023
/s/ Suketu Upadhyay
Suketu Upadhyay												Director															February 10, 2023

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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 10, 2023, 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, and 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. In addition, we involved our government pricing subject matter professionals to assist in evaluating management’s methodology and calculations used in the measurement of certain estimated rebates. 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 10, 2023

F-2

VERTEX PHARMACEUTICALS INCORPORATED

Consolidated Statements of Operations

(in millions, except per share amounts)

			Year Ended December 31,
			2022						2021						2020
Revenues:
Product revenues, net			$	8,930.7					$	7,573.4					$	6,202.8
Other revenues			—						1.0						2.9
Total revenues			8,930.7						7,574.4						6,205.7
Costs and expenses:
Cost of sales			1,080.3						904.2						736.3
Research and development expenses			2,540.3						1,937.8						1,644.9
Acquired in-process research and development expenses			115.5						1,113.3						184.6
Selling, general and administrative expenses			944.7						840.1						770.5
Change in fair value of contingent consideration			(57.5)						(3.1)						13.1
Total costs and expenses			4,623.3						4,792.3						3,349.4
Income from operations			4,307.4						2,782.1						2,856.3
Interest income			144.6						4.9						22.2
Interest expense			(54.8)						(61.5)						(58.2)
Other (expense) income, net			(164.8)						4.9						296.6
Income before provision for income taxes			4,232.4						2,730.4						3,116.9
Provision for income taxes			910.4						388.3						405.2
Net income			$	3,322.0					$	2,342.1					$	2,711.7
Net income per common share:
Basic			$	12.97					$	9.09					$	10.44
Diluted			$	12.82					$	9.01					$	10.29
Shares used in per share calculations:
Basic			256.1						257.7						259.8
Diluted			259.1						259.9						263.4

Please refer to Note A, “Nature of Business and Accounting Policies,” for an explanation of amounts reclassified from “Research and development expenses” to “Acquired in-process research and development expenses” for 2021 and 2020.

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,
			2022						2021						2020
Net income			$	3,322.0					$	2,342.1					$	2,711.7
Other comprehensive (loss) income:
Unrealized holding gains (losses) on marketable securities, net			0.4						(0.8)						(0.2)
Unrealized (losses) gains on foreign currency forward contracts, net of tax of $1.0, $(21.8) and $14.3, respectively			(4.1)						83.2						(51.6)
Foreign currency translation adjustment			(11.4)						2.0						(14.7)
Total other comprehensive (loss) income			(15.1)						84.4						(66.5)
Comprehensive income			$	3,306.9					$	2,426.5					$	2,645.2

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,
			2022						2021
Assets
Current assets:
Cash and cash equivalents			$	10,504.0					$	6,795.0
Marketable securities			274.5						729.9
Accounts receivable, net			1,442.2						1,136.8
Inventories			460.6						353.1
Prepaid expenses and other current assets			553.5						545.8
Total current assets			13,234.8						9,560.6
Property and equipment, net			1,108.4						1,094.1
Goodwill			1,088.0						1,002.2
Intangible assets			603.6						400.0
Deferred tax assets			1,246.9						934.5
Operating lease assets			347.4						330.3
Other assets			521.8						110.8
Total assets			$	18,150.9					$	13,432.5
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable			$	303.9					$	195.0
Accrued expenses			2,126.7						1,678.6
Other current liabilities			311.5						268.4
Total current liabilities			2,742.1						2,142.0
Long-term finance lease liabilities			430.8						509.8
Long-term operating lease liabilities			379.5						377.4
Other long-term liabilities			685.8						303.3
Total liabilities			4,238.2						3,332.5
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, 257,011,628 and 254,479,046 shares issued and outstanding, respectively			2.6						2.5
Additional paid-in capital			7,386.5						6,880.8
Accumulated other comprehensive income			0.8						15.9
Retained earnings			6,522.8						3,200.8
Total shareholders’ equity			13,912.7						10,100.0
Total liabilities and shareholders’ equity			$	18,150.9					$	13,432.5

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, 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
Other comprehensive loss, net of tax			—						—						—						(15.1)						—						(15.1)
Net income			—						—						—						—						3,322.0						3,322.0
Common stock withheld for employee tax obligations			(0.7)						(0.0)						(172.0)						—						—						(172.0)
Issuance of common stock under benefit plans			3.2						0.1						187.3						—						—						187.4
Stock-based compensation expense			—						—						490.4						—						—						490.4
Balance, December 31, 2022			257.0						$	2.6					$	7,386.5					$	0.8					$	6,522.8					$	13,912.7

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,
			2022						2021						2020
Cash flows from operating activities:
Net income			$	3,322.0					$	2,342.1					$	2,711.7
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense			491.3						441.4						429.5
Depreciation expense			148.3						125.6						109.5
Deferred income taxes			(275.9)						(154.6)						277.3
Losses (gains) on equity securities			149.1						(17.1)						(311.9)
(Decrease) increase in fair value of contingent consideration			(57.5)						(3.1)						13.1
Other non-cash items, net			11.8						14.4						78.7
Changes in operating assets and liabilities:
Accounts receivable, net			(358.6)						(274.7)						(223.4)
Inventories			(136.4)						(92.8)						(132.0)
Prepaid expenses and other assets			(326.4)						(91.8)						(297.6)
Accounts payable			120.8						31.9						51.3
Accrued expenses			542.5						305.4						122.2
Other liabilities			498.9						16.8						425.1
Net cash provided by operating activities			4,129.9						2,643.5						3,253.5
Cash flows from investing activities:
Payment to acquire ViaCyte, net of cash acquired			(295.9)						—						—
Purchases of available-for-sale debt securities			(692.7)						(528.2)						(431.4)
Sales and maturities of available-for-sale debt securities			920.0						499.3						372.3
Sale of equity securities			—						—						437.6
Purchases of property and equipment			(204.7)						(235.0)						(259.8)
Investment in equity securities and notes receivable			(47.8)						(77.0)						(19.3)
Net cash (used in) provided by investing activities			(321.1)						(340.9)						99.4
Cash flows from financing activities:
Issuances of common stock under benefit plans			186.3						102.0						264.9
Repurchases of common stock			—						(1,425.4)						(539.1)
Payments in connection with common stock withheld for employee tax obligations			(172.0)						(135.9)						(200.3)
Payments on finance leases			(85.5)						(47.0)						(42.3)
Proceeds from finance leases			—						22.6						13.3
Other financing activities			3.5						5.7						(1.8)
Net cash used in financing activities			(67.7)						(1,478.0)						(505.3)
Effect of changes in exchange rates on cash			(29.2)						(13.4)						20.6
Net increase in cash, cash equivalents and restricted cash			3,711.9						811.2						2,868.2
Cash, cash equivalents and restricted cash—beginning of period			6,800.1						5,988.9						3,120.7
Cash, cash equivalents and restricted cash—end of period			$	10,512.0					$	6,800.1					$	5,988.9
Supplemental disclosure of cash flow information:
Cash paid for interest			$	52.3					$	56.3					$	54.5
Cash paid for income taxes			$	1,057.8					$	476.3					$	191.8

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 a 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 four approved medicines that treat the underlying cause of cystic fibrosis (“CF”), a life-threatening genetic disease, and we continue to focus on developing additional treatments for CF. Beyond CF, we have a pipeline that includes mid- and late-stage clinical programs in sickle cell disease, beta thalassemia, acute and neuropathic pain, APOL1-mediated kidney disease, type 1 diabetes, and alpha-1 antitrypsin deficiency, and earlier-stage programs in diseases such as muscular dystrophies.

Our marketed CF medicines are TRIKAFTA/KAFTRIO (elexacaftor/tezacaftor/ivacaftor and ivacaftor), SYMDEKO/SYMKEVI (tezacaftor/ivacaftor and ivacaftor), ORKAMBI (lumacaftor/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 R, “Segment Information,” for enterprise-wide disclosures regarding our revenues, major customers and long-lived assets by geographic area.

Beginning in 2022, we separately classify upfront, contingent milestone, and other payments pursuant to our business development transactions, including collaborations, licenses of third-party technologies, and asset acquisitions as “Acquired in-process research and development expenses” in our consolidated statements of operations in cases where such acquired assets do not have an alternative future use. To conform prior periods to current presentation, we reclassified $1.1 billion and $184.6 million from “Research and development expenses” to “Acquired in-process research and development expenses” for 2021 and 2020, respectively. Please refer to Note B, “Acquired In-Process Research and Development and Other Arrangements,” for further information on these transactions.

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 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 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

F-8

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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 (the “U.S.”), which account for the largest portion of our total revenues. We make international sales primarily to specialty distributors and retail pharmacy 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 pay 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 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.

F-9

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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

Contract Liabilities

We had contract liabilities of $159.6 million and $171.7 million as of December 31, 2022 and 2021, 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 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, 2022, 2021 and 2020, we recorded $171.7 million, $191.5 million and $62.3 million, respectively, of revenues that were recorded as contract liabilities at the beginning of the year.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentration of credit risk consist principally of cash equivalents 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. 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, 2022. Please refer to Note R, “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, 2022, 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 with current maturities of less than one year as current assets on our consolidated balance sheets. The remainder of our marketable securities are classified as long-term assets within “Other assets” on our consolidated balance sheets. The fair value of these securities is based on quoted prices for identical or similar assets.

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

F-10

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

For available-for-sale debt securities in unrealized loss positions, we are required to assess whether to record an allowance for credit losses using an expected loss model. 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.

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

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, 2022. 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 O, “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; intangible asset impairment charges; 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 delivered or the related services are performed.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Acquired In-process Research and Development Expenses

Our research and development activities include upfront, contingent milestone, and other payments pursuant to our business development transactions, including collaborations, licenses of third-party technologies, and asset acquisitions. 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 “Acquired in-process research and development expenses” in our consolidated statements of operations in the period in which it is acquired.

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
Laboratory equipment, other equipment and furniture						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 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.

Cloud Computing Service Contracts

We classify costs incurred to implement cloud computing service contracts as “Other assets” on our consolidated balance sheets. Amortization is recorded over the noncancellable term of the cloud computing service contract, plus any optional renewal periods that are reasonably certain to be exercised.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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 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 for our real estate leases 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 sheets.

Income Taxes

Our provision for income taxes is accounted for under the asset and liability method and includes federal, state, local and foreign taxes.

Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and the income tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. 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

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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 agreement pursuant to which we license technologies owned by a third party to determine whether or not we have a variable interest via the license agreement with the third party and if the variable interest is a variable interest in the third party 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 a license agreement, it 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, 2022 and 2021, 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 third-party license agreements and acquisitions incorporate significant assumptions.

The fair value of our in-process research and development assets is determined using either the multi-period excess earnings or the relief from royalty methods of the income approach. Each method requires us to make: (i) assumptions regarding the probability of obtaining marketing approval for a product candidate; (ii) estimates of future cash flows from potential product sales with respect to a product candidate; and (iii) appropriate discount and tax rates. The multi-period excess earnings method also requires us to estimate the timing of and the expected costs to develop and commercialize a product candidate. The relief from royalty method also requires us to estimate the after-tax royalty savings expected from ownership of a product candidate that we acquired.

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 attributable to rare diseases and our knowledge of the programs and viability of the programs. 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 to “Change in fair value of contingent consideration” in our consolidated statements of operations. We record our contingent consideration liabilities at fair value on our consolidated balance sheets as “Other current liabilities” or “Other long-term liabilities” depending on when we estimate we will pay them. Please refer to Note E, “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 sheets 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.

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.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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” 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 contracts are recognized in “Other (expense) income, net” in our consolidated statements 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 our available-for-sale debt 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 our available-for-sale debt 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. Changes resulting from foreign currency translation are included in “Accumulated other comprehensive income.” Net foreign currency exchange transaction losses, which are included in “Other (expense) income, net” on our consolidated statements of operations, were $15.1 million, $13.9 million and $16.1 million for 2022, 2021 and 2020, 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 statements 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).

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Recently Adopted and Issued Accounting Standards

We have not been required to adopt any accounting standards that had a significant impact on our consolidated financial statements in the three years ended December 31, 2022. We do not expect any recently issued accounting standards to have a significant impact on our consolidated financial statements.

**B.**Acquired In-Process Research and Development and Other Arrangements

We have entered into numerous agreements with third parties to collaborate on research, development and commercialization programs, license technologies, or acquire assets. Our “Acquired in-process research and development expenses” included $115.5 million, $1.1 billion and $184.6 million in 2022, 2021 and 2020, respectively, related to upfront, contingent milestone, or other payments pursuant to our business development transactions, including collaborations, licenses of third-party technologies, and asset acquisitions that qualify as in-process research and development.

In-license Agreements

We have entered into several in-license agreements 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. 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 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 elected to exclusively license three targets, including CF, pursuant to the CRISPR Agreement. 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 exagamglogene autotemcel (“exa-cel”), formerly known as 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.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Pursuant to the A&R JDCA, we lead global development, manufacturing and commercialization of exa-cel, with support from CRISPR. Subject to the terms and conditions of the A&R JDCA, we conduct all research, development, manufacturing and commercialization activities relating to the product candidates and products under the A&R JDCA (including exa-cel) 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 “Acquired in-process 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 exa-cel 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, the net profits and net losses incurred with respect to exa-cel pursuant to the A&R JDCA began to be allocated 60% to us and 40% to CRISPR, subject to certain adjustments, 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 “Total costs and expenses” within our consolidated statements of operations. During the three years ended December 31, 2022, we recognized the following amounts in total, not including amounts recorded to “Acquired in-process research and development expenses,” related to these agreements:

			2022						2021						2020
			(in millions)
Total expenses incurred under the Original CTX001 JDCA and A&R JDCA			$	365.8					$	230.4					$	101.2
Vertex’s share recognized in “Total costs and expenses” in our consolidated statements of operations			251.1						129.0						50.6

Entrada Therapeutics, Inc.

In December 2022, we announced a strategic collaboration and license agreement (the “Entrada Agreement”) with Entrada Therapeutics, Inc. (“Entrada”) focused on discovering and developing intracellular Endosomal Escape Vehicle (EEV) therapeutics for myotonic dystrophy type 1 (“DM1”). In February 2023, the Entrada Agreement closed upon, among other things, the satisfaction of customary closing conditions and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, resulting in no financial statement impact during 2022. The collaboration includes Entrada’s program for DM1, ENTR-701, which is in late preclinical development. Upon closing, we made an upfront payment of approximately $224.0 million to Entrada, and purchased approximately $26.0 million of Entrada’s common stock in connection with the Entrada Agreements. Entrada is eligible to receive up to an additional $485.0 million in research, development, regulatory and commercial milestones for any products that may result from the Entrada Agreement, as well as royalties on net product sales. We will account for the Entrada Agreement in the first quarter of 2023.

Verve Therapeutics, Inc.

In 2022, we entered into a strategic collaboration and license agreement with Verve Therapeutics, Inc. (“Verve”) focused on discovering and developing an in vivo gene-editing program for a liver disease. Under the terms of the agreement, we made a $25.0 million upfront payment to Verve and also purchased $35.0 million of Verve’s common stock in connection with the agreement. Verve is also eligible to receive up to $66.0 million in success payments, up to an additional $340.0 million in development, regulatory and commercial milestones for any products that may result from the collaboration agreement, and royalties on net product sales. We determined that substantially all the fair value of the collaboration agreement was attributable to in-process research and development and no substantive processes were acquired that would constitute a business. We concluded that there is no alternative future use for the acquired in-process research and development and recorded the upfront payment to “Acquired in-process research and development expenses.” The investment in Verve’s common stock is recorded at fair value on our consolidated balance sheet within “Marketable securities.”

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

ApoLo1 Bio, LLC

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 “Acquired in-process research and development expenses” because we concluded that we did not have any alternative future use for the acquired in-process research and development.

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 encoding cystic fibrosis transmembrane conductance regulator 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 “Acquired in-process research and development expenses.”

Asset Acquisition

Catalyst Biosciences, Inc.

In 2022, pursuant to an asset purchase agreement, we acquired from Catalyst Biosciences, Inc.’s a portfolio of protease medicines that target the complement system and related intellectual property, including CB 2782-PEG, which is a pre-clinical complement component 3 degrader program for geographic atrophy in dry age-related macular degeneration. We determined that substantially all the fair value acquired is concentrated in the CB-2782 PEG in-process research and development assets, which did not constitute a business, and for which we determined there was no alternative future use. As a result, we recorded our $60.0 million upfront payment to “Acquired in-process research and development expenses.”

Additional In-License Agreements and Other Arrangements

In addition to the agreements described above, we recorded upfront, option and milestone payments totaling $30.5 million in 2022, $138.3 million in 2021 and $109.6 million in 2020 to “Acquired in-process 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, and $40.0 million to Skyhawk Therapeutics, Inc. (“Skyhawk”) in 2020.

For Mammoth, Arbor, Skyhawk, and several other in-license agreements that we entered into prior to 2022 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 associated with the agreements and recorded the upfront payments for these agreements to “Acquired in-process research and development expenses.” Please refer to Note E, “Fair Value Measurements,” and Note F, “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

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

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.

Cystic Fibrosis Foundation

In 2004, we entered into a collaboration agreement with the Cystic Fibrosis Foundation, as successor in interest to the Cystic Fibrosis Foundation Therapeutics, Inc., to support research and development activities. Pursuant to the collaboration agreement, as amended, we have agreed to pay 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 ivacaftor, lumacaftor and tezacaftor and royalties ranging from low-single digits to mid-single digits on potential net sales of certain compounds first synthesized and/or tested between March 1, 2014 and August 31, 2016, including elexacaftor. We do not have any royalty obligations on compounds first synthesized and tested on or after September 1, 2016. For combination products, such as ORKAMBI, SYMDEKO/SYMKEVI and TRIKAFTA/KAFTRIO, 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.”

**C.**Business Combination

On September 27, 2022, we acquired all outstanding shares of ViaCyte, Inc. (“ViaCyte”), a privately held biotechnology company primarily focused on delivering novel stem cell-derived cell replacement therapies as a functional cure for type 1 diabetes, in exchange for $315.0 million. ViaCyte’s intellectual property and assembled workforce complement our ongoing programs and have the potential to produce therapies for patients with type 1 diabetes. We accounted for the transaction as a business combination, and allocated the purchase price to the following assets acquired and liabilities assumed:

			As of September 27, 2022
			(in millions)
Cash and cash equivalents			$	19.1
Goodwill			85.8
Intangible asset			216.6
Net other liabilities			(6.5)
Total purchase price			$	315.0

The “Goodwill” represents the difference between the fair value of the consideration transferred and the fair value of the assets acquired and liabilities assumed. The goodwill is attributable to (i) the technological expertise in cell therapy of ViaCyte’s assembled workforce, (ii) the potential synergies from combining ViaCyte’s technology with our clinical development capabilities and (iii) the potential future benefits for other therapeutic programs that the acquired technology could be used for, but did not meet the definition of an in-process research and development asset. None of the goodwill is expected to be deductible for income tax purposes.

The “Intangible asset” is an in-process research and development asset of $216.6 million related to ViaCyte’s technology and intellectual property associated with stem cell differentiation and manufacturing. The fair value of the intangible asset was determined through a discounted cash flow analysis using the relief from royalty method, which estimated the cost savings associated with owning an asset instead of paying a royalty to the previous owner. The relief from royalty method utilized Level 3 fair value inputs including (i) estimated future product sales, which were calculated using, among other assumptions, an estimated probability of obtaining marketing approval for the asset, (ii) estimated after-tax royalty savings expected from ownership of the asset, and (iii) an appropriate discount and tax rate.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Our analysis of the fair value of certain assets acquired, including certain tax analyses, related to the ViaCyte business combination was preliminary as of September 30, 2022. In the fourth quarter of 2022, we recorded immaterial measurement period adjustments to goodwill and finalized our analysis of the fair value of assets acquired and liabilities assumed. In 2022, the financial results of ViaCyte did not have a material effect on our consolidated statement of operations.

**D.**Earnings Per Share

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

			2022						2021						2020
			(in millions, except per share amounts)
Net income			$	3,322.0					$	2,342.1					$	2,711.7
Basic weighted-average common shares outstanding			256.1						257.7						259.8
Effect of potentially dilutive securities:
Stock options			1.4						1.1						1.8
Restricted stock units (including PSUs)			1.6						1.1						1.7
Employee stock purchase program			0.0						0.0						0.1
Diluted weighted-average common shares outstanding			259.1						259.9						263.4
Basic net income per common share			$	12.97					$	9.09					$	10.44
Diluted net income per common share			$	12.82					$	9.01					$	10.29

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:

			2022						2021						2020
			(in millions)
Stock options			0.0						0.7						0.3
Unvested restricted stock units (including PSUs)			0.2						0.4						0.3

**E.**Fair Value Measurements

The following fair value hierarchy is used to classify assets and liabilities based on observable inputs and unobservable inputs used 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

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Notes to Consolidated Financial Statements (Continued)

equivalents and marketable securities as described in Note F, “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 statements of operations.

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 $3.1 billion and $3.3 billion of cash as of December 31, 2022 and 2021, respectively):

			As of December 31, 2022																								As of December 31, 2021
									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 positions):
Cash equivalents:
Money market funds			$	5,162.6					$	5,162.6					$	—					$	—					$	3,478.1					$	3,478.1					$	—					$	—
Time deposits			2,000.0						—						2,000.0						—						—						—						—						—
Corporate debt securities			5.8						—						5.8						—						—						—						—						—
Commercial paper			204.5						—						204.5						—						—						—						—						—
Marketable securities:
Corporate equity securities			116.8						88.8						28.0						—						230.9						230.9						—						—
U.S. Treasury securities			—						—						—						—						86.4						86.4						—						—
Government-sponsored enterprise securities			127.1						127.1						—						—						69.0						69.0						—						—
Corporate debt securities			87.0						—						87.0						—						90.9						—						90.9						—
Commercial paper			55.8						—						55.8						—						252.7						—						252.7						—
Prepaid expenses and other current assets:
Foreign currency forward contracts			47.5						—						47.5						—						44.5						—						44.5						—
Other assets:
Foreign currency forward contracts			0.8						—						0.8						—						2.0						—						2.0						—
Total financial assets			$	7,807.9					$	5,378.5					$	2,429.4					$	—					$	4,254.5					$	3,864.4					$	390.1					$	—
Financial instruments carried at fair value (liability positions):
Other current liabilities:
Foreign currency forward contracts			$	(14.3)					$	—					$	(14.3)					$	—					$	(5.6)					$	—					$	(5.6)					$	—
Contingent consideration			(14.6)						—						—						(14.6)						—						—						—						—
Other long-term liabilities:
Foreign currency forward contracts			(0.9)						—						(0.9)						—						(2.7)						—						(2.7)						—
Contingent consideration			(114.4)						—						—						(114.4)						(186.5)						—						—						(186.5)
Total financial liabilities			$	(144.2)					$	—					$	(15.2)					$	(129.0)					$	(194.8)					$	—					$	(8.3)					$	(186.5)

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

Fair Value of Corporate Equity Securities

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 F, “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

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Notes to Consolidated Financial Statements (Continued)

transformative gene-editing therapies to repair mutations that cause Duchenne muscular dystrophy 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 former Exonics equity holders. 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 attributable to rare diseases and our knowledge of the programs and viability of the programs. The discount rates used in the valuation model for contingent payments, which were between 5.1% and 6.0% as of December 31, 2022, 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 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, 2022
			(in millions)
Balance at December 31, 2021			$	186.5
Decrease in fair value of contingent payments			(57.5)
Balance at December 31, 2022			$	129.0

The decrease in fair value of contingent consideration during 2022 was primarily due to a revision to the scope of certain acquired gene-editing programs in the second quarter of 2022.

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Notes to Consolidated Financial Statements (Continued)

**F.**Marketable Securities and Equity Investments

A summary of our cash equivalents and marketable securities, which are recorded at fair value (and do not include $3.1 billion and $3.3 billion of cash as of December 31, 2022 and 2021, respectively), is shown below:

			As of December 31, 2022																								As of December 31, 2021
			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			$	5,162.6					$	—					$	—					$	5,162.6					$	3,478.1					$	—					$	—					$	3,478.1
Time deposits			2,000.0						—						—						2,000.0						—						—						—						—
Corporate debt securities			5.8						—						—						5.8						—						—						—						—
Commercial paper			204.5						—						—						204.5						—						—						—						—
Total cash equivalents			$	7,372.9					$	—					$	—					$	7,372.9					$	3,478.1					$	—					$	—					$	3,478.1
Marketable securities:
U.S. Treasury securities			$	—					$	—					$	—					$	—					$	86.6					$	—					$	(0.2)					$	86.4
Government-sponsored enterprise securities			127.0						0.2						(0.1)						127.1						69.0						—						—						69.0
Corporate debt securities			87.2						—						(0.2)						87.0						91.1						—						(0.2)						90.9
Commercial paper			55.8						—						—						55.8						252.8						—						(0.1)						252.7
Total marketable debt securities			270.0						0.2						(0.3)						269.9						499.5						—						(0.5)						499.0
Corporate equity securities			104.4						30.9						(18.5)						116.8						69.4						167.1						(5.6)						230.9
Total marketable securities			$	374.4					$	31.1					$	(18.8)					$	386.7					$	568.9					$	167.1					$	(6.1)					$	729.9

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

			December 31,
			2022						2021
			(in millions)
Cash and cash equivalents			$	5,372.9					$	3,478.1
Marketable securities			157.7						499.0
Other assets			112.2						—
Total			$	5,642.8					$	3,977.1

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

			December 31,
			2022						2021
			(in millions)
Matures within one year			$	5,530.6					$	3,912.3
Matures after one year through five years			112.2						64.8
Total			$	5,642.8					$	3,977.1

We did not record any allowances for credit losses to adjust the fair value of available-for-sale debt securities in 2022, 2021 or 2020. Additionally, we did not record any realized gains or losses that were material to our consolidated statements of operations in 2022, 2021 or 2020.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

We record changes in the fair value of our investments in corporate equity securities to “Other (expense) income, net” in our consolidated statements of operations. During the three years ended December 31, 2022, our net unrealized (losses) gains on corporate equity securities held at the conclusion of each period were as follows:

			2022						2021						2020
			(in millions)
Net unrealized (losses) gains			$	(149.1)					$	17.1					$	136.2

In 2020, we sold the common stock of publicly traded companies, which were primarily sales of our investment in CRISPR, resulting in the following:

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

In 2022 and 2021, we did not sell any common stock of publicly traded companies.

As of December 31, 2022, the carrying value of our equity investments without readily determinable fair values, which are recorded in “Other assets” on our consolidated balance sheets, was $98.6 million.

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**G.**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, 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
Other comprehensive (loss) income before reclassifications			(11.4)						(3.3)						138.9						124.2
Amounts reclassified from accumulated other comprehensive income (loss)			—						3.7						(143.0)						(139.3)
Net current period other comprehensive (loss) income			(11.4)						0.4						(4.1)						(15.1)
Balance as of December 31, 2022			$	(25.0)					$	(0.1)					$	25.9					$	0.8

**H.**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, 2022, all hedges were

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VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

determined to be highly effective.

We consider the impact of our counterparties’ credit risk on the fair value of the foreign currency forward contracts. As of December 31, 2022 and December 31, 2021, 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,
			2022						2021
Foreign Currency			(in millions)
Euro			$	1,497.7					$	1,364.5
British pound sterling			247.4						287.7
Canadian dollar			216.3						89.9
Australian dollar			174.9						96.3
Swiss Franc			65.2						54.1
Total foreign currency forward contracts			$	2,201.5					$	1,892.5

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 (expense) income, net” in our consolidated statements of operations each period. As of December 31, 2022, the notional amount of our outstanding foreign currency forward contracts where hedge accounting under U.S. GAAP is not applied was $1.0 billion.

During the three years ended December 31, 2022, we recognized the following related to foreign currency forward contracts in our consolidated statements of operations:

			December 31,
			2022						2021						2020
			(in millions)
Designated as hedging instruments - Reclassified from AOCI
Product revenues, net			$	182.5					$	(30.0)					$	(3.7)
Not designated as hedging instruments
Other (expense) income, net			$	(9.9)					$	(18.6)					$	22.1
Total reported in the Consolidated Statements of Operations
Product revenues, net			$	8,930.7					$	7,573.4					$	6,202.8
Other (expense) income, net			$	(164.8)					$	4.9					$	296.6

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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, 2022
Assets												Liabilities
Classification						Fair Value						Classification						Fair Value
(in millions)
Prepaid expenses and other current assets						$	47.5					Other current liabilities						$	(14.3)
Other assets						0.8						Other long-term liabilities						(0.9)
Total assets						$	48.3					Total liabilities						$	(15.2)

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, 2022, 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, “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, 2022
			Gross Amounts Recognized						Gross Amounts Offset						Gross Amounts Presented						Gross Amounts Not Offset						Legal Offset
Foreign currency forward contracts			(in millions)
Total assets			$	48.3					$	—					$	48.3					$	(15.2)					$	33.1
Total liabilities			(15.2)						—						(15.2)						15.2						—

			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						—

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Notes to Consolidated Financial Statements (Continued)

**I.**Inventories

“Inventories” consisted of the following:

			As of December 31,
			2022						2021
			(in millions)
Raw materials			$	38.1					$	42.4
Work-in-process			260.7						224.0
Finished goods			161.8						86.7
Total			$	460.6					$	353.1

**J.**Property and Equipment

“Property and equipment, net” consisted of the following:

			As of December 31,
			2022						2021
			(in millions)
Buildings and improvements			$	903.1					$	892.5
Laboratory equipment, other equipment and furniture			476.5						407.3
Leasehold improvements			410.9						363.5
Computers and software			312.1						293.7
Land			33.1						33.1
Total property and equipment, gross			2,135.7						1,990.1
Less: accumulated depreciation			(1,027.3)						(896.0)
Total property and equipment, net			$	1,108.4					$	1,094.1

We recorded depreciation expense of $148.3 million, $125.6 million and $109.5 million in 2022, 2021 and 2020, respectively, which includes our finance lease amortization.

**K.**Intangible Assets and Goodwill

Intangible Assets

As of December 31, 2022 and 2021, we had $603.6 million and $400.0 million, respectively, of in-process research and development intangible assets classified as “Intangible assets” on our consolidated balance sheets. In 2022, we recorded a $216.6 million in-process research and development intangible asset resulting from our acquisition of ViaCyte, which is described in Note C, “Business Combination,” and recorded a $13.0 million impairment of an in-process research and development intangible asset to “Research and development expenses,” due to a decision to revise the scope of certain acquired gene-editing programs.

Goodwill

As of December 31, 2022 and 2021, we had goodwill of $1.1 billion and $1.0 billion, respectively, on our consolidated balance sheets. During 2022, we recorded goodwill of $85.8 million related to our acquisition of ViaCyte, which is described in Note C, “Business Combination.”

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Notes to Consolidated Financial Statements (Continued)

**L.**Additional Balance Sheet Detail

“Prepaid expenses and other current assets” consisted of the following:

			As of December 31,
			2022						2021
			(in millions)
Tax related prepaid and receivables			$	319.8					$	358.6
Prepaid expenses			111.8						83.5
Fair value of cash flow hedges			47.5						44.5
Other			74.4						59.2
Total			$	553.5					$	545.8

“Accrued expenses” consisted of the following:

			As of December 31,
			2022						2021
			(in millions)
Product revenue accruals			$	1,300.8					$	847.4
Payroll and benefits			246.5						191.3
Research, development and commercial contract costs			198.7						171.6
Royalty payable			215.0						200.4
Tax related accruals			123.3						211.3
Other			42.4						56.6
Total			$	2,126.7					$	1,678.6

“Other current liabilities” consisted of the following:

			As of December 31,
			2022						2021
			(in millions)
Contract liabilities			$	159.6					$	171.7
Finance lease liabilities			40.8						46.9
Operating lease liabilities			48.6						33.3
Other			62.5						16.5
Total			$	311.5					$	268.4

“Other long-term liabilities” consisted of the following:

			As of December 31,
			2022						2021
			(in millions)
Tax related liabilities			$	452.8					$	—
Contingent consideration			114.4						186.5
Other			118.6						116.8
Total			$	685.8					$	303.3

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Notes to Consolidated Financial Statements (Continued)

Cash, Cash Equivalents and Restricted Cash Presented in Consolidated Statements of Cash Flows

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,
			2022						2021						2020						2019
			(in millions)
Cash and cash equivalents			$	10,504.0					$	6,795.0					$	5,988.2					$	3,109.3
Prepaid expenses and other current assets			8.0						5.1						0.7						8.0
Other assets			—						—						—						3.4
Cash, cash equivalents and restricted cash per consolidated statements of cash flows			$	10,512.0					$	6,800.1					$	5,988.9					$	3,120.7

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

Cloud Computing Service Contracts

As of December 31, 2022, “Other assets” included $40.2 million related to costs incurred to implement cloud computing service contracts. The amounts associated with cloud computing service contracts were not material to either our consolidated balance sheet as of December 31, 2021 or our consolidated statements of operations for 2022, 2021 and 2020.

**M.**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 an outstanding finance lease for 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 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 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.

Jeffrey Leiden Center for Cell and Genetic Therapies

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 for a term of 16 years. Base rent payments commenced in 2021 and will

F-30

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

continue through November 2036. We utilize the initial period as our lease term. We have an option to extend the lease term for up to two additional ten-year periods.

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.

Aggregate Lease Information

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

			2022						2021						2020
			(in millions)
Operating lease cost			$	35.3					$	33.9					$	23.1
Finance lease cost
Amortization of leased assets			51.0						51.9						51.2
Interest on lease liabilities			43.5						47.4						50.2
Variable lease cost			39.8						33.6						30.8
Sublease income			(2.7)						(0.4)						(4.0)
Net lease cost			$	166.9					$	166.4					$	151.3

Our variable lease cost during 2022, 2021 and 2020 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,
			2022						2021
			(in millions)
Finance leases
Property and equipment, net			$	315.5					$	400.1
Total finance lease assets			$	315.5					$	400.1
Other current liabilities			$	40.8					$	46.9
Long-term finance lease liabilities			430.8						509.8
Total finance lease liabilities			$	471.6					$	556.7
Operating leases
Operating lease assets			$	347.4					$	330.3
Total operating lease assets			$	347.4					$	330.3
Other current liabilities			$	48.6					$	33.3
Long-term operating lease liabilities			379.5						377.4
Total operating lease liabilities			$	428.1					$	410.7

F-31

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Maturities of our finance and operating lease liabilities as of December 31, 2022 were as follows:

Year						Finance Leases						Operating Leases						Total
						(in millions)
2023						$	76.0					$	58.4					$	134.4
2024						88.7						44.3						133.0
2025						89.0						40.2						129.2
2026						89.3						39.4						128.7
2027						89.7						35.3						125.0
Thereafter						233.6						273.7						507.3
Total lease payments						666.3						491.3						1,157.6
Less: amount representing interest						(194.7)						(63.2)						(257.9)
Present value of lease liabilities						$	471.6					$	428.1					$	899.7

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

			As of December 31,
			2022						2021
Weighted-average remaining lease term (in years)
Finance leases			10.60						10.73
Operating leases			11.57						12.81
Weighted-average discount rate
Finance leases			8.36		%				8.11		%
Operating leases			2.46		%				2.19		%

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

			2022						2021						2020
			(in millions)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases			$	50.8					$	21.5					$	16.3
Operating cash flows from finance leases			$	42.5					$	46.2					$	48.9
Financing cash flows from finance leases			$	85.5					$	47.0					$	42.3
Right-of-use assets obtained in exchange for lease obligations
Operating leases			$	58.6					$	36.3					$	293.6
Finance leases			$	—					$	—					$	33.1

F-32

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**N.**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, 2022 and 2021, we had no shares of preferred stock issued or outstanding.

Share Repurchase Programs

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

In November 2020, our Board of Directors approved a share repurchase program (the “2020 Share Repurchase Program”), pursuant to which we repurchased $500.0 million of our common stock in 2020 and 2021. In 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 share repurchase program (the “2021 Share Repurchase Program”), pursuant to which we were authorized to repurchase up to $1.5 billion of our common stock by December 31, 2022. In 2021, we repurchased 5.3 million shares of our common stock under the 2021 Share Repurchase Program for an aggregate of $1.0 billion. On December 31, 2022, the 2021 Share Repurchase Program expired with $499.7 million of the authorization remaining.

In February 2023, our Board of Directors approved a share repurchase program (the “2023 Share Repurchase Program”), pursuant to which we are authorized to repurchase up to $3.0 billion of our common stock. The 2023 Share Repurchase Program does not have an expiration date and can be discontinued at any time. We expect to fund repurchases of our common stock through a combination of cash on hand and cash generated by operations.

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, 2022
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						6,553						19,695
2006 Stock and Option Plan						Employees, Non-employee Directors and Consultants						NSO, RS and RSU						114						—
												Total						6,667						19,695

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, 2022, 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 2022, our shareholders approved an increase in the number of shares authorized for issuance pursuant to the 2013 Stock and Option Plan of 13.5 million shares.

In each of the three years ended December 31, 2022, we issued stock options to our non-employee directors. The grant date for our stock options was the date the award was approved by our Board of Directors or the date new directors were 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, 2022:

			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, 2021			3,611						$	141.76
Granted			20						$	276.17
Exercised			(1,087)						$	133.50
Forfeited			(17)						$	181.49
Expired			—						$	—
Outstanding at December 31, 2022			2,527						$	146.11					4.67						$	355.6
Exercisable at December 31, 2022			2,446						$	144.94					4.61						$	347.1

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 2022, which was $286.86 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 2022, 2021 and 2020 was $157.2 million, $43.0 million and $255.0 million, respectively. The total cash we received as a result of employee stock option exercises during 2022, 2021 and 2020 was $144.6 million, $64.2 million and $228.2 million, respectively.

The following table summarizes information about stock options outstanding and exercisable as of December 31, 2022:

						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)
$45.11–$100.00						689						3.13						$	86.05					689						$	86.05
$100.01–$150.00						286						2.58						$	123.17					286						$	123.17
$150.01–$200.00						1,482						5.61						$	173.26					1,401						$	172.78
$200.01–$286.27						70						8.33						$	256.44					70						$	256.44
Total						2,527						4.67						$	146.11					2,446						$	144.94

Restricted Stock Units (excluding PSUs) and Restricted Stock

The following table summarizes our restricted stock unit activity during the year ended December 31, 2022:

			Restricted Stock Units (excluding PSUs)
			Number of Shares						Weighted-average Grant-date Fair Value
			(in thousands)						(per share)
Unvested at December 31, 2021			2,909						$	213.17
Granted			1,710						$	258.39
Vested			(1,445)						$	209.08
Cancelled			(261)						$	228.88
Unvested at December 31, 2022			2,913						$	240.54

The total fair value of restricted stock units and restricted stock that vested during 2022, 2021 and 2020 (measured based on the market price of our common stock on the date of vesting) was $372.5 million, $281.1 million and $391.7 million, respectively.

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, 2022:

			Performance-Based RSU
			Number of Units						Weighted-average Grant-date Fair Value
			(in thousands)						(per share)
Unvested at December 31, 2021 (1)			1,078						$	215.85
Granted (2)			608						$	247.26
Vested			(426)						$	203.75
Cancelled			(33)						$	222.16
Unvested at December 31, 2022			1,227						$	226.75
(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 2022 and (ii) any change in the number of shares issuable pursuant to outstanding PSUs based on performance certification during 2022.

The total fair value of PSUs that vested during 2022, 2021 and 2020 (measured on the date of vesting) was $98.7 million, $92.2 million and $138.5 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, 2022, there were 1.5 million shares of common stock authorized for issuance pursuant to the ESPP.

In 2022, the following shares were issued to employees under the ESPP:

			Year Ended December 31, 2022
Number of shares (in thousands)			261
Average price paid per share			$	161.74

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. In 2022, 2021 and 2020, we contributed approximately $27.5 million, $21.8 million and $19.2 million to the plan, respectively.

**O.**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, 2022 was as follows:

			2022						2021						2020
			(in millions)
Stock-based compensation expense by line item:
Cost of sales			$	9.4					$	6.3					$	5.6
Research and development expenses			297.9						268.3						262.7
Selling, general and administrative expenses			184.0						166.8						161.2
Total stock-based compensation expense included in costs and expenses			491.3						441.4						429.5
Income tax effect			(144.1)						(82.9)						(147.0)
Total stock-based compensation included in costs and expenses, net of tax			$	347.2					$	358.5					$	282.5

The stock-based compensation expense by type of award during the three years ended December 31, 2022 was as follows:

			2022						2021						2020
			(in millions)
Stock-based compensation expense by type of award:
Restricted stock units (including PSUs)			$	456.1					$	384.3					$	360.4
Stock options			17.6						36.8						59.7
ESPP share issuances			16.7						24.4						13.0
Stock-based compensation expense related to inventories			0.9						(4.1)						(3.6)
Total stock-based compensation expense included in costs and expenses			$	491.3					$	441.4					$	429.5

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, 2022, by type of award and the weighted-average period over which that expense is expected to be recognized:

			As of December 31, 2022
			Unrecognized Expense						Weighted-average Recognition Period
			(in millions)						(in years)
Type of award:
Restricted stock units (including PSUs)			$	477.9					1.93
Stock options			2.2						0.42
ESPP share issuances			11.3						0.61
Total unrecognized stock-based compensation expense			$	491.4

Stock Options

In each of the three years ended December 31, 2022, we issued stock options to our non-employee directors. 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 options granted during 2022, 2021 and 2020 had a weighted-average grant-date fair value per share of $89.65, $65.94 and $88.37,

F-37

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

respectively.

The fair value of each option granted during 2022, 2021 and 2020 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

			2022						2021						2020
Stock options granted			20,079						27,302						22,636
Expected stock price volatility			34.03%						35.03%						35.87%
Risk-free interest rate			2.93%						0.86%						0.43%
Expected term of options (in years)			4.36						4.50						4.67
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.

As described in Note N, “Common Stock, Preferred Stock and Equity Plans,” we grant PSUs to certain members of senior management. Our 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. Our non-financial based PSUs cliff vest at the end of the three-year performance period and are expensed on a straight-line basis over that same period based upon an assessment of the likely level of achievement.

Employee Stock Purchase Plan

The weighted-average fair value of each purchase right granted during 2022, 2021 and 2020 was $79.36, $51.71 and $65.88, respectively. The following table reflects the weighted-average assumptions used in the Black-Scholes option pricing model for 2022, 2021 and 2020:

			2022						2021						2020
Expected stock price volatility			33.55%						34.06%						37.70%
Risk-free interest rate			4.05%						0.05%						0.11%
Expected term (in years)			0.71						0.69						0.71
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.

F-38

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

**P.**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, 2022, consisted of the following:

			2022						2021						2020
			(in millions)
United States			$	3,257.0					$	2,030.7					$	2,885.4
Foreign			975.4						699.7						231.5
Income before provision for income taxes			$	4,232.4					$	2,730.4					$	3,116.9

The components of our provision for income taxes during the three years ended December 31, 2022, consisted of the following:

			2022						2021						2020
			(in millions)
Current taxes:
Federal			$	779.0					$	374.9					$	71.4
State			34.9						26.5						18.9
Foreign			372.4						141.5						37.6
Total current taxes			1,186.3						542.9						127.9
Deferred taxes:
Federal			(404.0)						(36.9)						510.2
State			(11.0)						(19.3)						6.7
Foreign			139.1						(98.4)						(239.6)
Total deferred taxes			(275.9)						(154.6)						277.3
Provision for income taxes			$	910.4					$	388.3					$	405.2

Unremitted Earnings

As of December 31, 2022, we are treating all our foreign subsidiaries earnings to be indefinitely reinvested. Upon repatriation of the indefinitely reinvested 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 do not provide for deferred taxes on the excess of financial statement reporting over the tax basis of our investments in our foreign subsidiaries as they are deemed to be essentially permanent in duration. These permanently reinvested basis differences could reverse if we sell our foreign subsidiaries or various other events occur, none of which were considered probable as of December 31, 2022. The tax liabilities described above would not be material to our consolidated financial statements.

F-39

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Effective Tax Rate Reconciliation

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

			2022						2021						2020
Federal statutory tax rate			21.0		%				21.0		%				21.0		%
State taxes, net of federal benefit			0.6		%				0.8		%				0.6		%
Foreign income tax rate differential			(0.3)		%				(0.3)		%				0.2		%
U.S. tax on foreign earnings, net of credits			1.9		%				0.7		%				2.7		%
Foreign derived intangible income deduction			(1.4)		%				(0.8)		%				(0.2)		%
Tax credits			(2.2)		%				(6.4)		%				(1.8)		%
Tax rate change			0.0		%				(3.5)		%				(1.2)		%
Stock compensation (benefit), shortfalls and cancellations			(0.8)		%				0.0		%				(2.3)		%
Long-term intercompany receivable write-off			—		%				—		%				(1.7)		%
Uncertain tax positions			2.7		%				2.0		%				1.3		%
Intra-entity transfer of intellectual property rights			—		%				—		%				(6.7)		%
Other			0.0		%				0.7		%				1.1		%
Effective tax rate			21.5		%				14.2		%				13.0		%

Our 21.5% effective tax rate for 2022 was higher than the U.S. statutory rate primarily due to an increase in our unrecognized tax benefit liabilities associated with intercompany transfer pricing matters offset by excess tax benefits related to stock-based compensation, tax credits and changes in our estimated to prior-year tax liabilities.

Our 14.2% 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 (the “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 13.0% 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.

F-40

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Deferred Tax Assets and Liabilities

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,
			2022						2021
			(in millions)
Deferred tax assets:
Net operating loss			$	77.4					$	106.6
Tax credit carryforwards			223.0						202.4
Intangible assets			738.5						802.8
Stock-based compensation			124.4						94.6
Finance lease liabilities			94.9						103.4
Operating lease assets			79.6						81.1
R&D capitalization			438.3						—
Other			69.2						90.3
Gross deferred tax assets			1,845.3						1,481.2
Valuation allowance			(237.8)						(220.4)
Total deferred tax assets			1,607.5						1,260.8
Deferred tax liabilities:
Property and equipment			(139.8)						(118.2)
Acquired intangibles			(130.5)						(87.0)
Operating lease liabilities			(63.1)						(64.8)
Other			(27.2)						(56.3)
Total deferred tax liabilities			(360.6)						(326.3)
Net deferred tax assets			$	1,246.9					$	934.5

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, 2022, we maintained a valuation allowance of $237.8 million related primarily to U.S. state tax attributes.

In addition to deferred tax assets and liabilities, we have recorded deferred charges related to intra-entity sales of inventory. As of December 31, 2022 and 2021, the total deferred charges were $195.1 million and $225.4 million, respectively.

As of December 31, 2022, we had net operating loss (“NOL”) carryforwards of $65.3 million, which are subject to annual utilization limitations for U.S. federal income tax purposes. In 2027, our definite lived U.S. federal NOLs of $19.8 million will begin to expire, while the remaining portion may be carried forward indefinitely. For U.S. state income tax purposes, we had NOL carryforwards of $553.8 million and tax credit carryforwards of $273.5 million. The state NOL and tax credit carryforwards begin to expire in 2023. For foreign income tax purposes, we had NOL carryforwards of $151.4 million and tax credit carryforwards of $21.5 million. The foreign NOL carryforwards may be carried forward indefinitely, with the exception of $70.0 million that will expire in 2041. The foreign tax credit carryforwards will begin to expire in 2026.

F-41

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Consolidated Financial Statements (Continued)

Unrecognized Tax Benefits

Unrecognized tax benefits during the three years ended December 31, 2022 were as follows:

			2022						2021						2020
			(in millions)
Balance at beginning of the period			$	147.2					$	86.6					$	33.9
Increases related to current period tax positions			128.3						42.0						26.7
Increases related to prior period tax positions			205.3						19.9						26.7
Decreases related to prior period tax positions			(14.4)						—						—
Statute of limitations expiration			(4.5)						(1.3)						(0.7)
Foreign currency translation adjustment			(2.3)						—						—
Balance at end of period			$	459.6					$	147.2					$	86.6

During 2022, we increased our gross unrecognized tax benefits by $312.4 million, primarily associated with intercompany transfer pricing matters. This unrecognized tax benefit was recorded as a $29.7 million reduction to our gross deferred tax assets and a $282.7 million gross tax liability.

As of December 31, 2022, we have classified $44.1 million and $415.5 million of our unrecognized tax benefits as credits to “Deferred tax assets” and “Other long-term liabilities,” respectively, on our consolidated balance sheet.

Included in our unrecognized tax benefits as of December 31, 2022, 2021 and 2020, we had $208.5 million, $129.5 million and $75.8 million (net of the federal benefit on state issues), respectively, of unrecognized tax benefits, which would affect our effective income tax rate if recognized.

We recognize potential interest and penalties related to unrecognized tax benefits in our provision for income taxes. In 2022, we recognized total interest and penalty expenses of $36.6 million. As of December 31, 2022, our accrual for interest and penalties was $39.2 million. Our total interest and penalty expenses in 2021 and 2020 and our accrual for interest and penalties as of December 31, 2021 were not material to our consolidated financial statements.

The U.S. Internal Revenue Service and other local and foreign tax authorities routinely examine our tax returns, including intercompany transfer pricing, and it is reasonably possible that we will adjust the value of our uncertain tax positions related these matters and other issues as we receive additional information from various taxing authorities, including reaching settlements with such authorities.

As a result of various audit closures, settlements and statutes of limitations, we estimate that it is reasonably possible that our gross unrecognized tax benefits could decrease by up to $9.1 million in the next 12 months due to statute of limitations expirations.

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 2014 in jurisdictions that have a material impact on our consolidated financial statements.

**Q.**Commitments and Contingencies

2022 Revolving Credit Facility

In July 2022, Vertex and certain of its subsidiaries entered into a $500.0 million unsecured revolving facility (the “Credit Agreement”) with Bank of America, N.A., as administrative agent and the lenders referred to therein (the “Lenders”), which matures on July 1, 2027. The Credit Agreement was not drawn upon at closing and we have not drawn upon it to date. Amounts drawn pursuant to the Credit Agreement, if any, will be used for general corporate purposes. Subject to satisfaction

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Notes to Consolidated Financial Statements (Continued)

of certain conditions, we may request that the borrowing capacity for the Credit Agreement be increased by an additional $500.0 million. Additionally, the Credit Agreement provides a sublimit of $100.0 million for letters of credit.

Any amounts borrowed under the Credit Agreement will bear interest, at our option, at either a base rate or a Secured Overnight Financing Rate (“SOFR”), in each case plus an applicable margin. Under the Credit Agreement, the applicable margins on base rate loans range from 0.000% to 0.500% and the applicable margins on SOFR loans range from 1.000% to 1.500%, in each case 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).

Any amounts borrowed pursuant to the Credit Agreement are guaranteed by certain of our existing and future domestic subsidiaries, subject to certain exceptions.

The Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including a financial covenant to maintain 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. As of December 31, 2022, we were in compliance with the covenants described above. The Credit Agreement also contains customary events of default. In the case of a continuing event of default, the administrative agent would be entitled to exercise various remedies, including the acceleration of amounts due under outstanding loans.

Direct costs related to the Credit Agreement are recorded over its term and were not material to our financial statements.

Prior Credit Facilities

In July 2022, in conjunction with entering our new credit agreement, we terminated the $500.0 million credit agreement we entered into in 2019. In September 2022, a $2.0 billion credit agreement we entered into in 2020 expired in accordance with its terms.

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 product 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

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Notes to Consolidated Financial Statements (Continued)

minimal.

Other Contingencies

We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue such 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 E, “Fair Value Measurements,” there were no material contingent liabilities accrued as of December 31, 2022 or 2021.

**R.**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:

			2022						2021						2020
			(in millions)
TRIKAFTA/KAFTRIO			$	7,686.8					$	5,697.2					$	3,863.8
SYMDEKO/SYMKEVI			180.0						420.4						628.6
ORKAMBI			510.7						771.6						907.5
KALYDECO			553.2						684.2						802.9
Total product revenues, net			$	8,930.7					$	7,573.4					$	6,202.8

Product Revenues by Geographic Location

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

			2022						2021						2020
			(in millions)
United States			$	5,699.3					$	5,287.3					$	4,826.4
Outside of the United States
Europe			2,705.5						1,972.9						1,126.5
Other			525.9						313.2						249.9
Total product revenues outside of the United States			3,231.4						2,286.1						1,376.4
Total product revenues, net			$	8,930.7					$	7,573.4					$	6,202.8

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Notes to Consolidated Financial Statements (Continued)

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,
			2022						2021						2020						2022						2021
McKesson Corporation			25		%				22		%				20		%				22		%				21		%
Accredo Health Group, Inc.			12		%				12		%				15		%				<10%						10		%
Walgreen Co.			10		%				10		%				14		%				<10%						<10 %
Lloyds Pharmacy*			<10%						<10%						<10%						12		%				15		%
*A wholly-owned subsidiary of McKesson Corporation in the U.K. until 2022.

Long-lived Assets by Location

Long-lived assets by location consisted of the following:

			As of December 31,
			2022						2021
			(in millions)
United States			$	1,365.5					$	1,348.1
Outside of the United States
United Kingdom			75.7						60.9
Other			14.6						15.4
Total long-lived assets outside of the United States			90.3						76.3
Total long-lived assets			$	1,455.8					$	1,424.4

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