Item 1. Financial Statements

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Item 1. Financial Statements

VERTEX PHARMACEUTICALS INCORPORATED

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues:
Product revenues, net	$	1,984,164	$	1,536,271	$	5,500,839	$	4,575,863
Other revenues	—		2,000		1,000		2,000
Total revenues	1,984,164		1,538,271		5,501,839		4,577,863
Costs and expenses:
Cost of sales	236,512		186,182		656,813		533,199
Research and development expenses	493,751		493,497		2,356,814		1,362,953
Selling, general and administrative expenses	198,189		184,551		584,935		558,613
Change in fair value of contingent consideration	1,200		1,800		(1,100)		12,600
Total costs and expenses	929,652		866,030		3,597,462		2,467,365
Income from operations	1,054,512		672,241		1,904,377		2,110,498
Interest income	1,116		3,100		3,714		19,919
Interest expense	(15,255)		(13,856)		(46,411)		(41,863)
Other income (expense), net	42,368		84,386		(2,234)		139,621
Income before provision for income taxes	1,082,741		745,871		1,859,446		2,228,175
Provision for income taxes	230,813		78,437		287,456		120,718
Net income	$	851,928	$	667,434	$	1,571,990	$	2,107,457

Net income per common share:
Basic	$	3.30	$	2.56	$	6.08	$	8.10
Diluted	$	3.28	$	2.53	$	6.03	$	7.98
Shares used in per share calculations:
Basic	257,876		260,392		258,740		260,313
Diluted	259,707		264,079		260,877		264,031

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

VERTEX PHARMACEUTICALS INCORPORATED

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	851,928	$	667,434	$	1,571,990	$	2,107,457
Other comprehensive income (loss):
Unrealized holding (losses) gains on marketable securities, net	(56)		(1,132)		(329)		818
Unrealized gains (losses) on foreign currency forward contracts, net of tax of $(9.6) million, $7.6 million, $(21.2) million and $7.3 million, respectively	34,766		(26,313)		77,011		(27,211)
Foreign currency translation adjustment	1,986		584		3,335		(12,616)
Total other comprehensive income (loss)	36,696		(26,861)		80,017		(39,009)
Comprehensive income	$	888,624	$	640,573	$	1,652,007	$	2,068,448

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

VERTEX PHARMACEUTICALS INCORPORATED

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except per share amounts)


	September 30,		December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	6,275,698	$	5,988,187
Marketable securities	685,187		670,710
Accounts receivable, net	1,100,372		885,352
Inventories	333,456		280,777
Prepaid expenses and other current assets	457,827		308,353
Total current assets	8,852,540		8,133,379
Property and equipment, net	1,042,347		958,534
Goodwill	1,002,158		1,002,158
Intangible assets	400,000		400,000
Deferred tax assets	933,839		882,779
Operating lease assets	312,343		325,564
Other assets	75,518		49,394
Total assets	$	12,618,745	$	11,751,808
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	127,863	$	155,139
Accrued expenses	1,584,992		1,404,971
Other current liabilities	201,409		317,423
Total current liabilities	1,914,264		1,877,533
Long-term finance lease liabilities	513,255		539,042
Long-term operating lease liabilities	363,545		350,463
Long-term contingent consideration	188,500		189,600
Other long-term liabilities	108,473		108,355
Total liabilities	3,088,037		3,064,993
Commitments and contingencies	—		—
Shareholders’ equity:
Preferred stock, $0.01 par value; 1,000 shares authorized; none issued and outstanding	—		—
Common stock, $0.01 par value; 500,000 shares authorized, 256,206 and 259,890 shares issued and outstanding, respectively	2,562		2,599
Additional paid-in capital	7,085,950		7,894,027
Accumulated other comprehensive income (loss)	11,537		(68,480)
Retained earnings	2,430,659		858,669
Total shareholders’ equity	9,530,708		8,686,815
Total liabilities and shareholders’ equity	$	12,618,745	$	11,751,808

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

VERTEX PHARMACEUTICALS INCORPORATED

Condensed Consolidated Statements of Shareholders’ Equity

(unaudited)

(in thousands)


	Three Months Ended
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Total Shareholders’ Equity
	Shares	Amount
Balance at June 30, 2020	260,124	$	2,601	$	7,943,717	$	(14,121)	$	(412,955)	$	7,519,242
Other comprehensive loss, net of tax	—	—		—		(26,861)		—		(26,861)
Net income	—	—		—		—		667,434		667,434
Repurchase of common stock	(403)	(4)		(108,003)		—		—		(108,007)
Common stock withheld for employee tax obligations	(141)	(1)		(40,527)		—		—		(40,528)
Issuance of common stock under benefit plans	594	5		21,699		—		—		21,704
Stock-based compensation expense	—	—		100,489		—		—		100,489
Balance at September 30, 2020	260,174	$	2,601	$	7,917,375	$	(40,982)	$	254,479	$	8,133,473

Balance at June 30, 2021	259,114	$	2,591	$	7,640,233	$	(25,159)	$	1,578,731	$	9,196,396
Other comprehensive income, net of tax	—	—		—		36,696		—		36,696
Net income	—	—		—		—		851,928		851,928
Repurchase of common stock	(3,293)	(33)		(642,240)		—		—		(642,273)
Common stock withheld for employee tax obligations	(144)	(1)		(28,558)		—		—		(28,559)
Issuance of common stock under benefit plans	529	5		12,862		—		—		12,867
Stock-based compensation expense	—	—		103,653		—		—		103,653
Balance at September 30, 2021	256,206	$	2,562	$	7,085,950	$	11,537	$	2,430,659	$	9,530,708

	Nine Months Ended
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Accumulated Deficit)		Total Shareholders’ Equity
	Shares	Amount
Balance at December 31, 2019	258,993	$	2,589	$	7,937,606	$	(1,973)	$	(1,852,978)	$	6,085,244
Other comprehensive loss, net of tax	—	—		—		(39,009)		—		(39,009)
Net income	—	—		—		—		2,107,457		2,107,457
Repurchase of common stock	(1,807)	(18)		(408,015)		—		—		(408,033)
Common stock withheld for employee tax obligations	(727)	(7)		(179,768)		—		—		(179,775)
Issuance of common stock under benefit plans	3,715	37		232,042		—		—		232,079
Stock-based compensation expense	—	—		335,510		—		—		335,510
Balance at September 30, 2020	260,174	$	2,601	$	7,917,375	$	(40,982)	$	254,479	$	8,133,473

Balance at December 31, 2020	259,890	$	2,599	$	7,894,027	$	(68,480)	$	858,669	$	8,686,815
Other comprehensive income, net of tax	—	—		—		80,017		—		80,017
Net income	—	—		—		—		1,571,990		1,571,990
Repurchase of common stock	(5,282)	(53)		(1,067,172)		—		—		(1,067,225)
Common stock withheld for employee tax obligations	(633)	(6)		(134,217)		—		—		(134,223)
Issuance of common stock under benefit plans	2,231	22		66,707		—		—		66,729
Stock-based compensation expense	—	—		326,605		—		—		326,605
Balance at September 30, 2021	256,206	$	2,562	$	7,085,950	$	11,537	$	2,430,659	$	9,530,708

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

VERTEX PHARMACEUTICALS INCORPORATED

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net income	$	1,571,990	$	2,107,457
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	322,792		332,434
Depreciation expense	91,768		80,160
(Decrease) increase in fair value of contingent consideration	(1,100)		12,600
Deferred income taxes	(112,654)		65,110
Gains on equity securities	(4,993)		(140,866)
Other non-cash items, net	20,588		52,371
Changes in operating assets and liabilities:
Accounts receivable, net	(231,166)		(151,191)
Inventories	(65,827)		(94,907)
Prepaid expenses and other assets	(107,672)		(264,909)
Accounts payable	(22,043)		16,153
Accrued expenses	254,157		451,084
Other liabilities	(67,333)		296,477
Net cash provided by operating activities	1,648,507		2,761,973
Cash flows from investing activities:
Purchases of available-for-sale debt securities	(447,759)		(246,937)
Maturities of available-for-sale debt securities	452,133		184,419
Purchases of property and equipment	(173,285)		(212,109)
Investment in equity securities and notes receivable	(37,991)		(19,327)
Sale of equity securities	—		149,595
Net cash used in investing activities	(206,902)		(144,359)
Cash flows from financing activities:
Issuances of common stock under benefit plans	67,289		234,854
Repurchases of common stock	(1,057,225)		(408,033)
Payments in connection with common stock withheld for employee tax obligations	(134,223)		(179,775)
Payments on finance leases	(34,592)		(31,378)
Proceeds from finance leases	12,647		8,642
Other financing activities	4,339		(4,399)
Net cash used in financing activities	(1,141,765)		(380,089)
Effect of changes in exchange rates on cash	(8,472)		2,779
Net increase in cash, cash equivalents and restricted cash	291,368		2,240,304
Cash, cash equivalents and restricted cash—beginning of period	5,988,845		3,120,681
Cash, cash equivalents and restricted cash—end of period	$	6,280,213	$	5,360,985

Supplemental disclosure of cash flow information:
Cash paid for interest	$	42,698	$	40,769
Cash paid for income taxes	$	381,533	$	81,684

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

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

**A.**Basis of Presentation and Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Vertex Pharmaceuticals Incorporated (“Vertex” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

The condensed consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. The Company operates in one segment, pharmaceuticals. The Company has reclassified certain items from the prior year’s condensed consolidated financial statements to conform to the current year’s presentation.

Certain information and footnote disclosures normally included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”) have been condensed or omitted. These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods ended September 30, 2021 and 2020.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2020, which are contained in the Company’s 2020 Annual Report on Form 10-K.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the amounts of revenues and expenses during the reported periods. The Company bases its estimates on historical experience and various other assumptions, including in certain circumstances future projections that management believes to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.

Recently Adopted and Issued Accounting Standards

Income Taxes

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

For a discussion of other recent accounting pronouncements please refer to Note A, “Nature of Business and Accounting Policies,” in the Company’s 2020 Annual Report on Form 10-K.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note A, “Nature of Business and Accounting Policies,” in its 2020 Annual Report on Form 10-K.

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

**B.**Revenue Recognition

Disaggregation of Revenue

Revenues by Product

Product revenues, net consisted of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
TRIKAFTA/KAFTRIO	$	1,555,772	$	960,308	$	4,004,600	$	2,773,256
SYMDEKO/SYMKEVI	81,415		156,178		339,969		501,066
ORKAMBI	184,561		225,919		624,224		692,038
KALYDECO	162,416		193,866		532,046		609,503
Total product revenues, net	$	1,984,164	$	1,536,271	$	5,500,839	$	4,575,863

Product Revenues by Geographic Location

Total net product revenues by geographic region, based on the location of the customer, consisted of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
United States	$	1,382,892	$	1,222,565	$	3,893,245	$	3,620,467
Outside of the United States
Europe	518,826		251,366		1,382,701		766,438
Other	82,446		62,340		224,893		188,958
Total product revenues outside of the United States	601,272		313,706		1,607,594		955,396
Total product revenues, net	$	1,984,164	$	1,536,271	$	5,500,839	$	4,575,863

Contract Liabilities

The Company had contract liabilities of $104.1 million and $191.5 million as of September 30, 2021 and December 31, 2020, respectively, related to annual contracts with government-owned and supported customers in international markets that limit the amount of annual reimbursement the Company can receive. Upon exceeding the annual reimbursement amount, products are provided free of charge, which is a material right. These contracts include upfront payments and fees. The Company defers a portion of the consideration received for shipments made up to the annual reimbursement limit as a portion of “Other current liabilities.” The deferred amount is recognized as revenue when the free products are shipped. The Company’s product revenue contracts include performance obligations that are one year or less.

The Company’s contract liabilities at the end of each fiscal year relate to contracts with annual reimbursement limits in international markets in which the annual period associated with the contract is not the same as the Company’s fiscal year. In these markets, the Company recognizes revenues related to performance obligations satisfied in previous years; however, these revenues do not relate to any performance obligations that were satisfied more than 12 months prior to the beginning of the current year.

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

**C.**Collaborative Arrangements

The Company has entered into numerous agreements pursuant to which it collaborates with third parties on research, development and commercialization programs, including in-license and out-license agreements.

The Company’s in-license and out-license agreements that had a significant impact on its financial statements for the three and nine months ended September 30, 2021 and 2020, or were new or materially revised during the nine months ended September 30, 2021, are described below. Additional in-license and out-license agreements were described in Note B, “Collaborative Arrangements,” of the Company’s 2020 Annual Report on Form 10-K.

In-license Agreements

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

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

The Company typically can terminate its in-license agreements by providing advance notice to its collaborators; the required length of notice is dependent on whether any product developed under the license agreement has received marketing approval. The Company’s license agreements may be terminated by either party for a material breach by the other, subject to notice and cure provisions. Unless earlier terminated, these license agreements generally remain in effect until the date on which the royalty term and all payment obligations with respect to all products in all countries have expired.

The Company’s “Research and development expenses” included $26.8 million and $986.8 million for the three and nine months ended September 30, 2021, respectively, and $80.1 million and $143.3 million for the three and nine months ended September 30, 2020, respectively, related to upfront and milestone payments pursuant to its in-license agreements.

CRISPR Therapeutics AG - CRISPR-Cas9 Gene-editing Therapies

In 2015, the Company entered into a strategic collaboration, option and license agreement (the “CRISPR Agreement”) with CRISPR Therapeutics AG and its affiliates (“CRISPR”) to collaborate on the discovery and development of potential new treatments aimed at the underlying genetic causes of human diseases using CRISPR-Cas9 gene-editing technology. The Company had the exclusive right to license certain targets. In 2019, the Company elected to exclusively license three targets, including cystic fibrosis, pursuant to the CRISPR Agreement. For each of the three targets that the Company elected to license, CRISPR has the potential to receive up to an additional $410.0 million in development, regulatory and commercial milestones as well as royalties on net product sales.

In 2017, the Company entered into a joint development and commercialization agreement with CRISPR pursuant to the terms of the CRISPR Agreement (the “Original CTX001 JDCA”), under which the Company and CRISPR were co-developing and preparing to co-commercialize CTX001 for the treatment of hemoglobinopathies, including treatments for sickle cell disease and beta thalassemia.

In the second quarter of 2021, the Company 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 the Company relating to the products that may be researched, developed, manufactured and commercialized under such agreement.

Pursuant to the A&R JDCA, the Company is now leading global development, manufacturing and commercialization of CTX001, with support from CRISPR. Subject to the terms and conditions of the A&R JDCA, the Company also has the right

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

to conduct all research, development, manufacturing and commercialization activities relating to the product candidates and products under the A&R JDCA (including CTX001) throughout the world subject to CRISPR’s reserved right to conduct certain activities.

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

The Company and CRISPR shared equally all expenses incurred under the Original CTX001 JDCA. On July 1, 2021, with respect to CTX001, the net profits and net losses incurred pursuant to the A&R JDCA began to be allocated 60% to the Company and 40% to CRISPR, while all other product candidates and products continued to have net profits and net losses shared equally between the parties. The Company concluded that the Original CTX001 JDCA and the A&R JDCA are cost-sharing arrangements, which result in the net impact of the arrangements being recorded in “Research and development expenses” in its condensed consolidated statements of operations. During the three and nine months ended September 30, 2021 and 2020, the Company recognized the following amounts in total related to these agreements:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
Total research and development expenses incurred under the Original CTX001 JDCA and A&R JDCA	$	58,659	$	28,623	$	147,448	$	66,720
Vertex’s share recognized in research and development expenses in condensed consolidated statement of operations	35,195		14,311		79,590		33,360

Moderna, Inc.

In 2016, the Company entered into a strategic collaboration and licensing agreement with Moderna, Inc. (“Moderna”), pursuant to which the parties are seeking to identify and develop messenger ribonucleic acid (“mRNA”) therapeutics for the treatment of CF.

In September 2020, the Company entered into a new strategic collaboration and licensing agreement with Moderna (the “2020 Moderna Agreement”) aimed at the discovery and development of lipid nanoparticles and mRNAs that can deliver gene-editing therapies to lung cells for the treatment of CF. Pursuant to the 2020 Moderna Agreement, Moderna received an upfront payment of $75.0 million and is eligible to receive up to $380.0 million in development, regulatory and commercial milestones as well as royalties on net product sales. The Company determined that substantially all of the fair value of the 2020 Moderna Agreement was attributable to in-process research and development and no substantive processes were acquired that would constitute a business. The Company concluded that it did not have any alternative future use for the acquired in-process research and development and recorded the upfront payment to “Research and development expenses” in the third quarter of 2020.

Out-license Agreements

The Company has entered into licensing agreements pursuant to which it has out-licensed rights to certain drug candidates to third-party collaborators. Pursuant to these out-license agreements, the Company’s collaborators become responsible for all costs related to the continued development of such drug candidates and obtain development and commercialization rights to these drug candidates. Depending on the terms of the agreements, the Company’s collaborators may be required to make upfront payments, milestone payments upon the achievement of certain product research and development objectives and may also be required to pay royalties on future sales, if any, of commercial products resulting from the collaboration. The termination provisions associated with these collaborations are generally the same as those described above related to the Company’s in-license agreements. None of the Company’s out-license agreements had a significant impact on the Company’s condensed consolidated statement of operations during the three and nine months ended September 30, 2021 and 2020.

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

Cystic Fibrosis Foundation

The Company has a research, development and commercialization agreement that was originally entered into in 2004 with the Cystic Fibrosis Foundation, as successor in interest to the Cystic Fibrosis Foundation Therapeutics, Inc. This agreement was most recently amended in 2016. Pursuant to the agreement, as amended, the Company agreed to pay royalties ranging from low-single digits to mid-single digits on potential sales of certain compounds first synthesized and/or tested between March 1, 2014 and August 31, 2016, including elexacaftor, and tiered royalties ranging from single digits to sub-teens on covered compounds first synthesized and/or tested during a research term on or before February 28, 2014, including KALYDECO (ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor). For combination products, such as ORKAMBI, SYMDEKO/SYMKEVI and TRIKAFTA/KAFTRIO (elexacaftor/tezacaftor/ivacaftor and ivacaftor), sales are allocated equally to each of the active pharmaceutical ingredients in the combination product.

**D.**Earnings Per 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.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands, except per share amounts)
Net income	$	851,928	$	667,434	$	1,571,990	$	2,107,457

Basic weighted-average common shares outstanding	257,876		260,392		258,740		260,313
Effect of potentially dilutive securities:
Stock options	971		1,887		1,124		1,936
Restricted stock units (including PSUs)	841		1,788		1,003		1,765
Employee stock purchase program	19		12		10		17
Diluted weighted-average common shares outstanding	259,707		264,079		260,877		264,031

Basic net income per common share	$	3.30	$	2.56	$	6.08	$	8.10
Diluted net income per common share	$	3.28	$	2.53	$	6.03	$	7.98

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
	(in thousands)
Stock options	1,060	23	711	303
Unvested restricted stock units (including PSUs)	204	252	440	229

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

**E.**Fair Value Measurements

The following fair value hierarchy is used to classify assets and liabilities based on observable inputs and unobservable inputs used in order to determine the fair value of the Company’s financial assets and liabilities:


Level 1:			Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:			Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3:			Unobservable inputs based on the Company’s assessment of the assumptions that market participants would use in pricing the asset or liability.

The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument. The Company maintains strategic investments separately from the investment policy that governs its other cash, cash equivalents and marketable securities as described in Note F, “Marketable Securities and Equity Investments.” Additionally, the Company utilizes foreign currency forward contracts intended to mitigate the effect of changes in foreign exchange rates on its condensed consolidated statement of operations.

During the three and nine months ended September 30, 2021 and 2020, the Company did not record any other-than-temporary impairment charges related to its financial assets.

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

The following tables set forth the Company’s financial assets and liabilities subject to fair value measurements by level within the fair value hierarchy (and does not include $2.7 billion and $2.8 billion of cash as of September 30, 2021 and December 31, 2020, respectively):


	As of September 30, 2021								As of December 31, 2020
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	(in thousands)
Financial instruments carried at fair value (asset positions):
Cash equivalents:
Money market funds	$	3,578,764	$	3,578,764	$	—	$	—	$	3,141,053	$	3,141,053	$	—	$	—
Commercial paper	31,998		—		31,998		—		—		—		—		—
Marketable securities:
Corporate equity securities	218,764		218,764		—		—		195,781		15,650		180,131		—
U.S. Treasury securities	46,539		46,539		—		—		—		—		—		—
Government-sponsored enterprise securities	69,002		69,002		—		—		80,063		80,063		—		—
Corporate debt securities	95,359		—		95,359		—		231,598		—		231,598		—
Commercial paper	255,523		—		255,523		—		163,268		—		163,268		—
Prepaid expenses and other current assets:
Foreign currency forward contracts	34,300		—		34,300		—		—		—		—		—
Other assets:
Foreign currency forward contracts	4,781		—		4,781		—		—		—		—		—
Total financial assets	$	4,335,030	$	3,913,069	$	421,961	$	—	$	3,811,763	$	3,236,766	$	574,997	$	—

Financial instruments carried at fair value (liability positions):
Other current liabilities:
Foreign currency forward contracts	$	(4,356)	$	—	$	(4,356)	$	—	$	(59,184)	$	—	$	(59,184)	$	—
Long-term contingent consideration	(188,500)		—		—		(188,500)		(189,600)		—		—		(189,600)
Other long-term liabilities:
Foreign currency forward contracts	(29)		—		(29)		—		(4,283)		—		(4,283)		—
Total financial liabilities	$	(192,885)	$	—	$	(4,385)	$	(188,500)	$	(253,067)	$	—	$	(63,467)	$	(189,600)

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

Fair Value of Corporate Equity Securities

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

Fair Value of Contingent Consideration

In 2019, the Company acquired Exonics Therapeutics, Inc. (“Exonics”), a privately-held company focused on creating transformative gene-editing therapies to repair mutations that cause DMD and other severe neuromuscular diseases, including DM1. The Company’s Level 3 contingent consideration liabilities are related to $678.3 million of development and regulatory milestones potentially payable to Exonics’ former equity holders. The Company bases its estimates of the probability of achieving the milestones relevant to the fair value of contingent payments on industry data attributable to rare diseases. The discount rates used in the valuation model for contingent payments, which were between 0.3% and 2.2% as of September 30, 2021, represent a measure of credit risk and market risk associated with settling the liabilities. Significant

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

judgment is used in determining the appropriateness of these assumptions at each reporting period. Due to the uncertainties associated with development and commercialization of drug candidates in the pharmaceutical industry and the effects of changes in other assumptions including discount rates, the Company expects its estimates regarding the fair value of contingent consideration to change in the future, resulting in adjustments to the fair value of the Company’s contingent consideration liabilities, and the effect of any such adjustments could be material.

The following table represents a rollforward of the fair value of the Company’s contingent consideration liabilities:


	Nine Months Ended September 30, 2021
	(in thousands)
Balance at December 31, 2020	$	189,600
Decrease in fair value of contingent payments	(1,100)
Balance at September 30, 2021	$	188,500

**F.**Marketable Securities and Equity Investments

A summary of the Company’s cash equivalents and marketable securities, which are recorded at fair value (and do not include $2.7 billion and $2.8 billion of cash as of September 30, 2021 and December 31, 2020, respectively), is shown below:


	As of September 30, 2021								As of December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Cash equivalents:
Money market funds	$	3,578,764	$	—	$	—	$	3,578,764	$	3,141,053	$	—	$	—	$	3,141,053
Commercial paper	31,997		1		—		31,998		—		—		—		—
Total cash equivalents	$	3,610,761	$	1	$	—	$	3,610,762	$	3,141,053	$	—	$	—	$	3,141,053
Marketable securities:
U.S. Treasury securities	$	46,536	$	4	$	(1)	$	46,539	$	—	$	—	$	—	$	—
Government-sponsored enterprise securities	68,996		8		(2)		69,002		80,046		17		—		80,063
Corporate debt securities	95,385		26		(52)		95,359		231,263		377		(42)		231,598
Commercial paper	255,501		40		(18)		255,523		163,286		19		(37)		163,268
Total marketable debt securities	466,418		78		(73)		466,423		474,595		413		(79)		474,929
Corporate equity securities	69,418		150,263		(917)		218,764		51,427		144,354		—		195,781
Total marketable securities	$	535,836	$	150,341	$	(990)	$	685,187	$	526,022	$	144,767	$	(79)	$	670,710

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


	As of September 30, 2021		As of December 31, 2020
	(in thousands)
Cash and cash equivalents	$	3,610,762	$	3,141,053
Marketable securities	466,423		474,929
Total	$	4,077,185	$	3,615,982

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

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


	As of September 30, 2021		As of December 31, 2020
	(in thousands)
Matures within one year	$	4,014,441	$	3,526,185
Matures after one year through five years	62,744		89,797
Total	$	4,077,185	$	3,615,982

The Company has a limited number of available-for-sale debt securities in insignificant loss positions as of September 30, 2021, which it does not intend to sell and has concluded it will not be required to sell before recovery of the amortized costs for the investments at maturity. The Company did not record any charges for other-than-temporary declines in the fair value of available-for-sale debt securities or gross realized gains or losses in the three and nine months ended September 30, 2021 and 2020.

The Company records changes in the fair value of its investments in corporate equity securities to “Other income (expense), net” on its condensed consolidated statements of operations. During the three and nine months ended September 30, 2021 and 2020, the Company’s net unrealized gains on corporate equity securities held at the conclusion of each period were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
Net unrealized gains	$	46,679	$	69,834	$	4,993	$	102,317

During the nine months ended September 30, 2020, the Company received proceeds of $149.6 million related to the sale of the common stock of publicly traded companies, which had a total original weighted-average cost basis of $51.3 million. There were no sales of the common stock of publicly traded companies during the nine months ended September 30, 2021.

As of September 30, 2021, the carrying value of the Company’s equity investments without readily determinable fair values, which are recorded in “Other assets” on its condensed consolidated balance sheets, was $35.9 million.

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

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

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


	Foreign Currency Translation Adjustment			Unrealized Holding Gains (Losses), Net of Tax					Total
			On Available-For-Sale Debt Securities			On Foreign Currency Forward Contracts
	(in thousands)
Balance at December 31, 2020	$	(15,678)		$	334		$	(53,136)	$	(68,480)
Other comprehensive income (loss) before reclassifications	3,335			(329)			46,175		49,181
Amounts reclassified from accumulated other comprehensive (loss) income	—			—			30,836		30,836
Net current period other comprehensive income (loss)	3,335			(329)			77,011		80,017
Balance at September 30, 2021	$	(12,343)		$	5		$	23,875	$	11,537

Balance at December 31, 2019	$	(895)		$	503		$	(1,581)	$	(1,973)
Other comprehensive (loss) income before reclassifications	(12,616)			818			(20,913)		(32,711)
Amounts reclassified from accumulated other comprehensive loss	—			—			(6,298)		(6,298)
Net current period other comprehensive (loss) income	(12,616)			818			(27,211)		(39,009)
Balance at September 30, 2020	$	(13,511)		$	1,321		$	(28,792)	$	(40,982)

**H.**Hedging

Foreign currency forward contracts - Designated as hedging instruments

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

The Company formally documents the relationship between foreign currency forward contracts (hedging instruments) and forecasted product revenues (hedged items), as well as the Company’s risk management objective and strategy for undertaking various hedging activities, which includes matching all foreign currency forward contracts that are designated as cash flow hedges to forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the foreign currency forward contracts are highly effective in offsetting changes in cash flows of hedged items on a prospective and retrospective basis. If the Company were to determine that a (i) foreign currency forward contract is not highly effective as a cash flow hedge, (ii) foreign currency forward contract has ceased to be a highly effective hedge or (iii) forecasted transaction is no longer probable of occurring, the Company would discontinue hedge accounting treatment prospectively. The Company measures effectiveness based on the change in fair value of the forward contracts and the fair value of the hypothetical foreign currency forward contracts with terms that match the critical terms of the risk being hedged. As of September 30, 2021, all hedges were determined to be highly effective.

The Company considers the impact of its counterparties’ credit risk on the fair value of the foreign currency forward contracts. As of September 30, 2021 and December 31, 2020, credit risk did not change the fair value of the Company’s foreign currency forward contracts.

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

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


	As of September 30, 2021		As of December 31, 2020
Foreign Currency	(in thousands)
Euro	$	1,194,338	$	745,099
British pound sterling	277,815		160,427
Australian dollar	95,970		99,922
Canadian dollar	87,259		86,468
Swiss Franc	41,335		—
Total foreign currency forward contracts	$	1,696,717	$	1,091,916

Foreign currency forward contracts - Not designated as hedging instruments

The Company also enters into foreign currency forward contracts with contractual maturities of less than one month, 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. The Company recognizes realized gains and losses for such contracts in “Other income (expense), net” in its condensed consolidated statements of operations each period. As of September 30, 2021, the notional amount of the Company’s outstanding foreign currency forward contracts where hedge accounting under U.S. GAAP is not applied was $306.2 million.

During the three and nine months ended September 30, 2021 and 2020, the Company recognized the following related to foreign currency forward contracts in its condensed consolidated statements of operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
Designated as hedging instruments - Reclassified from AOCI
Product revenues, net	$	(5,224)	$	(7,249)	$	(39,342)	$	8,039
Not designated as hedging instruments
Other income (expense), net	$	(400)	$	25,897	$	(9,350)	$	15,724

Total reported in the Condensed Consolidated Statement of Operations
Product revenues, net	$	1,984,164	$	1,536,271	$	5,500,839	$	4,575,863
Other income (expense), net	$	42,368	$	84,386	$	(2,234)	$	139,621

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


As of September 30, 2021
Assets			Liabilities
Classification	Fair Value		Classification	Fair Value
(in thousands)
Prepaid expenses and other current assets	$	34,300	Other current liabilities	$	(4,356)
Other assets	4,781		Other long-term liabilities	(29)
Total assets	$	39,081	Total liabilities	$	(4,385)

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)


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

As of September 30, 2021, the Company expects 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.

The following table summarizes the potential effect of offsetting derivatives by type of financial instrument designated as cash flow hedges under U.S. GAAP on the Company’s condensed consolidated balance sheets:


	As of September 30, 2021
	Gross Amounts Recognized		Gross Amounts Offset		Gross Amounts Presented		Gross Amounts Not Offset		Legal Offset
Foreign currency forward contracts	(in thousands)
Total assets	$	39,081	$	—	$	39,081	$	(4,385)	$	34,696
Total liabilities	(4,385)		—		(4,385)		4,385		—


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

**I.**Inventories

Inventories consisted of the following:


	As of September 30, 2021		As of December 31, 2020
	(in thousands)
Raw materials	$	45,990	$	46,232
Work-in-process	192,650		161,324
Finished goods	94,816		73,221
Total	$	333,456	$	280,777

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

**J.**Stock-based Compensation Expense and Share Repurchase Programs

Stock-based compensation expense

During the three and nine months ended September 30, 2021 and 2020, the Company recognized the following stock-based compensation expense:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
Stock-based compensation expense by type of award:
Restricted stock units (including PSUs) and restricted stock	$	89,458	$	84,043	$	279,131	$	279,611
Stock options	7,875		13,221		29,580		47,334
ESPP share issuances	6,321		3,225		17,895		8,565
Stock-based compensation expense related to inventories	(658)		(950)		(3,814)		(3,076)
Total stock-based compensation expense included in costs and expenses	$	102,996	$	99,539	$	322,792	$	332,434

Stock-based compensation expense by line item:
Cost of sales	$	1,599	$	1,250	$	4,570	$	3,998
Research and development expenses	60,995		60,770		196,412		203,732
Selling, general and administrative expenses	40,402		37,519		121,810		124,704
Total stock-based compensation expense included in costs and expenses	102,996		99,539		322,792		332,434
Income tax effect	(21,556)		(35,295)		(73,663)		(130,692)
Total stock-based compensation expense, net of tax	$	81,440	$	64,244	$	249,129	$	201,742

Share repurchase programs

In 2019, the Company’s Board of Directors approved a share repurchase program (the “2019 Share Repurchase Program”), pursuant to which the Company repurchased $500.0 million of its common stock in 2019 and 2020. During the nine months ended September 30, 2020, the Company repurchased 1,806,587 shares of its common stock under the 2019 Share Repurchase Program for an aggregate of $408.0 million.

In November 2020, the Company’s Board of Directors approved a share repurchase program (the “2020 Share Repurchase Program”), pursuant to which the Company repurchased $500.0 million of its common stock in 2020 and the first quarter of 2021. During the three months ended March 31, 2021, the Company repurchased 1,988,941 shares of its common stock under the 2020 Share Repurchase Program for an aggregate of $424.9 million.

On June 23, 2021, the Company’s Board of Directors approved a new share repurchase program (the “2021 Share Repurchase Program”), pursuant to which the Company is authorized to repurchase up to $1.5 billion of its common stock by December 31, 2022. During the three months ended September 30, 2021, the Company repurchased 3,293,161 shares of its common stock under the 2021 Share Repurchase Program for an aggregate of $642.2 million. As of September 30, 2021, a total of $857.8 million remained available under this program.

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

**K.**Income Taxes

The Company is subject to U.S. federal, state, and foreign income taxes. During the three and nine months ended September 30, 2021 and 2020, the Company recorded the following provisions for income taxes and effective tax rates as compared to its income before provision for income taxes:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands, except percentages)
Income before provision for income taxes	$	1,082,741	$	745,871	$	1,859,446	$	2,228,175
Provision for income taxes	230,813		78,437		287,456		120,718


Effective tax rate			21		%				11		%				15		%				5		%

The Company’s effective tax rate for the three months ended September 30, 2021 was similar to the U.S. statutory rate. The Company’s effective tax rate for the nine months ended September 30, 2021 was lower than the U.S. statutory rate primarily due to a $99.7 million discrete tax benefit associated with an increase in the U.K.’s corporate tax rate from 19% to 25%, which was enacted in June 2021 and will become effective in April 2023.

The Company’s effective tax rate for the three months ended September 30, 2020 was lower than the U.S. statutory rate primarily due to 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. The Company’s effective tax rate for the nine months ended September 30, 2020 was lower than the U.S. statutory rate due to a discrete tax benefit of $209.0 million associated with an intra-entity transfer of intellectual property rights to the U.K., a discrete benefit related to the write-off of a long-term intercompany receivable, the increase in the U.K.’s corporate tax rate from 17% to 19% noted above and excess tax benefits related to stock-based compensation.

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

The Company has reviewed the tax positions taken, or to be taken, in its tax returns for all tax years currently open to examination by a taxing authority. Unrecognized tax benefits represent the aggregate tax effect of differences between tax return positions and the benefits recognized in the consolidated financial statements. As of September 30, 2021 and December 31, 2020, the Company had $89.0 million and $75.8 million, respectively, of net unrecognized tax benefits, which would affect the Company’s tax rate if recognized. The Company does not expect that its unrecognized tax benefits will materially change within the next twelve months.

As of September 30, 2021, foreign earnings have been retained by foreign subsidiaries for indefinite reinvestment. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company could be subject to withholding taxes payable to the various foreign countries.

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

**L.**Commitments and Contingencies

Revolving Credit Facilities

The Company and certain of its subsidiaries have entered into two credit agreements (the “Credit Agreements”) with Bank of America, N.A., as administrative agent and the lenders referred to therein (the “Lenders”). The Credit Agreements

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

were not drawn upon at closing and the Company has not drawn upon them to date. Amounts drawn pursuant to the Credit Agreements, if any, will be used for general corporate purposes. Any amounts borrowed under the Credit Agreements will bear interest, at the Company’s option, at either a base rate or a Eurocurrency rate, in each case plus an applicable margin based on the Company’s consolidated leverage ratio (the ratio of the Company’s total consolidated funded indebtedness to the Company’s consolidated EBITDA for the most recently completed four fiscal quarter period).

In September 2019, the Company and certain of its subsidiaries entered into a $500.0 million unsecured revolving facility (the “2019 Credit Agreement”) with the Lenders, which matures on September 17, 2024. Under the 2019 Credit Agreement, the applicable margins on base rate loans range from 0.125% to 0.500% and the applicable margins on Eurocurrency loans range from 1.125% to 1.500%. The 2019 Credit Agreement provides a sublimit of $50.0 million for letters of credit.

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

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

The Credit Agreements contain customary representations and warranties and affirmative and negative covenants, including financial covenants to maintain (x) subject to certain limited exceptions, a consolidated leverage ratio of 3.50 to 1.00, subject to an increase to 4.00 to 1.00 following a material acquisition and (y) a consolidated interest coverage ratio of 2.50 to 1.00, in each case measured on a quarterly basis. As of September 30, 2021, the Company was in compliance with the covenants described above. The Credit Agreements also contain customary events of default. In the case of a continuing event of default, the administrative agent would be entitled to exercise various remedies, including the acceleration of amounts due under outstanding loans.

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

Guaranties and Indemnifications

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

The Company customarily agrees in the ordinary course of its business to indemnification provisions in agreements with clinical trial investigators and sites in its drug development programs, sponsored research agreements with academic and not-for-profit institutions, various comparable agreements involving parties performing services for the Company and its real estate leases. The Company also customarily agrees to certain indemnification provisions in its drug discovery, development and commercialization collaboration agreements. With respect to the Company’s clinical trials and sponsored research agreements, these indemnification provisions typically apply to any claim asserted against the investigator or the investigator’s institution relating to personal injury or property damage, violations of law or certain breaches of the Company’s contractual obligations arising out of the research or clinical testing of the Company’s compounds or drug candidates. With respect to lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Company’s contractual obligations. The indemnification provisions appearing in the Company’s collaboration agreements are similar to those for the other agreements discussed above, but in addition provide some limited indemnification for its collaborator in the event of third-party claims alleging infringement of intellectual property rights. In

VERTEX PHARMACEUTICALS INCORPORATED

Notes to Condensed Consolidated Financial Statements (unaudited)

each of the cases above, the indemnification obligation generally survives the termination of the agreement for some extended period, although the Company believes the obligation typically has the most relevance during the contract term and for a short period of time thereafter. The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited. The Company has purchased insurance policies covering personal injury, property damage and general liability that reduce its exposure for indemnification and would enable it in many cases to recover all or a portion of any future amounts paid. The Company has never paid any material amounts to defend lawsuits or settle claims related to these indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements is minimal.

Other Contingencies

The Company has certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a reserve for contingent liabilities when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. Other than the Company’s contingent consideration liabilities discussed in Note E, “Fair Value Measurements,” there were no material contingent liabilities accrued as of September 30, 2021 or December 31, 2020.

**M.**Additional Cash Flow Information

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


	Nine Months Ended September 30,
	2021				2020
	Beginning of period		End of period		Beginning of period		End of period
	(in thousands)
Cash and cash equivalents	$	5,988,187	$	6,275,698	$	3,109,322	$	5,358,087
Prepaid expenses and other current assets	658		4,515		8,004		2,898
Other assets	—		—		3,355		—
Cash, cash equivalents and restricted cash per condensed consolidated statement of cash flows	$	5,988,845	$	6,280,213	$	3,120,681	$	5,360,985

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