Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

64K characters. Original on sec.gov · Markdown

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We invest in scientific innovation to create transformative medicines for people with serious diseases with a focus on specialty markets. We have four approved medicines to treat cystic fibrosis, or CF, a life-threatening genetic disease, and are focused on increasing the number of people with CF eligible and able to receive our medicines through label expansions, approval of new medicines, and expanded reimbursement. We are broadening our pipeline into additional disease areas through internal research efforts and accessing external innovation through business development transactions.

Our triple combination regimen, TRIKAFTA/KAFTRIO (elexacaftor/tezacaftor/ivacaftor and ivacaftor), was approved in 2019 in the United States, or U.S., and in 2020 in the European Union, or E.U. Collectively, our four medicines are approved to treat the majority of the approximately 83,000 people with CF in North America, Europe and Australia. We are evaluating our medicines in additional patient populations, including younger children, with the goal of having small molecule treatments for up to 90% of people with CF. We are also pursuing genetic therapies to address the remaining 10% of people with CF who are not eligible for our small molecule correctors.

Beyond CF, we continue to research and develop small molecule drug candidates for the treatment of serious diseases, including alpha-1 antitrypsin, or AAT, deficiency, APOL1-mediated kidney diseases, and pain. We are also focused on developing cell and genetic therapies for various diseases in our pipeline, including sickle cell disease, or SCD, beta thalassemia, type 1 diabetes, or T1D, Duchenne muscular dystrophy, or DMD, myotonic dystrophy, or DM1, and CF. We are evaluating CTX001, a genetic therapy, as a potential treatment for SCD and transfusion-dependent beta thalassemia, or TDT, the most severe form of beta thalassemia, in collaboration with CRISPR Therapeutics AG, or CRISPR. In T1D, we are pursuing two programs for the transplant of functional islets into patients: transplantation of islet cells alone, using immunosuppression to protect the implanted cells, and implantation of the islet cells inside a novel immunoprotective device.

Financial Highlights


Revenues In the third quarter of 2021, our net product revenues continued to increase due to the uptake of KAFTRIO in Europe and continued performance of TRIKAFTA in the U.S.						Cash Our cash, cash equivalent and marketable securities increased to $6.96 billion as of September 30, 2021 as compared to $6.66 billion as of December 31, 2020 primarily due to our net product revenues and profitability, offset by repurchases of our common stock, and a $900.0 million payment we made to CRISPR in connection with an amendment to our CTX001 collaboration.

Expenses Our total R&D and SG&A expenses increased to $691.9 million in the third quarter of 2021 as compared to $678.0 million in the third quarter of 2020. In the third quarter of 2021, cost of sales was 12% of our net product revenues.

Business Updates

Cystic Fibrosis Marketed Products

We expect to continue to grow our CF business by increasing the number of people with CF eligible and able to receive our medicines. Recent progress in our CF business is included below.

We have signed a letter of intent with the pan-Canadian Pharmaceutical Alliance regarding the public reimbursement of TRIKAFTA for eligible people with CF. We have reached multiple provincial reimbursement agreements across Canada providing approximately 90% of Canadian patients 12 years of age and older and covered by government insurance with reimbursed access to TRIKAFTA.
Our application for approval of TRIKAFTA in children 6 through 11 years of age has been accepted for priority review by Health Canada.
TRIKAFTA/KAFTRIO is now approved and reimbursed or accessible in more than 20 countries outside the U.S., including Italy, France and Canada.

Pipeline

We continue to advance a pipeline of potentially transformative small molecule, and cell and genetic therapies aimed at treating serious diseases. Recent and anticipated progress in activities supporting these efforts is included below.

Cystic Fibrosis

We recently initiated our Phase 3 clinical trials evaluating the new once-daily investigational triple combination of VX-121/tezacaftor/VX-561 (deutivacaftor).
In collaboration with Moderna, Inc., we are seeking to discover and develop CF mRNA therapeutics designed to treat the underlying cause of CF by enabling cells in the lungs to produce functional CF transmembrane conductance regulator, or CFTR, protein for the treatment of the 10% of patients who do not produce any CFTR protein. We are conducting enabling studies and expect to submit an Investigational New Drug Application, or IND, for this program in 2022.

Beta Thalassemia and Sickle Cell Disease

We and our collaborator, CRISPR, are evaluating the use of a non-viral ex vivo CRISPR gene-editing therapy, CTX001, for the treatment of TDT and severe SCD. This approach aims to edit a person’s hematopoietic stem cells to produce fetal hemoglobin in red blood cells, which has the potential to reduce or eliminate symptoms associated with the diseases.
Data presented to date support the potential profile of CTX001 as a one-time functional cure for people with TDT and severe SCD, showing consistent and durable benefit across all treated patients. CTX001 safety data to date is generally consistent with an autologous stem cell transplant and myeloablative conditioning.
Target enrollment has been achieved in the ongoing clinical trials evaluating CTX001 in TDT and severe SCD. We anticipate submissions for regulatory approval of CTX001 in late 2022.

Type 1 Diabetes

We are developing cell therapies designed to replace insulin-producing islet cells that are destroyed in people with T1D, with the goal of delivering a potential functional cure.
VX-880 is a stem cell-derived, allogeneic, fully differentiated, insulin-secreting islet cell replacement therapy, using standard immunosuppression to protect the implanted cells. Our Phase 1/2 clinical trial evaluating VX-880 as a potential treatment for T1D is ongoing at multiple clinical sites in the U.S. and the Clinical Trial Application has been approved in Canada. In October 2021, we announced positive Day 90 data for the first T1D patient in the Phase 1/2 clinical trial of VX-880.
We are pursuing a second program in which these stem cell-derived, fully differentiated, insulin-secreting islet cells are encapsulated and implanted in an immunoprotective device. We are conducting IND-enabling studies, and we expect to submit an IND for this cells and device program in 2022.

APOL1-Mediated Kidney Diseases

We are evaluating the potential of oral, small molecule inhibitors of APOL1 function to treat people with APOL1-mediated kidney diseases.
Enrollment is complete in the Phase 2 proof-of-concept clinical trial evaluating VX-147 for treatment of people with APOL1-mediated focal segmental glomerulosclerosis with reduction of proteinuria as the primary endpoint. We expect results from this clinical trial in the fourth quarter of 2021 and expect that these results will inform the potential progression of VX-147 into pivotal clinical trials in the broader population of people with APOL1-mediated non-diabetic proteinuric kidney diseases.

Pain

NaV1.8 is a genetically and pharmacologically validated novel target for the treatment of pain. We previously have demonstrated clinical proof-of-concept with a small molecule investigational treatment targeting NaV1.8 in multiple pain indications including acute pain, neuropathic pain and musculoskeletal pain. We have discovered multiple selective small molecule inhibitors of NaV1.8 with the objective of creating a new class of medicines that have the potential to be highly effective for both acute and chronic pain, without the limitations of opioids and other existing pain medications.
Two Phase 2 dose ranging acute pain clinical trials evaluating VX-548 are underway; one following bunionectomy surgery and the other following abdominoplasty surgery. We expect to have data from the clinical trials evaluating VX-548 following bunionectomy and abdominoplasty surgeries in the first quarter of 2022.

Alpha-1 Antitrypsin Deficiency

We are evaluating multiple preclinical compounds with the potential to correct the misfolding of Z-AAT protein in the liver, in order to increase the systemic levels of functional AAT. Misfolded Z-AAT protein is the root cause of AAT deficiency and our small molecule corrector program targets both the liver and lung manifestations of the disease.
We plan to advance one or more novel small molecule Z-AAT correctors into the clinic in 2022.

Investments in External Innovation

In the third quarter of 2021, we entered into a new collaboration with Arbor Biotechnologies, Inc., or Arbor, to enhance efforts in developing ex vivo engineered cell therapies for multiple serious diseases using Arbor’s proprietary CRISPR gene-editing technology.
In October 2021, we entered into a collaboration with Mammoth Biosciences, Inc., or Mammoth, to develop in vivo gene-editing therapies for two diseases using Mammoth’s next-generation CRISPR systems.

COVID-19

We continue to monitor the impacts of the COVID-19 global pandemic on our business. COVID-19 has not affected our supply chain or the demand for our medicines, and we believe that we will be able to continue to supply all of our approved medicines to patients globally. We adjusted our business operations in response to COVID-19 and have continued to monitor local COVID-19 trends and government guidance for each of our site locations. We are utilizing a phased, site-specific approach to assess and permit employee access to our sites. Currently, our sites are open to certain employees where appropriate and permitted by local laws and guidelines.

Research

We continue to invest in our research programs and foster scientific innovation in order to identify and develop transformative medicines. Our strategy is to combine transformative advances in the understanding of human disease and the

science of therapeutics in order to identify and develop new medicines. We believe that pursuing research in diverse areas allows us to balance the risks inherent in drug development and may provide drug candidates that will form our pipeline in future years. To supplement our internal research programs, we acquire technologies and programs and collaborate with biopharmaceutical and technology companies, leading academic research institutions, government laboratories, foundations and other organizations, as needed, to advance research in our areas of therapeutic interest and to access technologies needed to execute on our strategy.

Drug Discovery and Development

Discovery and development of a new pharmaceutical product is a difficult and lengthy process that requires significant financial resources along with extensive technical and regulatory expertise. Potential drug candidates are subjected to rigorous evaluations, driven in part by stringent regulatory considerations, designed to generate information concerning efficacy, side effects, proper dosage levels and a variety of other physical and chemical characteristics that are important in determining whether a drug candidate should be approved for marketing as a pharmaceutical product. Most chemical compounds that are investigated as potential drug candidates never progress into development, and most drug candidates that do advance into development never receive marketing approval. Our investments in drug candidates are subject to considerable risks. We closely monitor the results of our discovery, research, clinical trials and nonclinical studies and frequently evaluate our drug development programs in light of new data and scientific, business and commercial insights, with the objective of balancing risk and potential. This process can result in rapid changes in focus and priorities as new information becomes available and as we gain additional understanding of our ongoing programs and potential new programs, as well as those of our competitors. For example, in June 2021, we decided not to progress VX-864, a drug candidate for the treatment of AAT deficiency, into late-stage development based on data obtained from a Phase 2 clinical trial.

If we believe that data from a completed registration program support approval of a drug candidate, we submit an New Drug Application or Biologics License Application to the FDA requesting approval to market the drug candidate in the U.S. and seek analogous approvals from comparable regulatory authorities in jurisdictions outside the U.S. To obtain approval, we must, among other things, demonstrate with evidence gathered in nonclinical studies and well-controlled clinical trials that the drug candidate is safe and effective for the disease it is intended to treat and that the manufacturing facilities, processes and controls for the manufacture of the drug candidate are adequate. The FDA and ex-U.S. regulatory authorities have substantial discretion in deciding whether or not a drug candidate should be granted approval based on the benefits and risks of the drug candidate in the treatment of a particular disease, and could delay, limit or deny regulatory approval. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for the drug candidate involved will be harmed.

Regulatory Compliance

Our marketing of pharmaceutical products is subject to extensive and complex laws and regulations. We have a corporate compliance program designed to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems and through the promotion of a culture of compliance. Among other laws, regulations and standards, we are subject to various U.S. federal and state laws, and comparable laws in other jurisdictions, pertaining to health care fraud and abuse, including anti-kickback and false claims laws, and laws prohibiting the promotion of drugs for unapproved or off-label uses. Anti-kickback laws generally make it illegal for a prescription drug manufacturer to knowingly and willfully solicit, offer, receive or pay any remuneration in return for or to induce the referral of business, including the purchase or prescription of a particular drug that is reimbursed by a state or federal health care program. False claims laws prohibit anyone from knowingly or willfully presenting for payment to third-party payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. We are subject to laws and regulations that regulate the sales and marketing practices of pharmaceutical manufacturers, as well as laws such as the U.S. Foreign Corrupt Practices Act, which govern our international business practices with respect to payments to government officials. In addition, we are subject to various data protection and privacy laws and regulations in the U.S., E.U., U.K., Canada, Australia and other jurisdictions.

We expect to continue to devote substantial resources to maintain, administer and expand these compliance programs globally.

Reimbursement

Sales of our products depend, to a large degree, on the extent to which our products are reimbursed by third-party payors, such as government health programs, commercial insurance and managed health care organizations. Reimbursement for our products, including our potential pipeline therapies, cannot be assured and may take significant periods of time to obtain. We dedicate substantial management and other resources in order to obtain and maintain appropriate levels of reimbursement for our products from third-party payors, including governmental organizations in the U.S. and ex-U.S. markets.

In the U.S., we have worked successfully with third party payors in order to promptly obtain appropriate levels of reimbursement for our CF medicines. We plan to continue to engage in discussions with numerous commercial insurers and managed health care organizations, along with government health programs that are typically managed by authorities in the individual states, to ensure that payors recognize the significant benefits that our medicines provide and provide patients with appropriate levels of access to our medicines.

In Europe and other ex-U.S. markets, we seek government reimbursement for our medicines on a country-by-country basis. This is necessary for each new medicine, as well as for label expansions for our current medicines. We have obtained broad reimbursement for our CF medicines in ex-U.S. markets. TRIKAFTA/KAFTRIO is reimbursed or accessible in more than 20 countries outside the U.S., including England, Ireland, Italy, France and Canada. We expect to continue to focus significant resources to obtain expanded reimbursement for our CF medicines and pipeline therapies in ex-U.S. markets.

Strategic Transactions

Acquisitions

As part of our business strategy, we seek to acquire drugs, drug candidates and other technologies and businesses that have the potential to complement our ongoing research and development efforts. In 2019, we invested significantly in business development transactions designed to augment our pipeline, including the acquisition of Semma Therapeutics, Inc., or Semma, a privately-held company focused on the use of stem cell-derived human islets as a treatment for T1D, and Exonics Therapeutics, Inc., or Exonics, a privately-held company focused on creating transformative gene-editing therapies to repair mutations that cause DMD and other severe neuromuscular diseases, including DM1. We expect to continue to identify and evaluate potential acquisitions and may include larger transactions or later-stage assets.

Collaboration and Licensing Arrangements

We enter into arrangements with third parties, including collaboration and licensing arrangements, for the development, manufacture and commercialization of drugs, drug candidates and other technologies that have the potential to complement our ongoing research and development efforts. We expect to continue to identify and evaluate collaboration and licensing opportunities that may be similar to or different from the collaborations and licenses that we have engaged in previously.

In-License Agreements

We have entered into collaborations with biotechnology and pharmaceutical companies in order to acquire rights or to license drug candidates or technologies that enhance our pipeline and/or our research capabilities. Over the last several years, we entered into collaboration agreements with a number of companies, including Arbor, CRISPR, Kymera Therapeutics, Inc., Mammoth, Moderna, Inc., and Obsidian Therapeutics, Inc. Generally, when we in-license a technology or drug candidate, we make upfront payments to the collaborator, assume the costs of the program and/or agree to make contingent payments, which could consist of milestone, royalty and option payments. Most of these collaboration payments are expensed as research and development expenses; however, depending on many factors, including the structure of the collaboration, the significance of the in-licensed drug candidate to the collaborator’s operations and the other activities in which our collaborators are engaged, the accounting for these transactions can vary significantly. In the nine months ended September 30, 2021 and 2020, our research and development expenses included $986.8 million and $143.3 million, respectively, related to upfront and milestones payments pursuant to our collaboration agreements. In the nine months ended September 30, 2021, these payments were primarily related to the $900.0 million upfront payment we made to CRISPR in the second quarter of 2021.

Joint Development and Commercialization Agreement with CRISPR

In 2017, we entered into a joint development and commercialization agreement, or JDCA, with CRISPR pursuant to which we are developing and preparing to commercialize CTX001 for TDT and SCD. This JDCA was entered into following our exercise of an option to co-develop and co-commercialize the hemoglobinopathies program that was contained in the collaboration agreement that we entered into with CRISPR in 2015.

In April 2021, we and CRISPR entered into an amended and restated joint development and commercialization agreement, or the A&R JDCA. In June 2021, we made a $900.0 million upfront payment to CRISPR in connection with the closing of the transactions contemplated by the A&R JDCA, which we recorded to research and development expenses. Under the terms of the A&R JDCA, we are leading worldwide development, manufacturing and commercialization of CTX001. Additionally, 60% of the net profits and net losses for CTX001 are allocated to us and 40% of the net profits and net losses for CTX001 are allocated to CRISPR. CRISPR may earn an additional one-time $200.0 million milestone payment upon regulatory approval of CTX001.

Out-License Agreements

We also have out-licensed internally developed programs to collaborators who are leading the development of these programs. These out-license arrangements include our agreement with Merck KGaA, Darmstadt, Germany, which licensed oncology research and development programs from us in early 2017. Pursuant to these out-licensing arrangements, our collaborators are responsible for the research, development and commercialization costs associated with these programs, and we are entitled to receive contingent milestone and/or royalty payments. As a result, we do not expect to incur significant expenses in connection with these programs and have the potential for future collaborative and royalty revenues resulting from these programs.

Please refer to Note C, “Collaborative Arrangements,” for further information regarding our in-license agreements and out-license agreements.

Strategic Investments

In connection with our business development activities, we have periodically made equity investments in our collaborators. As of September 30, 2021, we held strategic equity investments in public companies and certain private companies, and we plan to make additional strategic equity investments in the future. While we invest the majority of our cash, cash equivalents and marketable securities in instruments that meet specific credit quality standards and limit our exposure to any one issue or type of instrument, our strategic investments are maintained and managed separately from our other cash, cash equivalents and marketable securities. Any changes in the fair value of equity investments with readily determinable fair values (including publicly traded securities) are recorded to other income (expense), net in our condensed consolidated statement of operations.

In the nine months ended September 30, 2021 and 2020, we recorded within other income (expense), gains of $5.0 million and $140.9 million, respectively, related to changes in the fair value of our strategic investments, and from sales of certain equity investments. As of September 30, 2021, the fair value of our investments in publicly traded companies was $218.8 million. To the extent that we continue to hold strategic investments, particularly strategic investments in publicly traded companies, we will record other income (expense) related to these strategic investments on a quarterly basis. Due to the volatility of the global markets, including as a result of COVID-19, and the high volatility of stocks in the biotechnology industry, we expect the value of these strategic investments to fluctuate and that the increases or decreases in the fair value of these strategic investments will continue to have material impacts on our net income (expense) and our profitability on a quarterly and/or annual basis.

RESULTS OF OPERATIONS


	Three Months Ended September 30,				Increase/(Decrease)			Nine Months Ended September 30,				Increase/(Decrease)
	2021		2020		$		%	2021		2020		$		%
	(in thousands, except percentages and per share amounts)
Revenues	$	1,984,164	$	1,538,271	$	445,893	29%	$	5,501,839	$	4,577,863	$	923,976	20%
Operating costs and expenses	929,652		866,030		63,622		7%	3,597,462		2,467,365		1,130,097		46%
Income from operations	1,054,512		672,241		382,271		57%	1,904,377		2,110,498		(206,121)		(10)%
Other non-operating income (expense), net	28,229		73,630		(45,401)		(62)%	(44,931)		117,677		(162,608)		**
Provision for income taxes	230,813		78,437		152,376		194%	287,456		120,718		166,738		138%
Net income	$	851,928	$	667,434	$	184,494	28%	$	1,571,990	$	2,107,457	$	(535,467)	(25)%

Net income per diluted common share	$	3.28	$	2.53				$	6.03	$	7.98
Diluted shares used in per share calculations	259,707		264,079					260,877		264,031

												** Not meaningful

Net Income

Our net income increased in the third quarter of 2021 as compared to the third quarter of 2020 primarily due to increased revenues resulting from the continued uptake of KAFTRIO in Europe and strong performance of TRIKAFTA in the U.S., including the launch of TRIKAFTA in children with CF 6 through 11 years of age. Our increased revenues were partially offset by increased cost of sales consistent with increased product revenues, changes in the fair value of our strategic investments and an increased provision for income taxes.

Our net income decreased in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 primarily due to the $900.0 million upfront payment we made to CRISPR in the second quarter of 2021 in connection with the amendment of our CTX001 collaboration. Changes in the fair value of our strategic investments, increased cost of sales consistent with increased product revenues and an increased provision for income taxes also decreased our net income. These decreases to our net income were partially offset by increased revenues resulting from the uptake of KAFTRIO in Europe and strong performance of TRIKAFTA in the U.S.

Revenues


	Three Months Ended September 30,				Increase/(Decrease)			Nine Months Ended September 30,				Increase/(Decrease)
	2021		2020		$		%	2021		2020		$		%
	(in thousands, except percentages)
Product revenues, net	$	1,984,164	$	1,536,271	$	447,893	29%	$	5,500,839	$	4,575,863	$	924,976	20%
Other revenues	—		2,000		(2,000)		N/A	1,000		2,000		(1,000)		(50)%
Total revenues	$	1,984,164	$	1,538,271	$	445,893	29%	$	5,501,839	$	4,577,863	$	923,976	20%

Product Revenues, Net


	Three Months Ended September 30,				Increase/(Decrease)			Nine Months Ended September 30,				Increase/(Decrease)
	2021		2020		$		%	2021		2020		$		%
	(in thousands, except percentages)
TRIKAFTA/KAFTRIO	$	1,555,772	$	960,308	$	595,464	62%	$	4,004,600	$	2,773,256	$	1,231,344	44%
SYMDEKO/SYMKEVI	81,415		156,178		(74,763)		(48)%	339,969		501,066		(161,097)		(32)%
ORKAMBI	184,561		225,919		(41,358)		(18)%	624,224		692,038		(67,814)		(10)%
KALYDECO	162,416		193,866		(31,450)		(16)%	532,046		609,503		(77,457)		(13)%
Total product revenues, net	$	1,984,164	$	1,536,271	$	447,893	29%	$	5,500,839	$	4,575,863	$	924,976	20%

In the third quarter and nine months ended September 30, 2021, our net product revenues increased by $447.9 million and $925.0 million, respectively, as compared to the third quarter and nine months ended September 30, 2020. The increase in our net product revenues in the third quarter and nine months ended September 30, 2021 was primarily due to the continued uptake of KAFTRIO, which was approved in the E.U. in the third quarter of 2020, and the strong performance of TRIKAFTA in the U.S., including the launch of TRIKAFTA in June 2021 in children with CF 6 through 11 years of age. Decreases in revenues for our products other than TRIKAFTA/KAFTRIO were primarily the result of patients switching from these medicines to TRIKAFTA/KAFTRIO.

Our net product revenues from U.S. and ex-U.S. markets were as follows:


	Three Months Ended September 30,				Increase/(Decrease)	Nine Months Ended September 30,				Increase/(Decrease)
	2021		2020		%	2021		2020		%
	(in thousands, except percentages)
U.S. markets	$	1,382,892	$	1,222,565	13%	$	3,893,245	$	3,620,467	8%
Ex-U.S. markets	601,272		313,706		92%	1,607,594		955,396		68%
Total product revenues, net	$	1,984,164	$	1,536,271	29%	$	5,500,839	$	4,575,863	20%

Other Revenues

Our other revenues were $1.0 million and $2.0 million related to collaborative milestones that we earned in the nine months ended September 30, 2021 and 2020, respectively. Our other revenues have historically fluctuated significantly from one period to another based on our collaborative out-license activities, and may continue to fluctuate in the future. Our future royalty revenues will be dependent on if, and when, our collaborators are able to successfully develop drug candidates that we have out-licensed to them.

Operating Costs and Expenses


`	Three Months Ended September 30,				Increase/(Decrease)			Nine Months Ended September 30,				Increase/(Decrease)
	2021		2020		$		%	2021		2020		$		%
	(in thousands, except percentages)
Cost of sales	$	236,512	$	186,182	$	50,330	27%	$	656,813	$	533,199	$	123,614	23%
Research and development expenses	493,751		493,497		254		—%	2,356,814		1,362,953		993,861		73%
Selling, general and administrative expenses	198,189		184,551		13,638		7%	584,935		558,613		26,322		5%
Change in fair value of contingent consideration	1,200		1,800		(600)		(33)%	(1,100)		12,600		(13,700)		**
Total costs and expenses	$	929,652	$	866,030	$	63,622	7%	$	3,597,462	$	2,467,365	$	1,130,097	46%

												** Not meaningful

Cost of Sales

Our cost of sales primarily consists of third-party royalties payable on our net sales of our products as well as the cost of producing inventories that corresponded to product revenues for the reporting period. Pursuant to our agreement with the Cystic Fibrosis Foundation our tiered third-party royalties on sales of TRIKAFTA/KAFTRIO, SYMDEKO/SYMKEVI, KALYDECO and ORKAMBI, calculated as a percentage of net sales, range from the single digits to the sub-teens, with royalties on sales of TRIKAFTA/KAFTRIO slightly lower than for our other products. Over the last several years, our cost of sales has been increasing due to increased net product revenues. Our cost of sales as a percentage of our net product revenues was 12% in each of the third quarter of 2021 and 2020 and nine months ended September 30, 2021 and 2020.

Research and Development Expenses


	Three Months Ended September 30,				Increase/(Decrease)			Nine Months Ended September 30,				Increase/(Decrease)
	2021		2020		$		%	2021		2020		$		%
	(in thousands, except percentages)
Research expenses	$	148,620	$	186,152	$	(37,532)	(20)%	$	426,352	$	477,560	$	(51,208)	(11)%
Development expenses	345,131		307,345		37,786		12%	1,930,462		885,393		1,045,069		118%
Total research and development expenses	$	493,751	$	493,497	$	254	—%	$	2,356,814	$	1,362,953	$	993,861	73%

Our research and development expenses include internal and external costs incurred for research and development of our drugs and drug candidates and expenses related to certain technologies that we acquire or license through business development transactions. We do not assign our internal costs, such as salary and benefits, stock-based compensation expense, laboratory supplies and other direct expenses and infrastructure costs, to individual drugs or drug candidates, because the employees within our research and development groups typically are deployed across multiple research and development programs. These internal costs are significantly greater than our external costs excluding collaborative upfront and milestone payments, such as the costs of services provided to us by clinical research organizations and other outsourced research, which we allocate by individual program. All research and development costs for our drugs and drug candidates are expensed as incurred.

Since January 2019, we have incurred approximately $5.9 billion in research and development expenses associated with drug discovery and development. The successful development of our drug candidates is highly uncertain and subject to a number of risks. In addition, the duration of clinical trials may vary substantially according to the type, complexity and novelty of the drug candidate and the disease indication being targeted. The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activities. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The duration and cost of discovery, nonclinical

studies and clinical trials may vary significantly over the life of a project and are difficult to predict. Therefore, accurate and meaningful estimates of the ultimate costs to bring our drug candidates to market are not available.

In 2020 and the nine months ended September 30, 2021, costs related to our CF programs represented the largest portion of our development costs, excluding the $900.0 million upfront payment to CRISPR. Any estimates regarding development and regulatory timelines for our drug candidates are highly subjective and subject to change. Until we have data from Phase 3 clinical trials, we cannot make a meaningful estimate regarding when, or if, a clinical development program will generate revenues and cash flows.

Research Expenses


	Three Months Ended September 30,				Increase/(Decrease)			Nine Months Ended September 30,				Increase/(Decrease)
	2021		2020		$		%	2021		2020		$		%
	(in thousands, except percentages)
Research Expenses:
Salary and benefits	$	34,635	$	32,145	$	2,490	8%	$	102,529	$	97,513	$	5,016	5%
Stock-based compensation expense	17,388		15,301		2,087		14%	56,361		68,206		(11,845)		(17)%
Outsourced services and other direct expenses	35,798		27,911		7,887		28%	114,920		79,837		35,083		44%
Collaborative payments	26,750		80,050		(53,300)		(67)%	54,150		143,300		(89,150)		(62)%
Infrastructure costs	34,049		30,745		3,304		11%	98,392		88,704		9,688		11%
Total research expenses	$	148,620	$	186,152	$	(37,532)	(20)%	$	426,352	$	477,560	$	(51,208)	(11)%

We expect to continue to invest in our research programs with a focus on creating transformative medicines for serious diseases. Our research expenses have historically fluctuated, and are expected to continue to fluctuate, from one period to another due to upfront and milestone payments related to our business development activities that are reflected in the preceding table as collaborative payments. Our research expenses, excluding these collaborative payments, have been increasing over the last several years as we have invested in our pipeline and expanded our cell and genetic therapy capabilities.

Development Expenses


	Three Months Ended September 30,				Increase/(Decrease)			Nine Months Ended September 30,				Increase/(Decrease)
	2021		2020		$		%	2021		2020		$		%
	(in thousands, except percentages)
Development Expenses:
Salary and benefits	$	88,568	$	73,698	$	14,870	20%	$	252,173	$	221,828	$	30,345	14%
Stock-based compensation expense	43,607		45,469		(1,862)		(4)%	140,051		135,526		4,525		3%
Outsourced services and other direct expenses	149,627		133,595		16,032		12%	426,441		374,926		51,515		14%
Collaborative payments	—		—		—		N/A	932,650		—		932,650		**
Infrastructure costs	63,329		54,583		8,746		16%	179,147		153,113		26,034		17%
Total development expenses	$	345,131	$	307,345	$	37,786	12%	$	1,930,462	$	885,393	$	1,045,069	118%

												** Not meaningful

Our development expenses increased by $37.8 million in the third quarter of 2021 as compared to third quarter of 2020, primarily due to increased expenses related to our diversifying pipeline, including clinical trials, headcount and infrastructure costs. Our development expenses increased by $1.05 billion in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to the $900.0 million upfront payment to CRISPR in the second quarter of 2021, that is included in the preceding table under collaborative payments, and increased expenses related to our diversifying pipeline, including clinical trials, headcount and infrastructure costs.

Selling, General and Administrative Expenses


	Three Months Ended September 30,				Increase/(Decrease)			Nine Months Ended September 30,				Increase/(Decrease)
	2021		2020		$		%	2021		2020		$		%
	(in thousands, except percentages)
Selling, general and administrative expenses	$	198,189	$	184,551	$	13,638	7%	$	584,935	$	558,613	$	26,322	5%

Selling, general and administrative expenses increased by 7% in the third quarter of 2021 as compared to third quarter of 2020 and increased by 5% in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to the continued investment to support the commercialization of our medicines and increased support for our CF pipeline products and other disease areas.

Contingent Consideration

The fair value of contingent consideration potentially payable to Exonics’ former equity holders increased $1.2 million and decreased $1.1 million in the third quarter and nine months ended September 30, 2021, respectively. The fair value of contingent consideration increased by $1.8 million and $12.6 million in the third quarter and nine months ended September 30, 2020, respectively.

Other Non-Operating Income (Expense), Net

Interest Income

Interest income was $1.1 million and $3.7 million in the third quarter and nine months ended September 30, 2021, respectively, which was lower than our interest income of $3.1 million and $19.9 million in the third quarter and nine months ended September 30, 2020, respectively, due to a decrease in prevailing market interest rates, despite an increase in our cash equivalents and available-for-sale debt securities. Our future interest income will be dependent on the amount of, and prevailing market interest rates on, our outstanding cash equivalents and available-for-sale debt securities.

Interest Expense

Interest expense was $15.3 million and $46.4 million in the third quarter and nine months ended September 30, 2021, respectively, as compared to $13.9 million and $41.9 million in the third quarter and nine months ended September 30, 2020, respectively. The majority of our interest expense in these periods was related to imputed interest expense associated with our leased corporate headquarters in Boston. Our future interest expense will be dependent on whether, and to what extent, we borrow amounts under our credit facilities.

Other Income (Expense), Net

Other income (expense), net was income of $42.4 million and expense of $2.2 million in the third quarter and nine months ended September 30, 2021, respectively, as compared to income of $84.4 million and $139.6 million in the third quarter and nine months ended September 30, 2020, respectively. Our other income (expense), net in these periods was primarily related to changes in the fair value of our strategic investments. We expect that due to the volatility of the stock price of biotechnology companies, our other income (expense), net will fluctuate in future periods based on increases or decreases in the fair value of our strategic investments.

Income Taxes

We recorded provisions for income taxes of $230.8 million and $287.5 million in the third quarter and nine months ended September 30, 2021, respectively, as compared to provisions for income taxes of $78.4 million and $120.7 million in the third quarter and nine months ended September 30, 2020, respectively. Our effective tax rate of 15% for the nine months ended September 30, 2021 was lower than the U.S. statutory rate primarily due to a $100 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. Our effective tax rate of 5% for the nine months ended September 30, 2020 was lower than the U.S. statutory rate primarily due to (i) a $209 million discrete tax benefit associated with the transfer of intellectual property rights to the U.K., (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.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes the components of our financial condition as of September 30, 2021 and December 31, 2020:


	September 30,		December 31,		Increase/(Decrease)
	2021		2020		$		%
	(in thousands)
Cash, cash equivalents and marketable securities	$	6,960,885	$	6,658,897	$	301,988	5%
Working Capital:
Total current assets	8,852,540		8,133,379		719,161		9%
Total current liabilities	(1,914,264)		(1,877,533)		36,731		2%
Total working capital	$	6,938,276	$	6,255,846	$	682,430	11%

As of September 30, 2021, total working capital was $6.94 billion, which represented an increase of $682.4 million from $6.26 billion as of December 31, 2020. The increase in total working capital in the nine months ended September 30, 2021 was primarily related to $1.65 billion of cash provided by operations, which was net of our $900.0 million payment to CRISPR, partially offset by $1.06 billion of cash used to repurchase our common stock pursuant to our share repurchase programs and expenditures for property and equipment of $173.3 million.

Sources of Liquidity

As of September 30, 2021, we had cash, cash equivalents and marketable securities of $6.96 billion, which represented an increase of $302 million from $6.66 billion as of December 31, 2020. We intend to rely on our existing cash, cash equivalents and marketable securities together with cash flows from product sales as our primary source of liquidity.

We may borrow up to a total of $2.5 billion pursuant to two revolving credit facilities. We may repay and reborrow amounts under these revolving credit agreements without penalty. Subject to certain conditions, we may request that the borrowing capacity for each of the credit agreements be increased by an additional $500.0 million, for a total of $3.5 billion collectively.

Other possible sources of future liquidity include commercial debt, public and private offerings of our equity and debt securities, strategic sales of assets or businesses and financial transactions. Negative covenants in our credit agreement may prohibit or limit our ability to access these sources of liquidity. As of September 30, 2021, we were in compliance with these covenants.

Future Capital Requirements

We have significant future capital requirements, including:

significant expected operating expenses to conduct research and development activities and to operate our organization; and
substantial facility and finance lease obligations.

In addition:

We have entered into certain collaboration agreements with third parties that include the funding of certain research, development and commercialization efforts. Certain of our business development transactions, including collaborations and acquisitions, include the potential for future milestone and royalty payments by us upon the achievement of pre-established developmental and regulatory targets and/or commercial targets. We may enter into additional business development transactions, including acquisitions, collaborations and equity investments, that require additional capital.
To the extent we borrow amounts under the credit agreements we entered into in 2020 and 2019, we would be required to repay any outstanding principal amounts in 2022 or 2024, respectively.
As of September 30, 2021, we had $857.8 million available under our 2021 Share Repurchase Program. We repurchased an additional $357.8 million of our common stock during October 2021.

We expect that cash flows from our products together with our current cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next twelve months. The adequacy of our available funds to meet our future operating and capital requirements will depend on many factors, including the amounts of future revenues generated by our products, and the potential introduction of one or more of our other drug candidates to the market, the level of our business development activities and the number, breadth, cost and prospects of our research and development programs.

Financing Strategy

We may raise additional capital by borrowing under credit agreements, through public offerings or private placements of our securities or securing new collaborative agreements or other methods of financing. We will continue to manage our capital structure and will consider all financing opportunities, whenever they may occur, that could strengthen our long-term liquidity profile. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all.

CONTRACTUAL COMMITMENTS AND OBLIGATIONS

Our commitments and obligations were reported in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission, or SEC, on February 11, 2021. There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are reflected in reported results for the period in which the change occurs. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. During the nine months ended September 30, 2021, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 11, 2021.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements, please refer to Note A, “Basis of Presentation and Accounting Policies.”

Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk