filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Operations
(unaudited)
(in millions, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Product revenues, net | $ | 2,334.3 | $ | 1,984.1 | $ | 6,628.0 | $ | 5,500.8 | |||||||||||||||
| Other revenues | — | — | — | 1.0 | |||||||||||||||||||
| Total revenues | 2,334.3 | 1,984.1 | 6,628.0 | 5,501.8 | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of sales | 289.4 | 236.5 | 797.0 | 656.8 | |||||||||||||||||||
| Research and development expenses | 645.0 | 467.0 | 1,846.2 | 1,370.0 | |||||||||||||||||||
| Acquired in-process research and development expenses | 29.0 | 26.7 | 92.9 | 986.8 | |||||||||||||||||||
| Selling, general and administrative expenses | 246.8 | 198.2 | 677.3 | 584.9 | |||||||||||||||||||
| Change in fair value of contingent consideration | (2.6) | 1.2 | (59.3) | (1.1) | |||||||||||||||||||
| Total costs and expenses | 1,207.6 | 929.6 | 3,354.1 | 3,597.4 | |||||||||||||||||||
| Income from operations | 1,126.7 | 1,054.5 | 3,273.9 | 1,904.4 | |||||||||||||||||||
| Interest income | 46.2 | 1.1 | 58.6 | 3.7 | |||||||||||||||||||
| Interest expense | (13.7) | (15.2) | (43.2) | (46.4) | |||||||||||||||||||
| Other income (expense), net | 17.2 | 42.4 | (133.7) | (2.2) | |||||||||||||||||||
| Income before provision for income taxes | 1,176.4 | 1,082.8 | 3,155.6 | 1,859.5 | |||||||||||||||||||
| Provision for income taxes | 245.9 | 230.9 | 652.5 | 287.5 | |||||||||||||||||||
| Net income | $ | 930.5 | $ | 851.9 | $ | 2,503.1 | $ | 1,572.0 | |||||||||||||||
| Net income per common share: | |||||||||||||||||||||||
| Basic | $ | 3.63 | $ | 3.30 | $ | 9.78 | $ | 6.08 | |||||||||||||||
| Diluted | $ | 3.59 | $ | 3.28 | $ | 9.68 | $ | 6.03 | |||||||||||||||
| Shares used in per share calculations: | |||||||||||||||||||||||
| Basic | 256.5 | 257.9 | 255.8 | 258.7 | |||||||||||||||||||
| Diluted | 259.5 | 259.7 | 258.7 | 260.9 |
Please refer to Note A, “Basis of Presentation and Accounting Policies,” for an explanation of amounts reclassified from “Research and development expenses” to “Acquired in-process research and development expenses” for the three and nine months ended September 30, 2021.
The accompanying notes are an integral part of these condensed consolidated financial statements.
VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | 930.5 | $ | 851.9 | $ | 2,503.1 | $ | 1,572.0 | |||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Unrealized holding losses on marketable securities, net | (0.6) | (0.0) | (3.6) | (0.3) | |||||||||||||||||||
| Unrealized gains on foreign currency forward contracts, net of tax of $(16.0), $(9.6), $(34.3) and $(21.2), respectively | 58.8 | 34.7 | 128.1 | 77.0 | |||||||||||||||||||
| Foreign currency translation adjustment | (18.1) | 2.0 | (42.8) | 3.3 | |||||||||||||||||||
| Total other comprehensive income | 40.1 | 36.7 | 81.7 | 80.0 | |||||||||||||||||||
| Comprehensive income | $ | 970.6 | $ | 888.6 | $ | 2,584.8 | $ | 1,652.0 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Balance Sheets
(unaudited)
(in millions, except share data)
| September 30, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 9,171.5 | $ | 6,795.0 | |||||||
| Marketable securities | 599.2 | 729.9 | |||||||||
| Accounts receivable, net | 1,385.2 | 1,136.8 | |||||||||
| Inventories | 388.2 | 353.1 | |||||||||
| Prepaid expenses and other current assets | 726.9 | 545.8 | |||||||||
| Total current assets | 12,271.0 | 9,560.6 | |||||||||
| Property and equipment, net | 1,118.7 | 1,094.1 | |||||||||
| Goodwill | 1,075.2 | 1,002.2 | |||||||||
| Intangible assets | 603.6 | 400.0 | |||||||||
| Deferred tax assets | 1,162.7 | 934.5 | |||||||||
| Operating lease assets | 342.7 | 330.3 | |||||||||
| Other assets | 132.5 | 110.8 | |||||||||
| Total assets | $ | 16,706.4 | $ | 13,432.5 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 126.9 | $ | 195.0 | |||||||
| Accrued expenses | 2,264.4 | 1,678.6 | |||||||||
| Other current liabilities | 218.0 | 268.4 | |||||||||
| Total current liabilities | 2,609.3 | 2,142.0 | |||||||||
| Long-term finance lease liabilities | 442.3 | 509.8 | |||||||||
| Long-term operating lease liabilities | 382.3 | 377.4 | |||||||||
| Long-term contingent consideration | 127.2 | 186.5 | |||||||||
| Other long-term liabilities | 115.7 | 116.8 | |||||||||
| Total liabilities | 3,676.8 | 3,332.5 | |||||||||
| Commitments and contingencies | — | — | |||||||||
| Shareholders’ equity: | |||||||||||
| Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding | — | — | |||||||||
| Common stock, $0.01 par value; 500,000,000 shares authorized, 256,645,737 and 254,479,046 shares issued and outstanding, respectively | 2.6 | 2.5 | |||||||||
| Additional paid-in capital | 7,225.5 | 6,880.8 | |||||||||
| Accumulated other comprehensive income | 97.6 | 15.9 | |||||||||
| Retained earnings | 5,703.9 | 3,200.8 | |||||||||
| Total shareholders’ equity | 13,029.6 | 10,100.0 | |||||||||
| Total liabilities and shareholders’ equity | $ | 16,706.4 | $ | 13,432.5 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Shareholders’ Equity
(unaudited)
(in millions)
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) Income | Retained Earnings | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | 259.1 | $ | 2.6 | $ | 7,640.2 | $ | (25.2) | $ | 1,578.8 | $ | 9,196.4 | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 36.7 | — | 36.7 | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | 851.9 | 851.9 | |||||||||||||||||||||||||||||
| Repurchase of common stock | (3.3) | (0.0) | (642.2) | — | — | (642.2) | |||||||||||||||||||||||||||||
| Common stock withheld for employee tax obligations | (0.1) | (0.0) | (28.6) | — | — | (28.6) | |||||||||||||||||||||||||||||
| Issuance of common stock under benefit plans | 0.5 | 0.0 | 12.9 | — | — | 12.9 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 103.7 | — | — | 103.7 | |||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 256.2 | $ | 2.6 | $ | 7,086.0 | $ | 11.5 | $ | 2,430.7 | $ | 9,530.8 | ||||||||||||||||||||||||
| Balance at June 30, 2022 | 256.0 | $ | 2.6 | $ | 7,100.0 | $ | 57.5 | $ | 4,773.4 | $ | 11,933.5 | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 40.1 | — | 40.1 | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | 930.5 | 930.5 | |||||||||||||||||||||||||||||
| Common stock withheld for employee tax obligations | (0.2) | (0.0) | (48.0) | — | — | (48.0) | |||||||||||||||||||||||||||||
| Issuance of common stock under benefit plans | 0.8 | 0.0 | 38.2 | — | — | 38.2 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 135.3 | — | — | 135.3 | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 256.6 | $ | 2.6 | $ | 7,225.5 | $ | 97.6 | $ | 5,703.9 | $ | 13,029.6 | ||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) Income | Retained Earnings | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 259.9 | $ | 2.6 | $ | 7,894.0 | $ | (68.5) | $ | 858.7 | $ | 8,686.8 | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 80.0 | — | 80.0 | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,572.0 | 1,572.0 | |||||||||||||||||||||||||||||
| Repurchase of common stock | (5.3) | (0.0) | (1,067.2) | — | — | (1,067.2) | |||||||||||||||||||||||||||||
| Common stock withheld for employee tax obligations | (0.6) | (0.0) | (134.2) | — | — | (134.2) | |||||||||||||||||||||||||||||
| Issuance of common stock under benefit plans | 2.2 | 0.0 | 66.8 | — | — | 66.8 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 326.6 | — | — | 326.6 | |||||||||||||||||||||||||||||
| Balance at September 30, 2021 | 256.2 | $ | 2.6 | $ | 7,086.0 | $ | 11.5 | $ | 2,430.7 | $ | 9,530.8 | ||||||||||||||||||||||||
| Balance at December 31, 2021 | 254.5 | $ | 2.5 | $ | 6,880.8 | $ | 15.9 | $ | 3,200.8 | $ | 10,100.0 | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 81.7 | — | 81.7 | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | 2,503.1 | 2,503.1 | |||||||||||||||||||||||||||||
| Common stock withheld for employee tax obligations | (0.7) | (0.0) | (169.9) | — | — | (169.9) | |||||||||||||||||||||||||||||
| Issuance of common stock under benefit plans | 2.8 | 0.1 | 135.2 | — | — | 135.3 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 379.4 | — | — | 379.4 | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 256.6 | $ | 2.6 | $ | 7,225.5 | $ | 97.6 | $ | 5,703.9 | $ | 13,029.6 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
VERTEX PHARMACEUTICALS INCORPORATED
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in millions)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 2,503.1 | $ | 1,572.0 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Stock-based compensation expense | 379.8 | 322.8 | |||||||||
| Depreciation expense | 109.9 | 91.8 | |||||||||
| Decrease in fair value of contingent consideration | (59.3) | (1.1) | |||||||||
| Deferred income taxes | (424.0) | (112.7) | |||||||||
| Gains (losses) on equity securities | 143.1 | (5.0) | |||||||||
| Other non-cash items, net | (32.8) | 20.5 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | (368.8) | (231.2) | |||||||||
| Inventories | (58.1) | (65.8) | |||||||||
| Prepaid expenses and other assets | (41.9) | (107.7) | |||||||||
| Accounts payable | (39.1) | (22.0) | |||||||||
| Accrued expenses | 980.3 | 254.2 | |||||||||
| Other liabilities | (40.7) | (67.3) | |||||||||
| Net cash provided by operating activities | 3,051.5 | 1,648.5 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of available-for-sale debt securities | (417.8) | (447.8) | |||||||||
| Maturities of available-for-sale debt securities | 435.9 | 452.1 | |||||||||
| Payment to acquire ViaCyte, Inc., net of cash acquired | (295.9) | — | |||||||||
| Purchases of property and equipment | (171.1) | (173.2) | |||||||||
| Investment in equity securities and notes receivable | (47.8) | (38.0) | |||||||||
| Net cash used in investing activities | (496.7) | (206.9) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Issuances of common stock under benefit plans | 134.7 | 67.3 | |||||||||
| Repurchases of common stock | — | (1,057.2) | |||||||||
| Payments in connection with common stock withheld for employee tax obligations | (169.9) | (134.2) | |||||||||
| Payments on finance leases | (75.1) | (34.6) | |||||||||
| Proceeds from finance leases | — | 12.6 | |||||||||
| Other financing activities | 2.4 | 4.3 | |||||||||
| Net cash used in financing activities | (107.9) | (1,141.8) | |||||||||
| Effect of changes in exchange rates on cash | (70.0) | (8.5) | |||||||||
| Net increase in cash, cash equivalents and restricted cash | 2,376.9 | 291.3 | |||||||||
| Cash, cash equivalents and restricted cash—beginning of period | 6,800.1 | 5,988.9 | |||||||||
| Cash, cash equivalents and restricted cash—end of period | $ | 9,177.0 | $ | 6,280.2 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | 41.1 | $ | 42.7 | |||||||
| Cash paid for income taxes | $ | 840.1 | $ | 381.5 |
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,” “we,” “us” or “our”) 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 Vertex and our wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. We operate in one segment, pharmaceuticals.
Beginning with the second quarter of 2022, we are separately classifying upfront, contingent milestone, and other payments pursuant to our business development transactions, including collaborations, licenses of third-party technologies, and asset acquisitions as “Acquired in-process research and development expenses” in our condensed consolidated statements of operations. To conform prior periods to current presentation, we reclassified $26.7 million and $986.8 million from “Research and development expenses” to “Acquired in-process research and development expenses” for the three and nine months ended September 30, 2021, respectively. Please refer to Note C, “Acquired In-Process Research and Development and Other Arrangements,” for further information on these transactions.
Certain information and footnote disclosures normally included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 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, 2022 and 2021.
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, 2021, which are contained in our 2021 Annual Report on Form 10-K.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements, and the amounts of revenues and expenses during the reported periods. We base our estimates on historical experience and various other assumptions, including in certain circumstances future projections that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in estimates are reflected in reported results in the period in which they become known.
Recently Adopted and Issued Accounting Standards
For a discussion of recently adopted accounting pronouncements please refer to Note A, “Nature of Business and Accounting Policies,” in our 2021 Annual Report on Form 10-K. We do not expect any recently issued accounting standards to have a significant impact on our condensed consolidated financial statements.
Summary of Significant Accounting Policies
Our significant accounting policies are described in Note A, “Nature of Business and Accounting Policies,” in our 2021 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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| TRIKAFTA/KAFTRIO | $ | 2,010.5 | $ | 1,555.8 | $ | 5,665.3 | $ | 4,004.6 | |||||||||||||||
| SYMDEKO/SYMKEVI | 38.2 | 81.4 | 145.7 | 340.0 | |||||||||||||||||||
| ORKAMBI | 146.2 | 184.5 | 399.9 | 624.2 | |||||||||||||||||||
| KALYDECO | 139.4 | 162.4 | 417.1 | 532.0 | |||||||||||||||||||
| Total product revenues, net | $ | 2,334.3 | $ | 1,984.1 | $ | 6,628.0 | $ | 5,500.8 |
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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| United States | $ | 1,455.6 | $ | 1,382.9 | $ | 4,238.9 | $ | 3,893.2 | |||||||||||||||
| Outside of the United States | |||||||||||||||||||||||
| Europe | 730.5 | 518.8 | 2,018.3 | 1,382.7 | |||||||||||||||||||
| Other | 148.2 | 82.4 | 370.8 | 224.9 | |||||||||||||||||||
| Total product revenues outside of the United States | 878.7 | 601.2 | 2,389.1 | 1,607.6 | |||||||||||||||||||
| Total product revenues, net | $ | 2,334.3 | $ | 1,984.1 | $ | 6,628.0 | $ | 5,500.8 |
Contract Liabilities
We had contract liabilities of $119.5 million and $171.7 million as of September 30, 2022 and December 31, 2021, respectively, related to annual contracts with government-owned and supported customers in international markets that limit the amount of annual reimbursement we can receive. Upon exceeding the annual reimbursement amount, products are provided free of charge, which is a material right. These contracts include upfront payments and fees. We defer a portion of the consideration received for shipments made up to the annual reimbursement limit as a portion of “Other current liabilities.” The deferred amount is recognized as revenue when the free products are shipped. Our product revenue contracts include performance obligations that are one year or less.
Our contract liabilities at the end of each fiscal year relate to contracts with annual reimbursement limits in international markets in which the annual period associated with the contract is not the same as our fiscal year. In these markets, we recognize revenues related to performance obligations satisfied in previous years; however, these revenues do not relate to any performance obligations that were satisfied more than 12 months prior to the beginning of the current year.
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
**C.**Acquired In-Process Research and Development and Other Arrangements
We have entered into numerous agreements with third parties to collaborate on research, development and commercialization programs, license technologies, or acquire assets. Our “Acquired in-process research and development expenses” included $29.0 million and $92.9 million for the three and nine months ended September 30, 2022, respectively, and $26.7 million and $986.8 million, for the three and nine months ended September 30, 2021, respectively, related to upfront, contingent milestone, or other payments pursuant to our business development transactions, including collaborations, licenses of third-party technologies, and asset acquisitions.
Our collaboration, licensing and asset acquisition agreements that had a significant impact on our financial statements for the three and nine months ended September 30, 2022 and 2021, or were new or materially revised during the three and nine months ended September 30, 2022, are described below. Additional agreements were described in Note B, “Collaborative and Other Arrangements,” of our 2021 Annual Report on Form 10-K.
In-license Agreements
We have entered into a number of in-license agreements in order to advance and obtain access to technologies and services related to our research and early-development activities. We are generally required to make an upfront payment upon execution of our license agreements; development, regulatory and commercialization milestones payments upon the achievement of certain product research, development and commercialization objectives; and royalty payments on future sales, if any, of commercial products resulting from our collaborations.
Pursuant to the terms of our in-license agreements, our collaborators typically lead the discovery efforts and we lead all preclinical, development and commercialization activities associated with the advancement of any product candidates and fund all expenses.
We typically can terminate our in-license agreements by providing advance notice to our collaborators; the required length of notice is dependent on whether any product developed under the license agreement has received marketing approval. Our license agreements may be terminated by either party for a material breach by the other, subject to notice and cure provisions. Unless earlier terminated, these license agreements generally remain in effect until the date on which the royalty term and all payment obligations with respect to all products in all countries have expired.
CRISPR Therapeutics AG - CRISPR-Cas9 Gene-editing Therapies
In 2015, we entered into a strategic collaboration, option and license agreement (the “CRISPR Agreement”) with CRISPR Therapeutics AG and its affiliates (“CRISPR”) to collaborate on the discovery and development of potential new treatments aimed at the underlying genetic causes of human diseases using CRISPR-Cas9 gene-editing technology. We had the exclusive right to license certain targets. In 2019, we elected to exclusively license three targets, including cystic fibrosis, pursuant to the CRISPR Agreement. For each of the three targets that we elected to license, CRISPR has the potential to receive up to an additional $410.0 million in development, regulatory and commercial milestones as well as royalties on net product sales.
In 2017, we entered into a joint development and commercialization agreement with CRISPR pursuant to the terms of the CRISPR Agreement (the “Original CTX001 JDCA”), under which we and CRISPR were co-developing and preparing to co-commercialize exagamglogene autotemcel (“exa-cel”), formerly known as CTX001, for the treatment of hemoglobinopathies, including treatments for sickle cell disease and transfusion-dependent beta thalassemia.
In the second quarter of 2021, we and CRISPR amended and restated the Original CTX001 JDCA (the “A&R JDCA”), pursuant to which the parties agreed to, among other things, (a) adjust the governance structure for the collaboration and adjust the responsibilities of each party thereunder; (b) adjust the allocation of net profits and net losses between the parties; and (c) exclusively license (subject to CRISPR’s reserved rights to conduct certain activities) certain intellectual property rights to us relating to the products that may be researched, developed, manufactured and commercialized under such agreement.
Pursuant to the A&R JDCA, we lead global development, manufacturing and commercialization of exa-cel, with support from CRISPR. Subject to the terms and conditions of the A&R JDCA, we conduct all research, development, manufacturing and commercialization activities relating to the product candidates and products under the A&R JDCA (including exa-cel) throughout the world subject to CRISPR’s reserved right to conduct certain activities.
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
In connection with the A&R JDCA, we made a $900.0 million upfront payment to CRISPR in the second quarter of 2021. We concluded that we did not have any alternative future use for the acquired in-process research and development and recorded this upfront payment to “Acquired in-process research and development expenses.” CRISPR has the potential to receive an additional one-time $200.0 million milestone payment upon receipt of the first marketing approval of exa-cel from the U.S. Food and Drug Administration or the European Commission.
We and CRISPR shared equally all expenses incurred under the Original CTX001 JDCA. On July 1, 2021, the net profits and net losses incurred with respect to exa-cel pursuant to the A&R JDCA began to be allocated 60% to us and 40% to CRISPR, subject to certain adjustments, while all other product candidates and products continue to have net profits and net losses shared equally between the parties. We concluded that the Original CTX001 JDCA and the A&R JDCA are cost-sharing arrangements, which result in the net impact of the arrangements being recorded in “Total costs and expenses” within our condensed consolidated statements of operations. During the three and nine months ended September 30, 2022 and 2021, we recognized the following amounts in total, not including amounts recorded to “Acquired in-process research and development expenses,” related to these agreements:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Total expenses incurred under the Original CTX001 JDCA and A&R JDCA | $ | 98.2 | $ | 58.7 | $ | 259.8 | $ | 147.4 | |||||||||||||||
| Vertex’s share recognized in “Total costs and expenses” in our condensed consolidated statements of operations | $ | 59.0 | $ | 35.2 | $ | 155.9 | $ | 79.6 |
Verve Therapeutics, Inc.
In July 2022, we entered into a research collaboration with Verve Therapeutics, Inc. (“Verve”) focused on discovering and developing an in vivo gene-editing program for a liver disease. Under the terms of the agreement, we made a $25.0 million upfront payment to Verve and purchased $35.0 million of Verve’s common stock. We concluded that there is no alternative future use for the acquired in-process research and development and recorded the upfront payment to “Acquired in-process research and development expenses.” The investment in Verve’s common stock is recorded at fair value on our condensed consolidated balance sheet within “Marketable securities.”
Asset Acquisition
Catalyst Biosciences, Inc. - Complement 3 Degrader Program
In May 2022, pursuant to an asset purchase agreement, we acquired Catalyst Biosciences, Inc.’s portfolio of protease medicines that target the complement system (the “complement portfolio”) and related intellectual property, including CB 2782-PEG, which is a pre-clinical complement component 3 degrader program for geographic atrophy in dry age-related macular degeneration. We determined that substantially all the fair value acquired was concentrated in the CB-2782 PEG in-process research and development assets, which did not constitute a business, and for which we determined there was no alternative future use. As a result, we recorded our $60.0 million upfront payment to “Acquired in-process research and development expenses” in the nine months ended September 30, 2022.
Cystic Fibrosis Foundation
We have a research, development and commercialization agreement that was originally entered into in 2004 with the Cystic Fibrosis Foundation, as successor in interest to the Cystic Fibrosis Foundation Therapeutics, Inc. This agreement was most recently amended in 2016. Pursuant to the agreement, as amended, we agreed to pay royalties ranging from low-single digits to mid-single digits on potential sales of certain compounds first synthesized and/or tested between March 1, 2014 and August 31, 2016, including elexacaftor, and tiered royalties ranging from single digits to sub-teens on covered compounds first synthesized and/or tested during a research term on or before February 28, 2014, including KALYDECO (ivacaftor), ORKAMBI (lumacaftor in combination with ivacaftor) and SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor). For combination products, such as ORKAMBI, SYMDEKO/SYMKEVI and TRIKAFTA/KAFTRIO (elexacaftor/tezacaftor/ivacaftor and ivacaftor), sales are allocated equally to each of the active pharmaceutical ingredients in the combination product. We record our royalties payable to the Cystic Fibrosis Foundation to “Cost of sales.”
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
**D.**Business Combination
On September 27, 2022, we acquired all outstanding shares of ViaCyte, Inc. (“ViaCyte”), a privately held biotechnology company primarily focused on delivering novel stem cell-derived cell replacement therapies as a functional cure for type 1 diabetes, in exchange for $315.0 million. ViaCyte’s intellectual property and assembled workforce complement our ongoing programs and have the potential to produce therapies for patients with type 1 diabetes. We accounted for the transaction as a business combination, and allocated the purchase price to the following assets acquired and liabilities assumed:
| As of September 27, 2022 | |||||
| (in millions) | |||||
| Cash and cash equivalents | $ | 19.1 | |||
| Goodwill | 73.0 | ||||
| Intangible asset | 216.6 | ||||
| Net other assets | 6.3 | ||||
| Total purchase price | $ | 315.0 |
The “Goodwill” represents the difference between the fair value of the consideration transferred and the fair value of the assets acquired and liabilities assumed. The goodwill is attributable to (i) the technological expertise in cell therapy of ViaCyte’s assembled workforce, (ii) the potential synergies from combining ViaCyte’s technology with our clinical development capabilities and (iii) the potential future benefits for other therapeutic programs that the acquired technology could be used for, but did not meet the definition of an in-process research and development asset. None of the goodwill is expected to be deductible for income tax purposes.
The “Intangible asset” is an in-process research and development asset of $216.6 million related to ViaCyte’s technology and intellectual property associated with stem cell differentiation and manufacturing. The fair value of the intangible asset was determined through a discounted cash flow analysis using the relief from royalty method, which estimated the cost savings associated with owning an asset instead of paying a royalty to the previous owner. The relief from royalty method utilized Level 3 fair value inputs including (i) estimated future product sales, which were calculated using, among other assumptions, an estimated probability of obtaining marketing approval for the asset, (ii) estimated after-tax royalty savings expected from ownership of the asset, and (iii) an appropriate discount and tax rate.
As of September 30, 2022, our analysis of the fair value of certain assets acquired, including certain tax analyses, related to the ViaCyte business combination is preliminary and will be finalized during the measurement period of up to one year from the acquisition date. The financial results of ViaCyte did not have a material effect on our condensed consolidated statement of operations in the three and nine months ended September 30, 2022.
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
**E.**Earnings Per Share
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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||||||
| Net income | $ | 930.5 | $ | 851.9 | $ | 2,503.1 | $ | 1,572.0 | |||||||||||||||
| Basic weighted-average common shares outstanding | 256.5 | 257.9 | 255.8 | 258.7 | |||||||||||||||||||
| Effect of potentially dilutive securities: | |||||||||||||||||||||||
| Stock options | 1.4 | 1.0 | 1.4 | 1.1 | |||||||||||||||||||
| Restricted stock units (including PSUs) | 1.6 | 0.8 | 1.4 | 1.1 | |||||||||||||||||||
| Employee stock purchase program | 0.0 | 0.0 | 0.1 | 0.0 | |||||||||||||||||||
| Diluted weighted-average common shares outstanding | 259.5 | 259.7 | 258.7 | 260.9 | |||||||||||||||||||
| Basic net income per common share | $ | 3.63 | $ | 3.30 | $ | 9.78 | $ | 6.08 | |||||||||||||||
| Diluted net income per common share | $ | 3.59 | $ | 3.28 | $ | 9.68 | $ | 6.03 |
We did not include the securities in the following table in the computation of the diluted net income per common share because the effect would have been anti-dilutive during each period:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Stock options | — | 1.1 | 0.0 | 0.7 | |||||||||||||||||||
| Unvested restricted stock units (including PSUs) | 0.0 | 0.2 | 0.2 | 0.4 |
**F.**Fair Value Measurements
The following fair value hierarchy is used to classify assets and liabilities based on observable inputs and unobservable inputs used in order to determine the fair value of our financial assets and liabilities:
| Level 1: | Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. | ||||
| Level 2: | Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active. | ||||
| Level 3: | Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability. |
Our investment strategy is focused on capital preservation. We invest in instruments that meet the credit quality standards outlined in our investment policy, which also limits the amount of credit exposure to any one issue or type of instrument. We maintain strategic investments separately from the investment policy that governs our other cash, cash equivalents and marketable securities as described in Note G, “Marketable Securities and Equity Investments.” Additionally, we utilize foreign currency forward contracts intended to mitigate the effect of changes in foreign exchange rates on our condensed consolidated statement of operations.
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
The following tables set forth our financial assets and liabilities subject to fair value measurements by level within the fair value hierarchy (and does not include $3.5 billion and $3.3 billion of cash as of September 30, 2022 and December 31, 2021, respectively):
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Financial instruments carried at fair value (asset positions): | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | $ | 3,610.9 | $ | 3,610.9 | $ | — | $ | — | $ | 3,478.1 | $ | 3,478.1 | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Time deposits | 2,000.0 | — | 2,000.0 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Commercial paper | 18.2 | — | 18.2 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Marketable securities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Corporate equity securities | 122.8 | 78.2 | 44.6 | — | 230.9 | 230.9 | — | — | |||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 130.0 | 130.0 | — | — | 86.4 | 86.4 | — | — | |||||||||||||||||||||||||||||||||||||||
| Government-sponsored enterprise securities | 10.5 | 10.5 | — | — | 69.0 | 69.0 | — | — | |||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | 66.8 | — | 66.8 | — | 90.9 | — | 90.9 | — | |||||||||||||||||||||||||||||||||||||||
| Commercial paper | 269.1 | — | 269.1 | — | 252.7 | — | 252.7 | — | |||||||||||||||||||||||||||||||||||||||
| Prepaid expenses and other current assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | 191.6 | — | 191.6 | — | 44.5 | — | 44.5 | — | |||||||||||||||||||||||||||||||||||||||
| Other assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | 9.1 | — | 9.1 | — | 2.0 | — | 2.0 | — | |||||||||||||||||||||||||||||||||||||||
| Total financial assets | $ | 6,429.0 | $ | 3,829.6 | $ | 2,599.4 | $ | — | $ | 4,254.5 | $ | 3,864.4 | $ | 390.1 | $ | — | |||||||||||||||||||||||||||||||
| Financial instruments carried at fair value (liability positions): | |||||||||||||||||||||||||||||||||||||||||||||||
| Other current liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | (0.0) | $ | — | $ | (0.0) | $ | — | $ | (5.6) | $ | — | $ | (5.6) | $ | — | |||||||||||||||||||||||||||||||
| Long-term contingent consideration | (127.2) | — | — | (127.2) | (186.5) | — | — | (186.5) | |||||||||||||||||||||||||||||||||||||||
| Other long-term liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | (0.0) | — | (0.0) | — | (2.7) | — | (2.7) | — | |||||||||||||||||||||||||||||||||||||||
| Total financial liabilities | $ | (127.2) | $ | — | $ | (0.0) | $ | (127.2) | $ | (194.8) | $ | — | $ | (8.3) | $ | (186.5) |
Please refer to Note G, “Marketable Securities and Equity Investments,” for the carrying amount and related unrealized gains (losses) by type of investment.
Fair Value of Corporate Equity Securities
We classify our investments in publicly traded corporate equity securities as “Marketable securities” on our condensed consolidated balance sheets. Generally, our investments in the common stock of publicly traded companies are valued based on Level 1 inputs because they have readily determinable fair values. However, certain of our investments in publicly traded companies have been or continue to be valued based on Level 2 inputs due to transfer restrictions associated with these investments. Please refer to Note G, “Marketable Securities and Equity Investments,” for further information on these investments.
Fair Value of Contingent Consideration
In 2019, we acquired Exonics Therapeutics, Inc. (“Exonics”), a privately-held company focused on creating transformative gene-editing therapies to repair mutations that cause Duchenne muscular dystrophy and other severe neuromuscular diseases, including myotonic dystrophy type 1. Our Level 3 contingent consideration liabilities are related to $678.3 million of development and regulatory milestones potentially payable to former Exonics equity holders. We base our estimates of the probability of achieving the milestones relevant to the fair value of contingent payments on industry data attributable to rare diseases and our knowledge of the progress and viability of the programs. The discount rates used in the valuation model for contingent payments, which were between 5.2% and 5.7% as of September 30, 2022, represent a measure of credit risk and market risk associated with settling the liabilities. Significant judgment is used in determining the appropriateness of these assumptions at each reporting period. Due to the uncertainties associated with development and
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
commercialization of product candidates in the pharmaceutical industry and the effects of changes in other assumptions including discount rates, we expect our estimates regarding the fair value of contingent consideration to change in the future, resulting in adjustments to the fair value of our contingent consideration liabilities, and the effect of any such adjustments could be material.
The following table represents a rollforward of the fair value of our contingent consideration liabilities:
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 186.5 | |||||||||||||||||||||
| Decrease in fair value of contingent payments | (59.3) | ||||||||||||||||||||||
| Balance at September 30, 2022 | $ | 127.2 |
The decrease in fair value of contingent consideration during the nine months ended September 30, 2022 was primarily due to a revision to the scope of certain acquired gene-editing programs in the second quarter of 2022.
Fair Value of Intangible Assets
As of September 30, 2022 and December 31, 2021, we had $603.6 million and $400.0 million, respectively, of in-process research and development intangible assets classified as “Intangible assets” on our condensed consolidated balance sheets. In the third quarter of 2022, we recorded a $216.6 million in-process research and development intangible asset resulting from our acquisition of ViaCyte, which is described in Note D, “Business Combination.” In the nine months ended September 30, 2022, we recorded a $13.0 million impairment of an in-process research and development intangible asset to “Research and development expenses,” due to a decision to revise the scope of certain acquired gene-editing programs.
**G.**Marketable Securities and Equity Investments
A summary of our cash equivalents and marketable securities, which are recorded at fair value (and do not include $3.5 billion and $3.3 billion of cash as of September 30, 2022 and December 31, 2021, respectively), is shown below:
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | $ | 3,610.9 | $ | — | $ | — | $ | 3,610.9 | $ | 3,478.1 | $ | — | $ | — | $ | 3,478.1 | |||||||||||||||||||||||||||||||
| Time deposits | 2,000.0 | — | — | 2,000.0 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Commercial paper | 18.2 | — | — | 18.2 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Total cash equivalents | $ | 5,629.1 | $ | — | $ | — | $ | 5,629.1 | $ | 3,478.1 | $ | — | $ | — | $ | 3,478.1 | |||||||||||||||||||||||||||||||
| Marketable securities: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | $ | 131.7 | $ | — | $ | (1.7) | $ | 130.0 | $ | 86.6 | $ | — | $ | (0.2) | $ | 86.4 | |||||||||||||||||||||||||||||||
| Government-sponsored enterprise securities | 10.6 | — | (0.1) | 10.5 | 69.0 | — | — | 69.0 | |||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | 67.8 | — | (1.0) | 66.8 | 91.1 | — | (0.2) | 90.9 | |||||||||||||||||||||||||||||||||||||||
| Commercial paper | 270.4 | — | (1.3) | 269.1 | 252.8 | — | (0.1) | 252.7 | |||||||||||||||||||||||||||||||||||||||
| Total marketable debt securities | 480.5 | — | (4.1) | 476.4 | 499.5 | — | (0.5) | 499.0 | |||||||||||||||||||||||||||||||||||||||
| Corporate equity securities | 104.4 | 29.2 | (10.8) | 122.8 | 69.4 | 167.1 | (5.6) | 230.9 | |||||||||||||||||||||||||||||||||||||||
| Total marketable securities | $ | 584.9 | $ | 29.2 | $ | (14.9) | $ | 599.2 | $ | 568.9 | $ | 167.1 | $ | (6.1) | $ | 729.9 |
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
Available-for-sale debt securities were classified on our condensed consolidated balance sheets at fair value as follows:
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||
| (in millions) | |||||||||||
| Cash and cash equivalents | $ | 3,629.1 | $ | 3,478.1 | |||||||
| Marketable securities | 476.4 | 499.0 | |||||||||
| Total | $ | 4,105.5 | $ | 3,977.1 |
Available-for-sale debt securities by contractual maturity were as follows:
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||
| (in millions) | |||||||||||
| Matures within one year | $ | 4,091.4 | $ | 3,912.3 | |||||||
| Matures after one year through five years | 14.1 | 64.8 | |||||||||
| Total | $ | 4,105.5 | $ | 3,977.1 |
We have a limited number of available-for-sale debt securities in insignificant loss positions as of September 30, 2022, which we do not intend to sell and have concluded we will not be required to sell before recovery of the amortized costs for the investments at maturity. We did not record any allowances for credit losses to adjust the fair value of available-for-sale debt securities or gross realized gains or losses in the three and nine months ended September 30, 2022 and 2021.
We record changes in the fair value of our investments in corporate equity securities to “Other income (expense), net” in our condensed consolidated statements of operations. During the three and nine months ended September 30, 2022 and 2021, our net unrealized gains (losses) on corporate equity securities held at the conclusion of each period were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Net unrealized gains (losses) | $ | 16.7 | $ | 46.7 | $ | (143.1) | $ | 5.0 |
As of September 30, 2022, the carrying value of our equity investments without readily determinable fair values, which are recorded in “Other assets” on our condensed consolidated balance sheets, was $98.6 million.
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
**H.**Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component:
| Unrealized Holding Gains (Losses), Net of Tax | |||||||||||||||||||||||
| Foreign Currency Translation Adjustment | On Available-For-Sale Debt Securities | On Foreign Currency Forward Contracts | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Balance at December 31, 2021 | $ | (13.6) | $ | (0.5) | $ | 30.0 | $ | 15.9 | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (42.8) | (3.6) | 230.2 | 183.8 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | — | (102.1) | (102.1) | |||||||||||||||||||
| Net current period other comprehensive (loss) income | (42.8) | (3.6) | 128.1 | 81.7 | |||||||||||||||||||
| Balance at September 30, 2022 | $ | (56.4) | $ | (4.1) | $ | 158.1 | $ | 97.6 | |||||||||||||||
| Balance at December 31, 2020 | $ | (15.6) | $ | 0.3 | $ | (53.2) | $ | (68.5) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 3.3 | (0.3) | 46.2 | 49.2 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | — | — | 30.8 | 30.8 | |||||||||||||||||||
| Net current period other comprehensive income (loss) | 3.3 | (0.3) | 77.0 | 80.0 | |||||||||||||||||||
| Balance at September 30, 2021 | $ | (12.3) | $ | 0.0 | $ | 23.8 | $ | 11.5 |
**I.**Hedging
Foreign currency forward contracts - Designated as hedging instruments
We maintain a hedging program intended to mitigate the effect of changes in foreign exchange rates for a portion of our forecasted product revenues denominated in certain foreign currencies. The program includes foreign currency forward contracts that are designated as cash flow hedges under U.S. GAAP having contractual durations from one to eighteen months. We recognize realized gains and losses for the effective portion of such contracts in “Product revenues, net” in our condensed consolidated statements of operations in the same period that we recognize the product revenues that were impacted by the hedged foreign exchange rate changes.
We formally document the relationship between foreign currency forward contracts (hedging instruments) and forecasted product revenues (hedged items), as well as our risk management objective and strategy for undertaking various hedging activities, which includes matching all foreign currency forward contracts that are designated as cash flow hedges to forecasted transactions. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the foreign currency forward contracts are highly effective in offsetting changes in cash flows of hedged items on a prospective and retrospective basis. If we were to determine that a (i) foreign currency forward contract is not highly effective as a cash flow hedge, (ii) foreign currency forward contract has ceased to be a highly effective hedge or (iii) forecasted transaction is no longer probable of occurring, we would discontinue hedge accounting treatment prospectively. We measure effectiveness based on the change in fair value of the forward contracts and the fair value of the hypothetical foreign currency forward contracts with terms that match the critical terms of the risk being hedged. As of September 30, 2022, all hedges were determined to be highly effective.
We consider the impact of our counterparties’ credit risk on the fair value of the foreign currency forward contracts. As of September 30, 2022 and December 31, 2021, credit risk did not change the fair value of our 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 our outstanding foreign currency forward contracts designated as cash flow hedges under U.S. GAAP:
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||
| Foreign Currency | (in millions) | ||||||||||
| Euro | $ | 1,081.9 | $ | 1,364.5 | |||||||
| Canadian dollar | 192.3 | 89.9 | |||||||||
| British pound sterling | 183.5 | 287.7 | |||||||||
| Australian dollar | 150.8 | 96.3 | |||||||||
| Swiss Franc | 59.2 | 54.1 | |||||||||
| Total foreign currency forward contracts | $ | 1,667.7 | $ | 1,892.5 |
Foreign currency forward contracts - Not designated as hedging instruments
We also enter into foreign currency forward contracts with contractual maturities of less than one month, which are designed to mitigate the effect of changes in foreign exchange rates on monetary assets and liabilities, including intercompany balances. These contracts are not designated as hedging instruments under U.S. GAAP. We recognize realized gains and losses for such contracts in “Other income (expense), net” in our condensed consolidated statements of operations each period. As of September 30, 2022, the notional amount of our outstanding foreign currency forward contracts where hedge accounting under U.S. GAAP is not applied was $641.6 million.
During the three and nine months ended September 30, 2022 and 2021, we recognized the following related to foreign currency forward contracts in our condensed consolidated statements of operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Designated as hedging instruments - Reclassified from AOCI | |||||||||||||||||||||||
| Product revenues, net | $ | 65.2 | $ | (5.2) | $ | 130.3 | $ | (39.3) | |||||||||||||||
| Not designated as hedging instruments | |||||||||||||||||||||||
| Other income (expense), net | $ | (22.1) | $ | (0.4) | $ | (38.9) | $ | (9.4) | |||||||||||||||
| Total reported in the Condensed Consolidated Statement of Operations | |||||||||||||||||||||||
| Product revenues, net | $ | 2,334.3 | $ | 1,984.1 | $ | 6,628.0 | $ | 5,500.8 | |||||||||||||||
| Other income (expense), net | $ | 17.2 | $ | 42.4 | $ | (133.7) | $ | (2.2) |
The following table summarizes the fair value of our outstanding foreign currency forward contracts designated as cash flow hedges under U.S. GAAP included on our condensed consolidated balance sheets:
| As of September 30, 2022 | ||||||||||||||||||||
| Assets | Liabilities | |||||||||||||||||||
| Classification | Fair Value | Classification | Fair Value | |||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Prepaid expenses and other current assets | $ | 191.6 | Other current liabilities | $ | (0.0) | |||||||||||||||
| Other assets | 9.1 | Other long-term liabilities | (0.0) | |||||||||||||||||
| Total assets | $ | 200.7 | Total liabilities | $ | (0.0) |
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
| As of December 31, 2021 | ||||||||||||||||||||
| Assets | Liabilities | |||||||||||||||||||
| Classification | Fair Value | Classification | Fair Value | |||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Prepaid expenses and other current assets | $ | 44.5 | Other current liabilities | $ | (5.6) | |||||||||||||||
| Other assets | 2.0 | Other long-term liabilities | (2.7) | |||||||||||||||||
| Total assets | $ | 46.5 | Total liabilities | $ | (8.3) |
As of September 30, 2022, we expect the amounts that are related to foreign exchange forward contracts designated as cash flow hedges under U.S. GAAP recorded in “Prepaid expenses and other current assets” and “Other current liabilities” to be reclassified to earnings within twelve months.
We present the fair value of our foreign currency forward contracts on a gross basis within our condensed consolidated balance sheets. The following table summarizes the potential effect of offsetting derivatives by type of financial instrument designated as cash flow hedges under U.S. GAAP on our condensed consolidated balance sheets:
| As of September 30, 2022 | |||||||||||||||||||||||||||||
| Gross Amounts Recognized | Gross Amounts Offset | Gross Amounts Presented | Gross Amounts Not Offset | Legal Offset | |||||||||||||||||||||||||
| Foreign currency forward contracts | (in millions) | ||||||||||||||||||||||||||||
| Total assets | $ | 200.7 | $ | — | $ | 200.7 | $ | (0.0) | $ | 200.7 | |||||||||||||||||||
| Total liabilities | (0.0) | — | (0.0) | 0.0 | — |
| As of December 31, 2021 | |||||||||||||||||||||||||||||
| Gross Amounts Recognized | Gross Amounts Offset | Gross Amounts Presented | Gross Amounts Not Offset | Legal Offset | |||||||||||||||||||||||||
| Foreign currency forward contracts | (in millions) | ||||||||||||||||||||||||||||
| Total assets | $ | 46.5 | $ | — | $ | 46.5 | $ | (8.3) | $ | 38.2 | |||||||||||||||||||
| Total liabilities | (8.3) | — | (8.3) | 8.3 | — | ||||||||||||||||||||||||
**J.**Inventories
Inventories consisted of the following:
| As of September 30, 2022 | As of December 31, 2021 | ||||||||||
| (in millions) | |||||||||||
| Raw materials | $ | 32.2 | $ | 42.4 | |||||||
| Work-in-process | 229.3 | 224.0 | |||||||||
| Finished goods | 126.7 | 86.7 | |||||||||
| Total | $ | 388.2 | $ | 353.1 |
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
**K.**Stock-based Compensation Expense and Share Repurchase Programs
Stock-based compensation expense
During the three and nine months ended September 30, 2022 and 2021, we recognized the following stock-based compensation expense:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Stock-based compensation expense by type of award: | |||||||||||||||||||||||
| Restricted stock units (including PSUs) | $ | 130.3 | $ | 89.5 | $ | 351.5 | $ | 279.1 | |||||||||||||||
| Stock options | 3.1 | 7.9 | 14.9 | 29.6 | |||||||||||||||||||
| ESPP share issuances | 1.9 | 6.3 | 13.0 | 17.9 | |||||||||||||||||||
| Stock-based compensation expense related to inventories | 0.3 | (0.7) | 0.4 | (3.8) | |||||||||||||||||||
| Total stock-based compensation expense included in “Total costs and expenses” | $ | 135.6 | $ | 103.0 | $ | 379.8 | $ | 322.8 | |||||||||||||||
| Stock-based compensation expense by line item: | |||||||||||||||||||||||
| Cost of sales | $ | 2.4 | $ | 1.6 | $ | 7.0 | $ | 4.6 | |||||||||||||||
| Research and development expenses | 80.0 | 61.0 | 229.9 | 196.4 | |||||||||||||||||||
| Selling, general and administrative expenses | 53.2 | 40.4 | 142.9 | 121.8 | |||||||||||||||||||
| Total stock-based compensation expense included in costs and expenses | 135.6 | 103.0 | 379.8 | 322.8 | |||||||||||||||||||
| Income tax effect | (38.8) | (21.6) | (101.3) | (73.7) | |||||||||||||||||||
| Total stock-based compensation expense, net of tax | $ | 96.8 | $ | 81.4 | $ | 278.5 | $ | 249.1 |
Share repurchase programs
In November 2020, our Board of Directors approved a share repurchase program (the “2020 Share Repurchase Program”), pursuant to which we repurchased $500.0 million of our common stock in 2020 and the first quarter of 2021. During the three months ended March 31, 2021, we repurchased 2.0 million shares of our common stock under the 2020 Share Repurchase Program for an aggregate of $424.9 million.
In June 2021, our Board of Directors approved a share repurchase program (the “2021 Share Repurchase Program”), pursuant to which we are authorized to repurchase up to $1.5 billion of our common stock by December 31, 2022. During the nine months ended September 30, 2022, we did not repurchase any shares of our common stock under the 2021 Share Repurchase Program. As of September 30, 2022, a total of $499.7 million remained authorized for repurchases of common stock under the 2021 Share Repurchase Program.
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
**L.**Income Taxes
We are subject to U.S. federal, state, and foreign income taxes. During the three and nine months ended September 30, 2022 and 2021, we recorded the following provisions for (benefits from) income taxes and effective tax rates as compared to our income before provision for income taxes:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Income before provision for income taxes | $ | 1,176.4 | $ | 1,082.8 | $ | 3,155.6 | $ | 1,859.5 | |||||||||||||||
| Provision for income taxes | 245.9 | 230.9 | 652.5 | 287.5 |
| Effective tax rate | 21 | % | 21 | % | 21 | % | 15 | % |
Our effective tax rate for the three and nine months ended September 30, 2022, and the three months ended September 30, 2021, was similar to the U.S. statutory rate.
Our effective tax rate for the nine months ended September 30, 2021 was different 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.
We have reviewed the tax positions taken, or to be taken, in our tax returns for all tax years currently open to examination by a taxing authority. As of September 30, 2022 and December 31, 2021, we had $144.9 million and $129.5 million, respectively, of net unrecognized tax benefits, which would affect our tax rate if recognized.
Starting in 2022, our cash paid for income taxes is substantially increasing due to the elimination of the option in the U.S. to deduct research and development expenses in the period they are incurred and instead, as required by the Tax Cuts and Jobs Act of 2017, amortize them over a five year period if they are performed in the U.S. and fifteen years if they are performed in foreign jurisdictions.
In August 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law. The IRA includes a 15% corporate alternative minimum tax and a 1% excise tax on share repurchases. We do not expect the IRA to have a significant impact on our consolidated financial statements.
We file U.S. federal income tax returns and income tax returns in various state, local and foreign jurisdictions. We have various income tax audits ongoing at any time throughout the world. Except for jurisdictions where we have net operating losses or tax credit carryforwards, we are no longer subject to any tax assessment from tax authorities for years prior to 2018 in jurisdictions that have a material impact on our consolidated financial statements.
**M.**Commitments and Contingencies
2022 Credit Facility
In July 2022, Vertex and certain of its subsidiaries entered into a $500.0 million unsecured revolving facility (the “Credit Agreement”) with Bank of America, N.A., as administrative agent and the lenders referred to therein (the “Lenders”), which matures on July 1, 2027. The Credit Agreement was not drawn upon at closing and we have not drawn upon it to date. Amounts drawn pursuant to the Credit Agreement, if any, will be used for general corporate purposes. Subject to satisfaction of certain conditions, we may request that the borrowing capacity for the Credit Agreement be increased by an additional $500.0 million. Additionally, the Credit Agreement provides a sublimit of $100.0 million for letters of credit.
Any amounts borrowed under the Credit Agreement will bear interest, at our option, at either a base rate or a SOFR rate, in each case plus an applicable margin. Under the Credit Agreement, the applicable margins on base rate loans range from 0.000% to 0.500% and the applicable margins on SOFR loans range from 1.000% to 1.500%, in each case based on our consolidated leverage ratio (the ratio of our total consolidated funded indebtedness to our consolidated EBITDA for the most recently completed four fiscal quarter period).
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
Any amounts borrowed pursuant to the Credit Agreement are guaranteed by certain of our existing and future domestic subsidiaries, subject to certain exceptions.
The Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including a financial covenant to maintain subject to certain limited exceptions, a consolidated leverage ratio of 3.50 to 1.00, subject to an increase to 4.00 to 1.00 following a material acquisition. As of September 30, 2022, we were in compliance with the covenants described above. The Credit Agreement also contains customary events of default. In the case of a continuing event of default, the administrative agent would be entitled to exercise various remedies, including the acceleration of amounts due under outstanding loans.
Direct costs related to the Credit Agreement are recorded over its term and were not material to our financial statements.
Prior Credit Facilities
In July 2022, in conjunction with entering our new credit agreement, we terminated the $500.0 million credit agreement we entered into in 2019. In September 2022, a $2.0 billion credit agreement we entered into in 2020 expired in accordance with its terms.
Guaranties and Indemnifications
As permitted under Massachusetts law, our Articles of Organization and By-laws provide that we will indemnify certain of our officers and directors for certain claims asserted against them in connection with their service as an officer or director. The maximum potential amount of future payments that we could be required to make under these indemnification provisions is unlimited. However, we have purchased directors’ and officers’ liability insurance policies that could reduce our monetary exposure and enable us to recover a portion of any future amounts paid. No indemnification claims currently are outstanding, and we believe the estimated fair value of these indemnification arrangements is minimal.
We customarily agree in the ordinary course of our business to indemnification provisions in agreements with clinical trial investigators and sites in our product development programs, sponsored research agreements with academic and not-for-profit institutions, various comparable agreements involving parties performing services for us, and our real estate leases. We also customarily agree to certain indemnification provisions in our drug discovery, development and commercialization collaboration agreements. With respect to our clinical trials and sponsored research agreements, these indemnification provisions typically apply to any claim asserted against the investigator or the investigator’s institution relating to personal injury or property damage, violations of law or certain breaches of our contractual obligations arising out of the research or clinical testing of our compounds or product candidates. With respect to lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to personal injury or property damage caused by us, to violations of law by us or to certain breaches of our contractual obligations. The indemnification provisions appearing in our collaboration agreements are similar to those for the other agreements discussed above, but in addition provide some limited indemnification for our collaborator in the event of third-party claims alleging infringement of intellectual property rights. In each of the cases above, the indemnification obligation generally survives the termination of the agreement for some extended period, although we believe the obligation typically has the most relevance during the contract term and for a short period of time thereafter. The maximum potential amount of future payments that we could be required to make under these provisions is generally unlimited. We have purchased insurance policies covering personal injury, property damage and general liability that reduce our exposure for indemnification and would enable us in many cases to recover all or a portion of any future amounts paid. We have never paid any material amounts to defend lawsuits or settle claims related to these indemnification provisions. Accordingly, we believe the estimated fair value of these indemnification arrangements is minimal.
Other Contingencies
We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue a reserve for contingent liabilities when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. Other than our contingent consideration liabilities discussed in Note F, “Fair Value Measurements,” there were no material contingent liabilities accrued as of September 30, 2022 or December 31, 2021.
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Condensed Consolidated Financial Statements (unaudited)
**N.**Additional Cash Flow Information
The cash, cash equivalents and restricted cash at the beginning and ending of each period presented in our condensed consolidated statements of cash flows consisted of the following:
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Beginning of period | End of period | Beginning of period | End of period | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 6,795.0 | $ | 9,171.5 | $ | 5,988.2 | $ | 6,275.7 | |||||||||||||||
| Prepaid expenses and other current assets | 5.1 | 5.5 | 0.7 | 4.5 | |||||||||||||||||||
| Cash, cash equivalents and restricted cash per condensed consolidated statement of cash flows | $ | 6,800.1 | $ | 9,177.0 | $ | 5,988.9 | $ | 6,280.2 |
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