# VERTEX PHARMACEUTICALS INC / MA (VRTX) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from VERTEX PHARMACEUTICALS INC / MA's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/875320/000087532022000007/vrtx-20211231.htm
Accession: 0000875320-22-000007
Filing date: 2022-02-09
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/VRTX/
All MD&A years: /company/VRTX/mda/
Next year: /company/VRTX/mda/fy2022/ (FY 2022)

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our discussion and analysis of our financial condition and results of operations for 2021 as compared to 2020 are discussed below. For a discussion of our financial condition and results of operations for 2020 as compared to 2019, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K, except as set forth below.

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 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 being used by 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 approximately 90% of people with CF.

We continue to research and develop product candidates for the treatment of serious diseases, including genetic therapies to address the remaining approximately 10% of people with CF, sickle cell disease, beta thalassemia, APOL1-mediated kidney disease, type 1 diabetes, pain, alpha-1 antitrypsin deficiency, Duchenne muscular dystrophy, and myotonic dystrophy type 1.

Financial Highlights

[[GREPCENT_TABLE]]
[["Revenues","In 2021, our net product revenues continued to increase due to the uptake of KAFTRIO in Europe and continued strong performance of TRIKAFTA in the U.S., including the expanded indication of TRIKAFTA for children with CF 6 through 11 years of age."],["Expenses","Our total R&D and SG&A expenses increased to $3.9 billion as compared to $2.6 billion in 2020 primarily due to a $900.0 million upfront payment we made to CRISPR in connection with an amendment to our CTX001 collaboration. In 2021, cost of sales was 12% of our net product revenues."],["Cash","Our cash, cash equivalents and marketable securities increased to $7.5 billion as of December 31, 2021 as compared to $6.7 billion as of December 31, 2020 primarily due to our net product revenues and profitability, offset by repurchases of our common stock and the $900.0 million payment to CRISPR."]]
[[/GREPCENT_TABLE]]

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Business Updates

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 and providing improved treatment options for people who are already eligible for one of our medicines. Since the beginning of 2021, we have made significant progress in activities supporting these efforts.

•The U.S. Food and Drug Administration, or the FDA, approved the use of TRIKAFTA for children with CF 6 through 11 years of age who have at least one F508del mutation or at least one mutation that is responsive to TRIKAFTA.

•In January 2022, the European Commission and the U.K.’s Medicines and Healthcare products Regulatory Agency granted marketing authorization for KAFTRIO in the treatment of children with CF 6 through 11 years of age who have at least one F508del mutation in the CFTR gene.

•TRIKAFTA/KAFTRIO is now approved and reimbursed or accessible in more than 20 countries outside the U.S.

•Our Phase 3 clinical trial evaluating ORKAMBI for the treatment of children with CF 12 through 24 months of age met its primary endpoint. Based on these data, we plan to submit regulatory filings in the U.S. and Europe in the first and second quarters of 2022, respectively.

Pipeline

We continue to advance a pipeline of potentially transformative small molecule, and cell and genetic therapies aimed at treating serious diseases. Since the beginning of 2021, we have made important progress in activities supporting these programs.

Cystic Fibrosis

•In the third quarter of 2021, we announced the initiation of Phase 3 clinical trials evaluating a once-daily investigational triple combination of VX-121/tezacaftor/VX-561 (deutivacaftor). Enrollment is underway in these two Phase 3 clinical trials, and we expect to complete enrollment in both trials by late 2022 or early 2023.

•We are conducting enabling studies for CF messenger ribonucleic acid, or mRNA, therapeutics designed to treat the underlying cause of CF by enabling cells in the lungs to produce functional CFTR protein for the treatment of the approximately 10% of people with CF who do not produce any CFTR protein. We expect to submit an Investigational New Drug Application, or IND, for this program in 2022.

Sickle Cell Disease and Beta Thalassemia

•We are evaluating the use of a non-viral ex vivo CRISPR gene-editing therapy, CTX001, for the treatment of severe sickle cell disease, or SCD, and transfusion-dependent beta thalassemia, or TDT. Enrollment is complete in the ongoing clinical trials evaluating CTX001 in severe SCD and TDT.

•Data presented to date support the profile of CTX001 as a potential one-time functional cure for people with severe SCD and TDT. CTX001 safety data to date is generally consistent with an autologous stem cell transplant and myeloablative conditioning. We anticipate regulatory submissions of CTX001 in late 2022.

APOL1-Mediated Kidney Disease

•In December 2021, we announced that patients with APOL1-mediated focal segmental glomerulosclerosis, or FSGS, treated with VX-147, a small molecule inhibitor of APOL1 function, on top of standard of care achieved a statistically significant, substantial and clinically meaningful reduction of proteinuria in a Phase 2 proof-of-concept clinical trial. We anticipate completing our end of Phase 2 meetings with regulators and advancing VX-147 into pivotal development in people with APOL1-mediated kidney disease, or AMKD, including APOL1-mediated FSGS, in the first quarter of 2022.

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Type 1 Diabetes

•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 type 1 diabetes, or T1D, is ongoing at multiple clinical sites in the U.S. In January 2022, we announced positive Day 150 data for the first T1D patient in this clinical trial, including restoration of islet cell function and rapid improvements in multiple measures. In this first patient, the safety of VX-880 was generally consistent with the immunosuppressive regimen used in this study. We will continue to dose patients in 2022.

•We also are pursuing additional programs in T1D, in which these stem cell-derived, fully differentiated, insulin-secreting islet cells are encapsulated and implanted in an immunoprotective device or modified to produce hypoimmune cells. We are conducting IND-enabling studies for the cells and device program, and we expect to submit an Investigational New Drug Application, or IND, for this program in 2022.

Pain

•Two Phase 2 dose ranging acute pain clinical trials evaluating VX-548, a selective small molecule inhibitor of NaV1.8, are underway; one following bunionectomy surgery and the other following abdominoplasty surgery. We expect to obtain data from the clinical trials evaluating VX-548 in the first quarter of 2022.

Alpha-1 Antitrypsin, or AAT, Deficiency

•We plan to advance one or more novel small molecule Z-AAT correctors into the clinic in 2022.

Investments in External Innovation

•Pursuant to a collaboration with CRISPR that we amended in 2021, we now lead global development, manufacturing and commercialization of CTX001, with support from CRISPR.

•We entered into research collaborations with Obsidian Therapeutics, Inc., Arbor Biotechnologies, Inc., and Mammoth Biosciences, Inc.

Our Business Environment

Our net product revenues come from the sale of our medicines for the treatment of CF. Our CF strategy involves continuing to develop and obtain approval and reimbursement for treatment regimens that will provide benefits to all people with CF and increasing the number of people with CF eligible and able to receive our medicines, including through label expansions, expanded reimbursement, and the development of new medicines. We are actively pursuing a pipeline of product candidates for the treatment of serious diseases outside of CF. Our strategy is to combine transformative advances in the understanding of human disease biology and the science of therapeutics in order to discover and develop new medicines. This approach includes advancing multiple compounds from each program, spanning multiple modalities, into early clinical trials and evaluating patient data to inform discovery and development of additional compounds, with the goal of bringing first-in-class and best-in-class therapies to patients, and to provide durable clinical and commercial success.

In pursuit of new product candidates and therapies in specialty markets, we invest in research and development. We believe that pursuing research in diverse areas allows us to balance the risks inherent in product development and may provide product 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.

Discovery and development of a new pharmaceutical or biological product is a difficult and lengthy process that requires significant financial resources along with extensive technical and regulatory expertise. Most chemical compounds that are investigated as potential drug or biological product candidates never progress into development, and most product candidates that do advance into development never receive marketing approval. Our investments in product candidates are subject to considerable risks. We closely monitor the results of our discovery, research, clinical trials and nonclinical studies and frequently evaluate our product 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

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information becomes available and as we gain additional understanding of our ongoing programs and potential new programs, as well as those of our competitors.

Our business also requires ensuring appropriate manufacturing and reimbursement of our products. As we advance our product candidates through clinical development toward commercialization and market and sell our approved products, we build and maintain our supply chain and quality assurance resources. We rely on a global network of third parties and our internal capabilities to manufacture and distribute our products for commercial sale and post-approval clinical trials and to manufacture and distribute our product candidates for clinical trials. In addition to establishing supply chains for each new approved product, we adapt our supply chain for existing products to include additional formulations or to increase scale of production for existing products as needed. The processes for cell and genetic therapies can be more complex than those required for small molecule drugs and require different systems, equipment, facilities and expertise. We are focused on ensuring the stability of the supply chains for our current products, as well as for our pipeline programs.

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 now and in the future. In Europe and other ex-U.S. markets, we seek government reimbursement for our medicines on a country-by-country or region-by-region basis, as required. This is necessary for each new medicine, as well as for label expansions for our current medicines. We expect to continue to focus significant resources to obtain expanded reimbursement for our CF medicines and, ultimately, pipeline therapies in U.S. and ex-U.S. markets.

COVID-19

We continue to monitor the impacts of the COVID-19 global pandemic on our business, including in our clinical trials, manufacturing facilities and capabilities, and ability to access necessary resources. COVID-19 has not materially 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 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.

Strategic Transactions

Acquisitions

As part of our business strategy, we seek to acquire products, product candidates and other technologies and businesses that are aligned with our corporate and research and development strategies and complement and advance 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 Duchenne muscular dystrophy, or DMD, and other severe neuromuscular diseases, including myotonic dystrophy type 1, or DM1. In the Semma acquisition, we paid approximately $950.0 million in cash to Semma equity holders. In the Exonics acquisition, we paid approximately $245.0 million upfront to Exonics equity holders and agreed to additional payments based upon successful achievement of specified development and regulatory milestones. We expect to continue to identify and evaluate potential acquisitions and may include larger transactions or later-stage assets.

Both of our 2019 acquisitions were accounted for as business combinations. As of the acquisition date for each transaction, the cash payments, as well as the fair value of contingent consideration for Exonics, were allocated primarily to

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goodwill and the fair value of several in-process research and development assets that we acquired. The fair value of contingent consideration related to Exonics was recorded as a liability and continues to be adjusted on a quarterly basis. As a result, these acquisitions are primarily reflected in additional assets and liabilities on our consolidated balance sheet. Operating expenses incurred by Exonics and Semma after the acquisition dates and specific expenses associated with the acquisitions are reflected in our consolidated statement of operations.

Please refer to our critical accounting policies, “Acquisitions,” for further information regarding the significant judgments and estimates related to our acquisitions.

Collaboration and Licensing Arrangements

We enter into arrangements with third parties, including collaboration and licensing arrangements, for the development, manufacture and commercialization of products, product 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 product 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 Biotechnologies, Inc., CRISPR, Kymera Therapeutics, Inc., Mammoth Biosciences, Inc., Moderna, Inc., and Obsidian Therapeutics, Inc. Generally, when we in-license a technology or product 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 product candidate to the collaborator’s operations and the other activities in which our collaborators are engaged, the accounting for these transactions can vary significantly. Our research and development expenses included $1.1 billion in 2021, $184.6 million in 2020 and $318.3 million in 2019 related to upfront, milestone and other payments pursuant to our collaboration agreements and other business development agreements. The increase in these payments in 2021 was primarily related to the $900.0 million upfront payment we made to CRISPR that is described below.

Joint Development and Commercialization Agreement with CRISPR

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

In April 2021, we and CRISPR entered into an amendment and restatement of the Original JDCA, 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. We concluded that we did not have any alternative future use for the acquired in-process research and development and recorded this upfront payment to “Research and development expenses.” Under the terms of the A&R JDCA, we are leading worldwide development, manufacturing, and commercialization of CTX001. As of July 1, 2021, 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. We concluded that the Original JDCA and the A&R JDCA are cost-sharing arrangements, which result in the net impact of the arrangements being recorded in “Research and development expenses” in our consolidated statements of operations.

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

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expenses in connection with these programs and have the potential for future collaborative and royalty revenues resulting from these programs.

Please refer to Note B, “Collaborative and Other 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 December 31, 2021, we held strategic equity investments in certain public and private companies, and we expect 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. As discussed below in “Other Income (Expense), Net” in our Results of Operations, 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 consolidated statement of operations.

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RESULTS OF OPERATIONS

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Revenues

[[GREPCENT_TABLE]]
[["","2021","","% Change","","2020","","% Change","","2019"],["","(in millions, except percentages)"],["TRIKAFTA/KAFTRIO","$","5,697.2","","","47%","","$","3,863.8","","","820%","","$","420.1"],["SYMDEKO/SYMKEVI","420.4","","","(33)%","","628.6","","","(56)%","","1,417.7"],["ORKAMBI","771.6","","","(15)%","","907.5","","","(32)%","","1,331.9"],["KALYDECO","684.2","","","(15)%","","802.9","","","(19)%","","991.0"],["Product revenues, net","7,573.4","","","22%","","6,202.8","","","49%","","4,160.7"],["Other revenues","1.0","","","**","","2.9","","","**","","2.1"],["Total revenues","$","7,574.4","","","22%","","$","6,205.7","","","49%","","$","4,162.8"],["","","","","","","","** Not meaningful"]]
[[/GREPCENT_TABLE]]

Product Revenues, Net

In 2021, our net product revenues increased by $1.4 billion, or 22%, as compared to 2020 primarily due to the launch of KAFTRIO in multiple countries internationally, which was approved in the E.U. in the third quarter of 2020, and the performance of TRIKAFTA in the U.S., including the launch of TRIKAFTA in June 2021 for 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 the U.S. and from ex-U.S. markets were as follows:

[[GREPCENT_TABLE]]
[["","2021","","% Change","","2020","","% Change","","2019"],["","(in millions, except percentages)"],["United States","$","5,287.3","","","10%","","$","4,826.4","","","58%","","$","3,060.3"],["ex-U.S.","2,286.1","","","66%","","1,376.4","","","25%","","1,100.4"],["Product revenues, net","$","7,573.4","","","22%","","$","6,202.8","","","49%","","$","4,160.7"]]
[[/GREPCENT_TABLE]]

We expect that our net product revenues will increase in 2022 due to increasing numbers of people being treated with our medicines. The increase is expected to result from continued performance of KAFTRIO outside the U.S. and TRIKAFTA in the U.S., label expansions for our previously approved products, and expanded access to our medicines.

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Other Revenues

Our other revenues were $1.0 million and $2.9 million in 2021 and 2020, respectively, related to collaborative milestones that we earned. 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.

Operating Costs and Expenses

[[GREPCENT_TABLE]]
[["","2021","","% Change","","2020","","% Change","","2019"],["","(in millions, except percentages)"],["Cost of sales","$","904.2","","","23%","","$","736.3","","","34%","","$","547.8"],["Research and development expenses","3,051.1","","","67%","","1,829.5","","","4%","","1,754.5"],["Selling, general and administrative expenses","840.1","","","9%","","770.5","","","17%","","658.5"],["Change in fair value of contingent consideration","(3.1)","","","**","","13.1","","","**","","4.5"],["Total costs and expenses","$","4,792.3","","","43%","","$","3,349.4","","","13%","","$","2,965.3"],["","","","","","","","** Not meaningful"]]
[[/GREPCENT_TABLE]]

Cost of Sales

Our cost of sales primarily consists of third-party royalties payable on net sales of our products as well as the cost of producing inventories. 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 2021 and 2020. In 2022, we expect our total cost of sales will increase due to expected increases in our net product revenues and our cost of sales as a percentage of our net product revenues will be similar to our cost of sales as a percentage of net product revenues in 2021 and 2020.

Research and Development Expenses

[[GREPCENT_TABLE]]
[["","2021","","% Change","","2020","","% Change","","2019"],["","(in millions, except percentages)"],["Research expenses","$","617.7","","","(3)%","","$","636.7","","","(13)%","","$","732.7"],["Development expenses","2,433.4","","","104%","","1,192.8","","","17%","","1,021.8"],["Total research and development expenses","$","3,051.1","","","67%","","$","1,829.5","","","4%","","$","1,754.5"]]
[[/GREPCENT_TABLE]]

Our research and development expenses include internal and external costs incurred for research and development of our products and product 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 products or product candidates, because the employees within our research and development groups typically are deployed across multiple research and development programs. We assign external costs of services provided to us by clinical research organizations and other outsourced research by individual program. Apart from upfront, milestone, and other payments related to our business development activities, our internal costs are significantly greater than our external costs. All research and development costs for our products and product candidates are expensed as incurred.

Over the past three years, we have incurred $6.6 billion in research and development expenses associated with product discovery and development. The successful development of our product 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 product 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

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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 product candidates to market are not available. Any estimates regarding development and regulatory timelines for our product 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

[[GREPCENT_TABLE]]
[["","2021","","Change %","","2020","","Change %","","2019"],["","(in millions, except percentages)"],["Research Expenses:"],["Salary and benefits","$","136.7","","","5%","","$","129.8","","","(4)%","","$","134.6"],["Stock-based compensation expense","77.3","","","(10)%","","85.6","","","23%","","69.4"],["Outsourced services and other direct expenses","160.0","","","38%","","116.2","","","\u2014%","","116.6"],["Collaborative payments","105.4","","","(43)%","","184.6","","","(40)%","","307.8"],["Infrastructure costs","138.3","","","15%","","120.5","","","16%","","104.3"],["Total research expenses","$","617.7","","","(3)%","","$","636.7","","","(13)%","","$","732.7"]]
[[/GREPCENT_TABLE]]

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, milestone and certain other payments related to our business development activities that are reflected in the preceding table as collaborative payments. Our research expenses, apart from 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

[[GREPCENT_TABLE]]
[["","2021","","Change %","","2020","","Change %","","2019"],["","(in millions, except percentages)"],["Development Expenses:"],["Salary and benefits","$","347.6","","","18%","","$","295.7","","","18%","","$","249.9"],["Stock-based compensation expense","191.0","","","8%","","177.1","","","14%","","155.2"],["Outsourced services and other direct expenses","629.4","","","23%","","512.2","","","21%","","425.0"],["Collaborative payments","1,007.9","","","**","","\u2014","","","**","","10.5"],["Infrastructure costs","257.5","","","24%","","207.8","","","15%","","181.2"],["Total development expenses","$","2,433.4","","","104%","","$","1,192.8","","","17%","","$","1,021.8"],["","","","","","** Not meaningful"]]
[[/GREPCENT_TABLE]]

In 2021 and 2020, costs related to our CF programs represented the largest portion of our development costs, apart from the $900.0 million upfront payment to CRISPR in 2021, which is included in the preceding table under collaborative payments. Our development expenses increased by $1.2 billion, or 104%, in 2021 as compared to 2020, primarily due to the payment to CRISPR and increased expenses related to our diversifying pipeline, including clinical trials, headcount, and infrastructure costs. We expect our development expenses, apart from payments related to our business development activities, to continue to increase in 2022 as a result of our diversifying pipeline.

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Selling, General and Administrative Expenses

[[GREPCENT_TABLE]]
[["","2021","","% Change","","2020","","% Change","","2019"],["","(in millions, except percentages)"],["Selling, general and administrative expenses","$","840.1","","","9%","","$","770.5","","","17%","","$","658.5"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses increased by 9% in 2021 as compared to 2020, primarily due to the continued investment to support the commercialization of our medicines and increased support for our pipeline products. We expect our selling, general and administrative expenses to continue to increase in 2022.

Contingent Consideration

The change in the fair value of our contingent consideration potentially payable to Exonics’ former equity holders was a $3.1 million decrease in 2021 and a $13.1 million increase in 2020. In future periods, we expect the fair value of contingent consideration to increase or decrease based on, among other things, our estimates of the probability of achieving and the timing of these contingent development and regulatory milestone payments, as well as the time value of money and changes in market interest rates.

Other Non-Operating Income (Expense), Net

Interest Income

Interest income was $4.9 million in 2021, which was lower than our interest income of $22.2 million in 2020, 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 $61.5 million in 2021 as compared to $58.2 million in 2020. The majority of our interest expense in these periods was related to imputed interest expense associated with our leased corporate headquarters in Boston.

Other Income (Expense), Net

In 2021 and 2020, we recorded net other income of $4.9 million and $296.6 million, respectively, primarily related to net gains of $17.1 million and $311.9 million in 2021 and 2020, respectively, resulting from changes in the fair value and sales of certain of our strategic investments. As of December 31, 2021, the fair value of our investments in publicly traded companies was $230.9 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. 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

Our provision for income taxes was $388.3 million for 2021 and $405.2 million for 2020. Our effective tax rate of 14% for 2021 was lower than the U.S. statutory rate primarily due to discrete tax benefits of (i) $94.8 million associated with an increase in the U.K.’s corporate tax rate from 19% to 25%, which was enacted in June 2021 and will become effective in April 2023, and (ii) $44.1 million resulting from an R&D tax credit study that we completed in 2021.

Our effective tax rate of 13% for 2020 was lower than the U.S. statutory rate primarily due to (i) a discrete tax benefit of $209.0 million 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. The impact of these items was partially offset by U.S. income tax on foreign earnings.

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Net Income

In summary, our net income decreased to $2.3 billion in 2021 as compared to $2.7 billion in 2020 primarily due to (i) our $900.0 million upfront payment to CRISPR in 2021 and (ii) less other income derived from changes in the fair value of our strategic investments in 2021 as compared to 2020, (iii) partially offset by increased operating income in 2021, apart from the payment to CRISPR, resulting from our product revenues.

LIQUIDITY AND CAPITAL RESOURCES

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

[[GREPCENT_TABLE]]
[["","2021","","2020","","% Change"],["","(in millions)"],["Cash, cash equivalents and marketable securities","$","7,524.9","","","$","6,658.9","","","13%"],["Working Capital:"],["Total current assets","$","9,560.6","","","$","8,133.4","","","18%"],["Total current liabilities","(2,142.0)","","","(1,877.5)","","","14%"],["Total working capital","$","7,418.6","","","$","6,255.9","","","19%"]]
[[/GREPCENT_TABLE]]

Working Capital

As of December 31, 2021, total working capital was $7.4 billion, which represented an increase of $1.2 billion from $6.3 billion as of December 31, 2020. The increase in total working capital in 2021 was primarily related to $2.6 billion of cash provided by operations, which was net of our $900.0 million payment to CRISPR, partially offset by $1.4 billion of cash used to repurchase our common stock pursuant to our share repurchase programs and purchases of property and equipment of $235.0 million.

Sources and Uses of Liquidity

As of December 31, 2021, we had cash, cash equivalents, and marketable securities of $7.5 billion, which represented an increase of $866.0 million from $6.7 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 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 product candidates to the market, the level of our business development activities and the number, breadth, cost and prospects of our research and development programs.

Credit Facilities & Financing Strategy

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. Negative covenants in our credit agreement may prohibit or limit our ability to access these sources of liquidity. As of December 31, 2021, we were in compliance with these covenants.

We may also 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.

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Cash Flows

[[GREPCENT_TABLE]]
[["","2021","","","","2020","","","","2019"],["","(in millions)"],["Net cash provided by (used in):"],["Operating activities","$","2,643.5","","","","","$","3,253.5","","","","","$","1,569.3"],["Investing activities","$","(340.9)","","","","","$","99.4","","","","","$","(1,235.3)"],["Financing activities","$","(1,478.0)","","","","","$","(505.3)","","","","","$","126.8"]]
[[/GREPCENT_TABLE]]

Operating Activities

Cash provided by operating activities was $2.6 billion in 2021 as compared to $3.3 billion in 2020 primarily due to a $369.6 million decrease in our net income resulting from the $900.0 million upfront payment we made to CRISPR in 2021. Cash provided by operating activities was $3.3 billion in 2020 as compared to $1.6 billion in 2019 primarily due to a $1.5 billion increase in our net income resulting from increased net product revenues.

Investing Activities

Cash used in investing activities was $340.9 million in 2021, primarily related to purchases of property and equipment, and, to a lesser extent, purchases of notes receivable and strategic investments. In 2020, our investing activities primarily related to $437.6 million of proceeds from sales of our strategic investments, partially offset by purchases of property and equipment. In 2019, we spent $1.2 billion to acquire Semma and Exonics.

Financing Activities

Cash used in financing activities was $1.5 billion in 2021 and $505.3 million in 2020 as compared to cash provided by financing activities of $126.8 million in 2019. In 2021 and 2020, aggregate share repurchases pursuant to our share repurchase programs were $1.4 billion and $539.1 million, respectively, which represented the largest portion of our financing activities. In 2019, our financing activities provided $126.8 million of cash related to the issuance of common stock pursuant to our employee benefit plans, partially offset by repurchases of our common stock pursuant to our share repurchase programs.

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;

•substantial facility and finance lease obligations as described below;

•royalties we pay to the Cystic Fibrosis Foundation on sales of our CF products; and

•cash paid for income taxes.

In addition, we have significant potential future capital requirements including:

•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. Our obligation to fund these research and development and commercialization efforts and to pay these potential milestone and royalties is contingent upon continued involvement in the programs and/or the lack of any adverse events that could cause the discontinuance of the programs associated with our collaborations and acquisitions. We may enter into additional business development transactions, including acquisitions, collaborations, and equity investments, that require additional capital.

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•To the extent we borrow amounts under our existing credit agreements, we would be required to repay any outstanding principal amounts in 2022 or 2024.

•As of December 31, 2021, we had $0.5 billion available under our 2021 Share Repurchase Program.

Additional information on several of our future capital requirements is provided below.

Research and Development Costs

At any point in time, we have several ongoing clinical trials at various stages of clinical development. Our clinical trial costs are dependent on, among other things, our research activities advancing to later-stage clinical development as well as the size, number, and length of our clinical trials.

Leases

Finance Leases

Our corporate headquarters is in two buildings that we lease at Fan Pier in Boston, Massachusetts. We commenced lease payments on these buildings in 2013 and the initial lease periods end in December 2028. We also lease office and laboratory space in San Diego, California. We commenced lease payments for this building in 2019 pursuant to an initial 16 year lease term. We account for each of these buildings as finance leases.

Operating Leases

The remainder of our real estate leases are accounted for as operating leases, including office and laboratory space at our Innovation Square facility near our corporate headquarters. Base rent payments commenced in 2021 pursuant to an initial 15 year lease term for this building.

Our total future minimum lease payments for our finance and operating leases for each of the next five years and in total are included in Note L, “Leases.” The total future undiscounted minimum lease payments were $796.2 million and $482.2 million related to our finance and operating leases, respectively, as of December 31, 2021.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our 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 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.

We believe that our application of the following accounting policies, each of which requires significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating our reported financial results:

•revenue recognition;

•acquisitions, including intangible assets, goodwill and contingent consideration; and

•income taxes.

Our accounting policies, including the ones discussed below, are more fully described in the Notes to our consolidated financial statements, including Note A, “Nature of Business and Accounting Policies,” included in this Annual Report on Form 10-K.

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Revenue Recognition

Product Revenues, Net

We generate product revenues from sales in the U.S. and in international markets. We sell our products principally to a limited number of specialty pharmacy and specialty distributors in the U.S., which account for the largest portion of our total revenues. We make international sales primarily to specialty distributors and retail chains, as well as hospitals and clinics, many of which are government-owned or supported customers. Our customers in the U.S. subsequently resell our products to patients and health care providers. We contract with government agencies so that our products will be eligible for purchase by, or partial or full reimbursement from, such third-party payors. We recognize net product revenues from sales of our products when our customers obtain control of our products, which typically occurs upon delivery to our customers. Revenues from our product sales are recorded at the net sales price, or “transaction price,” which requires us to make several significant estimates regarding the net sales price.

The most significant estimate we are required to make is related to government and private payor rebates, chargebacks, discounts and fees, collectively rebates. The value of the rebates provided to third-party payors per course of treatment vary significantly and are based on government-mandated discounts and our arrangements with other third-party payors. In order to estimate our total rebates, we estimate the percentage of prescriptions that will be covered by each third-party payor, which is referred to as the payor mix. We track available information regarding changes, if any, to the payor mix for our products, to our contractual terms with third-party payors and to applicable governmental programs and regulations and levels of our products in the distribution channel. We adjust our estimated rebates based on new information, including information regarding actual rebates for our products, as it becomes available. Claims by third-party payors for rebates are submitted to us significantly after the related sales, potentially resulting in adjustments in the period in which the new information becomes known. Our credits to revenue related to prior period sales, apart from an adjustment to the transaction price for ORKAMBI distributed through early access programs in France in 2019, have not been significant (typically less than 1% of gross product revenues) and primarily related to U.S. rebates.

The following table summarizes activity related to our accruals for rebates (including a refund liability to the French government related to ORKAMBI distributed through early access programs in France, which was paid in 2020) for 2021, 2020 and 2019:

[[GREPCENT_TABLE]]
[["","(in millions)"],["Balance as of December 31, 2018","$","545.1"],["Provision related to 2019 sales","656.0"],["Adjustments related to prior year(s) sales","(95.5)"],["Credits/payments made","(469.9)"],["Balance as of December 31, 2019","$","635.7"],["Provision related to 2020 sales","1,284.1"],["Adjustments related to prior year(s) sales","0.6"],["Credits/payments made","(1,144.8)"],["Balance as of December 31, 2020","$","775.6"],["Provision related to 2021 sales","2,126.1"],["Adjustments related to prior year(s) sales","(27.6)"],["Credits/payments made","(2,035.5)"],["Balance as of December 31, 2021","$","838.6"]]
[[/GREPCENT_TABLE]]

We have also entered into 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. We defer a portion of the consideration received, which includes upfront payments and fees, for shipments made up to the annual reimbursement limit as “Other current liabilities.” The deferred amount is recognized as revenue when the free products are shipped. In order to estimate the portion of the consideration received to recognize as revenue and the portion of the amount to defer, we rely on our forecast of the number of units we will distribute during the applicable annual period in each international market in which our contracts with

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government-owned and supported customers limit the amount of annual reimbursement we can receive. Our forecasts are based on, among other things, our historical experience.

The preceding estimates and judgments materially affect our recognition of net product revenues. Changes in our estimates of net product revenues could have a material effect on net product revenues recorded in the period in which we determine that change occurs.

French Early Access Programs

In 2015, we began distributing ORKAMBI through early access programs in France and remained engaged in reimbursement discussions with the French government for ORKAMBI, including ORKAMBI distributed through early access programs, until November 2019, when we reached an agreement with the French government. From the time we began distributing ORKAMBI through early access programs in France, we expected that the difference between the amounts collected based on the invoiced amount and the final amount for ORKAMBI distributed through these programs would be returned to the French government. Our refund liability related to the early access programs in France was classified in “Accrued expenses” on our consolidated balance sheets.

From the first quarter of 2018 through the third quarter of 2019, we recognized net product revenues for ORKAMBI sales in France under the early access programs based on a transaction price that reflected our estimate of consideration we expected to retain that would not be subject to a significant reversal in amounts recognized, which resulted in revenue representing a portion of the invoiced amount.

Upon reaching an agreement with the French government for ORKAMBI, including the final amount for ORKAMBI distributed through early access programs in France in the fourth quarter of 2019, we updated the transaction price related to ORKAMBI distributed through early access programs and recognized net product revenues of $155.8 million related to these shipments, which occurred from 2015 through the date of our agreement with the French government, because the final amount for these shipments exceeded our previous estimate.

Acquisitions

We are required to make several significant judgments and estimates in order to calculate the purchase price for our business combinations and then allocate it to the assets that we have acquired and the liabilities that we have assumed on our consolidated balance sheet. The most significant judgments and estimates relate to the fair value of the in-process research and development assets and contingent consideration liabilities related to these business combinations. Based on these judgments and estimates, the fair value of the goodwill that we record as a result of these business combinations may be material. Once recorded, these assets are subject to quarterly impairment analysis and our contingent consideration liability is adjusted quarterly, which requires similar judgments and estimates.

Intangible Assets

In 2019, we recorded in-process research and development assets related to our acquisitions of Exonics and Semma totaling $400.0 million on our consolidated balance sheet, which remained on our consolidated balance sheet as of December 31, 2021. Each of these assets is accounted for as an indefinite-lived intangible asset and is maintained on our consolidated balance sheet until either the project underlying it is completed or the asset becomes impaired. When we determine that an asset has become impaired or we abandon a project, we write down the carrying value of the related intangible asset to its fair value and record an impairment charge in the period in which the impairment occurs.

To determine the fair value of our in-process research and development assets, we utilize the multi-period excess earnings method of the income approach, which requires us to make estimates of the probability of technical and regulatory success, development cost assumptions, revenue projections and growth rates, commercial cost estimates and appropriate discount rates. These assumptions require significant management judgment and reasonable changes in the assumptions can cause material changes to the fair value of the intangible assets. Due to the early stage of Exonics and Semma’s programs, these significant assumptions could be affected by future economic and market conditions.

Contingent Consideration

As of December 31, 2021 and 2020, we had $186.5 million and $189.6 million, respectively, of liabilities on our consolidated balance sheet attributable to the fair value of the contingent development and regulatory payments that we may

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owe to Exonics’ former equity holders upon the achievement of certain events.

We record an increase or a decrease in the fair value of the contingent consideration liability on our consolidated balance sheet and in our consolidated statement of operations on a quarterly basis. We determine the fair value of our contingent consideration liability using a probability weighted discounted cash flow method of the income approach, which requires us to make estimates of the timing of regulatory and commercial milestone achievement and the corresponding estimated probability of technical and regulatory success rates. Significant judgment is used in determining the appropriateness of these assumptions during each reporting period. Reasonable changes in these assumptions can cause material changes to the fair value of our contingent consideration liability. Due to the early stage of Exonics’ DMD and DM1 programs, these significant assumptions could be affected by future economic and market conditions.

Goodwill

In 2021 and 2020, we did not have any business combinations; therefore, we did not record any additional goodwill on our consolidated balance sheet. In 2019, we recorded goodwill of $554.6 million and $397.1 million related to our acquisitions of Semma and Exonics, respectively. Goodwill reflects the difference between the fair value of the consideration transferred and the fair value of the net assets acquired. Thus, the goodwill that we record is dependent on the significant judgments and estimates inherent in the fair value of our in-process research and development assets and contingent consideration liabilities. We have one reporting unit for goodwill reporting purposes. We have not identified any goodwill impairment to date.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. If our estimate of the tax effect of reversing temporary differences is (i) not reflective of actual outcomes, (ii) modified to reflect new developments or interpretations of the tax law, or (iii) revised to incorporate new accounting principles, or changes in the expected timing or manner of the reversal, our results of operations could be materially impacted.

We provide a valuation allowance when it is more likely than not that deferred tax assets will not be realized. On a periodic basis, we reassess our valuation allowances on our deferred tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets. Significant judgment is required in making these assessments to maintain or reverse our valuation allowances and, to the extent our future expectations change we would have to assess the recoverability of these deferred tax assets at that time. As of December 31, 2021, we maintained a valuation allowance of $220.4 million related primarily to U.S. state and foreign tax attributes.

We record liabilities related to uncertain tax positions by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We adjust our liability to reflect any subsequent changes in the relevant facts and circumstances surrounding the uncertain positions. Significant judgment is required in making this assessment, and, therefore, we re-evaluate uncertain tax positions and consider various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, and changes in facts or circumstances related to a tax position.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note A, “Nature of Business and Accounting Policies,” in the accompanying notes to the consolidated financial statements for a discussion of recent accounting pronouncements and new accounting pronouncements adopted during 2021.

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