U.S. Research Published by Raymond James & Associates

Transcription

1 Vertex Pharmaceuticals Inc. (VRTX-NASDAQ) Christopher Raymond, (312) , Laura Chico, Ph.D., Sr. Res. Assoc., (312) , Allison Bratzel, Sr. Res. Assoc., (312) , Biotechnology 3Q16 Earnings Brings Triple the Excitement, but Also Triple the Questions Published by & Associates October 26, 2016 Company Comment Rating Market Perform 3 Current and Target Price Current Price (Oct-25-16) $78.71 Target Price: NM 52-Week Range $ $75.90 Suitability High Risk/Growth Recommendation: Remain Market Perform rated on VRTX shares. On the plus side, the long-awaited triple combo development update arrived and we think investors will be encouraged two separate combination regimens are advancing. Nevertheless, with Phase 1 data unlikely to be released and initial Phase 2 readouts not expected until 2H17, we anticipate far more questions than answers will remain for the next-gen programs as investors attempt to gauge the likelihood of success and how these agents will fit into the existing treatment paradigm. For our part, with shares trading at 9x 2017E consensus revenue (largecap peers 7x), we await a better entry point before getting more constructive. Commercial update less impactful this time around Vertex reported non-gaap EPS of $0.16 versus the consensus/rj estimate of $0.18. Management previously disclosed that seasonal weakness negatively impacted 3Q16 results, so few surprises in the print itself. Orkambi impacted by summer slowdown. U.S. Orkambi net revenue of $211M fell 8% Q-Q, while ex-u.s. Orkambi of $23M grew 43% over the prior quarter, with the latter still deriving from Germany. Management anticipates the September Orkambi label expansion will drive 4Q16 growth, and we re maintaining our 4Q16 global Orkambi revenue estimate of $259M (+23% Q-Q). Kalydeco reaches peak penetration? Kalydeco net revenue of $176M missed consensus of $179M (RJ $183M). Management highlighted Kalydeco s market penetration has now eclipsed ~90%, limiting future growth. Given this dynamic and without visibility into additional regulatory submissions, we re trimming our 2017 Kalydeco estimate to $779M (previously $796M). with multiple triple-combination regimens advancing to Phase 2 studies. Management will initiate two Phase 2 studies by YE16 with next-gen correctors VX-440 and VX-152. Both studies will explore combinations with VX-661 and ivacaftor while fourth-generation corrector VX-659 will enter the clinic in We now know the how but not necessarily the why. While management detailed how triple Phase 2 studies are designed, data demonstrating why the Phase 1 studies support advancing VX-440 and VX-152 were not shared. We spoke with the company and learned investors are unlikely to gain additional Phase 1 visibility. With management hinting at a few potential safety/tolerability issues (e.g. GI tolerability, teratogenicity), we think this could ultimately leave investors struggling to assess the potential for success. Sticking with the sidelines. Despite the encouraging pipeline advancement, we remain Market Perform rated as success appears largely priced in with shares trading at 9x 2017 consensus revenue (large-cap peers ~7x). Non-GAAP Q1 Q2 Q3 Q4 Full GAAP EPS Total EPS Mar Jun Sep Dec Year Full Year Revenues (mil.) 2015A $(0.62) $(0.54) $(0.13) $0.17 $(1.11) $(2.31) $1,008 Old 2016E 0.09A 0.24A (0.52) 1,696 New 2016E 0.09A 0.24A 0.16A (0.68) 1,689 Old 2017E ,298 New 2017E ,281 Rows may not add due to rounding. Non-GAAP EPS excludes non-recurring items. Please read domestic and foreign disclosure/risk information beginning on page 6 and Analyst Certification on page 6. Market Data Shares Out. (mil.) Market Cap. (mil.) $19,394 Avg. Daily Vol. (10 day) 1,778,127 Dividend/Yield $0.00/0.0% BVPS (Jun-16) $3.96 ROE % -29% LT Debt (mil.)/% Cap. $582/40% Earnings & Valuation Metrics 2015A 2016E 2017E P/E Ratios (Non-GAAP) NM NM 29.4x Company Description Vertex Pharmaceuticals Inc. was founded in 1989 by Joshua Boger and Kevin Kinsella. Based in Boston, Massachusetts, it became a publicly traded entity on NASDAQ in Vertex s flagship products Kalydeco and Orkambi represent the first approved CFTR modulator therapies for the treatment of cystic fibrosis (CF) and are the first to treat the underlying cause of the disease. In 2015, Kalydeco and Orkambi generated $983 million in global sales. The company is engaged in broadening and advancing its CF pipeline with numerous next-generation products and potential novel combination therapies in clinical development. International Headquarters: The Financial Center 880 Carillon Parkway St. Petersburg, Florida

2 Investment conclusion: No change to Market Perform rating on VRTX shares. The company s decision to advance two, distinct triple-combination regimens should be encouraging to investors as this keeps open the possibility of developing more comprehensive therapies that can address a larger portion of the cystic fibrosis market. While data could arrive by 2H17 from these programs, gauging the probability of success is somewhat challenging given the dearth of information provided on the Phase 1 studies that were used to design the development plan. Management s disclosure that VX-440 possessed potential preclinical signals of teratogenicity and that VX-152 GI tolerability issues (e.g. nausea, vomiting) manifested at higher doses makes it somewhat difficult to understand the potential efficacy/safety profile of these regimens. Despite the potential for shares to rally in the near term amidst the advancement of the triple combo regimens, we remain cautious on the commercial outlook for Orkambi. Additionally, we believe much of the commercial and developmental successes are already priced in to shares and as such remain on the sidelines. Figure 1. 3Q16 Vertex Actual Results Versus Historical Results and RJ/Consensus Estimates Note: non-gaap estimates/results; in $M, except per share data Source: Vertex Pharmaceuticals, FactSet, research Model update We are lowering our 2017 Kalydeco revenue estimate by $17M to $779M based on the commentary that growth has peaked for this franchise, absent additional label expansions. For Orkambi, our 4Q16 estimate remains unchanged ($259M) as we anticipate meaningful sequential growth with the rollout into U.S. pediatric patients. Longer term, the revenue trajectory in 2017 remains levered to successful reimbursement and access in various European, Australian and Canadian markets. Triple-Combination Regimen Phase 2 Strategy Management disclosed the advancement of two, separate regimens containing next-generation corrector molecules VX-440 and VX-152. As shown in the figures below, following completion of Phase 1 studies in ~100 healthy volunteers, the combinations will be evaluated in cystic fibrosis (CF) patients harboring either two copies of the F508del mutation or patients with a het/min phenotype (F508del mutation, plus separate minimal function mutation). The VX-440 program will evaluate the regimen over the course of a four-week treatment period. Patients will initially receive a lower dose of VX-440 as the compound has not been evaluated in CF patients. This will allow Vertex to match the pharmacokinetic exposures to determine if there are differences between healthy volunteers and affected CF patients. If successful, this Phase 2 study would lead to the advancement of the VX-440 regimen to a Phase 3 study. Data is anticipated in 2H17. International Headquarters: The Financial Center 880 Carillon Parkway St. Petersburg, Florida

3 Figure 2. VX-440 Phase 2 Development Strategy Source: Vertex Pharmaceuticals During the earnings call, management disclosed that preclinical screening detected teratogenic potential for VX-440 and as a result they will require females of child bearing age to use contraception. Additionally, in our check in with the company we learned that two of the healthy volunteers in the study experienced reversible, asymptomatic hemolysis. While both instances were mild and resolved without incidence, both subjects were G6PD deficiency patients. As a precaution, Vertex will exclude patients with this condition from their studies. VX-152 containing regimens will also be advanced, but due to the emergence of GI tolerability issues during the Phase 1 study (e.g. nausea, vomiting) it is thought to have a more narrow therapeutic index than VX-440. As a result, Vertex will evaluate this combination over the course of two weeks to better understand the dosing. If the study is successful, a second Phase 2b study would be employed to further refine the dosing. International Headquarters: The Financial Center 880 Carillon Parkway St. Petersburg, Florida

4 Figure 3. VX-152 Phase 2 Development Strategy Source: Vertex Pharmaceuticals International Headquarters: The Financial Center 880 Carillon Parkway St. Petersburg, Florida

5 Vertex Pharmaceuticals Inc. (VRTX) Statement of Operations Dollars in 000's Except Per Share Data 2014A 2015A Q1A Q2A Q3A Q4E 2016E Q1E Q2E Q3E Q4E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenue Product Revenues, net $443,195 $975,987 $393,485 $425,567 $409,443 $441,870 $1,670,365 $488,629 $526,946 $546,359 $704,763 $2,266,696 $2,836,567 $3,225,066 $3,436,990 $3,571,323 $3,721,342 $3,848,122 $3,995,197 $4,128,306 Royalty Revenues $40,919 $23,959 $3,596 $5,282 $3,835 $4,500 $17,213 $3,500 $3,500 $3,500 $3,500 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $4,000 $4,000 $4,000 Collaborative Revenues $51,675 $8,053 $74 $675 $259 $50 $1,058 $50 $50 $50 $50 $200 $200 $200 $200 $200 $200 $200 $200 $200 Total Revenue $535,789 $1,007,999 $397,155 $431,524 $413,537 $446,420 $1,688,636 $492,179 $530,496 $549,909 $708,313 $2,280,896 $2,848,767 $3,235,266 $3,445,190 $3,577,523 $3,725,542 $3,852,322 $3,999,397 $4,132,506 Y-Y Growth 68% 35% 25% 14% 6% 4% 4% 3% 4% 3% Operating Expenses Cost of Product Revenues $23,689 $117,550 $49,650 $44,160 $53,238 $53,570 $200,618 $59,061 $58,355 $65,989 $84,998 $268,403 $340,388 $387,008 $412,439 $428,559 $446,561 $461,775 $479,424 $495,397 % of Product Sales 5% 12% 13% 10% 13% 12% 12% 12% 11% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12% Research & Development $694,179 $764,434 $222,046 $217,673 $213,966 $221,000 $874,685 $220,000 $220,500 $221,000 $222,000 $883,500 $890,000 $895,000 $900,000 $903,000 $907,000 $910,000 $912,000 $915,000 % of Total Revenue 130% 76% 56% 50% 52% 50% 52% 45% 42% 40% 31% 39% 31% 28% 26% 25% 24% 24% 23% 22% Selling, General, and Administrative $225,634 $295,423 $83,679 $88,591 $83,992 $90,000 $346,262 $90,375 $91,000 $91,250 $91,500 $364,125 $427,315 $485,290 $516,778 $536,629 $558,831 $577,848 $599,910 $619,876 % of Total Revenue 42% 29% 21% 21% 20% 20% 21% 18% 17% 17% 13% 16% 15% 15% 15% 15% 15% 15% 15% 15% Total Operating Expenses $964,764 $1,184,768 $356,235 $351,522 $352,051 $365,770 $1,425,578 $370,636 $371,055 $379,439 $399,698 $1,520,828 $1,661,303 $1,770,298 $1,831,617 $1,869,987 $1,913,592 $1,950,823 $1,992,533 $2,031,473 Operating Income (Loss) ($428,975) ($176,769) $40,920 $80,002 $61,486 $80,649 $263,057 $121,542 $159,441 $170,470 $308,615 $760,068 $1,187,464 $1,464,968 $1,613,573 $1,707,536 $1,811,950 $1,901,499 $2,006,864 $2,101,034 Other Income, net ($79,161) ($90,919) ($16,076) ($21,410) ($20,343) ($16,500) ($74,329) ($14,500) ($13,500) ($12,000) ($12,000) ($52,000) ($45,000) ($45,000) ($45,000) ($45,000) ($45,000) ($45,000) ($45,000) ($45,000) Income (Loss) Before Tax ($508,136) ($267,688) $24,844 $58,592 $41,143 $64,149 $188,728 $107,042 $145,941 $158,470 $296,615 $708,068 $1,142,464 $1,419,968 $1,568,573 $1,662,536 $1,766,950 $1,856,499 $1,961,864 $2,056,034 Provision for Income Taxes (Tax Benefit) $3,082 $650 $2,422 $620 $1,012 $641 $4,695 $5,352 $7,297 $7,923 $14,831 $35,403 $57,123 $70,998 $156,857 $249,380 $353,390 $371,300 $392,373 $411,207 Effective Tax Rate -1% 0% 10% 1% 2% 1% 2% 5% 5% 5% 5% 5% 5% 5% 10% 15% 20% 20% 20% 20% Net Income, Non-GAAP ($738,555) ($268,338) $22,422 $57,972 $40,131 $63,508 $184,033 $101,690 $138,644 $150,546 $281,784 $672,665 $1,085,340 $1,348,970 $1,411,715 $1,413,156 $1,413,560 $1,485,199 $1,569,491 $1,644,827 EPS - Basic ($2.17) ($2.31) ($0.17) ($0.26) ($0.17) ($0.08) ($0.68) $0.08 $0.23 $0.28 $0.80 $1.39 $3.03 $4.10 $4.32 $4.34 $4.31 $4.61 $4.90 $5.23 EPS - Diluted (GAAP) ($2.17) ($2.31) ($0.17) ($0.26) ($0.17) ($0.08) ($0.68) $0.08 $0.23 $0.28 $0.80 $1.39 $3.03 $4.10 $4.32 $4.34 $4.31 $4.61 $4.90 $5.23 EPS - Diluted (Non-GAAP) ($3.14) ($1.11) $0.09 $0.24 $0.16 $0.26 $0.74 $0.41 $0.55 $0.60 $1.12 $2.68 $4.29 $5.35 $5.55 $5.58 $5.54 $5.84 $6.12 $6.45 Shares Outstanding - Basic (thousands) 235, , , , , , , , , , , , , , , , , , , ,045 Shares Outstanding - Diluted (thousands) 235, , , , , , , , , , , , , , , , , , , ,045 Fiscal year ends December 31 Sources: Estimates, Company Reports International Headquarters: The Financial Center 880 Carillon Parkway St. Petersburg, Florida

6 Important Investor Disclosures & Associates (RJA) is a FINRA member firm and is responsible for the preparation and distribution of research created in the United States. & Associates is located at The Financial Center, 880 Carillon Parkway, St. Petersburg, FL 33716, (727) Non-U.S. affiliates, which are not FINRA member firms, include the following entities that are responsible for the creation and distribution of research in their respective areas: in Canada, Ltd. (RJL), Suite 2100, 925 West Georgia Street, Vancouver, BC V6C 3L2, (604) ; in Latin America, Argentina S.A., San Martin 344, 22nd Floor, Buenos Aires, C10004AAH, Argentina, ; in Europe, Euro Equities SAS (also trading as International), 40, rue La Boetie, 75008, Paris, France, , and Financial International Ltd., Broadwalk House, 5 Appold Street, London, England EC2A 2AG, This document is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The securities discussed in this document may not be eligible for sale in some jurisdictions. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Investors should consider this report as only a single factor in making their investment decision. For clients in the United States: Any foreign securities discussed in this report are generally not eligible for sale in the U.S. unless they are listed on a U.S. exchange. This report is being provided to you for informational purposes only and does not represent a solicitation for the purchase or sale of a security in any state where such a solicitation would be illegal. Investing in securities of issuers organized outside of the U.S., including ADRs, may entail certain risks. The securities of non-u.s. issuers may not be registered with, nor be subject to the reporting requirements of, the U.S. Securities and Exchange Commission. There may be limited information available on such securities. Investors who have received this report may be prohibited in certain states or other jurisdictions from purchasing the securities mentioned in this report. Please ask your Financial Advisor for additional details and to determine if a particular security is eligible for purchase in your state. The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. Persons within the family of companies may have information that is not available to the contributors of the information contained in this publication., including affiliates and employees, may execute transactions in the securities listed in this publication that may not be consistent with the ratings appearing in this publication. ( RJ ) research reports are disseminated and available to RJ s retail and institutional clients simultaneously via electronic publication to RJ's internal proprietary websites (RJ Investor Access & RJ Capital Markets). Not all research reports are directly distributed to clients or third-party aggregators. Certain research reports may only be disseminated on RJ's internal proprietary websites; however such research reports will not contain estimates or changes to earnings forecasts, target price, valuation, or investment or suitability rating. Individual Research Analysts may also opt to circulate published research to one or more clients electronically. This electronic communication distribution is discretionary and is done only after the research has been publically disseminated via RJ s internal proprietary websites. The level and types of communications provided by Research Analysts to clients may vary depending on various factors including, but not limited to, the client s individual preference as to the frequency and manner of receiving communications from Research Analysts. For research reports, models, or other data available on a particular security, please contact your RJ Sales Representative or visit RJ Investor Access or RJ Capital Markets. Additional information is available on request. Analyst Information Registration of Non-U.S. Analysts: The analysts listed on the front of this report who are not employees of & Associates, Inc., are not registered/qualified as research analysts under FINRA rules, are not associated persons of & Associates, Inc., and are not subject to FINRA Rule 2241 restrictions on communications with covered companies, public companies, and trading securities held by a research analyst account. Analyst Holdings and Compensation: Equity analysts and their staffs at are compensated based on a salary and bonus system. Several factors enter into the bonus determination including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks. The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. In addition, said analyst has not received compensation from any subject company in the last 12 months. International Headquarters: The Financial Center 880 Carillon Parkway St. Petersburg, Florida

7 Ratings and Definitions & Associates (U.S.) definitions Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Ltd. (Canada) definitions Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Argentina S.A. rating definitions Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Europe ( Euro Equities SAS & Financial International Limited) rating definitions Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments. Rating Distributions Coverage Universe Rating Distribution* Investment Banking Distribution RJA RJL RJ Arg RJEE/RJFI RJA RJL RJ Arg RJEE/RJFI Strong Buy and Outperform (Buy) 54% 69% 56% 52% 18% 42% 11% 0% Market Perform (Hold) 42% 30% 44% 35% 7% 21% 0% 0% Underperform (Sell) 5% 1% 0% 13% 5% 0% 0% 0% * Columns may not add to 100% due to rounding. International Headquarters: The Financial Center 880 Carillon Parkway St. Petersburg, Florida

8 Suitability Ratings (SR) Medium Risk/Income (M/INC) Lower to average risk equities of companies with sound financials, consistent earnings, and dividend yields above that of the S&P 500. Many securities in this category are structured with a focus on providing a consistent dividend or return of capital. Medium Risk/Growth (M/GRW) Lower to average risk equities of companies with sound financials, consistent earnings growth, the potential for long-term price appreciation, a potential dividend yield, and/or share repurchase program. High Risk/Income (H/INC) Medium to higher risk equities of companies that are structured with a focus on providing a meaningful dividend but may face less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and potential risk of principal. Securities of companies in this category may have a less predictable income stream from dividends or distributions of capital. High Risk/Growth (H/GRW) Medium to higher risk equities of companies in fast growing and competitive industries, with less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial or legal issues, higher price volatility (beta), and potential risk of principal. High Risk/Speculation (H/SPEC) High risk equities of companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, significant financial or legal issues, or a substantial risk/loss of principal. Relationship Disclosures expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months. Company Name Vertex Pharmaceuticals Inc. Disclosure & Associates makes a market in shares of VRTX. Stock Charts, Target Prices, and Valuation Methodologies Valuation Methodology: The methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have target prices and thus valuation methodologies. Target Prices: The information below indicates our target price and rating changes for VRTX stock over the past three years. Valuation Methodology: Our valuation methodology for VRTX shares applies an appropriate multiple to forward full-year revenue estimates, considering relative valuation to its large-cap commercial biotech peers. International Headquarters: The Financial Center 880 Carillon Parkway St. Petersburg, Florida

9 Risk Factors General Risk Factors: Following are some general risk factors that pertain to the businesses of the subject companies and the projected target prices and recommendations included on research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. Specific Investment Risks Related to the Industry or Issuer Biotechnology Industry Risk Factors Risks include various policy and government regulatory risk, intellectual property risk, and potential health care reform initiatives that could impact demand, availability, and/or reimbursement of key products within the U.S. (or other foreign) markets. Company-Specific Risk Factors for Vertex Pharmaceuticals Inc. Clinical Risk As with any other biotechnology company engaged in drug development, Vertex's pipeline programs face potential risk in that clinical trials may fail to demonstrate sufficient safety and/or efficacy to warrant regulatory approval. In addition, although trials may generate statistically significant results, these may not necessarily be clinically meaningful or may be viewed by regulators as incomplete or insufficient. Regulatory Risk If FDA determines Vertex's current and future studies are insufficient to support approval, then the company may face a longer development time. Vertex recently received a Complete Response Letter for a proposed Kalydeco label expansion. Competitive Risk The cystic fibrosis therapeutics space is a highly competitive environment. Vertex will likely face competitive threats from other agents in development. Although Vertex's clinical trials may be successfully completed, if the results do not compare competitively versus other players in the space or versus agents in development, then Vertex's shares will likely face pressure. Additional Risk and Disclosure information, as well as more information on the rating system and suitability categories, is available at rjcapitalmarkets.com/disclosures/index. Copies of research or summary policies relating to research analyst independence can be obtained by contacting any & Associates or Financial Services office (please see raymondjames.com for office locations) or by calling , toll free or sending a written request to the Equity Research Library, & Associates, Inc., Tower 3, 6 th Floor, 880 Carillon Parkway, St. Petersburg, FL For clients in the United Kingdom: For clients of & Associates (London Branch) and Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (High net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For clients of Investment Services, Ltd.: This report is for the use of professional investment advisers and managers and is not intended for use by clients. For purposes of the Financial Conduct Authority requirements, this research report is classified as independent with respect to conflict of interest management. RJA, RJFI, and Investment Services, Ltd. are authorised and regulated by the Financial Conduct Authority in the United Kingdom. For clients in France: This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in Code Monétaire et Financier and Règlement Général de l Autorité des Marchés Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. International Headquarters: The Financial Center 880 Carillon Parkway St. Petersburg, Florida

10 releasable resear ch For clients of Euro Equities: Euro Equities is authorised and regulated by the Autorité de Contrôle Prudentiel et de Résolution and the Autorité des Marchés Financiers. For institutional clients in the European Economic Area (EEA) outside of the United Kingdom: This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted. For Canadian clients: This report is not prepared subject to Canadian disclosure requirements, unless a Canadian analyst has contributed to the content of the report. In the case where there is Canadian analyst contribution, the report meets all applicable IIROC disclosure requirements. Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows: This report is provided to clients of only for your personal, noncommercial use. Except as expressly authorized by, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate or commercially exploit the information contained in this report, in printed, electronic or any other form, in any manner, without the prior express written consent of. You also agree not to use the information provided in this report for any unlawful purpose. This is RJA client This report and its contents are the property of and are protected by applicable copyright, trade secret or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec.501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works. International Headquarters: The Financial Center 880 Carillon Parkway St. Petersburg, Florida