VRTX Vertex Pharmaceuticals Inc

AUDIT AND FINANCE COMMITTEE REPORT

The Audit and Finance Committee of the Board of Directors (the “Audit Committee”) of Vertex Pharmaceuticals Incorporated (the “Company”), which consists entirely of directors who meet the independence and experience requirements of the Securities and Exchange Commission and The Nasdaq Stock Market LLC, has furnished the following report:

The Audit Committee assists the Company’s Board of Directors in overseeing and monitoring the integrity of the Company’s financial reporting process, compliance with legal and regulatory requirements related to financial reporting and the quality of internal controls and external audit processes. The Audit Committee’s roles and responsibilities are set forth in a written charter, which is available on the Company’s website www.vrtx.com under “Investors—Corporate Governance—Governance Documents.” Among its duties, the Audit Committee is responsible for recommending to the Company’s Board of Directors that the Company’s financial statements be included in the Company’s Annual Report on Form 10-K. As a basis for that recommendation, the Audit Committee engaged in the following activities. First, the Audit Committee discussed with Ernst & Young LLP (“Ernst & Young”), the Company’s independent registered public accounting firm for 2016, those matters that Ernst & Young is required to communicate to and discuss with the Audit Committee by the Public Company Accounting Oversight Board (United States) Auditing Standard No. 16, Communications with Audit Committees , which included information regarding the scope and results of the audit. These communications and discussions are intended to assist the Audit Committee in overseeing the financial reporting and disclosure process. Second, the Audit Committee discussed with Ernst & Young the firm’s independence, and received from Ernst & Young the written disclosures and the letter concerning independence as required by Public Company Accounting Oversight Board Ethics and Independence Rule 3526 (Communication with Audit Committees Concerning Independence). This discussion and disclosure informed the Audit Committee of Ernst & Young’s relationships with the Company and was designed to assist the Audit Committee in considering Ernst & Young’s independence. Finally, the Audit Committee reviewed and discussed, with Ernst & Young and with the Company’s management, the Company’s audited consolidated balance sheet as of December 31, 2016, and the Company’s consolidated statements of operations, comprehensive income (loss), shareholders’ equity and noncontrolling interest, and cash flows for the year ended December 31, 2016, including the notes thereto.

Management of the Company is responsible for the consolidated financial statements and reporting process, including establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)); establishing and maintaining internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)); evaluating the effectiveness of disclosure controls and procedures; evaluating the effectiveness of internal control over financial reporting; and evaluating any change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. The independent registered public accounting firm is responsible for expressing an opinion on the conformity of these consolidated financial statements with accounting principles generally accepted in the United States, as well as expressing an opinion on the effectiveness of internal control over financial reporting.

During 2016, management tested and evaluated the Company’s system of internal control over financial reporting in response to the requirements set forth in Section 404 of the Sarbanes-Oxley Act of 2002 and related regulations. At the conclusion of the process, management provided the Audit Committee with a report on the effectiveness of the Company’s internal control over financial reporting, which the Audit Committee reviewed. The Audit Committee also reviewed the report of management contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission, as well as Ernst & Young’s Reports of Independent Registered Public Accounting Firm included in the Company’s Annual Report on Form 10-K. The latter reports relate to Ernst & Young’s audit of (i) the consolidated financial statements and (ii) the effectiveness of internal control over financial reporting.

Based on (i) discussions with Ernst & Young concerning the audit and the consolidated financial statements, (ii) the independence discussions, (iii) discussions with the Company’s management concerning the consolidated financial statements, and (iv) such other matters deemed relevant and appropriate by the Audit Committee, the Audit Committee recommended to the Company’s Board of Directors that the consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. This report is provided by the following independent directors, who comprise the Audit Committee:

Terrence C. Kearney (Chair)

Yuchun Lee

Bruce I. Sachs

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Our compensation program is structured to attract, retain and motivate talented, experienced leaders and reward our executive officers for the achievement of short- and long-term strategic and operational goals while avoiding inappropriate or excessive risk-taking.

As described in the Summary Information beginning on page 3 of this proxy statement and Compensation Discussion and Analysis section beginning on page 38 of this proxy statement, based on the evolution of our business and financial profile and feedback we received from our shareholders, we adopted significant changes to our executive compensation program, and in particular, our equity compensation program that were fully implemented in 2016.

Our compensation for our named executive officers was supported by 74% of the “Say-on-Pay” advisory votes cast by our shareholders in 2016, which was a significant increase in support compared to 2015. Compensation for 2016 represents the implementation of our new program discussed and received favorably by our shareholders at our last annual meeting. Over the last several years, we have continued engaging with our shareholders regarding, among other matters, our executive compensation program and dilution caused by our broad-based equity compensation program. During these discussions, which included discussions with shareholders representing approximately 75% of our common stock in 2016, we listened to their perspectives and gained insight into how we could further align the interests of our company with the interests of our shareholders. Based in part on this feedback, we made significant changes to our equity compensation program, which have now been fully implemented, and which we believe will allow us to (i) continue to attract, retain and motivate our named executive officers and (ii) address the concerns raised by our shareholders. As a result of these changes, our named executive officer’s total equity compensation as provided in the summary compensation tables decreased by approximately 40% in 2016 under the new program as compared to our NEO’s total equity compensation in 2015 under the prior program.

Our board of directors and MDCC reviewed our compensation programs and made the following key decisions, which were implemented in 2016:

Our executive compensation program, including our performance and the compensation earned by our named executive officers, is discussed in greater detail in the Compensation Discussion and Analysis section beginning on page 38 of this proxy statement. In that section, we discuss our executive compensation program and policies and explain the compensation decisions relating to our named executive officers for 2016, which resulted in significant decreases in the amounts reported in comparison to prior years. Our focus remains on maintaining the strong link between our compensation programs and our ability to continue to develop transformative medicines while delivering sustained revenues and earnings growth.

Based upon a vote of shareholders at the 2011 annual meeting of shareholders, following our board’s recommendation for an annual advisory vote to approve executive compensation, we are presenting the following proposal, which gives you as a shareholder the opportunity to endorse or not endorse our 2016 executive compensation program by voting for or against the following resolution:

RESOLVED, that the shareholders approve, on an advisory basis, the compensation of our named executive officers, as disclosed in the Compensation Discussion and Analysis section, the Compensation and Equity Tables and the related narrative executive compensation disclosures contained in this proxy statement.

While the vote on this resolution is advisory in nature, and therefore will not bind us to take any particular action, our MDCC and board intend to consider carefully the shareholder vote resulting from the proposal in making future decisions regarding our executive compensation program.

Our board of directors recommends that you vote FOR the approval of the resolution set forth above. The affirmative vote by the holders of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

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In this proposal, we are asking our shareholders to vote on whether future advisory votes on executive compensation, similar to proposal 5 contained in this proxy statement, should occur every year, every two years or every three years. While this say-on-pay frequency vote is advisory in nature and therefore will not bind us to adopt any particular frequency, our board intends to consider carefully the shareholder vote resulting from this proposal in determining how frequently we will hold “say-on-pay” votes.

Our board has determined that an annual advisory vote on executive compensation will allow our shareholders to provide timely, direct input on our executive compensation philosophy, policies and practices as disclosed in the proxy statement each year. In determining to recommend that shareholders vote for a frequency of once per year, our board considered how an advisory vote at this frequency might over-emphasize short-term variations in compensation and business results, particularly in our industry, where a long-term focus for our executive compensation program is required because it can take from 10-15 years to bring a product from inception through to commercialization. On balance, however, our board has determined that the advantages of receiving regular and prompt feedback from our shareholders on our executive compensation program outweigh this concern at this time.

Our board of directors recommends that you vote for ANNUAL shareholder advisory votes on our executive compensation program. The recommendation that receives a plurality of the votes cast in person or by proxy at the annual meeting will be adopted .

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We expect the following shareholder proposal will be presented for consideration at the 2017 annual meeting of shareholders. Our board of directors recommends a vote AGAINST the shareholder proposal for the reasons set forth following the proposal.

THE SHAREHOLDER PROPOSAL

Kenneth Steiner, c/o John Chevedden, 2212 Nelson Avenue., No. 2015, Redondo Beach, CA 90278, who is the owner of at least 200 shares of our common stock as of December 22, 2016, has given notice that he intends to present for action at the 2017 annual meeting of shareholders the following resolution:

Item 7 – Simple Majority Vote

RESOLVED, Shareholders request that our board take each step necessary so that each voting requirement in our charter and bylaws that calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws. If necessary this means the closest standard to a majority of the votes cast for and against such proposals consistent with applicable laws.

Shareowners are willing to pay a premium for shares of companies that have excellent corporate governance. Supermajority voting requirements have been found to be one of 6 entrenching mechanisms that are negatively related to company performance according to “What Matters in Corporate Governance” by Lucien Bebchuk, Alma Cohen and Allen Ferrell of the Harvard Law School. Supermajority requirements are used to block initiatives supported by most shareowners but opposed by a status quo management.

This proposal topic won from 74% to 88% support at Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill and Macy’s. The proponents of these proposals included Ray T. Chevedden and William Steiner.

Currently a 1%-minority can frustrate the will of our 79%-shareholder majority. In other words a1%-minority could have the power to prevent shareholders from improving our corporate governance.

Please vote to enhance shareholder value.

Item 7 – Simple Majority Vote

YOUR COMPANY’S RESPONSE

Our board of directors recommends a vote AGAINST the shareholder proposal requesting we take steps necessary to eliminate supermajority provisions from our Restated Articles of Organization and Amended and Restated By-Laws.

A simple majority vote requirement already applies to most corporate matters submitted to a vote of our shareholders. However, amendments to certain provisions of our Restated Articles of Organization and Amended and Restated By-Laws relating to (1) the number, election and terms of our board of directors, (2) director nominations, (3) newly created directorships and vacancies and (4) removal of directors, require a supermajority vote of our shareholders. Our board believes that the higher voting requirement in these limited circumstances serves important corporate governance objectives, including:

Broad Shareholder Consensus: Our board believes that these limited fundamental changes to corporate governance should have the support of a broad consensus of our shareholders. Our board also believes that the supermajority vote requirements protect shareholders, particularly minority shareholders, from the potentially self-interested actions of short-term investors. Without these provisions, it would be possible for a group of short-term shareholders to approve fundamental changes to corporate governance that are not in the best interests of our company and opposed by nearly half of the remaining shareholders.

Fiduciary Duty: Our board is subject to fiduciary duties under the law to act in a manner that it believes to be in the best interests of Vertex and its shareholders. Shareholders, on the other hand, do not have the same fiduciary duty as directors and may act in their own self-interests to the detriment of other shareholders. Accordingly, the supermajority voting standards are necessary to safeguard the long-term interests of our company and our shareholders.

Protection Against Certain Takeovers: Our supermajority voting provisions further protect our shareholders by encouraging persons or firms making unsolicited takeover proposals to negotiate directly with our board. We believe that our independent board is in the best position to evaluate proposed offers, to consider alternatives and to protect shareholders against abusive tactics during a takeover process, and as appropriate, to negotiate the best possible return for all shareholders. Elimination of these supermajority provisions may make it more difficult for our board to preserve and maximize value for all shareholders in the event of an unsolicited takeover bid.

Corporate Governance Practices. Our corporate governance and nominating committee regularly considers and evaluates corporate governance developments and recommends appropriate changes to our board. For example, we implemented proxy access in 2016 and our board has approved, subject to shareholder approval at the 2017 annual meeting of shareholders, amendments to our Restated Articles of Organization and Amended and Restated By-Laws that would declassify our board. Our governance policies and practices fully comply with all corporate governance standards of NASDAQ and SEC and our board believes that implementation of this proposal would adversely impact our carefully considered corporate governance practices.

For all of the above reasons our board of directors recommends that you vote AGAINST the shareholder advisory proposal to eliminate the supermajority provisions from our restated articles of organization and amended and restated by-laws. The affirmative vote by the holders of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

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We expect the following shareholder proposal will be presented for consideration at the 2017 annual meeting of shareholders. Our board of directors recommends a vote AGAINST the shareholder proposal for the reasons set forth following the proposal.

THE SHAREHOLDER PROPOSAL

Friends Fiduciary Corporation, an owner of at least 400 shares of our common stock as of December 14, 2016, and Benedictine Sisters of Mount St. Scholastica, the owner of 92 shares of our common stock as of December 22, 2016, has given notice that one or both of them, intend to present for action at the 2017 annual meeting of shareholders the following resolution:

WHEREAS, we believe in full disclosure of our company’s direct and indirect lobbying activities and expenditures to assess whether Vertex’s lobbying is consistent with its expressed goals and in the best interests of shareholders.

RESOLVED , the shareholders of Vertex Pharmaceuticals Incorporated (“Vertex”) request the preparation of a report, updated annually, disclosing:

For purposes of this proposal, a “grassroots lobbying communication” is a communication directed to the general public that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to the legislation or regulation. “Indirect lobbying” is lobbying engaged in by a trade association or other organization of which Vertex is a member.

Both “direct and indirect lobbying” and “grassroots lobbying communications” include efforts at the local, state and federal levels.

The report shall be presented to the Audit Committee or other relevant oversight committees and posted on Vertex’s website.

SUPPORTING STATEMENT

We encourage transparency in the use of corporate funds to influence legislation and regulation, both directly and indirectly. Vertex spent $2.52 million in 2014 and 2015 on federal lobbying (opensecrets.org). This figure does not include lobbying expenditures to influence legislation in states, where Vertex also lobbies but disclosure is uneven or absent. For example, Vertex had 101 lobbyists in 28 states in 2015 ( http://www.followthemoney.org/ ). Vertex’s lobbying to fight a California pricing initiative has attracted media attention (“When a Flawed Remedy to Drug Prices Looks Better Than None at All,” Sacramento Bee, August 12, 2016), as has its lobbying at the national level (“Mom To Vertex On Pricey CF Drugs: ‘We’re Middle-Class And We’re Screwed,” Forbes, October 28, 2016).

Vertex is listed as a member of the Biotechnology Innovation Organization, which spent $16.63 million on lobbying in 2014 and 2015. Vertex does not disclose its trade association memberships, nor payments and the portions used for lobbying. Transparent reporting would reveal whether company assets are being used for objectives contrary to Vertex’s long-term interests. We are concerned that Vertex’s lack of trade association lobbying disclosure, coupled with potential negative publicity for opposing drug price initiatives, presents reputational risks for Vertex.

Transparent reporting would reveal whether company assets are being used for objectives contrary to Vertex’s long-term interests.

YOUR COMPANY’ RESPONSE

Our board of directors recommends a vote AGAINST the shareholder proposal to prepare a report on our policies and activities with respect to lobbying.

We engage with public policymakers, where legal and appropriate, when we believe it will serve the best interests of our company, our shareholders, employees, patients and other stakeholders. The associations and coalitions to which we belong perform many valuable functions. Lobbying is not the primary focus of these entities, but it is an element of their role, and a portion of the dues that we and other members pay to such organizations may be partially used, in their sole discretion, to engage in certain lobbying activities. We do not direct how these funds are used. Accordingly, our board believes that additional disclosures regarding payments to these trade associations would not necessarily present an accurate reflection of our positions on certain public policy issues.

Our board acknowledges the interests of shareholders in information about our participation in the political process. However, our board believes that the proposal’s additional detailed reporting obligation would be duplicative of existing disclosures and that it would impose an unnecessary administrative burden and expense on the company when sufficient disclosure already exists.

For all of the above reasons our board of directors recommends that you vote AGAINST the shareholder proposal regarding report on lobbying activities. The affirmative vote by the holders of a majority of the votes cast in person or by proxy on this matter is required for the approval of this proposal.

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COMPENSATION DISCUSSION AND ANALYSIS

Overview

Letter from Management Development and Compensation Committee to Our Shareholders

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This section discusses the principles underlying our policies and decisions with respect to the compensation of our “named executive officers” and all material factors we believe are relevant to an analysis of these policies and decisions. Our named executive officers, or NEOs, for 2016 were:

As will be discussed throughout this section of the proxy statement, in 2016 we implemented our revised equity compensation program, which reflects the evolution of our business and financial profile and feedback we received from our shareholders.

Performance-based Executive Compensation Program

Our compensation program is designed to attract, retain and motivate talented and experienced individuals across all areas of our business and to align the interests of our executive officers with the interests of our shareholders as we seek to create value through the discovery, development and commercialization of transformative medicines. Our MDCC seeks to achieve this objective through a program consisting of the following principal components:

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Executive Summary

Over the last several years, we have met or exceeded most of our goals, significantly increasing our revenues and establishing a strong financial profile, building on our leadership position in the treatment of cystic fibrosis, or CF, bolstering our research capabilities and executing on business development transactions that support our business strategy. 2016 was an important year for Vertex and positioned us well for future success as we succeeded in reaching several critical milestones:

Strengthened our Financial Position

INCREASING CF NET PRODUCT REVENUES		INCREASING FINANCIAL STRENGTH AND GENERATING SIGNIFICANT POSITIVE CASH FLOWS
MANAGING OPERATING EXPENSES

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CLINICAL MILESTONES AND STRATEGIC EXECUTION

Advanced our CF Pipeline

We advanced our CF development pipeline to help us reach our goal of developing treatments for all CF patients, including:

Improved Research Capabilities and Strategic Execution Beyond CF

These accomplishments have positioned us for future growth as we seek to develop additional transformative medicines for people with serious diseases.

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Stock Price and Long-Term Value Creation

We are focused on building value over the long term in an industry that is characterized by volatility of stock prices for companies in our sector. Despite this volatility, the success of our executive team in executing our focused strategy has created significant shareholder returns over the last several years. While we experienced volatility in our stock price in 2016, we believe this was reflective of volatility across the entire biotechnology sector -- generated in part by political uncertainty in the United States and in Europe -- as well as certain challenges we faced in 2016 with respect to ORKAMBI net product revenues. The following charts show the long-term value creation as reflected in the increase in our stock price that has occurred under Dr. Leiden and his management team over the last five years, both through the end of 2016 and through April 11, 2017. In addition, we have included a chart with our stock price performance during 2017 through April 11, 2017.

STOCK PRICE PER SHARE		VERTEX STOCK PRICE (% INCREASE SINCE JAN 1, 2017)

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Adoption of New “Value-based” Equity Compensation Program

As discussed in more detail below, in response to the evolution of our business and financial profile as well as to the feedback we received during our shareholder engagement efforts, we adopted for 2016 a new approach for granting equity and equity-based compensation to our executives, including our named executive officers. Under this program, awards of equity compensation are no longer based upon a targeted number of shares. The value-based program provides that:

Under the value-based program, our CEO is eligible for annual equity awards with a value between zero and $14 million (with the actual value depending upon his performance), as compared to the 2015 grant value of $23.3 million under the prior share-based approach. Our other named executive officers are eligible for annual equity awards with values between zero and $4.5 million, as compared to the 2015 grant values for such officers, which ranged from $6.6 million to $7.5 million.

In order to ensure that our compensation program is aligned with the achievement of strategic objectives and company performance, we continue to have approximately 90% of the compensation for our CEO and our other named executive officers performance-linked through annual cash bonuses, restricted unit awards and stock-option awards.

In reviewing the compensation information included in this proxy statement, it is important to note that the equity compensation in these tables for 2016 reflects compensation received under our current program and equity compensation for 2015 and 2014 reflects compensation received under our prior equity compensation program.

Key Compensation Decisions

Our focus is and continues to be maintaining the strong link between our compensation programs and our ability to continue to develop transformative medicines while delivering sustained company performance, with approximately 90% of our NEO compensation tied to performance. Retention of our talented core of executives is likewise critical, as their services have led to the transformation of the company over the last several years.

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The key recent decisions that our MDCC and board of directors made are as follows:

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2016 v. 2015 Equity Levels

As a result of the changes to our equity compensation program, we have substantially decreased the value of compensation provided in the form of stock options, reduced the value of compensation delivered in the form of time-vested restricted stock, and introduced PSUs. As a result of these changes, the grant date fair-value of our NEOs’ total equity compensation under the annual program decreased by approximately 40% in 2016 as compared to 2015 as set forth in the following chart, which sets forth the fair value of equity compensation received by executives who were named executive officers in both 2016 and 2015. Dr. Altshuler’s equity grants in 2015 included the sign-on equity grant he received when he became an employee in January 2015.

The values of equity-based awards are based on our methodology for determining the grant-date fair value, including underlying assumptions for calculating these values as set forth in Note N to our consolidated financial statements included in our 2016 Annual Report on Form 10-K.

Dilution

Since our inception, we have compensated all eligible employees using a mix of cash and equity. The broad-based nature of our equity compensation program is an important element of our overall employee compensation program and reflects our philosophy that it is important for all of our employees to approach their jobs with a long-term commitment and perspective. Over the last several years, we have modified our equity compensation programs. These modifications are consistent with modifications other biotechnology companies have made as they matured from development-stage companies to commercial-stage companies with a strong financial profile. As a result of these changes, we granted on an absolute basis equity awards representing 35% fewer shares of common stock in 2016 as compared to 2012 and reduced our “burn rate” from 3.6% in 2012 to 2.0% in 2016.

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Compensation Governance Practices

 

We continue to implement and maintain leading practices in our compensation program, shareholder outreach and related areas.

 

	Mix of cash and equity with focus on long-term performance		Focus on alignment of shareholder and executive interests
	Risk Mitigation		Independent Compensation Consultant
	Compensation Recoupment (Clawback) Policy		Director and Officer Stock Ownership Guidelines
	No Hedging or Pledging		No Option Repricing
	Policy Against Gross-ups		Robust Shareholder Outreach
	No executive perquisites		Double-trigger severance provisions

Total Compensation and Total Realized Compensation

Total compensation for our NEOs in 2016 is set forth under the caption “Total Compensation” in the table below. To supplement this information, we have included a column entitled “Total Realized Compensation,” which subtracts the grant-date fair value of equity awards granted in 2016 and substitutes the actual value realized on the exercise of stock options and the vesting of restricted stock awards during 2016.

For more information regarding our NEOs’ compensation as calculated under SEC rules, see the narrative and notes accompanying the Summary Compensation Table set forth beginning on page 64 of this proxy statement. For more information regarding the calculation of “Total Realized Compensation” see the narrative accompanying the Total Realized Compensation Table on page 66 of this proxy statement.

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Detailed Discussion and Analysis

Compensation Philosophy and Compensation Decision-Making Process

Compensation Philosophy

Our compensation program is designed to attract, retain and motivate talented and experienced individuals across all areas of our business and to align the interests of our executive officers with the interests of our shareholders as we seek to create value through the discovery, development and commercialization of transformative medicines. Our NEOs have had long and varied careers, and possess experiences and skills that make them extremely valuable members of our executive team and to our company as a whole. They have been instrumental in building Vertex into the company it is today, with a leadership position in the treatment of CF, an advancing CF pipeline that has been significantly broadened over the last several years, increasing revenues and an established strong financial profile all of which positions Vertex to achieve its strategic objectives.

Our MDCC and our board of directors seek to connect the achievement of our strategic objectives with our compensation program in a number of ways, including through company goals that underlie our annual cash bonuses and the performance goals which are now included in our equity awards. Our company goals involve a mix of goals relating to revenues from our current products, achievement of research and development objectives, our organizational capability and maintenance of our financial strength. These objectives are selected specifically because they are considered by our board to be objective milestones that our company must achieve if it is to maintain its movement towards significant revenue growth and sustainable profitability. Our MDCC and board expects to continue to seek to balance the use of financial metrics and research and development goals in order to motivate our executive team to increase revenues and manage operating expenses, while providing appropriate incentives for our management to continue to make appropriate investments in our business.

In determining compensation, we consider compensation paid to similar companies as reference points, but do not strictly benchmark or target compensation at any particular level. Rather, the MDCC retains flexibility to structure compensation based on good governance practices and our objectives of building our company and creating shareholder value.

Compensation Decision-Making Process

Role of MDCC and Chief Executive Officer in Setting Executive Compensation

The MDCC has responsibility for overseeing the design, development and implementation of the compensation program for our chief executive officer and other NEOs. The MDCC evaluates the performance of our chief executive officer and the performance of the other executive officers. Our chief executive officer and our human resources group, assist the MDCC in evaluating the performance of our other executive officers, including the named executive officers other than the chief executive officer. Our chief executive officer does not make any recommendations to the MDCC regarding his own compensation and does not participate in portions of MDCC meetings or meetings of the board of directors when his compensation is discussed and determined.

The members of the MDCC, each of whom is an independent director, together with the other independent directors, make final compensation decisions for the CEO’s and other executive officers’ compensation levels based on these assessments.

Role of Compensation Consultant

The MDCC (i) is directly responsible for the appointment and oversight of its compensation consultants, (ii) has the authority to determine the fees that we pay for services provided by such compensation consultants and (iii) prior to engaging any compensation consultant, considers applicable factors potentially affecting the independence of the compensation consultant, including the factors set forth in Nasdaq Marketplace Rule 5605(d)(3).

Annually, the MDCC has engaged a compensation consultant to conduct an analysis of all elements of compensation paid to our executive officers, including our NEOs, compared to similar elements paid to similarly situated executives at companies in our peer group and to provide a written report and presentation of findings at the meeting of the MDCC that occurs in July each year. In 2016, the MDCC selected Pearl Meyer to conduct and present this analysis to the MDCC. In addition, our MDCC engaged Pearl Meyer in order to assist us in making significant modifications and improvements to our compensation program that were implemented in early 2016.

Pearl Meyer only provides, and is compensated for, advice provided to us at the direction of the MDCC. The MDCC considered the following information provided to it by Pearl Meyer:

Based on these, and other factors considered by the MDCC, the MDCC determined that Pearl Meyer’s work did not raise a conflict of interest.

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Use of Peer Group Companies

In order to make judgments about elements of executive compensation on a competitive basis, the MDCC and our board of directors considers information about the compensation practices of a representative group of companies with whom we compete for executive talent, or Peer Group. We conduct a detailed analysis to select companies for this Peer Group on the basis of similarity and complexity of business model. Selecting a peer group for our company is difficult because of the limited number of companies that are at a similar stage of development and our level of revenues. As a result, we use a mix of quantitative and qualitative factors in order to establish our peers, including the following:

We consider revenue but it is not a factor we emphasize because we do not believe revenue adequately reflects business model similarity or complexity in the biotechnology industry. A company with similar revenues may not have global or commercial operations like we have nor may it focus on innovative therapies, but rather on generic medicines, which we believe results in a different business model requiring less research and development investment. Moreover, companies with similar revenues may not focus on innovative therapies such as those designated as Breakthrough Therapies by the FDA, a designation which can expedite the development and review of medicines that are intended to treat serious conditions where preliminary clinical evidence indicates that the medicine may demonstrate substantial improvement over available therapy. As a result, we believe the factors listed above provide a better way to assess similarity versus a reliance on the combination of revenue and industry. We also note that it is unlikely for companies to align on all the factors listed above, so we look for companies meeting a majority of the criteria although we place greater weight on companies focused on innovation and importance of medicines to patients and society as we believe these are the key drivers of our business model. We also focus on market capitalization over revenue because we believe it is a better indicator of the complexity of a company’s business model in our industry. On a regular basis, we review and revise the list of companies with the goal of maintaining a group of comparators comprised of at least twelve companies.

As a result of this analysis, and on the basis of the criteria listed above, the MDCC selected the following comparator companies for 2016.

This Peer Group was modified in 2016 from 2015 to include one additional company (Jazz Pharmaceuticals plc) to replace one prior peer company (Endo International plc). We believe, based on our discussions with major shareholders, that the Peer Group identified by our MDCC is consistent with our shareholders’ views of our relevant peers in the biotechnology industry. In addition, the Peer Group companies have many of the business model characteristics that we seek in comparator companies as set forth in the following table.

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Back to Contents

Company													Innovative and Importance of Medicines
Information				R&D Expense (1)					Operational Focus				Orphan/		Breakthrough		Innovative		Uses		Market Position
Company		Industry		$ (millions)			% of Revenue		Global		Commercial		Unmet Clinical Need		Therapy Designations (2)		Drugs in Last 6 Years (3)		Vertex as Peer		Nasdaq 100		S&P 500
AbbVie		Biotech		$	4,366		17%								3		3
Alexion		Biotech		$	757		25%								1		2
Alkermes		Biotech		$	387		52%								0		1
Amgen		Biotech		$	3,847		18%								1		4
Biogen		Biotech		$	1,973		20%								0		4
BioMarin		Biotech		$	662		59%								0		1
Celgene		Biotech		$	4,470		40%								0		3
Gilead		Biotech		$	4,666		15%								4		5
Incyte		Biotech		$	595		54%								0		1
Jazz		Biotech		$	162		11%								0		1
Regeneron		Biotech		$	2,052		43%								1		3
Shire		Pharma		$	1,431		13%								0		3
United Therapeutics		Biotech		$	148		9%								0		3
Vertex		Biotech		$	1,062		62%								5		3

We do not strictly benchmark to a particular level of compensation relative to compensation levels at the Peer Group companies, but rather make a judgment about where each executive should fall in comparison with executives with similar responsibilities at the Peer Group companies. We believe this should mitigate concerns regarding our Peer Group including companies that have significantly higher revenues than our current revenues. The MDCC looks at Peer Group information to confirm that our compensation levels are competitive with those of the Peer Group companies and consistent with our compensation philosophy. In addition, the MDCC reviews broader industry specific executive compensation surveys published by Radford, Mercer SIRS and Towers Watson, but does not make any material compensation decisions based on any particular company participants in such surveys.

Elements of Annual Compensation

Our practice is to target total direct compensation including base salary, annual cash incentives targets, and long-term incentive targets at market competitive levels depending upon the NEO’s responsibilities, expertise and experience. Our executive compensation program uses a mix of long-term equity compensation awards in the form of performance stock options and performance restricted stock unit awards and time-based restricted stock units to incent and reward those individuals who make the greatest contribution to our company performance over time. For the NEOs, this means compensation is primarily in the form of equity and directly tied to changes in shareholder value over time.

Each year we review the balance of elements of our executive compensation program to ensure that they are appropriately designed in light of our goals to align the program with our shareholders’ interests, the competitive environment and our business strategy.

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Compensation Program (Implemented in 2016)

As shown in the following charts, our new compensation program was fully implemented this year, and we have deemphasized options and introduced performance restricted stock unit awards:

The charts above represent the actual values, and exclude the compensation of Mr. Parini, who joined the company in 2016 and was not eligible for grants under our annual program in 2016.

Performance-Linked Value-Based Program

We made significant changes to our equity program that were fully implemented in 2016 due to the evolution of our company as well as feedback we received from our engagement with shareholders. We have matured from a research and development company to a global biotechnology company. We became cash flow positive in 2016, are marketing two commercial medicines that each produce significant revenues and are the first and only medicines to treat the underlying cause of CF and have expanded our global footprint to support sales of KALYDECO and ORKAMBI. Because of these accomplishments, we believed it was the right time to modify our equity compensation program to better fit where we are in our stage of growth. As a result, we fully implemented the following changes in 2016:

Under the new value-based program we implemented in 2016, we continue to focus on performance-linked elements as follows:

More specifically:

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In total, approximately 90% of our CEO’s 2017 compensation is performance-linked:

2017 COMPENSATION ELEMENTS AT TARGET

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Base Salary

The MDCC recommends base salaries for each of our executive officers on the basis of a market analysis, on a position-by-position basis. Annually, the MDCC reviews tables showing a comparison of each executive’s prior year base salary and cash bonus opportunity, measured at the target level, to salaries and cash bonuses reported for executives with similar responsibilities at comparable companies. We do not strictly benchmark to a particular level of compensation relative to compensation levels at the Peer Group companies, but rather make a judgment about where each executive should fall in comparison with executives with similar responsibilities at the Peer Group companies, taking into account the executive’s general level of experience and capability, the significance of his or her job responsibilities to the achievement of our business strategy and company goals, and general performance over time, including demonstration of the values and desirable behaviors under our core values program. On the basis of that information, including compensation at Peer Group companies, and taking into consideration the executive’s base salary for the previous year, the MDCC recommends an appropriate salary for each executive officer, subject to final approval by our independent directors. Our current base salaries for our named executive officers approximate the median base salaries for counterparts at companies in our Peer Group.

In November 2016, our board of directors negotiated an extension to the term of Dr. Leiden’s employment agreement, which provided that his base salary would remain the same in 2017 as 2016. In connection with Mr.  Smith and Mr.  Parini assuming new responsibilities as Chief Operating Officer and Chief Legal and Administrative Officer, respectively, their base salaries were increased for 2017 as compared to 2016.

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Company and Individual Ratings

Two of the principal elements of our executive compensation program - annual cash bonus and annual equity awards - are awarded in amounts determined on the basis of annual company and individual performance ratings.

Overview of Company Performance Rating & Achievement in 2016

At the beginning of each year, our board of directors, in consultation with our CEO, establishes company-wide goals for that year. Our performance against these goals is the most important factor considered by our board in assessing our corporate performance, but our board considers additional accomplishments and may increase or decrease the performance scores. Although the directors discuss and analyze our performance as a group, each director makes his or her own judgment about specific performance factors and accomplishment of the goals in reaching a conclusion.

For 2016, the board set company goals and assigned relative weights that reflected our operational, strategic and financial objectives for the year and the importance of these goals to our long-term goals of significant revenue growth and achieving sustainable profitability. Our 2016 weighted goals and the year-end score achieved by the company and assigned by the board are set forth in the following table:

Our 2016 company performance score was 120 out of a potential of 150.

Our 2017 company performance will be evaluated against the broad categories set forth above putting slightly more emphasis on Marketed & Approval Stage Products (60 points in 2017 as compared to 50 points in 2016) and Organization Development and Capability (20 points in 2017 as compared to 15 points in 2016) and less on Financial Strength (15 points in 2017 compared to 30 points in 2016). These change were made to align our annual incentive plan with our business goals for 2017.

Detailed Discussion of Company Performance Rating Factors and Achievements

Goals - Marketed and Approval-Stage Products

ORKAMBI. ORKAMBI net product revenues increased from $350.7 million in 2015 to $979.6 million in 2016. However, we did not meet our U.S. or our ex-U.S. ORKAMBI goals for 2016 due primarily to lower than expected initiations and adherence in the U.S. and slower than expected uptake in Germany. Specifically, we fell $20 million or 2% short of the low end of our ORKAMBI net product revenue guidance for 2016 ($980 million actual compared to guidance of $1.0 billion to $1.1 billion).

KALYDECO. In 2016, we exceeded the upper end of our KALYDECO net product revenue guidance by $13 million, or 2% ($703 million actual vs. guidance of $670 million to $690 million). KALYDECO net product revenues increased by 11% from $631.7 million in 2015 to $703.4 million in 2016. The increase was due to additional patients being treated with KALYDECO and the maintenance of high compliance rates.

Overall, we increased CF net product revenues to $1.68 million, an increase of 71% compared to 2015, with additional increases in CF net product revenues expected in 2017.

For marketed and approval-stage products goals, our board assigned the company a score of 26 out of 50, due to (1) our not achieving our goals with respect to ORKAMBI net product revenues and (2) our success in expanding our KALYDECO revenues, which resulted in KALYDECO net product revenues that increased by 11%.

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Goals - Pipeline Growth (Late and Early-Stage)

In 2016, we expanded our leadership position in the treatment of CF, achieved our research goals and executed on strategic transactions. Specifically, we:

Partially offsetting these achievements, were challenges and/or delays we encountered with respect to the timing of enrollment of two of the four Phase 3 clinical trials of tezacaftor in combination with ivacaftor.

On the basis of (1) the accomplishments in advancing our research and development programs and, in particular, the advancement of next-generation correctors and (2) executing our business development strategy, partially offset by delays with respect to development activities, our board assigned the company a score of 40 out of 55 for our pipeline growth goal.

Goals - Organizational Development and Capability

Talent and expertise. Strengthened our organizational capabilities by attracting, developing and retaining the key talent necessary to operate our business, including filling 23 of 26 critical positions with superior and diverse talent and initiating new leadership and management training programs.

Systems. Continued improvement of infrastructure to support and integrate external research efforts and to support clinical operations, including the installation of Vsmart software to support clinical development.

Compliance. Continued to promote effective governance, communication and training to support our company-wide compliance and risk management programs.

To reflect the improvements to our organizational structure, processes and systems achieved in 2016, our board assigned the company a score of 15 out of 15 for our organizational development and capability goals.

Goals - Financial Strength

We met all of our financial strength goals in 2016. We managed our operating expenses to our guidance allowing us to strengthen our balance sheet and end 2016 with cash, cash equivalents and marketable securities of $1.43 billion.

As a result of our success in maintaining our financial strength by managing our operating expenses and securing a strong cash position, our board assigned the company a score of 30 out of 30 for our financial strength goals.

Additional Factors

In connection with determining our 2016 company rating, our board of directors made a positive nine point adjustment based on additional factors that were not anticipated in our goals, which were primarily related to our success in accelerating the development of multiple next-generation correctors (four versus two in our plan), including positive data from clinical trials evaluating VX-440 and VX-152 allowing both to advance into proof-of-concept clinical trials and the advancement of two additional next-generation correctors, VX-659 and VX-445, which are each being evaluated in Phase 1 clinical trials, and also included two additional points for exceeding the upper end of our KALYDECO net product revenue guidance by $13.4 million.

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2016 Individual Performance Ratings - Overview

The MDCC evaluates executives’ individual performance on a “results-based, values-tempered” basis, which takes into account not only “what” was accomplished, but “how” it was accomplished. The results-based component evaluates the executive officer’s performance in his or her individual role and as a leader of our company in achieving our objectives. The possible individual results-based performance ratings are “not building,” “building,” “strong” or “leading.” The values-tempered component of the individual evaluations builds upon our company core values: “uncompromising commitment to patients;” “innovation is our lifeblood;” “fearless pursuit of excellence” and “we wins” and are based on whether the decisions made by the executives were consistent with these values and what is in the best interests of the company in the long term. Under our Values Into Practice program, we expect all employees to demonstrate our company core values in all aspects of job performance. We further expect that our executives will be stewards of our core values, and the performance ratings assigned to them incorporate our board’s assessment of the strength of their leadership with respect to, and demonstration of, values-based behavior. This evaluation results in ratings of “not demonstrating,” “living the values” or “exemplary demonstration.” The possible individual performance ratings under this program are as set forth in the following table:

The 2016 results-based rating recommendation for each NEO, other than our CEO, is the combined result of the committee members’ observations and review of the executive’s role in the accomplishment of the corporate goals and recommendations provided to the MDCC by our chief executive officer made on the basis of his independent assessment of each executive officer’s performance. The MDCC and Dr.  Leiden discussed the recommendations at length, on both an individual-by-individual basis, and on a comparative basis. Upon completion of these discussions, the MDCC finalized its recommendation for the results-based rating for each executive, taking into account Dr. Leiden’s recommendations, factors considered in the discussions and the opinions of MDCC members based on the executive’s contributions and the committee members’ interactions with the executive. When considering the more subjective values-based rating, the MDCC also discussed Dr. Leiden’s recommendations, giving Dr. Leiden’s recommendations greater weight when determining the values-based rating than when determining the results-based rating, because the values-based rating is pertinent to the executive’s daily interactions in carrying out his or her duties. Furthermore, the MDCC believes that, in his role as CEO, Dr. Leiden had greater visibility than the committee members into the quality of these interactions. Taking into account all of the factors raised in the discussion and the assigned individual performance rating, the MDCC assigns an individual performance factor for each NEO within the ranges set forth above. While the individual ratings are not 100% objective, we view them as critical factors indicative of management success and critical to achieving the more objective goals discussed above.

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On the basis of the MDCC’s recommendation, our independent directors rated Dr. Leiden’s overall performance for 2016 as “leading” with an individual performance factor of 120%. The performance rating for Dr. Leiden combined a “strong” results-based rating with an “exemplary demonstration” values-based rating. The rating derived principally from his leadership of our executive team as we executed our strategy for 2016, which included:

The MDCC recommended and the board adopted a “leading” rating for Mr. Smith based on a results-based rating of “leading” and a values-based rating of “living the values” with an individual performance factor of 125%. Mr. Smith’s rating was due to his overall contributions to the execution of our strategy with a focus on performance of the finance/accounting, business development, information systems and investor relations functions. More specifically, Mr. Smith was responsible for: