equity research vertex pharmaceuticals

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19 January 2016Americas/United States

Equity ResearchBiotechnology

Vertex Pharmaceuticals Incorporated (VRTX)

INITIATION Rating OUTPERFORMPrice (15-Jan-16,US$) 97.91Target price (US$) 151.0052-week price range 141.48 - 96.37Market cap (US$ m) 24,058.18Enterprise value (US$ m) 23,374.35*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.¹Target price is for 12 months.

Research AnalystsAlethia Young

212 538 [email protected]

Eliana Merle212 538 0678

[email protected]

Grant Hesser212 325 2587

[email protected]

The Growth Story to Own in 2016■ We are initiating coverage of Vertex with an Outperform rating and a $151 target

price. Vertex has no real competition in sight, and we think its advantage is sustainable due to innovation. We also see upside with the HetMin opportunity, and it is worth $38/sh to our DCF estimate. We assume a 50% POS as we believe preclinical CF data have yielded clinical outcomes.

■ Best-in-Class Growth: On a five-year (2016-20) CAGR basis, we see top and bottom-line growth of 31% and 51% vs. other mid-cap peers of 24% and 29%, respectively, based on our estimates. In 2015, the stock performed mostly in-line with the S&P, but we are confident on outperformance in '16.

■ Our Detailed CF Subpopulation Model: We have built our sales model up by each label expansion opportunity. We have also built an EU Orkambi country-by-country model to better predict reimbursement trends. We estimate 2020 sales of $6.6B for the franchise and EPS of $13.05.

■ Vertex M&A DCF Valuations of $135-$170/sh (w/Prob-Adjusted HetMin Sales): Vertex has been cited as takeout candidate by various companies in both Bloomberg on 7/15 and Wall Street Journal on 4/14. We think Vertex has a valuable franchise to biotech and pharma peers. We created a M&A DCF scenario analyzer that considers different sales and expense synergies.

■ HetMin, Launch Catalysts: These include updates on Orkambi sales, label expansion approvals for Orkambi and Kalydeco, data on next-gen corrector combos or VX-371, and 661 data in 2017 (enrollment complete mid-2016).

■ Valuation: Our $151 TP is based on DCF and assumes an 8% discount rate and 0% terminal growth rate, which is in-line with peers that have sustainable franchises due to continued innovation. Downside risks include competition, weak CF sales, and no success in future CF trials.

Share price performance

VRT X.O Q S& P 5 0 0 IN D EX

A p r - 1 5 Ju l - 1 5 O ct - 1 5 Jan - 1 59 0

1 1 0

1 3 0

1 5 0

On 15-Jan-2016 the S&P 500 INDEX closed at 1880.33Daily Jan16, 2015 - Jan15, 2016, 01/16/15 = US$122.86

Quarterly EPS Q1 Q2 Q3 Q42014A -1.00 -0.68 -0.72 -0.742015E -0.83 -0.78 -0.39 -0.222016E 0.07 0.27 0.45 0.54

Financial and valuation metricsYear 12/14A 12/15E 12/16E 12/17EEPS (CS adj.) (US$) -2.17 -1.20 2.54 6.58Prev. EPS (US$) - - - -P/E (x) -45.0 -81.5 38.6 14.9P/E rel. (%) -252.5 -459.7 233.0 101.2Revenue (US$ m) 580.4 1,009.2 2,212.6 3,453.7EBITDA (US$ m) -629.2 -380.7 477.3 1,476.2OCFPS (US$) -2.16 -1.41 1.48 1.49P/OCF (x) -54.9 -69.6 66.1 65.6EV/EBITDA (current) -36.5 -61.4 48.4 15.5Net debt (US$ m) -1,092 -684 -955 -1,242ROIC (%) -18145.59 381.75 -109.22 -235.88

Number of shares (m) 245.72 IC (current, US$ m) 3.85Net debt (Next Qtr., US$ m) - EV/IC (x) -Net debt/tot eq (Next Qtr.,%) - Dividend (current, US$) -Source: Company data, Thomson Reuters, Credit Suisse estimates

19 January 2016

Vertex Pharmaceuticals Incorporated (VRTX) 2

Vertex Pharmaceuticals Incorporated (VRTX)Price (15 Jan 2016): US$97.91; Rating: OUTPERFORM; Target Price: US$151Income Statement 12/14A 12/15E 12/16E 12/17ERevenue (US$ m) 580.4 1,009.2 2,212.6 3,453.7EBITDA (629) (381) 477 1,476Depr. & amort. (63) (65) (66) (69)EBIT (US$) (692) (445) 411 1,407Net interest exp (73) (85) (78) (78)Associates 0 0 0 0Other adj. 30 (5) 0 0PBT (US$) (735) (535) 333 1,330Income taxes (7) (32) -0 -0Profit after tax (742) (567) 333 1,330Minorities - - - -Preferred dividends - - - -Associates & other 3 31 0 0Net profit (US$) (739) (536) 333 1,330Other NPAT adjustments 0 0 0 0Reported net income (739) (536) 333 1,330Cash Flow 12/14A 12/15E 12/16E 12/17EEBIT (692) (445) 411 1,407Net interest (73) (85) (78) (78)Cash taxes paid - - - -Change in working capital (11) 132 286 238Other cash & non-cash items 267 59 (248) (1,195)Cash flow from operations (509) (339) 371 373CAPEX (51) (69) (100) (86)Free cashflow to the firm (560) (409) 271 287Aquisitions (10) 0 0 0Divestments - - - -Other investment/(outflows) 135 0 0 0Cash flow from investments 74 (69) (100) (86)Net share issue(/repurchase) 275 0 0 0Dividends paid 0 0 0 0Issuance (retirement) of debt 294 0 0 0Other (504) (0) (0) (0)Cashflow from financing activities 64 (0) (0) (0)Effect of exchange rates (2) 0 0 0Changes in Net Cash/Debt (373) (409) 271 287Net debt at start (1,465) (1,092) (684) (955)Change in net debt 373 409 (271) (287)Net debt at end (1,092) (684) (955) (1,242)Balance Sheet (US$) 12/14A 12/15E 12/16E 12/17EAssetsCash & cash equivalents 1,387 979 1,250 1,537Account receivables 76 141 314 490Inventory 31 76 202 317Other current assets 53 69 80 83Total current assets 1,547 1,265 1,846 2,426Total fixed assets 716 721 754 771Intangible assets and goodwill 69 69 69 69Investment securities - - - -Other assets 3 3 3 3Total assets 2,335 2,058 2,672 3,270LiabilitiesAccounts payables 71 176 467 732Short-term debt 14 14 14 14Other short term liabilities 283 437 742 1,008Total current liabilities 368 627 1,223 1,755Long-term debt 281 281 281 281Other liabilities 590 590 590 590Total liabilities 1,238 1,498 2,093 2,625Shareholder equity 1,096 560 579 645Minority interests - - - -Total liabilities and equity 2,335 2,058 2,672 3,270Net debt (1,092) (684) (955) (1,242)

Per share 12/14A 12/15E 12/16E 12/17ENo. of shares (wtd avg) 235 241 250 250CS adj. EPS (2.17) (1.20) 2.54 6.58Prev. EPS (US$)Dividend (US$) 0.00 0.00 0.00 0.00Dividend payout ratio -0.00 -0.00 0.00 0.00Free cash flow per share (2.38) (1.70) 1.08 1.15Earnings 12/14A 12/15E 12/16E 12/17ESales growth (%) (52.1) 73.9 119.2 56.1EBIT growth (%) (13.5) 35.7 192.3 242.5Net profit growth (%) (66.0) 27.4 162.2 299.1EPS growth (%) (154.6) 44.7 310.9 159.6EBITDA margin (%) (108.4) (37.7) 21.6 42.7EBIT margin (%) (119.3) (44.1) 18.6 40.8Pretax margin (%) (126.6) (53.0) 15.1 38.5Net margin (%) (127.2) (53.1) 15.1 38.5Valuation 12/14A 12/15E 12/16E 12/17EEV/Sales (x) 39.57 23.16 10.44 6.61EV/EBITDA (x) (36.5) (61.4) 48.4 15.5EV/EBIT (x) (33.2) (52.5) 56.2 16.2P/E (x) (45.0) (81.5) 38.6 14.9Price to book (x) 21.0 42.1 42.3 37.9Asset turnover 0.2 0.5 0.8 1.1Returns 12/14A 12/15E 12/16E 12/17EROE stated-return on (%) (60.2) (64.7) 58.5 217.3ROIC (%) (181.5) 3.8 (1.1) (2.4)Interest burden (%) 1.06 1.20 0.81 0.94Tax rate (%) (0.9) (5.9) 0.0 0.0Financial leverage (%) 0.27 0.53 0.51 0.46Gearing 12/14A 12/15E 12/16E 12/17ENet debt/equity (%) (99.6) (122.1) (165.0) (192.5)Net Debt to EBITDA (x) 1.7 1.8 Net

CashNet

CashInterest coverage ratio (X) (9.5) (5.3) 5.3 18.1Quarterly EPS Q1 Q2 Q3 Q42014A -1.00 -0.68 -0.72 -0.742015E -0.83 -0.78 -0.39 -0.222016E 0.07 0.27 0.45 0.54

Share price performance

VRT X.O Q S& P 5 0 0 IN D EX

A p r - 1 5 Ju l - 1 5 O ct - 1 5 Jan - 1 69 0

1 1 0

1 3 0

1 5 0

On 15-Jan-2016 the S&P 500 INDEX closed at 1880.33Daily Jan16, 2015 - Jan15, 2016, 01/16/15 = US$122.86

Source: Company data, Thomson Reuters, Credit Suisse estimates

19 January 2016


Vertex Key Charts

Figure 1: Our Vertex Thesis Figure 2: Total Revenues vs. Consensus

Point CS take

Sustainability of dominant position in cystic fibrosis

We don't see any competitors in sight that provide meaningful risk of destorying dominant position. Vertex could buy or partner with small

companies. Secondly, Vertex R&D continues to see better triplet therapy combos

Cystic Fibrosis is a big market to have sole leadership position

We estimate 2018 and 2020 Vertex CF franchise sales of $4.3B and $6.6B

Best-in-class biotech growth profileOur estimated 2016-2020 year top & bottom line CAGR is 31% and

51% vs. 24% & 23% mid-cap average ex- Vertex

Execution with label expansion remains on or ahead of schedule

Expanding label to younger ages and different mutations is key to the strategy. We have seen strong exeuction in '14 and 15 on this point.

We expect that it continues going forward in 16/17

Big market opportunity with HetMins remaining whithout full credit given to shares

here

We estimte the HetMin opportunity is about $3.3B in sales on-top of peak estimates with Kalydeco and Orkambi. Next generation

correctors with 661 have shown much more potency. In the past preclinical models have correlated well with clinical outcomes

Valuable franchise to other biotechs

A key issue in biotech is that many companies are looking to acquire companies with steep growth curves in the near-term. In major press journals, Vertex has been cited as a takeout target likely due to robust

5 year growth profile

2016 is the beginning of the growth ramp2016 looks to be a very important year for Vertex due to size of

Orkambi market opportunity (~22K patients). We estimate sales of $2.3B in 2016 and that the company turns earnings positive

$992

$2,213

$3,454

$4,305

$5,400

$6,591$7,239

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2015 2016 2017 2018 2019 2020 2021

Total revenes- CS Total revenues- Consensus

Source: Credit Suisse estimates. Source: Credit Suisse estimates.

Figure 3: Orkambi Sales vs. Consensus Figure 4: Kalydeco Sales vs. Consensus

$354

$1,500

$2,664$3,431

$4,271

$4,983

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2015 2016 2017 2018 2019 2020

Orkambi WW - CS Orkambi WW - Consensus

$164 $168 $174 $179

$684

$0

$100

$200

$300

$400

$500

$600

$700

$800

1Q16E 2Q16E 3Q16E 4Q16E 2016

Kalydeco WW - CS Kalydeco WW - Consensus


19 January 2016


Vertex Is Transforming into an Earnings Positive Company — This Should Drive a Re-rating of SharesInvestment Summary: A Story with a Sustainable Competitive Advantage that Will Transform into an Earnings Story over the next 12-18 months; Along with This Comes Best-in-Class Growth Relative to its PeersOur Vertex thesis is based on many factors that we think will lead to shares re-rating over the next 12-18 months.In this report, we will discuss our key reasons why we find compelling value in Vertex shares. We are not sure what the next 12-18 months holds for the biotech tape, but we think that, if it is a more bearish market year, growth stocks will be favored. We also note that Vertex has more execution/launch risk this year vs. clinical/binary risk. We also think investors may favor execution risk over clinical risk. Our other reasons are summarized in Figure 5.

Figure 5: Our Vertex Thesis Summarized

Point CS take

Sustainability of dominant position in cystic fibrosis

We don't see any competitors in sight that provide meaningful risk of destorying dominant position. Vertex could buy or partner with small

companies. Secondly, Vertex R&D continues to see better triplet therapy combos

Cystic Fibrosis is a big market to have sole leadership position

We estimate 2018 and 2020 Vertex CF franchise sales of $4.3B and $6.6B

Best-in-class biotech growth profileOur estimated 2016-2020 year top & bottom line CAGR is 31% and

51% vs. 24% & 23% mid-cap average ex- Vertex

Execution with label expansion remains on or ahead of schedule

Expanding label to younger ages and different mutations is key to the strategy. We have seen strong exeuction in '14 and 15 on this point.

We expect that it continues going forward in 16/17

Big market opportunity with HetMins remaining whithout full credit given to shares

here

We estimte the HetMin opportunity is about $3.3B in sales on-top of peak estimates with Kalydeco and Orkambi. Next generation

correctors with 661 have shown much more potency. In the past preclinical models have correlated well with clinical outcomes

Valuable franchise to other biotechs

A key issue in biotech is that many companies are looking to acquire companies with steep growth curves in the near-term. In major press journals, Vertex has been cited as a takeout target likely due to robust

5 year growth profile

2016 is the beginning of the growth ramp2016 looks to be a very important year for Vertex due to size of

Orkambi market opportunity (~22K patients). We estimate sales of $2.3B in 2016 and that the company turns earnings positive

Source: Credit Suisse, Company data.

19 January 2016


2015 stock performance was roughly in-line with the S&P, but we think 2016 could be a breakout year for the company for the reasons we previously mentioned.

Figure 6: One-Year Performance vs. S&P 500 Figure 7: Five-Year Performance vs. S&P 500

70

80

90

100

110

120

130

VRTX S&P500-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

VRTX S&P500

Source: © 2016 Thomson Reuters. Source: © 2016 Thomson Reuters.

Sustainability of Dominant Position in Cystic Fibrosis (CF)We think the competitive advantage of Vertex’s CF franchise is sustainable relative to its peers; we think players will either have to collaborate, or Vertex would likely acquire them. Vertex has mentioned in public presentations that it keeps a close eye on the CF space and that, if it saw something interesting, it could lead to partnership or acquisition. In 2015, the company partnered with Parion for a novel mechanism in treating CF.

In our review of the CF landscape, we have found players who are also developing therapies. However, we have not seen many that are doing work that has the potential to erode Vertex’s competitive advantage. There was a small study with gene therapy that showed an FEV1 of 3.7%, but we view that as a very modest benefit.

Figure 8: Other Players in the CF Space

CF asset Developer Mechanism Status

Ataluren PTC Therapeutics read-through of nonsense mutation Phase 3

Riociguat Bayer Stimulates sGC in cardiopulmonary

system and receptor for nitrous oxide Phase 2

QBQ251 Novartis Potentiator like Kalydeco Phase 2

N9115 NivalisIncrease level of GSNO; modulates

function of defective CFTRPhase 1b

QR-010 ProQR RNA repair of CFTR Phase 1bGLPG2222 Galapagos Potentiator like Kalydeco Phase 1

pGM169/GL67AUK CF Gene Therapy

consortiumGene therapy encased in fat and

delivered by nebuliserPhase 2

P-1037 Parion/Vertex ENaC blocker; maintain mucus hydration Phase 2

Source: Company data, Credit Suisse estimates.

19 January 2016


Improved profile with triplet regimen remains key to the long-term bull thesis on Vertex.We draw some parallels to HIV and how, with time, adding new agents to the cocktail improved efficacy.We think Vertex has a sustainable competitive advantage over its CF competitors in the field. While there are many companies developing different assets, Vertex remains the company with an asset on the market that should lead to stickiness. Furthermore, Vertex continues to innovate, which should sustain the leadership position that we believe it has. Vertex is working on triplet combinations with next-gen corrector+VX-661+ivacaftor, which would (1) extend the patent life, (2) increase number of patients treated, and (3) likely improve the clinical benefit seen.

Figure 9: Vertex CF Strategy

Source: Company data.

CF Is a Large Market Opportunity, and We Think Vertex Will Remain the Leader for the Foreseeable FutureThe prevalence suggests that there are roughly 70-75K CF patients globally, with about 30K in the United States. Vertex cites an addressable opportunity at over 60K.■ Of the population, ~10% is likely not eligible for treatment since they may have the

nonsense mutation. PTC Therapeutics is developing a drug for nonsense CF mutations that allows read-through.

■ We assume 30K prevalence in the U.S. and 42K in EU/Australia/Canada.■ Recent Vertex slides have suggested the addressable treatment opportunity for the

franchise is 60K.

19 January 2016


Figure 10: Vertex CF Treatment Opportunity


We estimate the prevalence increases slightly due to consistent incidence and a lower death rate. ■ We heard many times at the North American Cystic Fibrosis meeting that it was

expected that the survival might improve with new disease-modifying therapies.■ Average survival with CF is currently about 40 years.■ We model the age increasing by one year every two years in our base case, implying

that survival is going up.■ We also assume treatment rates increase by 5% to 95% by 2018 in the U.S. and 2020

ex-U.S. We think that these new disease-modifying therapies will attract more patients to treatment.

We estimate 2020 sales for Vertex’s CF franchise of $6.6B, which is slightly higher than the consensus forecast. We predict the company will pay taxes around 2018. Our estimated tax rate is in the low 20% level per Vertex. (We assume 22%.)Our revenue estimates are fairly in-line with the consensus expectations. (See Figure 11.) We have slightly lower EPS estimates (see Figure 12) due to higher expenses and likely the calculation that we made for taxes in 2018. That is the year that we predict the company uses its $4B (as of end of 2015) NOLS. Our share count is a little higher consensus, as we keep it constant at 250 million assuming no stock repurchase activity in the model. That would imply upside to our estimates.

19 January 2016


Figure 11: Total Revenues vs. Consensus Figure 12: EPS vs. Consensus

$992

$2,213

$3,454

$4,305

$5,400

$6,591$7,239

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

2015 2016 2017 2018 2019 2020 2021

Total revenes- CS Total revenues- Consensus

-$1.20

$2.54

$6.58

$8.93$10.03

$13.05

$14.60

-$4.00

-$2.00

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

2015 2016 2017 2018 2019 2020 2021

EPS - CS EPS - Consensus

Source: Credit Suisse estimates, Vertex, First Order Analytics. Source: Credit Suisse estimates, Vertex, First Order Analytics.

Execution with Label Expansion Remains on or Ahead of Schedule A key piece of the Vertex CF story is slow but steady expansion toward treating over 60K patients in the long-term. The company has been executing well on expanding the Kalydeco and Orkambi labels, and we expect that to continue.

Vertex’s addressable opportunity is currently about 25K patients. It has increased about almost three fold in one year with the approval of Orkambi and expansion indications.

Figure 13: History of Vertex Approvals

Milestone Date Vertex drug CF type AgeCF population size by

VertexCS pop size 2016

EU approval Nov 20, 2015 Orkambi F508del homozygous 12 and older 12,000 12,172EU approval November 18, 2015 Kalydeco 9 gating mutations 2-5 years 125 125EU approval November 18, 2015 Kalydeco R117H 18 and older 350 349US approval July 2, 2015 Orkambi F508del homozygous 12 and older 8,500 8,872

US approval March 18, 2015 Kalydeco10 mutations including

R117H 2-5 years 300 305

US approval December 29, 2014 Kalydeco R117H 6 and older 500 554EU approval July 31, 2014 Kalydeco 8 gating 6 and older 250 249US approval Feb 21, 2014 Kalydeco 8 gating 6 and older 150 152EU approval July 27, 2012 Kalydeco G551D 6 and older 1,100 1,130US approval July 31, 2012 Kalydeco G551D 6 and older 1,200 1,245

Current treated total 24,475 25,154

Source: Company data, Credit Suisse estimates.

Moving past 2016, Vertex is running studies with different assets to treat close to another 35K patients globally.As of June 2015, Vertex had about 3,400 patients that were included in its addressable market. With the approval of Orkambi in the U.S. and Europe, the population has significantly increased. We note that 10% of the population has a nonsense-based mutation that cannot be treated by a Vertex therapy that we know of yet. PTC has a product that is designed to treat the nonsense mutation CF patients. It is working with the EMA in a rolling submission in late 2015/16. The Phase 3 is expected late 2016.

19 January 2016


As far as execution goes, Figure 14 shows what we are focused on for the next 12-18 months. We think the Orkambi launch and progress with HetMin studies will be key drivers.

Figure 14: Key Vertex Catalysts

Asset Catalyst DateKalydeco PDUFA date for residual function patient sNDA Feb 6, 2016Orkambi sNDA filing in children ages 6-11 1H 2016VX-661 First three pivotal Phase 3 studies complete enrollment mid-2016

VX-984 (DNA protein kinase inhibitor) Phase 1 oncology begins 1H 2016

VX-371+Orkambi Phase 2 in homozygous patients 12 and over 1H 2016VX-371 vs. saline 14 day Phase 2 study Mid 2016

VX-371 + ORKAMBI Phase 2 next generation corrector begins 2016VX-152/VX-440 combos Phase 1 SAD/MAD study in healthies 2016

661+Ivacaftor Phase 3 study data readouts 2017VX-152/VX-440 combos Phase 2 triplet data 2017

Orkambi 6-11 sNDA approval late 2016/early 17VX-970 (ATR inhibitor) Phase 1 studies with chemo at CRADA Ongoing

VX-150 (NaV 1.8) Phase 2 osteoarthritis proof of concept starts End 2015

Source: Credit Suisse estimates, Company data.

Large Market Opportunity Remaining with HetMins (Our Estimate Is $3B Unadjusted) — We Assume 50% SuccessWe think Vertex’s preclinical models are good predictors of clinical success, and the data from VX-152 and VX-440 in combo with VX-661 showed two- to three-fold increases in chloride transport.Because preclinical data for cystic fibrosis have correlated very closely with clinical outcomes, we are comfortable assigning 50% probability of success to VRTX's triplet programs that are just moving into the clinic.We remain confident that Vertex will successfully gain share and develop therapies in the F508del heterozygous patients (HetMin). There are about ~17K patients globally. We think that we could see clinical evidence over the next 12-18 months.

19 January 2016


Figure 15: Triplet CFTR Function in Vitro Figure 16: In Vitro Triplet Chloride Transport

Source: Company data. Source: Company data.

We estimate peak sales from Vertex’s HetMin franchise of $3B in 2024. We currently assume 50% probability of success. If successful, it would add another ~$38/share to our base-case valuation. Our FV would be $190/sh.We see the next leg of growth after 2020 in the HetMin patients. Vertex is currently moving assets into the clinic to address this population. We estimate 2020 sales of $1.2B vs. consensus expectation of $1B if Vertex can treat HetMin patients. Our assumptions are as follows:

■ Pricing: In-line with Orkambi■ Market Size: 7K patients in the U.S. and 10K patients ex-U.S. This 17K estimate is in-

line with Vertex estimates■ Gross to Net: 12%■ Compliance and Discontinuations: 75%■ Launch: We estimate 2019 in the U.S. and 2020 ex-U.S.■ Peak Share and Time to Peak Share: Five years in the U.S. and ex-U.S. to achieve

80-85% of the market share. We would estimate that it might take a little longer with the HetMin patients to identify this variable CF mutation population. We also wanted to factor in more time in case it takes Vertex a couple of different combos to achieve peak share similar to Kalydeco and Orkambi in that group.

19 January 2016


Figure 17: HetMin Unadjusted Sales

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2019

2020

2021

2022

2023

2024

2025

HetMin US HetMin ex-US

Source: Credit Suisse estimates.

Best–in-Class Revenue and EPS Growth ProfileVertex has standout growth relative to the other mid-caps over the next five years.Looking over the next few years, we expect that Vertex will experience significant top and bottom-line growth as its addressable population of CF patients expands. We estimate ~123% top-line growth and 139% bottom-line growth in 2016. By our estimates, Vertex has a 31% top-line growth CAGR over 2016-2020 and a 51% bottom-line growth CAGR over 2016-2020. Importantly, as we mentioned, this growth appears sustainable, as we see no real competitors that Vertex couldn’t acquire in the near-term.

Figure 18: Rev Growth vs. Mid-Cap Peers Figure 19: EPS Growth vs. Mid-Cap Peers

16%17%

31%

26%

33%

25%

15%

20%

27% 27%

24% 23%

0%

5%

10%

15%

20%

25%

30%

35%

REGN ALXN VRTX BMRN INCY Average (all5)

Rev CAGRs 16-20

Rev CAGR 16-20 (CS estimates) Rev CAGR 16-20 (Consensus)

29%24%

51%

34%

20%

27%

40%

29%

0%

10%

20%

30%

40%

50%

60%

REGN ALXN VRTX Average (all 3)

EPS growth CAGR 16-20

EPS CAGR 16-20 (CS estimates) EPS CAGR 16-20 (Consensus)

Source: Credit Suisse estimates, First Order Analytics. Source: Credit Suisse estimates, First Order Analytics.

19 January 2016


Vertex Is a Valuable Franchise to Other Biotech and Pharma Companies — We Think the Story Is De-risked at This PointOur M&A DCF valuation for Vertex with probability-adjusted sales for the HetMins is ~$135-170/share. This assumes 50% probability of success for the HetMin population.Vertex has been cited in the press as a potential takeout candidate. Reports have been in Bloomberg on July 30, 2015, titled, Biogen Can Get Growth Spurt It Needs with Vertex Deal: Real M&A. On April 21, 2015, the Wall Street Journal reported potential Vertex takeout by Gilead in an article, titled, Gilead’s Stock Spikes on Possibility of Vertex Deal. We have built an M&A DCF scenario analyzer in which we can input different scenarios of cuts associated with R&D, SG&A, and potential sales increases. If we assumed 100% success for the HetMin, our M&A DCF valuation for Vertex would be ~$175-210/sh.

Figure 20: Our Cost Synergy Assumptions on M&A

Choose Potential Acquirer --> 6 1 2 3 4 5 6

Company

Potential Synergies Change to Vertex Total Revenue 1% 0% 2% 5% 2% 1% 1%Change to Vertex COGS 0% 0% 0% 0% 0% 0% 0%Change to Vertex R&D -50% -25% -40% -40% -25% -40% -50%Change to Vertex SG&A -75% -40% -50% -50% -75% -75% -75%Change to Vertex Cap Ex 0% 0% 0% 0% 0% 0% 0%Tax Rate of Acquirer 15% 25% 25% 15% 25% 15% 15%Value to Acquirer $170Additional Value to DCF $19

Potential Acquirer


Our M&A DCF Model for Vertex Is Shown in Figure 21: We assume 0% terminal growth rate in this analysis.

19 January 2016


Figure 21: Vertex M&A DCF

Vertex - DCF Valuation from Acquirer's PerspsectivePeriod 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 10.25 11.25

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

Annual Free Cash Flow ProjectionsPrevious Total Revenues $395 $2,213 $3,426 $4,277 $5,372 $6,563 $7,211 $7,597 $7,923 $8,304 $8,360 $5,753New Total Revenues $399 $2,235 $3,460 $4,320 $5,426 $6,629 $7,283 $7,673 $8,003 $8,387 $8,444 $5,811Total Revenue Synergies $4 $22 $34 $43 $54 $66 $72 $76 $79 $83 $84 $58Previous COGS Spend $51 $295 $462 $577 $725 $886 $973 $1,026 $1,070 $1,121 $1,129 $805New COGS Spend $51 $295 $462 $577 $725 $886 $973 $1,026 $1,070 $1,121 $1,129 $805COGS Synergies $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Previous R&D Spend $222 $862 $913 $959 $1,007 $1,057 $1,110 $1,166 $1,201 $1,237 $1,245 $858New R&D Spend $111 $431 $457 $480 $504 $529 $555 $583 $600 $618 $623 $429R&D Synergies $111 $431 $457 $480 $504 $529 $555 $583 $600 $618 $623 $429Previous SG&A Spend $80 $344 $355 $365 $376 $388 $399 $411 $424 $436 $439 $303New SG&A Spend $20 $86 $89 $91 $94 $97 $100 $103 $106 $109 $110 $76SG&A Synergies $60 $258 $266 $274 $282 $291 $299 $308 $318 $327 $329 $227Total Cost Synergies $171 $689 $723 $754 $786 $819 $855 $891 $918 $946 $952 $656Previous EBIT -$32 $411 $1,407 $2,074 $2,948 $3,902 $4,382 $4,632 $4,855 $5,124 $5,158 $3,528EBIT Synergies $175 $711 $757 $796 $839 $885 $927 $967 $997 $1,029 $1,036 $714New EBIT $143 $1,122 $2,164 $2,870 $3,788 $4,787 $5,308 $5,599 $5,853 $6,152 $6,194 $4,241Multiply: (1 - Tax Rate) $121 $954 $1,840 $2,440 $3,219 $4,069 $4,512 $4,759 $4,975 $5,229 $5,265 $3,605Plus Tax benefit due to the use of VRTX NOLS $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Plus: Depreciation and Amortization $16 $66 $69 $70 $73 $77 $82 $88 $94 $100 $105 $108Plus: Other non cash charges $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Less: Capital Spending -$17 -$100 -$86 -$86 -$108 -$132 -$145 -$152 -$159 -$167 -$168 -$116Less: Working Capital Change $33 $286 $238 $165 $211 $229 $128 $79 $68 $78 $12 -$514Free Cash Flow $153 $1,206 $2,060 $2,589 $3,395 $4,243 $4,577 $4,773 $4,977 $5,240 $5,214 $3,084Discounted Cash Flow $150 $1,096 $1,733 $2,016 $2,448 $2,832 $2,829 $2,732 $2,638 $2,572 $2,369 $1,297

Terminal Value Growth Rate 0.0%

Discount Rate 8%PV FCF $24,712PV Terminal Value $16,218Enterprise Value $40,930Shares Outstanding 242FCF Value Per Share $169.16Net Cash/Share $0.98Equity value per share $170


We Think That 2016 Is the Beginning of the Growth Ramp — Our Estimates and Key Considerations in the ModelWe estimate Orkambi sales at $1.5B vs. consensus forecast of $1.6B in 2016. We assume Vertex hits peak share of 85% in the U.S. for Orkambi in the labeled 12 and older population. This is in-line with guidance achieving peak share in 2016. In the first quarter of launch in 3Q 2015, Vertex reported that it had treated 3,000 of the 8,500 eligible patients (35% share).

We Do Note the Collaboration between Galapagos and AbbVie in CF as another Potential Competitor in the CF Space

19 January 2016


Figure 22: GLPG/ABBV Assets in Development Figure 23: GLPG/ABBV Early-Stage CF Portfolio

Cystic Fibrosis Class II Class IIICF Mutation F508del G551DAllele Frequency ~90% 4%Approved/Filed Drugs Orkambi KalydecoGalapagos/AbbVie Potentiator + C1 + C2 Potentiator

Potentiator '1837 Phase 2 filed 4Q 2015Backup Potentiator '2451 Phase 1 start 2Q 2016Corrector 1 '2222 Phase 1 data June 2016Backup Corrector 1 '2851 Phase 1 start 4Q 2016Corrector 2 '2665 Phase 1 start 3Q 2016Backup Corrector 2 '2737 Phase 1 start 4Q 2016

Upcoming Catalysts for GLPG/ABBV CF Portfolio

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Our 2016 Orkambi ex-U.S. sales estimate is lower than the consensus forecast by ~$15M. We assume a slower ramp ex-U.S. due to reimbursement.

Figure 24: Orkambi 2016 Sales vs. Consensus Figure 25: Orkambi 2016 Patients vs. Consensus

$343 $385 $414 $417

$1,560

$325 $375 $423 $481

$1,604

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

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1Q16E 2Q16E 3Q16E 4Q16E 2016


6,9238,331

9,32910,135

7,0397,621

8,2039,121

-1,000

1,000

3,000

5,000

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9,000

11,000

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15,000

1Q16E 2Q16E 3Q16E 4Q16E



Vertex management has noted that timelines around reimbursement in Europe will be similar to what we saw with Kalydeco. Kalydeco reimbursement in Europe took 12-18 months for the countries that don’t have more immediate reimbursement plans. We highlight some observations on reimbursement from Europe from looking at Kalydeco.

■ Germany reimburses quickly, although the final price is not set for a year, but the reimbursement in price for the first year is in-line with that of the United States.

■ Spain and Italy are typically the slowest to pay.■ In France, we would expect an ATU, but once there is reimbursement there, we would

expect rapid uptake. ■ Australia and Canada have 1,000 F508del patients each. ■ We know the United Kingdom's process can take months, but we do assume ultimately

that the company achieves reimbursement in 2017.

19 January 2016


Figure 26: Orkambi 2016 Sales Ex-U.S. Figure 27: Orkambi 2016 Patients Ex-U.S.

$66 $67 $68 $71

$272

$32$60

$84$111

$287

$0

$50

$100

$150

$200

$250

$300

$350

1Q16E 2Q16E 3Q16E 4Q16E 2016

Orkambi ex-US - CS Orkambi ex-US - Consensus

352787

1,304

2,094

4,537

7171,159

1,6002,097

5,573

0

1,000

2,000

3,000

4,000

5,000

6,000

1Q16E 2Q16E 3Q16E 4Q16E 2016

Orkambi ex-US - CS Orkambi ex-US - Consensus


We model a slower ramp in Europe based on our quarterly build by country for Orkambi in Europe. We exclude 2016 UK, Italy, and Spain sales from our estimates.We have built a quarterly EU Orkambi build for 2016. We think that sales mostly come from Germany and the Nordics in 2016. Our ending market share assumptions by country are highlighted below, and for other countries, we do not include any sales in 2016. That would imply upside to our estimates.

■ Germany: 65%■ Nordics: 55%■ France: 20%

A Key Trend to Watch for in 2016 Is Discontinuations: We assume 75%, which includes compliance and dropouts. From our doc checks at the North American Cystic Fibrosis meeting in November 2015, most doctors that we spoke with at the meeting had tried Orkambi. One comment that came up with a few doctors was that some patients experience chest tightness for a period of time when taking Orkambi.

Over 2016, we expect Vertex will add another 2K patients to the Orkambi label.Vertex currently has a supplementary filing for U.S. Orkambi patients who are aged 6-11. This is about 2,500 patients, so not a small market opportunity.

Our U.S. and EU assumptions in the model are shown in Figure 28.

Figure 28: Orkambi Age Expansion, Size, and Expected Timelines

Age # of patients Status Launch year

US Orkambi 6-11 years 2,500 sNDA in 1H2016 2016

US Orkambi 2-5 years 1,000Regulatory discussions from 6-11 year old data will inform this population

2017

Ex-US Orkambi 6-11 years 3,0006 month efficacy study is

ongoing2019

Ex-US Orkambi 2-5 years 1,500Same as US 2-5 year old

status2019


In Europe, we have built a country-by-country model to better capture when each market comes on with reimbursement.

19 January 2016


Figure 29: Our EU Country Build for Orkambi

1Q16E 2Q16E 3Q16E 4Q16E 2016 2017 2018Germany CF 508del 2,285 2,285 2,285 2,285 2,285 2,285 2,285

Orkambi patients 343 685 1142 1485 914 1,942 1,942Orkambi market share % 15% 30% 50% 65% 40% 85% 85%

The Nordics 780 780 780 780 780 780 780Orkambi patients 78 117 156 117 312 507

Orkambi market share % 5% 10% 15% 20% 15% 40% 65%

France 1,862 1,862 1,862 1,862 1,862 1,862 1,862Orkambi patients 372 372 1024 1397

Orkambi market share % 20% 20% 55% 75.0%

United Kingdom 1,819 1,819 1,819 1,819 1,819 1,819 1,819Orkambi patients 0 0 727 1273


Italy 1,719 1,719 1,719 1,719 1,719 1,719 1,719Orkambi patients 0 0 344 688


Spain 1,315 1,315 1,315 1,315 1,315 1,315 1,315Orkambi patients 0 0 263 526

Orkambi market share % 0% 0% 20% 40%

Canada 1,000 1,000 1,000 1,000 1,000 1,000 1,000Orkambi patients 0 0 200 400


Australia 1,000 1,000 1,000 1,000 1,000 1,000 1,000Orkambi patients 0 0 200 400


Total patients F508del 11,780 11,780 11,780 11,780 11,780 11,780 11,780Orkambi patients 343 763 1,259 2,013 1,403 5,013 7,133

Orkambi market share 3% 6% 11% 17% 12% 43% 61%Source: Credit Suisse estimates.

Our Orkambi sales estimate grows to ~$5B in 2020, with the majority of the eligible population on the drug.

19 January 2016


Figure 30: Orkambi Sales vs. the Consensus Figure 31: Orkambi Patients

$354

$1,500

$2,664$3,431

$4,271

$4,983

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2015 2016 2017 2018 2019 2020


0

5,000

10,000

15,000

20,000

25,000

2016

2017

2018

2019

Orkambi US patients Orkambi ex-US patients


Our Kalydeco Estimates for 2016We estimate Kalydeco sales of $684M vs. $732M for consensus. We are lower than the consensus due to taking out about 200 patients from the commercial population due to the 661 studies.

Figure 32: WW Kalydeco Sales vs. ConsensusFigure 33: WW Kalydeco Patients vs. the Consensus

$164 $168 $174 $179

$684

$170 $171 $192 $199

$732

$0

$100

$200

$300

$400

$500

$600

$700

$800

1Q16E 2Q16E 3Q16E 4Q16E 2016


2,640 2,701 2,775 2,855

10,971

3,128 3,1283,947 4,198

14,401

0

2,000

4,000

6,000

8,000

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1Q16E 2Q16E 3Q16E 4Q16E 2016



661 trial will subtract some patients from the commercial poll until that study concludes.Currently ongoing is the 661+ivacaftor trial that is in Phase 3. The company is enrolling over 1,000 people across the four studies. One of the studies is a 200-patient gating mutation study. The enrollment should be complete by mid-2016, but until then, there could be some competition for patients into this trial. Although we know other competitive trials are enrolling, we think these will be less of a headwind to Vertex commercial sales. We have significantly lowered our sales estimate from the gating populations that would have overlap with the 661 gating study.

19 January 2016


Figure 34: Vertex 661 Studies — Impact to Sales


The Kalydeco market opportunity is currently about ~3,500 patients. Since the G551D approval, the market opportunity has grown by about 1,200 patients.For the most recent label expansions, Europe has lagged by about five to eight months. First approval was G551D in 2012. Around 400 patients were added in 2014, and 775 patients were added to the label in 2015 globally.

More Kalydeco expansion opportunities in 2016Another 1,500 patients may be approved for Kalydeco, including patients aged two and older who have 1 of 23 residual mutations. The potential U.S. approval date is February 6, 2016.

19 January 2016


Figure 35: U.S. Kalydeco Patient Expansion Figure 36: Ex-U.S. Kalydeco Patient Expansion

1200

150300

0

200

400

600

800

1000

1200

1400

G551D 6 or older (July2012)

8 gating mutations 6 orolder (Feb 2014)

10 mutations includingR117H 2-5 years (March

2015)

US Kalydeco expansions so far

1100

250

475

0

200

400

600

800

1000

1200

G551D (July 2012) 8 gating mutations 6 orolder (July 2014)

10 mutations includingR117H 2-5 years (Nov

2015)

ex-US Kalydeco expansions


Our Kalydeco sales forecasts are slightly under the consensus estimates (~$100M+). This is likely due to the dip down from 661 studies that impact our 2016 and 2017 numbers globally.

Figure 37: Kalydeco WW vs. Consensus Figure 38: Kalydeco Patients

$684$762

$845$922

$732

$872

$1,002$1,048

$0

$200

$400

$600

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$1,200

2016 2017 2018 2019


0

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2016

2017

2018

2019

Kalydeco US patients Kalydeco ex-US patients


This was based on our modeling and share assumptions by each specific population in U.S. and EU.

19 January 2016


Figure 39: Our Kalydeco Market Share Assumptions (2015, 2016, and 2020)

USPatient

opportunity% share in 2015

(CS)% share in 2016

(CS)% share in 2020

(CS)

G551D 6 or older 1235 90% 90% 90%R117H over 6 549 56% 81% 85%

Gating mutations 2-5 302 48% 81% 85%Gating mutations over 6 years 151 45% 72% 85%

Residual function over 2 1512 0% 7% 25%ex-US

G551D patients over 6 1131 77% 90% 90%R117H over 18 years 350 0% 5% 75%Gating mutations 2-5 125 0% 5% 75%

Gating mutations over 6 years 250 79% 48% 48%Residual function over 2 1498 0% 0% 0%


Our long-term expense assumptions are fairly in-line with Street estimates.

Figure 40: Vertex Expenses vs. the Consensus

COGS & royalties 2015 2016 2017 2018 2019 2020

COGS and Royalties- CS $111 $295 $462 $577 $725 $886COGS and Royalties- Consensus $121 $310 $484 $635 $778 $963

Delta -$10 -$15 -$22 -$57 -$52 -$77R&D 2015 2016 2017 2018 2019 2020

R&D - CS $782 $862 $913 $959 $1,007 $1,057R&D- Consensus $771 $847 $892 $934 $982 $1,034

Delta $12 $15 $22 $25 $25 $24SG&A 2015 2016 2017 2018 2019 2020

SG&A- CS $297 $344 $355 $365 $376 $388SG&A - Consensus $299 $336 $367 $403 $409 $428

Delta -$2 $8 -$12 -$38 -$33 -$40

Source: Credit Suisse estimates, First Order Analytics.

ValuationOur Vertex target price is $151. We rates shares Outperform. Like all of our mid-cap stocks, we are valuing Vertex shares using only DCF. We model cash flows out to 2029. We assign a 0% terminal growth rate, which is in-line with biotech companies with sustainable franchises. We assume an 8% discount rate, which is in-line with biotech peers with similar revenues and a near-term or current positive earnings profile.

19 January 2016


Figure 41: Vertex DCF Valuation

CS Biotech: Vertex

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

GAAP EBIT ($32) $411 $1,407 $2,074 $2,948 $3,902 $4,382 $4,632 $4,855 $5,124 $5,158 $3,528less: Taxes ($2) $0 $0 ($97) ($726) ($939) ($1,048) ($1,106) ($1,158) ($1,220) ($1,228) ($841)GAAP Tax Rate -6% 0% 0% 5% 25% 24% 24% 24% 24% 24% 24% 24%

D&A $16 $66 $69 $70 $73 $77 $82 $88 $94 $100 $105 $108Stock based compensation $75 $301 $316 $329 $343 $358 $374 $390 $402 $414 $417 $287Change in Working Capital $33 $286 $238 $165 $211 $229 $128 $79 $68 $78 $12 ($514)Capital Expenditures ($17) ($100) ($86) ($86) ($108) ($132) ($145) ($152) ($159) ($167) ($168) ($116)Operating free cash flow $72 $964 $1,944 $2,456 $2,741 $3,495 $3,773 $3,930 $4,102 $4,329 $4,297 $2,453

Discount Period 0.00 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 10.25Discount Factor 1.00 0.98 0.91 0.84 0.78 0.72 0.67 0.62 0.57 0.53 0.49 0.45Present value of Cash Flows $72 $946 $1,765 $2,065 $2,134 $2,520 $2,519 $2,429 $2,348 $2,294 $2,109 $1,115

VALUE OF Vertex SHARESTerminal growth assumption 0.0%Terminal Value $30,663

Discount Rate 8%NPV of FCF $22,316NPV of Terminal Value $13,932Total NPV $36,249TV as a % of total 38%Net Cash/(Debt)** $238

$ / Share $151

Shares outstanding 242Cash per share

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Operating free cash flow


Detailed RisksRisks to our Outperform rating■ Weaker–than-expected sales for Kalydeco and Orkambi■ Loss of sustainable competitive advantage in cystic fibrosis■ Clinical success by competitors■ Inability to enroll future exploratory trials■ Higher–than-expected patient discontinuations on Kalydeco or Orkambi■ Pricing pressure since its CF franchise drugs are priced like rare disease■ Higher-than-expected operating expenses■ Clinical failure due to efficacy or safety for HetMin studies with VX-152 and VX-440■ Worse–than-expected execution on key timelines including label expansions and study

start dates

19 January 2016


Vertex ManagementJeffrey Leiden, M.D., Ph.D. — Chairman, President, and CEODr. Leiden is the chairman, president, and chief executive officer of Vertex Pharmaceuticals. He has served as a member of Vertex’s board of directors since 2009. Dr. Leiden has more than 20 years of scientific, commercial, and financial experience in the pharmaceutical and biotechnology industries, as well as clinical and scientific experience in academia as a practicing cardiologist and molecular biologist.

David Altshuler, M.D., Ph.D. — Executive Vice President, Global Research and Chief Scientific OfficerDr. Altshuler joined Vertex in 2015 as the company’s executive vice president, global research and chief scientific officer. Dr. Altshuler leads Vertex’s research efforts aimed at discovering new medicines for the treatment of serious diseases and oversees the company’s five research sites in the United States, Canada, and Europe.

Stuart A. Arbuckle — Executive Vice President and Chief Commercial OfficerMr. Arbuckle joined Vertex in September 2012. As Vertex’s executive vice president and chief commercial officer, Mr. Arbuckle oversees Vertex’s global commercial team, which is responsible for the company’s sales, marketing, patient support, market research, and other activities that support the approved use of Vertex’s cystic fibrosis medicines. Mr. Arbuckle has more than 25 years of experience in leading global sales and marketing efforts at biopharmaceutical companies.

Jeffrey A. Chodakewitz, MD — Executive Vice President, Global Medicines Development and Medical Affairs, and Chief Medical OfficerDr. Chodakewitz joined Vertex in January 2014 and is the company’s executive vice president, global medicines development and affairs, and chief medical officer. He oversees clinical development, global regulatory affairs, medical affairs, drug safety, and other related functions and is responsible for developing, advising, and driving execution of Vertex’s clinical development programs.

Ian F. Smith — Executive Vice President and Chief Financial OfficerIan Smith joined Vertex in November 2001. As Vertex’s Executive vice president and chief financial officer, Mr. Smith is responsible for core functions at Vertex, including finance and accounting, investor relations, business development, information systems and worldwide operations.

19 January 2016

Vertex Pharmaceuticals Incorporated (VR

TX)23

Figure 42: Credit Suisse HOLT Analysis

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VERTEX PHARMACEUTICALS INC(VRTX) : Pricing in accelerating sales growth

Historical Operations. VRTX, like many peers in development stage, resembles characteristics of an early life cycle company; CFROI has been negative over many years with generally strong asset growth. Acceleration and subsequent decline in CFROI levels from 2011-2014 was related to the introduction and subsequent decline of its hepititis C treatment, Incivek. Valuation going forward will be dependent on the success of VRTX's Cystic Fibrosis drug.Market Expectations. Relying on IBES consensus estimates through 2017, thereafter VRTX is priced to decline to 10% long-term sales growth assuming a 700 bps/yr decline in margins to 40% by 2019. 70% upside is warranted if sales growth slows to 15% by 2019, assuming flat margins subsequent to 2017. Alternatively, 30% downside is warranted if sales growth decline to 0% by 2019 or $4.7B in total sales.Risks To Consider. Despite an overall rating of Poor for accounting quality, the company is identified as having accounting quality concerns in the following areas: accounts receivable; accounts payable; and high levels of depreciation expense and a volatile asset life. In the past month, both its price momentum and CFROI revisions have been weaker than its peer group average. Author: Steve Bock , HOLT Sector Specialist

Risk

Probability of Default

Average Credit Rating

Momentum

CFROI Revisions

Price Change %

Price (Dec 15, 2015)

Biotechnology, United States

117.28 USD

0%

NA

NA NA NA

-5.40 -12.25 -4.40

6m 3m 1m

HOLT

Market Implied Scenario Open In HOLT Lens™

Market Cap (bil) 28.809 USD

Source: Credit Suisse estimates, HOLT®

19 January 2016


TX)24

Figure 43: Vertex Income Statement

2013A 1Q14A 2Q14A 3Q14A 4Q14A 2014A 1Q15A 2Q15A 3Q15A 4Q15E 2015E 1Q16E 2Q16E 3Q16E 4Q16E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

Total Revenue $1,030 $108 $122 $165 $141 $536 $135 $160 $302 $395 $992 $465 $530 $587 $630 $2,213 $3,454 $4,305 $5,400 $6,591 $7,239 $7,625 $7,951 $8,332 $8,388 $5,781

NON-GAAP EPS ($0.85) ($0.65) ($0.61) ($0.37) ($0.55) ($2.17) ($0.62) ($0.54) ($0.13) $0.09 ($1.20) $0.37 $0.56 $0.75 $0.85 $2.54 $6.58 $8.93 $10.03 $13.05 $14.60 $15.43 $16.16 $17.03 $17.15 $11.66

RevenuesKalydeco $371 $100 $113 $127 $124 $464 $130 $155 $166 $167 $618 $164 $168 $174 $179 $684 $762 $845 $922 $983 $1,037 $1,078 $1,122 $1,167 $1,019 $1,218Orkambi $0 $0 $131 $222 $353 $294 $355 $407 $445 $1,501 $2,664 $3,431 $4,271 $4,983 $5,236 $5,374 $5,484 $5,598 $5,715 $2,876HetMin $0 $0 $180 $597 $938 $1,145 $1,318 $1,539 $1,625 $1,659Non-GAAP net product revenues $371 $100 $113 $127 $124 $464 $130 $155 $297 $389 $971 $458 $523 $580 $623 $2,185 $3,426 $4,277 $5,372 $6,563 $7,211 $7,597 $7,923 $8,304 $8,360 $5,753Non-GAAP Royalty and Collaboration revenues $658 $9 $9 $38 $16 $72 $5 $5 $6 $6 $21 $7 $7 $7 $7 $28 $28 $28 $28 $28 $28 $28 $28 $28 $28 $28

31.38%Non-GAAP total revenues $1,030 $108 $122 $165 $141 $536 $135 $160 $302 $395 $992 $465 $530 $587 $630 $2,213 $3,454 $4,305 $5,400 $6,591 $7,239 $7,625 $7,951 $8,332 $8,388 $5,781% growth -4% 18% 89% 31% 85% 18% 14% 11% 7% 123% 56% 25% 25% 22% 10% 5% 4% 5% 1% -31%

Expenses

Non-GAAP Cost of Revenues and Expenses (COR) $120 $10 $11 $11 $13 $45 $11 $16 $34 $51 $111 $62 $71 $78 $84 $295 $462 $577 $725 $886 $973 $1,026 $1,070 $1,121 $1,129 $805% growth #DIV/0! 14% 2% 19% -63% 103% 51% 148% 22% 14% 11% 7% 165% 57% 25% 26% 22% 10% 5% 4% 5% 1% -29%% of net product revenues 32% 10% 10% 9% 11% 10% 8% 11% 11% 13% 11% 14% 14% 14% 14% 14% 14% 14% 14% 14% 14% 14% 14% 14% 14% 14%

Non-GAAP R&D $788 $182 $180 $157 $176 $694 $177 $182 $202 $222 $782 $211 $215 $215 $221 $862 $913 $959 $1,007 $1,057 $1,110 $1,166 $1,201 $1,237 $1,245 $858% growth #DIV/0! -1% -12% 12% -12% 1% 3% 11% 10% 13% -5% 2% 0% 3% 10% 6% 5% 5% 5% 5% 5% 3% 3% 1% -31%% of net product revenues 212% 182% 159% 124% 141% 150% 136% 117% 68% 57% 81% 46% 41% 37% 36% 39% 27% 22% 19% 16% 15% 15% 15% 15% 15% 15%

Non-GAAP SG&A $309 $52 $58 $55 $60 $226 $69 $72 $76 $80 $297 $82 $85 $87 $90 $344 $355 $365 $376 $388 $399 $411 $424 $436 $439 $303% growth 10% -5% 10% 15% 4% 6% 5% 32% 3% 3% 3% 3% 16% 3% 3% 3% 3% 3% 3% 3% 3% 1% -31%% of net product revenues 83% 53% 51% 43% 49% 49% 53% 46% 26% 21% 31% 18% 16% 15% 14% 16% 10% 9% 7% 6% 6% 5% 5% 5% 5% 5%

Total R&D and SG&A - Non-GAAP $1,097 $234 $237 $212 $236 $920 $246 $254 $278 $302 $1,080 $293 $300 $302 $311 $1,206 $1,268 $1,324 $1,383 $1,445 $1,510 $1,577 $1,624 $1,673 $1,684 $1,161

Total Expenses - Non-GAAP $1,217 $244 $248 $224 $249 $965 $257 $270 $311 $352 $1,191 $355 $370 $381 $395 $1,501 $1,731 $1,902 $2,109 $2,331 $2,483 $2,603 $2,694 $2,794 $2,813 $1,966

Operating Income - Non-GAAP -$187 -$135 -$126 -$59 -$109 -$429 -$122 -$111 -$9 $43 -$198 $110 $160 $207 $235 $712 $1,723 $2,403 $3,292 $4,260 $4,756 $5,022 $5,257 $5,538 $5,575 $3,815% operating margin -50% -136% -112% -46% -87% -93% -93% -71% -3% 11% -20% 24% 31% 36% 38% 33% 50% 56% 61% 65% 66% 66% 66% 67% 67% 66%

Interest Expense and Other Income - Non-GAAP $0 -$15 -$15 -$24 -$25 -$79 -$26 -$20 -$22 -$21 -$90 -$19 -$19 -$19 -$21 -$78 -$78 -$78 -$78 -$78 -$78 -$78 -$78 -$78 -$78 -$78

Pre-Tax Income - Non-GAAP -$187 -$151 -$141 -$83 -$134 -$508 -$148 -$130 -$31 $21 -$288 $91 $141 $188 $213 $634 $1,645 $2,325 $3,214 $4,182 $4,678 $4,944 $5,180 $5,460 $5,497 $3,737

Taxes - Non-GAAP $5 $1 $1 $3 -$2 $3 $0 $0 $1 $0 $1 $0 $0 $0 $0 $0 $0 $93 $707 $920 $1,029 $1,088 $1,140 $1,201 $1,209 $822% effective tax rate -3% -1% 0% -4% 1% -1% 0% 0% -2% 0% 0% 0% 0% 0% 0% 0% 0% 4% 22% 22% 22% 22% 22% 22% 22% 22%

$11 51%Net Income - Non-GAAP -$192 -$151 -$142 -$86 -$132 -$511 -$148 -$131 -$32 $21 -$290 $91 $141 $188 $213 $634 $1,645 $2,232 $2,507 $3,262 $3,649 $3,857 $4,040 $4,259 $4,288 $2,915

Non-GAAP EPS - Basic ($0.85) ($0.65) ($0.61) ($0.37) ($0.55) ($2.17) ($0.62) ($0.54) ($0.13) $0.09 ($1.20) $0.37 $0.56 $0.75 $0.85 $2.54 $6.58 $8.93 $10.03 $13.05 $14.60 $15.43 $16.16 $17.03 $17.15 $11.66Non-GAAP EPS - Diluted ($0.85) ($0.65) ($0.61) ($0.37) ($0.55) ($2.17) ($0.62) ($0.54) ($0.13) $0.09 ($1.20) $0.37 $0.56 $0.75 $0.85 $2.54 $6.58 $8.93 $10.03 $13.05 $14.60 $15.43 $16.16 $17.03 $17.15 $11.66% growth EPS 160% 36% 12% 30% 12% 6% 5% 5% 1% -32%GAAP EPS - Basic ($1.98) ($1.00) ($0.68) ($0.72) ($0.74) ($3.14) ($0.83) ($0.78) ($0.39) ($0.22) ($2.22) $0.07 $0.27 $0.45 $0.54 $1.33 $5.32 $7.61 $8.65 $11.62 $13.10 $13.87 $14.55 $15.38 $15.48 $10.51GAAP EPS - Diluted ($1.98) ($1.00) ($0.68) ($0.72) ($0.74) ($3.14) ($0.83) ($0.78) ($0.39) ($0.22) ($2.22) $0.07 $0.27 $0.45 $0.54 $1.33 $5.32 $7.61 $8.65 $11.62 $13.10 $13.87 $14.55 $15.38 $15.48 $10.51

GAAP - Basic 225 233 234 236 238 235 239 241 242 242 241 250 250 250 250 250 250 250 250 250 250 250 250 250 250 250GAAP - Diluted 225 233 234 236 238 235 239 241 242 242 241 250 250 250 250 250 250 250 250 250 250 250 250 250 250 250

Non- GAAP - Basic 225 233 234 236 238 235 239 241 242 242 241 250 250 250 250 250 250 250 250 250 250 250 250 250 250 250Non- GAAP - Diluted 225 233 234 236 238 235 239 241 242 242 241 250 250 250 250 250 250 250 250 250 250 250 250 250 250 250


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Figure 44: Vertex Balance Sheet

Balance Sheet 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

Cash, cash equivalents and short-term marketable securities$1,031 $969 $1,321 $1,465 $1,387 $979 $1,250 $1,537 $1,798 $2,110 $2,617 $4,012 $5,929 $8,095 $11,009 $14,234 $17,179 Accounts receivable, net $13 $183 $143 $86 $76 $141 $314 $490 $610 $766 $934 $1,026 $1,081 $1,127 $1,181 $1,189 $820 Inventories $0 $112 $30 $14 $31 $76 $202 $317 $396 $498 $608 $668 $704 $734 $769 $775 $553

Prepaid expenses and other current assets $13 $67 $95 $24 $53 $69 $80 $83 $85 $88 $90 $93 $96 $99 $102 $102 $71Total Current Assets $1,057 $1,331 $1,590 $1,589 $1,547 $1,265 $1,846 $2,426 $2,890 $3,461 $4,250 $5,799 $7,810 $10,055 $13,062 $16,300 $18,622Property, plant and equipment, net $72 $133 $434 $697 $716 $721 $754 $771 $787 $823 $878 $941 $1,006 $1,071 $1,138 $1,200 $1,208Intangible assets, net $519 $664 $664 $0 $29 $29 $29 $29 $29 $29 $29 $29 $29 $29 $29 $29 $29Goodwill $26 $31 $31 $31 $40 $40 $40 $40 $40 $40 $40 $40 $40 $40 $40 $40 $40Other long term assets $51 $45 $42 $3 $3 $3 $3 $3 $3 $3 $3 $3 $3 $3 $3 $3 $3Total Assets $1,725 $2,204 $2,759 $2,319 $2,335 $2,058 $2,672 $3,270 $3,750 $4,356 $5,200 $6,812 $8,887 $11,198 $14,272 $17,573 $19,902

Accounts payable $36 $75 $101 $49 $71 $176 $467 $732 $914 $1,149 $1,403 $1,542 $1,624 $1,694 $1,775 $1,787 $1,276Accrued expenses $138 $243 $265 $271 $210 $317 $495 $633 $731 $854 $987 $1,064 $1,113 $1,157 $1,207 $1,215 $859Deferred revenue $75 $45 $28 $22 $17 $32 $72 $113 $140 $176 $215 $236 $249 $259 $272 $273 $188Short term debt $215 $0 $0 $0 $14 $14 $14 $14 $14 $14 $14 $14 $14 $14 $14 $14 $14Capital lease obligations,current portion $0 $0 $14 $17 $18 $18 $18 $18 $18 $18 $18 $18 $18 $18 $18 $18 $18Other current liabilities $12 $29 $25 $39 $38 $70 $157 $244 $305 $382 $466 $512 $539 $563 $589 $593 $409

Total Current Liabilities $475 $392 $433 $398 $368 $627 $1,223 $1,755 $2,122 $2,592 $3,103 $3,386 $3,558 $3,705 $3,875 $3,901 $2,764Deferred revenues, excluding current portion $160 $118 $96 $49 $28 $28 $28 $28 $28 $28 $28 $28 $28 $28 $28 $28 $28Long term debt $400 $400 $400 $0 $281 $281 $281 $281 $281 $281 $281 $281 $281 $281 $281 $281 $281Capital lease obligations, excluding current portion $0 $0 $15 $49 $39 $39 $39 $39 $39 $39 $39 $39 $39 $39 $39 $39 $39Construction financing lease obligation, excluding current portion$0 $56 $268 $441 $473 $473 $473 $473 $473 $473 $473 $473 $473 $473 $473 $473 $473Deferred tax liabilities $160 $244 $280 $0 $15 $15 $15 $15 $15 $15 $15 $15 $15 $15 $15 $15 $15Other long-term liabilities $26 $29 $32 $26 $34 $34 $34 $34 $34 $34 $34 $34 $34 $34 $34 $34 $34Redeemable noncontrolling interest (Alios) $0 $37 $39 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Total Liabilities $1,221 $1,276 $1,563 $963 $1,238 $1,498 $2,093 $2,625 $2,992 $3,463 $3,974 $4,256 $4,428 $4,575 $4,745 $4,772 $3,634

Equity $504 $928 $1,196 $1,356 $1,096 $560 $579 $645 $758 $893 $1,227 $2,556 $4,459 $6,623 $9,527 $12,801 $16,268Total Liabilities and Equity $1,725 $2,204 $2,759 $2,319 $2,335 $2,058 $2,672 $3,270 $3,750 $4,356 $5,200 $6,812 $8,887 $11,198 $14,272 $17,573 $19,902


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Figure 45: Vertex Cash Flows

Cash Flow 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

CASH FLOW FROM OPERATIONSNet Income $0 $0 $0 ($445) ($739) ($536) $18 $67 $112 $136 $333 $1,330 $1,903 $2,163 $2,904 $3,275 $3,466Adjustments for non-operating items:

Depreciation and Amortization $30 $35 $38 $48 $63 $65 $66 $69 $70 $73 $77 $82 $88 $94 $100 $105 $108Other Adjustments $153 $260 $293 $593 $177 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Changes in:

Accounts receivable ($3) ($171) $40 $53 $7 ($65) ($173) ($176) ($121) ($155) ($169) ($92) ($55) ($46) ($54) ($8) $370Inventories $0 ($111) ($30) $7 ($16) ($46) ($126) ($115) ($79) ($101) ($110) ($60) ($36) ($30) ($35) ($5) $222Prepaid expenses and other assets ($1) $10 ($24) ($12) ($16) ($17) ($11) ($2) ($2) ($3) ($3) ($3) ($3) ($3) ($3) ($1) $32Accounts payable ($1) $37 $15 ($49) $25 $105 $291 $265 $182 $234 $255 $138 $83 $70 $81 $12 ($512)Accrued expenses and other l iabil ities $11 $117 $29 $44 ($3) $107 $179 $138 $97 $123 $133 $77 $50 $44 $50 $8 ($356)Deferred revenue ($66) ($72) ($39) ($53) ($26) $15 $40 $40 $28 $36 $39 $21 $13 $11 $12 $2 ($85)Other ($4) ($3) ($3) $5 $18 $32 $86 $88 $60 $77 $84 $46 $27 $23 $27 $4 ($184)

Net Cash From Operations $119 $103 $319 $191 ($509) ($339) $371 $373 $348 $420 $639 $1,539 $2,070 $2,325 $3,081 $3,392 $3,061CASH FLOW FROM INVESTINGCapital Expenditures (PP&E) ($38) ($35) ($71) ($51) ($51) ($69) ($100) ($86) ($86) ($108) ($132) ($145) ($152) ($159) ($167) ($168) ($116)Acquisitions, net of cash acquired $0 ($60) $0 $0 ($10) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Purchase or sale of intangible assets $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Purchases of marketable securities ($1,235) ($722) ($1,706) ($2,412) ($1,424)Maturity or sale of marketable securities $1,285 $1,016 $1,368 $2,348 $1,558Other investments ($5) $13 ($17) $61 $1 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Net Cash From Investing $7 $212 ($426) ($54) $74 ($69) ($100) ($86) ($86) ($108) ($132) ($145) ($152) ($159) ($167) ($168) ($116)CASH FLOW FROM FINANCINGDebt Additions $392 $0 $0 $0 $294 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Debt (Retirement) $0 ($155) $0 ($0) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Equity Additions $33 $125 $192 $266 $275 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Equity (Re/purchase) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Proceeds/payments capital lease obligations $0 $0 ($3) ($16) ($21) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Proceeds/payments construction financing lease obligations ($19) ($68) ($52) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Other Financing ($0) ($94) $2 ($1) $2 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Net Cash From Financing $425 ($124) $172 $181 $497 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Change in Cash $552 $191 $65 $318 $62 ($409) $271 $287 $262 $312 $507 $1,395 $1,917 $2,166 $2,915 $3,225 $2,945

FX Impact ($0) $0 ($0) $5 ($2) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Beginning Cash & CE $447 $998 $1,189 $1,254 $1,576 $1,637 $1,228 $1,499 $1,786 $2,048 $2,359 $2,867 $4,261 $6,178 $8,344 $11,259 $14,483Ending Cash & CE $998 $1,189 $1,254 $1,576 $1,637 $1,228 $1,499 $1,786 $2,048 $2,359 $2,867 $4,261 $6,178 $8,344 $11,259 $14,483 $17,428

Ending Cash & CE and short-term marketable securities $1,031 $969 $1,321 $1,465 $1,387 $979 $1,250 $1,537 $1,798 $2,110 $2,617 $4,012 $5,929 $8,095 $11,009 $14,234 $17,179Ending Cash, CE & Marketable Securities $1,031 $969 $1,321 $1,465 $1,387 $979 $1,250 $1,537 $1,798 $2,110 $2,617 $4,012 $5,929 $8,095 $11,009 $14,234 $17,179

Free Cash Flow $81 $68 $248 $140 ($560) ($409) $271 $287 $262 $312 $507 $1,395 $1,917 $2,166 $2,915 $3,225 $2,945


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Figure 46: Vertex Cystic Fibrosis Sales

CF Sales Summary 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025EKalydeco US $275 $358 $412 $461 $510 $558 $601 $650 $691 $734 $778 $825Kalydeco ROW $162 $259 $272 $301 $335 $364 $381 $387 $387 $388 $388 $194Kalydeco WW $437 $617 $684 $762 $845 $922 $983 $1,037 $1,078 $1,122 $1,167 $1,019

Orkambi US $0 $354 $1,287 $1,669 $1,991 $2,134 $2,279 $2,377 $2,468 $2,562 $2,659 $2,760Orkambi ROW $0 $0 $213 $995 $1,440 $2,137 $2,704 $2,858 $2,906 $2,922 $2,939 $2,955Orkambi WW $0 $354 $1,500 $2,664 $3,431 $4,271 $4,983 $5,236 $5,374 $5,484 $5,598 $5,715

HetMin US $0 $360 $673 $931 $1,128 $1,254 $1,475 $1,531HetMin ROW $0 $0 $522 $946 $1,162 $1,381 $1,603 $1,719Total HetMin WW $0 $360 $1,195 $1,877 $2,290 $2,636 $3,078 $3,251Probability of success 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%Total HetMin - adjusted $0 $180 $597 $938 $1,145 $1,318 $1,539 $1,625Total CF franchise sales $437 $971 $2,184 $3,426 $4,277 $5,372 $6,563 $7,211 $7,597 $7,923 $8,304 $8,360% growth 122% 125% 57% 25% 26% 22% 10% 5% 4% 5% 1%


19 January 2016


AcknowledgementThe author of this report, Alethia Young, wishes to acknowledge the contributions made by Ashitha John, employee of Irevna, a division of CRISIL limited, a third-party provider of offshore research support services to Credit Suisse.

19 January 2016


Companies Mentioned (Price as of 15-Jan-2016)Alexion Pharmaceuticals Incorporated (ALXN.OQ, $158.68)Bayer (BAYGn.DE, €100.6)Biogen, Inc. (BIIB.OQ, $273.33)Biomarin Pharmaceuticals, Incorporated (BMRN.OQ, $83.14)Galapagos NV (GLPG.AS, €47.06)Gilead Sciences, Incorporated (GILD.OQ, $91.84)Incyte Corporation (INCY.OQ, $76.95)Nivalis (NVLS.OQ, $5.75)Novartis (NOVN.VX, SFr80.35)PTC Therapeutics, Inc. (PTCT.OQ, $23.11)ProQR Therapeutics NV (PRQR.OQ, $6.11)Regeneron Pharmaceuticals, Inc. (REGN.OQ, $462.95)Vertex Pharmaceuticals Incorporated (VRTX.OQ, $97.91, OUTPERFORM, TP $151.0)

Disclosure AppendixImportant Global Disclosures Alethia Young, Eliana Merle and Grant Hesser each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Vertex Pharmaceuticals Incorporated (VRTX.OQ)

VRTX.OQ Closing Price Target Price Date (US$) (US$) Rating 30-Jan-13 44.65 48.00 N 18-Apr-13 52.87 80.00 29-Oct-13 76.09 78.00 25-Jun-14 89.86 94.00 11-Dec-14 120.78 130.00 13-May-15 125.52 NR * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price VRTX.OQ

1- Jul- 13 1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 1640

65

90

115

140

165

N EU T RA LN O T RA T ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activitiesAs of December 10, 2012 Analysts’ stock rating are defined as follows:Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

19 January 2016


Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings DistributionRating Versus universe (%) Of which banking clients (%)Outperform/Buy* 56% (34% banking clients)Neutral/Hold* 31% (26% banking clients)Underperform/Sell* 12% (42% banking clients)Restricted 1%*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.htmlCredit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and RatingValuation Methodology and Risks: (12 months) for Vertex Pharmaceuticals Incorporated (VRTX.OQ)

Method: Our Vertex $151 TP and Outperform rating are based on a DCF and assume a 8% discount rate & 0% terminal growth rate in-line with peers that have sustainable franchises due to continued innovation.

Risk: Risks to our Outperform rating and TP of $151/sh: Weaker than expected sales for Kalydeco and Orkambi; Loss of sustainable competitive advantage in cystic fibrosis; Clinical success by competitors; Inability to enroll future exploratory trials; Higher than expected patient discontinuations on Kalydeco or Orkambi; Pricing pressure since their CF franchise drugs are priced like rare disease; Higher than expected operating expenses; Clinical failure due to efficacy or safety for HetMin studies with VX-152 and VX-440; Worse than expected execution on key timelines including label expansions and study start dates

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19 January 2016


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19 January 2016


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