CORPORATE GOVERNANCE 2022

THE ANALYSIS OF VERTEX CG

SYSTEM
Polyanskiy Pavel, Pronina Anastasiia, BMN-194

Introduction
In accordance with the official website, Vertex Pharmaceuticals, or Vertex is the
American biotech company that focuses on discovering, developing and bringing
innovative medicines to people with serious diseases so they can lead better lives (Vertex
Pharmaceuticals, n.d.). This report is aimed to investigate the corporate governance system
in the following order:

1. The description of the company

2. The analysis of ownership
3. The analysis of Board of Directors
4. The findings
5. Conclusion

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 Apart from these aspects, the goal of the report is to find drawbacks of the
corporate governance system and to propose possible solutions and improvements.

The description of the company

As it was stated in the description section, Vertex is the US-based pharmaceutical
company that strives for saving peoples’ lives from several hazard diseases like Type 1
diabetes and Duchenne muscular dystrophy. However, before moving on to the company
itself, it is essential to understand the industry and environment that the firm operates in.

Industry overview

Vertex performs in the pharmaceutical industry which can be considered as highly

competitive and innovative. According to the recent reports, the total market capitalization
is $1.45 trillion (Pharmaceuticals Global Market Report, 2022). Moreover, according to this
report, the industry is predicted to prosper at the compound annual growth rate of 9.1%.
The development of the US market in this industry is plotted below.

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 Figure 1. U.S. Pharmaceutical Industry Revenue 2010-2020 1

It is clearly seen that the industry started to grow rapidly in 2017. Moreover, the
pandemic crisis did not harm the performance of the pharma-companies as much as it did
to other segments of the economy. The major reason is that the medical industry was
responsible for creating the vaccine from COVID-19 and companies like Pfizer benefited a
lot from the coronavirus.

Major trends in the industry

One more aspect to cover about the industry is its trends and the main changes
committed during the last years. According to Kruglyak (2022), the main trends in pharma
in 2022 are:

1. The largest degree of technological impact - the pharma industry is predicted to

be the most tech-driven one with the help of Artificial Intelligence, Machine Learning
(ML), and Natural Language Processing (NLP).
2. Pharmacovigilance development - set of scientific activities for preventing adverse
drug effects and other medicine-related safety problems. In 2022, this direction is
extremely popular among the medical companies due to the high number of cases
when vaccines from COVID-19 negatively impacted the health of the users.
3. Real-word-evidence will promote vaccine development - the RWE approach is
not novel, however, it is trendy now as it is widely used for the development of
pandemic vaccines
4. Improvement of cybersecurity - the pharma industry is one of the most data-
sensitive sectors with personal data about the diseases and health problems of the
clients. Nowadays, medical companies invest a lot into R&D in order to secure the
data from hackers.

In fact, these major trends can be grouped into 2 main parts:

1. Increased demand for Artificial Intelligence - any company in the industry uses
Machine Learning and Deep Learning models for analyzing patients’ data, making
the decisions and creating drugs and vaccines.
2. Post-COVID era - coronavirus changed the life of every segment and pharma is not
an exception. Pharmaceutical organizations are now willing either to improve the
quality of vaccines or to decrease the adverse effect of the drugs (or, actually, both
of them).

1 Source: 26 Incredible US Pharmaceutical Statistics [2022]: Facts, Data, Trends and More – Zippia, 2022

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The main competitors of Vertex

The pharmaceutical industry is presented by several large companies that drive the
whole market in this segment.
№ Company Market capitalization

1 Johnson & Johnson $469.97 B

2 Eli Lilly $345.38 B

3 Pfizer $305.81 B

4 Abbvie $291.55 B

… … …

19 Vertex Pharmaceuticals $80.11 B

Table 1. The largest firms by market capitalization2

Vertex is ranked 19th position in the top most capitalized companies in the US
market of pharmaceuticals. The main giants seem to be unreachable for Vertex. However,
it is still considered to be one of the largest companies in the world of medicine with a total
market cap of ~$80 billion dollars.

Financial analysis

Once the industry the company is operating in is observed, one can proceed with
the financial overview of Vertex performance. In order to see relative progress/regress of
the company, financial indicators are taken for multiple periods and presented below.

Indicator 2021 2020 % change

Total Revenue in 7,574,400,000 6,205,683,000 +22.05

USD

Net Income in USD 2,342,000,000 2,712,000,000 -13.6

Earnings per Share 10.29 9.01 +14.2

2 Source: https://finance.yahoo.com/

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 (EPS) in USD

Stock Price 219.60 236.34 -7.1

P/E ratio 24.32 22.95 +5.96

Net profit margin 30.92 43.70 -29.24

ROI 22.07 29.39 -24.9

Table 2. Change in main financial indicators 2020-2021 3

Due to the fact that the 2022 year is not over as for now and no 10-K reports are
published, the data for 2020-2021 were collected in order to analyze dynamics of the
financial performance of Vertex. Going back to the table above, the picture is a bit
controversial. On the one hand, total revenue and EPS increased by 22.05% and 14.2%
respectively, indicating higher sales and earnings that the investor receives per each share
obtained. On the other hand, Net income, Net profit margin and ROI dropped significantly
by 13.6%, 29.24% and 24.9% correspondingly. It indicates that Vertex's ability to efficiently
use resources and costs in order to generate net income worsened during these years.
However, if one looks at the market cap and stock prices charts below, it is certainly
obvious that 2021 was a recession period for Vertex with a high spike during the current
year. Both market cap and stock price surged dramatically from ~$45 billion USD to ~$80
billion USD and from ~$180 to $308 respectively. It indicates excellent performance during
this year.

3 Source: https://www.macrotrends.net/

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 Figure 2. VRTX Market Capitalization Rate from 2010 to 2022 4

Figure 3. VRTX Stock Price history5

4 Source: https://www.macrotrends.net/

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 To sum up the financial section, Vertex was successfully growing during several

years with a slight recession in 2021. However, the company and the management team

were able to significantly improve the situation after that. As a result, the major financial

indicators increased by double-digit rates.

The Analysis of Ownership

Shareholders’ equity

The capital of Vertex is extremely dispersed which is common for US-based

companies. The number of shares and the types are described in the following table.
Table 3. 10-K report for 20216

In total, Vertex issued 2 types of shares: 500,000,000 common shares and

1,000,000 preferred ones. The former ones are entitled to one vote per share. Overall, total
shareholders’ equity of Vertex was equal to ~$10.100 billion as of the end of 2021. It is also
growing right now during the 2022 year and comprises ~$13 billion, showing a great
increase after the fall in 2021. Moreover, the total shareholders’ equity constantly rises. The
chart below illustrates this trend.

5 Source: https://finance.yahoo.com/
6 Source: Vertex Annual Report 2021

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 Figure 4. Total shareholders’ equity dynamic7

The value of Vertex SE is growing from 2018 every year from ~$2 billion to more
than $13 billion. It can be explained by the increased retained earnings and additional-paid-
in-capital.

Distribution of shares

As it was stated above, Vertex capital is highly distributed among different entities.

According to Yahoo.Finance, 95.72% of total shares issued is controlled by institutions while

only 0.19% of shares is owned by insiders of the company (probably, preferred ones). The

most representative holders are shown in the following table.

7 Source: https://www.zacks.com/

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 Table 4. Top institutional holders of VRTX shares8

The biggest owners of Vertex shares have from ~2% up to ~10% of total shares
outstanding. It shows the degree of diversity in terms of share owners compared to what
can be found in Japanese and German models of corporate governance. Among the
holders, such famous funds as Vanguard Group and Blackrock inc. take the leading position
in terms of the number of Vertex shares controlled. Unfortunately, there is no information
about preferred stock owners. Nevertheless, it was stated in the latest 10-K report that no
preferred stocks are issued meaning that they are not publicly available and distributed
among internal members of the company.

Dividend policy and payments

Surprisingly enough, Vertex Pharmaceuticals has never paid any dividends. In other
words, Vertex pursues no dividend policy. In this case, the company reinvest earnings
back in order to grow further and increase the enterprise value. Investors continue to
invest into Vertex (it can be seen from the market cap graph in the Financial analysis
section) because they do believe in the firm and its future development.

However, in order to expand the analysis of dividend policies and not to limit this
part just by saying “no dividends are paid”, hypothetical scenarios are drawn below for
different dividend policies in case Vertex is to start paying out dividends.
● Stable Dividend Policy

8 Source: https://finance.yahoo.com/

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 This policy implies the constant payments regardless of financial performance of the
company. It can bring stability to the investors during crises but take higher profits away
during “boom years”. The following table represents hypothetical case when Vertex pays
out $0.35 per share:

Year Average Stock Dividend payment Dividend Yield

Price per share

2017 $126,9 $0.35 0.28%

2018 $167,4 $0.35 0.21%

2019 $184,7 $0.35 0.19%

2020 $251,5 $0.35 0.14%

2021 $204,4 $0.35 0.17%

2022 $273,75 $0.35 0.13%

Table 5. Scenario for stable dividend policy of $0.35 per share 9

The table above shows the average price for the period 2017-2022 (the average is
taken in order to get mean estimation of dividend yield). Then, yield is calculated as
Dividend payment divided by Stock Price. As a result, the yield is steadily going down due to
the constant rise of stock prices except for the 2021 year recession that described earlier. It
proves the fact that this policy would bring stable payments to the investors. However, if
the company is continuously rising(as Vertex), investors are unable to capture the value
from this development.

● Constant Dividend Policy

Another possible scenario in case Vertex takes the decision to pay out dividends is
Constant Dividend Policy. It gives payments to the shareholders as a constant percent of
earnings per each share.

Year Average Stock Earnings per 10% Dividend Dividend Yield

Price Share payment per

9 Source: https://finance.yahoo.com/

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 share

2017 $126,9 $1.04 $0.104 0.08%

2018 $167,4 $8.09 $0.809 0.48%

2019 $184,7 $4.51 $0.451 0.24%

2020 $251,5 $10.29 $1.029 0.41%

2021 $204,4 $9.01 $0.901 0.44%

Table 6. Scenario for Constant Dividend policy and 10% pay-out ratio 10

The table represents the case when Vertex paid out dividends from 2017 to 2021 at
the 10% rate of EPS. One can see that when earnings increase investors capital scale up as
well. However, during decreases in EPS, investors got paid less. Here the advantages and
drawbacks are obvious: it is more risky and volatile (payments are less during the
recession) and more profitable when the financial performance is better. It allows investors
to receive gains from “boom years”.

To conclude this section, Vertex uses no dividend policy throughout its period of
operations. Also, this report provides 2 scenarios of hypothetical dividend policies: stable
and constant and gives insights how dividend yield can change depending on different
stock prices and EPS.

The Analysis of the Board of Directors

The board of Vertex is two-tiered. It consists of both management or leadership and
governance teams comprising 20 talented professionals from different areas of service.
While the management body has only 2 women out of 9 members and a scarce share of
minorities’ representatives, the regulatory group of the size of 11 includes 45 % of
individuals from racial and ethnic minority groups and 36 % of female specialists taking
part in controlling pharmaceutical organization’s activity. The company’s website states that
the chosen way of board structure is applied for better guidance achieved by taking into
account various perspectives combined with decades of experience, and, in terms of
Corporate Governance, it is obviously the greatest method of running the business.

As it can be observed from members’ profile bios, the majority of them came to
Vertex after 2015, and it might mean that the enterprise’s success partly emerges from the

10 Source: Vertex Annual Report 2021

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constant stream of fresh ideas brought by the renewal of headquarters’ composition.
Despite the lack of a wide range of news related to the Board of Directors which is a sign of
stability, one event went viral due to its importance for the global business community. In
2019 Reshma Kewalramani, the former Chief Medical Officer of Vertex Pharmaceuticals,
became one of the very few female CEOs in biopharma moving Jeffrey Leiden to the
position of an Executive Chairman (Sagonowsky, 2019). This situation poses a question
about the independence of Leiden because the research community still cannot decide on
the status of such agents, but it definitely illustrates the high extent of former leader’s
entrenchment and strong performance of the entity in general (Cummings et al., 2022).

Table, placed in the Appendix, is dedicated to the members of both bodies of Board
of Directors, collecting their competencies and involvement in Vertex operations through
supervising some managerial divisions or working as a part of one or multiple committees
the overall number of which is 4. It is required to point out that 9 members of the
supervisory board, except for Jeffrey Leiden and Reshma Kewalramani, are independent.

The findings
The next step of our analysis is to determine which corporate governance model the
company adheres to. In order to complete this part, it is required to overview various
parameters of Vertex presented below.

1. Headquarters location and Legal regulation

There are two main offices of the company, locations of which usually fall under the
influence of the Anglo-US model. Headquarters and Research & Development Site and
Vertex Pharmaceuticals are situated in Boston, Massachusetts and London, UK
correspondingly. The degree of governmental control of business there is pretty
impressive. The USA has a strong regulation mechanisms after the period of huge
enterprises’ collapse, and the UK is working on prevention of illegal activities intensively
because the inadequate governance observed in recent years has led to major business
failures comprising Thomas Cook, Carillion, British Steel, and Patisserie Valerie and
provoked the introduction of a new Code by Financial Reporting Council in 2018 (Elsayed et
al., 2022).

2. Capital structure and source of financing

In compliance with the Analysis of Ownership section of our project, it is clear that
the structure of the capital is dispersed. Top shareholders have no more than 10 % of the
stocks issued, and, combined with other owners of VRTX quotations, they are represented

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by independent institutional entities that are not connected with the organization studied.
As there is no information about concrete investors spending large amounts of money on
growth of Vertex, it is feasible to say that the key source of financing in this case is the
equity market known for its high liquidity and velocity of investments.

3. Transparency

The company’s transparency may become an example for many other enterprises.
Vertex website has an entire section with the name identical to the title of this subsection
which includes all Transparency Disclosure Reports. If the visitor is not satisfied with the
results placed in an open access, he or she can send a request for receiving more precise
data. Moreover, organization is guided by generally recognized international standards,
codes, and principles of interaction with all participants of the work progress. This range of
documents identifying the boundaries of what is permitted includes Statement of
Corporate Governance Principles, rules regarding Corporate Governance and Nominating
Committee, Audit and Finance Committee,, Management Development and Compensation
Committee, Science and Technology Committee, Code of Conduct and 2021 Code of
Conduct Updates, Articles of Organization of Vertex Pharmaceuticals Incorporated, and,
finally, By-Laws of Vertex Pharmaceuticals Incorporated11.

All these specifications prove that the model of Corporate governance applied by
Vertex is the Anglo-US one. However, the only feature is distinct and belongs to the
continental framework, and it is the two-tier board.

Notwithstanding the positive features of organization, it periodically appears in

news reports related to the violation of norms or to the questionable behavior of the
management. From 2019 the drawbacks of the existing corporate governance system,
which, in our opinion, are not only company’s, but also governmental institutions’ fault
entailed by disadvantages of the modern legislative oversight, have been noticed on a
yearly basis.

● 2019: unjustified management cash inflows

The press revealed that Vertex’s CEO Jeff Leiden, who is now the chair of the Board
of Directors, received £4.6 million in a single month from selling his part of the company’s
shares while his colleagues from the UK gained £1.1 million pay and more than £15 million
through their share options (Riches, 2019).

● 2020: Friends Fiduciary Corporation, first proposal

11Source: https://investors.vrtx.com/corporate-governances

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 Friends Fiduciary Corporation, a firm that provides investment solutions, obliged
Vertex to present information about its political contribution activities, expenditures, and
oversight mechanisms (Institutional Shareholder Services Inc., 2021).

● 2021: Friends Fiduciary Corporation, second proposal (resolved)

The same organization asked for Vertex Shareholders’ Support in order to make the
defendant raise the disclosure volume by uncovering their reports about lobbying and
give concrete description of management’s and the Board’s decision-making process
(Institutional Shareholder Services Inc., 2021).

Taking into account the above points, we can offer the following improvements
for the corporate governance model of Vertex: strengthening Supervisory Board control of
management deeds and considering the payment in a form of dividends to the
shareholders for the company loyalty increase.

Conclusion
In this work, a detailed analysis of the corporate governance system of the company

Vertex Pharmaceuticals Inc. was carried out. The internal structure of the organization was

examined through the coverage of the composition of the capital structure, consideration

of the board of directors, and determination of the type of corporate governance model.

These steps allowed our team to identify strengths and weaknesses of the firm and to

propose several possible improvements, consisting in intensification of internal control

and introduction of dividend payments in accordance with one of the proposed

policies.

References
1. Cummings, M. E., Eggers, J. P., & Wang, R. D. (2022). Monitoring the monitor:
Enabling strategic change when the former CEO stays on the board. Long Range
Planning, 55(3), 102130.
2. Elsayed, M., Elshandidy, T., & Ahmed, Y. (2022). Corporate failure in the UK: An
examination of corporate governance reforms. International Review of Financial
Analysis, 82, 102165.
3. Institutional Shareholder Services Inc. (2021, May 5). Vertex Pharmaceuticals
Incorporated: Key Takeaways.

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 https://friendsfiduciary.org/wp-content/uploads/VertexPharmaceuticalsIncorporate
d_VRTX_1529319_ISS_Research-1.pdf
4. Kruglyak, I. (2022, May 18). Top 10 pharmaceutical industry trends in 2022. Avenga.
https://www.avenga.com/magazine/pharmaceutical-industry-trends/
5. Pharmaceuticals Global Market Report 2022. (2022, March 4). GlobeNewswire
NewsRoom.
6. Riches, C. (2019, February 20). Cystic Fibrosis scandal: Drug firm in dispute with NHS
“gave bosses £15m.” Express.co.uk.
https://www.express.co.uk/news/uk/1089904/cystic-fibrosis-scandal-vertex-in-
dispute-NHS-finance-health
7. Sagonowsky, E. (2019, July 25). Vertex joins the new-CEO brigade with Leiden
jumping to exec chairman, CMO stepping up. Fierce Pharma.
https://www.fiercepharma.com/pharma/vertex-cmo-kewalramani-set-to-become-
next-ceo-april-2020-leiden-moving-up-to-executive
8. Vertex Pharmaceuticals. (n.d.). Vertex Pharmaceuticals | Home. Vertex.
https://www.vrtx.com/
9. 26 Incredible US Pharmaceutical Statistics [2022]: Facts, Data, Trends And More – Zippia.

Appendix
Appendix 1: Supervisory and Management boards12

Member Position Competences

Supervisory board

Jeffrey Leiden Executive Chairman Managing work of the Supervisory board

Reshma CEO and President Leading and executing Vertex strategy and
mission, serving as a member of the board of
Kewalramani
directors of the Biomedical Science Careers
Program

Sangeeta N. Chair of S&T Committee, member Professor of Engineering at the Massachusetts

Bhatia of Corporate Governance and Institute of Technology (MIT), Director of the
Nominating Committee Marble Center for Cancer Nanomedicine, and
an investigator for the Howard Hughes
Medical Institute

Lloyd Carney Member of Audit and Finance, Chief Acquisition Officer of Carney Technology
Management Development and Acquisition Corp. II

12 Source: https://www.vrtx.com/

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 Compensation Committees

Alan Garber Member of Science and Provost of Harvard University, the

Technology, Mallinckrodt Professor of Health Care Policy at
Audit and Finance Committees Harvard Medical School, a Professor of
Economics in the Faculty of Arts and Sciences,
Professor of Public Policy in the Harvard
Kennedy School of Government, and a
Professor in the Department of Health Policy
and Management in the Harvard T.H. Chan
School of Public Health

Terrence Chair of Audit and Finance Member of the board of directors of Levo
Kearney Committee, member of Therapeutics, Inc.
Management Development and
Compensation Committee

Yuchun Lee Member of Audit and Finance, Chief Executive Officer of Allego Inc., Executive
Management Development and Chairman of Clarabridge, Inc., Executive in
Compensation Committees Residence of General Catalyst Partners

Margaret Chair of Corporate Governance Member of the Board of Directors for Amicus
McGlynn and Nominating Committee, Therapeutics, Inc., member of the National
member of S&T Committee Industrial Advisory Committee at the
University at Buffalo School of Pharmacy and
Pharmaceutical Sciences

Diana Member of Corporate Governance Member on the board of directors of MetLife,

McKenzie and Nominating Committee Inc., Change Healthcare, Inc., and Paradox AI,
and as a Special Advisor to Brighton Park
Capital

Bruce Sachs Lead Independent Director, Chair General Partner at Charles River Ventures
of Management Development and
Compensation Committee,
member of Corporate Governance
and Nominating Committee

Suketu Director Executive Vice President and Chief Financial

Upadhyay Officer of Zimmer Biomet

Management board

Reshma CEO and President Leading and executing Vertex strategy and
Kewalramani mission, serving as a member of the board of
directors of the Biomedical Science Careers
Program

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David Global Research, and Chief Leading internal and external innovation,
Altshuler Scientific Officer inclusive of research, preclinical and
pharmaceutical sciences, as well as corporate
data strategy, technology and engineering,
implementing research strategy, shaping
research pipeline

Stuart A. Chief Operating Officer Overseeing Vertex’s global commercial team,

Arbuckle leading the program and portfolio
management, commercial manufacturing,
supply chain, human resources, and
corporate communications functions, serving
on the board of directors for Rhythm
Pharmaceuticals and ImmunoGen and as co-
chair of the BIO Standing Committee on
Access & Value

Jonathan Chief Legal Officer Overseeing all aspects of company’s global

Biller legal and compliance functions

Carmen Bozic Global Medicines Development Developing and driving the execution of
and Medical Affairs, and Chief clinical development programs, including
Medical Officer clinical development, medical affairs, drug
safety, global clinical operations and
biometrics

Amit K. Chief Patient Officer Strengthening relationships with the cystic

Sachdev fibrosis community, building new
relationships globally with patients and
advocates

Bastiano Chief of Cell and Genetic Therapies Working on advancing research, development
Sanna and manufacturing for all of cell and genetic
therapy programs

Nia Tatsis Chief Regulatory and Quality Providing global regulatory leadership,
Officer managing all regulatory interactions and
quality assurance involving the research and
development, manufacturing and
commercialization, controlling team of
regulatory professionals

Charles Chief Financial Officer Overseeing the accounting, finance, internal

Wagner audit, investor relations, business
development transactions and alliance
management, and global security and facilities
functions

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