Vertex Pharmaceuticals Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial statements are unaudited and prepared under U.S. GAAP. Vertex develops and commercializes medicines, with its business focused on cystic fibrosis (CF). Its marketed products are ORKAMBI and KALYDECO.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $398.1 million | $138.5 million |
| Product revenue, net | $394.4 million | $130.9 million |
| Operating loss | $14.3 million | $172.0 million |
| Net loss attributable to Vertex | $41.6 million | $198.6 million |
| Diluted loss per share | $0.17 | $0.83 |
| Net cash used in operating activities | $15.1 million | $222.2 million |
- ORKAMBI generated $223.1 million of product revenue in Q1 2016; it had no comparable Q1 2015 sales. KALYDECO revenue rose 31% to $170.5 million. INCIVEK contributed $0.8 million.
- Operating costs and expenses were $412.4 million, up 33%. Research and development expense rose 19% to $255.9 million, principally from outsourced clinical-trial services and higher infrastructure costs. SG&A increased 23% to $105.2 million, largely reflecting ORKAMBI commercial support outside the U.S.
- Cost of product revenues was $49.8 million, including a final $13.9 million Cystic Fibrosis Foundation Therapeutics commercial milestone related to ORKAMBI sales. Excluding no items, the simple product gross margin calculated as product revenue less cost of product revenue was approximately 87%; the milestone affected the period’s cost.
- Operating loss was about 3.6% of revenue, versus about 124% in Q1 2015. Vertex-attributable net loss was about 10.5% of revenue, versus about 143% previously. These ratios are calculated from reported figures.
- Interest expense, net was $20.7 million; other income, net was $4.4 million, primarily due to foreign-exchange gains. Income-tax provision was $5.5 million.
- Cash and cash equivalents were $604.2 million and marketable securities were $421.4 million at March 31, for combined cash, equivalents and marketable securities of $1.026 billion. Current assets were $1.403 billion and current liabilities $552.0 million.
- Operating cash use improved to $15.1 million from $222.2 million. Capital expenditures were $12.0 million. Cash and cash equivalents decreased $110.5 million during the quarter; purchases and maturities of marketable securities also affected cash flows.
- Senior secured term-loan carrying amount was approximately $295.8 million, including $146.3 million current and $149.6 million long-term. The loan matures July 2017, with $75 million quarterly principal installments scheduled from October 2016. Construction-financing lease obligation was $472.5 million.
Material changes versus the prior period
- Revenue increased 187%, driven by ORKAMBI launch sales and 31% growth in KALYDECO.
- Vertex-attributable net loss narrowed to $41.6 million from $198.6 million, despite higher operating costs. Restructuring moved from a $3.3 million credit in Q1 2015 to $0.7 million of expense in Q1 2016.
- Development expense rose 29%, while research expense declined 4%. Royalty revenue fell 47%, and royalty expense fell 71%, primarily reflecting lower INCIVO sales by collaborator Janssen.
- Cash, equivalents and marketable securities declined approximately $16.8 million from December 31, 2015. The balance-sheet cash-and-equivalents line alone declined $110.5 million.
Outlook, management commentary and risks
- Management expected ORKAMBI net product revenue to increase during the remainder of 2016 compared with Q1. Q1 U.S. patient starts were largely offset by treatment discontinuations. Ex-U.S. sales were expected initially to come mainly from Germany while reimbursement discussions continue elsewhere.
- Management said cash flows from KALYDECO and ORKAMBI, together with existing cash, equivalents and marketable securities, were expected to fund operations for at least the next 12 months. Future liquidity depends substantially on product sales and R&D, business-development and other spending.
- Management expected SG&A for the rest of 2016 to be similar to Q1 and forecast approximately $45 million of lease-related interest expense and $13 million of credit-agreement interest expense for the remainder of 2016.
- Clinical and regulatory milestones include FDA review of the ORKAMBI supplemental application for ages 6–11; anticipated VX-661 trial enrollment and data; and ongoing or planned programs in CF, oncology, pain and spinal-cord injury. Timelines and trial outcomes are uncertain.
- Risks include clinical-trial failure or delay, regulatory decisions, patient persistence and compliance, reimbursement negotiations, product-sales estimates and foreign-exchange movements. Management cautioned that interim results may not indicate full-year results.
- The DOJ had subpoenaed documents primarily concerning Good Laboratory Practices at a bioanalytical laboratory in connection with marketed medicines; Vertex said it was responding and cooperating. A shareholder securities class-action dismissal was on appeal; Vertex recorded no reserve and intended to defend the case.
- No material changes to the risk factors in the 2015 Form 10-K were reported. No material contingent liabilities were accrued at March 31, 2016.
Important facts for investors to verify
- Whether ORKAMBI treatment starts, patient persistence and ex-U.S. reimbursement progress support management’s expected revenue growth.
- Clinical-trial results and regulatory timing for ORKAMBI in younger patients and the VX-661, VX-371 and other pipeline programs.
- Upcoming $75 million quarterly term-loan installments, loan covenant compliance and the impact of lease and other commitments on liquidity.
- Developments in the DOJ subpoena and the shareholder litigation appeal, including any subsequent disclosures or financial effects.
- How R&D spending, product margins and cash generation evolve as the commercial business expands.