Vertex Pharmaceuticals Incorporated — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results include Alios BioPharma, a variable interest entity; Alios cash is restricted and is not available for Vertex’s general use.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $221.7 million | $336.0 million | $860.8 million | $1,193.0 million |
| Operating income (loss) | $(134.1) million | $(1.1) million | $(629.3) million | $79.8 million |
| Net income (loss) attributable to Vertex | $(124.1) million | $(57.5) million | $(489.3) million | $(30.9) million |
| Diluted loss per share | $(0.54) | $(0.27) | $(2.20) | $(0.15) |
| Net cash from (used in) operations | Not separately reported for the quarter | $(80.4) million | $227.3 million |
Q3 product revenue was $186.7 million, down 39% year over year: KALYDECO generated $101.1 million, up 106%, while INCIVEK generated $85.6 million, down 66%. For the nine months, product revenue fell 33% to $708.8 million; royalty revenue rose 22% to $119.7 million, while collaborative revenue declined 25% to $32.3 million. Operating expenses for the nine months included a $412.9 million VX-222 impairment charge.
Cash, cash equivalents and marketable securities totaled $1.423 billion at September 30, excluding Alios restricted cash. Current assets were $1.649 billion and current liabilities $409.5 million. Vertex reported no 2015 notes outstanding after holders converted $399.8 million of principal into shares in Q2; the remaining $0.2 million was redeemed. Obligations included $392.6 million of construction financing for the Fan Pier buildings and $53.8 million in present-value capital lease payments. Shareholders’ equity was $1.447 billion.
Changes and notable items
- Revenue fell 34% in Q3, principally because INCIVEK sales continued to contract; KALYDECO growth and higher INCIVO royalties partly offset the decline.
- Nine-month operating costs rose 34%, chiefly due to the VX-222 impairment. R&D expense increased 13% to $669.2 million; SG&A declined 12% to $287.2 million.
- The $412.9 million VX-222 impairment followed trial data and competitive developments that led Vertex to conclude the candidate was unlikely to be competitive. The impairment reduced nine-month Vertex earnings by $285.3 million after a $127.6 million tax benefit.
- Vertex issued approximately 8.3 million shares upon conversion of the notes and approximately 8.0 million shares through employee equity programs; shares outstanding rose to 233.6 million from 217.3 million at year-end 2012.
- Operating cash use was $80.4 million for the nine months, compared with $227.3 million provided in the prior-year period. Cash and marketable securities nevertheless increased by $101.4 million, supported in part by $242.4 million of employee-plan share proceeds.
Outlook, risks and contingencies
- Management expected Q4 2013 total product revenue to be below Q4 2012, with INCIVEK sales continuing to decline amid reduced demand, new competing HCV therapies expected in Q4, and lower promotion after restructuring. Management expected KALYDECO revenue to be similar to Q3 2013.
- Management said current cash, cash equivalents and marketable securities, together with product and royalty cash flows, should fund operations for at least 12 months. Future liquidity depends in part on KALYDECO sales and clinical and commercial outcomes; development spending was expected to rise in 2013.
- In July, the FDA placed a partial clinical hold on U.S. VX-135 testing at the 200 mg dose after reversible liver-enzyme elevations in patients given 400 mg with ribavirin in a European trial. The company reported no serious adverse events or liver or cardiac safety issues in the tested 100 mg and 200 mg groups, but efficacy results were mixed and development and regulatory outcomes remain uncertain.
- Vertex adopted a strategic restructuring plan in October 2013, eliminating about 370 positions, approximately 15% of its workforce, primarily in response to declining INCIVEK demand and a shift toward CF and other R&D. Estimated total charges were $35–$45 million; $11.4 million was recorded in Q3, and most actions were expected to be completed in Q4.
- CF pipeline milestones included expected mid-2014 data from pivotal lumacaftor/ivacaftor trials, with potential U.S. and EU submissions in the second half of 2014 if successful. VX-509 Phase 2 results met primary endpoints at 12 weeks; 24-week data were expected in early 2014. These are forward-looking expectations, not guaranteed outcomes.
- A shareholder class action alleging securities-law misstatements remained pending; Vertex said it would defend the case and had recorded no reserve. The filing reported no material accrued contingent liabilities.
Key facts for investors to verify
- Whether KALYDECO growth and planned label expansions can offset continuing INCIVEK declines and evolving HCV competition.
- VX-135’s clinical-hold status, safety and efficacy data, and prospects relative to competing HCV regimens.
- Progress and results of the lumacaftor/ivacaftor pivotal trials, regulatory submissions, and VX-509 follow-up data.
- Cash burn, employee-equity proceeds, R&D commitments, restructuring costs, and Fan Pier financing and lease obligations.
- Potential financial effects of the pending securities litigation and changes in Alios contingent-payment valuations.