Vertex Pharmaceuticals Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars.
Business context
Vertex is a specialty pharmaceutical company focused on cystic fibrosis (CF). Its marketed CF medicines are TRIKAFTA, SYMDEKO/SYMKEVI, ORKAMBI and KALYDECO. In October 2019, the FDA approved TRIKAFTA for eligible patients age 12 and older, expanding U.S. patient eligibility by approximately 6,000. The company says its four medicines were collectively approved for approximately 60% of an estimated 75,000 CF patients in North America, Europe and Australia.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $4.163 billion | $3.048 billion |
| Net product revenue | $4.161 billion | $3.038 billion |
| Operating income | $1.198 billion | $635.2 million |
| Net income attributable to Vertex | $1.177 billion | $2.097 billion |
| Diluted earnings per share | $4.51 | $8.09 |
| Cash provided by operating activities | $1.569 billion | $1.270 billion |
| Cash, cash equivalents and marketable securities at year-end | $3.808 billion | $3.168 billion |
Revenue grew 37% year over year, while operating costs and expenses rose 23% to $2.965 billion. Calculated operating margin was approximately 28.8% in 2019; cost of sales was about 13.2% of product revenue. Net income was lower than in 2018 mainly because 2018 included a one-time, non-cash $1.56 billion tax benefit from releasing a valuation allowance. In 2019, the company recorded $218.1 million of income tax provision.
Product revenue by medicine was $1.418 billion for SYMDEKO/SYMKEVI, $1.332 billion for ORKAMBI, $991.1 million for KALYDECO and $420.1 million for TRIKAFTA. Fourth-quarter revenue was $1.413 billion and net income attributable to Vertex was $583.2 million.
At year-end, total current assets were $4.823 billion and current liabilities were $1.335 billion. Vertex had no borrowings outstanding under its $500 million revolving credit facility, with capacity to request an increase of up to a further $500 million subject to conditions. Long-term finance lease liabilities were $538.6 million. The filing states available liquidity and product cash flows are expected to fund operations for at least the next 12 months.
Material changes and unusual items
- Net product revenue increased $1.122 billion, principally from growth in SYMDEKO/SYMKEVI, the TRIKAFTA launch, label expansions and broader international access.
- Fourth-quarter TRIKAFTA revenue was $420.1 million. TRIKAFTA also began to shift some patients from older Vertex CF products.
- Under a November 2019 reimbursement agreement with France, Vertex recorded a $155.8 million fourth-quarter revenue adjustment for prior-period ORKAMBI early-access shipments. It expects to repay the French government the remaining difference between amounts previously collected and the final agreed amount in 2020; the filing does not state that amount here.
- Research and development expense rose 24% to $1.755 billion, including $318.3 million of collaboration and asset-acquisition expenses. SG&A rose 18% to $658.5 million.
- Vertex acquired Exonics for DMD and DM1 gene-editing programs and Semma for type 1 diabetes cell-therapy programs. Cash paid to acquire the businesses, net of cash acquired, was $1.154 billion. The acquisitions added $1.002 billion of goodwill, $400.0 million of in-process R&D intangible assets and $176.5 million of Exonics contingent consideration liability.
- Other income included $197.6 million of realized and unrealized gains related to strategic investments, primarily equity holdings. Such gains may fluctuate with biotechnology share prices.
- Share repurchases were $192.0 million in 2019. A new $500 million repurchase authorization had $464 million remaining at year-end.
Outlook, commentary and principal risks
Management expected product revenue to increase in 2020, with TRIKAFTA revenue expected to rise significantly from its partial-year 2019 launch. It also expected higher SG&A and cost of sales as revenue and launch support grow. The filing provides no quantified 2020 revenue or earnings guidance.
Pipeline plans included seeking ex-U.S. approval for TRIKAFTA, studying it in younger CF patients, advancing VX-814 and VX-864 for alpha-1 antitrypsin deficiency, initiating a Phase 2 study of VX-147, and continuing CTX001 trials with CRISPR Therapeutics. The company anticipated starting clinical development of a pain candidate in the first half of 2020 and type 1 diabetes development in late 2020 or early 2021. These programs remain subject to clinical and regulatory uncertainty.
- Revenue is highly concentrated in CF medicines; failure to sustain CF sales or diversify could materially affect results.
- International reimbursement negotiations, pricing pressure and government cost-containment may limit access or net prices. Vertex cited delays in reimbursement for ORKAMBI in some markets.
- Vertex relies on third parties for substantial manufacturing and clinical supply, including some manufacturing steps in China; single-source dependencies or disruption could affect sales and trials.
- Clinical-development, regulatory, safety and commercialization outcomes for pipeline assets are uncertain, particularly for cell and genetic therapies, where Vertex has limited experience.
- The company’s 2019 earnings were affected by investment fair-value gains, while the 2018 comparison was heavily affected by the tax valuation-allowance release. Reported earnings are therefore not directly comparable without considering these items.
- Management reported effective disclosure controls and internal control over financial reporting; acquired Exonics and Semma operations were excluded from the year-end internal-control assessment.
Management announced a planned leadership transition: Jeffrey Leiden was to become Executive Chairman and Reshma Kewalramani President and CEO in April 2020.
Important facts for investors to verify
- Timing and terms of EMA review, ex-U.S. reimbursement and potential launch of TRIKAFTA, and progress in younger patients.
- 2020 product-revenue trajectory and the extent to which TRIKAFTA growth offsets switching away from older CF products.
- Final French ORKAMBI settlement and 2020 cash repayment, including the amount not clearly stated in the filing text summarized here.
- Progress, safety and financing commitments for CTX001 and other pipeline programs, and whether stated development timelines are achieved.
- Assumptions underlying acquisition valuations, Exonics milestone liabilities and strategic-investment gains; these include significant estimates and could change.
- Use of the revolving facility, lease commitments, remaining share-repurchase authorization and ongoing dependence on CF product revenues.