Vertex Pharmaceuticals Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Figures are unaudited; dollar amounts below are in millions except per-share data. Vertex develops and commercializes medicines primarily for cystic fibrosis (CF), alongside research programs in other diseases.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $784.5 | $578.2 | $2,177.5 | $1,837.0 |
| Product revenue, net | $782.5 | $549.6 | $2,170.2 | $1,544.3 |
| Operating income (loss) | $205.6 | $(326.0) | $507.4 | $(2.5) |
| Net income (loss) attributable to Vertex | $128.7 | $(103.0) | $546.4 | $162.8 |
| Diluted earnings (loss) per share | $0.50 | $(0.41) | $2.11 | $0.64 |
| Cash provided by operating activities | Not separately reported | Not separately reported | $955.7 | $617.4 |
- Revenue increased 36% for the quarter and 19% year to date. Product revenue growth was 42% and 41%, respectively, led by SYMDEKO and higher KALYDECO sales.
- Operating margin, calculated as operating income divided by total revenue, was approximately 26% for Q3 and 23% year to date in 2018. Cost of sales was $111.3 million in Q3 and $287.3 million year to date.
- Research and development expense was $330.5 million in Q3 and $978.6 million year to date; SG&A was $137.3 million and $404.4 million, respectively.
- Other expense was $61.0 million in Q3, mainly reflecting a $61.2 million unrealized loss on Vertex’s CRISPR equity investment. Year-to-date other income was $89.7 million, primarily reflecting an $85.3 million unrealized gain on that investment.
Balance sheet, liquidity and obligations
- Cash and cash equivalents were $2,478.3 million and marketable securities were $577.6 million at September 30, 2018. Together, these totaled $3,055.9 million, up $967.2 million from December 31, 2017.
- Working capital was $2,694.1 million; current assets were $3,686.6 million and current liabilities were $992.5 million. Total assets were $4,620.8 million and shareholders’ equity was $2,934.5 million.
- Operating cash flow for the first nine months was $955.7 million; investing activities used $161.3 million, including $79.8 million for property and equipment. Financing activities provided $29.8 million, including $207.0 million of share repurchases and $245.8 million of employee-plan share issuance proceeds.
- Vertex had no principal or interest outstanding under its $500 million revolving credit facility. Long-term obligations included a $561.4 million construction-financing lease obligation and $26.7 million of capital lease obligations. The company also has substantial facility leases.
Changes versus the prior comparable period
- SYMDEKO, approved in the U.S. in February 2018, generated $254.9 million of Q3 revenue and $474.6 million year to date. KALYDECO revenue rose 15% in Q3 and 27% year to date; ORKAMBI revenue fell 16% in Q3 and was down 1% year to date, in part as U.S. patients switched to SYMDEKO.
- Q3 operating results improved substantially versus 2017, which included a $255.3 million impairment charge for Parion’s pulmonary ENaC platform. The 2017 nine-month comparison also included the $160 million Concert asset-acquisition expense and $230 million of Merck KGaA upfront collaborative revenue.
- New revenue-recognition rules adopted in 2018 increased reported product revenue by $5.4 million in Q3 and $14.0 million year to date versus amounts that would have been reported under the prior standard; operating income and Vertex net income increased by $3.7 million and $9.0 million, respectively.
Outlook, commentary and risks
- Management expected total CF product revenue to continue increasing in Q4 2018, largely driven by SYMDEKO; it expected Q4 KALYDECO revenue to be similar to Q3. The company expected EU approval of SYMKEVI in Q4, but not significant 2018 revenue even if approved.
- Vertex expected VX-659 Phase 3 data in late 2018 and VX-445 data in Q1 2019, with an FDA filing for F508del/minimal-function patients targeted no later than mid-2019 if results support it. Management also described plans for additional CF label expansions and continued investment in pain, gene-editing and other research programs.
- In October 2018, after the reporting date, Vertex announced it would stop VX-210 development and end its Phase 2b trial following a data monitoring board recommendation based on futility. It expected a Q4 impairment of approximately $29 million, partially offset by a tax benefit, and planned to reassess whether it remained the primary beneficiary of BioAxone.
- Amounts collected for ORKAMBI under French early-access programs were $324.3 million at quarter-end and are recorded as a refund liability. Vertex expects to return a portion once pricing discussions conclude; the ultimate amount is uncertain, and changes to revenue estimates could be material.
- Management said existing cash, securities and expected product-sale cash flows should fund operations for at least the next 12 months. Important uncertainties include product reimbursement and pricing, clinical and regulatory outcomes, and volatile fair values of strategic equity investments. The company anticipated approximately $17 million of imputed real-estate lease interest expense in Q4 2018.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were considered effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Progress and timing of SYMDEKO growth, SYMKEVI approval and reimbursement, and the effect of switching on ORKAMBI sales.
- Final French ORKAMBI pricing, potential refunds against the $324.3 million early-access liability, and related revenue-estimate changes.
- VX-659 and VX-445 clinical results and filing plans, along with the implications of stopping VX-210 and the expected impairment.
- Quarter-to-quarter changes in CRISPR investment value and their effect on reported earnings, which can differ from operating performance.
- Lease obligations and planned share repurchases; $289.0 million remained authorized for repurchase as of September 30, 2018.