Vertex Pharmaceuticals Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Vertex develops and commercializes medicines, with its business focused on cystic fibrosis (CF). ORKAMBI launched in the United States in July 2015; KALYDECO was also marketed. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $309.8 million | $179.0 million | $614.4 million | $435.9 million |
| Net loss attributable to Vertex | $95.1 million | $170.1 million | $482.6 million | $561.9 million |
| Loss per diluted share | $0.39 | $0.72 | $2.00 | $2.40 |
| Operating loss | $70.0 million | $142.2 million | $413.2 million | $538.8 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(349.4) million | $(391.3) million |
- Q3 product revenue was $302.5 million: ORKAMBI $130.8 million, KALYDECO $165.9 million and INCIVEK $5.8 million. Nine-month product revenue was $593.8 million.
- Q3 research and development expense was $246.3 million, up 29%; SG&A was $99.8 million, up 33%. For nine months, R&D was $685.7 million and SG&A $280.0 million.
- Approximate product gross margin, using product revenue less cost of product revenue, was 90.0% in Q3 2015 versus 92.6% in Q3 2014; nine-month margin was 90.7% versus 92.2%. Cost of product revenue includes third-party royalties.
- At September 30, cash and cash equivalents were $756.3 million and marketable securities $249.6 million, totaling $1.006 billion. Current assets were $1.359 billion and current liabilities $375.0 million; some reported cash is restricted and unavailable for general use.
- Operating cash use was partly offset by $391.5 million of investing cash inflow and $91.1 million of financing cash inflow; cash and cash equivalents increased $131.0 million during the nine months.
- Senior secured term loan carrying value was $294.8 million. Other significant financing obligations included the $472.7 million Fan Pier lease obligation and $53.4 million of capital lease obligations.
Changes versus comparable periods
- Revenue rose 73% in Q3 and 41% over nine months, primarily from ORKAMBI sales and higher KALYDECO sales. KALYDECO revenue increased 31% in Q3 and 33% for nine months.
- Operating losses narrowed, and Vertex-attributable net losses improved, despite higher R&D, commercial and product costs. Q3 restructuring expense fell to $1.8 million from $40.8 million; nine-month expense fell to $0.7 million from $46.8 million.
- Royalty and collaborative revenue declined: nine-month royalties fell 45%, largely with lower INCIVO sales, while collaborative revenue fell 93%, largely because 2014 included a one-time $30 million Janssen payment.
- Nine-month other income/expense was less favorable year over year, partly because 2014 included a $36.7 million one-time landlord payment. The 2015 tax provision rose to $31.8 million from $4.9 million, principally due to Parion’s consolidation and its related tax provision.
Outlook, commentary and risks
- Management expected U.S. ORKAMBI revenue to increase in Q4 2015 as more patients started treatment. More than 3,000 U.S. patients had started by September 30; Vertex estimated approximately 8,500 were eligible.
- Conditional on European approval, Vertex expected first European ORKAMBI revenue in the first half of 2016, initially mainly from Germany as reimbursement discussions elsewhere take time. The CHMP had issued a positive opinion; European Commission approval remained pending.
- Vertex expected cash, cash equivalents, marketable securities and product cash flows to fund operations for at least the next 12 months. Future liquidity depended substantially on KALYDECO and ORKAMBI sales, approvals and reimbursement, and research and development spending.
- Management expected approximately $27.8 million of ORKAMBI-related commercial milestone payments to CFFT by early 2016. In October 2015, the term-loan repayment schedule was amended: principal repayments were deferred to October 2016, then four quarterly installments of $75 million through July 2017.
- Pipeline milestones included expected mid-2016 data from a VX-371 exploratory Phase 2a trial, planned 2016 trials and enrollment activity for CF programs, and planned early-2016 starts for certain other studies. Development and regulatory outcomes remain uncertain.
- In October 2015, Vertex entered a CRISPR collaboration, agreeing to a $75 million upfront payment and a $30 million investment, with potential milestone and royalty obligations. These post-quarter commitments are not reflected in September 30 cash flows.
- Risks included drug-development and regulatory uncertainty, reimbursement and patient uptake, foreign exchange exposure, debt covenants and substantial lease obligations. A DOJ subpoena received in Q3 sought records primarily concerning Good Laboratory Practices in a bioanalytical laboratory; Vertex said it was responding and intended to cooperate.
- A shareholder class action was dismissed on September 30, but the plaintiff filed an appeal in October. Vertex reported no reserve for the case and no material accrued contingent liabilities. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Key facts for investors to verify
- ORKAMBI uptake, patient persistence, net pricing and the extent of rebates, discounts and reimbursement coverage.
- European approval and reimbursement timing, and whether management’s first-half 2016 revenue expectation is achieved.
- Progress and clinical data for VX-661, VX-371 and other pipeline programs, including the timing and results of planned trials.
- Cash burn, restricted VIE cash, milestone obligations, debt repayment capacity and compliance with the term-loan covenants.
- Developments in the DOJ subpoena and shareholder-litigation appeal; the filing does not quantify potential exposure.