Vertex Pharmaceuticals Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Vertex operates in pharmaceuticals, with its business centered on cystic fibrosis (CF) medicines and research into other serious diseases.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $949.8 million | $784.5 million | $2.750 billion | $2.177 billion |
| Operating income | $99.3 million | $205.6 million | $646.1 million | $507.4 million |
| Net income attributable to Vertex | $57.5 million | $128.7 million | $593.6 million | $546.4 million |
| Diluted EPS | $0.22 | $0.50 | $2.28 | $2.11 |
| Operating margin, approximate | 10.5% | 26.2% | 23.5% | 23.3% |
- Q3 revenue increased 21%; nine-month revenue increased 26%. Product revenue accounted for nearly all revenue.
- Q3 net product revenue rose 21% to $949.8 million, led by SYMDEKO/SYMKEVI, up 58% to $403.7 million. ORKAMBI rose 5% in the quarter but fell 4% for the nine-month period; KALYDECO was broadly stable.
- Q3 costs and expenses increased 47% to $850.5 million. Research and development rose 68% to $555.9 million, primarily reflecting a $175 million CRISPR upfront payment. SG&A increased 16% to $159.7 million.
- Cost of sales was approximately 14% of product revenue in Q3 and 13% for the nine-month period.
- Other expense/income included volatile fair-value changes in strategic equity investments: a $31.2 million unrealized loss in Q3 2019 versus a $61.2 million loss in Q3 2018; nine-month unrealized gains were $68.9 million and $88.2 million, respectively.
Cash, liquidity and obligations
- Cash, cash equivalents and marketable securities totaled $4.0 billion at September 30, 2019, up $828 million from year-end 2018. Working capital was $3.39 billion.
- Nine-month operating cash flow was $1.123 billion, compared with $956 million in 2018. Investing cash outflow was $338 million, including $246 million net cash paid for Exonics. Financing cash outflow was $35 million; cash and cash equivalents increased $746 million.
- Vertex reported $578.6 million of finance lease liabilities and $71.2 million of operating lease liabilities. It had no drawn revolving-credit balance at quarter-end. A new $500 million unsecured revolver matures in September 2024 and may, subject to conditions, be increased by another $500 million.
- Current assets were $4.78 billion and current liabilities $1.39 billion. Total liabilities were $2.26 billion; shareholders’ equity was $5.25 billion.
Changes, outlook and material items
- Revenue growth reflected increased SYMDEKO/SYMKEVI use. Management expected product revenue to increase in Q4 2019 following U.S. approval of TRIKAFTA; no specific revenue or earnings guidance was provided.
- FDA approved TRIKAFTA on October 21, 2019 for eligible CF patients aged 12 and older with at least one F508del mutation. Vertex had also submitted a European marketing application. The company said this expanded the U.S. population eligible for its medicines by approximately 6,000 and was pursuing treatments for up to 90% of CF patients.
- Vertex completed its Exonics acquisition in July for an accounting purchase price of $438.4 million, including $172.0 million fair value of contingent consideration. The filing recorded $397.1 million of goodwill and a $13.0 million in-process R&D intangible. Potential additional milestone payments and associated valuation estimates remain uncertain.
- Vertex paid $175 million to CRISPR for DMD/DM1 rights and $50 million to Kymera under a research collaboration; these upfront amounts were expensed in R&D. The filing also describes further potential milestone and royalty obligations.
- Semma’s acquisition closed in October 2019 for approximately $950 million in cash, after quarter-end, and therefore had no Q3 balance-sheet impact. Vertex expected to account for it in Q4.
- The company expected cash and product-sale proceeds to fund operations for at least the next 12 months. Future liquidity depends in part on product revenues, reimbursement outcomes, R&D spending and business-development activity.
- Management expected a refund to the French government related to ORKAMBI early-access sales once pricing discussions conclude; the amount was not stated. Q3 2019 tax expense was $13.1 million and nine-month tax expense $124.4 million, with most of the 2019 provision expected to be non-cash while tax losses are used.
- Management highlighted drug-development and regulatory uncertainty, reimbursement access, foreign-exchange exposure and potential volatility in strategic investment values. It also noted a CEO transition planned for April 1, 2020. No material change to previously disclosed risk factors was reported; no material legal proceedings or accrued contingent liabilities were reported.
Key facts for investors to verify
- TRIKAFTA’s commercial launch, uptake, reimbursement and European regulatory progress, including whether Q4 revenue met management’s expectation.
- Whether SYMDEKO/SYMKEVI growth continues to offset ORKAMBI switching and any pressure on legacy-product sales.
- R&D spending and further acquisition or collaboration commitments, including Exonics milestone estimates and the accounting and cash impact of Semma.
- The eventual French ORKAMBI price, refund obligation and timing of resolution.
- Cash generation and liquidity after the Semma payment, share repurchases and other pipeline investments; the revolver remained undrawn at quarter-end.
- How strategic-investment fair-value changes and the higher tax provision affect reported earnings compared with operating performance.