Vertex Pharmaceuticals Incorporated — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results; amounts below are in U.S. dollars. Vertex is a pharmaceutical company focused on cystic fibrosis (CF) medicines and development programs in other serious diseases.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $941.3 million | $752.2 million | $1,799.7 million | $1,393.0 million |
| Operating income | $270.0 million | $172.9 million | $546.8 million | $301.8 million |
| Net income attributable to Vertex | $267.4 million | $207.4 million | $536.1 million | $417.6 million |
| Diluted EPS | $1.03 | $0.80 | $2.06 | $1.61 |
| Cash from operations | — | $788.5 million | $574.4 million |
- Q2 revenue grew 25%; first-half revenue grew 29%. Product revenue accounted for nearly all revenue.
- SYMDEKO/SYMKEVI revenue was $361.8 million in Q2, up 95%, and $682.1 million in the first half, up 210%. ORKAMBI was $316.4 million in Q2 and $609.4 million for the first half; first-half sales declined 8%. KALYDECO was $262.1 million in Q2 and $506.1 million for the first half, broadly stable year over year.
- Q2 operating margin was approximately 28.7%, versus 23.0% a year earlier. Product gross margin was approximately 85.6%, versus 86.1%. Q2 net margin attributable to Vertex was approximately 28.4%, versus 27.6%.
- Q2 R&D expense was $379.1 million, up 12%; SG&A was $156.5 million, up 14%; and cost of sales was $135.7 million, up 30%. Combined R&D and SG&A rose 13%, including a $50 million Kymera upfront payment in R&D.
- Other income, net was $53.9 million in Q2 and $96.5 million in the first half, primarily reflecting unrealized gains on strategic equity investments. First-half gains were $100.1 million, down from $149.4 million in 2018.
Liquidity, cash flow and obligations
- At June 30, cash and cash equivalents were $3.295 billion and marketable securities were $656.5 million, totaling $3.951 billion. Working capital was $3.452 billion, up 27% from year-end 2018.
- First-half operating cash flow was $788.5 million; investing cash outflow was $89.3 million; financing cash outflow was $55.0 million. Capital expenditures were $34.4 million and share repurchases totaled $155.8 million.
- Vertex had no principal or interest outstanding under its $500 million revolving credit facility. Finance lease liabilities were $588.6 million and operating lease liabilities were $68.4 million; these are lease obligations, not revolver borrowings.
- Management said existing cash, investments and product cash flows should fund operations for at least the next 12 months.
Changes, outlook and notable items
- Revenue growth was primarily driven by increased SYMDEKO/SYMKEVI use. ORKAMBI sales faced patient switching to SYMDEKO, partly offset by expanded eligibility and ex-U.S. reimbursement.
- Vertex expected SYMDEKO/SYMKEVI revenue to continue increasing through the rest of 2019. It expected second-half cost of sales as a percentage of product revenue to be similar to Q2. No numerical full-year revenue or earnings guidance is stated in the supplied filing text.
- Vertex submitted an FDA NDA in July 2019 for the elexacaftor/tezacaftor/ivacaftor triple combination and expected to submit a European MAA in Q4 2019. Approval and commercial uptake were not assured.
- In July, Vertex paid CRISPR $175 million under a DMD/DM1 collaboration and approximately $245 million to acquire Exonics; the acquisition also included approximately $70 million in deferred payments and up to $728 million in contingent development and regulatory milestone payments. Vertex expected to record the CRISPR upfront payment as Q3 R&D expense. In Q2, it also recorded a $50 million Kymera upfront R&D expense and invested $20 million in Kymera preferred stock.
- The $500 million 2018 share-repurchase authorization was completed by June 30. In July, the board authorized a new program of up to $500 million for August 2019 through December 2020.
- Lease-accounting adoption increased recognized lease assets and liabilities and changed expense timing. Management estimated approximately $26 million higher operating expenses and $13 million lower interest expense in 2019 from the accounting change.
- Risks include uncertain clinical and regulatory outcomes, dependence on reimbursement and pricing in international markets, and volatile strategic-investment valuations that can materially affect reported earnings. Vertex expected to repay a portion of French ORKAMBI early-access collections once pricing discussions conclude.
- The filing reported no material legal proceedings, no material accrued contingent liabilities, and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Progress and timing of FDA review and European filing for the triple combination, including whether approval and launch expectations change.
- Continued SYMDEKO/SYMKEVI growth and the effects of ORKAMBI-to-SYMDEKO switching, country-level reimbursement, and the unresolved French ORKAMBI price and refund.
- How much reported earnings depend on unrealized strategic-investment gains and how those holdings’ values change.
- The cash and R&D impact of the CRISPR collaboration and Exonics acquisition, including deferred and milestone payments, alongside the new repurchase authorization.
- Progress across the broader clinical pipeline and the potential for trial, safety, manufacturing, or regulatory setbacks.