Business context and reporting period
Vertex Pharmaceuticals Incorporated filed this unaudited Form 10-Q for the quarter ended September 30, 2017. The company focuses on discovering, developing and commercializing medicines, principally for cystic fibrosis (CF). Its marketed products were ORKAMBI and KALYDECO; tezacaftor in combination with ivacaftor was under regulatory review.
Financial performance and position
Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $578.2 | $413.8 | $1,837.0 | $1,243.5 |
| Product revenue, net | $549.6 | $409.7 | $1,544.3 | $1,229.8 |
| Operating loss | $(326.0) | $(18.7) | $(2.5) | $(29.7) |
| Net income (loss) attributable to Vertex | $(103.0) | $(38.8) | $162.8 | $(145.0) |
| Diluted earnings (loss) per share | $(0.41) | $(0.16) | $0.64 | $(0.59) |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $617.4 | $91.4 |
Q3 product revenue comprised ORKAMBI $336.2 million (up 44% year over year) and KALYDECO $213.5 million (up 22%). For the first nine months, ORKAMBI revenue was $955.5 million (up 36%) and KALYDECO revenue was $588.8 million (up 12%). Q3 collaborative revenue was $26.3 million; nine-month collaborative revenue was $286.1 million, including the Merck KGaA collaboration upfront payment recognized in Q1. Royalty revenue declined to $2.2 million in Q3 and $6.6 million for the nine-month period.
Research and development expense was $454.9 million in Q3 and $1,018.0 million for nine months, including the $160.0 million VX-561 acquisition charge in Q3. Q3 also included a $255.3 million impairment of Parion’s pulmonary ENaC platform. Total costs and expenses were $904.2 million in Q3 and $1,839.5 million for nine months. The nine-month Vertex-attributable profit differs from consolidated net loss of $10.6 million because results attributable to noncontrolling interests were substantial, particularly in connection with Parion.
At September 30, cash and cash equivalents were $1,385.0 million and marketable securities were $427.3 million, totaling $1,812.2 million, up from $1,434.6 million at December 31, 2016. Current assets were $2,328.0 million and current liabilities $710.7 million. The $500 million revolving credit facility was undrawn after repayment of the $300 million balance in February 2017. Other obligations included a $547.1 million construction financing lease obligation and $40.1 million of capital lease obligations. Cash from operations for nine months was $617.4 million; investing activities used $416.6 million and financing activities used $4.8 million.
Material changes versus prior comparable periods
- Revenue rose 40% in Q3 and 48% for the first nine months, primarily from higher ORKAMBI and KALYDECO sales; nine-month results also benefited from Merck KGaA collaboration revenue.
- Q3 attributable loss widened, largely reflecting the Parion impairment and VX-561 acquisition expense. R&D expense increased 67% in Q3 and 27% for nine months, while development expense rose due to the acquisition and increased clinical-trial activity.
- For the nine-month period, Vertex reported attributable income of $162.8 million versus an attributable loss of $145.0 million in 2016. The comparison includes the one-time Merck KGaA revenue and significant Parion-related accounting effects.
- Cash and marketable securities increased by $377.7 million from year-end 2016. The company repaid its revolving-credit borrowing and paid $160.0 million for VX-561.
- Parion was deconsolidated effective September 30, 2017 following disappointing VX-371 Phase 2 data and a reassessment of control. Its $255.3 million platform intangible asset was fully impaired.
Outlook, commentary, risks and unusual items
- Management expected current cash, cash equivalents, marketable securities and product cash flows to fund operations for at least the next 12 months. Future liquidity depends substantially on CF product sales, reimbursement outcomes, R&D spending and business-development activity.
- The FDA’s target action date for tezacaftor/ivacaftor was February 28, 2018; management expected an EMA decision in the second half of 2018. Approval and reimbursement were not assured.
- Management planned to report additional next-generation CFTR corrector data in early 2018 and, subject to results and regulatory discussions, initiate pivotal development of one or two triple-combination regimens in the first half of 2018. It expected higher outsourced development expense in Q4 2017.
- In October 2017, Vertex reported a Phase 3 ORKAMBI trial in children aged two to five met its safety endpoint and expected U.S. and European submissions in Q1 2018. In a separate Phase 3 trial, tezacaftor/ivacaftor did not meet its primary endpoint in patients already taking ivacaftor with specified mutations; Vertex did not plan to seek approval for that group.
- VX-371 failed its primary efficacy endpoint in a Phase 2 trial. The filing states that the impairment and Parion deconsolidation followed those results; a separate Phase 2 trial in primary ciliary dyskinesia remained ongoing.
- Vertex had collected $190.3 million for ORKAMBI supplied through French early-access programs but had not recognized the amount as revenue because the price was not fixed or determinable. Some or much of the collection could be returned; revenue treatment depended on pricing discussions and the upcoming accounting-standard adoption.
- Revenue remained concentrated in CF products: ORKAMBI and KALYDECO represented approximately 52% and 32%, respectively, of nine-month total revenue. Risks include reimbursement delays, patient uptake and persistence, product safety or efficacy, regulatory outcomes, and successful development and commercialization of triple combinations.
- The company reported no material changes to previously disclosed legal proceedings and no material contingent liabilities accrued. It stated that disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ORKAMBI and KALYDECO sales and patient persistence support continued revenue growth, particularly amid ex-U.S. reimbursement negotiations.
- The regulatory outcome and commercial opportunity for tezacaftor/ivacaftor, including the FDA review date and expected European review timing.
- Upcoming trial data and pivotal-development plans for triple-combination regimens, and whether results support safety, efficacy and eventual reimbursement.
- The French ORKAMBI pricing resolution, potential refunds from the $190.3 million customer deposit, and the effect of revenue-standard adoption.
- Cash generation and R&D spending relative to lease obligations, potential VX-561 milestone payments, and credit-facility covenants.
- The detailed effects of Parion’s impairment and deconsolidation on reported earnings, noncontrolling interests, taxes and future comparisons.