Vertex Pharmaceuticals Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited results include Alios BioPharma, a consolidated variable-interest entity; certain Alios assets, including its cash, are restricted and are not available for Vertex’s general use.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $310.8 million | $418.3 million | $639.1 million | $857.0 million |
| Operating income (loss) | $(56.9) million | $(10.8) million | $(495.2) million | $80.9 million |
| Net income (loss) attributable to Vertex | $(57.2) million | $(64.9) million | $(365.2) million | $26.7 million |
| Diluted earnings (loss) per share | $(0.26) | $(0.31) | $(1.67) | $0.12 |
| Net cash from (used in) operating activities | Not separately provided | Not separately provided | $(66.7) million | $121.3 million |
- Q2 product revenue was $254.8 million: INCIVEK $155.8 million and KALYDECO $99.0 million. Royalty revenue was $49.1 million and collaborative revenue was $6.8 million.
- Q2 operating margin was approximately negative 18%, versus negative 3% a year earlier. The six-month operating loss included a $412.9 million VX-222 impairment charge.
- At June 30, cash, cash equivalents and marketable securities totaled $1.43 billion, excluding Alios cash. Current assets were $1.72 billion and current liabilities $381.7 million. Six-month capital expenditures were $74.8 million.
- Vertex had no 2015 convertible notes outstanding after holders converted approximately $399.8 million into shares; the remaining amount was redeemed. The conversion and employee equity issuances increased shares outstanding by 14.9 million from year-end 2012 to June 30, 2013.
- Balance-sheet obligations included $359.1 million of construction financing lease obligations and $38.8 million of capital lease obligations. The Fan Pier buildings are expected to begin lease payments in December 2013.
Changes versus the prior comparable period
- Q2 revenue fell 26%; six-month revenue fell 25%. INCIVEK product revenue declined 52% in Q2 and 47% for the first half, while KALYDECO revenue grew 117% and 151%, respectively.
- Janssen INCIVO royalties increased, contributing to higher royalty revenue. Collaborative revenue declined, including because Vertex recognized no Mitsubishi Tanabe revenue in 2013.
- Q2 net loss attributable to Vertex narrowed from $64.9 million to $57.2 million, despite lower revenue. Lower costs of product revenue—partly reflecting a $78.0 million obsolete-inventory write-off in Q2 2012—and lower SG&A helped offset higher R&D spending.
- The first-half result shifted from net income to a substantial loss, primarily because of the VX-222 impairment. R&D expense increased 12% in the first half to $440.6 million.
- Operating cash flow shifted from a $121.3 million inflow to a $66.7 million outflow for the first half.
Outlook, commentary and risks
- Management expected INCIVEK revenue to continue declining as patients defer treatment amid anticipated competing HCV therapies. It expected KALYDECO quarterly revenue in Q3 and Q4 2013 to be similar to Q2, which management believed reflected treatment of most eligible patients in the United States and Europe.
- Vertex said current cash, cash equivalents and marketable securities, together with cash flows from INCIVEK/INCIVO and KALYDECO, were expected to fund operations for at least 12 months. It expected 2013 development expense to increase versus 2012; no specific earnings or revenue guidance was provided.
- In July 2013, the FDA placed a partial clinical hold on the U.S. VX-135 trial, barring evaluation of the 200 mg dose pending further review after reversible liver-enzyme elevations in patients given 400 mg with ribavirin in a European trial. The U.S. 100 mg arm continued. Vertex planned to submit additional data to the FDA in Q4 2013. This development could delay or prevent VX-135 development.
- Vertex recorded a $412.9 million impairment of VX-222 after concluding the program was unlikely to compete with emerging HCV regimens; it did not plan new VX-222 trials. Separately, it continued VX-135 development and reported that 100 mg and 200 mg European trial arms were tolerated without reported serious adverse events.
- Vertex reported positive July 2013 Phase 3 data for ivacaftor in patients with non-G551D gating mutations and planned U.S. and EU regulatory submissions in the second half of 2013. It also expected to complete enrollment in VX-809/ivacaftor Phase 3 trials in the second half of 2013 and planned an NDA submission in 2014 if successful.
- A shareholder securities class action seeking unspecified damages remained pending; Vertex said it considered the case without merit and had recorded no reserve. The filing reported no material contingent liabilities accrued.
Key facts for investors to verify
- Whether INCIVEK declines and KALYDECO growth track management’s expectations, including the effects of competitor launches and reimbursement access.
- FDA follow-up on the VX-135 partial hold, safety and efficacy results, and the timing and scope of further trials.
- Progress and results for KALYDECO label expansion and VX-809/ivacaftor Phase 3 trials, and whether stated submission timelines remain achievable.
- Ongoing R&D spending, operating cash use, equity-related dilution, and the cash available after excluding restricted Alios balances.
- Future Fan Pier lease and construction-financing obligations, and developments in the shareholder litigation.