Vertex Pharmaceuticals Incorporated — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filing dated February 22, 2012. Vertex discovers, develops, manufactures and commercializes small-molecule medicines. Its principal 2011 product launch was INCIVEK (telaprevir) for genotype 1 hepatitis C. KALYDECO (ivacaftor) was approved in the United States in January 2012, after year-end, for a defined cystic fibrosis population.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $1,410.6 million | $143.4 million |
| Net product revenue | $950.9 million | None |
| Royalty revenue | $50.0 million | $30.2 million |
| Collaborative revenue | $409.7 million | $113.1 million |
| Operating income (loss) | $113.8 million | $(696.1) million |
| Net income (loss) attributable to Vertex | $29.6 million | $(754.6) million |
| Diluted earnings (loss) per share | $0.14 | $(3.77) |
| Operating cash flow | $143.7 million | $(635.4) million |
| Cash, cash equivalents and marketable securities | $968.9 million | $1,031.4 million |
Revenue rose 884%, primarily from $950.9 million of INCIVEK sales and $318.5 million of Janssen and Mitsubishi Tanabe milestone revenue. Those milestones are not expected to recur. Operating expenses increased 54% to $1,296.8 million, including R&D of $707.7 million, SG&A of $400.7 million and a $105.8 million VX-759 impairment. Product cost of revenue was $63.6 million; the filing cautions that much of the launch inventory cost had been expensed as R&D before 2011, so this period’s product cost is not a steady-state indicator of margins.
Vertex reported positive operating cash flow for the year, but cash and marketable securities excluding Alios declined $62.5 million year over year. Cash and equivalents increased by $232.1 million; investing cash flow was positive $212.4 million, largely reflecting net securities maturities and purchases, while financing cash flow was negative $124.2 million. Alios’s $51.9 million of restricted cash is not available to Vertex and is excluded from management’s liquidity measure.
At year-end, Vertex had $400 million of 3.35% convertible notes due October 2015. Current assets were $1,331.3 million and current liabilities $392.3 million. The company also disclosed $1,844.2 million of contractual commitments and obligations, including substantial lease commitments; the Fan Pier leases alone represent approximately $1.03 billion of future payments in the obligations table. A $100 million revolving credit facility was unused and scheduled to terminate July 6, 2012, with a $400 million domestic-liquidity covenant.
Material changes and business developments
- Vertex moved from substantial annual losses to modest full-year profitability, with operating cash flow positive, after INCIVEK launched in May 2011. Net income attributable to Vertex was $379.7 million in the second half, offset by first-half losses.
- INCIVEK generated $419.6 million and $456.8 million of net product revenue in the third and fourth quarters, respectively. The filing says more than 25,000 U.S. patients were treated in 2011. KALYDECO’s U.S. launch began in January 2012; it contributed no 2011 product revenue.
- Collaborative revenue included $250 million in Janssen milestones and a $65 million Mitsubishi Tanabe commercial milestone. Management expects collaborative revenue to decrease significantly in 2012 because no further milestones are expected under those agreements.
- SG&A more than doubled, reflecting the commercial build-out and INCIVEK launch; 2011 advertising expense was $30.8 million. R&D rose 11% as the company expanded research and development.
- Vertex recorded a $105.8 million impairment after concluding that the fair value of backup HCV candidate VX-759 was zero. It also consolidated Alios as a variable-interest entity; the collaboration added $250.6 million of HCV-program intangible assets and introduced material fair-value estimates for contingent milestones and royalties.
Outlook, commentary and risks
- Management outlook: Vertex expects 2012 product revenue to increase as INCIVEK is sold for a full year and KALYDECO sales begin. It expects INCIVO royalty revenue to rise, collaborative revenue to fall significantly, SG&A to be broadly consistent with 2011, and development expense to increase. No specific full-year revenue or earnings guidance is provided.
- Management said cash, cash equivalents and marketable securities, together with expected product and royalty cash flows, should fund operations for at least the next twelve months. Continued significant revenue is necessary to sustain profitability and planned R&D investment.
- Key commercial risks include dependence on INCIVEK, competition from Merck’s VICTRELIS and possible future all-oral, interferon-free HCV regimens, potential treatment deferrals, reimbursement and pricing pressure, post-approval safety findings, and reliance on third-party manufacturing. Management viewed all-oral competitors as a significant longer-term threat and anticipated possible market entry as early as 2014 or 2015.
- Pipeline outcomes remain uncertain. Programs include HCV candidates VX-222, ALS-2200 and ALS-2158; CF candidates VX-809 and VX-661; and VX-509, VX-765 and VX-787. Clinical setbacks could prompt further impairment of substantial intangible assets, including the $412.9 million carrying value for VX-222 and $250.6 million for Alios HCV assets.
- Other exposures include a growing employee base, a planned move to Boston and long-term Fan Pier leases, collaboration dependence, intellectual-property and regulatory risks, and potential dilution from equity awards or conversion of notes. The CEO and president transition to Jeffrey Leiden occurred in February 2012; Matthew Emmens planned to retire in May 2012.
- The filing reports no material legal proceedings or material accrued contingent liabilities. Ernst & Young issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Most important facts for investors to verify
- Whether INCIVEK demand, net pricing, reimbursement and market share remain strong as competitors and potential all-oral HCV therapies advance.
- Whether KALYDECO adoption and coverage develop as expected, and whether European and expanded-population approvals are achieved on the anticipated timetable.
- How much of 2011 profitability depended on nonrecurring milestones, launch-period cost accounting and estimates for product rebates, returns and incentives.
- Liquidity available to Vertex excluding Alios restricted cash, and the company’s ability to meet the 2015 notes, credit-facility covenants and substantial lease commitments.
- Clinical progress and impairment assumptions for VX-222 and the Alios candidates, including the fair value of contingent payments and acquired intangible assets.