Vertex Pharmaceuticals Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
Business context
Vertex’s business is centered on medicines for cystic fibrosis (CF), with research and development expanding into other serious diseases. TRIKAFTA/KAFTRIO remained its leading product. The company reported that its CF medicines served the majority of approximately 83,000 people with CF in North America, Europe, and Australia.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $2,334.3 | $1,984.1 | $6,628.0 | $5,501.8 |
| Income from operations | $1,126.7 | $1,054.5 | $3,273.9 | $1,904.4 |
| Net income | $930.5 | $851.9 | $2,503.1 | $1,572.0 |
| Diluted EPS | $3.59 | $3.28 | $9.68 | $6.03 |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $3,051.5 | $1,648.5 |
Q3 revenue rose 18% year over year, operating income 7%, and net income 9%. For the first nine months, revenue increased 20% and net income 59%. The 2021 year-to-date comparison included a $900 million CRISPR upfront payment recorded as acquired in-process R&D, contributing to the lower comparative operating income and net income.
Revenue mix: Q3 TRIKAFTA/KAFTRIO revenue was $2,010.5 million, up 29%; U.S. product revenue was $1,455.6 million, up 5%, and ex-U.S. revenue was $878.7 million, up 46%. Revenue declines for SYMDEKO/SYMKEVI, ORKAMBI, and KALYDECO were primarily attributed to patients switching to TRIKAFTA/KAFTRIO.
Costs and margins: Q3 total costs and expenses rose 30% to $1,207.6 million; R&D increased 38% to $645.0 million, and SG&A increased 25% to $246.8 million. Cost of sales was 12% of product revenue in both Q3 comparison periods. Based on reported figures, the approximate operating margin was 48% in Q3 2022 versus 53% in Q3 2021; the approximate net margin was 40% versus 43%.
Cash, liquidity, and obligations: Cash, cash equivalents, and marketable securities totaled $9.77 billion at September 30, up 30% from $7.52 billion at year-end 2021. Working capital was $9.66 billion. Nine-month operating cash flow was $3.05 billion; investing cash outflow was $496.7 million, including the ViaCyte acquisition, and financing cash outflow was $107.9 million. The balance sheet reported no conventional borrowings; finance lease liabilities were $442.3 million long term. A new $500 million revolving credit facility, maturing in 2027, was undrawn. The company stated available resources and product cash flows were expected to fund operations for at least 12 months.
Material changes and unusual items
- ViaCyte was acquired on September 27 for $315 million, including a $216.6 million in-process R&D intangible asset and $73 million of goodwill. Purchase accounting remained preliminary.
- Vertex acquired Catalyst Biosciences’ complement portfolio for $60 million and made a $25 million upfront payment to Verve; both contributed to 2022 acquired in-process R&D expense. The Verve arrangement also included a $35 million equity investment.
- Year-to-date 2022 other expense, net, was $133.7 million, largely reflecting unrealized losses on strategic equity investments. The comparable 2021 period had $5 million in net unrealized gains on equity securities.
- The fair value of contingent consideration declined $59.3 million year to date, primarily following a revision to the scope of certain gene-editing programs.
- Cash taxes paid increased to $840.1 million from $381.5 million. Management attributed higher cash tax payments beginning in 2022 in part to required capitalization and amortization of R&D costs under U.S. tax law.
Outlook, management commentary, and risks
The filing provided no numerical revenue or earnings guidance. Management cited continued CF revenue growth efforts and ongoing investment in its pipeline, with R&D expense increases driven partly by programs advancing into mid- and late-stage development.
- Management anticipated a U.S. exa-cel BLA submission beginning in November 2022, with completion by the end of Q1 2023, and anticipated European and U.K. submissions in Q4 2022. These were forward-looking expectations, not reported outcomes.
- Management expected to present Phase 3 results for TRIKAFTA/KAFTRIO in children aged 2–5 and make global submissions before year-end 2022; it also anticipated KALYDECO submissions for infants before year-end.
- Pipeline plans included Phase 3 development of VX-548 for acute pain and anticipated IND submissions for CFTR mRNA and a type 1 diabetes cell/device program in Q4 2022. Timelines and outcomes remain uncertain.
- Risks include clinical and regulatory failure or delay, reimbursement and market access, reliance on manufacturing and supply networks, and volatility in strategic investment values. Management said COVID-19 had not materially affected product demand or supply chains as of the filing.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2022.
Important facts for investors to verify
- Whether TRIKAFTA/KAFTRIO growth and ex-U.S. reimbursement expansion continue to offset declining sales of older CF medicines.
- Actual regulatory filing and clinical development progress for exa-cel, pediatric CF label expansions, VX-548, and other pipeline programs versus stated timelines.
- How R&D and SG&A growth affects margins as pipeline investment expands.
- Subsequent ViaCyte purchase-accounting adjustments and the development prospects of its acquired technology.
- Changes in strategic investment valuations, contingent consideration estimates, and cash tax payments.
- Use of the remaining $499.7 million share-repurchase authorization and any borrowing under the undrawn revolving facility.