Vertex Pharmaceuticals Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context and reporting period
Vertex discovers, develops and commercializes medicines, with its business centered on cystic fibrosis (CF). Its marketed products were ORKAMBI and KALYDECO. ORKAMBI sales began following U.S. approval in July 2015; during 2016 it also received approval in Canada and Australia. The company operates in one pharmaceutical segment.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $431.6 | $166.1 | $829.7 | $304.6 |
| Net product revenue | $425.7 | $160.4 | $820.1 | $291.3 |
| Operating income (loss) | $3.4 | $(171.2) | $(11.0) | $(343.1) |
| Net loss attributable to Vertex | $(64.5) | $(188.8) | $(106.2) | $(387.5) |
| Diluted loss per share | $(0.26) | $(0.78) | $(0.43) | $(1.61) |
- Product mix: Q2 ORKAMBI revenue was $245.5 million and KALYDECO revenue was $180.2 million. Six-month totals were $468.6 million and $350.7 million, respectively. INCIVEK revenue was minimal and declining.
- Expenses: Q2 R&D was $271.0 million and SG&A was $111.7 million; six-month R&D was $526.9 million and SG&A was $216.9 million. Cost of product revenue was $44.2 million and $93.9 million, respectively.
- Cash flow: Operating activities provided $25.7 million in the first half of 2016, versus $332.5 million used in the prior-year period. Investing activities used $160.5 million; financing activities provided $26.0 million. Cash and cash equivalents declined $108.9 million to $605.9 million.
- Liquidity: Cash, cash equivalents and marketable securities totaled $1.071 billion at June 30, 2016, up from $1.042 billion at December 31, 2015. Current assets were $1.454 billion and current liabilities $622.9 million.
- Debt and leases: The senior secured term loan had a reported fair and carrying value of $296.5 million. $221.6 million was classified as current and $74.9 million as long-term. A separate construction financing lease obligation was $472.4 million; capital lease obligations totaled $51.8 million.
- Margins: The filing does not provide a clearly stated gross margin. Operating margin, calculated from reported operating income or loss divided by revenue, was approximately 0.8% in Q2 2016 and negative 103.1% in Q2 2015; for the first half it was negative 1.3% versus negative 112.7%.
Material changes versus prior comparable periods
- Revenue rose 160% in Q2 and 172% in the first half, driven primarily by ORKAMBI launches and higher KALYDECO sales. KALYDECO increased 16% in Q2 and 23% in the first half.
- Operating results improved substantially as revenue growth outpaced higher costs. Vertex-attributable net loss narrowed by $124.3 million in Q2 and $281.3 million in the first half.
- R&D expense rose 21% in Q2 and 20% in the first half, principally reflecting development activity and clinical trials, including the VX-661 program. SG&A rose 18% and 20%, primarily due to commercial support for ORKAMBI outside the U.S.
- Q2 and first-half results included $48.4 million and $57.4 million, respectively, of expense associated with increased fair value of contingent Parion milestone and royalty obligations. The increase was primarily linked to VX-371 reaching its primary safety endpoint in a Phase 2 trial.
- Operating cash flow improved from substantial use in the first half of 2015 to modest positive cash generation in 2016. Marketable securities increased, while cash and cash equivalents decreased.
Outlook, commentary, risks and unusual items
- Management expected ORKAMBI net product revenue to continue increasing during the remainder of 2016, while noting that patient starts, treatment persistence, compliance and reimbursement would affect results. Ex-U.S. ORKAMBI revenue was expected in the near term to come mainly from Germany as reimbursement discussions elsewhere continued.
- Management stated that existing cash and securities, together with expected KALYDECO and ORKAMBI cash flows, should fund operations for at least the next 12 months. This depends on future product revenue, development spending and other business requirements.
- The $300 million term loan requires four $75 million principal installments beginning October 1, 2016, with final maturity July 9, 2017. It is secured by substantially all of the company’s assets, subject to exceptions, and includes a minimum KALYDECO revenue covenant. No default was reported.
- ORKAMBI’s U.S. supplemental application for patients ages 6–11 received priority review, with an FDA target date of September 30, 2016. Vertex expected to complete VX-661 Phase 3 enrollment on stated timelines and, if supported by results, submit an NDA in the second half of 2017. These are forward-looking expectations, not assurances.
- In July 2016, after quarter-end, Vertex entered a Moderna CF mRNA collaboration, paid $20 million upfront and invested $20 million through a convertible note. Moderna may receive up to $275 million in development and regulatory milestones, plus royalties.
- France ORKAMBI early-access sales were not recognized as revenue because the reimbursement price remained undetermined; associated cash received was recorded as a liability. U.S. ORKAMBI patient discontinuations partly offset new starts in the first half.
- Risks include lengthy and uncertain clinical development and regulatory review, reimbursement delays, product uptake and persistence, foreign exchange movements and the effects of Brexit. A shareholder securities class action was on appeal; Vertex said it would defend the claims and had recorded no reserve. The company was also responding to a Department of Justice subpoena concerning marketed medicines and Good Laboratory Practices at a bioanalytical laboratory.
- Vertex reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- ORKAMBI patient initiation, discontinuation and persistence trends, and the pace and terms of reimbursement outside the U.S.
- FDA action on the ORKAMBI age 6–11 application and clinical progress and data for VX-661, VX-371 and other pipeline programs.
- Whether product revenue growth converts into sustained operating cash flow as R&D and commercial expenses remain substantial.
- Ability to meet the term-loan installments and covenants, and any refinancing plans before the July 2017 maturity.
- Changes in Parion contingent obligations, France reimbursement liabilities, and the status or potential financial consequences of the litigation and DOJ inquiry.