Vertex Pharmaceuticals Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated financial statements; amounts below are in U.S. dollars. Vertex focuses on cystic fibrosis (CF) medicines and research programs in other areas. ORKAMBI was approved by the FDA in July 2015, after the reporting period.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $166.1m | $138.4m | $304.6m | $256.9m |
| Net product revenue | $160.4m | $122.3m | $291.3m | $225.8m |
| Operating loss | $(171.2)m | $(180.5)m | $(343.1)m | $(396.6)m |
| Net loss attributable to Vertex | $(188.8)m | $(159.4)m | $(387.5)m | $(391.8)m |
| Diluted loss per share attributable to Vertex | $(0.78) | $(0.68) | $(1.61) | $(1.68) |
Q2 revenue growth was driven by KALYDECO; product revenue rose 31% year over year. KALYDECO revenue was $154.9m for the quarter, including $61.2m internationally. INCIVEK revenue continued to decline. Royalty revenue fell 61% in Q2 and 50% in the first half, principally reflecting lower collaborator sales of INCIVO (telaprevir). Collaborative revenue also declined, in part because Vertex received no Cystic Fibrosis Foundation Therapeutics research funding in the first half of 2015.
First-half research and development expense was $439.5m, down 5%; sales, general and administrative expense was $180.3m, up 19%. First-half total costs and expenses were nearly flat year over year at $647.7m. The filing does not provide a clear consolidated profit-margin measure.
Cash flow, liquidity and debt
- Cash and cash equivalents were $870.5m at June 30; marketable securities were $145.9m. Combined cash, equivalents and securities totaled $1.016bn, down about $370.7m from December 31, 2014. Restricted cash is separate and not included in that total.
- Operating cash outflow was $302.4m in the first half, compared with $303.7m a year earlier. Investing activities provided $492.5m, including substantial proceeds from marketable securities sales and maturities; financing activities provided $56.5m.
- Current assets were $1.295bn and current liabilities $373.8m. The company reported total liabilities of $1.326bn.
- The senior secured term loan had a carrying value of about $294.8m, including $42.9m current and $251.9m long-term. Principal repayments were scheduled to begin in October 2015, with $15m quarterly installments through July 2016 and $60m quarterly installments thereafter through its July 2017 maturity. The loan is secured, has covenants including minimum KALYDECO revenue, and had no reported default at June 30.
- The Fan Pier building lease obligation was approximately $473.2m; the leases run through December 2028. Management stated that existing funds and expected KALYDECO and ORKAMBI cash flows should fund operations for at least the next 12 months.
Material changes, outlook and risks
- Parion collaboration: Vertex paid $80m upfront in June for rights to investigational ENaC inhibitors, including VX-371 and P-1055. Parion may receive up to $490m in CF development and regulatory milestones, additional milestones for non-CF indications and other candidates, plus tiered royalties. Consolidation of Parion as a variable interest entity (VIE) increased reported intangible assets and liabilities and contributed to the period’s tax provision.
- ORKAMBI: Vertex began U.S. marketing after FDA approval in July and expected first product revenue in Q3 2015. Its stated U.S. wholesale acquisition cost was $259,000 annually; management estimated about 8,500 eligible U.S. patients. U.S. results depend on uptake, reimbursement, discounts and adherence. European approval was possible in Q4 2015, but Vertex did not expect significant ex-U.S. ORKAMBI revenue in 2015 because reimbursement negotiations would take time.
- Management said second-half 2015 results would depend substantially on U.S. ORKAMBI commercialization. It expected higher product costs, including higher CFFT royalties and possible ORKAMBI milestones, and higher outsourced development costs as clinical programs advanced.
- Pipeline activity included Phase 3 trials of VX-661 with ivacaftor across CF patient groups; Vertex planned to submit a U.S. supplemental application for ORKAMBI in ages 6–11 in the first half of 2016 if the trial succeeded. VX-371 was in an exploratory Phase 2a trial, with data expected in mid-2016. Development, trial outcomes, regulatory decisions and reimbursement remain uncertain.
- Q2 2014 included a one-time $36.7m landlord-related credit in other income; there was no comparable item in 2015. This largely explains the year-over-year deterioration in Q2 other income and contributed to the higher Q2 net loss despite revenue growth.
- A shareholder securities class action remained pending; the court had taken Vertex’s motion to dismiss under advisement. The company said it intended to defend the case and had recorded no reserve. Management reported no material changes to the risk factors in its 2014 Form 10-K.
Key facts investors should verify
- ORKAMBI launch uptake, payer coverage, realized net price and resulting cash generation.
- Timing and terms of European and other ex-U.S. approvals and reimbursement decisions.
- Progress and results of VX-661, VX-371 and other clinical programs, including stated trial and data timelines.
- Cash burn, scheduled term-loan repayments, lease commitments and compliance with loan covenants.
- Parion milestone and royalty exposure, VIE-related accounting and the basis for the unusual tax provision.
- Outcome of the shareholder litigation and any developments in the company’s broader risk disclosures.