Vertex Pharmaceuticals Incorporated — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
Vertex discovers, develops and commercializes medicines for serious diseases. The quarter marked the first full quarter of U.S. sales of INCIVEK (telaprevir), approved in May 2011 for genotype 1 hepatitis C. Vertex also reported European approval and launch of INCIVO by collaborator Janssen, Japanese approval by Mitsubishi Tanabe, and October submissions of U.S. and EU applications for KALYDECO (ivacaftor).
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $659.2 | $23.8 | $847.3 | $77.8 |
| Net product revenue | $419.6 | — | $494.1 | — |
| Operating income (loss) | $215.7 | $(199.6) | $(110.1) | $(529.4) |
| Net income (loss) attributable to Vertex | $221.1 | $(209.0) | $(129.1) | $(574.2) |
| Diluted earnings (loss) per share | $1.02 | $(1.04) | $(0.63) | $(2.87) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(359.9) | $(469.3) |
- Q3 collaborative revenue was $231.1 million, including a $200 million Janssen milestone for European approval and launch. Vertex said it did not expect further Janssen milestones; future Janssen revenue was expected mainly as royalties.
- Q3 costs and expenses were $443.5 million, including $189.1 million R&D, $110.7 million SG&A, $35.3 million cost of product revenue and a $105.8 million impairment charge. SG&A rose 126% year over year, primarily due to commercial launch costs.
- Q3 product revenue less reported product cost was approximately $384.3 million, but this is not a complete measure of product economics: some INCIVEK manufacturing costs had been expensed as R&D before 2011.
Liquidity, debt and balance sheet
- At September 30, cash, cash equivalents and marketable securities were $658.7 million, excluding $50.6 million of Alios restricted cash. Vertex reported a $65.2 million increase in its own cash and securities from June 30; it also reported a $372.7 million decrease over the first nine months.
- Current assets were $1.246 billion and current liabilities $548.9 million. Accounts receivable was $445.7 million, including $200 million of Janssen milestone receivables; inventory, all INCIVEK-related, was $67.7 million.
- Debt included $400 million principal of 3.35% convertible notes due 2015 and $105 million face value of secured notes due 2012 at quarter-end. The remaining 2012 notes were redeemed on October 31, 2011 using Janssen milestone proceeds. The company also had a $100 million revolving credit facility, unused at September 30, with a $400 million domestic-liquidity covenant.
- Cash from operations was negative for the first nine months, despite the Q3 increase in cash and securities. Management said INCIVEK cash flows, together with available cash and securities, were expected to fund operations for at least the next 12 months, conditional on future revenue and spending.
Material changes and unusual items
- Revenue growth primarily reflected INCIVEK sales and Janssen milestones, with no comparable product revenue in 2010. Management cautioned that collaborative revenue fluctuates and expected it to be a smaller share of future revenue.
- R&D increased 11% year over year for both Q3 and the nine-month period; SG&A increased 126% and 122%, respectively, reflecting commercialization and sales infrastructure.
- Vertex impaired VX-759, a backup HCV candidate, by $105.8 million after prioritizing VX-222 and considering competitor progress. A related $32.7 million tax benefit reduced the impairment’s net effect on income to $73.1 million.
- Vertex began consolidating Alios as a variable interest entity in June 2011. The company paid $60 million upfront and Alios may receive substantial development and commercial milestones and royalties. Alios cash is restricted and, according to the filing, is not available for Vertex’s general obligations. A $17.5 million increase in the estimated fair value of contingent Alios payments affected Q3 noncontrolling-interest results.
Outlook, commentary and risks
- Management said Vertex needed to sustain or increase product revenue to maintain profitability and continued investment in R&D. It expected INCIVO royalties to increase as Janssen launched in its territories and anticipated KALYDECO revenue in 2012 if approved.
- Vertex planned additional INCIVEK studies, further development of CF candidates, a Phase 2b study of VX-509 for rheumatoid arthritis, and continued research across its pipeline. Drug development timing, approval and commercial prospects remained uncertain.
- Key risks include competition in HCV, reimbursement and demand uncertainty, regulatory and clinical-trial outcomes, post-approval safety, manufacturing and third-party supply-chain dependence, and rapidly rising commercial and R&D costs. Management noted that INCIVEK sales and future cash flows could be affected by these factors.
- The filing reported no material change to previously disclosed risk factors, no material contingent liabilities accrued, and effective disclosure controls as of September 30, 2011.
Most important facts for investors to verify
- Whether INCIVEK sales and collections continued at a level sufficient to support elevated operating expenses after the launch period.
- How much future revenue came from recurring product sales and royalties versus the nonrecurring Janssen milestone payments.
- The status and timing of KALYDECO regulatory decisions and the resulting commercial outlook.
- Whether the VX-759 impairment, VX-222 development progress and Alios milestone/royalty valuations led to further material charges or changes.
- The post-quarter redemption of the remaining 2012 notes, and compliance with the credit facility’s liquidity covenant and other terms.