VERTEX PHARMACEUTICALS INC quarterly report, Q1 FY2017

Vertex Pharmaceuticals — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017. Unaudited U.S. GAAP results. Unless otherwise stated, amounts are USD millions.

Business context and results

Vertex develops and sells medicines for serious diseases, with its commercial business focused on cystic fibrosis (CF). Its marketed products were ORKAMBI and KALYDECO. Results improved substantially year over year, supported by product growth and a large Merck KGaA collaboration payment.

Product gross margin, calculated as product revenue less cost of product revenue divided by product revenue, was approximately 90.4%, versus 87.4% in Q1 2016. Operating margin was approximately 37.9%; it was negative in the prior-year quarter and is not directly comparable given the collaboration revenue recognized this quarter.

Revenue, costs and material changes

• ORKAMBI revenue increased 32% to $294.9; KALYDECO rose 9% to $185.7. Product revenue overall increased 22%.
• Collaborative revenue was $232.5, versus $0.1 a year earlier, primarily from the January Merck KGaA agreement licensing four oncology programs. Vertex reported approximately $231.7 of revenue associated with the upfront payment and research/transition services; the filing describes the upfront payment as $230.0.
• Operating costs and expenses increased 8% to $443.9. R&D rose 7% to $273.6; SG&A rose 8% to $113.3; restructuring expense was $10.0 versus $0.7.
• Interest expense, net declined to $16.8 from $20.7, primarily following repayment of the $300.0 revolving-facility draw. Other expense was $0.5, compared with $4.4 of other income. Income-tax provision was $4.0.

Cash, liquidity and obligations

Cash and cash equivalents were $1,003.7 and marketable securities were $405.1 at March 31, for combined unrestricted cash and securities of $1,408.8, down from $1,434.6 at year-end. Current assets were $1,871.8 and current liabilities $489.8. Operating cash flow was $265.7; investing cash flow was $(157.8) and financing cash flow was $(289.6). Cash and cash equivalents declined $180.3, mainly reflecting the $300.0 facility repayment. Restricted VIE cash of $44.6 is not available to satisfy claims against Vertex’s general assets.

The $500.0 revolving facility had no outstanding balance after repayment in February 2017; borrowings are subject to covenants. The balance sheet also included a $498.8 construction-financing lease obligation and $49.6 of capital lease obligations. Management said existing cash, securities and expected product cash flows should fund operations for at least the next 12 months.

Outlook, risks and unusual items

• Management expects near-term net income to depend on ORKAMBI revenue and future cash flows to depend substantially on CF product sales. ORKAMBI’s growth depends in part on reimbursement outcomes, patient starts, persistence and adherence.
• Vertex reported positive Phase 3 results for tezacaftor plus ivacaftor in two CF trials and planned U.S. and European regulatory submissions in Q3 2017. Approval, timing, labeling, coverage and reimbursement remain uncertain. The filing also describes ongoing studies and expected 2017–2018 data for next-generation triple-combination candidates.
• ORKAMBI early-access sales in France had generated $104.8 of customer deposits but no recognized product revenue pending a formal reimbursement agreement. KALYDECO’s Q1 growth included approximately $9 of one-time revenue credits from finalized European reimbursement agreements.
• The pending Concert asset purchase for CTP-656 calls for $160.0 cash at closing and up to $90.0 in potential milestones. It remained subject to Concert shareholder approval and antitrust clearance; no transaction accounting impact was recorded in Q1.
• Vertex began consolidating research activities and closing its Canadian research site, affecting approximately 70 positions. It estimated total restructuring charges of $11.3–$13.0; $10.0 was recorded in Q1.
• Adoption of share-based compensation guidance produced a $410.8 deferred-tax asset fully offset by a valuation allowance; the filing reports no net effect on equity from that item. No material contingent liabilities were accrued, and the company reported no material changes to previously disclosed legal proceedings or risk factors other than the added tezacaftor and Concert transaction risks.

Key facts for investors to verify

• How much future revenue growth comes from recurring product sales versus collaboration payments and other one-time items.
• ORKAMBI reimbursement progress outside the U.S., particularly the French agreement and the treatment of the $104.8 in customer deposits.
• Tezacaftor/ivacaftor filing timing, regulatory outcomes and commercial reimbursement prospects; progress and data for triple-combination programs.
• Whether the Concert acquisition closes, its final accounting treatment, and CTP-656’s development prospects.
• Cash generation, research and facility spending, and compliance with the revolving-credit facility’s covenants.