Vertex Pharmaceuticals Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results include Alios BioPharma from June 13, 2011. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial highlights
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $114.4m | $31.6m | $188.1m | $54.1m |
| Net loss attributable to Vertex | $(174.1)m | $(200.0)m | $(350.2)m | $(365.3)m |
| Loss per share, basic and diluted | $(0.85) | $(1.00) | $(1.72) | $(1.83) |
| Operating loss | $(165.9)m | $(169.6)m | $(325.8)m | $(329.9)m |
| Operating costs and expenses | $280.3m | $201.2m | $513.9m | $383.9m |
- Q2 product revenue was $74.5m, all from U.S. INCIVEK sales following FDA approval on May 23, 2011. Product cost was $5.4m. The filing cautions that much of the manufacturing cost of product sold had been expensed as R&D before inventory capitalization began in January 2011; the resulting implied product margin is therefore not necessarily representative of future periods.
- Q2 royalty revenue was $10.0m and collaborative revenue was $29.9m. Six-month collaborative revenue included a $50.0m Janssen milestone recognized in Q1.
- R&D expense was $173.6m in Q2, up 12%; selling, general and administrative expense was $96.7m, up 136%, primarily reflecting commercialization and INCIVEK launch spending. Q2 stock-based compensation was $31.9m.
- Operating cash flow was $(402.8)m for the first six months, versus $(305.3)m in 2010. Investing cash flow was $578.7m, principally reflecting marketable-security maturities and sales; financing cash flow was $38.7m.
- At June 30, cash and cash equivalents were $458.2m and marketable securities were $135.3m, totaling $593.5m. This excludes $63.1m of Alios restricted cash, which Vertex says is not available for its liquidity needs. Cash plus marketable securities declined from $1.03bn at year-end 2010.
- Debt included $400m principal of 3.35% convertible notes due 2015 and $105m face amount of secured notes due 2012. The secured notes are subject to milestone-linked mandatory redemption. A $100m revolving credit facility was undrawn; it includes a $400m minimum domestic cash-and-investments covenant and terminates July 6, 2012.
Changes, outlook and material developments
- Revenue growth reflects INCIVEK’s U.S. launch and the Janssen milestone; commercial-launch spending drove higher operating expenses. Vertex’s attributable net loss narrowed year over year despite those higher expenses.
- Management expected INCIVEK revenue to increase over the remainder of 2011 and cash receipts from product sales to begin in Q3. It believed existing liquidity and expected telaprevir cash flows would fund operations for at least 12 months, and said it could become cash-flow positive during 2012 if INCIVEK sales met expectations. These are forward-looking expectations, not guarantees; no formal earnings or revenue guidance is provided.
- Vertex planned to submit U.S. and EU applications for cystic fibrosis drug VX-770 in October 2011, with potential revenue in 2012 if approved. It also planned further CF combination trials and Phase 1 development of influenza candidate VX-787 in September 2011.
- In June, Vertex paid Alios $60m for exclusive worldwide rights to two early-stage HCV nucleotide analogues. Alios may receive up to $715m in development milestones, up to $750m in commercial milestones, and royalties. Vertex consolidated Alios as a variable-interest entity; the related asset and contingent-payment valuations were preliminary. Alios’s $63.1m restricted cash is not Vertex liquidity.
- Vertex signed leases for approximately 1.1m square feet at Boston’s Fan Pier, expected to open in late 2013. The 15-year initial term carries average annual rent of approximately $72.5m, excluding operating expenses.
- Key risks include commercial execution and competition from Merck’s Victrelis, uncertain payer rebates and product-return estimates, reliance on third-party manufacturing and supply chains, clinical and regulatory uncertainty, and potential need for additional financing or program reductions. Vertex estimated Q2 INCIVEK returns below 1%; no returns had been received by June 30.
- Management reported disclosure controls effective as of June 30. The filing reported no material accrued contingent liabilities and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Subsequent INCIVEK prescriptions, distributor inventory, collections, payer mix, rebates and actual product returns versus the estimates used for Q2 revenue.
- INCIVEK sales growth, ongoing launch costs, competitive response, and whether commercial cash flows support management’s 2012 cash-flow-positive expectation.
- VX-770 filing and regulatory milestones, and the safety, efficacy and timing of planned CF and HCV studies.
- Final Alios purchase-price allocation and valuation assumptions, plus future milestone, royalty and operating-cost exposure.
- Liquidity relative to ongoing cash burn, the credit facility’s financial covenants, and timing of remaining Janssen milestones and 2012-note redemptions.
- Long-term Fan Pier lease economics and construction-related accounting and obligations.