Vertex Pharmaceuticals Incorporated — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Vertex is a pharmaceutical company focused on cystic fibrosis (CF) medicines and drug development. Its marketed products were KALYDECO, ORKAMBI and, following U.S. approval in February 2018, SYMDEKO.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $640.8m | $714.7m | Down 10% |
| Product revenue | $637.7m | $480.6m | Up 33% |
| Operating income | $128.9m | $270.8m | Down 52% |
| Net income attributable to Vertex | $210.3m | $247.8m | Down 15% |
| Diluted EPS | $0.81 | $0.99 | Down 18% |
| Operating cash flow | $252.7m | $265.7m | Down 5% |
- Product revenue by medicine: KALYDECO $249.5m, up 34%; ORKAMBI $354.1m, up 20%; and SYMDEKO $34.1m, newly launched in the United States.
- Operating expenses were $511.9m, up 15%: cost of sales $71.6m, R&D $310.6m, SG&A $129.8m, and a small restructuring credit. Operating margin was approximately 20%, compared with 38% a year earlier.
- Other income, net was $96.8m, principally including a $92.5m unrealized gain on Vertex’s CRISPR investment and a $2.9m gain on its Moderna investment. The company recorded a $12.7m income-tax benefit, including $21.9m of excess stock-compensation tax benefits.
- Cash, cash equivalents and marketable securities totaled $2.477bn at March 31, 2018, up $388m from year-end. Working capital was $2.214bn. Net cash from investing activities was $4.9m; financing activities provided $79.0m.
- Vertex had no principal or interest outstanding under its $500m revolving credit facility. Balance-sheet obligations included a $561.3m construction financing lease obligation, $33.8m in capital lease obligations, and a $79.5m advance from a collaborator.
Material changes and notable items
- Total revenue declined despite higher CF product sales, primarily because Q1 2017 included a one-time $230m Merck KGaA collaboration payment. Collaborative revenue was $1.7m in Q1 2018 versus $232.5m a year earlier.
- R&D expense rose 14%, mainly from development activity, outsourced services and drug supply costs, including work on next-generation CF triple-combination regimens. SG&A rose 15%, including support for marketed products and SYMDEKO launch preparation.
- Operating cash flow was modestly lower than the prior-year quarter. The cash-flow statement includes a $95.5m noncash adjustment for the equity-investment gain; the gain also contributed to reported net income.
- Vertex adopted ASC 606 in 2018. The company reported that adoption increased Q1 product revenue and net income attributable to Vertex by $4.7m and $3.1m, respectively, versus balances without adoption. It also changed the accounting for equity investments, with unrealized fair-value changes now affecting earnings.
Outlook, commentary and risks
- Management expected total CF product revenue to increase quarterly through the remainder of 2018 and anticipated SYMDEKO revenue growth as more patients began treatment. Switching from KALYDECO or ORKAMBI to SYMDEKO could reduce revenue from those products.
- Management expected development expenses to increase quarterly during the rest of 2018, driven by Phase 3 triple-combination trials. The filing did not provide a clear numerical full-year revenue or earnings forecast.
- The EMA was expected to complete its review of tezacaftor/ivacaftor in the second half of 2018. FDA review targets for certain younger-patient label expansions were August 2018; data from a Phase 3 tezacaftor/ivacaftor study in children ages 6–11 were expected in the second half of 2018.
- Vertex held $268.4m collected under French ORKAMBI early-access programs while pricing discussions continued. The company expected to return the difference between invoiced and final prices; changes in its revenue estimate could materially affect revenue.
- Management said existing cash, securities and expected product cash flows should fund operations for at least 12 months. Future results nevertheless depend on product sales, reimbursement negotiations, clinical and regulatory outcomes, and R&D and collaboration spending.
- Key risks include uncertain drug-development and approval outcomes, reimbursement access—particularly for ORKAMBI in Europe—and volatility in strategic biotechnology investments. The company also noted foreign-exchange exposure and real-estate lease commitments. No material legal proceedings or accrued material contingencies were reported; previously disclosed risk factors were unchanged.
Important facts for investors to verify
- Progress and final pricing/reimbursement outcomes for ORKAMBI in France and other European markets, and the resulting treatment of the $268.4m early-access accrual.
- SYMDEKO uptake and any resulting substitution from KALYDECO or ORKAMBI; compare underlying product growth with reported total revenue, which was affected by the prior-year Merck payment.
- Clinical data, trial timelines and regulatory decisions for VX-659, VX-445 and the planned label expansions.
- Quarterly fair-value changes in CRISPR and other strategic investments, which can materially affect GAAP earnings without representing operating cash generation.
- Cash generation, ongoing R&D commitments, lease-related obligations and any changes in use of the share-repurchase authorization, of which $488.8m remained at March 31, 2018.