VERTEX PHARMACEUTICALS INC quarterly report, Q3 FY2016

Vertex Pharmaceuticals Inc. — Q3 2016 Form 10-Q

Reporting period: Three and nine months ended September 30, 2016. Vertex discovers, develops, manufactures and commercializes medicines, with its business focused on cystic fibrosis (CF). Its marketed products are ORKAMBI and KALYDECO. Unless stated otherwise, amounts below are in U.S. dollars.

Financial performance and liquidity

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Total revenue	$413.8 million	$309.8 million	$1,243.5 million	$614.4 million
Operating loss	$18.7 million	$70.0 million	$29.7 million	$413.2 million
Net loss attributable to Vertex	$38.8 million	$95.1 million	$145.0 million	$482.6 million
Diluted loss per share	$0.16	$0.39	$0.59	$2.00
Operating cash flow	Not separately stated	Not separately stated	$91.4 million	$(394.6) million

• Q3 product revenue was $409.7 million, including ORKAMBI of $234.0 million and KALYDECO of $175.6 million. Nine-month product revenue was $1,229.8 million: ORKAMBI $702.7 million and KALYDECO $526.4 million.
• Q3 total revenue increased 34% year over year; nine-month revenue increased 102%. Product revenue growth was principally driven by ORKAMBI, launched in the U.S. in 2015, and increased KALYDECO sales.
• Q3 cost of product revenue was $53.2 million, equivalent to an approximately 87% product gross margin. The filing does not present this margin as a reported measure.
• Nine-month R&D expense rose 17% to $799.2 million; SG&A rose 15% to $322.9 million. Total costs and expenses increased 24% to $1,273.2 million.
• At September 30, cash and cash equivalents were $719.7 million and marketable securities were $408.7 million, totaling $1.128 billion. Current assets were $1.502 billion versus current liabilities of $722.8 million. Restricted cash, including VIE cash, is not freely available for general use.
• Nine-month investing cash outflow was $125.7 million, including $41.8 million of property and equipment spending; financing cash inflow was $39.5 million. Cash and cash equivalents increased $4.9 million over the period.
• At quarter-end, the balance sheet showed a $297.8 million senior secured term loan, $473.1 million construction financing lease obligation and $49.5 million in capital lease obligations. The loan was classified as current at September 30.

Material changes and unusual items

• Improved results primarily reflect higher product revenue. Nine-month net loss attributable to Vertex narrowed by $337.6 million year over year, while operating expenses increased, notably for R&D and commercial support.
• Nine-month results included a $58.5 million increase in the fair value of contingent milestone and royalty obligations, primarily related to Parion’s VX-371 after its Phase 2 trial met its primary safety endpoint. The filing describes related VIE/noncontrolling-interest accounting; the effect is not equivalent to a cash payment in the period.
• In October 2016, Vertex repaid its Macquarie term loan using proceeds from a new $500 million revolving credit facility, of which $300 million was drawn at closing. The facility matures in 2021, has financial covenants, and is secured by substantially all company assets subject to exclusions. Vertex expected a $2.2 million fourth-quarter loss on extinguishment.
• Also in October, Cystic Fibrosis Foundation Therapeutics provided a $75 million upfront program award and agreed to provide up to $6 million annually in development funding under an amended agreement. The amended agreement includes royalty obligations on specified compounds and products.
• Vertex entered a Moderna CF mRNA collaboration in July 2016, paying $20 million upfront and investing $20 million; Moderna may receive up to $275 million in development and regulatory milestones plus royalties.
• ORKAMBI sales in France under early-access programs generated cash receipts, but no product revenue was recognized because reimbursement pricing remained undetermined. The related amounts were recorded as a liability.

Outlook, pipeline and risks

• Management expected Q4 2016 ORKAMBI revenue to increase versus Q3, while noting dependence on new treatment starts, persistence, adherence, reimbursement and rebates. Near-term ex-U.S. ORKAMBI revenue was expected to come mainly from Germany as reimbursement discussions elsewhere continued.
• Management expected Q4 SG&A expense to be similar to the quarterly level for the first nine months. It stated that existing cash, cash equivalents, marketable securities and expected KALYDECO and ORKAMBI cash flows should fund operations for at least the next 12 months.
• Pipeline timing included expected VX-661 combination trial data in the first half of 2017 and a potential NDA submission in the second half of 2017 if results supported it. Data from planned VX-440 and VX-152 trials was expected in the second half of 2017. These are forward-looking expectations, not assured outcomes.
• A VX-661/ivacaftor trial in patients with minimal-function mutations was stopped following an interim futility analysis and DSMB recommendation; no safety concerns were identified. A VX-371 Phase 2 trial met its safety endpoint but showed no statistically significant change in FEV1 or reported respiratory symptoms.
• Drug development, trial results, regulatory approvals and commercial uptake are uncertain. Other risks include lengthy or unsuccessful reimbursement negotiations, reliance on ORKAMBI and KALYDECO sales, foreign-exchange movements, Brexit-related uncertainty, and debt covenants and collateral obligations.
• A shareholder securities class action dismissal was affirmed on appeal in October 2016. Vertex also disclosed a Department of Justice subpoena received in 2015 concerning marketed medicines and Good Laboratory Practices at a bioanalytical laboratory; the company said it was responding and cooperating.

Key facts for investors to verify

• Subsequent-quarter ORKAMBI uptake, including U.S. pediatric use and reimbursement progress outside the U.S., and the recognized-versus-deferred treatment of French sales.
• Whether the VX-661, VX-440, VX-152 and other pipeline milestones occur on the stated timelines and produce clinically meaningful results.
• Cash generation and spending trends, including R&D investment, contingent collaboration obligations and the availability of restricted cash.
• Drawn debt, interest expense, covenant compliance and the effect of the October 2016 credit agreement on liquidity and financial flexibility.
• Developments in the DOJ subpoena matter and any material changes in legal, regulatory, reimbursement or foreign-exchange risks.