Vertex Pharmaceuticals — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results include Vertex, its subsidiaries, and Alios BioPharma, a variable-interest entity. Comparisons are with Q1 2012.
Business context and key financial metrics
Vertex discovers, develops, manufactures, and commercializes medicines. Its marketed products were INCIVEK for hepatitis C (HCV) and KALYDECO for cystic fibrosis (CF); it also earns royalties on international telaprevir sales. Management’s development focus included CF, HCV, and autoimmune disease programs.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $328.4 million | $438.7 million | Down 25% |
| Net product revenue | $267.4 million | $375.4 million | Down 29% |
| Net income (loss) attributable to Vertex | $(308.0) million | $91.6 million | Loss in 2013 |
| Diluted EPS attributable to Vertex | $(1.43) | $0.43 | Loss in 2013 |
| Operating cash flow | $(65.8) million | $2.9 million | Lower by $68.7 million |
Q1 2013 product revenue comprised INCIVEK $205.6 million (down from $356.9 million) and KALYDECO $61.8 million (up from $18.4 million). Royalty revenue was $43.6 million, up 12%, primarily reflecting increased INCIVO royalties from Janssen. Collaborative revenue was $17.4 million, down 29%.
Vertex reported a $412.9 million VX-222 intangible-asset impairment charge, partly offset by a $127.6 million tax benefit. The after-tax impact increased Vertex’s net loss by $285.3 million, or $1.32 per share. Excluding this unusual charge, operating costs still increased, chiefly from higher R&D spending.
Research and development expense was $218.1 million, up 11%; sales, general and administrative expense was $92.9 million, down 16%. Cost of product revenue was $31.0 million. The filing does not provide a standalone gross-margin percentage.
At March 31, 2013, cash and cash equivalents were $379.1 million and marketable securities were $860.3 million, totaling $1.239 billion and excluding Alios restricted cash. Current assets were $1.566 billion and current liabilities $407.6 million. Total liabilities were $1.415 billion. Debt included $400 million of 3.35% convertible notes due October 2015; capital lease obligations were $23.1 million and the construction financing lease obligation was $316.8 million. Vertex reported no material change in contractual commitments from its 2012 Form 10-K.
Cash and cash equivalents declined $110.3 million during the quarter. Investing cash use was $37.6 million, including $16.6 million of property and equipment expenditures; financing cash use was $6.1 million. The filing also reports $44.4 million of capital expenditures in its liquidity discussion, including construction-related amounts. Alios cash of $63.0 million is restricted and not available to satisfy Vertex’s general obligations.
Material changes and management commentary
- INCIVEK revenue continued to decline as fewer HCV patients initiated available treatment and competing therapies advanced. Vertex expected the decline to continue and forecast lower total product revenue in 2013 than in 2012, with KALYDECO growth partly offsetting it.
- KALYDECO revenue had risen quarter over quarter since launch. Management expected Q2 2013 growth as reimbursement began in additional European countries, and further international growth during 2013.
- Development expense rose 16%; management expected it to increase in 2013 because of CF, HCV, and autoimmune clinical programs. SG&A declined as U.S. marketing spending fell, partly offset by international KALYDECO marketing.
- Vertex expected current cash, cash equivalents, marketable securities, and product and royalty cash flows to fund operations for at least 12 months. It noted possible need to repay the $400 million notes in 2015 and substantial lease obligations extending through 2028.
Outlook, pipeline, risks, and contingencies
- CF: Vertex initiated a pivotal Phase 3 program of VX-809 plus ivacaftor for patients homozygous for F508del. It expected final data from two trials in 2014 and, if successful, planned U.S. and European filings in 2014. It expected data from ivacaftor label-expansion trials in the second half of 2013.
- HCV: Vertex was evaluating all-oral VX-135 combinations in Phase 2 and expected initial data in the second half of 2013. It warned that competitors’ programs were more advanced and that all-oral HCV regimens could reach the market as soon as late 2014. Success and timing of VX-135 development remained uncertain.
- VX-222: Following preliminary Phase 2 safety, tolerability, and efficacy findings and competitive developments, Vertex concluded the program was unlikely to compete, valued the asset at zero, and did not plan new trials. It cautioned that VX-135 could also face impairment if development prospects deteriorated.
- VX-661: April 2013 Phase 2 results showed statistically significant relative lung-function improvements versus placebo at the two highest combination doses (9.0% and 7.5%); monotherapy lung-function findings were not statistically significant. Vertex planned further evaluation, subject to regulatory discussions.
- Alios obligations: The agreement provides for up to $312.5 million in additional VX-135 development milestones, up to $750 million in commercial milestones, and tiered royalties. If VX-135 advances, Vertex expected increases in the fair value of contingent payments, which could materially affect earnings.
- Legal: A shareholder class action alleges securities-disclosure misstatements relating to May–June 2012. Vertex filed a motion to dismiss, denied merit, and intended to defend the case; no reserve was recorded as of March 31, 2013. The company reported no material accrued contingent liabilities.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. Other risk factors were unchanged from the 2012 Form 10-K.
Important facts for investors to verify
- Whether INCIVEK’s decline and KALYDECO’s expected international growth develop as management projected.
- VX-135 safety, efficacy, clinical timing, and the potential value and accounting impact of future Alios milestone and royalty obligations.
- VX-809/ivacaftor Phase 3 results, anticipated in 2014, and whether results support planned regulatory filings.
- Liquidity and funding needs as operating cash use continues, including the 2015 notes and construction-financing and other lease obligations.
- Any developments in the shareholder litigation, competitive HCV therapies, or impairment assessments for pipeline assets.