Vertex Pharmaceuticals Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report; the filing provides annual comparisons with 2020 and 2019. Amounts are in U.S. dollars.
Business context
Vertex is a biotechnology company whose approved products and product revenue are concentrated in cystic fibrosis (CF). Its four CF medicines are TRIKAFTA/KAFTRIO, SYMDEKO/SYMKEVI, ORKAMBI and KALYDECO. The company is expanding eligibility and access for CF medicines while investing in pipeline programs including gene editing for sickle cell disease and beta thalassemia, kidney disease, type 1 diabetes, pain, and muscular dystrophies.
Financial results and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $7.574 billion | $6.206 billion | +22% |
| Net product revenue | $7.573 billion | $6.203 billion | +22% |
| Income from operations | $2.782 billion | $2.856 billion | -3% |
| Net income | $2.342 billion | $2.712 billion | -14% |
| Diluted earnings per share | $9.01 | $10.29 | Down |
| Operating cash flow | $2.644 billion | $3.254 billion | Down |
Operating margin was approximately 36.7% in 2021 versus 46.0% in 2020; net margin was approximately 30.9% versus 43.7%. Cost of sales was $904 million, or 12% of net product revenue, in both years. Operating cash flow less $235 million of property and equipment purchases was approximately $2.409 billion; this is a simple cash-flow measure, not company-reported free cash flow.
Cash, cash equivalents and marketable securities totaled $7.525 billion at year-end, up from $6.659 billion. Working capital was $7.419 billion. Current assets were $9.561 billion and current liabilities $2.142 billion. Vertex reported no principal or interest outstanding under its revolving credit facilities. Total liabilities were $3.333 billion, including $967 million of finance and operating lease liabilities; these leases are not revolver borrowings.
Revenue mix and changes versus 2020
- TRIKAFTA/KAFTRIO revenue rose 47% to $5.697 billion and represented about 75% of product revenue.
- U.S. product revenue increased 10% to $5.287 billion; ex-U.S. revenue increased 66% to $2.286 billion, driven substantially by KAFTRIO uptake in Europe.
- Revenue declined for SYMDEKO/SYMKEVI (-33%), ORKAMBI (-15%) and KALYDECO (-15%), primarily as patients switched to TRIKAFTA/KAFTRIO.
- R&D expense rose 67% to $3.051 billion, including a $900 million upfront payment to CRISPR for the amended CTX001 collaboration. SG&A rose 9% to $840 million. Total operating costs and expenses increased 43% to $4.792 billion.
- Net income also reflected lower gains on strategic investments: other income, net, was $4.9 million in 2021 versus $296.6 million in 2020. The 2020 tax rate benefited from a $209 million discrete tax benefit related to an intellectual-property transfer; the 2021 effective tax rate was 14.2%.
Outlook, management commentary and key risks
- Management expected net product revenue to increase in 2022, citing continued TRIKAFTA/KAFTRIO performance, label expansions and broader access. It expected cost of sales as a percentage of product revenue to remain similar to 2021 and R&D expense, excluding business-development payments, and SG&A to increase. No quantified 2022 revenue or earnings guidance is stated in the supplied filing text.
- Pipeline milestones described included anticipated late-2022 regulatory submissions for CTX001; pivotal development for VX-147 targeted for Q1 2022; and 2022 filings or IND submissions for certain CF and diabetes programs. These are forward-looking expectations, not assured outcomes.
- CTX001 development, manufacturing and commercialization are led by Vertex under the revised CRISPR agreement; Vertex paid $900 million upfront and CRISPR may receive a further $200 million upon first FDA or European Commission approval. CTX001 profits and losses are allocated 60% to Vertex and 40% to CRISPR beginning July 1, 2021.
- Vertex discontinued plans to advance VX-864 into late-stage development: despite proof of mechanism, management judged the treatment effect unlikely to deliver substantial clinical benefit.
- Principal business risks include dependence on CF products for nearly all product revenue; reimbursement, drug-pricing and access pressure; competition; clinical, regulatory and commercialization uncertainty in the pipeline; complex cell- and gene-therapy manufacturing; third-party and single-source supply dependencies; and intellectual-property disputes. COVID-19 had caused some clinical enrollment, supply-chain and regulatory delays, although the company reported no material impact to medicine demand or supply to date.
- The company reported no material legal proceedings. It cautioned that U.S. R&D-cost amortization requirements beginning in 2022, if not changed, could materially affect cash flows.
Most important facts for investors to verify
- Whether TRIKAFTA/KAFTRIO growth, international reimbursement and patient access continue to offset declines in older CF products.
- Whether 2022 revenue and expense trends match management’s expectations, particularly rising R&D and SG&A costs.
- Clinical, regulatory and manufacturing progress for CTX001 and other pipeline programs, including the timing and terms of any eventual approvals.
- Cash generation after the CRISPR payment, share repurchases and capital spending; confirm the effect of R&D tax amortization rules and other tax changes.
- Payor-rebate estimates, product revenue concentration among a small number of distributors, and exposure to supply interruptions or patent challenges.
Ernst & Young issued an unqualified audit opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2021.