Vertex Pharmaceuticals Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Vertex discovers, develops and commercializes small-molecule medicines; its lead candidate, telaprevir, was in Phase 3 registration trials for hepatitis C. Financial statements are unaudited. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $22.4 million | $24.0 million | Down 6% |
| Operating expenses | $182.7 million | $185.9 million | Down 2% |
| Operating loss | $160.3 million | $161.9 million | Loss narrowed $1.6 million |
| Net loss | $165.3 million | $162.7 million | Loss increased $2.6 million |
| Net loss per share | $0.83 | $1.04 | Lower loss per share, principally due to more shares outstanding |
| Net cash used in operations | $196.5 million | $185.6 million | Cash use increased $10.9 million |
Royalty revenue was $6.4 million, up 4%; collaborative revenue was $16.0 million, down 10%. R&D expense was $143.0 million, essentially flat year over year; SG&A rose 25% to $35.6 million, reflecting commercial preparation and increased headcount. The filing does not report a conventional gross margin; operating loss substantially exceeded revenue.
At March 31, cash, cash equivalents and marketable securities totaled $1.093 billion, down $192.2 million from year-end. Current assets were $1.127 billion and current liabilities $211.5 million. Operating cash outflow was partly offset by $138.8 million of investing cash inflow, largely from marketable-security sales and maturities; financing provided $7.6 million. Capital expenditures were $3.1 million.
Debt included $155.0 million principal of secured notes due October 2012, carried at $125.3 million on the balance sheet, including associated accounting effects. The remaining $32.1 million principal of convertible notes due 2013 converted into 1.386 million shares during the quarter. Stockholders’ equity was $990.6 million.
Material changes and unusual items
- Collaborative revenue declined $1.8 million. Janssen revenue fell to $6.5 million from $17.1 million, mainly as net reimbursable telaprevir development costs declined near completion of registration trials. Mitsubishi Tanabe revenue rose to $9.6 million from $0.2 million, principally from amortization of its 2009 upfront payment.
- Operating expenses were lower mainly because Q1 2009 included $7.8 million of ViroChem acquisition-related costs and higher restructuring expense. These offsets partly masked higher SG&A and increased commercial supply investment.
- Net interest expense rose to $3.5 million from $0.8 million; lower investment yields and interest on the 2012 notes contributed. Vertex recorded a $1.5 million loss from changes in fair value of derivatives associated with its September 2009 financing transactions.
- Vertex’s accumulated deficit increased to $2.855 billion. Shares outstanding increased year over year, principally from equity offerings, the ViroChem acquisition and conversions/exchanges of convertible notes.
- The $33.3 million Kendall Square lease restructuring liability remained subject to quarterly estimation; management said changed assumptions could materially adjust the liability.
Outlook, commentary and risks
- Management expected final telaprevir registration-trial data in Q2 and Q3 2010, rolling NDA submissions to begin in summer 2010, and completion of the U.S. NDA submission in the second half of 2010, assuming successful trial results. U.S. sales were anticipated in 2011 if approval and development timelines were achieved. No telaprevir product revenue was expected in 2010.
- Vertex expected a substantial loss for 2010 and continuing quarterly and annual losses until a product is approved and successfully commercialized. It believed available cash, cash equivalents and marketable securities would fund operations for at least 12 months, but said additional capital might be needed, particularly if telaprevir development were materially delayed.
- Management planned continued investment in telaprevir, VX-770 and other pipeline programs, including telaprevir/VX-222 combination work. It anticipated possible VX-770 NDA submission in the second half of 2011 if its registration program succeeded.
- Key risks include clinical-trial outcomes, regulatory review and timing, commercialization and manufacturing execution, dependence on collaborators, uncertain financing access, and the possibility that drug candidates fail or require additional trials. Third-party manufacturers and a global supply chain limit Vertex’s control over supply.
- The company reported no material change to previously disclosed risk factors, no accrued contingent liabilities at quarter-end, and effective disclosure controls; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Telaprevir Phase 3 results, NDA submission timing and whether regulatory approval and launch assumptions remain achievable.
- Cash burn and runway relative to the stated expectation of funding operations for at least 12 months; potential need and terms for new financing.
- Progress and potential cash impact of the $155 million secured notes and the Janssen milestones, including the $95 million of milestone rights sold to a purchaser.
- Collaborative revenue recognition and the remaining deferred revenue balances, especially under Janssen and Mitsubishi Tanabe agreements.
- Clinical, manufacturing, commercial-launch and Kendall Square lease risks, including possible material changes in restructuring estimates.