Vertex Pharmaceuticals Inc. — Q1 2019 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2019, compared with Q1 2018. Vertex operates in pharmaceuticals, with its business centered on cystic fibrosis (CF) medicines SYMDEKO/SYMKEVI, ORKAMBI and KALYDECO, alongside a developing pipeline in other serious diseases.
Financial performance
Amounts below are in millions of dollars, except per-share amounts and percentages.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $858.4 | $640.8 | +34% |
| Net product revenue | $857.3 | $637.7 | +34% |
| Operating income | $276.8 | $128.9 | +115% |
| Net income attributable to Vertex | $268.6 | $210.3 | +28% |
| Diluted EPS | $1.03 | $0.81 | +27% |
| Net cash provided by operating activities | $324.8 | $252.7 | +$72.1 |
- Product revenue by medicine: SYMDEKO/SYMKEVI $320.3 million (up from $34.1 million); ORKAMBI $293.0 million (down 17%); KALYDECO $244.0 million (down 2%). Growth in the newer combination therapy more than offset declines in the other products.
- Operating costs and expenses were $581.6 million, up 14%. Cost of sales was $95.1 million, or approximately 11% of product revenue; R&D was $339.5 million, up 9%; and SG&A was $147.0 million, up 13%.
- Operating margin was approximately 32.2%, compared with 20.1% in Q1 2018. Product gross margin, using product revenue less cost of sales, was approximately 88.9%, compared with 88.8%.
- Interest income was $15.6 million and interest expense was $14.9 million. Other income, net, was $42.6 million, primarily reflecting gains on strategic investments, versus $96.8 million in Q1 2018.
Liquidity, cash flow and obligations
- Cash, cash equivalents and marketable securities totaled $3.478 billion at March 31, 2019, up $309.8 million from year-end 2018. Working capital was $3.077 billion.
- Operating cash flow was $324.8 million. Investing activities used $39.1 million and financing activities used $42.0 million, including $99.8 million of share repurchases. Cash, cash equivalents and restricted cash increased $243.3 million during the quarter.
- Vertex reported no principal or interest outstanding under its $500 million revolving credit facility. Finance lease liabilities totaled $596.1 million and operating lease liabilities totaled $71.0 million at quarter-end; these lease obligations are not revolver borrowings.
- The company said existing liquidity and product cash flows should be sufficient to fund operations for at least the next 12 months. It had $52.0 million remaining under its share-repurchase authorization, which expires December 31, 2019.
Material changes, outlook and risks
- Management expects product revenue to increase during the remainder of 2019, primarily from SYMDEKO/SYMKEVI, but gave no numerical full-year revenue guidance in the provided filing text. Cost of sales is expected to rise in dollars, with its percentage of product revenue expected to be similar to 2018.
- Vertex reported positive Phase 3 data for triple combinations involving VX-445 and VX-659. It expected final 24-week data in Q2 2019 and planned to submit an FDA application in Q3 2019 and a European application in Q4 2019 for a triple-combination regimen. These were forward-looking expectations, not approvals.
- Reimbursement and pricing negotiations remain important, particularly for ORKAMBI in France and England. A $382.7 million early-access sales accrual, primarily related to French ORKAMBI sales, reflects amounts potentially repayable to the French government after a final price is negotiated.
- Strategic-investment fair-value changes can materially affect quarterly earnings; Vertex cautioned that biotechnology investment values may fluctuate. Q1 2019 included $43.6 million of unrealized gains, compared with $95.5 million in Q1 2018.
- Vertex adopted the new lease accounting standard on January 1, 2019, recognizing lease assets and liabilities and recording a $40.3 million cumulative-effect adjustment to accumulated deficit. Management estimated the change would raise 2019 operating expenses by about $26 million and reduce interest expense by about $13 million.
- Q1 2019 included a $51.5 million income-tax provision, versus a $12.7 million tax benefit in Q1 2018. Management said most of the current provision was expected to be noncash while tax attributes remained available.
- Management described drug development, clinical and regulatory outcomes, product reimbursement, foreign exchange and investment valuations as uncertainties. No material legal proceedings or material changes to previously disclosed risk factors were reported; disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether triple-combination trial results supported the stated filing timetable and whether regulators approved the regimen.
- How quickly SYMDEKO/SYMKEVI growth offsets continued ORKAMBI and KALYDECO declines, and whether the qualitative 2019 revenue outlook is achieved.
- The eventual French ORKAMBI price and the portion of the $382.7 million accrual that may need to be refunded, plus progress on reimbursement in England and other markets.
- The sustainability of earnings and cash generation after separating operating performance from volatile strategic-investment gains and tax effects.
- The cash-flow impact of lease commitments, planned R&D and share repurchases; confirm the undrawn revolver and remaining repurchase authorization in subsequent filings.