Vertex Pharmaceuticals Incorporated — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited consolidated results. Vertex develops medicines, with telaprevir its lead candidate; it reported no product sales in the period.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Total revenue | $31.6 | $19.1 | $54.1 | $43.0 |
| Operating expenses | $201.2 | $176.2 | $383.9 | $362.1 |
| Operating loss | $(169.6) | $(157.2) | $(329.9) | $(319.1) |
| Net loss | $(200.0) | $(171.3) | $(365.3) | $(334.0) |
| Net loss per share | $(1.00) | $(0.99) | $(1.83) | $(2.03) |
- Revenue was primarily collaborative and royalty revenue. Collaborative revenue rose 85% in Q2 and 30% in the first half; royalty revenue rose 23% and 13%, respectively. The filing does not report a conventional gross margin. Operating losses substantially exceeded revenue, reflecting research, development and launch-preparation spending.
- Research and development expense increased 11% in Q2 and 5% in the first half. Sales, general and administrative expense increased 26% and 25%, respectively. Higher telaprevir commercial-supply investment and expansion of commercial capabilities were key cost drivers.
- Operating cash use was $305.3 million in the first half, versus $303.6 million a year earlier. Investing activities provided $179.4 million, chiefly reflecting net sales and maturities of marketable securities; financing provided $17.1 million. Cash and cash equivalents ended the period at $337.6 million.
- Cash, cash equivalents and marketable securities totaled $979.1 million at June 30, down from $1.285 billion at December 31, 2009. Current assets were $1.005 billion and current liabilities $292.4 million. Management said available funds should support operations for at least 12 months.
- Vertex had $155 million principal amount of secured notes due October 2012. The balance sheet reported $132.2 million of related notes, before considering the separately reported embedded-derivative liability. The notes do not pay current interest and may be subject to earlier redemption from specified telaprevir milestone proceeds. The remaining 2013 convertible notes converted into shares in Q1 2010.
- Stockholders’ equity was $827.1 million, down from $1.096 billion at year-end, mainly reflecting accumulated losses. Shares outstanding were 202.5 million at June 30; 202.8 million were outstanding July 29.
Changes, outlook and material items
- Net loss increased 17% in Q2 and 9% in the first half year over year. Revenue growth was outweighed by higher operating costs, lower interest income and a Q2 non-cash derivative fair-value loss. Q2 2010 loss per share was nearly unchanged from 2009 as the weighted-average share count increased.
- Following positive Phase 3 ADVANCE results reported in May, telaprevir achieved sustained virologic response rates of 75% and 69% in its 12-week and 8-week treatment arms, versus 44% for control; differences were statistically significant. Rash, anemia, nausea and pruritus were more frequent in telaprevir arms, and discontinuations of all study drugs were 6.9%, 7.7% and 3.6%, respectively.
- Management expected ILLUMINATE and REALIZE Phase 3 data in August and September 2010, respectively, and intended to complete the U.S. telaprevir NDA submission in the second half of 2010, assuming successful clinical results. U.S. commercial launch and product revenue were anticipated in 2011, subject to approval. Vertex expected no telaprevir product revenue in 2010.
- Management expected final VX-770 registration-program data in the first half of 2011 and said an NDA could be filed in the second half of 2011 if results supported approval. Other pipeline programs included VX-222, VX-809, VX-509 and VX-765; timing and success remained uncertain.
- The company expected substantial losses to continue at least until a product is approved and successfully commercialized. A material delay to telaprevir approval could require additional capital; financing may not be available on acceptable terms, and Vertex could have to curtail programs or relinquish rights.
- Positive telaprevir data led Vertex to revise assumptions about the timing and likelihood of Janssen milestones. This increased fair-value liabilities and produced a $27.2 million Q2 derivative loss ($28.7 million for the first half). Related September 2009 transaction expenses totaled $30.9 million in Q2. If the $250 million milestones are earned, Vertex expects a further $54.7 million of transaction-related expense; milestone proceeds are committed to note redemption or the purchaser of sold milestone rights.
- Other unusual or ongoing items included a $33.9 million Kendall Square lease restructuring liability, with estimates subject to change and potentially material adjustments; no contingent liabilities were accrued. No material changes to previously disclosed contractual commitments or risk factors were reported. Management stated disclosure controls were effective and no material control changes occurred in Q2.
Investor verification points
- Check subsequent ILLUMINATE and REALIZE results, the completed telaprevir NDA submission, regulatory review and any changes to the expected launch timetable.
- Track cash burn, cash and securities balances, financing needs, commercial launch spending and whether management’s stated 12-month liquidity expectation remains supportable.
- Review the accounting and cash implications of the 2012 notes, milestone-payment assignments and derivative revaluations, including the timing and conditions of milestone receipts and note redemption.
- Monitor VX-770 trial outcomes and other pipeline decisions, as well as third-party manufacturing readiness and regulatory requirements.
- Assess changes in the Kendall Square restructuring estimate, collaboration revenue recognition and accumulated losses.