Business context and reporting period
Vertex Pharmaceuticals Incorporated filed this Form 10-K for the fiscal year ended December 31, 2017. The company focuses on cystic fibrosis (CF) medicines and research and development in other diseases. Its marketed CF products were ORKAMBI and KALYDECO; SYMDEKO received FDA approval in February 2018, after the reporting period.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $2.489 billion | $1.702 billion |
| Net product revenue | $2.165 billion | $1.684 billion |
| Operating income | $123.2 million | $9.9 million |
| Net income (loss) attributable to Vertex | $263.5 million | $(112.1) million |
| Diluted earnings (loss) per share attributable to Vertex | $1.04 | $(0.46) |
| Cash from operating activities | $844.9 million | $236.1 million |
| Cash, cash equivalents and marketable securities at year-end | $2.089 billion | $1.435 billion |
| Working capital at year-end | $1.842 billion | $1.039 billion |
Revenue increased 46% year over year, while net product revenue rose 29%. ORKAMBI generated $1.321 billion, up from $979.6 million; KALYDECO generated $844.6 million, up from $703.4 million. Product revenue growth reflected increased sales of both medicines. The company reported total costs and expenses of $2.365 billion, including research and development expense of $1.325 billion and selling, general and administrative expense of $496.1 million. Cost of product revenue was $272.7 million, equivalent to an approximate 87% product gross margin before other operating expenses.
Reported net income attributable to Vertex includes the effect of noncontrolling interests: consolidated net income was $91.6 million, with a $171.8 million loss attributable to noncontrolling interests. The company reported a $107.3 million income tax benefit. Operating cash flow improved substantially; property and equipment expenditures were $99.4 million. Investing cash flow was $(437.7) million and financing cash flow was $68.4 million.
At year-end, the company had no borrowings outstanding under its $500 million revolving credit facility, after repaying $300 million in February 2017. It had $563.4 million of long-term construction-financing lease obligations and $43.0 million of capital lease obligations. The filing also lists $1.207 billion of contractual commitments and obligations, primarily facility leases. The company stated that available cash and expected product cash flows should fund operations for at least the next 12 months.
Material changes and unusual items
- Total revenue rose by $786.5 million year over year, including $315.2 million of collaborative revenue versus $1.9 million in 2016. The 2017 amount included a $230 million upfront payment from Merck KGaA and a $25 million Janssen milestone; it also included $40 million received by Parion from a third party while Parion was consolidated.
- Research and development expense increased 26%, including a $160 million expense for acquiring VX-561 from Concert Pharmaceuticals and higher clinical-trial spending. Management expected development expense, excluding collaboration and asset-acquisition payments, to increase in 2018 as triple-combination programs advanced.
- Vertex recorded a $255.3 million impairment of Parion’s pulmonary ENaC platform after a Phase 2 VX-371 trial missed its primary efficacy endpoint. Vertex deconsolidated Parion effective September 30, 2017; related tax and noncontrolling-interest accounting materially affected reported results.
- Operating cash flow and liquidity increased; cash, cash equivalents and marketable securities rose $654.1 million. The company attributed the increase principally to product-sale receipts and the Merck payment, partly offset by operating spending, the VX-561 acquisition and debt repayment.
- Vertex held $232.4 million in customer deposits for ORKAMBI supplied through French early-access programs. Because the French price was not fixed or determinable at year-end, the company had not recognized the associated revenue and expected to return some of the collected amount once pricing was settled.
Guidance, outlook, commentary and key risks
Management expected 2018 CF product revenue to increase compared with 2017, depending on SYMDEKO’s U.S. launch, expanded patient eligibility, and approvals and reimbursement in markets outside the United States. It expected 2018 product-cost percentage to be similar to 2017. Vertex expected an EMA decision on tezacaftor/ivacaftor in the second half of 2018 and planned to begin Phase 3 development of VX-659 in the first half of 2018 and VX-445 around mid-2018, subject to further clinical, toxicology and regulatory work. These were forward-looking expectations, not guarantees.
Clinical results disclosed for four-week Phase 2 trials of VX-659 and VX-445 in F508del/minimal-function patients showed within-group improvements in lung function and sweat chloride. The filing cautions that the trials were small and short, interim or early-stage findings may not predict later results, and larger trials must establish safety and efficacy. Other programs included pain candidates VX-150 and VX-128, gene-editing candidate CTX001 with CRISPR for beta-thalassemia and sickle cell disease, and VX-210 for spinal cord injury.
Key risks include heavy dependence on CF products and a concentrated revenue base; competition and possible patient switching from ORKAMBI to SYMDEKO; uncertain clinical, regulatory and commercial outcomes for triple combinations; delays or unfavorable terms in ex-U.S. pricing and reimbursement; and reliance on third-party manufacturing, including single-source steps for ivacaftor, pediatric ORKAMBI tablets and SYMDEKO supply. Other risks include foreign-exchange exposure, regulatory and compliance obligations, intellectual-property disputes, and the possibility that expenses or clinical setbacks impair profitability. Vertex reported GAAP profitability for the first time since 2011, but cautioned that future profitability was uncertain.
Most important facts for investors to verify
- Whether SYMDEKO adoption expands the treated population and revenue without materially displacing ORKAMBI sales.
- Progress and complete safety and efficacy results from Phase 3 VX-659 and VX-445 triple-combination trials, including the status of VX-445 toxicology work.
- Resolution of French ORKAMBI pricing, the amount of the $232.4 million customer deposits retained or returned, and the related revenue-recognition adjustment.
- Whether reimbursement agreements and regulatory approvals outside the United States meet management’s timing and revenue expectations.
- Cash generation relative to rising R&D investment, lease commitments, potential milestone obligations and the announced share repurchase authorization of up to $500 million.
- How the Parion impairment and deconsolidation, tax benefits, and noncontrolling-interest accounting affect comparisons of reported earnings across periods.