Vertex Pharmaceuticals Incorporated — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015, with quarterly results including the fourth quarter. Unless noted otherwise, financial amounts are in U.S. dollars.
Business context
Vertex discovers, develops, manufactures and commercializes medicines, principally for cystic fibrosis (CF). Its marketed products were KALYDECO (ivacaftor) and ORKAMBI (lumacaftor/ivacaftor). ORKAMBI received U.S. approval in July 2015 and European Commission approval in November 2015 for patients aged 12 and older with two F508del mutations. The company continued investing in CF and earlier-stage oncology, pain and neurology programs.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $1,032.3 million | $580.4 million |
| Net product revenue | $1,000.3 million | $487.8 million |
| Operating loss | $466.9 million | $692.4 million |
| Net loss attributable to Vertex | $556.3 million | $738.6 million |
| Diluted loss per share attributable to Vertex | $2.31 | $3.14 |
| Cash and cash equivalents plus marketable securities at year-end | $1,042.5 million | $1,387.1 million |
| Net cash used in operating activities | $365.4 million | $573.1 million |
- 2015 product revenue comprised KALYDECO at $631.7 million, ORKAMBI at $350.7 million and INCIVEK at $18.0 million. KALYDECO represented about 61% of total revenue.
- Fourth-quarter product revenue was $406.6 million, including $219.9 million from ORKAMBI and $180.7 million from KALYDECO.
- Total revenue rose 78% and product revenue rose 105% year over year. The smaller attributable net loss mainly reflected higher revenue; the company nevertheless remained loss-making.
- Operating costs and expenses were $1,499.2 million, including R&D of $995.9 million and SG&A of $376.6 million. Reported product gross margin was approximately 88% (product revenue less cost of product revenue, before other operating expenses).
- Operating cash use improved year over year but remained substantial. Investing activities provided $268.9 million and financing activities provided $188.9 million; cash and cash equivalents increased $89.5 million during the year. The broader cash-and-marketable-securities balance fell $344.6 million from year-end 2014.
- At year-end, current assets were $1,407.2 million and current liabilities $506.3 million. Current assets include restricted VIE cash; restricted cash is not generally available for Vertex’s corporate use.
- Debt included a $300 million senior secured term loan, with a reported carrying amount of approximately $295.4 million, and a $472.6 million long-term construction financing lease obligation. Principal repayments on the term loan were scheduled in four $75 million installments from October 2016 through July 2017. The loan is secured by substantially all of Vertex’s and guarantor subsidiaries’ assets and includes a minimum KALYDECO revenue covenant.
Material changes and management outlook
- ORKAMBI generated its first U.S. revenue in the second half of 2015; U.S. treatment had begun for more than 4,500 of approximately 8,500 eligible patients by year-end. The company said 2016 results would depend largely on ORKAMBI uptake, persistence, adherence and rebates.
- KALYDECO revenue increased from $463.8 million to $631.7 million, while ORKAMBI added $350.7 million in its initial launch year. INCIVEK, which had been withdrawn from the U.S. market, declined to $18.0 million from $24.1 million.
- R&D expense increased 16% and SG&A increased 23%, reflecting clinical-trial investment and commercial preparation for ORKAMBI. Management expected both development and commercial expenses to increase in 2016; it also expected KALYDECO revenue to grow.
- Management stated that existing cash, cash equivalents, marketable securities and expected product cash flows should fund operations for at least the next 12 months. It identified product sales, particularly ORKAMBI and KALYDECO, as key to future liquidity.
- Pipeline milestones included a planned second-quarter 2016 U.S. supplemental application for ORKAMBI in ages 6–11, and anticipated VX-661 combination-trial data in 2017. VX-371 was in Phase 2; next-generation correctors VX-152 and VX-440 entered Phase 1 in late 2015.
- In February 2016, after the fiscal year-end, the FDA issued a Complete Response Letter for KALYDECO’s application covering 23 residual-function mutations. Vertex planned to discuss a path forward with the FDA; approval was uncertain.
Risks, contingencies and unusual items
- Commercial performance and valuation were substantially dependent on ORKAMBI launch success and continued KALYDECO sales. Reimbursement negotiations outside the U.S. could delay or limit revenue; Vertex did not expect significant ex-U.S. ORKAMBI revenue in 2016 beyond Germany.
- Vertex reported significant operating losses in each of the preceding three years. Drug-development, safety, regulatory, competition, pricing and reimbursement risks could delay or prevent pipeline products from reaching market.
- Vertex paid Parion $80 million upfront for ENaC-inhibitor rights and paid CRISPR $75 million upfront, plus a $30 million investment. The CRISPR upfront payment was expensed in R&D; milestone and royalty obligations may add future costs.
- A $75 million CRISPR upfront payment contributed to higher 2015 R&D expense. Stock-based compensation was $231.0 million, up from $177.5 million in 2014. No 2015 continuing-operations intangible impairment charge was recorded.
- Vertex received a U.S. Department of Justice subpoena in the third quarter of 2015 concerning marketed medicines, primarily laboratory Good Laboratory Practices; it was responding and cooperating. A shareholder securities lawsuit was dismissed, but the plaintiff appealed.
- Manufacturing relied substantially on third parties, including single-source providers for one ivacaftor manufacturing step and KALYDECO granules for young children. The company also cited foreign-exchange, data-protection, intellectual-property and facility risks.
Important facts for investors to verify
- ORKAMBI’s U.S. patient starts, treatment persistence and adherence, net pricing, rebates, and the pace of European reimbursement and sales.
- KALYDECO revenue durability and the regulatory outcome for the residual-function application following the FDA’s Complete Response Letter.
- Cash burn, accessible (not restricted) liquidity, term-loan repayment and covenant compliance, and the distinction between debt and substantial lease obligations.
- Clinical-trial results and timelines for VX-661 combinations, VX-371, VX-152/VX-440 and other pipeline programs, alongside related collaboration commitments.
- Developments in the DOJ subpoena and securities-litigation appeal, and any resulting financial, compliance or reputational exposure.