Vertex Pharmaceuticals Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Vertex develops and sells cystic fibrosis (CF) medicines and invests in other drug-development programs. Its marketed products were KALYDECO, ORKAMBI and SYMDEKO; SYMDEKO received U.S. approval in February 2018.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $752.2 million | $544.1 million | $1,393.0 million | $1,258.9 million |
| Operating income | $172.9 million | $52.7 million | $301.8 million | $323.5 million |
| Net income attributable to Vertex | $207.4 million | $18.0 million | $417.6 million | $265.8 million |
| Diluted EPS attributable to Vertex | $0.80 | $0.07 | $1.61 | $1.06 |
| Operating cash flow | Not presented quarterly in this filing | $574.4 million | $447.3 million |
- Q2 revenue rose 38% year over year; first-half revenue rose 11%. Net product revenue increased 46% in Q2 and 40% for the first half.
- Q2 product revenue: KALYDECO $253.1 million, ORKAMBI $311.3 million and SYMDEKO $185.6 million. First-half product revenue was $1,387.6 million.
- Q2 operating margin was approximately 23.0%, compared with 9.7% a year earlier. First-half operating margin was approximately 21.7%, versus 25.7% in 2017; the prior-year period included a $230 million Merck KGaA upfront collaboration payment.
- Other income was $53.8 million in Q2 and $150.7 million in the first half, mainly unrealized gains on Vertex’s CRISPR equity investment ($53.9 million and $146.5 million, respectively). These gains boosted reported earnings but were not operating revenue.
- R&D expense increased 17% in Q2 and 15% in the first half, to $337.5 million and $648.1 million. Management attributed the increase largely to clinical development, including triple-combination CF programs. SG&A increased 8% and 11%, respectively.
Liquidity, cash flow and obligations
- Cash, cash equivalents and marketable securities totaled $2.77 billion at June 30, up $679.1 million from year-end 2017. Working capital was $2.48 billion.
- Operating cash flow was $574.4 million for the first half. Capital expenditures were $58.9 million; share repurchases used $115.0 million. Cash and cash equivalents alone were $2.15 billion.
- Total liabilities were $1.62 billion. These included $562.6 million of non-current construction-financing lease obligations and $80.6 million due to a collaborator. The company reported no outstanding principal or interest under its $500 million revolving facility at June 30; the facility matures in October 2021.
- Vertex said existing liquidity and expected product cash flows should fund operations for at least the next 12 months. It had $381.0 million remaining under its authorized $500 million share-repurchase program, which runs through December 2019.
Changes, outlook and notable risks
- SYMDEKO’s launch drove much of product growth. Management expected CF product revenue to continue increasing quarterly during the rest of 2018, largely from SYMDEKO, and expected KALYDECO quarterly revenue to be similar to Q2. No numerical revenue or earnings forecast was provided.
- Management expected higher development expense in the second half of 2018 as Phase 3 triple-combination trials progressed. It expected approximately $34 million of imputed real-estate lease interest expense for the remainder of 2018.
- Vertex expected completion of the EMA review for tezacaftor/ivacaftor in the second half of 2018, but did not expect significant ex-U.S. revenue from it during 2018 even if approved. It planned to complete enrollment in VX-445 and VX-659 Phase 3 programs in the second half of 2018 and anticipated an FDA filing no later than mid-2019.
- In May 2018, the FDA placed a clinical hold on the CTX001 sickle-cell IND pending resolution of questions. Vertex and CRISPR were working with the FDA; a beta-thalassemia Phase 1/2 trial was expected to begin in the second half of 2018.
- France pricing discussions remain a significant uncertainty: $290.5 million collected for ORKAMBI early-access shipments was recorded as an accrual, and Vertex expected to repay a portion once the final price was agreed. Revenue estimates under the new accounting standard could be revised, potentially materially.
- Equity-market volatility could materially affect earnings through changes in the fair value of strategic investments. Other risks include reimbursement negotiations, clinical and regulatory outcomes, and the uncertainty and cost of drug development. The filing reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material accrued contingencies.
- ASC 606 adoption increased first-half 2018 product revenue by $8.6 million and Vertex-attributable net income by $5.4 million versus the amounts that would have been reported without adoption. The new equity-investment accounting also put unrealized fair-value changes into earnings.
Important facts for investors to verify
- How quickly SYMDEKO adoption grows, and how much switching from ORKAMBI or KALYDECO affects each product’s sales.
- Final French ORKAMBI pricing and the amount of the $290.5 million accrual that must be refunded.
- Regulatory and clinical milestones, particularly the CTX001 hold and VX-445/VX-659 Phase 3 progress and filing timing.
- How much reported earnings depend on volatile CRISPR investment gains, versus recurring product operations and cash generation.
- Developments in ex-U.S. reimbursement negotiations and the implications of lease-accounting changes expected in 2019.