Is Vertex profitable, and when does management expect to reach profitability?

No. Vertex has reported operating losses every year since inception, with a 2001 net loss of $66.2 million (or $40.3 million on a pro forma basis under the new revenue method). Management expects a significant operating loss in 2002 and expects losses to continue beyond 2002, and it says the company may never achieve sustained profitability.

How dependent is Vertex on its collaboration partners?

Heavily. Novartis (22%) and Pfizer (17%) accounted for a large share of 2001 revenue, and the Novartis kinase collaboration alone contributed $36.7 million. Partners such as GlaxoSmithKline, Aventis, Novartis, and Eli Lilly can terminate agreements on notice, and GlaxoSmithKline controls most of Agenerase's marketing. Loss of any of these partners could materially hurt funding and milestone income.

What is the status of Agenerase and its outlook?

Agenerase, an HIV protease inhibitor marketed by GlaxoSmithKline, generated $11.1 million in royalties in 2001 on $71.9 million of worldwide sales. Its U.S. share of protease inhibitor prescriptions was about 6.8%, and more than 60% of U.S. use was in combination with ritonavir. The risk factors note that competition, changes in treatment strategy, and reduced protease inhibitor use could cut sales.

What are the main legal risks disclosed?

Two suits are pending. Chiron Corporation alleges infringement of three U.S. patents related to hepatitis C protease research; the case is stayed pending reexamination. Oregon Health Sciences University, filed December 7, 2001, seeks to add an inventor and claim part ownership of five Vertex neurophilin patents. Vertex believes both claims are without merit and plans to contest them vigorously.

How much capital does Vertex have, and does it need to raise more?

At December 31, 2001, Vertex had $743.2 million in cash and marketable securities, plus $315 million of convertible notes outstanding. Management believes existing resources and expected payments will fund planned activities for at least 18 months. If not, it may need to raise money through equity or debt, which could dilute shareholders or restrict financing options.

VRTX 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 1, 2002. Cited figures are marked; the original filing is the authoritative source.

Vertex Pharmaceuticals' 2001 10-K shows a company in heavy investment mode: total revenue rose to $167.5 million^a (from $139.0 million restated for 2000), but R&D spending climbed to $148.7 million and the company posted a net loss of $66.2 million, or $0.89 per share, after accounting charges.

Vertex's revenue base remains concentrated: Agenerase (amprenavir) royalties were only $11.1 million^b in 2001 on $71.9 million of worldwide sales, and collaborative R&D revenue, led by the Novartis kinase deal, made up the largest revenue category at $69.0 million. Aurora Biosciences, acquired in July 2001 as a pooled transaction, added assay and screening services and product sales, and also contributed about $23.7 million in merger costs. The balance sheet is still strong, with $743.2 million in cash and marketable securities against $315 million of 5% convertible notes due 2007 and total stockholders' equity of $475.4 million.

Management says current funds are sufficient for at least 18 months, though it guides to a significant operating loss in 2002 and to continuing losses beyond that. The pipeline has more than 12 candidates, with VX-175 (HIV, Phase III with GlaxoSmithKline) the most advanced of the clinical programs, and merimepodib (hepatitis C, Phase II) and pralnacasan (rheumatoid arthritis, Phase II with Aventis) next. Investors should weigh the approaching regulatory filing for VX-175, the dependence on partners such as Novartis and GlaxoSmithKline, and the ongoing Chiron and Oregon Health Sciences University patent suits.

The filing also reports a change in revenue recognition (the Substantive Milestone Method), which produced a $25.9 million^c non-cash cumulative-effect charge and defers $35.2 million of revenue into later years. Pro forma net loss under the new method would have been $40.3 million, or $0.54 per share. The stock traded between $15.50 and $75.17 during 2001 and closed at $27.33 on March 26, 2002.

02—Key points

Key Highlights

Total revenue grew to $167.5 million in 2001 from $139.0 million in 2000 (restated), led by collaborative R&D revenue of $69.0 million and product sales of $59.9 million.
Net loss was $66.2 million, or $0.89 per share, including a $25.9 million non-cash charge for the revenue recognition change, $23.7 million in merger costs, and a $17.7 million gain from a derivatives accounting change; pro forma net loss under the new method was $40.3 million ($0.54 per share).
R&D expense rose 47% to $148.7 million as Vertex expanded its kinase, protease, and ion channel programs and advanced more than 12 drug candidates.
Agenerase royalties were $11.1 million on $71.9 million of worldwide sales; the drug has 6.8% of U.S. HIV protease inhibitor prescriptions and is approved in 34 countries.
Cash and marketable securities totaled $743.2 million at year-end 2001, against $315 million of 5% convertible subordinated notes due 2007; management says funds should last at least 18 months.
Acquisition of Aurora Biosciences (July 2001, pooling of interests) added about 450 employees and contracts worth over $70 million of potential 2002 revenue.
Pipeline catalysts include VX-175 (HIV, Phase III with GlaxoSmithKline, anticipated regulatory filings in 2002), merimepodib (hepatitis C, Phase II), and pralnacasan (rheumatoid arthritis, Phase II with Aventis).

03—Questions

Frequently Asked Questions

Is Vertex profitable, and when does management expect to reach profitability?
No. Vertex has reported operating losses every year since inception, with a 2001 net loss of $66.2 million (or $40.3 million on a pro forma basis under the new revenue method). Management expects a significant operating loss in 2002 and expects losses to continue beyond 2002, and it says the company may never achieve sustained profitability.
How dependent is Vertex on its collaboration partners?
Heavily. Novartis (22%) and Pfizer (17%) accounted for a large share of 2001 revenue, and the Novartis kinase collaboration alone contributed $36.7 million. Partners such as GlaxoSmithKline, Aventis, Novartis, and Eli Lilly can terminate agreements on notice, and GlaxoSmithKline controls most of Agenerase's marketing. Loss of any of these partners could materially hurt funding and milestone income.
What is the status of Agenerase and its outlook?
Agenerase, an HIV protease inhibitor marketed by GlaxoSmithKline, generated $11.1 million in royalties in 2001 on $71.9 million of worldwide sales. Its U.S. share of protease inhibitor prescriptions was about 6.8%, and more than 60% of U.S. use was in combination with ritonavir. The risk factors note that competition, changes in treatment strategy, and reduced protease inhibitor use could cut sales.
What are the main legal risks disclosed?
Two suits are pending. Chiron Corporation alleges infringement of three U.S. patents related to hepatitis C protease research; the case is stayed pending reexamination. Oregon Health Sciences University, filed December 7, 2001, seeks to add an inventor and claim part ownership of five Vertex neurophilin patents. Vertex believes both claims are without merit and plans to contest them vigorously.
How much capital does Vertex have, and does it need to raise more?
At December 31, 2001, Vertex had $743.2 million in cash and marketable securities, plus $315 million of convertible notes outstanding. Management believes existing resources and expected payments will fund planned activities for at least 18 months. If not, it may need to raise money through equity or debt, which could dilute shareholders or restrict financing options.

04—Continue

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