01—Abstract
Summary
Summary of the 10-K filed March 31, 2003. Cited figures are marked; the original filing is the authoritative source.
Vertex Pharmaceuticals' 2002 Form 10-K reports a net loss of $108.6 milliona, or $1.43 per share, versus $66.2 million ($0.89 per share) in 2001.
Total revenue was $161.1 millionb, down slightly from $167.5 million. Pharmaceutical revenue rose to $87.3 million, driven by Novartis kinase collaboration revenue of $41.9 million, while Discovery Tools and Services revenue fell 16% to $73.7 million as the company shifted away from instrumentation and sold PanVera assets. Research and development spending increased 35% to $203.0 million as Vertex advanced its own pipeline, which investors should weigh against the company's dependence on partner funding and royalties from Agenerase.
The pipeline is the central investment story. GlaxoSmithKline filed an NDA for 908 (VX-175), an HIV protease inhibitor, in December 2002, with a U.S. launch targeted for Q4 2003. Vertex-driven candidates in Phase I or II include VX-148 (psoriasis), VX-702 (acute coronary syndromes), merimepodib (hepatitis C), and VX-563 (sickle cell disease).
Management expects to select two priority candidates for internal U.S. development by year-end 2003. Partnered programs include pralnacasan with Aventis, which is in Phase II for rheumatoid arthritis and osteoarthritis. Balance sheet strength is a key positive.
Cash and marketable securities were $635 millionc at year-end 2002, and the March 2003 sale of PanVera assets to Invitrogen for about $95 million is expected to produce a gain above $75 million. Against that, the company carries $315 million of 5% convertible notes due 2007, has an accumulated deficit of $423 million, and expects to remain loss-making in 2003, with a guided net loss of $140 to $160 million before the PanVera gain. The company also disclosed a Chiron patent suit and an Oregon Health Sciences University inventorship claim, and it is evaluating the Kendall Square lease obligation.
02—Key points
Key Highlights
- 2002 net loss of $108.6M ($1.43/share), up from $66.2M ($0.89/share) in 2001; R&D expense rose 35% to $203.0M
- Total 2002 revenue of $161.1M, down 4% year over year; pharmaceutical revenue grew 9% to $87.3M while Discovery Tools and Services fell 16% to $73.7M
- 908 (VX-175), an HIV protease inhibitor partnered with GlaxoSmithKline, has an NDA and EU MAA filed; U.S. launch is expected in Q4 2003 under standard review
- Cash, cash equivalents, and marketable securities of $635M at year-end 2002, plus about $95M from the March 2003 PanVera asset sale to Invitrogen (expected gain above $75M)
- Novartis collaboration contributed $41.9M in 2002 revenue (26% of total) and offers up to about $600M in pre-commercial payments, with a $200M interest-free loan facility
- Five Vertex-driven programs (VX-148, VX-702, VX-563, VX-765, VX-950) are the focus for 2003, with two priority candidates to be selected by year-end 2003
- $315M of 5% convertible subordinated notes due September 2007; accumulated deficit of $423M; 2003 net loss guidance of $140M to $160M excluding the PanVera gain
03—Questions
Frequently Asked Questions
What drove the increase in Vertex's net loss in 2002?
The net loss grew to $108.6M from $66.2M, mainly because research and development expense rose to $203.0M from $150.2M as Vertex advanced its clinical pipeline and expanded gene-family research. The 2001 results also included one-time items: a $25.9M revenue recognition charge, a $23.7M merger cost, and a $17.7M derivative gain, so the year-over-year comparison is partly distorted. Interest income also fell by about $16M to $28.7M due to lower cash balances and rates.
When could 908 reach the U.S. market, and why does it matter?
GlaxoSmithKline submitted the NDA in December 2002. The FDA accepted it for standard review, and Vertex expects approval and launch in Q4 2003, although the filing warns that a delay could hurt revenue. 908 is a prodrug of amprenavir (Agenerase), designed for more compact dosing. Vertex co-promotes it in the U.S. and EU and receives royalties on sales, so approval is an important potential revenue step. The risk factors also note that Agenerase's market share could decline once 908 launches.
Is Vertex dependent on its partners for funding?
Yes. Collaborative R&D revenue was $77.1M in 2002, the largest part of pharmaceutical revenue, and Novartis alone accounted for 26% of total revenue. Several collaborations are ending or shrinking: Taisho, Schering, and Lilly research programs concluded in 2002, so 2003 partner funding is expected to be lower. Several partners, including Novartis, GlaxoSmithKline, and Aventis, can terminate on notice of six to twelve months. Management says the company will need to raise additional capital if collaboration revenue falls short.
How much cash does Vertex have, and how long will it last?
Vertex had $635M in cash and marketable securities at December 31, 2002, and expects more than $600M at year-end 2003 after the PanVera sale and planned 2003 losses. Management says current funds should cover planned activities for at least 18 months. Cash used in operations was $79.5M in 2002. The company also has $315M of convertible notes due 2007 and a $407M operating lease commitment, including a Kendall Square lease it is trying to sublease or exit.
What are the main legal and competitive risks disclosed?
Vertex is defending a Chiron Corporation patent infringement suit over hepatitis C protease research, in which the case is stayed pending patent reexamination. It is also contesting an Oregon Health Sciences University claim that seeks co-ownership of five neurophilin patents. Management believes neither will have a material impact. Competition is intense: at least 15 HIV drugs, five hepatitis C drugs, and 25 rheumatoid arthritis or psoriasis drugs are in development by others, and many competitors have far greater resources.
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