Why did Vertex's net loss increase so much in 2003?

The main driver was a $91.8M restructuring and other expense, of which $78.7M related to the potential restructuring of the unoccupied Kendall Square lease. Revenue also fell from $94.8M to $69.1M as funding from Lilly, Schering and Taisho ended. These effects were partly offset by a $69.6M income line from discontinued operations, which includes a gain of $70.3M on the sale of the Discovery Tools and Services assets.

Is Vertex's cash position sufficient to fund operations?

Management states that funds are sufficient for at least 18 months and expects year-end 2004 cash, equivalents and marketable securities above $350M. Cash and securities totaled $583M at December 31, 2003. Beyond that horizon, funding depends on collaboration revenue, Lexiva royalties and possibly new financing. Management says any financing may not be available on acceptable terms.

What are the main risks from the convertible debt?

Vertex had $315M of 5% convertible notes due September 2007. In February 2004, about $153.1M was exchanged into 5.75% notes due 2011, leaving $161.9M of 2007 notes and $153.1M of 2011 notes. The 2011 notes are senior to the 2007 notes. Annual interest payments rise to about $16.9M. Management notes that high debt may limit its ability to raise additional financing.

What is the status of Vertex's key drug candidates?

Lexiva was approved in the US in October 2003 and is marketed with GlaxoSmithKline, with EU approval expected in 2004. Merimepodib for hepatitis C is in Phase II, with expanded studies planned for 2004 and a possible NDA as early as 2007. VX-950 for hepatitis C is expected to enter Phase I in 2004. Pralnacasan, a partnered ICE inhibitor, was voluntarily suspended after a liver fibrosis finding in a nonclinical toxicology study, and development could be delayed 12-24 months or discontinued.

What is the Kendall Square lease issue and how large could it get?

Vertex decided not to occupy the Kendall Square facility and recorded a $69.5M accrued liability, which is its estimate of the cost to restructure the lease through subleases or a buyout. If restructuring fails, the liability could rise to the full remaining lease obligation of up to $312.5M. Management says the real estate market in Cambridge declined in 2003, which led to the $42.4M third-quarter increase in the charge.

VRTX 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.

Vertex Pharmaceuticals' FY2003 10-K shows a company in transition.

Revenue fell to $69.1 million^a from $94.8 million in 2002, driven by the end of Lilly, Schering and Taisho funding and no new collaboration revenue since 2000. Net loss widened to $196.8 million, or $2.56 per share, from $108.6 million, mainly because of a $91.8 million restructuring charge tied to the Kendall Square lease. That charge was partly offset by a $69.6 million gain from discontinued operations after the sale of the Discovery Tools and Services business for about $101 million.

R&D spending was roughly flat at $199.6 million^b. Novartis (64% of revenue) and GlaxoSmithKline (17%) account for most of the top line. The balance sheet is the key risk for investors.

Cash and marketable securities were $583 million^c at year-end, but stockholders' equity fell to $192.8 million from $378.6 million. The company carries $315 million of 5% convertible notes due 2007. In February 2004 it exchanged $153.1 million of those for 5.75% notes due 2011, which pushed out much of the near-term repayment.

The Kendall Square lease liability is $69.5 million^d, with total future lease obligations of up to $312.5 million, and the outcome depends on the sublease market. Management guides to a 2004 loss of $140-150 million and year-end 2004 cash above $350 million. It states that current funds are sufficient for at least 18 months.

Pipeline progress is concentrated in viral and inflammatory disease. Lexiva was approved by the FDA in October 2003, and its EU approval is expected in 2004. Merimepodib (HCV) is in Phase II and VX-950 (HCV) is moving toward Phase I.

VX-765 is in Phase I for inflammatory disease. Pralnacasan was voluntarily suspended over a liver fibrosis finding in nonclinical toxicology, with a 12-24 month delay possible.

A shareholder class action relating to VX-745 is pending. The company remains unprofitable with no near-term path to profitability disclosed.

02—Key points

Key Highlights

Revenue declined 27% to $69.1M (2002: $94.8M), with royalties of $9.0M and collaborative revenue of $60.1M; Novartis and GSK made up 64% and 17% of total revenue
Net loss widened to $196.8M ($2.56/share) from $108.6M, driven by a $91.8M restructuring charge, partly offset by a $69.6M gain from discontinued operations
Stockholders' equity dropped to $192.8M from $378.6M; cash and marketable securities were $583.2M at year-end 2003
Feb 2004 debt exchange moved $153.1M of 2007 convertible notes into 5.75% notes due 2011; $161.9M of 2007 notes remain outstanding
Kendall Square lease liability of $69.5M is an open risk, with total future lease commitments of up to $312.5M depending on sublease outcomes
Lexiva approved by FDA in October 2003; EU approval expected in 2004; Agenerase and Lexiva royalties were only $15-18M of guided 2004 revenue
2004 guidance: revenue $90-100M, R&D $190-205M, SG&A $38-43M, net loss $140-150M before charges, year-end cash above $350M

03—Questions

Frequently Asked Questions

Why did Vertex's net loss increase so much in 2003?
The main driver was a $91.8M restructuring and other expense, of which $78.7M related to the potential restructuring of the unoccupied Kendall Square lease. Revenue also fell from $94.8M to $69.1M as funding from Lilly, Schering and Taisho ended. These effects were partly offset by a $69.6M income line from discontinued operations, which includes a gain of $70.3M on the sale of the Discovery Tools and Services assets.
Is Vertex's cash position sufficient to fund operations?
Management states that funds are sufficient for at least 18 months and expects year-end 2004 cash, equivalents and marketable securities above $350M. Cash and securities totaled $583M at December 31, 2003. Beyond that horizon, funding depends on collaboration revenue, Lexiva royalties and possibly new financing. Management says any financing may not be available on acceptable terms.
What are the main risks from the convertible debt?
Vertex had $315M of 5% convertible notes due September 2007. In February 2004, about $153.1M was exchanged into 5.75% notes due 2011, leaving $161.9M of 2007 notes and $153.1M of 2011 notes. The 2011 notes are senior to the 2007 notes. Annual interest payments rise to about $16.9M. Management notes that high debt may limit its ability to raise additional financing.
What is the status of Vertex's key drug candidates?
Lexiva was approved in the US in October 2003 and is marketed with GlaxoSmithKline, with EU approval expected in 2004. Merimepodib for hepatitis C is in Phase II, with expanded studies planned for 2004 and a possible NDA as early as 2007. VX-950 for hepatitis C is expected to enter Phase I in 2004. Pralnacasan, a partnered ICE inhibitor, was voluntarily suspended after a liver fibrosis finding in a nonclinical toxicology study, and development could be delayed 12-24 months or discontinued.
What is the Kendall Square lease issue and how large could it get?
Vertex decided not to occupy the Kendall Square facility and recorded a $69.5M accrued liability, which is its estimate of the cost to restructure the lease through subleases or a buyout. If restructuring fails, the liability could rise to the full remaining lease obligation of up to $312.5M. Management says the real estate market in Cambridge declined in 2003, which led to the $42.4M third-quarter increase in the charge.

04—Continue

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