01—Abstract
Summary
Summary of the 10-K filed February 17, 2011. Cited figures are marked; the original filing is the authoritative source.
Vertex Pharmaceuticals' FY2010 10-K (filed February 17, 2011) is dominated by a single binary catalyst: telaprevir, its lead hepatitis C protease inhibitor.
The NDA was submitted in November 2010 and granted priority review in January 2011, with an FDA target action date of May 23, 2011. Management expects a mid-2011 U.S. launch if approved, a Canadian launch in the second half of 2011, and an EU launch in the second half of 2011 by partner Janssen. The company is still pre-revenue on products.
Its 2010 total revenues were $143.4 milliona (up 41%), driven mainly by collaborative revenues from Janssen and Mitsubishi Tanabe, while the net loss widened to $754.6 million ($3.77 per share) from $642.2 million. Most of the increase came from R&D (up 16% to $637.4 million, including a $65.9 million commercial supply investment) and SG&A (up 44% to $187.8 million) as the company builds a commercial organization. The balance sheet is strained but liquid.
Cash, equivalents and marketable securities fell to $1.03 billionb from $1.28 billion. Stockholders' equity dropped to $504 million from $1.10 billion, reflecting the accumulated deficit. Debt rose after the September 2010 issuance of $400 million of 3.35% convertible notes due 2015, and the 2012 secured notes ($155 million) are partly retired by Janssen milestone payments.
Management says current resources fund operations for at least twelve months, and it expects cash-flow positivity in 2012 if telaprevir launches as planned. A January 2011 $100 millionc revolving credit facility carries a $400 million minimum cash covenant. Key investor considerations are the concentration of value in telaprevir, competition from Merck's boceprevir (which is under a similar FDA review timeline), reliance on Janssen and Mitsubishi Tanabe, and possible non-cash charges tied to the September 2009 financial transactions.
Those charges could total $35.2 milliond more if the EU milestones are achieved. The VX-770 cystic fibrosis program, now in Phase 3, is the next major pipeline catalyst, with data expected in early 2011.
02—Key points
Key Highlights
- Telaprevir NDA submitted November 2010; FDA priority review granted January 2011 with a May 23, 2011 target action date. Management expects a mid-2011 U.S. launch if approved.
- 2010 total revenues rose 41% to $143.4 million, but the net loss widened 18% to $754.6 million ($3.77 per share) as R&D ($637.4M, +16%) and SG&A ($187.8M, +44%) rose sharply.
- Cash, cash equivalents and marketable securities declined to $1.03 billion from $1.28 billion. Management states that resources are sufficient for at least the next twelve months.
- Stockholders' equity fell to $504 million from $1.10 billion as the accumulated deficit grew to $3.44 billion. Debt includes $400M of 3.35% convertible notes due 2015 and $155M of secured 2012 notes.
- Collaboration dependence is high: Mitsubishi Tanabe and Janssen accounted for 57% and 21% of 2010 revenues. Janssen can terminate its agreement on six months' notice.
- Competitive risk: Merck's boceprevir is under a similar FDA review timeline and may be approved shortly before telaprevir.
- Pipeline: VX-770 (CF, G551D mutation) is in a Phase 3 registration program with primary data expected in Q1 2011. Other programs (VX-222, VX-809, VX-509, VX-765) are in Phase 2a.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 17, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $143.37M$101.89M | +40.7% |
| Cost of Revenue | $0— | — |
| Gross Profit | $143.37M— | — |
| R&D Expenses | $637.42M$550.27M | +15.8% |
| SG&A Expenses | $187.80M$130.19M | +44.2% |
| Operating Expenses | $839.45M$715.90M | +17.3% |
| Operating Income | -$696.08M-$614.01M | −13.4% |
| Interest Expense | $19.27M$13.19M | +46.1% |
| Net Income | -$754.63M-$642.18M | −17.5% |
| EPS (Basic) | $-3.77$-3.71 | −1.6% |
| EPS (Diluted) | $-3.77$-3.71 | −1.6% |
| Shares Outstanding (Basic) | 200.40M173.26M | +15.7% |
| Shares Outstanding (Diluted) | 200.40M173.26M | +15.7% |
05—Questions
Frequently Asked Questions
When could Vertex begin selling telaprevir, and what could delay it?
The FDA's target review date is May 23, 2011, with a mid-2011 U.S. launch expected if approval is granted. Canadian and EU launches are targeted for the second half of 2011. Delays could come from FDA questions about efficacy, safety, manufacturing inspections, labeling or an advisory committee process. Competition from Merck's boceprevir, which is under a similar review timeline, is also a factor.
Why did the net loss increase in 2010?
Operating expenses rose 17% to $839.4 million. R&D grew 16%, driven by commercial supply investment in telaprevir ($65.9M), and SG&A grew 44% as the U.S. commercial organization was built out. Non-cash charges of $56.3M tied to the September 2009 financial transactions, mostly from fair value changes after positive telaprevir data, also contributed. Revenue growth of 41% only partly offset these costs.
Does Vertex have enough cash to operate, and will it need to raise capital?
Management says the $1.03 billion in cash and securities is sufficient for at least twelve months. The company expects to become cash-flow positive in 2012 if telaprevir succeeds. It has a $100 million credit facility from January 2011, and the 2012 notes will be partly redeemed from Janssen milestones. The filing notes that additional equity or debt financing could be needed, particularly if approval is delayed, which would cause dilution.
How much of Vertex's value depends on telaprevir and VX-770?
The filing states that a significant portion of investor value is based on telaprevir's commercial potential, and that the company is heavily dependent on telaprevir's U.S. approval. VX-770 is the next most advanced program, with a possible NDA and MAA filing in the second half of 2011 if the Phase 3 data are supportive. Most other pipeline candidates are in early clinical development, so the outcome of these two programs will largely determine the company's near-term prospects.
What non-cash items could affect future earnings?
The September 2009 financial transactions (2012 secured notes and the sale of milestone rights) generate non-cash fair value changes tied to telaprevir milestone probabilities. Management expects about $35.2 million of additional non-cash expense if Janssen obtains EU approval and launches. The ViroChem in-process R&D intangibles ($518.7 million, roughly 80% tied to VX-222) could also face impairment charges if VX-222 data are unfavorable.
06—Continue