How much of Vertex's 2011 revenue is recurring versus one-time?

Most of the $1.41B total is not recurring. Collaborative revenues of $409.7M include $318.5M of milestones tied to the Janssen and Mitsubishi Tanabe agreements, which management says will not recur because no further milestones are expected. Management expects collaborative revenue to decline significantly in 2012. Product revenue of $950.9M from INCIVEK is the main ongoing source, but it depends on continued HCV treatment demand and competition from VICTRELIS, and royalty revenue of $50.0M is comparatively small.

Why did Vertex report a profit in 2011 after large losses in prior years?

The profit came from INCIVEK product sales and milestone revenue after the May 2011 approval. Management says the company became cash-flow positive in the second half of 2011, with net income attributable to Vertex of $379.7M in that half alone. The full year net income of $29.6M was reduced by the $105.8M VX-759 impairment, a $70.0M increase in fair value of contingent payments to Alios, and $19.3M of income tax expense. Earlier losses reflected heavy R&D spending before commercialization.

What are the main near-term catalysts and risks for investors?

Near-term catalysts include the first KALYDECO sales in 2012, the expected EU decision on ivacaftor in the third quarter of 2012, interim ZENITH data from VX-222 all-oral combinations in Q1 2012, first data from ALS-2200 and ALS-2158 in Q2 2012, and the start of a Phase 2b rheumatoid arthritis trial for VX-509. Key risks are INCIVEK's dependence on a single product in the face of competition from VICTRELIS and future all-oral regimens, uncertain KALYDECO uptake in a small orphan population, possible impairments of intangible assets such as VX-222 ($412.9M) and the Alios assets ($250.6M), and ongoing dependence on third-party manufacturers.

How strong is Vertex's balance sheet and liquidity position?

At 12/31/2011, Vertex had $968.9M in cash, cash equivalents and marketable securities, excluding Alios' cash. Total assets were $2.2B and total Vertex shareholders' equity was $786.8M. Debt consisted of $400.0M of 3.35% convertible notes due October 2015, with a conversion price of about $48.83. A $100.0M revolving credit facility was undrawn and expires July 2012. The credit agreement requires at least $400.0M of domestic cash and securities. Long-term lease commitments of about $1.3B, including Fan Pier leases, are a significant obligation.

What is the Alios consolidation and why does it affect reported earnings?

Vertex consolidates Alios BioPharma as a variable interest entity because it is the primary beneficiary of the HCV nucleotide analog collaboration, even though it holds no equity in Alios. Alios' $51.9M of cash is restricted and excluded from Vertex's liquidity. The fair value of Vertex's contingent milestone and royalty payments to Alios rose by $70.0M in 2011 as the compounds advanced into the clinic, which reduced net income attributable to Vertex. Future advances of these compounds are expected to produce further fair value increases that reduce reported earnings, even though they reflect clinical progress.

VRTX 10-K FY2011 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 22, 2012. Cited figures are marked; the original filing is the authoritative source.

Vertex Pharmaceuticals' FY2011 10-K marks its transition from a development-stage biotech to a commercial company.

Total revenues rose to $1.41 billion^a in 2011 from $143.4 million in 2010, driven by $950.9 million of net INCIVEK (telaprevir) product sales following the May 2011 U.S. launch, $409.7 million of collaborative revenues (including $318.5 million of milestones from Janssen and Mitsubishi Tanabe), and $50.0 million of royalties. The company reported net income attributable to Vertex of $29.6 million, or $0.14 per diluted share, versus losses of $754.6 million in 2010. Management says Vertex was cash-flow positive in the second half of 2011, with cash, cash equivalents and marketable securities of $968.9 million at year-end (excluding Alios cash).

The 2011 result is flattered by one-time items. Collaborative milestone revenue of $318.5 million^b will not recur, since the company states it expects no further milestones from Janssen or Mitsubishi Tanabe, so collaborative revenues are guided to fall significantly in 2012. Earnings were also pressured by a $105.8 million impairment on VX-759, and by a $70.0 million increase in the fair value of contingent payments owed to Alios, the consolidated VIE.

Operating expenses rose 54% to $1.30 billion^c, with SG&A up 113% to $400.7 million on the INCIVEK launch. Research and development spending increased 11% to $707.7 million. The investment case rests on whether INCIVEK can sustain sales against Merck's VICTRELIS and, later, all-oral interferon-free regimens expected around 2014-2015.

Pipeline catalysts for 2012 include the first KALYDECO (ivacaftor) sales after its January 2012 FDA approval, a possible EU decision in the third quarter, interim ZENITH data from VX-222 combinations, and Phase 2 data for CF correctors. Risks include concentration in a single HCV product, a $400.0 million^d 3.35% convertible note due 2015, a $1.0 billion Fan Pier lease commitment, and a valuation allowance that keeps the company largely untaxed on its roughly $2.7 billion of federal NOLs.

02—Key points

Key Highlights

Total revenue of $1,410.6M in 2011 vs. $143.4M in 2010 (+884%), led by $950.9M of INCIVEK net product revenue following the May 2011 FDA approval.
Net income attributable to Vertex of $29.6M ($0.14 per diluted share) vs. a net loss of $754.6M in 2010, but 2011 included $318.5M of one-time collaborative milestones that management does not expect to recur.
Operating expenses rose 54% to $1,296.8M, with SG&A up 113% to $400.7M and R&D up 11% to $707.7M; a $105.8M impairment on VX-759 was recorded in Q3 2011.
Cash, cash equivalents and marketable securities of $968.9M at 12/31/2011 (excluding Alios cash), up $375.4M from June 30, 2011; management says the company is cash-flow positive and expects to fund operations for at least 12 months.
KALYDECO (ivacaftor) was approved by the FDA in January 2012 for CF patients aged 6+ with the G551D mutation, with an EU decision expected in Q3 2012 and about 1,200 U.S. patients with this mutation.
Competition is intensifying: Merck's VICTRELIS (boceprevir) launched in 2011, and all-oral interferon-free HCV regimens could reach market as early as 2014-2015, which threatens INCIVEK's long-term sales.
Financial exposure includes $400.0M of 3.35% convertible notes due 2015, about $1.0B of Fan Pier lease commitments starting in late 2013, and a full valuation allowance against roughly $2.7B of federal NOLs.

03—One dollar

Follow one dollar

Of each $1.00 of revenue in FY2011, Vertex Pharmaceuticals Inc kept $0.02.

Revenue$1.41B100.0%100.0%
Cost of revenue−$63.6M4.5%4.5%
Gross profit$1.35B95.5%95.5%
Operating costs−$1.23B87.4%87.4%
Operating income$113.8M8.1%8.1%
Interest, other & tax−$84.2M6.0%6.0%
Net income$29.6M2.1%2.1%

10-KFY2011filed February 22, 2012Computed from this filing’s revenue, gross profit, operating income and net income · right columngrey figure: share of revenue

Where FY2011 revenue went

$1.41B

R&D: $707.7M, 50% of revenue
SG&A: $400.7M, 28% of revenue
Net income: $29.6M, 2.1% of revenue
Cost of revenue: $63.6M, 4.5% of revenue
Other operating costs: $124.8M, 8.8% of revenue
Interest, other & tax: $84.2M, 6.0% of revenue

Kept 2.1% as net incomeNet income $29.6M · 2.1%

Full revenue history →

04—Financials

Financial Highlights

10-KFY2011filed February 22, 2012

Revenue$1.41B95.5% Gross Margin Net Income$29.57M2.1% Net Margin EPS (Diluted)$0.14 Total Assets$2.20B Cash & Equivalents$475.32M Free Cash Flow$109.14M

Financial Statements

FY2011 against FY2010

Line item	FY2011FY2010	FY2010	Change
Revenue	$1.41B$143.37M	$143.37M	+883.9%
Cost of Revenue	$63.63M$0	$0	—
Gross Profit	$1.35B$143.37M	$143.37M	+839.5%
R&D Expenses	$707.71M$637.42M	$637.42M	+11.0%
SG&A Expenses	$400.72M$187.80M	$187.80M	+113.4%
Operating Expenses	$1.30B$839.45M	$839.45M	+54.5%
Operating Income	$113.82M-$696.08M	-$696.08M	+116.4%
Interest Expense	$38.45M$19.27M	$19.27M	+99.5%
Net Income	$29.57M-$754.63M	-$754.63M	+103.9%
EPS (Basic)	$0.14$-3.77	$-3.77	+103.7%
EPS (Diluted)	$0.14$-3.77	$-3.77	+103.7%
Shares Outstanding (Basic)	204.89M200.40M	200.40M	+2.2%
Shares Outstanding (Diluted)	208.81M200.40M	200.40M	+4.2%

05—Questions

Frequently Asked Questions

How much of Vertex's 2011 revenue is recurring versus one-time?
Most of the $1.41B total is not recurring. Collaborative revenues of $409.7M include $318.5M of milestones tied to the Janssen and Mitsubishi Tanabe agreements, which management says will not recur because no further milestones are expected. Management expects collaborative revenue to decline significantly in 2012. Product revenue of $950.9M from INCIVEK is the main ongoing source, but it depends on continued HCV treatment demand and competition from VICTRELIS, and royalty revenue of $50.0M is comparatively small.
Why did Vertex report a profit in 2011 after large losses in prior years?
The profit came from INCIVEK product sales and milestone revenue after the May 2011 approval. Management says the company became cash-flow positive in the second half of 2011, with net income attributable to Vertex of $379.7M in that half alone. The full year net income of $29.6M was reduced by the $105.8M VX-759 impairment, a $70.0M increase in fair value of contingent payments to Alios, and $19.3M of income tax expense. Earlier losses reflected heavy R&D spending before commercialization.
What are the main near-term catalysts and risks for investors?
Near-term catalysts include the first KALYDECO sales in 2012, the expected EU decision on ivacaftor in the third quarter of 2012, interim ZENITH data from VX-222 all-oral combinations in Q1 2012, first data from ALS-2200 and ALS-2158 in Q2 2012, and the start of a Phase 2b rheumatoid arthritis trial for VX-509. Key risks are INCIVEK's dependence on a single product in the face of competition from VICTRELIS and future all-oral regimens, uncertain KALYDECO uptake in a small orphan population, possible impairments of intangible assets such as VX-222 ($412.9M) and the Alios assets ($250.6M), and ongoing dependence on third-party manufacturers.
How strong is Vertex's balance sheet and liquidity position?
At 12/31/2011, Vertex had $968.9M in cash, cash equivalents and marketable securities, excluding Alios' cash. Total assets were $2.2B and total Vertex shareholders' equity was $786.8M. Debt consisted of $400.0M of 3.35% convertible notes due October 2015, with a conversion price of about $48.83. A $100.0M revolving credit facility was undrawn and expires July 2012. The credit agreement requires at least $400.0M of domestic cash and securities. Long-term lease commitments of about $1.3B, including Fan Pier leases, are a significant obligation.
What is the Alios consolidation and why does it affect reported earnings?
Vertex consolidates Alios BioPharma as a variable interest entity because it is the primary beneficiary of the HCV nucleotide analog collaboration, even though it holds no equity in Alios. Alios' $51.9M of cash is restricted and excluded from Vertex's liquidity. The fair value of Vertex's contingent milestone and royalty payments to Alios rose by $70.0M in 2011 as the compounds advanced into the clinic, which reduced net income attributable to Vertex. Future advances of these compounds are expected to produce further fair value increases that reduce reported earnings, even though they reflect clinical progress.

06—Continue

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