01—Abstract
Summary
Summary of the 10-K filed March 1, 2013. Cited figures are marked; the original filing is the authoritative source.
Vertex Pharmaceuticals' FY2012 10-K shows a company in transition from a single-blockbuster story to a two-product launch.
Total revenues rose 8% to $1.53 billiona (from $1.41 billion), driven by INCIVEK (telaprevir) net product revenues of $1.16 billion and first-year KALYDECO sales of $171.6 million, plus royalties on Janssen's INCIVO sales. However, the company posted a net loss attributable to Vertex of $(107.0) million, or $(0.50) per diluted share, versus net income of $29.6 million in 2011. The swing was driven by $133.2 million in inventory write-downs on excess INCIVEK, a $115.0 million increase in the fair value of contingent payments owed to Alios, and R&D and SG&A growth.
Management explicitly guided that total revenues will decline in 2013 as INCIVEK sales erode, and INCIVEK quarterly revenue has been falling since its Q4 2011 peak (Q4 2012: $222.8 millionb). The investment case therefore rests on pipeline timing and KALYDECO expansion. Cash, cash equivalents and marketable securities were $1.3 billion at year-end, and management expects operating cash flow plus existing cash to fund operations for at least 12 months.
Against that, the company carries $400 millionc of 3.35% convertible notes due October 2015 and has committed to roughly $1.0 billion of Fan Pier headquarters lease payments beginning December 2013. Key catalysts flagged include the initiation of a pivotal Phase 3 program for VX-809 with ivacaftor (data expected 2014), ivacaftor monotherapy Phase 3 label-expansion data in 2013, VX-509 Phase 2b data in 2H 2013, and VX-135-based all-oral regimens. Competitive risk is significant: Gilead's GS-7977 and Janssen's TMC435 are expected to reach the market as early as late 2013 or 2014, which management acknowledges could take a substantial share of HCV therapy.
The filing also discloses a securities class action (City of Bristol Pension Fund) tied to May-June 2012 disclosures, which management believes is without merit, and a Massachusetts-law and sales-concentration profile in which two wholesalers (AmerisourceBergen and McKesson) account for over half of gross revenues. Net product revenue concentration in INCIVEK (87%d of product revenues in 2012) is the central risk for investors.
02—Key points
Key Highlights
- Total revenues rose 8% to $1.527 billion in 2012, but management expects total revenues to decline in 2013 as INCIVEK sales fall.
- Net loss attributable to Vertex of $(107.0) million, or $(0.50) per diluted share, versus net income of $29.6 million in 2011; drivers included $133.2 million of INCIVEK inventory write-downs and a $115.0 million increase in the fair value of Alios contingent payments.
- INCIVEK net product revenues of $1.16 billion accounted for 87% of 2012 net product revenues; quarterly INCIVEK sales have declined since peaking in Q4 2011 and were $222.8 million in Q4 2012.
- KALYDECO (ivacaftor) generated $171.6 million of first-year net product revenue, with management expecting growth in 2013 as reimbursement expands in England, Ireland and other European markets.
- Cash, cash equivalents and marketable securities totaled $1.3 billion at December 31, 2012, against $400 million of 3.35% convertible notes due 2015 and roughly $1.0 billion of Fan Pier headquarters lease commitments starting December 2013.
- Pipeline catalysts include a pivotal Phase 3 program for VX-809 plus ivacaftor (final data expected 2014), ivacaftor monotherapy Phase 3 data in 2013, and VX-509 Phase 2b data in 2H 2013.
- Competitive risk is elevated: Gilead's GS-7977 and Janssen's TMC435 may be approved in late 2013 or 2014, and management expects INCIVEK to lose a significant share of the genotype 1 HCV market if competing regimens with similar or better profiles are approved.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2012, Vertex Pharmaceuticals Inc lost $0.07.
- Revenue$1.53B100.0%
- Cost of revenue−$236.7M15.5%
- Gross profit$1.29B84.5%
- Operating costs−$1.24B81.4%
- Operating income$46.7M3.1%
- Interest, other & tax−$153.8M10.1%
- Net income−$107.0M7.0%
Where FY2012 revenue went
$1.53B- R&D: $765.9M, 50% of revenue
- SG&A: $432.7M, 28% of revenue
- Cost of revenue: $236.7M, 16% of revenue
- Operating income: $46.7M, 3.1% of revenue
- Other operating costs: $45.0M, 2.9% of revenue
Kept 3.1% as operating incomeOperating income $46.7M · 3.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 1, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $1.53B$1.41B | +8.3% |
| Cost of Revenue | $236.74M$63.63M | +272.1% |
| Gross Profit | $1.29B$1.35B | −4.2% |
| R&D Expenses | $765.90M$707.71M | +8.2% |
| SG&A Expenses | $432.68M$400.72M | +8.0% |
| Operating Expenses | $1.48B$1.30B | +14.2% |
| Operating Income | $46.73M$113.82M | −58.9% |
| Interest Expense | $16.65M$38.45M | −56.7% |
| Net Income | -$107.03M$29.57M | −461.9% |
| EPS (Basic) | $-0.50$0.14 | −457.1% |
| EPS (Diluted) | $-0.50$0.14 | −457.1% |
| Shares Outstanding (Basic) | 211.95M204.89M | +3.4% |
| Shares Outstanding (Diluted) | 215.26M208.81M | +3.1% |
05—Questions
Frequently Asked Questions
Why did Vertex swing to a net loss in 2012 despite revenue growth?
Revenues rose 8% to $1.53 billion, but operating costs grew 18% to $1.52 billion. Key items were $133.2 million in lower-of-cost-or-market charges on excess INCIVEK inventory, a $115.0 million increase in the fair value of contingent milestone and royalty obligations to Alios (which reduces Vertex net income dollar-for-dollar), and higher R&D ($806 million, up 14%) and SG&A ($437 million, up 9%) from the KALYDECO launch and clinical programs. Net loss attributable to Vertex was $(107.0) million, or $(0.50) per diluted share.
What does management expect for revenue in 2013?
Management expects total revenues to decline in 2013 versus 2012, because INCIVEK revenues are expected to fall faster than KALYDECO revenues can grow. KALYDECO revenues are expected to increase as reimbursement is secured in additional international markets, but management does not believe these gains will fully offset INCIVEK declines in the near term. The company also expects sales, general and administrative expenses to decrease in 2013, while development expenses are expected to rise.
How sustainable is INCIVEK's revenue, and what threatens it?
INCIVEK sales have been declining quarterly since peaking in Q4 2011, reaching $222.8 million in Q4 2012, as patients increasingly delay treatment in anticipation of newer therapies. The main threats are GS-7977 (Gilead) and TMC435 (Janssen), which could be approved in late 2013 or 2014 in combination with peg-IFN and ribavirin, followed by all-oral regimens that do not require injected peg-IFN. A December 2012 Boxed Warning for serious skin reactions added further pressure. Management also recorded $22.8 million of remaining INCIVEK inventory at year-end and signaled that further write-downs are possible.
Is the company's cash position sufficient to fund operations?
Management states that cash flows from INCIVEK/INCIVO and KALYDECO, together with cash, cash equivalents and marketable securities of $1.3 billion, should be sufficient for at least the next twelve months. Longer-term obligations include $400 million of 3.35% convertible notes due October 1, 2015 (convertible at about $48.83 per share and callable after October 1, 2013), Fan Pier lease payments of roughly $1.0 billion over 15 years beginning December 2013, and milestone obligations to Alios of up to $312.5 million in development milestones plus $750 million in commercial milestones. Management says it has no near-term plans to raise capital, but the filing notes it may do so in the future.
What are the key pipeline catalysts for investors over the next 12 to 24 months?
Near-term catalysts include the start of pivotal Phase 3 trials (TRAFFIC and TRANSPORT, about 1,000 patients total) for VX-809 plus ivacaftor in F508del homozygous patients, with final 24-week data expected in 2014 and a planned NDA submission that year. Data from three Phase 3 ivacaftor monotherapy label-expansion trials in patients six and older is expected in 2013, with approval for broader populations not expected until 2014 or later. VX-509 Phase 2b data in rheumatoid arthritis is expected in 2H 2013, VX-661 Phase 2 data in 1H 2013, and VX-787 influenza Phase 2 results in March 2013. Early-stage all-oral HCV regimens built on VX-135 are planned for Phase 2 testing in 2013.
06—Continue