01—Abstract
Summary
Summary of the 10-K filed February 11, 2014. Cited figures are marked; the original filing is the authoritative source.
Vertex Pharmaceuticals' FY2013 10-K shows a company in transition away from its HCV franchise toward cystic fibrosis.
Total revenues fell 21% to $1.21 billiona, driven by a 37% drop in net product revenues to $837.6 million as INCIVEK sales collapsed after competing direct-acting antivirals were approved in late 2013. KALYDECO, the CF therapy, grew to $371.3 million, and management expects it to become the main revenue driver in 2014 even as total revenues are expected to decline significantly. The company reported a net loss attributable to Vertex of $445.0 million, or $1.98 per share, versus a $107.0 million loss in 2012.
The result was driven by $663.5 millionb of intangible asset impairment charges on the HCV programs (VX-222 and VX-135), partly offset by a $152.0 million Janssen payment and a $68.2 million gain from deconsolidating Alios. Management guided to a substantial net loss in 2014 and a significant operating loss, and said it expects to sustain operations for at least twelve months from cash of about $1.47 billion. The key forward catalysts are the FDA's March 27, 2014 PDUFA date for the sNDA covering additional ivacaftor mutations, and mid-2014 Phase 3 data for the lumacaftor/ivacaftor combination in patients homozygous for F508del.
The R117H Phase 3 trial missed its primary endpoint, and a shareholder class action remains pending. Investors should weigh the strength of the CF pipeline against the heavy near-term losses, the expiring HCV revenue base, and the regulatory and clinical binary events ahead.
02—Key points
Key Highlights
- Total revenues fell 21% to $1.21 billion in 2013 from $1.53 billion, as INCIVEK product revenue dropped 60% to $466.4 million.
- KALYDECO net product revenues rose to $371.3 million in 2013 from $171.6 million, and management expects continued growth in 2014.
- Net loss attributable to Vertex was $445.0 million ($1.98 per share), including $663.5 million of intangible asset impairment charges tied to HCV drug candidates.
- Management expects a significant operating loss and substantial net loss in 2014, with total revenues declining significantly as INCIVO royalties end and INCIVEK sales fall.
- Cash, cash equivalents and marketable securities were about $1.47 billion at year-end 2013, which management says is sufficient for at least twelve months.
- Key 2014 catalysts include the FDA PDUFA date of March 27, 2014 for ivacaftor in additional CFTR mutations, and mid-2014 TRAFFIC/TRANSPORT Phase 3 data for lumacaftor/ivacaftor.
- The R117H Phase 3 trial of ivacaftor missed its primary endpoint, and the company is still discussing a possible sNDA filing with the FDA.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2013, Vertex Pharmaceuticals Inc lost $0.37.
- Revenue$1.21B100.0%
- Cost of revenue−$89.0M7.3%
- Gross profit$1.12B92.7%
- Operating costs−$1.73B143.0%
- Operating income−$610.0M50.3%
- Interest, other & tax$165.0M13.6%
- Net income−$445.0M36.7%
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 11, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $1.21B$1.53B | −20.6% |
| Cost of Revenue | $88.98M$236.74M | −62.4% |
| Gross Profit | $1.12B$1.29B | −13.0% |
| R&D Expenses | $882.10M$765.90M | +15.2% |
| SG&A Expenses | $356.19M$432.68M | −17.7% |
| Operating Expenses | $1.82B$1.48B | +23.1% |
| Operating Income | -$610.01M$46.73M | −1405.5% |
| Net Income | -$445.03M-$107.03M | −315.8% |
| EPS (Basic) | $-1.98$-0.50 | −296.0% |
| EPS (Diluted) | $-1.98$-0.50 | −296.0% |
| Shares Outstanding (Basic) | 224.91M211.95M | +6.1% |
| Shares Outstanding (Diluted) | 224.91M215.26M | +4.5% |
05—Questions
Frequently Asked Questions
Why did Vertex's revenues decline sharply in 2013?
INCIVEK, the HCV protease inhibitor, was the majority of product revenue in prior years, but its sales declined rapidly through 2013 after the FDA approved competing direct-acting antivirals SOVALDI and OLYSIO in late 2013. INCIVEK product revenue fell from $1.16 billion in 2012 to $466.4 million in 2013. Partly offsetting this, KALYDECO revenue grew and the Janssen amendment produced one-time collaborative revenue in Q4 2013.
What drove the large 2013 net loss?
The loss was driven mainly by $663.5 million in intangible asset impairment charges: $412.9 million for VX-222 in Q1 2013 and $250.6 million for the VX-135 HCV nucleotide program in Q4 2013. Research and development expense also rose 14% to $918.8 million, and the Alios deconsolidation contributed a $68.2 million gain that partly offset these items.
What are the most important near-term catalysts for CF?
The FDA's PDUFA target date of March 27, 2014 for the sNDA covering ivacaftor in patients with other specified CFTR mutations is the nearest event. Mid-2014 data from the TRAFFIC and TRANSPORT Phase 3 trials of lumacaftor/ivacaftor in patients homozygous for F508del are the largest potential catalyst, since that population is about 28,000 patients in North America, Europe and Australia. A planned NDA and EU MAA filing would follow in the second half of 2014 if the trials succeed.
Is Vertex's cash position sufficient to fund operations?
Management said that cash flows from product sales, plus cash, cash equivalents and marketable securities of about $1.47 billion at December 31, 2013, will be sufficient to fund operations for at least the next twelve months. It also said it has no near-term plans to raise capital but may need to in the future, which could mean dilution or financing on unfavorable terms.
What risks could affect Vertex's shares beyond the pipeline?
Risks include pricing and reimbursement pressure, especially in Australia and Canada where KALYDECO reimbursement is still under discussion, and a shareholder class action filed in September 2012 that the company is defending. The company also faces a partial clinical hold on VX-135 in the United States and the continuing expense of the Boston headquarters lease, which runs through 2028 and carries roughly $1.09 billion in future minimum payments.
06—Continue