01—Abstract
Summary
Summary of the 10-K filed February 13, 2015. Cited figures are marked; the original filing is the authoritative source.
Vertex Pharmaceuticals' FY2014 10-K shows a company in transition from a shrinking HCV franchise to a cystic fibrosis (CF) growth story.
Total revenues fell 52% to $580.4 milliona in 2014 from $1.21 billion in 2013, as INCIVEK net product revenue collapsed to $24.1 million from $466.4 million. KALYDECO (ivacaftor) grew 25% to $463.8 million, now the company's core revenue driver, including $201.4 million from ex-U.S. markets. Net loss attributable to Vertex widened to $738.6 million ($3.14 per share) from $445.0 million in 2013, though 2013 included a $412.9 million VX-222 impairment, and 2014 included $50.9 million of restructuring charges tied to the Boston headquarters move and $45.2 million of net other expense driven largely by headquarters lease interest.
The investment case rests almost entirely on lumacaftor in combination with ivacaftor for patients with two copies of the F508del mutation, roughly 22,000 patients across North America, Europe and Australia. The NDA was submitted in November 2014 with priority review, and the FDA PDUFA target date is July 5, 2015. The MAA is under Accelerated Assessment with EMA review expected in Q4 2015.
Management expects U.S. revenue recognition to begin in mid-2015 and does not expect significant ex-U.S. revenue in 2015. The filing states that a significant portion of company value is tied to this combination, and that Vertex does not expect to be profitable in the near term. Liquidity is adequate but the balance sheet has become more leveraged.
Cash, equivalents and marketable securities were $1.39 billionb at year-end, down $78 million, after a $300 million Macquarie senior secured term loan (7.2% initial rate) drawn in July 2014, with amortization starting in October 2015. Management states cash flows from KALYDECO plus existing cash should fund operations for at least twelve months.
The company also carries about $473 millionc of construction financing lease obligations tied to its Fan Pier headquarters, and a KALYDECO minimum-revenue covenant applies under the credit agreement. Investors should also weigh the pending securities class action (filed May 2014), dependence on a sole-source supplier, and a Massachusetts-based shareholder base that has seen significant share price volatility, from $59.79 to $124.35 during 2014.
02—Key points
Key Highlights
- Total revenues fell 52% to $580.4 million in 2014 from $1.21 billion, driven by the INCIVEK collapse (from $466.4 million to $24.1 million in product revenue), partially offset by KALYDECO growth.
- KALYDECO net product revenue rose 25% to $463.8 million, including $201.4 million from ex-U.S. markets, and the FDA approved label expansions in 2014 including R117H.
- Net loss attributable to Vertex was $738.6 million ($3.14 per share) in 2014, versus $445.0 million in 2013, which had a $412.9 million VX-222 impairment.
- Lumacaftor/ivacaftor (NDA filed November 2014, FDA PDUFA date July 5, 2015) is the primary value driver; the filing states a significant portion of company value depends on this combination for ~22,000 F508del-homozygous patients.
- Cash, equivalents and marketable securities totaled $1.39 billion at year-end 2014, down $78 million, with management stating funding is sufficient for at least the next twelve months.
- Debt increased: a $300 million Macquarie senior secured term loan (July 2014) begins amortizing in October 2015, with $15M per quarter then $60M per quarter from October 2016, and it is secured by substantially all assets with a KALYDECO minimum-revenue covenant.
- Risk factors include a securities class action (filed May 2014, motion to dismiss pending), sole-source manufacturing dependence, and the company's continuing expectation of operating losses in 2015.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2014, Vertex Pharmaceuticals Inc lost $1.27.
- Revenue$580.4M100.0%
- Cost of revenue−$39.7M6.8%
- Gross profit$540.7M93.2%
- Operating costs−$1.23B212.5%
- Operating income−$692.4M119.3%
- Interest, other & tax−$46.1M8.0%
- Net income−$738.6M127.2%
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 13, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $580.41M$1.21B | −52.1% |
| Cost of Revenue | $39.73M$88.98M | −55.4% |
| Gross Profit | $540.69M$1.12B | −51.9% |
| R&D Expenses | $855.51M$882.10M | −3.0% |
| SG&A Expenses | $305.41M$356.19M | −14.3% |
| Operating Expenses | $1.27B$1.82B | −30.1% |
| Operating Income | -$692.41M-$610.01M | −13.5% |
| Net Income | -$738.55M-$445.03M | −66.0% |
| EPS (Basic) | $-3.14$-1.98 | −58.6% |
| EPS (Diluted) | $-3.14$-1.98 | −58.6% |
| Shares Outstanding (Basic) | 235.31M224.91M | +4.6% |
| Shares Outstanding (Diluted) | 235.31M224.91M | +4.6% |
05—Questions
Frequently Asked Questions
What is driving Vertex's revenue decline and is it stabilizing?
The decline is driven by INCIVEK, the HCV drug, whose U.S. sales collapsed from $466.4 million in 2013 to $24.1 million in 2014 after it was withdrawn from the U.S. market. Royalty and collaborative revenue also fell sharply because of the 2013 Janssen amendment and the lack of a repeat of its $203 million in 2013 collaborative revenue. KALYDECO revenue growth ($463.8 million, up 25%) partially offset this, but total revenue is not stabilizing until lumacaftor/ivacaftor launches. Management expects 2015 product revenue to rise, but only if the combination is approved and launched in the U.S. in mid-2015.
What happens if the FDA does not approve lumacaftor/ivacaftor on schedule?
The filing says the company's business and future net product revenue depend heavily on this combination. Approval delays or refusal would materially harm the business and likely cause the stock to decline. Management also indicates that the 2015 loss and near-term profitability depend on the timing of U.S. approval and commercialization. Because the company has a $300 million term loan with a KALYDECO minimum-revenue covenant and amortization beginning in late 2015, a delay would also increase financing pressure.
How much debt does Vertex carry and when is it due?
Vertex carries a $300 million senior secured term loan from July 2014, bearing interest initially at 7.2% and dropping to 6.2% after FDA approval of a product for F508del-homozygous patients aged 12 and older and one year after closing. Principal repayments are $15 million per quarter from October 2015 through July 2016, then $60 million per quarter until the July 2017 maturity. The company also has about $473 million of construction financing lease obligations related to its Boston headquarters, which the filing treats as a financing obligation. It may request up to an additional $200 million under the credit agreement.
Is Vertex's cash position sufficient to fund operations?
As of December 31, 2014, Vertex had $1.39 billion in cash, cash equivalents and marketable securities, and management says cash flows from KALYDECO together with this balance should fund operations for at least the next twelve months. Operating cash flow was negative $513 million in 2014, and the company expects continued quarterly losses until lumacaftor/ivacaftor generates meaningful revenue. Investors should note that the company has relied on stock issuances under employee plans ($274.6 million in 2014) and debt to fund the gap, and it may need to raise additional capital if approval is delayed.
06—Continue