01—Abstract
Summary
Summary of the 10-K filed February 16, 2016. Cited figures are marked; the original filing is the authoritative source.
Vertex Pharmaceuticals' FY2015 10-K shows a company in transition from development to commercial-stage biotech, anchored by cystic fibrosis (CF).
Total revenues rose 78% to $1.03 billiona in 2015 from $580.4 million in 2014, driven by total net product revenues that more than doubled (up 105% to $1.0 billion). KALYDECO contributed $631.7 million and ORKAMBI, launched in the U.S. in the second half of 2015, contributed $350.7 million, with ORKAMBI revenue rising from $130.8 million in Q3 to $219.9 million in Q4. Despite this growth, the company posted a net loss attributable to Vertex of $556.3 million ($2.31 per share), an improvement from the $738.6 million loss in 2014, as R&D expense rose to $995.9 million and SG&A to $376.6 million.
The investment case rests heavily on ORKAMBI's U.S. ramp and its ex-U.S. reimbursement timing. Management noted roughly 8,500 eligible U.S. patients, with more than 4,500 having started treatment by year-end, and said ex-U.S. ORKAMBI revenue will be concentrated in Germany until other European reimbursement discussions conclude. KALYDECO represented about 61%b of 2015 revenue, down from 80% in 2014, and the FDA issued a Complete Response Letter in February 2016 on the sNDA for residual-function mutations, creating regulatory uncertainty.
Pipeline spending is substantial, with a four-trial Phase 3 program for VX-661 and next-generation correctors, and the CRISPR and Parion collaborations added significant upfront payments. Balance sheet and liquidity are the key watch items.
Cash, cash equivalents and marketable securities fell to $1.04 billionc from $1.39 billion, and the company carries a $300 million senior secured term loan with $75 million quarterly principal repayments beginning October 2016, plus a covenant requiring minimum KALYDECO net revenues. Management states that cash flows and existing cash should fund operations for at least the next twelve months, but the company has a substantial accumulated deficit, a full valuation allowance on U.S. NOLs of about $4.2 billion, and a securities class action plus a DOJ subpoena still pending.
02—Key points
Key Highlights
- Total revenues grew 78% to $1,032.3M in 2015 (from $580.4M in 2014), led by a 105% increase in net product revenues to $1,000.3M.
- ORKAMBI launched in the U.S. in H2 2015 and generated $350.7M in 2015, with Q4 sales of $219.9M; 4,500+ of ~8,500 eligible U.S. patients had started treatment by December 31, 2015.
- KALYDECO net product revenues reached $631.7M (including $266.1M ex-U.S.), but their share of total revenue fell to ~61% from ~80%.
- Net loss attributable to Vertex narrowed to $556.3M ($2.31/share) from $738.6M ($3.14/share) in 2014, though R&D expense rose 16% to $995.9M.
- Cash, equivalents and marketable securities declined to $1.04B from $1.39B; management expects existing cash plus product cash flows to fund operations for at least 12 months.
- The FDA issued a Complete Response Letter in February 2016 on the KALYDECO sNDA for 23 residual-function mutations, and the company plans to meet with the FDA on a path forward.
- Debt: $300M senior secured term loan with $75M quarterly principal repayments starting October 2016, plus a minimum quarterly KALYDECO net revenue covenant; a securities class action (dismissed in September 2015, under appeal) and a DOJ subpoena remain pending.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2015, Vertex Pharmaceuticals Inc lost $0.54.
- Revenue$1.03B100.0%
- Cost of revenue−$117.2M11.3%
- Gross profit$915.2M88.7%
- Operating costs−$1.38B133.9%
- Operating income−$466.9M45.2%
- Interest, other & tax−$89.5M8.7%
- Net income−$556.3M53.9%
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 16, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $1.03B$580.41M | +77.9% |
| Cost of Revenue | $117.15M$39.73M | +194.9% |
| Gross Profit | $915.18M$540.69M | +69.3% |
| R&D Expenses | $995.92M$855.51M | +16.4% |
| SG&A Expenses | $376.57M$305.41M | +23.3% |
| Operating Expenses | $1.50B$1.27B | +17.8% |
| Operating Income | -$466.88M-$692.41M | +32.6% |
| Net Income | -$556.33M-$738.55M | +24.7% |
| EPS (Basic) | $-2.31$-3.14 | +26.4% |
| EPS (Diluted) | $-2.31$-3.14 | +26.4% |
| Shares Outstanding (Basic) | 241.31M235.31M | +2.6% |
| Shares Outstanding (Diluted) | 241.31M235.31M | +2.6% |
05—Questions
Frequently Asked Questions
How quickly is ORKAMBI ramping, and what drives 2016 revenue?
ORKAMBI generated $350.7M in 2015, with quarterly sales rising from $130.8M in Q3 to $219.9M in Q4. Management expects 2016 ORKAMBI revenue to rise versus 2015 as a full year is recognized. Key drivers are the number of U.S. patients initiating treatment, the proportion who stay on therapy, compliance, and rebates and other gross-to-net adjustments. Ex-U.S. revenue is expected to come mainly from Germany initially, since reimbursement talks in other European countries take time.
How much does the company depend on KALYDECO, and what does the CRL mean?
KALYDECO accounted for about 61% of 2015 revenue, though it still grew to $631.7M. The FDA's February 2016 Complete Response Letter means the sNDA for 23 residual-function mutations cannot be approved in its current form. That delays a label expansion that would have broadened the eligible population. Vertex plans to meet with the FDA to define the next steps, but there is no assurance the outcome will support approval.
Is Vertex close to sustained profitability, and how much runway does it have?
Not yet. The company lost $556.3M in 2015 and has an accumulated deficit of about $5.3B, with a full valuation allowance on most deferred tax assets. Cash and marketable securities were $1.04B at year-end. Management says cash flows and existing resources should fund operations for at least 12 months. The $300M term loan begins amortizing in October 2016 at $75M per quarter, which will pressure liquidity unless product revenue continues to grow.
What are the main pipeline catalysts and spending commitments?
The Phase 3 VX-661 program has four trials, with data expected from early 2017 for the two-copy F508del population and in the first half of 2017 for the gating and residual-function populations. Phase 2 readouts for VX-371 are expected in mid-2016, and Phase 1 studies of next-generation correctors VX-152 and VX-440 started in Q4 2015, with Phase 2 planned for H2 2016. Research and development spending is expected to rise in 2016 due to the VX-661 program, and the company has milestone and royalty obligations under the Parion, CRISPR and BioAxone agreements.
What legal or regulatory risks could affect the investment case?
A securities class action (Local No. 8 IBEW Retirement Plan & Trust) was dismissed in September 2015, and the plaintiff has appealed; the company says the claims are without merit. A DOJ subpoena received in Q3 2015 concerns Good Laboratory Practices at a bioanalytical lab, and the company is cooperating. Other exposures include U.S. healthcare fraud and off-label promotion laws, the EU's Safe Harbor invalidation affecting data transfers, and pricing pressure from payors on specialty drugs. Any adverse outcome could affect the cost of defense, reputation and revenue.
06—Continue