01—Abstract
Summary
Summary of the 10-K filed February 23, 2017. Cited figures are marked; the original filing is the authoritative source.
Vertex Pharmaceuticals' FY2016 10-K shows a company in commercial transition, with net product revenues rising 68% to $1.68 billiona, driven by ORKAMBI (launched mid-2015), which generated $979.6 million, up from $350.7 million.
KALYDECO grew to $703.4 millionb. Total revenues reached $1.70 billion versus $1.03 billion in 2015. Net loss attributable to Vertex narrowed sharply to $112.1 million ($0.46 per share) from $556.3 million, and operating income turned positive at $9.9 million, the first annual operating profit cited in the filing's comparison period.
The investment case rests on the pipeline and on ORKAMBI's ex-U.S. reimbursement path. Management expects to file an NDA for tezacaftor/ivacaftor in the second half of 2017 if Phase 3 data in the first half of 2017 are supportive, with triple-combination data from next-generation correctors (VX-152, VX-440) expected in the second half. Risk factors emphasize heavy dependence on CF revenues, with ORKAMBI and KALYDECO together accounting for nearly all revenue.
KALYDECO was about 41% of 2016 revenues, and ORKAMBI's growth depends on European reimbursement timing, patient discontinuations, and a 2016 FDA complete response letter for ivacaftor in residual-function mutations. Balance sheet actions improved liquidity. Cash, equivalents and marketable securities rose to $1.43 billionc.
Vertex entered a $500 milliond revolving credit facility in October 2016, drew $300 million, and repaid it in February 2017. A subsequent January 2017 Merck KGaA deal brings a $230 million upfront payment for four oncology programs. Research and development expense of $1.05 billion remains very large relative to revenue, and the company has not yet reached sustained GAAP profitability.
02—Key points
Key Highlights
- Net product revenues grew 68% to $1.68B in 2016, led by ORKAMBI ($979.6M, up from $350.7M) and KALYDECO ($703.4M, up 11%).
- Operating income turned positive at $9.9M in 2016, versus an operating loss of $466.9M in 2015. Net loss attributable to Vertex narrowed to $112.1M ($0.46/share) from $556.3M.
- Tezacaftor + ivacaftor Phase 3 data expected 1H 2017, with a planned NDA in 2H 2017 if supported. Next-generation triple-combination data (VX-152, VX-440) expected 2H 2017.
- Concentration risk is high: ORKAMBI and KALYDECO account for substantially all revenue, and KALYDECO alone was ~41% of 2016 revenue.
- Ex-U.S. ORKAMBI revenue was only ~$76.4M in 2016 (mostly Germany), with France revenue unrecognized pending reimbursement. European reimbursement timing is a key 2017 driver.
- Liquidity of $1.43B in cash and marketable securities; $300M revolver drawn in 2016 was repaid in February 2017. Merck KGaA deal adds a $230M upfront payment in 2017, subject to HSR clearance.
- R&D expense of $1.05B (62% of total costs) and a $4.1B federal NOL carryforward underscore the continued investment burden and the long path to sustained profitability.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2016, Vertex Pharmaceuticals Inc lost $0.07.
- Revenue$1.70B100.0%
- Cost of revenue−$210.5M12.4%
- Gross profit$1.49B87.6%
- Operating costs−$1.48B87.1%
- Operating income$9.9M0.6%
- Interest, other & tax−$122.0M7.2%
- Net income−$112.1M6.6%
Where FY2016 revenue went
$1.70B- R&D: $1.05B, 62% of revenue
- SG&A: $432.8M, 25% of revenue
- Cost of revenue: $210.5M, 12% of revenue
- Operating income: $9.9M, 0.6% of revenue
Kept 0.6% as operating incomeOperating income $9.9M · 0.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 23, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $1.70B$1.03B | +64.9% |
| Cost of Revenue | $210.46M$117.15M | +79.6% |
| Gross Profit | $1.49B$915.18M | +63.0% |
| R&D Expenses | $1.05B$995.92M | +5.2% |
| SG&A Expenses | $432.83M$376.57M | +14.9% |
| Operating Expenses | $1.69B$1.50B | +12.9% |
| Operating Income | $9.94M-$466.88M | +102.1% |
| Net Income | -$112.05M-$556.33M | +79.9% |
| EPS (Basic) | $-0.46$-2.31 | +80.1% |
| EPS (Diluted) | $-0.46$-2.31 | +80.1% |
| Shares Outstanding (Basic) | 244.69M241.31M | +1.4% |
| Shares Outstanding (Diluted) | 244.69M241.31M | +1.4% |
05—Questions
Frequently Asked Questions
How much did Vertex's revenue grow in 2016, and what drove it?
Total revenues rose 65% to $1.70 billion from $1.03 billion. Growth came mainly from ORKAMBI, which began selling in mid-2015 and reached $979.6 million in 2016, plus a 11% increase in KALYDECO to $703.4 million. Royalty and collaborative revenues declined.
Is Vertex profitable now?
Not on a full-year net basis. The company reported a net loss attributable to Vertex of $112.1 million ($0.46 per share) for 2016, although this is a large improvement from $556.3 million in 2015. Operating income was slightly positive at $9.9 million, the first annual operating profit in the period shown, helped by a $54.9 million non-cash charge tied to VIE contingent payments that increased the loss. The filing notes a history of losses and no assurance of future profitability.
What are the key catalysts for 2017?
Tezacaftor + ivacaftor Phase 3 data (1H 2017) and a planned NDA filing (2H 2017); next-generation corrector data (VX-152, VX-440) in 2H 2017; an EMA filing for ORKAMBI in children aged 6-11 in 1H 2017; and ex-U.S. reimbursement progress for ORKAMBI, especially in Europe and France.
What are the biggest risks to investors?
Dependence on CF products, with ORKAMBI and KALYDECO providing nearly all revenue; slow ex-U.S. reimbursement; patient discontinuation rates on ORKAMBI; competition from other CF developers (e.g., AbbVie/Galapagos, PTC, Proteostasis); and pipeline failure risk, as shown by a 2016 futility stop of a tezacaftor trial. The filing also cites a DOJ subpoena related to bioanalytical lab practices and a securities class action that was dismissed in 2016.
How is Vertex funding its operations and pipeline?
Primarily from product cash flow and existing cash. Cash and marketable securities were $1.43 billion at year-end 2016. The company repaid its $300 million revolver in February 2017 and expects the $230 million Merck KGaA upfront payment in 2017. It also has large lease obligations, including about $887 million in Fan Pier lease commitments through 2028, and contingent milestone obligations to collaborators.
06—Continue