01—Abstract
Summary
Summary of the 10-K filed February 15, 2018. Cited figures are marked; the original filing is the authoritative source.
Vertex Pharmaceuticals' 2017 10-K shows a company that has reached a turning point: it reported its first annual GAAP profit since 2011, with net income attributable to Vertex of $263.5 milliona (diluted EPS $1.04) on total revenues of $2.49 billion, up 46% from $1.70 billion in 2016.
The result was helped by $230.0 millionb of one-time collaborative revenue from the Merck KGaA deal and a $107.3 million income tax benefit tied to the impairment of Parion's ENaC platform. Net product revenues rose 29% to $2.17 billion, driven by ORKAMBI ($1.32 billion) and KALYDECO ($844.6 million). Both figures were concentrated in cystic fibrosis (CF) medicines, which account for substantially all product revenue.
Cash, cash equivalents and marketable securities rose to $2.09 billionc, and working capital reached $1.84 billion. The filing's key investor issues are pipeline and execution risk. Management plans to start Phase 3 trials for triple-combination regimens built on next-generation correctors VX-659 and VX-445 in 2018, and SYMDEKO was approved by the FDA in February 2018.
Several risks are significant. ORKAMBI ex-U.S. reimbursement remains difficult, with ex-U.S. revenue only 13% of ORKAMBI sales in 2017. About $232.4 milliond collected in France is held as customer deposits pending a price decision, and it is expected to be partly repaid.
In September 2017 a Phase 2 VX-371 trial failed its primary endpoint, which forced a $255.3 million impairment and the deconsolidation of Parion. The company also carries about $3.6 billion of U.S. federal NOLs and a valuation allowance on most deferred tax assets, which could produce a large future tax benefit if reversed. On the balance sheet, a $500 million credit facility was repaid in February 2017 and is undrawn, a $500 million share repurchase program was authorized in January 2018, and management expects cash flows to cover operations for at least twelve months.
Vertex reports no material legal proceedings, though the risk factors describe substantial exposure to product liability, pricing pressure and healthcare fraud enforcement. The primary takeaway for investors is that profitability is real but partly one-time, and future results depend on triple-combination success and on ex-U.S. reimbursement for ORKAMBI and SYMDEKO.
02—Key points
Key Highlights
- Achieved first GAAP annual profitability since 2011: net income attributable to Vertex of $263.5 million ($1.04 diluted EPS) vs. a $112.1 million loss in 2016, though helped by one-time items.
- Total revenues rose 46% to $2.49 billion; net product revenues grew 29% to $2.17 billion, led by ORKAMBI ($1.32B, +35%) and KALYDECO ($845M, +20%).
- Recognized $230.0 million one-time collaborative revenue from the Merck KGaA upfront payment, and a $107.3 million income tax benefit for the year.
- Pipeline catalysts for 2018: Phase 3 starts for triple-combination regimens with VX-659 (1H18) and VX-445 (mid-2018); SYMDEKO FDA approval in February 2018; EMA review of tezacaftor/ivacaftor expected 2H18.
- Significant ex-U.S. ORKAMBI reimbursement challenges: ex-U.S. represented only 13% of ORKAMBI 2017 net product revenue, and $232.4 million in French early-access cash remains unrecognized customer deposits.
- Concentrated revenue base: essentially all product revenue comes from CF medicines, with Walgreens (17%) and Accredo/Curascript (14%) as major customers.
- Strong liquidity: $2.09 billion in cash and marketable securities, $1.84 billion working capital, a $500M credit facility repaid and undrawn, and a new $500M buyback authorized through 2019.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Vertex Pharmaceuticals Inc kept $0.11.
- Revenue$2.49B100.0%
- Cost of revenue−$272.7M11.0%
- Gross profit$2.22B89.0%
- Operating costs−$2.09B84.1%
- Operating income$123.2M5.0%
- Interest, other & tax$140.2M5.6%
- Net income$263.5M10.6%
Where FY2017 revenue went
$2.49B- R&D: $1.32B, 53% of revenue
- SG&A: $496.1M, 20% of revenue
- Operating income: $123.2M, 5.0% of revenue
- Cost of revenue: $272.7M, 11% of revenue
- Other operating costs: $272.0M, 11% of revenue
Kept 5.0% as operating incomeOperating income $123.2M · 5.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 15, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $2.49B$1.70B | +46.2% |
| Cost of Revenue | $272.68M$210.46M | +29.6% |
| Gross Profit | $2.22B$1.49B | +48.6% |
| R&D Expenses | $1.32B$1.05B | +26.4% |
| SG&A Expenses | $496.08M$432.83M | +14.6% |
| Operating Expenses | $2.37B$1.69B | +39.8% |
| Operating Income | $123.24M$9.94M | +1140.4% |
| Interest Expense | $69.30M— | — |
| Net Income | $263.48M-$112.05M | +335.1% |
| EPS (Basic) | $1.06$-0.46 | +330.4% |
| EPS (Diluted) | $1.04$-0.46 | +326.1% |
| Shares Outstanding (Basic) | 248.86M244.69M | +1.7% |
| Shares Outstanding (Diluted) | 253.22M244.69M | +3.5% |
05—Questions
Frequently Asked Questions
Is Vertex now a sustainably profitable company?
Vertex reported its first annual GAAP profit since 2011, but 2017 results were flattered by non-recurring items. These include the $230 million Merck KGaA upfront payment and a $107 million tax benefit, largely from the Parion impairment. The company also says profitability depends on continued growth in CF revenue and on launching SYMDEKO and triple-combination regimens. Its $3.6 billion of federal NOLs means taxes will stay low for some time.
What are the main pipeline catalysts investors should watch in 2018?
The key catalysts are Phase 3 initiation for VX-659 with tezacaftor and ivacaftor in the first half of 2018, and for VX-445 with tezacaftor and VX-561 in mid-2018, both contingent on additional Phase 2 data. Investors should also watch the EMA decision on tezacaftor/ivacaftor expected in the second half of 2018, the SYMDEKO launch in the U.S., and ORKAMBI reimbursement in the UK and France. Vertex has also flagged that several programs, including pain (VX-150) and CTX001, are at earlier stages.
What risks could derail the triple-combination strategy?
The filing notes that the Phase 2 data come from small patient populations, so later-stage results may differ. A failed endpoint or safety signal could delay or halt the program. Because the triples contain ivacaftor or its deuterated analog VX-561, a safety problem with ivacaftor could affect the whole franchise. The company also expects triple-combination sales to partly cannibalize existing medicines, which would limit the net revenue gain.
How significant is the French ORKAMBI early-access liability?
Vertex has collected $232.4 million from French early-access sales of ORKAMBI and recorded it as customer deposits, because the final price is not set and no product revenue has been recognized. The company expects to return the difference between the invoiced and final price to the French government. The amount of the cumulative-effect adjustment in Q1 2018 under the new revenue standard depends on the pricing outcome, so it could be material to 2018 results.
What capital allocation options does Vertex have?
Vertex has $2.09 billion in cash and marketable securities and a $500 million revolver that is undrawn, with an option to increase it by $300 million. In January 2018 it authorized a $500 million share repurchase program through December 2019, aimed mainly at offsetting employee equity dilution. The company does not pay dividends and its credit agreement restricts them. It also has significant lease commitments, including the Fan Pier buildings through 2028 and a San Diego facility from 2019. It also anticipates ongoing business development spending.
06—Continue