01—Abstract
Summary
Summary of the 10-K filed February 13, 2019. Cited figures are marked; the original filing is the authoritative source.
Vertex Pharmaceuticals' FY2018 10-K shows a company whose financial results are now driven almost entirely by its cystic fibrosis (CF) franchise.
Total revenues rose 22% to $3.05 billiona, with CF net product revenues of $3.04 billion (up 40%), led by the U.S. launch of SYMDEKO/SYMKEVI ($769 million in its first year) and continued growth in KALYDECO ($1.01 billion). ORKAMBI declined 4% to $1.26 billion as patients switched to SYMDEKO. Net income attributable to Vertex was $2.10 billion, or $8.09 per diluted share, but this figure is inflated by a one-time, non-cash $1.56 billion income tax benefit from releasing most of the valuation allowance on net operating losses.
Operating income was a more representative $635 millionb. Management expects future tax provisions to become significant as those NOLs are used. The main investment thesis rests on the triple combination regimens.
Phase 3 data for VX-659 showed statistically significant improvements in lung function (14.0 and 10.0 percentage-point ppFEV1 gains), and data for VX-445 were expected in Q1 2019 before Vertex picks the better regimen for an NDA by mid-2019. Management says these therapies could address about 90%c of CF patients, but also notes that some revenue from them will likely cannibalize existing products. Outside CF, the pipeline includes VX-150 for pain (Phase 2b), CTX001 gene editing for sickle cell disease and beta-thalassemia (with CRISPR), and an AAT deficiency candidate in Phase 1.
Business development spending was significant, including $111.6 milliond in 2018 research expenses tied to collaborations and $65 million paid for a DNA-PK license. Risks to note include revenue concentration in CF, limited reimbursement for ORKAMBI in the UK and France, and a $354.4 million early access sales accrual in France that could be partly refunded depending on the final price.
Cash, cash equivalents and marketable securities reached $3.2 billion, with no debt outstanding under a $500 million revolver. The company also repurchased $350 million of stock in 2018.
02—Key points
Key Highlights
- Total revenues rose 22% to $3.05 billion, driven by CF product revenues up 40% to $3.04 billion; SYMDEKO/SYMKEVI contributed $769 million in its first year on the market.
- Net income attributable to Vertex was $2.10 billion ($8.09 diluted EPS), but this includes a one-time, non-cash $1.56 billion tax benefit (about $6.03 per share). Operating income was $635 million.
- Triple combination regimens (VX-659 and VX-445 with tezacaftor and ivacaftor) are the key catalyst: VX-659 Phase 3 showed 14.0 and 10.0 percentage-point ppFEV1 improvements, with VX-445 data due Q1 2019 and an NDA targeted by mid-2019.
- Management expects the triple combinations to address about 90% of CF patients, but a portion of their revenue is expected to replace revenue from current medicines.
- Pipeline diversification includes VX-150 (pain, Phase 2b), CTX001 gene editing with CRISPR (sickle cell and beta-thalassemia, Phase 1/2), and an AAT deficiency candidate (Phase 1); VX-210 was discontinued in 2018.
- Cash, cash equivalents and marketable securities totaled $3.2 billion with no borrowings outstanding; the company repurchased $350 million of stock in 2018.
- Key risks include ORKAMBI reimbursement gaps in the UK and France, a $354.4 million early access sales accrual in France that may be partially refunded, and the expected rise in income tax provisions as NOLs are used.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Vertex Pharmaceuticals Inc kept $0.69.
- Revenue$3.05B100.0%
- Cost of revenue−$409.5M13.4%
- Gross profit$2.64B86.6%
- Operating costs−$2.00B65.7%
- Operating income$635.1M20.8%
- Interest, other & tax$1.46B48.0%
- Net income$2.10B68.8%
Where FY2018 revenue went
$3.05B- R&D: $1.42B, 46% of revenue
- Operating income: $635.1M, 21% of revenue
- SG&A: $557.6M, 18% of revenue
- Cost of revenue: $409.5M, 13% of revenue
- Other operating costs: $28.8M, 0.9% of revenue
Kept 21% as operating incomeCost of revenue $409.5M · 13%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 13, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $3.05B$2.49B | +22.5% |
| Cost of Revenue | $409.54M$272.68M | +50.2% |
| Gross Profit | $2.64B$2.22B | +19.0% |
| R&D Expenses | $1.42B$1.32B | +6.9% |
| SG&A Expenses | $557.62M$496.08M | +12.4% |
| Operating Expenses | $2.41B$2.37B | +2.0% |
| Operating Income | $635.15M$123.24M | +415.4% |
| Interest Expense | $72.47M$69.30M | +4.6% |
| Net Income | $2.10B$263.48M | +695.8% |
| EPS (Basic) | $8.24$1.06 | +677.4% |
| EPS (Diluted) | $8.09$1.04 | +677.9% |
| Shares Outstanding (Basic) | 254.29M248.86M | +2.2% |
| Shares Outstanding (Diluted) | 259.19M253.22M | +2.4% |
05—Questions
Frequently Asked Questions
Is Vertex's 2018 net income of $2.1 billion a sustainable earnings level?
Not entirely. About $1.56 billion of the $2.10 billion came from a one-time, non-cash release of the valuation allowance on net operating losses and deferred tax assets in Q4 2018. Operating income was $635 million. Management expects to start recording significant tax provisions in 2019 as it uses those deferred tax assets, so reported earnings will be lower going forward even if operations grow.
What do the triple combination regimens mean for Vertex's growth?
They are the main driver of the long-term outlook. Management says VX-659 and VX-445 could treat all patients with at least one F508del mutation (about 90% of CF patients), including the F508del/Min group that current medicines do not cover. The company expects an NDA by mid-2019. Management also acknowledges that some of this revenue will replace revenue from existing products, so the net gain is smaller than the gross patient count suggests.
Why did ORKAMBI revenue fall, and how important is it to the business?
ORKAMBI revenue fell 4.4% to $1.26 billion in 2018 as patients switched to SYMDEKO/SYMKEVI, which was approved in the U.S. in 2018. ORKAMBI is still the largest CF product by revenue, but its reimbursement in the UK and France remains limited, and about $354 million collected in France under early access programs may have to be partly returned once the final price is set.
How concentrated is Vertex's revenue?
Very concentrated. CF medicines account for nearly all product revenue, and SYMDEKO/SYMKEVI, ORKAMBI and KALYDECO represented about 25%, 41% and 33% of total 2018 revenue. Walgreens, Accredo/Curascript and McKesson together accounted for roughly 48% of 2018 gross revenue. Any competitive, pricing or reimbursement setback in CF would have a large effect on the company.
What is Vertex's balance sheet and capital allocation position?
The balance sheet is strong. Cash, cash equivalents and marketable securities were $3.2 billion at year-end 2018, up $1.1 billion, and the company had no borrowings outstanding under its $500 million revolving credit facility. Vertex repurchased $350 million of its stock in 2018 under a $500 million program that runs through the end of 2019, and it says current cash plus CF cash flows should fund operations for at least the next 12 months.
06—Continue