01—Abstract
Summary
Summary of the 10-K filed February 13, 2020. Cited figures are marked; the original filing is the authoritative source.
Vertex Pharmaceuticals' FY2019 10-K shows a company in a strong commercial and financial position, driven almost entirely by cystic fibrosis (CF) medicines.
Total revenues rose 37% to $4.16 billiona, with net product revenues of $4.16 billion, up from $3.04 billion. Growth came from SYMDEKO/SYMKEVI ($1.42 billion), ORKAMBI ($1.33 billion), KALYDECO ($991 million), and the first partial year of TRIKAFTA ($420 million, FDA-approved in October 2019). Income from operations nearly doubled to $1.20 billion, and net income attributable to Vertex was $1.18 billion, or $4.51 per diluted share.
That is below 2018's $8.09b, which was inflated by a one-time $1.56 billion tax benefit from releasing a valuation allowance. Operating cash flow was $1.57 billion, and cash plus marketable securities ended the year at $3.8 billion. The filing also highlights heavy investment in the pipeline.
Vertex spent about $2.4 billionc on R&D and SG&A and completed two major 2019 acquisitions: Exonics (DMD/DM1, about $245 million upfront plus milestones) and Semma (type 1 diabetes, about $950 million cash). Collaborative license and acquisition expenses were $318 million, which weighed on R&D. Investors should note that the company remains highly concentrated in CF, with the vast majority of revenue from CF products.
Its ex-U.S. reimbursement challenges (for example, ORKAMBI's four-year path to reimbursement in England) and the mix shift from SYMDEKO to TRIKAFTA are key watch items. Strategic equity investments, mainly in CRISPR, also add earnings volatility, with a $197.6 milliond gain in 2019. Management is also transitioning.
Jeffrey Leiden moves to Executive Chair and Reshma Kewalramani becomes CEO on April 1, 2020. The filing reports no material legal proceedings, an effective internal control assessment with an unqualified auditor opinion from Ernst & Young, and a $500 million 2019 share repurchase program, with $464 million remaining.
02—Key points
Key Highlights
- Total revenues grew 37% to $4.16 billion in 2019, driven by SYMDEKO/SYMKEVI ($1.42B, up 84%) and the first TRIKAFTA sales ($420M in Q4 after the October 2019 FDA approval).
- Income from operations rose 89% to $1.20 billion; net income attributable to Vertex was $1.18 billion, or $4.51 per diluted share, versus $8.09 in 2018 (which included a $1.56B tax benefit).
- Operating cash flow of $1.57 billion and cash, equivalents and marketable securities of $3.8 billion provide substantial liquidity; the company says this is sufficient for at least 12 months.
- TRIKAFTA was approved for patients 12+ with at least one F508del mutation, expanding eligibility in the U.S. by about 6,000 patients; four CF medicines now treat about 60% of the ~75,000 CF patients in North America, Europe and Australia.
- Two 2019 acquisitions: Exonics (DMD/DM1, ~$245M upfront) and Semma (type 1 diabetes, ~$950M cash), adding goodwill of about $952M and $400M in in-process R&D intangibles.
- Concentration risk remains high: substantially all revenue comes from CF medicines, and ex-U.S. reimbursement has been slow (ORKAMBI took four years to get reimbursed in England).
- Leadership transition: Dr. Kewalramani becomes CEO and Dr. Leiden becomes Executive Chair effective April 1, 2020; the company also has a $500M share repurchase authorization with $464M remaining.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Vertex Pharmaceuticals Inc kept $0.28.
- Revenue$4.16B100.0%
- Cost of revenue−$547.8M13.2%
- Gross profit$3.62B86.8%
- Operating costs−$2.42B58.1%
- Operating income$1.20B28.8%
- Interest, other & tax−$20.7M0.5%
- Net income$1.18B28.3%
Where FY2019 revenue went
$4.16B- R&D: $1.75B, 42% of revenue
- Net income: $1.18B, 28% of revenue
- SG&A: $658.5M, 16% of revenue
- Cost of revenue: $547.8M, 13% of revenue
Kept 28% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 13, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $4.16B$3.05B | +36.6% |
| Cost of Revenue | $547.80M$409.54M | +33.8% |
| Gross Profit | $3.62B$2.64B | +37.0% |
| R&D Expenses | $1.75B$1.42B | +23.9% |
| SG&A Expenses | $658.50M$557.62M | +18.1% |
| Operating Expenses | $2.97B$2.41B | +22.9% |
| Operating Income | $1.20B$635.15M | +88.5% |
| Interest Expense | $58.50M$72.47M | −19.3% |
| Net Income | $1.18B$2.10B | −43.9% |
| EPS (Basic) | $4.58$8.24 | −44.4% |
| EPS (Diluted) | $4.51$8.09 | −44.3% |
| Shares Outstanding (Basic) | 256.70M254.29M | +0.9% |
| Shares Outstanding (Diluted) | 260.70M259.19M | +0.6% |
05—Questions
Frequently Asked Questions
How much of Vertex's revenue comes from cystic fibrosis products, and what is the risk?
Substantially all product revenue, and the vast majority of total revenue, comes from CF medicines (TRIKAFTA, SYMDEKO/SYMKEVI, ORKAMBI and KALYDECO). This concentration means competition, reimbursement changes, safety issues or supply disruptions affecting CF products would materially affect the company. Management's stated goal is to treat up to 90% of CF patients and to pursue other approaches for the remaining 10%.
Why did EPS fall from 2018 to 2019 even though revenue grew strongly?
2018 net income included a one-time, non-cash $1.56 billion tax benefit from releasing the valuation allowance on most net operating losses, worth $6.03 per diluted share. In 2019 Vertex began recording a provision for income taxes near statutory rates ($218 million in 2019), so reported EPS fell to $4.51 even though operating income rose 89%.
What are the main drivers of future growth investors should watch?
Management expects net product revenues to increase in 2020, driven by TRIKAFTA's ramp in the U.S., the pending EMA review of the triple combination, label expansions for younger children, and expanded ex-U.S. access. Pipeline catalysts include Phase 2 data for VX-814 (AAT deficiency) expected in 2020, the planned Phase 2 start for VX-147 (APOL1-mediated kidney disease), and CTX001 data for sickle cell disease and beta-thalassemia.
How volatile might earnings be from non-operating items?
Quite volatile. Vertex holds strategic equity stakes, primarily in CRISPR Therapeutics, whose fair value changes flow through other income (expense). In 2019 these changes contributed $197.6 million of gains. Foreign currency forward contracts and contingent consideration liabilities tied to Exonics (remeasured to $176.5 million at year-end) can also swing results.
What are the main risks from the company's international operations and Brexit?
Vertex's European headquarters and a research facility are in the U.K., and a significant share of ex-U.S. revenue comes from the U.K. Brexit could create legal and regulatory uncertainty. Ex-U.S. operations also face reimbursement delays, foreign currency exposure (hedged in part with forwards covering about $728 million of notional amount), and supply chain concentration in China and the EU.
06—Continue