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VRTX > SEC Filings for VRTX > Form 10-Q on 3-Nov-2011All Recent SEC Filings

Show all filings for VERTEX PHARMACEUTICALS INC / MA | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for VERTEX PHARMACEUTICALS INC / MA


3-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are in the business of discovering, developing and commercializing small molecule drugs for the treatment of serious diseases. In May 2011, we began marketing INCIVEK™ (telaprevir) in the United States for the treatment of patients with genotype 1 chronic hepatitis C virus, or HCV, infection. In October 2011, we submitted a New Drug Application, or NDA, in the United States and a marketing authorization application, or MAA, in the European Union for KALYDECO™ (ivacaftor/VX-770), the lead drug candidate in our cystic fibrosis, or CF, program.

In the third quarter of 2011, we generated earnings as a cashflow positive company, with net income attributable to us of $221.1 million and an increase in our cash, cash equivalents and marketable securities of $65.2 million. We recognized net revenues on sales of INCIVEK of $419.6 million in the third quarter of 2011, which was an increase of $345.1 million as compared to the second quarter of 2011. Our operating expenses also have been increasing on a quarterly basis because expenses related to our commercial organization and sales of INCIVEK have increased substantially. In order to maintain profitability and continue our investment in research and development activities, we will need to sustain or increase our product revenues in future quarters.

In September 2011, our collaborator, Janssen Pharmaceutica, N.V., or Janssen, obtained marketing approval for telaprevir from the European Commission. Janssen is marketing telaprevir under the brand name INCIVO™. We anticipate that royalties payable by Janssen to us on net sales of INCIVO will provide a secondary source of revenues beginning in the fourth quarter of 2011. In addition, we expect to begin receiving revenues from KALYDECO, if approved, in 2012.

We have ongoing Phase 2 clinical programs involving drug candidates intended for the treatment of HCV infection, CF, rheumatoid arthritis, or RA, and epilepsy, and have an ongoing Phase 1 clinical development program for VX-787, which is our first drug candidate intended for the treatment of influenza. We believe that our longer-term success will depend on our ability to continue to generate and develop innovative compounds for the treatment of serious diseases. As a result, we expect to continue investing in research programs directed toward the identification of new drug candidates and to develop and commercialize selected drug candidates that emerge from those programs, alone or with third-party collaborators.

Drug Development and Commercialization

Discovery and development of a new pharmaceutical product is a difficult and lengthy process that requires significant financial resources along with extensive technical and regulatory expertise and can take 10 to 15 years or more. Potential drug candidates are subjected to rigorous evaluation, driven in part by stringent regulatory considerations, designed to generate information concerning efficacy, side-effects, proper dosage levels and a variety of other physical and chemical characteristics that are important in determining whether a drug candidate should be approved for marketing as a pharmaceutical product. Most chemical compounds that are investigated as potential drug candidates never progress into formal development, and most drug candidates that do advance into formal development never receive marketing approval. Because our investments in drug candidates are subject to considerable risks, we closely monitor the results of our discovery research, clinical trials and nonclinical studies, and frequently evaluate our drug development programs in light of new data and scientific, business and commercial insights, with the objective of balancing risk and potential. This process can result in relatively abrupt changes in focus and priority as new information becomes available and we gain additional understanding of our ongoing programs and potential new programs.

If we believe the data from a completed registration program support approval of a drug candidate, we would submit an NDA to the United States Food and Drug Administration, or FDA,


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requesting approval to market the drug candidate in the United States. We or our collaborators also may seek analogous approvals from comparable regulatory authorities in foreign jurisdictions, such as an MAA in the European Union. To obtain approval, we must, among other things, demonstrate with evidence gathered in nonclinical studies and well-controlled clinical trials that the drug candidate is safe and effective for the disease it is intended to treat and that the manufacturing facilities, processes and controls for the manufacture of the drug candidate are adequate. The FDA and foreign regulatory authorities have substantial discretion in deciding whether or not a drug candidate should be granted approval based on the benefits and risks of the drug candidate in the treatment of a particular disease, and could delay, limit or deny regulatory approval. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for the drug candidate involved will be harmed.

We believe that by focusing on serious diseases and innovative drugs that have the potential to provide significant advantages over existing therapies, we can increase the likelihood that our drug candidates, if approved, will be commercially successful. Our marketing efforts for INCIVEK in the United States have focused on establishing effective marketing, distribution and pricing strategies; infrastructure to support commercial sales; appropriate and sustained levels of INCIVEK inventory; company-wide processes and systems to support compliance with applicable laws and regulations and post-marketing safety evaluations; and an effective sales force and managed markets organization to promote INCIVEK to healthcare providers and payors. We plan to continue to focus on our marketing efforts for INCIVEK and are in the process of negotiating with various government agencies and managed market organizations in an effort to expand the availability and extent of reimbursement from these third-party payors.

We believe that initial sales of INCIVEK have confirmed its commercially competitive profile, and to date a significant group of patients with genotype 1 HCV infection have sought treatment with an INCIVEK-based treatment regimen. We and Janssen are competing with Merck & Co., Inc.'s Victrelis™ (boceprevir), another HCV protease inhibitor that was approved for sale in the United States and Europe in 2011. KALYDECO (VX-770), if approved, would be the first drug to treat the underlying cause of CF in any patient population. However, it is difficult to predict future revenues that will be generated by telaprevir or by KALYDECO (VX-770), if it receives regulatory approvals, and we may need to adjust our business plan if demand declines or if our product revenues decrease based on competition from current or future therapies. Drugs that obtain market acceptance may later be rendered obsolete or noncompetitive by the introduction of additional therapies, expiration of intellectual property protections or introduction of generic competition. Medivir AB, in collaboration with Janssen, is currently evaluating an HCV protease inhibitor in Phase 3 clinical trials in combination with pegylated-interferon, or peg-IFN, and ribavirin, or RBV. In earlier-stage clinical trials, we are evaluating combinations involving VX-222, including all-oral combinations, and numerous competitors are evaluating protease inhibitors, HCV polymerase inhibitors and HCV NS5A inhibitors, including such competitors' all-oral combinations. We believe that these earlier-stage drug candidates, if approved, will not be available until several years from now. Approved drugs continue to be subject to, among other things, numerous regulatory risks, post-approval safety monitoring and risks related to supply chain disruptions.

We require a supply of INCIVEK for sale in North America and will require a supply of KALYDECO (VX-770) for sale worldwide if we are successful in obtaining marketing approval for KALYDECO (VX-770). We rely on an international network of third parties to manufacture and distribute our drug candidates for clinical trials, and we expect that we will continue to rely on third parties for the foreseeable future to meet our commercial supply needs for INCIVEK and any of our drug candidates that are approved for sale. Third-party contract manufacturers, including some in China, supply us with raw materials, and contract manufacturers in the European Union and the United States convert these raw materials into drug substance and convert the drug substance into final


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dosage form. Establishing and managing this global supply chain requires a significant financial commitment and the creation and maintenance of numerous third-party relationships. Although we attempt to effectively manage the business relationships with companies in our supply chain, we do not have complete control over their activities. Also, because of the significant lead times required to manufacture our commercial supply of INCIVEK, we may have less flexibility to adjust our supply in response to increased demand than if we had shorter lead times.

We had not marketed pharmaceutical products before we obtained approval for INCIVEK, and prior to 2010 we had a relatively small commercial organization. As a result, in the past many of the regulations related to the marketing of pharmaceutical products had limited applicability to our business. As we expanded our commercial organization, we focused on implementing a comprehensive compliance program to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems and the promotion of a culture of compliance. Among other laws, regulations and standards, we are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims statutes. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. False claims laws prohibit anyone from presenting for payment to third-party payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed or claims for medically unnecessary items or services. We expect to continue to devote substantial resources to maintain, administer and expand these compliance programs.

Recent Developments

HCV

º •
º In August 2011, we obtained approval to market INCIVEK in Canada for patients who have genotype 1 chronic HCV.

º •
º In September 2011, Janssen obtained approval from the European Commission to market INCIVO in the European Union. Janssen currently is marketing INCIVO in the United Kingdom, Germany, France and Sweden.

º •
º In September 2011, Mitsubishi Tanabe obtained approval to market telaprevir in Japan, which it plans to market under the brand name TELAVIC™.

º •
º We have ongoing Phase 3b clinical trials to support potential supplemental applications for INCIVEK, including a clinical trial evaluating a twice-daily dosing regimen of INCIVEK and a clinical trial evaluating shorter treatment durations for patients with genotype 1 chronic HCV with a specific genetic variation near the IL28B gene referred to as the "CC" variation. We also plan to initiate a Phase 3b clinical trial of INCIVEK in patients co-infected with HCV and HIV, as well as a Phase 2b clinical trial of INCIVEK in patients with recurrent HCV following a liver transplant.

º •
º We have completed enrollment in two, all-oral three-drug treatment arms of an ongoing Phase 2 clinical trial evaluating our HCV polymerase inhibitor VX-222 in combination with INCIVEK and RBV.

CF

º •
º In October 2011, we submitted our NDA in the United States and our MAA in the European Union for KALYDECO (VX-770). KALYDECO (VX-770) has been evaluated in patients with CF 6 years of age and older who have at least one copy of the G551D mutation in the cystic fibrosis transmembrane conductance regulator, or CFTR, gene. We requested Priority Review of


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the NDA from the FDA in the United States and have received agreement from the European Medicines Agency for accelerated assessment of KALYDECO (VX-770) in the European Union.

º •
º In October 2011, we initiated the second part of a Phase 2 clinical trial evaluating combination regimens of KALYDECO (VX-770) and VX-809, a corrector compound, in patients with the F508del mutation in the CFTR gene. In 2012, we plan to conduct a Phase 2 clinical trial of VX-661, another CFTR corrector compound.

º •
º In 2012, we plan to initiate a Phase 2 clinical trial of KALYDECO (VX-770) dosed as a monotherapy in patients ages 2 through 5 years who have at least one copy of the G551D mutation in the CFTR gene, as well as additional clinical trials designed to evaluate KALYDECO (VX-770) dosed as a monotherapy in patients with certain gating mutations in the CFTR gene other than the G551D mutation.

Rheumatoid Arthritis

º •
º In September 2011, we announced data from our Phase 2a clinical trial that evaluated VX-509 in patients with RA over a twelve-week period. Based on the safety and efficacy data from this clinical trial, we plan to evaluate VX-509 as part of a six-month Phase 2b clinical trial in patients with RA. In this Phase 2b clinical trial, we expect to evaluate once-daily and twice-daily doses of VX-509 in combination with methotrexate, a commonly prescribed disease-modifying antirheumatic drug that is frequently used in combination with other RA drugs.

Intangible Asset Impairment Charge

º •
º In the third quarter of 2011, we incurred an intangible asset impairment charge related to VX-759, the back-up HCV polymerase inhibitor to VX-222. Please refer to Note L, "Acquisition of ViroChem Pharma Inc.," in the accompanying notes to the condensed consolidated financial statements for further information.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are reflected in reported results for the period in which the change occurs. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. During the nine months ended September 30, 2011, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2010, as updated by our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011.


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Results of Operations-Three and Nine Months Ended September 30, 2011 Compared with Three and Nine Months Ended September 30, 2010

                    Three Months          Increase/      Increase/           Nine Months          Increase/     Increase/
                 Ended September 30,      (Decrease)     (Decrease)      Ended September 30,     (Decrease)     (Decrease)
                  2011         2010           $              %            2011         2010           $             %
                           (in thousands)                                         (in thousands)
Revenues        $ 659,200   $   23,795    $   635,405          2,670 % $  847,286   $   77,846    $  769,440            988 %
Operating
costs and
expenses          443,493      223,383        220,110             99 %    957,368      607,289       350,079             58 %
Gain (loss)
on other
items, net          5,403       (9,369 )          n/a            n/a      (18,973 )    (44,791 )     (25,818 )          (58 )%
Net income
(loss)
attributable
to Vertex       $ 221,110   $ (208,957 )          n/a            n/a   $ (129,055 ) $ (574,234 )  $ (445,179 )          (78 )%

Net Income (Loss) Attributable to Vertex

In the third quarter of 2011, we had net income attributable to Vertex of $221.1 million. Our increased revenues were the result $419.6 million of INCIVEK net product revenues and $200.0 million in milestone revenues from Janssen recognized in the third quarter 2011, for which there were no comparable revenues in third quarter of 2010. Our increased revenues were partially offset by increased operating costs and expenses in the third quarter of 2011 as compared to the third quarter of 2010. A significant portion of the increase in operating costs and expenses was due to a $105.8 million impairment charge that we incurred in the third quarter of 2011 related to VX-759, a back-up HCV polymerase inhibitor that we determined was impaired based on, among other factors, the advancement of our lead HCV polymerase inhibitor VX-222. The remaining $114.3 million increase in operating costs and expenses in the third quarter of 2011 as compared to the third quarter of 2010 was principally attributable to a $61.8 million increase in sales, general and administrative expenses and a $35.3 million increase in costs of product revenues. Our operating costs and expenses in the third quarter of 2011 and 2010 included $29.4 million and $23.8 million, respectively, of stock-based compensation expense.

Our net loss attributable to Vertex in the nine months ended September 30, 2011 decreased as compared to our net loss attributable to Vertex in the nine months ended September 30, 2010, due to significant increases in our revenues, partially offset by significant increases in our operating costs and expenses. Our increased revenues were the result of INCIVEK net product revenues recognized in the second and third quarters of 2011 and $250.0 million in milestone revenues from Janssen recognized in 2011, for which there were no comparable revenues in the nine months ended September 30, 2010. The increased operating costs and expenses were primarily the result of the expansion of our commercial organization, costs related to INCIVEK sales and marketing in the United States and the impairment charge we recorded in the third quarter of 2011. Our operating costs and expenses in the nine months ended September 30, 2011 and 2010 included $89.2 million and $67.6 million, respectively, of stock-based compensation expense.

Net Income (Loss) Attributable to Vertex per Share

Our net income (loss) attributable to Vertex for the third quarter of 2011 was $1.02 per diluted share as compared to ($1.04) per diluted share for the third quarter of 2010. Our net income (loss) attributable to Vertex for the nine months ended September 30, 2011 was ($0.63) per diluted share as compared to ($2.87) per diluted share for the nine months ended September 30, 2010.


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Revenues

                       Three Months          Increase/      Increase/           Nine Months          Increase/      Increase/
                    Ended September 30,      (Decrease)     (Decrease)      Ended September 30,      (Decrease)     (Decrease)
                      2011         2010          $              %             2011         2010          $              %
                              (in thousands)                                          (in thousands)
Product
revenues, net      $   419,595   $      -    $   419,595            n/a    $   494,130   $      -    $   494,130            n/a
Royalty
revenues                 8,539      8,173            366              4 %       24,610     21,842          2,768             13 %
Collaborative
revenues               231,066     15,622        215,444          1,379 %      328,546     56,004        272,542            487 %

   Total
   revenues        $   659,200   $ 23,795    $   635,405          2,670 %  $   847,286   $ 77,846    $   769,440            988 %

Product Revenues, Net

We began recognizing net product revenues on sales of INCIVEK in the United States in the second quarter of 2011. Our net product revenues in the third quarter of 2011 increased significantly as compared to the second quarter of 2011 as a result of month-over-month increases in net product revenues, and as a result of recognizing net product revenues for a full fiscal quarter in the third quarter of 2011 as compared to only the final five weeks of the second quarter of 2011.

Royalty Revenues

In late September 2011, Janssen obtained approval from the European Commission and began marketing INCIVO in certain European countries. We expect that our royalty revenues related to INCIVO will increase significantly over the next several fiscal quarters as Janssen launches INCIVO in its territories. We also earned royalty revenues from Janssen on sales of INCIVO pursuant to an early access program that was authorized by the French government. In the three and nine months ended September 30, 2011, our royalty revenues reflect $1.3 million and $3.8 million, respectively, of royalty revenues due to sales of INCIVO by Janssen.

Our remaining royalty revenues in the three and nine months ended September 30, 2011, and all of our royalty revenues in periods prior to the second quarter of 2011, relate to sales by GlaxoSmithKline plc of HIV protease inhibitors that were discovered and developed pursuant to our collaboration with GlaxoSmithKline. In 2008, we sold our right to receive future royalties from GlaxoSmithKline with respect to these HIV protease inhibitors, excluding the portion allocated to pay a subroyalty on these net sales to a third party, in return for a one-time cash payment. We deferred the recognition of revenues from this sale and are recognizing these deferred revenues over the term of our agreement with GlaxoSmithKline under the units-of-revenue method. We recognize additional royalty revenues equal to the amount of a third-party subroyalty and an offsetting royalty expense for the third-party subroyalty payment.


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Collaborative Revenues

Our collaborative revenues have fluctuated significantly on a quarterly basis. This variability has been due to, among other things: the timing of recognition of up-front payments and significant milestone revenues, the variable level of net reimbursement we have received for the telaprevir development program from Janssen and revenues from services we provided to our telaprevir collaborators through our third-party manufacturing network. In the third quarter of 2011, we recognized the final milestone revenues we expect to recognize from our collaboration with Janssen, and we expect that in future periods our collaborative revenues from existing collaborations will represent a small percentage of our total revenues. The table presented below summarizes our collaborative revenues for the three and nine months ended September 30, 2011 and 2010:

                                               Three Months Ended       Nine Months Ended
                                                 September 30,            September 30,
                                                2011         2010        2011        2010
                                                             (in thousands)
Janssen                                       $  207,720   $  4,566    $ 272,894   $ 22,912
Mitsubishi Tanabe                                 19,500     11,056       45,858     32,650
Cystic Fibrosis Therapeutics Incorporated          3,846          -        9,794          -
Other                                                  -          -            -        442

   Total collaborative revenues               $  231,066   $ 15,622    $ 328,546   $ 56,004

We recognized $200.0 million in milestone revenues under our collaboration agreement with Janssen in the third quarter of 2011 related to the approval and launch of INCIVO in the European Union, and $50.0 million in milestone revenues under this collaboration agreement in the first quarter of 2011 related to the acceptance of the filing of the MAA for INCIVO. The $50.0 million milestone payment received in the first quarter of 2011 was applied to the redemption of $50.0 million of our secured notes due 2012, or 2012 Notes, as required pursuant to the terms of the 2012 Notes. The $200.0 million in milestone payments we were entitled to receive from Janssen based on the achievement of milestones in the third quarter of 2011 were reflected as accounts receivable, net on our condensed consolidated balance sheet as of September 30, 2011. We applied the proceeds from $105.0 million of these milestone payments, which were received in October 2011, toward the redemption of the remaining $105.0 million of 2012 Notes, and the other $95.0 million of these accounts receivable were paid directly to the purchaser of the remaining portion of these milestone payments. We do not expect to earn any additional milestones pursuant to our collaboration with Janssen, and we expect our future revenues related to the Janssen collaboration will primarily be reflected as royalty revenues.

In each of the three and nine months ended September 30, 2011 and 2010, we recognized $9.6 million and $28.7 million of deferred revenues from Mitsubishi Tanabe Pharma Corporation related to a one-time payment of $105.0 million that we received in 2009. We expect to continue recognizing $9.6 million of deferred revenues each quarter from the one-time payment of $105.0 million through the first quarter of 2012. In the second quarter of 2011, we began recognizing collaborative revenues pursuant to the April 2011 amendment to our collaboration agreement with the Cystic Fibrosis Therapeutics Incorporated.


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Operating Costs and Expenses

                     Three Months Ended      Increase/      Increase/        Nine Months Ended      Increase/      Increase/
                       September 30,         (Decrease)     (Decrease)         September 30,        (Decrease)     (Decrease)
                      2011        2010           $              %            2011        2010           $              %
                              (in thousands)                                          (in thousands)
. . .
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