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VRTX > SEC Filings for VRTX > Form 10-Q on 5-May-2014All Recent SEC Filings

Show all filings for VERTEX PHARMACEUTICALS INC / MA

Form 10-Q for VERTEX PHARMACEUTICALS INC / MA


5-May-2014

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, manufacturing and commercializing small molecule drugs. We invest in scientific innovation to create transformative medicines for patients with serious diseases in specialty markets. Our business is focused on developing and commercializing therapies for the treatment of cystic fibrosis, or CF, and advancing our other research and early-stage development programs, while maintaining our financial strength. Since mid-2011, we have obtained approval for, and initiated commercial sales of, our first two products: KALYDECO (ivacaftor) and INCIVEK (telaprevir). KALYDECO is approved in the United States and international markets for the treatment of patients six years of age and older with CF who have specific genetic mutations in their cystic fibrosis transmembrane conductance regulator, or CFTR, gene. INCIVEK is approved in the United States and Canada for the treatment of adults with genotype 1 hepatitis C virus, or HCV, infection. Our collaborators, Janssen Pharmaceutica NV, or Janssen, and Mitsubishi Tanabe Pharma Corporation, or Mitsubishi Tanabe, market telaprevir in other international markets. Our first quarter 2014 net product revenues included KALYDECO net product revenues of $99.5 million and INCIVEK net product revenues of $3.9 million.
Cystic Fibrosis
Our plan is to (i) increase the number of patients eligible for treatment with ivacaftor, (ii) evaluate ivacaftor in combination with lumacaftor for the treatment of patients with CF who have the most prevalent mutation in their CFTR gene and (iii) research and develop earlier-stage compounds for the treatment of CF.
Ivacaftor
KALYDECO was approved in 2012 in the United States and European Union as a treatment for patients with CF six years of age and older who have the G551D mutation in their CFTR gene. We believe that most patients with CF six years of age and older who have the G551D mutation in the United States and Europe have started treatment with KALYDECO. We are in discussions with relevant agencies in Australia and Canada regarding public reimbursement of the cost of KALYDECO for patients with CF six years of age and older in these countries who have the G551D mutation in their CFTR gene.
In February 2014, the U.S. Food and Drug Administration, or FDA, approved KALYDECO for the treatment of patients with CF six years of age and older who have one of eight other mutations in their CFTR gene, which were studied in our first Phase 3 label-expansion clinical trial for ivacaftor. We are seeking to further expand the number of patients eligible for treatment with ivacaftor by
(i) submitting a Marketing Authorization Application, or MAA, variation in the European Union based on this clinical trial, (ii) evaluating ivacaftor as a potential treatment for patients with CF who have residual CFTR function, including patients with CF who have the R117H mutation in their CFTR gene, and
(iii) evaluating ivacaftor as a potential treatment for patients with CF two to five years of age with specific mutations in their CFTR gene. Our Phase 3 clinical trial to evaluate ivacaftor in patients with the R117H mutation in their CFTR gene did not meet its primary endpoint of a statistically significant absolute change from baseline in percent predicted forced expiratory volume in one second, or PPFEV1. However, a pre-specified subgroup analysis demonstrated a statistically significant clinical benefit in patients with CF 18 years of age and older who have the R117H mutation on at least one allele. Based on these data, we plan to submit a supplemental New Drug Application, or sNDA, to the FDA in mid-2014 followed by an MAA variation in the European Union in the second half of 2014 for patients with the R117H mutation. We believe there are approximately 700 patients with CF 18 years of age or older who have the R117H mutation in their CFTR gene in North America, Europe and Australia. Our Phase 3 clinical trial to evaluate ivacaftor as a treatment for children with CF two to five years of age with specific mutations in their CFTR gene, including the G551D mutation, is fully-enrolled, and all patients have completed the 24-week dosing period. We expect data from this clinical trial in the third quarter of 2014. If this clinical trial is successful, we plan to submit a New Drug Application, or NDA, and an MAA variation based on this clinical trial in the second half of 2014. We believe there are approximately 300 children with CF two to five years of age who have the mutations evaluated in this clinical trial.
Ivacaftor in Combination with Lumacaftor We are conducting a Phase 3 development program to evaluate combinations of ivacaftor and lumacaftor, our most advanced investigational CFTR corrector compound. The Phase 3 development program includes two Phase 3 clinical


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trials, referred to as TRAFFIC and TRANSPORT, that each enrolled patients 12 years of age and older with CF who have two copies (homozygous) of the F508del mutation in their CFTR gene. All patients have completed the six-month dosing period in TRAFFIC and TRANSPORT, and we expect data in mid-2014. If TRAFFIC and TRANSPORT are successful, we plan to submit an NDA to the FDA and an MAA in the European Union in the second half of 2014. Ivacaftor in Combination with VX-661
We are evaluating VX-661, a second investigational CFTR corrector, in combination with ivacaftor, in Phase 2 clinical development. VX-661 was granted Orphan Drug Designation by the FDA in 2014.
In April 2014, we announced data from a Phase 2 double-blind clinical trial evaluating VX-661 in combination with KALYDECO in patients with CF twelve years of age and older who have one copy of the G551D mutation and one copy of the F508del mutation in their CFTR gene. Patients in this clinical trial must have received KALYDECO for at least four weeks prior to entering the clinical trial and on average had received KALYDECO for approximately one year. Patients received VX-661, or placebo, in combination with their ongoing KALYDECO treatment for four weeks. To measure both the on-treatment and off-treatment effect of VX-661 in combination with KALYDECO, observations were made at baseline (Day 0), every week during the treatment period (Day 0 - 28) and at multiple timepoints in the four-week period after the completion of treatment (Day 28 - 56). Eighteen patients enrolled in the clinical trial, and 14 of these patients received VX-661 (100 mg once daily) in addition to their ongoing treatment with KALYDECO (150 mg every twelve hours). The remaining four patients received placebo and KALYDECO to ensure the clinical trial was blinded. The primary endpoints of the clinical trial were safety, tolerability and change in sweat chloride. Change in lung function (PPFEV1) was measured as a secondary endpoint.
In this clinical trial, VX-661 was generally well-tolerated when dosed in combination with KALYDECO, and all 18 patients completed the clinical trial. The most common adverse events in the treatment group were cough, pulmonary exacerbation, headache and upper respiratory tract infection. One serious adverse event of arthritis occurred in the VX-661 treatment arm and was deemed unrelated to VX-661 or KALYDECO.
The baseline lung function and sweat chloride levels for patients who were randomized to receive VX-661 and KALYDECO were 59.1 percent predicted FEV1 and 52.9 mmol/L, respectively. A summary of the lung function and sweat chloride data for patients who received VX-661 in combination with KALYDECO is provided below:

     VX-661 + KALYDECO         Day 0 Through Day 28         Day 28 to Day 56
    (Within-Group; n=14)    (End of VX-661 Treatment)  (4 Weeks Following the End
                                                          of VX-661 Treatment)
  Mean Absolute Change in    +4.60 percentage points    -3.44 percentage points
  Lung Function (PPFEV1)            (p=0.012)                  (p=0.010)
  Mean Relative Change in        +7.3% (p=0.012)            -5.4% (p=0.008)
  Lung Function (PPFEV1)
      Sweat Chloride          -7.02 mmol/L (p=0.053)    +12.26 mmol/L (p=0.001)

The result of statistical testing is often defined in terms of a "p-value," with p<0.05 generally considered to represent a statistically significant difference. Additional clinical trials of longer duration and with additional patients will be required to further validate the results of this clinical trial in patients with CF who have the G551D mutation in their CFTR gene.

We recently began dosing in a 12-week clinical trial of VX-661 in combination with ivacaftor in patients with CF who are homozygous for the F508del mutation in their CFTR gene. This clinical trial is designed to evaluate safety, efficacy and pharmacokinetics to characterize VX-661 for further development. Based on the data from the clinical trial evaluating VX-661 in combination with KALYDECO in patients who have the G551D mutation in their CFTR gene and pending data from the ongoing 12-week clinical trial in patients homozygous for the F508del mutation, we plan to discuss with global regulatory authorities the potential approval pathway for VX-661 in combination with KALYDECO for patients with CF who have the F508del mutation and another mutation in their CFTR gene known to respond to KALYDECO alone.

Next-generation CFTR Corrector Compounds We also are seeking to identify and develop next-generation CFTR corrector compounds that could be evaluated in regimens combining ivacaftor with two CFTR corrector compounds.


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HCV Infection
Over the past several years, we have obtained most of our product revenues from INCIVEK sales and focused a large portion of our resources on commercializing INCIVEK and seeking to develop other drug candidates for the treatment of HCV infection. Our INCIVEK net product revenues declined rapidly over the course of 2013 and represented less than 4% of our net product revenues in the first quarter of 2014. In 2013, in response to declining sales of INCIVEK and increased competition, we reduced our focus on marketing INCIVEK, eliminating the U.S. field-based sales force that had been promoting INCIVEK. In addition, in the first quarter of 2013 and fourth quarter of 2013, we incurred intangible asset impairment charges of $412.9 million and $250.6 million, respectively, related to drug candidates for the treatment of HCV infection. In April 2014, we amended our collaboration with Alios BioPharma, Inc., or Alios, and following this amendment we have no further obligations to continue development of VX-135. We do not plan to further develop VX-135 independently and plan to seek to outlicense our rights to VX-135.
Research and Early-Stage Development
We are engaged in a number of other research and early-stage development programs, including programs in the areas of oncology, multiple sclerosis and other serious and rare diseases. We have evaluated in Phase 2 clinical trials:
VX-509, our JAK3 inhibitor, in patients with rheumatoid arthritis and VX-787, a drug candidate for the treatment of influenza A. We are seeking collaborators and outside funding to advance the clinical development of VX-509 and VX-787 and do not expect to conduct any significant clinical development activities with respect to VX-509 or VX-787 without a collaborator or outside funding. We plan to continue investing in our research programs as well as our early-stage development programs, and fostering scientific innovation in order to identify and develop transformative medicines. We believe that pursuing research in diverse areas allows us to balance the risks inherent in drug development and may provide drug candidates that will form our pipeline in future years. Drug Discovery and Development
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 evaluations, 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 development, and most drug candidates that do advance into 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 as well as those of our competitors.
If we believe that data from a completed registration program support approval of a drug candidate, we submit an NDA to the FDA requesting approval to market the drug candidate in the United States and seek analogous approvals from comparable regulatory authorities in foreign jurisdictions. 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.
Regulatory Compliance
Our marketing of pharmaceutical products is subject to extensive and complex laws and regulations. We have a corporate compliance program designed 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 U.S. federal and state and comparable foreign laws pertaining to health care fraud and abuse, including anti-kickback and false claims statutes, and laws prohibiting the promotion of drugs for unapproved, or off-label, uses. 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


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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 globally.


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RESULTS OF OPERATIONS
                                                 Three Months Ended March 31,          Increase/(Decrease)
                                                    2014               2013              $              %
                                                                (in thousands)
Revenues                                      $      118,451       $   328,368     $   (209,917 )       (64 )%
Operating costs and expenses                         334,839           766,656         (431,817 )       (56 )%
Other items, net                                     (16,069 )         125,661              n/a         n/a
Net loss attributable to noncontrolling
interest (Alios)                                           -             4,611           (4,611 )      (100 )%
Net loss attributable to Vertex               $     (232,457 )     $  (308,016 )        (75,559 )       (25 )%

Net Loss Attributable to Vertex
Net loss attributable to Vertex was $232.5 million in the first quarter of 2014 compared to a net loss attributable to Vertex of $308.0 million in the first quarter of 2013. Our revenues decreased in the first quarter of 2014 as compared to the first quarter of 2013 due to decreased INCIVEK net product revenues partially offset by increased KALYDECO net product revenues. Our operating costs and expenses decreased in the first quarter of 2014 as compared to the first quarter of 2013 primarily due to a $412.9 million impairment charge we recorded in the first quarter of 2013, which was included in operating costs and expenses. In connection with this impairment charge, we recorded a benefit from income taxes of $127.6 million in the first quarter of 2013, which is included in other items, net. The net effect of the impairment charge and the benefit from income taxes was to increase net loss attributable to Vertex in the first quarter of 2013 by $285.3 million. We expect to continue to incur net losses attributable to Vertex on a quarterly basis until we can substantially increase revenues as a result of potential future regulatory approvals. Net Loss Attributable to Vertex per Diluted Share Net loss attributable to Vertex was $1.00 per diluted share in the first quarter of 2014 as compared to net loss attributable to Vertex of $1.43 per diluted share in the first quarter of 2013.

Revenues
                             Three Months Ended March 31,           Increase/(Decrease)
                                  2014                  2013             $            %
                                             (in thousands)
Product revenues, net  $       103,461               $ 267,381    $    (163,920 )   (61 )%
Royalty revenues                10,733                  43,573          (32,840 )   (75 )%
Collaborative revenues           4,257                  17,414          (13,157 )   (76 )%
Total revenues         $       118,451               $ 328,368    $    (209,917 )   (64 )%


Product Revenues, Net
                                                Three Months Ended March 31,         Increase/(Decrease)
                                                     2014             2013              $              %
                                                                (in thousands)
KALYDECO                                       $        99,515     $  61,827     $      37,688         61  %
INCIVEK                                                  3,946       205,554          (201,608 )      (98 )%
Total product revenues, net                    $       103,461     $ 267,381     $    (163,920 )      (61 )%

Our total net product revenues decreased in the first quarter of 2014 as compared to the first quarter of 2013 due to decreased INCIVEK net product revenues, partially offset by increased KALYDECO net product revenues. We began marketing KALYDECO in the United States in the first quarter of 2012 and in certain international markets in the third quarter of 2012. KALYDECO net product revenues were $99.5 million in the first quarter of 2014, including $43.9 million of net product revenues from international markets. This increase in KALYDECO net product revenues was


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primarily due to additional European countries beginning to provide reimbursement for KALYDECO in the second quarter of 2013. Future increases in KALYDECO net product revenues are dependent on (i) the potential for obtaining public reimbursement for the cost of KALYDECO in Australia and/or Canada, and
(ii) potential additional label expansions that could increase the number of patients with CF who are eligible for treatment with KALYDECO. INCIVEK net product revenues have been declining over the past two years and were $3.9 million in the first quarter of 2014. We expect INCIVEK net product revenues to continue to represent a small portion of our total net product revenues in future periods. Royalty Revenues
Our royalty revenues were $10.7 million and $43.6 million in the three months ended March 31, 2014 and 2013, respectively.
Pursuant to an amendment to our collaboration agreement entered into in the fourth quarter of 2013, beginning in the first quarter of 2014, Janssen has a fully-paid license to market INCIVO in its territories, subject to the continued payment of certain third-party royalties. These third-party royalties resulted in $4.9 million in royalty revenues and offsetting royalty expenses in the first quarter of 2014, which was a decrease of $34.1 million compared to royalty revenues related to INCIVO of $39.0 million in the first quarter of 2013. We recognized royalty revenues related to sales by GlaxoSmithKline of an HIV protease inhibitor that was discovered and developed pursuant to a collaboration with GlaxoSmithKline of $5.8 million in the three months ended March 31, 2014, compared to $4.5 million in the three months ended March 31, 2013. We sold our rights to these HIV royalties in 2008 for a one-time cash payment of $160.0 million.

Collaborative Revenues
                                   Three Months Ended March 31,
                                         2014                 2013
                                          (in thousands)
Janssen                      $       1,389                  $ 13,379
CFFT and other                       2,868                     4,035
Total collaborative revenues $       4,257                  $ 17,414

Our collaborative revenues for the first quarter of 2014 related to net reimbursements for telaprevir development costs from Janssen and research funding provided by CFFT. Our collaborative revenues from Janssen for the first quarter of 2013 included $10.3 million in reimbursements for manufacturing services. We do not expect to recognize significant collaborative revenues related to the Janssen collaboration in future periods.

Operating Costs and Expenses
                                               Three Months Ended March 31,        Increase/(Decrease)
                                                    2014             2013             $             %
                                                              (in thousands)
Cost of product revenues                      $         8,572     $  30,955     $   (22,383 )       (72 )%
Royalty expenses                                        6,904        11,788          (4,884 )       (41 )%
Research and development expenses                     238,963       218,095          20,868          10  %
Sales, general and administrative expenses             74,212        92,879         (18,667 )       (20 )%
Restructuring expense                                   6,188            39           6,149       >100%
Intangible asset impairment charge                          -       412,900        (412,900 )      (100 )%
Total costs and expenses                      $       334,839     $ 766,656     $  (431,817 )       (56 )%


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Cost of Product Revenues
Our cost of product revenues includes the cost of producing inventories that corresponded to product revenues for the reporting period, plus the third-party royalties payable on our net sales of KALYDECO and INCIVEK. Cost of product revenues decreased in the first quarter of 2014 as compared to the first quarter of 2013 due to decreased product revenues and a $9.3 million commercial milestone payment payable under our agreement with CFFT that was recognized in the first quarter of 2013 for which there was no comparable commercial milestone payment in the first quarter of 2014.
Royalty Expenses
Royalty expenses include third-party royalties payable upon net sales of telaprevir by our collaborators and royalty expenses related to a subroyalty payable to a third party on net sales of an HIV protease inhibitor sold by GlaxoSmithKline. Royalty expenses in the first quarter of 2014 decreased by $4.9 million, or 41%, compared to the first quarter of 2013.

Research and Development Expenses
                                               Three Months Ended March 31,             Increase/(Decrease)
                                                    2014             2013                  $                  %
                                                                   (in thousands)
Research expenses                             $        67,023     $  61,343     $        5,680                  9 %
Development expenses                                  171,940       156,752             15,188                 10 %
Total research and development expenses       $       238,963     $ 218,095     $       20,868                 10 %

Our research and development expenses include internal and external costs incurred for research and development of our drugs and drug candidates. We do not assign our internal costs, such as salary and benefits, stock-based compensation expense, laboratory supplies and other direct expenses and infrastructure costs, to individual drugs or drug candidates, because the employees within our research and development groups typically are deployed across multiple research and development programs. These internal costs are significantly greater than our external costs, such as the costs of services provided to us by clinical research organizations and other outsourced research, which we do allocate by individual program. All research and development costs for our drugs and drug candidates are expensed as incurred.
To date, we have incurred $6.7 billion in research and development expenses associated with drug discovery and development. The successful development of our drug candidates is highly uncertain and subject to a number of risks. In addition, the duration of clinical trials may vary substantially according to the type, complexity and novelty of the drug candidate and the disease indication being targeted. The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products, typically requiring lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activities. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a project and are difficult to predict. Therefore, accurate and meaningful estimates of the ultimate costs to bring our drug candidates to market are not available.
In recent years, costs related to our CF and HCV programs have represented the largest portion of our development costs. Any estimates regarding development . . .

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