1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: JUNE 30, 1996 Commission File Number 0-19319
------------- -------
VERTEX PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)
Massachusetts 04-3039129
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 WAVERLY STREET, CAMBRIDGE, MASSACHUSETTS 02139-4242
-------------------------------------------------------
(Address of principal executive offices, including zip code)
(617) 577-6000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 21,008,062
- -------------------------------------- ----------
Class Outstanding at August 14, 1996
Number of Pages: 12
--
Exhibit Index on Page 11
--
-1-
2
VERTEX PHARMACEUTICALS INCORPORATED
INDEX
PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Operations -
Six Months Ended June 30, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. - OTHER INFORMATION 11
SIGNATURES 12
-2-
3
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
June 30, December 31,
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 9,250 $ 28,390
Short-term investments 51,234 58,588
Prepaid expenses and other current assets 1,748 959
-------- --------
Total current assets 62,232 87,937
Restricted cash 2,316 2,316
Property and equipment, net 7,222 7,840
Other assets 1,973 888
-------- --------
Total assets $ 73,743 $ 98,981
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Obligations under capital lease $ 2,306 $ 2,075
Accounts payable and accrued expenses 4,145 6,525
Deferred revenue 1,000 197
-------- --------
Total current liabilities 7,451 8,797
-------- --------
Obligations under capital leases, excluding
current portion 4,550 4,912
-------- --------
Total liabilities 12,001 13,709
-------- --------
Stockholders' equity:
Common stock 176 173
Additional paid-in capital 148,572 142,038
Equity adjustments (274) ---
Accumulated deficit (86,732) (56,939)
-------- --------
Total stockholders' equity 61,742 85,272
-------- --------
Total liabilities and stockholders' equity $ 73,743 $ 98,981
======== ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-3-
4
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
Three Months Ended June 30,
--------------------------------
1996 1995
---- ----
Revenues:
Collaborative and other research and development $ 3,116 $ 6,534
Interest income 1,030 1,417
----------- -----------
Total revenues 4,146 7,951
----------- -----------
Costs and expenses:
Research and development 9,490 15,115
General and administrative 1,878 1,739
License payment 15,000 --
Interest 103 120
----------- -----------
Total costs and expenses 26,471 16,974
----------- -----------
Net loss $ (22,325) $ (9,023)
=========== ===========
Net loss per common share $ (1.28) $ (0.52)
=========== ===========
Weighted average number of common shares
outstanding 17,397,601 17,220,654
=========== ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-4-
5
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
Revenues:
Collaborative and other research and development $ 5,589 $ 11,587
Interest income 2,308 2,697
----------- -----------
Total revenues 7,897 14,284
----------- -----------
Costs and expenses:
Research and development 18,827 24,477
General and administrative 3,641 3,297
License payment 15,000 ---
Interest 222 236
----------- -----------
Total costs and expenses 37,690 28,010
----------- -----------
Net loss $ (29,793) $ (13,726)
=========== ===========
Net loss per common share $ (1.72) $ (0.80)
=========== ===========
Weighted average number of common shares
outstanding 17,364,683 17,205,251
=========== ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-5-
6
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
Cash flows from operating activities:
Net loss $(29,793) $(13,726)
Adjustment to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 1,675 1,667
Changes in assets and liabilities:
Prepaid expenses and other
current assets (789) (2,405)
Accounts payable and accrued
expenses (2,380) 2,095
Deferred revenue 803 438
-------- --------
Net cash provided (used) by
operating activities (30,484) (11,931)
-------- --------
Cash flows from investing activities:
Short-term investments 7,080 (13,280)
Deposit to collateralize letter of credit --- (2,316)
Expenditures for property and equipment (1,057) (978)
Other assets (1,085) (31)
-------- --------
Net cash provided (used) by
investing activities 4,938 (16,605)
-------- --------
Cash flows from financing activities:
Proceeds from private placement of common stock 5,000 ---
Other issuances of common stock 1,536 452
Proceeds from equipment sale/leaseback 903 1,439
Repayment of capital lease obligations (1,034) (902)
-------- --------
Net cash provided (used) by
financing activities 6,405 989
-------- --------
Effect of exchange rate changes on cash 1 2
-------- --------
Decrease in cash and cash equivalents (19,140) (27,545)
Cash and cash equivalents at beginning of period 28,390 71,643
-------- --------
Cash and cash equivalents at end of period $ 9,250 $ 44,098
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-6-
7
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principles. Certain information and footnote disclosures normally included in
the Company's annual financial statements have been condensed or omitted. The
interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair statement
of the results for the interim periods ended June 30, 1996 and 1995.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year,
although the Company expects to incur a substantial loss for the year ended
December 31, 1996. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1995, which are contained in the Company's 1995 Annual Report to its
shareholders and in its Form 10-K filed with the Securities and Exchange
Commission.
2. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the date of purchase to be cash equivalents. Changes in
cash and cash equivalents may be affected by shifts in investment portfolio
maturities as well as by actual net cash receipts or disbursements.
3. NET LOSS PER COMMON SHARE
The net loss per common share is computed based upon the weighted
average number of common shares outstanding. Common equivalent shares are not
included in the per-share calculations where the effect of their inclusion would
be anti-dilutive.
4. LICENSE PAYMENT AND EQUITY TRANSACTION
In June 1996, the Company and Glaxo Wellcome plc ("Glaxo") obtained a
worldwide, non-exclusive license under certain G.D. Searle & Co. ("Searle")
patent applications in the area of HIV protease inhibition. Vertex paid $15.0
million and Glaxo paid $10.0 million to Searle for the license. The Company also
agreed to pay Searle a royalty on sales of VX-478, the Company's lead HIV
compound. In connection with this transaction, Glaxo purchased 151,792 shares of
the Company's Common Stock at a price of $32.94 per share, with net proceeds to
the Company of approximately $5.0 million.
5. SUBSEQUENT EVENT - PUBLIC OFFERING OF COMMON STOCK
On August 14, 1996, the Company completed a public offering of
3,450,000 shares of its common stock, including an over-allotment option
excercised by the underwriters for 450,000 shares, at a price of $24 per share.
Total gross proceeds to the Company from this offering were $82,800,000, and
net proceeds totaled approximately $77,539,000 after expenses.
-7-
8
VERTEX PHARMACEUTICALS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Vertex Pharmaceuticals Incorporated ("Vertex" or "the Company") is
engaged in the discovery, development and commercialization of novel, small
molecule pharmaceuticals for the treatment of major diseases for which there are
currently limited or no effective treatments. The Company is a leader in the use
of structure-based drug design, an approach to drug discovery that integrates
advanced biology, biophysics and chemistry. The Company is conducting eight
significant pharmaceutical research and development programs to develop
pharmaceuticals for the treatment of viral diseases, multidrug resistance in
cancer, hemoglobin disorders, inflammation, immunosuppression and
neurodegenerative disorders. Three of these programs are in the development
phase, and the other five are in the research phase. During the second quarter
of 1996, Glaxo conducted Phase I/II clinical trials to assess the safety,
pharmacokinetics and initial efficacy of VX-478, the lead compound from the
Company's HIV Program. Kissei Pharmaceutical Co., Ltd. ("Kissei") is also
developing VX-478 as Vertex's partner for the HIV Program in the Far East.
During the second quarter the Company initiated Phase II clinical trials in
liver cancer of VX-710, the Company's lead compound in its cancer multidrug
resistance program. The Company, together with its partners Alpha Therapeutic
Corporation ("Alpha") and Ravizza Farmaceutici S.p.A., also continued
development of VX-366 in its Hemoglobin Disorders Program.
To date, the Company has not received any revenues from the sale of
pharmaceutical products and does not expect to receive such revenues, if any,
for several years. The Company has incurred since its inception, and expects to
incur over the next several years, significant operating losses as a result of
expenditures for its research and development programs. The Company expects that
losses will fluctuate from quarter to quarter and that such fluctuations may be
substantial.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED WITH THREE MONTHS ENDED JUNE
30, 1995. For the second quarter of 1996 the Company's total revenues decreased
to $4,146,000 from $7,951,000 during the same period in 1995. The decrease
resulted principally from reimbursements of material and patent costs by the
Company's collaborators which were approximately $3,194,000 lower during the
second quarter in 1996. In addition, the research funding requirements of the
Chugai Pharmaceutical Co., Ltd. ("Chugai") and Kissei collaborative agreements
concluded in April and December 1995, respectively. These two collaborations
generated $1,063,000 of revenue during the second quarter of 1995. Interest
income decreased due to lower investment balances in the Company's portfolio.
From quarter to quarter, the Company's revenues fluctuate as a result of changes
in the timing and amount of partner research support payments, partner
reimbursements of Vertex drug development costs, and payments for the
achievement of various research and development milestones. In the second
quarter of 1996, the Company earned $2,865,000 in revenue from its
collaborative agreements, $1,030,000 in interest income and $251,000 from
government grants and other income. In the second quarter of 1995, revenues
consisted of $6,347,000 earned under collaborative agreements, $1,417,000 in
interest earned on invested funds and $187,000 from government grants and other
income.
-8-
9
VERTEX PHARMACEUTICALS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONTINUED
The Company's total costs and expenses increased to $26,471,000 in the
second quarter of 1996, from $16,974,000 during the same period in 1995. The
increase in total costs and expenses resulted principally from the Company's
payment of $15,000,000 to obtain a non-exclusive, world-wide license under
certain Searle patent applications claiming HIV protease inhibitors which was
offset in part by a decline in research and development expenses. Research and
development expenses decreased to $9,490,000 in the second quarter of 1996 from
$15,115,000 in the second quarter of 1995 primarily because the Company
expensed approximately $5,600,000 during the second quarter of 1995 to
manufacture bulk intermediate drug substance for the HIV Program in anticipation
of the advancement of clinical trials. General and administrative expenses
increased modestly during the second quarter of 1996 to $1,878,000 from
$1,739,000 in the second quarter of 1995 due primarily to increases in personnel
costs as well as an increase in marketing efforts by Altus Biologics Inc.
("Altus"), a subsidiary of the Company. Interest expense was $103,000 in the
second quarter of 1996, a decrease from $120,000 in the second quarter of 1995
as a result of slightly lower levels of equipment financing during the second
quarter of 1996.
For the reasons stated above, the Company incurred a net loss of
$22,325,000 or $1.28 per share in the second quarter of 1996 as compared to a
net loss of $9,023,000 or $.52 per share in the second quarter of 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30,
1995. The Company's total revenues decreased to $7,897,000 for the six months
ended June 30, 1996 from $14,284,000 for the six months ended June 30, 1995.
The quarterly revenue decline for the six months ended June 30, 1996 compared to
the six months ended June 30, 1995 was principally due to reimbursements of
material and patent costs by the Company's collaborators which were $4,163,000
lower during the first half of 1996. In addition, the research funding
requirements of the Chugai and Kissei collaborative agreements concluded in
April and December 1995, respectively. These two collaborations generated
$3,000,000 of revenue during the first half of 1995. These decreases were
partially offset in the first half of 1996 by a $500,000 initial licensing fee
from the Company's collaborator, BioChem Pharma. In 1996, the Company's
revenues consisted of $5,147,000 earned under the Company's collaborative
agreements, $2,308,000 in interest income and $442,000 in government grants and
other income. The Company's revenues during the same period in 1995 consisted of
$11,268,000 earned under the Company's collaborative agreements, $2,697,000 of
interest carried on invested funds and $319,000 from government grants.
The Company's total costs increased to $37,690,000 for the six months
ended June 30, 1996 from $28,010,000 for the six months ended June 30, 1995.
The principal reason for this increase during the first half of 1996 was due to
the Company's payment of $15,000,000 to obtain a non-exclusive, world-wide
license under certain Searle patent applications claiming HIV protease
inhibitors.
-9-
10
VERTEX PHARMACEUTICALS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONTINUED
Research and development expenses decreased to $18,827,000 in the first
half of 1996 from $24,477,000 in the first half of 1995 primarily because the
Company expensed approximately $5,600,000 during the first half of 1995 to
manufacture bulk intermediate drug substance for the HIV Program in anticipation
of the advancement of clinical trials.
General and administrative expenses increased during the second quarter
of 1996 to $3,641,000 from $3,297,000 in the second quarter of 1995 due
primarily to increases in personnel costs as well as an increase in Altus'
marketing efforts. Interest expense was $222,000 in the second quarter of 1996,
a small decrease from $236,000 in the second quarter of 1995 as a result of
slightly lower levels of equipment financing during the two periods.
For the reasons stated above, the Company incurred a net loss of
$29,793,000 or $1.72 per share in the six months ended June 30, 1996 compared to
a net loss of $13,726,000 or $.80 per share in the six months ended June
30,1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company's operations have been funded
principally through strategic collaborative agreements, public offerings and
private placements of the Company's equity securities, equipment lease
financing, government grants and interest income. The Company expects to incur
increased research and development and related supporting expenses and,
consequently, continued losses on a quarterly and annual basis as it continues
developing existing and future compounds as well as undertaking clinical trials
of potential drugs. The Company also expects to incur substantial administrative
and commercialization expenditures in the future and additional expenses related
to the filing, prosecution, defense and enforcement of patent and other
intellectual property rights.
The Company expects to finance these substantial cash needs through the
net proceeds of its current public offering, existing cash and investments,
together with interest earned thereon, future payments under its existing
collaborative agreements, and facilities and equipment financing. To the extent
that funds from these sources are not sufficient to fund the Company's
activities, it will be necessary to raise additional funds through public
offerings or private placements of securities or other methods of financing.
There can be no assurance that such financing will be available on acceptable
terms, if at all.
On June 28, 1996, the Company sold 151,792 shares of common stock in a
private placement to Glaxo at a price of $32.94 per share, with net proceeds to
the Company of approximately $5.0 million.
At June 30, 1996, the Company's aggregate cash and investments were
approximately $60,484,000, a decrease of $26,494,000 during the six months then
ended. Cash used by operations, principally to fund research and development
activities, was $30,484,000, including a payment of $15,000,000 to obtain a
non-exclusive, world-wide license to certain Searle patent applications claiming
HIV protease inhibitors.
-10-
11
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings:
------------------
None
Item 2. Changes in Securities:
----------------------
None
Item 3. Defaults Upon Senior Securities:
--------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
The Company's Annual Meeting of Stockholders was held on May 9, 1996.
The stockholders elected two directors to the class of directors whose term
expires in 1999. The tabulation of votes with respect to the election of such
directors is as follows:
Total Vote For: Total Vote Withheld:
--------------- --------------------
Roger W. Brimblecombe 14,427,257 91,481
Donald R. Conklin 14,425,657 93,081
The stockholders approved an amendment to the Vertex Pharmaceuticals
Incorporated Employee Stock Purchase Plan (the "Plan") to increase the number of
shares of common stock, $.01 par value per share, of the Company authorized for
issuance under the Plan from 150,000 to 300,000. This proposal was approved by a
vote of 12,854,152 shares in favor, 1,248,077 shares against, 40,866 shares
abstaining and 375,643 shares not voting.
In addition, the stockholders approved the appointment of Coopers &
Lybrand L.L.P. as the Company's independent accountants for the 1996 fiscal year
by a vote of 14,507,221 shares in favor, 6,102 shares against, and 5,415 shares
abstaining.
Item 5. Other Information:
------------------
None
Item 6. Exhibits and Reports on Form 8-K:
---------------------------------
27 Financial Data Schedule (submitted as an exhibit only
in the electronic format of this Quarterly Report on
Form 10-Q submitted to the Securities and Exchange
Commision).
Reports on Form 8-K:
None
-11-
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERTEX PHARMACEUTICALS INCORPORATED
Date: August 14, 1996 /s/Thomas G. Auchincloss
----------------------------------------
Thomas G. Auchincloss
Senior Director of Finance and Treasurer
(Principal Financial Officer)
/S/Hans D. van Houte
----------------------------------------
Hans D. van Houte
Controller
(Principal Accounting Officer)
-12-
5
1,000
U.S. DOLLARS
3-MOS
DEC-31-1995
APR-1-1996
JUN-30-1996
1.0
9,250
51,234
0
0
0
62,232
25,774
18,552
73,743
7,451
0
176
0
0
61,742
73,743
0
4,146
0
26,368
0
0
103
(22,325)
0
0
0
0
0
(22,325)
(1.28)
0
