SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended March 31, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from to
Commission File Number 000-19319
Vertex Pharmaceuticals Incorporated
(Exact name of registrant as specified in its charter)
Massachusetts 04-3039129
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
130 Waverly Street, Cambridge, 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 25,288,904
Class Outstanding at May 6, 1998
1
VERTEX PHARMACEUTICALS INCORPORATED
INDEX
Page
Part I. - Financial Information
Item 1. Condensed Consolidated Financial Statements
Report of Independent Accountants 3
Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997 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
Report of Independent Accountants
To the Board of Directors and Stockholders of Vertex Pharmaceuticals
Incorporated:
We have reviewed the condensed consolidated balance sheet of Vertex
Pharmaceuticals Incorporated as of March 31, 1998, and the related condensed
consolidated statements of income and cash flows for the three month periods
ended March 31, 1998 and 1997. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997, and the
related consolidated statements of income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated
February 23, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1997, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 22, 1998
3
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1998 1997
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 58,446 $ 71,454
Short-term investments 207,428 208,217
Prepaid expenses and other current assets 1,662 1,952
--------- ---------
Total current assets 267,536 281,623
Restricted cash 2,316 2,316
Property and equipment, net 12,381 11,095
Other assets 1,113 570
--------- ---------
Total assets $ 283,346 $ 295,604
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Obligations under capital lease and debt $ 2,537 $ 2,510
Accounts payable and accrued expenses 6,174 10,632
Deferred revenue -- 556
--------- ---------
Total current liabilities 8,711 13,698
--------- ---------
Obligations under capital leases and debt,
excluding current portion 6,209 5,905
--------- ---------
Total liabilities 14,920 19,603
--------- ---------
Stockholders' equity:
Common stock 253 252
Additional paid-in capital 393,312 392,372
Accumulated other comprehensive income 50 152
Accumulated deficit (125,189) (116,775)
--------- ---------
Total stockholders' equity 268,426 276,001
--------- ---------
Total liabilities and stockholders' equity $ 283,346 $ 295,604
--------- ---------
--------- ---------
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Revenues:
Collaborative and other research and development $ 3,173 $ 4,660
Interest income 3,996 2,258
-------- --------
Total revenues 7,169 6,918
-------- --------
Costs and expenses:
Research and development 12,182 10,314
General and administrative 3,253 2,218
Interest 148 152
-------- --------
Total costs and expenses 15,583 12,684
-------- --------
Net loss $ (8,414) $ (5,766)
-------- --------
-------- --------
Basic and diluted net loss per common share $(0.33) $(0.26)
-------- --------
-------- --------
Basic and diluted weighted average number of
common shares outstanding 25,250 21,975
-------- --------
-------- --------
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (8,414) $ (5,766)
Adjustment to reconcile netloss to
net cash used by operating activities:
Depreciation and amortization 932 814
Changes in assets and liabilities:
Prepaid expenses and other
current assets 290 104
Accounts payable and accrued
expenses (4,458) 2,116
Deferred revenue (556) --
--------- ---------
Net cash provided (used) by
operating activities (12,206) (2,732)
--------- ---------
Cash flows from investing activities:
Short-term investments 686 (94,997)
Expenditures for property and equipment (2,218) (2,260)
Other assets (543) (75)
--------- ---------
Net cash provided (used) by
investing activities (2,075) (97,332)
--------- ---------
Cash flows from financing activities:
Proceeds from public offering of common stock -- 148,810
Other issuances of common stock 941 1,692
Proceeds from equipment sale/leaseback 1,004 343
Repayment of capital lease obligations (673) (698)
--------- ---------
Net cash provided (used) by
financing activities 1,272 150,147
--------- ---------
Effect of exchange rate changes on cash 1 (7)
--------- ---------
Increase (decrease) in cash and cash equivalents (13,008) 50,076
Cash and cash equivalents at beginning of period 71,454 34,851
--------- ---------
Cash and cash equivalents at end of period $ 58,446 $ 84,927
--------- ---------
--------- ---------
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated 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 March 31, 1998 and
1997.
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, 1998. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1997, which are contained in the Company's 1997 Annual Report to its
shareholders and in its Form 10-K filed with the Securities and Exchange
Commission.
2. Cash and Cash Equivalents
For purposes of the statement of cash flows, 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. Basic and Diluted Loss per Common Share
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
based upon the weighted average number of common shares outstanding during
the period plus additional weighted average common equivalent shares
outstanding during the period when the effect is not anti-dilutive. Common
equivalent shares result from the assumed exercise of outstanding stock
options, the proceeds of which are then assumed to have been used to
repurchase outstanding stock using the treasury stock method. Common
equivalent shares have not been included in the per share calculations as the
effect would be anti-dilutive. Total potential common equivalents shares
consist of 4,697,158 stock options outstanding with a weighted average
exercise price of $22.24 as of March 31, 1998.
7
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
4. Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires that all components of comprehensive income and total comprehensive
income be reported and that changes be shown in a financial statement
displayed with the same prominence as other financial statements. The Company
has elected to disclose this information in its statement of stockholders'
equity. For the quarters ended March 31, 1998 and 1997 total comprehensive
loss was as follows (in thousands):
March 31, 1998 March 31, 1997
-------------- --------------
Net loss $(8,414) $(5,766)
Other comprehensive income (loss):
Unrealized holding gains (losses) on investments (103) (348)
Foreign currency translation adjustment 1 (7)
------- -------
Total other comprehensive income (loss) (102) (355)
------- -------
Total comprehensive loss $(8,516) $(6,121)
------- -------
------- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements which are subject to
certain risks and uncertainties that can cause actual results to differ
materially from those described. Factors that may cause such differences
include but are not limited to those described in the section of the
Company's annual report on Form 10-K entitled "Risk Factors." Readers are
cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no obligation
to publicly update or revise these forward-looking statements to reflect
events or circumstances after the date hereof.
Since its inception in 1989, the Company has been 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 research and development programs to develop pharmaceuticals for
the treatment of viral diseases, multidrug resistance in cancer,
inflammation, immunosuppression and neurodegenerative disorders.
To date, the Company has not received any revenues from the sale of
pharmaceutical products. The Company's lead product candidate, amprenavir for
the treatment of HIV infection, is presently undergoing Phase III clinical
trials. If such clinical trials are concluded successfully and a New Drug
Application is approved by the FDA and product sales, if any, commence, the
Company will receive a royalty on sales of amprenavir by its partner Glaxo
Wellcome plc ("Glaxo Wellcome"). However, there can be no assurance that
Phase III clinical trials will be completed in a timely fashion, if at all,
that
8
such trials will be successful, or that any approval will be granted by the
FDA. The Company has incurred operating losses since its inception and
expects to incur a loss in 1998. The Company believes that operating losses
may continue for the next several years even if significant royalties are
realized on amprenavir sales because the Company is planning to make
significant investments in research and development for its other potential
products. The Company expects that losses will fluctuate from quarter to
quarter and that such fluctuations may be substantial.
Results of Operations
Three Months Ended March 31, 1998 Compared with Three Months Ended March 31,
1997.
The Company's total revenues increased to $7,169,000 in the first
quarter of 1998 from $6,918,000 in the first quarter of 1997. In the first
quarter of 1998, revenues consisted of $2,958,000 under the Company's
collaborative agreements, $3,996,000 in investment income, and $215,000 in
government grants and other income. In the first quarter of 1997, the Company
received $4,237,000 in revenue from its collaborative agreements, $2,258,000
in interest received on invested funds and $423,000 from government grants
and other revenue. Total revenue in the first quarter of 1998 includes
greater investment income from higher levels of cash and investment balances
which offset lower collaborative revenues. Lower collaborative revenue during
first quarter of 1998 as compared to the first quarter of 1997 was
principally due to a $2,000,000 payment in the first quarter of 1997 from
Kissei Pharmaceutical Co. Ltd. ("Kissei") associated with a clinical trial of
amprenavir, Vertex's HIV protease inhibitor. In addition, the product
research funding requirements under the HMR agreement ended on December 31,
1997. This was partially offset by ongoing product research funding from
agreements signed with Eli Lilly and Company in June 1998 and Kissei in
September 1998.
The Company's total costs and expenses increased to $15,583,000 in the
first quarter of 1998 from $12,684,000 in the first quarter of 1997. Research
and development expenses increased to $12,182,000 in the first quarter of
1998 from $10,314,000 in the first quarter of 1997 principally due to the
commencement of preclinical development activities for drug candidates in the
ICE and Neurophilins programs as well as the continued expansion of the
Company's core scientific staff. In addition, general and administrative
expenses increased to $3,253,000 in the first quarter of 1998 from $2,218,000
in the first quarter of 1997. The increase in general and administrative
expense principally reflects the impact of personnel additions and an
increase in marketing activities. Interest expense decreased to $148,000 in
the first quarter of 1998 from $152,000 in the first quarter of 1997 due to
lower interest rates on higher levels of equipment lease financing during the
year. The Company expects that research and development as well as general
and administrative expenses will continue to increase as the Company starts
new research projects, advances current clinical and preclinical candidates,
and expands its marketing and business development activities.
The Company recorded a net loss of $8,414,000 or $0.33 per share in the
first quarter of 1998 compared to a net loss of $5,766,000 or $0.26 per share
in the first quarter of 1997.
9
Liquidity and Capital Resources
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
investment income. The Company expects to incur increased research and
development and related supporting expenses and, consequently, may continue
to experience losses on a quarterly and annual basis as it continues to
develop existing and future compounds and to conduct 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 with its
existing cash and investments of approximately $266 million at March 31,
1998, together with investment income 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. The Company believes that its existing cash
and investments should be sufficient to meet its anticipated requirements for
at least the next two years.
The Company's aggregate cash and investments decreased by $13,797,000
during the three months ended March 31, 1998 to $265,874,000. Cash used by
operations, principally to fund research and development activities, was
$12,206,000 during the same period. In addition to the net loss of
approximately $8,414,000, cash was used by operations to significantly
decrease accounts payable and accrued expenses in the amount of $4,458,000
which was related to development expenses incurred in 1997 for the Company's
cancer MDR, autoimmune and inflammation projects. The Company also expended
$2,218,000 during this period to acquire property and equipment, principally
for research equipment and facilities. During the first quarter of 1998, the
Company entered into equipment lease financing in the aggregate amount of
$1,004,000 and repaid $673,000 of its lease obligations.
The Company adopted requirements relating to comprehensive income in
accordance with the Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income". This Statement requires that
total comprehensive income be reported and that changes be shown in a
financial statement displayed with the same prominence as other financial
statements.
The Company is currently assessing the potential impact of the year 2000
on the processing of date-sensitive information by the Company's computerized
information systems and products purchased by the Company. The Company
believes that its internal information systems are either year 2000 compliant
or will be so prior to the year 2000 without incurring material costs. There
can be no assurance, however, that the Company will not experience unexpected
costs and delays in achieving year 2000 compliance for its internal
information systems and current products, which could result in a material
adverse effect on the Company's future results of operations.
10
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:
None
Item 5. Other Information:
None
Item 6. Exhibits:
27 Financial Data Schedule. (Exhibit 27 is submitted as an
exhibit only in the electronic format of this Quarterly
Report on Form 10-Q submitted to the Securities and
Exchange Commission.)
99 Letter of Independent Accountants
Reports on Form 8-K:
None
11
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: May 13, 1998 /s/Thomas G. Auchincloss. Jr
----------------------------
Thomas G. Auchincloss, Jr.
Vice President of Finance and Treasurer
(Principal Financial Officer)
Date: May 13, 1998 /s/ Hans D. van Houte
---------------------
Hans D. van Houte
Controller
(Principal Accounting Officer)
12
5
1,000
3-MOS
DEC-31-1998
JAN-31-1998
MAR-31-1998
58,446
207,428
0
0
0
267,536
36,939
24,558
283,346
8,711
0
0
0
253
268,173
283,346
0
7,169
0
15,435
0
0
148
(8,414)
0
(8,414)
0
0
0
(8,414)
(0.33)
(0.33)
