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, 1999
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 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 25,473,644
- -------------------------------------- --------------------------
Class Outstanding at May 7, 1999
-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, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. - OTHER INFORMATION 12
SIGNATURES 13
-2-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Vertex Pharmaceuticals
Incorporated:
We have reviewed the accompanying condensed consolidated balance sheet of Vertex
Pharmaceuticals Incorporated as of March 31, 1999, and the related condensed
consolidated statements of operations and cash flows for the three month periods
ended March 31, 1999 and 1998. 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, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
February 25, 1999, 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, 1998, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 21, 1999
-3-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, December 31,
1999 1998
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,810 $ 24,169
Short-term investments 204,490 221,483
Prepaid expenses and other current assets 2,429 3,056
---------- ----------
Total current assets 226,729 248,708
Restricted cash 3,776 2,316
Property and equipment, net 15,692 14,476
Investment in equity affiliate 2,878 --
Other assets 627 846
---------- ----------
Total assets $ 249,702 $ 266,346
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Obligations under capital leases and debt $ 2,673 $ 2,752
Accounts payable and accrued expenses 11,112 10,350
---------- ----------
Total current liabilities 13,785 13,102
---------- ----------
Obligations under capital leases and debt,
excluding current portion 6,406 7,032
---------- ----------
Total liabilities 20,191 20,134
---------- ----------
Stockholders' equity:
Common stock 254 254
Additional paid-in capital 396,461 395,165
Accumulated other comprehensive income 211 654
Accumulated deficit (167,415) (149,861)
---------- ----------
Total stockholders' equity 229,511 246,212
---------- ----------
Total liabilities and stockholders' equity $ 249,702 $ 266,346
---------- ----------
---------- ----------
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,
----------------------------
1999 1998
-------- --------
Revenues:
Collaborative and other research and development $ 3,963 $ 3,173
Interest and investment income 3,166 3,996
-------- --------
Total revenues 7,129 7,169
-------- --------
Costs and expenses:
Research and development 18,605 12,182
General and administrative 5,772 3,253
Loss in equity affiliate 122 --
Interest 184 148
-------- --------
Total costs and expenses 24,683 15,583
-------- --------
Net loss $(17,554) $ (8,414)
-------- --------
-------- --------
Basic and diluted net loss per common share $ (0.69) $ (0.33)
-------- --------
-------- --------
Basic and diluted weighted average number of
common shares outstanding 25,389 25,250
-------- --------
-------- --------
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,
----------------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net loss $ (17,554) $ (8,414)
Adjustment to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 1,244 932
Realized gains/losses on available
for sale securities (70) 221
Loss in equity affiliate 122 --
Changes in assets and liabilities:
Prepaid expenses and other
current assets 627 290
Accounts payable and accrued
expenses 762 (4,458)
Deferred revenue -- (556)
---------- ----------
Net cash provided (used) by
operating activities (14,869) (11,985)
---------- ----------
Cash flows from investing activities:
Purchases of investments (150,309) (303,378)
Sales and maturities of investments 166,943 303,843
Expenditures for property and equipment (2,460) (2,218)
Restricted cash(1,460) --
Investment in equity affiliate (3,000) --
Other assets 219 (543)
---------- ----------
Net cash provided (used) by
investing activities 9,933 (2,296)
---------- ----------
Cash flows from financing activities:
Repayment of capital lease obligations and debt (705) (673)
Proceeds from debt -- 1,004
Proceeds from issuances of common stock 1,296 941
---------- ----------
Net cash provided (used) by
financing activities 591 1,272
---------- ----------
Effect of exchange rate changes on cash (14) 1
---------- ----------
Increase (decrease) in cash and cash equivalents (4,359) (13,008)
Cash and cash equivalents at beginning of period 24,169 71,454
---------- ----------
Cash and cash equivalents at end of period $ 19,810 $ 58,446
---------- ----------
---------- ----------
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-6-
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED 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, 1999 and 1998.
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, 1999. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1998, which are contained in the Company's 1998 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 condensed consolidated 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 equivalent shares consist of 5,182,014 stock options outstanding with a
weighted average exercise price of $22.76 as of March 31, 1999.
-7-
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. COMPREHENSIVE INCOME
For the quarters ended March 31, 1999 and 1998 total comprehensive loss
was as follows (in thousands):
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
Net loss $(17,554) $ (8,414)
Other comprehensive income (loss):
Unrealized holding gains (losses) on investments 222 (103)
Foreign currency translation adjustment (11) 1
-------------- --------------
Total other comprehensive income (loss) 211 (102)
-------------- --------------
Total comprehensive loss $(17,343) $ (8,516)
-------------- --------------
-------------- --------------
5. INVESTMENT IN ALTUS BIOLOGICS INC.
Altus Biologics, Inc. ("Altus") develops, manufactures and markets
products based on a novel and proprietary technology for stabilizing
proteins. At December 31, 1998, Vertex owned approximately 70% of the capital
stock of Altus. On February 5, 1999, Vertex restructured its investment in
Altus. As part of the transaction, Vertex provided Altus $3,000,000 of cash
in exchange for preferred stock and warrants. The preferred stock provides
Vertex with a minority ownership position in Altus, and the warrants become
exercisable upon certain events. As a result of the transaction, Altus now
operates independently from Vertex. In addition, Vertex has retained a
non-exclusive royalty-free right to use Altus' technology for discovering,
developing and manufacturing small molecule drugs. Vertex is recording its
percentage of Altus' net income and losses using the equity method of
accounting.
6. SUBSEQUENT EVENT - APPROVAL OF AGENERASE
Agenerase(TM) was granted accelerated approval by the U.S. Food and
Drug Administration on April 15, 1999 for use in combination with other
antiretrovirals for the treatment of HIV infection. In connection with approval
of Agenerase, the Company earned a $5 million milestone payment under the
agreement with Glaxo Wellcome. The company will receive a royalty from sales of
the drug.
-8-
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.
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, chemistry and
information technologies. The Company is conducting research and development
programs to develop pharmaceuticals for the treatment of viral diseases,
multidrug resistance in cancer, autoimmune and inflammatory diseases and
neurodegenerative disorders.
To date, the Company has not received any material revenues from the
sale of pharmaceutical products. The Company's lead product, Agenerase
(amprenavir) received U.S. FDA approval through an expedited review process for
the treatment of HIV infection on April 15, 1999. Glaxo Wellcome plc ("Glaxo
Wellcome"), Vertex's partner, has also submitted applications for market
approval to Canadian and European regulatory agencies. The Company will receive
a royalty on sales of Agenerase by Glaxo Wellcome. The Company has incurred
operating losses since its inception and expects to incur a loss in 1999. The
Company believes that operating losses may continue beyond 1999 even if
significant royalties are realized on Agenerase 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, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998.
The Company's total revenues were $7,129,000 in the first quarter of
1999 as compared to $7,169,000 in the first quarter of 1998. In the first
quarter of 1999, revenues consisted of $3,782,000 under the Company's
collaborative agreements, $3,166,000 in interest and investment income and
$181,000 in government grants and other income. In the first quarter of 1998,
revenues consisted of $2,958,000 under the Company's collaborative agreements,
$3,996,000 in interest and investment income, and $215,000 in government grants
and other income. Research support payments under the Company's current
collaborative agreements increased from the first quarter of 1998 to the first
quarter of 1999. This increase was offset by lower investment income due to a
lower level of cash and investments in the first quarter of 1999 as compared to
the same period in 1998.
The Company's total costs and expenses increased to $24,684,000 in the
first quarter of 1999 from $15,583,000 in the first quarter of 1998. Research
and development expenses increased to $18,605,000 in the first quarter of 1999
from $12,182,000 in the first quarter of 1998. The Company continued to increase
its scientific staff, as well as support personnel, both in the US and in the UK
through 1998 and into 1999. In addition, development expenses have increased
with the commencement of clinical studies for drug candidates in the P38 MAP
Kinase and Neurophilin Ligand programs.
-9-
General and administrative expenses increased to $5,772,000 in the
first quarter of 1999 from $3,253,000 in the first quarter of 1998. The increase
in general and administrative expense principally reflects the impact of
additional marketing personnel and an increase in expenses associated with
co-promotion preparations related to the launch of Agenerase. In addition, the
Company's expenses for patent, legal, and other professional fees increased as
the Company continued the expansion of its intellectual property protection.
Interest expense increased to $184,000 in the first quarter of 1998 from
$148,000 in the first quarter of 1998 due to a higher blended interest rate on
similar levels of equipment lease financing during the year.
Using the equity method of accounting, the Company recorded $122,000
as its share of the loss in Altus in the first quarter of 1999.
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 $17,554,000 or $0.69 per share in
the first quarter of 1999 compared to a net loss of $8,414,000 or $0.33 per
share in the first quarter of 1998.
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
royalties from the sale of Agenerase, its existing cash and investments of
approximately $224 million at March 31, 1999, 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's aggregate cash and investments decreased by $21,352,000
during the three months ended March 31, 1999 to $224,300,000. Cash used by
operations was $14,799,000 during the same period. Restricted cash increased
during the quarter as the Company issued a letter of credit in the amount of
$1,460,000 for a security deposit under one of the Company's facilities leases.
This was for the takedown of additional, available space at the end of 1998. The
Company continues to invest in equipment and leasehold improvements for its
facilities to match the growth in its headcount. The Company also restructured
its investment in Altus and as part of the transaction Vertex provided Altus
$3,000,000 of cash in exchange for new classes of preferred stock and warrants.
Vertex has recognized $122,000 as its portion of Altus' losses for the first
quarter of 1999 using the equity method of accounting.
-10-
YEAR 2000
The Company is conducting a program to address the impact of the Year
2000 on the processing of date sensitive information by the Company's computer
systems and software ("IT Systems"), embedded systems in its non-computer
equipment ("Non-IT Systems") and relationships with certain third parties.
In the first stage of the program, the Company determined which IT
Systems, Non-IT Systems and third party relationships were critical to the
Company's business. This review has been completed. The Company does not intend
to perform a comprehensive review of systems and third parties that are not
deemed critical, and the Company cannot guarantee that such systems and entities
will be Year 2000 compliant.
The Company has completed its assessment of its critical IT Systems and
determined the actions necessary in order to ensure that they will function
without disruption. Based on this assessment, the Company has begun remediation
and testing of certain critical IT Systems. The Company expects that remediation
of all critical IT Systems will be completed by August 1999 and testing will be
completed by September 1999.
The Company is currently assessing its critical Non-IT Systems for Year
2000 compliance. The Company expects that assessment of critical Non-IT Systems
and remediation of non-compliant critical Non-IT Systems will be completed by
July 1999 and testing will be completed by September 1999. Some critical Non-IT
Systems are non-compliant and, because of the age of those systems or other
factors, cannot be made compliant. The Company intends to formulate contingency
plans for each of those systems by the end of the third quarter of 1999.
The Company has contacted third parties that provide goods, services
and information that are deemed critical to the Company's business. The Company
is currently reviewing the responses and Year 2000 website statements of these
entities to assess their Year 2000 compliance. The Company has not yet
identified the most likely worst case scenario in the event that one or more
critical third parties are not Year 2000 compliant. The Company expects to
formulate contingency plans by the end of the third quarter of 1999 for the
services provided by third parties that are found to be non-compliant, or where
the Company is unable to determine whether a third party is compliant. There can
be no assurance, however, that the Company will be able to locate alternate
sources for goods or services furnished by non-compliant providers.
The Company is using both internal and external resources to conduct
its Year 2000 program. The Company believes that the total costs, both out-of
pocket and internal, of the Company's Year 2000 program will not be material.
The Company plans to fund these Year 2000 costs through available cash. However,
the Company may experience unexpected costs in achieving full Year 2000
compliance which could result in a material adverse effect on the Company's
results of operations. Other IT Systems projects have not been significantly
deferred as a result of the Company's Year 2000 program, because the Company was
able to integrate much of its Year 2000 assessment and remediation effort into
its routine maintenance and upgrade programs.
There can be no assurance that the Company's Year 2000 assessment and
any required remedial actions and contingency plans will be successfully
completed on a timely basis.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to the Company's assessment of market
risk as disclosed in its 10-K filing for the year ended December 31, 1998.
-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:
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
-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: May 14, 1999 /s/ THOMAS G. AUCHINCLOSS
----------------------------------------
Thomas G. Auchincloss, Jr.
Vice President of Finance and Treasurer
(Principal Financial Officer)
Date: May 14, 1999 /s/ HANS D. VAN HOUTE
----------------------------------------
Hans D. van Houte
Controller
(Principal Accounting Officer)
-13-
5
1,000
3-MOS
DEC-31-1999
JAN-01-1999
MAR-31-1999
19,810
204,490
0
0
0
226,729
45,080
29,388
249,702
13,785
6,406
0
0
254
229,257
249,702
0
7,129
0
24,377
122
0
184
(17,554)
0
0
0
0
0
(17,554)
(0.69)
(0.69)
Exhibit 99
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Vertex Pharmaceuticals Incorporated
Registration on Form S-8
We are aware that our report dated April 21, 1999 on our review of interim
financial information of Vertex Pharmaceuticals Incorporated for the period
ended March 31, 1999 and included in the Company's quarterly report on Form 10-Q
for the quarter then ended is incorporated by reference in the Company's
registration statements on Form S-8 (File Nos. 33-48030, 33-48348, 33-65742,
33-93224, 33-12325, 333-27011 and 333-56179). Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statement prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
May 14, 1999
