(VRTX) Vertex Pharmaceuticals Posts Disappointing Quarter

Vertex Pharmaceuticals Inc. (VRTX) posted break-even (including stock-based compensation expense) results in the third quarter of 2012, well below the year-ago earnings of 56 cents per share. Third quarter results missed the Zacks Consensus Estimate of 19 cents. Excluding the impact of stock-based compensation expense, third quarter 2012 earnings were 13 cents, well below the year-ago earnings of 70 cents.

Revenues for the reported quarter fell 49% to $336 million. Revenues were also significantly below the Zacks Consensus Estimate of $375 million. However, we note that the year-ago quarter included a $200 million milestone payment from Janssen, a Johnson & Johnson (JNJ) company.


Vertex’s third quarter revenues consisted of revenue earned from the sale of Incivek ($254.3 million), Kalydeco ($49.2 million; launched in January 2012), royalty revenue (up 201.2% to $25.6 million) and collaborative revenue (down 70.1% to $6.9 million).

While Incivek revenues declined 39.4% from the year-ago quarter, revenues also declined (down 22.5%) on a sequential basis. Sales continue to be affected by a fewer number of new patients seeking treatment and the warehousing effect. Patients are basically deferring treatment and waiting for new and more effective drugs to become available.

Kalydeco gained US approval in January. Kalydeco is approved for the treatment of cystic fibrosis (CF) in patients age 6 years and older who have a certain mutation in their CF gene called the G551D mutation.

Vertex is currently working on the EU launch of Kalydeco, where it gained approval earlier this year. Kalydeco is currently under review in Canada and Australia. The company expects reimbursement coverage in each of the four major European countries that account for 80% of the G551D patients in Europe in 2013.

Vertex reported that it is now treating most of the eligible G551D patients in the US. The company is working on expanding Kalydeco’s label and is conducting monotherapy studies which could expand the target population from the current 4% to approximately 15% of CF patients. Vertex also remains on track to commence pivotal studies in early 2013 with Kalydeco plus VX-809 in delta 508 homozygous patients. Vertex will be meeting with the FDA this quarter.

Royalty revenue for the quarter included $20.0 million received from partner Johnson & Johnson on sales of Incivo in Europe.

Vertex has exclusive US commercialization rights to Incivek and has agreements with Johnson & Johnson and Mitsubishi Tanabe Pharma for the commercialization of the drug outside the US. While Johnson & Johnson is responsible for the commercialization of Incivek outside North America and the Far East, Mitsubishi Pharma markets it in certain areas of the Far East including Japan.

While Incivek gained European approval under the trade name Incivo during the third quarter of 2011, the product is marketed in Japan as Telavic.

Other Details

Research and development (R&D) expenses for the quarter increased 5.9% to $200.2 million, mainly due to continued investment in development activities.

Third quarter 2012 selling, general and administrative (SG&A) expenses declined 11.7% to $97.7 million.

Along with reporting third quarter results, Vertex announced two non-exclusive agreements for its HCV candidate, VX-135. While one agreement is with GlaxoSmithKline (GSK) for the evaluation of Vertex’s nucleotide analogue hepatitis C hepatitis C virus (HCV) polymerase inhibitor VX-135 plus Glaxo’s NS5A inhibitor GSK2336805 in a phase II proof-of-concept study, the other agreement is with Johnson & Johnson’s Janssen Pharmaceuticals, Inc. Under the Janssen agreement, the companies will conduct a phase II proof-of-concept study evaluating an all-oral HCV treatment regimen consisting of VX-135 and Janssen’s protease inhibitor simeprevir (TMC435).

Incivek Guidance Maintained

Vertex maintained its 2012 Incivek revenue guidance of $1.1–$1.25 billion. The company reiterated its operating expenses guidance of $1.03-$1.13 billion.

Our View

Vertex’s third quarter results were disappointing with both earnings and revenues missing expectations. We expect Incivek sales to continue being affected by warehousing and a slowdown in new patient additions. Meanwhile, Kalydeco sales should pick up from 2013 when additional launches take place in the EU. With the company working on expanding Kalydeco’s label and strengthening its HCV portfolio, we expect investor focus to remain on pipeline progress. We currently have a Neutral recommendation on Vertex, which carries a Zacks #3 Rank (short-term ‘Hold’ rating).

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