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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 September 30, 2000
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
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(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
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(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 59,023,873
- -------------------------------------- -----------------------------------
Class Outstanding at November 9, 2000
VERTEX PHARMACEUTICALS INCORPORATED
INDEX
PAGE
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PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Report of Independent Accountants 3
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 2000 and 1999 5
Condensed Consolidated Statements of Operations-
Nine Months Ended September 30, 2000 and 1999 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. - OTHER INFORMATION 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
-2-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Vertex Pharmaceuticals
Incorporated:
We have reviewed the accompanying condensed consolidated balance sheets of
Vertex Pharmaceuticals Incorporated and its subsidiaries as of September 30,
2000, and the related condensed consolidated statements of operations for each
of the three-month and nine-month periods ended September 30, 2000 and 1999, and
the condensed consolidated statements of cash flows for the nine-month periods
ended September 30, 2000 and 1999. 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 accompanying condensed consolidated interim financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as
of December 31, 1999, and the related consolidated statement of operations,
stockholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 16, 2000, except as to the
information in Note R for which the date is February 28, 2000, 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, 1999 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has
been derived.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
October 24, 2000
-3-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
Pro Forma
September 30, September 30, December 31,
2000(A) 2000 1999
------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $457,054 $471,429 $31,548
Short-term investments 241,918 241,918 156,254
Accounts receivable 7,087 7,087 5,956
Prepaid expenses 1,751 1,751 1,439
-------- -------- ---------
Total current assets 707,810 722,185 195,197
Restricted cash 9,788 9,788 9,788
Property and equipment, net 24,691 24,691 24,480
Investment in equity affiliate 1,882 1,883 2,276
Other assets 11,475 16,016 704
-------- -------- ---------
Total assets $755,646 $774,563 $232,445
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $17,012 $31,387 $14,152
Deferred revenue 4,650 4,650 2,000
Obligations under capital lease and debt 2,131 163,800 2,366
-------- -------- ---------
Total current liabilities 23,793 199,837 18,518
Obligations under capital lease and debt, excluding
current portion 348,121 348,121 4,693
-------- -------- ---------
Total liabilities 371,914 547,958 23,211
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 authorized;
none issued -- -- --
Common stock, $.01 par value; 100,000,000 authorized;
issued and outstanding: 58,611,402 pro forma
shares at September 30, 2000; 54,601,768 shares
at September 30, 2000; 51,370,728 shares at
December 31, 1999 586 546 514
Additional paid-in-capital 602,001 444,914 400,631
Deferred compensation (75) (75) (114)
Accumulated other comprehensive income/(loss) 451 451 (970)
Accumulated deficit (219,231) (219,231) (190,827)
-------- -------- ---------
Total stockholders' equity 383,732 226,605 209,234
-------- -------- ---------
Total liabilities and stockholders' equity $755,646 $774,563 $232,445
======== ======== =========
(A) The pro forma September 30, 2000 column reflects the conversion of the
remaining $161,669,000 of $175,000,000 of 5% Convertible Subordinated Notes,
due March 2007 including the reclassification of $4,542,000 of related
unamortized deferred debt issuance costs to stockholders' equity. As a result
of the conversion, 4,009,634 shares of common stock were issued to holders of
the notes. Cash and cash equivalents and accounts payable and accrued
expenses have been adjusted to reflect the $14,375,000 "make-whole" payment
which was paid in cash on October 5, 2000. (see Note 4)
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-4-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
---- ----
Revenues:
Royalties and product sales $3,221 $2,180
Collaborative and other research and development 10,645 5,045
--------- --------
Total revenues 13,866 7,225
--------- --------
Costs and expenses:
Royalties and product costs 1,147 727
Research and development 21,348 16,421
Sales, general and administrative 6,543 6,415
--------- --------
Total costs and expenses 29,038 23,563
--------- --------
Net loss from operations (15,172) (16,338)
Interest income 7,242 2,336
Interest expense (2,136) (155)
Debt conversion expense (14,375) --
Loss in equity affiliate (417) (129)
--------- --------
Net loss $(24,858) $(14,286)
========= ========
Basic and diluted loss per common share $(0.46) $(0.28)
Basic and diluted weighted average number of
common shares outstanding 53,843 51,104
========= ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-5-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
Revenues:
Royalties and product sales $9,143 $ 5,054
Collaborative and other research and development 49,280 18,650
---------- ---------
Total revenues 58,423 23,704
---------- ---------
Costs and expenses:
Royalties and product costs 3,119 1,926
Research and development 59,776 54,055
Sales, general and administrative 19,809 17,653
---------- ---------
Total costs and expenses $82,704 $73,634
---------- ---------
Net loss from operations (24,281) (49,930)
Interest income 15,947 8,314
Interest expense (5,302) (511)
Debt conversion expense (14,375) --
Loss in equity affiliate (393) (554)
---------- ---------
Net Loss $ (28,404) $ (42,681)
========== =========
Basic and diluted loss per common share $(0.54) $(0.84)
Basic and diluted weighted average number of
common shares outstanding 52,782 50,946
========== =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-6-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
Cash flows from operating activities:
Net loss ................................................... $ (28,404) $ (42,681)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization .............................. 6,360 4,343
Amortization of deferred compensation ...................... 39 --
Equity compensation for services rendered .................. 81 --
Realized losses/(gains) on short-term investments .......... 268 (539)
Loss in equity affiliate ................................... 393 554
Changes in assets and liabilities:
Accounts receivable .................................. (1,131) (3,328)
Prepaid expenses ..................................... (312) 372
Accounts payable and accrued expenses ................ 17,235 269
Deferred revenue ..................................... 2,650 --
--------- ---------
Net cash used by operating activities ........... (2,821) (41,010)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments ........................ (289,426) (288,839)
Sales and maturities of short-term investments ............. 205,677 343,933
Expenditures for property and equipment .................... (6,102) (13,470)
Restricted cash ............................................ -- (1,882)
Investment in equity affiliate ............................. -- (3,000)
Other assets ............................................... (118) 371
--------- ---------
Net cash (used) provided by investing activities ..... (89,969) 37,113
--------- ---------
Cash flows from financing activities:
Repayment of capital lease obligations and debt ............ (1,807) (2,075)
Proceeds from the sale of convertible subordinated notes ... 520,000 --
Costs associated with the sale of convertible
subordinated notes ................................... (16,038) --
Proceeds from other issuances of common stock .............. 31,278 3,973
--------- ---------
Net cash provided by financing activities ............ 533,433 1,898
--------- ---------
Effect of exchange rate changes on cash ......................... (762) 199
--------- ---------
Increase (decrease) in cash and cash equivalents ................ 439,881 (1,800)
Cash and cash equivalents at beginning of period ................ 31,548 24,169
--------- ---------
Cash and cash equivalents at end of period ...................... $ 471,429 $ 22,369
========= =========
Supplemental disclosure of non-cash financing activities:
Conversion of convertible subordinated notes net of
unamortized deferred debt issuance costs (see Note 4) .. $ 12,956 --
========= =========
The accompanying notes are an integral part of
these condensed consolidated financial statements
-7-
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 Vertex Pharmaceuticals Incorporated (Vertex
or 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. Certain
prior year amounts have been reclassified to conform to current year
presentation. 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 September 30, 2000
and 1999.
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, 2000. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1999, which are contained in the Company's 1999 Annual Report to its
shareholders and in its Form 10-K filed with the Securities and Exchange
Commission.
2. Accounting Policies
DEBT ISSUANCE COSTS
Debt issuance costs are deferred and amortized using the effective
interest method over the term of the related debt issuance.
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic loss per share is based upon the weighted average number of
common shares outstanding during the period. Diluted loss 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 assumed to have been used to repurchase outstanding
stock using the treasury stock method, and the assumed conversion of
convertible notes. Common equivalent shares have not been included in the
diluted loss per share calculations as the effect would be anti-dilutive.
Total potential common equivalent shares, at September 30, 2000, consist of
11,026,425 stock options outstanding with a weighted average exercise price
of $13.66 and notes convertible into 7,261,304 shares of common stock at a
weighted average conversion price of $63.56 per share (See Note 4). Total
potential common equivalent shares at September 30, 1999 consisted of
11,506,450 stock options outstanding with a weighted average exercise price
of $11.48.
3. Comprehensive Loss
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
Net income (loss) $(24,858) $(14,286) $(28,404) $(42,681)
Changes in other comprehensive loss:
Unrealized holding gains (losses) on
investments 1,850 297 2,183 (1,183)
Foreign currency translation adjustment (242) 306 (762) 199
Total change in other comprehensive loss 1,608 603 1,421 (984)
-------- -------- -------- --------
Total comprehensive loss $(23,250) $(13,683) $(26,983) $(43,665)
======== ======== ======== ========
-8-
4. Long-Term Debt
On March 14, 2000, the Company issued $175,000,000 of 5% Convertible
Subordinated Notes, due March 2007 (the March Notes). The March Notes are
convertible, at the option of the holder, into common stock at a price equal to
$40.32 per share, subject to adjustment under certain circumstances. The
deferred costs associated with the issuance of the March Notes were
$5,340,000, and the related amortization expense, for the nine-month period
ended September 30, 2000 was $423,000.
On September 15, 2000, the Company issued a call for redemption of
the March Notes. As of September 30, 2000, $13,331,000 of the March Notes had
been converted by holders into 330,626 shares of common stock. In the third
quarter of 2000, the Company reclassified $375,000 of related unamortized
deferred debt issuance costs to stockholders' equity in connection with the
conversions. As of October 4, 2000, the remaining $161,669,000 of the March
Notes were converted by the holders into 4,009,634 shares of common stock. As
a result of the call for redemption, the holders of the March Notes were
entitled to a "make-whole" payment of $82.14 per $1,000 principal amount of
March Notes, which resulted in a one-time charge to earnings of $14,375,000
in the third quarter of 2000. The "make-whole" payment is classified as debt
conversion expense on the income statement and is included in accounts
payable and accrued expenses on the balance sheet at September 30, 2000. The
"make-whole" payment was paid in cash on October 5, 2000.
On September 19, 2000, the Company issued $345,000,000 of 5%
Convertible Subordinated Notes, due September 2007(the September Notes). The
September Notes are convertible, at the option of the holder, into common
stock at a price equal to $92.26 per share, subject to adjustment under
certain circumstances. The September Notes bear an interest rate of 5% per
annum, and the Company is required to make semi-annual interest payments on
the outstanding principal balance of the September Notes on March 19 and
September 19 of each year. The September Notes are redeemable by the Company
at any time on or after September 19, 2003, at specific redemption prices if
the closing price of Vertex common stock exceeds 120% of the conversion price
then in effect for at least 20 trading days within a period of 30 consecutive
trading days. Before September 19, 2003 the Company may redeem the September
Notes at a redemption price equal to the principal amount of notes, plus
accrued and unpaid interest, if any, and a specified additional payment
amount, if the closing price of Vertex common stock exceeds 150% of the
conversion price then in effect for at least 20 trading days within a period
of 30 consecutive trading days. The deferred costs associated with the sale
of the September Notes were $10,698,000 and the related amortization
expense, for the nine-month period ended September 30, 2000, was $46,000.
5. Legal Proceedings
Chiron Corporation (Chiron) filed suit on July 30, 1998 against
Vertex and Eli Lilly and Company in the United States District Court for the
Northern District of California, alleging infringement by the defendants of
three U.S. patents issued to Chiron. The infringement action relates to
research activities by the defendants in the hepatitis C viral protease field
and the alleged use of inventions claimed by Chiron in connection with that
research. Chiron has requested damages in an unspecified amount, as well as
an order permanently enjoining the defendants from unlicensed use of the
claimed Chiron inventions. During 1999, Chiron requested and was granted a
reexamination by the U.S. Patent and Trademark Office of all three of the
patents involved in the suit. Chiron also requested and, over the opposition
of Vertex and Lilly, was granted a stay in the infringement lawsuit, pending
the outcome of the patent reexamination. While the length of the stay, the
outcome of the reexamination, the effect of that outcome on the lawsuit and
the final outcome of the lawsuit cannot be determined, Vertex maintains that
the plaintiff's claims are without merit and intends to vigorously defend the
lawsuit, if and when it resumes.
6. Recent Accounting Pronouncements
-9-
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," (SAB 101) which, as amended,
is to be implemented no later than the fiscal quarter ending December 31,
2000. Vertex and its independent accountants are continuing to review the
effect that the implementation of SAB 101 will have on the Company's net
financial results. The Company expects that the net effect of SAB 101 will be
to defer revenue recognition for some portion of the amounts received by the
Company under contract partnerships into future accounting periods. Vertex
would record the cumulative effect of this change in accounting principle as
of January 1, 2000. The implementation of SAB 101 is expected to have a
material effect on the reported financial results for the year ending
December 31, 2000.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation" (FIN 44), which provides
guidance for issues that have arisen in applying APB No. 25, "Accounting for
Stock Issued to Employees". This Interpretation is generally effective for
transactions occurring after July 1, 2000 except for the provisions related
to repricings and the definition of an employee, which apply to awards issued
after December 31, 1998. The Company has evaluated the effects of FIN 44 on
its financial position and results of operations and has determined any such
effects to be immaterial.
7. Recent Collaborative Agreements
On May 8, 2000 the Company entered into an agreement with Novartis
Pharma AG to collaborate on the discovery, development and commercialization of
small molecule drugs directed at targets in the kinase protein family. Under the
agreement, Novartis agreed to pay the Company up to approximately $600 million
in pre-commercial payments, comprised of $15 million paid upon signing of the
agreement, up to $200 million in product research funding over six years and up
to approximately $400 million in further license fees, milestone payments and
cost reimbursements. These amounts are based on the development of eight drug
candidates. In addition, Novartis created a $200 million loan facility to
support certain clinical studies which the Company may draw down in increments
up to $25 million. The loan is interest free and Novartis will forgive the full
amount of any advances if Novartis accepts the drug candidate for development
under the Company's agreement with Novartis. Vertex will have the responsibility
for drug discovery and clinical proof-of-concept testing of drug candidates.
Novartis will have exclusive worldwide development, manufacturing and marketing
rights to clinically and commercially relevant drug candidates that it accepts
for development from the Company. The Company will receive royalties on any
products that are marketed as part of the collaboration. Subject to certain
conditions, the Company will have co-promotion rights in the United States and
Europe. Vertex will retain the rights to any intellectual property resulting
from this collaboration. Novartis may terminate this agreement without cause
after four years upon one year's written notice. In June 2000, Vertex received
clearance for the agreement under the Hart Scott Rodino Antitrust Improvements
Act of 1976. The Company recognized approximately $25,146,000 in revenue under
the contract during the nine-months ended September 30, 2000.
8. Stockholders' Equity
On July 14, 2000, the Company's board of directors authorized a
two-for-one stock split effected in the form of a 100 percent stock dividend
distributed on August 23, 2000 to shareholders of record as of August 9, 2000.
All share data in these Financial Statements and the Management's Discussion and
Analysis have been adjusted to reflect the stock split for all periods
presented.
9. Subsequent Events
On October 4, 2000, the conversion of the March Notes was completed.
All of the holders of the March Notes converted their notes into common stock at
a price of $40.32 per share. As a result of the conversion, the Company issued a
total of 4,340,260 shares of common stock to holders of the March Notes. Also,
on October 5, 2000, the Company made a "make-whole" payment of $82.14 per $1,000
principal amount of the March Notes, which resulted in a one-time charge to
earnings of $14,375,000 in the third quarter of 2000 which is classified as
debt conversion expense on the income statement.
In November 2000, the Company received a $3,000,000 milestone payment
from Glaxo Welcome, plc (Glaxo) as a result of Glaxo receiving approval from the
European Commission to market the HIV protease inhibitor Agenerase, in all 15
countries of the European Union.
-10-
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, uncertainties relating to our
ability to successfully discover, develop, test, and secure regulatory
approval of any of our current or future drug candidates, uncertainties
regarding our ability to obtain financial and other resources for our
research, development and commercial activities, and uncertainty regarding
the effect of SAB 101 on Vertex's financial results, as well as those
described in the section of our 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. We
undertake no obligation to publicly update or revise these forward-looking
statements to reflect events or circumstances after the date hereof.
We discover, develop and market small molecule drugs that address
major unmet medical needs. We have twelve drug candidates in development to
treat viral diseases, inflammation, cancer, autoimmune diseases and
neurological disorders. We have created our pipeline using a proprietary,
information-intensive approach to drug design that integrates multiple
technologies in biology, chemistry and biophysics aimed at increasing the
speed and success rate of drug discovery.
Our first approved product is Agenerase-TM- (amprenavir), an HIV
protease inhibitor, which we co-promote with Glaxo Wellcome plc. We are
earning a royalty from Glaxo Wellcome from sales of Agenerase. Agenerase has
also received approval in other countries, including Japan where the drug is
sold under the trade name Prozei-TM-. Agenerase was approved in the European
Union on October 23, 2000.
We have incurred annual operating losses since our inception and
expect to incur a loss for the fiscal year ending December 31, 2000. We
expect that operating losses will continue beyond fiscal year 2000 even if
significant royalties are realized on Agenerase sales because we are planning
to make significant investments in research and development for our other
potential products. We expect that losses will fluctuate from quarter to
quarter and that such fluctuations may be substantial.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS
ENDED SEPTEMBER 30, 1999.
The net loss for the three months ended September 30, 2000 was
$24,858,000 or $0.46 per basic and diluted share, compared to a net loss of
$14,286,000 or $0.28 per basic and diluted share, for the same period in
1999. The net operating loss before debt conversion expense for the three
months ended September 30, 2000 was $10,483,000 or $0.19 per basic and diluted
share.
Total revenues increased to $13,866,000 in the third quarter of 2000
from $7,225,000 in the third quarter of 1999. In the third quarter of 2000,
royalty and product sales revenue was $3,221,000 and collaborative and other
research and development revenue was $10,645,000. In the third quarter of 1999,
we recognized $2,180,000 in royalties and product sales and $5,045,000 in
collaborative and other research and development revenue.
Royalty and product sales revenue consists of Agenerase royalty
revenue from Glaxo Wellcome as well as sales of commercial drug substance to
Kissei Pharmaceutical Co., Ltd. ("Kissei") in Japan in the third quarter of
2000. Agenerase royalty revenue is based upon worldwide net sales of
Agenerase as provided by Glaxo Wellcome.
The growth in collaborative and other research and development
revenue in the third quarter of 2000, as compared with the third quarter of
1999, is principally due to a new collaborative agreement with Novartis
Pharma AG (Novartis) entered into in May of 2000. We recorded $6,591,000 in
collaborative revenue from Novartis in the third quarter of 2000 under the
agreement. As of June 30, 2000, the research support payments from Kissei
under the p38 MAP Kinase collaboration ended. The balance of collaborative
and other research and development revenue for both 2000 and 1999 is made up
of development reimbursements and research support payments from other
collaborative partners.
-11-
Total costs and expenses increased to $29,038,000 in the third quarter
of 2000 from $23,563,000 in the third quarter of 1999. Royalties and product
costs of $1,147,000 and $727,000 in the third quarter of 2000 and 1999,
respectively, consist of royalty payments to G.D. Searle on the sales of
Agenerase as well as the cost of commercial drug substance sold to Kissei in the
third quarter of 2000. The increase in royalties and product costs is due
primarily to increased royalties paid to G.D. Searle.
Research and development expenses increased $4,927,000 during the three
months ended September 30, 2000 as compared with same period in 1999. We
continue to expand our research and development operations both in the US and
the UK. Related to our expansion were increases in personnel, facilities
expenses, equipment depreciation and increased technology license payments for
access to gene database information. Additionally, there was an increase in
development expenditures due to increased development activities associated with
our IMPDH inhibitor, VX-497, and our p38 MAP Kinase inhibitor, VX-745. We
anticipate that research and development expenses will increase as personnel are
added and additional research and development activities are expanded to
accommodate existing collaborations and additional commitments we may undertake
in the future.
Sales, general and administrative expenses increased slightly in
the third quarter of 2000 from the third quarter of 1999. We expect that sales,
general and administrative expenses will continue to increase as we continue to
grow.
Interest income increased to $7,242,000 in the third quarter of 2000
from $2,336,000 in the third quarter of 1999. The increase was due to higher
levels of cash and investments during the third quarter of 2000 as compared
with the same period of 1999 as a result of the proceeds received from the
issuances of convertible notes in March and September of 2000.
Interest expense increased $1,981,000 to $2,136,000 for the three
months ended September 30, 2000 from $155,000 for the same period in 1999. The
increase is due to interest expense associated with the convertible notes issued
in March and September of 2000.
In the third quarter of 2000 we recognized debt conversion expense of
$14,375,000, representing the "make-whole" payment resulting from the call for
redemption of our $175,000,000 aggregate principal amount of 5% Convertible
Subordinated Notes due March 2007 (the March Notes). As a result of the call for
redemption issued on September 15, 2000, the holders of the March Notes were
entitled to a "make-whole" payment of $82.14 per $1,000 principal amount of the
March Notes, which was paid in cash on October 5, 2000.
Using the equity method of accounting, we recorded $417,000 as our
share of the loss in Altus Biologics Inc. (Altus) for the three month period
ended September 30, 2000, compared with $129,000 for the same period in
1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1999.
The net loss for the nine months ended September 30, 2000 was
$28,404,000, or $0.54 per basic and diluted share, compared to $42,681,000,
or $0.84 per basic and diluted share, for the nine months ended September 30,
1999. The net operating loss before debt conversion expense for the nine
months ended September 30, 2000 was $14,029,000 or $0.27 per basic and
diluted share.
Total revenues for the period increased $34,719,000 to $58,423,000
for the nine months ended September 30, 2000 from $23,704,000 for the same
period in 1999. In 2000, revenue consisted of $9,143,000 in royalties and
product sales and $49,280,000 in collaborative and other research and
development revenue. In 1999, we earned $5,054,000 in royalties and product
sales and $18,650,000 in collaborative and other research and development
revenue.
Royalties and product sales consist of Agenerase royalty revenue from
Glaxo Wellcome as well as sales of commercial drug substance to Kissei in Japan.
Agenerase royalty revenue from Glaxo Wellcome was recognized for the first time
in the second quarter of 1999 and is based upon the worldwide net sales of
Agenerase as provided by Glaxo Wellcome.
Collaborative and other research and revenue increased $30,630,000
for the nine-month
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period ended September 30, 2000 compared with the same period in 1999
primarily due to new collaborative agreements. In the second quarter of 2000,
we recognized a $10,000,000 payment for prior research costs from Aventis
S.A. under the terms of a collaborative agreement signed during the second
half of 1999. Additionally, in May 2000 we entered into a new collaborative
agreement with Novartis to collaborate on the discovery, development and
commercialization of small molecule drugs directed at targets in the kinase
protein family. In connection with this contract, we recognized a $15,000,000
payment upon signing the agreement and $10,146,000 in product research
funding. As of June 30, 2000, the research support payments from Kissei under
the p38 MAP Kinase collaboration ended. Collaborative and other research and
development revenue for the nine months ended September 30,1999 included a
$5,000,000 milestone payment from Glaxo Wellcome for U.S. FDA approval of
Agenerase. The balance of collaborative and other research and development
revenue for both 2000 and 1999 is made up of development reimbursements and
research support payments from other collaborative partners.
Total costs and expenses increased to $82,704,000 for the nine
months ended September 30, 2000 from $73,634,000 for the nine months ended
September 30, 1999. Royalties and product costs of $3,119,000 and $1,926,000
for the first nine months of 2000 and 1999, respectively, consist of royalty
payments to G.D. Searle and the cost of commercial drug substance sold to
Kissei.
Research and development expenses increased to $59,776,000 in 2000
from $54,055,000 in 1999 principally due to the continued expansion of our
research and development operations. Related to our expansion were increases
in personnel, facilities expenses, equipment depreciation and increased
technology license payments for access to gene database information. The
expenses associated with the expansion were partially offset by a decrease in
external development activities associated with certain drug candidates.
Sales, general and administrative expenses increased during 2000 to
$19,809,000 from $17,653,000 in 1999 due primarily to increases in personnel
and professional expenses in the first two quarters of 2000. Legal and patent
expenses increased due to costs associated with new collaborative agreements,
general business activities and expanding efforts to protect our intellectual
property.
Interest income increased to $15,947,000 in the first three quarters
of 2000 from $8,314,000 in the first three quarters of 1999. The increase was
primarily due to higher levels of cash and investments as a result of the
proceeds received from the issuances of convertible notes in March and
September of 2000.
Interest expense increased by $4,791,000 due to interest expense
associated with the convertible notes issued in March and September of 2000.
In the third quarter of 2000 we recognized debt conversion expense of
$14,375,000, representing the "make-whole" payment resulting from the call for
redemption of the March Notes. As a result of the call for redemption issued on
September 15, 2000, the holders of the March Notes were entitled to a
"make-whole" payment of $82.14 per $1,000 principal amount of the March Notes,
which was paid in cash on October 5, 2000.
Using the equity method of accounting, we recorded $393,000 as our
share of the loss in Altus Biologics Inc. (Altus) for the nine month period
ended September 30, 2000, compared with $554,000 for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been funded principally through strategic
collaborative agreements, public offerings and private placements of our equity
and debt securities, equipment lease financing, and investment income. With the
approval and launch of Agenerase in April 1999, we began receiving product
royalty revenues. During the nine months ended September 30, 2000, we completed
a private placement of $175,000,000 of 5% Convertible Subordinated Notes due
March 2007 and $345,000,000 of 5% Convertible Subordinated Notes due September
2007. We have continued to increase and advance products in our research and
development pipeline. Consequently, we expect to incur losses on a quarterly and
annual basis as we continue to develop existing and future compounds and to
conduct clinical trials of potential drugs. We also expect to incur substantial
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administrative and commercialization expenditures in the future and additional
expenses related to filing, prosecution, defense and enforcement of patent and
other intellectual property rights.
We expect to finance these substantial cash needs with future
payments under our existing and future collaborative agreements, royalties
from the sales of Agenerase, existing cash and investments of $713,347,000 at
September 30, 2000, together with investment income earned thereon, and
facilities and equipment financing. To the extent that funds from these
sources are not sufficient to fund our 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.
Our aggregate cash and investments increased by $525,545,000 during
the nine months ended September 30, 2000 to $713,347,000. Cash used by
operations was $2,821,000 during the same period. We received $30,000,000
from Novartis in connection with a collaborative agreement signed in May of
2000 of which $25,146,000 was recognized as revenue during the nine months
ended September 30, 2000. Under the agreement, we will collaborate to
discover, develop and commercialize small molecule drugs directed at targets
in the kinase protein family. Under a collaborative agreement with Aventis
signed in October 1999, we received a $10,000,000 payment for prior research
costs in May of 2000. We continue to invest in equipment and leasehold
improvements for facilities to meet the operating needs associated with the
growth in our headcount. Property and equipment expenditures were $6,102,000
for the first nine months of 2000. Cash provided by financing activities for
the third quarter of 2000 was $533,433,000. We received $503,962,000 in net
proceeds from the issuance of $175,000,000 and $345,000,000 of convertible
subordinated notes in March and September of 2000, respectively.
Additionally, issuance of common stock under employee benefit plans in the
first nine months of 2000 resulted in a $31,278,000 increase to common stock
and additional paid in capital.
On September 15, 2000, the Company issued a call for redemption of
the March Notes. As of September 30, 2000, $13,331,000 of the March Notes
were converted by holders into 330,626 shares of common stock at a price of
$40.32 per share. The Company reclassified $375,000 of related unamortized
deferred debt issuance costs to stockholders' equity as part of the
conversion in the third quarter of 2000. As of October 4, 2000, the remaining
$161,669,000 of the March Notes were converted by the holders into 4,009,634
shares of common stock at a price of $40.32 per share. In connection with the
call for redemption, the holders of the notes were entitled to a "make-whole"
payment of $82.14 per $1,000 principal amount of notes, which resulted in a
one-time charge to earnings of $14,375,000 in the third quarter of 2000. The
"make-whole" payment is included in accounts payable and accrued expenses on
the balance sheet at September 30, 2000 and was paid in cash on October 5,
2000.
LEGAL PROCEEDINGS
Chiron ("Chiron") filed suit on July 30, 1998 against Vertex and Eli
Lilly and Company ("Lilly") in the United States District Court for the
Northern District of California, alleging infringement of three U.S. patents
issued to Chiron. The infringement action relates to research activities by
the defendants in the hepatitis C viral protease field and the alleged use of
inventions claimed by Chiron in connection with that research. During 1999,
Chiron requested and was granted a reexamination by the U.S. Patent and
Trademark Office of all three of the patents in suit. Chiron also requested
and, over the opposition of Vertex and Lilly, was granted a stay in the
infringement lawsuit, pending the outcome of the patent reexamination. While
the length of the stay, the outcome of the reexamination, the effect of that
outcome on the lawsuit and the final outcome of the lawsuit cannot be
determined, we believe, based on information currently available, that the
ultimate outcome of the action will not have a material impact on our
consolidated financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," (SAB 101) which, as amended,
is expected to be implemented no later than the fiscal quarter ending
December 31, 2000. Together with our independent accountants, we are
continuing to review the effect that the implementation of SAB 101 would have
on our net financial results. We expect that the net effect of SAB 101 will
be to defer revenue recognition for some portion of the amounts received
under contract partnerships into future accounting periods. We would record
the cumulative effect of this change in accounting principle as of January 1,
2000. The implementation of SAB 101 is expected to have a material effect on
the reported financial results for the year ending December 31, 2000.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions involving
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Stock Compensation" (FIN 44), which provides guidance for issues that have
arisen in applying APB No. 25, "Accounting for Stock Issued to Employees".
This Interpretation is generally effective for transactions occurring after
July 1, 2000 except for the provisions related to repricings and the
definition of an employee, which apply to awards issued after December 31,
1998. We have evaluated the effects of FIN 44 on our financial position and
results of operations and have determined any such effects to be immaterial.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material to our assessment of market risk as disclosed in
our Annual Report on Form 10-K for the year ended December 31, 1999.
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PART II.
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On September 19, 2000, the Company issued $345,000,000 of
Convertible Subordinated Notes due September 2007 (September Notes) in a
transaction which was exempt from registration under the Securities Act of
1933 pursuant to Rule 144A as a sale to qualified institutional buyers. The
September Notes are convertible, at the option of the holder, into common
stock at a price equal to $92.26 per share, subject to adjustment in certain
circumstances. The initial purchasers of the September Notes were Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Credit Suisse First Boston
Corporation, Robertson Stephens, Inc. and Chase Securities Inc.
Item 6.
(a) Exhibits:
4.1 Indenture dated as of September 19, 2000 between the Company and State
Street Bank and Trust Company.
4.2 Registration Rights Agreement dated as of September 19, 2000 among the
Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Credit Suisse First Boston Corporation, Robertson Stephens,
Inc., Chase Securities Inc. and J.P. Morgan Securities Inc., as Initial
Purchasers.
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 Commission).
99 Letter of Independent Accountants.
(b) Reports on Form 8-K:
On August 1, 2000, we filed a Report on Form 8-K dated July 14, 2000, reporting
the two-for-one split of our common stock.
On September 11, 2000 we filed a Report on Form 8-K dated September 8, 2000,
reporting our intention to redeem our 5% Convertible Subordinated Notes due
March 2007 and a private offering of Convertible Subordinated Notes.
On September 14, 2000, we filed a Report on Form 8-K dated September 13, 2000,
reporting our sale of $300 million of Convertible Subordinated Notes due
September 2007.
On September 15, 2000, we filed a Report on Form 8-K dated September 15, 2000,
reporting the call for redemption of our Convertible Subordinated Notes due
March 2007.
On September 19, 2000, we filed a Report on Form 8-K dated September 19, 2000,
reporting that the initial purchasers of the Convertible Subordinated Notes due
September 2007 had exercised in full their over-allotment option.
On October 5, 2000, we filed a Report on Form 8-K dated October 5, 2000,
reporting that all of the Convertible Subordinated Notes due March 2007 had been
converted in lieu of redemption.
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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: November 13, 2000
Thomas G. Auchincloss, Jr.
Vice of Finance and Treasurer
(Principal Financial Officer)
Date: November 13, 2000
Johanna Messina Power
Assistant Controller
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