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, 2001
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 60,296,772
- -------------------------------------- --------------------------------
Class Outstanding at May 8, 2001
VERTEX PHARMACEUTICALS INCORPORATED
INDEX
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2001 and December 31, 2000................ 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2001 and 2000.......... 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 and 2000.......... 5
Notes to Condensed Consolidated Financial Statements..... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II. - OTHER INFORMATION
SIGNATURES................................................................. 14
-2-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 222,662 $ 322,090
Short-term investments, available for sale.................................... 100,674 66,509
Accounts receivable........................................................... 7,615 12,262
Prepaid expenses.............................................................. 2,327 2,325
--------- ---------
Total current assets....................................................... 333,278 403,186
Restricted cash............................................................... 25,908 9,788
Long-term investments, available for sale..................................... 361,535 318,825
Property and equipment, net................................................... 36,063 28,149
Investment in equity affiliate................................................ 1,726 1,726
Other assets.................................................................. 11,034 11,207
--------- ---------
Total assets............................................................... $ 769,544 $ 772,881
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 2,596 $ 3,847
Accrued expenses.............................................................. 15,359 14,994
Accrued interest.............................................................. 557 4,879
Deferred revenue.............................................................. 11,174 12,574
Obligations under capital lease and debt...................................... 2,186 2,377
--------- ---------
Total current liabilities..................................................... 31,872 38,671
Obligations under capital lease and debt, excluding current portion............. 1,966 2,313
Convertible subordinated notes.................................................. 345,000 345,000
--------- ---------
Total liabilities............................................................. 378,838 385,984
--------- ---------
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued
and outstanding............................................................. -- --
Common stock, $0.01 par value; 100,000,000 shares authorized; 60,242,135 and
59,612,816 shares issued and outstanding at March 31, 2001 and
December 31, 2000, respectively............................................. 602 596
Additional paid-in capital.................................................... 621,299 613,166
Deferred compensation, net.................................................... (51) (61)
Accumulated other comprehensive income........................................ 8,211 3,681
Accumulated deficit........................................................... (239,355) (230,485)
--------- ---------
Total stockholders' equity.................................................... 390,706 386,897
--------- ---------
Total liabilities and stockholders' equity.................................... $ 769,544 $ 722,881
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
2001 2000
restated*
-------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Revenues:
Royalties and product sales................................................... $ 2,513 $ 2,619
Collaborative and other research and development revenues..................... 16,544 5,513
-------- --------
Total revenues.............................................................. 19,057 8,132
Operating expenses:
Royalties and product costs................................................... 837 872
Research and development...................................................... 26,119 18,604
Sales, general and administrative............................................. 7,496 6,577
-------- --------
Total operating expenses.................................................... 34,452 26,053
-------- --------
Net loss from operations........................................................ (15,395) (17,921)
-------- --------
Interest income................................................................. 11,299 3,243
Interest expense................................................................ (4,774) (891)
Equity in income of unconsolidated subsidiary................................... -- 19
Net loss before cumulative effect of change in accounting principle............. $ (8,870) $(15,550)
-------- --------
Cumulative effect of change in accounting principle............................. -- (3,161)
-------- --------
Net loss........................................................................ $(8,870) $(18,711)
======== ========
Basic and diluted net loss per common share before cumulative effect of change
in accounting principle....................................................... $(0.15) $(0.30)
Cumulative effect of change in accounting principle--basic and diluted.......... -- $(0.06)
-------- --------
Basic and diluted net loss per common share..................................... $(0.15) $(0.36)
========= ========
Basic and diluted weighted average number of common shares outstanding.......... 60,011 51,928
The accompanying notes are an integral part of these condensed
consolidated financial statements.
* See Note 2.
-4-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
2001 2000
restated*
---------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss....................................................................... $ (8,870) $(18,711)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................................. 2,513 1,924
Amortization of deferred compensation.......................................... 10 51
Equity compensation for services rendered...................................... 11 13
Realized (gains)/losses on investments......................................... (225) 134
Equity in income of unconsolidated subsidiary.................................. -- (19)
Changes in operating assets and liabilities:
Accounts receivable............................................................ 4,647 1,450
Prepaid expenses............................................................... (2) (558)
Accounts payable............................................................... (1,251) 928
Accrued expenses............................................................... 365 (2,042)
Accrued interest............................................................... (4,322) 729
Deferred revenue............................................................... (1,400) 552
--------- --------
Net cash used in operating activities.......................................... (8,524) (15,549)
--------- --------
Cash flows from investing activities:
Purchases of investments....................................................... (266,891) (63,570)
Sales and maturities of investments............................................ 195,168 63,938
Expenditures for property and equipment........................................ (10,046) (2,654)
Restricted cash................................................................ (16,120) --
Other assets................................................................... (209) 126
--------- --------
Net cash used in investing activities.......................................... (98,098) (2,160)
--------- --------
Cash flows from financing activities:
Repayment of capital lease obligations and debt................................ (538) (632)
Proceeds from the sale of convertible subordinated notes....................... -- 175,000
Costs associated with the sale of convertible subordinated notes............... -- (5,309)
Proceeds from other issuances of common stock.................................. 8,129 9,000
--------- --------
Net cash provided by financing activities...................................... 7,591 178,059
--------- --------
Effect of changes in exchange rates on cash.................................... (397) (148)
--------- --------
Net Increase (decrease) in cash and cash equivalents............................. (99,428) 160,202
Cash and cash equivalents at beginning of year................................... 322,090 31,548
--------- --------
Cash and cash equivalents at end of year......................................... $ 222,662 $191,750
========= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
* See Note 2.
-5-
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 with 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 March 31, 2001 and
2000.
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, 2001. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 2000, which are contained in the Company's 2000 Progress Report to its
shareholders and in its Form 10-K filed with the Securities and Exchange
Commission.
2. ACCOUNTING POLICIES
REVENUE RECOGNITION
In the fourth quarter of 2000, retroactive to January 1, 2000,
Vertex changed its method of accounting for revenue recognition in accordance
with Staff Accounting Bulletin (SAB) No. 101 ("SAB 101"), Revenue Recognition
in Financial Statements. Previously, the Company had recognized revenue from
collaborative research and development arrangements as earned under the terms
of the arrangements. License payments were recorded as revenue when the
payment was assured and contractual obligations met. Payments from
contractual milestones were recognized when achieved, and product research
funding was recorded on a quarterly basis, when the research effort was
incurred. Under the new accounting method, the Company recognizes revenue
from the research and development arrangements over the period of continuing
involvement as prescribed by Emerging Issues Task Force No. 91-6 (EITF 91-6).
Under that model, revenue is recognized for non-refundable license fees,
milestones, and collaborative research and development using the lessor of
the non-refundable cash received or the result achieved using percentage of
completion accounting.
-6-
Where the Company has no continuing involvement, non-refundable license
fees will be recorded as revenue upon receipt and milestones will be recorded as
revenue upon achievement of the milestone by the collaborative partner.
Royalty revenue is recognized based upon estimated and actual net sales
of licensed products in licensed territories as provided by the collaborative
partner and is generally recognized in the period the sales occur.
Product sales revenue is recognized upon shipment, when the title to
product and associated risk of loss has passed to the customer.
The cumulative effect of the change on prior years resulted in a charge
to income of $3,161,000, which is included in the loss for the three months
ended March 31, 2000. Prior year financial results have been restated for the
retroactive adoption of SAB 101 to January 1, 2000.
DERIVATIVE INSTRUMENTS
In June of 2000, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities
- - an Amendment to FASB Statement No. 133." This statement establishes
accounting and reporting standards for derivative instruments embedded in
other contracts (collectively referred to as "derivatives") and for hedging
activities. The statement requires companies to recognize all derivatives as
either assets or liabilities, with the instruments measured at fair value.
The accounting for changes in fair value, gains or losses, depends on the
intended use of the derivative and its resulting designation. The Company has
adopted this new accounting standard effective January 1, 2001 and it did not
have a significant effect on the Company's financial statements.
Subsequent to the issuance of SFAS No. 133, "Accounting for Certain
Derivative Instruments and Hedging Activities", the FASB established the
Derivatives Implementation Group ("DIG") to address and interpret practice
issues relating to that standard. On March 21, 2001, the FASB approved DIG
Implementation Issue No. A17 ("A17") relating to contracts that provide for
net share settlement, including warrants of a privately held company. Under
the proposed transition provisions for applying DIG guidance, an entity
should account for the effects of initially complying with the new
implementation guidance as of the first day of the fiscal quarter following
posting on the FASB's website (i.e. July 1, 2001 for Vertex's implementation
of A17). The Company currently holds warrants meeting that definition and
expects to adopt A17 in the third quarter of 2001. Management is currently
determining what effect, if any, A17 will have on the Company's financial
statements. The potential effects could result in a material increase to
other income in the third quarter of 2001.
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 then 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 per share calculations as the
effect would be anti-dilutive. Total potential common equivalent shares at March
31, 2001 consist of 11,526,635 stock options outstanding with a weighted average
exercise price of $25.14 and notes convertible into 3,739,432 shares of common
stock at a conversion price of $92.26 per share. Total potential common
equivalent shares at March 31, 2000 consist of 12,571,274 stock options
outstanding with a weighted average exercise price of $12.06 and notes
convertible into 4,340,280 shares of common stock at a conversion price of
$40.32 per share.
-7-
3. COMPREHENSIVE INCOME (LOSS)
For the quarters ended March 31, 2001 and 2000 total comprehensive loss
was as follows (in thousands):
MARCH 31, 2001 MARCH 31, 2000
-------------- --------------
Net loss $(8,870) $(18,711)
Other comprehensive income (loss):
Unrealized holding gains (losses) on investments 4,927 (254)
Foreign currency translation adjustment (397) (148)
------- --------
Total other comprehensive income (loss) 4,530 (402)
------- --------
Total comprehensive loss $(4,340) $(19,113)
======= ========
4. RESTRICTED CASH
In accordance with operating lease agreements, at March 31, 2001 and
2000 the Company held in deposit approximately $25,908,000 and $9,788,000,
respectively, with its bank to collateralize conditional, stand-by letters of
credit in the name of the landlord. In January 2001, the Company entered into
a new operating lease for additional space and facilities. The letters of
credit are redeemable only if the Company defaults on the leases under
specific criteria. These funds are restricted from the Company's use during
the lease period, $9,788,000 of funds are restricted through 2010 and the
remaining $16,120,000 of funds are restricted through 2017. The Company is
entitled to all interest earned on the funds.
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. That
-8-
reexamination is ongoing and the stay is still in effect. 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 defend
the lawsuit, if and when it resumes, vigorously.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a Replacement of FASB Statement No. 125."
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities and is
effective for periods after March 31, 2001. To date the Company does not
believe the adoption of SFAS 140 will have a material impact on its financial
statements and related disclosures.
7. SUBSEQUENT EVENT
On April 29, 2001, Vertex and Aurora Biosciences Corporation ("Aurora")
signed a definitive agreement whereby Vertex will acquire Aurora in a
stock-for-stock transaction. Under the terms of the agreement, which have been
approved by the Boards of Directors of both Vertex and Aurora, each share of
Aurora will convert into shares of newly issued Vertex common stock at a fixed
ratio of 0.62 shares of Vertex common stock for each share of Aurora common
stock. Vertex will be obligated to issue a total of approximately 14.0 million
shares of common stock in exchange for Aurora's outstanding common stock, and
Aurora options will be equitably converted to Vertex options. The transaction
will be structured as a tax-free share exchange and is intended to be accounted
for as a pooling-of-interests. The merger is subject to approval by both
Vertex's and Aurora's shareholders, regulatory approval and other closing
conditions, and is expected to close in the third quarter of 2001. After the
merger, Aurora will operate as a wholly owned subsidiary of Vertex.
-9-
ITEM 2. 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, 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 are a global biotechnology company. We seek to discover, develop,
and commercialize major pharmaceutical products independently and with partners.
Chemogenomics, our proprietary, systematic, genomics-based platform, is designed
to accelerate the discovery of new drugs and to expand intellectual property
coverage of drug candidate compounds and classes of related compounds. This
approach, which targets gene families, has formed the basis for several
commercial collaborations that retain rights to downstream revenue for us. We
have 12 drug candidates in development to treat viral diseases, inflammation,
cancer, autoimmune diseases and neurological disorders.
Our first approved product is Agenerase(R) (amprenavir), an HIV
protease inhibitor, which we co-promote with GlaxoSmithKline. We earn a
royalty from GlaxoSmithKline from sales of Agenerase. Agenerase has received
approval in 33 countries worldwide, including the United States, the 15
member states of the European Union, and Japan, where the drug is sold under
the trade name Prozei(TM).
We have significant collaborations with Aventis, Eli Lilly,
GlaxoSmithKline, Kissei, Novartis, Schering AG (Germany), Serono and Taisho.
These collaborations provide us with financial support and other valuable
resources for our research programs, development of our clinical drug
candidates, and marketing and sales of our products.
We have incurred operating losses since our inception and expect to
incur a loss in 2001. We believe that operating losses will continue beyond 2001
as we are planning to make significant investments in research and development
for our other potential products. We expect that losses will fluctuate from year
to year and that such fluctuations may be substantial.
In the fourth quarter of 2000, we adopted SAB 101 "Revenue Recognition
in Financial Statements" retroactive to January 1, 2000. SAB 101 was issued by
the
-10-
Securities and Exchange Commission in December 1999 and provides guidance
related to revenue recognition policies based on interpretations and
practices followed by the SEC. The impact of our adoption of SAB 101 was to
defer revenue recognition for certain portions of revenues previously
recognized under our collaborative agreements into future accounting periods.
As a result, we recorded a one-time, non-cash charge of $3,161,000 in the
first quarter of 2000. The results of operations for the three months ending
March 31, 2000 have been restated in accordance with SAB 101. Additionally,
the $3,161,000 expense associated with the cumulative effect of change in
accounting principle is included in the net loss and net loss per basic and
diluted share for the three months ending March 31, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2000.
Our net loss for the three months ended March 31, 2001 was $8,870,000
or $0.15 per basic and diluted share, compared to $18,711,000 or $0.36 per basic
and diluted share, including the cumulative effect of a change in accounting
principle, for the three months ended March 31, 2000.
Total revenues increased to $19,057,000 in the first quarter of 2001
from $8,132,000 in the first quarter of 2000. In the first quarter of 2001,
royalty and product sales revenue was $2,513,000 and collaborative and other
research and development revenue was $16,544,000. In the first quarter of 2000,
royalty and product sales revenue was $2,619,000 and collaborative and other
research and development revenue was $5,513,000.
Royalties and product sales include Agenerase royalty revenue from
GlaxoSmithKline. Agenerase royalty revenue is based on estimated and actual
worldwide net sales of Agenerase as provided by GlaxoSmithKline.
The growth in collaborative and other research and development
revenue in the first quarter of 2001 as compared to the first quarter of 2000
is due to the signing of new collaborative agreements during fiscal 2000. In
May 2000 we agreed with Novartis to collaborate to discover, develop and
commercialize small molecule drugs targeted at the kinase protein family. In
the first quarter of 2001 we recognized approximately $10,574,000 of revenue
in connection with this contract. In December 2000 we entered into a
collaboration with Serono to discover, develop and market caspase inhibitors.
Previously, in November 1999, we entered into a collaborative agreement with
Taisho for our caspase program. In connection with these two contracts, we
recognized approximately $1,201,000 of revenue in the first quarter of 2001
compared with $875,000 in the first quarter of 2000. Also during first
quarter 2001 we received and recognized as revenue a $1,000,000 milestone
payment from Kissei for the completion of clinical development of Prozei in
Japan. The balance of collaborative and other research
-11-
and development revenues represents revenues earned under collaborative
agreements with Eli Lilly, Schering AG and Kissei for both 2001 and 2000.
Total costs and expenses increased to $34,452,000 in the first quarter
of 2001 from $26,053,000 in the first quarter of 2000. Royalties and product
costs were $837,000 and $872,000 as of March 31, 2001 and March 31, 2000,
respectively, and consist of royalty payments to G.D. Searle & Co on sales
of Agenerase.
Research and development expenses increased to $26,119,000 in the first
quarter of 2001 from $18,604,000 in the first quarter of 2000 principally due to
the continued expansion of our research and development operations and an
increase in the number of drug development candidates. Related to our expansion
were increases in personnel, facilities expenses, equipment depreciation and
increased technology license payments. We anticipate research and development
expenses to continue to increase as personnel are added and research and
development activities are expanded to accommodate our existing collaborations
and additional commitments we may undertake in the future.
Sales, general and administrative expenses increased to $7,496,000 for
the first quarter of 2001 compared to $6,577,000 for the first quarter of 2000.
The increase was primarily a result of increased personnel and professional
expenses. We expect sales, general and administrative expenses to continue to
increase as we continue to grow.
Interest income increased approximately $8,056,000 to $11,299,000 for
the first quarter of 2001 from $3,243,000 for the first quarter of 2000. The
increase is due to a higher level of cash and investments in the first quarter
of 2001 versus the first quarter of 2000. The increase in cash and investments
is primarily a result of the proceeds received from the issuances of convertible
subordinated notes in March and September 2000.
Interest expense increased to approximately $4,774,000 for the first
quarter of 2001 from $891,000 for the first quarter of 2000. The increase is due
to interest expense associated with the convertible subordinated notes issued in
September 2000.
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. In 2000, we completed private placements 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
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 $684,871,000 at March 31, 2001,
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 decreased by $22,553,000 during
the three months ended March 31, 2001 to $684,871,000 from $707,424,000 for
the year ended December 31, 2000. Cash used by operations, principally to
fund research and development activities, was $8,524,000 during the same
period. We continue to invest in equipment and leasehold improvements for
facilities to meet the operating needs associated with the growth in our
headcount. For the first quarter of 2001 property and equipment expenditures
were $10,046,000. Cash provided by financing activities for the three months
ended March 31, 2001 was $7,591,000, including $8,129,000 from the issuance
of common stock under employee stock option and benefit plans for the three
months partially offset by $538,000 used for the repayment of capital lease
obligations. Finally, in connection with a new lease signed in January 2001,
we were required to provide a security deposit in the form of a stand by
letter of credit in the amount of $16,120,000, which is reflected in the
increase of restricted cash.
On April 29, 2001, Vertex and Aurora Biosciences Corporation
("Aurora") signed a definitive agreement whereby Vertex will acquire Aurora
in a stock-for-stock transaction. Under the terms of the agreement, which
have been approved by the Boards of Directors of both Vertex and Aurora, each
share of Aurora will convert into shares of newly issued Vertex common stock
at a fixed ratio of 0.62 shares of Vertex common stock for each share of
Aurora common stock. Vertex will be obligated to issue a total of
approximately 14.0 million shares of common stock in exchange for Aurora's
outstanding common stock, and Aurora options will be equitably converted to
Vertex options. The transaction will be structured as a tax-free share
exchange and is intended to be accounted for as a pooling-of-interests. The
merger is subject to approval by both Vertex's and Aurora's shareholders,
regulatory approval and other closing conditions, and is expected to close in
the third quarter of 2001. After the merger, Aurora will operate as a wholly
owned subsidiary of Vertex. The transaction, excluding merger-related
expenses, is not expected to materially affect our net operating results for
2001.
LEGAL PROCEEDINGS
Chiron Corporation 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. That reexamination is ongoing and
the stay is still in effect. 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.
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RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a Replacement of FASB Statement No. 125."
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities, and is
effective after March 31, 2001. To date we do not believe the adoption of
SFAS 140 will have a material impact on our financial statements and related
disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to our assessment of market risk as
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 8, 2001.
The stockholders elected Joshua S. Boger, Charles A. Sanders and Elaine S.
Ullian to the class of directors whose term expires in 2004. The tabulation
of votes with respect to the election of such directors is as follows:
Total Vote For: Total Vote Withheld:
--------------- --------------------
Joshua S. Boger 45,114,219 942,761
Charles A. Sanders 45,091,257 965,723
Elaine S. Ullian 45,114,258 942,722
In addition, the stockholders approved the amendment to the Company's
Restated Articles of Organization to increase the number of authorized shares
of common stock, $.01 par value per share, of the Company from 100 million to
200 million, by a vote of 40,020,139 shares in favor, 6,014,413 shares
against, and 25,391 shares abstaining.
The stockholders also approved amendments to the 1996 Stock and
Option Plan, including an amendment to increase the total number of shares of
common stock authorized for issuance under that plan by 4 million, to a total
of 13 million, by a vote of 24,761,873 shares in favor, 9,295,932 shares
against, and 74,240 shares abstaining.
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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: May 15, 2001 By: /s/ Johanna Messina Power
-----------------------------------------
Johanna Messina Power
Controller (Principal Accounting Officer)
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