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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 September 30, 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 25,644,002
- -------------------------------------- -----------------------------------
Class Outstanding at November 8, 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 -
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Operations -
Nine Months Ended September 30, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. - OTHER INFORMATION 15
Exhibits 15
Signatures 16
-2-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Vertex Pharmaceuticals
Incorporated:
We have reviewed the accompanying condensed consolidated balance sheet of Vertex
Pharmaceuticals Incorporated as of September 30, 1999, and the related condensed
consolidated statements of operations for each of the three month and nine month
periods ended September 30, 1999 and 1998 and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 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 accompanying condensed consolidated interim financial statements
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
October 26, 1999
-3-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $22,369 $ 24,169
Short-term investments 165,745 221,483
Accounts receivable 4,790 1,462
Prepaid expenses 1,222 1,594
-------- ---------
Total current assets 194,126 248,708
Restricted cash 4,198 2,316
Property and equipment, net 23,603 14,476
Investment in equity affiliate 2,446 ---
Other assets 475 846
-------- ---------
Total assets $224,848 $ 266,346
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Obligations under capital lease and debt $ 2,452 $ 2,752
Accounts payable and accrued expenses 10,619 10,350
--------- ---------
Total current liabilities 13,071 13,102
--------- ---------
Obligations under capital leases and debt,
excluding current portion 5,257 7,032
--------- ---------
Total liabilities 18,328 20,134
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value;1,000,000 authorized
none issued
Commonstock, $.01 par value; 100,000,000 authorized;
issued and outstanding - 25,603,528 shares in 1999
and 25,358,559 shares in 1998 256 254
Additional paid-in capital 399,136 395,165
Accumulated other comprehensive income (330) 654
Accumulated deficit (192,542) (149,861)
--------- ---------
Total stockholders' equity 206,520 246,212
--------- ---------
Total liabilities and stockholders' equity $224,848 $ 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 amounts)
Three Months Ended September 30,
--------------------------------
1999 1998
---- ----
Revenues:
Royalties and product sales $2,180 ---
Collaborative and other research and development 5,045 $14,633
Investment income 2,336 3,784
--------- ----------
Total revenues 9,561 18,417
--------- ----------
Costs and expenses:
Royalties and product costs 727 ---
Research and development 16,421 15,741
General and administrative 6,415 4,772
Loss in equity affiliate 129 ---
Interest 155 177
--------- ----------
Total costs and expenses 23,847 20,690
--------- ----------
Net loss $(14,286) $ (2,273)
========= ==========
Basic and diluted net loss per common share $ (.56) $ (0.09)
========= ==========
Basic and diluted weighted average number of
common shares outstanding 25,552 25,308
========= ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-5-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Revenues:
Royalties and product sales $ 5,054 ---
Collaborative and other research and development 18,650 $ 21,053
Investment income 8,314 11,685
----------- ----------
Total revenues 32,018 32,738
Costs and expenses:
Royalties and product costs 1,926 ---
Research and development 54,055 40,554
General and administrative 17,653 12,189
Loss in equity affiliate 554 ---
Interest 511 484
----------- ----------
Total costs and expenses 74,699 53,227
----------- ----------
Net loss $(42,681) $(20,489)
=========== ==========
Basic and diluted net loss per common share $ (1.68) $ (0.81)
=========== ==========
Basic and diluted weighted average number of
common shares outstanding 25,473 25,282
=========== ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-6-
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Cash flows from operating activities:
Net loss $(42,681) $(20,489)
Adjustment to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 4,343 3,116
Realized gains/(losses) on short-term (539) 327
investments
Loss in equity affiliate 554 ---
Changes in assets and liabilities:
Accounts Receivable (3,328) (54)
Prepaid expenses 372 34
Accounts payable and accrued
expenses 269 (2,312)
Deferred revenue --- (556)
---------- ----------
Net cash used by
operating activities (41,010) (19,934)
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments (288,839) (459,716)
Sales and maturities of short-term investments 343,933 459,903
Expenditures for property and equipment (13,470) (5,730)
Restricted cash (1,882)
Investment in equity affiliate (3,000) ---
Other assets 371 (391)
---------- ----------
Net cash provided (used) by
investing activities 37,113 (5,934)
---------- ----------
Cash flows from financing activities:
Repayment of capital lease obligations and debt (2,075) (2,030)
Proceeds from debt --- 4,084
Proceeds from other issuances of common stock 3,973 2,002
---------- ----------
Net cash provided by
financing activities 1,898 4,056
---------- ----------
Effect of exchange rate changes on cash 199 10
---------- ----------
Decrease in cash and cash equivalents (1,800) (21,802)
Cash and cash equivalents at beginning of period 24,169 71,454
---------- ----------
Cash and cash equivalents at end of period $ 22,369 $ 49,652
=========== ==========
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 (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 September 30, 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. ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue under research and development arrangements is recognized as
earned under the terms of the respective agreements. License payments are
recorded as revenue when contractual obligations have been met. Product research
funding is recorded as revenue, generally on a quarterly basis, as research
effort is incurred. Deferred revenue arises from payments received that have not
yet been earned under research and development arrangements. The Company
recognizes milestone payments when the milestones are achieved. Royalty revenue
is recognized based on actual and estimated sales of licensed products in
licensed territories net of actual and estimated discounts, rebates, chargebacks
and returns. Product sales revenue is recorded upon shipment.
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. 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 5,753,225 stock options outstanding with a
weighted average exercise price of $22.96 as of September 30, 1999.
-8-
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. COMPREHENSIVE INCOME
For the nine months ended September 30, 1999 and 1998 total comprehensive
loss was as follows (in thousands):
September 30, 1999 September 30, 1998
------------------ ------------------
Net loss $ (42,681) $ (20,489)
Other comprehensive income (loss):
Unrealized holding gains (losses) on investments (1,183) 1,559
Foreign currency translation adjustment 199 10
-------- ----------
Total other comprehensive income (loss) (984) 1,569
-------- ----------
Total comprehensive loss $(43,665) $ (18,920)
========= ==========
4. RESTRUCTURED 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 records its percentage of Altus' net income and losses
using the equity method of accounting.
5. AGENERASE APPROVAL
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 plc. Agenerase royalty revenue was recognized for
the first time in the second quarter of 1999.
6. RECENT COLLABORATIVE AGREEMENTS
On September 1, 1999, the Company and Hoechst Marion Roussel
Deutschland GmbH ("HMR") entered into an expanded agreement covering the
development of VX-740, an orally active inhibitor of interleukin-1 beta
converting enzyme (ICE). Under the agreement, HMR will pay the Company $20
million in closing payments in connection with prior research, up to $62 million
in milestone payments for successful development by HMR of VX-740 in rheumatoid
arthritis, the first targeted indication, as well as similar milestones for each
additional indication. HMR will hold an exclusive worldwide license to develop,
manufacture and market VX-740, as well as an exclusive option for all other
compounds discovered as part of the research collaboration that ended in 1997.
HMR will fund the development of VX-740. Vertex will co-promote the product in
the U.S. and Europe and will receive royalties on global sales, as well as a
co-promotion royalty and reimbursement of its co-promotion costs. The agreement
was subject to U.S. government approval under the Hart-Scott Rodino Antitrust
Improvements Act of 1976.
-9-
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On September 16, 1999 HMR commenced a Phase II clinical trial of VX-740
in patients with rheumatoid arthritis. Upon U.S. government approval under the
Hart-Scott Rodino Antitrust Improvements Act of 1976, the company will record $5
million as revenue related to this milestone.
7. LEGAL PROCEEDINGS
Chiron Corporation ("Chiron") filed suit on July 30, 1998 against
the Company and Eli Lilly and Company in the United States District Court for
the Northern District of California, alleging infringement by the defendants
of various 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 and development. Chiron has requested damages in an unspecified
amount, as well as an order permanently enjoining the defendants from
unlicensed use of Chiron inventions. While the final outcome of these actions
cannot be determined, the Company believes that the plaintiff's claims are
without merit and intends to defend the actions vigorously.
8. SUBSEQUENT EVENT
On October 9, 1999 the Company received clearance for the HMR agreement
under the Hart-Scott Rodino Antitrust Improvements Act of 1976. The Company will
recognize $15 million in revenue for closing and milestone payments in the
fourth quarter of 1999.
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 discovers, develops and markets small molecule drugs
that address major unmet medical needs. The Company has drug candidates in
clinical development to treat viral diseases, inflammation, cancer,
autoimmune diseases and neurological disorders. The Company has created its
pipeline using a proprietary approach, information-driven drug design, that
integrates multiple technologies in biology, chemistry and biophysics aimed
at increasing the speed and success rate of drug discovery. The Company's
first approved product is Agenerase-TM- (amprenavir), an HIV protease
inhibitor, which Vertex co-promotes with Glaxo Wellcome plc ("Glaxo
Wellcome"). The Company is earning a royalty from Glaxo Wellcome from sales
of Agenerase.
-10-
The Company's lead product, Agenerase-TM- (amprenavir), received
U.S. FDA approval on April 15, 1999 for the treatment of HIV infection
through an expedited review process. Glaxo Wellcome, Vertex's partner, has
also submitted applications for market approval to regulatory agencies in
countries throughout the world. The Company has incurred operating losses
since its inception and expects to incur a loss in 1999. The Company expects
that operating losses will 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 SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998.
The Company's total revenues decreased to $9,561,000 in the third
quarter of 1999 from $18,417,000 in the third quarter of 1998. In the third
quarter of 1999, royalty and product sales revenue was $2,180,000, $5,045,000
was earned under the Company's collaborative agreements and other research
and development revenue, and $2,336,000 was earned in investment income. In the
third quarter of 1998, the Company earned $14,407,000 in revenue from its
collaborative agreements and $226,000 in other research and development revenue,
and $3,784,000 in investment income.
The lower collaborative revenue during the third quarter of 1999 as
compared to the third quarter of 1998 was principally due to recognition of
$9,000,000 in revenue from Schering AG in August 1998 associated with an
agreement signed in the same month. In addition, Vertex earned a $2,000,000
milestone from Kissei in 1998 for selection of a clinical candidate in the
Company's p38 MAP kinase program. Investment income decreased due to a lower
level of cash and investments in the third quarter of 1999 as compared with the
same period in 1998.
The Company's total costs and expenses increased to $23,847,000 in the
third quarter of 1999 from $20,690,000 in the third quarter of 1998. Royalties
and product costs were $727,000 in the third quarter of 1999.
Research and development expenses increased to $16,421,000 in the third
quarter of 1999 from $15,741,000 in the third quarter of 1998 principally due to
the continued expansion of the Company's research and development organization.
The Company's U.K. subsidiary expanded from a business development operation to
include scientific research and development staff and facilities in the second
half of 1998.
General and administrative expenses increased to $6,415,000 in the
third quarter of 1999 from $4,772,000 in the third quarter of 1998. The increase
in general and administrative expenses principally reflects the impact of
personnel additions and a continued increase in marketing activities
particularly associated with Agenerase. In addition, legal and patent expenses
have increased as the Company continues to protect its intellectual property and
contests a suit filed by Chiron Corporation claiming infringement of various
U.S. patents issued to Chiron. While the final outcome of the litigation with
Chiron cannot be determined, the Company believes, based on information
currently available, that the ultimate outcome of the action will not have a
material impact on its consolidated financial position.
Using the equity method of accounting, the Company recorded $129,000 as
its share of the loss in Altus for the third quarter of 1999.
-11-
Interest expense was $155,000 in the third quarter of 1999 as
compared to $177,000 in the third quarter of 1998 due to lower levels of
equipment lease debt during the quarter.
For the reasons stated above, the Company recorded a net loss of
$14,286,000 or $0.56 per share in the third quarter of 1999 compared to a net
loss of $2,273,000 or $0.09 per share in the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998.
The Company's total revenues were $32,018,000 for the nine months
ended September 30, 1999 compared to $32,738,000 for the nine months ended
September 30, 1998. In 1999, the Company's revenues consisted of $5,054,000
in royalty and product sales revenue, $18,650,000 under the Company's
collaborative agreements and other research and development revenue, and
$8,314,000 in investment income. In 1998, the Company's revenues consisted of
$20,368,000 earned under the Company's collaborative agreements and
$11,685,000 in investment income and $685,000 in government grants and other
income.
Royalty and product sales revenue for the nine month period ending
September 30, 1999 consist of Agenerase royalty revenue from Glaxo Wellcome as
well as revenue from sales of commercial drug substance to Kissei in Japan.
Agenerase royalty revenue from Glaxo Wellcome is based upon the worldwide sales
(outside the Far East) of the drug net of actual and estimated discounts,
rebates, chargebacks, and product returns. These sales reflect prescriptions as
well as initial trade stocking which the Company expects will adjust to be
consistent with underlying demand over the remainder of the year.
Revenue under the Company's collaborative agreements decreased
$2,403,000 for the nine months ended September 30, 1999 as compared with the
same period in 1998. In addition to research and development funding, the
company earned $9,000,000 from Schering AG in August 1998 associated with a new
collaborative agreement for the Company's neurophilins program. The Company
earned a $5,000,000 milestone payment from Glaxo Wellcome for U.S. FDA approval
of Agenerase in April 1999 and a $1,000,000 milestone payment from Kissei in
July 1999 in connection with the filing for approval to market Prozei -TM-
(amprenavir) in Japan.
The Company's total costs increased to $74,699,000 for the nine months
ended September 30, 1999 from $53,227,000 for the nine months ended September
30, 1998. Royalties and product costs of $1,926,000 consist of royalty payments
to G.D. Searle & Co. under a patent license and the cost of commercial drug
substance sold to Kissei.
Research and development expenses increased to $54,055,000 in the
first three quarters of 1999 from $40,554,000 in the first three quarters of
1998. The first three quarters of 1999 include expenses for the U.K. research
and development staffing and facilities growth initiated in the second half
of 1998. Additionally, development expenses were higher in the first three
quarters of 1999 due to the commencement of clinical trials in the second
half of 1998 and an increase in activities associated with the Company's
IMPDH program for psoriasis and hepatitis C, its neurophilins program for
diabetic neuropathy, and its p38 MAP kinase program for inflammatory diseases.
General and administrative expenses increased during the first three
quarters of 1999 to $17,653,000 from $12,189,000 in the first three quarters of
1998 due primarily to increases in personnel and professional expenses,
particularly associated with the marketing of Agenerase and corporate
advertising activities. Legal and patent expenses have increased as the Company
continues to protect its intellectual property and contests a suit filed by
Chiron Corporation.
Using the equity method of accounting, the Company recorded $554,000 as
its share of the loss in Altus in the first three quarters of 1999.
-12-
Interest expense was $511,000 in the first three quarters of 1999, an
increase from $484,000 in the first three quarters of 1998 due to a higher
blended interest rate on similar levels of equipment lease financing during the
year.
For the reasons stated above, the Company incurred a net loss of
$42,681,000 or $1.68 per share in the nine months ended September 30, 1999
compared to a net loss of $20,489,000 or $0.81 per share in the nine months
ended September 30, 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, 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 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 $188 million at September 30, 1999, together with investment
income earned thereon, future payments under its existing and future
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 $57,538,000
during the nine months ended September 30, 1999 to $188,114,000. Cash used by
operations was $41,010,000 during the same period. Accounts receivable increased
$3,328,000 during the first three quarters of 1999 due primarily to the
recording of a royalty receivable from Glaxo Wellcome for Agenerase sales.
Restricted cash increased $1,882,000 during the nine months ended September 30,
1999 as the Company issued a letter of credit for a security deposit under one
of the Company's facilities leases in connection with the acquisition of
additional 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 in cash in exchange for new
classes of preferred stock and warrants. As a result of the transaction, Altus
now operates independently from Vertex.
In October 1999, the Company entered into an operating lease agreement
for an additional facility. The lease will commence in the second quarter of
2000 and have an initial term through the year 2010. The Company has the option
to extend the term thereafter. Related to this facility, the Company will
continue to make significant investments in leasehold improvements and
equipment.
-13-
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. The Company has completed remediation and testing of its
critical IT Systems.
The Company has also completed its assessment, testing, and
remediation of its critical Non-IT Systems for Year 2000 compliance. Some
non-critical Non-IT Systems are non-compliant and, because of the age of
those systems or other factors, cannot be made compliant. The Company has
formulated contingency plans for each of those systems which are
non-compliant and cannot be made compliant.
The Company has contacted third parties that provide goods, services
and information that are deemed critical to the Company's business. If these
or other parties experience Y2K failures or malfunctions there could be an
adverse impact on the Company's ability to conduct operations, including
conducting continued research development efforts. The Company is currently
reviewing the responses and Year 2000 website statements of these entities to
assess their Year 2000 compliance. The Company expects to formulate
contingency plans by the end of November 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. In addition,
there can be no guarantee that any contingency plans developed by the Company
will prevent such failures from having a material adverse effect. At this
time, the Company does not anticipate this worst case scenario to occur, nor
does Vertex anticipate any major interruptions in its ability to provide
products and services to our customers.
The Company is using both internal and external resources to conduct
its Year 2000 program. The total costs, both out-of-pocket and internal, of
the Company's Year 2000 program have not been material. 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. The Company has funded these Year 2000 costs through
available cash and expects its remaining costs to be immaterial as well.
However, the Company may experience unexpected costs in the beginning of the
year 2000 which could result in a material adverse effect on the Company's
results of operations.
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 Annual Report on Form 10-K for the year ended December
31, 1998.
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PART II.
OTHER INFORMATION
Item 6. EXHIBITS:
--------
10.1 License, Development and Commercialization Agreement
between the Company and Hoechst Marion Roussel
Deutschland GmbH dated September 1, 1999 (filed
herewith with certain confidential information
deleted).
10.27 Lease by and between Trustees of Fort Washington
Realty Trust, Landlord, and the Company as Tenant,
executed September 17, 1999 (filed herewith with
certain confidential information deleted).
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.
REPORTS ON FORM 8-K:
-------------------
None
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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 15, 1999 /S/ THOMAS G. AUCHINCLOSS
----------------- ------------------------------------
Thomas G. Auchincloss, Jr.
Vice President of Finance and Treasurer
(Principal Financial Officer)
Date: November 15, 1999 /S/ HANS D. VAN HOUTE
----------------- -------------------------------------
Hans D. van Houte
Controller and Assistant Treasurer
(Principal Accounting Officer)
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