___________________________________________________________________________
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, 1998
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 25,341,169
- --------------------------------------- ---------------------
Class Outstanding at November 10, 1998
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, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Operations -
Nine Months Ended September 30, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 7
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. - Other Information 15
Signatures 16
2
Report of Independent Accountants
To the Board of Directors and Stockholders of Vertex Pharmaceuticals
Incorporated:
We have reviewed the condensed consolidated balance sheet of Vertex
Pharmaceuticals Incorporated as of September 30, 1998, and the related
condensed consolidated statements of operations and cash flows for the three
month and nine month periods ended September 30, 1998 and 1997. These
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997, 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 23, 1998, 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, 1997, 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 21, 1998
3
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, December 31,
1998 1997
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 49,652 $ 71,454
Short-term investments 209,261 208,217
Prepaid expenses and other current assets 1,972 1,952
----------- ---------
Total current assets 260,885 281,623
Restricted cash 2,316 2,316
Property and equipment, net 13,709 11,095
Other assets 961 570
----------- ---------
Total assets $ 277,871 $ 295,604
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Obligations under capital lease and debt $ 2,840 $ 2,510
Accounts payable and accrued expenses 8,320 10,632
Deferred revenue -- 556
----------- ---------
Total current liabilities 11,160 13,698
----------- ---------
Obligations under capital leases and debt,
excluding current portion 7,629 5,905
----------- ---------
Total liabilities 18,789 19,603
----------- ---------
Stockholders' equity:
Common stock 253 252
Additional paid-in capital 394,373 392,372
Accumulated other comprehensive income 1,720 152
Accumulated deficit (137,264) (116,775)
----------- ---------
Total stockholders' equity 259,082 276,001
----------- ---------
Total liabilities and stockholders' equity $ 277,871 $ 295,604
----------- ---------
----------- ---------
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended September 30,
--------------------------------
1998 1997
-------- -------
Revenues:
Collaborative and other research and
development $ 14,633 $ 9,739
Investment income 3,784 3,808
--------- --------
Total revenues 18,417 13,547
--------- --------
Costs and expenses:
Research and development 15,741 16,449
General and administrative 4,772 2,813
Interest 177 141
--------- --------
Total costs and expenses 20,690 19,403
--------- --------
Net loss $ (2,273) $ (5,856)
--------- --------
--------- --------
Basic and diluted net loss per common share $ (0.09) $ (0.23)
--------- --------
--------- --------
Basic and diluted weighted average number of
common shares outstanding 25,308 25,119
--------- --------
--------- --------
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,
--------------------------------
1998 1997
--------- --------
Revenues:
Collaborative and other research and development $ 21,053 $ 22,719
Investment income 11,685 9,901
--------- ---------
Total revenues 32,738 32,620
--------- ---------
Costs and expenses:
Research and development 40,554 37,561
General and administrative 12,189 7,654
Interest 484 438
--------- ---------
Total costs and expenses 53,227 45,653
--------- ---------
Net loss $(20,489) $ (13,033)
--------- ---------
--------- ---------
Basic and diluted net loss per common share $ (0.81) $ (0.54)
--------- ---------
--------- ---------
Basic and diluted weighted average number of
common shares outstanding 25,282 23,950
--------- ---------
--------- ---------
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,
-------------------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net loss $ (20,489) $ (13,033)
Adjustment to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 3,116 2,565
Changes in assets and liabilities:
Prepaid expenses and other
current assets (20) (392)
Accounts payable and accrued
expenses (2,312) 4,379
Deferred revenue (556) 556
--------- ---------
Net cash provided (used) by
operating activities (20,261) (5,925)
--------- ---------
Cash flows from investing activities:
Short-term investments 514 (10,468)
Expenditures for property and equipment (5,730) (4,084)
Other assets (391) (393)
--------- ---------
Net cash provided (used) by
investing activities (5,607) (14,945)
--------- ---------
Cash flows from financing activities:
Proceeds from public offering of common stock -- 148,810
Proceeds from private placement of common stock -- 10,000
Other issuances of common stock 2,002 4,776
Proceeds from equipment sale/leaseback 4,084 1,855
Repayment of capital lease obligations (2,030) (2,217)
--------- ---------
Net cash provided (used) by
financing activities 4,056 163,224
--------- ---------
Effect of exchange rate changes on cash 10 (14)
--------- ---------
Increase (decrease) in cash and cash equivalents (21,802) 142,340
Cash and cash equivalents at beginning of period 71,454 34,851
--------- ---------
Cash and cash equivalents at end of period $ 49,652 $ 177,191
--------- ---------
--------- ---------
The accompanying notes are an integral part of
these condensed consolidated financial statements.
7
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements are
unaudited and have been prepared by the Company in accordance with generally
accepted accounting principles.
Certain information and footnote disclosures normally included in the
Company's annual financial statements have been condensed or omitted. The
interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended September 30, 1998 and
1997.
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, 1998. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1997, which are contained in the Company's 1997 Annual Report to its
shareholders and in its Form 10-K filed with the Securities and Exchange
Commission.
2. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of three months or less at the date
of purchase to be cash equivalents. Changes in cash and cash equivalents may
be affected by shifts in investment portfolio maturities as well as by actual
net cash receipts or disbursements.
3. Basic and Diluted Loss per Common Share
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
based upon the weighted average number of common shares outstanding during
the period plus additional weighted average common equivalent shares
outstanding during the period when the effect is not anti-dilutive. Common
equivalent shares result from the assumed exercise of outstanding stock
options, the proceeds of which are then assumed to have been used to
repurchase outstanding stock using the treasury stock method. Common
equivalent shares have not been included in the per share calculations as the
effect would be anti-dilutive. Potential common equivalent shares consist of
5,311,300 stock options outstanding with a weighted average exercise price of
$22.15 as of September 30, 1998.
8
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
4. Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires that all components of comprehensive income and
total comprehensive income be reported and that changes be shown in a
financial statement displayed with the same prominence as other financial
statements. The Company has elected to disclose this information in its
statement of stockholders' equity. For the nine months ended September 30,
1998 and 1997 total comprehensive loss was as follows (in thousands):
September 30, 1998 September 30, 1997
------------------- ------------------
Net loss $ (20,489) $ (13,033)
Other comprehensive income (loss):
Unrealized holding gains (losses) on investments 1,559 116
Foreign currency translation adjustment 10 (14)
--------- ---------
Total other comprehensive income (loss) 1,569 102
--------- ---------
Total comprehensive loss $ (18,920) $ (12,931)
--------- ---------
--------- ---------
5. Subsequent Event
In October 1998, the Company earned a $3,000,000 milestone payment from
Glaxo Wellcome on the submission of a New Drug Application (NDA) for the new
HIV protease inhibitor Agenerase-TM- (amprenavir).
6. Recent Collaborative Agreements
In August 1998, the Company and Schering AG, Germany entered into an
agreement to collaborate on the research, development and commercialization
of novel, orally active neurophilin compounds to promote nerve regeneration
for the treatment of a number of neurological diseases. Under the terms of
the agreement, Schering AG will pay the Company up to $88,000,000 composed of
a $6,000,000 upfront license payment paid in September 1998, $22,000,000 of
product research funding over five years and $60,000,000 of development and
commercialization milestone payments. Under terms of the agreement, Vertex
and Schering AG will have an equal role in management of neurophilin research
and product development. In North America, Vertex will have manufacturing
rights, and Vertex and Schering AG will share equally in the marketing
expenses and profits from commercialized compounds. In addition to having
manufacturing rights in North America, the Company retains the option to
manufacture bulk drug substance for sales and marketing in territories
outside Europe, the Middle East and Africa. Schering AG will have the right
to manufacture and market any commercialized compounds in Europe, the Middle
East and Africa, and pay Vertex a royalty on product sales. Schering AG has
the right to terminate the research agreement without cause upon three
months' notice after December 1998, but will be obligated to make the
payments for the period January to December 1999. After December 2000,
Schering AG has the right to terminate without cause upon a six months'
written notice.
9
7. Recently Issued Accounting Standards
In July 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which is effective for fiscal years beginning after December
15, 1997. The interim reporting disclosures are not required in the first
year of adoption. SFAS 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information
to be disclosed. SFAS 131 changes current practice under SFAS No. 14 by
establishing a new framework on which to base segment reporting. The
"management" approach expands the required disclosures for each segment. The
Company will adopt SFAS 131 in the fourth quarter ending December 31, 1998
and has not yet determined the impact of such adoption on its segment
reporting.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and if it
is, the type of hedge transaction. The Company is currently assessing the
impact of this SFAS 133 does not believe that it will have a material impact
on the financial statements.
8. 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. The Company intends to vigorously
contest the action.
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.
Since its inception in 1989, the Company has been engaged in the
discovery, development and commercialization of novel, small molecule
pharmaceuticals for the treatment of major diseases for which there are
currently limited or no effective treatments. The Company is a leader in the
use of structure-based drug design, an approach to drug discovery that
integrates advanced biology, biophysics and chemistry. The company is
conducting research and development programs to develop pharmaceuticals for
the treatment of viral diseases, multidrug resistance in cancer, autoimmune
and inflammatory diseases and neurodegenerative disorders.
10
To date, the Company has not received any revenues from the sale of
pharmaceutical products. The Company's lead product candidate,
Agenerase-TM-(amprenavir) for the treatment of HIV infection, is presently
undergoing Phase III clinical trials. A New Drug Application ("NDA") was
submitted to the U.S. Food and Drug Administration in October 1998, and
equivalent applications were subsequently submitted to Canadian and European
regulatory agencies. If the clinical trials are concluded successfully and
if the NDA is approved by the FDA, and product sales commence, the Company
will receive a royalty on sales of Agenerase-TM- by its partner Glaxo
Wellcome plc ("Glaxo Wellcome"). However, there can be no assurance that
Phase III clinical trials will be successfully completed, or that marketing
approval will be granted by the FDA. The Company has incurred operating
losses since its inception and expects to incur a loss in 1998. The Company
believes that operating losses may continue for the next several years even
if significant royalties are realized on Agenerase-TM- 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, 1998 Compared with Three Months Ended September
30, 1997.
The Company's total revenues increased to $18,417,000 in the third
quarter of 1998 from $13,547,000 in the third quarter of 1997. In the third
quarter of 1998, revenues consisted of $14,407,000 under the Company's
collaborative agreements, $3,784,000 in investment income and $226,000 in
government grants and other revenue. In the third quarter of 1997, the
Company received $9,380,000 in revenue from its collaborative agreements,
$3,808,000 in investment income and $359,000 from government grants and other
revenue. Revenues for the third quarter in 1998 included $9,000,000 of
payments from Schering AG, under a new collaboration (the "Schering
Agreement") signed in August 1998 to research, develop and commercialize
novel, orally active neurophilin compounds that promote nerve growth and
repair. The payment included $3,000,000 in research funding for the period
from January 1, 1998 to September 30, 1998, and a $6,000,000 license fee.
Also in the third quarter 1998, Vertex received a $2,000,000 milestone
payment from Kissei Pharmaceutical Co., Ltd. ("Kissei") relating to the
selection of Vertex's compound VX-745 as a lead drug development candidate
targeting the p38 MAP kinase enzyme. Revenues for the third quarter of 1998
increased even though 1997 third quarter revenues included a $4,000,000
up-front payment and $750,000 in research funding received from Kissei under
the collaborative agreement for the Company's p38 MAP kinase program, signed
in September 1997, and the reimbursement by Hoechst Marion Roussel ("HMR") of
certain costs associated with the Company's ICE program.
The Company's total costs and expenses increased to $20,690,000 in the
third quarter of 1998 from $19,403,000 in the third quarter of 1997. Research
and development expenses decreased to $15,741,000 in the third quarter of
1998 from $16,449,000 in the third quarter of 1997. In the third quarter of
1998, the Company experienced lower clinical and preclinical development
expenses for its MDR program for cancer, the ICE program for inflammatory
diseases and the IMPDH program for autoimmune diseases. These decreases were
offset in part by headcount growth of the scientific organization and by
commencement of research activities at the Company's new U.K. research
facility. General and administrative expenses increased to $4,772,000 in the
third quarter of 1998 from $2,813,000 in the third quarter of 1997. The
increase in general and administrative expenses principally reflects the
impact of personnel additions and an increase in marketing activities in
preparation for the anticipated launch of Agenerase-TM-. Interest expense
increased to $177,000 in the third quarter of 1998 from $141,000 in the third
quarter of 1997 due to higher levels of equipment lease financing during the
year. The Company expects that research and development as well as general
and administrative expenses will continue to increase as the Company starts
new research projects, advances current clinical and preclinical candidates,
and expands its marketing and business development activities.
The Company recorded a net loss of $2,273,000 or $0.09 per share in the
third quarter of 1998 compared to a net loss of $5,856,000 or $0.23 per share
in the third quarter of 1997.
11
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997.
The Company's total revenues were $32,738,000 for the nine months ended
September 30, 1998 as compared to $32,620,000 for the nine months ended
September 30, 1997. In 1998, the Company's revenues consisted of $20,368,000
in collaborative revenues, $11,685,000 in investment income, and $685,000 in
government grants and other income. In 1997, the Company's revenues
consisted of $21,439,000 earned under the Company's collaborative agreements,
$9,901,000 in investment income and $1,280,000 in government grants and other
income. While the 1998 first three quarters revenue included $9,000,000 of
payments from Schering AG, there was a moderate decline relative to the 1997
period due to the Company's receipt in 1997 of $4,000,000 in development
reimbursements from Kissei for a clinical trial of Agenerase-TM-, $3,000,000
of upfront payments from Lilly for the Company's Hepatitis C program and
$4,000,000 from Kissei for the p38 MAP Kinase program.
The Company's total costs increased to $53,227,000 for the nine months
ended September 30, 1998 from $45,653,000 for the nine months ended September
30, 1997. Research and development expenses increased to $40,554,000 in the
first three quarters of 1998 from $37,561,000 in the first three quarters of
1997, primarily due to the expansion of the Company's research and
development activities. General and administrative expenses increased during
the first three quarters of 1998 to $12,189,000 from $7,654,000 in the first
three quarters of 1997 due primarily to increases in personnel and
professional expenses, particularly in preparation for the expected market
launch of Agenerase-TM- and corporate advertising activities. Interest
expense was $484,000 in the first three quarters of 1998, an increase from
$438,000 in the first three quarters of 1997 as a result of higher levels of
equipment financing during the period.
For the reasons stated above, the Company incurred a net loss of
$20,489,000 or $0.81 per share in the nine months ended September 30, 1998
compared to a net loss of $13,033,000 or $0.54 per share in the nine months
ended September 30, 1997.
Liquidity and Capital Resources
The Company's operations have been funded principally through strategic
collaborative agreements, public offerings and private placements of the
Company's equity securities, equipment lease financing, government grants and
investment income. The Company expects to incur increased research and
development and related supporting expenses and, consequently, may continue
to experience losses on a quarterly and annual basis as it continues to
develop existing and future compounds and to conduct clinical trials of
potential drugs. The Company also expects to incur substantial administrative
and commercialization expenditures in the future and additional expenses
related to the filing, prosecution, defense and enforcement of patent and
other intellectual property rights.
The Company expects to finance these substantial cash needs with its
existing cash and investments of approximately $258,913,000 at September 30,
1998, together with investment income earned thereon, future payments under
its existing collaborative agreements, and facilities and equipment
financing. In addition, an NDA for Agenerase-TM- was submitted in October
which, if approved, will lead to royalty income. 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 new research collaborations for new or
existing projects, or other methods of financing. There can be no assurance
that such financing will be available on acceptable terms, if at all. The
Company believes that its existing cash and investments should be sufficient
to meet its anticipated requirements for at least the next two years.
The Company's aggregate cash and investments decreased by $20,758,000
during the nine months ended September 30, 1998 to $258,913,000. Cash used
by operations, principally to fund research and development activities, was
$20,261,000 during the same period. The Company also expended $5,730,000
during this period to acquire property and equipment, principally for
research equipment and
12
facilities. During the first three quarters of 1998, the Company entered
into equipment financing arrangements in the aggregate amount of $4,084,000
and repaid $2,030,000 of its lease obligations.
In addition to the expansion of the research and development activities
in the U.S., the Company started the expansion of its U.K. operations to
include a research site during the third quarter in 1998. The Company expects
that, in general, research and development as well as general and
administrative expenses will continue to increase as the Company starts new
research projects, advances current clinical and preclinical candidates, and
expands its marketing and business development activities.
Under the terms of the Schering Agreement, Schering AG will pay the
Company up to $88,000,000 composed of a $6,000,000 upfront license payment
paid in September 1998, $22,000,000 of product research funding over five
years and $60,000,000 of development and commercialization milestone
payments.
The Company adopted requirements relating to comprehensive income in
accordance with the Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income". This Statement requires that
total comprehensive income be reported and that changes be shown in a
financial statement displayed with the same prominence as other financial
statements.
In July 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which is effective for fiscal years beginning after December
15, 1997. The interim reporting disclosures are not required in the first
year of adoption. SFAS 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of financial information
to be disclosed. SFAS 131 changes current practice under SFAS No. 14 by
establishing a new framework on which to base segment reporting. The
"management" approach expands the required disclosures for each segment. The
Company will adopt SFAS 131 in the fourth quarter ended December 31, 1998 and
has not yet determined the impact of such adoption on its segment reporting.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and if it
is, the type of hedge transaction. The Company is currently assessing the
impact of this FASB and does not believe that it will have a material impact
on the financial statements.
Year 2000
The Company is currently assessing the potential impact of the Year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and products purchased by the Company. The Company's
review includes its own computer systems and software ("IT Systems"),
embedded systems in its non-computer equipment ("Non-IT Systems"), and
relationships with certain third parties.
The Company has completed its evaluation of its business critical IT Systems
and has determined the actions necessary in order to ensure that such IT
Systems will be able to function without disruption with respect to the
application of dating systems in the Year 2000. The Company has begun to
upgrade, replace and test certain of its IT Systems based on the results of
that evaluation. Evaluation of Non-IT Systems for Year 2000 compliance is
under way but has not been completed.
In addition to risks associated with the Company's own computer systems and
equipment, the Company has relationships with, and is to varying degrees
dependent upon, a number of third parties that provide goods, services and
information to the Company. These include contract manufacturers, suppliers,
13
licensees and licensors, vendors, research partners and financial
institutions, whose systems and equipment are outside the control of the
Company. If certain of these third parties experience failures in their
computer systems or equipment due to Year 2000 non-compliance, it could
affect the Company's ability to engage in normal business activities. The
Company intends to contact its significant vendors and partners to ascertain
their Year 2000 compliance and to determine the extent to which the Company
is vulnerable to their non-compliance, if any.
The Company expects to complete its internal evaluation and remediation
efforts and its assessment of third party compliance by mid-1999. However,
there can be no assurance that these evaluations and any required remedial
actions will be able to be completed on a timely basis. The Company believes
that its internal IT Systems and Non-IT Systems are either already Year 2000
compliant or will be so prior to the Year 2000 without incurring material
costs. There can be no assurance, however, that the Company will not
experience unexpected costs in achieving Year 2000 compliance for its
internal systems, which could result in a material adverse effect on the
Company's future results of operations. The Company believes that it will be
able to locate alternate sources for any critical goods or services provided
by non-compliant third parties, if any. However, the Company may not be able
to timely develop or implement contingency plans to address those business
critical systems and third party relationships which may not be Year 2000
compliant.
14
PART II.
OTHER INFORMATION
Item 1. 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. The Company intends to vigorously contest the action.
Item 2. Changes in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information:
None
Item 6. Exhibits:
10.1 Research Agreement dated August 24, 1998 between the
Company and Schering AG. (Filed herewith with certain
confidential information omitted. The omitted portions have
been filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment.)
27 Financial Data Schedule. (Exhibit 27 is submitted as an exhibit
only in the electronic format of this Quarterly Report on
Form 10-Q submitted to the Securities and Exchange Commission.)
99 Letter of Independent Accountants
Reports on Form 8-K:
None
15
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, 1998 /s/ Thomas G. Auchincloss
-------------------------
Thomas G. Auchincloss, Jr.
Vice President of Finance and Treasurer
(Principal Financial Officer)
Date: November 13, 1998 /s/ Hans D. van Houte
--------------------------------------
Hans D. van Houte
Controller
(Principal Accounting Officer)
16