VERTEX PHARMACEUTICALS INCORPORATED OVERVIEW
We invest in scientific innovation to create transformative medicines for people with serious diseases with a focus on specialty markets. We continue to focus on developing and commercializing therapies for the treatment of cystic fibrosis, or CF. In 2019, we obtained approval inthe United States , orU.S. , for and launched TRIKAFTA (elexacaftor/tezacaftor/ivacaftor and ivacaftor). We are broadening our pipeline through internal research efforts and accessing external innovation through business development transactions. We have four approved medicines that treat the underlying cause of CF, which is a life-threatening genetic disease. InOctober 2019 , TRIKAFTA, our triple-combination regimen, was approved by theUnited States Food and Drug Administration , or FDA, for the treatment of patients with CF 12 years of age or older who have at least one F508del mutation in the cystic fibrosis transmembrane conductance regulator, or CFTR, gene. This approval increased the number of patients eligible for our medicines in theU.S. by approximately 6,000 and provided an additional treatment option for many patients who are also eligible for one of our previously approved products. We have submitted a Marketing Authorization Application, or MAA, to theEuropean Medicines Agency , or EMA, for this triple combination regimen. Our four medicines are collectively approved to treat approximately 60% of the 75,000 CF patients inNorth America ,Europe andAustralia . We are focused on obtaining approval for the triple combination in ex-U.S. markets for patients 12 years of age and older and evaluating our triple combination in younger patients with the goal of having treatments for up to 90% of patients with CF. We are also pursuing genetic therapies to address the remaining 10% of CF patients. Our small molecule programs include programs focused on developing treatments for alpha-1 antitrypsin, or AAT, deficiency, APOL1-mediated kidney diseases and pain. We are evaluating CTX001, a genetic therapy as a potential treatment for sickle cell disease and beta thalassemia, in Phase 1/2 clinical trials in collaboration with CRISPR Therapeutics AG, or CRISPR. In 2019, through a series of strategic transactions, we acquired preclinical genetic therapy programs for Duchenne muscular dystrophy, or DMD, and myotonic dystrophy type 1, or DM1, and preclinical programs to develop cell-based therapies for type 1 diabetes, or T1D. We are monitoring the potential impacts of the recent spread of the novel strain of the coronavirus ("COVID-19") on our business. COVID-19 has not affected our supply chain or the demand for our medicines and we believe that we will be able to continue to supply all of our approved medicines to our patients globally. We have adjusted our business operations in response to COVID-19, with a majority of our employees working remotely, and COVID-19 has resulted in delays in certain research and development activities. Financial Highlights Revenues In the first quarter of 2020, our net product revenues continued to increase due to the approval of TRIKAFTA in late 2019 and uptake of our medicines medicines in ex-U.S. markets following completion of reimbursement agreements in 2019. [[Image Removed: chart-c6f6127e7bb55486951.jpg]] Expenses Our combined R&D and SG&A expenses increased to$630.8 million in the first quarter of 2020 from$486.5 million in the first quarter of 2019. In the first quarter of 2020, cost of sales was 11% of our net product revenues. Balance Sheet [[Image Removed: chart-46ee851a54315f11b13.jpg]] 25
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Business Updates COVID-19 has not affected our supply chain and we believe that we will be able to continue to supply all of our approved medicines to our patients globally. TRIKAFTA (elexacaftor/tezacaftor/ivacaftor and ivacaftor) • The majority of the approximately 18,000 eligible patients in the United
States have now initiated treatment with TRIKAFTA following its approval in
• The MAA for the elexacaftor, tezacaftor and ivacaftor triple combination in
patients 12 years of age and older with at least one F508del mutation that
we submitted in 2019 is being reviewed by the EMA.
• We recently submitted our applications for approval of the elexacaftor,
tezacaftor and ivacaftor triple combination for patients 12 years of age and
older with at least one F508del mutation in
• We recently completed enrollment for a Phase 3 clinical trial evaluating the
use of the elexacaftor, tezacaftor and ivacaftor triple combination in
children 6 to 11 years of age with CF who have two copies of
the F508del mutation or who have one F508del mutation and one minimal
function mutation. If the data from this clinical trial is positive, we plan
to submit a supplemental New Drug Application, or sNDA, to the FDA in the
second half of 2020 for children 6 to 11 years of age with at least oneF508del mutation, followed by regulatory submissions in other countries.
KALYDECO (ivacaftor) • We recently completed the submission of an sNDA to the FDA and Type 2
variation to the EMA for the use of KALYDECO in patients four to less than
six months of age.
Pipeline
Depending on the disease, stage of development and type of clinical trial, and to ensure patient safety and reduce the burden on the healthcare system at a time of critical need, we have temporarily paused or delayed enrollment in certain clinical trials. • AAT Deficiency: We temporarily paused screening and enrollment in the Phase
2 proof-of-concept clinical trial for VX-814, our first investigational oral
small molecule corrector for the treatment of alpha-1 antitrypsin, or AAT,
deficiency, in patients with AAT deficiency who have two copies of the Z
mutation. The Phase 2 clinical trial remains active and we continue to
initiate new trial sites to enable future patient enrollment.
• Focal Segmental Glomerulosclerosis: We recently initiated a Phase 2
proof-of-concept clinical trial designed to evaluate the reduction in
proteinuria in patients with APOL1-mediated focal segmental
glomerulosclerosis, or FSGS, receiving treatment with VX-147.
• Beta Thalassemia and Sickle Cell Disease: We and our collaborator, CRISPR,
expect to provide additional data from the two ongoing Phase 1/2 clinical
trials of the investigational CRISPR/Cas9 gene-editing therapy CTX001, in
patients with transfusion-dependent beta thalassemia and in patients with
severe sickle cell disease in 2020.
• T1D: We continue to advance our cell therapy program for the treatment of
T1D and expect to initiate clinical development in patients in late 2020 or
early 2021.
External Innovation
• Affinia Therapeutics: In
to support our ongoing research and development efforts in genetic
therapies. The goal of the collaboration will be to develop gene therapies
for people affected by DMD, DM1 and CF.
• Moderna: Based on preclinical data generated to date, we recently extended
our collaboration with Moderna, aimed at the discovery and development of
messenger ribonucleic acid, or mRNA, therapeutics for the treatment of CF.
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Research
We are continuing to invest in our research programs and fostering scientific innovation in order to identify and develop transformative medicines. Our strategy is to combine transformative advances in the understanding of human disease and the science of therapeutics in order to identify and develop new medicines. We believe that pursuing research in diverse areas allows us to balance the risks inherent in drug development and may provide drug candidates that will form our pipeline in future years. To supplement our internal research programs, we acquire technologies and programs and collaborate with biopharmaceutical and technology companies, leading academic research institutions, government laboratories, foundations and other organizations, as needed, to advance research in our areas of therapeutic interest and to access technologies needed to execute on our strategy. Drug Discovery and Development Discovery and development of a new pharmaceutical product is a difficult and lengthy process that requires significant financial resources along with extensive technical and regulatory expertise. Potential drug candidates are subjected to rigorous evaluations, driven in part by stringent regulatory considerations, designed to generate information concerning efficacy, side effects, proper dosage levels and a variety of other physical and chemical characteristics that are important in determining whether a drug candidate should be approved for marketing as a pharmaceutical product. Most chemical compounds that are investigated as potential drug candidates never progress into development, and most drug candidates that do advance into development never receive marketing approval. Because our investments in drug candidates are subject to considerable risks, we closely monitor the results of our discovery, research, clinical trials and nonclinical studies and frequently evaluate our drug development programs in light of new data and scientific, business and commercial insights, with the objective of balancing risk and potential. This process can result in abrupt changes in focus and priorities as new information becomes available and as we gain additional understanding of our ongoing programs and potential new programs, as well as those of our competitors. If we believe that data from a completed registration program support approval of a drug candidate, we submit an NDA to the FDA requesting approval to market the drug candidate inthe United States and seek analogous approvals from comparable regulatory authorities in jurisdictions outsidethe United States . To obtain approval, we must, among other things, demonstrate with evidence gathered in nonclinical studies and well-controlled clinical trials that the drug candidate is safe and effective for the disease it is intended to treat and that the manufacturing facilities, processes and controls for the manufacture of the drug candidate are adequate. The FDA and ex-U.S. regulatory authorities have substantial discretion in deciding whether or not a drug candidate should be granted approval based on the benefits and risks of the drug candidate in the treatment of a particular disease, and could delay, limit or deny regulatory approval. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for the drug candidate involved will be harmed. Regulatory Compliance Our marketing of pharmaceutical products is subject to extensive and complex laws and regulations. We have a corporate compliance program designed to actively identify, prevent and mitigate risk through the implementation of compliance policies and systems and through the promotion of a culture of compliance. Among other laws, regulations and standards, we are subject to variousU.S. federal and state laws, and comparable laws in other jurisdictions, pertaining to health care fraud and abuse, including anti-kickback and false claims laws, and laws prohibiting the promotion of drugs for unapproved or off-label uses. Anti-kickback laws generally make it illegal for a prescription drug manufacturer to knowingly and willfully solicit, offer, receive or pay any remuneration in return for or to induce the referral of business, including the purchase or prescription of a particular drug that is reimbursed by a state or federal health care program. False claims laws prohibit anyone from knowingly or willfully presenting for payment to third-party payors, including Medicare and Medicaid, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. We are subject to laws and regulations that regulate the sales and marketing practices of pharmaceutical manufacturers, as well as laws such as theU.S. Foreign Corrupt Practices Act, which govern our international business practices with respect to payments to government officials. In addition, we are subject to various data protection and privacy laws and regulations in theU.S. , E.U.,Canada ,Australia and other jurisdictions. We expect to continue to devote substantial resources to maintain, administer and expand these compliance programs globally. Reimbursement Sales of our products depend, to a large degree, on the extent to which our products are reimbursed by third-party payors, such as government health programs, commercial insurance and managed health care organizations. We dedicate substantial management and other resources in order to obtain and maintain appropriate levels of reimbursement for our products from third-party payors, including governmental organizations inthe United States and ex-U.S. markets. 27
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Inthe United States , we have worked successfully with third party payors in order to promptly obtain appropriate levels of reimbursement for our first three CF medicines and are working with these stakeholders to obtain reimbursement for TRIKAFTA. We plan to continue to engage in discussions with numerous commercial insurers and managed health care organizations, along with government health programs that are typically managed by authorities in the individual states, to ensure that payors recognize the significant benefits that our medicines provide by treating the underlying cause of cystic fibrosis and continue to provide access to our medicines. InEurope and other ex-U.S. markets, we seek government reimbursement for our medicines on a country-by-country basis. This is necessary for each new medicine, as well as, label expansions for our current medicines in most countries. We successfully obtained reimbursement for KALYDECO in each significant ex-U.S. market within two years of approval. We experienced significant challenges in obtaining reimbursement for ORKAMBI in certain ex-U.S. markets, however, we now have obtained reimbursement for ORKAMBI or SYMKEVI in most of our significant ex-U.S. markets. In some ex-U.S. markets, includingIreland ,Denmark andAustralia , our reimbursement agreements include innovative arrangements that provide a pathway to access and rapid reimbursement for certain future CF medicines. We filed a MAA with the EMA for the triple combination regimen of elexacaftor, tezacaftor and ivacaftor and, if approved, we would need to seek government reimbursement on a country-by-country basis, in most European markets. InDecember 2019 , we reached an agreement with the government inIreland to expand the existing reimbursement agreement to include the triple combination regimen pending approval by the EMA. We continue to seek government reimbursement and label expansions for our medicines in the applicable jurisdictions. Strategic Transactions Acquisitions As part of our business strategy, we seek to acquire drugs, drug candidates and other technologies and businesses that have the potential to complement our ongoing research and development efforts. In 2019, we invested significantly in business development transactions designed to augment our pipeline, including the acquisition of Exonics, a privately-held company focused on creating transformative gene-editing therapies to repair mutations that cause DMD and other severe neuromuscular diseases, including DM1, and Semma, a privately-held company focused on the use of stem cell-derived human islets as a potentially curative treatment for T1D. In the Exonics acquisition, we paid approximately$245.0 million upfront to Exonics equity holders and agreed to additional payments based upon successful achievement of specified development and regulatory milestones. In the Semma acquisition, we paid approximately$950.0 million in cash to Semma equity holders. We expect to continue to identify and evaluate potential acquisitions that may be similar to or different from the transactions that we have engaged in previously. Both of our 2019 acquisitions were accounted for as business combinations. As of the acquisition date for each transaction, the cash payments, as well as the fair value of contingent consideration for Exonics, were allocated primarily to goodwill and the fair value of several in-process research and development assets that we acquired. The fair value of contingent consideration related to Exonics was recorded as a liability and will be adjusted on a quarterly basis in the future. As a result, these acquisitions are primarily reflected in additional assets and liabilities on our condensed consolidated balance sheet. Please refer to Note C, "Acquisitions," and our critical accounting policies, "Acquisitions," in our 2019 Annual Report on Form 10-K for further information regarding the significant judgments and estimates related to our 2019 acquisitions. Collaboration and Licensing Arrangements We enter into arrangements with third parties, including collaboration and licensing arrangements, for the development, manufacture and commercialization of drugs, drug candidates and other technologies that have the potential to complement our ongoing research and development efforts. We expect to continue to identify and evaluate collaboration and licensing opportunities that may be similar to or different from the collaborations and licenses that we have engaged in previously. In-License Agreements We have entered into collaborations with biotechnology and pharmaceutical companies in order to acquire rights or to license drug candidates or technologies that enhance our pipeline and/or our research capabilities. Over the last several years, we entered into collaboration agreements with a number of companies, includingArbor Biotechnologies, Inc. , CRISPR,Kymera Therapeutics, Inc. and Molecular Templates, Inc. Generally, when we in-license a technology or drug candidate, we make upfront payments to the collaborator, assume the costs of the program and/or agree to make contingent payments, which could consist of milestone, royalty and option payments. Most of these collaboration payments are expensed as research and development expenses; however, depending on many factors, including the structure of the collaboration, the significance of the drug candidate that we license to the collaborator's operations and the other activities in which our collaborators are engaged, the accounting for these transactions can vary significantly. In the first quarter of 2020 and the first quarter of 2019, 28
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our research and development expenses included$36.3 million and$5.3 million , respectively, related to upfront and milestones payments pursuant to our collaboration agreements. Out-License Agreements We also have out-licensed internally developed programs to collaborators who are leading the development of these programs. These out-license arrangements include our agreements withJanssen Pharmaceuticals, Inc. , or Janssen, which is evaluating pimodivir in Phase 3 clinical trials for the treatment of influenza; and Merck KGaA, Darmstadt,Germany , which licensed oncology research and development programs from us in early 2017. Pursuant to these out-licensing arrangements, our collaborators are responsible for the research, development and commercialization costs associated with these programs, and we are entitled to receive contingent milestone and/or royalty payments. As a result, we do not expect to incur significant expenses in connection with these programs and have the potential for future collaborative and royalty revenues resulting from these programs. Please refer to Note C, "Collaborative Arrangements," for further information regarding our in-license agreements and out-license agreements. Strategic Investments In connection with our business development activities, we have periodically made equity investments in our collaborators. As ofMarch 31, 2020 , we held strategic equity investments in several public companies, including CRISPR, and certain private companies, and we plan to make additional strategic equity investments in the future. While we invest the majority of our cash, cash equivalents and marketable securities in instruments that meet specific credit quality standards and limit our exposure to any one issue or type of instrument, our strategic investments are maintained and managed separately from our other cash, cash equivalents and marketable securities. Any changes in the fair value of equity investments with readily determinable fair values (including publicly traded securities such as CRISPR) are recorded to other income (expense), net in our condensed consolidated statement of operations. For equity investments without readily determinable fair values including equity investments in private companies, each reporting period we are required to re-evaluate the carrying value of the investment, which may result in other income (expense). In the first quarter of 2020 and the first quarter of 2019, we recorded within other income (expense), a net loss of$44.9 million and a net gain of$43.6 million , respectively, related to changes in the fair value of our strategic investments, and from sales of certain equity investments. To the extent that we continue to hold strategic investments, particularly strategic investments in publicly traded companies, we will record other income (expense) related to these strategic investments on a quarterly basis. Due to the high volatility of stocks in the biotechnology industry, we expect the value of these strategic investments to fluctuate and that the increases or decreases in the fair value of these strategic investments will continue to have material impacts on our net income (expense) and our profitability on a quarterly and/or annual basis. 29
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RESULTS OF OPERATIONS
Three Months Ended March 31, Increase/(Decrease)
2020 2019 $ %
(in thousands)
Revenues $ 1,515,107 $ 858,435 $ 656,672 76 %
Operating costs and expenses 794,883 581,627 213,256 37 %
Income from operations 720,224 276,808 443,416 160 %
Other non-operating (expense) income, net (62,690 ) 43,357 ** **
Provision for income taxes 54,781 51,534 3,247 6 %
Net income $ 602,753 $ 268,631 $ 334,122 124 %
Net income per diluted common share $ 2.29 $ 1.03
Diluted shares used in per share calculations 263,515 260,175
** Not meaningful
Net Income
Our net income increased in the first quarter of 2020 as compared to the first
quarter of 2019 due to significant increases in our revenues partially offset by
increases in our operating expenses, non-operating expense and provision for
income taxes. The increase in revenues was primarily due to the U.S. approval of
TRIKAFTA in the fourth quarter of 2019. Increases in operating expenses were the
result of increased cost of sales consistent with increased product revenues,
increased investment in research and development and increased sales, general
and administrative expenses to support our business. The change in non-operating
(expense) income, net was primarily related to changes in the value of our
strategic investments.
Earnings Per Share
Diluted net income per common share was $2.29 in the first quarter of 2020 as
compared to diluted net income per common share of $1.03 in the first quarter of
2019.
Revenues
Three Months Ended March 31, Increase/(Decrease)
2020 2019 $ %
(in thousands)
Product revenues, net $ 1,515,107 $ 857,253 $ 657,854 77 %
Collaborative and royalty revenues - 1,182 (1,182 ) **
Total revenues $ 1,515,107 $ 858,435 $ 656,672 76 %
** Not meaningful
Product Revenues, Net
Three Months Ended March 31, Increase/(Decrease)
2020 2019 $ %
(in thousands)
TRIKAFTA $ 895,233 $ - $ 895,233 **SYMDEKO/SYMKEVI 173,159 320,275 (147,116 ) (46 )% ORKAMBI 234,138 293,007 (58,869 ) (20 )% KALYDECO 212,577 243,971 (31,394 ) (13 )% Total product revenues, net$ 1,515,107 $ 857,253 $ 657,854 77 % ** Not meaningful In the first quarter of 2020, our net product revenues increased by$657.9 million as compared to the first quarter of 2019. The increase in total net product revenues in the first quarter of 2020 was primarily due to the launch of TRIKAFTA, which was approved inthe United States in the fourth quarter of 2019. Decreases in revenues for our other products were the result of patients inthe United States switching from these medicines to TRIKAFTA partially offset by label expansions and expanded access to our medicines in ex-U.S markets. In the first quarter of 2020 and 2019, our net product revenues included 30
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product revenues of$327.5 million and$217.4 million , respectively, from ex-U.S. markets. Net product revenues in the first quarter of 2020 were also positively impacted by factors that may not be repeated in future periods, including early prescription refills, advance purchasing of medicines and initial compliance and persistence rates of patients who recently initiated treatment with TRIKAFTA. Collaborative and Royalty Revenues We did not record any collaborative and royalty revenues in the first quarter of 2020. Our collaborative and royalty revenues were$1.2 million in the first quarter of 2019. Our collaborative revenues have historically fluctuated significantly from one period to another and may continue to fluctuate in the future. Our future royalty revenues will be dependent on if, and when, our collaborators, including Janssen and Merck KGaA, Darmstadt,Germany are able to successfully develop drug candidates that we have out-licensed to them. Operating Costs and Expenses ` Three Months Ended March 31, Increase/(Decrease) 2020 2019 $ % (in thousands) Cost of sales$ 162,497 $ 95,092 $ 67,405 71 % Research and development expenses 448,528 339,490 109,038 32 % Sales, general and administrative expenses 182,258 147,045 35,213 24 % Change in fair value of contingent consideration 1,600 - 1,600 ** Total costs and expenses$ 794,883 $ 581,627 $ 213,256 37 % ** Not Meaningful Cost of Sales Our cost of sales primarily consists of the cost of producing inventories that corresponded to product revenues for the reporting period, plus the third-party royalties payable on our net sales of our products. Pursuant to our agreement with the CFF, our tiered third-party royalties on sales of TRIKAFTA, SYMDEKO/SYMKEVI, KALYDECO and ORKAMBI, calculated as a percentage of net sales, range from the single digits to the sub-teens. Over the last several years, our cost of sales has been increasing due to increased net product revenues. Our cost of sales as a percentage of our net product revenues was approximately 11% in each of the first quarter of 2019 and 2020. Research and Development Expenses Three Months Ended March 31, Increase/(Decrease) 2020 2019 $ % (in thousands) Research expenses$ 157,270 $ 90,463 $ 66,807 74 % Development expenses 291,258 249,027 42,231 17 %
Total research and development expenses
32 %
Our research and development expenses include internal and external costs
incurred for research and development of our drugs and drug candidates and
expenses related to certain technology that we acquire or license through
business development transactions. We do not assign our internal costs, such as
salary and benefits, stock-based compensation expense, laboratory supplies and
other direct expenses and infrastructure costs, to individual drugs or drug
candidates, because the employees within our research and development groups
typically are deployed across multiple research and development programs. These
internal costs are significantly greater than our external costs, such as the
costs of services provided to us by clinical research organizations and other
outsourced research, which we allocate by individual program. All research and
development costs for our drugs and drug candidates are expensed as incurred.
Since January 2018 , we have incurred approximately $3.6 billion in research and
development expenses associated with drug discovery and development. The
successful development of our drug candidates is highly uncertain and subject to
a number of risks. In addition, the duration of clinical trials may vary
substantially according to the type, complexity and novelty of the drug
candidate and the disease indication being targeted. The FDA and comparable
agencies in foreign countries impose substantial requirements on the
introduction of therapeutic pharmaceutical products, typically requiring lengthy
and detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures. Data obtained from nonclinical and
clinical activities at any step in the testing process may be adverse and lead
to
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discontinuation or redirection of development activities. Data obtained from
these activities also are susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. The duration and cost of discovery,
nonclinical studies and clinical trials may vary significantly over the life of
a project and are difficult to predict. Therefore, accurate and meaningful
estimates of the ultimate costs to bring our drug candidates to market are not
available.
In 2019 and the first quarter of 2020, costs related to our CF programs
represented the largest portion of our development costs. Any estimates
regarding development and regulatory timelines for our drug candidates are
highly subjective and subject to change. Until we have data from Phase 3
clinical trials, we cannot make a meaningful estimate regarding when, or if, a
clinical development program will generate revenues and cash flows.
Research Expenses
Three Months Ended March 31, Increase/(Decrease)
2020 2019 $ %
(in thousands)
Research Expenses:
Salary and benefits $ 34,269 $ 24,379 $ 9,890 41 %
Stock-based compensation expense 26,409 17,535 8,874 51 %
Outsourced services and other direct expenses 30,853 23,364 7,489 32 %
Collaboration and asset acquisition payments 36,250 - 36,250 **
Infrastructure costs 29,489 25,185 4,304 17 %
Total research expenses $ 157,270 $ 90,463 $ 66,807 74 %
** Not meaningful
We expect to continue to invest in our research programs with a focus on
identifying drug candidates with the goal of creating transformative medicines
for serious diseases. Our research expenses increased by 74% in the first
quarter of 2020 compared to the first quarter of 2019 primarily as a result of
collaboration and asset acquisition payments for which there were no similar
expenses in the first quarter of 2019 as well as increased expenses to support
our cell and genetic therapy programs.
Development Expenses
Three Months Ended March 31, Increase/(Decrease)
2020 2019 $ %
(in thousands)
Development Expenses:
Salary and benefits $ 79,598 $ 60,507 $ 19,091 32 %
Stock-based compensation expense 46,278 42,180 4,098 10 %
Outsourced services and other direct expenses 116,433 97,768
18,665 19 %
Collaboration and asset acquisition payments - 5,250 (5,250 ) **
Infrastructure costs 48,949 43,322 5,627 13 %
Total development expenses $ 291,258 $ 249,027 $ 42,231 17 %
** Not meaningful
Our development expenses increased by 17% in the first quarter of 2020 as compared to the first quarter of 2019, primarily due to increased expenses related to our advancing pipeline including clinical trials, headcount and infrastructure costs. Sales, General and Administrative Expenses
Three Months Ended March 31, Increase/(Decrease)
2020 2019 $ %
(in thousands)
Sales, general and administrative expenses
24 %
Sales, general and administrative expenses increased by 24% in the first quarter
of 2020 as compared to the first quarter of 2019, primarily due to increased
global support for our medicines and incremental investment to support the
launch of our triple combination regimen.
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Contingent Consideration In the first quarter of 2020, the increase in the fair value of contingent consideration potentially payable to Exonics' former equity holders was$1.6 million . There were no similar amounts for the first quarter of 2019. Other Non-Operating Income (Expense), Net Interest Income Interest income decreased from$15.6 million in the first quarter of 2019 to$12.6 million in the first quarter of 2020 primarily due to prevailing market interest rates. Our future interest income will be dependent on the amount of, and prevailing market interest rates on, our outstanding cash equivalents and marketable securities. Interest Expense Interest expense was$14.1 million in the first quarter of 2020 as compared to$14.9 million in the first quarter of 2019. The majority of our interest expense in these periods was related to imputed interest expense associated with our leased corporate headquarters inBoston . Our future interest expense will be dependent on whether, and to what extent, we borrow amounts under our credit facility. Other Income (Expense), Net Other income (expense), net was an expense of$61.1 million in the first quarter of 2020 as compared to income of$42.6 million in the first quarter of 2019. Our other income (expense), net in these periods is primarily related to changes in the fair value of our strategic investments, as well as realized gains from sales of certain investments. We expect that due to the volatility of the stock price of biotechnology companies, our other income (expense), net will fluctuate in future periods based on increases or decreases in the fair value of our strategic investments. Income Taxes Our provision for income taxes in the first quarter of 2020 was$54.8 million as compared to$51.5 million in the first quarter of 2019. Our effective tax rate for the first quarter of 2020 was lower than theU.S. statutory rate primarily due to a discrete benefit related to the write off of a long-term intercompany receivable and excess tax benefits related to stock-based compensation. Our effective tax rate for the first quarter of 2019 was lower than theU.S. statutory rate primarily due to excess tax benefits related to stock-based compensation. We released our valuation allowance on the majority of our net operating losses and other deferred tax assets in the fourth quarter of 2018. Starting in 2019, we began recording a provision for income taxes on our pre-tax income using an effective tax rate approximating statutory rates. Due to our ability to offset our pre-tax income against previously benefited net operating losses, we expect a portion of our tax provision to represent a non-cash expense until our net operating losses have been fully utilized. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the components of our financial condition as ofMarch 31, 2020 andDecember 31, 2019 : March 31, December 31, Increase/(Decrease) 2020 2019 $ % (in thousands) Cash, cash equivalents and marketable securities$ 4,190,396 $ 3,808,294 $ 382,102 10 % Working Capital Total current assets 5,446,400 4,822,829 623,571 13 % Total current liabilities (1,538,750 ) (1,334,827 ) 203,923 15 % Total working capital$ 3,907,650 $ 3,488,002 $ 419,648 12 % As ofMarch 31, 2020 , total working capital was$3.9 billion , which represented an increase of$420 million from$3.5 billion as ofDecember 31, 2019 . The increase in total working capital in the first quarter of 2020 was primarily related to$815.7 million of cash provided by operations partially offset by$300.0 million of cash used to repurchase our common stock pursuant to our share repurchase program that we announced inJuly 2019 . Sources of Liquidity As ofMarch 31, 2020 , we had cash, cash equivalents and marketable securities of$4.2 billion , which represented an increase of$382 million from$3.8 billion as ofDecember 31, 2019 . We intend to rely on our existing cash, cash equivalents and marketable securities together with cash flows from product sales as our primary source of liquidity. We may borrow up to$500.0 million pursuant to our revolving credit facility that we entered into in 2019. We may repay and reborrow amounts under the revolving credit agreement without penalty. Subject to certain conditions, we may request that the borrowing capacity under this credit agreement be increased by an additional$500.0 million , up to a total of$1.0 billion . Other possible sources of future liquidity include commercial debt, public and private offerings of our equity and debt securities, strategic sales of assets or businesses and financial transactions. Negative covenants in our credit agreement may prohibit or limit our ability to access these sources of liquidity. Future Capital Requirements We have significant future capital requirements, including: • significant expected operating expenses to conduct research and development activities and to operate our organization; and
• substantial facility and capital lease obligations, including leases for
two buildings in
In addition: • We have entered into certain collaboration agreements with third parties
that include the funding of certain research, development and
commercialization efforts with the potential for future milestone and
royalty payments by us upon the achievement of pre-establisheddevelopmental and regulatory targets and/or commercial targets, and we may
enter into additional business development transactions, including
acquisitions, collaborations and equity investments, that require
additional capital.
• We have reached an agreement with the French government and will repay a
portion of the amounts we have collected under the ORKAMBI early access
programs in
difference between the invoiced amount and the final amount for ORKAMBI
distributed through these programs as reflected in the structure of the
agreement with the French government.
• To the extent we borrow amounts under the credit agreement we entered into
in 2019, we would be required to repay any outstanding principal amounts
in 2024.
• As of March 31, 2020 , $164.0 million remained available to fund
repurchases under our share repurchase program.
We expect that cash flows from our products together with our current cash, cash
equivalents and marketable securities will be sufficient to fund our operations
for at least the next twelve months and do not expect COVID-19 to have an
adverse affect on our liquidity. The adequacy of our available funds to meet our
future operating and capital requirements will depend on many factors, including
the amounts of future revenues generated by our products, and the potential
introduction of one or more of our other drug candidates to the market, the
level of our business development activities and the number, breadth, cost and
prospects of our research and development programs.
Financing Strategy
We may raise additional capital by borrowing under credit agreements, through
public offerings or private placements of our securities or securing new
collaborative agreements or other methods of financing. We will continue to
manage our capital structure and will consider all financing opportunities,
whenever they may occur, that could strengthen our long-term liquidity profile.
There can be no assurance that any such financing opportunities will be
available on acceptable terms, if at all.
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CONTRACTUAL COMMITMENTS AND OBLIGATIONS Our commitments and obligations were reported in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theSecurities and Exchange Commission , orSEC , onFebruary 13, 2020 . There have been no material changes from the contractual commitments and obligations previously disclosed in that Annual Report on Form 10-K. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles inthe United States . The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are reflected in reported results for the period in which the change occurs. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate. During the three months endedMarch 31, 2020 , there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theSEC onFebruary 13, 2020 . RECENT ACCOUNTING PRONOUNCEMENTS For a discussion of recent accounting pronouncements, please refer to Note A, "Basis of Presentation and Accounting Policies."
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