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 have four approved medicines to treat cystic fibrosis, or CF, a life-threatening genetic disease, and are focused on expanding the number of CF patients eligible for our medicines. We are broadening our pipeline into additional disease areas through internal research efforts and accessing external innovation through business development transactions. InOctober 2019 , TRIKAFTA (elexacaftor/tezacaftor/ivacaftor and ivacaftor), our triple-combination regimen, was approved by theU.S. Food and Drug Administration , or FDA, for the treatment of patients with CF 12 years of age and older who have at least one F508del mutation in the cystic fibrosis transmembrane conductance regulator, or CFTR, gene. Approval of TRIKAFTA in theU.S. increased the number of CF patients eligible for our medicines by approximately 6,000 and provided an additional treatment option for many patients who are also eligible for one of our previously approved products. Collectively, our medicines are currently approved to treat approximately 60% of the 75,000 CF patients inNorth America ,Europe andAustralia . We are seeking approval from theEuropean Commission for our triple combination regimen for patients with CF 12 years of age and older with specific mutations in their CFTR gene. If our triple combination is approved by theEuropean Commission , up to 10,000 patients will be newly eligible for our medicines. We are evaluating our triple combination in younger patients with the goal of having small molecule treatments for up to 90% of patients with CF. We are also pursuing genetic therapies to address the remaining 10% of CF patients. Beyond CF, 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, or SCD, and transfusion-dependent beta thalassemia, or TDT, 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 programs to develop cell-based therapies for type 1 diabetes, or T1D, and preclinical genetic therapy programs for Duchenne muscular dystrophy, or DMD, and myotonic dystrophy type 1, or DM1. Financial Highlights Revenues In the second quarter of 2020, our net product revenues continued to increase due to the approval of TRIKAFTA in late 2019 and uptake of our medicines in ex-U.S. markets following completion of reimbursement agreements in 2019. Expenses Our combined R&D and SG&A expenses increased to$612.7 million in the second quarter of 2020 from$535.6 million in the second quarter of 2019. In the second quarter of 2020, cost of sales was 12% of our net product revenues.
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Balance Sheet
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Business Updates
Cystic Fibrosis
TRIKAFTA/KAFTRIO (elexacaftor in combination with tezacaftor and ivacaftor)
•In the U.S. , most of the approximately 18,000 eligible patients 12 years of age
and older have initiated treatment with TRIKAFTA following its approval in
October 2019 .
•In June 2020 , the European Medicines Agency's Committee for Medicinal Products
for Human Use, or CHMP, adopted a positive opinion for our triple combination,
which we intend to market as KAFTRIO in Europe if approved. This opinion was
based on the Marketing Authorization Application, or MAA, we submitted to the
European Medicines Agency , or EMA, in 2019 and is for the treatment of patients
with CF 12 years of age and older with one F508del mutation and one minimal
function mutation or two F508del mutations. The CHMP's positive opinion will be
reviewed by the European Commission , which has the authority to approve the MAA.
•In June 2020 , we expanded our reimbursement agreement with the National Health
Service, or NHS , England to include KAFTRIO, subject to approval of the
medicine. If approved, KAFTRIO will be available to patients with CF in England
12 years of age and older with one F508del mutation and one minimal function
mutation or two F508del mutations.
•In July 2020 , we announced positive Phase 3 clinical trial results for TRIKAFTA
in patients with CF 12 years and older who have one copy of the F508del mutation
and one gating or residual function mutation. In the U.S. , this clinical trial
was a post-marketing commitment and TRIKAFTA is already approved for use in
patients with CF 12 years of age and older who have at least one copy of the
F508del mutation, which includes the populations evaluated in this clinical
trial. The data from this clinical trial will be submitted to the EMA to support
a potential indication expansion of the European Union , or EU, label, after
initial approval has been granted for our triple combination.
•Data from our Phase 3 clinical trial evaluating the use of our triple
combination regimen 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 is expected in the second half of 2020. 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 fourth quarter of 2020 for children 6 to
11 years of age with at least one F508del mutation, followed by regulatory
submissions in other countries.
SYMDEKO/SYMKEVI (tezacaftor in combination with ivacaftor)
•The EMA review of the application for use of SYMKEVI in children 6 through 11
years of age in Europe is ongoing. If approved, this will be the first CFTR
modulator to treat patients 6 through 11 years of age with residual function
mutations in the EU.
KALYDECO (ivacaftor)
•In June 2020 , the European Commission granted approval of the label extension
for KALYDECO for treatment in patients six months of age and older who have the
R117H mutation.
Pipeline
Beta Thalassemia and Sickle Cell Disease
•In June 2020 , we and our collaborator, CRISPR, provided new clinical data at
the European Hematology Association Congress from the two ongoing Phase 1/2
clinical trials of the investigational CRISPR/Cas9 gene-editing therapy CTX001
in patients with TDT and in patients with severe SCD. Data from two TDT patients
demonstrated clinical proof-of-concept for CTX001 in this disease. Longer
duration data from one SCD patient showed a durable effect on HbF levels and the
patient was free of vaso-occlusive crises. Screening, enrollment and
mobilization of these trials is ongoing; conditioning and dosing in both trials
have been resumed following temporary pauses related to the spread of the novel
coronavirus, or COVID-19. We and CRISPR expect to report data from additional
patients in the second half of 2020.
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Alpha-1 Antitrypsin Deficiency
•We are evaluating multiple compounds with the potential to correct the
misfolding of Z-AAT protein in the liver in order to increase the levels of
functional AAT in the blood. Misfolded Z-AAT protein is the root cause of AAT
deficiency.
•Enrollment and dosing have been re-initiated at some but not all sites
following a temporary COVID-19-related pause in a Phase 2 proof-of-concept
clinical trial designed to evaluate the levels of circulating, functional AAT
protein after treatment with VX-814. We expect data from this clinical trial at
the end of 2020 or in the first quarter of 2021.
•In July 2020 , we initiated a Phase 2 proof-of-concept clinical trial for a
second Z-AAT corrector, VX-864.
APOL1-Mediated Kidney Diseases
•We are evaluating inhibitors of APOL1 function to reduce proteinuria in people
with serious kidney disease, including focal segmental glomerulosclerosis, or
FSGS.
•Enrollment is underway at multiple clinical trial sites in a Phase 2
proof-of-concept clinical trial designed to evaluate the reduction of
proteinuria in people with APOL1-mediated FSGS after treatment with VX-147.
Type 1 Diabetes
•We are developing a cell therapy designed to replace insulin-producing islet
cells in patients with T1D. Two opportunities exist for the transplant of these
functional islets into patients: transplantation of islet cells alone, using
immunosuppression to protect the implanted cells, and implantation of the islet
cells inside a novel immunoprotective device.
•We plan to submit an IND application to the FDA for the first program
(transplantation of islet cells alone) in late 2020 to support evaluation of
this potential therapy in patients with T1D.
COVID-19
We continue to monitor the impacts of 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 continuing to work remotely. In
addition, we have re-initiated enrollment and dosing in all of our ongoing
clinical trials and initiated new clinical trials despite some temporary pauses
to enrollment and dosing caused by COVID-19.
Research
We continue to invest in our research programs and foster 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,
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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 in the United States and seek analogous approvals from
comparable regulatory authorities in jurisdictions outside the 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
various U.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 the U.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 the U.S. , E.U., U.K. , 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 in the U.S. and ex-U.S. markets.
In the U.S. , we have worked successfully with third party payors in order to
promptly obtain appropriate levels of reimbursement for our CF medicines. 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 CF and continue to provide access to our medicines.
In Europe 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, but experienced
significant challenges in obtaining reimbursement for ORKAMBI in certain ex-U.S.
markets. With the completion of reimbursement discussions in England and France
in 2019, we have reimbursement for ORKAMBI or SYMKEVI in most of our significant
ex-U.S. markets. In addition, in several ex-U.S. markets, including England ,
Ireland , Denmark and Australia , our reimbursement agreements include innovative
arrangements that provide a pathway to access and rapid reimbursement for
certain future CF medicines. For example, our existing reimbursement agreements
in England and Ireland have been expanded to include our triple combination
regimen pending approval by the European Commission . We expect to continue to
focus significant resources to obtain appropriate reimbursement for our products
in ex-U.S. markets.
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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 Semma Therapeutics, Inc. , or Semma, a privately-held company
focused on the use of stem cell-derived human islets as a potentially curative
treatment for T1D, and Exonics Therapeutics, Inc. , or 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.
In the Semma acquisition, we paid approximately $950.0 million in cash to Semma
equity holders. 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. 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, including Affinia Therapeutics Inc. , Arbor 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 in-licensed drug candidate 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 half of 2020 and 2019, our research and development expenses included
$63.3 million and $57.6 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 with Janssen 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
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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 of June 30, 2020 , we held
strategic equity investments in 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 half of 2020 and 2019, we recorded within other income (expense),
net gains of $65.1 million and $100.1 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 increased volatility of the global markets, including as a
result of COVID-19, and 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.
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RESULTS OF OPERATIONS
Three Months Ended June 30 , Increase/(Decrease) Six Months Ended June 30 , Increase/(Decrease)
2020 2019 $ % 2020 2019 $ %
(in thousands, except percentages)
Revenues $ 1,524,485 $ 941,293 $ 583,192 62 % $ 3,039,592 $ 1,799,728 $ 1,239,864 69 %
Operating costs and expenses 806,452 671,333 135,119 20 % 1,601,335 1,252,960 348,375 28 %
Income from operations 718,033 269,960 448,073 166 % 1,438,257 546,768 891,489 163 %
Other non-operating income, net 106,737 57,178 49,559 87 % 44,047 100,535 (56,488) (56) %
(Benefit from) provision for
income taxes (12,500) 59,711 ** ** 42,281 111,245 (68,964) (62) %
Net income $ 837,270 $ 267,427 $ 569,843 213 % $ 1,440,023 $ 536,058 $ 903,965 169 %
Net income per diluted common
share $ 3.18 $ 1.03 $ 5.46 $ 2.06
Diluted shares used in per share
calculations 263,403 259,822 263,746 260,015
** Not meaningful
Net Income
Our net income increased in the second quarter and first half of 2020 as
compared to the second quarter and first half of 2019 primarily due to
significant increases in our revenues, partially offset by increases in our
operating expenses. The increase in revenues was primarily due to the U.S.
approval of TRIKAFTA in the fourth quarter of 2019. The 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, and general and administrative expenses to support our business.
Revenues
Three Months Ended June 30 , Increase/(Decrease) Six Months Ended June 30 , Increase/(Decrease)
2020 2019 $ % 2020 2019 $ %
(in thousands)
Product revenues, net $ 1,524,485 $ 940,380 $ 584,105 62 % $ 3,039,592 $ 1,797,633 $ 1,241,959 69 %
Collaborative and royalty
revenues - 913 (913) ** - 2,095 (2,095) **
Total revenues $ 1,524,485 $ 941,293 $ 583,192 62 % $ 3,039,592 $ 1,799,728 $ 1,239,864 69 %
** Not meaningful
Product Revenues, Net
Three Months Ended June 30 , Increase/(Decrease) Six Months Ended June 30 , Increase/(Decrease)
2020 2019 $ % 2020 2019 $ %
(in thousands, except percentages)
TRIKAFTA $ 917,715 $ - $ 917,715 ** $ 1,812,948 $
- $ 1,812,948 **
SYMDEKO/SYMKEVI 171,729 361,832 (190,103) (53) % 344,888 682,107 (337,219) (49) %
ORKAMBI 231,981 316,441 (84,460) (27) % 466,119 609,448 (143,329) (24) %
KALYDECO 203,060 262,107 (59,047) (23) % 415,637 506,078 (90,441) (18) %
Total product revenues, net $ 1,524,485 $ 940,380 $ 584,105 62 % $ 3,039,592 $ 1,797,633 $ 1,241,959 69 %
** Not meaningful
In the second quarter and first half of 2020, our net product revenues increased
by $584.1 million and $1.24 billion , respectively, as compared to the second
quarter and first half of 2019. The increase in total net product revenues in
the second quarter and first half of 2020 was primarily due to the launch of
TRIKAFTA, which was approved in the United States in the fourth quarter of 2019.
Decreases in revenues for our other products were the result of patients in the
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
second quarter and first half of 2020, our net product revenues included $314.2
million
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and $641.7 million , respectively, from ex-U.S. markets. In the second quarter
and first half of 2019, our net product revenues included $240.7 million and
$458.1 million , respectively, from ex-U.S. markets. Net product revenues in the
first half of 2020 were also positively impacted by factors that may not be
repeated in future periods, including increased patient inventory levels and
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 second quarter
and first half of 2020. Our collaborative and royalty revenues were $0.9 million
and $2.1 million in the second quarter and first half of 2019, respectively. 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 June 30 , Increase/(Decrease) Six Months Ended June 30 , Increase/(Decrease)
2020 2019 $ % 2020 2019 $ %
(in thousands, except percentages)
Cost of sales $ 184,520 $ 135,740 $ 48,780 36 % $ 347,017 $ 230,832 $ 116,185 50 %
Research and development expenses 420,928 379,091 41,837 11 % 869,456 718,581 150,875 21 %
Sales, general and administrative
expenses 191,804 156,502 35,302 23 % 374,062 303,547 70,515 23 %
Change in fair value of contingent
consideration 9,200 - 9,200 ** 10,800 - 10,800 **
Total costs and expenses $ 806,452 $ 671,333 $ 135,119 20 % $ 1,601,335 $ 1,252,960 $ 348,375 28 %
** 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 12%
and 14% in the second quarter of 2020 and 2019, respectively. Our cost of sales
as a percentage of our net product revenues was approximately 11% and 13% in
first half of 2020 and 2019, respectively.
Research and Development Expenses
Three Months Ended June 30 , Increase/(Decrease) Six Months Ended June 30 , Increase/(Decrease)
2020 2019 $ % 2020 2019 $ %
(in thousands, except percentages)Research expenses$ 134,138 $ 144,628 $ (10,490) (7) %$ 291,408 $ 235,091 $ 56,317 24 % Development expenses 286,790 234,463 52,327 22 % 578,048 483,490 94,558 20 % Total research and development expenses$ 420,928 $ 379,091 $ 41,837 11 %$ 869,456 $ 718,581 $ 150,875 21 % 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. 30 -------------------------------------------------------------------------------- Table of Contents SinceJanuary 2018 , we have incurred approximately$4.0 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 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 half 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 EndedJune 30 , Increase/(Decrease) Six Months EndedJune 30 , Increase/(Decrease) 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Research Expenses: Salary and benefits$ 31,099 $ 22,498 $ 8,601 38 %$ 65,368 $ 46,877 $ 18,491 39 % Stock-based compensation expense 26,496 17,138 9,358 55 % 52,905 34,673 18,232 53 % Outsourced services and other direct expenses 21,073 27,622 (6,549) (24) % 51,926 50,986 940 2 % Collaboration and asset acquisition payments 27,000 52,200 (25,200) (48) % 63,250 52,200 11,050 21 % Infrastructure costs 28,470 25,170 3,300 13 % 57,959 50,355 7,604 15 % Total research expenses$ 134,138 $ 144,628 $ (10,490) (7) %$ 291,408 $ 235,091 $ 56,317 24 % 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 decreased by 7% in the second quarter of 2020 compared to the second quarter of 2019 and increased by 24% in the first half of 2020 compared to the first half of 2019. The decrease in the second quarter of 2020 compared to the second quarter of 2019 was primarily due to a decrease in collaboration and asset acquisition payments partially offset by increased expenses to support our cell and genetic therapy programs. The increase in the first half of 2020 compared to the first half of 2019 was primarily due to increased expenses to support our cell and genetic therapy programs and an increase in collaboration and asset acquisition payments. 31 -------------------------------------------------------------------------------- Table of Contents Development Expenses Three Months EndedJune 30 , Increase/(Decrease) Six Months EndedJune 30 , Increase/(Decrease) 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Development Expenses: Salary and benefits$ 68,532 $ 58,195 $ 10,337 18 %$ 148,130 $ 118,702 $ 29,428 25 % Stock-based compensation expense 43,779 38,494 5,285 14 % 90,057 80,674 9,383 12 % Outsourced services and other direct expenses 124,898 93,701 31,197 33 % 241,331 191,469 49,862 26 % Collaboration and asset acquisition payments - 190 (190) ** - 5,440 (5,440) ** Infrastructure costs 49,581 43,883 5,698 13 % 98,530 87,205 11,325 13 % Total development expenses$ 286,790 $ 234,463 $ 52,327 22 %$ 578,048 $ 483,490 $ 94,558 20 % ** Not meaningful Our development expenses increased by 22% in the second quarter of 2020 as compared to the second quarter of 2019 and increased by 20% in the first half of 2020 as compared to the first half 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 EndedJune 30 , Increase/(Decrease) Six Months EndedJune 30 , Increase/(Decrease) 2020 2019 $ % 2020 2019 $ % (in thousands, except percentages) Sales, general and administrative expenses$ 191,804 $ 156,502 $ 35,302 23 %$ 374,062 $ 303,547 $ 70,515 23 % Sales, general and administrative expenses increased by 23% in the second quarter of 2020 as compared to the second quarter of 2019 and increased by 23% in the first half of 2020 as compared to the first half of 2019, primarily due to increased global support for our medicines and incremental investment to support the launch of our triple combination regimen. Contingent Consideration In the second quarter and first half of 2020, the increase in the fair value of contingent consideration potentially payable to Exonics' former equity holders was$9.2 million and$10.8 million , respectively. There were no similar amounts for the second quarter and first half of 2019. Other Non-Operating Income (Expense), Net Interest Income Interest income decreased from$18.1 million and$33.7 million in the second quarter and first half of 2019, respectively, to$4.2 million and$16.8 million in the second quarter and first half of 2020, respectively, primarily due to a decrease in 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$13.9 million and$28.0 million in the second quarter and first half of 2020, respectively, as compared to$14.8 million and$29.7 million in the second quarter and first half of 2019, respectively. 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. 32 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense), Net Other income (expense), net was income of$116.4 million and$55.2 million in the second quarter and first half of 2020, respectively, as compared to income of$53.9 million and$96.5 million in the second quarter and first half of 2019, respectively. Our other income (expense), net in these periods was 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 We recorded a benefit from income taxes in the second quarter of 2020 of$12.5 million and a provision for income taxes in the first half of 2020 of$42.3 million , respectively, as compared to provisions for income taxes of$59.7 million and$111.2 million in the second quarter and first half of 2019, respectively. Our effective tax rate for the first half of 2020 was lower than theU.S. statutory rate primarily due to a discrete tax benefit of$187.0 million associated with the transfer of intellectual property rights to theUnited Kingdom in the second quarter of 2020, a discrete tax benefit associated with the write-off of a long-term intercompany receivable in the first quarter of 2020 and excess tax benefits related to stock-based compensation. Our effective tax rate for the first half 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 and credits, we expect a portion of our tax provision to represent a non-cash expense until our net operating losses and credits have been fully utilized. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the components of our financial condition as ofJune 30, 2020 andDecember 31, 2019 : June 30, December 31, Increase/(Decrease) 2020 2019 $ % (in thousands) Cash, cash equivalents and marketable securities$ 5,450,769 $ 3,808,294 $ 1,642,475 43 % Working Capital Total current assets 6,694,320 4,822,829 1,871,491 39 % Total current liabilities (1,798,640) (1,334,827) 463,813 35 % Total working capital$ 4,895,680 $ 3,488,002 $ 1,407,678 40 % As ofJune 30, 2020 , total working capital was$4.9 billion , which represented an increase of$1.4 billion from$3.5 billion as ofDecember 31, 2019 . The increase in total working capital in the first half of 2020 was primarily related to$1.9 billion of cash provided by operations partially offset by$300.0 million of cash used to repurchase our common stock pursuant to the share repurchase program that we announced inJuly 2019 . Sources of Liquidity As ofJune 30, 2020 , we had cash, cash equivalents and marketable securities of$5.5 billion , which represented an increase of$1.6 billion 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. 33 -------------------------------------------------------------------------------- Table of Contents 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 inBoston, Massachusetts that continue through 2028. 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-established developmental 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 inFrance to the French government in the second half of 2020 based on the 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 ofJune 30, 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 effect 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. 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 34
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Table of Contents 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 six months endedJune 30, 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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