<PAGE>
--------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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)
<TABLE>
<S> <C>
MASSACHUSETTS 04-3039129
------------ ---------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
130 WAVERLY STREET, CAMBRIDGE, MASSACHUSETTS 02139-4242
--------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(617) 577-6000
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(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.
<TABLE>
<C> <S>
Yes /X/ No/ /
</TABLE>
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Common Stock, par value $.01 per share 53,694,464*
-------------------------------------- -----------
<S> <C>
Class Outstanding at August 11, 2000
* See Note 8
</TABLE>
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--------------------------------------------------------------------------------
<PAGE>
VERTEX PHARMACEUTICALS INCORPORATED
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I.--FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Report of Independent Accountants........................... 3
Condensed Consolidated Balance Sheets--June 30, 2000 and
December 31, 1999......................................... 4
Condensed Consolidated Statements of Operations--Three
Months Ended
June 30, 2000 and 1999.................................... 5
Condensed Consolidated Statements of Operations--Six Months
Ended
June 30, 2000 and 1999.................................... 6
Condensed Consolidated Statements of Cash Flows--Six Months
Ended
June 30, 2000 and 1999.................................... 7
Notes to Condensed Consolidated Financial Statements........ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
PART II.--OTHER INFORMATION....................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures........................................................................ 17
</TABLE>
2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Vertex Pharmaceuticals
Incorporated:
We have reviewed the accompanying condensed consolidated balance sheet of
Vertex Pharmaceuticals Incorporated and its subsidiaries as of June 30, 2000,
and the related condensed consolidated statements of operations for each of the
three-month and six month periods ended June 30, 2000 and 1999, and the
condensed consolidated statements of cash flows for the six-month periods ended
June 30, 2000 and 1999. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated interim financial
statements for them to be in conformity with generally accepted accounting
principles.
We have previously audited in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1999, and the
related consolidated statement of operations, stockholders' equity, and cash
flows for the year then ended (not presented herein), and in our report dated
February 16, 2000, except as to the information in Note R for which the date is
February 28, 2000, 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, 1999, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
July 25, 2000
3
<PAGE>
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 183,208 $ 31,548
Short-term investments.................................... 195,177 156,254
Accounts receivable....................................... 5,434 5,956
Prepaid expenses.......................................... 1,700 1,439
--------- --------
Total current assets.................................... 385,519 195,197
Restricted cash............................................. 9,788 9,788
Property and equipment, net................................. 25,080 24,480
Investment in equity affiliate.............................. 2,300 2,276
Other assets................................................ 5,635 704
--------- --------
Total assets............................................ $ 428,322 $232,445
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 17,645 $ 14,152
Deferred revenue.......................................... 4,742 2,000
Obligations under capital leases and debt................. 2,204 2,366
--------- --------
Total current liabilities............................... 24,591 18,518
--------- --------
Obligations under capital leases and debt, excluding current
portion................................................... 178,619 4,693
--------- --------
Total liabilities....................................... 203,210 23,211
--------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 authorized none
issued
Common stock, $.01 par value; 100,000,000 authorized;
issued and outstanding: 53,346,628 shares in 2000 and
51,370,728 shares in 1999............................... 533 514
Additional paid-in capital................................ 420,197 400,631
Deferred compensation..................................... (88) (114)
Accumulated other comprehensive loss...................... (1,157) (970)
Accumulated deficit....................................... (194,373) (190,827)
--------- --------
Total stockholders' equity............................ 225,112 209,234
--------- --------
Total liabilities and stockholders' equity.............. $ 428,322 $232,445
========= ========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
<PAGE>
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Royalties and product sales............................... $ 3,303 $ 2,874
Collaborative and other research and development.......... 33,731 9,642
------- --------
Total revenues........................................ 37,034 12,516
======= ========
Costs and expenses:
Royalties and product costs............................... 1,100 1,199
Research and development.................................. 19,824 19,029
Sales, general and administrative......................... 6,658 5,466
------- --------
Total costs and expenses.............................. 27,582 25,694
======= ========
Net income (loss) from operations........................... 9,452 (13,178)
Interest income, net........................................ 3,156 2,640
Gain (loss) in equity affiliate............................. 5 (303)
------- --------
Net income (loss)........................................... $12,613 $(10,841)
======= ========
Basic earnings(loss) per common share....................... $ 0.24 $ (0.21)
======= ========
Basic weighted average number of common shares
outstanding............................................... 52,636 50,960
======= ========
Diluted earnings(loss) per common share..................... $ 0.21 $ (0.21)
======= ========
Diluted weighted average number of common shares
outstanding............................................... 58,946 50,960
======= ========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
<PAGE>
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Royalties and product sales............................... $ 5,922 $ 2,874
Collaborative and other research and development.......... 38,635 13,605
------- --------
Total revenues........................................ 44,557 16,479
======= ========
Costs and expenses:
Royalties and product costs............................... 1,972 1,199
Research and development.................................. 38,428 37,634
Sales, general and administrative......................... 13,266 11,238
------- --------
Total costs and expenses.............................. 53,666 50,071
======= ========
Net loss from operations.................................... (9,109) (33,592)
Interest income, net........................................ 5,539 5,622
Gain (loss) in equity affiliate............................. 24 (425)
------- --------
Net loss.................................................... $(3,546) $(28,395)
======= ========
Basic and diluted loss per common share..................... $ (0.07) $ (0.56)
======= ========
Basic and diluted weighted average number of common shares
outstanding............................................... 52,283 50,868
======= ========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
<PAGE>
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
------------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (3,546) $ (28,395)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 4,059 2,649
Amortization of deferred compensation................... 26 26
Equity compensation for services rendered............... 66 30
Realized (gains) losses on short-term investments....... 351 (193)
(Gain) loss in equity affiliate......................... (24) 425
Changes in assets and liabilities:
Accounts Receivable..................................... 522 (2,447)
Prepaid expenses........................................ (261) (839)
Accounts payable and accrued expenses................... 3,493 1,309
Deferred revenue........................................ 2,742 --
--------- ---------
Net cash provided (used) by operating activities...... 7,428 (27,435)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments....................... (161,038) (240,944)
Sales and maturities of short-term investments............ 122,097 267,321
Expenditures for property and equipment................... (4,432) (7,831)
Restricted cash........................................... -- (1,882)
Investment in equity affiliate............................ -- (3,000)
Other assets.............................................. 182 (21)
--------- ---------
Net cash provided (used) by investing activities...... (43,191) 13,643
--------- ---------
Cash flows from financing activities:
Repayment of capital lease obligations and debt........... (1,236) (1,395)
Proceeds from the sale of convertible subordinated
notes................................................... 175,000 --
Costs associated with the sale of convertible subordinated
notes................................................... (5,340) --
Proceeds from other issuances of common stock............. 19,519 2,298
--------- ---------
Net cash provided by financing activities............. 187,943 903
--------- ---------
Effect of exchange rate changes on cash..................... (520) (107)
--------- ---------
Increase(decrease) in cash and cash equivalents............. 151,660 (12,996)
Cash and cash equivalents at beginning of period............ 31,548 24,169
--------- ---------
Cash and cash equivalents at end of period.................. $ 183,208 $ 11,173
========= =========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
7
<PAGE>
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by Vertex Pharmaceuticals Incorporated (Vertex or the
Company) in accordance with generally accepted accounting principles.
Certain information and footnote disclosures normally included in the
Company's annual financial statements have been condensed or omitted. Certain
prior year amounts have been reclassified to conform to current year
presentation. The interim financial statements, in the opinion of management,
reflect all adjustments (including normal recurring accruals) necessary for a
fair statement of the results for the interim periods ended June 30, 2000 and
1999.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year. The
Company expects to incur a substantial loss for the year ended December 31,
2000. These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1999, which are
contained in the Company's 1999 Annual Report to its shareholders and in its
Form 10-K filed with the Securities and Exchange Commission.
2. ACCOUNTING POLICIES
DEBT ISSUANCE COSTS
Debt issuance costs are deferred and amortized on a straight-line basis over
the term of the related debt issuance.
BASIC AND DILUTED EARNINGS(LOSS) PER COMMON SHARE
Basic earnings (loss) 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
8
<PAGE>
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
used to repurchase outstanding stock using the treasury stock method, and the
assumed conversion of convertible notes (see Note 4).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
---------------------------------------- --------- --------- -------- --------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss)...................................... $12,613 $(10,841) $(3,546) $(28,395)
Weighted-average number of common shares outstanding... 52,636 50,960 52,283 50,868
Basic earnings (loss) per share........................ $ 0.24 $ (0.21) $ (0.07) $ (0.56)
Diluted earnings (loss) per share:
Net income (loss)...................................... $12,613 $(10,841) $(3,546) $(28,395)
Weighted-average number of common shares outstanding... 52,636 50,960 52,283 50,868
Net effect of dilutive stock options at average market
value................................................ 6,310 -- -- --
Weighted-average number of shares assuming dilution.... 58,946 50,960 52,283 50,868
Diluted earnings (loss) per share...................... $ 0.21 $ (0.21) $ (0.07) $ (0.56)
Weighted-average anti-dilutive stock options and
convertible notes.................................... 4,367 11,626 15,297 11,634
</TABLE>
Basic earnings per share, diluted earnings per share, weighted-average
common shares outstanding, weighted average shares assuming dilution and all
other applicable information for the three months and six months ended June 30,
2000 and 1999 have been adjusted to reflect a 2 for 1 stock split effected in
the form of a 100 percent stock dividend on outstanding shares to be distributed
on August 23, 2000 to shareholders of record as of August 9, 2000 (See Note 8).
3. COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- -------------------
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Net income (loss)...................................... $12,613 $(10,841) $(3,546) $(28,395)
Changes in other comprehensive loss:
Unrealized holding gains (losses) on investments....... 586 (1,051) 333 (1,480)
Foreign currency translation adjustment................ (371) (93) (520) (107)
------- -------- ------- --------
Total change in other comprehensive loss............... 215 (1,144) (187) (1,587)
Total comprehensive loss............................... $12,828 $(11,985) $(3,733) $(29,982)
======= ======== ======= ========
</TABLE>
4. LONG-TERM DEBT
On March 14, 2000 the Company issued $175,000,000 of Convertible
Subordinated Notes, due 2007. The notes are convertible, at the option of the
holder, into common stock at a price equal to $40.32 per share, subject to
adjustment under certain circumstances. The notes bear an interest rate of 5%
per annum and the Company is required to make semi-annual interest payments on
the outstanding principal balance of the notes on March 14 and September 14 of
each year. The notes are redeemable by the Company at
9
<PAGE>
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
any time after March 17, 2003 at specific redemption prices. Before March 17,
2003 the Company may redeem the notes at a redemption price equal to the
principal amount of notes, plus accrued and unpaid interest, if any, and a
specified additional payment amount, if the closing price of Vertex common stock
exceeds 150% of the conversion price then in effect for at least 20 trading days
within a period of 30 consecutive trading days. The deferred costs associated
with the sale of the convertible notes was $5,340,000 and the related
amortization expense, for the six month period ended June 30, 2000, was
$227,000.
5. LEGAL PROCEEDINGS
Chiron Corporation (Chiron) filed suit on July 30, 1998 against Vertex and
Eli Lilly and Company in the United States District Court for the Northern
District of California, alleging infringement by the defendants of three U.S.
patents issued to Chiron. The infringement action relates to research activities
by the defendants in the hepatitis C viral protease field and the alleged use of
inventions claimed by Chiron in connection with that research. Chiron has
requested damages in an unspecified amount, as well as an order permanently
enjoining the defendants from unlicensed use of the claimed Chiron inventions.
During 1999, Chiron requested and was granted a reexamination by the U.S. Patent
and Trademark Office of all three of the patents involved in the suit. Chiron
also requested and, over the opposition of Vertex and Lilly, was granted a stay
in the infringement lawsuit, pending the outcome of the patent reexamination.
While the length of the stay, the outcome of the reexamination, the effect of
that outcome on the lawsuit and the final outcome of the lawsuit cannot be
determined, Vertex maintains that the plaintiff's claims are without merit and
intends to defend the lawsuit, if and when it resumes, vigorously.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
which addresses accounting policies to be applied in the recognition,
presentation and disclosure of revenues from contract partnerships in financial
statements filed with the SEC. On June 26, 2000, the SEC issued SAB 101B which
delays the implementation of SAB 101 until no later than the fiscal quarter
ending December 31, 2000, in order to provide companies with additional time to
determine the effect that a change in accounting policy under SAB 101 will have
on their revenue recognition practices. Vertex and its independent accountants
are continuing to review the potential effect that the implementation of
SAB 101 would have on the Company's net financial results. The implementation of
SAB 101 could have a material effect on the reported financial results for the
year ending December 31, 2000.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for Certain
Transactions involving Stock Compensation", which provides guidance for issues
that have arisen in applying APB No. 25, "Accounting for Stock Issued to
Employees". This Interpretation is generally effective for transactions
occurring after July 1, 2000 except for the provisions related to repricings and
the definition of an employee which apply to awards issued after December 31,
1998. The Company believes that this interpretation will not have a material
impact on net financial results.
7. RECENT COLLABORATIVE AGREEMENT
On May 8, 2000 the Company and Novartis Pharma AG (Novartis) entered into an
agreement to collaborate on the discovery, development and commercialization of
small molecule drugs directed at targets in the kinase protein family. Under the
agreement, Novartis agreed to pay the Company up to
10
<PAGE>
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RECENT COLLABORATIVE AGREEMENT (CONTINUED)
approximately $800,000,000 in pre-commercial payments, comprised of $15,000,000
paid upon signing of the agreement, up to $200,000,000 in product research
funding over six years and up to approximately $600,000,000 in further license
fees, milestone payments and cost reimbursements. These amounts are based on the
development of eight drug candidates. Vertex will have the responsibility for
drug discovery and clinical proof-of-concept testing of drug candidates.
Novartis will have exclusive worldwide development, manufacturing and marketing
rights to clinically and commercially relevant drug candidates that it accepts
for development from the Company. Vertex will receive royalties on any products
that are marketed as part of the collaboration. Subject to certain conditions,
the Company will have co-promotion rights in the United States and Europe.
Novartis may terminate this agreement without cause after four years upon one
year's written notice. In June 2000 the Company received clearance for the
agreement under the Hart Scott Rodino Antitrust Improvements Act of 1976. The
Company recognized $18,600,000 in revenue under the contract during the second
quarter of 2000.
8. SUBSEQUENT EVENT
On July 14, 2000, the Company's board of directors authorized a two-for-one
stock split effected in the form of a 100 percent stock dividend to be
distributed on August 23, 2000 to shareholders of record as of August 9, 2000.
All share data in these Financial Statements and the Management's Discussion and
Analysis have been adjusted to reflect the stock split for all periods
presented.
11
<PAGE>
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 OUR ANNUAL REPORT ON
FORM 10-K ENTITLED "RISK FACTORS." READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE DATE
HEREOF. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF.
We discover, develop and market small molecule drugs that address major
unmet medical needs. We have eight drug candidates in clinical development to
treat viral diseases, inflammation, cancer, autoimmune diseases and neurological
disorders. We have created our pipeline using a proprietary approach,
information-driven drug design, that integrates multiple technologies in
biology, chemistry and biophysics aimed at increasing the speed and success rate
of drug discovery.
Our first approved product is Agenerase-TM- (amprenavir), an HIV protease
inhibitor, which we co-promote with Glaxo Wellcome plc. We are earning a royalty
from Glaxo Wellcome from sales of Agenerase. Agenerase has received approval in
other countries, including Japan where the drug is sold under the trade name
Prozei-TM-. Approval of Agenerase is pending in other countries, including the
European Union, where the drug is being made available through early access
programs.
We have incurred annual operating losses since our inception and expect to
incur a loss for the fiscal year ending December 31, 2000. We expect that
operating losses will continue beyond fiscal year 2000 even if significant
royalties are realized on Agenerase sales because we are planning to make
significant investments in research and development for our other potential
products. We expect that losses will fluctuate from quarter to quarter and that
such fluctuations may be substantial.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30,
1999.
The net income for the three months ended June 30, 2000 was $12,613,000, or
$0.21 per diluted share, compared to a net loss of $10,841,000, or $0.21 per
basic and diluted share, for the same period in 1999.
Total revenues increased to $37,034,000 in the second quarter of 2000 from
$12,516,000 in the second quarter of 1999. In the second quarter of 2000,
royalty and product sales revenue was $3,303,000 and collaborative and other
research and development revenue was $33,731,000. In the second quarter of 1999,
we recognized $2,874,000 in royalties and product sales and $9,642,000 in
collaborative and other research and development revenue.
Royalty and product sales revenue consists of Agenerase royalty revenue from
Glaxo Wellcome as well as initial sales of commercial drug substance to Kissei
Pharmaceutical Co., Ltd. in Japan in the second quarter of 1999. Agenerase
royalty revenue is based upon worldwide net sales of Agenerase as provided by
Glaxo Wellcome.
The growth in collaborative and other research and development revenue in
the second quarter of 2000, as compared with the second quarter of 1999, is
principally due to new collaborative agreements. In May of 2000, we recognized a
$10,000,000 payment for prior research costs from Aventis S.A. under a
collaborative agreement signed in October of 1999. We recorded $18,600,000 in
collaborative revenue from Novartis Pharma AG in June of 2000 upon entering into
an agreement to collaborate on the discovery, development and commercialization
of small molecule drugs directed at targets in the kinase protein family. This
consisted of a $15,000,000 non-refundable payment earned in connection with the
signing of the agreement and $3,600,000 in product research funding.
Collaborative and other research and development revenue for the second quarter
of 1999 included a $5,000,000 milestone payment from Glaxo
12
<PAGE>
Wellcome for U.S. FDA approval of Agenerase. The balance of collaborative and
other research and development revenue for both 2000 and 1999 is made up of
development reimbursements and research support payments from other
collaborative partners.
Total costs and expenses increased to $27,582,000 in the second quarter of
2000 from $25,694,000 in the second quarter of 1999. Royalties and product costs
of $1,100,000 and $1,199,000 in the second quarter of 2000 and 1999,
respectively, consist of royalty payments to G.D. Searle on the sales of
Agenerase as well as the cost of commercial drug substance sold to Kissei in the
second quarter of 1999.
Research and development expenses increased slightly during the three months
ended June 30, 2000 as compared with same period in 1999. We continue to expand
our research and development operations both in the US and the UK. Related to
our expansion were increases in facilities expenses, equipment depreciation and
increased technology license payments for access to gene database information.
However, in the second quarter of 2000, these expenses were partially offset by
a decrease in external development activities associated with certain drug
candidates. We anticipate that research and development expenses will increase
as personnel are added and additional research and development activities are
expanded to accommodate existing collaborations and additional commitments we
may undertake in the future.
Sales, general and administrative expenses increased to $6,658,000 in the
second quarter of 2000 from $5,466,000 in the second quarter of 1999. The
increase in sales, general and administrative expenses reflects the impact of
personnel additions and increased legal and patent expenses. Legal and patent
expenses increased due to costs associated with new collaborative agreements,
general business activities and expanding efforts to protect our intellectual
property. We expect that sales, general and administrative expenses will
continue to increase as we continue to grow.
Net interest income increased to $3,156,000 in the second quarter of 2000
from $2,640,000 in the second quarter of 1999. Interest income increased
primarily due to higher levels of cash and investments during the second quarter
of 2000 as compared with the same period of 1999 as a result of the proceeds
received from the sale of convertible notes in March 2000. The increase in
interest income was partially offset by higher interest expense, in the second
quarter of 2000, related to the convertible notes.
Using the equity method of accounting, we recorded $5,000 as our share of
the income in Altus Biologics Inc. (Altus) for the three month period ended
June 30, 2000, compared with $303,000 as our share of Altus' loss for the same
period in 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999.
The net loss for the six months ended June 30, 2000 was $3,546,000, or $0.07
per basic and diluted share, compared to $28,395,000, or $0.56 per basic and
diluted share, for the six months ended June 30, 1999.
Total revenues increased $28,078,000 to $44,557,000 for the six months ended
June 30, 2000 from $16,479,000 for the same period in 1999. In 2000, revenue
consisted of $5,922,000 in royalties and product sales and $38,635,000 in
collaborative and other research and development revenue. In 1999, we earned
$2,874,000 in royalties and product sales and $13,605,000 in collaborative and
other research and development revenue.
Royalties and product sales consist of Agenerase royalty revenue from Glaxo
Wellcome as well as initial sales of commercial drug substance to Kissei in
Japan in the second quarter of 1999. Agenerase royalty revenue from Glaxo
Wellcome was recognized for the first time in the second quarter of 1999 and is
based upon the worldwide net sales of Agenerase as provided by Glaxo Wellcome.
Collaborative and other research and development revenue increased
$25,030,000 for the six month period ended June 30, 2000 compared with the same
period in 1999 primarily due to new collaborative
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agreements. In the second quarter of 2000, we recognized a $10,000,000 payment
for prior research costs from Aventis S.A. under the terms of a collaborative
agreement signed during the second half of 1999. Additionally, in May 2000 we
entered into a new collaborative agreement with Novartis to collaborate on the
discovery, development and commercialization of small molecule drugs directed at
targets in the kinase protein family. In connection with this contract, we
recognized a $15,000,000 non-refundable payment upon signing the agreement and
$3,600,000 in product research funding. Collaborative and other research and
development revenue for the six months ended June 30, 1999 included a $5,000,000
milestone payment from Glaxo Wellcome for U.S. FDA approval of Agenerase. The
balance of collaborative and other research and development revenue for both
2000 and 1999 is made up of development reimbursements and research support
payments from other collaborative partners.
Total costs and expenses increased to $53,666,000 for the six months ended
June 30, 2000 from $50,071, 000 for the six months ended June 30, 1999.
Royalties and product costs of $1,972,000 and $1,199,000 for the first six
months of 2000 and 1999, respectively, consist of royalty payments to G.D.
Searle and the cost of commercial drug substance sold to Kissei in the second
quarter of 1999.
Research and development expenses increased to $38,428,000 in the first half
of 2000 from $37,634,000 in the first half of 1999 principally due to the
continued expansion of our research and development operations. Related to our
expansion were increases in facilities expenses, equipment depreciation and
increased technology license payments for access to gene database information.
The expenses associated with the expansion were partially offset by a decrease
in external development activities associated with certain drug candidates. We
anticipate that research and development expenses will increase as personnel are
added and additional research and development activities are expanded to
accommodate existing collaborations and additional commitments we may undertake
in the future.
Sales, general and administrative expenses increased during the first half
of 2000 to $13,266,000 from $11,238,000 in the first half of 1999 due primarily
to increases in personnel and professional expenses. Legal and patent expenses
increased due to costs associated with new collaborative agreements, general
business activities and expanding efforts to protect our intellectual property.
Net interest income decreased to $5,539,000 in the first six months of 2000
from $5,622,000 in the first six months of 1999. The decrease was primarily due
to lower levels of cash and investments for the majority of the first quarter of
2000 as compared with the same period of 1999.
Using the equity method of accounting, we recorded $24,000 as our share of
the income in Altus Biologics Inc. (Altus) for the six month period ended
June 30, 2000, compared with $425,000 as our share of Altus' loss for the same
period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been funded principally through strategic collaborative
agreements, public offerings and private placements of our equity and debt
securities, equipment lease financing, and investment income. With the approval
and launch of Agenerase in April 1999, we began receiving product royalty
revenues. In March 2000, we issued $175,000,000 of convertible subordinated
notes. We have continued to increase and advance products in our research and
development pipeline. Consequently, we expect to incur losses on a quarterly and
annual basis as we continue to develop existing and future compounds and to
conduct clinical trials of potential drugs. We also expect to incur substantial
administrative and commercialization expenditures in the future and additional
expenses related to filing, prosecution, defense and enforcement of patent and
other intellectual property rights.
We expect to finance these substantial cash needs with future payments under
our existing and future collaborative agreements, royalties from the sales of
Agenerase, existing cash and investments of $378,385,000 at June 30, 2000,
together with investment income earned thereon, and facilities and equipment
financing. To the extent that funds from these sources are not sufficient to
fund our activities, it
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will be necessary to raise additional funds through public offerings or private
placements of securities or other methods of financing. There can be no
assurance that such financing will be available on acceptable terms, if at all.
Our aggregate cash and investments increased by $190,583,000 during the six
months ended June 30, 2000 to $378,385,000. Cash provided by operations was
$7,428,000 during the same period. We received $22,500,000 from Novartis in
connection with a collaborative agreement signed in May of 2000 of which
$18,600,000 was recognized as revenue during the quarter ended June 30, 2000.
Under the agreement we will collaborate to discover, develop and commercialize
small molecule drugs directed at targets in the kinase protein family. Under a
collaborative agreement with Aventis signed in October 1999, we received a
$10,000,000 payment for prior research costs in May of 2000. We continue to
invest in equipment and leasehold improvements for facilities to meet the
operating needs associated with the growth in our headcount. Property and
equipment expenditures were $4,432,000 for the first six months of 2000. Cash
provided by financing activities for the first quarter of 2000 was $187,943,000.
We received $169,660,000 in net proceeds from the issuance of $175,000,000 of
convertible subordinated notes in March of 2000. Additionally, issuances of
common stock under employee benefit plans in the first six months of 2000
resulted in a $19,519,000 increase to common stock and additional paid in
capital.
LEGAL PROCEEDINGS
Chiron Corporation ("Chiron") filed suit on July 30, 1998 against Vertex and
Eli Lilly and Company ("Lilly") in the United States District Court for the
Northern District of California, alleging infringement of three U.S. patents
issued to Chiron. During 1999, Chiron requested and was granted a reexamination
by the U.S. Patent and Trademark Office of all three of the patents in suit.
Chiron also requested and, over the opposition of Vertex and Lilly, was granted
a stay in the infringement lawsuit, pending the outcome of the patent
reexamination. While the length of the stay, the outcome of the reexamination,
the effect of that outcome on the lawsuit and the final outcome of the lawsuit
cannot be determined, we believe, based on information currently available, that
the ultimate outcome of the action will not have a material impact on our
consolidated financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
which addresses accounting policies to be applied in the recognition,
presentation and disclosure of revenues from contract partnerships in financial
statements filed with the SEC. On June 26, 2000, the SEC issued SAB 101B which
delays the implementation of SAB 101 until no later than the fiscal quarter
ending December 31, 2000, in order to provide companies with additional time to
determine the effect that a change in accounting policy under SAB 101 will have
on their revenue recognition practices. Together with our independent
accountants, we are continuing to review the potential effect that the
implementation of SAB 101 would have on our net financial results. The
implementation of SAB 101 could have a material effect on the reported financial
results for the year ending December 31, 2000.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for Certain
Transactions involving Stock Compensation", which provides guidance for issues
that have arisen in applying APB No. 25, "Accounting for Stock Issued to
Employees". This Interpretation is generally effective for transactions
occurring after July 1, 2000 except for the provisions related to repricings and
the definition of an employee, which apply to awards issued after December 31,
1998. We believe that this interpretation will not have a material impact on net
financial results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to our assessment of market risk as disclosed
in our Annual Report on Form 10-K for the year ended December 31, 1999.
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PART II.
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders:
The Company's Annual Meeting of Stockholders was held on May 23, 2000. The
stockholders elected Barry M. Bloom and Bruce I. Sachs to the class of directors
whose term expires in 2003. The tabulation of votes with respect to the election
of such directors is as follows:
<TABLE>
<CAPTION>
TOTAL VOTE FOR: TOTAL VOTE WITHHELD:
--------------- --------------------
<S> <C> <C>
Barry M. Bloom................................ 21,440,777 16,507
Bruce I. Sachs................................ 21,440,767 16,517
</TABLE>
In addition, the stockholders approved the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants for the 2000
fiscal year by a vote of 21,402,247 shares in favor, 46,067 shares against, and
8,970 shares abstaining.
<TABLE>
<S> <C> <C>
Item 6. Exhibits:
27 Financial Data Schedule (Submitted as an exhibit only in the
electronic format of this Quarterly Report on Form 10-Q
submitted to the Securities and Exchange Commission).
99 Letter of Independent Accountants.
</TABLE>
REPORTS ON FORM 8-K:
On August 2, 2000, we filed a Report on Form 8-K dated July 14, 2000,
reporting the two-for-one split of our common stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
VERTEX PHARMACEUTICALS INCORPORATED
Date: August 14, 2000
---------------------------------------------------
Thomas G. Auchincloss, Jr.
Vice President of Finance and Treasurer
(Principal Financial Officer)
Date: August 14, 2000
---------------------------------------------------
Johanna Messina Power
Assistant Controller
</TABLE>
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