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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
(MARK ONE)
/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, 2001
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 000-19319
------------------------
VERTEX PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3039129
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
130 WAVERLY STREET, CAMBRIDGE, MASSACHUSETTS 02139-4242
(Address of principal executive offices, including zip code)
(617) 444-6600
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 74,704,821
--------------------------------------------- ---------------------------------------------
Class Outstanding at August 8, 2001
EXPLANATORY NOTE
This Amendment No. 1 to the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001 is being filed by Vertex Pharmaceuticals Incorporated
solely to correct an error in the information contained on the cover page of the
Form 10-Q filed on August 14, 2001, which incorrectly reported the number of
shares of Vertex common stock, par value $.01 per share, outstanding as of
August 8, 2001.
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VERTEX PHARMACEUTICALS INCORPORATED
INDEX
Part I--Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2001 and December 31, 2000................... 1
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2001 and 2000............. 2
Condensed Consolidated Statement of Operations
Six Months Ended June 30, 2001 and 2000............... 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000............... 4
Notes to Condensed Consolidated Financial Statements.... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................. 15
Part II--Other Information
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................... 15
SIGNATURES
i
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $168,527 $322,090
Short-term investments, available for sale................ 151,501 66,509
Accounts receivable....................................... 8,414 12,262
Prepaid expenses.......................................... 2,032 2,325
-------- --------
Total current assets.................................... 330,474 403,186
Restricted cash........................................... 25,908 9,788
Long-term investments, available for sale................. 355,427 318,825
Property and equipment, net............................... 43,534 28,149
Investment in equity affiliate............................ 1,400 1,726
Other assets.............................................. 10,091 11,207
-------- --------
Total assets............................................ $766,834 $772,881
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,362 $ 3,847
Accrued expenses.......................................... 14,443 14,994
Accrued interest.......................................... 4,869 4,879
Deferred revenue.......................................... 11,162 12,574
Obligations under capital lease and debt.................. 2,016 2,377
-------- --------
Total current liabilities............................... 38,852 38,671
Obligations under capital lease and debt, excluding
current portion......................................... 1,633 2,313
Convertible subordinated notes............................ 345,000 345,000
-------- --------
Total liabilities....................................... 385,485 385,984
-------- --------
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $0.01 par value; 200,000,000 shares
authorized; 60,450,750 and 59,612,816 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively............................................ 605 596
Additional paid-in capital................................ 624,490 613,166
Deferred compensation, net................................ (41) (61)
Accumulated other comprehensive income.................... 7,757 3,681
Accumulated deficit....................................... (251,462) (230,485)
-------- --------
Total stockholders' equity.............................. 381,349 386,897
-------- --------
Total liabilities and stockholders' equity.............. $766,834 $722,881
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
-------------------------------
2001 2000
-------------- --------------
RESTATED*
Revenues:
Royalties and product sales............................... $ 2,767 $ 3,303
Collaborative and other research and development
revenues................................................ 18,676 23,720
-------- -------
Total revenues........................................ 21,443 27,023
Costs and expenses:
Royalties and product costs............................... 921 1,100
Research and development.................................. 27,794 19,824
Sales, general and administrative......................... 10,176 6,462
-------- -------
Total costs and expenses.............................. 38,891 27,386
-------- -------
Net loss from operations.................................. (17,448) (363)
-------- -------
Interest income........................................... 10,441 5,463
Interest expense.......................................... (4,774) (2,503)
Equity in income (loss) of unconsolidated subsidiary...... (326) 5
-------- -------
Net income (loss)........................................... $(12,107) $ 2,602
======== =======
Basic net income (loss) per common share.................... $ (0.20) $ 0.05
Diluted net income (loss) per common share.................. $ (0.20) $ 0.04
Basic weighted average number of common shares
outstanding............................................... 60,337 52,636
Diluted weighted average number of common shares
outstanding............................................... 60,337 58,946
The accompanying notes are an integral part of these condensed consolidated
financial statements.
*See Note 2.
2
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------------
2001 2000
-------------- --------------
RESTATED*
Revenues:
Royalties and product sales............................... $ 5,280 $ 5,922
Collaborative and other research and development
revenues................................................ 35,220 29,233
-------- --------
Total revenues........................................ 40,500 35,155
Costs and expenses:
Royalties and product costs............................... 1,758 1,972
Research and development.................................. 53,913 38,428
Sales, general and administrative......................... 17,672 13,039
-------- --------
Total costs and expenses.............................. 73,343 53,439
-------- --------
Net loss from operations.................................. (32,843) (18,284)
-------- --------
Interest income........................................... 21,740 8,706
Interest expense.......................................... (9,548) (3,394)
Equity in income (loss) of unconsolidated subsidiary...... (326) 24
-------- --------
Net loss before cumulative effect of change in accounting
principle................................................. $(20,977) $(12,948)
Cumulative effect of change in accounting principle......... -- $ (3,161)
-------- --------
Net loss.................................................... $(20,977) $(16,109)
======== ========
Basic and diluted net loss per common share before
cumulative effect of change in accounting principle....... $ (0.35) $ (0.25)
Cumulative effect of change in accounting principle- basic
and diluted............................................... -- $ (0.06)
-------- --------
Basic and diluted net loss per common share................. $ (0.35) $ (0.31)
======== ========
Basic and diluted weighted average number of common shares
outstanding............................................... 60,175 52,283
The accompanying notes are an integral part of these condensed consolidated
financial statements.
*See Note 2.
3
VERTEX PHARMACEUTICALS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
----------- -----------
RESTATED*
Cash flows from operating activities:
Net loss.................................................. $ (20,977) $(16,109)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of change in accounting principle....... -- 3,161
Depreciation and amortization............................. 5,582 4,059
Non-cash stock-based compensation expense................. 41 92
Realized (gains)/losses on investments.................... (926) 351
Equity in (income) loss of unconsolidated subsidiary...... 326 (24)
Changes in operating assets and liabilities:
Accounts receivable....................................... 3,848 522
Prepaid expenses.......................................... 293 (261)
Accounts payable.......................................... 2,515 1,352
Accrued expenses.......................................... (551) (775)
Accrued interest.......................................... (10) 2,916
Deferred revenue.......................................... (1,412) 12,144
---------- --------
Net cash (used in) provided by operating activities... (11,271) 7,428
---------- --------
Cash flows from investing activities:
Purchases of investments.................................. (548,585) (161,038)
Sales and maturities of investments....................... 432,429 122,097
Expenditures for property and equipment................... (20,203) (4,432)
Restricted cash........................................... (16,120) --
Other assets.............................................. 352 182
---------- --------
Net cash used in investing activities................. (152,127) (43,191)
---------- --------
Cash flows from financing activities:
Repayment of capital lease obligations and debt........... (1,041) (1,236)
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............. 11,312 19,519
---------- --------
Net cash provided by financing activities............. 10,271 187,943
---------- --------
Effect of changes in exchange rates on cash............... (436) (520)
---------- --------
Net increase (decrease) in cash and cash
equivalents......................................... (153,563) 151,660
Cash and cash equivalents at beginning of year............ 322,090 31,548
---------- --------
Cash and cash equivalents at end of year.................. $ 168,527 $183,208
========== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
*See Note 2.
4
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by Vertex Pharmaceuticals Incorporated (the "Company") in
accordance with generally accepted accounting principles.
Certain information and footnote disclosures normally included in the
Company's annual financial statements have been condensed or omitted. Certain
prior year amounts have been reclassified to conform with current year
presentation. On July 18, 2001, Vertex completed a merger with Aurora
BioSciences Corporation ("Aurora"). The interim financial statements do not
include the results of Aurora. 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, 2001 and 2000.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year,
although the Company expects to incur a substantial loss for the year ended
December 31, 2001. These interim financial statements should be read in
conjunction with the audited financial statements for the year ended
December 31, 2000, which are contained in the Company's 2000 Annual Report to
its shareholders and in its Form 10-K filed with the Securities and Exchange
Commission.
2. ACCOUNTING POLICIES
REVENUE RECOGNITION
In the fourth quarter of 2000, retroactive to January 1, 2000, Vertex
changed its method of accounting for revenue recognition in accordance with
Staff Accounting Bulletin (SAB) No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. Previously, the Company had recognized revenue from
collaborative research and development arrangements as earned under the terms of
the arrangements. License payments were recorded as revenue when the payment was
assured and contractual obligations met. Payments from contractual milestones
were recognized when achieved, and product research funding was recorded on a
quarterly basis, when the research effort was incurred. Under the new accounting
method, the Company recognizes revenue from research and development
arrangements over the period of continuing involvement as prescribed by Emerging
Issues Task Force No. 91-6 (EITF 91-6). Under that model, revenue is recognized
for non-refundable license fees, milestones, and collaborative research and
development funding using the lesser of the non-refundable cash received or the
result achieved using percentage of completion accounting.
Where the Company has no continuing involvement, non-refundable license fees
will be recorded as revenue upon receipt and milestones will be recorded as
revenue upon achievement of the milestone by the collaborative partner.
Royalty revenue is recognized based upon actual and estimated net sales of
licensed products in licensed territories as provided by the collaborative
partner and is generally recognized in the period the sales occur. Differences
between actual royalty revenues and estimated royalty revenues, which have not
been historically significant, are reconciled and adjusted for in the following
quarter.
Product sales revenue is recognized upon shipment, when the title to product
and associated risk of loss has passed to the customer.
5
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cumulative effect of the change in accounting principle from prior years
resulted in a charge to income of $3,161,000, which is included in the loss for
the six months ended June 30, 2000. Prior year financial results have been
restated for the retroactive adoption of SAB 101 to January 1, 2000.
DERIVATIVE INSTRUMENTS
In June of 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities--an Amendment to
FASB Statement No. 133." This statement establishes accounting and reporting
standards for derivative instruments embedded in other contracts (collectively
referred to as "derivatives") and for hedging activities. The statement requires
companies to recognize all derivatives as either assets or liabilities, with the
instruments measured at fair value. The accounting for changes in fair value,
gains or losses, depends on the intended use of the derivative and its resulting
designation. The Company has adopted this new accounting standard effective
January 1, 2001 and it did not have a significant effect on the Company's
financial statements.
Subsequent to the issuance of SFAS No. 133, "Accounting for Certain
Derivative Instruments and Hedging Activities", the FASB established the
Derivatives Implementation Group ("DIG") to address and interpret practice
issues relating to that standard. On March 21, 2001, the FASB approved DIG
Implementation Issue No. A17 ("A17") relating to contracts that provide for net
share settlement, including warrants of a privately held company. Under the
proposed transition provisions for applying DIG guidance, an entity should
account for the effects of initially complying with the new implementation
guidance as of the first day of the fiscal quarter following posting on the
FASB's website (i.e. July 1, 2001 for Vertex's implementation of A17). As of
June 30, 2001 the Company held warrants meeting that definition and will adopt
A17 in the third quarter of 2001. Management is currently determining the effect
A17 will have on the Company's financial statements. The potential effects could
result in a cumulative change in accounting principle as of July 1, 2001 and a
material increase to other income in the third quarter of 2001.
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 (loss) per share
is based upon the weighted average number of common shares outstanding during
the period plus additional weighted average common equivalent shares outstanding
during the period when the effect is not anti-dilutive. Common equivalent shares
result from the assumed exercise of outstanding stock options, the proceeds of
which are then assumed to have been used to repurchase outstanding stock using
the treasury stock method, and the assumed conversion of convertible notes.
6
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the computation of basic and diluted earnings
(loss) per common share (in thousands, except per share amounts):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ------------------------
2001 2000 2001 2000
------------ ------------ ---------- -----------
Basic earnings (loss) per common share:
Net income (loss) before cumulative effect
of change in accounting principle......... $(12,107) $2,602 $(20,977) $(12,948)
Weighted average number of common shares
outstanding............................... 60,337 52,636 60,175 52,283
Basic earnings (loss) per common share
before cumulative effect of change in
accounting principle...................... $ (0.20) $ 0.05 $ (0.35) $ (0.25)
Diluted earnings (loss) per common share:
Net income (loss) before cumulative effect
of change in accounting principle......... $(12,107) $2,602 $(20,977) $(12,948)
Weighted average number of common shares
outstanding............................... 60,337 52,636 60,175 52,283
Net effect of dilutive stock options........ -- 6,310 -- --
-------- ------ -------- --------
Weighted average number of shares assuming
dilution.................................. 60,337 58,946 60,175 52,283
======== ====== ======== ========
Diluted earnings (loss) per common share
before cumulative effect of change in
accounting principle...................... $ (0.20) $ 0.04 $ (0.35) $ (0.25)
Anti-dilutive common equivalent shares
outstanding:
Stock options............................... 11,375 103 11,375 11,727
Convertible notes........................... 3,739 4,340 3,739 4,340
3. COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2001 and 2000, respectively,
comprehensive income (loss) was as follows (in thousands):
FOR THE THREE FOR THE SIX
MONTHS MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss)...................................... $(12,107) $2,602 $(20,977) $(16,109)
Changes in other comprehensive income (loss):
Unrealized holding gains (losses) on investments....... (415) 586 4,512 333
Foreign currency translation adjustment................ (39) (371) (436) (520)
-------- ------ -------- --------
Total change in other comprehensive income (loss)...... (454) 215 4,076 (187)
-------- ------ -------- --------
Total comprehensive income (loss)...................... $(12,561) $2,817 $(16,901) $(16,296)
======== ====== ======== ========
7
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RESTRICTED CASH
In accordance with operating lease agreements, at June 30, 2001 and 2000 the
Company held in deposit approximately $25,908,000 and $9,788,000, respectively,
with its bank to collateralize conditional, stand-by letters of credit in the
name of the landlord. In January 2001, the Company entered into new operating
leases for additional space and facilities. The letters of credit are redeemable
only if the Company defaults on the leases under specific criteria. These funds
are restricted from the Company's use during the lease period, $9,788,000 of
funds are restricted through 2010 and the remaining $16,120,000 is restricted
through 2017. The Company is entitled to all interest earned on the funds.
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.
That reexamination proceeding is still ongoing and the stay is still in effect.
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 June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141"). SFAS No. 141 requires that all business
combinations be accounted for under the purchase method only and that certain
acquired intangible assets in a business combination be recognized as assets
apart from goodwill. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for by
the purchase method for which the date of acquisition is after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), which requires that ratable amortization of goodwill
be replaced with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. The provisions
of SFAS No. 142 will be effective for fiscal years beginning after December 15,
2001, and will thus be adopted by the Company, as required, on January 1, 2002.
Management is currently determining what effect, if any, SFAS No. 142 will have
on its financial position and results of operations.
7. SUBSEQUENT EVENT
On July 18, 2001, Vertex completed a merger with Aurora. Vertex acquired all
of Aurora's outstanding common stock in a tax-free, stock for stock transaction,
for approximately 14.1 million
8
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shares of Vertex common stock. Vertex intends to account for the merger as a
pooling of interests, as the business combination was initiated prior to
June 30, 2001. The pro forma results are based on the historical results of
Vertex and Aurora. The Company is currently evaluating the effect, if any,
resulting from conforming accounting policies. The unaudited pro forma combined
results for the three and six months ended June 30, 2001 and 2000, respectively,
are presented below.
(In thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue............................................. $43,805 $47,726 $80,838 $ 71,145
Net income (loss)................................... $(10,215) $ 7,027 $(20,807) $(11,530)
Net income (loss) per basic share................... $ (0.12) $ 0.09 $ (0.25) $ (0.16)
Net income (loss) per diluted share................. $ (0.12) $ 0.08 $ (0.25) $ (0.15)
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a global biotechnology company. We seek to discover, develop, and
commercialize major pharmaceutical products independently and with partners.
Chemogenomics, our proprietary, systematic, genomics-based platform, is designed
to accelerate the discovery of new drugs and to expand intellectual property
coverage of drug candidate compounds and classes of related compounds. This
approach, which targets gene families, has formed the basis for several
commercial collaborations that retain rights to downstream revenue for us. We
have 12 drug candidates in development to treat viral diseases, inflammation,
cancer, autoimmune diseases and neurological disorders.
Our first approved product is Agenerase-Registered Trademark- (amprenavir),
an HIV protease inhibitor, which we co-promote with GlaxoSmithKline. We earn a
royalty from GlaxoSmithKline from sales of Agenerase. Agenerase has received
approval in 33 countries worldwide, including the United States, the 15 member
states of the European Union, and Japan, where the drug is sold under the trade
name Prozei-TM-.
We have significant collaborations with Aventis, Eli Lilly, GlaxoSmithKline
("GSK"), Kissei, Novartis, Schering AG (Germany), Serono and Taisho. These
collaborations provide us with financial support and other valuable resources
for our research programs, development of our clinical drug candidates, and
marketing and sales of our products.
We have incurred operating losses since our inception and expect to incur a
loss in 2001. We believe that operating losses will continue beyond 2001 as we
are planning to make significant investments in research and development for our
other potential products. We expect that losses will fluctuate from year to year
and that such fluctuations may be substantial.
On July 18, 2001, we completed our merger with Aurora Biosciences
Corporation ("Aurora"). We acquired all of Aurora's outstanding common stock in
a tax-free, stock for stock transaction, for approximately 14.1 million shares
of Vertex common stock. We intend to account for the merger as a pooling of
interests. We are currently evaluating the effect, if any, resulting from
conforming accounting policies.
The merger unites Aurora's industry-leading assay development, screening and
cell biology capabilities with our integrated drug discovery expertise, creating
a comprehensive, scalable platform for systematically accelerating drug
candidate output in target-rich gene families. The combination of Vertex's and
Aurora's technology and expertise is expected to:
- increase the flow of novel drug candidates into development,
- accelerate the creation of a broad intellectual property estate, and
- provide an enhanced opportunity for collaborations in drug discovery,
development and commercialization.
In the fourth quarter of 2000, we adopted SAB 101 "Revenue Recognition in
Financial Statements" retroactive to January 1, 2000. SAB 101 was issued by the
Securities and Exchange Commission ("SEC") in December of 1999 and provides
guidance related to revenue recognition policies based on interpretations and
practices followed by the SEC. The impact of our adoption of SAB 101 was to
defer revenue recognition for certain portions of revenues previously recognized
under our collaborative agreements into future accounting periods. During the
first quarter of 2001, we recorded the full amount of the $3,161,000 expense
associated with the cumulative effect of the change in accounting principle.
This expense is included in the net loss and net loss per basic and diluted
share for the six months ending June 30, 2000. The results of operations for the
three and six months ended June 30, 2000 have been restated in accordance with
SAB 101.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000.
Our net loss for the three months ended June 30, 2001 was $12,107,000 or
$0.20 per basic and diluted share, including merger related costs of $2,658,000,
compared to net income $2,602,000 or $0.04 per diluted share for the three
months ended June 30, 2000.
Total revenues decreased to $21,443,000 in the second quarter of 2001 from
$27,023,000 in the second quarter of 2000. In the second quarter of 2001,
royalty and product sales revenue was $2,767,000 and collaborative and other
research and development revenue was $18,676,000. In the second quarter of 2000,
royalty and product sales revenue was $3,303,000 and collaborative and other
research and development revenue was $23,720,000.
Royalties and product sales include Agenerase royalty revenue from GSK.
Agenerase royalty revenue is based on estimated and actual worldwide net sales
of Agenerase as provided by GSK.
In the second quarter of 2001 we recognized revenue from six collaborative
partners. Approximately $12,431,000 of our $18,676,000 in collaborative and
other research and development revenue earned during the second quarter of 2001
was earned under the Novartis collaboration. Additionally, in the second quarter
of 2001 we recognized $2,381,000 in connection with our collaborations with
Taisho and Serono. The balance of our collaborative and other research and
development revenue for the second quarter of 2001 was earned under
collaborations with Eli Lilly, Schering AG and Kissei. Comparatively, in the
second quarter of 2000 we received and recognized $10,000,000 in connection with
the Aventis collaboration and $7,776,000 under the Novartis collaboration. The
balance of collaborative and other research and development revenue earned in
the second quarter of 2000 was under the Eli Lilly, Schering AG, Kissei and
Taisho collaborations.
Total costs and expenses increased to $38,891,000 in the second quarter of
2001 from $27,386,000 in the second quarter of 2000. Royalties and product costs
of $921,000 and $1,100,000 for the three months ended June 30, 2001 and 2000,
respectively, consist of royalty payments to G.D. Searle & Co on the sales of
Agenerase. The decrease in royalties and product costs is a result of decreased
sales of Agenerase.
Research and development expenses increased to $27,794,000 in the second
quarter of 2001 from $19,824,000 in the second quarter of 2000, principally due
to the continued expansion of our research and development operations and an
increase in our number of drug development candidates, from eight candidates
during the second quarter of 2000 to twelve candidates during the second quarter
of 2001. Our expansion of our research and development operations also resulted
in increases in personnel and facilities expenses, equipment depreciation and
increased technology license payments for access to gene database information.
We anticipate that our research and development expenses will continue to
increase as we add personnel and expand our research and development activities
to accommodate our existing collaborations and additional commitments we may
undertake in the future.
Sales, general and administrative expenses increased to $10,176,000 for the
second quarter of 2001 compared to $6,462,000 for the second quarter of 2000.
The increase was primarily a result of merger related costs of $2,658,000 as
well as increased personnel and professional expenses. Merger related costs
represent costs associated with our acquisition of Aurora which we completed on
July 18, 2001. We expect sales, general and administrative expenses to continue
to increase as we continue to grow. Additionally, we anticipate incurring
significant merger related costs in the third quarter of 2001.
Interest income increased approximately $4,978,000 to $10,441,000 in the
second quarter of 2001 from $5,463,000 in the second quarter of 2000. The
increase was due to a higher level of cash and investments in the second quarter
of 2001 compared to the second quarter of 2000. The increase in cash and
investments was primarily a result of the proceeds we received from the issuance
of
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$345,000,000 of convertible subordinated notes in September 2000. We previously
issued $175,000,000 of convertible subordinated notes in March 2000, which we
redeemed in September 2000.
Interest expense increased to approximately $4,774,000 in the second quarter
of 2001 from $2,503,000 in the second quarter of 2000. The increase was due to
interest expense associated with the convertible subordinated notes we issued in
September 2000.
Using the equity method of accounting we recorded $326,000 as our share of
loss in Altus Biologics Inc. ("Altus") for the second quarter of 2001, compared
with $5,000 as our share of income for the second quarter of 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000
The net loss for the six months ended June 30, 2001 was $20,977,000 or $0.35
per basic and diluted share, including merger related costs of $2,658,000,
compared to $16,109,000 or $0.31 per basic and diluted share, including the
cumulative effect of change in accounting principle, for the six months ended
June 30, 2000.
Total revenues increased to $40,500,000 for the six months ended June 30,
2001 from $35,155,000 for the six months ended June 30, 2000. In the first half
of 2001, revenue consisted of $5,280,000 in royalties and product sales and
$35,220,000 in collaborative and other research and development revenue. In the
first half of 2000, revenue consisted of $5,922,000 in royalties and product
sales and $29,233,000 in collaborative and other research and development
revenue.
Collaborative and other research and development revenue increased
$5,987,000 for the six month period ended June 30, 2001, compared with June 30,
2000 primarily due to new collaborative agreements. In May of 2000, we entered
into a collaboration with Novartis to discover, develop and commercialize small
molecule drugs targeted at the kinase protein family. For the six months ended
June 30, 2001, we recognized $23,025,000 in connection with this collaboration,
compared with $7,776,000 for the six months ended June 30, 2000. In December of
2000, we entered into a collaboration with Serono to discover, develop, and
market caspase inhibitors. Previously, in November 1999, we entered into a
collaborative agreement with Taisho for our caspase program. In connection with
these collaborations, we recognized approximately $3,582,000 of revenue in the
first six months of 2001 compared with $1,750,000 in the first six months of
2000. Included in collaborative and other research and development revenue for
the six months ended June 30, 2000 is $10,000,000 earned in connection with the
Aventis collaboration.
Total costs and expenses increased to $73,343,000 for the six months ended
June 30, 2001 from $53,439,000 for the six months ended June 30, 2000. Royalties
and product costs of $1,758,000 and $1,972,000 for the first six months of 2001
and 2000, respectively, consist of royalty payments to G.D. Searle & Co on the
sales of Agenerase.
Research and development costs increased $15,485,000 from $38,428,000 for
the six months ended June 30, 2000 to $53,913,000 for the six months ended
June 30, 2001. During the first six months of 2001, we continued expansion of
our research and development operations. Related to our expansion was an
increase in our number of drug development candidates from eight candidates at
June 30, 2000 to twelve candidates at June 30, 2001, as well as increases in
personnel and facilities expenses, equipment depreciation and increased
technology license payments for access to gene database information.
Sales, general and administrative expenses increased $4,633,000 from
$13,039,000 for the six months ended June 30, 2000 to $17,672,000 for the six
months ended June 30, 2001. The increase was primarily a result of merger
related costs of $2,658,000 for the first six months of 2001, as well as
increased personnel and professional expenses. Merger related costs represent
costs through June 30, 2001 associated with the acquisition of Aurora completed
on July 18, 2001.
12
Interest income increased to approximately $21,740,000 for the first six
months of 2001 from $8,706,000 for the first six months of 2000. The increase
was due to a higher level of cash and investments for the six months ended
June 30, 2001 compared to the same period of 2000. The increase in cash and
investments was primarily a result of the proceeds we received from the issuance
of $345,000,000 of convertible subordinated notes in September 2000.
Interest expense increased to approximately $9,548,000 for the six months
ended June 30, 2001 from $3,394,000 for the six months ended June 30, 2000. The
increase was due to interest expense associated with the convertible
subordinated notes we issued in September 2000.
Using the equity method of accounting we recorded $326,000 as our share of
loss in Altus for the six month period ended June 30, 2001, compared with
$24,000 as our share of income for the six month period ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations 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 2000, we completed private placements of $175,000,000 of 5%
convertible subordinated notes due March 2007 and $345,000,000 of 5% convertible
subordinated notes due September 2007.
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 $675,455,000 at June 30, 2001,
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 will be necessary for us 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 remained relatively consistent at
June 30, 2001 compared with December 31, 2000, at $675,455,000 and $707,424,000,
respectively. Cash used by operations, principally to fund research and
development activities, was $11,271,000 during the six months ended June 30,
2001. We continue to invest in equipment and leasehold improvements for
facilities to meet our operating needs associated with our growth in headcount.
Cash used by investing activities for the six months ended June 30, 2001 was
$152,127,000, including net purchases of available-for-sale securities, property
and equipment expenditures, and an increase in restricted cash in connection
with a new lease signed in January 2001. Cash provided by financing activities
for the six months ended June 30, 2001 was $10,271,000, including $11,312,000
from the issuance of common stock under employee stock option and benefit plans
for the six months partially offset by $1,041,000 of cash used for the repayment
of capital lease obligations.
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FORWARD-LOOKING STATEMENTS
This discussion may contain forward-looking statements about the expected
benefits that we will realize from our merger with Aurora, including an
increased flow of novel drug candidates into development, an accelerated
creation of a broad intellectual property estate and an enhanced opportunity for
collaborations in drug discovery, development and commercialization. Additional
forward-looking statements include our expectation that (i) our losses will
continue, (ii) our research and development expenses and sales, general and
administrative expenses will increase, and (iii) the Chiron litigation will not
have a material adverse effect on us. While management makes its best efforts to
be accurate in making forward-looking statements, such statements are subject to
risks and uncertainties that could cause our actual results to vary materially.
These risks and uncertainties include, among other things, our inability to
successfully integrate Aurora into our existing business, costs related to the
merger and the integration of Aurora, the failure to qualify the merger for
pooling of interests accounting treatment, the termination of existing Aurora
pharmaceutical and biotechnology collaborations, our inability to further
identify, develop and achieve commercial success for new products and
technologies, the possibility of delays in the research and development
necessary to select drug development candidates and delays in clinical trials,
the risk that clinical trials may not result in marketable products, the risk
that we may be unable to successfully finance and secure regulatory approval of
and market our drug candidates, our dependence upon pharmaceutical and
biotechnology collaborations, the levels and timing of payments under our
collaborative agreements, uncertainties about our ability to obtain new
corporate collaborations and acquire new technologies on satisfactory terms, if
at all, the development of competing systems, our ability to protect our
proprietary technologies, patent-infringement claims, risks of new, changing and
competitive technologies and regulations in the U.S. and internationally. We
disclaim any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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.
That reexamination proceeding is still ongoing and the stay is still in effect.
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 the information currently available, that the
ultimate outcome of the action will not have a material impact on our
consolidated financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
On March 21, 2001, the FASB approved DIG Implementation Issue No. A17
("A17") relating to contracts that provide for net share settlement, including
warrants of a privately held company. Under the proposed transition provisions
for applying DIG guidance, an entity should account for the effects of initially
complying with the new implementation guidance as of the first day of the fiscal
quarter following posting on the FASB's website (i.e. July 1, 2001 for our
implementation of A17). As of June 30, 2001, we held warrants meeting that
definition and we will adopt A17 in the third quarter of 2001. We are currently
determining the effect A17 will have on our financial position and results of
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operations. The potential effects could result in a cumulative change in
accounting principle as of July 1, 2001 and a material increase to other income
in the third quarter of 2001.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141"). SFAS No. 141 requires that all business
combinations be accounted for under the purchase method only and that certain
acquired intangible assets in a business combination be recognized as assets
apart from goodwill. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for by
the purchase method for which the date of acquisition is after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), which requires that ratable amortization of goodwill
be replaced with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. The provisions
of SFAS No. 142 will be effective for fiscal years beginning after December 15,
2001, and will thus be adopted by the Company, as required, on January 1, 2002.
We are currently determining what effect, if any, SFAS No. 142 will have on our
financial position and results of operations.
ITEM 3. 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, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 18, 2001, Vertex held a special meeting of its stockholders in
connection with the merger between Vertex and Aurora Biosciences Corporation.
The following matters were voted on by the stockholders at the special meeting:
(1) The stockholders approved the issuance of shares of Vertex common stock
in connection with the merger. This proposal was approved with
35,309,788 votes for, 38,684 votes against, 28,354 abstentions and
0 broker non-votes.
(2) The stockholders also approved an amendment to Vertex's 1996 Stock and
Option Plan to increase the number of shares of Vertex common stock
reserved for issuance under the plan from 13,000,000 to 16,000,000. This
proposal was approved with 28,880,426 votes for, 6,456,792 votes against,
and 39,608 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.4 Second Amendment to Rights Agreement dated as of June 30, 2001 (filed
herewith).
10.26 Letter Agreement, dated April 29, 2001, by and among Aurora
Biosciences Corporation and Stuart J.M. Collinson (previously filed as
exhibit 10.26 to Vertex's registration statement on Form S-4
(Registration No. 333-61480) and incorporated herein by reference)
10.27 Employment Agreement, dated April 29, 2001, by and among Aurora
Biosciences Corporation and Harry Stylli (previously filed as
exhibit 10.27 to Vertex's registration statement on Form S-4
(Registration No. 333-61480) and incorporated herein by reference)
(b) Reports on Form 8-K:
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On April 30, 2001, we filed a Report on Form 8-K dated April 20, 2001 under
Item 5, reporting that we entered into an Agreement and Plan of Merger with
Aurora Biosciences Corporation.
On August 1, 2001, we filed a Report on Form 8-K dated July 18, 2001 under
Item 2, reporting the completion of the acquisition of Aurora Biosciences
Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERTEX PHARMACEUTICALS INCORPORATED
August 22, 2001 By: /s/ JOHANNA MESSINA POWER
-----------------------------------------
Johanna Messina Power
CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)