Shares of Vertex Pharmaceuticals Inc. (VRTX - Analyst Report) continued to lose ground during the two trading sessions following the release of third quarter results. In addition to posting a higher-than-expected loss, the company also missed revenue expectations by a wide margin. Moreover, with Incivek revenues declining rapidly, Vertex Pharma lowered its revenue guidance for 2013. Shares are down 6.2% since third quarter results were reported.
Vertex Pharma’s third quarter loss came in at 46 cents per share (including stock-based compensation expense), well below the break-even earnings reported in the year-ago quarter. Third quarter 2013 loss was wider than the Zacks Consensus Estimate of a loss of 39 cents.
Excluding the impact of stock-based compensation expense, third quarter 2013 loss was 32 cents per share, well below the year-ago earnings of 13 cents per share.
Revenues for the reported quarter fell 34% to $221.7 million. Revenues were well short the Zacks Consensus Estimate of $276 million.
The Quarter in Detail
Vertex Pharma’s third quarter revenues consisted of Incivek ($86 million), Kalydeco ($101 million), royalty revenues ($27 million) and collaborative revenues ($8 million).
Incivek (hepatitis C virus) revenues declined 66.3% year over year and 44.8% on a sequential basis. Revenues continued to be affected by a fewer number of new patients seeking treatment. Other factors affecting Incivek revenues included channel inventory reduction and a reduced realized price due to changes in the payer mix. Incivek revenues will continue declining as patients await new treatments.
Royalty revenues for the quarter consisted of revenues received from partner Johnson & Johnson (JNJ - Analyst Report) on Incivo (ex-U.S. trade name of Incivek) sales in international markets.
As far as Kalydeco (cystic fibrosis) is concerned, Vertex Pharma reported rapid uptake among eligible patients in the U.S as well as Europe where reimbursement discussions concluded. Additional growth should materialize with the conclusion of reimbursement discussions in Australia and Canada.
Research and development (R&D) expenses for the quarter increased 14.2% to $228.6 million, mainly due to continued investment in development activities.
Third quarter 2013 selling, general and administrative (SG&A) expenses declined 10.1% to $87.8 million.
Revenue Guidance Cut
Given the disappointing performance of Incivek, Vertex Pharma lowered its 2013 total revenues outlook. Total revenues for 2013 are now expected in the range of $1 billion to $1.05 billion (previous range: $1.1 billion to $1.2 billion). With the company lowering its revenue outlook, the Zacks Consensus Estimate for 2013 has gone down from $1.161 billion to $1.048 billion.
Vertex Pharma, however, raised its Kalydeco revenues outlook again to $360 million − $365 million (old guidance: $345 million − $360 million).
The company now expects operating expenses (excluding stock-based compensation expense) of $1.1 billion (old guidance: $1.09 billion to $1.15 billion).
Given the rapid decline in Incivek sales and the increasing competition in the HCV market, the company will cut down 15% of its total workforce or 370 positions. The job cuts will be focused on positions related to the promotion and development of Incivek.
Vertex Pharma expects to cut its operating expenses (estimated to be about $1.1 billion in 2013) by about $150 million - $200 million next year. A major part of the reduction should come from the SG&A line.
Going forward, Vertex Pharma intends to focus on its cystic fibrosis program and other early development programs like VX-135 (hepatitis C).
Vertex Pharma’s third quarter results were disappointing with the company posting a wider loss and lower revenues. Given the ongoing slide in Incivek revenues, we view the company’s restructuring initiative as a step in the right direction. Meanwhile, Kalydeco revenues should keep growing with launches in Australia and Canada and expansion into additional patient populations.
Vertex Pharma has a series of pipeline related events lined up in the coming quarters and we expect investor focus to remain on pipeline progress.
Vertex Pharma presently carries a Zacks Rank #4 (Sell). At present, companies that look well-positioned include Actelion Ltd. (ALIOF - Snapshot Report) and AMAG Pharmaceuticals, Inc. (AMAG - Snapshot Report). Both are Zacks Rank #1 (Strong Buy) stocks.