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4Q Revenues Decline at Vertex

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Vertex Pharmaceuticals Inc. (VRTX - Free Report) posted a loss of 9 cents per share (including stock-based compensation expense) in the fourth quarter of 2012, well below the year-ago earnings of 73 cents per share. Fourth quarter 2012 loss was, however, narrower than the Zacks Consensus Estimate of a loss of 13 cents.

Excluding the impact of stock-based compensation expense, fourth quarter 2012 earnings were 4 cents, well below the year-ago earnings of 86 cents.

Revenues for the reported quarter fell 40.7% to $334 million. Revenues were above the Zacks Consensus Estimate of $312 million. We note that the year-ago quarter included a $65 million milestone payment from Mitsubishi related to the approval and launch of Telavic in Japan.

Full year earnings (including stock-based compensation expense) were 64 cents per share compared to the year-ago loss of 48 cents. Excluding the impact of stock-based compensation expense, 2012 earnings were $1.18, well above the year-ago earnings of 8 cents. Revenues increased 8.3% to $1.5 billion in 2012. Revenues were in line with the Zacks Consensus Estimate.

The Quarter in Details

Vertex’ fourth quarter revenues consisted of revenues earned from the sale of Incivek ($222.8 million), Kalydeco ($58.5 million), royalty revenue ($36.8 million) and collaborative revenues ($15.9 million).

While Incivek revenues declined 51.2% from the year-ago quarter, revenues declined 12.4% on a sequential basis. Revenues continue to be affected by a fewer number of new patients seeking treatment and the warehousing effect. Patients are basically deferring treatment and waiting for new and more effective drugs to become available.

Royalty revenues for the quarter consisted of revenues received from partner Johnson & Johnson (JNJ - Free Report) on Incivo sales in Europe.

Vertex has exclusive US commercialization rights to Incivek and has agreements with Johnson & Johnson and Mitsubishi Tanabe Pharma for the commercialization of the drug outside the US. While Johnson & Johnson is responsible for the commercialization of Incivek outside North America and the Far East, Mitsubishi Pharma markets it in certain areas of the Far East including Japan.

While Incivek gained European approval under the trade name Incivo during the third quarter of 2011, the product is marketed in Japan as Telavic.

Research and development (R&D) expenses for the quarter increased 14.3% to $213.1 million, mainly due to continued investment in development activities.

Fourth quarter 2012 selling, general and administrative (SG&A) expenses declined 9.4% to $110.5 million.

2013 Revenues Will Decline

Vertex expects 2013 revenues to decline to $1.10 - $1.25 billion. Guidance includes Kalydeco revenues of $280 - $320 million. Vertex said that Kalydeco growth depends on the completion of reimbursement discussions in ex-US countries.

Vertex expects first quarter 2013 Kalydeco revenues to be similar to fourth quarter 2012 Kalydeco revenues – Kalydeco revenues should start growing from the second quarter with the completion of reimbursement discussions in EU countries.

Meanwhile, combined Incivek revenues, Incivo royalties and collaborative and other royalty revenues are expected in the range of $820 million to $930 million. Incivek revenues will most likely continue to decline sequentially. Vertex, which is seeing treatment rates change in the hepatitis C virus (HCV) market, expects a decline in the number of patients initiating treatment. Incivo royalty is expected to increase slightly in 2013.

Operating expenses (excluding stock-based compensation expense and Alios expenses) are expected in the range of $1.09 billion to $1.15 billion. This includes R&D expenses of $750 million to $790 million and SG&A spend of $340 million to $360 million.

This implies higher R&D expenses and lower SG&A expenses in 2013 compared to 2012. The lower SG&A spend reflects reduced marketing expenses for Incivek and Kalydeco in the US the impact of cost reduction initiatives.

Our View

Vertex’ fourth quarter results were better-than-expected. However, we expect Incivek revenues to continue being affected by warehousing and a slowdown in new patient additions. Meanwhile, Kalydeco revenues should pick up from 2013 when additional launches take place in the EU.

With Vertex working on expanding Kalydeco’s label and strengthening its HCV portfolio, we expect investor focus to remain on pipeline progress. The successful development of the Kalydeco and VX-809 combination would expand the market for Kalydeco significantly.

Vertex currently carries a Zacks Rank #4 (Sell). Pharma companies that currently look more attractive include Medivation Inc. and Targacept, Inc. . Both are Zacks Rank #1 (Strong Buy) stocks.

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