Cash Concerns at Vertex

The past few months have been good to Vertex Pharmaceuticals (Nasdaq: VRTX). The company signed a substantial deal with Income Investor recommendation Merck (NYSE: MRK) on the development of cancer drug VX-680. On the commercialization front, the HIV protease inhibitor Telzir from Vertex and partner GlaxoSmithKline (NYSE: GSK) was approved in Europe. The EU approval follows the drug's approval late last year in the U.S. market, where it is marketed as Lexiva.

Under the partnership with Glaxo, Vertex receives royalties on the sales of HIV drugs Lexiva and Agenerase. Yesterday, Vertex reported second-quarter earnings and released the royalty revenue numbers. Through the first two quarters, Vertex received $6.6 million in royalty payments on the sale of these two drugs. For the full year, the company gave guidance of royalty revenue of $15 million to $18 million, on top of $75 million in research and development funding from various partnerships.

The royalty revenue is nice, and I expect it to grow, as Lexiva is a new product with several years of growth ahead of it. However, the royalties have to be put in context with Vertex's expecting a net loss of $140 million to $150 million this year. Losses of that magnitude are not going to vanish in the future despite increasing royalty payments. As investors, if we are one day looking for Vertex to become an operation that is sustained on profits and not financing, we have to turn to its internal pipeline to see what's on the horizon.

While I think there are a few interesting drug programs in the pipeline, especially merimepodib and VX-950 for the treatment of hepatitis C, the reality is that these drugs remain a long way from the market. During yesterday's conference call, management said its timeline for filing for approval of merimepodib with the Food and Drug Administration is 2007. If all goes well, the most advanced drug in Vertex's pipeline would launch in about four years.

That timeline is a source of some nervousness about the company's balance sheet. While Vertex has $460 million cash, that is expected to drop to somewhere north of $350 million by year-end. That may seem like a lot, but with a high burn rate and $162 million in convertible notes due in 2007, a few hundred million in cash just doesn't go as far as it used to. Because there won't be a product launch before this time, I'm expecting to see some financing activity at some point.

For additional articles on biotech companies, see:

• Patience With MedImmune
• A Millennium Pharmaceuticals Mix
• Drug Fails, Get Sued

Fool contributor Charly Travers owns a cat, a dog, and shares of Vertex Pharmaceuticals.