Here's Why Vertex Pharmaceuticals Earnings Are Growing Faster Than Revenue

Vertex Pharmaceuticals' (VRTX -1.34%) launch of its newest cystic fibrosis drug, Symdeko, continues to progress well, driving second-quarter revenue growth. With much of the revenue falling to the bottom line, earnings are growing even faster.

Vertex Pharmaceuticals results: The raw numbers

Data source: Vertex Pharmaceuticals.

What happened with Vertex Pharmaceuticals this quarter?

• Revenue from the company's cystic fibrosis drugs was actually up 46% year over year; one-time collaboration revenue in the year-ago quarter dragged down the overall revenue number.
• Sales of its newest cystic fibrosis drug, Symdeko came in at $186 million. Some of the sales are coming from patients switching from Orkambi, which was down a little year over year, but management noted that the strong start is also due to patients who have never been on a Vertex treatment before or who were taking Orkambi previously but had discontinued because the benefits didn't justify the side effects.
• Sales of Kalydeco, Vertex's oldest drug, jumped 33% year over year as the company has gained approval to treat more cystic fibrosis.
• The previously disclosed phase 3 trials for Vertex's next-generation correctors VX-659 and VX-445 being tested as triple combinations with the two medications that make up Symdeko are progressing rapidly with enrolment expected to be complete in the second half of this year.
• As with many biotechs that have large one-time items in their GAAP results, adjusted earnings are the best way to compare the year-over-year results. Earnings are growing substantially faster than revenue because of the economies of scale -- its second and third cystic fibrosis drugs don't require a new sales force, for example.

Image source: Getty Images.

What management had to say

"The VX-659 and VX-445 programs have moved exceptionally fast, advancing from first synthesis of the molecules all the way to late-stage development in a little over two years," Jeffrey Leiden, Vertex's chairman, CEO and president, said of the next-generation correctors. Not only does the speed increase the time to revenue generation, but it decreases the development costs as well.

Leiden also highlighted the company's potential to get drugs on the market through licensing or acquisition deals, often referred to as business development (BD):

Obviously, we're also accumulating a lot of capital and that gives us a lot of opportunities to invest externally more and more each quarter, as you're seeing. And so, we are seeing our BD efforts ramp up pretty significantly. As I've said before, are we going to go out and buy short-term revenue? No, we really don't need to, but we certainly want to supplement our pipeline and invest in other kinds of innovation.

Looking forward

With Symdeko's solid start, management felt comfortable raising 2018 guidance for cystic fibrosis drug sales to a range of $2.9 billion to $3 billion, up from previous guidance of between $2.65 billion and $2.8 billion. Management still isn't giving earnings guidance, but noted that it still expects to spend the same amount on research and development and on selling, general and administrative expenses, so most of that increase should fall to the earnings line.

Looking to the pipeline for the next growth prospect beyond the triple combinations, Vertex and partner CRISPR Therapeutics (CRSP -0.60%) are looking to move CTX001, the first gene-editing treatment for both sickle cell disease and beta-thalassemia using CRISPR-Cas9 technology, into the clinic later this year. The companies already have approval to run the trial in Canada and the U.K., but the Food and Drug Administration still has questions before it's willing to sign off on the trial starting in the U.S.