SEC Comment Letter for VERTEX PHARMACEUTICALS (VRTX) — Aug 20, 2012
VERTEX PHARMACEUTICALS INC / MA (VRTX) (CIK 0000875320)
Date: Aug. 20, 2012 · CIK: 0000875320 · Accession: 0000000000-12-045151
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 000-19319
Letter
August 20, 2012 Via E -mail Ian F. Smith Executive V ice President , And Chief Financial Officer Vertex Pharmaceuticals I ncorporated 130 Waverly Street Cambridge, Massachusetts 02139
Re: Vertex Pharmaceuticals Incorporated Form 10-K for the Fiscal Year Ended December 31 , 201 1 Filed February 22, 201 2 Form 10 -Q for the Quarterly Period Ended March 31, 2012 Filed May 10, 2012 File No. 000-19319
Dear Mr. Smith:
We have reviewed your July 11, 2012 response to our June 26, 2012 letter and have the following comments.
Please respond to this letter within 10 business days by providing the requested information, or by advising us when you will provide the requested response . If you do not believe a comment applies to your facts and circumstances, please tell us why in your response. Please furnish us a letter on EDGAR under the form type label CORRESP that key s your responses to our comments.
After reviewing the information you provide in response to th ese comment s, we may have additional comments.
Form 10 -K for the Fiscal Year Ended December 31, 2011 Item 7. Management’s Discussion and Analysis of Financial Co ndition and Results of Operations
Results Of Operations Operating Costs and Expenses Cost of product revenues, page 63
1. Refer to your response to our comment s two and five . Please t ell us how you considered the guidance in ASC 730 -10-15-4 a. through e. in determining that classifying the drug supply costs incurred prior to 2011totaling $203.8 million as research and development expenses in your statements of operations complies with GAAP.
Ian F. Smith Vertex Pharmaceuticals Incorporated August 20, 2012 Page 2
2. Refer to your response to our comment three. In your response you state that, as of January 1, 2011, you had expensed , in periods prior to 2011, $84 million in INCIVEK inventory which you refer to as “Zero Cost Inventory” . You state that these Inventory costs were charged to R&D expense in your Statements o f Operations for periods prior to 2011 because you had not received FDA approval to commercialize INCIVEK until May 2011. Further you state that this inventory is to be sold to your customers when they reach the finished goods stage and that the future Re venue from Product Sales of this $84 million in “Zero Cost Inventory” approximates $1.8 billion. Finally you stated that this inventory should be sold by the end of 2013 although your table on page 6 indicates that there would still be $10 million in inve ntory at December 31, 2013 . We have the following additional comments: To the extent that costs included in the $84 million are not part of the drug supply costs referred to in comment one above, t ell us how you considered the guidance in ASC 730 -10-15-4 a. through e. in determining that classifying the se costs incurred prior to 2011 as research and development expenses in your statements of operations complies with GAAP. Tell us why a material portion of the $112.4 million and $126.9 million Inventor y at December 31, 2011 and March 31, 2012 should not be classified as “non - current” assets since your accounting is on a FIFO basis and you estimate that you will still have over $10 million of “Zero Cost Inventory” unsold at December 31, 2013. Tell us wha t the shelf life is for INCIVEK and why you believe you will be able to realize inventory held at December 31, 2011, March 31, 2012 and June 30, 2012.
3. We have the following comments regarding the $78 million reserve you recorded for the quarterly period e nded June 30, 2012 “to reserve against the potential for excess INCIVEK inventory ”: Tell us how you considered the guidance in ASC 330 -10-50-2 which indicate s that it would be desirable to separately identi fy the $78 million charge in your statement of operations . Please clarify what is meant by “ reserve against the potential for excess INCIVEK inventory ” to indicate whether and, if so, to what extent it refer s to the carrying value of inventory or to expected future sales returns under your policy of allowing products to be returned up to twelve months after the labeled expiration date. Tell us if you believe there is excess inventory in your distribution channel and whether you expect to incur a material increase in INCIVEK product returns. Describe th e events and timeline leading to your decision to record the $78 million reserve in the quarter ended June 30, 2012 . Provide us analyses demonstrating why a similar charge was not necessary at either December 31, 2011 and/or at March 31, 2012 . In your r esponse, tell us the facts and circumstances that existed before issuing the financial statements for
Ian F. Smith Vertex Pharmaceuticals Incorporated August 20, 2012 Page 3
those dates that supported your assertion that inventory amounts reflected on the December 31, 2011 and March 31, 2012 balance sheets w ere stated at lower of cost or market. In doing so, please address your statement in the April 26, 2012 “Earnings Call” that INCIVEK Revenues of $357 million, down from $456.8 million in the 4th Quarter of 2011, were “affected by a reduction of approximately $22 million in inventory levels by wholesalers between December 31, 2011, and March 31, 2012.”
4. On page 41 of your Form 10 -Q for the period ended June 30, 2012, you state “we recorded within cost of product revenues a $78.0 million charge for excess and obsolete INCIVE K inventories, which included an accrual for estimated expenses related to our non-cancelable purchase commitments. ” We have the following comments: Please name these “non -cancelable” purchase commitments and provide us a description of the key terms and commitments included therein. Clarify if they contain mandatory minimum periodic purchases of product and, if so, summarize those commitments and explain why they were not included in your Form 10 -K disclosure and Contractual Obligations table. Describe th e source, nature and amount of the “accrual for estimated expenses” referred to above.
Please contact James Peklenk, Staff Accountant, at (202) 551 -3661 or Lisa Vanjoske, Assistant Chief Accountant, at (202) 551 -3614 , if you have any questions regarding the comment s. In this regard, do not hesitate to contact me at (202) 551 -3679.
Sincerely,
/s/ Jim B. Rosenberg
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August 20, 2012 Via E -mail Ian F. Smith Executive V ice President , And Chief Financial Officer Vertex Pharmaceuticals I ncorporated 130 Waverly Street Cambridge, Massachusetts 02139 Re: Vertex Pharmaceuticals Incorporated Form 10-K for the Fiscal Year Ended December 31 , 201 1 Filed February 22, 201 2 Form 10 -Q for the Quarterly Period Ended March 31, 2012 Filed May 10, 2012 File No. 000-19319 Dear Mr. Smith: We have reviewed your July 11, 2012 response to our June 26, 2012 letter and have the following comments. Please respond to this letter within 10 business days by providing the requested information, or by advising us when you will provide the requested response . If you do not believe a comment applies to your facts and circumstances, please tell us why in your response. Please furnish us a letter on EDGAR under the form type label CORRESP that key s your responses to our comments. After reviewing the information you provide in response to th ese comment s, we may have additional comments. Form 10 -K for the Fiscal Year Ended December 31, 2011 Item 7. Management’s Discussion and Analysis of Financial Co ndition and Results of Operations Results Of Operations Operating Costs and Expenses Cost of product revenues, page 63 1. Refer to your response to our comment s two and five . Please t ell us how you considered the guidance in ASC 730 -10-15-4 a. through e. in determining that classifying the drug supply costs incurred prior to 2011totaling $203.8 million as research and development expenses in your statements of operations complies with GAAP. 5 Ian F. Smith Vertex Pharmaceuticals Incorporated August 20, 2012 Page 2 2. Refer to your response to our comment three. In your response you state that, as of January 1, 2011, you had expensed , in periods prior to 2011, $84 million in INCIVEK inventory which you refer to as “Zero Cost Inventory” . You state that these Inventory costs were charged to R&D expense in your Statements o f Operations for periods prior to 2011 because you had not received FDA approval to commercialize INCIVEK until May 2011. Further you state that this inventory is to be sold to your customers when they reach the finished goods stage and that the future Re venue from Product Sales of this $84 million in “Zero Cost Inventory” approximates $1.8 billion. Finally you stated that this inventory should be sold by the end of 2013 although your table on page 6 indicates that there would still be $10 million in inve ntory at December 31, 2013 . We have the following additional comments: To the extent that costs included in the $84 million are not part of the drug supply costs referred to in comment one above, t ell us how you considered the guidance in ASC 730 -10-15-4 a. through e. in determining that classifying the se costs incurred prior to 2011 as research and development expenses in your statements of operations complies with GAAP. Tell us why a material portion of the $112.4 million and $126.9 million Inventor y at December 31, 2011 and March 31, 2012 should not be classified as “non - current” assets since your accounting is on a FIFO basis and you estimate that you will still have over $10 million of “Zero Cost Inventory” unsold at December 31, 2013. Tell us wha t the shelf life is for INCIVEK and why you believe you will be able to realize inventory held at December 31, 2011, March 31, 2012 and June 30, 2012. 3. We have the following comments regarding the $78 million reserve you recorded for the quarterly period e nded June 30, 2012 “to reserve against the potential for excess INCIVEK inventory ”: Tell us how you considered the guidance in ASC 330 -10-50-2 which indicate s that it would be desirable to separately identi fy the $78 million charge in your statement of operations . Please clarify what is meant by “ reserve against the potential for excess INCIVEK inventory ” to indicate whether and, if so, to what extent it refer s to the carrying value of inventory or to expected future sales returns under your policy of allowing products to be returned up to twelve months after the labeled expiration date. Tell us if you believe there is excess inventory in your distribution channel and whether you expect to incur a material increase in INCIVEK product returns. Describe th e events and timeline leading to your decision to record the $78 million reserve in the quarter ended June 30, 2012 . Provide us analyses demonstrating why a similar charge was not necessary at either December 31, 2011 and/or at March 31, 2012 . In your r esponse, tell us the facts and circumstances that existed before issuing the financial statements for 5 Ian F. Smith Vertex Pharmaceuticals Incorporated August 20, 2012 Page 3 those dates that supported your assertion that inventory amounts reflected on the December 31, 2011 and March 31, 2012 balance sheets w ere stated at lower of cost or market. In doing so, please address your statement in the April 26, 2012 “Earnings Call” that INCIVEK Revenues of $357 million, down from $456.8 million in the 4th Quarter of 2011, were “affected by a reduction of approximately $22 million in inventory levels by wholesalers between December 31, 2011, and March 31, 2012.” 4. On page 41 of your Form 10 -Q for the period ended June 30, 2012, you state “we recorded within cost of product revenues a $78.0 million charge for excess and obsolete INCIVE K inventories, which included an accrual for estimated expenses related to our non-cancelable purchase commitments. ” We have the following comments: Please name these “non -cancelable” purchase commitments and provide us a description of the key terms and commitments included therein. Clarify if they contain mandatory minimum periodic purchases of product and, if so, summarize those commitments and explain why they were not included in your Form 10 -K disclosure and Contractual Obligations table. Describe th e source, nature and amount of the “accrual for estimated expenses” referred to above. Please contact James Peklenk, Staff Accountant, at (202) 551 -3661 or Lisa Vanjoske, Assistant Chief Accountant, at (202) 551 -3614 , if you have any questions regarding the comment s. In this regard, do not hesitate to contact me at (202) 551 -3679. Sincerely, /s/ Jim B. Rosenberg Jim B. Rosenberg Senior Assistant Chief Accountant