Incyte Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Incyte is a biopharmaceutical company with commercial products JAKAFI and ICLUSIG and a pipeline spanning oncology and other therapeutic areas. PEMAZYRE was approved by the FDA in April 2020, after quarter-end.
Financial results and liquidity
- Revenue: $568.5 million, up 14.2% from $497.9 million in Q1 2019. Product revenue was $486.7 million, including JAKAFI revenue of $459.5 million and ICLUSIG revenue of $27.2 million. Royalties rose to $81.8 million from $61.6 million. No milestone or contract revenue was recorded, compared with $40.0 million in Q1 2019.
- Earnings: Operating loss was $664.0 million versus operating income of $74.1 million. Net loss was $720.6 million, or $3.33 per diluted share, compared with net income of $102.3 million, or $0.47 per diluted share.
- Costs and margins: Cost of product revenue was $27.3 million; calculated product gross margin was approximately 94.4%. Research and development expense rose to $1.085 billion from $270.5 million, principally reflecting the MorphoSys transaction. SG&A declined to $111.1 million from $124.0 million.
- Unusual items: R&D included the $750.0 million MorphoSys upfront payment and $54.5 million attributed to the premium paid for MorphoSys shares. A $48.1 million unrealized loss on long-term investments also weighed on results, versus a $21.0 million gain in Q1 2019.
- Cash flow: Operating cash outflow was $683.4 million, versus $155.7 million provided in Q1 2019. Incyte attributed the decline mainly to MorphoSys-related cash outflows and working-capital changes. Investing cash outflow was $108.6 million; financing cash inflow was $2.5 million. Cash, cash equivalents, restricted cash and investments declined by $787.9 million during the quarter.
- Liquidity and debt: Cash and cash equivalents were $1.043 billion and current marketable securities were $259.4 million at quarter-end; management reported $1.3 billion of available cash, cash equivalents and marketable securities. Total liabilities were $814.7 million. The $18.5 million carrying amount of 1.25% convertible notes was current and the notes mature November 15, 2020. Lease liabilities totaled $32.9 million; acquisition-related contingent consideration was $275.0 million.
Material changes versus Q1 2019
- Product revenue increased 22.8%, led by JAKAFI, whose sales growth reflected higher volume and, to a lesser extent, price. Royalty revenue increased 32.7%.
- The absence of the prior-year $40.0 million Innovent milestone partly offset product and royalty growth.
- The MorphoSys collaboration and related investment drove a substantial, largely one-time increase in R&D expense and cash use. Its terms include a 55% Incyte share of specified development costs, shared U.S. commercialization profits and losses, and potential future milestones and royalties.
- Investment fair-value movements reversed from gains to losses, contributing to the change from net income to a large quarterly net loss.
Outlook, risks and other notable matters
- Outlook: The filing provides no specific revenue or earnings guidance. Management said existing cash, cash equivalents, marketable securities and operating cash flow should meet capital needs for the foreseeable future, while noting that requirements depend on development, commercialization, facilities and strategic transactions.
- COVID-19: Incyte reported no material effect on commercial operations or manufacturing supply chain to date, but warned that clinical-trial recruitment, laboratory work, sales activity and operations could be disrupted. In April, it initiated a Phase III ruxolitinib COVID-19 study and planned another; these developments were after quarter-end.
- Pipeline and product developments: April FDA approval of PEMAZYRE was a subsequent event. Itacitinib failed the primary endpoint in a Phase III steroid-naïve acute GVHD trial in January 2020. Results from the Phase III ruxolitinib chronic GVHD study were expected in the second half of 2020.
- Legal contingency: A DOJ inquiry and unsealed qui tam action concern speaker programs and patient assistance programs. Incyte said it could not predict the outcome or reasonably estimate a possible loss; no reserve was recorded.
- Other risks: JAKAFI revenue concentration, pricing and reimbursement pressure, product and clinical-development uncertainty, reliance on limited suppliers and distribution channels, volatility in strategic equity investments, and potential generic competition for JAKAFI. Incyte also disclosed that JAKAFI-related patent challenges remain a risk.
Key facts for investors to verify
- How much of the quarterly loss and cash outflow reflects the MorphoSys upfront payment and related share-purchase premium, and what recurring collaboration costs follow.
- Whether JAKAFI sales and royalty growth persist, considering customer purchasing patterns, rising sales allowances and the Medicare Part D coverage-gap change.
- The commercial uptake and reimbursement trajectory for newly approved PEMAZYRE, and progress toward confirmatory evidence required following accelerated approval.
- COVID-19 effects on clinical-trial enrollment, research operations, product demand and supply continuity.
- Developments and potential exposure in the DOJ inquiry and qui tam action, for which the filing gives no estimable loss range.
- Repayment or conversion of the notes due in November 2020, and future liquidity needs amid continued R&D and facility spending.