Incyte Corporation (Form 10-K) — Fiscal Year Ended December 31, 2017
Business context and reporting period
Incyte is a biopharmaceutical company focused on developing and commercializing therapeutics. This annual filing covers the year ended December 31, 2017; quarterly figures below include the quarter ended December 31, 2017. Its marketed products were JAKAFI in the United States and ICLUSIG in Europe and select markets. JAKAFI was the principal revenue driver. The company also reported royalties and milestone revenue from collaboration partners.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $1.536 billion | $1.106 billion |
| Product revenue | $1.200 billion | $882.4 million |
| Product royalty revenue | $160.8 million | $110.7 million |
| Milestone and contract revenue | $175.0 million | $112.5 million |
| Operating income (loss) | $(243.7) million | $145.0 million |
| Net income (loss) | $(313.1) million | $104.2 million |
| Diluted earnings (loss) per share | $(1.53) | $0.54 |
| Cash, cash equivalents and marketable securities at year-end | $1.170 billion | $808.5 million |
| Cash from (used in) operating activities | $(93.0) million | $304.8 million |
- JAKAFI revenue was $1.133 billion, up from $852.8 million; management attributed the increase to $204.6 million of volume growth and $76.0 million of price increases. ICLUSIG revenue was $66.9 million, versus $29.6 million in 2016, when sales began following the acquisition.
- Cost of product revenue was $79.5 million. This implies an approximate product gross margin of 93.4% (product revenue less reported product cost, divided by product revenue); the filing does not present this margin as a reported metric.
- Research and development expense increased to $1.326 billion from $581.9 million, including $359.1 million of charges associated with new or amended collaboration agreements and increased pipeline development costs. Selling, general and administrative expense rose to $366.4 million from $303.3 million.
- Operating cash use reflected, among other things, payments to collaboration partners and working-capital changes. Investing cash use was $350.0 million, including $111.0 million of capital expenditures and $123.9 million of long-term investments. Financing provided $690.2 million, principally from a $649.4 million net public-offering raise.
- Year-end current assets were $1.505 billion and current liabilities $375.4 million; working capital was $1.129 billion. Total assets were $2.303 billion and total liabilities $672.0 million.
- Convertible senior notes had a $24.0 million carrying amount at year-end (contractual principal obligations totaled $26.8 million). Significant note exchanges for common shares during 2017 reduced the reported note balance. The 2018 Notes were classified as current; the 2020 Notes remained long-term.
Material changes versus the prior comparable period
- Revenue increased approximately 39%, driven by JAKAFI growth, a full year of ICLUSIG sales, higher royalties, and $62.5 million more milestone and contract revenue.
- The company moved from $104.2 million of net income in 2016 to a $313.1 million net loss in 2017. The principal operating change was a $744.5 million increase in R&D expense; non-operating items included $54.9 million of expense related to senior-note conversions and $24.3 million of unrealized investment losses.
- Operating cash flow swung from $304.8 million provided to $93.0 million used. Cash and marketable securities nevertheless rose, supported chiefly by the public equity offering.
- Long-term investments increased to $134.4 million from $32.0 million, partly reflecting investments in collaborators Agenus and Merus. The company recorded unrealized losses on those investments.
Outlook, commentary, risks and unusual items
- Management stated that cash, cash equivalents, marketable securities and operating cash flow were expected to meet capital needs for at least the next 12 months. No specific revenue, earnings or cash-flow guidance was provided.
- Management expected continued investment in discovery and development and increased commercial infrastructure spending as candidates advance. Development outcomes, approval timing and future milestones remain uncertain.
- Baricitinib was approved in Europe and Japan for rheumatoid arthritis, but the FDA issued a complete response letter requesting additional dose and safety data. Lilly resubmitted the application in December 2017, beginning a new six-month review cycle.
- Incyte’s epacadostat combination programs were in multiple Phase III trials at the reporting date. The filing emphasizes the risks of clinical-trial failure, regulatory delays, safety findings and reliance on collaboration partners.
- The acquired ICLUSIG second-line OPTIC-2L study was discontinued in 2017. Incyte recorded a $12.0 million impairment of acquired in-process R&D and a $24.0 million contingent-consideration benefit associated with lower expected future royalties; the total annual fair-value change in contingent consideration was a $7.7 million expense.
- The 2017 results included provisional tax effects from the Tax Cuts and Jobs Act; management said the accounting would be completed after further analysis and filing of the 2017 tax return. A full valuation allowance remained against U.S. and Swiss net deferred tax assets.
- Key risks include dependence on JAKAFI, reimbursement and pricing pressure, generic challenges to JAKAFI patents, clinical and regulatory uncertainty, reliance on third-party manufacturers and collaborators, and the possibility that substantial R&D spending will not yield approved products. The filing also cites concentration among JAKAFI distribution customers and supply-chain exposure, including Chinese sources for certain ruxolitinib raw materials.
- After year-end, Incyte and Hengrui agreed to terminate their collaboration; Incyte also entered a Syros research collaboration and related stock purchase. These are subsequent events, not 2017 operating results.
Most important facts for investors to verify
- Whether JAKAFI sales growth, pricing and reimbursement remain sufficient to support revenue growth, and how much sales allowances may rise.
- Cash burn and the sustainability of the $1.170 billion liquidity position given elevated R&D spending, capital expenditure and collaboration commitments.
- FDA progress on baricitinib and clinical outcomes for the major pipeline programs, especially Phase III epacadostat combinations and ruxolitinib GVHD trials.
- The status and potential impact of the generic JAKAFI challenge, patent protection, and ICLUSIG safety, regulatory and commercial performance.
- Potential future milestone, royalty and co-development obligations, including contingent consideration and obligations under newly signed collaborations.