Incyte Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results; amounts below are in U.S. dollars unless stated otherwise.
Business context
Incyte is a biopharmaceutical company with one operating segment. Its commercial products were JAKAFI (U.S. ruxolitinib) and ICLUSIG (European ponatinib). Revenue also included royalties on Novartis’s JAKAVI sales and collaboration milestones. JAKAFI remained the principal revenue source.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $326.4 million | $246.3 million | $710.5 million | $509.8 million |
| Product revenue | $291.7 million | $212.1 million | $556.5 million | $395.4 million |
| Operating income (loss) | $7.2 million | $44.6 million | $(126.1) million | $80.6 million |
| Net income (loss) | $(12.5) million | $34.4 million | $(199.6) million | $58.5 million |
| Diluted earnings (loss) per share | $(0.06) | $0.18 | $(1.00) | $0.30 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(56.8) million | $115.1 million |
- Q2 revenue rose 32.5%; six-month revenue rose 39.4%. JAKAFI revenue was $276.0 million in Q2 and $527.1 million for six months. Management attributed JAKAFI growth to higher volume and price. ICLUSIG revenue was $15.7 million and $29.4 million, respectively; 2016 comparisons included only sales after the June 2016 acquisition.
- Product royalties were $34.8 million for Q2 and $64.0 million for six months, primarily JAKAVI royalties. Contract revenue was zero in Q2 and $90.0 million for six months, including a $65.0 million Lilly milestone for European baricitinib approval and a $25.0 million Novartis GVHD milestone.
- Q2 operating margin was approximately 2.2%; six-month operating margin was approximately negative 17.7%. Cost of product revenue was $20.3 million in Q2 and $35.1 million for six months. The filing does not provide an overall gross-margin figure.
- Research and development expense increased to $201.8 million in Q2 and $609.8 million for six months, from $120.3 million and $277.1 million. The six-month increase included $209.1 million of charges associated with the Calithera, Merus and amended Agenus arrangements, alongside higher pipeline-development spending.
- Net results also reflected six-month expense of $54.9 million related to senior-note conversions and a $25.4 million unrealized loss on long-term investments. The Q2 unrealized investment loss was $19.6 million, primarily reflecting Merus’s share-price decline.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $451.8 million and current marketable securities were $156.9 million. Incyte reported $608.6 million of available cash, cash equivalents and marketable securities. Long-term investments were an additional $144.4 million.
- Cash and cash equivalents declined $200.6 million from year-end 2016. Six-month investing cash use was $176.1 million, including $123.9 million of long-term investment purchases and $51.5 million of capital expenditures. Operating activities used $56.8 million, which management attributed mainly to collaboration-related payments and working-capital changes.
- Convertible-note carrying value fell from $651.5 million at December 31, 2016 to $23.4 million at June 30, 2017 after exchanges involving $722.8 million of aggregate principal. The exchanges included shares and cash; common shares outstanding increased from 188.8 million to 205.6 million. The remaining notes became convertible on July 1, 2017, and management intended to settle conversions in shares.
- Total assets were $1.64 billion and total liabilities were $612.6 million. Incyte stated that available liquidity and operating cash flow were expected to fund capital needs for at least the next 12 months. Contractual obligations totaled $57.4 million, principally leases and remaining note principal and interest.
Changes, outlook and material risks
- Growth in product and royalty revenue was offset by sharply higher R&D spending and investment-related and note-conversion charges, driving a six-month shift from profit to loss and negative operating cash flow.
- In July 2017, Japan approved baricitinib for rheumatoid arthritis; Incyte expected to recognize a $15.0 million milestone in Q3. The FDA had issued a complete response letter for the U.S. application, requesting additional dosing and safety data. Incyte and Lilly said resubmission would be delayed by at least 18 months and were evaluating an additional study.
- Management provided no quantified revenue or earnings forecast. It cited continued investment in research, development and commercialization and said spending and cash needs could vary with clinical progress, strategic agreements, investments and other factors.
- Key business risks include clinical-trial failure or delay, regulatory and safety outcomes, reimbursement and pricing pressure, reliance on collaborators and third-party manufacturers, and competition. JAKAFI faces a generic patent challenge: Incyte received a Paragraph IV notice concerning an ANDA and stated that a loss was not then probable or estimable.
- Revenue depends substantially on JAKAFI and a limited number of customers: four customers represented 46% of accounts receivable at June 30. Government rebates and chargebacks may rise with price increases above inflation and may reduce reported net revenue. The filing also identifies supplier concentration and potential investment-value volatility.
- Incyte reported effective disclosure controls and no material change in internal control over financial reporting during the six-month period.
Important facts for investors to verify
- JAKAFI sales growth, pricing, volume trends, payer coverage and the effect of rebates, chargebacks and customer concentration.
- R&D spending, collaboration commitments and cash burn, including whether operating cash flow improves after the substantial 2017 partnership-related charges.
- The path and timing for baricitinib’s U.S. application, including FDA-required data and the expected timing of any resubmission.
- Further conversions or settlement of the remaining senior notes, associated dilution and the resulting share count.
- Changes in the fair value of Incyte’s strategic equity investments and in ARIAD-related contingent consideration.
- Developments in the JAKAFI generic patent challenge and any resulting effect on exclusivity or commercialization.