Incyte Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; balance-sheet comparisons are against December 31, 2010. Incyte is a drug discovery and development company focused on oncology and inflammation.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $16.8 million | $49.8 million | $48.8 million | $67.1 million |
| Operating income (loss) | $(41.1) million | $13.6 million | $(56.9) million | $(6.2) million |
| Net income (loss) | $(51.9) million | $3.0 million | $(78.4) million | $(32.7) million |
| Basic and diluted EPS | $(0.41) | $0.03 basic; $0.02 diluted | $(0.63) | $(0.27) |
Q2 revenue was almost entirely contract revenue; the filing reports no gross profit or gross margin figure. R&D expense was $46.0 million in Q2 and $82.3 million for the half-year; SG&A was $11.9 million and $22.7 million, respectively. Interest expense was $10.9 million in Q2 and $21.6 million for the half-year.
At June 30, cash and cash equivalents were $359.1 million, marketable securities $5.0 million, and restricted cash and investments $29.0 million. Management reported $364.1 million of available cash, cash equivalents and marketable securities, excluding the restricted escrow. Six-month operating cash use was $75.0 million, compared with $100.1 million of operating cash provided in the first half of 2010; cash declined $58.8 million to $359.1 million.
Total liabilities were $552.9 million and stockholders’ deficit was $136.3 million. Debt principal was $420.0 million: $400.0 million of 4.75% convertible senior notes due 2015 and $20.0 million of Pfizer convertible subordinated notes due 2013 and 2014. The balance-sheet carrying value of convertible notes was $304.5 million. Contractual obligations totaled $517.6 million, including $400.0 million senior-note principal and $85.5 million senior-note interest. The company had $28.5 million escrowed for senior-note interest through October 2012.
Material changes and business developments
- Q2 revenue fell $33.0 million year over year, largely reflecting the $30.0 million Lilly milestone recognized in Q2 2010. First-half 2011 contract revenue included a $15.0 million Novartis milestone recognized in Q1 for INCB28060; first-half 2010 included Lilly and Pfizer milestone revenue.
- R&D expense rose 59% in Q2 year over year, primarily from clinical-trial timing, higher development activity and medical-affairs costs. SG&A rose 58%, mainly from increased headcount and preparation for a potential ruxolitinib launch.
- Ruxolitinib was in Phase III development for myelofibrosis and polycythemia vera; Incyte submitted a U.S. NDA for myelofibrosis in June 2011. Other programs included LY3009104 for rheumatoid arthritis (Phase IIb), INCB28060 for solid tumors (Phase I), and additional early- to mid-stage candidates.
Outlook, commentary and risks
Management expected continued losses for several years and said quarterly losses could fluctuate substantially. It believed available cash, cash equivalents and marketable securities would fund capital needs for at least the next 12 months. Information-product revenue was expected to decline and not be a significant 2011 cash source. Management stated that future funding might require equity, debt or collaborations; additional financing may be unavailable or dilutive, and debt covenants restrict certain financing and asset transactions.
Management expected the FDA might grant priority review for the ruxolitinib NDA; if granted, review could be completed in six months from submission. If approval came on that timeline, Incyte planned to begin U.S. commercialization in late 2011. These were expectations, not assurances. Key risks include clinical or regulatory delays or failure, safety findings, dependence on collaborators and third-party manufacturers, single-source supply exposure and incomplete ruxolitinib process validation, commercialization and reimbursement challenges, competition, intellectual-property disputes, and substantial debt. One customer accounted for 80% of Q2 revenue and 86% of first-half revenue; three customers represented 98% of receivables at quarter-end.
No material change in internal control over financial reporting was reported, and management concluded disclosure controls were effective at the reasonable-assurance level. The 2011 adoption of revised revenue-recognition guidance had no financial-statement impact. No off-balance-sheet arrangements were reported other than those discussed in the filing.
Most important facts for investors to verify
- FDA review status, any priority-review decision, and the eventual ruxolitinib NDA outcome and launch timing.
- Cash burn, collaboration milestone receipts, and whether the stated 12-month liquidity outlook remains adequate as development and commercialization spending rises.
- Debt service and refinancing capacity, including the $400 million senior notes due 2015 and applicable indenture restrictions.
- Progress on clinical trials, manufacturing validation and qualifying a second ruxolitinib API supplier.
- Revenue concentration and the timing and achievement of future collaboration milestones and royalties.