Incyte Corporation — Q2 2013 Form 10-Q
Business context and period: Incyte is a biopharmaceutical company focused on oncology and inflammation, with marketed U.S. product JAKAFI (ruxolitinib) and a clinical-stage pipeline. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are to the corresponding 2012 periods unless noted. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2013 | Six months 2013 |
|---|---|---|
| Total revenue | $101.7 million, versus $86.5 million | $172.8 million, versus $122.7 million |
| JAKAFI net product revenue | $54.1 million, versus $29.7 million | $102.4 million, versus $49.0 million |
| JAKAVI royalties | $5.8 million, versus none reported | $11.7 million, versus none reported |
| Contract revenue | $41.7 million, versus $56.7 million | $58.5 million, versus $73.5 million |
| Operating income (loss) | $17.3 million, versus $15.2 million | $13.2 million, versus a loss of $19.0 million |
| Net income (loss) | Loss of $2.6 million, versus income of $4.0 million | Loss of $18.2 million, versus a loss of $41.4 million |
| Operating cash flow | Not separately stated | Provided $32.8 million, versus used $45.7 million |
Q2 interest expense was $10.3 million; six-month interest expense was $22.0 million. A $9.8 million debt-exchange expense in Q2 and the first half contributed to the net losses. Research and development expense increased to $61.0 million in Q2 and $113.7 million for six months; selling, general and administrative expense increased to $23.2 million and $45.5 million, respectively. The filing reports very low product cost of revenue, but notes that capitalized inventory reflects lower average unit costs because pre-approval manufacturing costs were expensed as R&D; the reported product cost should not be treated as a mature, representative margin measure.
At June 30, cash and cash equivalents were $258.2 million and available-for-sale marketable securities were $19.3 million, for total cash, cash equivalents and marketable securities of $277.5 million. Total assets were $334.2 million; current liabilities were $103.0 million. Stockholders’ deficit was $27.8 million. Debt carrying value was $223.8 million, while disclosed aggregate principal debt was $266.3 million: $256.3 million of 4.75% convertible senior notes due 2015 and a $10.0 million Pfizer convertible subordinated note due 2014.
Six-month investing cash use was $16.5 million, including a $15.0 million certificate-of-deposit purchase and $1.4 million of capital expenditures. Financing provided $17.8 million, including $27.6 million from stock-plan issuances, offset by $9.8 million paid in the note exchange.
Material changes and business developments
- JAKAFI revenue more than doubled year over year for both the quarter and first half. Incyte began recognizing product sales when specialty pharmacies received product in Q3 2012, after it gained sufficient experience to estimate returns.
- JAKAVI royalty revenue began contributing in 2013. Contract revenue fell against 2012, when it included a $40.0 million Novartis milestone for EU approval of JAKAVI; 2013 included a $25.0 million Novartis development milestone for initiation of a Phase II c-MET trial.
- In May and June, holders exchanged $143.7 million principal amount of 4.75% senior notes for 16.4 million common shares and $9.8 million cash. The company recorded the cash payment as debt-exchange expense and reclassified the converted notes’ carrying value to additional paid-in capital.
- Common shares outstanding increased to 152.9 million at June 30 from 133.5 million at December 31, 2012. The filing also reports $5.0 million received under a Delaware workforce grant, with up to approximately $6.0 million more expected by year-end; the grant proceeds are recognized over the performance period.
- The pipeline included baricitinib in Phase III for rheumatoid arthritis, ruxolitinib in Phase III for polycythemia vera, and additional clinical-stage programs. Incyte shares development costs for baricitinib rheumatoid arthritis with Lilly under its co-development arrangement.
Outlook, risks and contingencies
Management stated that cash, cash equivalents and marketable securities should meet capital needs for at least the next 12 months. The filing gives no specific revenue, earnings or product-sales guidance. Management expects continued significant R&D and commercialization spending and cautions that losses may continue and profitability may not be achieved or sustained. Future funding needs depend on JAKAFI commercialization, development spending, milestones and royalties, litigation, and other factors; additional financing may be needed, with availability and terms uncertain.
- Key risks include dependence on JAKAFI, reimbursement and pricing pressure, reliance on a limited number of specialty pharmacies, and reliance on third parties and single-source suppliers for manufacturing inputs and product supply.
- Clinical, regulatory, safety, competition, intellectual-property and collaboration risks could delay development, limit approvals or reduce future revenues. Milestones and royalties are contingent and not assured.
- Two securities class-action lawsuits filed in Delaware in March and April 2013 allege misleading statements about the JAKAFI launch. Incyte intends to defend them; it could not estimate any possible loss or range of loss.
- A proposed 15-year lease for approximately 190,000 square feet of laboratory and office space is contingent on landlord financing and build-out conditions; occupancy was expected in 2014 if it became effective.
- Contractual obligations totaled $300.5 million, including $256.3 million senior-note principal and $10.0 million subordinated-note principal. The senior-note indenture restricts certain additional debt, liens and asset dispositions. Management said an immediate, uniform 10% increase in market interest rates would not materially reduce investment fair value.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- Whether JAKAFI’s sales growth and reimbursement access persist, and how estimates for rebates, returns and other sales allowances affect reported net revenue.
- How much future revenue depends on collaboration milestones and royalties, and the timing and development progress of the clinical pipeline.
- The cash-flow outlook relative to R&D and commercialization spending, and the company’s ability to meet debt obligations when the notes mature.
- The outcome and potential financial exposure of the securities litigation, which the filing does not quantify.
- Whether the contingent Delaware facility lease takes effect and whether the expected remaining grant proceeds are received and earned.