Incyte Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Incyte is a biopharmaceutical company whose marketed U.S. product is JAKAFI (ruxolitinib); it also earns royalties on ex-U.S. JAKAVI sales and revenue from collaborations.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 or comparison |
|---|---|---|
| Total revenue | $263.5 million | $159.3 million; up 65% |
| U.S. product revenue, net | $183.3 million | $115.3 million; up 59%, from volume and price increases |
| Product royalty revenue | $21.9 million | $15.7 million |
| Contract revenue | $58.2 million | $28.2 million |
| Operating expenses | $227.4 million | $166.2 million |
| Operating income (loss) | $36.0 million | $(6.9) million |
| Net income (loss) | $24.0 million | $(18.4) million |
| Diluted EPS | $0.12 | $(0.11) |
| Operating cash flow | $97.5 million provided | $4.6 million used |
| Cash and cash equivalents | $657.6 million | $521.4 million at Dec. 31, 2015 |
| Marketable securities | $153.1 million | $186.3 million at Dec. 31, 2015 |
| Total assets | $1,103.9 million | $1,007.4 million at Dec. 31, 2015 |
| Convertible notes, carrying amount | $627.6 million | $619.9 million at Dec. 31, 2015 |
| Convertible notes, principal | $749.8 million | Due 2018 and 2020 |
Product revenue less cost of product revenue implies a product gross margin of approximately 96.7%; this calculation excludes research and development and selling, general and administrative expenses. Operating margin was approximately 13.7%, versus a loss in the prior-year quarter. Cash, cash equivalents and marketable securities totaled $810.7 million. The company reported total liabilities of $876.2 million and stockholders’ equity of $227.7 million.
Material changes and notable items
- Revenue growth reflected higher JAKAFI sales and JAKAVI royalties, as well as a larger collaboration contribution. The $58.2 million of contract revenue included $55 million of Lilly milestones tied to U.S. and European regulatory submissions for baricitinib; Q1 2015 included a $25 million Novartis milestone.
- R&D increased to $156.8 million from $118.4 million, including a $35 million payment to Lilly for U.S. GVHD development rights, higher pipeline spending and development costs under the Agenus collaboration. SG&A rose to $64.6 million from $44.9 million, principally reflecting commercialization, marketing and patient-assistance costs.
- Operating cash flow improved by $102.1 million year over year, primarily due to working-capital changes. Investing cash flow was $28.8 million provided, including $51.1 million of marketable-security sales and maturities, partly offset by purchases and $5.6 million of capital expenditures.
- Interest expense was $10.1 million, including $7.8 million of non-cash debt-discount amortization. A $3.0 million unrealized loss on the Agenus investment reduced pretax income.
- In March, Incyte amended its Lilly agreement to pursue ruxolitinib for GVHD in the U.S., agreeing to a $35 million upfront payment and up to $40 million in further regulatory milestones. It waived its baricitinib U.S. co-promotion option.
Outlook, risks and contingencies
- Management said available cash, cash equivalents and marketable securities should meet capital needs for at least the next 12 months. No specific full-year revenue or earnings guidance is provided in the filing. Management cautioned that future expenses and results depend on development spending, commercialization, milestones and other factors.
- In May 2016, after quarter-end, Incyte agreed to acquire ARIAD’s European Iclusig operations for $140 million, with tiered royalties of 32%–50%, up to $135 million in potential milestones and up to $7 million of study co-funding in each of 2016 and 2017. Closing was expected June 1, 2016, subject to customary conditions. The company expected to use cash on hand.
- In April 2016, Incyte closed on the purchase of its previously leased headquarters property; the filing states the purchase price was approximately $79.9 million and that remaining lease obligations under the terminated arrangement would no longer be paid.
- In February 2016, Incyte received a Paragraph IV notice challenging certain ruxolitinib patents expiring in 2028. The company said a related loss was not probable or estimable at that time. The notice did not challenge the composition-of-matter patent expiring in 2027.
- Clinical setbacks included discontinuation of several ruxolitinib cancer studies and an INCB39110 pancreatic-cancer study after interim efficacy reviews; a ruxolitinib/regorafenib colorectal-cancer trial also stopped early for insufficient likelihood of meeting its endpoint.
- Principal risks include dependence on JAKAFI, pricing and reimbursement, generic and other competition, clinical and regulatory uncertainty, reliance on collaborators and third-party manufacturers, and substantial debt. The $749.8 million principal amount of notes carries contractual interest and maturity obligations; both note series became convertible from April 1, 2016 through at least June 30, 2016, and management intended to settle conversions in shares.
- Incyte early adopted the share-based payment accounting standard in Q1. It recognized $325.6 million of excess-tax-benefit deferred tax assets, subject to a full valuation allowance, and recorded $0.3 million of excess tax benefits in the income-tax provision.
Important facts for investors to verify
- How much of revenue growth is recurring JAKAFI/JAKAVI demand versus collaboration milestones, and how sales allowances and reimbursement trends affect net JAKAFI revenue.
- Progress, costs and clinical results for the pipeline, especially epacadostat, baricitinib and ruxolitinib in GVHD; also assess the implications of discontinued studies.
- Outcome and timing of the generic patent challenge, including the scope of patents challenged and potential litigation developments.
- Closing and subsequent financial impact of the ARIAD transaction, including its substantial royalty rate, milestone terms and cash requirements.
- Cash generation after working-capital movements, planned R&D and acquisition spending, and the company’s capacity to service or settle convertible debt.
- Whether collaboration milestones, product royalties, revenue-recognition estimates and the full valuation allowance on deferred tax assets change materially in later filings.