Incyte Corporation — 2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; it was filed February 21, 2014. Incyte is a biopharmaceutical company focused on oncology and inflammation. Its marketed product is JAKAFI (ruxolitinib), approved in the U.S. for intermediate- or high-risk myelofibrosis. Novartis markets ruxolitinib outside the U.S. as JAKAVI and pays Incyte royalties. Other pipeline programs include ruxolitinib for polycythemia vera and pancreatic cancer, baricitinib for rheumatoid arthritis, and several earlier-stage candidates.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $354.9 million | $297.1 million |
| JAKAFI net product revenue | $235.4 million | $136.0 million |
| JAKAVI product royalties | $28.3 million | $3.7 million |
| Contract revenue | $91.0 million | $156.9 million |
| Research and development expense | $260.4 million | $210.4 million |
| Selling, general and administrative expense | $110.0 million | $85.4 million |
| Operating income (loss) | $(16.1) million | $1.1 million |
| Net loss | $(83.1) million | $(44.3) million |
| Net loss per share, basic and diluted | $(0.56) | $(0.34) |
| Cash, cash equivalents and marketable securities | $509.0 million | $228.4 million |
| Working capital | $447.8 million | $173.4 million |
| Cash from (used in) operating activities | $9.2 million | $(94.8) million |
2013 fourth-quarter revenue was $97.1 million and net loss was $42.9 million. Fourth-quarter JAKAFI revenue was $72.8 million, JAKAVI royalties were $8.4 million, and contract revenue was $15.8 million.
Reported cost of product revenue was only $0.6 million, reflecting remaining inventory costs incurred before JAKAFI approval that had been expensed as R&D. Incyte expects product cost to rise to the mid-single digits as a percentage of net product sales after this inventory is used; the reported cost therefore does not represent a steady-state product margin.
At year-end, total debt had $846.6 million aggregate principal outstanding; the balance-sheet carrying amount of convertible notes was $661.6 million. Principal included $96.6 million due in 2015, $375.0 million due in 2018, and $375.0 million due in 2020. Stockholders’ deficit was $193.1 million. Incyte reported total assets of $629.6 million and current liabilities of $108.0 million.
Material changes versus 2012
- Revenue rose 19.5%, principally as JAKAFI sales increased by $99.4 million and JAKAVI royalties by $24.6 million. Contract revenue declined by $65.9 million, mainly because 2012 included $90 million of Novartis and Lilly milestone revenue, compared with $25 million of Novartis milestone revenue in 2013.
- R&D expense increased 23.8%, largely from greater clinical development activity; SG&A increased 28.8%, reflecting commercial headcount and JAKAFI marketing.
- Net loss widened by $38.8 million. In addition to the operating loss, 2013 included $11.5 million of debt exchange expense and a $17.9 million loss on repurchase of convertible notes.
- Operating cash flow improved to $9.2 million from cash use of $94.8 million, with the filing citing milestone-receipt timing and working-capital changes. Financing activity included issuance of $750 million principal of 2018 and 2020 convertible notes, repurchase of $117.3 million principal of 2015 notes for approximately $500 million, and exchange of $186 million principal of 2015 notes for shares and cash.
Outlook, commentary and risks
- Management stated that available cash, cash equivalents and marketable securities were expected to fund capital needs for at least the next 12 months. It also warned that ongoing R&D and commercialization spending could sustain losses and that profitability was not assured. No formal revenue or earnings guidance was provided.
- Incyte expected to submit a supplemental application for ruxolitinib in hydroxyurea-resistant or -intolerant polycythemia vera in the first half of 2014 if Phase III results were positive. Two Phase III pancreatic-cancer trials and three proof-of-concept studies in lung, breast and colon cancer were expected to begin in the first half of 2014. Baricitinib’s rheumatoid arthritis Phase III program was ongoing; diabetic-nephropathy results were expected in 2014.
- Key risks include dependence on JAKAFI and its reimbursement and market uptake; clinical, regulatory and commercialization uncertainty for pipeline candidates; competition; and reliance on third parties for manufacturing. The filing identifies single-source suppliers for JAKAFI active ingredient and finished tablets, with second sources still being qualified.
- Incyte reported $846.6 million of debt principal and described substantial leverage and future funding needs. Contractual obligations totaled $996.3 million, including debt principal and interest and lease commitments. The new Wilmington headquarters entails a 15-year lease and approximately $94.8 million of future minimum payments.
- Two securities class-action lawsuits filed in 2013 allege misleading statements about JAKAFI’s commercial launch. Incyte said it intended to defend the cases and could not estimate a possible loss. The company also disclosed the appointment of Hervé Hoppenot as CEO effective January 2014.
Most important facts for investors to verify
- JAKAFI sales growth, net pricing, payer coverage, specialty-pharmacy concentration and future product-cost levels.
- Timing and outcomes of the polycythemia vera and pancreatic-cancer trials, and progress in baricitinib and other pipeline programs.
- Cash generation excluding milestone timing and financing transactions, and the company’s ability to meet debt and lease obligations.
- Progress in qualifying backup JAKAFI manufacturers and maintaining reliable supply.
- Developments in the securities litigation and any resulting financial exposure.