Incyte Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Incyte is a biopharmaceutical company focused on oncology and inflammation; JAKAFI (ruxolitinib) was its marketed U.S. product. Financial amounts below are in U.S. dollars; “million” is abbreviated as “m.”
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $85.1m | $60.5m | $257.9m | $183.2m |
| Net product revenue | $60.2m | $43.7m | $162.6m | $92.7m |
| Product royalty revenue | $8.2m | — | $19.9m | — |
| Contract revenue | $16.7m | $16.7m | $75.2m | $90.2m |
| Research and development expense | $71.7m | $50.1m | $185.4m | $150.6m |
| Selling, general and administrative expense | $26.4m | $20.5m | $72.0m | $61.6m |
| Operating income (loss) | $(13.2)m | $(10.1)m | $0.04m | $(29.1)m |
| Net loss | $(22.0)m | $(21.7)m | $(40.3)m | $(63.1)m |
| Net loss per share | $(0.14) | $(0.17) | $(0.28) | $(0.49) |
- Q3 revenue increased about 41% year over year, led by JAKAFI sales and the first recorded JAKAVI royalty revenue. Nine-month revenue rose about 41%; contract revenue declined, partly because 2012 included a $40m Novartis regulatory milestone while 2013 included a $25m development milestone.
- Q3 net loss was broadly unchanged despite higher revenue, as research and development and commercial expenses increased. Nine-month net loss narrowed by $22.8m year over year.
- Cost of product revenue was $0.2m for Q3 and $0.5m for the nine months. The filing notes that capitalized inventory costs kept reported product cost low; this is not a representative mature-product margin measure.
- Operating cash flow was $20.9m for the nine months, versus $72.8m used in the prior-year period. Management attributed the improvement mainly to the lower net loss and changes in accounts receivable. Investing activities used $17.5m; financing activities provided $44.7m, including $55.9m from stock-plan issuances and $11.3m paid in connection with debt exchanges.
- At September 30, cash and cash equivalents were $272.1m; available cash, cash equivalents, a certificate of deposit and marketable securities totaled $291.2m. Current assets were $333.7m and current liabilities $109.5m. Accounts receivable was $33.2m, down from $71.0m at year-end 2012.
- Convertible notes had a $187.1m carrying amount, while total principal outstanding was $219.0m, due in October 2015. The difference reflects accounting carrying-value adjustments. Stockholders’ equity was $28.8m, compared with a $175.0m deficit at year-end 2012; accumulated deficit remained $1.7bn.
Material changes, outlook and risks
- In May, June and September 2013, Incyte exchanged $181.0m principal amount of 4.75% convertible senior notes for 20.6m common shares and $11.3m cash. The Pfizer convertible note was also converted into 1.0m shares. These transactions reduced debt but increased shares outstanding; weighted-average shares for the nine-month period rose to 143.9m from 129.1m.
- Research and development spending rose, primarily due to increased clinical development activity and headcount. SG&A also increased with JAKAFI commercialization and marketing. The pipeline included Phase III ruxolitinib trials in polycythemia vera and Lilly’s Phase III baricitinib rheumatoid arthritis program, among other clinical-stage programs.
- Management said available cash and marketable securities should be adequate for capital needs for at least the next 12 months. The filing provides no quantified revenue, earnings or product-sales guidance and warns that future losses may continue and profitability may never be achieved.
- A Delaware grant agreement provides up to approximately $11m; $5m was received during the nine months and recorded as a liability, with the balance expected by year-end 2013.
- A new 15-year lease for approximately 190,000 square feet of Wilmington laboratory and office space became effective in October 2013, after quarter-end. Expected minimum payments are approximately $80m, subject to final build-out costs; Incyte posted a $15m letter of credit. The company expects occupancy in late 2014.
- Two securities class-action lawsuits filed in 2013 allege misleading statements about JAKAFI’s commercial launch. Incyte intends to defend the claims but said it cannot estimate any possible loss.
- Principal risks include dependence on JAKAFI, reimbursement and pricing pressure, specialty-pharmacy concentration, reliance on single-source and third-party manufacturers, clinical and regulatory uncertainty, collaborator execution, patent and litigation exposure, and the substantial 2015 debt obligation. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether JAKAFI sales growth and Novartis royalty receipts continue, and how net sales allowances and reimbursement trends affect realized revenue.
- The cash-flow sustainability of the nine-month operating cash inflow, including the effects of receivables collections and deferred collaborative revenue.
- Plans and funding for the $219m principal due in 2015, note covenants, and any further conversions or exchanges.
- The final cost and accounting treatment of the new facility lease, including the $15m letter of credit and resulting long-term commitments.
- Progress, costs and outcomes of key clinical programs, manufacturing-source qualification, and the potential financial impact of the securities litigation.