Incyte Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. Incyte is a biopharmaceutical company focused on oncology and inflammation. Its marketed product was U.S. JAKAFI (ruxolitinib) for myelofibrosis; its pipeline included candidates at multiple development stages, including baricitinib, licensed to Lilly, and programs partnered with Novartis.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 or prior balance-sheet date |
|---|---|---|
| Total revenue | $71.1 million | $36.2 million |
| Product revenue, net | $48.3 million | $19.3 million |
| Product royalty revenue | $5.9 million | None reported |
| Contract revenue | $16.7 million | $16.7 million |
| Research and development expense | $52.8 million | $49.0 million |
| Selling, general and administrative expense | $22.3 million | $21.4 million |
| Operating loss | $4.1 million | $34.2 million |
| Net loss | $15.7 million | $45.4 million |
| Basic and diluted loss per share | $0.12 | $0.36 |
| Cash and cash equivalents | $265.8 million | $224.1 million at Dec. 31, 2012 |
| Cash, cash equivalents and marketable securities | $270.2 million | $228.4 million at Dec. 31, 2012 |
| Net cash from (used in) operating activities | $24.7 million | $(54.4) million |
| Capital expenditures | $0.9 million | $0.5 million |
| Total debt principal | $410.0 million | Comprises $400.0 million of 4.75% notes due 2015 and a $10.0 million Pfizer note due 2014 |
| Stockholders’ deficit | $163.5 million | $175.0 million at Dec. 31, 2012 |
Operating margin was approximately negative 5.8% of revenue, versus negative 94.5% in Q1 2012; net margin was approximately negative 22.0%, versus negative 125.6%. Product cost of revenue was $0.2 million, but this is not a representative measure of normalized product economics: Incyte expensed pre-approval manufacturing costs as R&D and reported that inventory costs would reflect a lower average unit cost for several quarters. Current assets of $309.1 million exceeded current liabilities of $121.3 million by $187.8 million.
Material changes and business developments
- Revenue nearly doubled, driven by higher JAKAFI sales and $5.9 million of royalties on Novartis’s ex-U.S. JAKAVI sales. JAKAFI product revenue rose about 151% year over year.
- Operating loss narrowed by $30.1 million and net loss by $29.8 million. Improved revenue and a $42.9 million reduction in accounts receivable contributed to the shift to positive operating cash flow; cash flow also included noncash expenses and a $16.7 million decline in collaborative-agreement deferred revenue.
- R&D increased $3.8 million, primarily from clinical and outside services and development headcount. SG&A increased $0.9 million, reflecting commercialization headcount and JAKAFI marketing activity.
- Cash and cash equivalents increased $41.8 million during the quarter. Financing cash flow of $17.8 million came from stock-plan share issuances.
- At March 31, 2013, the carrying value of convertible notes was $337.5 million. The filing reports their aggregate fair value as $1.10 billion; fair value is not the same as principal repayment obligations.
Outlook, risks and unusual items
- Management said available cash, cash equivalents and marketable securities were expected to meet capital needs for at least the next 12 months. No quantified revenue, earnings or cash-flow guidance was provided. Incyte cautioned that it expected continued investment and could incur future losses; sustained profitability was uncertain.
- Pipeline and commercialization execution remain central: risks include JAKAFI adoption, reimbursement and pricing, safety and regulatory outcomes, clinical trial timing and results, and reliance on third parties for manufacturing and distribution. Incyte disclosed single-source supply dependencies, including a single source for JAKAFI raw materials, and said it was working to qualify a second API source.
- Revenue depends on a limited number of partners and specialty pharmacies. Four specialty pharmacy customers represented 69% of Q1 2013 net product revenue; two collaboration partners generated all contract revenue. The four pharmacy customers represented 54% of receivables at March 31.
- Debt obligations are substantial: contractual obligations listed $400 million of senior-note principal and $57 million of related interest, largely due within one to three years, plus the $10 million Pfizer note due within one year. The senior-note indenture restricts additional debt and certain liens or asset dispositions.
- Two securities class-action lawsuits filed in March and April 2013 allege misleading statements about JAKAFI’s commercial launch. Incyte intends to defend the cases but said it could not estimate any possible loss or range of loss.
- Subsequent events: In April, Incyte reported earning a $25 million Novartis milestone for initiation of a Phase II c-MET inhibitor trial, expected to be recognized and received in Q2 2013. It also entered a Delaware workforce grant agreement for up to approximately $11 million, with proceeds expected by year-end. A proposed 15-year lease for approximately 190,000 square feet is contingent on specified conditions, including an acceptable build-out budget.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether JAKAFI sales growth, reimbursement, customer demand and product-return and rebate estimates remain durable; revenue is recognized when specialty pharmacies receive product under the sell-in method adopted in 2012.
- Whether Novartis’s reported sales support continuing royalty growth and whether the $25 million milestone was recognized and collected in Q2 as expected.
- Pipeline progress, trial results, regulatory decisions and the extent of Incyte’s future co-development spending, particularly for baricitinib and ruxolitinib programs.
- Ability to meet the 2015 senior-note maturity and related interest obligations without materially constraining R&D or requiring additional financing.
- Outcome and potential financial exposure of the securities litigation, and whether the contingent facility lease and state grant become effective on the disclosed terms.