INCYTE CORP quarterly report, Q1 FY2018

Incyte Corporation — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. Unaudited consolidated results; amounts are in U.S. dollars unless stated otherwise. Incyte is a biopharmaceutical company with commercial products JAKAFI and ICLUSIG and a research and development pipeline.

Financial performance and position

MetricQ1 2018Q1 2017 or comparator
Total revenue$382.3 million$384.1 million
Product revenue$334.5 million$264.8 million
Product royalty revenue$47.7 million$29.2 million
Milestone revenue$0$90.0 million
Research and development expense$303.1 million$407.9 million
Selling, general and administrative expense$121.5 million$87.2 million
Loss from operations$(67.1) million$(133.2) million
Net loss$(41.1) million; $(0.19) per share$(187.1) million; $(0.96) per share
Cash from operating activities$20.8 million provided$173.6 million used
  • JAKAFI revenue was $313.7 million, up from $251.1 million; management attributed the increase to $31.9 million of volume growth and $30.7 million of price growth. ICLUSIG revenue was $20.8 million, up from $13.7 million.
  • Revenue was nearly flat overall despite product and royalty growth because Q1 2017 included $90 million of milestones: $65 million tied to baricitinib approval in Europe and $25 million tied to a Novartis development milestone.
  • R&D declined mainly because Q1 2017 included $209.1 million of upfront and milestone expenses for collaboration arrangements. SG&A increased with commercial and European headcount, JAKAFI commercialization costs, and patient-assistance donations.
  • Net loss improved substantially, but included a $22.7 million unrealized gain on long-term investments. This non-cash fair-value gain materially affected the comparison.
  • At March 31, cash and cash equivalents were $894.4 million; current marketable securities were $276.6 million. Together, these were approximately $1.17 billion. Total assets were $2.31 billion, current assets $1.47 billion, and current liabilities $381.1 million.
  • Convertible notes had a carrying amount of $24.3 million and fair value of $43.6 million. The 2018 notes, with $7.5 million carrying value, mature in November 2018; the 2020 notes had $16.8 million carrying value. Acquisition-related contingent consideration was $287.0 million, including current and long-term portions.
  • Investing cash outflow was $28.5 million, including $12.6 million in capital expenditures; financing cash inflow was $2.6 million. Cash, cash equivalents, restricted cash and investments decreased by $5.1 million during the quarter.

Material changes, outlook and significant items

  • Management stated that cash, cash equivalents, marketable securities and operating cash flow should meet capital needs for at least the next 12 months. No specific revenue, earnings or cash-flow guidance was provided.
  • In April 2018, after quarter-end, an external monitoring committee found the Phase III ECHO-301 epacadostat combination study did not meet its progression-free-survival endpoint and overall survival was not expected to reach statistical significance. The study was stopped and Incyte significantly downsized the epacadostat program; certain other pivotal studies were halted, converted to Phase II, or not initiated.
  • Also after quarter-end, an FDA advisory committee recommended baricitinib approval at the 2 mg dose for rheumatoid arthritis, but did not recommend the 4 mg dose on safety and benefit-risk grounds. The FDA action date was expected in June 2018.
  • In February 2018, Incyte and Hengrui agreed to terminate their collaboration. In April 2018, Incyte exercised a BMS PD-1 antibody license option for a $15 million fee, to be recorded as Q2 R&D expense.
  • Incyte entered a 15-year lease in February 2018 for a building in Morges, Switzerland, intended as its European headquarters; completion was estimated for November 2019, with extension options.
  • Key risks include dependence on JAKAFI, reimbursement and pricing pressure, customer and supplier concentration, clinical-trial and regulatory uncertainty, reliance on collaborators and contract manufacturers, potential generic competition, and volatility in publicly traded collaborator investments. The filing notes a generic JAKAFI application challenging certain patents; Incyte’s composition-of-matter patent was not challenged in that notice.
  • The company adopted ASC 606 revenue guidance in Q1 2018 with no significant overall change to revenue-recognition methodology and no cumulative retained-earnings adjustment. It also began recognizing equity-investment fair-value changes in earnings; this contributed to Q1 investment-related volatility.

Important facts for investors to verify

  • Whether JAKAFI sales growth, pricing and reimbursement trends continue, and how government rebates and chargebacks affect net revenue.
  • The FDA’s final baricitinib decision, approved dose and label, and resulting potential royalties and milestones.
  • The financial and pipeline consequences of the ECHO-301 outcome and the epacadostat program reductions.
  • How much of reported earnings reflects operating performance versus volatile unrealized gains or losses on equity investments.
  • The timing and cash impact of convertible-note maturities and the $287 million contingent consideration obligation.
  • Whether the stated cash runway remains adequate as clinical, commercialization, collaboration and facility expenditures evolve.