Incyte Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Incyte is a biopharmaceutical company focused on drug development and commercialization. Its principal marketed products were JAKAFI in the United States and, following a June 1 acquisition, ICLUSIG in Europe and certain other territories. JAKAFI and JAKAVI royalties, collaborations, and licensing also contributed revenue.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $246.3 | $163.0 | $509.8 | $322.3 |
| Operating income (loss) | $44.6 | ($7.4) | $80.6 | ($14.3) |
| Net income (loss) | $34.4 | $9.3 | $58.5 | ($9.1) |
| Diluted EPS | $0.18 | $0.05 | $0.30 | ($0.05) |
- Q2 revenue increased 51% year over year; six-month revenue increased 58%. Product revenue was $212.1 million in Q2 and $395.4 million for the half. JAKAFI revenue was $208.1 million and $391.4 million, respectively; ICLUSIG contributed $4.0 million after the acquisition.
- Q2 product royalty revenue rose to $26.0 million from $17.4 million, principally reflecting Novartis’s JAKAVI sales. Contract revenue was $8.2 million in Q2 and $66.4 million for the half; first-half results included baricitinib regulatory milestones and other collaboration revenue.
- Six-month research and development expense was $277.1 million, up from $230.8 million; selling, general and administrative expense was $131.4 million, up from $96.5 million. Management attributed increases mainly to pipeline investment, staffing, commercialization costs, and the $35 million payment for U.S. ruxolitinib GVHD rights.
- Operating margin was approximately 18% for Q2 and 16% for the first half. These figures reflect reported operating income and revenue; acquired ICLUSIG inventory valuation and amortization affect product costs.
- Operating cash flow was $115.1 million for the first half, versus $8.8 million a year earlier. Investing cash outflow was $186.5 million, including $144.8 million net cash for the ARIAD European acquisition and $87.8 million of capital expenditures. Cash and cash equivalents ended at $487.7 million.
- Cash, cash equivalents, and marketable securities totaled $629.2 million. Current assets were $792.1 million and current liabilities $199.0 million. Total assets were $1.418 billion; stockholders’ equity was $297.1 million.
- Convertible notes had a $635.5 million carrying value; aggregate principal was $749.8 million, comprising notes due 2018 and 2020. Management stated that available cash and securities should fund capital needs for at least 12 months. Contractual obligations totaled $795.5 million, including debt principal and interest.
Material changes and notable items
- ARIAD European acquisition: Incyte paid $147.5 million upfront for ARIAD’s European operating subsidiaries and acquired exclusive ICLUSIG development and commercialization rights in Europe and other territories. Preliminary total consideration was $440.5 million, including $293.0 million fair value of contingent royalty and milestone obligations. The acquired balance sheet included $283.0 million of intangible assets and $155.7 million of goodwill; purchase accounting remained provisional.
- ARIAD’s acquired European business contributed $4.0 million revenue and a $7.9 million net loss from acquisition through June 30. The acquired ICLUSIG inventory is expected to raise its product costs for the next 12 months; licensed intellectual property is amortized over an estimated 12.5 years.
- JAKAFI revenue growth included higher sales volume and price. The filing reports Q2 increases of $48.6 million from volume and $17.1 million from price; first-half increases were $106.1 million and $27.6 million, respectively.
- Prior-year comparisons were affected by a $27.2 million unrealized gain on the Agenus investment in 2015. In 2016, that investment generated unrealized losses of $0.9 million in Q2 and $3.8 million for the first half.
- In April, Novartis received ex-U.S. ruxolitinib rights for GVHD; Incyte recognized a $5 million payment and became eligible for up to $75 million in milestones. In March, Incyte paid Lilly $35 million for U.S. GVHD rights and Lilly may receive up to $40 million in additional regulatory milestones.
Outlook, commentary, and risks
- The filing gives no specific financial guidance. Management said cash and marketable securities were expected to cover capital needs for at least the next 12 months, while noting that future cash needs depend on development, commercialization, acquisitions, and collaboration activity.
- Management expected to begin a U.S. registration program for ruxolitinib in GVHD in the second half of 2016. The FDA granted breakthrough therapy designation for acute GVHD. Several oncology programs were advancing in early clinical studies; epacadostat’s Phase III melanoma combination study was underway.
- Lilly submitted baricitinib applications in the United States and Europe in January 2016. In July 2016, after the reporting period, Lilly disclosed it would discontinue baricitinib development for psoriasis.
- Key risks include reliance on JAKAFI, reimbursement and pricing pressure, clinical and regulatory uncertainty, third-party manufacturing and collaborators, integration and expansion of European operations, and substantial debt. Incyte also warned that future profitability is uncertain.
- In February 2016, Incyte received a Paragraph IV notice challenging certain JAKAFI patents expiring in 2028; the filing said a loss was not then probable or estimable. The composition-of-matter patent expires in December 2027.
- ICLUSIG carries regulatory and safety risks, including the possibility of further EMA action. The acquired operation’s integration and related internal-control changes were still being evaluated; management reported disclosure controls were effective.
Important facts for investors to verify
- JAKAFI sales growth, price and volume trends, reimbursement, and exposure to government rebates and chargebacks.
- ARIAD acquisition integration, final purchase-price allocation, ICLUSIG commercialization and safety profile, and the contingent consideration valuation.
- Clinical and regulatory progress for GVHD, epacadostat, baricitinib, and other leading pipeline programs.
- Outcome and timing of the generic JAKAFI patent challenge and the scope of the challenged patents.
- Debt conversion and settlement developments, liquidity, and the use of cash for pipeline spending, capital expenditures, and strategic transactions.