Incyte Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Incyte is a biopharmaceutical company developing and commercializing small-molecule drugs; JAKAFI (ruxolitinib) was its first U.S.-marketed product, approved for intermediate- or high-risk myelofibrosis.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Total revenue | $60.5 million | $16.8 million | $183.2 million | $65.6 million |
| JAKAFI net product revenue | $43.7 million | — | $92.7 million | — |
| Contract revenue | $16.7 million | $16.7 million | $90.2 million | $65.2 million |
| Research and development expense | $50.1 million | $44.6 million | $150.6 million | $126.8 million |
| Selling, general and administrative expense | $20.5 million | $14.3 million | $61.6 million | $37.1 million |
| Operating loss | $10.1 million | $42.1 million | $29.1 million | $99.0 million |
| Net loss | $21.7 million | $53.1 million | $63.1 million | $131.5 million |
| Basic and diluted loss per share | $0.17 | $0.42 | $0.49 | $1.05 |
For the first nine months, the $40 million Novartis regulatory milestone for the EU approval recommendation of JAKAVI contributed to contract revenue. JAKAFI product cost of revenue was only $58,000 for the nine months; this reported cost base is affected by pre-approval costs having been expensed as R&D and should not be treated as a mature product margin.
Operating cash use was $72.8 million in the first nine months, versus $121.9 million in 2011. Investing cash use was $1.5 million; financing provided $40.2 million, primarily from employee stock plans. Cash and cash equivalents fell $34.1 million to $239.1 million. Cash, cash equivalents and marketable securities totaled $243.6 million, excluding $9.5 million restricted for note interest.
At September 30, 2012, current assets were $278.7 million and current liabilities $137.6 million. Total liabilities were $516.5 million and stockholders’ deficit was $220.0 million. Debt principal totaled $420 million: $400 million of 4.75% convertible senior notes due October 2015 and $20 million of Pfizer subordinated notes, with $10 million due in each of 2013 and 2014. Carrying value of the notes was $334.6 million. Nine-month interest expense was $34.3 million.
Changes and notable items
- JAKAFI net product revenue reached $43.7 million in Q3 and $92.7 million year to date; there was no product revenue in the 2011 comparison periods.
- In Q3, Incyte changed JAKAFI revenue recognition from sell-through to sell-in after gaining sufficient experience estimating returns. Q3 revenue included $9.0 million deferred from earlier periods, increasing Q3 EPS by $0.07. Gross Q3 JAKAFI sales were $47.2 million; reported net revenue reflected rebates, chargebacks, discounts, fees and assistance programs.
- Nine-month revenue and the lower net loss also reflected the $40 million Novartis milestone. R&D and SG&A rose as clinical development, pipeline activity and JAKAFI commercialization expanded.
- JAKAVI received European Commission approval in August 2012 for myelofibrosis-related splenomegaly or symptoms. Baricitinib’s Phase III rheumatoid arthritis program had begun screening patients; other disclosed pipeline programs included ruxolitinib studies in polycythemia vera and other indications.
Outlook, risks and contingencies
Management stated that available cash, cash equivalents and marketable securities should fund capital needs for at least the next 12 months. This is not a guarantee of profitability: Incyte reported a $1.7 billion accumulated deficit, expected continued substantial R&D spending and warned it may continue to incur losses. The filing provides no specific revenue or earnings guidance.
- Key commercial risks include JAKAFI adoption, pricing and reimbursement, maintaining specialty-pharmacy distribution, manufacturing capacity and regulatory compliance. JAKAFI relied on third-party manufacturers and single-source suppliers for certain components; the company was seeking to qualify a second API source.
- Revenue concentration remains material: one customer represented 22% of Q3 revenue and 44% of nine-month revenue; three customers represented 56% of receivables at quarter-end.
- Debt service and refinancing are significant risks. The $400 million senior notes mature in 2015, and the indenture restricts additional debt, liens and certain asset dispositions. Contractual obligations totaled $494.8 million, including principal, interest and leases.
- Clinical, regulatory, safety, competition, intellectual-property, collaboration and healthcare reimbursement uncertainties may delay or prevent product development or commercialization. The filing also notes potential future contingent Maxia acquisition earn-outs of up to $14 million; none had been achieved by quarter-end.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported beyond those discussed in the filing.
Important facts for investors to verify
- How much reported JAKAFI growth reflects patient demand versus the $9 million prior-period revenue recognition catch-up, and how returns and discount estimates develop.
- Whether JAKAFI sales, reimbursement and product margins can support the expanding commercial and R&D cost base.
- Cash burn and liquidity relative to the 2013–2015 debt payments, including the ability to address the $400 million senior-note maturity.
- Concentration among customers and specialty pharmacies, and progress qualifying alternative suppliers for JAKAFI.
- Clinical and regulatory progress for ruxolitinib and baricitinib, including the uncertainty of trial outcomes, approvals and collaboration milestones.