Business Context and Reporting Period
Company: Incyte Genomics, Inc. (formerly Incyte Pharmaceuticals, Inc.)
Reporting Period: Quarterly period ended June 30, 2001 (Form 10-Q)
Business Overview: Incyte designs, develops, and markets genomic information-based products and services, including database products, microarray-based gene expression services, SNP discovery services, and genomic reagents. The company also engages in internal disease pathway and therapeutic drug discovery programs. In December 2000, Incyte acquired Proteome, Inc., a proteomics information company.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2001 |
Six Months Ended June 30, 2001 |
Six Months Ended June 30, 2000 |
|---|---|---|---|
| Revenues | $56,051 | $107,172 | $86,769 |
| Net Loss | $(9,891) | $(20,203) | $(14,767) |
| Loss per Share (Basic & Diluted) | $(0.15) | $(0.31) | $(0.24) |
| Research & Development Expenses | $55,155 | $111,114 | $86,741 |
| Selling, General & Admin Expenses | $18,591 | $35,152 | $29,821 |
| Cash and Cash Equivalents (Balance Sheet) | $64,395 (as of June 30, 2001) | ||
| Marketable Securities (Available-for-sale) | $475,006 (as of June 30, 2001) | ||
| Total Current Assets | $592,470 (as of June 30, 2001) | ||
| Convertible Subordinated Notes (Debt) | $179,469 (as of June 30, 2001) | ||
| Accumulated Deficit | $(105,107) (as of June 30, 2001) |
Liquidity: As of June 30, 2001, the company held $539.4 million in cash, cash equivalents, and marketable securities. Net cash used in operating activities for the six months ended June 30, 2001, was $12.8 million, compared to net cash provided by operating activities of $20.9 million in the prior year period.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 21.8% for the three months ended June 30, 2001, compared to the same period in 2000 ($56.1M vs. $46.0M). For the six-month period, revenues increased 23.5% ($107.2M vs. $86.8M). Growth was driven by expanded customer base, partner programs, and custom genomics services.
- Increased Expenses: Total costs and expenses rose to $73.7 million for the quarter and $146.3 million for the six months, compared to $60.4 million and $116.6 million in 2000, respectively. R&D expenses increased due to bioinformatics efforts, SNP discovery, and the Proteome acquisition. SG&A expenses increased due to sales/marketing growth and significant legal fees ($4.8M for the quarter, $6.7M for six months) related to patent litigation.
- Net Loss Expansion: Net loss widened to $9.9 million for the quarter and $20.2 million for the six months, compared to $6.6 million and $14.8 million in 2000. This was partially offset by an extraordinary gain of $2.4 million (net of tax) from the repurchase of convertible notes and a $2.3 million gain from the cumulative effect of adopting SFAS 133.
- Cash Position: Cash and cash equivalents decreased from $110.2 million at December 31, 2000, to $64.4 million at June 30, 2001, primarily due to operating cash outflows and investing activities.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance: Management expects to report a net loss at least through 2001 due to significant investments in internal disease pathway and therapeutic drug discovery programs, intellectual property portfolio development, and bioinformatics. The company believes existing resources are adequate to satisfy capital needs for at least the next twelve months.
Unusual Items:
- Extraordinary Gain: A $2.4 million gain (net of tax) was recorded in the first quarter of 2001 from the repurchase of $8.0 million face value of convertible subordinated notes.
- Accounting Change: Adoption of SFAS 133 (Accounting for Derivative Instruments) resulted in a $2.3 million gain recorded as a cumulative effect of accounting change.
- Impairment: A $3.8 million impairment charge on long-term investments was recorded in the first half of 2001.
Material Risks and Contingencies:
- Patent Litigation: Incyte is engaged in significant patent litigation with Affymetrix, Inc. Affymetrix alleges infringement of multiple patents and seeks permanent injunctions, damages, and triple damages for alleged willful infringement. Incyte has filed counterclaims. The outcome is uncertain, and the litigation has resulted in substantial legal expenses and diversion of management resources. A loss could require Incyte to pay damages or cease selling microarray products.
- Profitability: The company has a history of net losses and an accumulated deficit of $105.1 million. Future profitability depends on increasing revenues or reducing expenses, which is uncertain given the competitive landscape and high R&D costs.
- Debt Obligations: The company has approximately $179.5 million in convertible subordinated notes due in 2007. Debt service obligations may limit flexibility and require dedication of cash flow.
- Strategic Investments: The company makes strategic equity investments in joint ventures and other businesses, which may result in losses or impairment charges.
Important Facts for Investors to Verify
- Outcome of Affymetrix Litigation: Verify the status and potential financial impact of the ongoing patent infringement lawsuits with Affymetrix, including the risk of injunctions or significant damages.
- Sustainability of Revenue Growth: Assess the durability of revenue growth given the competitive genomics market and reliance on database subscriptions and custom services.
- Cash Burn Rate: Monitor the rate of cash consumption from operating activities and the adequacy of current cash reserves ($539.4M in liquid assets) to fund planned R&D and debt obligations.
- Impact of Proteome Acquisition: Evaluate the integration progress and financial contribution of the Proteome, Inc. acquisition, including associated goodwill amortization.
- Debt Repurchase Strategy: Understand the company's strategy regarding the repurchase of its convertible notes and the associated financial impact.