Incyte Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed November 3, 2015. Amounts are in U.S. dollars unless noted. Incyte is a biopharmaceutical company focused primarily on oncology; JAKAFI (ruxolitinib) is its marketed U.S. product.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $187.6 million | $198.1 million | $509.9 million | $387.5 million |
| Net income (loss) | $(39.6) million | $59.3 million | $(48.6) million | $(11.5) million |
| Basic and diluted EPS | $(0.22) | $0.35 / $0.33 | $(0.27) | $(0.07) |
| Operating income (loss) | $(0.1) million | $69.9 million | $(14.4) million | $20.8 million |
- Revenue mix: Q3 product revenue, principally U.S. JAKAFI sales, was $161.3 million, up 65% year over year; product royalties were $18.1 million, up 50%. Contract revenue fell to $8.2 million from $88.2 million. For the nine months, product revenue was $419.0 million versus $251.5 million, royalties $51.2 million versus $34.3 million, and contract revenue $39.6 million versus $101.6 million.
- Expenses and margins: Q3 research and development (R&D) was $132.1 million versus $88.5 million; selling, general and administrative expense was $47.6 million versus $39.4 million. Nine-month R&D was $362.9 million versus $248.8 million, and SG&A was $144.1 million versus $117.3 million. Cost of product revenue was $8.0 million in Q3 and $17.3 million year to date; the filing expects it eventually to be in the mid-single digits as a percentage of net product sales after remaining pre-launch inventory is used. Overall operating margin was approximately breakeven in Q3 2015, versus 35% in Q3 2014; it was negative 3% for the first nine months of 2015.
- Unusual item: Q3 included a $31.3 million unrealized loss on Incyte’s Agenus investment, recorded in earnings. The nine-month unrealized loss was $4.1 million, reflecting earlier-period fair-value movements as well as the Q3 decline.
- Cash flow: Nine-month operating cash flow was positive $16.5 million, compared with $18.5 million used in the prior-year period. Investing cash use was $100.5 million, including the Agenus investment and capital expenditures; financing provided $77.5 million, primarily from stock-plan share issuance. Cash and cash equivalents ended at $445.8 million.
- Liquidity and balance sheet: Cash, cash equivalents and marketable securities totaled $635.0 million. Total assets were $931.9 million; stockholders’ equity was $88.7 million, versus a deficit of $81.6 million at year-end 2014. The company said available cash and securities should cover capital needs for at least 12 months.
- Debt: Outstanding convertible-note principal totaled $750 million: $375 million due in 2018 and $375 million due in 2020. Their combined carrying amount was about $623.9 million. The 2015 notes were nearly fully converted; the remaining carrying balance was $5,000. The 2018 and 2020 notes became convertible beginning October 1, 2015; management stated it intended to settle conversions in shares.
Material changes and business developments
- JAKAFI revenue growth reflected higher sales volume and price; management attributed the Q3 increase to $48.2 million of volume and $15.3 million of price. JAKAFI had gained a second U.S. indication, uncontrolled polycythemia vera, in December 2014.
- Lower contract revenue mainly reflected the absence of large Novartis milestones recorded in 2014. In the first nine months of 2015, Incyte recognized Novartis milestones of $5 million for capmatinib development and $25 million following a positive European regulatory opinion for JAKAVI in polycythemia vera.
- R&D growth reflected pipeline activity and upfront or development costs, including $25 million paid to Hengrui for rights to investigational PD-1 antibody INCSHR1210, and $20.2 million allocated to R&D in the Agenus transaction, plus subsequent development costs.
- Incyte acquired approximately 9% of Agenus for $35 million; it recorded the investment initially at $39.8 million fair value. Q3’s market-price decline drove the $31.3 million quarterly unrealized loss.
- The company agreed to buy its leased headquarters land and office building for approximately $79.9 million, with closing anticipated in Q1 2016, subject to conditions. The purchase price was not included in the contractual-obligations table; completion would replace remaining lease payments with purchase funding.
Outlook, commentary and risks
- Management expected cash and marketable securities to fund capital needs for at least 12 months, but noted possible future financing needs and the potential dilution or operating restrictions associated with equity or debt financing. Incyte anticipated continued R&D investment and acknowledged it might continue to incur losses.
- Management expected its 30% share of Lilly’s baricitinib rheumatoid-arthritis development costs to decline after Lilly’s anticipated NDA submission in late 2015 or early 2016. The filing reported that all four pivotal Phase III rheumatoid-arthritis trials had met their primary endpoint.
- Incyte stopped the Phase II INCB39110-plus-erlotinib trial in NSCLC during Q3 because of slow recruitment. Clinical development and regulatory outcomes across the pipeline remain uncertain; milestones and future royalties are contingent and not assured.
- Key risks include dependence on JAKAFI and its reimbursement, concentration among specialty-pharmacy customers, reliance on third-party manufacturers and some single-source suppliers, clinical-trial and regulatory uncertainty, competition, and substantial convertible debt. The filing noted that generic manufacturers could begin challenging JAKAFI patents as early as Q4 2015.
- Sales allowances depend on estimates for rebates, chargebacks and other discounts; management warned that price increases above inflation could raise certain government rebates and reduce net product revenue. Marketable securities face credit and interest-rate risk, though management said a uniform immediate 10% rate increase would not materially reduce their fair value.
- Subsequent event: In October 2015, Incyte earned a $15 million Novartis milestone for Japanese approval of JAKAVI in polycythemia vera; it expected to record the revenue in Q4 2015.
Important facts for investors to verify
- Whether JAKAFI sales growth, pricing, reimbursement and sales-allowance assumptions continue to support revenue growth and product economics.
- Progress, enrollment, safety and results for major pipeline trials, particularly ruxolitinib in pancreatic cancer and epacadostat combination studies.
- The impact of the Agenus investment’s fair-value changes and the costs and development obligations associated with Agenus and Hengrui collaborations.
- Conversion, settlement and dilution outcomes for the 2018 and 2020 notes, alongside the company’s $750 million principal debt burden.
- Completion, funding and timing of the approximately $79.9 million headquarters property purchase, and any resulting change to lease obligations.
- Potential JAKAFI patent challenges, manufacturing continuity, specialty-pharmacy concentration and future capital requirements.