Incyte Corporation — Q2 2018 Form 10-Q
Business context and period: Biopharmaceutical company reporting the three and six months ended June 30, 2018. Its marketed products were JAKAFI in the U.S. and ICLUSIG in Europe and other select countries; the company also received royalties and milestones from collaborators. Incyte reported one operating segment. Financial amounts below are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $521.5 | $326.4 | $903.8 | $710.5 |
| Operating income (loss) | $83.2 | $7.3 | $16.1 | $(126.0) |
| Net income (loss) | $52.4 | $(12.5) | $11.3 | $(199.6) |
| Diluted EPS | $0.24 | $(0.06) | $0.05 | $(1.00) |
- Revenue mix: Q2 product revenue was $365.5, including JAKAFI $345.6 and ICLUSIG $19.9; royalties were $56.0; milestones were $100.0. The milestone was earned from Lilly following FDA approval of OLUMIANT’s 2 mg dose.
- Costs and margins: Q2 cost of product revenue was $24.9, implying an approximate product gross margin of 93.2%. R&D was $298.1 and SG&A was $108.0. Operating margin was approximately 16.0% for Q2 and 1.8% for the first half.
- Cash flow: First-half operating cash flow was $53.2, versus cash use of $56.8 in 2017. Investing activities used $32.5 and financing activities provided $8.2. Cash, cash equivalents, restricted cash and investments totaled $929.5 at period end; cash, cash equivalents and marketable securities were approximately $1.198 billion.
- Balance sheet and debt: Total assets were $2.397 billion and total liabilities $664.2. Convertible notes had a $24.6 carrying value ($7.6 current and $17.0 long term); contractual principal obligations were $26.8. Acquisition-related contingent consideration was valued at $288.0. Accumulated deficit was $1.976 billion.
Material changes versus comparable periods
- Q2 revenue rose approximately 60% year over year; first-half revenue rose approximately 27%. JAKAFI sales and JAKAVI royalties increased, and OLUMIANT royalties grew from a small base.
- Q2 net income improved from a loss, and first-half results moved from a substantial loss to modest income. Comparisons include significant non-operating investment valuation changes and, in 2017, $54.9 of senior-note conversion expense.
- Q2 2018 included a $34.6 unrealized loss on long-term investments, largely reflecting market-price changes in holdings of collaboration partners. This reduced pre-tax income below operating income.
- First-half R&D declined to $601.2 from $609.7, partly because 2017 included substantial upfront and milestone collaboration costs. Q2 R&D increased to $298.1 from $201.8, reflecting higher clinical and outside-service spending and expanded development activity.
Outlook, commentary and risks
- No quantitative revenue, earnings or cash-flow guidance is provided in the filing. Management stated that cash flow from operations plus cash, cash equivalents and marketable securities should meet capital needs for at least the next 12 months.
- Management highlighted REACH1, a pivotal Phase II trial of ruxolitinib for steroid-refractory acute GVHD, as having met its primary endpoint; an FDA supplemental application was in preparation. Phase III GVHD trials were underway.
- Incyte reported that the Phase III ECHO-301 epacadostat trial did not meet its primary endpoint; the program was downsized. Development of INCB57643 was to be discontinued following a preclinical safety finding. Monotherapy development of INCB50465 in DLBCL was discontinued after response criteria were not met.
- Key risks include dependence on JAKAFI revenue; reimbursement, pricing and competition (including a generic JAKAFI patent challenge); clinical, regulatory and safety uncertainty; reliance on third-party manufacturers and collaborators; and volatility in publicly traded collaboration-partner investments. The company also disclosed Agenus’s going-concern uncertainty and said it did not plan to participate in future Agenus equity fundraising.
- Other notable items: Incyte signed a 15-year lease for a renovated building in Morges, Switzerland, intended as its European headquarters. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Investor facts to verify
- How much of reported earnings depends on the $100 million Lilly milestone and on volatile investment fair-value changes?
- Whether JAKAFI sales growth, reimbursement, and rebate or chargeback accruals remain sustainable; government rebates and chargebacks may rise with price increases above inflation.
- Progress and regulatory outcomes for ruxolitinib in GVHD, baricitinib/OLUMIANT, and other late-stage programs, including the implications of the ECHO-301 result.
- Future cash requirements from pipeline investment, Lilly co-development obligations, leases, convertible-note maturities and Takeda contingent consideration.
- Exposure to collaboration-partner concentration and investment risk, including the value and financial outlook of Agenus, Merus, Calithera and Syros holdings.