Incyte Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 13, 2020. The filing also reports fourth-quarter results. Incyte is a biopharmaceutical company focused on discovering, developing and commercializing therapeutics. JAKAFI is its principal U.S. product; it also sells ICLUSIG in Europe and receives royalties on partner-marketed JAKAVI and OLUMIANT.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $2.159 billion | $1.882 billion |
| Product revenue | $1.775 billion | $1.467 billion |
| Product royalty revenue | $306.3 million | $234.8 million |
| Milestone and contract revenue | $77.5 million | $180.0 million |
| Operating income | $402.0 million | $129.2 million |
| Net income | $446.9 million | $109.5 million |
| Diluted earnings per share | $2.05 | $0.51 |
| Operating cash flow | $710.7 million | $336.2 million |
- Revenue increased 14.7%; net income rose substantially. Operating margin was approximately 18.6%, versus 6.9% in 2018; net margin was approximately 20.7%, versus 5.8%.
- JAKAFI revenue was $1.685 billion, up from $1.387 billion. Management attributed the increase to $204.5 million of volume growth and $93.5 million of price growth. ICLUSIG revenue was $90.0 million, versus $79.9 million.
- JAKAVI royalties rose to $225.9 million from $194.7 million; OLUMIANT royalties rose to $80.4 million from $40.1 million. Milestone and contract revenue declined as 2018 included larger Lilly and Novartis milestones; 2019 revenue included Innovent and Zai Lab payments.
- R&D expense was $1.154 billion, down from $1.198 billion, primarily reflecting the end of Incyte’s additional baricitinib co-funding with Lilly and lower collaborative costs. SG&A increased to $468.7 million from $434.4 million.
- Cash, cash equivalents and marketable securities totaled $2.118 billion at year-end, compared with $1.438 billion; working capital was $1.968 billion. Investing cash outflow was $87.5 million, including $78.1 million of capital expenditures.
- Convertible senior notes had a carrying value of $18.3 million and were due in November 2020. The balance sheet also included $53.8 million of finance and operating lease liabilities and $277.0 million of acquisition-related contingent consideration. The company reported $2.598 billion of stockholders’ equity.
- Fourth-quarter 2019 revenue was $579.4 million and net income was $111.0 million, compared with $528.4 million and $69.1 million, respectively, in fourth-quarter 2018.
Material developments and outlook
- FDA approved JAKAFI in May 2019 for steroid-refractory acute graft-versus-host disease (GVHD) in adult and pediatric patients aged 12 and older. The approval triggered a $20 million milestone payment to Lilly.
- In October 2019, Incyte and Novartis reported that the Phase III REACH2 trial of ruxolitinib in steroid-refractory acute GVHD met its primary endpoint. Results from the REACH3 chronic GVHD trial were expected in 2020.
- FDA accepted pemigatinib’s application for priority review for previously treated cholangiocarcinoma with FGFR2 fusions or rearrangements; the stated target action date was May 30, 2020. In January 2020, Incyte reported positive top-line results from one Phase III trial of ruxolitinib cream in atopic dermatitis.
- There were important setbacks: in January 2020, itacitinib plus corticosteroids did not meet the primary endpoint in the Phase III GRAVITAS-301 acute GVHD trial. In February 2020, recruitment into the ruxolitinib RESET essential thrombocythemia trial was ended.
- In January 2020, Incyte agreed to partner with MorphoSys on tafasitamab, including a $750 million upfront payment and a $150 million MorphoSys share purchase. The agreement was subject to regulatory clearances and closing conditions; it is a significant post-year-end commitment.
- Management stated that operating cash flow and available cash and securities should meet capital needs for the foreseeable future. No specific revenue or earnings guidance was provided in the supplied filing text.
Risks, contingencies and unusual items
- Revenue remains substantially dependent on JAKAFI; pricing, reimbursement, competition and product acceptance could affect sales. Incyte disclosed a 2016 notice concerning an ANDA seeking a generic JAKAFI version and challenging certain patents; the company said the FDA had taken no action on the ANDA to its knowledge.
- Incyte relies on third parties for manufacturing. It cited supply-chain exposure, including Chinese-sourced raw materials for ruxolitinib, and potential manufacturing interruptions. The company planned to maintain 24 months of API safety stock and at least six months of semi-finished goods.
- A DOJ civil investigative demand concerning speaker and patient-assistance programs was followed by an unsealed qui tam complaint in November 2019. Incyte filed an answer in January 2020 and said it would defend itself. It could not estimate a possible loss and recorded no reserve.
- Other material risks include clinical-trial failure, regulatory delays, adverse safety findings, collaborator performance or termination, intellectual-property challenges, healthcare reform and pricing pressure, and potential additional capital needs. The company reported a $1.4 billion accumulated deficit despite 2019 profitability.
- Unusual earnings contributors included a $34.5 million unrealized gain on long-term investments, compared with a $44.1 million unrealized loss in 2018, and $52.2 million of other income, including interest income and Delaware R&D credits. These items contributed to year-over-year earnings improvement.
- Ernst & Young issued unqualified opinions on the financial statements and internal control. Its critical audit matters included estimation of government rebate allowances and valuation of the acquisition-related contingent consideration liability.
Key facts for investors to verify
- Underlying JAKAFI growth: prescription demand, volume and pricing, and the future effect of rebates, chargebacks and reimbursement.
- Progress and regulatory outcomes for pemigatinib, ruxolitinib in chronic GVHD, and ruxolitinib cream; also assess the consequences of the GRAVITAS-301 result and RESET recruitment decision.
- Status and potential financial exposure of the DOJ-related qui tam litigation, for which no loss estimate or reserve was recorded.
- JAKAFI patent and generic-challenge developments, and the resilience of third-party manufacturing and raw-material supply.
- Funding and closing of the MorphoSys transaction, including the $750 million upfront payment and $150 million equity investment, and its effect on liquidity and development commitments.
- Cash-flow sustainability and earnings quality, including the contribution of investment fair-value changes, collaboration milestones and tax items.