Incyte Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is Q1 2018 unless otherwise noted. Amounts are in U.S. dollars. Incyte is a biopharmaceutical company with one reported operating segment. Its marketed products include U.S. JAKAFI and European ICLUSIG; it also earns royalties from JAKAVI and OLUMIANT.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Total revenue | $497.9 million | $382.3 million | Up 30.2% |
| Product revenue | $396.2 million | $334.5 million | JAKAFI $375.6 million; ICLUSIG $20.6 million |
| Product royalties | $61.6 million | $47.7 million | JAKAVI $45.6 million; OLUMIANT $16.0 million |
| Milestone and contract revenue | $40.0 million | — | Innovent upfront payment |
| Operating income (loss) | $74.1 million | $(67.1) million | Operating margin approximately 14.9%, versus approximately (17.6%) |
| Net income (loss) | $102.3 million | $(41.1) million | Diluted EPS $0.47 versus $(0.19) |
| Operating cash flow | $155.7 million | $20.8 million | Increase primarily reflected working-capital changes |
JAKAFI revenue increased 19.7%, attributed to $41.5 million of volume growth and $20.4 million of price increases. ICLUSIG revenue was slightly lower year over year. Research and development expense fell to $270.5 million from $303.1 million, principally reflecting lower clinical research and outside-services costs, including the end of Incyte’s baricitinib co-funding. Selling, general and administrative expense was $124.0 million, compared with $121.5 million. Cost of product revenue was $22.6 million, including $13.4 million of JAKAFI royalties payable to Novartis.
Net income included a $21.0 million unrealized gain on long-term investments; the filing notes that investment gains and losses may fluctuate with collaborator share prices. The $40.0 million Innovent payment also contributed to revenue. These items are important context when assessing the period’s reported earnings.
At March 31, cash and cash equivalents were $1.300 billion and current marketable securities were $281.3 million, or approximately $1.581 billion combined. Current assets were $1.905 billion and current liabilities $364.5 million. Total assets were $2.754 billion; stockholders’ equity was $2.086 billion. The accumulated deficit was $1.775 billion.
Convertible senior notes had a carrying amount of $17.6 million and a 1.25% coupon, with maturity in 2020; contractual principal was reported as $19.1 million. The notes became convertible on April 1, 2019 through at least June 30, based on the share-price test. Management stated it intended to settle conversions during that period in shares. Acquisition-related contingent consideration was $287.0 million, a Level 3 fair-value liability. Operating and finance lease liabilities totaled $24.4 million following adoption of the new lease standard.
Investing activities used $24.6 million, including $18.3 million of capital expenditures. Financing activities provided $4.5 million, including stock-plan proceeds and partly offset by contingent-consideration payments. Management said cash, cash equivalents, marketable securities, and operating cash flow should meet capital needs for the foreseeable future. Contractual obligations totaled $87.9 million; this excludes potential future license fees, milestones, and royalties not then determinable.
Material developments, outlook, and risks
- Management provided no specific revenue or earnings guidance in the supplied filing text. It expects to continue investing in drug discovery and development and cautioned that quarterly results may fluctuate.
- Incyte reported active late-stage programs in ruxolitinib for graft-versus-host disease, itacitinib for acute and chronic GVHD, and pemigatinib for several cancers. The FDA extended the review period for the ruxolitinib GVHD supplemental application by three months in February 2019. Itacitinib’s acute-GVHD Phase III enrollment was reported complete in April 2019. Novartis expected to submit a capmatinib NDA that year.
- In April 2019, Incyte elected to end additional baricitinib development co-funding, effective January 1, 2019, while retaining royalties under the Lilly agreement. Lilly also announced it would not proceed with a Phase III baricitinib program in psoriatic arthritis.
- Incyte adopted ASC 842 leases on January 1, 2019, recording $23.6 million of right-of-use assets and $23.7 million of lease liabilities. The adoption did not materially affect net income or cash flows. The Morges, Switzerland European headquarters was expected to be occupied in the second half of 2019; a planned large-molecule facility was expected to be completed in the second half of 2020.
- A Department of Justice civil investigative demand received in December 2018 concerns speaker programs and patient assistance programs, including support for nonprofit patient-assistance organizations. Incyte said it was cooperating; the outcome and possible loss could not be estimated, and no reserve was recorded.
- Key risks include reliance on JAKAFI revenue, reimbursement and pricing pressure, competition and potential generic challenges to JAKAFI patents, clinical and regulatory uncertainty, dependence on third-party manufacturers and collaborators, and concentration among JAKAFI customers. The filing also describes regulatory and product-safety risks for marketed products.
Important facts for investors to verify
- How much of revenue and earnings growth is repeatable, given the Innovent milestone and unrealized investment gains?
- Whether JAKAFI volume, pricing, and sales allowances remain favorable; accrued sales allowances were $69.4 million at quarter-end.
- Progress, timing, and regulatory outcomes for the ruxolitinib GVHD application, itacitinib trials, pemigatinib programs, and Novartis’s capmatinib plans.
- The status and potential financial or reputational consequences of the DOJ inquiry; the filing provides no estimable loss range.
- How the convertible notes, contingent consideration, facility construction, and continuing R&D commitments affect future cash use and reported results.