Incyte Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results; amounts are in U.S. dollars unless stated otherwise. Incyte is a biopharmaceutical company with commercial products JAKAFI and ICLUSIG and a research and development pipeline.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 or comparator |
|---|---|---|
| Total revenue | $382.3 million | $384.1 million |
| Product revenue | $334.5 million | $264.8 million |
| Product royalty revenue | $47.7 million | $29.2 million |
| Milestone revenue | $0 | $90.0 million |
| Research and development expense | $303.1 million | $407.9 million |
| Selling, general and administrative expense | $121.5 million | $87.2 million |
| Loss from operations | $(67.1) million | $(133.2) million |
| Net loss | $(41.1) million; $(0.19) per share | $(187.1) million; $(0.96) per share |
| Cash from operating activities | $20.8 million provided | $173.6 million used |
- JAKAFI revenue was $313.7 million, up from $251.1 million; management attributed the increase to $31.9 million of volume growth and $30.7 million of price growth. ICLUSIG revenue was $20.8 million, up from $13.7 million.
- Revenue was nearly flat overall despite product and royalty growth because Q1 2017 included $90 million of milestones: $65 million tied to baricitinib approval in Europe and $25 million tied to a Novartis development milestone.
- R&D declined mainly because Q1 2017 included $209.1 million of upfront and milestone expenses for collaboration arrangements. SG&A increased with commercial and European headcount, JAKAFI commercialization costs, and patient-assistance donations.
- Net loss improved substantially, but included a $22.7 million unrealized gain on long-term investments. This non-cash fair-value gain materially affected the comparison.
- At March 31, cash and cash equivalents were $894.4 million; current marketable securities were $276.6 million. Together, these were approximately $1.17 billion. Total assets were $2.31 billion, current assets $1.47 billion, and current liabilities $381.1 million.
- Convertible notes had a carrying amount of $24.3 million and fair value of $43.6 million. The 2018 notes, with $7.5 million carrying value, mature in November 2018; the 2020 notes had $16.8 million carrying value. Acquisition-related contingent consideration was $287.0 million, including current and long-term portions.
- Investing cash outflow was $28.5 million, including $12.6 million in capital expenditures; financing cash inflow was $2.6 million. Cash, cash equivalents, restricted cash and investments decreased by $5.1 million during the quarter.
Material changes, outlook and significant items
- Management stated that cash, cash equivalents, marketable securities and operating cash flow should meet capital needs for at least the next 12 months. No specific revenue, earnings or cash-flow guidance was provided.
- In April 2018, after quarter-end, an external monitoring committee found the Phase III ECHO-301 epacadostat combination study did not meet its progression-free-survival endpoint and overall survival was not expected to reach statistical significance. The study was stopped and Incyte significantly downsized the epacadostat program; certain other pivotal studies were halted, converted to Phase II, or not initiated.
- Also after quarter-end, an FDA advisory committee recommended baricitinib approval at the 2 mg dose for rheumatoid arthritis, but did not recommend the 4 mg dose on safety and benefit-risk grounds. The FDA action date was expected in June 2018.
- In February 2018, Incyte and Hengrui agreed to terminate their collaboration. In April 2018, Incyte exercised a BMS PD-1 antibody license option for a $15 million fee, to be recorded as Q2 R&D expense.
- Incyte entered a 15-year lease in February 2018 for a building in Morges, Switzerland, intended as its European headquarters; completion was estimated for November 2019, with extension options.
- Key risks include dependence on JAKAFI, reimbursement and pricing pressure, customer and supplier concentration, clinical-trial and regulatory uncertainty, reliance on collaborators and contract manufacturers, potential generic competition, and volatility in publicly traded collaborator investments. The filing notes a generic JAKAFI application challenging certain patents; Incyte’s composition-of-matter patent was not challenged in that notice.
- The company adopted ASC 606 revenue guidance in Q1 2018 with no significant overall change to revenue-recognition methodology and no cumulative retained-earnings adjustment. It also began recognizing equity-investment fair-value changes in earnings; this contributed to Q1 investment-related volatility.
Important facts for investors to verify
- Whether JAKAFI sales growth, pricing and reimbursement trends continue, and how government rebates and chargebacks affect net revenue.
- The FDA’s final baricitinib decision, approved dose and label, and resulting potential royalties and milestones.
- The financial and pipeline consequences of the ECHO-301 outcome and the epacadostat program reductions.
- How much of reported earnings reflects operating performance versus volatile unrealized gains or losses on equity investments.
- The timing and cash impact of convertible-note maturities and the $287 million contingent consideration obligation.
- Whether the stated cash runway remains adequate as clinical, commercialization, collaboration and facility expenditures evolve.