Incyte Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited interim results. Incyte is a biopharmaceutical company whose marketed products included U.S. JAKAFI and, following its June acquisition, European ICLUSIG.
Financial performance
- Revenue: Q3 revenue was $269.5 million, up 43.6% from $187.6 million; nine-month revenue was $779.2 million, up 52.8% from $509.9 million. Q3 product revenue was $236.6 million, product royalties $29.6 million, and contract revenue $3.2 million.
- Product trends: Q3 JAKAFI revenue was $223.9 million versus $161.3 million a year earlier. ICLUSIG contributed $12.7 million in Q3; it was acquired in June. JAKAVI royalties from Novartis rose to $29.6 million from $18.1 million.
- Profit: Q3 net income was $36.9 million ($0.19 diluted EPS), versus a $39.6 million loss ($0.22 per share) in Q3 2015. Nine-month net income was $95.3 million ($0.49 diluted EPS), versus a $48.6 million loss ($0.27 per share).
- Costs and operating results: Q3 R&D was $143.2 million, up from $132.1 million; SG&A was $75.8 million, up from $47.6 million. Operating income was $22.3 million, compared with an operating loss of $0.1 million. Product cost was $20.2 million, including ICLUSIG acquisition-related amortization and elevated acquired-inventory costs.
- Cash flow and liquidity: Nine-month operating cash flow was $210.4 million, compared with $16.5 million in 2015. Investing cash outflow was $196.5 million, including $143.0 million for the acquisition and $104.4 million of capital expenditures. Cash and cash equivalents were $580.1 million; cash, cash equivalents and marketable securities totaled $716.6 million. Current assets were $886.7 million against current liabilities of $240.5 million.
- Debt and equity: Convertible notes had $749.8 million aggregate principal due in 2018 and 2020; their combined balance-sheet carrying amount was $643.4 million. Stockholders’ equity was $370.0 million.
Material changes and unusual items
- Revenue growth chiefly reflected higher JAKAFI sales, greater JAKAVI royalties, and collaboration milestones. Nine-month contract revenue included $55 million of baricitinib regulatory milestones and a $5 million Novartis payment for ex-U.S. GVHD rights.
- Q3 net income included a $24.3 million unrealized gain on Incyte’s Agenus investment. Acquisition-related contingent consideration remeasurement added $8.0 million of Q3 expense ($10.3 million for nine months). These items make reported earnings less representative of recurring operating performance.
- The June 2016 ARIAD European business acquisition had preliminary consideration of $440.5 million: $147.5 million cash and $293.0 million initial fair value of contingent consideration. At September 30, contingent consideration was valued at $298.0 million. ARIAD’s acquired entity contributed $16.7 million revenue and a $28.2 million net loss from acquisition through quarter-end; the loss included acquisition accounting effects and acquisition-related costs.
- R&D expense rose partly due to a $35 million payment to Lilly for U.S. ruxolitinib GVHD rights, pipeline development, and increased headcount. SG&A growth reflected commercialization and headcount, marketing and patient-assistance donations, and the acquired European operation.
Outlook, commentary and risks
- Management said available cash and marketable securities were expected to meet capital needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance; management cautioned that R&D, regulatory, commercialization and acquisition-related spending can vary.
- In October 2016, Novartis notified Incyte of a $40 million European JAKAVI reimbursement milestone, expected to be recognized as contract revenue in Q4 2016.
- Management planned to begin a U.S. registration program for ruxolitinib in GVHD in Q4 2016. Baricitinib rheumatoid-arthritis applications had been submitted by Lilly; Incyte expected its co-development costs to decline following submission.
- Key risks include dependence on JAKAFI sales and reimbursement, clinical-trial and regulatory uncertainty, competition, reliance on third-party manufacturing and collaborators, and integration of the acquired European business. Incyte disclosed a February 2016 Paragraph IV notice challenging certain JAKAFI patents; the notice did not challenge the composition-of-matter patent, and the company said a loss was not then probable or estimable.
- The company reported effective disclosure controls. It was still integrating the acquired ARIAD entities and evaluating related internal-control changes. The filing also notes that INCSHR1210 enrollment had been suspended pending further assessment.
Important facts for investors to verify
- How much reported earnings growth reflects recurring product and royalty performance versus the Agenus investment gain, milestones and acquisition accounting?
- Whether JAKAFI sales growth, pricing, reimbursement and sales-allowance estimates remain sustainable, and how the generic patent challenge develops.
- Whether ICLUSIG’s European launch and integration deliver expected commercial results, including the effect of ARIAD royalties, milestones and contingent consideration.
- Progress, safety and timing of key clinical programs, especially ruxolitinib in GVHD, epacadostat, and the suspended INCSHR1210 program.
- Cash deployment, capital spending and the ability to meet $749.8 million of note principal obligations as they approach maturity; note management’s stated 12-month liquidity outlook.