Incyte Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Incyte is a biopharmaceutical company focused primarily on oncology. Its marketed product is U.S. JAKAFI (ruxolitinib); Novartis markets JAKAVI outside the United States.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $163.0 million | $99.6 million | $322.3 million | $189.4 million |
| Operating loss | $7.4 million | $26.2 million | $14.3 million | $49.1 million |
| Net income (loss) | $9.3 million | ($36.9 million) | ($9.1 million) | ($70.8 million) |
| Net income (loss) per diluted share | $0.05 | ($0.22) | ($0.05) | ($0.43) |
- Q2 revenue rose about 64% year over year; six-month revenue rose about 70%. U.S. JAKAFI product revenue was $142.4 million in Q2 and $257.7 million for the half year, up from $84.0 million and $153.7 million, respectively. Management attributed the six-month product-revenue increase to volume (+$80.8 million) and price (+$23.2 million).
- JAKAVI royalties were $17.4 million in Q2 and $33.0 million for the half year, compared with $12.3 million and $22.2 million. Six-month contract revenue was $31.4 million, including a $25.0 million Novartis regulatory milestone; the comparable 2014 period included a $7.0 million milestone.
- Q2 product gross margin, calculated from reported product revenue and cost of product revenue, was approximately 95.6%. This is not a company-wide margin and reflects low-cost pre-launch inventory. Management expects product costs to reach the mid-single digits as a percentage of net product sales after that inventory is used.
- Q2 research and development expense increased to $112.4 million from $84.7 million; six-month expense rose to $230.8 million from $160.3 million. Increases reflected pipeline investment, including $20.2 million of Agenus license-related expense in the half year, and additional Agenus development costs. SG&A rose to $51.7 million in Q2 and $96.5 million for the half year, reflecting increased commercial staffing and marketing.
- Q2 net income included a $27.2 million unrealized gain on Incyte’s Agenus investment. Excluding that gain, the quarter remained loss-making before tax; operating results were still a loss. The gain was non-cash and based on Agenus’ share price.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $439.7 million and marketable securities were $187.8 million, totaling $627.5 million in available cash and securities. Current assets were $733.0 million and current liabilities $192.5 million.
- Six-month operating cash flow was positive $8.8 million, compared with $46.3 million used in the 2014 period. Investing cash use was $85.3 million, including the Agenus investment; financing provided $63.8 million. Cash declined $12.6 million from year-end 2014.
- Convertible notes had a carrying value of $660.0 million; aggregate principal was $793.8 million. The $43.8 million principal balance of 4.75% notes was due in October 2015. The $375 million 2018 notes and $375 million 2020 notes were also outstanding. Management said the 2018 and 2020 notes became convertible on July 1, after quarter-end, and that it intended to settle conversions in shares.
- Stockholders’ equity was $55.2 million, versus a deficit of $81.6 million at December 31, 2014; accumulated deficit was $1.8 billion. Management stated available cash and marketable securities should meet capital needs for at least the next 12 months.
Developments, outlook and risks
- JAKAFI was approved in the United States for myelofibrosis and, in December 2014, for polycythemia vera in patients with inadequate response or intolerance to hydroxyurea. European approval of JAKAVI for polycythemia vera followed in March 2015.
- The pipeline includes Phase III ruxolitinib trials in pancreatic cancer and Phase III baricitinib trials in rheumatoid arthritis. Incyte reported that two baricitinib Phase III rheumatoid arthritis studies had met their primary endpoints. The company expected Lilly’s NDA submission in late 2015 or early 2016 and anticipated its baricitinib co-development costs would decline after submission.
- Incyte entered an immunotherapy collaboration with Agenus and bought approximately 9% of Agenus for $35.0 million. The investment was marked to market; its fair value was $67.0 million at June 30. The collaboration includes four checkpoint-modulator programs, with different cost-sharing and royalty structures.
- Management gave no specific revenue or earnings forecast in the provided filing text. It expects continued significant research and development spending and warned it may continue to incur losses. Future funding needs depend on product sales, clinical spending, milestones, collaborations and debt obligations; additional financing may be dilutive or unavailable on acceptable terms.
- Key risks include reliance on JAKAFI and a concentrated group of specialty pharmacy customers, reimbursement and pricing pressure, third-party manufacturing and single-source supply exposure, clinical and regulatory uncertainty, collaborator execution, and substantial debt. The filing specifically noted that generic manufacturers could begin challenging JAKAFI-related patents as early as the fourth quarter of 2015.
- The Phase II INCB39110/docetaxel NSCLC trial was stopped in Q2 because of slow recruitment. The filing also cautions that clinical results, regulatory approvals, milestone payments and future royalties are uncertain.
Important facts for investors to verify
- How much JAKAFI revenue growth reflects durable patient demand versus pricing, and how rebates, chargebacks and other sales allowances evolve.
- Whether the Agenus fair-value gain is sustained; it materially affected reported Q2 net income but was unrealized and non-cash.
- The repayment, conversion or refinancing outcome for the 2015 notes due in October, and the dilution or cash consequences of conversions of the 2018 and 2020 notes.
- Progress and results in pivotal ruxolitinib and baricitinib trials, and the timing and regulatory outcomes of any planned submissions.
- JAKAFI patent challenges, reimbursement conditions, specialty-pharmacy concentration and continuity of third-party supply.
- Whether the company’s liquidity remains adequate as pipeline investment and commercialization costs continue; management’s 12-month liquidity assessment is not a guarantee of future funding availability.