Incyte Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Incyte is a drug discovery and development company focused on oncology and inflammation; its revenue was derived from collaboration and licensing arrangements.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $16.8 million | $16.9 million | $65.6 million | $84.0 million |
| Operating loss | $42.1 million | $22.1 million | $99.0 million | $28.3 million |
| Net loss | $53.1 million | $31.7 million | $131.5 million | $64.4 million |
| Basic and diluted loss per share | $0.42 | $0.26 | $1.05 | $0.53 |
| Operating cash flow | Not separately stated for the quarter | $(121.9) million | $70.5 million |
- For the first nine months, R&D expense rose to $126.8 million from $91.1 million; SG&A rose to $37.1 million from $21.6 million. Management attributed increases primarily to pipeline development, clinical trial activity, headcount, and preparation for a possible ruxolitinib launch. The filing does not present a gross margin.
- At September 30, cash and cash equivalents were $312.3 million and available-for-sale marketable securities were $4.6 million. Management reported $317.0 million of cash, cash equivalents, and marketable securities available, excluding $28.5 million of restricted funds escrowed for senior-note interest.
- Current assets were $346.4 million and current liabilities were $121.0 million. Total assets were $371.2 million, total liabilities $552.2 million, and stockholders’ deficit $181.0 million. Accumulated deficit was $1.55 billion.
- Debt carrying value was $310.3 million; stated principal outstanding was $420.0 million: $400.0 million of 4.75% convertible senior notes due 2015 and $20.0 million of Pfizer convertible subordinated notes due 2013 and 2014. The senior notes’ reported fair value was $708.0 million. The company had funded an escrow for interest through October 2012.
- For the first nine months, financing activities provided $17.7 million, mainly from stock plans; investing activities used $1.4 million. Cash and cash equivalents declined by $105.6 million to $312.3 million from year-end 2010.
Changes versus the prior comparable period
- Quarterly revenue was nearly unchanged, but nine-month revenue declined 22% year over year. The 2010 comparison included $30 million in Lilly milestone revenue and $3 million in Pfizer milestone revenue. 2011 included a $15 million Novartis milestone for INCB28060.
- Nine-month operating cash flow shifted from $70.5 million provided in 2010 to $121.9 million used in 2011, reflecting prior-period collaboration upfront and milestone receipts and ongoing cash requirements.
- Nine-month net loss approximately doubled. R&D and SG&A spending increased, while the 2010 period also included a $4.0 million loss on redemption of older notes.
- Cash and cash equivalents fell from $417.9 million at December 31, 2010 to $312.3 million at September 30, 2011. Convertible senior-note carrying value increased from $276.4 million to $292.6 million.
Outlook, commentary, and risks
- Incyte had submitted an NDA for ruxolitinib for myelofibrosis in June 2011; the FDA accepted it and granted priority review in August. Management said the FDA’s review goal was six months and that, if approved, U.S. availability could occur in Q4 2011. Approval and launch were not assured.
- Management expected cash, cash equivalents, and marketable securities to fund capital needs for at least 12 months, while also expecting losses in 2011 and future periods. It stated that additional capital may be needed and could require equity, debt, or collaboration financing on uncertain terms.
- Ruxolitinib was in Phase III studies for myelofibrosis and polycythemia vera. Other programs included LY3009104 for rheumatoid arthritis, INCB28060 for solid tumors, and INCB24360 for solid tumors. In September 2011, Incyte discontinued development of its lead sheddase inhibitor, INCB7839, for metastatic breast cancer.
- Key risks include regulatory approval and commercialization, reimbursement and pricing, reliance on third-party manufacturers and single-source supply, clinical and safety uncertainty, dependence on collaborators, competition, intellectual-property disputes, and substantial debt. The senior-note indenture restricts certain additional indebtedness, liens, and asset dispositions.
- One customer contributed 81% of Q3 revenue and 85% of nine-month revenue; three customers represented all accounts receivable at quarter-end. This creates significant customer and collection concentration.
- Contingent Maxia acquisition earn-outs of up to $14 million remained possible; none of the relevant milestones had been achieved as of September 30, 2011. Management reported no off-balance-sheet arrangements other than those discussed in the filing.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Subsequent FDA action on the ruxolitinib NDA and whether approval, launch timing, label, and commercial uptake matched management’s expectations.
- Cash burn, available liquidity, and financing needs relative to the company’s stated 12-month liquidity outlook and debt service obligations.
- Revenue concentration and the durability of collaboration revenue, including future milestones, royalties, and partner development decisions.
- Clinical progress and safety data for the lead pipeline, as well as the financial and strategic effects of the INCB7839 discontinuation.
- Manufacturing readiness, supply continuity, reimbursement, and the costs of building U.S. sales and distribution capabilities for ruxolitinib.