Incyte Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; financial statements are unaudited. Incyte is a biopharmaceutical company with commercial products JAKAFI and ICLUSIG and reports as one operating segment. Amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $381.5 million | $269.5 million | $1,092.1 million | $779.2 million |
| Operating income (loss) | $15.0 million | $22.3 million | $(111.1) million | $102.9 million |
| Net income (loss) | $36.1 million | $36.9 million | $(163.5) million | $95.3 million |
| Diluted earnings (loss) per share | $0.17 | $0.19 | $(0.81) | $0.49 |
| Operating cash flow | Not stated separately | Not stated separately | $(3.7) million | $210.4 million |
- Q3 revenue increased about 42% year over year; nine-month revenue increased about 40%. Product revenue was $322.0 million in Q3 and $878.5 million year to date. JAKAFI accounted for $303.9 million and $831.0 million, respectively; ICLUSIG accounted for $18.1 million and $47.5 million.
- Q3 product royalties were $44.5 million, including $41.3 million from Novartis’s JAKAVI sales; nine-month product royalties were $108.5 million. Contract revenue was $15.0 million in Q3 and $105.0 million year to date, including milestone revenue.
- Research and development expense rose to $269.6 million in Q3 and $879.4 million for nine months, from $143.2 million and $420.3 million, respectively. Incyte attributed the increase principally to expanded pipeline activity and collaboration-related upfront and milestone costs; charges for the Calithera, Merus and amended Agenus arrangements totaled $209.1 million in the first nine months.
- Q3 operating margin was approximately 3.9%; the nine-month operating margin was approximately negative 10.2%. The filing does not state a separate gross margin.
- At September 30, cash and cash equivalents were $1.128 billion, current marketable securities $153.3 million, and long-term investments $169.0 million. Management reported $1.3 billion of cash, cash equivalents and marketable securities. Total assets were $2.374 billion and stockholders’ equity $1.758 billion.
- Convertible notes had a $23.7 million carrying value at quarter-end, versus $651.5 million at December 31, 2016; contractual principal obligations were $26.8 million. Most of the reduction reflects note conversions. The company reported total contractual obligations of $56.5 million, including leases.
- Cash from financing was $686.4 million for nine months, including $649.4 million net proceeds from a September public stock offering. Cash used in investing was $207.0 million, including $85.8 million of capital expenditures and purchases of long-term investments. Cash and cash equivalents rose by $475.7 million during the period.
Material changes and unusual items
- In September, Incyte issued 4.945 million common shares for net proceeds of approximately $649.4 million. Shares outstanding increased to 211.0 million at September 30 from 188.8 million at year-end 2016.
- Incyte exchanged substantial portions of its 2018 and 2020 convertible notes for shares and cash. The exchanges generated $54.9 million of expense in the first nine months, including $48.4 million related to premium shares and cash paid.
- In Q3, ARIAD discontinued the OPTIC-2L ICLUSIG study. Incyte wrote off $12.0 million of acquired in-process research and development and recorded a $16.3 million benefit from remeasurement of acquisition-related contingent consideration. The filing identifies a $24.0 million Q3 benefit associated with reduced expected royalties following the study discontinuation.
- Nine-month results also included a $2.3 million unrealized loss on long-term investments; Q3 included a $23.0 million unrealized gain. These investment valuation changes can materially affect reported earnings.
Outlook, commentary and risks
- Management said available cash, cash equivalents and marketable securities, together with operating cash flow, should meet capital needs for at least the next 12 months. The filing provides no formal revenue or earnings guidance and cautions that interim results are not necessarily indicative of full-year results.
- In August 2017, Incyte and Lilly said they expected to resubmit the baricitinib rheumatoid arthritis NDA before the end of January 2018, with new safety and efficacy data; FDA approval remained uncertain after a complete response letter requested additional clinical information. Baricitinib had been approved in Europe and Japan.
- In October 2017, Incyte entered a global MGA012 (anti-PD-1) collaboration with MacroGenics, with a planned $150 million upfront payment, up to $750 million in potential milestones, and tiered royalties of 15%–24%, subject to closing conditions.
- Key disclosed risks include clinical-trial failure or delay, regulatory uncertainty, dependence on JAKAFI revenues, pricing and reimbursement pressure, reliance on collaborators and third-party manufacturers, competition and generic challenges to JAKAFI patents, and the potential for future losses. Incyte said it could not estimate a probable loss related to the 2016 generic JAKAFI patent challenge.
- Incyte reported effective disclosure controls and no material changes in internal control over financial reporting during the nine-month period.
Important facts for investors to verify
- JAKAFI prescription growth, pricing, reimbursement, sales allowances and the extent to which growth is sustainable.
- Progress and FDA requirements for the baricitinib resubmission, and the resulting timing and potential for milestone and royalty revenue.
- Whether elevated research and development spending and collaboration commitments translate into clinical progress, and their effect on cash use.
- Effects of the OPTIC-2L discontinuation on ICLUSIG development plans, contingent consideration and future royalties payable to ARIAD.
- Remaining convertible-note principal, conversion-related dilution, and the impact of the public stock issuance on per-share results.
- Valuation and liquidity risks in long-term strategic investments, and the execution and funding obligations of the MacroGenics agreement.