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INCY > SEC Filings for INCY > Form 10-Q on 27-Oct-2011All Recent SEC Filings

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Form 10-Q for INCYTE CORP


Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations as of and for the three and nine months ended September 30, 2011 should be read in conjunction with the financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements as of and for the year ended December 31, 2010 included in our Annual Report on Form 10-K previously filed with the SEC.

This report contains forward-looking statements that involve risks and uncertainties. These statements relate to future periods, future events or our future operating or financial plans or performance. Often, these statements include the words "believe," "expect," "target," "anticipate," "intend," "plan," "seek," "estimate," "potential," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," "might," or "may," or the negative of these terms, and other similar expressions. These forward-looking statements include statements as to:

the discovery, development, formulation, manufacturing and commercialization of our compounds and our product candidates including the date ruxolitinib could be available to myelofibrosis patients in the United States;

focus on our drug discovery, development and commercialization efforts;

conducting clinical trials internally, with collaborators, or with clinical research organizations;

our collaboration and strategic relationship strategy; anticipated benefits and disadvantages of entering into collaboration agreements;

our licensing, investment and commercialization strategies, including our plans to launch ruxolitinib;

the regulatory approval process, including obtaining U.S. Food and Drug Administration and other international health authorities approval for our products in the United States and abroad and the possible date for completion of priority review of ruxolitinib;

the safety, effectiveness and potential benefits and indications of our product candidates and other compounds under development;

the timing and size of our clinical trials; the compounds expected to enter clinical trials; timing of clinical trial results;

our ability to manage expansion of our drug discovery and development operations;

future required expertise relating to clinical trials, manufacturing, sales and marketing;

obtaining and terminating licenses to products, compounds or technology, or other intellectual property rights;

the receipt from or payments pursuant to collaboration or license agreements resulting from milestones or royalties;

the decrease in revenues from our information product-related activities;

plans to develop and commercialize products on our own;

plans to use third party manufacturers;

expected expenses and expenditure levels; expected uses of cash; expected revenues and sources of revenues;

          expected losses; fluctuation of losses;

          our profitability; the adequacy of our capital resources to continue

the need to raise additional capital;

the costs associated with resolving matters in litigation;

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          our expectations regarding competition;

          our investments, including anticipated expenditures, losses and

our patent prosecution and maintenance efforts; and

our indebtedness, and debt service obligations.

These forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. These risks and uncertainties could cause actual results to differ materially from those projected and include, but are not limited to:

our ability to successfully obtain regulatory approval for and commercialize ruxolitinib;

our ability to maintain at anticipated levels, reimbursement for ruxolitinib from government health administration authorities, private health insurers and other organizations;

our ability to establish and maintain effective sales, marketing and distribution capabilities;

the risk of reliance on other parties to manufacture ruxolitinib, which could result in a short supply of ruxolitinib, increased costs, and withdrawal of regulatory approval;

our ability to maintain regulatory approvals to market ruxolitinib;

our ability to successfully identify patients and achieve a significant market share in order to achieve or maintain profitability;

the risk of civil or criminal penalties if we market ruxolitinib in a manner that violates health care fraud and abuse laws;

our ability to discover, develop, formulate, manufacture and commercialize a drug candidate or product;

the risk of unanticipated delays in research and development efforts;

the risk that previous preclinical testing or clinical trial results are not necessarily indicative of future clinical trial results;

risks relating to the conduct of our clinical trials;

changing regulatory requirements;

the risk of adverse safety findings;

the risk that results of our clinical trials do not support submission of a marketing approval application for our product candidates;

the risk of significant delays or costs in obtaining regulatory approvals;

risks relating to our reliance on third party manufacturers, collaborators, and clinical research organizations;

risks relating to the development of new products and their use by us and our current and potential collaborators;

risks relating to our inability to control the development of out-licensed drug compounds or drug candidates;

risks relating to our collaborators' ability to develop and commercialize product candidates;

costs associated with prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights;

our ability to maintain or obtain adequate product liability and other insurance coverage;

the risk that our product candidates may not obtain or maintain regulatory approval;

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          the impact of technological advances and competition;

          the ability to compete against third parties with greater resources
than ours;

risks relating to changes in pricing and reimbursements in the markets in which we may compete;

          competition to develop and commercialize similar drug products;

          our ability to obtain patent protection and freedom to operate for
our discoveries and to continue to be effective in expanding our patent

the impact of changing laws on our patent portfolio;

developments in and expenses relating to litigation;

our ability to in-license potential drug compounds or drug candidates or other technology;

our substantial leverage and limitations on our ability to incur additional indebtedness and incur liens on our assets imposed by our debt obligations;

our ability to obtain additional capital when needed;

fluctuations in net cash provided and used by operating, financing and investing activities;

our history of operating losses; and

the risks set forth under "Risk Factors."

Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by federal securities laws, we undertake no obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

In this report all references to "Incyte," "we," "us," "our" or the "Company" mean Incyte Corporation and our subsidiaries, except where it is made clear that the term means only the parent company.

Incyte is our registered trademark. We also refer to trademarks of other corporations and organizations in this Quarterly Report on Form 10-Q.

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Incyte is a drug discovery and development company, focused on developing small molecule drugs to treat serious unmet medical needs. Our pipeline is focused in the areas of oncology and inflammation and includes compounds in various stages of development, ranging from preclinical to late-stage development.

Our two most advanced programs involve our janus kinase (JAK) inhibitors. Oral ruxolitinib (INCB18424) is in clinical development for the treatment of several myeloproliferative neoplasms and is part of a collaboration agreement with Novartis International Pharmaceutical Ltd. in which Novartis received exclusive development and commercialization rights outside of the United States to ruxolitinib for hematologic and oncology indications, including all hematological malignancies, solid tumors and myeloproliferative diseases. We submitted a New Drug Application (NDA) for ruxolitinib for the treatment of myelofibrosis in June 2011 and, in August 2011, the U.S. Food and Drug Administration (FDA) accepted our NDA filing. The FDA also granted our request for priority review, which is given to investigational drugs that may offer either a major advance in treatment or provide a treatment where no adequate therapy exists. The FDA has a goal to complete the priority review within six months. Therefore, if the NDA is approved, we anticipate that ruxolitinib could be available for U.S. patients with myelofibrosis in the fourth quarter of 2011.

Oral LY3009104 is in clinical development for rheumatoid arthritis by Eli Lilly and Company under our collaboration agreement with Lilly. Lilly received exclusive worldwide development and commercialization rights for the compound for inflammatory and autoimmune diseases; however, last year we exercised our co-development rights for rheumatoid arthritis in exchange for tiered royalty rates ranging up to the high twenties. We believe these strategic relationships increase the likelihood of the successful development and commercialization of these compounds.

We are engaged in a number of other development programs evaluating our novel c-METand IDO inhibitors and are also continuing to invest in our discovery efforts.

Our pipeline includes the following compounds:

Target/Drug Compound                      Indication                  Development Status
JAK1 and JAK2
Ruxolitinib(INCB18424)(1)    Myelofibrosis(5)                         Phase III
Ruxolitinib(INCB18424)(1)    Polycythemia Vera                        Phase III
Ruxolitinib(INCB18424)(1)    Essential Thrombocythemia                Phase II
Ruxolitinib(INCB18424)(1)    Pancreatic Cancer                        Phase II
Ruxolitinib(INCB18424)(1)    Solid Tumors/Other                       Phase I & Phase II
                             Hematologic Malignancies (6)
INCB18424(2)                 Psoriasis                                Phase IIb
LY3009104(INCB28050)(3)      Rheumatoid Arthritis                     Phase IIb
INCB28060(4)                 Solid Tumors                             Phase I
INCB24360                    Solid Tumors                             Phase I

(1) We licensed rights outside the U.S. to Novartis and retained U.S. rights.

(2) This compound is a topical formulation; all others are an oral formulation.

(3) We licensed worldwide rights to Lilly and have elected to co-develop with Lilly and we retain a co-promotion option.

(4) We licensed worldwide rights to Novartis and retained co-development and co-promotion options.

(5) This includes several other myelofibrosis studies, including a joint global Phase II trial with Novartis in thrombocytopenic patients and a Phase II trial in patients using a sustained-release formulation.

(6) These studies are investigator sponsored trials.

In September 2011, we announced that we had discontinued development of our lead sheddase inhibitor, INCB7839, for the treatment of metastatic breast cancer.

We expect to continue to expand our drug discovery and development program in the future. Conducting clinical trials for our drug candidates in development is a lengthy, time-consuming and expensive process. If we are unable to successfully develop and market pharmaceutical products over the next several years, our business, financial condition and results of operations would be adversely

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impacted. To date, we have not, and we may never, achieve sustained revenues sufficient to offset expenses. We may incur net losses in future periods and we may never achieve or maintain profitability. We also expect that our operating results may fluctuate from quarter to quarter and that those fluctuations may be substantial.

Critical Accounting Policies and Significant Estimates

The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

Revenue recognition;

Research and development costs;

Stock compensation;

Investments; and

Convertible debt and derivative accounting.

Revenue Recognition. Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectability is reasonably assured. Revenues are deferred for fees received before earned or until no further obligations exist. We exercise judgment in determining that collectability is reasonably assured or that services have been delivered in accordance with the arrangement. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer's payment history and on the creditworthiness of the customer.

Under agreements involving multiple deliverables, services and/or rights to use assets, the multiple elements are divided into separate units of accounting when certain criteria are met, including whether the delivered items have stand alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. When separate units of accounting exist, consideration is allocated among the separate elements based on their respective fair values. The determination of fair value of each element is based on objective evidence from historical sales of the individual elements by us to other customers. If such evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value for each undelivered element does exist or until all elements of the arrangement are delivered. When elements are specifically tied to a separate earnings process, revenue is recognized when the specific performance obligation tied to the element is completed. When revenues for an element are not specifically tied to a separate earnings process, they are recognized ratably over the term of the agreement. All milestone payments are recognized as revenue upon the achievement of the associated milestone.

Revenues from licenses to our intellectual property are recognized when earned under the terms of the related agreements. Royalty revenues are recognized upon the sale of products or services to third parties by the licensee or other agreed upon terms. We estimate royalty revenues based on previous period royalties received and information provided by the third party licensee. We exercise judgment in determining whether the information provided by licensees is sufficiently reliable for us to base our royalty revenue recognition thereon.

Research and Development Costs. Our policy is to expense research and development costs as incurred. We often contract with clinical research organizations (CROs) to facilitate, coordinate and perform agreed upon research and development of a new drug. To ensure that research and development costs are expensed as incurred, we record monthly accruals for clinical trials and preclinical testing costs based on the work performed under the contract.

These CRO contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain clinical trial milestones. In the event that we prepay CRO fees, we record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development services are performed. Most professional fees, including project and clinical management, data management, monitoring, and medical writing fees are

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incurred throughout the contract period. These professional fees are expensed based on their percentage of completion at a particular date. Our CRO contracts generally include pass through fees. Pass through fees include, but are not limited to, regulatory expenses, investigator fees, travel costs, and other miscellaneous costs, including shipping and printing fees. We expense the costs of pass through fees under our CRO contracts as they are incurred, based on the best information available to us at the time. The estimates of the pass through fees incurred are based on the amount of work completed for the clinical trial and are monitored through correspondence with the CROs, internal reviews and a review of contractual terms. The factors utilized to derive the estimates include the number of patients enrolled, duration of the clinical trial, estimated patient attrition, screening rate and length of the dosing regimen. CRO fees incurred to set up the clinical trial are expensed during the setup period. Reimbursable costs incurred in connection with collaborative license agreements are recorded as a reduction of research and development expenses.

Stock Compensation. Accounting guidance for stock compensation requires all share-based payment transactions with employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period based on their fair values. The accounting guidance also requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility and expected option lives, as well as expected option forfeiture rates, to value equity-based compensation and requires the recognition of the fair value of stock compensation in the statement of operations. We recorded $7.4 million and $21.5 million, respectively, of stock compensation expense on our condensed consolidated statement of operations for the three and nine months ended September 30, 2011 and $4.1 million and $10.7 million, respectively, for the three and nine months ended September 30, 2010.

Investments. We carry our investments at their respective fair values. We periodically evaluate the fair values of our investments to determine whether any declines in the fair value of investments represent an other-than-temporary impairment. This evaluation consists of a review of several factors, including the length of time and extent that a security has been in an unrealized loss position, the existence of an event that would impair the issuer's future repayment potential, the near term prospects for recovery of the market value of a security and if we intend to sell or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If management determines that such an impairment exists, we would recognize an impairment charge. Because we may determine that market or business conditions may lead us to sell a short-term investment or marketable security prior to maturity, we classify our short-term investments and marketable securities as "available-for-sale." Investments in securities that are classified as available-for-sale and have readily determinable fair values are measured at fair market value in the balance sheets, and unrealized holding gains and losses for these investments are reported as a separate component of stockholders' equity until realized. We classify those marketable securities that may be used in operations within one year as short-term investments. Those marketable securities in which we have both the ability to hold until maturity and have a maturity date beyond one year from our most recent condensed consolidated balance sheet date are classified as long-term marketable securities.

Convertible Debt and Derivative Accounting. We perform an assessment of all embedded features of a debt instrument to determine if (1) such features should be bifurcated and separately accounted for, and (2) if bifurcation requirements are met, whether such features should be classified and accounted for as equity or liabilities. If the embedded feature meets the requirements to be bifurcated and accounted for as a liability, the fair value of the embedded feature is measured initially, included as a liability on the condensed consolidated balance sheet, and remeasured each reporting period. Any changes in fair value are recorded in the condensed consolidated statement of operations. We monitor, on an ongoing basis, whether events or circumstances could give rise to a change in our classification of embedded features.

Results of Operations

We recorded a net loss of $53.1 million, or $0.42 per share (basic and diluted) for the three months ended September 30, 2011, as compared to a net loss of $31.7 million, or $0.26 per share (basic and diluted) for the same period in 2010. The net loss for the nine months ended September 30, 2011 was $131.5 million, or $1.05 per share (basic and diluted), as compared to $64.4 million, or $0.53 per share (basic and diluted), for the same period in 2010.


                                   For the three months ended,          For the nine months ended,
                                          September 30,                        September 30,
                                     2011               2010              2011               2010
                                          (in millions)                        (in millions)
Contract revenues               $         16.8     $         16.8    $         65.2     $         83.2
License and royalty revenues                 -                0.1               0.4                0.8
Total revenues                  $         16.8     $         16.9    $         65.6     $         84.0

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Our total revenues were $16.8 million and $65.6 million and $16.9 million and $84.0 million for the three and nine months ended September 30, 2011 and 2010, respectively, which included a $15.0 million milestone for INCB28060 recognized under the Novartis agreement during the nine months ended September 30, 2011. For the nine months ended September 30, 2010 we recognized $30.0 million and $3.0 million, respectively, in contract revenues relating to milestone payments under our Lilly and Pfizer agreements. In addition, for the three and nine months ended September 30, 2011 and 2010, contract revenues were derived from the straight line recognition of revenue associated with the Novartis and Lilly upfront fees over the estimated performance periods. The upfront fees related to the Novartis agreement included a $150.0 million upfront payment received in 2009, a $60.0 million immediate milestone payment received in 2010 and $10.9 million of reimbursable costs incurred prior to the effective date of the agreement. The upfront fees related to the Lilly agreement consisted of a $90.0 million upfront payment received in 2010.

Operating Expenses.

Research and development expenses.

                                   For the three months ended,          For the nine months ended,
                                          September 30,                        September 30,
                                     2011               2010              2011               2010
                                          (in millions)                        (in millions)
Salary and benefits related     $         13.1     $         10.1    $          38.9     $        31.0
Stock compensation                         4.8                2.6               14.0               7.3
Clinical research and
outside services                          20.7               13.3               57.9              40.0
Occupancy and all other
costs                                      6.0                4.6               16.0              12.8

Total research and
development expenses            $         44.6     $         30.6    $         126.8     $        91.1

We currently track research and development costs by natural expense line and not costs by project. Salary and benefits related expense increased from the three and nine months ended September 30, 2010 to the three and nine months ended September 30, 2011 due to increased development headcount to sustain our development pipeline. Stock compensation expense may fluctuate from period to period based on the number of options granted, stock price volatility and expected option lives, as well as expected option forfeiture rates which are used to value equity-based compensation. The increase in clinical research and outside services expense from the three and nine months ended September 30, 2010 to the three and nine months ended September 30, 2011 was primarily the result . . .

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