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INCY > SEC Filings for INCY > Form 10-Q on 3-Aug-2012All 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 six months ended June 30, 2012 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, 2011 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, our product candidates and JAKAFI® (ruxolitinib);

† 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 commercialize JAKAFI;

† 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;

† 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;

† 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;

†          our expectations regarding competition;

†          our investments, including anticipated expenditures, losses and

† our patent prosecution and maintenance efforts; and

† our indebtedness, and debt service obligations.

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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 commercialize JAKAFI;

† our ability to maintain at anticipated levels, reimbursement for JAKAFI 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 JAKAFI, which could result in a short supply of JAKAFI, increased costs, and withdrawal of regulatory approval;

† our ability to maintain regulatory approvals to market JAKAFI;

† 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 JAKAFI in a manner that violates health care fraud and abuse and other applicable laws, rules and regulations;

† our ability to discover, develop, formulate, manufacture and commercialize our other product candidates;

† 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;

†          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;

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

† 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 and JAKAFI are our registered trademarks. 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 biopharmaceutical company focused on the discovery, development and commercialization of proprietary small molecule drugs to treat serious unmet medical needs. We began our drug discovery and development operations in 2001 and have focused our research efforts primarily in the areas of oncology and inflammation where we believe our expertise in medicinal chemistry, target selection, and preclinical and clinical development can be most effectively leveraged.

Our most advanced compound, JAKAFI® (ruxolitinib), is an oral Janus associated kinase (JAK) inhibitor that is approved by the U.S. Food and Drug Administration (FDA) as a treatment for patients with intermediate or high-risk myelofibrosis (MF), including primary MF, post-polycythemia vera MF and post-essential thrombocythemia MF. MF is a serious, life-threatening blood cancer that belongs to a group of diseases known as myeloproliferative neoplasms that include polycythemia vera and essential thrombocythemia.

JAKAFI is the first FDA-approved JAK inhibitor and is part of a potentially important new oral drug class to treat cancer and chronic inflammatory diseases. The JAK pathway, which consists of four tyrosine kinases-JAK1, JAK2, JAK3 and Tyk2, is dysregulated in many oncologic and inflammatory conditions. This can occur through mutations that activate JAK2 or through other mechanisms such as overexpression of cytokines that activate JAK1 and JAK2. JAKAFI works by selectively inhibiting the overactive JAK1 and JAK2 signaling.

The FDA has also granted JAKAFI orphan drug status for MF as well as two related myeloproliferative neoplasms: polycythemia vera and essential thombocythemia. The European Commission has also granted the compound orphan drug status for MF. In addition, we hold patents that cover the formulation and use of JAKAFI through 2026, excluding potential patent term extensions.

JAKAFI is subject to a collaboration agreement with Novartis International Pharmaceutical Ltd. in which Novartis received exclusive development and commercialization rights to the product outside of the United States for all hematologic and oncologic indications, including hematological malignancies, solid tumors and myeloproliferative neoplasms. Pursuant to the terms of the collaboration agreement with Novartis, we retained all development and commercialization rights to JAKAFI in the United States and are eligible to receive development milestones and royalties from product sales outside the United States. In April 2012, a recommendation was made by the Committee for Medicinal Products for Human Use of the European Medicines Agency for the approval of ruxolitinib.

Following the FDA approval of JAKAFI as a treatment for patients with intermediate or high-risk MF in November 2011, we began its commercialization in the United States. We believe there are between 16,000 and 18,500 total myelofibrosis patients in the United States. Based on the modern prognostic scoring systems referred to as International Prognostic Scoring System and Dynamic International Prognostic Scoring System, we believe intermediate and high-risk patients represent 80 percent to 90 percent of all MF patients in the United States and encompass patients over the age of 65, or patients who have or have ever had any of the following: anemia, constitutional symptoms, elevated white blood cell or blast counts, or platelet counts less than 100,000 per microliter of blood.

In addition to its development as a treatment for MF, Incyte and Novartis believe ruxolitinib may have potential as a treatment for other cancers. Several additional clinical programs are ongoing, including a global Phase III trial in patients with advanced polycythemia vera, a Phase II trial in patients with pancreatic cancer, and Phase II trials in several other hematologic cancers being conducted as investigator-sponsored trials.

We have a second oral JAK1 and JAK2 inhibitor, baricitinib, also known as LY3009104 (INCB28050), which is subject to a collaboration agreement with Eli Lilly and Company in which Lilly received exclusive worldwide development and commercialization rights for the compound for inflammatory and autoimmune diseases. We could receive tiered, double-digit royalty payments on future global sales of products subject to the agreement with rates ranging up to 20% if the products are successfully commercialized. This collaboration also contains an option for us to co-develop compounds for any inflammatory and autoimmune disease, whereby we fund 30% of development costs from Phase IIb through regulatory approval for that indication in exchange for tiered royalties ranging up to the high twenties on potential future sales. We exercised our co-development option for the development of baricitinib in rheumatoid arthritis in 2010. A Phase IIb trial of baricitinib in patients with rheumatoid arthritis was recently completed and a Phase III clinical trial of this compound in patients with rheumatoid arthritis is expected to begin later this year. Baricitinib is also in a Phase IIb trial for patients with moderate-to-severe psoriasis.

We have several other orally available small molecule compounds that are in various stages of development. We intend to continue our investment in drug discovery to expand our pipeline.

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Our current pipeline includes the following compounds:

Target/Drug Compound                   Indication                    Status
JAK1 and JAK2
JAKAFI(1)                     Intermediate or High-Risk       FDA Approved-Marketed
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 and Other          Phase I and Phase II
Baricitinib                   Rheumatoid Arthritis            Phase IIb
Baricitinib                   Psoriasis                       Phase IIb
INCB28060(4)                  Solid Tumors                    Phase I
INCB24360                     Solid Tumors                    Phase II

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

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

(3) We licensed worldwide rights to Lilly and retained co-development and co-promotion options.

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

(5) Several clinical trials in patients with myelofibrosis are ongoing, including long-term extension studies, a joint global Phase II trial with Novartis in patients with low platelet counts, and an Incyte-sponsored Phase II trial in patients with low platelet counts.

(6) These studies are investigator sponsored trials.

The therapeutic and commercial value of new medicines is difficult to predict, and conducting clinical trials for our drug candidates in development is a lengthy, time-consuming and expensive process. Therefore, if we are unable to successfully commercialize JAKAFI or develop and market some of our other pharmaceutical products over the next several years, our business, financial condition and results of operations would be adversely 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 period to period 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

† Inventory.

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Revenue Recognition. Revenues are recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered,
(3) the price is fixed and determinable and (4) 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.

Product Revenues

Our product revenues consist of U.S. sales of JAKAFI and are recognized once we meet all four revenue recognition criteria described above. Upon receipt of product by the specialty pharmacy, we meet three of the four revenue recognition criteria in that persuasive evidence of an arrangement exists, delivery has occurred and collectability is reasonably assured. However, at the time of receipt of product by the specialty pharmacy, we presently do not have the ability to estimate product that will ultimately be returned due to our limited history with product revenues at this time. Accordingly, the price is not deemed fixed and determinable at this time since JAKAFI is a new and novel product, JAKAFI is the first approved treatment for intermediate or high-risk myelofibrosis, and JAKAFI is the first commercial drug product for Incyte.

Therefore, we recognize revenue once the specialty pharmacy has filled the patient's prescription for JAKAFI. This approach is frequently referred to as the "sell-through" revenue recognition model. Under the sell-through approach, revenue is recognized when the specialty pharmacy provides product to a patient based on the fulfillment of a prescription. Once the prescription has been filled and it is no longer in the specialty pharmacy's inventory, it may no longer be returned to Incyte by the specialty pharmacy.

We recognize revenues for prescriptions filled net of allowances for customer credits, including estimated rebates, chargebacks, discounts, returns, distribution service fees, patient assistance programs, and Medicare Part D coverage gap reimbursements. Product shipping and handling costs are included in cost of sales.

Customer Credits: The specialty pharmacies are offered various forms of consideration, including allowances, service fees and prompt payment discounts. We expect the specialty pharmacies will earn prompt payment discounts and, therefore, we deduct the full amount of these discounts from total product sales when revenues are recognized. Service fees are also deducted from product sales as they are earned.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program. Rebate amounts are based upon contractual agreements or legal requirements with public sector (e.g., Medicaid) benefit providers. Rebates are amounts owed after the final dispensing of the product to a benefit plan participant and are based upon contractual agreements or legal requirements with public sector benefit providers. The allowance for rebates is based on statutory discount rates and expected utilization. Our estimates for the expected utilization of rebates are based in part on third party market research data, and data received from the specialty pharmacies. Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's activity, plus an accrual balance for known prior quarter's unpaid rebates. If actual future rebates vary from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty pharmacy, or an intermediary distributor. Contracted customers, which currently consist primarily of Public Health Service institutions, non-profit clinics, and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty pharmacy or distributor, in turn, charges back to us the difference between the price initially paid by the specialty pharmacy or distributor and the discounted price paid to the specialty pharmacy or distributor by the customer. The allowance for chargebacks is based on known sales to contracted customers.

Medicare Part D Coverage Gap: Medicare Part D prescription drug benefit mandates manufacturers to fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Our estimates for expected Medicare Part D coverage gap are based in part on third party market research data and data received from the specialty pharmacies. Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter's activity, plus an accrual balance for known prior quarters. If actual future funding varies from estimates, we may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

Co-payment assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

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Contract, License and Royalty Revenues

Under agreements involving multiple deliverables, services and/or rights to use assets that we entered into prior to January 1, 2011, 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. We assess whether a substantive milestone exists at the inception of our agreements. For all milestones within our arrangements that are considered substantive, we recognize revenue upon the achievement of the associated milestone. If a milestone is not considered substantive, we would recognize the applicable milestone payment over the remaining period of performance under the arrangement. As of June 30, 2012, all remaining potential milestones under our collaborative arrangements are considered substantive.

On January 1, 2011, updated guidance on the recognition of revenues for agreements with multiple deliverables became effective and applies to any agreements we may enter into on or after January 1, 2011. This updated guidance
(i) relates to whether multiple deliverables exist, how the deliverables in a revenue arrangement should be separated and how the consideration should be allocated; (ii) requires companies to allocate revenues in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price; and
(iii) eliminates the use of the residual method and requires companies to allocate revenues using the relative selling price method. During the three and six months ended June 30, 2012, we did not enter into any agreements that are subject to this updated guidance. If we enter into an agreement with multiple deliverables after January 1, 2011, this updated guidance could have a material effect on our financial statements.

Our collaborations often include contractual milestones, which typically relate to the achievement of pre-specified development, regulatory and commercialization events. These three categories of milestone events reflect the three stages of the life-cycle of our drugs, which we describe in more detail in the following paragraph.

The regulatory review and approval process, which includes preclinical testing and clinical trials of each drug candidate, is lengthy, expensive and uncertain. Securing approval by the U.S. Food and Drug Administration (FDA) requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish a drug candidate's safety and efficacy. The approval process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance and may involve ongoing requirements for post-marketing studies. Before commencing clinical investigations of a drug candidate in humans, we must submit an Investigational New Drug application (IND), which must be reviewed by the FDA.

The steps generally required before a drug may be marketed in the United States . . .

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