INCYTE CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

¨	TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-27488

INCYTE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

94-3136539

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

Experimental Station, Route 141 & Henry Clay Road,

Building E336, Wilmington, DE 19880

(Address of principal executive offices)

(302) 498-6700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

x Yes ¨ No

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 72,753,938 as of March 31, 2004.

INCYTE CORPORATION

INDEX


		Page
PART I: FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Operations	4

	Condensed Consolidated Statements of Comprehensive Loss	5

	Condensed Consolidated Statements of Cash Flows	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4.	Controls and Procedures	33

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 2.	Changes in Securities and Use of Proceeds	33

Item 6.	Exhibits and Reports on Form 8-K	34

	Signatures	35

	Exhibit Index	36

PART I: FINANCIAL INFORMATION

Item 1:

Financial Statements

INCYTE CORPORATION

Condensed Consolidated Balance Sheets

(in thousands)


	March 31, 2004			December 31, 2003*
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	135,847		$	29,698
Marketable securities—available-for-sale		364,860			264,109
Accounts receivable, net		3,909			5,733
Prepaid expenses and other current assets ⁽¹⁾		9,503			11,387

Total current assets		514,119			310,927
Property and equipment, net		22,846			27,337
Long-term investments ⁽²⁾		13,272			16,196
Intangible and other assets, net		32,231			25,085

Total assets	$	582,468		$	379,545

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,490		$	6,450
Accrued compensation		7,340			12,402
Interest payable		2,601			3,816
Royalties payable		979			1,025
Accrued and other current liabilities		3,264			3,296
Deferred revenue		4,030			6,401
Accrued restructuring charges		21,634			22,702
Accrued acquisition costs		1,630			1,334

Total current liabilities		46,968			57,426
Convertible subordinated notes		417,682			167,786

Total liabilities		464,650			225,212

Stockholders’ equity:
Common stock		73			73
Additional paid-in capital		727,771			726,962
Deferred compensation		(524	)		(649	)
Accumulated other comprehensive income (loss)		(300	)		(566	)
Accumulated deficit		(609,202	)		(571,487	)

Total stockholders’ equity		117,818			154,333

Total liabilities and stockholders’ equity	$	582,468		$	379,545

*	The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited financial statements at that date.

⁽¹⁾	Includes amounts paid for an asset acquired in connection with the relocation of an executive officer of $0.7 million and $0 million at March 31, 2004 and December 31, 2003, respectively.

⁽²⁾	Includes investments in companies considered related parties under SFAS 57 of $12.8 million and $14.7 million at March 31, 2004 and December 31, 2003, respectively.

See accompanying notes.

INCYTE CORPORATION

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended March 31,
	2004			2003
Revenues	$	6,641		$	12,509
Costs and expenses:
Research and development		26,184			30,186
Selling, general and administrative		6,292			7,377
Purchased in-process research and development		—			28,116
Other expenses		7,642			1,103

Total costs and expenses		40,118			66,782

Loss from operations		(33,477	)		(54,273	)
Interest and other income (expense), net ⁽¹⁾		(413	)		1,233
Interest expense		(3,520	)		(2,439	)
Gain/(loss) on certain derivative financial instruments, net		(177	)		(45	)

Loss before income taxes		(37,587	)		(55,524	)
Provision for income taxes		128			260

Net loss	$	(37,715	)	$	(55,784	)

Basic and diluted net loss per share:	$	(0.52	)	$	(0.81	)

Shares used in computing basic and diluted net loss per share		72,643			68,986

⁽¹⁾	Includes loss on long-term investments in companies considered related parties under SFAS 57 of $1.9 million and $0 million for the three months ended March 31, 2004, and 2003, respectively.

See accompanying notes.

INCYTE CORPORATION

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2004			2003
Net loss	$	(37,715	)	$	(55,784	)
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities		205			(490	)
Foreign currency translation adjustments		61			(33	)

Other comprehensive income (loss)		266			(523	)

Comprehensive loss	$	(37,449	)	$	(56,307	)

See accompanying notes.

INCYTE CORPORATION

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2004			2003
Cash flows from operating activities:
Net loss	$	(37,715	)	$	(55,784	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash other expenses		2,626			393
Non-cash purchased in-process research and development		—			28,116
Depreciation and amortization		3,245			4,457
Compensation expense on executive loans		19			98
Stock compensation		125			501
Loss on derivative financial instruments, net		177			45
Realized gain on long-term investments, net		—			(22	)
Impairment of long-term investments		2,747			1,900
Changes in operating assets and liabilities:
Accounts receivable, net		1,824			652
Prepaid expenses and other assets		901			(1,184	)
Accounts payable		(960	)		(2,415	)
Accrued and other current liabilities		(7,127	)		(20,893	)
Deferred revenue		(2,371	)		1,386

Net cash used in operating activities		(36,509	)		(42,750	)

Cash flows from investing activities:
Acquisition of Maxia Pharmaceuticals, net of cash acquired		—			(3,532	)
Capital expenditures		(118	)		(5,584	)
Purchases of marketable securities		(423,614	)		(134,408	)
Sales and maturities of marketable securities		323,068			174,113

Net cash (used in) provided by investing activities		(100,664	)		30,589

Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans		761			8
Repurchase of common stock		—			(105	)
Net proceeds from issuance of convertible subordinated notes		242,500			—

Net cash provided by (used in) financing activities		243,261			(97	)

Effect of exchange rate on cash and cash equivalents		61			(33	)

Net increase (decrease) in cash and cash equivalents		106,149			(12,291	)
Cash and cash equivalents at beginning of period		29,698			22,928

Cash and cash equivalents at end of period	$	135,847		$	10,637

See accompanying notes.

INCYTE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004

(Unaudited)

1.	Organization and business

Incyte Corporation (“Incyte,” “we,” “us,” or “our”) is focused on the discovery and development of novel, small molecule drugs to treat major medical conditions, including the infection with human immunodeficiency virus, or HIV, inflammatory disorders, cancer and diabetes. We have assembled a team of scientists with core competencies in the area of medicinal chemistry, and molecular, cellular and in vivo biology.

For the past several years, Incyte has been considered a leader in the development of proprietary genomic information products, which we marketed to other pharmaceutical and biotechnology companies. Due to the competitive and challenging market for these products, in April 2004, we discontinued the majority of our information product lines and focused the majority of our resources on an ongoing basis on drug discovery and development.

2.	Summary of significant accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated balance sheet as of March 31, 2004, condensed consolidated statements of operations for the three months ended March 31, 2004 and 2003, condensed consolidated statements of comprehensive loss for the three months ended March 31, 2004 and 2003 and the condensed consolidated statements of cash flows for the three months ended March 31, 2004 and 2003 are unaudited, but include all adjustments consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2003 has been derived from audited financial statements.

Although we believe that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003.

Stock-based compensation

In accordance with the provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), we have elected to continue applying the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), as amended by FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation (“FIN 44”), in accounting for our stock-based compensation plans. Accordingly, we do not recognize compensation expense for stock options granted to employees and directors when the stock option price at the grant date is equal to or greater than the fair market value of the stock at that date. We also record, and amortize over the related vesting periods, deferred compensation representing the difference between the price per share of stock issued or the exercise price of stock options granted and the fair value of our common stock at the time of issuance or grant.

The fair value of each option and employee purchase right was estimated at the date of grant using a Black-Scholes option-pricing model, assuming no expected dividends and the following weighted average assumptions:


	Employee Stock Options				Employee Stock Purchase Plan
	For the Three Months Ended March 31,				For the Three Months Ended March 31,
	2004		2003		2004		2003
Average risk-free interest rates	2.28	%	3.26	%	1.52	%	1.40	%
Average expected life (in years)	3.31

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