THE DRIVE TO DISCOVER.
THE EXPERIENCE TO DELIVER.
Front Cover
Rendering of a small molecule bound
to the JAK2 ATP binding site
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Incyte Corporation
Experimental Station
Route 141 & Henry Clay Road, Building E336
Wilmington, DE 19880
www.incyte.com
INCYTE
Ann ua l Report 2007
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BOARD OF DIRECTORS
EXECUTIVE MANAGEMENT
Richard U. De Schutter
Chairman of the Board
Formerly Chairman
and Chief Executive Offi cer
DuPont Pharmaceuticals Company
Paul A. Friedman, M.D.
President and Chief Executive Offi cer
Incyte Corporation
Barry M. Ariko
President, Chief Executive Offi cer
and Chairman
Mirapoint, Inc.
Paul A. Friedman, M.D.
President and Chief Executive Offi cer
David C. Hastings
Executive Vice President
and Chief Financial Offi cer
John A. Keller, Ph.D.
Executive Vice President
and Chief Business Offi cer
Brian W. Metcalf, Ph.D.
Executive Vice President
and Chief Drug Discovery Scientist
Julian C. Baker
Managing Member
Baker Bros. Advisors, LLC
Patricia A. Schreck
Executive Vice President
and General Counsel
Paul A. Brooke
Chairman, Alsius Corporation
Managing Member, PMSV Holdings, LLC Human Resources
Senior Advisor, Morgan Stanley
Paula J. Swain
Executive Vice President,
Matthew W. Emmens
Chief Executive Offi cer
Shire plc
John F. Niblack, Ph.D.
Formerly Vice Chairman
and President of Global Research
and Development
Pfi zer Inc.
Roy A. Whitfi eld
Formerly Chairman of the Board
and Chief Executive Offi cer
Incyte Corporation
Transfer Agent and Registrar
BNY Mellon Shareowner Services
PO Box 358015
Pittsburgh, PA 15252-8015
or
480 Washington Boulevard
Jersey City, NJ 07310-1900
Phone: 800/851-9677
TDD for Hearing Impaired:
800/231-5469
Foreign Shareholders:
201/680-6610
TDD Foreign Shareholders:
201/680-6578
www.bnymellon.com/shareowner/isd
Annual Meeting
The Annual Meeting of Stockholders
will be held on May 22, 2008, at
10:00 a.m., Eastern Daylight Time, at the
Hotel du Pont, 11th and Market Streets,
Wilmington, Delaware.
Outside Counsel
Pillsbury Winthrop Shaw Pittman LLP
Independent Registered Public
Accounting Firm
Ernst & Young LLP
Market Information
Incyte’s Common Stock trades on
The NASDAQ Global Market under the
symbol INCY.
Investor Relations
You can obtain recent press releases
and other publicly available information
on Incyte by visiting our web site at
www.incyte.com.
Contact
Pamela Murphy
Vice President, Investor Relations and
Corporate Communications
Email: pmurphy@incyte.com
Corporate Headquarters
Incyte Corporation
Experimental Station
Route 141 & Henry Clay Road
Building E336
Wilmington, Delaware 19880
302/498-6700
Forward-looking Statements
Except for the historical statements contained herein, the statements contained in this annual report, including without limitation, statements as to our
productivity and transition from a pure drug discovery company, the anticipated advancement and composition of our pipeline, the expected timing,
progress, number of and other information regarding our preclinical and clinical trials, the likelihood of initiating registration trials of and receiving
expedited review for our JAK inhibitor for myelofi brosis, our expectations with respect to our development plans and program objectives for 2008,
plans to present and disclose data from our clinical trials, the potential benefi ts and effectiveness of our compounds in treating disease, and our plans
to seek strategic partnerships or out-licensing opportunities and to commercialize certain programs on our own, are forward-looking statements
within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based
on our current intent, belief and expectations, using information currently available to us, and are therefore subject to certain risks, uncertainties, and
assumptions that may cause actual results to differ materially, including the high degree of risk associated with drug development and clinical trials,
the uncertainty of the FDA approval process, results of further research and development, the impact of technological advances and competition, our
ability to enroll a suffi cient number of patients for our clinical trials, unanticipated delays in programs or uses of capital, and other risks discussed in
our Annual Report on Form 10-K for the year ended December 31, 2007, which is contained herein, and in our fi lings with the Securities and Exchange
Commission. These forward-looking statements speak only as of the date hereof. Incyte disclaims any intent or obligation to update these forward-
looking statements.
To Our Shareholders:
Incyte’s rapid transition from a pure discovery company to one that can
develop new medicines comes from experience, intellectual discipline and a
shared focus on fulfi lling unmet medical needs. The rigorous and systematic
approach to drug discovery and development we have employed over the
last six years has allowed us to create a diverse product pipeline that includes
programs in oncology, infl ammation, metabolic disease and HIV.
The programs that have the greatest near-term potential to create substantial
and sustained shareholder value are those that are focused on indications
that we can develop and commercialize independently. Therefore, our janus-
associated kinase inhibitor (JAK) program, which has shown compelling
early effi cacy results in myelofi brosis, psoriasis, and rheumatoid arthritis,
is now our highest priority program. In contrast, for programs that are
focused on primary care markets, such as our metabolic disease programs,
or are outside our core areas of oncology and infl ammation, such as our
CCR5 antagonist program, our objective is to form strategic partnerships
at appropriate points in their development, and to use the proceeds from
these alliances to fund the programs we elect to retain.
With as many as a dozen Phase II trials expected in 2008, as well as the potential
initiation of registration trials for myelofibrosis, I believe we are making
demonstrable progress in building a successful biopharmaceutical company.
2007 Program Achievements
In 2007, the potential value of the pipeline was substantially enhanced through multiple positive Phase
IIa proof-of-concept results.
›› Our lead JAK inhibitor, INCB18424, has demonstrated:
› Unprecedented efficacy in patients with myelofibrosis, a serious neoplastic condition
characterized by bone marrow failure, life-threatening splenic enlargement and marked
constitutional symptoms that adversely affect patients’ quality of life;
› Compelling early efficacy results in a 28-day trial, comparable to results seen with
injectable anti-TNF therapies in patients with rheumatoid arthritis; and
› Striking improvement in psoriatic skin lesions in a 28-day trial in patients with mild to
moderate psoriasis, comparable to a potent topical steroid without the skin atrophy
associated with steroid treatment.
›› Our lead HSD1 inhibitor, INCB13739, completed a 28-day Phase IIa trial in patients with type
2 diabetes. Improvements were achieved in six parameters of glucose control and cardiovascular
risk: fasting plasma glucose, clamp-measured glucose production, clamp-measured glucose
utilization, LDL cholesterol, total cholesterol, and triglycerides.
›› Our lead HM74a agonist, INCB19602, also for type 2 diabetes, reduced circulating free fatty
acids which are associated with insulin desensitization, with no rebound or cutaneous flushing.
These results in a Phase I trial with healthy volunteers suggest that INCB19602 could achieve
similar results in type 2 diabetics.
›› Our sheddase inhibitor, INCB7839, demonstrated improvement in several clinically relevant
pharmacodynamic markers and produced stable disease in five of six Her2-positive breast
cancer patients.
These encouraging clinical results are evidence that Incyte is rapidly transitioning from a pure drug-
discovery company into a highly productive drug discovery and development company. As such, it is now
both realistic and essential that we prioritize our programs.
JAK Inhibitor Program Is Now Our Highest Priority Program
The success we achieved in 2007 in the JAK inhibitor program for myelofi brosis, a rare life-threatening
myeloproliferative disease for which there are no approved drug therapies, is gratifying. Importantly,
based on recent discussions with representatives from the U.S. Food and Drug Administration (FDA)
in which we reached agreement on the type of endpoints that will support approval in myelofi brosis,
I believe we are well-positioned to begin registration trials in the fourth quarter of this year. As this
indication is likely to receive expedited FDA review, the JAK program offers tremendous potential for
creating near-term value. It is a program we can develop and commercialize on our own, and it is now
our highest priority.
There also is a growing body of preclinical and clinical evidence suggesting JAK inhibitors may represent
a new class of drugs to treat other hematological conditions, solid tumors and multiple infl ammatory
conditions. Given this broad potential, and the fact that we have one of the most advanced compounds
in clinical development, we are aggressively moving INCB18424 forward in multiple indications.
Currently, we are evaluating the oral form of INCB18424 in four Phase II trials: myelofi brosis, multiple
myeloma, hormone refractory prostate cancer, and rheumatoid arthritis. Phase II trials are also scheduled
to begin this year for polycythemia vera, essential thrombocythemia and psoriasis.
In addition to the oral formulation, we have developed a topical formulation of INCB18424 for mild-to-
moderate psoriasis. Clinical results from a 28-day study indicate an exceptionally clean safety profi le and
impressive effi cacy. This indication is also one we could commercialize on our own and could prove quite
valuable as we believe we are the only company developing a topical JAK inhibitor.
INCB28050, our lead follow-on JAK inhibitor, is expected to begin Phase I trials in the fi rst half of this
year. If this compound achieves comparable pharmacodynamics and safety characteristics as our lead
compound, we intend to move INCB28050 forward as an oral agent in rheumatoid arthritis and psoriasis,
and possibly other chronic infl ammatory conditions such as Crohn’s disease.
Decision to Out-License CCR5 Antagonist Program Confi rms Focus on Near-term Value
We have made good progress advancing our CCR5 antagonist, INCB9471, as a treatment for HIV.
We believe it has potential to become the best-in-class CCR5 antagonist. However, as we prioritize the
programs in our growing pipeline, it is essential that we focus our resources on those with the greatest
near-term value. Considering that this program is one of our more expensive, time- and labor-intensive
efforts, and is now our only HIV product, we have decided not to initiate Phase IIb trials and intend to
pursue out-licensing options.
2008 Program Objectives
In the coming year, we expect to make signifi cant and visible progress toward the following
program objectives:
JAK Inhibitor Program
INCB18424 for oncology:
›› Begin registration trials in myelofibrosis in the fourth quarter of the year.
›› Present results from the ongoing myelofibrosis Phase I/II trial at the American Society of Clinical
Oncology and European Hematology Association meetings in June, and the American Society
of Hematology meeting in December.
›› Conduct Phase II trials in:
› Polycythemia vera and essential thrombocythemia;
› Multiple myeloma; and,
› Hormone refractory prostate cancer.
INCB18424 for infl ammation:
›› Complete a 28-day Phase IIa dose-ranging study in patients with rheumatoid arthritis, and present
results from this study at the European League Against Rheumatism meeting in June.
›› Present Phase IIa results using the topical formulation at the European Academy of Dermatology
and Venereology meeting in September.
›› Begin a Phase IIa study in psoriatic patients with the oral-dosing form of INCB18424.
›› Begin a three-month Phase IIb study with topical dosing in patients with
mild-to-moderate psoriasis.
INCB28050 (follow-on JAK inhibitor):
›› Conduct Phase I trials in healthy volunteers.
›› Begin Phase II trials in rheumatoid arthritis patients.
HSD1 Inhibitor Program
INCB13739:
›› Conduct a dose-ranging three-month Phase IIb trial in type 2 diabetics.
›› Present the 28-day Phase IIa trial results at the American Diabetes Association
meeting in June.
INCB20817 (follow-on HSD1 inhibitor):
›› Conduct Phase I trials in healthy volunteers.
HM74a Agonist Program
INCB19602:
›› Complete Phase I trials in healthy volunteers.
›› Conduct 28-day fasting plasma glucose Phase IIa trial in type 2 diabetics.
Sheddase Inhibitor Program
INCB7839:
›› Conduct a Phase IIa trial in combination with Herceptin® in patients with breast cancer.
CCR2 Antagonist Program
INCB8696:
›› Complete Phase I trials in healthy volunteers.
Discovery
›› Advance at least one new oncology program through preclinical development
and initiate Phase I trials.
Remarkable Productivity
The level of productivity of the entire Incyte team, and the success achieved in so many of our programs
during 2007, are nothing short of remarkable. With as many as a dozen Phase II trials underway
and planned in 2008, as well as the potential initiation of registration trials for our lead program in
myelofi brosis, this year promises to be at least as dynamic.
I remain optimistic about our future and fully expect the year ahead to validate our near-term focus on
oncology and infl ammation – areas where there is clear unmet medical need and tremendous potential
for value creation.
Sincerely,
Paul A. Friedman, M.D.
President and Chief Executive Offi cer
April 2008
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(cid:2)
For the fiscal year ended December 31, 2007
or
TRANSITION REPORT 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
(State of other jurisdiction
of incorporation or organization)
Experimental Station,
Route 141 & Henry Clay Road,
Building E336, Wilmington, DE 19880
(Address of principal executives offices)
94-3136539
(IRS Employer
Identification No.)
(302) 498-6700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $.001 per share
Series A Participating Preferred Stock Purchase Rights
Name of exchange on which registered
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:1) No (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the
Exchange Act. Yes (cid:2) No (cid:1)
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. Yes (cid:1) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:1)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or
a smaller reporting company. See definitions of ‘‘large accelerated filer’’, ‘‘accelerated filer’’ and ‘‘smaller reporting
company’’ in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:2) Accelerated filer (cid:1) Non-accelerated filer (cid:2) Smaller reporting company (cid:2)
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (cid:2) No (cid:1)
The aggregate market value of Common Stock held by non-affiliates (based on the closing sale price on The Nasdaq
Global Market on June 30, 2007) was approximately $443.3 million.
As of February 28, 2008 there were 84,618,917 shares of Common Stock, $.001 per share par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12, 13 and 14 of Part III
incorporate by reference information from the registrant’s proxy statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the registrant’s 2008 Annual Meeting of Stockholders to be
held on May 22, 2008.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Table of Contents
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . .
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
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86
2
Item 1. Business
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. These
statements can often be identified by the use of forward-looking terminology such as ‘‘expects,’’ ‘‘believes,’’
‘‘intends,’’ ‘‘anticipates,’’ ‘‘estimates,’’ ‘‘plans,’’ ‘‘may,’’ or ‘‘will,’’ or the negative of these terms, and other
similar expressions. These forward-looking statements include statements as to:
(cid:127) the discovery, development, formulation, manufacturing and commercialization of our compounds and
our product candidates;
(cid:127) focus on our drug discovery and development efforts;
(cid:127) conducting clinical trials internally, with collaborators, or with clinical research organizations;
(cid:127) our collaboration and strategic alliance strategy; anticipated benefits and disadvantages of entering into
collaboration agreements;
(cid:127) our licensing, investment and commercialization strategies;
(cid:127) the regulatory approval process, including determinations to seek U.S. Food and Drug Administration, or
FDA, approval for, and plans to commercialize, our products in the United States and abroad;
(cid:127) the safety, effectiveness and potential benefits and indications of our product candidates and other
compounds under development; potential uses for our product candidates and our other compounds;
(cid:127) the timing and size of our clinical trials; the compounds expected to enter clinical trials; timing of clinical
trial results;
(cid:127) our ability to manage expansion of our drug discovery and development operations;
(cid:127) future required expertise relating to clinical trials, manufacturing, sales and marketing;
(cid:127) obtaining and terminating licenses to products, compounds or technology, or other intellectual property
rights;
(cid:127) 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;
(cid:127) plans to develop and commercialize products on our own;
(cid:127) plans to use third party manufacturers;
(cid:127) expected expenses and expenditure levels; expected uses of cash; expected revenues and sources of
revenues;
(cid:127) expected losses; fluctuation of losses;
(cid:127) our profitability; the adequacy of our capital resources to continue operations;
(cid:127) the need to raise additional capital;
(cid:127) the costs associated with resolving matters in litigation;
(cid:127) our expectations regarding competition;
(cid:127) our investments, including anticipated expenditures, losses and expenses;
(cid:127) our gene and genomics-related patent prosecution and maintenance efforts; and
(cid:127) our indebtedness, and debt service obligations.
3
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:
(cid:127) our ability to discover, develop, formulate, manufacture and commercialize a drug candidate or product;
(cid:127) the risk of unanticipated delays in research and development efforts;
(cid:127) the risk that previous preclinical testing or clinical trial results are not necessarily indicative of future
clinical trial results;
(cid:127) risks relating to the conduct of our clinical trials;
(cid:127) changing regulatory requirements;
(cid:127) the risk of adverse safety findings;
(cid:127) the risk that results of our clinical trials do not support submission of a marketing approval application
for our product candidates;
(cid:127) the risk of significant delays or costs in obtaining regulatory approvals;
(cid:127) risks relating to our reliance on third party manufacturers, collaborators, and clinical research
organizations;
(cid:127) risks relating to the development of new products and their use by us and our current and potential
collaborators;
(cid:127) risks relating to our inability to control the development of out-licensed drug compounds or drug
candidates;
(cid:127) our ability to in-license a potential drug compound or drug candidate;
(cid:127) the cost of accessing, licensing or acquiring potential drug compounds or drug candidates developed by
other companies;
(cid:127) the costs of terminating any licensing or access arrangement for third party drug compounds or drug
candidates;
(cid:127) costs associated with prosecuting, maintaining, defending and enforcing patent claims and other
intellectual property rights;
(cid:127) our ability to maintain or obtain adequate product liability and other insurance coverage;
(cid:127) the risk that our product candidates may not obtain regulatory approval;
(cid:127) the impact of technological advances and competition;
(cid:127) the ability to compete against third parties with greater resources than ours;
(cid:127) competition to develop and commercialize similar drug products;
(cid:127) our ability to obtain patent protection and freedom to operate for our discoveries and to continue to be
effective in expanding our patent coverage;
(cid:127) the impact of changing laws on our patent portfolio;
(cid:127) developments in and expenses relating to litigation;
(cid:127) the impact of past or future acquisitions on our business;
(cid:127) the results of businesses in which we have made investments;
(cid:127) our ability to obtain additional capital when needed;
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(cid:127) fluctuations in net cash used by investing activities;
(cid:127) our history of operating losses; and
(cid:127) 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’’ or ‘‘our’’ 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 Annual Report on Form 10-K.
Overview
Incyte is a drug discovery and development company focused on developing proprietary small
molecule drugs to treat serious unmet medical needs. We have a pipeline with programs in oncology,
inflammation, diabetes and human immunodeficiency virus (HIV).
Thus far in our drug discovery and development activities, which began in early 2002, we have filed
twelve Investigational New Drug Applications (INDs) and have progressed eight internally developed
proprietary compounds into clinical development. Currently, four of these compounds have advanced into
Phase II clinical trials. Our wholly-owned pipeline includes the following compounds:
Drug Target
JAK
HSD1
HM74a
CCR5
Sheddase
CCR2
Drug Compound
Indication
Development Status
INCB18424 (Oral)
Phase IIa
Myelofibrosis
Rheumatoid Arthritis
Phase IIa
Refractory Prostate Cancer Phase IIa
Phase IIa
Multiple Myeloma
Phase I
Psoriasis
INCB18424 (Topical)
Psoriasis
INCB28050
Rheumatoid Arthritis
INCB13739
INCB20817
Type 2 Diabetes
Type 2 Diabetes
Phase IIa
Preclinical
Phase IIa
Phase I
INCB19602
Type 2 Diabetes
Phase I
INCB9471
INCB15050
INCB7839
HIV
HIV
Solid Tumors
Breast Cancer
Phase II
Phase I
Phase IIa
Phase II
INCB8696
Multiple Sclerosis
Phase I
Other
Lead clinical candidate
Lead clinical candidate
Oncology
Oncology
Pre-clinical
Pre-clinical
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Our productivity in drug discovery is primarily a result of our core competency in medicinal chemistry
which is tightly integrated with and supported by an experienced team of biologists with expertise in
multiple therapeutic areas. As a number of our compounds have progressed into clinical development, we
have also built a clinical development and regulatory team. This team utilizes clinical research
organizations (CROs), expert scientific advisory boards, and leading consultants and suppliers in relevant
drug development areas in an effort to conduct our clinical trials as efficiently and effectively as possible
while maintaining strategic control of the design and management of our programs.
Incyte’s Approach to Drug Discovery and Development
To succeed in our objective to create a pipeline of novel, orally available drugs that address serious
unmet medical needs, we have established a broad range of discovery capabilities in-house, including target
validation, high-throughput screening, medicinal chemistry, computational chemistry, and pharmacological
and ADME (absorption, distribution, metabolism and excretion) assessment. We augment these
capabilities through collaborations with academic and contract laboratory resources with relevant
expertise.
We select drug targets with strong preclinical or clinical validation in areas where we have the
potential to generate either first-in-class molecules or compounds that are highly differentiated from
existing treatments.
Our chemistry and biology efforts are highly integrated and are characterized by the rapid generation
of relevant data on a broad and diverse range of compounds for each therapeutic target we pursue. This
process allows our scientists to better understand, in real time, the potency and selectivity of the
compounds, how they are likely to be absorbed and eliminated in the body, and to assess the potential
safety of the compounds. We believe that this approach, along with stringent criteria for the selection of
clinical candidates, will help us to select appropriate candidates for clinical development and rapidly assess
key characteristics required for success.
Given our chemistry-driven discovery process, our pipeline has grown to encompass multiple
therapeutic areas: oncology, inflammation, diabetes and HIV. While our productivity has created a diverse
pipeline, we conduct a limited number of discovery programs in parallel at any one time. This focus allows
us to allocate resources to our selected programs at a level that we believe is competitive with much larger
pharmaceutical companies. We believe this level of resource allocation, applied to the discovery process
outlined above, has been critical to our success in our current programs, and that it remains a meaningful
competitive advantage.
Additionally, in all of our programs we strive to generate a diverse and broad range of proprietary
compounds which we believe enhances the overall probability of success for our programs and creates the
potential for multiple products.
Once our compounds reach clinical development, our objective, whenever possible, is to rapidly
progress the lead candidate into a proof-of-concept clinical trial prior to initiating larger definitive
Phase IIb clinical trials to quickly assess the therapeutic potential of the clinical candidate itself and its
underlying mechanism. This information is then used to evaluate the commercial potential of the
compound and the most appropriate indication or indications to pursue.
Incyte’s Development Teams
Our development teams are responsible for ensuring that our clinical candidates are expeditiously
progressed from preclinical development and IND-enabling studies into Phase I and Phase II
development. To efficiently and effectively keep pace with the growth in our clinical pipeline, we have
added new members to the development teams by internal transfers and by recruiting new employees with
expertise in drug development including clinical trial design, statistics, regulatory affairs, and project
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management. We have also built core internal process chemistry and formulation teams using this same
strategy. Our internal multi-disciplinary project teams also work with experienced external CROs with
expertise in managing clinical trials, process chemistry, product formulation, and the manufacture of
clinical trial supplies to support our drug development efforts.
Clinical Pipeline
Our pipeline includes compounds in various stages of development in the areas of oncology,
inflammation, diabetes and HIV. The following summarizes the status of and rationale for our most
advanced compounds.
JAK 2 Program for Inflammation, Hematologic Malignancies, and Solid Tumors
The JAK family is composed of four tyrosine kinases—JAK1, JAK2, JAK3 and Tyk2—that are
involved in signaling triggered by a number of cytokines and growth factors. JAKs are central to a number
of biologic processes, including the formation and development of blood cells and the regulation of
immune functions. Excessive signaling through the JAK pathways is believed to play a critical role in a
number of disease states, including myeloproliferative disorders (MPDs), specifically myelofibrosis (MF),
polycythemia vera and essential thrombocythemia, inflammatory conditions such as rheumatoid arthritis
(RA) and psoriasis, and certain other solid and liquid tumors. Additionally, many MPD patients have a
mutation that is associated with JAK2, V617F, as well as other JAK2 mutations, which result in increased
JAK signaling and we believe further supports the hypothesis that hyperactivation of the JAK pathways is
central to these disorders. We believe inhibition of aberrant JAK signaling may have therapeutic value in
treating these various diseases.
We have discovered multiple potent, selective and orally bioavailable JAK inhibitors that are selective
for JAK1 and JAK2 from multiple distinct chemical scaffolds. Our lead JAK inhibitor, INCB18424, is
currently being developed as a treatment for several of these conditions, including MF, RA and psoriasis. A
lead follow-on JAK inhibitor compound, INCB28050, is expected to enter clinical trials in 2008.
Thus far, our clinical trial results with INCB18424 include positive interim results from several
Phase IIa clinical trials in MF, RA and psoriasis patients and the compound has been well tolerated.
Myelofibrosis
In December 2007, we reported positive interim results involving 11 MF patients from a
dose-escalation Phase Ib/IIa trial with orally administered INCB18424. We also announced that we
reached a maximum tolerated dose in this first Phase Ib/IIa trial and have expanded the study to include an
additional 21 patients at this dose. If the compound continues to be well tolerated and demonstrates
comparable efficacy in additional patients, we intend to begin discussions with the Food and Drug
Administration (FDA) to define the potential registration pathway for INCB18424 as a treatment for MF.
Provided the FDA agrees with our development plan, our objective is to initiate these trials in the second
half of 2008.
Rheumatoid Arthritis
In January 2008, we announced positive interim results from a 28-day Phase IIa dose-ranging trial
using the oral formulation of INCB18424 in six RA patients whose conditions were not well-controlled
with their existing therapy. This trial is expected to involve a total of 48 patients with final results expected
in the first half of 2008. Provided these results are positive, we plan to begin a six-month Phase IIb trial in
RA patients in the second half of 2008.
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Psoriasis (Topical)
In September 2007, we announced positive interim results from a 28-day Phase IIa dose-escalation
trial with topical INCB18424, involving 24 patients with mild-to-moderate psoriasis. In this trial the
compound was well tolerated with no adverse events reported at any dose administered and with rapid and
sustained improvement observed in all subjects. These results suggest that topical intervention in the JAK
pathway could be an effective way to treat psoriasis. If the compound continues to be well tolerated in the
ongoing safety studies, we expect to begin a three-month Phase IIb trial in psoriasis using this topical
formulation in the second half of 2008.
Refractory Prostate Cancer and Multiple Myeloma
We recently initiated Phase IIa clinical trials in refractory prostate cancer patients, as well as patients
with multiple myeloma. Results from these trials are expected in the second half of 2008.
We intend to complete our IND-enabling studies and initiate Phase I clinical trials with our follow-on
JAK inhibitor compound INCB28050 in mid-2008.
11ßHSD1 Program for Type 2 Diabetes and Related Disorders
We have developed a broad chemically diverse series of novel proprietary oral inhibitors of 11ßHSD1,
an enzyme that converts the biologically-inactive steroid cortisone into the potent biologically-active
hormone cortisol. Cortisol acts as a functional antagonist of insulin action in multiple tissue types,
including the liver, adipose, skeletal muscle, and pancreas. Inhibition of 11ßHSD1 offers the potential to
reduce insulin resistance and restore glycemic control in type 2 diabetes, and may also offer potential
benefits in allied conditions such as dyslipidemia, atherosclerosis, and coronary heart disease.
In September 2007, we reported positive interim results from the ongoing 28-day Phase IIa placebo-
controlled clinical trial in type 2 diabetes. In the patients included in this interim analysis, we observed
positive effects on multiple clinically relevant endpoints such as fasting plasma glucose and on
dyslipidemia, including reduction of LDL, total cholesterol and triglycerides. A three-month Phase IIb trial
in type 2 diabetes is scheduled to begin in the first half of 2008.
For INCB20817, our follow on 11ßHSD1 compound, the Investigational New Drug Application
(IND) has been accepted and Phase I trials are expected to begin in the first half of 2008.
HM74a for Type 2 Diabetes
HM74a is a G-protein-coupled receptor (GPCR) that is expressed in adipocytes (fat cells). GPCRs
are a large protein family of transmembrane receptors that sense molecules outside the cell, activate signal
transduction pathways and, ultimately, cellular responses. GPCRs are involved in many diseases, and are
the target of many existing drugs.
Agonism of HM74a by niacin causes a reduction in circulating free fatty acids (FFA). It is known that
elevated levels of FFAs are associated with an increase in glucose production and a decrease in glucose
uptake which leads to insulin resistance. While oral administration of niacin leads to a decrease in glucose
production and an increase in glucose uptake, niacin treatments cannot be used to treat insulin resistance
in type 2 diabetics because these compounds have very short half-lives that lead to intolerance and
discomfort such as cutaneous flushing. Additionally, the short half-life of niacin treatments can cause FFA
levels to rebound and actually lead to increased glucose level. In contrast to niacin containing treatments,
our lead HM74a agonist, INCB19602, which is in Phase I clinical trials in healthy volunteers, does not
appear to cause flushing and has resulted in profound and sustained reductions in FFA levels without
causing rebound. We therefore believe an HM74a agonist could prove to be an effective treatment for
insulin resistance in type 2 diabetics without the adverse effect and limitations of niacin containing
8
treatments. If the results from the Phase I trials continue to support development of INCB19602, we
intend to begin a 28-day Phase IIa clinical trial in type 2 diabetics in the first half of 2008.
CCR5 Antagonist Program for HIV
CCR5 is a major chemokine receptor that the HIV virus uses to enter CD4 cells, which are critical to
the human immune system. CCR5 antagonists belong to a new class of antiretrovirals known as HIV entry
inhibitors. This new class includes various experimental compounds designed to block cell surface
receptors, such as CCR5 or CXCR4, as well as other novel compounds that block HIV fusion with the cell
surface. Entry inhibitors work by blocking HIV before the virus enters the cell and begins its replication
process. In contrast, existing HIV drugs such as nucleoside or nucleotide reverse transcriptase inhibitors
(NRTIs), non-nucleoside reverse transcriptase inhibitors (NNRTIs) and protease inhibitors work inside the
cell and target the proteins, reverse transcriptases and proteases that are involved in the replication of the
virus.
Our CCR5 antagonist program has yielded potent, selective, proprietary compounds with
pharmacokinetic properties that have the potential to allow once-daily dosing without use of ritonavir
boosting, a key distinction from other CCR5 antagonists. Ritonavir is a protease inhibitor that is often used
in combination with other drugs to improve or ‘boost’ the bioavailability and cellular penetration of other
drugs but which is associated with increased cardiovascular risk. This dosing profile is particularly
attractive in patients who are in the earlier stages of disease, where CCR5 is most prevalent, where the
majority of regimens are once-daily (which improves patient compliance), and where ritonavir, which
increases the risk of cardiovascular disease, is less frequently used. Once-a-day dosing also offers the
potential for the development of once-daily fixed dose combination formulations with other anti-HIV
medications.
We have two CCR5 antagonists in development, INCB9471 and INCB15050. INCB9471 is the most
advanced compound in this program. Thus far, from a 14-day Phase IIa clinical trial, we have seen positive
results demonstrating that once-daily dosing with INCB9471 offers sustained inhibition of viral replication.
This suggests that INCB9471 may provide an advantage over other CCR5 antagonists in development and
other antiretroviral drugs that have shorter half-lives, less than 24 hours, especially in patients who are
intermittently non-compliant with their medications. Lack of adherence with drugs that have short half
lives can lead to insufficient drug levels, which reduces the effectiveness of the drug regimen and allows the
virus to replicate. We are conducting several required drug interaction studies and completing longer-term
safety studies with INCB9471 to support initiation of two Phase IIb trials in treatment-experienced HIV
patients.
Our follow-on CCR5 antagonist, INCB15050, has completed Phase I development. While the results
from the Phase I clinical trials suggest that INCB15050 also has the potential to be a potent once-a-day
treatment, based on the positive Phase IIa clinical trial data that we have seen with the lead compound,
INCB9471, we do not plan to advance INCB15050 beyond Phase I clinical trials at this time.
Sheddase Inhibitor Program for Solid Tumors
As the fundamental biology of cancer has been explored at the molecular level, new therapeutics are
emerging that distinguish themselves from the classic, relatively non-selective, cytotoxic agents. These new
therapeutics are targeted specifically to pathways or proteins that are more critical for the growth of tumor
cells than for the growth of normal cells, thereby having the potential to provide a greater therapeutic
benefit, both when used alone and in combination with cytotoxic agents. Currently available therapeutics
of this type have been shown to be effective in the treatment of certain important tumor types.
The signaling pathways that utilize the receptors and ligands of the epidermal growth factor receptor
(EGFR) family play a key role in the growth and survival of multiple tumor types, including breast,
colorectal, and non-small cell lung cancers. The EGFR, or HER, signaling pathways consist of four known
9
cellular receptors: HER1 (also known as EGFR), HER2, HER3, and HER4. Under normal conditions,
these pathways are tightly regulated. However, in cancer, the pathways can become dysregulated and
changes in the amount or the activity of HER family members, primarily HER1, HER2 and HER3, have
been shown to impact the growth, proliferation, migration, and survival of cancer cells. Sheddase is an
enzyme that is believed to activate all four EGFR pathways.
Currently approved therapies target one or more of the EGFR pathways. However, these currently
available therapeutics may not block all EGFR family-mediated signaling, even in the tumor types in which
they are approved. In contrast, we believe our sheddase inhibitor targets all four EGFR signaling pathways
and may provide meaningful advantages over therapies that target one or two.
We have identified novel, potent, and orally available small-molecule inhibitors of sheddase that, in
preclinical models, show efficacy as single agents and show synergy with other targeted therapeutic agents
and with cytotoxics. INCB7839, the lead compound from this program, is currently in Phase II
development. The first of two Phase II trials has been initiated and is designed to determine the
effectiveness of INCB7839 when used in combination with Herceptin. A second Phase II trial in breast
cancer patients is planned that will evaluate INCB7839 as a monotherapy.
CCR2 Receptor Antagonist Program for Inflammatory Diseases
CCR2 is a key chemokine receptor found on monocytes that controls their migration into sites of
inflammation. Once inside the monocytes differentiate into tissue scavenger cells known as macrophages.
In their normal role, macrophages scavenge foreign organisms or injured tissues; however, excessive or
inappropriately triggered macrophage activity results in the production of pro-inflammatory mediators that
can cause damage to tissues and can lead to a chronic inflammatory response. There is substantial
preclinical data from multiple academic centers suggesting that CCR2 antagonism could be of therapeutic
benefit in multiple sclerosis (MS). Activated macrophages accumulate in MS lesions, where they are
associated with and presumed to be required for the destruction of the myelin sheath, the protective
coating around the nerves which disrupts nerve signaling and leads to loss of muscle control, vision,
balance and sensation. Blocking macrophage accumulation at these sites could thus lead to significant
amelioration of this chronic and debilitating disease.
We established a collaborative research and license agreement with Pfizer Inc. (‘‘Pfizer) in January
2006 in which Pfizer gained worldwide development and commercialization rights to our portfolio of
CCR2 antagonist compounds. We retained rights to certain CCR2 antagonists for MS and lupus nephritis
and other autoimmune nephritides.
We are pursuing MS first given the preclinical evidence suggesting that selective CCR2 antagonism
has therapeutic potential in this disease. We have selected a lead clinical candidate, INCB8696, and
initiated a Phase I clinical trial in healthy volunteers in 2007.
Discovery
We have a number of early discovery programs at various stages of preclinical testing, including two
lead clinical candidates in oncology. We do not typically disclose these programs and/or targets until we
have successfully completed preclinical toxicology tests with the lead clinical candidate.
Commercial Strategy
We intend to develop and commercialize some of our compounds on our own in selected markets
where we believe a company of our size can compete effectively, such as oncology and certain
inflammatory conditions. For programs that target large primary care indications such as diabetes, or
require lengthy and expensive clinical development plans, we intend to form strategic alliances with
10
companies that have greater financial and commercial resources than we do, as we did with Pfizer for our
CCR2 antagonist program.
Collaborative Research and License Agreement with Pfizer
Effective in January 2006, we entered a collaborative research and license agreement with Pfizer for
the pursuit of our CCR2 antagonist program. We received an upfront nonrefundable payment of
$40.0 million in January 2006. In addition, we received an aggregate of $20.0 million through the purchase
of convertible subordinated notes, $10.0 million in February 2006 and $10.0 million in October 2007, and
we are eligible to receive additional future development and milestone payments of up to $740.0 million
for the successful development and commercialization of CCR2 antagonists in multiple indications, as well
as royalties on worldwide sales. We received a $3.0 million milestone payment from Pfizer in 2007. Pfizer
gained worldwide development and commercialization rights to our portfolio of CCR2 antagonist
compounds, the most advanced of which was in Phase IIa clinical trials in rheumatoid arthritis and insulin-
resistant obese patients at the time the agreement became effective in January 2006. Pfizer’s rights extend
to the full scope of potential indications, with the exception of multiple sclerosis and lupus nephritis and
other autoimmune nephritides, for which we retained worldwide rights, along with certain compounds. We
do not have obligations to Pfizer on preclinical development candidates we select for pursuit in these
indications.
Patents and Other Intellectual Property
We regard the protection of patents and other enforceable intellectual property rights that we own or
license as critical to our business and competitive position. Accordingly, we rely on patent, trade secret and
copyright law, as well as nondisclosure and other contractual arrangements, to protect our intellectual
property. We have established a patent portfolio of owned or in-licensed patents and patent applications
that cover aspects of all our drug candidates, as well as other patents and patent applications that relate to
full-length genes and genomics-related technologies obtained as a result of our past high-throughput gene
sequencing efforts. The patents and patent applications relating to our drug candidates generally include
claims directed to the drug candidates, methods of using the drug candidates, formulations of the drug
candidates, and methods of manufacturing the drug candidates. Our policy is to pursue patent applications
on inventions and discoveries we believe that are commercially important to the development and growth
of our business.
Patents extend for varying periods according to the date of patent filing or grant and the legal term of
patents in the various countries where patent protection is obtained. The actual protection afforded by a
patent, which can vary from country to country, depends on the type of patent, the scope of its coverage
and the availability of legal remedies in the country.
We have a number of established patent license agreements relating to our gene patent portfolio and
our genomics-related technology patent portfolio. We are presently receiving royalties and other payments
under certain of our gene and genomics-related patent license agreements. Under our gene patent license
agreements, we may in the future receive royalties and other payments if our partners are successful in
their efforts to discover drugs and diagnostics under these license agreements.
We may seek to license rights relating to compounds or technologies in connection with our drug
discovery and development programs. Under these licenses, we may be required to pay up-front fees,
license fees, milestone payments and royalties on sales of future products.
11
Although we believe our rights under patents and patent applications provide a competitive
advantage, the patent positions of pharmaceutical and biotechnology companies are highly uncertain and
involve complex legal and factual questions. We may not be able to develop patentable products or
processes, and may not be able to obtain patents in the United States or elsewhere from pending
applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may
not be valid or enforceable or may not be sufficient to protect the technology owned by or licensed to us or
provide us with a competitive advantage. Any patent or other intellectual property rights that we own or
obtain may be circumvented, challenged or invalidated by our competitors. Others may have patents that
relate to our business or technology and that may prevent us from marketing our product candidates unless
we are able to obtain a license to those patents. In addition, litigation or other proceedings may be
necessary to defend against claims of infringement, to enforce patents, to protect our other intellectual
property rights, to determine the scope and validity of the proprietary rights of third parties or to defend
ourselves in patent or other intellectual property right suits brought by third parties. We could incur
substantial costs in such litigation or other proceedings. An adverse outcome in any such litigation or
proceeding could subject us to significant liability.
With respect to proprietary information that is not patentable, and for inventions for which patents
are difficult to enforce, we rely on trade secret protection and confidentiality agreements to protect our
interests. While we require all employees, consultants and potential business partners to enter into
confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary
information. Others may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets.
Competition
Our drug discovery and development activities face, and will continue to face, intense competition
from organizations such as pharmaceutical and biotechnology companies, as well as academic and research
institutions and government agencies. Our major competitors include fully integrated pharmaceutical
companies that have extensive drug discovery efforts and are developing novel small molecule
pharmaceuticals. We face significant competition from organizations that are pursuing pharmaceuticals
that are competitive with our potential products.
Many companies and institutions, either alone or together with their collaborative partners, have
substantially greater financial resources and larger research and development staffs than we do. In
addition, many competitors, either alone or together with their collaborative partners, have significantly
greater experience than we do in:
(cid:127) drug discovery;
(cid:127) developing products;
(cid:127) undertaking preclinical testing and clinical trials;
(cid:127) obtaining FDA and other regulatory approvals of products; and
(cid:127) manufacturing, marketing, distributing and selling products.
Accordingly, our competitors may succeed in obtaining patent protection, receiving FDA approval or
commercializing products before we do. If we commence commercial product sales, we will be competing
against companies with greater manufacturing, marketing, distributing and selling capabilities, areas in
which we have limited or no experience.
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In addition, any drug candidate that we successfully develop may compete with existing therapies that
have long histories of safe and effective use. Competition may also arise from:
(cid:127) other drug development technologies and methods of preventing or reducing the incidence of
disease;
(cid:127) new small molecules; or
(cid:127) other classes of therapeutic agents.
Developments by others may render our drug candidates obsolete or noncompetitive. We face and will
continue to face intense competition from other companies for collaborative arrangements with
pharmaceutical and biotechnology companies, for establishing relationships with academic and research
institutions and for licenses to proprietary technology. These competitors, either alone or with their
collaborative partners, may succeed in developing products that are more effective than ours.
Our ability to compete successfully will depend, in part, on our ability to:
(cid:127) develop proprietary products;
(cid:127) develop and maintain products that reach the market first, are technologically superior to and/or
are of lower cost than other products in the market;
(cid:127) attract and retain scientific and product development personnel;
(cid:127) obtain patent or other proprietary protection for our products and technologies;
(cid:127) obtain required regulatory approvals; and
(cid:127) manufacture, market, distribute and sell any products that we develop.
In a number of countries, including in particular, developing countries, government officials and other
groups have suggested that pharmaceutical companies should make drugs available at a low cost. In some
cases, governmental authorities have indicated that where pharmaceutical companies do not do so, their
patents might not be enforceable to prevent generic competition. Some major pharmaceutical companies
have greatly reduced prices for their drugs in certain developing countries. If certain countries do not
permit enforcement of any of our patents, sales of our products in those countries, and in other countries
by importation from low-price countries, could be reduced by generic competition or by parallel
importation of our product. Alternatively, governments in those countries could require that we grant
compulsory licenses to allow competitors to manufacture and sell their own versions of our products in
those countries, thereby reducing our product sales, or we could respond to governmental concerns by
reducing prices for our products. In all of these situations, our results of operations could be adversely
affected.
Government Regulation
Our related ongoing research and development activities and any manufacturing and marketing of our
potential small molecule products to treat major medical conditions are subject to extensive regulation by
numerous governmental authorities in the United States and other countries. Before marketing in the
United States, any drug developed by us must undergo rigorous preclinical testing and clinical trials and an
extensive regulatory clearance process implemented by the FDA under the United States Food, Drug and
Cosmetic Act. The FDA regulates, among other things, the development, testing, manufacture, safety,
efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of these
products. None of our drug candidates has, to date, been submitted for approval for sale in the United
States or any foreign market. The regulatory review and approval process, which includes preclinical
testing and clinical trials of each drug candidate, is lengthy, expensive and uncertain. Securing FDA
approval requires the submission of extensive preclinical and clinical data and supporting information to
13
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 in
humans, we must submit to, and receive approval from, the FDA of an IND application. The steps
required before a drug may be marketed in the United States include:
(cid:127) preclinical laboratory tests, animal studies and formulation studies;
(cid:127) submission to the FDA of an IND for human clinical testing, which must become effective before
human clinical trials may commence;
(cid:127) adequate and well-controlled clinical trials in three phases, as described below, to establish the
safety and efficacy of the drug for each indication;
(cid:127) submission to the FDA of a new drug application, or NDA, which must become effective before
marketing can commence;
(cid:127) satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the
drug is produced to assess compliance with current good manufacturing practices; and
(cid:127) FDA review and approval of the NDA.
Similar requirements exist within many foreign agencies as well. The time required to satisfy FDA
requirements or similar requirements of foreign regulatory agencies may vary substantially based on the
type, complexity and novelty of the product or the targeted disease.
Preclinical testing includes laboratory evaluation of product chemistry, toxicity and formulation, as
well as animal studies. The results of the preclinical tests, together with manufacturing information and
analytical data, are submitted to the FDA as part of an IND. An IND will automatically become effective
30 days after receipt by the FDA, unless before that time, the FDA raises concerns or questions about
issues such as the conduct of the clinical trials as outlined in the IND. In the latter case, the IND sponsor
and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed.
We cannot be sure that submission of an IND will result in the FDA allowing clinical trials to commence.
Clinical trials involve the administration of the investigational drug to human subjects under the
supervision of qualified investigators. Clinical trials are conducted under protocols detailing the objectives
of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.
Each protocol must be submitted to the FDA as part of the IND and each trial must be reviewed and
approved by an independent ethics committee or institutional review board (IRB) before it can begin.
Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be
combined. Phase I usually involves the initial introduction of the investigational drug into healthy
volunteers to evaluate its safety, dosage tolerance, absorption, metabolism, distribution and excretion, and,
if possible, to gain an early indication of its effectiveness. Phase II usually involves clinical trials in a limited
patient population to:
(cid:127) evaluate dosage tolerance and optimal dosage;
(cid:127) identify possible adverse effects and safety risks; and
(cid:127) evaluate and gain preliminary evidence of the efficacy of the drug for specific indications.
Phase III clinical trials usually further evaluate clinical efficacy and safety by testing the drug in its
final form in an expanded patient population, providing statistical evidence of efficacy and safety and
providing an adequate basis for physician labeling. We cannot guarantee that Phase I, Phase II or Phase III
testing will be completed successfully within any specified period of time, if at all. Furthermore, we or the
FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
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Even after initial FDA approval has been obtained, further studies, including post-approval trials, may
be required to provide additional data on safety and will be required to gain approval for the sale of a
product as a treatment for clinical indications other than those for which the product was initially tested
and approved. Also, the FDA will require post-approval reporting to monitor the side effects of the drug.
Results of post-approval programs may limit or expand the indications for which the drug product may be
marketed. Further, if there are any requests for modifications to the initial FDA approval for the drug,
including changes
labeling or manufacturing facilities, a
supplemental NDA may be required to be submitted to the FDA.
indication, manufacturing process,
in
Clinical trials must meet requirements for IRB oversight, informed consent and good clinical
practices. Clinical trials must be conducted under FDA oversight. Before receiving FDA clearance to
market a product, we must demonstrate that the product is safe and effective for the patient population
that will be treated. If regulatory clearance of a product is granted, this clearance will be limited to those
disease states and conditions for which the product is safe and effective, as demonstrated through clinical
trials. Marketing or promoting a drug for an unapproved indication is prohibited. Furthermore, clearance
may entail ongoing requirements for post-marketing studies. Even if this regulatory clearance is obtained,
a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and
periodic inspections by the FDA. Discovery of previously unknown problems with a product, manufacturer
or facility may result in restrictions on this product, manufacturer or facility, including costly recalls or
withdrawal of the product from the market.
The length of time and related costs necessary to complete clinical trials varies significantly and may
be difficult to predict. Clinical results are frequently susceptible to varying interpretations that may delay,
limit or prevent regulatory approvals. Additional factors that can cause delay or termination of our clinical
trials, or cause the costs of these clinical trials to increase, include:
(cid:127) slow patient enrollment due to the nature of the protocol, the proximity of patients to clinical sites,
the eligibility criteria for the study, competition with clinical trials for other drug candidates or
other factors;
(cid:127) inadequately trained or insufficient personnel at the study site to assist in overseeing and
monitoring clinical trials;
(cid:127) delays in approvals from a study site’s IRB;
(cid:127) longer than anticipated treatment time required to demonstrate effectiveness or determine the
appropriate product dose;
(cid:127) lack of sufficient supplies of the drug candidate for use in clinical trials;
(cid:127) adverse medical events or side effects in treated patients; and
(cid:127) lack of effectiveness of the drug candidate being tested.
Any drug is likely to produce some toxicities or undesirable side effects in animals and in humans
when administered at sufficiently high doses and/or for sufficiently long periods of time. Unacceptable
toxicities or side effects may occur at any dose level, and at any time in the course of animal studies
designed to identify unacceptable effects of a drug candidate, known as toxicological studies, or in clinical
trials of our potential products. The appearance of any unacceptable toxicity or side effect could cause us
or regulatory authorities to interrupt, limit, delay or abort the development of any of our drug candidates,
and could ultimately prevent their marketing clearance by the FDA or foreign regulatory authorities for
any or all targeted indications.
The FDA’s fast track program is intended to facilitate the development and expedite the review of
drug candidates intended for the treatment of serious or life-threatening diseases and that demonstrate the
potential to address unmet medical needs for these conditions. Under this program, the FDA can, for
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example, review portions of an NDA for a fast track product before the entire application is complete, thus
potentially beginning the review process at an earlier time.
We cannot guarantee that the FDA will grant any of our requests for fast track designation, that any
fast track designation would affect the time of review or that the FDA will approve the NDA submitted for
any of our drug candidates, whether or not fast track designation is granted. Additionally, FDA approval of
a fast track product can include restrictions on the product’s use or distribution (such as permitting use
only for specified medical procedures or limiting distribution to physicians or facilities with special training
or experience). Approval of fast track products can be conditioned on additional clinical trials after
approval.
FDA procedures also provide for priority review of NDAs submitted for drugs that, compared to
currently marketed products, offer a significant improvement in the treatment, diagnosis or prevention of a
disease. The FDA seeks to review NDAs that are granted priority status more quickly than NDAs given
standard status. The FDA’s stated policy is to act on 90% of priority NDAs within six months of receipt.
Although the FDA historically has not met these goals, the agency has made significant improvements in
the timeliness of the review process.
We and any of our contract manufacturers are also required to comply with applicable FDA current
good manufacturing practice regulations. Good manufacturing practices include requirements relating to
quality control and quality assurance as well as to corresponding maintenance of records and
documentation. Manufacturing facilities are subject to inspection by the applicable regulatory authorities.
These facilities, whether our own or our contract manufacturers, must be approved before we can use them
in commercial manufacturing of our related products. We or our contract manufacturers may not be able
to comply with applicable good manufacturing practices and FDA or other regulatory requirements. If we
or our contract manufacturers fail to comply, we or our contract manufacturers may be subject to legal or
regulatory action, such as suspension of manufacturing, seizure of product, or voluntary recall of product.
Furthermore, continued compliance with applicable good manufacturing practices will require continual
expenditure of time, money and effort on the part of us or our contract manufacturers in the areas of
production and quality control and record keeping and reporting, in order to ensure full compliance.
Outside the United States, our ability to market a product is contingent upon receiving a marketing
authorization from the appropriate regulatory authorities. The requirements governing the conduct of
clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. At
present, foreign marketing authorizations are applied for at a national level, although within the European
Union, or EU, regional registration procedures are available to companies wishing to market a product in
more than one EU member state. If the regulatory authority is satisfied that adequate evidence of safety,
quality and efficacy has been presented, a marketing authorization may be granted. This foreign regulatory
approval process involves all of the risks associated with FDA approval discussed above and may also
include additional risks.
Incyte’s Transition into Small-Molecule Drug Discovery and Development
Before the completion of our transition into a drug discovery and development company, we
marketed and sold access to our genomic information databases. However, in recent years, consolidation
within the pharmaceutical and biotechnology sectors and a challenging economic environment led to
reduced demand for research tools and services. This trend, together with the public availability of
genomic information, significantly reduced the market for and revenues from, our information products.
On February 2, 2004, we announced substantial changes in our information products operations,
including the closure of our Palo Alto, California facility and the cessation of development of the
information products developed at this facility. In January 2005, we sold certain assets and liabilities
related to our Proteome facility based in Beverly, Massachusetts. We no longer have any activities in the
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information products area. However, we retain certain existing licenses and licensing activities related to
the intellectual property portfolio generated prior to the transition.
Research and Development
Since our inception, we have made substantial investments in research and technology development.
During 2007, 2006 and 2005, we incurred research and development expenses of $104.9 million,
$87.6 million and $95.6 million, respectively.
Human Resources
As of December 31, 2007, we had 196 employees, including 158 in research and development and 38
in operations support, finance and administrative positions. Of these employees, 74 employees have
advanced technical degrees including 8 MD’s and 66 Ph.D’s. None of our employees are covered by
collective bargaining agreements, and management considers relations with our employees to be good.
Available Information
We were incorporated in Delaware in 1991 and our website is located at www.incyte.com. We make
available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we
electronically file or furnish such materials to the Securities and Exchange Commission. Our website and
the information contained therein or connected thereto are not intended to be incorporated into this
Annual Report on Form 10-K.
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Item 1A. Risk Factors
RISKS RELATING TO OUR BUSINESS
We are at the early stage of our drug discovery and development efforts and we may be unsuccessful in our
efforts.
We are in the early stage of building our drug discovery and development operations. Our ability to
discover, develop, and commercialize pharmaceutical products will depend on our ability to:
(cid:127) hire and retain key scientific employees;
(cid:127) identify high quality therapeutic targets;
(cid:127) identify potential drug candidates;
(cid:127) develop products internally or license drug candidates from others;
(cid:127) identify and enroll suitable human subjects, either in the United States or abroad, for our clinical
trials;
(cid:127) complete laboratory testing and clinical trials on humans;
(cid:127) obtain and maintain necessary intellectual property rights to our products;
(cid:127) obtain and maintain necessary regulatory approvals for our products, both in the United States and
abroad;
(cid:127) enter into arrangements with third parties to provide services or to manufacture our products on
our behalf;
(cid:127) deploy sales and marketing resources effectively or enter into arrangements with third parties to
provide these functions;
(cid:127) lease facilities at reasonable rates to support our growth; and
(cid:127) enter into arrangements with third parties to license and commercialize our products.
We have limited experience with the activities listed above and may not be successful in discovering,
developing, or commercializing drug products.
Our efforts to discover and develop potential drug candidates may not lead to the discovery, development,
commercialization or marketing of drug products.
Our drug candidates in clinical trials are in early stage Phase I and Phase II trials. Our other drug
candidates are still undergoing preclinical testing. We have also licensed to Pfizer our portfolio of CCR2
antagonist compounds. We have no control over the further clinical development of any compounds we
licensed to Pfizer. Discovery and development of potential drug candidates are expensive and
time-consuming, and we do not know if our efforts will lead to discovery of any drug candidates that can be
successfully developed and marketed. If our efforts do not lead to the discovery of a suitable drug
candidate, we may be unable to grow our clinical pipeline or we may be unable to enter into agreements
with collaborators who are willing to develop our drug candidates. Of the compounds that we identify as
potential drug products or that we in-license from other companies, only a few, if any, are likely to lead to
successful drug development programs. For example, in 2006, we discontinued the development of DFC,
which was at the time our most advanced drug candidate and was in Phase IIb clinical trials. Prior to
discontinuation of the DFC program, we expended a significant amount of effort and money on that
program.
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The success of our drug discovery and development efforts may depend on our ability to find suitable
collaborators to fully exploit our capabilities. If we are unable to establish collaborations or if these future
collaborations are unsuccessful, our research and development efforts may be unsuccessful, which could
adversely affect our results of operations and financial condition.
An important element of our business strategy will be to enter into collaborative or license
arrangements with other parties, such as our collaboration with Pfizer, under which we license our drug
candidates to those parties for development and commercialization. We expect that while we plan to
conduct initial clinical trials on our drug candidates, we may need to seek collaborators for our drug
candidates such as our chemokine receptor antagonists because of the expense, effort and expertise
required to continue additional clinical trials and further develop those drug candidates. We may also seek
collaborators for our drug candidates that target large primary care indications such as diabetes because of
the expense involved in further clinical development of these indications and in establishing a sales and
marketing organization to address these indications. Because collaboration arrangements are complex to
negotiate, we may not be successful in our attempts to establish these arrangements. Also, we may not have
drug compounds that are desirable to other parties, or we may be unwilling to license a drug compound
because the party interested in it is a competitor. The terms of any such arrangements that we establish
may not be favorable to us. Alternatively, potential collaborators may decide against entering into an
agreement with us because of our financial, regulatory or intellectual property position or for scientific,
commercial or other reasons. If we are not able to establish collaborative agreements, we may not be able
to develop and commercialize a drug product, which would adversely affect our business and our revenues.
In order for any of these collaboration or license arrangements to be successful, we must first identify
potential collaborators or licensees whose capabilities complement and integrate well with ours. We may
rely on these arrangements for not only financial resources, but also for expertise or economies of scale
that we expect to need in the future relating to clinical trials, manufacturing, sales and marketing, and for
licenses to technology rights. However, it is likely that we will not be able to control the amount and timing
of resources that our collaborators or licensees devote to our programs or potential products. If our
collaborators or licensees prove difficult to work with, are less skilled than we originally expected or do not
devote adequate resources to the program, the relationship will not be successful. If a business
combination involving a collaborator or licensees and a third party were to occur, the effect could be to
diminish, terminate or cause delays in development of a potential product.
We face significant competition for our drug discovery and development efforts, and if we do not compete
effectively, our commercial opportunities will be reduced or eliminated.
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and
significant technological change. Our drug discovery and development efforts may target diseases and
conditions that are already subject to existing therapies or that are being developed by our competitors,
many of which have substantially greater resources, larger research and development staffs and facilities,
more experience in completing preclinical testing and clinical trials, and formulation, marketing and
manufacturing capabilities. As a result of these resources, our competitors may develop drug products that
render our products obsolete or noncompetitive by developing more effective drugs or by developing their
products more efficiently. Our ability to develop competitive products would be limited if our competitors
succeeded in obtaining regulatory approvals for drug candidates more rapidly than we were able to or in
obtaining patent protection or other intellectual property rights that limited our drug development efforts.
Any drugs resulting from our research and development efforts, or from our joint efforts with collaborators
or licensees, might not be able to compete successfully with our competitors’ existing and future products,
or obtain regulatory approval in the United States or elsewhere.
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We depend on our collaboration with Pfizer for the development and commercialization of CCR2 antagonist
compounds.
Under our collaborative research and license agreement with Pfizer, Pfizer gained worldwide
development and commercialization rights to our portfolio of CCR2 antagonist compounds. Pfizer’s rights
extend to the full scope of potential indications, with the exception of multiple sclerosis and autoimmune
nephritides.
Although Pfizer is required to use commercially reasonable efforts to develop and commercialize
CCR2 antagonists for the indications for which they are responsible, we cannot control the amount and
timing of resources Pfizer may devote to the development of CCR2 antagonists. Any failure of Pfizer to
perform its obligations under our agreement could negatively impact the development of CCR2
antagonists, lead to our loss of potential revenues from product sales and milestones and delay our
achievement, if any, of profitability.
Pfizer has certain rights to terminate the license agreement, including the right to terminate upon
90 days’ notice for any reason. Pfizer also has the right to terminate its rights and obligations with respect
to certain indications. If Pfizer terminates the license agreement or its rights with respect to certain
indications, we may not be able to find a new collaborator to replace Pfizer, and our business could be
adversely affected.
If conflicts arise between our collaborators, including Pfizer, licensees, or advisors and us, our
collaborators, licensees, or advisors may act in their self-interest, which may adversely affect our business.
If conflicts arise between us and our collaborators or licensees, including Pfizer, or our scientific
advisors, the other party may act in its self-interest and not in the interest of our stockholders. Conflicts
may arise with our collaborators or licensees if they pursue alternative technologies or develop alternative
products either on their own or in collaboration with others as a means for developing treatments for the
diseases that we have targeted. Competing products, either developed by these future collaborators or
licensees or to which these future collaborators or licensees have rights, may result in their withdrawal of
support for our product candidates.
Additionally, conflicts may arise if there is a dispute about the achievement and payment of a
milestone amount or the ownership of intellectual property that is developed during the course of the
relationship. Similarly, the parties to a collaboration or license agreement may disagree as to which party
owns newly developed products. Should an agreement be terminated as a result of a dispute and before we
have realized the benefits of the collaboration or license, our reputation could be harmed and we may not
obtain revenues that we anticipated receiving.
We have limited expertise with and capacity to conduct preclinical testing and clinical trials, and our
resulting dependence on other parties could result in delays in and additional costs for our drug
development efforts.
trials,
We have only
limited experience with clinical
formulation, manufacturing and
commercialization of drug products. We also have limited internal resources and capacity to perform
preclinical testing and clinical trials. As a result, we intend to hire Clinical Research Organizations, or
CROs, to perform preclinical testing and clinical trials for drug candidates. If the CROs that we hire to
perform our preclinical testing and clinical trials or our collaborators or licensees do not meet deadlines,
do not follow proper procedures, or a conflict arises between us and our CROs, our preclinical testing and
clinical trials may take longer than expected, may be delayed or may be terminated. If we were forced to
find a replacement entity to perform any of our preclinical testing or clinical trials, we may not be able to
find a suitable entity on favorable terms, or at all. Even if we were able to find another company to
perform a preclinical test or clinical trial, the delay in the test or trial may result in significant expenditures.
Events such as these may result in delays in our obtaining regulatory approval for our drug candidates or
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our ability to commercialize our products and could result in increased expenditures that would adversely
affect our operating results.
In addition, for some of our drug candidates, we plan to contract with collaborators or licensees to
advance those candidates through later-stage, more expensive clinical trials, rather than invest our own
resources to perform these clinical trials. Depending on the terms of our agreements with these
collaborators or licensees, we may not have any control over the conduct of these clinical trials, and in any
event we would be subject to the risks associated with depending on collaborators or licensees to develop
these drug candidates.
If we fail to enter into additional licensing agreements or if these arrangements are unsuccessful, our
business and operations might be adversely affected.
In addition to establishing collaborative or license arrangements under which other parties license our
drug candidates for development and commercialization, we intend to continue to explore opportunities to
develop our clinical pipeline by in-licensing drug compounds that fit within our expertise and research and
development capabilities. We may be unable to enter into any additional in-licensing agreements because
suitable product candidates that are within our expertise may not be available to us on terms that are
acceptable to us or because competitors with greater resources seek to in-license the same product
candidates. Product candidates that we would like to develop may not be available to us because they are
controlled by competitors who are unwilling to license the rights to the drug compound or candidate to us.
In addition, we may enter into license agreements that are unsuccessful and our business and operations
might be adversely affected by the termination of a drug candidate and termination and winding down of
the related license agreement. For example, in April 2006, we announced the discontinuation of
development of DFC and we gave notice of termination of our collaborative license agreement with
Pharmasset, Inc., which licensed DFC to us. DFC was at the time our most advanced drug candidate. We
may also need to license drug delivery or other technology in order to continue to develop our drug
candidate pipeline. If we are unable to enter into additional agreements to license drug candidates, drug
delivery technology or other technology or if these arrangements are unsuccessful, our research and
development efforts could be adversely affected.
If we are unable to obtain regulatory approval to develop and market products in the United States and
foreign jurisdictions, we will not be permitted to manufacture or commercialize products resulting from our
research.
In order to manufacture and commercialize drug products in the United States, our drug candidates
will have to obtain regulatory approval from the Food and Drug Administration, or the FDA. Satisfaction
of regulatory requirements typically takes many years. To obtain regulatory approval, we must first show
that our drug products are safe and effective for target indications through preclinical testing (animal
testing) and clinical trials (human testing). Preclinical testing and clinical development are long, expensive
and uncertain processes, and we do not know whether the FDA will allow us to undertake clinical trials of
any potential drug products in addition to our compounds currently in clinical trials.
Completion of clinical trials may take several years and failure may occur at any stage of testing. The
length of time required varies substantially according to the type, complexity, novelty and intended use of
the product candidate. Interim results of a preclinical test or clinical trial do not necessarily predict final
results, and acceptable results in early clinical trials may not be repeated in later clinical trials. For
example, a drug candidate that is successful at the preclinical level may cause harmful or dangerous side
effects when tested at the clinical level. Our rate of commencement and completion of clinical trials may
be delayed by many factors, including:
(cid:127) the high degree of risk associated with drug development;
(cid:127) our inability to formulate or manufacture sufficient quantities of materials for use in clinical trials;
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(cid:127) variability in the number and types of patients available for each study;
(cid:127) difficulty in maintaining contact with patients after treatment, resulting in incomplete data;
(cid:127) unforeseen safety issues or side effects;
(cid:127) poor or unanticipated effectiveness of drug candidates during the clinical trials; or
(cid:127) government or regulatory delays.
Data obtained from clinical trials are susceptible to varying interpretation, which may delay, limit or
prevent regulatory approval. A number of companies in the pharmaceutical industry, including
biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after achieving
promising results in earlier clinical trials. In addition, regulatory authorities may refuse or delay approval
as a result of other factors, such as changes in regulatory policy during the period of product development
and regulatory agency review. For example, the FDA has in the past required and could in the future
require that we conduct additional trials of any of our product candidates, which would result in delays.
Due, in part, to the early stage of our drug candidate research and development process, we cannot
predict whether regulatory approval will be obtained for any product we develop. Our drug candidates in
clinical trials are in early stage Phase I and Phase II trials. Our other drug candidates are still undergoing
preclinical testing. We have also licensed to Pfizer our portfolio of CCR2 antagonist compounds. We have
no control over the further clinical development of any compounds we licensed to Pfizer. Compounds
developed by us, alone or with other parties, may not prove to be safe and effective in clinical trials and
may not meet all of the applicable regulatory requirements needed to receive marketing approval. If
regulatory approval of a product is granted, this approval will be limited to those disease states and
conditions for which the product is demonstrated through clinical trials to be safe and effective. Failure to
obtain regulatory approval would delay or prevent us from commercializing products.
Outside the United States, our ability to market a product is contingent upon receiving a marketing
authorization from the appropriate regulatory authorities. This foreign regulatory approval process
typically includes all of the risks associated with the FDA approval process described above and may also
include additional risks.
Our reliance on other parties to manufacture our drug candidates could result in a short supply of the
drugs, delays in clinical trials or drug development, increased costs and withdrawal or denial of the
regulatory authority’s approval.
We do not currently operate manufacturing facilities for clinical or commercial production of our drug
candidates. We expect to continue to rely on third parties for the manufacture of our drug candidates and
any drug products that we may develop. The FDA requires that drug products be manufactured according
to its current Good Manufacturing Practices, or cGMP, regulations and a limited number of manufacturers
comply with these requirements. If the other parties that we choose to manufacture our drug products are
not compliant with cGMP, the FDA may not approve our application to manufacture our drug products.
We may not be able to arrange for our drug candidates or any drug products that we may develop to be
manufactured by one of these parties on reasonable terms, if at all. Failure to comply with cGMP in the
manufacture of our products could result in the FDA withdrawing or denying regulatory approval of our
drug product or other enforcement actions.
We may not be able to obtain sufficient quantities of our drug candidates or any drug products we may
develop if our designated manufacturers do not have the capacity or capability to manufacture our
products according to our schedule and specifications. Also, raw materials that may be required to
manufacture any products we develop may only be available from a limited number of suppliers. If we have
promised delivery of a new product and are unable to meet the delivery requirement due to manufacturing
difficulties, our development programs would be delayed, and we may have to expend additional sums in
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order to ensure that manufacturing capacity is available when we need it even if we do not use all of the
manufacturing capacity. This expense would adversely affect our operating results.
Manufacturers of pharmaceutical products often encounter difficulties in production, especially in
scaling up initial production. These problems include difficulties with production costs and yields, quality
control and assurance and shortages of qualified personnel, as well as compliance with strictly enforced
federal, state and foreign regulations. We may not be able to adequately manage and oversee the
manufacturers we choose, they may not perform as agreed or they may terminate their agreements with us.
Foreign manufacturing approval processes typically include all of the risks associated with the FDA
approval process for manufacturing and may also include additional risks.
We may incur additional expense in order to market our drug products.
We do not have experience marketing drug products. If the FDA grants regulatory approval to one or
more of our drug candidates, we would have to employ additional personnel or engage another party to
market our drug products, which would be an additional expense to us.
We might not be able to commercialize our drug candidates successfully, and we may spend significant time
and money attempting to do so.
We have a limited number of drug candidates in early stage Phase I and Phase II clinical trials. We
have also licensed to Pfizer our portfolio of CCR2 antagonist compounds. We, or our collaborators or
licensees, may decide to discontinue development of any or all of our drug candidates at any time for
commercial, scientific or other reasons. We discontinued development of DFC in April 2006 for safety
reasons. If a product is developed, but is not marketed, we may have spent significant amounts of time and
money on it, which would adversely affect our operating results and financial condition. Even if a drug
candidate that we develop receives regulatory approval, we may decide not to commercialize it if we
determine that commercialization of that product would require more money and time than we are willing
to invest. For example, drugs that receive approval are subject to post-regulatory surveillance and may
have to be withdrawn from the market if previously unknown side effects occur. At this point, the
regulatory agencies may require additional clinical trials or testing. Once a drug is marketed, if it causes
side effects, the drug product may be recalled or may be subject to reformulation, additional studies,
changes in labeling, warnings to the public and negative publicity. As a result, we may not continue to
commercialize a product even though it has obtained regulatory approval. Further, we may decide not to
continue to commercialize a product if the market does not accept the product because it is too expensive
and third parties such as insurance companies or Medicare have not approved it for substantial
reimbursement. In addition, we may decide not to continue to commercialize a product if another product
comes on the market that is as effective but has fewer side effects. There is also a risk that competitors may
develop similar or superior products or have proprietary rights that preclude us from ultimately marketing
our products.
Our ability to generate revenues will be diminished if we are unable to obtain acceptable prices or an
adequate level of reimbursement from payors of healthcare costs.
The continuing efforts of government and insurance companies, health maintenance organizations, or
HMOs, and other payors of healthcare costs to contain or reduce costs of health care may affect our future
revenues and profitability, and the future revenues and profitability of our potential customers, suppliers
and collaborative or license partners and the availability of capital. For example, in certain foreign markets,
pricing or profitability of prescription pharmaceuticals is subject to government control. In the United
States, given recent federal and state government initiatives directed at lowering the total cost of health
care, the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of
prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot
predict whether any such legislative or regulatory proposals will be adopted, the announcement or
23
adoption of these proposals could reduce the price that we or any of our collaborators or licensees receive
for any products in the future.
Our ability to commercialize our products successfully will depend in part on the extent to which
appropriate reimbursement levels for the cost of our products and related treatment are obtained by
governmental authorities, private health insurers and other organizations, such as HMOs. Third-party
payors are increasingly challenging the prices charged for medical products and services. Also, the trend
toward managed health care in the United States and the concurrent growth of organizations such as
HMOs, which could control or significantly influence the purchase of health care services and products, as
well as legislative proposals to reform health care or reduce government insurance programs, may all result
in lower prices for or rejection of our products. The cost containment measures that health care payors and
providers are instituting and the effect of any health care reform could materially and adversely affect our
ability to generate revenues.
As our drug discovery and development operations are conducted at our headquarters in Wilmington,
Delaware, the loss of access to this facility would negatively impact our business.
Our facility in Wilmington, Delaware is our headquarters and is also where we conduct all of our drug
discovery operations and research and development activities. Our lease contains provisions that provide
for its early termination upon the occurrence of certain events of default or upon a change of control.
Further, our headquarters facility is located in a large research and development complex that may be
temporarily or permanently shutdown if certain environmental or other hazardous conditions were to
occur within the complex. In addition, actions of activists opposed to aspects of pharmaceutical research
may disrupt our experiments or our ability to access or use our facilities. The loss of access to or use of our
Wilmington, Delaware, facility, either on a temporary or permanent basis, or early termination of our lease
would result in an interruption of our business and, consequently, would adversely affect the advancement
of our drug discovery and development programs and our overall business.
We depend on key employees in a competitive market for skilled personnel, and the loss of the services of
any of our key employees or our inability to attract and retain additional personnel would affect our ability
to expand our drug discovery and development programs and achieve our objectives.
We are highly dependent on the principal members of our management, operations and scientific
staff. We experience intense competition for qualified personnel. Our future success also depends in part
on the continued service of our executive management team, key scientific and management personnel and
our ability to recruit, train and retain essential scientific personnel for our drug discovery and development
programs, including those who will be responsible for overseeing our preclinical testing and clinical trials as
well as for the establishment of collaborations with other companies. If we lose the services of any of these
people or if we are unable to recruit sufficient qualified personnel, our research and product development
goals, including the identification and establishment of key collaborations, operations and marketing
efforts could be delayed or curtailed. We do not maintain ‘‘key person’’ insurance on any of our employees.
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If we fail to manage our growth effectively, our ability to develop and commercialize products could suffer.
We expect that if our clinical drug candidates continue to progress in development, we continue to
build our development organization and our drug discovery efforts continue to generate drug candidates,
we will require significant additional investment in personnel, management and resources. Our ability to
commercialize our drug candidates and to achieve our research and development objectives depends on
our ability to respond effectively to these demands and expand our internal organization, systems and
controls to accommodate additional anticipated growth. If we are unable to manage our growth effectively,
our business could be harmed and our ability to execute our business strategy could suffer.
We may encounter difficulties in integrating companies we acquire, which may harm our operations and
financial results.
As part of our business strategy, we have in the past and may in the future acquire assets,
technologies, compounds and businesses. Our past acquisitions, such as the acquisition of Maxia have
involved, and our future acquisitions may involve, risks such as the following:
(cid:127) we may be exposed to unknown liabilities of acquired companies;
(cid:127) our acquisition and integration costs may be higher than we anticipated and may cause our
quarterly and annual operating results to fluctuate;
(cid:127) we may experience difficulty and expense in assimilating the operations and personnel of the
acquired businesses, disrupting our business and diverting our management’s time and attention;
(cid:127) we may be unable to integrate or complete the development and application of acquired
technology, compounds or drug candidates;
(cid:127) we may experience difficulties in establishing and maintaining uniform standards, controls,
procedures and policies;
(cid:127) our relationships with key customers, suppliers, or collaborative or license partners of acquired
businesses may be impaired, due to changes in management and ownership of the acquired
businesses;
(cid:127) we may be unable to retain key employees of the acquired businesses;
(cid:127) we may incur amortization or impairment expenses if an acquisition results in significant goodwill or
other intangible assets; or
(cid:127) our stockholders may be diluted if we pay for the acquisition with equity securities.
If product liability lawsuits are brought against us, we could face substantial liabilities and may be required
to limit commercialization of our products and our results of operations could be harmed.
The clinical trials and marketing of medical products that are intended for human use entails an
inherent risk of product liability. If any product that we or any of our collaborators or licensees develops
causes or is alleged to cause injury or is found to be unsuitable during clinical trials, manufacturing or sale,
we may be held liable. If we cannot successfully defend ourselves against product liability claims, we may
incur substantial liabilities, including substantial damages to be paid to the plaintiffs and legal costs, or we
may be required to limit commercialization of our products. Our product liability insurance policy that
provides coverage for liabilities arising from our clinical trials may not fully cover our potential liabilities.
In addition, we may determine that we should increase our coverage upon the undertaking of new clinical
trials, and this insurance may be prohibitively expensive to us or our collaborators or licensees and may not
fully cover our potential liabilities. Our inability to obtain sufficient product liability insurance at an
acceptable cost to protect against potential product liability claims could prevent or inhibit the
commercialization of pharmaceutical products we develop, alone or with our collaborators. Additionally,
25
any product liability lawsuit could cause injury to our reputation, recall of products, participants to
withdraw from clinical trials, and potential collaborators or licensees to seek other partners, any of which
could impact our results of operations.
Because our activities involve the use of hazardous materials, we may be subject to claims relating to
improper handling, storage or disposal of these materials that could be time consuming and costly.
We are subject to various environmental, health and safety laws and regulations governing, among
other things, the use, handling, storage and disposal of regulated substances and the health and safety of
our employees. Our research and development processes involve the controlled use of hazardous and
radioactive materials and biological waste resulting in the production of hazardous waste products. We
cannot completely eliminate the risk of accidental contamination or discharge and any resultant injury
from these materials. If any injury or contamination results from our use or the use by our collaborators or
licensees of these materials, we may be sued and our liability may exceed our insurance coverage and our
total assets. Further, we may be required to indemnify our collaborators or licensees against all damages
and other liabilities arising out of our development activities or products produced in connection with
these collaborations or licenses. Compliance with the applicable environmental and workplace laws and
regulations is expensive. Future changes to environmental, health, workplace and safety laws could cause
us to incur additional expense or may restrict our operations or impair our research, development and
production efforts.
RISKS RELATING TO OUR FINANCIAL RESULTS
We expect to incur losses in the future and we may not achieve or maintain profitability in the future.
We had net losses from inception in 1991 through 1996 and in 1999 through 2007. Because of those
losses, we had an accumulated deficit of $1.0 billion as of December 31, 2007. We will continue to spend
significant amounts on our efforts to discover and develop drugs. As a result, we expect to continue to
incur losses in 2008 and in future periods as well.
We anticipate that our drug discovery and development efforts will increase as we focus on the studies,
including preclinical tests and clinical trials prior to seeking regulatory approval, that are required before
we can sell a drug product. The development of drug products will require us to spend significant funds on
research, development, testing, obtaining regulatory approvals, manufacturing and marketing. To date, we
do not have any drug products that have generated revenues and we cannot assure you that we will
generate revenues from the drug candidates that we license or develop for several years, if ever. We cannot
be certain whether or when we will achieve profitability because of the significant uncertainties relating to
our ability to generate commercially successful drug products. Even if we were successful in obtaining
regulatory approvals for manufacturing and commercializing a drug candidate, we expect that we will
continue to incur losses if our drug products do not generate significant revenues. If we achieve
profitability, we may not be able to sustain or increase profitability.
We will need additional capital in the future. The capital markets may not permit us to raise additional
capital at the time that we require it, which could result in limitations on our research and development or
commercialization efforts or the loss of certain of our rights in our technologies or drug candidates.
Our future funding requirements will depend on many factors and we anticipate that we will need to
raise additional capital to fund our business plan and research and development efforts going-forward.
Additional factors that may affect our future funding requirements include:
(cid:127) any changes in the breadth of our research and development programs;
(cid:127) the results of research and development, preclinical testing and clinical trials conducted by us or our
future collaborative partners or licensees, if any;
26
(cid:127) the acquisition or licensing of businesses, technologies or compounds, if any;
(cid:127) our ability to maintain and establish new corporate relationships and research collaborations;
(cid:127) competing technological and market developments;
(cid:127) the amount of revenues generated from our business activities, if any;
(cid:127) the time and costs involved in filing, prosecuting, defending and enforcing patent and intellectual
property claims;
(cid:127) the receipt of contingent licensing or milestone fees or royalties on product sales from our current
or future collaborative and license arrangements, if established; and
(cid:127) the timing of regulatory approvals, if any.
If we require additional capital at a time when investment in companies such as ours, or in the
marketplace generally, is limited due to the then prevailing market or other conditions, we may have to
scale back our operations, eliminate one or more of our research or development programs, or attempt to
obtain funds by entering into an agreement with a collaborative partner that would result in terms that are
not favorable to us or relinquishing our rights in certain of our proprietary technologies or drug candidates.
If we are unable to raise funds at the time that we desire or at any time thereafter on acceptable terms, we
may not be able to continue to develop our potential drug products. The sale of equity or additional
convertible debt securities in the future would be dilutive to our stockholders, and debt financing
arrangements may require us to pledge certain assets or enter into covenants that could restrict our
operations or our ability to incur further indebtedness.
Our current revenues are derived from collaborations and from licensing our intellectual property. If we are
unable to achieve milestones, develop products or renew or enter into new collaborations, our revenues may
decrease, and future milestone and royalty payments from our gene and genomics-related intellectual
property may not contribute significantly to revenues for several years, and may never result in revenues.
We derived substantially all of our revenues for the year ended December 31, 2007 from our
collaborative research and license agreement with Pfizer and from licensing our intellectual property to
others. We may be unable to enter into additional collaborative agreements. Revenues from research and
development collaborations depend upon continuation of the collaborations, the achievement of
milestones and royalties we earn from any future products developed from our research. If we are unable
to successfully achieve milestones or our collaborators fail to develop successful products, we will not earn
the revenues contemplated under our collaborative agreements. Part of our prior strategy was to license to
our database customers and to other pharmaceutical and biotechnology companies our know-how and
patent rights associated with the information we have generated in the creation of our proprietary
databases, for use in the discovery and development of potential pharmaceutical, diagnostic or other
products. Any potential product that is the subject of such a license will require several years of further
development, clinical trials and regulatory approval before commercialization, all of which is beyond our
control, and possibly beyond the control of our licensee. These licensees may not develop the potential
product if they do not devote the necessary resources or decide that they do not want to expend the
resources to do the clinical trials necessary to obtain the necessary regulatory approvals. Therefore,
milestone or royalty payments from these licenses may not contribute to our revenues for several years, if
at all. We have decided to discontinue some of our gene and genomics-related patent prosecution and
maintenance, and may in the future decide to discontinue additional gene and genomics-related patent
prosecution and maintenance, which could limit our ability to receive license-based revenues from our
gene and genomics-related patent portfolio.
27
We have a large amount of debt and our debt service obligations may prevent us from taking actions that we
would otherwise consider to be in our best interests.
As of December 31, 2007, the aggregate principal amount of total consolidated debt was
$421.8 million and our stockholders’ deficit was $159.5 million. The documents pursuant to which our
outstanding convertible senior and subordinated notes were issued do not limit the issuance of additional
indebtedness. Our substantial leverage could have significant negative consequences for our future
operations, including:
(cid:127) increasing our vulnerability to general adverse economic and industry conditions;
(cid:127) limiting our ability to obtain additional financing for working capital, capital and research and
development expenditures, and general corporate purposes;
(cid:127) requiring the dedication of a substantial portion of our expected cash flow or our existing cash to
service our indebtedness, thereby reducing the amount of our cash available for other purposes,
including working capital, capital expenditures and research and development expenditures;
(cid:127) limiting our flexibility in planning for, or reacting to, changes in our business and the industry in
which we compete; or
(cid:127) placing us at a possible competitive disadvantage compared to less leveraged competitors and
competitors that have better access to capital resources.
In the past five years, we have had negative cash flow from operations. We likely will not generate
sufficient cash flow from our operations in the future to enable us to meet our anticipated fixed charges,
including our debt service requirements with respect to our outstanding convertible senior notes and
convertible subordinated notes. As of December 31, 2007, $151.8 million aggregate principal amount of
our 31⁄2% convertible senior notes due 2011 was outstanding. Our annual interest payments, beginning in
2007, for the 31⁄2% convertible senior notes through 2010, assuming none of these notes are converted,
redeemed, repurchased or exchanged, are $5.3 million, and an additional $2.6 million in interest is payable
in 2011. As of December 31, 2007, $250.0 million aggregate principal amount of our 31⁄2% convertible
subordinated notes due 2011 was outstanding. Our annual interest payments for the 31⁄2% convertible
subordinated notes through 2010, assuming none of these notes are converted, redeemed, repurchased or
exchanged, are $8.8 million, and an additional $4.4 million in interest is payable in 2011. As of
December 31, 2007, $20.0 million aggregate principal amount of the non-interest bearing convertible
subordinated notes held by Pfizer was outstanding, of which $10.0 million is due in 2013 and $10.0 million
is due in 2014. If we are unable to generate cash from our operations or raise additional cash through
financings sufficient to meet these obligations, we will need to use existing cash or liquidate marketable
securities in order to fund these obligations, which may delay or curtail our research, development and
commercialization programs.
RISKS RELATING TO INTELLECTUAL PROPERTY AND LEGAL MATTERS
If we are subject to arbitration, litigation and infringement claims, they could be costly and disrupt our
drug discovery and development efforts.
The technology that we use to make and develop our drug products, the technology that we
incorporate in our products, and the products we are developing may be subject to claims that they infringe
the patents or proprietary rights of others. The success of our drug discovery and development efforts will
also depend on our ability to develop new compounds, drugs and technologies without infringing or
misappropriating the proprietary rights of others. We are aware of patents and patent applications filed in
certain countries claiming certain intellectual property relating to certain of our drug discovery targets such
as CCR5. While the validity of issued patents, patentability of pending patent applications and applicability
of any of them to our programs are uncertain, if any of these patents are asserted against us or if we choose
28
to license any of these patents, our ability to commercialize our products could be harmed or the potential
return to us from any product that may be successfully commercialized could be diminished.
From time to time we may receive notices from third parties offering licenses to technology or alleging
patent, trademark, or copyright infringement, claims regarding trade secrets or other contract claims.
Receipt of these notices could result in significant costs as a result of the diversion of the attention of
management from our drug discovery and development efforts. Parties sending these notices may have
brought and in the future may bring litigation against us or seek arbitration relating to contract claims.
We may be involved in future lawsuits or other legal proceedings alleging patent infringement or other
intellectual property rights or contract violations. In addition, litigation or other legal proceedings may be
necessary to:
(cid:127) assert claims of infringement;
(cid:127) enforce our patents or trademarks;
(cid:127) protect our trade secrets or know-how; or
(cid:127) determine the enforceability, scope and validity of the proprietary rights of others.
We may be unsuccessful in defending or pursuing these lawsuits, claims or other legal proceedings.
Regardless of the outcome, litigation or other legal proceedings can be very costly and can divert
management’s efforts. For example, we recently settled patent litigation with Invitrogen Corporation. We
incurred significant expenses related to this litigation and, as part of the settlement, paid Invitrogen
$3.4 million. An adverse determination may subject us to significant liabilities or require us or our
collaborators or licensees to seek licenses to other parties’ patents or proprietary rights. We or our
collaborators or licensees may also be restricted or prevented from manufacturing or selling a drug or
other product that we or they develop. Further, we or our future collaborators or licensees may not be able
to obtain any necessary licenses on acceptable terms, if at all. If we are unable to develop non-infringing
technology or license technology on a timely basis or on reasonable terms, our business could be harmed.
We may be unable to adequately protect or enforce our proprietary information, which may result in its
unauthorized use, a loss of revenue under a collaboration agreement or loss of sales to generic versions of
our products or otherwise reduce our ability to compete in developing and commercializing products.
Our business and competitive position depends in significant part upon our ability to protect our
proprietary technology, including any drug products that we create. Despite our efforts to protect this
information, unauthorized parties may attempt to obtain and use information that we regard as
proprietary. For example, one of our collaborators may disclose proprietary information pertaining to our
drug discovery efforts. Our patent applications may fail to result in issued patents. In addition, because
patent applications can take several years to issue as patents, there may be pending patent applications of
others that may later issue as patents that cover some aspect of our drug candidates. Our existing patents
and any future patents we may obtain may not be broad enough to protect our products or all of the
potential uses of our products, or otherwise prevent others from developing competing products or
technologies. In addition, our patents may be challenged and invalidated or may fail to provide us with any
competitive advantages if, for example, others were first to invent or first to file a patent application for the
technologies and products covered by our patents.
Additionally, when we do not control the prosecution, maintenance and enforcement of certain
important intellectual property, such as a drug compound in-licensed to us or subject to a collaboration
with a third party, the protection of the intellectual property rights may not be in our hands. If we do not
control the intellectual property rights in-licensed to us with respect to a compound and the entity that
controls the intellectual property rights does not adequately protect those rights, our rights may be
impaired, which may impact our ability to develop, market and commercialize the in-licensed compound.
29
Our means of protecting our proprietary rights may not be adequate, and our competitors may:
(cid:127) independently develop substantially equivalent proprietary information, products and techniques;
(cid:127) otherwise gain access to our proprietary information; or
(cid:127) design around patents issued to us or our other intellectual property.
We pursue a policy of having our employees, consultants and advisors execute proprietary information
and invention agreements when they begin working for us. However, these agreements may not provide
meaningful protection for our trade secrets or other proprietary information in the event of unauthorized
use or disclosure. If we fail to maintain trade secret and patent protection, our potential, future revenues
may be decreased.
If the effective term of our patents is decreased due to changes in the United States patent laws or if we need
to refile some of our patent applications, the value of our patent portfolio and the revenues we derive from it
may be decreased.
The value of our patents depends in part on their duration. A shorter period of patent protection
could lessen the value of our rights under any patents that we obtain and may decrease the revenues we
derive from our patents. The United States patent laws were amended in 1995 to change the term of patent
protection from 17 years from patent issuance to 20 years from the earliest effective filing date of the
application. Because the time from filing to issuance of biotechnology applications may be more than three
years depending on the subject matter, a 20-year patent term from the filing date may result in
substantially shorter patent protection. Also, we may need to refile some of our applications filed before
1995 that claim large numbers of genes or other additional subject matter and, in these situations, the
patent term will be measured from the date of the earliest priority application. This would shorten our
period of patent exclusivity and may decrease the revenues that we might derive from the patents.
International patent protection is particularly uncertain and costly, and if we are involved in opposition
proceedings in foreign countries, we may have to expend substantial sums and management resources.
Biotechnology and pharmaceutical patent law outside the United States is even more uncertain and
costly than in the United States and is currently undergoing review and revision in many countries. Further,
the laws of some foreign countries may not protect our intellectual property rights to the same extent as
United States laws. For example, certain countries do not grant patent claims that are directed to the
treatment of humans. We may participate in opposition proceedings to determine the validity of our
foreign patents or our competitors’ foreign patents, which could result in substantial costs and diversion of
our efforts.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties
Our corporate headquarters is in Wilmington, Delaware, which is where our drug discovery and
development operations are also located. These facilities are leased to us until June 2010. We believe that
these facilities are adequate to meet our business requirements for the near-term and that additional space
will be available on commercially reasonable terms, if required. In addition to this lease, we had lease
agreements as of December 31, 2007 for facilities that were closed as a part of the restructurings of our
genomic information business in Palo Alto and San Diego, California. As of December 31, 2007, we had
multiple sublease and lease agreements covering approximately 273,000 square feet that expire on various
dates ranging from June 2008 to March 2011. Of the approximately 273,000 square feet leased,
approximately 174,000 square feet of this space is currently subleased to others.
30
Item 3. Legal Proceedings
We are not currently a party to any material legal proceedings. We may from time to time become
involved in various legal proceedings arising in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the fourth quarter of 2007.
Executive Officers of the Registrant
Our executive officers are as follows:
Paul A. Friedman, M.D., age 65, joined Incyte as the Chief Executive Officer and a Director in
November 2001. Dr. Friedman also serves as our President. From 1998 until October 2001, Dr. Friedman
served as President of DuPont Pharmaceuticals Research Laboratories, a wholly owned subsidiary of
DuPont Pharmaceuticals Company (formerly The DuPont Merck Pharmaceutical Company), from 1994 to
1998 he served as President of Research and Development of The DuPont Merck Pharmaceutical
Company, and from 1991 to 1994 he served as Senior Vice President at Merck Research Laboratories.
Prior to his work at Merck and DuPont, Dr. Friedman was an Associate Professor of Medicine and
Pharmacology at Harvard Medical School. Dr. Friedman is a Diplomate of the American Board of Internal
Medicine and a Member of the American Society of Clinical Investigation. He received his A.B. in Biology
from Princeton University and his M.D. from Harvard Medical School.
David C. Hastings, age 46, has served as Executive Vice President and Chief Financial Officer since
October 2003. From February 2000 to September 2003, Mr. Hastings served as Vice President, Chief
Financial Officer, and Treasurer of ArQule, Inc. Prior to his employment with ArQule, Mr. Hastings was
Vice President and Corporate Controller at Genzyme, Inc., where he was responsible for the management
of the finance department. Prior to his employment with Genzyme, Mr. Hastings was the Director of
Finance at Sepracor, Inc., where he was primarily responsible for Sepracor’s internal and external
reporting. Mr. Hastings is a Certified Public Accountant and received his B.A. in Economics at the
University of Vermont.
John A. Keller, Ph.D., age 43, has served as Executive Vice President and Chief Business Officer since
September 2003. From January 2001 to September 2003, Dr. Keller served as Vice President, Business
Development at GlaxoSmithKline. From February 1987 to January 2001, Dr. Keller held a range of
positions at SmithKline Beckman and SmithKline Beecham, in areas encompassing discovery research,
project management, R&D strategy, alliance management and business development. Dr. Keller received
his B.A. from Johns Hopkins University and his Ph.D. in Microbiology from Rutgers University.
31
Brian W. Metcalf, Ph.D., age 62, has served as Executive Vice President and Chief Drug Discovery
Scientist since February 2002. From March 2000 to February 2002, Dr. Metcalf served as Senior Vice
President and Chief Scientific Officer of Kosan Biosciences Incorporated. From December 1983 to March
2000, Dr. Metcalf held a number of executive management positions with SmithKline Beecham, most
recently as Senior Vice President, Discovery Chemistry and Platform Technologies. Prior to joining
SmithKline Beecham, Dr. Metcalf held positions with Merrell Research Center from 1973 to 1983.
Dr. Metcalf received his B.S. and Ph.D. in Organic Chemistry from the University of Western Australia.
Patricia A. Schreck, age 54, joined Incyte as Executive Vice President and General Counsel in
December 2003. Prior to joining Incyte, Ms. Schreck was Chief Patent Counsel at Elan Drug Delivery, Inc.
Previously, she served as General Counsel for Genomics Collaborative, Inc. and diaDexus, Inc. (a
SmithKline Beecham and Incyte joint venture). From 1992 through 1998, Ms. Schreck held a variety of
senior patent and corporate legal positions at SmithKline Beecham. Ms. Schreck holds a B.A. in Chemistry
and Biology from the University of Colorado and a J.D. from Villanova University School of Law.
Ms. Schreck is admitted to practice before the United States Patent bar.
Paula Swain, age 50, has served as Executive Vice President, Human Resources, of Incyte since August
2002 and joined the company as Senior Vice President of Human Resources in January 2002. Ms. Swain
served as Senior Vice President of Human Resources at Bristol Meyers Squibb from October 2001 to
January 2002, after they acquired DuPont Pharmaceuticals Company. From July 1998 to October 2001,
Ms. Swain was Senior Vice President of Human Resources at DuPont Pharmaceuticals. From October
1992 to July 1998, Ms. Swain held a variety of human resources positions of increasing responsibility at
DuPont Pharmaceuticals. Ms. Swain received her B.A. in Psychology and Industrial Relations from
Rockhurst University.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock, par value $.001, is traded on The Nasdaq Global Market (‘‘Nasdaq’’) under the
symbol ‘‘INCY.’’ The following table sets forth, for the periods indicated, the range of high and low sales
prices for our common stock on Nasdaq as reported in its consolidated transaction reporting system.
2006
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High
Low
$ 6.25
4.62
5.20
6.10
$5.01
3.51
3.85
4.12
7.70
8.30
7.76
10.93
5.84
5.79
4.75
7.02
As of December 31, 2007, our common stock was held by 323 stockholders of record. We have never
declared or paid dividends on our capital stock and do not anticipate paying any dividends in the
foreseeable future.
32
Item 6. Selected Financial Data
Selected Consolidated Financial Data
(in thousands, except per share data)
The data set forth below should be read in conjunction with ‘‘Management’s Discussion and Analysis
of Financial Condition and Results of Operations’’ included in Item 7 and the Consolidated Financial
Statements and related Notes included in Item 8 of this Report.
Year Ended December 31,
2007
2006
2005
2004
2003
Consolidated Statement of Operations
Data(1):
Revenues:
Contract revenues(2) . . . . . . . . . . . . . . . .
License and royalty revenues . . . . . . . . . .
$ 29,852
4,588
$ 24,226
3,417
Total revenues . . . . . . . . . . . . . . . . . . .
34,440
27,643
Costs and expenses:
Research and development
. . . . . . . . . . .
Selling, general and administrative . . . . . .
Purchased in-process research and
development . . . . . . . . . . . . . . . . . . . .
Other expenses(3) . . . . . . . . . . . . . . . . . .
104,889
15,238
87,596
14,027
—
(407)
—
2,884
$
— $
— $
7,846
7,846
95,618
11,656
—
1,356
14,146
14,146
88,271
20,551
—
54,177
—
41,197
41,197
111,404
29,370
33,952
15,823
Total costs and expenses . . . . . . . . . . . .
119,720
104,507
108,630
162,999
190,549
Loss from operations . . . . . . . . . . . . . . . . .
Interest and other income (expense), net . . .
Interest expense . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on certain derivative financial
instruments . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on redemption/repurchase of
convertible subordinated notes . . . . . . . . .
Loss from continuing operations before
(85,280)
22,431
(24,032)
(76,864)
20,679
(17,911)
(100,784)
12,527
(16,052)
(148,853)
3,563
(17,241)
(149,352)
(7,988)
(9,561)
—
—
—
(70)
(106)
(454)
506
(226)
151
706
income taxes . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . .
(86,881)
—
(74,166)
—
(103,909)
(552)
(163,211)
453
(166,044)
342
Loss from continuing operations . . . . . . . . .
Gain (loss) from discontinued operation, net
of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
(86,881)
(74,166)
(103,357)
(163,664)
(166,386)
—
—
314
(1,153)
(77)
Net loss . . . . . . . . . . . . . . . . . . . . . . .
$ (86,881) $ (74,166) $(103,043) $(164,817) $(166,463)
Basic and diluted per share data
Continuing operations . . . . . . . . . . . . . . .
Discontinued operation . . . . . . . . . . . . . .
$
$
(1.03) $
—
(0.89) $
—
(1.24) $
—
(2.19) $
(0.02)
(2.33)
—
(1.03) $
(0.89) $
(1.24) $
(2.21) $
(2.33)
Number of shares used in computation of
basic and diluted per share data . . . . . . . .
84,185
83,799
83,321
74,555
71,369
(1) In December 2004, we entered into an agreement to sell certain assets and liabilities related to our
Proteome facility based in Beverly, Massachusetts, which subsequently closed in January 2005. Fiscal
33
years 2003 through 2004 have been restated to present the operations of our Proteome facility as a
discontinued operation.
(2) 2007 and 2006 contract revenues relate to our collaborative research and license agreement with
Pfizer Inc.
(3) 2007 and 2005 charges relates to restructuring activity. 2006 charges relate to restructuring charges
and $3.4 million paid to Invitrogen as a settlement fee. 2004 and 2003 charges relate to restructuring
charges and impairment of a long-lived asset.
2007
2006
2005
2004
2003
December 31,
Consolidated Balance Sheet Data:
Cash, cash equivalents, and short-term and
long-term marketable securities . . . . . . . . .
Working capital
. . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible senior notes . . . . . . . . . . . . . . . .
Convertible subordinated notes . . . . . . . . . . .
Stockholders’ equity (deficit) . . . . . . . . . . . . .
$ 257,327
227,817
275,695
122,180
264,376
(159,517)
$329,810
278,421
353,603
113,981
257,122
(84,908)
$344,971
326,119
374,108
—
341,862
(19,397)
$469,764
449,832
516,919
—
378,766
78,517
$293,807
268,937
379,545
—
167,786
154,333
34
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be
read in conjunction with ‘‘Selected Consolidated Financial Data’’ and the Consolidated Financial
Statements and related Notes included elsewhere in this Report.
Overview
Incyte is a drug discovery and development company focused on developing proprietary small
molecule drugs to treat serious unmet medical needs. We have a pipeline with programs in oncology,
inflammation, diabetes and human immunodeficiency virus (HIV).
Thus far in our drug discovery and development activities, which began in early 2002, we have filed
twelve Investigational New Drug Applications (INDs) and have progressed eight internally developed
proprietary compounds into clinical development. Currently, four of these compounds have advanced into
Phase II clinical trials. Our wholly-owned pipeline includes the following compounds:
Drug Target
JAK
HSD1
HM74a
CCR5
Sheddase
CCR2
Drug Compound
Indication
Development Status
INCB18424 (Oral)
Phase IIa
Myelofibrosis
Rheumatoid Arthritis
Phase IIa
Refractory Prostate Cancer Phase IIa
Phase IIa
Multiple Myeloma
Phase I
Psoriasis
INCB18424 (Topical)
Psoriasis
INCB28050
Rheumatoid Arthritis
INCB13739
INCB20817
Type 2 Diabetes
Type 2 Diabetes
Phase IIa
Preclinical
Phase IIa
Phase I
INCB19602
Type 2 Diabetes
Phase I
INCB9471
INCB15050
INCB7839
HIV
HIV
Solid Tumors
Breast Cancer
Phase II
Phase I
Phase IIa
Phase II
INCB8696
Multiple Sclerosis
Phase I
Other
Lead clinical candidate
Lead clinical candidate
Oncology
Oncology
Pre-clinical
Pre-clinical
We anticipate incurring additional losses for several years as we expand our drug discovery and
development programs. We also expect that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. Conducting clinical trials for our drug candidates in development is a
lengthy, time-consuming and expensive process. We do not expect to generate product sales from our drug
discovery and development efforts for several years, if at all. 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 impacted.
35
Collaborative Research and License Agreement with Pfizer
Effective in January 2006, we entered a collaborative research and license agreement with Pfizer Inc.
(‘‘Pfizer’’) for the pursuit of our CCR2 antagonist program. We received an upfront nonrefundable
payment of $40.0 million in January 2006. In addition, we received an aggregate of $20.0 million through
the purchase of convertible subordinated notes, $10.0 million in February 2006 and $10.0 million in
October 2007 (the ‘‘Pfizer Notes’’), and we are eligible to receive additional future development and
milestone payments of up to $740.0 million for the successful development and commercialization of
CCR2 antagonists in multiple indications, as well as royalties on worldwide sales. We received a
$3.0 million milestone payment from Pfizer in 2007. Pfizer gained worldwide development and
commercialization rights to our portfolio of CCR2 antagonist compounds, the most advanced of which was
in Phase IIa clinical trials in rheumatoid arthritis and insulin-resistant obese patients at the time the
agreement became effective in January 2006. Pfizer’s rights extend to the full scope of potential
indications, with the exception of multiple sclerosis and lupus nephritis and other autoimmune nephritides,
for which we retained worldwide rights, along with certain compounds. We do not have obligations to
Pfizer on preclinical development candidates we select for pursuit in these indications.
Restructuring Programs
In February 2004, we made the decision to discontinue further development of our information
products line, close our Palo Alto headquarters and focus solely on the discovery and development of novel
drugs. We recorded $42.1 million in restructuring charges in 2004, including charges related to the closure
of our facilities, prior tenant improvements and equipment, a workforce reduction and other items. The
restructuring charge originally included the present value of future lease obligations for two facilities. In
the fourth quarter of 2004, we made a lease termination payment to satisfy our remaining lease obligation
with respect to one of the facilities. The lease obligation for the second facility extends through March
2011. As a result of the long term nature of the remaining lease obligation, we will be recording a charge
each period through the March 2011 termination date of the lease related to increases in the fair value of
the lease obligations in accordance with the provisions of Financial Accounting Standards Board (‘‘FASB’’)
Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which total
approximately $0.9 million at December 31, 2007. The cash impact in 2007 from restructuring related
charges was $5.6 million.
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 consolidated financial statements:
(cid:127) Revenue recognition;
(cid:127) Research and development costs;
(cid:127) Valuation of long-lived assets;
(cid:127) Restructuring charges; and
(cid:127) Stock compensation.
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 collectibility
is reasonably assured.
36
We have entered into various types of agreements for access to our information databases and use of
our intellectual property. Revenues are deferred for fees received before earned or until no further
obligations exist. We exercise judgment in determining that collectibility 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 collectibility based primarily on the customer’s payment history
and on the creditworthiness of the customer.
Revenues from ongoing database agreements are recognized evenly over the access period. 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.
Under agreements involving multiple products, 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.
In connection with our collaborative research and license agreement with Pfizer, we received an
upfront non-refundable payment of $40.0 million in January 2006. The $40.0 million upfront fee was
recorded as deferred revenue and is being recognized on a straight-line basis over two years, our estimated
performance period under the agreement. In February 2006 and October 2007, Pfizer purchased the Pfizer
Notes. As the Pfizer Notes are non-interest bearing, they have been discounted to their net present value.
The difference between the cash received and the present value of the Pfizer Notes, plus the related
beneficial conversion feature, totals $3.2 million for each note, which represents additional consideration
from Pfizer under the agreement. We have accounted for this additional consideration as deferred revenue
and will recognize it over our estimated performance period under the agreement. We recognize contract
revenues in connection with research services provided to Pfizer as earned. We received a $3.0 million
milestone payment from Pfizer in 2007 that is included in contract revenues. All milestone payments will
be recognized as revenue upon the achievement of the associated milestone.
Research and Development Costs.
In accordance with Statement of Financial Accounting Standards
No. 2 (‘‘SFAS 2’’), Accounting for Research and Development Costs, it is our policy 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 in accordance
37
with EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities. Most professional fees, including project and clinical management,
data management, monitoring, and medical writing fees are 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. Because these fees are incurred at various times during the contract term and they are used
throughout the contract term, we record a monthly expense allocation to recognize the fees during the
contract period. Fees incurred to set up the clinical trial are expensed during the setup period.
Valuation of Long-Lived Assets. We assess the impairment of long-lived assets, which includes property
and equipment as well as intangible and other assets, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors we consider important that could indicate the need
for an impairment review include the following:
(cid:127) Significant changes in the strategy of our overall business;
(cid:127) Significant underperformance relative to expected historical or projected future operating results;
(cid:127) Significant changes in the manner of use of the acquired assets;
(cid:127) Significant negative industry or economic trends;
(cid:127) Significant decline in our stock price for a sustained period; and
(cid:127) Our market capitalization relative to net book value.
When we determine that the carrying value of long-lived assets may not be recoverable based upon
the existence of one or more of the above indicators of impairment, in accordance with Financial
Accounting Standards Board (‘‘FASB’’) Statement No. 144, Accounting for the Impairment or Disposal of
Long Lived Assets (‘‘SFAS 144’’), we perform an undiscounted cash flow analysis to determine if
impairment exists. If impairment exists, we measure the impairment based on the difference between the
asset’s carrying amount and its fair value.
Restructuring Charges. Costs associated with restructuring activities initiated after December 31, 2002,
are accounted for in accordance with FASB Statement No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (‘‘SFAS 146’’). Costs associated with restructuring activities initiated prior to
December 31, 2002 have been recorded in accordance with Emerging Issues Task Force (‘‘EITF’’) Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) (‘‘EITF 94-3’’) and Staff Accounting Bulletin No. 100,
Restructuring and Impairment Charges (‘‘SAB 100’’). Restructuring costs resulting from the acquisition of
Maxia Pharmaceuticals, Inc. (‘‘Maxia’’) have been recorded in accordance with EITF Issue No. 95-3,
Recognition of Liabilities in Connection with a Purchase Business Combination (‘‘EITF 95-3’’). The
restructuring charges are comprised primarily of costs to exit facilities, reduce our workforce, write-off
fixed assets, and pay for outside services incurred in the restructuring. The workforce reduction charge is
determined based on the estimated severance and fringe benefit charge for identified employees. In
calculating the cost to exit the facilities, we estimate for each location the amount to be paid in lease
termination payments, the future lease and operating costs to be paid until the lease is terminated, the
amount, if any, of sublease receipts and real estate broker fees. This requires us to estimate the timing and
costs of each lease to be terminated, the amount of operating costs, and the timing and rate at which we
might be able to sublease the site. To form our estimates for these costs, we perform an assessment of the
affected facilities and consider the current market conditions for each site. We also estimate our credit
adjusted risk free interest rate in order to discount our projected lease payments in accordance with
SFAS 146. Estimates are also used in our calculation of the estimated realizable value on equipment that is
being held for sale. These estimates are formed based on recent history of sales of similar equipment and
38
market conditions. Our assumptions on either the lease termination payments, operating costs until
terminated, the offsetting sublease receipts and estimated realizable value of fixed assets held for sale may
turn out to be incorrect and our actual cost may be materially different from our estimates. Our estimates
of future liabilities may change, requiring us to record additional restructuring charges or reduce the
amount of liabilities recorded.
At the end of each reporting period, we evaluate the remaining accrued balances to ensure their
adequacy, that no excess accruals are retained and the utilization of the provisions are for their intended
purposes in accordance with developed exit plans. We periodically evaluate current available information
and adjust our restructuring reserve as necessary. We also make adjustments related to accrued
professional fees to adjust estimated amounts to actual. For the year ended December 31, 2007, such
adjustments were made for the 2002 restructuring program, 2004 restructuring program, and the
acquisition of Maxia.
Stock Compensation. Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123 (revised 2004) (‘‘SFAS 123R’’), Share-Based Payment, which revised Statement of
Financial Accounting Standards 123 (‘‘SFAS 123’’), Accounting for Stock-Based Compensation. SFAS 123R
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 relative fair
values. SFAS 123R 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. SFAS 123R requires the recognition of the fair value
of stock compensation in the statement of operations. Prior to the adoption of SFAS 123R, stock-based
compensation expense related to employee stock options was not recognized in the statement of
operations. Prior to January 1, 2006, we had adopted the disclosure-only provisions under SFAS 123.
Under the provisions of SFAS 123R, we recorded $10.1 million and $8.9 million of stock compensation
expense for the years ended December 31, 2007 and 2006, respectively.
Results of Operations
Years Ended December 31, 2007 and 2006
We recorded net losses from operations for the years ended December 31, 2007 and 2006 of
$86.9 million and $74.2 million, respectively. On a basic and diluted per share basis, net loss from
operations was $1.03 and $0.89 for the years ended December 31, 2007 and 2006, respectively.
Revenues
Contract revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
License and royalty revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended,
December 31,
2007
2006
(in millions)
$29.8
4.6
$34.4
$24.2
3.4
$27.6
Our contract revenues were $29.8 million and $24.2 million in 2007 and 2006, respectively. Contract
revenues were derived from recognition of revenue associated with the Pfizer $40.0 million upfront fee,
recognition of revenue associated with the debt discount and beneficial conversion feature related to the
Pfizer Notes, and research services provided to Pfizer. In addition, we received a $3.0 million milestone
payment from Pfizer during 2007.
Our license and royalty revenues were $4.6 million and $3.4 million in 2007 and 2006, respectively.
License and royalty revenues were derived from database subscriptions and licensing of our gene- and
39
genomic-related intellectual property. We expect that revenues generated from information products,
including licensing of gene- and genomic-related intellectual property, will decline as we focus on our drug
discovery and development programs.
For the year ended December 31, 2006, revenues from companies considered to be related parties, as
defined by FASB Statement No. 57, Related Party Disclosures (‘‘SFAS 57’’) was $0.3 million. There was no
such revenue recorded for the year ended December 31, 2007. Our related parties consist of companies in
which members of our Board of Directors have invested, either directly or indirectly, or in which a member
of our Board of Directors is an officer or holds a seat on the Board of Directors (other than an Incyte-held
Board seat).
Operating Expenses
Research and development expenses
Salary and benefits related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collaboration and outside services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and all other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended,
December 31,
2007
2006
(in millions)
$ 32.8
6.9
47.9
17.3
$104.9
$27.1
5.7
38.9
15.9
$87.6
We currently track research and development costs by natural expense line and not costs by project.
Salary and benefits related expense increased from 2006 to 2007 due to increased development headcount
and incentive compensation expense. 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
collaboration and outside services from 2006 to 2007 is due primarily from the growth and steady
advancement of our clinical pipeline. The increase in occupancy and other costs from 2006 to 2007 was
primarily the result of costs associated with intellectual property protection.
Research and development expenses may fluctuate from period to period depending upon the stage of
certain projects and the level of preclinical and clinical trial-related activities. Many factors can affect the
cost and timing of our clinical trials, including inconclusive results requiring additional clinical trials, slow
patient enrollment, the need to enroll additional patient cohorts, adverse side effects among patients, the
availability of supplies for our clinical trials and real or perceived lack of effectiveness or safety of our
investigational drugs in our clinical trials. In addition, the development of all of our product candidates will
be subject to extensive governmental regulation. These factors make it difficult for us to predict the timing
and costs of the further development and approval of our products.
Selling, general and administrative expenses
Salary and benefits related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other contract services and outside costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended,
December 31,
2007
2006
($ in millions)
$ 6.4
3.2
5.6
$15.2
$ 5.4
3.2
5.4
$14.0
40
Salary and benefits related expense increased from 2006 to 2007 due to increased incentive
compensation expense. 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.
Other expenses. Other expenses for the years ended December 31, 2007 and 2006 were $(0.4) million
and $2.9 million, respectively. The decrease from 2006 to 2007 is due primarily to the settlement
agreement with Invitrogen related to our discontinued genomic information business which resulted in a
$3.4 million charge recorded in other expenses in 2006. This settlement resolved all outstanding claims
included in the litigation.
In 2007, we recorded $0.7 million of expense in connection with our 2004 restructuring program and
$0.9 million of benefit in connection with our 2002 restructuring program and a facility closed in
connection with our acquisition of Maxia. In 2006, we recorded $1.0 million of expense in connection with
our 2004 restructuring program and $1.5 million of benefit in connection with our 2002 restructuring
program and a facility closed in connection with our acquisition of Maxia.
Other income (expense)
Interest and other income (expense), net.
Interest and other income (expense), net, for the years
ended December 31, 2007 and 2006 was $22.4 million and $20.7 million, respectively. The increase in 2007
from 2006 was primarily attributable to the $8.5 million realized gain recorded from the sale of our
investment in a privately-held company in December 2007 offset by a lower average cash balance during
2007. In 2006, we recorded a $6.2 million realized gain from the sale of our investment in a publicly-held
company offset by an impairment charge of $1.3 million recorded to reduce the carrying value of our
investment in a privately-held investee.
Interest expense.
Interest expense for the years ended December 31, 2007 and 2006 was $24.0 million
and $17.9 million, respectively. The increase in 2007 from 2006 is primarily attributable to the increase in
accretion of the discount related to the 31⁄2% convertible senior notes due 2011 (the ‘‘31⁄2% Senior Notes’’)
issued in September 2006 of $8.2 million in 2007 compared to $2.1 million in the corresponding period of
2006.
Gain (loss) on redemption/repurchase of convertible subordinated notes.
In 2006 we redeemed
$91.6 million principal amount of our 5.5% convertible subordinated notes due 2007 (the ‘‘5.5% Notes’’).
The redemption resulted in a loss of $0.1 million for the year ended December 31, 2006.
Provision (benefit) for income taxes. Due to our net losses in 2007 and 2006, we did not have an
annual income tax provision.
41
Years Ended December 31, 2006 and 2005
We recorded net losses from continuing operations for the years ended December 31, 2006 and 2005
of $74.2 million and $103.4 million, respectively. On a basic and diluted per share basis, net loss from
continuing operations was $0.89 and $1.24 for the years ended December 31, 2006 and 2005, respectively.
Revenues
Contract revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
License and royalty revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended,
December 31,
2006
2005
(in millions)
$24.2
3.4
27.6
$ —
7.8
7.8
Our contract revenues were $24.2 million and $0.0 million in 2006 and 2005, respectively. Contract
revenues were derived from recognition of revenue associated with the Pfizer $40.0 million upfront fee,
recognition of revenue associated with the debt discount and beneficial conversion feature related to the
Pfizer Note due 2013, and research services provided to Pfizer.
Our license and royalty revenues were $3.4 million and $7.8 million in 2006 and 2005, respectively.
License and royalty revenues were derived from database subscriptions and licensing of our gene- and
genomic-related intellectual property. The decrease in license and royalty revenues from 2005 to 2006 is
attributable to our decision to discontinue offering information products. The increase in revenues from
2005 to 2006 was due to our collaborative research and license agreement with Pfizer.
For the year ended December 31, 2006 revenues from companies considered to be related parties, as
defined by SFAS 57 were $0.3 million. There were no such revenues recorded for the year ended
December 31, 2005.
Operating Expenses
Research and development expenses
Salary and benefits related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collaboration and outside services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and all other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended,
December 31,
2006
2005
($ in millions)
$27.1
5.7
38.9
15.9
$87.6
$27.3
—
49.9
18.4
$95.6
We currently track research and development costs by natural expense line and not costs by project.
Stock compensation costs for the year ended December 31, 2006 was the result of our adoption of
SFAS 123R which required the recognition of stock compensation expense in our consolidated statement
of operations. Stock compensation expense may fluctuate from period to period based on the number of
options granted, stock price volatility and expected option lives, as well as expected option forfeiture rates
which are used to value equity-based compensation. The decrease in collaboration and outside services
from 2005 to 2006 is due primarily the result of decreased drug discovery and development costs due to our
collaborative research and license agreement with Pfizer and the decision in April 2006 to discontinue the
42
development of our DFC program. The decrease in occupancy and other costs from 2005 to 2006 was
primarily the result of increased efficiency in our use of laboratory and reagent supplies.
Selling, general and administrative expenses
Salary and benefits related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other contract services and outside costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended,
December 31,
2006
2005
($ in millions)
$ 5.4
3.2
5.4
$14.0
$ 5.6
0.2
5.9
$11.7
Stock compensation costs for the year ended December 31, 2006 was the result of our adoption of
SFAS 123R which required the recognition of stock compensation expense in our consolidated statement
of operations. 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.
Other expenses. Other expenses for the years ended December 31, 2006 and 2005 were $2.9 million
and $1.4 million, respectively, and represent charges recorded in connection with restructuring and
long-lived asset impairments. The increase from 2005 to 2006 is due primarily to the settlement agreement
with Invitrogen related to our discontinued genomic information business which resulted in a $3.4 million
charge recorded in other expenses. This settlement resolved all outstanding claims included in the
litigation.
In 2006, we recorded $1.0 million of expense in connection with our 2004 restructuring program and
$1.5 million of benefit in connection with our 2002 restructuring program and a facility closed in
connection with our acquisition of Maxia.
In 2005, in conjunction with our 2004 restructuring program, we recorded $1.0 million in expense,
including charges related to the closure of our Palo Alto facility, previously capitalized tenant
improvements and equipment, a workforce reduction and other items. During 2005, we also recorded
charges of $0.4 million of expense in connection with our 2002 restructuring program and a facility closed
in connection with our acquisition of Maxia.
Other income (expense)
Interest and other income (expense), net.
Interest and other income (expense), net, for the years
ended December 31, 2006 and 2005 was $20.7 million and $12.5 million, respectively. The increase in 2006
from 2005 was primarily attributable to the $6.2 million realized gain recorded from the sale of our
investment in a publicly-held company in March 2006 and due to higher interest rates in 2006 offset by an
impairment charge of $1.3 million recorded in June 2006 to reduce the carrying value of our investment in
a privately-held investee. In 2005 we realized a $2.8 million gain from the sale of securities of a strategic
investee.
Interest expense.
Interest expense for the years ended December 31, 2006 and 2005 was $17.9 million
and $16.1 million, respectively. The increase in 2006 from 2005 is primarily attributable to the accretion of
$2.1 million of the discount related to the 31⁄2% Senior Notes issued in September 2006.
Losses on certain derivative financial instruments. Losses on certain derivative financial instruments
for the year ended December 31, 2005 of $0.1 million represents the change in fair value of certain
long-term investments, specifically warrants held in other companies, in accordance with FASB Statement
43
No. 133, Accounting for Derivative Financial Instruments and Hedging Activities (‘‘SFAS 133’’). Gain or loss
on derivative financial instruments may fluctuate in any given period based upon current market conditions
and is recognized during the period of change.
Gain (loss) on repurchase of convertible subordinated notes.
In 2006 we redeemed $91.6 million
principal amount and in 2005 we repurchased, on the open market, $36.5 million face value of our 5.5%
Notes. The redemption and repurchase resulted in a gain (loss) of $(0.1) million and $0.5 million,
respectively, for the years ended December 31, 2006 and 2005.
Provision (benefit) for income taxes. Due to our net losses in 2006 and 2005, we had a minimal
effective annual income tax rate. The benefit for income taxes for 2005 is primarily attributable to foreign
withholding taxes.
Gain (loss) from discontinued operation. The gain from discontinued operation of $0.3 million in
2005 represent the results of our Proteome facility based in Beverly, Massachusetts. In December 2004, we
entered into an agreement to sell certain assets and liabilities related to our Proteome facility, which
subsequently closed in January 2005. The consolidated financial statements have been restated to present
the operations of our Proteome facility as a discontinued operation for all periods presented.
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109 (‘‘FIN 48’’). FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. We adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did
not have a material impact on our condensed consolidated financial statements.
Liquidity and Capital Resources
December 31:
Cash, cash equivalents, and short-term and long-term marketable securities . . .
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31:
Cash provided by (used in):
2007
2006
2005
(in millions)
$257.3
$227.8
$329.8
$278.4
$ 345.0
$ 326.1
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures (included in investing activities above) . . . . . . . . . . . .
$ (92.7) $ (50.4) $(101.9)
$ 15.5
$ 26.0
$170.4
$ (34.3)
$ 31.7
$ 12.3
1.6
$
1.6
$
1.2
$
Sources and Uses of Cash. Due to our significant research and development expenditures, we have
not been profitable and have generated operating losses since we were incorporated in 1991 through 1996
and in 1999 through 2007. As such, we have funded our research and development operations through
sales of equity securities, the issuance of convertible subordinated notes, cash received from customers,
and collaborative arrangements. As of December 31, 2007, approximately $0.9 million of marketable
securities were classified as long-term assets on the condensed consolidated balance sheet as they had been
in an unrealized loss position for longer than six months and we had the ability to hold them until the
carrying value recovers, which may be longer than one year. At December 31, 2007, we had available cash,
cash equivalents, and short-term and long-term marketable securities of $257.3 million. Our cash and
marketable securities balances are held in a variety of interest-bearing instruments including obligations of
U.S. government agencies, high-grade corporate bonds, asset backed and mortgage backed securities and
44
money market accounts. Available cash is invested in accordance with our investment policy’s primary
objectives of liquidity, safety of principal and diversity of investments.
Cash used in Operating Activities. The $42.3 million increase in cash used in operating activities from
2006 to 2007 was due primarily to the $40.0 million nonrefundable upfront fee received from Pfizer in
January 2006. The $51.5 million decrease in cash used in operating activities from 2005 to 2006 was also
due primarily to the $40.0 million upfront fee received from Pfizer in January 2006.
Cash provided by Investing Activities. Our investing activities, other than purchases, sales and
maturities of marketable securities, have consisted predominantly of capital expenditures and sales and
purchases of long-term investments. In the future, net cash used by investing activities may fluctuate
significantly from period to period due to the timing of strategic equity investments, acquisitions, including
possible earn-out payments to former Maxia stockholders, capital expenditures and maturities/sales and
purchases of marketable securities.
Cash provided by (used in) Financing Activities.
In connection with the collaborative research and
license agreement, Pfizer purchased a $10.0 million Pfizer Note in October 2007. In addition, we received
$2.3 million of proceeds from issuance of common stock under our stock plans and employee stock
purchase plan. During 2006, we issued a total of $151.8 million of 31⁄2% Senior Notes, which resulted in
cash proceeds of approximately $111.9 million. In addition, we redeemed $91.6 million of the 5.5% Notes
during 2006. In connection with the collaborative research and license agreement, Pfizer purchased a
$10.0 million Pfizer Note in February 2006. During 2005, we paid $35.8 million in connection with
repurchases of $36.5 million in face value of the 5.5% Notes, offset partially by $1.5 million of proceeds
from issuance of common stock under our stock plans and employee stock purchase plan.
The following summarizes our significant contractual obligations as of December 31, 2007 and the
effect those obligations are expected to have on our liquidity and cash flow in future periods (in millions):
Total
Less Than
1 Year
Years
1 - 3
Years
4 - 5
Over
5 Years
Contractual Obligations:
Principal on convertible subordinated debt . . . . . . . . . . . .
Principal on convertible senior debt . . . . . . . . . . . . . . . . .
Interest on convertible subordinated debt
. . . . . . . . . . . .
Interest on convertible senior debt
. . . . . . . . . . . . . . . . .
Non-cancelable operating lease obligations:
Related to current operations . . . . . . . . . . . . . . . . . . . . .
Related to vacated space . . . . . . . . . . . . . . . . . . . . . . . .
$270.0
151.8
30.6
18.6
11.9
25.6
$ — $ — $250.0
— 151.8
4.4
2.7
—
8.7
5.3
17.5
10.6
$20.0
—
—
—
4.8
8.4
7.1
16.1
—
1.1
—
—
Total contractual obligations . . . . . . . . . . . . . . . . . . . . . .
$508.5
$27.2
$51.3
$410.0
$20.0
The amounts and timing of payments related to vacated facilities may vary based on negotiated timing
of lease terminations. We have entered into sublease agreements for our vacated space with scheduled
payments to us of $3.1 million (less than 1 year), $4.2 million (years 1 - 3), and $0.3 million (years 4 - 5);
these scheduled payments are not reflected in the above table.
The table above excludes certain commitments that are contingent upon future events. The most
significant of these contractual commitments that we consider to be contingent obligations are summarized
below.
Commitments related to our acquisition of Maxia are considered contingent commitments as future
events must occur to cause these commitments to be enforceable. We completed our acquisition of Maxia
in February 2003. Under the merger agreement, former Maxia stockholders have the right to receive
certain earn out amounts of up to a potential aggregate amount of $14.0 million upon the occurrence of
45
certain research and development milestones set forth in the merger agreement. Twenty percent of each
earn out payment, if earned, will be paid in cash and the remaining eighty percent will be paid in shares of
our common stock such that an aggregate of $2.8 million in cash and $11.2 million in our common stock
(based upon the then fair value) could potentially be paid pursuant to the earn out milestones. The
milestones are set to occur as Maxia products enter various stages of human clinical trials and may be
earned at any time prior to the tenth anniversary of the consummation of the merger. In any event, no
more than 13,531,138 shares of our common stock may be issued to former Maxia stockholders in the
aggregate pursuant to the merger agreement. None of these milestones has been achieved as of
December 31, 2007.
We have entered into and may in the future seek to license additional rights relating to compounds or
technologies in connection with our drug discovery and development programs. Under these licenses, we
may be required to pay up-front fees, milestone payments, and royalties on sales of future products.
We believe that our cash, cash equivalents and marketable securities will be adequate to satisfy our
capital needs for at least the next twelve months. Our cash requirements depend on numerous factors,
including our expenditures in connection with alliances, license agreements and acquisitions of and
investments in complementary products, technologies and businesses; expenditures in connection with
potential repayments of our 31⁄2% Senior Notes, 31⁄2% Subordinated Notes, the Pfizer Notes; expenditures
in connection with our drug discovery and development programs; expenditures in connection with
litigation or other legal proceedings; competing technological and market developments; the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual property rights; our receipt of
any milestone or other payments under any collaborative agreements we may enter into, including the
agreement with Pfizer; and costs associated with the integration of new operations assumed through any
mergers and acquisitions. Changes in our research and development plans or other changes affecting our
operating expenses may result in changes in the timing and amount of expenditures of our capital
resources. We expect that future revenues generated from information products, including licensing of
intellectual property, will continue to decline as we focus on drug discovery and development programs,
and in 2008, will not represent a significant source of cash inflow for us.
Off Balance Sheet Arrangements
We have no material off-balance sheet arrangements other than those that are discussed under
Contractual Obligations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our investments in marketable securities, which are composed primarily of investment-grade
corporate bonds, U.S. government agency debt securities, mortgage and asset-backed securities and money
market funds, are subject to default, changes in credit rating and changes in market value. These
investments are also subject to interest rate risk and will decrease in value if market rate interest rates
increase. As of December 31, 2007, cash, cash equivalents and short-term and long-term marketable
securities were $257.3 million. Due to the nature of these investments, if market interest rates were to
increase immediately and uniformly by 10% from levels as of December 31, 2007 the decline in fair value
would not be material.
46
Item 8. Financial Statements and Supplementary Data
INDEX
Consolidated Financial Statements of Incyte Corporation
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005 . .
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2007, 2006
and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Stockholders’ Equity (Deficit) for the years ended December 31,
2007, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 .
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interim Consolidated Financial Information (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
48
49
50
51
52
53
54
77
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Incyte Corporation
We have audited the accompanying consolidated balance sheets of Incyte Corporation as of
December 31, 2007 and 2006, and the related consolidated statements of operations, comprehensive loss,
stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31,
2007. Our audits also included the financial statement schedule listed in the Index at item 15 (a). These
financial statements and schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Incyte Corporation, at December 31, 2007 and 2006, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, Incyte Corporation changed its
method of accounting for stock-based compensation in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004) on January 1, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Incyte Corporation’s internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2008 expressed
an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 26, 2008
48
INCYTE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares and par value)
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities—available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities—available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible and other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2007
2006
108,854
147,576
1,551
6,431
264,412
897
3,943
6,443
$ 18,861
299,712
2,073
7,115
327,761
11,237
5,890
8,715
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
275,695
$ 353,603
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.001 par value; 200,000,000 shares authorized; 84,533,069
and 83,972,726 shares issued and outstanding as of December 31, 2007
and 2006, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,806
10,693
5,273
7,226
649
4,948
36,595
122,180
264,376
—
12,061
435,212
$
5,916
6,879
4,668
4,024
22,883
4,970
49,340
113,981
257,122
348
17,720
438,511
—
—
85
841,320
(528)
(1,000,394)
84
828,936
(415)
(913,513)
Total stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(159,517)
(84,908)
Total liabilities and stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . .
$
275,695
$ 353,603
See accompanying notes.
49
INCYTE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenues:
Contract revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
License and royalty revenues(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 29,852
4,588
34,440
$ 24,226
3,417
27,643
$
—
7,846
7,846
Year Ended December 31,
2007
2006
2005
Costs and expenses:
Research and development(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative(3) . . . . . . . . . . . . . . . . . . . . .
Other expenses(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net(5) . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on certain derivative financial instruments . . . . . . . . . . . . . . .
Gain (loss) on redemption/repurchase of convertible subordinated
notes(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations before income taxes . . . . . . . . . . .
Benefit for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain from discontinued operation, net of tax . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted per share data:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104,889
15,238
(407)
119,720
(85,280)
22,431
(24,032)
—
87,596
14,027
2,884
104,507
(76,864)
20,679
(17,911)
—
95,618
11,656
1,356
108,630
(100,784)
12,527
(16,052)
(106)
—
(86,881)
—
(86,881)
—
506
(103,909)
(552)
(103,357)
314
$ (86,881) $ (74,166) $(103,043)
(70)
(74,166)
—
(74,166)
—
$
$
(1.03) $
—
(1.03) $
(0.89) $
—
(0.89) $
(1.24)
—
(1.24)
Shares used in computing basic and diluted net loss per share . . . . .
84,185
83,799
83,321
(1) Includes revenues from transactions with companies considered related parties under SFAS 57 of
$0.3 million for the year ended December 31, 2006.
(2) Includes expenses from transactions with companies considered related parties under SFAS 57 of
$0.1 million for the year ended December 31, 2005. Also includes stock-based compensation charges
of $6.9 million and $5.7 million in 2007 and 2006, respectively.
(3) Includes stock-based compensation charges of $3.2 million, $3.2 million and $0.2 million in 2007, 2006
and 2005, respectively.
(4) 2006 charges relate to $3.4 million settlement fee paid to Invitrogen and restructuring charges.
Amounts for 2007 and 2005 are related to restructuring activity.
(5) Includes a gain on the sale of securities of $6.2 million and $2.8 million for the years ended
December 31, 2006 and 2005, respectively, and losses on long-term investments in companies
considered related parties under SFAS 57 of $1.3 million for the year ended December 31, 2006.
(6) Includes a gain from a transaction with an individual considered a related party under SFAS 57 of
$0.1 million for the year ended December 31, 2005.
See accompanying notes.
50
INCYTE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Year Ended December 31,
2007
2006
2005
$(86,881) $(74,166) $(103,043)
(113)
1,428
3,776
—
—
(3,071)
—
(1,643)
(1,281)
959
3,454
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive gain (loss):
Unrealized gains (losses) on marketable securities . . . . . . . . . . . . .
Reclassification adjustment for realized losses on marketable
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . .
Other comprehensive gain (loss)
. . . . . . . . . . . . . . . . . . . . . . . . .
(113)
Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(86,994) $(75,809) $ (99,589)
See accompanying notes.
51
INCYTE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except number of shares)
Balances at December 31, 2004 . . . .
Issuance of 184,865 shares of
Common Stock upon exercise of
stock options and 389,801 shares
of Common Stock under the
ESPP . . . . . . . . . . . . . . . . . . . .
Amortization of deferred
compensation . . . . . . . . . . . . . .
Other comprehensive gain . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2005 . . . .
Issuance of 61,931 shares of
Common Stock upon exercise of
stock options and 313,715 shares
of Common Stock under the
ESPP . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . .
Other comprehensive loss . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2006 . . . .
Issuance of 222,654 shares of
Common Stock upon exercise of
stock options and 337,689 shares
of Common Stock under the
ESPP . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . .
Other comprehensive loss . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . .
Common
Stock
Additional
Paid-in
Capital
Deferred
Compensation
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
(Deficit)
$83
$817,150
$(186)
$(2,226)
$ (736,304)
$ 78,517
1
—
—
—
1,488
—
—
—
—
186
—
—
—
—
3,454
—
—
1,489
—
—
(103,043)
186
3,454
(103,043)
$84
$818,638
$ —
$ 1,228
$ (839,347)
$ (19,397)
—
—
—
—
1,408
8,890
—
—
—
—
—
—
—
—
(1,643)
—
—
—
—
(74,166)
1,408
8,890
(1,643)
(74,166)
$84
$828,936
$ —
$ (415)
$ (913,513)
$ (84,908)
1
—
—
—
2,325
10,059
—
—
—
—
—
—
—
—
(113)
—
—
—
(86,881)
2,326
10,059
(113)
(86,881)
Balances at December 31, 2007 . . . .
$85
$841,320
$ —
$ (528)
$(1,000,394)
(159,517)
See accompanying notes.
52
INCYTE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to net cash used in operating activities:
Gain from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash restructuring charges and impairment of long-lived assets
. . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on repurchase of convertible subordinated notes . . . . . . . . . . . . . . . .
Compensation expense on executive loans . . . . . . . . . . . . . . . . . . . . . . . .
Loss on derivative financial instruments, net
. . . . . . . . . . . . . . . . . . . . . .
Impairment of long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gain on long-term investments, net
. . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2007
2006
2005
$ (86,881) $ (74,166) $(103,043)
—
(407)
12,963
10,059
—
—
—
—
(8,479)
522
1,121
1,890
2,349
(25,831)
—
(552)
7,411
8,890
(70)
18
—
1,312
(6,230)
(650)
586
2,343
(8,653)
19,394
(314)
2,324
8,192
186
(506)
75
106
—
(2,791)
721
2
1,252
(6,849)
(1,203)
Net cash used in continuing operating activities . . . . . . . . . . . . . . . . .
(92,694)
(50,367)
(101,848)
Net cash used in discontinued activities
. . . . . . . . . . . . . . . . . . . . . .
—
—
(24)
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . .
(92,694)
(50,367)
(101,872)
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,153)
—
(45,024)
135,150
81,389
(1,568)
—
(511,408)
109,971
429,040
(1,633)
59
(348,540)
134,327
231,315
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . .
170,362
26,035
15,528
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans . . . . . . . . . . . . .
Redemption/repurchase of convertible subordinated notes . . . . . . . . . . . . . . .
Net proceeds from issuance of convertible senior and subordinated notes . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . .
Effect of exchange rate on cash and cash equivalents . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . .
2,325
—
10,000
12,325
—
89,993
18,861
1,408
(91,614)
121,905
1,489
(35,837)
—
31,699
(34,348)
—
7,367
11,494
6
(120,686)
132,180
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
$108,854
$ 18,861
$ 11,494
Supplemental Schedule of Cash Flow Information
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,464
$ 14,839
$ 15,467
Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
— $
24
See accompanying notes.
53
INCYTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Organization and Business.
Incyte Corporation (‘‘Incyte,’’ ‘‘we,’’ ‘‘us,’’ or ‘‘our’’) is a drug discovery
and development company focused on developing proprietary small molecule drugs to treat serious unmet
medical needs. We have a pipeline with programs in oncology, inflammation, diabetes, and human
immunodeficiency virus (HIV).
We were founded and incorporated in Delaware in 1991. Until 2001, we devoted substantially all of
our resources to the development, marketing and sales of information and genomic products. We began
our drug discovery and development activities in early 2002.
Principles of Consolidation. The consolidated financial statements include the accounts of Incyte
Corporation and our wholly owned subsidiaries. All material inter-company accounts, transactions, and
profits have been eliminated in consolidation.
Reclassifications. Certain amounts reported in previous years have been reclassified to conform to
the 2007 financial statement presentation.
Use of Estimates. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Foreign Currency Translation. The financial statements of subsidiaries outside the United States are
measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange at the balance sheet date, as appropriate. The resulting translation
adjustments are included in accumulated other comprehensive income (loss), a separate component of
stockholders’equity (deficit). Income and expense items are translated at average monthly rates of
exchange.
Concentrations of Credit Risk. Cash, cash equivalents, marketable securities, trade receivables, and
long-term strategic investments are financial instruments which potentially subject us to concentrations of
credit risk. The estimated fair value of financial instruments approximates the carrying value based on
available market information. We primarily invest our excess available funds in notes and bills issued by the
U.S. government and its agencies and corporate debt securities and, by policy, limit the amount of credit
exposure to any one issuer and to any one type of investment, other than securities issued or guaranteed by
the U.S. government. Our customers for our information products are primarily pharmaceutical and
biotechnology companies which are typically located in the United States and Europe. We have not
experienced any significant credit losses on cash, cash equivalents, marketable securities or trade
receivables to date and do not require collateral on receivables.
Cash and Cash Equivalents. Cash and cash equivalents are held in U.S. banks or in custodial
accounts with U.S., and U.K. banks. Cash equivalents are defined as all liquid investments and money
market funds with maturity from date of purchase of 90 days or less that are readily convertible into cash
and have insignificant interest rate risk.
Marketable
Securities—Available-for-Sale. All marketable
as
available-for-sale. Available-for-sale securities are carried at fair value, based on quoted market prices,
with unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity
(deficit). We classify marketable securities available to fund current operations as current assets on the
consolidated balance sheets. Marketable securities are classified as long-term assets on the consolidated
securities
classified
are
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
balance sheets if (i) they have been in an unrealized loss position for longer than six months and (ii) we
have the ability to hold them until the carrying value is recovered and such holding period may be longer
than one year. The amortized cost of debt securities in this category is adjusted for amortization of
premiums and accretions of discounts to maturity. Such amortization is included in interest income.
Realized gains and losses and declines in value judged to be other than temporary for available-for-sale
securities are included in ‘‘Interest and other income (expense), net.’’ The cost of securities sold is based
on the specific identification method.
Accounts Receivable. As of December 31, 2007 and 2006 we had no allowance for doubtful accounts.
We provide an allowance for doubtful accounts based on experience and specifically identified risks.
Accounts receivable are carried at fair value and charged off against the allowance for doubtful accounts
when we determine that recovery is unlikely and we cease collection efforts.
Property and Equipment. Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation is recorded using the straight-line method over the estimated useful lives of the
respective assets (generally three to five years). Leasehold improvements are amortized over the shorter of
the estimated useful life of the assets or lease term.
Certain laboratory and computer equipment used by us could be subject to technological obsolescence
in the event that significant advancement is made in competing or developing equipment technologies.
Management continually reviews the estimated useful lives of technologically sensitive equipment and
believes that those estimates appropriately reflect the current useful life of our assets. In the event that a
currently unknown significantly advanced technology became commercially available, we would re-evaluate
the value and estimated useful lives of our existing equipment, possibly having a material impact on the
financial statements.
Valuation of Long-Lived Assets. Long-lived assets, including certain identifiable intangible assets, to
be held and used are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable such as a significant industry downturn or a
significant decline in our market value. Determination of recoverability is based on an estimate of
undiscounted cash flows resulting from the use of the asset and its eventual disposition. Measurement of
impairment charges for long-lived assets and certain identifiable intangible assets that management expects
to hold and use are based on the fair value of such assets. Long-lived assets and certain identifiable
intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to
sell. There have been no impairments of long-lived assets during the years ended December 31, 2007, 2006
or 2005.
Long-Term Investments. We have made equity and debt investments in a number of companies whose
businesses may be complementary to our business. Most of these investments were made in connection
with the establishment of a collaborative arrangement between us and the investee company. Our
long-term investments have historically consisted of investments in both privately and publicly-held
companies in which we have owned less than 20% of the outstanding voting stock and have not had the
ability to exert significant influence over the investees. Accordingly, our long-term investments in
privately-held companies have been accounted for under the cost method and our investments in
publicly-held companies have been accounted for in accordance with Financial Accounting Standards
Board (‘‘FASB’’) Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. Our
investments in publicly-held companies are classified as available-for-sale and are adjusted to their fair
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
value each period based on their quoted market price with any adjustments being recorded in accumulated
other comprehensive income (loss) as a separate component of stockholders’ equity (deficit).
We periodically evaluate the carrying value of our ownership interests in privately-held cost method
investees by reviewing conditions that might indicate an other-than temporary decline in fair value,
including the following:
(cid:127) Financial performance of the investee;
(cid:127) Achievement of business plan objectives and milestones including the hiring of key employees,
obtaining key business partnerships, and progress related to research and development activities;
(cid:127) Available cash; and
(cid:127) Completion of debt and equity financings.
If our review of these factors indicates that an other-than-temporary decline in the fair value of the
investee has occurred, we estimate the fair value of the investee. When the carrying value of our
investments is materially greater than our pro-rata share of the estimated fair value of the investee, we
record an impairment charge to reduce our carrying value. Impairment charges are recorded in the period
when the related triggering condition becomes known to management. We use the best information
available in performing our periodic evaluations; however, the information available may be limited. These
evaluations involve significant management judgment, and the actual amounts realized for a specific
investment may differ from the carrying value. For our available-for-sale investments in publicly-held
investees, we monitor all unrealized losses to determine whether a decline in fair value below carrying
value is other-than-temporary. Generally, when fair value is materially less than carrying value for six
consecutive months, we consider the decline to be other-than-temporary. When we conclude that a decline
is other-than-temporary, we adjust the carrying value of our long-term investments in publicly-held
investees so that our carrying value per share is equal to the quoted market price per share. Future adverse
changes in market conditions or poor operating results of underlying investments could result in additional
impairment charges.
Derivative Financial Instruments. We hold warrants to purchase equity securities of a publicly-held
company. Warrants that can be exercised and settled by delivery of net shares such that we pay no cash
upon exercise or that are held in public companies are deemed derivative financial instruments. Gains and
losses resulting from changes in fair value are recognized on the consolidated statements of operations in
‘‘Gain (loss) on certain derivative financial instruments’’ in the period of change. We determine the fair
value of our warrants through option pricing models using current market price and volatility assumptions.
Intangible and Other Assets. Patent application costs relating to ongoing drug discovery and
development are charged to expense as incurred. In prior years, costs of patents, patent applications and
patent defense for gene and genomic patents were capitalized and amortized on a straight-line basis over
their estimated useful lives of approximately five years in accordance with the provisions of Accounting
Principles Board Opinion No. 17, Intangible Assets (‘‘APB 17’’).
Income Taxes.
Income taxes are accounted for using SFAS No. 109, Accounting for Income Taxes.
Deferred income taxes are provided at the currently enacted income tax rates for the difference between
the financial statement and income tax basis of assets and liabilities and carry-forward items. The effective
tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of
various tax audits and issues. In addition, valuation allowances are established for deferred tax assets
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
where the amount of expected future taxable income from operations does not support the realization of
the asset. We believe that the current assumptions and other considerations used to estimate the current
year effective and deferred tax positions are appropriate. However, if the actual outcome of future tax
consequences differs from our estimates and assumptions, the resulting change to the provision for income
taxes could have a material impact on our consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109 (‘‘FIN 48’’). FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. We adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did
not have a material impact on our condensed consolidated financial statements.
Financing Costs Related to Long-term Debt. Costs associated with obtaining long-term debt are
deferred and amortized over the term of the related debt using the effective interest method.
Net Income (Loss) Per Share. We follow the provisions of SFAS No. 128, Earnings Per Share, which
requires us to present basic and diluted earnings per share. Our basic and diluted losses per share are
calculated by dividing the net loss by the weighted average number of shares of common stock outstanding
during all periods presented. Options to purchase stock and convertible debt are included in diluted
earnings per share calculations, unless the effects are anti-dilutive.
Accumulated Other Comprehensive Income (Loss). Accumulated other comprehensive income (loss)
consists of the following:
Unrealized losses on marketable securities . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2007
2006
(in thousands)
$(521) $(408)
(7)
(7)
$(528) $(415)
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 collectibility
is reasonably assured. We have entered into various types of agreements for access to our information
databases and use of our intellectual property. Revenues are deferred for fees received before earned or
until no further obligations exist. We exercise judgment in determining that collectibility 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 collectibility based primarily on the customer’s
payment history and on the creditworthiness of the customer.
Revenues from ongoing database agreements are recognized evenly over the access period. 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.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
Under agreements involving multiple products, 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.
In connection with our collaborative research and license agreement with Pfizer Inc. (‘‘Pfizer’’), we
received an upfront non-refundable payment of $40.0 million in January 2006. The $40.0 million upfront
fee was recorded as deferred revenue and is being recognized on a straight-line basis over two years, our
estimated performance period under the agreement. Pfizer purchased a $10.0 million principal amount
convertible subordinated note in February 2006 and an additional $10.0 million principal amount
convertible subordinated note (the ‘‘Pfizer Notes’’) in October 2007. As the Pfizer Notes are non-interest
bearing, they have been discounted to their net present value. The difference between the cash received
and the present value of the Pfizer Notes, plus the related beneficial conversion feature, totals $3.2 million
for each note, which represents additional consideration from Pfizer under the agreement. We have
accounted for this additional consideration as deferred revenue and will recognize it over our estimated
performance period under the agreement. We recognize contract revenues in connection with research
services provided to Pfizer as earned. We received a $3.0 million milestone payment from Pfizer in 2007
that is included in contract revenues. All milestone payments will be recognized as revenue upon the
achievement of the associated milestone.
Research and Development. Research and development expenses are comprised of the following
types of costs incurred in performing research and development activities: salaries and related benefits,
collaboration and outside services, and occupancy and all other costs. In accordance with Statement of
Financial Accounting Standards No. 2 (‘‘FAS 2’’), Accounting for Research and Development Costs, it is our
policy 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 trial and preclinical testing costs based on the work performed under the contract.
These CRO contracts typically call for 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 for
future milestones, 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 in accordance with EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development Activities. Most professional fees, including project
and clinical management, data management, monitoring, and medical writing fees are incurred throughout
the contract period. These professional fees are expensed based on their percentage of completion at a
particular date.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 1. Organization and Summary of Significant Accounting Policies (Continued)
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. Because these fees are incurred at various times during the contract term and they are used
throughout the contract term, we record a monthly expense allocation to recognize the fees during the
contract period. Fees incurred to set up the clinical trial are expensed during the setup period.
Other Expenses. We recognize other expenses in connection with our plans to exit certain activities.
In connection with our exit activities, we record other expenses for employee termination benefit costs,
long-lived asset impairments, costs related to leased facilities to be abandoned or subleased, and other
exit-related costs. These charges were incurred pursuant to formal plans developed by management and
accounted for in accordance with FASB Statement No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, (‘‘SFAS 146’’), EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)
(‘‘EITF 94-3’’) and EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business
Combination (‘‘EITF 95-3’’). Fixed assets that are written off or impaired as a result of restructuring plans
are typically held for sale or scrapped. The remaining carrying value of such assets was not material as of
December 31, 2007 and 2006. The recognition of other expenses requires our management to make
judgments and estimates regarding the nature, timing, and amount of costs associated with the planned
exit activity, including estimating sublease income and the fair value, less sales costs, of equipment to be
disposed of. Management’s estimates of future liabilities may change, requiring us to record additional
restructuring charges or reduce the amount of liabilities already recorded. At the end of each reporting
period, we evaluate the remaining accrued balances to ensure that they are adequate, that no excess
accruals are retained, and that the utilization of the provisions are for their intended purposes in
accordance with developed exit plans.
Stock-Based Compensation. Effective January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004) (‘‘SFAS 123R’’), Share-Based Payment, which revised
Statement of Financial Accounting Standards 123 (‘‘SFAS 123’’), Accounting
for Stock-Based
Compensation. SFAS 123R 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 relative fair values. The application of SFAS 123R 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. Prior to the
adoption of SFAS 123R, stock-based compensation expense related to employee stock options was not
recognized in the statement of operations. Prior to January 1, 2006, we had adopted the disclosure-only
provisions under SFAS 123. Under the provisions of SFAS 123R, we recorded $10.1 million and
$8.9 million, respectively, of stock compensation expense on our consolidated statements of operations for
the years ended December 31, 2007 and 2006. For the year ended December 31, 2005 we recorded stock
compensation expense of $0.2 million in the consolidated statements of operations related to restricted
shares issued to our Chief Executive Officer.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 2. Marketable Securities
The following is a summary of our marketable security portfolio as of December 31, 2007 and 2006,
respectively.
December 31, 2007
U.S. Treasury notes . . . . . . . . . . . . . . . . . . .
Mortgage backed securities . . . . . . . . . . . . . .
Asset backed securities . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . .
December 31, 2006
Debt securities fund . . . . . . . . . . . . . . . . . . .
U.S. Treasury notes . . . . . . . . . . . . . . . . . . .
U.S. government and agency securities . . . . . .
Mortgage backed securities . . . . . . . . . . . . . .
Asset backed securities . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . .
Amortized
Cost
Net
Unrealized
Gains
Net
Unrealized
Losses
Estimated Fair
Value
(in thousands)
$ 10,133
25,184
49,562
64,115
$148,994
$ 30,662
34,743
5,750
46,120
121,442
72,640
$311,357
$116
95
111
6
$328
$ —
4
—
15
151
30
$200
$ —
(239)
(38)
(572)
$(849)
$ —
(174)
—
(212)
(178)
(44)
$(608)
$ 10,249
25,040
49,635
63,549
$148,473
$ 30,662
34,573
5,750
45,923
121,415
72,626
$310,949
As of December 31, 2007, our marketable securities, excluding equity securities, had the following
maturities:
Amortized
Cost
Estimated
Fair Value
(in thousands)
Less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Between one and two years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Between two and five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 72,126
2,122
—
$ 71,619
2,179
—
Mortgage and asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . .
74,248
74,746
73,798
74,675
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$148,994
$148,473
Actual maturities may differ from those scheduled as a result of prepayments by the issuers. Because
of the potential for prepayment on mortgage and asset-backed securities, they are not categorized by
contractual maturity.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 2. Marketable Securities (Continued)
Our net unrealized losses and fair value of investments with net unrealized losses were as follows:
Loss Position For
Less Than
Twelve Months
December 31, 2007
Loss Position For
Greater Than
Twelve Months
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(in thousands)
Mortgage backed securities . . . . . . . . $ 7,140
36,324
Corporate debt securities . . . . . . . . . .
3,468
Asset-backed securities . . . . . . . . . . .
$(139) $ 6,099
1,991
5,310
(564)
(32)
$(100) $13,239
38,315
8,778
(9)
(1)
$(239)
(573)
(33)
Total—Marketable securities . . . . . . $46,932
$(735) $13,400
$(110) $60,332
$(845)
As of December 31, 2007, approximately $0.9 million of marketable securities were classified as
long-term assets on the consolidated balance sheets as they have been in an unrealized loss position for
longer than six months and we have the ability to hold them until the carrying value recovers, which may be
longer than one year.
Net realized gains (loss) of ($0.4) million, $6.1 million and $1.3 million from sales of marketable
securities were included in ‘‘Interest and other income/(expense), net’’ in 2007, 2006 and 2005, respectively.
Note 3. Concentrations of Credit Risk
As of December 31, 2007, we previously had entered into agreements for information products and
services, which include licensing a portion of our intellectual property, with pharmaceutical, biotechnology
and agricultural companies and academic institutions. Such agreements represented 100% of license and
royalty revenues in 2007, 2006 and 2005. In general, customers agree to pay, during the term of the
agreement, fees to receive non-exclusive access to selected modules of our databases and/or licenses of
certain of our intellectual property. In addition, if a customer develops certain products utilizing our
technology or proprietary information, we could potentially receive royalty and milestone payments. In
November 2005, we entered into a collaborative research and license agreement with Pfizer, which became
effective in January 2006.
A single customer contributed 87%, 88% and 21% of total revenues for the years ended December 31,
2007, 2006 and 2005, respectively.
Three customers comprised 68% and 78% of the accounts receivable balance as of December 31, 2007
and 2006, respectively.
Note 4. Collaborative License Agreement
Effective in January 2006, we entered a collaborative research and license agreement with Pfizer for
the pursuit of our CCR2 antagonist program. Pfizer gained worldwide development and commercialization
rights to our portfolio of CCR2 antagonist compounds. Pfizer’s rights extend to the full scope of potential
indications, with the exception of multiple sclerosis and autoimmune nephritides, where we retained
worldwide rights, along with certain compounds. We do not have obligations to Pfizer on pre-clinical
development candidates we select for pursuit in these indications.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 4. Collaborative License Agreement (Continued)
We received an upfront nonrefundable payment of $40.0 million in January 2006 and are eligible to
receive additional future development and milestone payments of up to $740.0 million for the successful
development and commercialization of CCR2 antagonists in multiple indications, as well as royalties on
worldwide sales. We received a $3.0 million milestone payment from Pfizer in 2007. The $40.0 million
upfront fee was recorded as deferred revenue and is being recognized on a straight-line basis over two
years, our estimated performance period under the agreement. Contract revenues related thereto of
approximately $20.7 million and $20.3 million, respectively, were recognized for the years ended
December 31, 2007 and 2006. All milestone payments will be recognized as revenue upon the achievement
of the associated milestone.
We also recognized contract revenues of approximately $1.5 million and $2.4 million, respectively, for
the years ended December 31, 2007 and 2006 in connection with research services provided to Pfizer. We
recognize contract revenues in connection with research services provided to Pfizer as earned. At
December 31, 2007 approximately $0.4 million was receivable from Pfizer for reimbursement of expenses
incurred by us pursuant to the agreement.
Note 5. Property and Equipment
Property and equipment consists of the following:
December 31,
2007
2006
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laboratory equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(in thousands)
598
13,809
9,186
2,093
571
13,108
9,153
2,016
Less accumulated depreciation and amortization . . . . . . . . . . .
25,686
(21,743)
24,848
(18,958)
$ 3,943
$ 5,890
Depreciation expense, including amortization expense of leasehold improvements, was $3.1 million,
$3.3 million and $3.9 million for 2007, 2006 and 2005, respectively.
Note 6. Long-Term Investments
In December 2007, we recorded a gain of approximately $8.5 million in interest and other income, net
as a result of the sale of Velocity11, a privately-held life sciences technology company in which we held an
ownership position. We may receive additional consideration of approximately $0.9 million after a one year
escrow period.
In June 2006, we recorded an impairment charge of $1.3 million in interest and other income, net to
reduce the carrying value of our investment in a privately-held investee because the investee had less than
six months of cash and we believed that the likelihood of obtaining future debt or equity financing that
would not result in an impairment was remote.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 6. Long-Term Investments (Continued)
In March 2006, we sold a portion of our investment in a publicly-held company accounted for under
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, for
$11.5 million, and in October 2006, we sold the remaining portion of this investment for $5.8 million, which
resulted in a aggregate realized gain of $6.2 million in interest and other income, net for the year ended
December 31, 2006.
In May 2005, we sold our investment in a publicly-held company accounted for under FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities, for $5.7 million, resulting in a
realized gain of $2.8 million in interest and other income, net.
The activity in our long-term investments, in any given period, may result in gains or losses on sales or
impairment charges. Amounts realized upon disposition of these investments may be different from their
carrying value.
Note 7. Intangible and Other Assets
Intangible and other assets consist of the following (in thousands):
December 31, 2007
December 31, 2006
Gross Carrying
Amount
Accumulated
Amortization
Intangible
Assets,
Net
Gross Carrying
Amount
Accumulated
Amortization
Intangible
Assets,
Net
Gene and genomics-
related patent costs . . .
Debt issuance cost . . . . .
Other assets . . . . . . . . . .
Total intangible and other
assets . . . . . . . . . . . . .
$ 1,381
8,578
3,574
$ (975)
(4,638)
(1,477)
$ 406
3,940
2,097
$ 1,381
8,529
4,000
$ (651)
(3,377)
(1,167)
$ 730
5,152
2,833
$13,533
$(7,090)
$6,443
$13,910
$(5,195)
$8,715
Amortization expense for the years ended December 31, 2007, 2006 and 2005 related to intangible
assets was $1.9 million, $2.3 million and $2.7 million, respectively.
In March 2002, in connection with his employment by Incyte as Executive Vice President and Chief
Drug Discovery Scientist, Brian W. Metcalf received an interest-free loan from us in the amount of
$400,000 to be used for financing his residence in California. The loan was evidenced by a promissory note
and secured by the residence. On February 6, 2003, 25% of the outstanding principal balance was forgiven,
and 1⁄48 of the principal amount was forgiven on the last day of each month thereafter, with the remaining
outstanding principal balance of the loan forgiven on February 6, 2006. We amortized this loan to
compensation expense on a straight-line basis over the forgiveness period.
In 2004, we sublet one of our existing facilities to a third party. Under the terms of the consent
agreement with the facility’s landlord, we were required to obtain a letter of credit in favor of the landlord
in the amount of $2.6 million. The deposit and the related amount required under the letter of credit
declines monthly on a pro-rata basis through March 2011, the remaining term of the lease agreement
assigned. The deposit is included in other assets at December 31, 2007.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 8. Convertible Notes
The components of the Convertible Notes are as follows (in thousands):
December 31,
December 31,
Carrying Amount
Debt
2007 Interest Rates Maturities
2007
2006
31⁄2% Convertible Senior Notes due 2011 . . . . . . .
31⁄2% Convertible Subordinated Notes due 2011 . . . .
Pfizer Convertible Subordinated Note due 2013 . . . .
Pfizer Convertible Subordinated Note due 2014 . . . .
3.5%
3.5%
0.0%
0.0%
2011
2011
2013
2014
122,180 113,981
250,000 250,000
7,122
—
7,531
6,845
Less current portion . . . . . . . . . . . . . . . . . . . .
—
—
$386,556 $371,103
Annual maturities of all Convertible Notes are as follows:
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
—
401,800
—
20,000
$421,800
The carrying amount and fair value of our Convertible Notes are as follows (in thousands):
31⁄2% Convertible Senior Notes due 2011 . . . . . . .
31⁄2% Convertible Subordinated Notes due 2011 . .
Pfizer Convertible Subordinated Note due 2013 . .
Pfizer Convertible Subordinated Note due 2014 . .
December 31,
2007
2006
Carrying
Amount
$122,180
250,000
7,531
6,845
Fair Value
$122,339
253,045
7,531
6,845
Carrying
Amount
$113,981
250,000
7,122
—
Fair Value
$126,563
200,625
7,122
—
$386,556
$389,760
$371,103
$334,310
In September 2006, we received proceeds of $111.9 million from the sale of $151.8 million aggregate
principal amount of the 31⁄2% convertible senior notes due 2011 (the ‘‘31⁄2% Senior Notes’’). The 31⁄2%
Senior Notes bear interest at the rate of 3.5% per year, payable semi-annually on February 15 and
August 15, and are due February 15, 2011. The 31⁄2% Senior Notes are convertible into shares of our
common stock at an initial conversion rate of 89.1385 shares per $1,000 principal amount of the 31⁄2%
Senior Notes, equivalent to an initial conversion price of approximately $11.22 per share. The 31⁄2% Senior
Notes are senior in right of payment to our outstanding 31⁄2% convertible subordinated notes due 2011 (the
‘‘31⁄2% Subordinated Notes’’) and the Pfizer Notes due 2013 and 2014. We may redeem the 31⁄2% Senior
Notes beginning on February 20, 2007. The 31⁄2% Senior Notes were issued at a discount to par of
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 8. Convertible Notes (Continued)
approximately $39.9 million. The carrying value of the 31⁄2% Senior Notes is $122.2 million at
December 31, 2007. The 31⁄2% Senior Notes will accrete up to their face value over the 53 month term of
the notes by recording interest expense under the effective interest method.
In connection with the collaborative research and license agreement, Pfizer purchased a $10.0 million
principal amount Pfizer Note in February 2006 and an additional $10.0 million principal amount Pfizer
Note in October 2007. The Pfizer Notes bear no interest, are due seven years from the date of issuance and
are convertible into our common stock at initial conversion prices of $6.8423 and $9.75 per share,
respectively, subject to adjustments. The Pfizer Notes are subordinated to all senior indebtedness,
including the 31⁄2% Senior Notes, and pari passu in right of payment with our 31⁄2% Subordinated Notes.
We may, at our option, repay the Pfizer Notes beginning February 3, 2009 and October 10, 2010,
respectively. Pfizer may require us to repay the Pfizer Notes upon a change of control, as defined. As the
Pfizer Notes are non interest bearing, they have been discounted to their net present value of $6.8 million
each by imputing interest at a rate of 4.5% and 3.9%, respectively, which represented market conditions in
place at the time the notes were issued. The carrying value of the Pfizer Notes were $7.5 million and
$6.8 million, respectively, at December 31, 2007. We will accrete the Pfizer Notes up to their face value
over their term of seven years by recording interest expense under the effective interest method. The
difference between the cash received and the present value of the Pfizer Notes plus the related beneficial
conversion feature totals $3.2 million for each note, which represents additional consideration from Pfizer
under the agreement. We have accounted for this additional consideration as deferred revenue and will
recognize it over our estimated performance period under the agreement. Contract revenues related
thereto of approximately $4.7 million and $1.5 million, respectively, were recognized for the years ended
December 31, 2007 and 2006.
In February and March 2004, in a private placement, we issued a total of $250.0 million of the 31⁄2%
Subordinated Notes, which resulted in net proceeds of approximately $242.5 million. The notes bear
interest at the rate of 3.5% per year, payable semi-annually on February 15 and August 15. The notes are
subordinated to all senior indebtedness, including the 31⁄2% Senior Notes, and pari passu in right of
payment with the Pfizer Notes. The notes are convertible into shares of our common stock at an initial
conversion price of approximately $11.22 per share, subject to adjustments. Holders may require us to
repurchase the notes upon a change in control, as defined. We may redeem the notes beginning
February 20, 2007.
Note 9. Other Expenses
The estimates below have been made based upon management’s best estimate of the amounts and
timing of certain events included in the restructuring plan that will occur in the future. It is possible that
the actual outcome of certain events may differ from the estimates. Changes will be made to the
restructuring accrual at the point that the differences become determinable. The accrual balances for the
restructuring plans are included in accrued restructuring and other liabilities (long-term) in the
consolidated balance sheets.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 9. Other Expenses (Continued)
2004 Restructuring and Other Impairments (in thousands)
Accrual
Balance
as of
2005
2005
Accrual
Balance
as of
2006
2006
Accrual
Balance
as of
2007
2007
Accrual
Balance
as of
December 31, Charges to Charges December 31, Charges to Charges December 31, Charges to Charges December 31,
Operations Utilized
Operations Utilized
Operations Utilized
2007
2005
2006
2004
Workforce reduction . .
Lease commitments
and related costs . . .
Other costs . . . . . . . .
$
2
$ (2)
$ — $ —
$ — $ — $ —
$ — $ — $ —
15,497
—
733
255
(2,685)
(255)
13,545
—
893
92
(2,966)
(92)
11,472
—
571
125
(2,864)
(125)
9,179
—
Total . . . . . . . . . . . .
$15,499
$986
$(2,940) $13,545
$985
$(3,058) $11,472
$696
$(2,989)
$9,179
In February 2004, we announced a restructuring plan to close our information products research
facility and headquarters in Palo Alto, California and move our headquarters to our Wilmington, Delaware
pharmaceutical research and development facility. The closure of the Palo Alto facility corresponded with
terminating further development activities around our Palo Alto-based information products line. The
restructuring plan included the elimination of 183 employees and charges related to the closure of our Palo
Alto facilities, previously capitalized tenant improvements and equipment and other items. The lease
commitment and related costs originally included the present value of future lease obligations for two
facilities. In the fourth quarter of 2004, we made a lease termination payment to satisfy our remaining
lease obligation with respect to one of the facilities. The lease obligation for the second facility extends
through March 2011. As a result of the long term nature of the remaining lease obligation, we will be
recording a charge each period through the March 2011 termination date of the lease related to increases
in the fair value of the lease obligations in accordance with the provisions of FASB Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities, which total approximately $0.9 million at
December 31, 2007.
2002 Restructuring (in thousands)
Accrual
Balance
as of
2005
2005
Accrual
Balance
as of
2006
2006
Accrual
Balance
as of
2007
2007
Accrual
Balance
as of
December 31, Charges to Charges December 31, Charges to Charges December 31, Charges to Charges December 31,
Operations Utilized
Operations Utilized
Operations Utilized
2006
2004
2005
2007
Lease commitments and other
restructuring charges . . . . .
$16,155
$ 57
$(2,512) $13,700
$(1,450) $(2,250) $10,000
$(282) $(2,184)
$7,534
In November 2002, we announced plans to reduce our expenditures, primarily in research and
development, through a combination of spending reductions, workforce reductions, and office
consolidations. The plan included elimination of approximately 37% of our approximately 700-person
workforce from our offices in Palo Alto, California; Beverly, Massachusetts; and Cambridge, England and
the consolidation of our office and research facilities in Palo Alto, California. As a result, we recorded an
expense of $33.9 million related to restructuring activities in the fourth quarter of 2002.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 9. Other Expenses (Continued)
We currently have one remaining lease related to an exited site that is due to expire in December
2010. During the years ended December 31, 2007, 2006 and 2005, we recognized additional charges of
$(0.3) million, $(1.5) million and $0.1 million, respectively, primarily relating to this facility for lease
expenses in excess or less than of amounts originally estimated. We estimated the costs based on the
contractual terms of agreements and current real estate market conditions. We may incur additional costs
associated with these subleasing and lease termination activities.
Maxia Acquisition (in thousands)
Accrual
Balance
as of
2005
2005
Accrual
Balance
as of
2006
2006
Accrual
Balance
as of
2007
2007
Accrual
Balance
as of
December 31, Charges to Accrual December 31, Charges to Accrual December 31, Charges to Accrual December 31,
Operations Utilized
Operations Utilized
Operations Utilized
2005
2004
2007
2006
Lease commitments and
other costs . . . . . . .
$2,373
$312
$(616)
$2,069
$(79)
$(772)
$1,218
$(568)
$(376)
$274
In accordance with EITF 95-3, we recorded a $2.9 million charge in 2003 related to restructuring costs
for Maxia Pharmaceuticals, Inc. (‘‘Maxia’’), which consisted of workforce reductions and consolidation of
facilities. We recorded employee termination costs of approximately $0.8 million for 28 employee
positions. The job eliminations were completed in July 2003. We also recorded restructuring costs related
to lease payments for property that has been vacated and other costs of $2.0 million. In 2007, 2006 and
2005 we recorded additional charges of $(0.6) million, $(0.1) million and $0.3 million, respectively, relating
to facilities lease expenses in excess of amounts originally estimated. The operating lease related to the
vacated facility expires in November 2008.
Note 10. Stockholders’ Deficit
Preferred Stock. We are authorized to issue 5,000,000 shares of preferred stock, none of which was
outstanding as of December 31, 2007 or 2006. The Board of Directors may determine the rights,
preferences and privileges of any preferred stock issued in the future. We have reserved 250,000 shares of
preferred stock designated as Series A Participating Preferred Stock for issuance in connection with the
Stockholders Rights plan described below.
Common Stock. As of December 31, 2007, we had reserved a total of 17,300,458 shares of our
common stock for future issuance related to our stock plans as described below.
On November 5, 2004, we completed a public offering of 9 million shares of our authorized but
unissued common stock at $9.75 per share pursuant to an effective shelf registration statement, resulting in
net proceeds of $83.3 million after deducting the underwriting discounts, commissions and offering
expenses.
Stock Compensation Plans. Summaries of stock option activity for our stock option plans as of
December 31, 2007, 2006 and 2005, and related information for the years ended December 31 are included
in the plan descriptions below.
1991 Stock Plan.
In November 1991, the Board of Directors adopted the 1991 Stock Plan (the ‘‘Stock
Plan’’), which was amended and restated for issuance of common stock to employees, consultants, and
scientific advisors. Options issued under the plan shall, at the discretion of the compensation committee of
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 10. Stockholders’ Deficit (Continued)
the Board of Directors, be either incentive stock options, nonstatutory stock options or restricted stock
units. The exercise prices of incentive and non-statutory stock options granted under the plan are not less
than the fair market value on the date of the grant, as determined by the Board of Directors. Options
granted after February 2007 generally vest over three years, pursuant to a formula determined by our
Board of Directors, and expire after seven years. Options granted prior to February 2007 generally vest
over four years, pursuant to a formula determined by our Board of Directors, and expire after ten years.
Certain options granted in 2002 vest pro rata monthly over three years and expire after ten years. In May
2007, our stockholders approved an increase in the number of shares of common stock reserved for
issuance under the Stock Plan from 22,350,000 to 25,350,000.
During 2001, we granted 490,000 restricted stock units under the Stock Plan to certain management
personnel. Stock compensation expense of $0.2 million was recorded in 2005. As of December 31, 2005, all
of the restricted stock units had vested or had been previously forfeited.
Non-Employee Directors’ Stock Option Plan.
In August 1993, the Board of Directors approved the
1993 Directors’ Stock Option Plan (the ‘‘Directors’ Plan’’), which was later amended. The Directors’ Plan
provides for the automatic grant of options to purchase shares of common stock to our non-employee
directors. In June 2005, our stockholders approved an increase in the number of shares of common stock
reserved for issuance under the plan from 1,100,000 to 1,500,000.
Under the Directors’ Plan, each new non-employee director joining the Board will receive an option
to purchase 35,000 shares of common stock. Additionally, members who continue to serve on the Board
will receive annual option grants for 20,000 shares exercisable in full on the first anniversary of the date of
the grant. All options are exercisable at the fair market value of the stock on the date of grant.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 10. Stockholders’ Deficit (Continued)
Activity under the combined plans was as follows:
Shares Subject to
Outstanding Options
Shares Available
for Grant
Shares
Weighted Average
Exercise Price
Balance at December 31, 2004 . . . . . . . . . . . . . . . . . . . .
7,247,237
6,518,745
Additional authorization . . . . . . . . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
400,000
(2,794,200)
—
20,000
1,275,121
—
2,794,200
(203,602)
(20,000)
(1,290,942)
Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . .
6,148,158
7,798,401
Additional authorization . . . . . . . . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(2,834,227)
—
33,736
442,814
—
2,834,227
(61,931)
(33,736)
(442,814)
Balance at December 31, 2006 . . . . . . . . . . . . . . . . . . . .
3,790,481
10,094,147
Additional authorization . . . . . . . . . . . . . . . . . . . . . . . . .
Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,000,000
(2,892,975)
—
18,000
311,963
—
2,892,975
(222,654)
(18,000)
(311,963)
Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . .
4,227,469
12,434,505
$ 9.61
—
$ 8.53
$ 1.33
$ 3.78
$11.97
$ 8.99
—
$ 5.25
$ 4.72
$ 9.39
$ 9.55
$ 7.94
—
$ 7.07
$ 4.90
$18.31
$ 6.57
$ 7.81
Options to purchase a total of 7,593,670, 5,577,911 and 4,181,999 shares as of December 31, 2007,
2006 and 2005, respectively, were exercisable and vested. The aggregrate intrinsic value of options
exercised for the years ended December 31, 2007, 2006 and 2005 were $0.7 million, $0.0 million and
$1.2 million, respectively. At December 31, 2007 the aggregate intrinsic value of options outstanding and
vested options are $34.6 million and $18.8 million, respectively.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 10. Stockholders’ Deficit (Continued)
The following table summarizes information about stock options outstanding as of December 31, 2007
for the 1991 Stock Plan and the 1993 Directors’ Stock Option Plan:
Range of Exercise Prices
$3.10 - $5.24 . . . . . . . . . . . . . . . . . . . . . .
$5.29 - $5.43 . . . . . . . . . . . . . . . . . . . . . .
$5.46 - $5.46 . . . . . . . . . . . . . . . . . . . . . .
$5.67 - $7.04 . . . . . . . . . . . . . . . . . . . . . .
$7.09 - $7.09 . . . . . . . . . . . . . . . . . . . . . .
$7.10 - $8.19 . . . . . . . . . . . . . . . . . . . . . .
$8.49 - $8.93 . . . . . . . . . . . . . . . . . . . . . .
$8.99 - $8.99 . . . . . . . . . . . . . . . . . . . . . .
$9.12 - $16.19 . . . . . . . . . . . . . . . . . . . . .
$17.81 - $35.00 . . . . . . . . . . . . . . . . . . . .
Options Outstanding
Options Exercisable
Number
Outstanding
Weighted Average
Remaining
Contractual Life
1,535,814
53,000
1,992,486
1,171,542
2,322,700
1,424,316
345,000
1,870,378
1,499,451
219,818
12,434,505
6.31
7.64
8.03
5.75
6.12
6.72
6.31
7.05
4.14
2.84
6.34
Weighted
Average
Exercise
Price
$ 4.70
$ 5.37
$ 5.46
$ 6.18
$ 7.09
$ 7.85
$ 8.68
$ 8.99
$13.10
$20.17
Number
Exercisable
1,278,727
18,104
936,605
925,966
0
1,050,639
322,747
1,352,942
1,488,122
219,818
Weighted
Average
Exercise
Price
$ 4.76
$ 5.38
$ 5.46
$ 6.16
$ 0.00
$ 7.99
$ 8.69
$ 8.99
$13.12
$20.17
$ 7.81
7,593,670
$ 8.47
Employee Stock Purchase Plan. On May 21, 1997, our stockholders adopted the ESPP. In May 2006,
our stockholders approved an increase in the number of shares available for grant from 3,100,000 shares to
3,850,000 shares. Each regular full-time and part-time employee working 20 hours or more per week is
eligible to participate after one month of employment. We issued 337,689, 313,715 and 389,801 shares
under the ESPP in 2007, 2006 and 2005, respectively. For the year ended December 31, 2007 and 2006 we
recorded stock compensation expense of $0.4 million and $0.4 million, respectively, under SFAS 123R as
the ESPP is considered compensatory under SFAS 123R. As of December 31, 2007, 638,484 shares remain
available for issuance under the ESPP.
Stockholders Rights Plan. On September 25, 1998, the Board of Directors adopted a Stockholder
Rights Plan (the ‘‘Rights Plan’’), pursuant to which one preferred stock purchase right (a ‘‘Right’’) was
distributed for each outstanding share of common stock held of record on October 13, 1998. One Right
will also attach to each share of common stock issued by the Company subsequent to such date and prior
to the distribution date defined below. Each Right represents a right to purchase, under certain
circumstances, a fractional share of our Series A Participating Preferred Stock at an exercise price of
$100.00, subject to adjustment. In general, the Rights will become exercisable and trade independently
from the common stock on a distribution date that will occur on the earlier of (i) the public announcement
of the acquisition by a person or group of 15% or more of the common stock or (ii) ten days after
commencement of a tender or exchange offer for the common stock that would result in the acquisition of
15% or more of the common stock. Upon the occurrence of certain other events related to changes in
ownership of the common stock, each holder of a Right would be entitled to purchase shares of common
stock, or an acquiring corporation’s common stock, having a market value of twice the exercise price.
Under certain conditions, the Rights may be redeemed at $0.01 per Right by the Board of Directors. The
Rights expire on September 25, 2008.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 11. Stock Compensation
We adopted SFAS 123R on January 1, 2006. SFAS 123R requires the recognition of the fair value of
stock compensation in the statement of operations. We recognize the stock compensation expense over the
requisite service period of the individual grants, which generally equals the vesting period. Prior to
January 1, 2006, we followed APB Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for our stock compensation.
We elected the modified prospective method in adopting SFAS 123R. Under this method, the
provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. In addition,
the unrecognized expense of awards not yet vested at the date of adoption is recognized in net income in
the periods after the date of adoption using the same valuation method (Black-Scholes) and assumptions
determined under the original provisions of SFAS 123, Accounting for Stock-Based Compensation, as
disclosed in our previous filings.
Under the provisions of SFAS 123R, we recorded $10.1 and $8.9 million, respectively, of stock
compensation expense on our audited condensed consolidated statement of operations for the year ended
December 31, 2007 and 2006. We utilized the Black-Scholes valuation model for estimating the fair value
of the stock compensation granted, with the following weighted-average assumptions:
Employee Stock Options
For the Year Ended
Employee Stock
Purchase Plan For the
Year Ended
December 31,
December 31,
2007
2006
2005
2007
2006
2005
Average risk-free interest rates . . . . . . . . . . . . . . . . . . .
Average expected life (in years) . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average fair value (in dollars) . . . . . . . . . . . .
4.81% 4.43% 3.95% 4.09% 4.80% 3.64%
2.91
0.50
3.29
3.13
0.50
0.50
65% 76% 86% 51% 63% 90%
3.22
2.75
4.94
1.24
1.26
2.81
The risk-free interest rate is derived from the U.S. Federal Reserve rate in effect at the time of grant.
The expected life calculation is based on the observed and expected time to the exercise of options by our
employees based on historical exercise patterns for similar type options. Expected volatility is based on the
historical volatility of our common stock over the period commensurate with the expected life of the
options. A dividend yield of zero is assumed based on the fact that we have never paid cash dividends and
have no present intention to pay cash dividends.
Based on our historical experience, we have assumed an annualized forfeiture rate of 5% for our
options. Under the true-up provisions of SFAS 123R, we will record additional expense if the actual
forfeiture rate is lower than we estimated, and will record a recovery of prior expense if the actual
forfeiture is higher than we estimated.
SFAS 123R requires us to present pro forma information for the comparative period prior to the
adoption as if we had accounted for all our stock options under the fair value method of the original
SFAS 123. The following table illustrates the effect on net loss and loss per share if we had applied the fair
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 11. Stock Compensation (Continued)
value recognition provisions of SFAS 123 to stock-based employee compensation in the prior-year period
(dollars in thousands, except per-share data).
Net loss, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Stock-based employee compensation . . . . . . . . . . . . . . . . . . . . . .
Deduct: Total stock-based employee compensation determined under
For the Year
Ended
December 31,
2005
$(103,043)
186
the fair value-based method for all awards . . . . . . . . . . . . . . . . . . . .
(9,777)
Pro forma net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(112,634)
Net loss per share:
Basic and diluted net loss per share—as reported . . . . . . . . . . . . . . . . .
Basic and diluted net loss per share—as SFAS 123 adjusted . . . . . . . . .
$
$
(1.24)
(1.35)
The amortization of stock compensation under SFAS 123R for the period after its adoption, and
under APB Opinion 25 or SFAS 123 (pro forma disclosure) for the period prior to its adoption was
calculated in accordance with FASB Interpretation (‘‘FIN’’) No. 28. Total compensation cost of options
granted but not yet vested, as of December 31, 2007, was $6.0 million, which is expected to be recognized
over the weighted average period of 3.17 years.
Note 12. Income Taxes
The benefit for income taxes consists of the following (in thousands):
Current
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $(228)
— (324)
—
Total benefit for income taxes . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $(552)
Year Ended December 31,
2007
2006
2005
Loss from continuing operations before benefit for income taxes consists of the following (in
thousands):
Year Ended December 31,
2007
2006
2005
U.S. taxable entities . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(86,881) $(74,161) $(103,030)
(879)
(5)
—
$(86,881) $(74,166) $(103,909)
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 12. Income Taxes (Continued)
The benefit for income taxes differs from the federal statutory rate as follows (in thousands):
Year Ended December 31,
2007
2006
2005
Benefit at U.S. federal statutory rate . . . . . . . . . . . .
Unbenefitted net operating losses and tax credits . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(30,408) $(26,000) $(36,300)
36,200
25,800
(452)
200
30,238
170
Benefit for income taxes . . . . . . . . . . . . . . . . . . . .
$
— $
— $
(552)
Significant components of our deferred tax assets are as follows (in thousands):
December 31,
2007
2006
Deferred tax assets:
Federal and state net operating loss carryforwards . . . . . . . .
Federal and state research credits . . . . . . . . . . . . . . . . . . . .
Capitalized research and development . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal and state capital loss carryforwards . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 327,000
37,000
76,000
6,000
8,000
12,000
$ 303,000
35,000
52,000
6,000
11,000
23,000
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance for deferred tax assets . . . . . . . . . .
466,000
(466,000)
430,000
(430,000)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
—
The valuation allowance for deferred tax assets increased by approximately $36.0 million,
$38.2 million and $48.8 million during the years ended December 31, 2007, 2006 and 2005, respectively.
Approximately $61.7 million of the valuation allowance for deferred tax assets relates to benefits from
stock option deductions which, when recognized, will be allocated directly to contributed capital.
Management believes the uncertainty regarding the realization of net deferred tax assets requires a
full valuation allowance.
As of December 31, 2007, we had federal and state net operating loss carryforwards of approximately
$804.0 million. We also had federal and state research and development tax credit carryforwards of
approximately $37.0 million. The net operating loss carryforwards and tax credits will expire at various
dates, beginning in 2008 through 2027, if not utilized. Utilization of the net operating losses and credits
may be subject to an annual limitation, due to the ‘‘change in ownership’’ provisions of the Internal
Revenue Code of 1986 and similar state provisions. We also had federal and state capital loss
carryforwards of approximately $19.4 million that will expire beginning in 2009.
Note 13. Net Loss Per Share
For all periods presented, both basic and diluted net loss per common share are computed by dividing
the net loss by the number of weighted average common shares outstanding during the period. Stock
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 13. Net Loss Per Share (Continued)
options and potential common shares issuable upon conversion of our 31⁄2% Senior Notes, 31⁄2%
Subordinated Notes and 5.5% convertible subordinated notes due 2007 (the ‘‘5.5% Notes’’) were excluded
from the computation of diluted net loss per share, as their share effect was anti-dilutive for all periods
presented. The potential common shares that were excluded from the diluted net loss per share
computation are as follows:
Outstanding stock options . . . . . . . . . . . . . . . . . . . . . .
Common shares issuable upon conversion of 31⁄2%
December 31,
2007
2006
2005
12,434,505
10,094,147
7,798,401
Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,531,224
13,531,224
—
Common shares issuable upon conversion of 31⁄2%
Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . .
22,284,625
22,284,625
22,284,625
Common shares issuable upon conversion of Pfizer
Note due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,461,496
1,461,496
Common shares issuable upon conversion of Pfizer
Note due 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,025,641
—
—
—
Common shares issuable upon conversion of 5.5%
Notes(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
— 1,358,865
Total potential common shares excluded from diluted
net loss per share computation . . . . . . . . . . . . . . . .
50,737,491
47,371,492
31,441,891
(1) All of the outstanding 5.5% Notes were redeemed on October 16, 2006.
Note 14. Segment Reporting
Our operations are treated as one operating segment, biotechnology drug discovery and development,
in accordance with FASB Statement No. 131 (‘‘SFAS 131’’). For the year ended December 31, 2007, we
recorded revenue from customers throughout the United States and in Canada, Germany, Sweden, and the
United Kingdom. Export revenues for the years ended December 31, 2007, 2006 and 2005 were
$0.7 million, $0.6 million and $2.8 million, respectively.
Note 15. Defined Contribution Plan
We have a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code
covering all domestic employees. Employees may contribute a portion of their compensation, which is then
matched by us, subject to certain limitations. Defined contribution expense was $0.5 million, $0.0 million
and $0.5 million in 2007, 2006 and 2005, respectively.
Note 16. Litigation
Invitrogen
In October 2001, Invitrogen Corporation (‘‘Invitrogen’’) filed an action against us in the federal court
for the District of Delaware, alleging infringement of three patents. On June 15, 2006 we entered into a
settlement agreement with Invitrogen pursuant to which we agreed to pay Invitrogen $3.4 million as a
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 16. Litigation (Continued)
settlement fee. This amount is included in other expenses in the accompanying condensed consolidated
statements of operations for the year ended December 31, 2006.
In addition to the matter described above, from time to time we have been involved in certain legal
actions arising in the ordinary course of business. In management’s opinion, the outcome of such actions
will not have a material adverse effect on our financial position, results of operations, or liquidity.
Note 17. Related Party Transactions
The following summarizes our related party transactions as defined by FASB Statement No. 57,
Related Party Disclosures (‘‘SFAS 57’’). In each of the transactions noted in which a director of Incyte was at
the time of the transaction in some way affiliated with the other party to the transaction, such director
recused himself from voting on the related party transaction, other than the Senomyx, Inc. transaction.
During 1997, we purchased diaDexus Series B Preferred Stock at a cost of $1.3 million. We do not
have the ability to exert significant influence over diaDexus. We have an executive officer who sits on
diaDexus’ Board of Directors. In June 2006, we recorded an impairment charge of $1.3 million to reduce
the carrying value of this investment because the investee had less than six months of cash and the
likelihood of future debt or equity financing that would not result in an impairment was remote.
During 2000 and 2001 we purchased shares of Series A Preferred Stock and Series C Preferred Stock
of Genomic Health, Inc. (‘‘Genomic Health’’) for an aggregate purchase price of $6.0 million. In
connection with the completion of its initial public offering on October 4, 2005, these shares were
converted into common shares. Additionally as part of its initial public offering, Genomic Health exercised
an election under which we were required to acquire an additional $5.0 million of Genomic Health
common stock. In March 2006, we sold our initial investment for $11.5 million, and in October 2006, we
sold the remaining portion of this investment for $5.8 million, which resulted in a aggregate realized gain
of $6.2 million for the year ended December 31, 2006. Julian C. Baker, one of our directors, is also a
director of Genomic Health and holds shares, directly or beneficially, of both companies.
During 2000, we purchased shares of Series D Preferred Stock of Senomyx, Inc. (‘‘Senomyx’’) for an
aggregate purchase price of $6.5 million. In connection with the completion of Senomyx’s initial public
offering in 2004, our ownership interest was converted into common shares. These shares were sold in 2005
for $5.7 million, resulting in a realized gain of $2.8 million from their carrying value. Frederick B. Craves,
one of our former directors, is a partner of Bay City Capital, which held shares of Senomyx stock.
During 2005, we repurchased on the open market, and retired, $36.5 million in face value of 5.5%
Notes. One such transaction in 2005 involved the repurchase, at a purchase price of 98.25% of face value,
of $5.0 million in face value of such notes from a limited partnership of which Julian C. Baker, one of our
directors, is a controlling member of the general partner of the general partner and may have a pecuniary
interest. Mr. Baker did not participate in our decision to engage in such a repurchase transaction. The
price paid by us in such repurchase transaction was equal to the price paid by us to an independent third
party in a comparable transaction negotiated on an arms’-length basis a short time prior to such repurchase
transaction.
Note 18. Commitments
As of December 31, 2007, we had noncancelable operating leases on multiple facilities and
equipment, including facilities in Palo Alto, California; San Diego, California; and Wilmington, Delaware.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 18. Commitments (Continued)
The leases expire on various dates ranging from June 2008 to March 2011. Certain leases have renewal
options for periods ranging up to 5 years. Rent expense for the years ended December 31, 2007, 2006 and
2005, was approximately $4.6 million, $4.4 million and $4.2 million, respectively.
As of December 31, 2007, future noncancelable minimum payments under operating leases, including
leases for sites included in the restructuring programs were as follows:
Year ended December 31,
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Leases
(in thousands)
$13,142
12,699
10,506
1,134
—
—
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37,481
The amounts and timing of payments related to vacated facilities may vary based on negotiated timing
of lease terminations. We have entered into sublease agreements for our vacated space with scheduled
payments to us of $3.1 million (less than 1 year), $4.2 million (years 1-3), and $0.3 million (years 4-5).
In addition to the non-cancelable commitments included in the table above, we have entered into
contractual arrangements that obligate us to make payments to the contractual counterparties upon the
occurrence of future events. We consider these potential obligations contingent, and have summarized all
significant arrangements below.
Commitments related to Maxia are considered contingent commitments as future events must occur
to cause these commitments to be enforceable. In February 2003, we completed our acquisition of Maxia.
Under the merger agreement, former Maxia stockholders have the right to receive certain earn out
amounts of up to a potential aggregate amount of $14.0 million upon the occurrence of certain research
and development milestones set forth in the merger agreement. Twenty percent of each earn out payment,
if earned, will be paid in cash and the remaining eighty percent will be paid in shares of our common stock
such that an aggregate of $2.8 million in cash and $11.2 million in our common stock (based upon the then
fair value) could potentially be paid pursuant to the earn out milestones. The milestones occur as Maxia
products enter various stages of human clinical trials and may be earned at any time prior to the tenth
anniversary of the consummation of the merger. In any event, no more than 13,531,138 shares of our
common stock may be issued to former Maxia stockholders in the aggregate pursuant to the merger
agreement. None of these milestones had been achieved as of December 31, 2007.
We have entered into and intend to continue to seek to license additional rights relating to
compounds or technologies in connection with our drug discovery and development programs. Under
these licenses, we may be required to pay up-front fees, milestone payments and royalties on sales of future
products.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCYTE CORPORATION
Note 19. Interim Consolidated Financial Information (Unaudited)
(in thousands, except per share data)
Fiscal 2007 Quarter Ended
March 31
June 30
September 30
December 31
Revenues(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net loss per share . . . . . . . . . . . . . .
Shares used in computation of basic and diluted net
$ 7,422
(22,147)
$
(0.26) $
$ 10,576
(18,439)
(0.22)
$ 6,690
(24,494)
(0.29)
$
$ 9,752
(21,801)
(0.26)
$
loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83,985
84,136
84,213
84,405
Fiscal 2006 Quarter Ended
March 31
June 30
September 30
December 31
Revenues(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net loss per share . . . . . . . . . . . . . .
Shares used in computation of basic and diluted net
$ 6,465
(17,306)
$
(0.21) $
$ 6,855
(20,520)
(0.24)
$ 7,268
(15,838)
(0.19)
$
$ 7,056
(20,502)
(0.24)
$
loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83,627
83,786
83,852
83,931
(1) In November 2005, we entered into a collaborative research and license agreement with Pfizer, which
became effective in January 2006. The March 31, 2007, June 30, 2007, September 30, 2007, and
December 31, 2007 quarters include $6.1 million, $8.9 million, $5.9 million, and $8.9 million,
respectively, of contract revenues relating to the agreement. The March 31, 2006, June 30, 2006,
September 30, 2006, and December 31, 2006 quarters include $5.5 million, $6.3 million, $6.2 million,
and $6.2 million, respectively, of contract revenues relating to the agreement.
(2) The June 30, 2006 quarter includes a $3.4 million charge related to the settlement fee paid to
Invitrogen.
77
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Description—Year Ended December 31,
Balance at
Beginning
of Period
Charged to
Costs and
Expenses
Deductions
Balance at
End of
Period
Allowance for doubtful accounts—2005 . . . . . . . . . . . . . .
Allowance for doubtful accounts—2006 . . . . . . . . . . . . . .
Allowance for doubtful accounts—2007 . . . . . . . . . . . . . .
$274
195
$ —
(in thousands)
35
—
—
114
195
—
195
$ —
$ —
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. We maintain ‘‘disclosure controls and procedures,’’
as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’),
that are designed to ensure that information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls
and procedures have been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any
disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K,
our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
Changes in internal control over financial reporting. There was no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Management’s annual report on internal control over financial reporting. Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rules 13a-15(f). Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
issued by the Committee of Sponsoring
framework
Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
Control—Integrated Framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2007. The effectiveness of our internal control over financial
reporting as of December 31, 2007 has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report which is included herein.
in Internal Control—Integrated Framework
78
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Incyte Corporation
We have audited Incyte Corporation’s internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Incyte Corporation’s
management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Incyte Corporation maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Incyte Corporation as of December 31, 2007 and
2006, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity
(deficit) and cash flows for each of the three years in the period ended December 31, 2007 of Incyte
Corporation and our report dated February 26, 2008 expressed an unqualified opinion thereon.
Philadelphia, Pennsylvania
February 26, 2008
/s/ Ernst & Young LLP
79
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item (with respect to Directors) is incorporated by reference from
the information under the caption ‘‘Election of Directors’’ contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2008
Annual Meeting of Stockholders to be held on May 22, 2008 (the ‘‘Proxy Statement’’). Certain information
required by this item concerning executive officers is set forth in Part I of this Report under the caption
‘‘Executive Officers of the Registrant’’ and is incorporated herein by reference.
Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a
report required by Section 16(a) of the Exchange Act. This disclosure is contained in the section entitled
‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ in the Proxy Statement and is incorporated
herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to all of our officers and
employees, including our Chief Executive Officer, Chief Financial Officer, Corporate Controller and other
employees who perform financial or accounting functions. The Code of Business Conduct and Ethics sets
forth the basic principles that guide the business conduct of our employees. We have also adopted a Senior
Financial Officers’ Code of Ethics that specifically applies to our Chief Executive Officer, Chief Financial
Officer, Corporate Controller, and others providing similar functions. Stockholders may request a free
copy of our Code of Business Conduct and Ethics and our Senior Financial Officers’ Code of Ethics by
contacting Incyte Corporation, Attention: Investor Relations, Experimental Station, Route 141 & Henry
Clay Road, Building E336, Wilmington, DE 19880.
To date, there have been no waivers under our Code of Business Conduct and Ethics or Senior
Financial Officers’ Code of Ethics. We intend to disclose future amendments to certain provisions of our
Code of Business Conduct and Ethics or Senior Financial Officers’ Code of Ethics or any waivers, if and
when granted, of our Code of Business Conduct and Ethics or Senior Financial Officers’ Code of Ethics on
our website at http://www.incyte.com within four business days following the date of such amendment or
waiver.
Our Board of Directors has appointed an Audit Committee, comprised of Mr. Barry M. Ariko, as
Chairman, Mr. Roy A. Whitfield and Mr. Matthew W. Emmens. The Board of Directors has also
determined that all three members of the Audit Committee are qualified as Audit Committee Financial
Experts under the definition outlined by the Securities and Exchange Commission. In addition, each of the
members of the Audit Committee qualifies as an ‘‘independent director’’ under the applicable standards of
The Nasdaq Stock Market.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the information under the
captions ‘‘Election of Directors—Compensation of Directors’’ and ‘‘Executive Compensation’’ contained
in the Proxy Statement.
80
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated by reference from the information under the
captions ‘‘Security Ownership of Certain Beneficial Owners and Management’’ and ‘‘Equity Compensation
Plan Information’’ contained in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from the information under the
captions ‘‘Certain Relationships and Related Transactions’’ and ‘‘Election of Directors—Director
Independence’’ contained in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from the information under the
caption ‘‘Principal Accountant Fees and Services’’ contained in the Proxy Statement.
81
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements of Incyte Corporation
under Item 8 of Part II hereof.
(2) Financial Statement Schedules
The following financial statement schedule of Incyte Corporation is filed as part of this
Form 10-K included in Item 8 of Part II:
Schedule II—Valuation and Qualifying Accounts for each of the three years in the period
ended December 31, 2007.
All other financial statement schedules have been omitted because they are not applicable or not
required or because the information is included elsewhere in the Consolidated Financial
Statements or the Notes thereto.
(3) Exhibits
See Item 15(b) below. Each management contract or compensatory plan or arrangement
required to be filed has been identified.
(b) Exhibits
Exhibit
Number
2.1
2.2
3(i)
3(ii)
4.1
4.2
Description of Document
Agreement and Plan of Merger, dated as of November 11, 2002, by and among the Company,
Maxia Pharmaceuticals, Inc. and other parties signatory thereto (incorporated by reference to
Exhibit 2.1 to the Company’s Current Report on Form 8-K filed February 25, 2003).
Amendment to Agreement and Plan of Merger, dated as of December 19, 2002, by and among
the Company, Monaco Acquisition Corporation, Maxia Pharmaceuticals, Inc. and Maxia
Pharmaceuticals, LLC (incorporated by reference to Exhibit 2.2 to the Company’s Current
Report on Form 8-K filed February 25, 2003).
Integrated copy of the Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3(i)(A) to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2002).
Bylaws of the Company, as amended as of May 25, 2004 (incorporated by reference to
Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2004).
Form of Common Stock Certificate (incorporated by reference to the exhibit of the same
number to the Company’s Annual Report on Form 10-K for the year ended December 31,
2002).
Rights Agreement dated as of September 25, 1998 between the Company and Chase Mellon
Shareholder Services, L.L.C., which includes as Exhibit B, the rights certificate (incorporated
by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed
September 30, 1998).
82
Exhibit
Number
4.3
Description of Document
Indenture dated as of February 19, 2004 between the Company and U.S. Bank National
Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Registration
Statement on Form S-3 (File No. 333-114863)).
4.4.1†
Form of Convertible Subordinated Promissory Note (incorporated by reference to the
Company’s Current Report on Form 8-K/A filed February 6, 2006).
4.4.2*
Schedule of notes issued by the Company in the form of Exhibit 4.4.1
4.5
4.6
10.1#
10.2#
10.3#
10.4#
10.5#
10.6
10.7#
10.8#
10.9#
Indenture dated as of September 26, 2006 between the Company and U.S. Bank National
Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed on September 28, 2006).
Registration Rights Agreement, dated as of September 26, 2006, by and between Incyte
Corporation and Piper Jaffray & Co. (incorporated by reference to Exhibit 4.2 to the
Company’s Current Report on Form 8-K filed on September 28, 2006).
1991 Stock Plan of Incyte Genomics, Inc., as amended and restated on March 13, 2007
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2007).
Form of Incentive Stock Option Agreement under the 1991 Plan (incorporated by reference to
the exhibit of the same number to the Company’s Registration Statement on Form S-1 (File
No. 33-68138)).
Form of Nonstatutory Stock Option Agreement under the 1991 Plan (incorporated by
reference to the exhibit of the same number to the Company’s Registration Statement on
Form S-1 (File No. 33-68138)).
1993 Directors’ Stock Option Plan of Incyte Genomics, Inc., as amended and restated on
May 19, 2005 (incorporated by reference to the exhibit of the same number to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
Form of Indemnity Agreement between the Company and its directors and officers
(incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on
Form S-1 (File No. 33-68138)).
Lease Agreement dated June 19, 1997 between the Company and The Board of Trustees of the
Leland Stanford Junior University (incorporated by reference to Exhibit 10.14 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1999).
1997 Employee Stock Purchase Plan of Incyte Corporation, as amended and restated
September 15, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on September 19, 2006).
Form of Restricted Stock Unit Agreement under the 1991 Stock Plan of Incyte Genomics, Inc.
(incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2001).
Offer of Employment Letter, dated November 21, 2001, from the Company to Paul A.
Friedman (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2001).
10.10#
Employment Agreement, dated November 26, 2001, between Paul A. Friedman and Incyte
Genomics, Inc. (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2001).
83
Exhibit
Number
10.11†
10.12
10.13#
10.14#
10.15#
10.16†
10.17
10.18
10.19*
12.1*
21.1*
23.1*
24.1*
31.1*
31.2*
32.1**
32.2**
Description of Document
Settlement Agreement dated December 21, 2001, between Affymetrix, Inc. and Incyte
Genomics, Inc. (incorporated by reference to Exhibit 10.34 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2001).
Sublease Agreement, dated June 16, 2003, between E. I. DuPont de Nemours and Company
and Incyte Corporation (incorporated by reference to Exhibit 10.45 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
Offer of Employment Letter, dated September 2, 2003, from the Company to David C.
Hastings (incorporated by reference to Exhibit 10.46 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2003).
Offer of Employment Letter, dated September 2, 2003, from the Company to John A. Keller
(incorporated by reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2003).
Form of Employment Agreement, effective as of November 21, 2003 between Incyte
Corporation and David C. Hastings, John A. Keller, Brian W. Metcalf, Patricia A. Schreck
(effective date of December 8, 2003) and Paula J. Swain (incorporated by reference to
Exhibit 10.48 to the Company’s Annual Report on Form 10-K for the year ended December 31,
2003).
Collaborative Research and License Agreement, dated as of November 18, 2005, by and
between the Company and Pfizer Inc. (incorporated by reference to Exhibit 10.49 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
Note Purchase Agreement, dated as of November 18, 2005, by and between the Company and
Pfizer Overseas Pharmaceuticals (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K/A filed February 6, 2006).
Amendment No.1 to the Note Purchase Agreement, by and between the Company and Pfizer
Overseas Pharmaceuticals, dated as of January 4, 2007 (incorporated by reference to
Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31,
2006).
Amendment No.2 to the Note Purchase Agreement, by and among the Company, Pfizer
Ireland Pharmaceuticals, and Pfizer Inc., dated as of October 10, 2007.
Computation of Ratios of Earnings to Fixed Charges.
Subsidiaries of the Company.
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
Power of Attorney (see page 86 of this Form 10-K).
Rule 13a-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a) Certification of the Chief Financial Officer.
Statement of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C Section 1350).
Statement of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C Section 1350).
*
Filed herewith.
84
**
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and
34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed
‘‘filed’’ for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the
extent that the registrant specifically incorporates it by reference.
†
Confidential treatment has been requested with respect to certain portions of these agreements.
# Indicates management contract or compensatory plan or arrangement.
(c) Financial Statements and Schedules
Reference is made to Item 15(a)(2) above.
85
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
INCYTE CORPORATION
By:
/s/ PAUL A. FRIEDMAN
Paul A. Friedman
Chief Executive Officer
Date: March 6, 2008
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Paul A. Friedman, David C. Hastings, and Patricia A. Schreck, and each of them,
his true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all
capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ PAUL A. FRIEDMAN
Paul A. Friedman
/s/ DAVID C. HASTINGS
David C. Hastings
/s/ LAURENT CHARDONNET
Laurent Chardonnet
/s/ RICHARD U. DESCHUTTER
Richard U. Deschutter
/s/ BARRY M. ARIKO
Barry M. Ariko
/s/ JULIAN C. BAKER
Julian C. Baker
/s/ PAUL A. BROOKE
Paul A. Brooke
/s/ MATTHEW W. EMMENS
Matthew W. Emmens
/s/ JOHN F. NIBLACK
John F. Niblack
/s/ ROY A. WHITFIELD
Roy A. Whitfield
Chief Executive Officer (Principal
Executive Officer) and Director
Chief Executive Officer (Principal
Financial Officer) and Director
Vice President, Finance and Treasurer
(Principal Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
86
March 6, 2008
March 6, 2008
March 6, 2008
March 6, 2008
March 6, 2008
March 6, 2008
March 6, 2008
March 6, 2008
March 6, 2008
March 6, 2008
STOCK PRICE PERFORMANCE GRAPH
The following graph illustrates a comparison of the cumulative total stockholder return (change in
stock price plus reinvested dividends) of the Company’s Common Stock, the Total Return Index for the
NASDAQ U.S. Stocks (the ‘‘NASDAQ Composite Index’’), and the Total Return Index for the NASDAQ
Biotechnology Stocks (the ‘‘NASDAQ Biotechnology Index’’) assuming an investment of $100 in each on
December 31, 2002. In previous years, the Company used the Total Return Index for the NASDAQ
Pharmaceutical Stocks (the ‘‘NASDAQ Pharmaceutical Index’’) as a comparative index, and that index is
also presented below for comparison purposes. The Company elected to change the comparative index
from the NASDAQ Pharmaceutical Index to the NASDAQ Biotechnology Index because the Company
believes it better represents the Company’s peer group engaged in a similar line-of-business. The
Company’s Common Stock is traded on the NASDAQ Global Market. The graph is required by the
Securities and Exchange Commission and is not intended to forecast or be indicative of possible future
performance of the Company’s Common Stock.
$250
$200
$150
$100
$50
$0
12/02
12/03
12/04
12/05
12/06
12/07
Incyte Corporation
NASDAQ Composite Index
NASDAQ Pharmaceutical Index
NASDAQ Biotechnology Index
21MAR200808464366
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BOARD OF DIRECTORS
EXECUTIVE MANAGEMENT
Richard U. De Schutter
Chairman of the Board
Formerly Chairman
and Chief Executive Offi cer
DuPont Pharmaceuticals Company
Paul A. Friedman, M.D.
President and Chief Executive Offi cer
Incyte Corporation
Barry M. Ariko
President, Chief Executive Offi cer
and Chairman
Mirapoint, Inc.
Paul A. Friedman, M.D.
President and Chief Executive Offi cer
David C. Hastings
Executive Vice President
and Chief Financial Offi cer
John A. Keller, Ph.D.
Executive Vice President
and Chief Business Offi cer
Brian W. Metcalf, Ph.D.
Executive Vice President
and Chief Drug Discovery Scientist
Julian C. Baker
Managing Member
Baker Bros. Advisors, LLC
Patricia A. Schreck
Executive Vice President
and General Counsel
Paul A. Brooke
Chairman, Alsius Corporation
Managing Member, PMSV Holdings, LLC Human Resources
Senior Advisor, Morgan Stanley
Paula J. Swain
Executive Vice President,
Matthew W. Emmens
Chief Executive Offi cer
Shire plc
John F. Niblack, Ph.D.
Formerly Vice Chairman
and President of Global Research
and Development
Pfi zer Inc.
Roy A. Whitfi eld
Formerly Chairman of the Board
and Chief Executive Offi cer
Incyte Corporation
Transfer Agent and Registrar
BNY Mellon Shareowner Services
PO Box 358015
Pittsburgh, PA 15252-8015
or
480 Washington Boulevard
Jersey City, NJ 07310-1900
Phone: 800/851-9677
TDD for Hearing Impaired:
800/231-5469
Foreign Shareholders:
201/680-6610
TDD Foreign Shareholders:
201/680-6578
www.bnymellon.com/shareowner/isd
Annual Meeting
The Annual Meeting of Stockholders
will be held on May 22, 2008, at
10:00 a.m., Eastern Daylight Time, at the
Hotel du Pont, 11th and Market Streets,
Wilmington, Delaware.
Outside Counsel
Pillsbury Winthrop Shaw Pittman LLP
Independent Registered Public
Accounting Firm
Ernst & Young LLP
Market Information
Incyte’s Common Stock trades on
The NASDAQ Global Market under the
symbol INCY.
Investor Relations
You can obtain recent press releases
and other publicly available information
on Incyte by visiting our web site at
www.incyte.com.
Contact
Pamela Murphy
Vice President, Investor Relations and
Corporate Communications
Email: pmurphy@incyte.com
Corporate Headquarters
Incyte Corporation
Experimental Station
Route 141 & Henry Clay Road
Building E336
Wilmington, Delaware 19880
302/498-6700
Forward-looking Statements
Except for the historical statements contained herein, the statements contained in this annual report, including without limitation, statements as to our
productivity and transition from a pure drug discovery company, the anticipated advancement and composition of our pipeline, the expected timing,
progress, number of and other information regarding our preclinical and clinical trials, the likelihood of initiating registration trials of and receiving
expedited review for our JAK inhibitor for myelofi brosis, our expectations with respect to our development plans and program objectives for 2008,
plans to present and disclose data from our clinical trials, the potential benefi ts and effectiveness of our compounds in treating disease, and our plans
to seek strategic partnerships or out-licensing opportunities and to commercialize certain programs on our own, are forward-looking statements
within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are based
on our current intent, belief and expectations, using information currently available to us, and are therefore subject to certain risks, uncertainties, and
assumptions that may cause actual results to differ materially, including the high degree of risk associated with drug development and clinical trials,
the uncertainty of the FDA approval process, results of further research and development, the impact of technological advances and competition, our
ability to enroll a suffi cient number of patients for our clinical trials, unanticipated delays in programs or uses of capital, and other risks discussed in
our Annual Report on Form 10-K for the year ended December 31, 2007, which is contained herein, and in our fi lings with the Securities and Exchange
Commission. These forward-looking statements speak only as of the date hereof. Incyte disclaims any intent or obligation to update these forward-
looking statements.
THE DRIVE TO DISCOVER.
THE EXPERIENCE TO DELIVER.
Front Cover
Rendering of a small molecule bound
to the JAK2 ATP binding site
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Incyte Corporation
Experimental Station
Route 141 & Henry Clay Road, Building E336
Wilmington, DE 19880
www.incyte.com
INCYTE
Ann ua l Report 2007