1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
/ / TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission File Number: 0-27488
INCYTE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3136539
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3174 Porter Drive
Palo Alto, California 94304
(Address of principal executive offices)
(415) 855-0555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. /X/ Yes / / No
The number of outstanding shares of the registrant's Common Stock, $0.001 par
value, was 10,266,976 as of October 31, 1996.
Page 1 of 15
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INCYTE PHARMACEUTICALS, INC.
INDEX
PART I: FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements - Unaudited
Condensed Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995 .................................................... 3
Condensed Consolidated Statements of Operations - three and nine month
periods ended September 30, 1996 and 1995 ............................ 4
Condensed Consolidated Statements of Cash Flows - nine months ended
September 30, 1996 and 1995 .......................................... 5
Notes to Condensed Consolidated Financial Statements ................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 12
Item 2. Changes in Securities ................................................ 12
Item 3. Defaults Upon Senior Securities ...................................... 12
Item 4. Submission of Matters to a Vote of Security Holders .................. 12
Item 5. Other Information .................................................... 12
Item 6. Exhibits and Reports on Form 8-K ..................................... 12
Exhibit Index ........................................................ 13
Signatures ........................................................... 14
Page 2 of 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
1996 1995 (1)
ASSETS
Current assets:
Cash and cash equivalents $ 19,748 $ 10,547
Marketable securities - available-for-sale 29,946 30,634
Accounts receivable 3,028 7,643
Prepaid expenses and other current assets 1,185 756
-------- --------
Total current assets 53,907 49,580
Property and equipment, net 20,016 9,084
Deposits and other assets 461 118
======== ========
Total assets $ 74,384 $ 58,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,308 $ 2,344
Accrued liabilities 2,222 901
Deferred revenue 22,699 7,268
Current portion of capital lease obligations and notes payable 111 84
-------- --------
Total current liabilities 29,340 10,597
Noncurrent portion of capital lease obligations and notes payable 79 147
Noncurrent portion of accrued rent 487 535
Stockholders' equity:
Capital stock 10 10
Additional paid-in capital 81,501 77,250
Deferred compensation, net of amortization -- (29)
Unrealized gains (losses) on securities available-for-sale (285) 33
Accumulated deficit (36,748) (29,761)
-------- --------
Total stockholders' equity 44,478 47,503
-------- --------
Total liabilities and stockholders' equity $ 74,384 $ 58,782
======== ========
(1) Derived from audited financial statements at December 31, 1995 restated
to include the unaudited results of Genome Systems, Inc.
See accompanying notes.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
1996 1995 (1) 1996 1995 (1)
-------- -------- -------- --------
Revenue $ 12,917 $ 2,854 $ 27,604 $ 7,297
Costs and expenses:
Research and development 11,928 4,981 28,986 13,223
Selling, general and administrative 1,735 960 4,263 2,592
Purchase of in-process research
and development 3,165 -- 3,165 --
-------- -------- -------- --------
Total costs and expenses 16,828 5,941 36,414 15,815
-------- -------- -------- --------
Loss from operations (3,911) (3,087) (8,810) (8,518)
Interest and other income, net 559 199 1,823 820
-------- -------- -------- --------
Net loss ($ 3,352) ($ 2,888) ($ 6,987) ($ 7,698)
======== ======== ======== ========
Net loss per share ($ 0.33) ($ 0.35) ($ 0.69) ($ 0.95)
======== ======== ======== ========
Shares used in computing net
loss per share 10,179 8,144 10,106 8,138
======== ======== ======== ========
(1) Derived from the unaudited statements of operations for the three and
nine months ended September 30, 1995 restated to include the unaudited
results of Genome Systems, Inc.
See accompanying notes.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995 (1)
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 6,987) ($ 7,698)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 4,282 1,811
Noncash portion of purchase of in-process research
and development 3,000 --
Changes in certain assets and liabilities:
Accounts receivable 4,615 (166)
Prepaid expenses and other assets (772) (209)
Accounts payable 1,964 (628)
Accrued liabilities 1,273 811
Deferred revenue 15,431 (1,348)
-------- --------
Total adjustments 29,793 271
-------- --------
Net cash provided by (used in) operating activities 22,806 (7,427)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,185) (6,183)
Purchases of securities - available-for-sale (11,230) (15,925)
Maturity of securities - available-for-sale 11,600 28,281
-------- --------
Net cash provided by (used in) investing activities (14,815) 6,173
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 1,251 82
Capital equipment lease -- 36
Principal payments on capital lease obligations and notes payable (41) (50)
-------- --------
Net cash provided by financing activities 1,210 68
-------- --------
Net increase (decrease) in cash and cash equivalents 9,201 (1,186)
Cash and cash equivalents at beginning of the period 10,547 6,950
-------- --------
Cash and cash equivalents at end of the period $ 19,748 $ 5,764
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 7 $ 39
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired pursuant to capital lease obligations -- $ 36
======== ========
(1) Derived from the unaudited statements of cash flows for the nine months
ended September 30, 1995 restated to include the unaudited results of
Genome Systems, Inc.
See accompanying notes.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INCYTE PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The balance sheets as of September 30, 1996 and December 31,
1995, statements of operations for the three and nine months ended September 30,
1996 and 1995 and the statements of cash flows for the nine months ended
September 30, 1996 and 1995 are unaudited, but include all adjustments
(consisting of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position, operating results
and cash flows for the periods presented. The consolidated financial statements
include the accounts of its wholly-owned subsidiaries. In July 1996, all of the
outstanding shares of Genome Systems, Inc. ("Genome Systems") were acquired by
the Company in a business combination accounted for as a pooling-of-interests.
Accordingly, all prior financial data have been restated to represent the
combined financial results of the previously separate entities (Note 4). In
August 1996, all of the outstanding shares of Combion Inc. ("Combion") were
acquired by the Company in a business combination accounted for as a purchase
transaction. The accompanying financial statements present the operating results
of this acquisition in the Company's consolidated results of operations from the
date of acquisition (Note 4). Although the Company believes that the disclosures
in these financial statements are adequate to make the information presented not
misleading, certain information and footnote information normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of results for any
future interim period or for the entire year. The accompanying financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
2. REVENUE RECOGNITION
The Company recognizes revenue for subscriptions to the LifeSeq(TM)
database evenly over the subscription period. Revenue is deferred for fees
received before earned. Revenues for custom orders, such as satellite
databases, are recognized upon delivery. Revenues for genomic screening
products are recognized when delivered and revenues for genomic screening
services are recognized upon completion.
3. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common shares outstanding have been restated
historically to reflect stock issued in the stock-for-stock pooling of interests
combination of Genome Systems (See Note 4). Common equivalent shares from stock
options and warrants are excluded from the computation as their effect is
antidilutive.
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4. BUSINESS COMBINATIONS
In July 1996, the Company issued 204,073 shares of common stock in exchange for
all of the capital stock of Genome Systems, Inc., a privately held genomics
company in St. Louis, Missouri. Genome Systems provides genomic research
products and technical support services to scientists to assist them in the
identification and isolation of novel genes. The merger has been accounted for
as a pooling of interests and, accordingly, the company's financial statements
and financial data have been restated to include the accounts and operations of
Genome Systems for all periods presented.
The table below presents the separate results of operations for Genome Systems
for the periods prior to the merger. The Company's results of operations include
Genome Systems since the transaction (in thousands):
Merger
Genome Related
Incyte Systems Expenses Combined
-------- -------- -------- --------
Three months ended September 30, 1996
Revenue $ 12,657 $ 260 $ 12,917
Net income (loss) (3,288) 79 (143) (3,352)
Nine months ended September 30, 1996
Revenue $ 25,870 $ 1,734 $ 27,604
Net income (loss) (6,950) 106 (143) (6,987)
Three months ended September 30, 1995
Revenue $ 2,260 $ 594 $ 2,854
Net income (loss) (2,997) 109 (2,888)
Nine months ended September 30, 1995
Revenue $ 5,695 $ 1,602 $ 7,297
Net income (loss) (7,854) 156 (7,698)
In August 1996, the Company acquired all the common stock of Combion Inc., a
privately held microarray technology company in Pasadena, California, for 73,171
shares of common stock. The acquisition has been accounted for as a purchase
and, accordingly, the purchase price has been allocated to assets and
liabilities based on the estimated fair value as of the date of acquisition. The
portion of the consideration paid over the estimated fair value of net assets
acquired is attributable to the purchase of in-process research and development.
Combion's results of operations have been included in the consolidated results
of operations since the date of acquisition.
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PART I - FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of September 30, 1996 and for the three and nine month
periods ended September 30, 1996 and 1995 should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and with the section of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 entitled "Item 1. Business -
Factors That May Affect Results".
When used in this discussion, the word "expects" and similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements as to the expected achievement of
profitability, expected expenditure levels and the adequacy of capital
resources, are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, the ability of the Company to
obtain additional customers; competition from other entities offering access to
genomic databases or sequencing services; early termination of a database
subscription agreement or failure to renew an agreement upon expiration; the
need for the continued investment in the development of the existing and new
databases and related products in advance of obtaining additional customers;
the ability to successfully integrate Genome Systems' and Combion's operations;
cost of accessing technologies developed by other companies; the development of
new, more advanced sequencing-related technologies not available to the
Company; uncertainty as to the patentability of gene sequences and other
genetic information; uncertainty as to the scope of coverage, enforceability or
commercial protection from patents that issue; and the matters discussed in
Item 1 of the Company's Form 10-K for the year ended December 31, 1995 under
the caption "Business -- Factors That May Affect Results" and under the caption
"Risk Factors" in the Company's Prospectus dated October 16, 1996 forming a
part of the Company's registration statement on Form S-3. These forward looking
statements speak only as of the date hereof. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
OVERVIEW
Incyte Pharmaceuticals, Inc. (the "Company") designs, develops and
markets genomic databases, products and services. The databases include the
LifeSeq(TM) human gene expression and gene sequence database, the LifeSeq
Atlas(TM) gene mapping database, the PathoSeq(TM) microbial database and the
LifeSeq FL(TM) database of full-length human gene sequences. The Company's
databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genetic information to create information-based
tools marketed to the pharmaceutical industry on a non-exclusive basis for use
in drug discovery and development. In building its genomic databases, the
Company utilizes high-throughput, computer-aided gene sequencing and analysis
technologies to identify and characterize the expressed genes of the human
genome. During the quarter ended September 30, 1996, two major companies were
added as subscribers to the Company's databases to bring the total number of
major subscribers to 11.
In July 1996, the Company issued shares of its Common Stock in exchange
for all of the outstanding shares of Genome Systems, Inc. ("Genome Systems"), a
genomics service company in St.
Page 8 of 15
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Louis, Missouri. The transaction has been accounted for as a pooling of
interests, and the consolidated financial statements discussed herein and all
historical financial information has been restated to reflect the combined
operations of both companies. Genome Systems will retain its name and current
operations, continuing to offer a range of genomic screening products and
services used by scientists to assist in the identification and isolation of
novel genes.
In August 1996, the Company acquired for stock Combion Inc. ("Combion")
a microarray technology company located in Pasadena, California. The acquisition
of Combion has been accounted for as a purchase, and the consolidated financial
statements discussed herein reflect the inclusion of the results of Combion from
the date of acquisition, August 15, 1996, forward.
Revenues recognized by the Company are predominately nonexclusive
database subscription fees. To a smaller extent, revenues consists of fees for
custom or "satellite" database services and the sales of genomic screening
products and services. The Company's database subscription agreements also
provide for future milestone payments and royalties from the sale of products
derived from proprietary information obtained through the databases. There can
be no assurance that the database subscribers will ever generate products from
information contained within the database and thus that the Company will ever
receive milestone payments or royalties. There can be no assurance that any of
the Company's database subscription agreements will be renewed upon expiration,
typically after a term of three years, or not terminated earlier if the Company
breaches any material provision of the database subscription agreement.
The Company has incurred operating losses since inception and, while it
currently expects to achieve profitability in the fourth quarter of 1996, the
Company may not be able to sustain significant annual revenues or achieve or
sustain profitable operations. There can be no assurance that the Company will
be able to obtain and retain additional customers for the Company's database and
genomic products and services on acceptable terms or that such database and
genomic products and services will produce revenues adequate to fund the
Company's operating expenses.
RESULTS OF OPERATIONS
Revenues for the three and nine months ended September 30, 1996
increased to $12.9 million and $27.6 million, respectively, compared to $2.9
million and $7.3 million for the corresponding periods in 1995. Revenues
resulted primarily from database access fees, and to a much lesser extent, from
custom satellite database services and genomic screening products and services.
The increase in revenues in comparable quarters was primarily due to an increase
in the number of database subscribers with a proportionately smaller increase
due to growth in custom satellite database services.
Total costs and expenses for the three and nine months ended September
30, 1996 were $16.8 million and $36.4 million, respectively, compared to $5.9
million and $15.8 million for the same periods of 1995. Total costs and expenses
for the three and nine months ended September 30, 1996 include a one-time charge
of $3.2 million for purchase of in-process research and development relating to
the acquisition of Combion. Research and development expenses accounted for most
of the remaining increase. Total operating expenses are expected to continue to
increase over the next few years, due to continued investment in new technology,
additional scientific, programming and administrative personnel required to
expand the Company's database development efforts and additional personnel
needed to support existing and prospective subscribers.
Research and development expenses increased to $11.9 million and $29.0
for the three and nine months ended September 30, 1996, respectively, compared
to $5.0 million and $13.2 million for the same periods in 1995. The increase
from 1995 to 1996 was primarily attributable to the increase in the production
of gene sequence information, increased bioinformatics and database development
efforts and increased investment in new technologies. The Company expects
research and development spending to increase over the next several years as the
Company continues to expand its gene sequence production operations, pursues the
development of new database products and services, invests in new technologies
and invests in the protection of its intellectual property.
Selling, general and administrative expenses increased to $1.7 and $4.3
million for the three and nine months ended September 30, 1996, respectively,
compared to $1.0 million and $2.6 million for the same periods in 1995. The
increase is due primarily to expenses related to the recruitment
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and support of database subscribers and additional administrative personnel and
to one-time accounting and legal fees associated with the merger with Genome
Systems. Selling, general and administrative expenses are expected to continue
to increase in support of the growing size and scope of the Company's
operations.
Interest and other income, net increased to $0.6 million and $1.8
million for the three and nine months ended September 30, 1996, respectively,
from $0.2 million and $0.8 million for the same periods in 1995 as the result of
higher average cash balances.
The Company's net loss for the three and nine months ended September
30, 1996 was $3.4 million and $7.0 million, respectively, compared to $2.9
million and $7.7 million for the comparable periods in 1995. The Company's
operating results may fluctuate significantly in the future as a result of a
variety of factors, including the timing of the addition of new database
subscribers, the timing of the delivery of custom orders including satellite
databases, the expiration or termination of existing subscription agreements,
and costs related to the expansion of the Company's gene sequencing and database
operations, including expenses related to investments in and/or acquisitions of
new technologies. These factors will be influenced by changes in the demand for
the Company's products and services resulting from changes in the research and
development budgets of the Company's existing or prospective customers and/or
the introduction of competitive databases or services. The Company believes that
quarterly comparisons of its financial results will not necessarily be
meaningful and should not be relied upon as an indication of future performance.
The Company recorded a net loss per share of $0.33 and $0.69 for the
three and nine months ended September 30, 1996, respectively, representing a
decrease from the net loss per share of $0.35 and $0.95 for the corresponding
periods in 1995. Excluding the one-time charge for purchase for in-process
research and development, the decrease in net loss per share for the comparable
1995 and 1996 periods was primarily the result of an increase in revenues and,
to a smaller extent, the increase in the shares used in computing net loss per
share subsequent to the issuance of common stock in a follow-on public offering
completed in November 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had $49.7 million in cash, cash
equivalents and marketable securities, compared to $41.2 million as of December
31, 1995.
Net cash generated by operating activities was $22.8 million for the
nine months ended September 30, 1996, as compared to net cash used in operating
activities of $7.4 million for the nine months ended September 30, 1995. The
increase in net cash generated by operating activities resulted primarily from
increased deferred revenue and decreased accounts receivable. Net cash generated
by operating activities may in the future fluctuate significantly from quarter
to quarter due to periodic large prepayments by subscribers. The Company's
investing activities, other than purchases and maturities of short-term
investments, have consisted of capital expenditures, which totaled $15.2 million
and $6.2 million for the nine months ended September 30, 1996 and 1995,
respectively. The increase was due to tenant improvements on the Company's
facilities and purchases of sequencing equipment and computer hardware required
to support existing and new database modules. Net cash provided by financing
activities was $1.2 million and $70 thousand for the nine months ended September
30, 1996 and 1995, respectively. The increase is primarily a result of the
exercise of stock options.
The Company expects its cash requirements to increase in future periods
as the Company continues to seek access to new technologies through
collaborations, license agreements and/or acquisitions, expands its existing
facilities, and continues to invest in sequencing equipment and computer
hardware required for new and existing database modules. The Company expects to
continue to fund future operations with revenues from genomic database products
and services in addition to using its current cash, cash equivalents and
investments when necessary. The Company expects these resources will satisfy the
Company's projected working capital and capital expenditure requirements at
least through 1997. However, the Company can offer no assurance that the Company
will be able to obtain additional subscribers to the Company's database or that
such database products and services will produce revenues, which together with
the Company's cash, cash equivalents and marketable securities, will be adequate
to fund the Company's operating expenses.
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The Company's cash requirements depend on numerous factors, including the
ability of the Company to attract subscribers to its databases and genomic
products and services; the Company's research and development activities;
competing technological and market developments; the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; the purchase of additional capital equipment, including capital
equipment necessary to insure that the Company's sequencing operation remains
competitive; and costs associated with the integration of new operations assumed
through mergers and acquisitions. There can be no assurance that additional
funding, if necessary, will be available on favorable terms, if at all.
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INCYTE PHARMACEUTICALS, INC.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
See Exhibit Index on Page 13
b) Reports on Form 8-K
The Company filed a Form 8-K dated July 22, 1996 reporting
the acquisition of all of the outstanding shares of Genome
Systems.
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INCYTE PHARMACEUTICALS, INC.
EXHIBIT INDEX
Page No.
--------
27 Financial Data Schedule 15
Page 13 of 15
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INCYTE PHARMACEUTICALS, INC.
Date: November 13, 1996 By: /s/ Roy A. Whitfield
-------------------------------
Roy A. Whitfield
President and Chief Executive
Officer
Date: November 13, 1996 By: /s/ Denise M. Gilbert
-------------------------------
Denise M. Gilbert
Executive Vice President and
Chief Financial Officer
Page 14 of 15
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EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
5
1,000
U.S. Dollars
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
1
19,748
29,946
3,028
0
0
53,907
20,016
0
74,384
29,340
0
0
0
10
32,151
74,384
0
27,604
0
0
36,414
0
0
(6,987)
0
(6,987)
0
0
0
(6,987)
(0.69)
(0.69)
