Incyte (INCY), which markets Jakafi (ruxolitinib) for the treatment of myelofibrosis, is well positioned for a strong 2nd half of 2013, as a host of new developments take place in both its commercial business and its pipeline efforts. Backed by a strengthening balance sheet and collaboration agreements with two leading pharmaceutical companies [Novartis (NVS) and Eli Lilly (LLY)], Incyte should see meaningful sales and profit growth in the long-term alongside continued efforts to expand its revenue base with new indications for Jakafi, as well as wholly novel compounds.
Q1 Review: Growing Jakafi’s Global Presence
Incyte’s Q1 2013 results, reported in early May, showed continued growth in its commercial business, both domestically and internationally (where Jakafi is marketed by Novartis as Jakavi), and moved closer to sustainable profitability. Total revenue surged over 96% on a year-over-year basis to $71.077 million, driven by 150.47% growth in domestic Jakafi sales to $48.289 million. The remainder of revenue growth was due to the addition of royalty revenues from Novartis’ international sales, which did not exist in Q1 2012, received in Q4 2012. On a sequential basis, Incyte’s royalty revenue grew by 61.8% to $5.909 million; under the terms of its agreement with Novartis (more on this later), Incyte receives tiered royalties ranging from the upper-teens to mid-twenties. The remainder of Incyte’s revenue in Q1 2013 was generated from contract revenue tied to its agreements with Novartis and Eli Lilly. This surge in revenue, coupled with tight SG&A cost controls (SG&A costs inched up just over 4%), allowed Incyte to trim its net loss to 12 cents per share, down from 36 cents per share in Q1 2012, despite a nearly 8% increase in R&D spending.
Domestic Jakafi sales grew 11.52% sequentially in Q1 2013, driven by a 7% increase in underlying patient demand (which Incyte measures via the total number of Jakafi bottles dispensed). Favorable pricing accounted for 200 basis points of sequential growth and inventory changes accounted for approximately 300 basis points. However, CCO Jim Daley reiterated on Incyte’s earnings call that channel inventories remain within Incyte’s target range of three to three-and-a-half weeks. Investors should note that sequential growth in domestic Jakafi sales was suppressed by 12 fewer shipping days (52 versus 64) in Q1 2013 relative to Q4 2012. Adjusting for this impact yields sequential domestic growth of over 37% ($928,634 in revenue per shipment day in Q1 2013, versus $676,578 in Q4 2012). Incyte is also making strides in increasing penetration rates within its target physician groups. 40% of target physicians have now prescribed Jakafi at least once, and the company notes that a third of these physicians have written two or more prescriptions. During the quarter, growth in new patients was split evenly between new and repeat prescribers. Incyte is also leveraging its financial flexibility (more on this later) to assist physicians in creating more customized Jakafi treatment regimens. Jakafi has FDA approval across five separate dosing regiments (5-25 mg), with dosing determined by patient platelet levels (as a reminder, myelofibrosis disrupts the body’s production of blood cells). In Q1 2013, the 5 and 10mg doses accounted for 44% of total prescriptions, 37% and 41% in the first and second halves of 2012 respectively. Daley outlined Incyte’s efforts to expand dosing flexibility during the second quarter, and the company has introduced a dose modification program that allows physicians to order (free of charge) a lower dose of Jakafi for any patient who requires dosing changes within three weeks of receiving their last prescription. Incyte is highlighting the importance of dose modification because patients with low baseline levels of hemoglobin and/or platelets are most at risk for treatment discontinuation within the first eight to twelve weeks of treatment, making it critical to ensure that these patients receive appropriate dosages lest they discontinue treatment altogether.
Investors should be aware of a potential safety issue related to Jakafi, albeit one we believe is overblown when evaluated in the proper context. In late March, Incyte disclosed that a 75-year old British man had been diagnosed with progressive multifocal leukoencephalopathy (PML), in which the brain’s white matter becomes inflamed and damaged. There is no cure for PML, and the disease is usually fatal. Shares of Incyte plunged 13% with this news (closing down over 4% that day) and are down over 6% since, even amidst a nearly 23% rally for the NASDAQ Biotechnology Index.
The news is not as damning as it sounds. First, this patient was alive as of March 18, and since then there have not been reports of his death due to PML. Second, this was the only reported case of PML within the 9,800 prescriptions that had been written as of that date. Third, the JC virus causes PML; research published in PLOS Pathogens indicates that 39% of the population is seropositive for the JC virus, and research in the Journal of Infectious Diseases indicates that the rate may be as high as 58%. The vast majority of people with the JC virus are asymptomatic; PML appears only in severely immunocompromised patients such as those with AIDS. However, Incyte has noted that myelofibrosis patients, particularly the intermediate and high-risk patients that Jakafi is designed for, have been shown to also be at higher risk for PML. We note that Jakafi is not the first drug to be associated with incidences of PML. Biogen Idec’s (BIID) Tysabri has been proven to increase the incidence of PML in multiple sclerosis patients, and that has not been an impediment to Tysabri sales. Biogen Idec has introduced a JC virus test to help patients determine their risk of PML, something that Incyte may turn to should this safety issue become more material.
We expect more color on this PML incident in the second half of the year, possibly on Incyte’s Q2 earnings call and believe that more clarity on this issue can act as a catalyst for Incyte’s share price. Incyte’s first quarter positioned the company for a year of meaningful growth. Full-year consensus estimates for 2013 call for revenue of $382.73 million, representing growth of 28.83% over 2012 (losses are projected to fall to 13 cents per share, down from 34 cents). But these estimates aren’t representative of the whole story. Incyte’s 2012 revenues were inflated by significant revenue related to its collaboration agreements; of the company’s $297 million in 2012 revenue, nearly $157 million was related to these agreements. Incyte’s core Jakafi sales growth is set to be far stronger than headline numbers would indicate. On its Q1 earnings call, the company reiterated full-year guidance of $217.5 million in domestic Jakafi sales (at the midpoint of guidance), representing full-year growth of nearly 60%. Continued growth in Jakafi sales, when combined with the company’s partnerships, is positioning Incyte for meaningful long-term earnings growth, as well as meaningful improvements to the balance sheet. Partnerships may yield milestones in aggregate of more than $1 billion.
Partnerships & Pipeline Progress
As mentioned above, Incyte has collaboration agreements in place with both Novartis and Eli Lilly for various aspects of its pipeline. Incyte’s partnership with Novartis began in November 2009 and gives Novartis exclusive rights to develop and commercialize Jakafi outside the United States. In addition, the agreement extends those rights to “back-up compounds” for hematologic and oncology indications, defined by Incyte and Novartis as “all hematological malignancies, solid tumors, and myeloproliferative diseases.” Furthermore, Novartis also received global rights to INCB28060 (known as c-MET), currently in Phase II trials for advanced hepatocellular carcinoma, with Incyte retaining options to co-develop and promote INC280 in the United States. Furthermore, should Novartis secure approval for Jakavi in a pre-specified number of countries, Incyte will be required to pay Novartis single-digit royalties on domestic Jakafi sales, an unusual provision. Although Incyte gave up a good deal of rights to potential future global revenue, the company received far more than it gave up. Incyte received $210 million upfront (which is recorded as revenue on a straight-line basis until December 2013), and is entitled to a cumulative $1.1 billion in milestone payments ($162 million in development milestones, $450 million in regulatory milestones, and $500 million in commercial milestones). Notably, much of these milestone payments have yet to be made. From 2010 to 2012, Incyte recorded just $115 million in milestone payments from Novartis, and in late April, the company received a further $25 million when Novartis initiated the Phase II trial of INC280 in hepatocellular carcinoma. In addition to over $1 billion in potential milestone payments, Novartis bears all costs related to development and commercialization outside the United States, with costs split evenly if a collaborative study takes place.
Incyte investors will see data from the products of this collaboration before the end of 2013. Data from Incyte’s Phase II RECAP trial of Jakafi in recurrent/refractory metastatic pancreatic cancer is set to be released in the 2nd half of the year (like many biotechnology companies, Incyte’s pipeline is split into two distinct halves: the label expansions of an existing approved product and the development of wholly new compounds). Phase III data from Incyte’s most advanced clinical program, Jakafi in polycythemia vera (patients with PV have bone marrow that makes too many blood cells; red blood cells in particular are the primary cause of symptoms, which include breathing difficulties, fatigue, numbness, weakness, and enlarged spleens) will be released in early 2014, and Incyte has announced that it plans to file the sNDA for Jakafi in PV within the first half of the year. In addition, Phase I trials of Jakafi in solid tumors are set to be completed by the end of 2014.
From a competitive standpoint, Jakafi is currently the only FDA approved treatment for myelofibrosis, but that may change in the years to come. Sanofi (SNY), Gilead Sciences (GILD), and Cell Therapeutics (CTIC) are all testing JAK inhibitors for the treatment of myelofibrosis (Cell Therapeutics’ Pacritinib, however, is both a JAK2 inhibitor and a FLT3 inhibitor). Phase III data for Sanofi’s SAR302503 was released in May, and SAR302503 met its primary endpoint of a minimum 35% reduction in spleen volume. Sanofi is currently planning its regulatory strategy for the compound, and we expect Incyte to be pressed for any potential threats from Sanofi on its upcoming earnings calls.
However, as analysts have noted before, Sanofi will most likely need to release detailed survival data for SAR302503 to show its long-term benefits, as Incyte did in June when it released pivotal survival data for Jakafi. Three-year follow-up data from COMFORT-II concluded that patients taking Jakafi saw a statistically significant (p=0.009) 52% decrease in the risk of death relative to patients taking the best alternative available therapy, and estimated overall survival was 81% for Jakafi patients at 144 weeks versus 61% in the alternative therapy arm.
Gilead’s CYT387, which it acquired through the takeover of YM Biosciences, is set to enter Phase III trials in the second half of the year, meaning that this compound is not yet a full competitive threat. Notably, CYT387 has been shown to have a positive impact on anemia, the reasons for which are not yet fully understood. Assuming that such a benefit is confirmed in Phase III trials, it could be a source of concern for Incyte. In the event that the drug secures FDA approval, myelofibrosis’ importance to Jakafi’s financial performance will likely have materially diminished due to the company’s wide pipeline. Cell Therapeutics’ is currently enrolling patients into a head-to-head Phase III trial of Pacritinib versus the best available therapy. The trial has a primary completion date of August 2014. We expect more focus on these JAK inhibitors in 2014 as the compounds advance further through the clinical process and closer to potential FDA approval.
As Jakafi faces mounting competition, we believe challenges can be overcome. First, Cell Therapeutics’ CEO James Bianco has dismissed competitive concerns, stating that the market for myeloproliferative neoplasms may be worth up to $7 billion in the United States alone, thereby allowing for multiple drugs to succeed. Secondly, Incyte’s pipeline includes 13 different clinical programs (4 of which are covered by Jakafi), and the company is moving quickly to diversify its revenue base. Although peak sales estimates for Jakafi have reached $1 billion, we do not believe this drug is the most interesting asset in Incyte’s pipeline (at least until Incyte releases new hematological clinical data). Rather, it is an asset covered by Incyte’s other collaboration agreement.
Incyte’s second collaboration agreement is with Eli Lilly and was inked in December 2009. This agreement covers baricitinib, in Phase III trials for the treatment of rheumatoid arthritis, psoriasis, and diabetic nephropathy (as well as “back-up compounds” for other inflammatory and auto-immune diseases), and gives Eli Lilly exclusive global rights to commercialize and develop baricitinib. Under the terms of the agreement, Incyte received a $90 million upfront payment and will be entitled to $665 million in milestone payments ($150 million in development milestones, $365 million in regulatory milestones, and $150 million in commercial milestones), of which $99 million has been received to date. Incyte will also be entitled to double-digit royalties (capped at 20%) on global sales of baricitinib. Incyte also retains the option to co-develop and promote compounds covered by this agreement if it wishes. Should the company choose to exercise these options, Incyte would be required to fund 30% of all development costs after the initiation of Phase IIb trials. In exchange for doing so, the company would be entitled to an increase in its global royalty rate to as high as 30%.
Incyte exercised its co-development option for baricitinib in July 2010, a shrewd move. Peak sales estimates for baricitinib easily surpass $1 billion in rheumatoid arthritis, to say nothing of its potential sales in psoriasis or diabetic nephropathy; both indications are now in Phase II trials. Eli Lilly initiated Phase III trials of baricitinib in November 2012, and has a primary completion date of August 2014. The trial will enroll 525 patients into 3 arms: placebo, 2 mg, and 4 mg doses of baricitinib dosed daily for 24 weeks, with the primary endpoint being the proportion of patients that achieve ACR20, the American College of Rheumatology’s benchmark test for RA improvement. In June, Incyte and Eli Lilly presented new long-term Phase IIb efficacy and safety data from the JADA trial, which highlighted the clinical benefits of baricitinib. The study noted that 24-week clinical improvements were sustained at 52 weeks. The JADA evaluated 201 patients in two dosing arms: 4 mg (n=108), or 8 mg (n=93), dosed daily for up to 52 weeks, with dose escalation to the 8 mg dose arm allowed at weeks 28 and 32, subject to investigator discretion if more than six tender and/or swollen joints were observed. Improvements were seen in this long-term study across all covered measures of efficacy relative to the 24-week trial.
| Disease Improvement / Activity Measure |
24-WeekResponders/Total Patients (Percent Responders) |
52-WeekResponders/Total Patients (Percent Responders) |
| ACR20 | 149/201 (74%) | 139/196 (71%) |
| ACR50 | 83/201 (41%) | 96/197 (49%) |
| ACR70 | 43/201 (21%) | 53/197 (27%) |
| CDAI Remission | 34/200 (17%) | 40/195 (21%) |
| SDAI Remission | 30/195 (15%) | 42/194 (22%) |
| DAS28 ESR <2.6 | 35/200 (18%) | 47/195 (24%) |
| DAS28 ESR </= 3.2 | 55/200 (28%) | 82/195 (42%) |
| DAS28 CRP <2.6 | 59/195 (30%) | 80/194 (41%) |
| DAS28 CRP </= 3.2 | 93/195 (48%) | 116/194 (60%) |
| Boolean Remission | 19/195 (10%) | 32/194 (16%) |
Baricitinib’s safety profile remained clean (there are analysts that argue that it has a cleaner safety profile than Pfizer’s Xeljanz) and consistent with historical clinical data.
Baricitinib Safety Profile
| 4 mg | 8 mg | |
| Treatment-Emergent Adverse Events | 53% | 63% |
| Serious Adverse Events | 11% | 9% |
| Infections | 31% | 40% |
| Serious Infections | 4% | 2% |
The most common adverse events were bronchitis, shingles, and urinary tract infections. Incyte and Eli Lilly note that the majority of these adverse events were manageable via conventional treatments. The JADA study showed no incidences of opportunistic infection or tuberculosis. There was one patient death within the 8 mg dose arm; subsequent investigation by Eli Lilly concluded that the likely cause of death was myocardial infarction. One patient presented with elevated levels of ALT, but that was the only reported “laboratory anomaly” seen across the JADA trial. We note that baricitinib is differentiated from Xeljanz, which recently received a negative opinion in Europe from the CHMP. Incyte CEO Paul Friedman noted that he and Eli Lilly remain confident in the Phase III trial design for baricitinib, and that Eli Lilly has already applied what it learned from Pfizer’s experience. The company boosted the trial size and “enrich[ed] for patients more at risk in the RA population for structural deterioration in the absence of effective treatment.” Of importance to Incyte investors (as well as Eli Lilly) is the fact that the CHMP rejected recommending Xeljanz due not only to concerns related to its efficacy (the CHMP noted that “[the studies] were not sufficient to show a consistent reduction in disease activity and structural damage to joints,” but because of serious concerns related to its safety, including incidences of liver damage, cancer, and gastrointestinal perforations. We do not believe Incyte investors have considered the full potential of baricitinib, especially in light of the concerns surrounding Xeljanz. And as investors await Phase III RA data, they will receive new Phase IIb data for baricitinib in psoriasis by the end of the year.
Incyte’s pipeline and collaboration agreements have positioned the company well for future success. The company has a diverse pipeline, targeting both expanded usage of Jakafi and novel compounds. The financial terms of these agreements are quite favorable, with potential milestone payments approaching $2 billion. These payments, along with continued growth in Jakafi sales, will help strengthen Incyte’s balance sheet and give it increased flexibility in pursuing new growth opportunities.
Financials & Forecasts
Incyte ended Q1 2013 with just over $270 million in cash & investments and around $337 million in debt in the form of convertible notes due in 2014 and 2015 (just over $9.1 million is due in 2014). The company was cash flow positive in Q1 2013, generating $24.738 million in operating cash flow due to highly favorable working capital changes (specifically, accounts receivable), and further quarters of positive cash flow are likely in 2013. Consensus forecasts call for Q2 2013 EPS of $0.08, and Q3 2013 EPS of $0.04, giving Incyte increased ability to post positive operating cash flow through the remainder of 2013. The company’s cash generation is set to ramp meaningfully in 2014 alongside the company’s projected EPS growth, which we display below (EPS estimates are taken from both First Call and Zacks, and P/E multiples are based on Incyte’s closing price of $22.48 on July 17).
Incyte EPS Forecasts
| EPS | Year-Over-Year Change | P/E Multiple | |
| 2011 | ($1.49) | N/A | N/A |
| 2012 | ($0.34) | N/A | N/A |
| 2013 | ($0.13) | N/A | N/A |
| 2014 | $0.08 | N/A | 281x |
| 2015 | $0.90 | +1,025% | 24.98x |
| 2016 | $1.83 | +103.33% | 12.28x |
The company’s EPS growth (as well as its pipeline prospects) may attract suitors. Although our thesis on Incyte is based on the company’s standalone prospects, current trends in biotechnology are conducive to deals. The most obvious potential suitors are Novartis and Eli Lilly, who may decide to take control of Incyte to avoid potentially paying out hundreds of millions (or in Novartis’ case over $1 billion) in milestone payments, to say nothing of ongoing royalty payments. Although shares of Incyte may trade at over 290x estimated 2014 EPS, the company’s rapid growth is set to push its multiple to below 13x by 2016, despite estimates that imply meaningful growth in both 2015 and 2016.
Conclusions
INCY began to break down early this week and legged down further with Novartis’ Jakavi sales figures released on Wednesday, which came in below estimates for the quarter. The 50SMA and nearest support lies at $21.16. Incyte has underperformed in 2013, likely held back in part due to ongoing safety concerns related to Jakafi. But Jakafi sales are continuing to grow, with almost 60% growth forecast for 2013, and Incyte is moving closer and closer to sustained profitability. The company’s collaboration agreements may bring in well over $1.5 billion in milestone payments, as well as royalties on promising products.
