Incyte's Undervalued as Pipeline Progresses

Incyte’s INCY myelofibrosis drug Jakafi showed strong sales growth in the fourth quarter, with U.S. sales of $380 million representing 26% growth; its sales for the full year were almost $1.4 billion (22% growth). Incyte slightly beat our expectations for 2018 thanks to stronger other revenue, but its 2019 guidance was in line with our assumptions. While we’ve slightly raised our long-term assumptions for research and development expenses, we’ve also boosted the probabilities of approval of several mid- to late-stage pipeline programs, and we don’t expect any significant changes to our $97 fair value estimate. The company’s narrow economic moat is supported by Jakafi’s dominance, and its positive moat trend is supported by expanding Jakafi approvals and a growing late-stage pipeline. Incyte has $1.4 billion in cash, which we expect it could use to add to its late-stage pipeline.

The Food and Drug Administration’s review of Jakafi in steroid-refractory graft-versus-host disease has been delayed by three months, with approval now expected in May. There will be significant additional data in GVHD from Incyte later this year with the potential to expand into steroid-naive patients, which could add 15,000 eligible patients to Incyte’s Jakafi and next-generation JAK itacitinib. Incyte expects GVHD data (steroid-naive patients) for itacitinib in the second half, as well as additional ruxolitinib (Jakafi) trials in both acute and chronic steroid-refractory GVHD.

Pemigatinib, which should be filed in second-line cholangiocarcinoma in the third quarter, is entering pivotal studies in first-line cholangiocarcinoma and first-line bladder cancer this year as well as a pan-tumor trial in FGF/FGFR driver mutation patients. In inflammation, ruxolitinib cream is in phase 3 in atopic dermatitis (estimated 2020 data) and entering phase 3 in vitiligo (phase 2 data expected this year). Olumiant also recently met primary endpoints in two atopic dermatitis studies, and royalties from partner Lilly for the approved indication of rheumatoid arthritis are beginning to ramp.

Jakafi's Dominance Digs Moat We believe Incyte's entrenched position in the myeloproliferative neoplasm market, which includes myelofibrosis and polycythemia vera, merits a narrow economic moat rating. The company is heavily dependent on Jakafi sales (nearly 90% of revenue) and has only hit profitability within the past few years. However, the lack of near-term threats to Jakafi's dominance in the myelofibrosis and polycythemia vera populations and Incyte's strong pricing power give us confidence that the company will generate returns over the cost of capital for the foreseeable future.

Incyte is in a very strong competitive position thanks to its Jakafi franchise in myeloproliferative neoplasms. As the only treatment approved by the FDA for myelofibrosis and with its approval in polycythemia vera for refractory patients, the drug has significant pricing power and has a first-mover advantage over competing pipeline treatments. Jakafi’s solid efficacy and safety profile for a patient population with high unmet need allow the company to set an average annual price at $90,000 worldwide. Jakafi’s key patents expire in 2026 (excluding potential extensions), which gives Incyte significant runway to further build its franchise and expand into the essential thrombocythemia and GVHD indications.

Pipeline competition has thinned out in recent years, and we do not foresee any significant near-term threats to Incyte’s Jakafi franchise following mixed pivotal results from Gilead’s GILD drug momelotinib and CTI Biopharma CTIC/Baxalta’s drug pacritinib, which both previously led the competition. With the acquisition of Impact Biomedicines in early 2018, Celgene CELG revived another competitor program, fedratinib, but we continue to believe Jakafi sets a high bar. The next round of novel molecules targeting the myelofibrosis indication--including Geron GERN/Johnson & Johnson’s JNJ telomerase inhibitor imetelstat, Bristol BMY/Promedior’s antifibrotic modulator PRM-15, and Lilly’s LLY JAK2 inhibitor gandotinib--are expected to be used in patients who cannot tolerate Jakafi (that is, have low levels of platelets) or have failed Jakafi therapy. While near-term prospects are promising, in our view, many early-stage competitor trials are underway, including checkpoint inhibitors Keytruda and Opdivo. However, we believe it is too early for these candidates to be a significant threat to Incyte’s Jakafi franchise.

Incyte has a robust pipeline, which mitigates threats to future Jakafi sales. The company has several early- and late-stage candidates focusing primarily on oncology and autoimmune indications. Incyte’s second-generation JAK inhibitor itacitinib, FGFR inhibitor pemigatinib, and PI3K-delta inhibitor INCB50465 provide multiple medium-term opportunities.

Competition Is a Risk Incyte has historically posted losses due to its heavy R&D spending. The company is currently in sound financial shape, but prolonged losses or erosion to Jakafi sales could put its financial position in jeopardy. There is significant risk that many of its drug candidates will never reach the market. Jakafi's phase 3 trial failures in pancreatic cancer in 2016 significantly reduced more-optimistic predictions, for example. In addition, new competitors for Jakafi could reach the market and erode Incyte's competitive position. Also, the drug is a small molecule, which ensures that generic competition will be difficult to stave off once it goes off patent. The melanoma trial failure of Incyte's highly anticipated IDO inhibitor epacadostat in combination with Merck's MRK PD-1 inhibitor Keytruda also highlights the developmental risk associated with biotech companies. Furthermore, while baricitinib has demonstrated an attractive profile and has a convenient oral formulation, the rheumatoid arthritis market is highly competitive, as demonstrated by the launch of Pfizer's PFE Xeljanz, which has been a disappointment even though it was the first oral product on the U.S. market. If AbbVie's ABBV upadacitinib can demonstrate a clean safety profile or significantly higher efficacy, it could give Olumiant a run for its money in the U.S. market, where Olumiant was approved at its less efficacious 2 milligram dose amid concerns of thrombotic events at the 4 mg dose.