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Incyte's Outlook Boosted by Robust Pipeline

We expect the pharma company to continue earning excess returns.

The cash-generating Jakafi franchise underpins our narrow economic moat rating, as we believe Incyte’s entrenched position in the myeloproliferative neoplasm market and the future opportunities for expansion will allow the company to continue earning excess returns. Incyte plans to file for Jakafi label expansion in steroid-refractory acute graft-versus-host disease next quarter, and it is mobilizing its salesforce in preparation for launch in the U.S., leaning on its existing relationships with U.S. payers and physicians in transplant centers who treat myelofibrosis. We expect the launch in second-line acute GVHD to expand the eligible patient population for Jakafi by a couple thousand, and there are further opportunities in chronic GVHD and treatment-naive patients on the horizon.

Incyte boasts a healthy pipeline in oncology, inflammation, and autoimmune disease, with near-term catalysts including data readouts for ruxolitinib cream for atopic dermatitis and for FGFR inhibitor (pemigatinib) in cholangiocarcinoma and bladder cancer before the end of the year. The recent restrictions on the use of PD-1 inhibitors in bladder cancer patients with low PD-L1 expression carve out nice potential for Incyte’s fibroblast growth factor receptor inhibitor, in our opinion. However, we expect the immuno-oncology market to remain highly competitive and highlight the importance of Incyte’s broad pipeline.

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 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 U.S. Food and Drug Administration for myelofibrosis, and with its approval in polycythemia vera for refractory patients, the drug has significant pricing power and 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 momelotinib and CTI Biopharma/Baxalta’s CTIC/SHPG pacritinib, which both previously led the competition. With the acquisition of Impact Biomedicines in early 2018, Celgene 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/Johnson & Johnson’s GERN/JNJ telomerase inhibitor imetelstat, Bristol/Promedior’s BMY antifibrotic modulator PRM-15, and Eli 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 (formerly INCB54828), and PI3K-delta inhibitor INCB50465 provide multiple medium-term opportunities.

Developmental Risk Exists Incyte has historically posted losses due to its heavy research and development spending. The company is currently in sound financial shape, but prolonged losses or an erosion in 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. The drug is also 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, the drug could give baricitinib a run for its money in the U.S. market, where it was approved at its less efficacious 2 mg dose amid concerns of thrombotic events at the 4 mg dose.

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