INVESTMENT THESIS
BUY-rated Incyte Corp. (NGM: INCY) is a biotech company with multiple products on the market, and has gained particular attention this year given the potential of certain products as treatments for COVID-19. It recently received FDA emergency use authorization for baricitinib, in combination with remdesivir, as a treatment for hospitalized COVID-19 patients requiring supplemental oxygen. Given the success of this combination in reducing median recovery time and patient mortality, we believe that the emergency authorization could provide a meaningful boost to earnings
In terms of approved products, the company continues to benefit from sales of Jakafi (ruxolitinib), a first-in-class JAK1/JAK2 inhibitor approved for the treatment for myelofibrosis (MF) and polycythemia vera (PV), two rare types of blood cancer, as well as for steroid-refractory acute graft-versus-host disease (GVHD), for which it gained approval in May 2019. Looking ahead, we believe that the company could launch several additional blockbuster drugs over the next few years, as it currently has multiple late-stage product candidates advancing through development.
Overall, we think that the company’s fundamentals are sound and that its recently approved drugs and strong pipeline will lead to rising earnings going forward. That said, the company does not consistently hit earnings targets and the shares are volatile. As such, we view INCY as appropriate for risk-tolerant investors as part of a diversified portfolio. Our revised target price is $105, reduced from $115.
RECENT DEVELOPMENTS
The share price is often driven by R&D developments, which we review below.
– Coronavirus therapies. In February 2020, the Lancet published two articles highlighting the potential of certain drugs to inhibit COVID-19’s viral infection of cells. While the research cited baricitinib, fedratinib, and ruxolitinib as drugs that are likely to be effective, it highlighted baricitinib as a particularly attractive option given its once-daily oral dosing and acceptable side-effect profile. The research also noted that baricitinib had a high potential for combination therapy, including with the direct-acting antivirals currently being used against COVID-19. Given that Incyte ended its co-funding of baricitinib development in 2019, research on the drug as a treatment for COVID-19 has been performed by Eli Lilly. Still, the two companies amended their agreement allowing Incyte to receive additional royalty payments on global sales of the drug for the treatment of COVID-19 that exceed a specified sales threshold. Aside from its own clinical studies, Lilly entered an agreement with the National Institute of Allergy and Infectious Diseases (NIAID) to study baricitinib as part of NIAID’s Adaptive COVID-19 Treatment Trial. Initial data from the NIAID study showed that baricitinib in combination with remdesivir reduced the time to recovery as compared to remdesivir alone, while follow-up data showed that the combination also reduced mortality. As a result, the FDA issued an Emergency Use Authorization (EUA) for the combination therapy on November 19 for hospitalized COVID-19 patients requiring supplemental oxygen. Additional data, published in the New England Journal of Medicine on December 11, further supported the EUA, noting that the combination provided a faster median recovery time and reduced the progression to ventilation or death as compared to remdesivir alone.
Regarding ruxolitinib, on December 14, Incyte announced that its Phase 3 RUXCOVID study of the drug as a treatment for patients aged 12 and over with COVID-19-associated cytokine storm did not meet its primary endpoint. Initial data showed that there was no reduction in the proportion of patients receiving ruxolitinib plus standard-of-care (SoC) who experienced severe complications, such as death or admission to an intensive care unit (ICU), as compared to SoC treatment alone. As such, the company declared the study complete. That said, management noted that the study did not identify any significant safety concerns with ruxolitinib, and did not affect other ongoing non-COVID-19-related ruxolitinib trials or approved uses of the drug.
– Ruxolitinib cream. While ruxolitinib is the drug compound found in Jakafi, Incyte has also tested its ability to treat certain skin conditions when delivered as a skin cream. In late October, the company presented pooled results from two Phase 3 trials evaluating ruxolitinib cream in mild-to-moderate atopic dermatitis. The results showed that ruxulitinib cream provided rapid, substantial, and sustained itch reduction, while also demonstrating improvement in patient-reported perceptions of sleep quality and sleep depth. Incyte expects to submit a new drug application (NDA) for the indication before the end of 2020. It has also acquired a priority review voucher, which it intends to use to accelerate the FDA decision timeline. Separately, the company is conducting two Phase 3 trials of ruxolitinib cream as a treatment for vitiligo, both of which are now fully recruited, and expects initial results in 2021. Given the potentially transformative impact of ruxolitinib cream for eligible patients, the company recently established Incyte Dermatology as a new franchise in the U.S., which it believes could have strong potential over the next five years. According to management, atopic dermatitis affects more than 30 million people in the U.S., of which 80%-90% of patients have mild-to-moderate disease.
– Retifanlimab, which the company has licensed from MacroGenics, is being studied as a potential treatment for endometrial, anal and merkel cell cancers. In September, the company presented encouraging Phase 2 data for the drug as a treatment for previously treated patients with advanced squamous cell anal carcinoma (SCAC), showing an overall response rate (ORR) of 14% with a well-tolerated safety profile and no loss of HIV infection control. The company has now opened recruitment for a Phase 3 trial of the drug in combination with platinum-based chemotherapy as a first-line treatment for this indication.
– Capmatinib (Tabrecta). Capmatinib, an oncology drug for certain patients with non-small-cell lung cancer (NSCLC), is licensed to Novartis globally. Incyte announced in early September that a Phase 2 study showed that Tabrecta had resulted in overall response rates (ORR) with durable responses for NSCLC patients whose tumors have a mutation that leads to MET exon 14 skipping (METex14). The drug was approved in Japan for this indication in late June, and in the U.S. in May. NSCLC accounts for approximately 85% of lung cancer diagnoses, while METex14 occurs in 3%-4% of newly diagnosed metastatic NSCLC cases.
– Tafasitamab (Monjuvi). On July 31, the FDA approved Monjuvi in combination with Lenalidomide as a second-line treatment for adult patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL). Following the FDA approval, on August 18, the National Comprehensive Cancer Network added Monjuvi to its Clinical Practice Guidelines in Oncology for B-cell Lymphomas. The product is also currently under review in Europe. Separately, in November, Incyte and MorphoSys announced a collaboration with Xencor to study the effect of adding plamotamab to the Monjuvi/Lenalidomide combination for patients with DLBCL or relapsed or refractory follicular lymphoma (FL). Incyte gained commercial rights to Monjuvi through a January 2020 joint collaboration and license agreement for the further development and global commercialization of the MorphoSys compound. The two companies share commercialization rights in the U.S., while Incyte holds exclusive rights in the rest of the world. DLBCL is the most common type of non-Hodgkin lymphoma in adults worldwide, for which about one in three patients do not respond to initial therapy or relapse thereafter.
EARNINGS & GROWTH ANALYSIS
Incyte recently reported 3Q20 results that fell short of consensus expectations for both revenue and earnings. On November 5, the company reported 13% growth in total revenue, to $621 million, driven by 15% growth in product revenue and 23% growth in product royalty revenue, but offset by a lack of milestone and contract revenue, which totaled $17.5 million in 3Q19.
The company posted third-quarter non-GAAP net income of $0.23 per share, down 72% from $0.82 per share in 3Q19 and below the consensus estimate of $0.76. The company does not provide explicit EPS guidance, but does provide projections for income-statement components such as net product revenue, R&D and SG&A. Along with the third-quarter results, management tightened its guidance for 2020 Jakafi sales to $1.91-$1.94 billion from $1.88-$1.95 billion. It also reaffirmed its guidance for Iclusig sales of $100-$105 million, cost of product revenue of $130-$135 million, R&D expenses (excluding upfront consideration related to its collaboration with MorphoSys and its purchase of an FDA priority review voucher) of $1.21-$1.28 billion, and SG&A expenses of $505-$535 million.
The company’s main product is Jakafi, which is used primarily as a treatment for polycythemia vera (PV), a type of blood cancer; for myelofibrosis (MF), a bone marrow disorder; and for steroid-refractory acute graft-versus-host-disease (GVHD). Jakafi posted 13% product revenue growth in 3Q, to $488 million, and accounted for 93% of total product-related revenue. Incyte’s other key products are Iclusig, for leukemia ($26 million in 3Q sales, up 28% from 3Q19), and recently approved Pemazyre, for bile duct cancer ($8.1 million in 3Q sales, up 114% from 2Q20).
In addition to product revenue, the company generates royalty revenue from products that it has outlicensed to other organizations. During the third quarter, Incyte generated 17% growth in royalty revenue from Jakavi (the trade name for Jakafi in Europe, where it is licensed to Novartis) to $68 million, and 32% growth in Olumiant royalty revenue (licensed to li Lilly in international markets) to $29 million. It also generated $1.4 million in Tabrecta product royalty revenue following the drug’s May 2020 approval in the U.S. and June approval in Japan; Tabrecta is a treatment for certain types of non-small-cell lung cancer and is licensed globally to Novartis.
On the expense side of the ledger, the company invests in R&D in addition to sales and marketing. In the latest quarter, Incyte spent $409 million on non-GAAP R&D, up 63% from 3Q19 and equivalent to 66% of quarterly revenue. Non-GAAP SG&A expense rose 18% to $106 million due to an increase in headcount and product commercialization efforts, while the non-GAAP cost of product revenue rose 17% to $29 million. Turning to our estimates, we are lowering our earnings outlook for 2020 following the company’s 3Q earnings miss and substantial increase in R&D spending. We now expect the company to record a loss of $0.60 per share, compared to our earlier loss estimate of $0.10 per share. We expect full-year growth to resume in 2021, but are lowering our 2021 EPS forecast to $3.10 from $3.45.
FINANCIAL STRENGTH & DIVIDEND
At the end of the third quarter, Incyte had cash, cash equivalents, and marketable securities of $1.73 billion, down from$2.12 billion at the end of 2019, largely due to the upfront payment and stock purchase related to the agreement with MorphoSys; however, cash rose from $1.59 billion at the end of 2Q20. Total debt was $71 million, down from $72 million at the end of 2019. Debt accounted for 2.9% of total capital, up from 2.7% but well below the peer average of 31%. We view average levels as 50%-55%.
The company generated 3Q20 adjusted operating income of $62 million, down 67% from 3Q19. INCY had 3Q operating cash flow of $182 million, down 33% from the prior-year quarter.
We do not expect the company to initiate dividends or buybacks in the near term. Incyte is not rated by Moody’s or Standard & Poor’s.
MANAGEMENT & RISKS
Herve Hoppenot is the chairman, president, and CEO of Incyte. Mr. Hoppenot joined Incyte from Novartis in 2014 as president and CEO, and became chairman in 2015. Christiana Stamoulis is the CFO, having succeeded David Gryska in February 2019 following his retirement. Prior to joining Incyte, Ms. Stamoulis served as president and CFO at Unum Therapeutics. She has also served as SVP of Corporate Strategy and Business Development at Vertex Pharmaceuticals and spent nearly 15 years in investment banking and management consulting.
The company has a strong pipeline of late-stage programs and partnerships, particularly in the fields of oncology, immunology, rheumatology, and dermatology. Risks for Incyte include its reliance on Jakafi, setbacks in clinical trials, and competition from well-capitalized firms with larger sales forces. We note that the spread of COVID-19, along with efforts to discover treatments and vaccines for the virus, may shift resources away from noncoronavirus-related clinical trials. The pandemic may also have an impact on the recruitment of patients for clinical trials.
COMPANY DESCRIPTION
Founded in 1991 and based in Wilmington, Delaware, Incyte is a drug discovery and development company. The company has several small-molecule compounds in clinical trials, while its primary revenue-generating products include Jakafi, Iclusig, and Olumiant. Jakafi treats polycythemia vera (PV), a type of blood cancer; myelofibrosis (MF), a rare bone marrow disorder; and steroid-refractory acute graft-versus-host-disease (GVHD), while Iclusig treats leukemia and Olumiant treats rheumatoid arthritis.
The company also recently launched Pemazyre, for chloangiocarcinoma, and Tabrecta, for non-small-cell lung cancer. It also has several active Phase 2 and 3 programs in oncology, as well as trials for drugs that may help to treat COVID-19.
VALUATION
The stock is trading at a 14-day relative strength index (RSI) of 47, suggesting that it could move considerably higher before becoming overbought. To value stocks on a fundamental basis, we typically compare their valuation multiples to peer and historical averages. However, these approaches are not entirely helpful for INCY, which has only had a brief history of profitability. Instead, we look ahead to potential sales of Jakafi, Olumiant, Iclusig, and other products to value the stock. Based on projected sales of key products and discounting the estimated earnings (using industry average margins) into today’s dollars, we obtain a value for INCY near $105 per share, down from a prior $115 due to the recent unfavorable results in the RUXCOVID trial. Our revised target of $105 implies a return of roughly 22% from current levels.
On December 18 at midday, BUY-rated INCY traded at $87.78, down $0.50.
Source: Argus
