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This is a 3-part report on Incyte (NASDAQ:INCY). In Part 1, we reviewed Incyte's business model, its key products and risk factors associated with the company. Incyte's revenues come from three sources: product sales by the company itself, royalty revenues from net sales by its corporate partners (Novartis, Eli Lilly), and contract revenues from milestone/development payments from its corporate partners. In Part 2, we will review INCY's partnership agreements with NVS and LLY and present a 5-year projection for its total revenues.

INCY started generating commercial revenues from JAKAFI in 2012. As the clinical programs progress, more revenues from the partnerships will materialize between 2013 and 2017. We will project revenue streams from its product sales as well as royalty revenues and contract revenues from these partnerships. We estimate that total revenues for INCY will be $358M (2013), $432B (2014), $665M (2015), $836M (2016) and $992M (2017). These revenue numbers will be used for a stock valuation in Part 3.

Licensing agreement with Novartis

In November 2009, INCY entered into a license agreement with Novartis (NYSE:NVS). Under the terms of the agreement, Novartis received exclusive development and commercialization rights outside of the United States to the JAK inhibitor ruxolitinib and back-up compounds for hematologic and oncology indications, whereas INCY retained exclusive development and commercialization rights to JAKAFI (ruxolitinib) in the United States.

Under this agreement, INCY received an upfront payment of $210.0 million and is eligible to receive up to $1.1 billion in milestone payments (up to $162.0 million for the development milestones, $450.0 million for the achievement of regulatory milestones, and up to $500.0 million for the achievement of commercialization milestones). For the last 3 years, the contract revenues from NVS are on average $92M. Using a straight-line average, we estimate that the remaining milestone payments will be about $90M per year for the next several years.

INCY could also receive tiered, double-digit royalties ranging from 15% to 25% on future ruxolitinib net sales outside the United States. We use 20% in our projection of Royalty revenues from NVS.

Licensing agreement with Eli Lilly

In December 2009, INCY entered into a license agreement with Eli Lilly (NYSE:LLY). Under terms of the agreement, Lilly received exclusive worldwide development and commercialization rights to the JAK inhibitor baricitinib and certain back-up compounds for inflammatory and autoimmune diseases.

INCY received an upfront payment of $90.0 million, and is eligible to receive up to $665.0 million in milestone payments, including up to $150.0 million for the achievement of development milestones, up to $365.0 million for the achievement of regulatory milestones and up to $150.0 million for the achievement of commercialization milestones. For the last 3 years, the contract revenues from LLY were on average $48M. We estimate that the remaining milestone payments will be about $50M per year for the next several years.

INCY also could receive tiered, double-digit royalty payments on future global net sales with rates ranging up to 20% if the product is successfully commercialized. However, if Incyte exercise the option to co-develop the drug for a certain indication, as it did for RA, then INCY could receive royalty payments at the high twenties rate. We used 25% in our projection of the royalty revenues from LLY for the baricitinib RA sales.

Projection of total revenues

Incyte's total revenues are derived from three sources. First is from the sales of its drug products, JAKAFI (for myelofibrosis) and ruxolitinib for polycythemia vera, if approved, in the U.S. Second is from royalty revenues from the net sales of the products by its corporate partners. For example, INCY could receive about 20% of JAKAVI and ruxolitinib sales outside of U.S. from Novartis. It could receive about 15% of baricitinib global sales from Lilly. Third is the contract revenues from milestone payments.

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As mentioned in Part 1, we estimate that the myelofibrosis market size is about $1.3B-$1.5B in the US alone or $2.5B-$3B globally. JAKAFI is the first drug approved for this indication. Competition from Sanofi's (NYSE:SNY) SAR302503 and Gilead's (NASDAQ:GILD) CYT387 are still years away. We estimate that sales for JAKAFI in U.S. will be $190M (2013), $248M (2014), $297M (2015), $356M (2016), and $392M (2017). The royalty revenues for JAKAVI from NVS are roughly 20% of its sales or about $28M to $90M between 2013 and 2017.

The potential market for polycythemia vera is about $3B-$4B globally. We assign an 80% probability of FDA approval in 2015 and estimate revenues of $96M (2015), $154M (2016) and $215M (2017). The royalty revenues from NVS are ~ 20% of its sales or $19M to $43M between 2015 and 2017.

Baricitinib for RA could generate estimated revenues of $250M (2015), $400M (2016), $560M (2017) for LLY. Under the agreement, INCY could receive ~25% of global net sales from LLY. With an 80% probability of approval, this translates to $50M and $112M between 2015 and 2017.

Adding the product revenues, royalty revenues and contract revenues together, we estimate that total revenues for INCY will be $358M (2013), $432B (2014), $665M (2015), $836M (2016) and $992M (2017). The revenue numbers will be used for stock valuation in Part 3.

References:

INCY investor site

INCY 2012 10K

INCY corporate presentation June2013

LLY INCY present 52 week results for RA June 2013

Jakavi price in UK

How Much Should You Pay For Incyte?

Source: 3 Sources Of Revenue For Incyte