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In November of last year, Incyte Corporation (INCY) announced FDA approval for its oral JAK inhibitor, Jakafi (ruxolitinib),the first approved treatment for patients with intermediate or high-risk myelofibrosis (MF), including primary MF, post-polycythemia vera MF and post-essential thrombocythemia MF. Incyte's marketing partner for Jakafi is Novartis (NVS), which owns ex-U.S. rights to the drug. Now, investors have turned their attention to the drug's launch trajectory in the US. Many investors are speculating about the size of this market, what peak sales might look like, and the impact of all of this on INCY shares. In order to gauge Jakafi's sales potential, we conducted a survey of hematologists from our proprietary Expert Network. We queried 1,781 hematologists on their current and expected use of Jakafi. We received responses from 59 hematologists who currently treat patients with myelofibrosis (MF). Full results of the survey can be downloaded for free here.

Drug launches are often problematic and can be the basis for a good short thesis. Recent launches by Dendreon Corporation (DNDN), Human Genome Sciences (HGSI), and Savient Pharmaceuticals (SVNT) have dampened excitement for new biotech drugs. Companies like AMAG Pharmaceuticals (AMAG), Auxilium Pharmaceuticals (AUXL), Allos Therapeutics (ALTH), and Cadence Pharmaceuticals (CADX) have also experienced disappointing drug launches. Even the successful launch of a new hepatitis C drug by Vertex (VRTX) has failed to buoy that company's stock. Seattle Genetics (SGEN) and Regeneron (REGN) are still early in their launches, but initial sales appear promising. Now, Incyte hopes to beat expectations with its launch of Jakafi.

Our survey revealed that reimbursement for Jakafi has not been a problem, as only 2/18 doctors who have prescribed Jakafi reported any issue with reimbursement, and at least one of those problems was ultimately resolved. This is an important factor because at $7K per patient per month, or $84K per year, the drug is expensive, and reimbursement often dictates which products physicians prescribe.

Before turning our attention to the survey results, it is worth evaluating Incyte's current share price and valuation. With a stock price of $17.44, Incyte has a market capitalization of $2.2B and enterprise value (EV) of $2.18B. At the end of the third quarter of 2011, Incyte reported cash reserves of $317MM and $310MM of debt. As of October 27, 2011, there are 126.3MM shares outstanding. The company burned $53.1MM in the third quarter, and $131.5MM in the first nine months of 2011. The company received $210MM in November, 2009, at the initiation of the Novartis collaboration agreement and was eligible for up to $1.1 billion in additional milestone payments based on continued regulatory progress for Jakafi in MF and other indications such as polycythemia vera. Incyte has received an additional $165MM in milestone payments and other contract revenue from Novartis since November, 2009. The collaboration agreement includes the c-MET inhibitor INCB28060, which is being tested in solid tumors. Incyte will receive tiered double-digit royalties from Novartis, which we estimate to be around 15%, for ex-US Jakafi sales. Incyte's exclusive period for selling Jakafi in the US is set to end on December 24, 2027, per the Orange Book listed patent.

It is worthwhile to look at some recent product launches in order become familiar with the companies' stock performance and market expectations. Regeneron shares were flat in November, 2011, upon approval of the drug Eylea for macular degeneration, but the stock is up more than 25% since the company provided stronger than expected sales figures. On the other hand, Human Genome Sciences stock has slid 70% since March, 2011, when its lupus drug Benlysta was approved, due to unexpectedly slow adoption. Similarly, investors had high hopes for Savient Pharmaceuticals and its gout drug Krystexxa, which was approved in December, 2010. However, a year of disappointing sales has led to an 80% loss in market capitalization. Onyx Pharmaceuticals (ONXX) and Jazz Pharmaceuticals (JAZZ), each of which has a similar enterprise value to Incyte, also have steady revenues of more than $300MM per year. Incyte's stock price has increased approximately 40% since Jakafi was approved, suggesting that investors are expecting a strong launch for the drug. But what level of sales is now baked into expectations?

In order to better understand Incyte's current valuation and investor expectations, it is worth examining some of Incyte's peers in the biotech industry, shown in the table below.

Symbol

Price

Market Cap (billions)

EV (billions)

Revenue Q3 2011 (MM)

Annualized Sales (MM)

EV/ Annual Sales

ONXX

$40.71

$2.59

$2.31

$ 75.1

$300.4

7.7

JAZZ

$47.03

$1.98

$1.83

$ 73.3

$293.2

6.2

DNDN

$13.21

$1.97

$2.03

$ 82.0

$328.0

6.2

VPHM

$29.13

$2.05

$1.80

$ 143.0

$572.0

3.1

HGSI

$8.91

$1.77

$1.76

$ 34.0

$136.0

12.9

AMLN

$11.11

$1.63

$1.89

$ 155.1

$620.4

3.0

QCOR

$36.23

$2.26

$2.12

$ 56.1

$224.4

9.4

CBST

$38.94

$2.44

$2.07

$ 201.7

$806.8

2.6

SVNT

$2.35

$0.16

$0.14

$ 2.6

$10.4

13.5

mean:

7.2

median:

6.2

The table above also compares the ratio of different companies' EV/annualized sales. The average ratio for this group is 7.2 and the median EV/annual sales ratio is 6.2. Applying this ratio to Incyte, investors are expecting sales between $290-330MM. Our survey suggests that peak sales of Jakafi will be in the range of $600-700MM per year. By this standard, Incyte's stock may be undervalued. Using our estimate for peak annual sales along with the average and mean rations of EV/annualized sales, we estimate a future EV for Incyte between $3.7-4.3B. Therefore, an accounting of U.S. Jakafi sales, based on our survey results, would lead to a share price for Incyte between $29-34, a significant premium over the current price. It should be noted that we did not discount back future peak sales (or pick a peak sales year). We also did not include potential Novartis royalty revenue from OUS sales in our valuation calculation. We also did not account for label expansion.

An approved oncology drug has made Incyte the object of takeover speculation. Peak sales of Jakafi could exceed $650MM in the US, according to half a dozen sell-side analysts, and more if the drug is approved in additional indications. Novartis has applied for European approval for Jakafi in MF, and is conducting Phase II MF trials in Asia. Peak ex-US sales of the drug might exceed $400MM, according to analyst projections. Novartis would be an obvious suitor, since a purchase would give the company exclusive rights to Jakafi. However, other companies such as Pfizer (PFE), Merck (MRK), Celgene (CELG), Alexion Pharmaceuticals (ALXN) and Sanofi, (SNY) are also possible suitors for Incyte. Hence, we expect that shares of INCY will contain an acquisition premium.

In addition to Jakafi, Incyte has multiple development programs in their pipeline. Perhaps the most important program is Jakafi for polycythemia vera (PV), now in Phase III, with data expected in late 2013 and possible approval in 2014. Incyte has the c-MET inhibitor INCB28060 in Phase I development for solid tumors and it is also being developed in collaboration with Novartis. LY3009104/INCB28050, which is being developed in partnership with Eli Lilly (LLY), is now being tested in a Phase IIb trial for rheumatoid arthritis (RA). Results from this trial are expected in mid-2012. As an oral treatment for RA, this new drug would enter a market worth $20B per year along with drugs such as Abbott Labs' (ABT) Humira, Johnson & Johnson's (JNJ) Remicade, Amgen's (AMGN) Enbrel, and possibly Pfizer's tofacitinib, if approved in 2012.

It should be noted that YM Biosciences (YMI) is developing a competitor to Jakafi, currently known as CYT387. This drug may potentially best Jakafi in efficacy and/or safety, but it is still in Phase II trials and the ultimate clinical profile is not known. Unforeseen problems can always derail drug development, but continued success for CYT387 may limit Jakafi's potential.

We estimate the peak US revenue for Jakafi, based on our survey results, at $600-700MM per year. We note that using group EV/sales ratios, we then forecast a future share price of $29-34. We reiterate that the survey is for informational purposes only and may contain certain unknown biases that affect the final results. Given the number of recent poor drug launches, investors may be taking a wait and see approach to discern the true potential of Jakafi.

Source: Jakafi Launch: Survey Reveals Upside To Stock