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Incyte Corporation (NASDAQ:INCY)

Q4 2011 Earnings Conference Call

February 15, 2012, 08:30 AM ET

Executives

Pamela Murphy - Vice President, Investor Relations and Corporate Communications

Paul Friedman - President and Chief Executive Officer

Patricia Andrews - Executive Vice President and Chief Commercial Officer

David Hastings - Executive Vice President, Chief Financial Officer

Richard Levy - Executive Vice President, Chief Drug Development and Medical Officer

Analysts

Matthew Roden – UBS

Ying Wang - Barclays Capital

Eric Schmidt - Cowen and Company

Salveen Richter – Collins Stewart

Brian Abrahams - Wells Fargo

Cory Kasimov - JP Morgan

Thomas Russo - Robert W. Baird

Rachel McMinn - Bank of America Merrill Lynch

Ian Somaiya - Piper Jaffray

Thomas Wei - Jefferies & Co

Yogesh – Goldman Sachs

David Friedman - Morgan Stanley

David Crumpler[ph] – Morningstar

Operator

Greetings ladies and gentlemen and welcome to the Incyte Corporation Fourth Quarter 2011 and year-end financial results call. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Pamela Murphy, Vice President, Investor Relations and Communications. Thank you Ms. Murphy, you may begin.

Pamela Murphy

Good morning and welcome to Incyte’s fourth quarter 2011 conference call. With me today are Paul Friedman, Incyte’s President and Chief Executive Officer; Pat Andrews, Executive Vice President, Chief Commercial Officer; Dave Hastings, Executive Vice President and Chief Financial Officer; and Rich Levy, Executive Vice President, Chief Drug Development and Medical Officer. Paul will begin with brief overview of the quarter, Pat will update you on the product launch of Jakafi, and Dave will describe our fourth quarter results and 2012 financial guidance.

Prior to opening up the call for the Q&A, Paul will close with the summary of some of our other programs.

Before beginning, we would like to remind you that some of the statements made during the call today are forward-looking statements including, statements regarding our expectations for the launch and commercialization of Jakafi, as well as our development plans for other indications and our 2012 financial guidance. These forward-looking statements are subject to a number of risks and uncertainties that may cause our actual results to differ materially including those described in our Form 10-Q for the quarter ended September 30, 2011 and from time-to-time in our SEC documents. Paul

Paul Friedman

Good morning everyone. The approval on the launch of Jakafi for myelofibrosis represents a major accomplishment for Incyte and an important advance for patients who suffer from this debilitating disease. Given the compelling benefits Jakafi provides, the encouraging survival trend that was described at ASH and the fact that this is the first FDA approved treatment for patients with MF, as well as the first commercially available JAK1 and JAK2 inhibitor not surprising to me that interest in Jakafi is high and that the launch has been going well.

Since approval, on November 16 and beginning on November 22 through December 31, we were able to recognize $2 million as net sales in 2011 based on $4.9 million of Jakafi that we shipped to our specialty pharmacies. Dave is going to walk you through this with more detail in a moment.

I would like to take a minute to describe why I believe Jakafi is going to be a successful product. First, there is no existing therapy that does what Jakafi does for these patients. Drug truly works, can make a meaningful difference and how a patient with myelofibrosis feels and gets through daily activities. It’s well tolerated. And the associated side effects that are seen are generally well managed. Second, once physicians have experience with the drug, more often first with their more ill MF patients and they see how effective Jakafi is, I believe they want to use Jakafi in the majority of their intermediate or high-risk MF patients. And we believe this represents about 80% to 90% of all MF patients.

I can tell you that we have gotten back from the field even in these early days multiple testaments to what I just said about the physicians and patients and the responses that they are getting through the drug. Now these two risk groups, intermediate or high-risk, encompass anyone over the age of 65 or anyone who has or has ever had any of the following: anemia, constitutional symptoms, or elevated white blood cell or blast counts, as well as anyone who has or ever had a platelet count of less than 100,000. So you can see in this group why the overwhelming majority of the total MF population fits in to these two risk categories.

Now, third reason for my optimism is about Jakafi’s commercial potential is that we have received a broad descriptive label from the FDA with no restriction on baseline platelet count, nor is the label limited to patients with splenomegaly or specific symptoms of MF. And this gives me further confidence that overtime the benefits of Jakafi will be viewed as appropriate for most patients with MF.

Myelofibrosis should be just the beginning. The JAK pathway is involved in the growth and survival of numerous other cancers and our plans, as well as those of our partner in Novartis involve advancing into other myeloproliferative neoplasms, hematologic cancers and solid tumors either in separate studies or collaboratively. In particular, in addition to the ongoing extensions of our Phase II/III trials in MF, there is a pivotal Phase III response trial in patients with advanced polycythemia and there are also trials in leukemias, lymphomas and in pancreatic cancer.

Regarding the PV pivotal study response, our proposal to amend the entry criteria and reduce the size of the study was accepted by the FDA under our existing SPA. The trial design now involves 200 patients randomized 1:1, ruxolitinib versus best available therapy, and we continue to expect the study to be completed in 2013 with our goal being to obtain FDA approval of the sNDA in 2014.

I am now going to turn the call over to Pat Andrews and then she will pass the baton to Dave Hastings. Pat is going to describe more specifics about the Jakafi launch and Dave will walk you through our fourth quarter results and 2012 guidance and then I will conclude with a very brief update on some of our earlier stage programs before we move to the Q&A. Pat.

Patricia Andrews

Thanks, Paul. Good morning. This is an exciting time for Incyte. Almost immediately after approval, the sales force began calling on physicians and the first patient, a Medicare patient received Jakafi within a week. With six weeks in the fourth quarter to sell Jakafi remembering that one we concluded at Thanksgiving, one included ASH and one was between Christmas and New Year, the level of sales achieved thus far confirms that the launch is going well.

While it’s still early, based on our market research and feedback from the field it’s very gratifying to see how much awareness there already is about Jakafi. Over 80% of the physicians we’ve surveyed say they are aware of the product. As importantly, over 90% of physicians we surveyed who have not yet prescribed Jakafi say they intend to do so.

To give you a sense of how it is going for the reps, so far the sales team has reached about two-thirds of the 6,500 hematologist, oncologist were focusing on, many of them more than once. Because the interest in Jakafi is high and there is a clear unmet need for an effective therapy for myelofibrosis, the reps have been able to have good discussions with their key physicians and accounts and office access has not been an issue.

Thus far the number of physicians who have written the script is above where we thought it would be and while most have written a script for one patient there is a growing number who have written for two patients and then there are some who have written for quite a few. The highest prescriber a leading expert in myelofibrosis has written more than -- a script for more than 15 patients.

As important as the thought leaders are and they are very important, we expect that about 75% to 80% of Jakafi prescriptions will ultimately come from community hematologists/oncologists, most of whom have only a handful of MF patients and thus far we are pleased to be seeing a broad base of prescribers emerging versus the concentration from a select group of thought leaders.

As predicted, most of the community hematologist/oncologist are starting with one patient, therefore we continue to expect uptake to be steady and gradual. Also, as we predicted, most of the initial uses in patients who have large spleens and/or have a high symptomatic burden but we are also seeing some use in earlier intermediate patients, especially among physicians who are already familiar with Jakafi because they participated in COMFORT-I, the US total study.

In terms of access and reimbursement, this too is going as expected. IncyteCARES, our patient assistance program is functioning well and hoping to insure all eligible patients have access to Jakafi. If financial assistance is needed, IncyteCARES can help patients directly or connect them to third party foundations where they may qualify for assistance.

In regards to payer coverage, most payers take between 90 and 180 days to make formulary decision, consequently most scripts are currently being processed as exceptions rather than underformulary. The time to fill the first script very significantly depending on the payer and the patient’s financial circumstances.

Now, some patients have received product within just a few days, while for others it has taken longer. The average is two to three weeks for the first script. Subsequent scripts are generally dispensed much faster because coverage in financial assistance have already been determined.

IncyteCARES is also working closely with the specialty pharmacies to ensure appropriate follow-up with patients and their physicians regarding refills and thus far this too is going well.

So, while we are still early on in the launch we are pleased with our results and believe that Jakafi should become the standard care for intermediate or high-risk MF patient’s overtime. With that I will turn the call over to Dave.

David Hastings

Thanks, Pat and good morning everybody. I will start today by discussing Q4 results and then I will review our 2012 guidance.

Let’s begin with 2011 cash. We ended the year with approximately $278 million in cash and investments. This excludes $19 million in restricted cash held in escrow for payments through October 2012 on our 4.75% Convertible Senior Notes. Our cash use for the year was $188 million not including $25 million received for milestone payments and $16 million received from stock option exercises. This was right within our cash use guidance for $185 to $200 million for 2011.

Now moving to Jakafi. It’s important to note that for a period of time we are using a sell-through method for revenue recognition, which means we defer revenue until the specialty pharmacy ships the product to the patient. We will transition to our normal policy of recognizing revenue when our product is received by the specialty pharmacy and once we have an established track record for product returns. While we do not expect product returns to be material, this is a standard practice for many new products.

Through December 31, we shipped 4.9 million of product to our specialty pharmacies resulting in gross revenue of $2.3 million and gross deferred revenue of $2.6 million. Our gross-to-net adjustment for product revenue recognized was approximately $300,000, resulting in net product revenue of $2 million. And our gross-to-net adjustment for deferred revenue was also approximately $300,000 resulting in net deferred revenue of $2.3 million.

As discussed at our approval call, our gross-to-net adjustment includes the following: fees to our specialty pharmacies, rebates to governmental payers, our share of the donut hole for Medicare Part D patients, co-pay assistance to eligible privately insured patients, and any product returns. We had no cost of goods sold as our finished goods inventory was previously expense of R&D prior to FDA approval. And in terms of our operating expenses both R&D and SG&A were within our expectations.

Now moving to 2012 guidance. It is too early on the launch to provide guidance on product revenue. We intend to provide sales guidance once we have a longer track record and greater clarity of the underlying trends related to Jakafi sales. This is also too early in the launch to determine the steady state impact of our gross to net adjustments on a go forward basis.

In terms of milestones, while we aren’t providing detailed guidance as to the timing or amounts of potential milestones, I can say that there are important events expected in 2012, including the potential product approval for Novartis in Europe and the potential initiation of Phase III in RA by Lilly.

We also expect $67 million in revenue from the amortization of the upfront payments received under the Novartis and Lilly collaborative agreements. As we mentioned on our approval call, we expect that our previously expensed validation batches will be utilized as inventory. Therefore cost of goods sold should be immaterial in 2012.

In terms of R&D expense, we expect that to range from $215 to $225 million. This includes non-cash stock compensation expense of approximately $25 to $28 million. Our increase in R&D expense from 2011 includes higher co-development cost for the ongoing development of 28050 for RA, our aggressive effort to expand the use of Jakafi and other indications, a commitment to advance our proprietary pipeline in oncology and inflammation and higher non-cash stock compensation charges.

In terms of SG&A expense, we expect that to range from $82 to $88 million. This includes non-cash stock compensation expense of $13 to $15 million. The increase reflects the impact of having a sales force onboard for the entire year, continued marketing investment in support of Jakafi, and increased non-cash stock compensation charges.

We expect our interest expenses here to be $46 million, including a non-cash charge of $27 million related primarily to the amortization of a discount on the 4.75% Convertible Senior Notes. As I mentioned earlier, we have an escrow, the $19 million in cash interest expense related to these notes in 2012.

So, with $278 million in cash and a product launch that’s going as expected, am confident we are in a strong financial position. There are also significant upcoming events from our partners that could lead to potential milestones. And so with that Paul I’ll turn the call back over to you.

Paul Friedman

Okay. And so, before we open the call for Q&A I just want to give you a very brief summary of the other compounds that we are moving forward in our pipeline. 428050, the JAK1 and JAK2 inhibitor that we partnered with Lilly, the Phase IIb trial in rheumatoid arthritis patients is nearing completion, it’s quite close to completing. Ideally the three months and six-month data will be presented at ULAR [ph] and ACR respectively. Plans for the Phase III are underway and leaves back that the Phase III program will start later this year. And because we have exercised our co-development option for RA, we are now responsible for funding 30% of the associated future development cost for this indication. As a result of this, our tiered [ph] royalties increase and now range from 20% up to the high 20s.

In addition, Lilly recently began a 240 patient randomized, double-blind, placebo-control, dose-ranging study to explore the efficacy and safety of 28050 in adults with moderate to severe psoriasis. While it’s dependent on the timing of patient enrollment obviously, we expect to see that for the primary end point in the first half of 2013.

Our earlier stage named oncology programs for inhibitors of the enzyme C-MET and IDO are ongoing. Both look very promising and are expected to move into Phase II trials this year. Novartis will take over the C-MET program and develop it. And for the indoleamine dioxgenase inhibitor we planned on beginning a trial in patients with melanoma mid-year followed by a trial in patients with ovarian cancer in the second half of the year. And we do have several other promising programs in oncology and inflammation clinical development and I really look forward to describing them to you possibly later this year.

So with that I would ask the operator to please open the call for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from the line of Matt Roden with UBS. Please proceed with your question. Mr. Roden, your line is live for questions.

Matthew Roden – UBS

I am sorry, I was on mute. Thanks for taking the question and congrats on a very nice start for Jakafi. I really appreciate all the color on the coverage and the time to acquiring a script, that’s really helpful. But we are at the exact mid-point of the quarter here, is there any color you can provide on a weekly run rates over the past five, six weeks vis-à-vis the first five weeks or so that you are selling in fourth quarter? And then secondly, Dave or Paul, can you comment on how you feel about your capitalization level at this point? You gave us guidance here pretty much in line with consensus, but also you have potential for several cash milestones coming in this year. So, can you give us a sense on how you feel for the year on capitalization? Thanks.

Paul Friedman

Yes. So on the first Matt, we don’t want to get ahead of ourselves. I don’t think that would be good for us and actually would not be good for you. We are very comfortable and pleased with how things are going right up until today, but we are not going to comment on what has happened since January 1st until the quarter is over and we do the next call. But the launch is going well and we are feeling very good about where we are. We just can’t get anymore quantitative than that at this point. On the second question, I am going to let Dave handle that.

David Hastings

Yes, let’s reiterate what Paul said. We are confident, we are in a very strong financial position. Launch is going as expected. We ended the year with $278 million in cash. As I mentioned, our partners have very exciting events coming up this year which would be for obvious milestones for our company. So I think we are in a very good shape from capitalization prospective.

Matthew Roden – UBS

Great. Thanks a lot and congrats on the launch.

Paul Friedman

Thank you, Matt.

Operator

Thank you. Our next question is from the line of Ying Wang of Barclays Capital. Please proceed with your question.

Ying Wang - Barclays Capital

Good morning guys. Thanks for taking my question also. First question is, should we expect the gross to net adjustment around a 12% to 13% for the rest of the year? Then also, do you guys have any idea when Lilly might release the data from the Phase IIb RA trail? Thank you.

Paul Friedman

Yes, on the gross, it is a little too early to project what that is going to look like, as I have mentioned a couple of times now. The components of those are primarily driven by Paramax [ph] and once we have an established trend there, we will be able to give guidance as to what the go for gross in that looks like.

David Hastings

So on the RA study, it is my belief that Lilly will not release data prior to the time that it is, either presented at a meeting or the abstract is published, we are pretty confident, but can’t be sure that will happen at ULAR, which is I think the first week in June of this year. That will be, as we said in the script, the 12-week results with the 24-week results are presented at ACR in the fall.

Paul Friedman

I would say from the two-way data that we generated earlier and the fact that the study is designed almost identically, I am looking forward to some very impressive data we make present it.

Ying Wang - Barclays Capital

Okay. Thanks. And then if I make another follow up, how long did it take the $2.3 million deferred revenue to clear the channel?

Paul Friedman

Well, we are not going to comment on that directly. What I can say is that based on our discussions with the specialty pharmacies, we expect them all probably about three weeks inventory, two to three weeks of inventory, something in that range.

Ying Wang - Barclays Capital

Great. Congratulations, thank you.

Operator

Thank you. Our next question is from the line of Eric Schmidt of Cowen and Company. Please proceed with your question.

Eric Schmidt - Cowen and Company

I understand that you don’t want to comment on sales or trends post December 31, but I was hoping maybe Pat would discuss how many patients were on the drug roughly at the end of the year and number of physicians who had written the prescription at the end of the year? I think she also commented that there could have been some disruption during Q4 due to the holidays and I am wondering, in fact, you observed such disruption in the weekly sales trends?

Patricia Andrews

Hi Eric. So I will try to give you some color on that. On the number of patients, we are not being precise on how many, but in the first six weeks, you might assume that most of the scripts were for one patient that you can almost back into what that number might have been for the first six weeks. There is some nuances to that so it’s not exactly that, but someone might have written for example, a 20 milligram script but done it in 5 milligram bottles and so that patient actually got four bottles rather than one bottle. Or a physician might have written a script for more than a month, so the patient got more bottles. So you can estimate based on what the net reported revenue was.

As far as prescribers, we have a broad base of prescribers which is or we were looking for and we feel that for the opportunity ultimately is with community hematologists, oncologists, that’s why we are focusing on 6,500 of them rather than a select group of thought leaders who may have a higher volume but collectively they just don’t have most of the patients. And with that, at the end of the year about 85% of the physicians with written -- a prescription had written in at that point for one patient and about 15% had written it for more than one patient.

And as far as disruption, the main, I wouldn’t call it really a disruption but there were holidays within the period from when we got approved on November 16 through year end. And holidays mean that the offices aren’t open, so almost, you would expect that there would be lower volume in a four-day week than in a five-day week.

Eric Schmidt - Cowen and Company

Great. And just a quick follow up for Dave, could you just remind us what is public about both the Nevada’s approval milestone and the Lilly started Phase III milestone in terms of their size?

David Hastings

Yeah. Unfortunately due to the confidentiality arrangements between the parties, we can’t disclose that Eric. But obviously those are important milestones for the program. So they would add a lot of weight, in terms of the way they would value that deal, so they are significant and important to us this year.

Eric Schmidt - Cowen and Company

Thanks a lot.

Operator

Thank you. Our next question is from the line of Salveen Richter with Collins Stewart. Please proceed with your question.

Salveen Richter – Collins Stewart

Thank you, congratulations on the quarter. Just two questions, so just following up on Matt’s question, is the rate of patient additions in Q1 to date similar to Q4? And I think what we are trying to understand is whether a bowless of patients played a role in your fortune numbers? And then secondly what questions are you getting from the physician community for Jakafi, are they mostly on efficacy or safety or to do more with the disease?

Patricia Andrews

Okay. So Salveen, on the bowless question, so I wouldn’t say that there was a bowless -- though there were clearly some physicians, some patients very knowledgeable the drugs eminent approval and waiting to get on it. But I wouldn’t say there was a bowless. We didn’t have some of the features that sometimes companies have that kind of creates an artificial bowless, such as an expanded access program or patients trying to transferring over clinical trials, we didn’t have that. And then as far as the types of questions that we are getting, honestly there is still a lot of listening and there is a certain amount on the disease, but really there is just a lot of listening on the new product. The safety has not been an issue at all. Not really come up. It is more on the spleen reduction and the symptoms and discussions along those lines. The only area that I would say there is definitely -- still an educational need is on whether you should have the D617 (inaudible) or not for this drug and that there is still a fair amount of misconception on that you need to have the limitation for the drug to work, when in fact you don’t need to have limitation for the drug to work. But other than that, it’s just what you would expect with a new product launch in an area that has not received a lot of attention and has a higher, then the internal focus is on efficacy, not a lot of worries about the safety.

Salveen Richter – Collins Stewart

Okay. Thank you.

Operator

Thank you. Our next question is from Brian Abrahams with Wells Fargo. Please state your question.

Brian Abrahams - Wells Fargo

Hi. Thanks for taking my questions and congratulations on the first quarter of launch. What’s your feedback then on what physicians want to see before they prescribe Jakafi to their second patient? And I am also curious how comfortable our physicians have been using ruxolitinib in patients with platelets below a 100 in light of the broad label?

Patricia Andrews

I think they just want to see how their first patient has come back and what he says about the effect on him and generally we expect that to be pretty positive because within sometimes a couple of days. But definitely within a month for symptoms and for spleen you begin to see results. And so chances are the first time that patient comes back, which should be two to four weeks after the initial script, they should be reporting that they are starting to feel better. And then as far as platelets below a 100,000, so for now we do awareness trackers, post-launch and we do Ask Physicians, a rotating group of physicians about 50, have they seen and met patients within the last two weeks or month depending on the time gap between the survey. And we ask them, did you talk about Jakafi, did you put a patient on the product, what type of patient was it, if you didn’t what stopped you, if you did what was the features that lead you to do so, etc. And from that they do say that they are putting patients on drugs who have the spectrum of platelets above 50,000 certainly a good number below a 100,000 and a good number up of a 100,000.

Brian Abrahams - Wells Fargo

That is very helpful. And just a quick follow up, are you seeing anything outside of your expectations with regards to adherence rates at this point?

Patricia Andrews:

No, I mean, it is in a very short period of time, but no, really it’s going very much as we expected it, it would.

Brian Abrahams - Wells Fargo

Great, thanks. Thanks again.

Paul Friedman

Brian, just to add one other thing to this. Probably it will sound like, when the President gives his state of the union and he has people whom he wants to highlight up in the gallery. So just as we have seen and heard in our clinical trials, patients and physicians appreciate how quickly the drug is working and this is one comment that we got back from one of our mid west, reps, we have got significant number of these, hearing of these across the country, the rep had met with one of our doctor’s nurses, doctor is saying that after only three weeks on treatment, his patient is “doing extremely well and while her spleen is still detectible, her abdomen is indeed smaller and no longer thought.” Patient had also told the nurse “I am feeling better than I have in a long long time.” The rep concluded it is nice to know the doctor, nurse and most importantly the patient, all things Jakafi is worthwhile. That is the course of events with most of these people. We have had a few people who have come into the study, who have been prescribed the drug, as you might have imagined, were so sick, they didn’t qualify for the clinical studies. And we are not certain how well they will do, because they are very very advance patients, but this is a very typical type story for this drug. Just as an anecdote.

Brian Abrahams - Wells Fargo

Thanks.

Operator

Thank you. Our next question is from the line of Cory Kasimov of JP Morgan. Please state your question.

Cory Kasimov - JP Morgan

Hey, good morning, thanks for taking the question. First of all I am curious how the real world experience has been with Jakafi’s tolerability relative to what you saw in the clinical trials? And then a second question, I guess for Dave, I want to ask you about your convertible debt and I hesitate to bring it up since it’s not even due until 2015, but we are getting are questions on it quite a bit so, it’s obviously well in the money and at this point as your expectation, you would just let it convert into common stock or you would entertain other strategies to avoid that dilution? Thanks.

Richard Levy

This is Rich. Let me just start the comment because the drug safety organization reports into me and we see the spontaneous report that come in. And while there have been a few spontaneous reports they tend to be the same sort of things that we had in our package insert. There have been nothing unusual or surprising. We hear patients say that they have bruising which we saw in the clinical trial but nothing unusual and that doesn’t surprise me because the safety profile was fairly well established in the past. But we will continue to follow that and see but I don’t think there have been any surprises.

David Hastings

Yes, so Cory on the convertible debt, unfortunately there is no magic bullet to rid ourselves of the dilution. What I would say as you mentioned, it is well in the money. We are always looking at our capital structure holistically and obviously that is part of that capital structure. We are hoping that over time, this becomes a capital allocation story. Our capital is precious to us and there are things you can do with notes, it is not callable. But there are things you could do privately and other techniques with the convertible debt but at this point of time we are really primarily focused on the launch and execution, at this point.

Cory Kasimov - JP Morgan

Alright, thank you.

Operator

Thank you. Our next question is from the line of Tom Russo with Robert W. Baird. Please proceed with your question.

Thomas Russo - Robert W. Baird

Good morning and congrats on the good start. Just wanted to circle back to a comment that Dave made earlier about inventory levels that are expected. Can you say what was the wholesaler or that did the channels stock in, in weeks at the end of the year?

Patricia Andrews

We don’t want to get into that detail at this point of time. But again just reiterating in general we expect these guys to hold somewhere between two to three weeks of inventory.

Thomas Russo - Robert W. Baird

Would they be expected to have done there that quickly or would they have started up, I am just trying to get a sense of whether there was a lot more than that in the channel at the end of the year or roughly the expected amount?

David Hastings

Yeah, I don’t think that their purchasing was out of ordinary at all. And I think it’s consistent with what they have communicated to us in terms of their strategy.

Thomas Russo - Robert W. Baird

Okay. And then continue to provide updates on the Phase III PV trial and I was just curious, are you able to give kind of a percent enrolled at this point and maybe the distribution of enrollment geographically that you are getting into that trial?

Richard Levy

Sure. You know it’s always been the case that enrollment has gone better outside of the U.S than in Europe. And the amendment that we have put into place last fall has been in effect at all of the U.S sites that are under essential IRB and now most of the ones that take a little bit longer to go through, they go through local IRBs and scientific review assessments before those things get made. With respect to Nevada’s territories, which is predominantly Europe, but not exclusively Europe, those take longer because they all need to go through the National Authorities as well. There have just been a couple of countries now outside of the U.S that have approved the amendment.

So the effect of the amendment can be looked at first within the U.S, where we have already enrolled in about two to three months, half of many patients in the U.S as we had enrolled over the first year in the U.S. So it’s clearly making a difference, but in terms of magnitude of effect we expect that to have a much bigger impact in Europe and outside of the U.S, because they have been able to enroll more anyway. And there are certain aspects of the way certain things are defined that are potentially more amendable to enrollment in Europe as well. And so we really expect by the end of second quarter to really have had probably by that point, a good three months of experience in Europe with the new amendment and at that point I should have a very good idea as to when the study will close to enrollments and then we can be precise about our timelines after that.

Thomas Russo - Robert W. Baird

Okay. And just a last quick question for Pat. Can you just comment relative to expectations you set a couple of months ago about early distribution across payer type and maybe the percent of patients that have gotten free drug to this point?

Patricia Andrews

Sure. I think on just the free drug, we had estimated it would be 10% to 15% of all patients and that still seems very realistic. And then payer types, so there -- in some regards the payer whether it’s Medicare or commercial doesn’t matter that much from a sales reporting because we don’t pry discounts to either and rebates to either. So they are kind of equal from our perspective. And we thought that it would be fairly equal as far as distribution between those two, we are probably running slightly higher on the commercial side than I had expected but that also might be at the beginning of the year or some other things with Medicare. And other than that, it is very consistent; the Medicaid remains a very small percent, and actually one that has like a large discount automatically associated with it. So in that regard payer distributions probably more on the commercial side than originally anticipated but that could well work its way out in the next few months.

Thomas Russo - Robert W. Baird

Okay. Thank you very much.

Operator

Thank you. Our next question is from the line of Rachel McMinn of Bank of America Merrill Lynch. Please proceed with your question.

Rachel McMinn - Bank of America Merrill Lynch

Yeah. Thanks. I wanted to follow up on the question about bolus and how sick patients working. Can you give us a sense and I know you were trying to target patients that weren’t critically ill because you wanted to make sure physicians had a good experience, but when we think about the initial trends and if you ended up getting a large proportion of very sick patients early on that could negatively impact duration of drug and kind of expectations of what uptake would be in the back half of the year and then I also wanted to dig in a little bit more into dose titration whether physicians are encountering any difficulties modifying the dosed based also some of the hematologic toxicity. Thanks.

Paul Friedman

So, let me just start and then I think you have a more elaborate answer. With the point I was making was there have been a few really sick people that was the sole point of what I was saying not that the majority of patients who’ll be put on the drug in the fourth quarter were terminally ill people. There are few as you might expect and I think Pat can give you may be a better breakdown of the types of patients we will put on.

Patricia Andrews

Sure. So, while there have clearly been some patients who were sicker and we know that from a variety of way. I think that is still a very small minority. Most patients who started on drugs started at the 15 or 20 mg dose and I would say that as far as dose titration goes most physicians have only put one patient on drug and that patient might generally start on 15 to 20. For physicians who put multiple patients on drugs you can see them using the range of doses as low as 5 as high as nearly 25 even there are very very few with that, at the higher 25 and so I would say that they are adapting based on experience as well as what is in the label as to what the right dose is for the patient and the more experience they have the more adapted that they are which is why you see physicians you put on is looking for patients put on one at a 15 and one at a 10 and one at a 20 or something so you see that richness developing and I feel like that will continue with greater experience with the product.

David Hastings

I think it is also fair to say that we haven’t heard concerns coming back to the reps and things like that saying I don’t know how to titrate my patient, I can’t do it, it is too complicated, none of that. It has just been pack and look and see what size doses are prescribed, but we haven’t heard any issues.

Rachel McMinn - Bank of America Merrill Lynch

Great and then just one follow-up on the V6 17F mutation and the lack of understanding from physicians on that. You had mentioned at ASH and sort of one of the biggest misconceptions. How does that impact? Is it just something where docs don’t understand it, but you tell them a couple of times they get it or is it something that you think it is actually limiting initial I guess desire to use the drug because GI have to go and test and I don’t want to do that.

Patricia Andrews

Well actually most test anyway, so that is not really it. It is just the, there has been so much push towards personalized medicine in the last few years and there has been recent oncology products and others where having a mutation is part of the diagnostic criteria so they have just been over the past few years sort of pushed towards believing that if there is a mutation involved in a disease then the drug treats only patients with the mutations, but that is not the case here, we treat a pathway not a mutation and they will get that as just as you know most of the physicians who are in the community have this broad patients across the spectrum of different diseases and their just not as familiar and as on top of what the situation is with myelofibrosis and what the different causes of the disease are, but they generally heard of the mutation and so that is just one of the things that over time with education and greater exposure and familiarity with the product it will work through. I don’t think in anyway limit ultimate usage of the drug, but it probably adds to the gradual and steady nature of our launch.

Rachel McMinn - Bank of America Merrill Lynch

Great. Thanks very much.

Paul Friedman

One other point was that I think you made the point while just few patients were extremely sick, most of the initial use has been in patients who indeed have enlarged spleens and/or a higher symptomatic burden, but in fact we have already seen some use in earlier intermediate patients which I think is encouraging.

Operator

Thank you. Our next question is from the line of Ian Somaiya with Piper Jaffray. Please state your question.

Ian Somaiya - Piper Jaffray

Thanks and congratulations on a great start. I had a question for Pat, I know we’re roughly 12 weeks into the launch of Jakafi, but can you give us a sense of what the size of the market, I don’t know if there have been any changes in your expectations for the overall market opportunity? And second question I had was on anemia obviously there is a prevalent concern coming from the Phase III studies, whether that has manifested itself in any way in the commercial experience? Then I had one last question on the guidance.

Patricia Andrews

Okay. So, the size of the market we have for a long time been saying 16,000 to 18,500 of which 80% to 90% are intermediate were high risk and that has been that is still is the case from everything that we know, nothing has changed our thoughts or opinions on them and I am sorry there are questions on anemia.

Ian Somaiya - Piper Jaffray

Anemia, yes.

David Hastings

Paul made an introductory statement on that. I don’t think that the phase III date there was a significant problem with anemia. I think what it said is that there was generally a one gram drop in hemoglobin over the first 8 to 12 weeks which is about 50% improved only a 0.5 gram difference at 24 weeks which is very similar to placebo at that point and also was probably at least as good as what you saw with best available therapy and that is what the other choice really is that was seen in the COMFORT-II trial and these patients require -- for those patients who require transfusions they require fewer transfusions then on the control because they have so much more energy from the drug itself and so it is there, but we never really would actually called it a problem per se and then I’ll turn it over to Pat to have any comment on what she may or may not know about anemia in the market place.

Patricia Andrews

So, we are not getting feedbacks from the rep saying that there is a lot of concern over anemia or thrombocytopenia that in fact the physicians are very used to managing both of those effects and what was really appealing to them is they have not had anything to treat there in that patients with and now if they have something and it is very effective on spleen and symptoms was the heavy symptom burden so they now get to provide something to the patient and we’re not getting the feedback of thrombocytopenia or anemia or issues for them (inaudible).

Ian Somaiya - Piper Jaffray

If I could ask a little bit differently. Given your clinical trial experience, are you seeing a lower rate of transfusions in the market place with patients all on drug.

Patricia Andrews

It would be really early to see that and to be honest that is not the type of data that we get we’ll have to do separate market research on that and it is probably something I’ll do much later this year.

Ian Somaiya - Piper Jaffray

Okay and just a question on R&D guidance. What portion of that is related to the 050 [ph] Phase III trials.

Paul Friedman

Yeah. So, we don’t breakdown the actual numbers from the overall number. We’ve never done that, but the bulk of the increase comes from the 30% commitment with the phase IIB and Phase III studies and we expect the Phase III study to start this year so that is a reason that those expenses are going to go up and our aggressive and I think appropriate efforts to expand Jakafi’s indications by having carefully selected a bigger myeloproliferative neoplasm liquid tumors where we know the JAK pathway is turned on and the first solid tumor being pancreatic cancer where the JAK pathway in many patients seems to be overtly active and there is a lot of cytokine-induced cachexia. So, those two areas account for the bulk of our increase in R&D and we think that that is wise spending of money. There are a couple of other smaller items that Dave you might want to answer.

David Hastings

Oh yeah. I just also add that sort of an artifact of the (inaudible) are noncash charges this year our R&D are up over 10 million, so that is another pretty significant component of the increase.

Ian Somaiya - Piper Jaffray

Okay. Thanks and that has been very helpful.

Operator

Our next question is from Thomas Wei of Jefferies & Co. Please proceed with your question.

Thomas Wei - Jefferies & Co

Thanks. I just wanted to understand a little bit more about your Medicare commentary. How has that donut hole affected prescribing so far or did you actually see in the fourth quarter a lot of Medicare patients resisting filling their prescriptions because they didn’t want to pay a double donut hole in both December and January and should we assume that that doctor has corrected itself or does the donut hole concern still persist through the first quarter for this patient population.

Patricia Andrews

So, Thomas as I think we saw both, we saw some patients already through the donut hole, so they definitely wanted to get their medicines in December and if they could get more than one-month supply that was good, but we also saw the opposite. I was very clear that some patients said, “I haven’t gone through yet and I am not ready to pay $1,800 for out of pocket for something that I am going to pay another $1,800 on two weeks later. So, there was clearly some waiting on that. However; once you go through the donut hole you are through it and so if you want to get on drug there is really no reason to wait once the New Year starts and the only reason would be that you don’t have the money and you need assistance and for that there are foundations established that have been very very active since they were set up, but particularly since the beginning of the year and I think that combination up there is no really no need to wait because you have to go through the donut hole and deal with the first prescription of Jakafi and that the foundations are there and they are able to support patients who have financial need, but there is really no reason to wait. I expected that to work its way out within the first quarter.

Thomas Wei - Jefferies & Co

And the other sense of what proportion of Medicare patients in general with myelofibrosis actually exceed their donut hole before the launch of Jakafi just based on whatever diseases they had or whatever drugs they were receiving, was the donut hole something that they typically encountered, you know what percentage maybe encountered at?

Patricia Andrews

No. I wouldn’t have that level of detail.

Thomas Wei - Jefferies & Co

And then just following up on Ian’s question about the size of the patient population. I got some, here you got your field force out there. If we have to guess what is the direction of your bias on the patient population number based on what the sales force is seeing out there in physician practices. Do you think that number to go higher, lower and also seeing with the proportion of low versus intermediate versus high risk?

Patricia Andrews

So, again there has not been enough time for me to change any view that I had on the size of the market or the distribution across different segments. It is just we needed more time and actually substantial amount more time, most of this year I would say before we would be able to have additional insight into those two questions Thomas.

Thomas Wei - Jefferies & Co

Thanks.

Operator

Thank you. Our next question is from the line of Sapna Srivastava with Goldman Sachs. Please proceed with your question.

Yogesh – Goldman Sachs

Hi this is Yogesh on behalf of Sapna. Thanks for taking my question. Congratulations on the launch. I just want to follow-up, is there any further color on in terms of the patient phase breakdown between intermediate I, intermediate II and high risk and then also in terms of the prescriber base between community and academics.

Patricia Andrews

Not really, between community and academic it is probably weighted slightly more towards academics at the moment, but that is because they were more familiar with the product because more of them were COMFORT-I investigators, but I fully expect that to modify and go to the 75 to 80% of all patients we expect to come from the community and we’re not quite there at the moment, but we’re getting it is closing in on that and…

Yogesh – Goldman Sachs

In terms of intermediate I, intermediate II and high risk patients.

Patricia Andrews

We don’t ask for that breakdown that we don’t get that and I wouldn’t know anecdotally we’re getting more use in the high risk and the intermediate II and it will take longer to work through the intermediate I as I said before there is more obvious patients for the drug and it is those with greater splenomegaly and a greater symptom burden and they are more likely go on the drug first and so it is not surprising that is really where we see more usage and that would take a period of time for physicians and their offices and patients to be fully comfortable going on the drug earlier and earlier in the disease and so that is why this is a launch that takes time and doesn’t all occur in the first 3 to 6 months, but that is where we are heading toward and I expect that the end of this year, next year we’ll see a lot more usage in the earlier stage.

Yogesh – Goldman Sachs

That is great. Thanks a lot.

Operator

Thank you. Our next question is from David Friedman with Morgan Stanley. Please proceed with your question.

Patricia Andrews

Actually, could I just add because maybe it wasn’t clear what I said. The majority of all prescribes have to date have been in the community on more of the academics have prescribed more than one patient, but the majority of all prescribes even now have been in the community.

David Friedman - Morgan Stanley

Thanks for taking my question. Just on the reimbursement side, are you seeing payers have any specific hurdles either to get on drug or to stay on drug regarding spleen size or counts or symptom burden specifically more on the back end, are there any checks on the back-end to make sure the people are responding in a safe way in order to allow them to maintain the prescriptions.

Patricia Andrews

Again it takes most payers 90 to 180 days before the next formulary decisions and so what we are operating under now and certainly through year-end has been much more on an exception basis and it would be to draw conclusions from that. It is an oncology product and therefore a protected class in Medicare and it is difficult for them to Medicare patient to be restricted beyond what is actually in the label and on the commercial side again we’ll see that over time and it would early to comment on that, but I haven’t seen things that are unexpected.

David Friedman - Morgan Stanley

Okay. Thank you.

Operator

Thank you. Our next question is from David Crumpler[ph] with Morningstar. Please proceed with your question.

David Crumpler[ph] - Morningstar

Hi. Thanks for taking my question. Can you guys talk a little bit about how your potential competing treatments from Sanofi and others if that is something you guys even think about it all again? Obviously Jakafi have a nice head start, but you think you’ll be able to hold on to the market if new entrants do join?

Patricia Andrews

So, I’ll start, but then let others add. I will say commercially it doesn’t matter someone is two to three years behind us. No one is going to wait to go on drug for something down the road and so we have this nice runway of time to get those physicians and the patient community familiar with Jakafi and its benefit and I feel very confident that once patients go on drug and once physicians have the experience with it that most patients will be well controlled and very happy with their medication and therefore physician would not take them off drug nearly because there is other possibilities that are now on the market so new entrants would be competing primarily for newly diagnosed patients which is about 1/6 of the overall market and when new competitor they always do they always make some inroads but I wouldn’t expect it would be easy for them to do so because the reality is there is a very high unmet need before Jakafi came into the market, but once it is on the market the unmet need reduces significantly and now let others comment on more clinical effects of it.

Paul Friedman

Yeah. So, the Sanofi [ph] compound is a compound that is actually it is highly selective for JAK2. It doesn’t do much for JAK1. Our experience has been that to treat the symptoms well you need JAK1 inhibitory activity. So for them to get significant JAK1 inhibitory activity, they have to go higher in dose which would then lead to more JAK2 suppression, ergo you would predict more bone marrow suppression. Additionally, the pharmacophore that they have ended up with and a number of our would-be competitors have – have crossed over to another kinase called FLIP 3 and FLIP 3 inhibition leads to significant amount of GI side effects and the drug has that issue.

So when you look at the profile of that particular compound it’s difficult for me to see any advantage and it’s most likely going to have disadvantages. The other compound is the YMI compound, and again we have talked about that at infinitum and what you have there is a compound that is impacting JAK1 and JAK2 to a lesser degree at the dose they are using than we are and therefore they are lower on the dose response curve. They have a long way to go. They have some off target toxicity, compounds weaker. If we go lower on our dose response curve we can minimize that initial effect on hemoglobin that Rich referred to earlier. You lose a little bit of efficacy but you can still be effective at a dose like 10 milligrams BID, it’s a pretty good dose.

So, they probably have a chance of getting there. I don’t see at the end of the day when all the data plays out that there would be any qualitative difference other than the off target side effect profile that they do have.

Richard Levy

I just want to make one comment and that is in the relatively short term where they are doing clinical trials, whether it would be targets in Sanofi are potentially YM if they go to Phase III. We are already seeing for some of our open labeled trials that are still enrolling patients with MF, some decrease in our ability to recruit patients, because they say they will just go on and Jakafi is a commercial product rather than going into a clinical trial. Now compare that to a patient that needs to go – might consider going into a trial where they have maybe a 50-50 chance of being randomized to placebo or to what was currently -- previously considered best available therapy, both of which we have already shown clearly superior results. So I think that you are not going to see a significant impact on our commercial sales within the short term when they are trying to enroll into their clinical trials.

David Crumpler[ph] - Morningstar

Great. Thanks for the answer guys.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Dr. Friedman for closing comments.

Paul Friedman

Okay. Well, as we have said throughout the call, we are very comfortable and pleased with where we are as of today. It is early days and we would be more expansive in what we report going forward. Probably need another quarter or two to really have a good feeling for the trajectory of the launch. And we are looking forward to Lilly presenting their Phase IIb data, I think that is going to be an interesting presentation and moving the other indications for Jakafi along, in particular the RESPONSE trail. And so, thank you very much for your attention this morning and we look forward to speaking with you again. Good bye.

Operator

This concludes today’s teleconference. You may disconnect your lines. Thank you for your participation.

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