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Incyte Corporation (NASDAQ:INCY)

Q2 2012 Earnings Call

August 2, 2012 08:30 am ET

Executives

Paul Friedman – President & Chief Executive Officer

Patricia Andrews – Executive Vice President & Chief Commercial Officer

Dave Hastings – Executive Vice President & Chief Financial Officer

Rich Levy – Executive Vice President & Chief Drug Development and Medical Officer

Pamela Murphy – Vice President, Investor Relations and Corporate Communications

Analysts

Matt Roden – UBS

Brian Abrahams – Wells Fargo

Salveen Richter – Canaccord Genuity

Ian Somaiya – Piper Jaffray

Cory Kasimov – JP Morgan

Thomas Wei – Jefferies & Co.

Rachel McMinn – Bank of America

Tom Russo – Robert W. Baird

Lisa Bayko – JMP Securities

Eric Schmidt – Cowen & Company

Christina – Barclays Capital

David Friedman – Morgan Stanley

Boris Peaker – Oppenheimer

David Crump – Morningstar

Mani Mohindru – ThinkEquity

Operator

Greetings, ladies and gentlemen, and welcome to the Incyte Corporation’s Q2 2012 Earnings 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 now begin.

Pamela Murphy

Good morning and welcome to Incyte’s Q2 2012 conference call. On the call today are Paul Friedman, Incyte’s President and Chief Executive Officer; Pat Andrews, Executive Vice President and Chief Commercial Officer; Dave Hastings, Executive Vice President and Chief Financial Officer; and Rich Levy, Executive Vice President and Chief Drug Development and Medical Officer. Pat is traveling outside of the country right now and is therefore not in the room with us. Paul will begin with a brief overview of the quarter, Pat will update you on the product launch of Jakafi, and Dave will describe the Q2 2012 financial results.

Prior to opening the call for Q&A Paul will close with a summary of some of our other programs. Before beginning we’d 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, our product revenue guidance as well as our development plan. 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 March 31, 2012 and from time to time in our other SEC documents. Paul?

Paul Friedman

Good morning. The launch of Jakafi for patients with intermediate or high-risk Myelofibrosis continues to go well and is pretty much right on the forecasts that we’ve made. During Q2 we shipped $35.1 million of Jakafi to our specialty pharmacies compared to $25.1 million in Q1. As Pat will describe in greater detail we’re seeing steady growth in the use of Jakafi by hematologists and oncologists.

Since the pace of the launch is going as we expected, we’re providing revenue guidance for 2012 net product sales in the range of $120 million to $135 million. This range reflects our continued belief that the growth will be steady and gradual as physicians move from prescribing Jakafi for more severely ill MF patients to using the product in less severely ill patients, specifically patients with any degree of splenomegaly and/or symptoms.

The drug provides dramatic relief in spleen reduction and in symptom improvement and additionally, as we shared with you last quarter, further analysis of COMFORT 1 first published in The New England Journal of Medicine further suggests that there may be a survival advantage for Jakafi over placebo. In that regard, more recently [Doctor Bershtofstick] et al published an article in the journal Blood regarding their analysis of 107 MF patients from our Phase I/II study. In the article, the authors state that in this group of patients followed for a median of 32 months there could be a survival advantage with ruxolitinib treatment when compared to historic controls who had similar patient entry criteria.

Now, while there are clearly limitations to these comparisons to historical controls, the authors also state that the data suggests a survival benefit from ruxolitinib independent of any comparison with a historical control group. Specifically, survival in the high-risk patients treated with ruxolitinib was consistent with that of intermediate II risk patients. The published data states that the normal life expectancy for high-risk patients is approximately two years compared to four years for intermediate II risk patients. This would suggest a very meaningful improvement in survival.

In early June there were a number of Jakafi posters presented as ASCO, all of which are available from our website. One I want to highlight which is also the subject of an oral presentation at EHA is for the ongoing Phase II study in patients with baseline platelet counts between 50,000 and 100,000 who as you may recall were excluded from the Phase III trials but are part of the indication in the label. In this study we start patients with a dose of 5 mg twice daily and allow for dose modifications based on adequate platelet counts.

At the time of this interim analysis the majority of patients had optimized their dose to 10 mg twice daily or higher, and for patients completing the week 24 visit most experienced reductions in spleen size and improvements in symptoms to a degree that is comparable to what we saw at 15 mg and 20 mg twice a day in the Phase III trials. I’ll now turn the call over to Pat who will provide you with more details on the launch; Dave will follow with an update about our financial performance for Q2, and I’ll conclude by providing an update on our other ongoing programs. Pat?

Patricia Andrews

Thanks, Paul. Good morning. We’re going to start with a few metrics that may help you appreciate the basis for the guidance we’re now providing. I’m pleased to say that we were able to increase the number of physicians who have used Jakafi from over 1000 reported in Q1 to over 1600 in Q2. We’re building a broad base of subscribers, of which about 80% are from the community; and since launch, these community hematologists/oncologists have generated about 75% of the prescription volumes.

We’re targeting approximately 6500 hematologists/oncologists, most of whom are community-based. Unlike the key opinion leaders, these physicians each tend to have only a handful of MF patients, usually less than five. About 25% of our targeted physicians have prescribed Jakafi, and according to our market research, most physicians who have not yet prescribed the product say that they are likely to. Their primary reason for not using the product yet tends to be “I’m just waiting for the right patient.”

Our market research suggests that what they mean by “the right patient” is one who has a very large spleen and a fairly heavy symptom burden. Now, our label states that Jakafi is indicated for the treatment of patients with intermediate or high-risk MF. The label doesn’t specify the degree of splenomegaly or symptom burden required for use, and we fully expect to see use in less severely ill MF patients – patients with any degree of splenomegaly or symptoms – continue to grow over the next several years.

We estimate that intermediate and high-risk patients represent about 80% to 90% of all Myelofibrosis patients and we continue to believe that there are between 16,000 and 18,500 MF patients in the United States. Therefore, to capture this market opportunity, a top priority for us is educating as many as possible of the 6500 healthcare professionals who treat these patients to help them understand who the right patient is. We’re doing this through a steady systematic combination of direct calls by our field force, exhibits and displays at conferences, direct advertising, multichannel communications and educational efforts including speaker programs.

We’re confident that once a physician sees firsthand that Jakafi truly works to make a meaningful difference in how a patient with Myelofibrosis feels – it is generally well tolerated and the associated side effects are generally well managed – that he or she will be open to and appreciate the data that show that patients with MF who go untreated or who are treated with historical best available care worsen over time and they worsen fairly quickly. That is why we’re confident over time physicians will see the value in using Jakafi in their immediate or high-risk MF patients with any degree of splenomegaly or symptoms, and why we continue to expect our peak share in MF to occur about three years from the launch – around the same time that we expect to have an indication in polycythemia vera.

I’ll now describe a few other factors that we think are relevant to the launch as well as the ultimate use of Jakafi. First, some of the earliest patients who were prescribed Jakafi were very advanced, so ill they would not have been eligible for the Phase III trial in which life expectancy had to be at least six months. The second point is that the discontinuation rate seen in COMFORT 1 and COMFORT 2 of 14% and 18% at 24 weeks and 48 weeks respectively are probably a good reference point for the low end of the discontinuation rates we are likely to see commercially. And for length of therapy, remember that at the ongoing Phase I/II study at MD Anderson about 50% of patients were still on drug at three years.

On another subject, nearly all payers have Jakafi on formulary. Preauthorization is required maybe two-thirds of the time which can slow down the initial script, but it is nearly always approved for on-label use of Jakafi. About 50% of patients have been covered commercially; about 70% of these patients have had copays of less than $100 a month. About one-third of all patients have been covered by Medicare Part D. Nearly all Medicare Part D patients have been covered under the standard benefit design and many have sought and have been able to access funds through charitable foundations. A small percent of patients have Medicaid or seek care through other government programs such as the VA, a [340D’s], or Tricare; and as expected, between 10% and 15% of patients have received free drug.

To summarize, the launch continues to go well. We’re very pleased with our current level of market penetration in MF and look forward to seeing a gradual increase in the number of patients on drug, a steady increase in physician interest and use, a greater appreciation among those physicians and patients that MF is a progressive life-threatening disease that worsens over time, and that treatment with Jakafi provides compelling and important clinical benefits to patients with any degree of splenomegaly or symptoms.

Importantly, Myelofibrosis is just the beginning and we look forward to seeing the use of Jakafi grow with future indications in polycythemia vera and potentially other cancers. With that I’ll turn the call over to Dave.

Dave Hastings

Thanks, Pat, and good morning everybody. Let’s start with product revenue this morning. It’s important to note that we are still using the sell through method for revenue recognition which means we defer revenue until the specialty pharmacy ships the product to the patient. We anticipate transitioning to the sell in method later this year at which time we will recognize when our product is received by the specialty pharmacy. Therefore, our 2012 net revenue guidance of $120 million or $135 million assumes this transition takes place and that revenue deferred as a result of the sell through method is recognized this year.

As noted in the press release, this deferred revenue amounts to approximately $9 million net as of June 30. As Paul mentioned for the quarter ended June 30 we shipped $35.1 million of product to our specialty pharmacies and reported gross revenue of $31.9 million. Our gross net adjustment for product revenue recognized in Q2 was approximately $2.2 million resulting in a net product revenue of $29.7 million under the sell through method. Had we been reporting under the sell in method our net revenue would have been approximately $32.7 million. The difference between the two methods, about $3 million net, was added to deferred revenue.

Our gross 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. Our cost of goods sold was immaterial as our starting finished goods inventory was previously expensed with R&D prior to FDA approval; and in terms of operating expenses, both R&D and SG&A were within our expectations.

In terms of cash we ended the quarter in a strong position with $262 million in cash and investments excluding $9.5 million of restricted cash held in escrow for interest payments through October, 2012, on our 4.75% convertible senior notes. So with that I’ll turn the call back to Paul. Paul?

Paul Friedman

Thanks. So before opening for Q&A I’m going to give a brief description of some of the other programs in the pipeline. First, the Phase II and Phase III long-term extension trials in Myelofibrosis are continuing. Second, we anticipate patient recruitment in our pivotal P vera trial to complete this year so what we’ve guided is where we think we’ll end up here, which keeps us on track for a potential approval in the second half of 2014. Third, we’ve recently initiated a second study in PV patients called RELIEF. It evaluates symptom improvements in ruxolitinib-treated patients as compared to hydroxyurea-treated patients. And although it’s not required for approval we intend to submit results of this study to support labeling claims [of a symptomatic] benefit for NPB.

Fourth, the Phase II trial in pancreatic cancer is well on its way to enrolling the approximately 130 patients with results anticipated next year. Fifth, the three-month data from the Phase II-B trial in rheumatoid arthritis for baricitinib, our JAK1 and JAK2 inhibitor partnered with Lily were presented at EULAR in June. The results were impressive. The six-month data are expected to be presented later in 2012 and we continue to expect that the Phase III program will start this year.

Lastly, our early stage oncology programs for c-MET and Indoleamine dioxygenase or IDO are progressing, and I or Rich can address any questions you may have about them in Q&A. And we have other ongoing clinical development programs in oncology and inflammation – I anticipate describing these proprietary programs at the appropriate time. With that, Operator, let’s open the call for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator instructions.) Thank you. Our first question is from the line of Matt Roden with UBS. Please proceed with your question.

Matt Roden – UBS

Thanks very much for taking the question. I was hoping that we could talk a little bit more about the guidance. Considering that you’ll be changing the revenue recognition for the full year, if I’m doing the math right here it seems to suggest that demand could be modestly up to even sequentially down in the second half. So first of all, can you correct me if I’m thinking about this the right way? And then can you comment on whether or not this is just conservatism on your part or whether or not it reflects something that you’re seeing in the field that gives you the sense that momentum is slowing? I guess what we’re trying to get at is why could demand be sequentially down in the second half.

Paul Friedman

So I’ll let Dave and Pat add to this, but I’ll just say you have to remember it’s the first product in this therapeutic area; it’s the first JAK inhibitor approved for any indication and we’re about six months into this. We’ve evaluated a number of different scenarios and we’ve developed a range of outcomes that we believe reflects a launch that is proceeding well. And it’s expected to grow at a steady, gradual pace. We did see in Q1 and late last year an influx of patients who were quite sick, could not get into the Phase III trials and were queued up to get into our studies. So I wouldn’t call that a bolus but I will say that revenues in Q1 were somewhat higher than our forecasts.

Since that time, we are I’d say slightly ahead of our forecast and right where we think the launch should be. But I’ll let Pat and Dave comment on your question as well.

Dave Hastings

Yeah, just on the growth question you know, even on gross shipments the low end of the range does imply growth in the high teens, and certainly on the higher end of the range higher growth than that. So Matt, there is growth second half compared to first half.

Patricia Andrews

And I’ll just add that one of the factors driving our guidance range is the time it will take for us to evolve from the use of Jakafi in more severely ill patients that Paul was referencing to less severely ill, specifically the moderate to mild MF patients with any degree of splenomegaly or symptoms. And that you know, will take education and education is a major component of our marketing efforts, and we will help the treating physician who’s not that familiar with Myelofibrosis in the first place because they just don’t have that much experience with it and they need experience with Jakafi to understand who the right patient is. And then we remain confident that over time this will lead to pretty broad usage within the intermediate and high-risk patient category for patients with any degree of splenomegaly and symptoms. But it will take some time to get there.

Matt Roden – UBS

Okay, thanks for that. And then a question on the new RELIEF study in PV – does that imply that you could actually wind up with a first-line PV label? And can you talk about the implications of the study as you see it and whether or not it would be filed as part of your initial filling or as an SNDA?

Paul Friedman

Rich?

Rich Levy

Yeah, so the study compared to hydroxyurea is still in patients that are, we’re starting with a patient population that’s already on hydroxyurea but who are not responding as well as can be by virtue of the fact that they’re still symptomatic, which is one of the parts of the definition of refractoriness to HU. So I don’t see this as the potential for an actual indication for first line. The second thing is that this study which is just starting now has a significantly shorter duration of treatment to the endpoint than the ongoing RESPONSE study, so the timing is such that both studies should finish around the same time and both would be included in the initial labeling. And that’s our current expectation.

Matt Roden – UBS

Thanks. Congrats for all the progress.

Operator

Our next question is from Brian Abrahams of Wells Fargo. Please proceed with your question.

Brian Abrahams – Wells Fargo

Hi, thanks very much for taking my question and congratulations on the continued strong launch here. I have two questions. I guess the first is actually a follow-up on the RELIEF study. We noticed that some of the inclusion criteria refers to patients who don’t have palpable splenomegaly, and I guess if you could maybe just talk a little bit more about the population you’re planning to enroll in RELIEF as compared to the RESPONSE study. I guess my impression of that one is the major symptomatic benefits that you could potentially elicit here would be on spleen.

So if you could maybe talk a little bit about that, and then just separately I know you have a new compound in Phase II for Myelofibrosis and rheumatoid arthritis – 110. I’m just wondering if you can generally speak about how that potentially fits into your lifecycle extension strategy for the franchise and what the Phase II timelines might be there. Thanks very much.

Paul Friedman

Rich, why don’t you do the RELIEF and I’ll try the other one?

Rich Levy

So we didn’t want to directly compete for patients who are still enrolling in RESPONSE, so there are two differences in the patient population to make them not be eligible for both studies. One is that, well let me just say it a different way. In RESPONSE you have to have both an enlarged spleen and have to have at least two phlebotomies within the prior six months. So in RELIEF we said you could have one of those things but not both so there’s no overlap in the entry criteria. But otherwise they’re very similar except that in RELIEF you have to have symptoms of at least a certain level.

And we also are studying the same endpoints in RESPONSE for symptoms; however that study is not a blinded study so we don’t expect to be able to use that data in the same way. This study is a fully blinded study and therefore something as subjective as symptomatic improvements really requires a placebo controlled study. But in both cases you’re still talking about a patient population that would be defined as refractory to hydroxyurea.

Paul Friedman

So with respect to 39-110, it’s a very interesting compound. We think it has potential in RA, other inflammatory diseases and potentially in Myelofibrosis. It is our compound and we are not ready to really talk much about its mechanism or clinical results yet. We want it to mature a little bit before we put it into primetime. But I can tell you it is an interesting mechanism and it’s an interesting compound.

Brian Abrahams – Wells Fargo

And just to quickly follow up on that, when you say it’s your compound you’re suggesting that this is not something that would fall under any of your existing partnerships I assume?

Paul Friedman

Correct.

Brian Abrahams – Wells Fargo

Okay. That’s very helpful, thank you so much.

Operator

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

Salveen Richter – Canaccord Genuity

Thanks for taking my questions. I’m just wondering if we can just get some more color here when you’re talking about switching to the sell in method. Should we assume that that happens in Q3 and the $9 million of deferred revenue will appear that quarter?

Dave Hastings

Most likely, Salveen, but you never know. But I would think at this point Q3 is the most likely outcome for that, yeah.

Salveen Richter – Canaccord Genuity

Okay, and then just following up on past comments about the discontinuation rate saying 14% to 18% is too low. What should we be considering then for discontinuation?

Paul Friedman

Pat, do you want to comment on that?

Patricia Andrews

Sure. It’s early to say what the discontinuation rate would be. Usually it’s something that you’ve had longer-term and look retrospectively and say that’s what it was, and so we’re trying to provide what is the longer-term data which is from COMFORT 1 and COMFORT 2 to give you some sense of what we think it would be. And of course, you know, it’s frequently the case that what you see in commercial practice is higher discontinuation rates than you would see in a clinical study because the study is controlled. And so we’re trying to remind people what the discontinuation rates were in the studies and we would expect that to be probably the low end of what we see commercially.

Salveen Richter – Canaccord Genuity

Great, and then Pat, just to follow up on your earlier point that the physician is waiting for the right patient and they want a patient who has an enlarged spleen and heavy symptom burden. Do they need to treat that patient first before they go to the less severe patients?

Patricia Andrews

I think for a lot of physicians yes. I mean I don’t want to generalize about all physicians but yes, because there’s always… You know, the first priority of the physician is to do no harm and they want to make sure that when a new product is out on the market that it’s going to be appropriate for their patient population. And if they don’t have a lot of MF patients it does take a while to work their way through patients who are less severely ill, versus it’s a much easier call for patients who are really, really suffering with the disease burden or an incredibly large spleen. So I feel very confident that we’ll see that over time but it is an over time thing; it’s not something that we would have expected to occur yet.

Salveen Richter – Canaccord Genuity

Great, thank you.

Operator

Our next question is from Ian Somaiya with Piper Jaffray. Please state your question.

Ian Somaiya – Piper Jaffray

Thanks. I wanted to just get maybe a better sense from you, Pat, for the types of patients that came on therapy this quarter. And one of the issues you’d highlighted last quarter given the severity of the patients who were coming onto therapy was the potential for a high rate of dropouts. Can you just speak to those factors? And then I’ll have one question, a follow-up to one Brian asked earlier.

Patricia Andrews

Sure, Ian. Our market research suggests that about 90% of the patients going on drug are intermediate II or high-risk which more closely parallels the Phase III study but it is narrower than what our label is, because our label is actually intermediate or high-risk. So again, we would expect that over time with more familiarity with the drug that there would be a shift in patient population treated to those less advanced.

Ian Somaiya – Piper Jaffray

And just on the dropouts?

Patricia Andrews

Well as I said it’s too early to really comment on discontinuation rates or compliance during the duration of therapy, so that’s why we’ve referenced the studies and other data which is long-term.

Ian Somaiya – Piper Jaffray

Okay. And on your follow-on, JAK, can you share with us the relative selectivity for JAK-1, for that compound and when we can potentially see data for that product?

Paul Friedman

Well, we haven’t said it’s a JAK inhibitor. I mean I’m sure your question relates to the [Avid Galapagos], heading in that direction. That early data in a small number of Moldovans was interesting and let’s see what comes out of their further studies. I would say, Rich, when do you think we’d have enough data on 39-110 to start talking about it?

Rich Levy

Well, I think in terms of medical meetings we’re probably talking about late spring or early summer next year, but I don’t know for example whether we’d be giving top line results on anything in advance of the next real medical meeting. So it’s not really that well decided as to what that strategy would be.

Paul Friedman

I think that’s the best answer we can give at this point.

Ian Somaiya – Piper Jaffray

Okay, thank you very much.

Operator

Thank you. Our next question is from Cory Kasimov with JP Morgan. Please proceed with your question.

Cory Kasimov – JP Morgan

Hey, good morning guys. Thanks for taking the question. Most of them have been asked already but Dave, a couple for you. One is that it look like the gross to net was a bit lower in Q2 than Q1, I think about 7% versus 9%. How should we be thinking about that going forward? And then also you had mentioned I believe in reference to Matt’s earlier question that at the lower end of your guidance range you’re still looking for I believe it was somewhere in the teens growth rate in the second half. I just wanted to confirm that’s what you said and maybe if you can give a little bit more behind that math. Thanks.

Dave Hastings

Sure. So the growth on average for the first six months is about 8%, Cory, as you mentioned. It’s a little early to assume that’s going to be the rate going forward. The driver, the key driver for growth in that is patient mix so that may change over time. That range, though, has some variability but not significant amounts of variability as you think about gross net going forward. In terms of growth, I was just looking at we shipped $60 million in the first half and our revenue guidance is net, so you would have to ship more than that to achieve the low end of our net revenue guidance.

Cory Kasimov – JP Morgan

Okay, I see. And then lastly just for Paul, I’m just curious quickly on the IDO inhibitor and kind of the interest in this asset coming out of ASCO. And I know you just recently started a trial with Ipi in melanoma – any kinds of expectations in terms of how long this trial might take to accrue where we could see some data from it? Thanks.

Paul Friedman

Again, I’ll pass that on to Rich. I think it’s going to be a while.

Rich Levy

Yeah, you’re talking about a combination therapy with Ipilimumab in that study where Ipilimumab itself has proven activity. So it’s not the sort of study where you simply see a response and then say “Well, it must be your drug that’s causing that to happen” because it is a combination study. So I think it’s going to be a while before we have a sense of that. We also have a second study starting soon in ovarian cancer where we’re using the drug as monotherapy, and that might potentially give a quicker answer simply because if there’s activity it’s due to your drug and not to the drug that you’re adding on top of it.

Operator

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

Thomas Wei – Jefferies & Co.

Hi, thanks. Just wanted to follow up a little bit on the questions that have been asked on discontinuation rates. Could you be a little bit more specific for maybe patients who have already started? You’ve described this bolus phenomenon and sicker patients going on – have you seen kind of a disproportionate rate of early discontinuations already for the patients who had started in Q4 and Q1? And then also for the growth in the quarter, just doing a little bit of back-of-the-envelope math here, is it fair to say that almost all of the growth in the quarter in terms of new patients who were added was related to these new physicians – the 1002 over 1600, that they each basically put one patient on drug and that’s almost the entirety of the source of new growth during the quarter?

Paul Friedman

Pat, would you want to [answer that one]?

Patricia Andrews

Sure, Tom, let me answer the second one first. So the over 1600 physicians who have prescribed Jakafi which we think is a good, solid foundation at this time, seven months into the launch. The majority of them have indeed only put one patient on drug, and what we see is that we have both new prescribers joining each week and month as well as repeat prescribers. But we’re still working strongly on broadening our prescribing base because we think that’s really the key to this market, because the patients are dispersed throughout the community and most physicians only have a handful of patients. So it’s really been our focus and one of the reasons why I have emphasized it in our prepared remarks.

On the discontinuations, again it is very difficult to compare over time because at any point when you look – you said compare Q1 to Q2. You know, if they started in Q2, even if they started in April they would have only been on drug for two months. So I would just encourage people not to over focus in on discontinuations at this time because it’s really hard to know what is a like discontinuation rate and what to expect, which is why we referenced the clinical trials which were of longer duration and you can get a better sense for over time what might be an expected discontinuation rate.

Thomas Wei – Jefferies & Co.

I guess just to make sure that I understand, when you make those comments on discontinuation, I guess I’m having a hard time interpreting if right now what you’re seeing is a relatively high discontinuation rate that you think will stabilize out to something more normalized even if it’s not as good as the clinical trials; or if actually you’re seeing not very many people discontinuing even though there were sicker patients enrolled to start.

Paul Friedman

So we had early on people whose life expectancies were less than six months were put on the drug and early on we had people discontinue because they died. That’s washing through, and we are acsentoting to a number that is lower but we don’t have that number yet. But it’s proceeding as you would expect it to proceed, and I think what Pat has said is that you would expect when we do finally acsentote to a more or less steady state discontinuation rate it’s going to be probably slightly higher than the 14% to 18%, which is what you’d expect out in the field as opposed to a controlled trial. I don’t think we can be any more precise than that at this point.

Thomas Wei – Jefferies & Co.

That’s helpful. And I’m sorry, but just to clarify on the first question that I asked: so if we look at an add of over 600 new physicians during the quarter and basically assume that they each put one patient onto drug, is that basically the source of all of the new patient stream during the quarter – that the 1000 who prescribed before you did not actually see much progress in getting them to prescribe to other patients?

Patricia Andrews

No actually, Thomas, what I was trying to convey was that we see both repeat prescribers as well as new prescribers and both are growing in Q2 over Q1.

Thomas Wei – Jefferies & Co.

Okay, great.

Paul Friedman

And so just to clarify that first statement or to try to clarify it, what we’re seeing because we obviously track this is an increasing percentage over time of physicians who are putting a second patient and a third patient on drug. But still at this point in time the majority of physicians have prescribed for a single patient, but it’s moving in the direction of more physicians putting more than a single patient on. And of course we have individual physicians who’ve put several dozen patients on. So it’s a mix but the majority of prescribers have prescribed for one patient at this point in time.

Operator

Our next question is coming from the line of Rachel McMinn with Bank of America. Please proceed with your question.

Rachel McMinn – Bank of America

Hi, yeah, I have a similar question; I guess a couple of things. One is another way of getting at this: was demand from new patients actually steady in Q2 versus Q1? I think that would help us understand how we should be thinking about the discontinuation rate. And then I’m still struggling over the guidance I have to say, because if you grew $10 million sequentially in Q2 and you kind of assume that demand would be reasonably steady, and you throw in the $9 million of deferred revenue on top we should be getting to much bigger numbers – the high end of your guidance should basically be the low end of your guidance. So I think that’s the part I’m struggling with, and I think when Matt said initially that your guidance assumes falling off in the back half, I think what he was probably referring to was demand; that the number of new patients coming on would be dramatically lower if we go by your guidance. Thanks.

Paul Friedman

So the number of new patients has not declined week-over-week as we follow it. It looks good and I will let Dave reiterate what he said before about the guidance and the growth.

Dave Hastings

Yeah. Again, if you just look at gross shipments for the first half at $60 million, to get to the low end of our net revenue guidance you do have growth in the high teens in terms of gross shipments. At the high end your growth is in the low 30%’s. So there is growth, Rachel, in the back half on a like-to-like basis.

Rachel McMinn – Bank of America

So basically you’re assuming that there’s significant discontinuation rates coming in the back half.

Paul Friedman

No, I don’t think that’s correct. Pat, do you have anything to add to that?

Patricia Andrews

No, not really. I feel like we’ve said about as much on discontinuation rates as we can. We’re not expecting significant discontinuations in the back half beyond what one would expect based on patients staying on drug for six months or one year as you saw in the trials.

Rachel McMinn – Bank of America

Alright, well I’ll follow up offline. Thanks.

Operator

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

Tom Russo – Robert W. Baird

Good morning. Most of my questions have been asked and answered, but I haven’t heard anyone ask yet about the frequency of patient visits. I’m just curious how that’s comparing to expectations, just thinking about docs getting to learn the experience that their first patient is having and then also maybe seeing the next logical patient walk in the door.

Paul Friedman

Pat?

Patricia Andrews

Sure. So patients do visit, MF patients do visit their doctor every one, three, six months depending on their level of illness. And what we’re seeing is that the feedback from the field for doctors who have put that first patient on drug is generally very positive, very encouraging, even surprising in some regards on the physician level. The drug does more and more dramatically than they expect. That being said, a lot of them still haven’t put that first patient on drug. They view the patient as maybe not having such an enlarged spleen or such a burdensome disease that it’s worth taking a risk putting that patient on a new drug. There’s more of a “Well let’s see a little while longer.”

So for me that is all about education and experience, and hearing in professional circles and through education in other forums and through reading in publications for the physician to get comfortable in putting the first patient on and then subsequently, when they have a good experience – which is not after month one; it can be a longer-term thing – putting additional patients on.

Tom Russo – Robert W. Baird

Okay, and are you able to quantify from your market research at all and maybe even provide the trends for awareness, kind of the aided and unaided level of interest and that sort of thing that exists out there today maybe versus at the time of launch, the beginning of the launch?

Patricia Andrews

Sure. So at launch there was not much awareness of Jakafi – it was very low. I don’t want to cite the numbers but it was a low double-digit number on awareness of the product. And now on an unaided basis it’s more like 70% and on an aided basis it’s pretty much 100%. So it’s definitely becoming more aware. There is a difference as you know between awareness and knowledge and comfort, and so awareness is really getting up there. We still need to work on knowledge and comfort and that will happen over time.

Tom Russo – Robert W. Baird

Okay, and my last question: over on 050 you reaffirmed expectations to start Phase III before the end of the year, and I was just wondering if you’d share your latest thoughts on design and maybe setting up for success on the structure [and endpoints] too.

Paul Friedman

Rich, you’re closer to this than I am.

Rich Levy

Yes, so I have to be a little bit careful in what I say since Lily hasn’t announced their specific plans. But what I will say is that we’ve learned from the experience of Pfizer, both from the data on patients who are already experienced on Methotrexate that was presented at the FDA Advisory Committee as well as the information that came out just this week on their positive results with both 5 mg and 10 mg [VID] doses in Methotrexate naives where top line results say that they did see a structure benefit there. And there are other lessons that we learned from Pfizer’s experience as well. So yes, there’ll be structure studies and we’ll be able to talk more specifically about it when Lily announces what they’re doing.

Tom Russo – Robert W. Baird

Great, thank you.

Operator

Thank you. Our next question is from the line of Lisa Bayko with JMP Securities. Please proceed with your question.

Lisa Bayko – JMP Securities

Hi there, good morning. Can you just remind us what the Q1 sold in net was? I’m not sure that I’m tracking with all the numbers for at least Q1.

Dave Hastings

It was $22.1 million or something like that.

Paul Friedman

And that would be analogous to $32.7 million for this quarter. If you were doing sell in net it’s $32.7 million, and since we’ve had no product returns whatsoever that seems like a pretty legitimate number.

Dave Hastings

It was $22.7 million, in that range.

Lisa Bayko – JMP Securities

$22.7 million, and now we’re at about $32.7 million for the quarter?

Paul Friedman

Exactly.

Lisa Bayko – JMP Securities

Okay. And then can you give us any update you can on sort of the rollout timing expectations for Europe? We know obviously it’s approved but then it comes down to all the pricing negotiations and whatnot – just a sense of timing on when we can see some royalties flowing through that?

Rich Levy

So we said that we expect the approval to come sometime this summer, and I just couldn’t be real specific about country-by-country pricing and reimbursement. We do know that Novartis had some sort of call earlier this week and talked about their expanded access program where they have 2200 patients on drug now and when there was pricing in each of those countries those patients had all come over very quickly, almost a bolus there which we don’t have because we didn’t have expanded access per se. So but I think that you can probably look at histories in each individual country as to how long those things usually take to get a ballpark.

Lisa Bayko – JMP Securities

Okay, fair enough. Thanks.

Operator

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

Eric Schmidt – Cowen & Company

Good morning, thanks for taking my question. Dave, I hate to beat the dead horse here on the guidance but I just want to make sure I understand the mid-teens quote from you. So if I understand the math right you’re looking at net bookings of about $49 million in the first half of the year and comparing that to maybe $60 million-ish which is implied at the low end of your $120 million guidance for the year; and that the difference between those two is roughly high teens? Is that where you’re coming from?

Dave Hastings

Yeah, that’s one way of looking at it or you can look at gross shipments as well, Eric, where we did $60 million. If you want to do like-for-like we did $60 million and you would need high teens growth to get to net low end of our guidance.

Eric Schmidt – Cowen & Company

Okay. Thanks for the clarification. And then maybe a question for Pat: one thing that I am still struggling with is on patient numbers. If we kind of make some assumptions looking at your revenue growth Q4 to Q1 to Q2 of this year and kind of make some assumptions for when patients were added, it looks like you had a dramatic number of new patient adds in Q1; and probably exit Q1 it’s something like 1300 patients to 1500 patients on the drug; and then saw very few if any net new patient adds if any in Q2. Clearly you indicated you had at least 600 new patients being added in the quarter so where am I off here? Can you provide us with total patients on this drug? Any reason you’re not?

Patricia Andrews

Well, we’ve always tried to go back to what are the market dynamics with Myelofibrosis and the fact that the patients are dispersed in the community and most docs only have a small number. We’ve always thought the raw basis [decision for prescribing] was always the most critical metric. Because there’s not been a drug out there for Myelofibrosis before, estimating things like discontinuations, compliance, duration of therapy – that’s hard to do with the patients. You can look to the study data and make some estimates and conclusions but you don’t know how that will be in the real world.

But you do know that a new prescriber is a very valuable thing to have because that means that is a physician who probably has a handful of MF patients now getting experience with the drug. So that’s why that is the metric we continue to highlight, because we think that is a kind of unequivocal metric – we know what that means. That is a net positive that that number continues to grow; versus it is a little bit harder to read patient numbers and say “What do they mean?” It depends on how long the patients stay on drug.

Eric Schmidt – Cowen & Company

Okay. I mean I guess I understand that point but can you also help me understand where my math has gone wrong? Or did the new patients total on this drug grow very little from the end of Q1 to the end of Q2?

Patricia Andrews

No, there were definitely new patient adds in Q2.

Eric Schmidt – Cowen & Company

Net patients on drug?

Patricia Andrews

The net patients on drug increased in Q2.

Eric Schmidt – Cowen & Company

Substantially?

Patricia Andrews

That depends on your definition of “substantially.” It increased very much the way we’ve sort of outlined we expected this to unfurl, in a gradual but steady increase.

Eric Schmidt – Cowen & Company

Okay. Is there a point in time when you might allow IMS to collect data on prescriptions just to provide another source of information to us?

Patricia Andrews

Our challenge is that if we let the third parties collect data on prescriptions it also goes to potential competitors to give them a leg up even though they are a number of years behind us that we don’t have to actually give them. And so it is important competitive intelligence and I would like to guard that for as long as I am able to.

Eric Schmidt – Cowen & Company

Thanks for the answers.

Operator

Thank you. Our next question is from the line of [Ying Wa] of Barclays Capital. Please state your question.

Christina – Barclays Capital

Hi guys, this is Christina on behalf of [Ying Wa]. So I just had a quick question around what types of average duration of Jakafi therapy you’re seeing so far; and also to the extent that you can separate for us the proportion of intermediate and high-risk patients on Jakafi therapy.

Paul Friedman

Pat?

Patricia Andrews

Sure. So we think it’s too early to comment on duration of therapy so we haven’t provided that information. It’s just I’m not sure that it would tell you something that you’d actually be able to successfully build a model off of, which is why we’ve gone the opposite way and tried to focus in on prescribers and referred you back to things such as the studies which provide you longer-term information. So we’re somewhat more forward-looking.

And on the percent, what we know from our tracking studies is that about 90% of patients on the drug from the physicians that we’ve surveyed are intermediate II and high-risk, which is maybe 50% of the total in that patient population.

Operator

Thank you. Our next question is from David Friedman of Morgan Stanley. Please state your question.

David Friedman – Morgan Stanley

Hi, thanks for taking the question. Is the $9 million that you guys have shipped but booked as deferred revenue this year so far, is that a reasonably proxy for the dollar amount of channel fill to just build up the run rate of inventory? Or I guess a different way is of the revenue guidance that you’ve given, what amount of that in dollars is inventory buildup to get the channels full?

Dave Hastings

Yeah, $9 million is a good proxy for the inventory held at specialty pharmacies, David.

David Friedman – Morgan Stanley

Okay, and that’s a reasonable run rate given the demand that you guys are forecasting for the year?

Dave Hastings

Yes.

David Friedman – Morgan Stanley

Okay, thank you.

Operator

Thank you. Our next question is from the line of Boris Peaker with Oppenheimer. Please state your question.

Boris Peaker – Oppenheimer

Yes, hello. I would just like to understand the dosing within the first two to three months of new patient, particularly in the community settings. I mean specifically how often do you see docs prescribe maybe two different pill doses, either twice the number of 5 mgs or 5 mgs and 10 mgs to the same patient in order to enable them to adjust the dose themselves? And how is that different between the community setting versus more of an academic setting?

Paul Friedman

Pat?

Patricia Andrews

Sure. So most scripts are written for one bottle, a 30-day supply – that is the vast majority. But you’re right; there are certainly some scripts that are for lower doses, say two bottles of 5 mg for what’s intended to be a 10 mg dose and allows flexibility on the part of the prescribing physician. So just a couple of points on that: we have seen that those are generally covered without too much delay by payers so we consider that a very positive thing. It is coming more from academic physicians, physicians who have more experience with more patients I would say. More of the community physicians are actually starting on a fixed dose such as 15 mg or 20 mg and prescribing it in that strength rather than in subsets so they can titrate around it. But the majority are the script equals one bottle.

Boris Peaker – Oppenheimer

And can you give maybe a more quantitative answer for the patients that do get let’s say two bottles: how long do they typically get the two bottles for? My guess is at some point insurance companies might object to that. And quantitatively how much of an impact does that have on your revenue in terms of having twice the revenue from one patient?

Patricia Andrews

So again, it’s really quite a small percentage of the total. It’s probably single-digit but to be honest I don’t have that data in front of me, but it’s probably a single-digit number. And at the moment as I said it’s not something where there have been many payer issues, but of course the sooner you do something which is a little bit different from what the norm would be there may be an added delay on it. But we see in general very few payer issues, certainly none worth being overly concerned about.

Boris Peaker – Oppenheimer

Okay. Thank you very much for taking my questions.

Operator

Thank you. Our next question is from David Crump with Morningstar. Please state your question.

David Crump – Morningstar

Hi, thanks for taking the call. My question is on that 75% of physicians that you believe are waiting for the perfect candidate. How confident are you that they’re going to get one of those severe patients? It just seems like if there’s maybe 3000 to 4000 severe patients out there there’s a good chance, maybe even half the physicians will never get that perfect severe patient or at least not for many years. So is there any plan to kind of get them more comfortable with the drug and start using it on more intermediate or less severe candidates before they get that perfect candidate?

Patricia Andrews

Yes, absolutely. I mean education and particularly understanding a couple of aspects of the disease is really important because remember, most of these physicians may have 1500 patients in their practice and three or four of them are MF patients. So they’re just not as familiar overall with the disease or with the drug. But one thing that is clear is that many patients advance relatively rapidly; you saw that in our clinical trial. Data even at six months, if you look at what happened to the patients on placebo in COMFORT 1, their spleens grew – the vast majority progressed and progressed fairly rapidly, and sometimes to a fairly large extent.

So MF patients, most will become severe at some point in time. Now of course we think for the benefit of patients it would be better to capture them earlier on in the disease so you don’t let the spleen get so large, so you don’t let the patient have this diminished quality of life, this heavy burden of disease. So it is important to start earlier and our label clearly allows that.

There are no restrictions on timing or starting, and so working on education about the progression of the disease and the role of our therapy in it is definitely an important thing and we will be focusing in on that more over the coming year than we have the past seven months where our focus was more directed on the already-diagnosed, more severely ill patient – put them on drug. They’ve waited long enough; give them something that’s going to help them.

David Crump – Morningstar

Okay, thanks.

Operator

Our next question is from Mani Mohindru with ThinkEquity. Please state your question.

Mani Mohindru – ThinkEquity

Hi, thanks for taking my question. Most of my questions have been answered but I just wanted to get a qualitative sense on discontinuations. What has your feedback been from the field and what’s driving the discontinuations if at all? Is it the lack of expected efficacy or symptom relief that the patient or the physician wanted to see? Or is there emergence of side effects like thrombocytopenia or other [side opinions] that’s driving that? And then I have one more follow-up question on the pipeline.

Patricia Andrews

So I would say the discontinuations, again, it’s hard to be more granular but anecdotally from our feedback from physicians there have been certainly some patients who were very severely ill who went on drug and their discontinuations are because they were just so advanced. But there’s also some discontinuations for anemia or from bicitopenia.

There has to be more education out there on how you might manage expected side effects of the drug, and how when patients are on drug over a long period of time their hemoglobin comes back to somewhat below baseline but to a very reasonable level; and how patients, even though they may experience bad actually tend to still have a significant improvement in their spleen and their symptoms. In support of it is education on working through the discontinuations by adjusting the dose before the patient discontinues rather than having them discontinue.

So we are seeing, there’s certainly dose holds out there and it would be hard to know if something is a dose hold or a discontinuation until time passes. But a lot of it is just what we would expect on side effect management and comfort with that, and that goes back to the education.

Mani Mohindru – ThinkEquity

Okay, so the way I’m looking at it right now is there’s a potential for these patients to come back on therapy unless they go onto some other clinical trials once these side effects get resolved or managed in some way.

Patricia Andrews

I do think that patients, their platelets recover; their hemoglobin if it was depressed would recover. It’s certainly a potential when the patient has that recovery to go back on drug. Our label really states how you restart dosing. Remember, thrombocytopenia would be an expected side effect based on mechanism. The part of it that is making sure that it’s well understood, how you work through that, how you keep the patient on drug – that’s clearly the most beneficial thing for us if the patient is to never stop their treatment rather than discontinue, wait to recover and then go back on. And when they do restart what’s the appropriate restarting dose?

So all of those things are about familiarity with the drug and for a physician who has one patient on drug that’s a longer education than it would be for a physician on their fifth patient, on their sixth patient. So over time I do think that will also be something that familiarity and knowledge helps us work through, but right at the moment it’s all part of what would be expected at this stage of launch.

Mani Mohindru – ThinkEquity

Okay, that’s helpful. And one quick question on the c-MET and the IDO: will we see any Phase I data from that before it’s completely handed over to your partner?

Rich Levy

So that’s going to be up to Novartis at this point. Even though we did the Phase I study for them it really is their decision about what data will get presented and when.

Mani Mohindru – ThinkEquity

Okay. And the initiation of the Phase III RA program, will that be more likely a Q4 event right now rather than Q3? Is that how we should look at it? And I’m trying to get at it from more of a financial perspective to you, from a milestone perspective.

Rich Levy

So I mean let me just say that I don’t think Lily would be comfortable with us being that specific. But we don’t think that there’s much risk at all that it wouldn’t happen this year, which indicates that it’s not close to the end of the year where things are targeted for.

Mani Mohindru – ThinkEquity

Okay, that’s very helpful. Thank you.

Operator

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

Ian Somaiya – Piper Jaffray

My questions were answered so I’ll take myself off the queue.

Operator

Thank you. Our final question is from Thomas Wei of Jefferies & Co. Please state your question.

Thomas Wei – Jefferies & Co.

Thanks for taking the follow-up. Just two things: one, just to clarify from Rachel’s question. So when you talk about a consistent rate of week-over-week adds you meant throughout Q2 and going so far into Q3? And then what can you say around quantify round compliance rates with Jakafi so far?

Paul Friedman

Pat, do you want to take that?

Patricia Andrews

Sure. So my comment on new patient adds I was referring to Q2 over Q1. We’re not commenting on anything after the quarter at the moment, which of course would be understood since this is a Q2 call. And on the next question, it was on... oh, compliance. It’s still, it would be early to talk about compliance. Compliance almost by definition is a longer-term number. You look back over a year and you say how often did patients take the drug versus how often they were supposed to take the drug. And so it’s just too early to comment on a compliance rate.

Thomas Wei – Jefferies & Co.

I know before you’ve said that reasonably well-tolerated oral chemotherapy drugs, the compliance that we’d be looking at is in the 70% to 75% rate long-term. Is it fair to say that just given the fact that doctors are still getting used to this and used to the side effect profile that dose holds and the like, that you may be running at less than that and hoping to kind of get up to those rates over time?

Patricia Andrews

No. I think what I was trying to convey with the 70% to 75% is that that is a good compliance rate for a chronic oral cancer therapy, and I wasn’t necessarily trying to tie it to Jakafi. It was more again, what things do you look at to help give some sense. I can’t give compliance numbers because there hasn’t been enough time since launch, but out there in general compliance of 70%, 75% is pretty good for a chronic oral oncology product.

Thomas Wei – Jefferies & Co.

And that consistent rate comment of it being Q2 over Q1, I guess I don’t understand that. I thought you talked about there being a bolus in Q1 so how could the number of patients added in Q2 be the same as Q1?

Patricia Andrews

I think what I was saying is there was consistent new patient adds in Q2.

Thomas Wei – Jefferies & Co.

Okay, thank you. I’ll follow up offline.

Operator

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

Paul Friedman

This is Paul. We’ve run past 9:30, it’s been a long call. So I’ll just summarize by saying launch is going well. It is almost to the letter on what we forecasted before we launched the drug, and there’s lumpiness if you look at it on a daily or weekly basis but if you look at it on a quarterly basis we think we’re growing. Launch is going well and we’ve said all along that we thought there would be steady and gradual growth and that’s what we’re seeing. Just to reiterate about Q1, it was mildly higher than what we forecasted – not a classical bolus but there were some very sick people queued up. And we’ll obviously keep plugging away and we’ll anticipate that we will continue to grow. And so far there’s no indication that we’re [not] growing at exactly the rate that we forecasted before we started this.

We’re very excited about baricitinib going into Phase III. We think it has a very high probability of technical success and we think that the compounds that we have earlier in the clinic, including 39-110 are very interesting and we look forward to providing you with more information on those at the appropriate time. So with that I will end the call and thank you very much for your attention. Bye-bye.

Operator

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

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