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On top its JAK programs, Incyte has been developing two additional programs it intends to out-license. The first program is INCB13739 for diabetes, which already reached clinical proof of concept and could be licensed imminently. The second program, INCB7839 for breast cancer, is less advanced but could become very interesting later this year depending on data from an ongoing trial.

INCB13739 for diabetes

Incyte made a strategic decision to focus on cancer and inflammation, so the company will probably not retain any marketing rights for 739. The decision also makes sense given the toughened regulatory standards for diabetes drugs the FDA issued following the Avandia fiasco. According to the new policy, trials for diabetes drugs must demonstrate lack of any negative impact on cardiovascular health, necessitating huge pre and post marketing trials.

Last summer, Incyte published positive results from a 300-patient, placebo controlled study, where the drug showed a dose dependent, statistically significant improvement when given in combination with a standard of care drug, metformin. Its activity was similar to that seen with Merck’s (MRK) Januvia in a phase III study in a similar patient population and time point.

Bearing in mind that most drugs perform less well in phase III trials compared to phase II trials, assuming 739 gets approved, it will probably be marginally less effective than Januvia. Nevertheless, 739 could become a successful drug as there is always a need for new treatments for type II diabetes, especially ones that can be taken orally.

739’s novel mechanism of action renders the drug suitable for combination with practically any agent in the market, including the recently approved Januvia (2006) and Byetta (2005). The only issue with those combinations will be pricing, so 739 will probably be tested first with a generic drug such as metformin or Actos.

In a regulatory environment that puts so much emphasis on safety, particularly in the case of metabolic diseases, a good safety profile is necessary in order to ink a deal. 739 seems to have an extremely clean safety profile with a favorable effect on other metabolic parameters such as cholesterol, although long term effects are still unknown.

Incyte is in advanced negotiations and a deal could be finalized already this year. Two deals come to mind as benchmarks for the potential deal. In 2002, when Lilly (LLY) licensed Byetta from Amylin (AMLN), it paid a total of $110M in upfront payment and equity investment for 50% of the US rights and full rights outside North America. Five years later, AstraZeneca (AZN) paid BMS (BMY) $100M for 50% of the marketing rights in the US and Europe for two advanced stage diabetes drugs. The more advanced of these drugs, Onglyza, has just gained FDA approval. The second drug, dapagliflozin, had a positive data read out from a phase III trial this week. Based on the data, some analysts expect dapagliflozin to become the next blockbuster in diabetes with annual sales of $1.5B.

Unfortunately, the tough regulatory environment and the growing competition prevent Incyte from receiving what it could have received several years ago for the same data package. Nevertheless, with the growing prevalence of type II diabetes, 739 could still become a blockbuster drug if the phase II efficacy and safety profiles are corroborated in phase III trials. If Incyte gets half of what Lilly and AstraZeneca paid with mid-teen royalties for the global rights of 739, investors should be more than happy.

INCB7839 for cancer

INCB7839, currently in a breast cancer phase II, is the least validated but probably the most undervalued asset in Incyte’s pipeline. It employs a mode of action long abandoned by the pharmaceutical industry, but Incyte might succeed where other industry leaders such as Pfizer (PFE) and Bayer have failed.

839 inhibits the enzymes ADAM-10 and ADAM-17 that are found on the cell surface of cancer cells. ADAM-10 and ADAM-17 belong to a class of proteins called matrix metallo-proteases (MMPs) that were heralded as promising targets for cancer therapy in the 90’s. Unfortunately, all the MMP inhibitors failed in the clinic due to safety and efficacy issues. Incyte’s approach is a little bit different, as it decided to target only two members of the MMP family, which might be a good enough difference. More importantly, while past trials of MMP inhibitors included chemotherapy drugs, Incyte wisely chose a different setting where the addition of 839 makes a lot of sense.

MMPs clip other proteins on the cell surface and release them to the bloodstream (a phenomenon known as shedding). Some of their clients are important therapeutic targets, such as Her2, the target of Herceptin. The clipping of Her2 results in two unwanted outcomes. First, it creates an active form of Her2 that constantly sends growth signals to the cancer cell. In addition, because the clipped part of Her2 contains the binding area of Herceptin, MMPs decrease the number of available targets on the cancer cell and create decoy targets that can bind and neutralize Herceptin in the bloodstream. Therefore, there is a strong rationale in using 839 in combination with Herceptin.

Another factor which makes 839 so interesting is the ability to focus on the right patient population. Since shedding of Her2 can be measured, it is relatively easy to identify patients who have a high level of Her2 shedding and are therefore more likely to derive benefit from 839. Such a strategy decreases the addressable market but it can also dramatically increase chances for approval and market acceptance, similar to the case in Lilly’s Alimta.

Not surprisingly, patients with increased Her2 shedding are less responsive to treatment with Herceptin, creating an ideal opportunity for Incyte. If Incyte can show that 839 sensitizes patients who do not do well on Herceptin, it would serve as a fast route to market as well as a preliminary proof of concept for the drug’s activity. The ideal way to prove that 839 works is a trial that compares Herceptin with or without 839 in patients who are have high levels of Her2 shedding.

But before that, Incyte decided to do a single arm trial hoping to get some preliminary signs of efficacy. The trial, which is enrolling patients who are Her2 positive with high shedding levels but have never been treated with Herceptin, is a difficult one to enroll. First and foremost, most patients receive Herceptin in combination with chemotherapy, while Incyte’s trial does not include chemotherapy. Moreover, the Her2 segment is packed with new investigational agents (see table), which might explain the relatively low rate of accrual and Incyte’s decision to conduct the trial in India.

Preliminary results from the trial were encouraging and the company expects to present an update in December at The San Antonio Breast Cancer Symposium. Because the trial is not a comparative study, the results should be approached conservatively, but good results in comparison to historical data of Herceptin monotherapy in this patient population might be enough for a modest licensing deal.

Incyte in 2010

The most important catalyst on Incyte’s horizon is data release from the registration trial in myelofibrosis (MF), expected towards the end of 2010. Until then, shares will be affected by two contradicting forces. The company is expected to sign several deals that could provide up to $180M in non-dilutive funds as well as substantially decrease development costs. While these licensing deals are expected to push shares higher, they might face resistance at the $9 level, due to the new convertible bonds.

Assuming full conversion of the debt and a price per share of $10, Incyte’s market cap will be ~$1.6B, not cheap for a development stage company. On the other hand, the company will be debt free, with an additional $400M in its coffers as a result of the debt conversion. As of June of 2009, the company had $147.5 million. Assuming an annual burn rate of ~$130M, expected upfront payments (~$160M), the recent stock offering (~130M) and full debt conversion (~$400M), by June 2010 Incyte could have approximately $700M in cash.

This will put an enterprise value of $900M for a company with several late stage programs, including a potential diabetes blockbuster in phase III (out-licensed) and a drug (INCB018424) that is a year away from approval for MF, a $500M indication. Obviously, initial sales of 424 will be modest ($100-$200M globally) and only half of that figure is expected to end up in Incyte’s hands. However, Incyte’s JAK inhibitors will probably be in mid stage trials for autoimmune indications including RA and psoriasis as well as other blood disorders such as polycythemia vera (PV) and essential thrombocythemia (ET), all representing very large markets.

The main risk in owning Incyte is its dependence on a binary event, which is a common theme in biotech companies. What distinguishes Incyte is that a failure in the MF trial is highly unlikely given the trial design and the data generated to date. Taking all factors into consideration, Incyte is not “money on the floor” but it certainly represents an attractive risk/reward ratio.

Portfolio updates

We decided to sell our position in Alnylam (ALNY) and split the cash in the portfolio between Incyte and Immunogen (IMGN).

                        Portfolio holdings as of Oct 18th, 2009