In 2021, Incyte Corporation (NASDAQ:INCY) expects free cash flow growth as well as many updates from the FDA. With the cash flow from operations growing in the last quarters, Incyte Corporation appears undervalued. I designed a DCF model with a conservative discount of 7.5%, which implied a valuation of $135. Traders are buying shares in the open market at $65-$75, so I believe that Incyte has an upside potential. As soon as more traders learn about market estimates, the share price will most likely creep up.
Incyte Expects Sales Growth To Come Back, And Has More Updates For 2021
Incyte Corp is a biopharmaceutical company conducting both commercial and clinical development operations.
The company’s portfolio is large. Incyte Corporation has product candidates that FDA approved for the treatment of Myelofibrosis, Cholangiocarcinoma, Diffuse large B-cell lymphoma, Chronic myeloid leukemia, and Rheumatoid arthritis, among other conditions.
The company offers approved candidates, and a large pipeline. So, shareholders get access to free cash flow from the company’s commercial activities and may make a lot of money if the product candidates are approved by the FDA.
That’s not all. According to the most recent quarterly report, Incyte Corporation appears to see that growth is returning to pre-covid levels. Q2 sales growth of Incyte ’s product Jakafi was larger in 2021 than that in 2020. The company’s outlook for 2021 is beneficial. Forward year guidance for 2021 was equal to $2.1 billion:
Source: Presentation
The company’s FDA product Pemazyre is also outpacing expectations. Incyte reported sales growth of 33% quarter on quarter. The outlook for 2021 was also beneficial. The company expects patients to increase use of the product:
Source: Presentation
In the last quarterly report, the company also noted that there are plenty of opportunities in Europe and Japan. If Pemazyre and Tafasitamab are successfully launched in markets outside the United States, the company’s sales growth will increase:
Source: Presentation
As shown in the presentation below, Incyte expects many decisions from the FDA in the second half of 2021. The company expects to start trials and release information about clinical efficacy in hematology, oncology, and dermatology products. If some of the new data is beneficial, the stock price will most likely increase. In particular, I would be studying carefully the data to be released about Olumiant for the treatment of Lupus and the FDA decision for the company’s Ruxolitinib:
Source: Presentation
DCF Model Not Taking Into Account New Products Approved By The FDA
If we only take into account the net revenue produced by the products Jakafy, Iclusig, Pemazyre, and the royalties, Q2 2021 revenue is equal to $696 million. Notice that the company is reporting sales growth of 17%:
Source: Presentation
Using the figures shown above, I would expect 2021 revenue to be equal to $2.85 billion, with 2022 sales of $3.4 billion. Notice that my numbers are not very different from that of other market analysts. In 2025, if the FDA does not approve many more products, I would say that 2025 sales will be equal to $5.9 billion.
Like other analysts, I expect FCF/Sales to increase from close to 9% in 2021 to more than 15% in 2025. With these assumptions and a WACC of 7.5%, I get a FCF of $251-$857 million from 2021 to 2025. Now, if we use a Gordon Growth model with a 4% long-term growth and a terminal FCF of $1.28 billion, the implied stock price would be equal to $139:
Source: My Target Price Is $139 With A WACC of 7.50% And Market Estimates
If The Credit Conditions Change, I Expect An Implied Stock Price Of $82
The company does not use debt. However, if the credit conditions change a bit in the future, I would say that volatility may come back to the market. As a result, Incyte’s beta could increase, which may lead to an increase in the company’s WACC. In this case scenario, I used a WACC of 10% and the same FCF expectations. Under these conditions, the implied price is equal to $82, which is more significant than the current share price:
Source: With A WACC of 10% And Market Estimates, The Fair Price Is $82
Source: Seeking Alpha
Incyte Has A Lot Of Cash To Invest In R&D
From the balance sheet, the most remarkable factor is the total amount of cash and marketable securities. In total, as of June 30, 2021, I count more than $2 billion:
Source: 10-Q
Interestingly, the company reported more cash than six months ago. Investors did not give more money to Incyte Corporation. In order to explain the increase in cash, we need to study the cash flow statement. In the last two quarters, Incyte reported positive cash flow from operations. I believe that it explains why cash in hand is increasing:
Source: Fundamental Chart Creator
With regards to the total amount of liabilities, I wouldn’t worry much. Incyte Corporation reported $0.968 billion in total liabilities with almost no debt. With $2 billion in cash, I am not worried about the current amount of liabilities:
Source: 10-Q
Risks From A Decline In Prices Or Competition
The company is expected to receive reimbursement for its products from the government, insurance companies, and other organizations. If the company does not negotiate well its prices, or governments force Incyte to decline prices, revenue will most likely decline. As a result, the free cash flow expectations will most likely decline significantly:
The costs of JAKAFI, ICLUSIG, PEMAZYRE, and MONJUVI are not insignificant and almost all patients will require some form of third-party coverage to afford their cost. Our future revenues and profitability will be adversely affected if we cannot depend on the government and other third-party payors to defray the cost of our products to the patient. Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis. Reimbursement in the EU must be negotiated on a country-by-country basis and in many countries, the product cannot be commercially launched until reimbursement is approved. Source: 10-K
Regarding the negotiations with the US Government, notice that Joe Biden called lawmakers to start legislation so that corporations like Incyte don’t increase drug prices:
President Joe Biden on Thursday called on U.S. lawmakers to enact legislation aimed at lowering drug prices, including allowing Medicare to negotiate drug prices and imposing penalties on drugmakers that hike prices faster than inflation. Source: Biden urges U.S. Congress to take steps to lower prescription drug costs | Reuters
Other companies may get approval for drugs, which could compete with Incyte’s drugs. For instance, Bristol-Myers Squibb (BMY) received FDA approval for INREBIC for the treatment of myelofibrosis. Generic products approved by other companies may also damage the company’s revenue line. In this case scenario, the company could reduce its sales expectations, which may lead to a decline in Incyte’s valuation:
We face significant competition for our drug discovery and development efforts, and if we do not compete effectively, our commercial opportunities will be reduced or eliminated” for a description of risks relating to this type of competition. In addition, JAKAFI could face competition from generic products. As a result of the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, in the United States, generic manufacturers may seek approval of a generic version of an innovative pharmaceutical by filing with the FDA an Abbreviated New Drug Application, or ANDA. Source: 10-k
Conclusion
With Incyte Corporation expecting significant sales growth and several updates coming from the FDA, the outlook looks very beneficial. I used market estimates and a conservative discount of 7.50%, which implied a share price valuation of more than $135. With this in mind, Incyte appears quite undervalued at the current share price of $65-$75. In my opinion, once investors learn about the incoming free cash flow generation, Incyte’s valuation could increase by more than 50%.
