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Incyte Pharmaceuticals- The Next Big Thing?

|Includes: Incyte Corporation (INCY), PFE
Incyte Pharmaceuticals- JAK it Up
Incyte Pharmaceuticals has one of the most promising pipelines in the small to mid-cap space. It has two very promising compounds in development, INCB18424 for the treatment of Myelofibrosis (MF), a disease classified under the Myeloproliferative disorders (MPD) family, and other oncology indications, and INCB28050 for the treatment of Rheumatoid Arthritis (NYSE:RA).

Both of these compounds belong to a class of compounds called JAK inhibitors- currently an area of very hot development. Pfizer is farthest ahead with a JAK inhibitor for RA with pivotal trials ongoing, but Incyte has been granted orphan status for MF. Although MF is a small market, with a prevalence of fewer than 18,000 patients in the US, it will allow Incyte a quick path to market and revenue generation. Incyte has estimated that at a price of $50,000/patient, it has a market potential of $800M/year in the US from MF treatment alone. This does not take into account any other indications INCB18424 is currently being tested for.

The JAKs are intracellular Tyrosine Kinases that transduce signals by activating the STAT transcription factors. JAKs have some overlapping but also unique functions. For example, JAK1 is vital in IL-6 signaling, JAK2 for G-CSF, JAK3 in B-Cell function, and TYK2 can mediate both pro and anti-inflammatory responses.
Incyte has promoted INCB18424 as a specific inhibitor of JAK1 and JAK2. By suppressing JAK1, IL-6 signaling is decreased. IL-6 is a key component in the pathogenesis of autoimmune diseases, inflammation and certain cancers. In fact, Roche has just received approval for its anti-IL-6 antibody Actemra for RA this January.

Just as important, JAK2 is a well-studied and validated target in MF. A mutation called JAK2 V617F is found in greater than 30% of MF patients. This makes this the JAK2 mutation an ideal target for MF.

Incyte had shown stellar activity with INCB18424 in earlier Phase II MF trials. The compound showed quick onset of clinical activity, improved constitutional symptoms, reduced number of cells with mutant JAK2 (allele burden), reduced need for blood transfusions, reduced inflammatory cytokine levels, and most of all caused a marked reduction in spleen size. Thrombocytopenia (decrease in platelets) was observed at high dose, but no other toxicities were observed. No patients dropped out. This is important because one other JAK2 inhibitor, XL109 from Exelixis, was dropped due to unresolved toxicities.

On November 27, 2009, Incyte entered into a partnership with Novartis to form a worldwide development plan for INCB18424. For an initial payment of $210M, Novartis gained the ex-US rights to the compound. Incyte retained all rights to the compound in the US. Each company will pay for studies in their own territories. If successful, Incyte will also receive up to $1,100M in developmental in commercialization milestone payments along with tiered double digit royalties. 
Following quickly on the heals of this deal, Incyte announced a partnership with Eli Lilly for a worldwide license agreement to INCB28050. This deal netted Incyte $90M upfront and $665M in milestones. Although these numbers are smaller than the previous deal, the deal gives Incyte a higher royalty and a potentially greater share of profits. Royalties will begin around 20%, but if Incyte should decide to opt in and share 30% of development costs with Lilly, its royalty rate jumps to the high twenties.

With upfront payments from these two deals along with a secondary offering placed in September 30, 2009 which netted $132.7M, Incyte now has a strong balance sheet with over $400M in cash. This is more than sufficient to take it into the launch of INCB18424 in 2011, and the leeway to co-develop INCB28050 should it so desire, generating greater future returns.

High expectations are built in for INCB18424 due to the impressive Phase II data. In the ongoing Phase III trials, the US trial is placebo controlled, with the primary endpoint set at a statistically significant proportion of patients achieving a 35% reduction in spleen volume at 24 months. Patients in the placebo arm are allowed to cross over to the treatment arm. The EU trial is compared to best of care; the endpoint is the same, but the timeline is 48 months. Management has said they fully expect to meet these endpoints based on their knowledge of the compound. Data is expected at the end of this year. Talks with the FDA are ongoing to determine trial designs for a Phase III study for PV, a disease lessor in severity to MF, but also catorized as an MPD.

On May 6, Incyte revealed top-line
three-month Phase II results for INCB28050 from an ongoing six month trial. In this 125 patient trial, they showed that at the three doses tested, ACR scores improving rapidly for the 4 mg, 7 mg and 10 mg dose groups. On the ACR20, 50 and 70 measures, patients demonstrated response rates of 60 percent, 36 percent and 16 percent. All three dose groups had similar ACR responses, adverse events were described as mild to moderate. These results were said to be comparable to Pfizer’s JAK inhibitor as well as current biologics used in the treatment for RA. The company indicated that in the planned Phase IIb trial, they intend on dropping the 10 mg dose and adding a lower dose due to the compound’s potency.

In current RA treatments, patients first receive drugs such as NSAIDS and Methotrexate, then biologics such as Embrel if their conditions do not improve. Incyte management has speculated that due to the safety profile and ease of administration (oral vs. injection), JAK inhibitors may upend the current therapy regime, with the use of biologics following the use of oral JAK compounds.

Incyte is now trading at just below $13, off its recent April high of $14.78 during the anticipation of interim INCB28050 RA data. In the last three months, it has continued to out-performed both the Nasdaq and Amex biotech indices.

Here are some catalysts that could cause a spike in the stock price:
1: INCB18424 Phase III trial is ended early due to overwhelming signs of success
2: Partnership announced for topical INCB18424 in psoriasis
3: Initation of INCB18424 in Phase III for PV under SPA
4: Unveiling of final 6 week Phase II data for INCB28050 at the American College of Rheumatology in November

Disclosure: Long INCY