Incyte Has Insight Into Market With Potential Blockbuster Drugs

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The biotech industry has a mixed outlook for 2017 with few new drugs coming to market this year, but midcap Incyte ( INCY ) is one of the few companies with potential blockbusters in its pipeline.

Incyte closed out 2016 and started 2017 with some major developments. The first came late last year when the company discovered that its Jakafi drug won't be facing competition from Gilead ( GILD ) in 2018 as previously expected. Jakafi is used to treat two maladies: myelofibrosis, a bone marrow disorder, and polycythemia vera, a type of blood cancer.

Gilead's rival drug to Jakafi, now known as momelotinib, failed a Phase 3 study for previously untreated myelofibrosis patients in November. That left Incyte's primary revenue driver free of competition for the foreseeable future, according to Ian Somaiya, a biotech analyst at BMO Capital Markets.

"It's rare to see a drug that can generate $2.5 billion to $3 billion (in sales) and face no competition," he said of Jakafi's peak sales potential. In its most recent earnings report, Incyte officials said Jakafi accounted for $224 million in net product revenue in the third quarter, up 39% from the year before. The company raised its full-year net sales outlook on the drug to $850 million-$855 million from an earlier outlook of $825 million-$835 million.

Morgan Stanley analysts said in a note to clients Tuesday that they see the drug's revenue growing 13% a year.

Cancer Drug Potential

Then earlier this month, Incyte announced its immuno-oncology drug, epacadostat, along with Merck 's ( MRK ) Keytruda, will be used in four Phase 3 studies this year. They include treatment of non-small lung cancer as well as renal, bladder and head and neck cancers.

"The opportunities in solid tumors could be a (earnings) multiplier" for epacadostat, Somaiya said.

If the drug passes the trials and receives Food and Drug Administration approval, analysts expect $1.6 billion in peak sales, according to a recent Goldman Sachs note.

Morgan Stanley analysts said in their note that they expect key data from the studies that prompted the companies to start a Phase 3 trial will be disclosed at the American Society of Clinical Oncology conference in Chicago in June.

[ibdchart symbol="INCY" type="daily" size="threequarter" position="rightchart" ]"Epacadostat has the potential at least to be one of the biggest pipeline drugs," said Eric Schmidt, biotechnology analyst at Cowen. "It could be active against so many tumor types."

Arthritis Treatment

Finally, on Jan. 13 the FDA extended its review period of baricitinib, and investigational rheumatoid arthritis drug jointly developed by Incyte and Eli Lilly ( LLY ). But Morgan Stanley took that as a bullish sign that the FDA didn't ask for any new studies and sees "imminent approval."

Still, analysts lowered its U.S. sales estimates for the drug to $98 million from $197 million for the 2017 on the delay. Yet they see peak sales of $1.8 billion in 2026.

Management has played a key role in Incyte's success in recent years. Incyte Chief Executive Herve Hoppenot, who took the helm in 2014, was previously the president of oncology at Novartis ( NVS ). Many scientists on the oncology side followed Hoppenot to Incyte.

"What always made Incyte unique is the expertise in biology," Somaiya said. "With the management changes, you have that expertise to develop those drugs, conduct larger trials, bring those drugs to the market and independently market them."

Acquisition Target?

But analysts question how much longer the company will remain independent. Incyte is the largest midsize company in the oncology space and a potential buyout target .

The endgame for most biotechs is to be bought by a larger pharmaceutical firm that has a "less fruitful pipeline" according to Michael Schmidt, senior biotech analyst at Leerink Partners. He is no relation to Cowen's Eric Schmidt.

IBD'S TAKE:Incyte is ranked second in IBD's Medical-Biomed/Biotech Group and has a 94 composite rating. Shares jumped into buy range out of a flat base with a 110.05 buy point on Jan. 9, after the company announced its drug trails for epacadostat.

"Oncology pipelines are very interesting from an M&A standpoint. There's scarcity of companies that have a good pipeline," Michael Schmidt said. But he wouldn't speculate on what companies could be interested in Incyte.

In a September poll by the Evercore ISI investment bank, analysts voted Gilead as the most likely to buy out Incyte in the next 12 months.

Despite President Donald Trump calling out the drug industry over "disastrous" drug prices, merger activity could heat up this year. Under a Trump administration, there could be changes in the tax code, as well as a possible boost in foreign cash and increased stock valuations, according to a Reuters report .

Plenty Of Risks

While Incyte is poised for a successful 2017, the biotech world isn't without risks.

"Beyond the traditional drug development risks, there is always regulatory risks," Michael Schmidt said. "And oncology is obviously a competitive space, particularly immuno-oncology."

But Cowen's Eric Schmidt said he's not worried about competition in the oncology sector.

"There is too much unmet need, too many patients are dying," he said, adding that valuation is the prime risk.

"The biggest risk is that there is a fair bit of good news priced into Incyte," he said. "So if something goes wrong valuation could come in and correct a lot."

Shares of Incyte seemed ready to hit a third straight day of gains, but met resistance after crossing the 120 mark on Friday. Shares ended Monday's session up marginally to 117.42.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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