Analyst Conference Summary

biotechnology

conference date: May 4, 2017 @ 7:00 AM Pacific Time
for quarter ending: March 31, 2017 (Q1, first quarter 2017)

Forward-looking statements

Overview: Product revenue continues ramping rapidly while newer products near FDA & EMA decisions. Heavy R&D expense leads to net loss.

Basic data (GAAP):

Revenue was $384.1 million, up 18% sequentially from $326.5 million, and up 46% from $263.5 million in the year-earlier period.

Net income was negative $187.1 million, down sequentially from $8.9 million, and down from $24.0 million year-earlier.

Diluted EPS was negative $0.96, down sequentially from $0.05, and down from $0.12 year-earlier.

Guidance:

Updated full 2017 guidance: mostly unchanged except R&D expense raised to $1.0 to $1.1 billion. But milestones now estimated at $130 million, had previously been $300 million, this was due to the delay of approval in Olumiant in the U.S.

Jakafi product revenue $1.02 to $1.07 billion; Iclusig $60 to $65 million; SG&A expense $340 to $360 million; contingent consideration $30 to $35 million.

Resulting in a net loss of $150 to $170 million, vs. the prior prediction of net income of $50 to $70 million.

Conference Highlights:

“We believe that our clinical portfolio is progressing well, with epacadostat moving rapidly into multiple pivotal programs and numerous other programs in or planned to enter potentially registration-enabling studies.” stated Hervé Hoppenot, Incyte’s CEO. Incyte is estimating a Jakafi, United States only sales peak of $2 billion per year.

Incyte will being included in the S&P 500.

Key short term drivers to value are:

Baricitinib (Olumiant) for rheumatoid arthritis, which was approved in Europe, but is now being subjected to a longer review by the FDA (complete response letter). Royalties from Novartis were included in Q1 product royalty number, not broken out, only for 1 month.

Jakafi in new indications: GVHD, essential thrombocytemia, myelofibrosis and polycythemia vera. See below for details.

The epacadostat collaboration with Merck, combining it with pemrolizumab in trials for five tumor types. Also in collaboration with Bristol-Myers Squibb in combination with nivolumab in pivotal studies for two cancer types. Some data driving this program will be released next month.

Incyte amended its collaboration agreement with Agenus to develop GITR and OX40 antibodies (they are immune checkpoint modulators) to royalty programs. Renames INCAGN1876 & INCAGN1949. Incyte will fund and conduct development, Agenus will receive a 15% royalty if they are commercialized, and possible milestone payments. The TIM-3 and LAG-3 collaboration deals remain unchanged; they are already royalty programs. Agenus also gets a $20 million milestone payment. Incyte also bought 10 million shares of Agenus (AGEN) at $6 per share, a premium above the February 13, 2017 closing price of $4.12. See Incyte press release on Agenus agreement.

In Q1 Incyte also invested in Merus for long term access to bispecific technology and in Calithera for global rights to a first-in-class arginase inhibitor.

Cash and equivalents ended at $512 million, down sequentially from $809 million. Debt reduced to $42 million in convertible notes.

"Baricitinib, a potential new oral treatment for patients with rheumatoid arthritis (RA) licensed to Eli Lilly and Company (Lilly), is now approved in Europe as Olumiant®. But the FDA asked for more data, which could result in a substantial delay in approval, if any. Incyte has recently opted into co-development of multiple new indications for baricitinib, including psoriatic arthritis, in which Lilly is expected to begin a Phase 3 trial in 2017."

Epacadostat, a IDO1 inhibitor, Phase 3trial in first-line advanced or metastatic melanoma in combination with Merck’s pembrolizumab could have the initial data in 2018. Multiple Phase 2, tumor-specific, expansion cohorts of epacadostat in combination with anti-PD-1 and anti-PD-L1 checkpoint modulators are also underway (the ECHO series trials). Phase 3 trials for NSCLC, bladder, renal, and head and neck cancers are planned. Also in collaboration with Bristol-Myers Squibb in combination with nivolumab in pivotal studies for two cancer types. Data presentations will be made as ASCO.

Novartis expects to announce NSCLC data for Capmatinib in 2017, with an NDA submission expected in 2018.

Jakofi (ruxolitinib) for GVHD (graph v. host disease) is in development, with a Phase 3 trial sponsored by Novartis for acute GVHD started in March and a second trial for chronic GVHD to begin later in 2017.

Jakafi received positive Phase 3 data in trials for myelofibrosis and polycythemia vera (both myeloproliferative neoplasms).

INCB39110 (now Itacitinib) is also in a proof of concept trial for graft vs. host disease and has completed recruitment, with initial data expected this year. A combination Phase 1 trial for lung cancer should start this year.

INCB54828 Phase 2 trial for bladder cancer with FGFR pathway alterations is recruiting patients. 54828 is a FGFR inhibitor. Another Phase 2 trial was started for cholangiocarcinoma. First data was released at AACR in April.

INCB50465, the selective PI3Kδ inhibitor as monotherapy in patients with diffuse large B-cell lymphoma (DLBCL), first patient was dosed in the Phase 2 CITADEL-202 trial in February.

"Novartis anticipates submitting an NDA for capmatinib, Incyte’s potent and selective c-MET inhibitor, in 2018."

A large number of other trials continued, or are expected to be launched in 2017.

See also Incyte pipeline or Slide 14 of the presentation accompanying the webcast.

Cost of product revenue was $15 million. GAAP operating expenses were: $408 million for research and development and $87 million for selling, general and administrative expenses, and $7 million for change in value of a contingent consideration. Leaving income from operations of negative $133 million. Interest and other expense was $6 million. Unrealized loss on investment was $6 million. Senior note conversion expense $54 million. Income tax benefit $11 million.

R&D expense included $209 million in upfront and milestone payments to Agenus, Calithera, and Merus.

Takeda notified Incyte that they will not be exercising the Iclusig buy out rights in Europe.

204.6 million shares, mainly as a result of converting senior notes.

Q&A:

ASCO epacadostat threshold data? We will show response rates and progression free survival. Our decision was the conclusion is that, based on deltas in response rates and long-term durability, we will reach the necessary threshold.

Jakofi revenue, how much inventory, why no guidance raise? Inventory was at low end at end of 2016, did build inventory by about 1/2 week in Q1, want to see more data before raising guidance.

Epacadostat choices, reasoning? We are not married to the need for chemotherapy or not, in the immunotherapy trials. We want a variety of data in combo with chemotherapy for various histologies. This could guide the choice of future phase 3 studies.

Steroid-refractory, how is that defined in REACH trials? Accepted definition is that resistance after 5 to 7 days to standard steroids indicates refractory. We are using well-established standards for endpoints.

Sickle cell anemia trial planned? Preclinical data is compelling. Will need to see first patient responses to know more.

Looking for PD-1 monotherapy comparison, or more? For PD-1 alone you would be benchmarking against prior studies. But new studies could come out, including combo studies that set a higher standard for results. Our doublet is showing long term tolerability.

Post CRL meeting with FDA on Olumiant? We remain confident, given the EMA approval. Lilly is guiding to continuance of the programs for other indications. Lilly is in charge here, so we can't comment further.

1210, our PD-1, that program is on recruitment hold. We are accessing safety and efficacy.

Tolerability of topical Ruxo (Jakafi) given a similar product's adverse rash events? We presented data in November 2016, there were grade 1 and 2 skin reactions. But nothing to prevent us from going forward with atopic dermatitis. The alopicia areata program was stopped because of lack of efficacy, not adverse reactions.

Today we do not think our portfolio is too large for us to manage internally. We can always look to partner for commercialization, but would be worth more if we have more value built into products first.

Business development appetite? In Q1 it was very busy. We are looking at the long-term growth of the organizations. We will continue to look, the Olumiant event is not changing that. If we see opportunities that are good for the shareholders long-term, we can take advantage. No real change in plan.

IDO inhibitor competition? We thing our Epacadostat data is broad and ahead of the competiton.

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