INCY - Incyte: Growing Strong But Overhyped

2023-04-18 10:45:54 ET

Summary

• Incyte Corp. has strong growth in their two main drugs, Jakafi and Opzelura.
• Jakafi patent expires in 5 years, with no current solution.
• Opzelura is growing, but still uncertain in potential market size.
• Incyte is currently overweight and is above its fair value.

Investment Thesis

Incyte Corporation ( INCY ) is a biopharmaceutical company headquartered in Wilmington, Delaware, that specializes in the creation, development, and commercialization of pharmaceuticals in health fields including oncology/hematology and autoimmune disorders. The company currently has 8 approved products on the market: Jakafi, Pemazyre, Monjuvi, Iclusig, Zynyz, Opzelura, Olumiant, and Tabrecta. Jakafi, its main product, is used to treat myelofibrosis, polycythemia vera, and more recently, graft-vs-host-disease (GVHD) in adults. Their newest drug Opzelura, has been approved as a treatment for nonsegmental vitiligo and atopic dermatitis (eczema) in adults and children 12 years and older. Incyte Corporation currently has a market cap of $16.54 billion.

I believe that high interest rates, expiring COVID-related laws and regulations, and a still stuffy supply chain will hurt the markets in 2023, with global tensions and war adding more uncertainty to the picture. However, the health care sector is much more resilient to these knock on effects, as their products are always used and needed, but that does not mean they are immune to falling stock values. They currently have quite a high P/E ratio, at around 50x, along with an EV/EBITDA of 20.46x. That is a bad valuation, even for a biotechnology company. Incyte’s P/E is 92.7% higher than the sector median, and the EV/EBIDTA is 31.7% higher. That, along with the nearing expiration of the patent on their main product, would usually lead me away from an equity like this.

With all that being said, Incyte has great fundamentals. Their new drug, Opzelura, is quickly picking up market share in its first few quarters out. They’re actively reinvesting their profits from the company back into R&D, which is coming to bear fruit, with many new drugs in trials and testing. The company is receiving new international approvals for new uses of some of their existing drugs, like Jakafi, Pemazyre, and Zynyz. The company has over $3 billion on its books, which is 3x its total liabilities, with the company having little to no debt. I love the financials of Incyte, they have great net income, good margins, and with all their cash on hand, they are set up well for an explosion of growth.

Now, with both of these negatives and positives in mind, I would consider Incyte a wash for the current time. Its poor valuation and looming problems in the market, as well as in its own patent worries, dissuade me from entering a position in INCY at its current price. However, if it is already in your portfolio, not selling might be the best move, as I think it could be a winner in the long run.

Jakafi

In Q4 of 2022, Jakafi hauled in $647 million in revenue, comprising almost 85% of net revenues for the quarter. Jakafi revenues increased 13% YoY with end year revenues of $2.4 billion representing nearly 71% of full year product revenues for Incyte. This growth was seen across the board, with new adult patients taking Jakafi for all three ailments it’s approved to treat, myelofibrosis, polycythemia vera, and more recently, graft-vs-host-disease. Also factoring in this growth was the establishment of the standard-of-care (SOC) for all three ailments with long term benefits seen, specifically a longer duration of treatment for chronic GHVD patients. Total GHVD patients grew 11% YoY in Q4, showing good growth in this new market. Myelofibrosis remains the majority of patient treatments, representing around 47% of total patients, but it’s majority has been losing ground to the new GVHD market and the growing polycythemia vera patients. Incyte projects YoY revenue growth of 4.8% to 8.4% for Jakafi in 2023.

Jakafi is a great product, with good future outlook, but its patent runs out in 2028, giving Incyte 5 years to attempt to extend the patent, or else face fierce competition from generic brands. The golden goose for Incyte, the loss of even a third of Jakafi revenues would severely affect the company. Incyte hoped to gain approval for a new once-a-day extended release version of Jakafi that would be granted its own patent and be more attractive than any possible multiple tablet generics. Many analysts and people within Incyte itself expected the approval of this form in March 2023, however this did not come pass. The FDA promptly rejected the approval of this new extended release form on March 24 ^th . Although Incyte seemingly had the correct requirements met for approval, the FDA recognized “…additional requirements for approval.” With this new extended release form now in FDA limbo, it’s hard to see where Incyte will be able to maintain the patent or Jakafi sales post expiration.

Incyte has also been trying to develop combination drugs that use Jakafi as a way to maintain revenues post expiration. This has led to the development of the Leading in MPNs Beyond Ruxolitinib (Jakafi) program also known as LIMBER. This LIMBER program recently resulted in the trial testing of a new drug to combine with Jakafi, called parsaclisib. This drug was supposed to help non-responders to Jakafi who suffer from myelofibrosis, however the trial was cut short after early findings failed to meet its primary endpoint. Although we don’t have access to the data from the trial yet, we can infer that parsaclisib is a dead end for Incyte in the search for a Jakafi companion drug. We do not know of any other plans for other drug combinations involving Jakafi, but they now have a freed up R&D budget after the cancellation that I’m sure they will put to work soon. Still, as of now, there is no concrete solution to the Jakafi problem.

Opzelura

Opzelura, Incyte’s new vitiligo treatment drug, has seen great growth over its first real year on the market, bringing in revenues of $61 million in Q4, a 61% increase from Q3, and a 469% increase from Q1. This large increase of revenue can be explained by the increase in patient advocacy along with high social media activity, and the launch of Incyte’s “This is Vitiligo” campaign. Opzelura is also used to treat atopic dermatitis ((AD)) which Opzelura is now one of the top first choice treatments prescribed by dermatitis, although it is more often the second or third option of treatment. Incyte has just started broadcasting TV direct-to-consumer advertisements in the first quarter of 2023, so we have not been able to see the results, but we will see on May 2 ^nd when Q1 earnings come out. Incyte expects the improved advertising campaigns, including an ad narrated by Morgan Freeman , will help boost sales and help quicken the pace of market dominance and awareness. This quarter has also seen the approval of Opzelura for vitiligo treatment in the EU , majorly increasing the market size for the products.

Opzelura is quickly picking up market share but is still an unknown in terms of long term revenue. We are just starting to see the first patients using Opzelura in the long term, the results so far have been positive, showing effectiveness with long term use. The question remains with just how large the market can be, and with what effectiveness can Opzelura dominate the market. Incyte are still selling Opzelura for a fairly high discount, standing at 57% at the end of Q4, off the company’s end of year goal of 50%, but a marked improvement from its 71% discount in Q3. Incyte is aggressively pursuing more coverage for the drug and hopes to achieve a 40-50% discount rate in the near future. This high discount rate signifies the high competition in the atopic dermatitis space, and only puts more pressure into the vitiligo side of the drug, which for the moment, is competition free.

However, Chinese biotech company Minghui Pharmaceutical is currently starting FDA approved late stage trials for their own JAK inhibitor, the same kind of drug as Opzelura. Minghui believes their drug could treat dermatitis, vitiligo, alopecia areata, and prurigo nodularis. Dermavant Sciences has also seen positive results in their first of two phase 3 studies for their drug, Vtama . Vtama could possibly eat into the market share of Opzelura in the atopic dermatitis field. Dermavant expects Vtama to reach the market as early as 2024. Although Minghui’s and Dermavant’s drugs are not FDA approved, their trial results have been positive and seem to further increase the need for speed in gaining market dominance for Opzelura and Incyte.

Other Drugs

Incyte has seen an increase in sales across their portfolio, with two of their other drugs, Monjuvi/Minjuvi and Pemazyre, also seeing large growth. Monjuvi/Minjuvi is a drug used as treatment of diffuse large B-cell lymphoma (DLBCL) that has relapsed or did not respond to prior treatment. Monjuvi has seen an increase in sales 13% YoY, up to $89 million in 2022. Minjuvi is currently successfully launching in the European markets, seeing sales in Germany increase over 250% YoY in 2022. Pemazyre is a drug used to treat adult bile duct cancer patients when the cancer has spread or cannot be surgically removed. Sales for Pemzyre totaled $83 million for 2022, up 22% YoY. Much of this growth has been attributed to the launching and growth of it in European and Japanese markets. Pemazyre has also recently been approved in Japan to treat myeloproliferative syndrome, a rare type of blood cancer. Although all these movements have been positive and are good to see, the other 6 drugs outside of Jakafi and Opzelura account for only 7.6% of yearly revenues, meaning they take a backseat priority behind the other two drugs.

Valuation & Financials

As I previously said, the financials for Incyte are phenomenal. Very low debt at only $55.6 million , $3 billion plus in cash on their books, and almost $6 billion in total assets, compared to $1.157 billion in total liabilities. As shown above, their revenue as been steadily increasing, and they are looking to thicken their margins in the upcoming years.

However, for as good as their financials are, Incyte needs to know its place in the market. It’s not a huge firm in the open drug market and is definitely still a small time player, focusing on niche drugs. For this reason, I think their current P/E ratio of 49.01x is very bad, even for biotech firms, and is 92.34% higher than the industry median average of 25.48x. Their price to book ratio is also very high with their P/B coming in 91.98% higher than the median average of 1.98x at 3.80x.

Let’s quickly walk through a discounted cash flow evaluation to get a better look at their current value:

Free Cash Flow = $719,800,000

Cost of Equity = 7.2%

Cost of Debt after taxes = 5.45%

Weighted Average Cost of Capital ((WACC)) = 7.53%

Terminal Growth Rate = 3%

Current Stock Price = $74.83

DCF Price Per Share = $68.41

My DCF calculations imply that INCY is currently above its fair valuation price, and this is what I expected when given the financials and ratios I previously mentioned. This current overvaluation could turn into a loss of about 8.5% if the stock falls to its estimated value.

Conclusion

Even with the strong growth numbers in Jakafi and promising new drug entries into the market such as Opzelura, I still think Incyte has become overhyped. The company has no concrete solution to their Jakafi problem and Opzelura revenues are still relatively low, and it is uncertain how much it could potentially bring in. There are too many what ifs and leaps of faith I would have to make to enter a position at its current price. If we see a sizable fall in their stock price, I might consider entering a position, but as of right now, I’ll let Incyte pass on by.

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