PFE - Incyte: One Of The Most Undervalued Pharmaceuticals

2023-10-18 12:49:03 ET

Summary

• Incyte's stock has declined nearly 60% from all-time highs in 2017 due to market volatility, regulatory challenges, and increased competition.
• Despite the decline, Incyte reported strong financial performance with a 25% increase in net product revenues in Q2 2023 and revised guidance for its flagship product, Jakafi.
• Incyte's drug pipeline and future prospects include promising candidates in various stages of development for the treatment of cancer and inflammatory diseases, positioning the company for long-term growth.

Overview

Incyte Corporation (INCY) is a biopharmaceutical company known for its innovative therapies in the field of oncology and inflammation. Incyte's stock has experienced a significant decline, with shares down nearly 60% from all-time highs in 2017. This contraction in valuation can be attributed to various factors, including market volatility, regulatory challenges, and increased competition. Nonetheless, Incyte continues to show resilience and has positioned itself as a leader in the development of targeted therapies.

Financial Performance

In the second quarter of 2023, Incyte reported total net product revenues amounting to $827 million, marking a 25% year-over-year increase. The company's flagship product, Jakafi (ruxolitinib), accounted for a substantial portion of this revenue, bringing in $682 million, which is a 14% rise from the previous year. As a result of its strong performance, Incyte has revised its full-year guidance for Jakafi, now projecting a revenue range between $2.58 and $2.63 billion for the entirety of 2023.

Another noteworthy product, Opzelura (ruxolitinib cream), experienced a significant surge in sales, with Q2'23 revenues reaching $80 million - a staggering 384% increase year-over-year. This growth is attributed to its continued uptake for conditions like atopic dermatitis ((AD)) and vitiligo. Additionally, the company announced positive outcomes from two pivotal studies. The ruxolitinib cream showed promising results in pediatric atopic dermatitis as part of the TRuE-AD3 study, and axatilimab successfully met its primary endpoint in the AGAVE-201 study for chronic GVHD.

Incyte's Q2 2023 earnings report revealed a modest increase in total GAAP revenues, reaching $954.6 million, representing a 5% year-over-year growth. The company reported $204 million in net income, representing a healthy 21% profit margin. Investors will be looking at Q2 earnings, which the company is set to report on October 31, 2023, before the market opens. This could be a key catalyst to drive performance for the remainder of the year.

Drug Pipeline and Future Prospects

Oncology : Incyte was heavily invested in oncology research, with Jakafi (ruxolitinib) being its flagship product approved for myelofibrosis and other indications. They also had several other molecules being studied for different cancers.

Immunology : Incyte had been developing treatments for a range of immune disorders, including atopic dermatitis, rheumatoid arthritis, and other conditions.

Hematology : Beyond Jakafi, Incyte had been researching other potential treatments for blood-related disorders.

Targeted Therapies : Incyte had various molecules in development that target specific pathways or mechanisms involved in disease.

Checkpoint Inhibitors : Immune checkpoint inhibitors are a class of drugs that help the immune system attack cancer cells, and Incyte had been exploring this area as well.

Incyte's drug pipeline is a key component of its long-term growth strategy. Beyond its FDA-approved pipeline, the company has several promising candidates in various stages of development for the treatment of cancer and inflammatory diseases. Axatilimab and parsaclisib are among the potential breakthrough therapies that could further expand Incyte's product portfolio. However, it is important to approach these candidates with cautious optimism, as they are still in the early stages of clinical trials. The upcoming Phase II data will be critical in assessing their efficacy and safety profile.

Attractive Valuation

From its initial highs in 2017, Incyte's valuation has contracted significantly. The company's valuation has traded at over 10 times Price to Sales (P/S) for most of the past decade due to its continuous growth. While this may have arguably been a very forward-thinking valuation, it is not uncommon for stocks in the pharmaceutical sector to trade at such valuations.

For instance, Regeneron ( REGN ) and Vertex Pharmaceuticals ( VRTX ) have been able to hold up a valuation of over 10x P/S and still grow into their valuations due to their high-profit margins. Recently, Pfizer ( PFE ) agreed to acquire Seagen ( SGEN ) for $43 billion in order to get a hold of its promising oncology pipeline. As of right now, Seagen has a revenue run rate of just over $2 billion. It also hasn't turned a profit yet. This compares to Incyte, which is generating well over $3 billion in annual TTM sales and is already profitable.

Research and development (R&D) is one of the most crucial aspects of the pharmaceutical industry, as it allows for the discovery of new drugs, which can lead to significant revenues until the patent runs out. In this regard, Incyte has continuously increased its R&D spend over the past years, in accordance with its increase in revenues. The company is currently spending roughly $1.7 billion in TTM R&D, which represents roughly 50% of its TTM revenues. In comparison to other Biotech companies with similar size and growth rates, Incyte's market cap to R&D spending is by far the lowest. In my opinion, this highlights its significant undervaluation with regard to future potential drug developments.

Incyte also has a strong balance sheet with $3.4 billion in cash reserves and just $40 million in debt. This gives Incyte significant flexibility for potential acquisitions or share buybacks. Thus, Incyte currently trades at a price-to-book ratio of just 2.7x, which is at an all-time low. I also see Incyte as a potential acquisition target for larger competitors like Gilead Sciences ( GILD ) or AbbVie ( ABBV ).

Conclusion

Incyte's recent earnings report highlights its ability to generate consistent revenue growth, driven by successful products like Jaka? and Opzelura. The company's robust financial position and promising drug pipeline provide a solid foundation for future growth. However, the competitive landscape and regulatory challenges warrant careful consideration. Investors should closely monitor Incyte's clinical milestones and assess its ability to navigate the evolving biopharmaceutical landscape. While risks exist, Incyte's dedication to innovation and its historically low valuation make it an appealing investment opportunity, in my opinion.

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