INCY - Opzelura's Growth Challenges: Incyte Faces Hurdles In Nonsegmental Vitiligo Market

2023-07-10 11:17:31 ET

Summary

• Incyte Corporation's Q1 2023 financial performance showed mixed results, with a 10% rise in GAAP revenues but a significant drop in operating and net income.
• Despite a 23% stock decline over the past six months, Incyte demonstrated impressive growth and profitability, with minimal debt and a sizable cash reserve.
• Despite promising growth potential, the company's dramatic drop in income and high GAAP P/E ratio may raise concerns for investors; a "Hold" recommendation is suggested.

Introduction

Incyte Corporation ( INCY ) is a biopharmaceutical company that develops and sells therapies for hematology/oncology, inflammation, and autoimmunity. Their products include JAKAFI for myelofibrosis, MONJUVI/MINJUVI for diffuse large B-cell lymphoma, PEMAZYRE for various tumors, and ICLUSIG for leukemia. They also have clinical stage products like axatilimab and parsaclisib for lymphomas and retifanlimab for anal canal carcinoma and lung cancer. Incyte has collaboration and licensing agreements with several companies. Founded in 1991 and based in Delaware, it operates internationally.

Q1 2023 Earnings

Incyte's total financial performance for the first quarter ending March 31, 2023 showed mixed results. GAAP revenues rose to $808.67 million, up by 10% from $733.24 million in the same period of the previous year. However, Incyte saw a significant drop in GAAP operating income from $116.54 million in 2022 to $24.77 million in 2023. Similarly, GAAP net income declined from $37.99 million to $21.70 million. Non-GAAP figures painted a similar picture, with operating income dropping from $172.15 million to $89.73 million and net income falling from $122.87 million to $84.58 million. Earnings per share ((EPS)), both basic and diluted, also saw a reduction in the GAAP and non-GAAP figures.

On the product front, all of Incyte's products recorded increased revenues: Jakafi by 7%, Iclusig by 6%, Pemazyre by 25%, Minjuvi by 46%, and Opzelura by a substantial 343%. This resulted in a 14% increase in total net product revenues, reaching $693.24 million. However, royalty revenues presented a mixed picture with an 8% increase for Jakavi, a 29% decrease for Olumiant, and a 20% increase for Tabrecta. The new product, Pemazyre, began to generate royalty revenues. Despite this, total royalty revenues saw a slight decrease of 6% to $115.44 million. Notably, Incyte did not record any milestone and contract revenues, marking a 100% drop from the previous year.

INCY Stock Assessment

Per Seeking Alpha , Incyte Corporation's stock has a mixed evaluation, with strong aspects and areas of concern. Despite a high valuation grade of "C+" marked by a high GAAP P/E [TTA] of 42.89, the company showcases solid growth (rated "A") with YoY revenue increasing by 11.41% and a 3-year CAGR of 15.89%. This is, however, offset by a substantial drop in diluted EPS YoY by -65.51%. Profitability is robust, also rated "A", demonstrated by decent margins and return figures, yet momentum is poor with a "C-" rating, as the stock price has consistently decreased over the past year. On the bright side, Incyte's capital structure is strong with a market cap of $13.85B, minimal debt ($40.24M), and a large cash reserve of $3.11B. Overall, while Incyte shows promising growth and profitability, its high P/E GAAP and weak momentum might worry investors. However, its sturdy capital structure may make it an interesting long-term investment, although additional research is advisable.

Q1 Earnings Call Review

During the most recent earnings call , Incyte's management provided a positive update on the company's financial performance and future prospects. The first quarter saw a 14% YoY growth in product revenue, which management believes doesn't fully reflect the robust patient demand for Jakafi and Opzelura. The launches of Pemazyre and Minjuvi ex-US and the approval of Zynyz for Merkel cell carcinoma in the US, as well as the approval of Opzelura for vitiligo in Europe, contributed to the 17% YoY growth in hematology and oncology. Despite typical Q1 higher deductions due to Medicare coverage and other factors, the strong underlying patient demand prompted management to raise the lower end of their guidance to a new range of $2.55 billion to $2.63 billion for the full year. Opzelura demonstrated strong trends in prescription growth, and management expressed optimism about the product's prospects for the rest of the year. Incyte is also focusing its R&D efforts on projects with high revenue growth potential, discontinuing six programs to better allocate resources to eight high-potential programs. This strategic concentration is expected to increase the speed and efficiency of these selected programs, while also accelerating promising early clinical initiatives.

Opzelura's Growth Challenges: BofA Securities Downgrades Incyte Corp.

In recent developments, BofA Securities downgraded Incyte Corp. to neutral, citing slower growth for Opzelura for the treatment of nonsegmental vitiligo . The price target was lowered to $84 with peak sales estimate at $1.8B. The disappointing growth for Opzelura has most likely contributed to Incyte's recent stock weakness.

According to UpToDate , the management of nonsegmental vitiligo depends on the extent of the disease. For patients with less than 10% body surface area [BSA] involvement, topical corticosteroids or calcineurin inhibitors are suggested as initial therapy. Topical ruxolitinib, a JAK inhibitor, can be considered if initial treatments fail. NBUVB phototherapy is recommended for patients with disseminated disease. For patients with limited, stable, and unresponsive disease, targeted phototherapy, PUVA photochemotherapy, or surgical procedures can be considered based on availability and patient preference.

Incyte's Opzelura may be experiencing slower growth in the nonsegmental vitiligo market for several reasons. Firstly, Opzelura is typically not the first line of treatment for patients, which are topical corticosteroids or calcineurin inhibitors. Therefore, it's not the immediate choice for physicians or patients. Secondly, the cost of Opzelura and insurance coverage can significantly impact its market growth. If it's costly and not covered by insurance, patients might lean towards more affordable options. BofA Securities' lowered price target may also reflect concerns about Opzelura's affordability. Furthermore, Opzelura's usage is limited to situations where initial treatments fail and isn't the primary recommendation for patients with disseminated disease. This reduces its potential patient population and hinders its market growth. Additionally, the presence of multiple alternative treatments for limited, stable, and unresponsive disease provides physicians and patients with other choices, possibly resulting in fewer Opzelura prescriptions. The market's high expectations of novel treatments like Opzelura often contrast with the reality of slow adoption rates in clinical practice, especially when existing treatments are effective and well-established. Finally, some clinicians and investors may be awaiting more evidence about the efficacy of JAK inhibitors like Opzelura, creating hesitance and slowing down usage and sales growth. These challenges contribute to a complex market environment for Opzelura in treating nonsegmental vitiligo. Future growth will depend on wider acceptance of JAK inhibitors, more clinical data, and potential changes in treatment recommendations.

My Analysis & Recommendation

In conclusion, Incyte Corporation, despite a 23% fall in its stock price over the past six months, still exhibits promising prospects in certain aspects. Its strong YoY revenue growth, robust product sales, and strategic refocusing of R&D resources towards high potential programs present opportunities for future growth. However, the falling operating income and net income, high P/E GAAP, and notably the drop in diluted EPS, all raise concerns. The company's stock performance and profitability have been negatively impacted, especially in light of the mixed response to Opzelura's performance in the nonsegmental vitiligo market. Incyte faces challenges in this domain due to Opzelura not being the primary treatment choice and the presence of multiple alternative treatments.

However, Incyte's strong capital structure and the robust demand for its products, such as Jakafi, suggest that it could weather these challenges and bounce back, especially if management can leverage its promising early clinical initiatives and better position Opzelura in the market. The company's future growth will likely be driven by wider acceptance of JAK inhibitors, more robust clinical data, and changes in treatment recommendations.

Given the current mixed outlook, and pending stronger evidence of turnaround, a "hold" recommendation might be apt for Incyte at the moment. Investors already holding Incyte's stocks could wait and watch for signs of improvement in the company's financial performance and a potential recovery in the stock price. Meanwhile, potential investors may wish to wait for stronger signals of upward momentum and more conclusive evidence of the success of Incyte's strategic focus before buying in.

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