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Why Incyte may stay hot

April 12, 2017

In the burgeoning market for drugs that use the body’s immune system to fight cancer, Incyte is the belle of the ball.

Shares of Incyte (ticker: INCY) have jumped 76% in the past year. And with revenue of just $1.1 billion last year the company is currently valued at $28 billion.

Why the excitement?

It is the closest to market with a new type of immunotherapy called an IDO1 inhibitor. Its drug, epacadostat, has captured the attention of investors and some of the world’s largest drugmakers.

Recently, both Merck (MRK) and bitter rival Bristol-Myers Squibb (BMY) unveiled big plans for a string of late-stage clinical trials testing their own blockbuster drugs in combination with epacadostat on a variety of tumors. And early stage trials are also underway pairing Incyte’s drug with those from Roche (RHHBY) and AstraZeneca (AZN).

Because the biggest names in the immunotherapy cancer market are willing to invest in costly late-stage trials some analysts see this as confirmation that epacadostat is “the real deal.” Sales forecasts for the drug are reaching into the billions. And Incyte is the most talked about takeover target in the drug industry.

At $136, Incyte stock has climbed 36% this year, making it one of the Standard & Poor’s 500’s best performers in 2017. It is also one of the index’s priciest drug stocks, trading for a vertiginous 523 times estimated 2017 earnings.

However, Incyte is set to take that next big step, which could deliver big returns to patient investors.

At a Glance

Incyte (INCY)

INCY

Stock Price:  $136.07
52-Week High:  $153.15
52-Week Low:  $68.03
Market Value: $28 billion
Est. 2017 EPS: $0.26
2017 P/E:  523
Est. Long-Term EPS Growth:* 39.50%
Est. (’17/’16) EPS Growth:  -51.0%
Revenue (ttm): $1.1 billion
Dividend Yield:  None
CEO:  Hervé Hoppenot
Headquarters: Wilmington, Del.
* Based on analyst estimates looking ahead three to five years.
Sources: Thomson Reuters and Yahoo! Finance

Unlike other small drugmakers, Incyte is a commercial success with one blockbuster drug already on the market. Its research and development pipeline is capable of making Incyte the next big large-cap drugmaker.

It’s reasonable to expect a $200 share price within three years.

“This is a small drugmaker that has prepared itself for a second growth spurt, and you don’t always see that in the biotech industry,” says I-hung Shih, the biotech industry analyst at T. Rowe Price. “It’s not uncommon for a $10 billion market cap drugmaker to graduate to the $20 billion to $30 billion level. The big hurdle is reaching the next level, north of a $50 billion market cap. That takes more than one quarter. It takes more than one year. It takes more than one big drug.”

But she insists: “If I had to buy one stock and put it in a box for three years, this would be it.”

Others echo similar sentiments. “This is an opportunity to catch the next big oncology drug company as it grows, or catch it before it gets acquired,” says Credit Suisse analyst Kennen MacKay.

To date, Incyte’s commercial success has had nothing to do with cancer medications. Wall Street expects revenue to jump 43% this year to $1.6 billion, and to keep rising via its only marketed product, the orphan drug Jakafi, and royalties from licensing deals withNovartis (NVS) and Eli Lilly (LLY).

It’s a lucrative base business that is fueling fast profit growth. The Street sees per share earnings growing at an average annual clip of 39% over the next five years. It has also given Incyte the resources and a platform to explore new targets and drugs, with much of that effort centering around oncology.

Right now, Incyte has a pipeline with more than a dozen experimental cancer drugs in various stages of clinical development. That accounts for roughly 60% of the company’s current market cap, says Simos Simeonidis, an analyst at RBC Capital Markets. And $11 billion of that market value alone stems from epacadostat.

The market for cancer immunotherapies is lucrative and expected by some to eventually reach $20 billion in annual sales. So far, it has revolved around drugs known as PD-1 inhibitors, with Merck’s Keytruda and Bristol-Myers’ Opdivo leading the charge. But the therapies don’t benefit all patients, which has led drugmakers to look for different targets and different drugs, and to explore combination therapies.

Incyte is one of a handful of companies working on so-called IDO1 inhibitors. Early studies showed the drugs don’t work well as stand-alone therapies, but epacadostat did show promise in subsequent studies when paired with Merck’s Keytruda. A large Phase 3 study testing the combo as a melanoma treatment should read out next year, and some see the drug hitting the U.S. market by 2019.

Both Merck and Bristol-Myers are testing the drug on a variety of other cancers, including lung, kidney, bladder and head and neck. Credit Suisse’s MacKay forecasts sales at $2.5 billion by 2025 but concedes that sales could peak at $8 billion.

However, given Incyte’s size, a takeover might prove elusive. More importantly, results from several Phase 2 clinical trials are expected to be unveiled in June at the American Society of Clinical Oncology meeting, the biggest gathering of cancer doctors in the U.S. Weak data could deflate the stock.

Moreover, many market pros think Incyte stock has run too far. Recently, Raymond James downgraded the drugmaker to Market Perform, arguing that shares were priced for perfection.

But drug development is never an easy road, says T. Rowe’s Shih. “It’s a bumpy road to become the next large-cap drugmaker, but Incyte is set up to handle the bumps.”

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