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Incyte: Priced for perfection

April 22, 2017

Wilmington, Del.-based Incyte Corporation (INCY) is widely viewed as a hot property. In a study by Evercore ISI last year that surveyed 244 biotech industry observers, Incyte was cited as the top acquisition target.

Yet Sean Williams, writing for The Motley Fool, says, “As for this Fool, I believe Wall Street, investors, and this analyst are insane. In my eyes, Incyte just might be the most overpriced biotech stock.”

Wait, what? Let’s look at Williams’ arguments.

On the positive side, the company’s stock is up 64 percent, and over five years, it’s shown an increase of 450 percent. Since March 2009, shares are up almost 5,300 percent. It reported $1.1 billion in sales last year and $104.2 million in net income. Wall Street projects by 2020 its profit could hit $600 million.

The company’s lead drug, Jakafi, a JAK inhibitor, doesn’t have much competition and its sales grew by 42 percent year over year. It also has a deep pipeline for solid tumor cancer drugs, some of which are in Phase III trials. It also has a half-dozen or so drugs for inflammation under development.

So what’s Williams beef?

1. Baricitinib

First, the U.S. Food and Drug Administration (FDA) rejected it and Eli Lilly and Company (LLY)’s baricitinib for moderate-to-severe rheumatoid arthritis (RA) on Monday. The FDA has requested more data on dosing and broad safety concerns. Both companies have indicated they will appeal the decision. The drug has been approved in Europe.

Williams notes three problems Incyte faces. One, more money needs to be spent, which isn’t a problem for Eli Lilly, but is only going to pound on Incyte’s cash flow. Second, now Wall Street has to reevaluate all the regulatory and sales milestones Incyte was expecting from an approval. And finally, it will likely take at least two years to comply with the FDA’s requests, and meanwhile, other companies aren’t sitting still, they’re working to get their own drugs for RA approved.

Williams writes, “Though both companies plan to appeal the CRL, it’s unlikely that anything comes of it. As of now, Eli Lilly and Incyte have to wait patiently and spend more to hopefully get their rheumatoid arthritis drug on pharmacy shelves.”

2. Jakafi’s competition

Jakafi is a great drug without any real competition—yet. And the drug also accounts for about $964 million of Incyte’s $1.11 billion in sales. Currently, Geron (GERN) and its licensing partner Johnson & Johnson (JNJ) are evaluating imetelstat in Phase II trials for myelofibrosis and myelodysplastic syndromes. In Phase I studies, it looked good, so good that J&J coughed up $35 million up front and threw in a potential $900 million in “biobucks” milestones to license the drug.

Williams writes, “If imetelstat is approved and makes it to market by 2019, it could literally gobble up nearly all of Incyte’s current sales. Without Jakafi/Jakavi, Incyte isn’t a profitable company on Iclusig and baricitinib’s European sales alone.”

3. Pipeline

Incyte (INCY) has a great pipeline. The problem here is that analysts and investors often act as if every compound in its pipeline is going to make it to the market—which is highly unlikely. It could happen, but it rarely does. Williams writes, “This isn’t to say that Incyte can’t beat the odds and surprise Wall Street, but the data would suggest that Incyte’s entire pipeline succeeding is a utopian dream. But the market has priced Incyte as if its whole oncology pipeline, including its IDO-inhibitors, is going to run the table. This probably won’t be the case.”

Which may be why, although most analysts and investors argue that Incyte should be bought, nobody has yet to seal the deal or even publicly admit that talks are ongoing.

Incyte stock is currently trading for $125.15.



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