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Incyte called top 2H pick by Gabelli; Gilead most likely buyer

June 28, 2017

Gabelli analyst Jing He highlighted Incyte (NASDAQ: INCY) as their top 2nd-half biotech pick and reiterated a Buy rating and price target of $174.

Despite the 34% year-to-date run-up, the analyst said shares remain undervalued and its valuation could benefit from additional Epacadostat data readout and potential oncology deals in 2H’17.

He highlighted:

Cheap Valuation after ASCO Sell-off. Despite positive PhI/II data of Epacadostat (IDO)+ Keytruda (PD-1 by MRK) announced at ASCO in early June (Note 1, Note 2), the stock sold off for over 10% during ASCO. Although it bounced back with the biotech rally in the past week, we believe INCY is still undervalued. Over 30% response rate of Epa+PD-1 in multiple tumor types with superior safety is encouraging. The combo also demonstrated activity in low PD-L1 expression (<50%) patients in indications such as NSCLC (lung cancer), which PD-1 monotherapy is not approved for. Roche’s decision in dropping off licensing rights of NewLink’s IDO inhibitor post-ASCO makes us believe that Epa has scarcity value and would face limited competition in the near-term. We maintain our peak sales estimates of $5.1bn for Epa.

M&A could Pick up in 2H’17, Especially in Oncology. Biotech rally in the past week demonstrated reduced risk of the sector, as Trump’s drug pricing proposals aimed to deregulate the industry and increase competition, rather than addressing major changes such as Medicare negotiation. In 1H’17, deal activity continued to stay at slowest pace since massive sector sell-off in 2015. Despite uncertainty in tax policy and repatriation holiday, we are positive that deal activity will pick up in 2H’17. We have observed that deal multiples remain high (5-6x peak sales) in oncology in the past two years, reflecting strong demand for such assets. We expect to see more deals in oncology and INCY could benefit from the valuation.

Most Likely Buyers for INCY. We continue to believe Gilead (Buy) is the most likely buyer to be interested in INCY. GILD management has repeatedly expressed ambition to become a leader in oncology in multiple conferences in 1H’17. Although other oncology assets such as TSRO and CLVS are mentioned more often in deal speculation due to their sizes, we believe INCY is a better fit for GILD who is looking for both revenue and long-term pipeline growth. Other companies that might also be interested in INCY include Sanofi, who has pressure after failing past two deals, and Merck who could benefit from Epa+PD-1 synergy.

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