Incyte: Opzelura Is The Main Growth Driver (NASDAQ:INCY)

Background

In my last article, I emphasized the undervaluation of Incyte’s (NASDAQ:INCY) shares. Incyte’s share price has risen by 17% since the publication of my last article (June 17) to the current moment, while the S&P 500 index has grown by 8% over the same period. Looking ahead, I will note that I maintain my bullish view on the company’s shares. As part of this article, I will update the investment case of the company. Since I did not separately publish an overview of INCY’s 3Q financials, in this article I combined the analysis of the company’s last reporting, a review of news from the ASH annual meeting, and a preview of the Q4 results. I also separately analyzed sales numbers and expectations for the most important drugs of the company.

The overview of 3Q results

Total quarterly revenue was $823 million (+1% YoY, -10% QoQ). Weak revenue growth YoY and QoQ were due to the absence of milestone payments in Q3, while such payments amounted to $35 million in the same period last year. The strong drop in Olumiant’s royalties was the second reason. The revenue was 2% worse than consensus expected. Product revenue totalled $713 million (+20% YoY). Operating income was at $138 million (-41% YoY, -46% QoQ), 1% better than consensus expected. EPS was $0.51 (-38% YoY, -29% QoQ), 2% better than the consensus forecast. The overall 3Q results are positive. Revenue outside the US was affected by the strengthening of the US dollar. Let’s analyze results of individual drugs.

Jakafi/Jakavi

Jakafi remains company’s key product. Jakafi and Jakavi’s share accounted for 86% of total company revenue in Q3. Jakafi’s sales was totalled $620 million (+13% YoY, +4% QoQ, 1% better than expected) in the US. The increase in sales of the drug was due to the strong increase of revenue in cGVHD indication and to the growth in patient start in myelofibrosis and polycythemia vera. The new patient starts in the myelofibrosis and polycythemia vera increased by 8% and 9% YoY, respectively. The total number of patients with GVHD increased by 20% YoY, mainly due to the increase in the number of patients with chronic GVHD. Jakavi’s royalties amounted to $86 million (-9% YoY, +3% QoQ), 11% worse than consensus expected. The year-on-year decline was due to the strengthening of the US dollar. Excluding the F/X impact, revenue growth amounted to 6% YoY.

The key Jakafi issue is the LOE in 2028. There are several options to extend the patent and protect sales from the entry of generics. Firstly, there is PDUFA on March 23 for Jakafi once-daily administration form. That frequency is more comfortable for patients and can keep some patients from switching to generics in the future. The current form of administration is twice a day. Recent studies have proven the efficacy of the once-daily administration. Given the positive results of this study, I expect Jakafi’s new form of treatment approval in March.

Another opportunity to maintain sales could be the development of a combo therapy based on Jakafi along with another drug. Despite the fact that Jakafi is the standard of care for the myelofibrosis treatment, there are still several unmet needs for the current patient treatments. First, there are patients who do not respond to Jakafi treatment. For this category of patients, Incyte is developing parsaclisib. Adding parsaclisib to the treatment decreases spleen volume and improves symptoms of the disease, according to phase II trials. Full data on the effectiveness of the drug is expected at the end of 2023. Secondly, the problem of developing anemia in patients has not been solved. The company plans to solve this problem with the Jakafi combo therapy with NCB00928. NCB00928 is an ALK2 inhibitor. ALK2 is likely increases protein, called hepcidin, levels, leading to anemia. Anemia occurs in about a third of patients with myelofibrosis and may worsen as treatment with Jakafi starts. According to the Phase 1/2 study, INCB00928 reduces the level of hepcidin. More details are expected this year.

Opzelura

Opzelura revenue was at $38 million, 32% better than consensus expected. Unit sales of the drug amounted to 62,000, assuming a 32% YoY growth. According to management, Opzelura is now the number one choice for new patients with mild atopic dermatitis (17% market share). Management also notes that as many as 45% of patients with atopic dermatitis may be candidates for the Opzelura treatment. However, the issue with insurance coverage is key to the growth of sales of the drug. The management continues to expand Opzelura’s insurance coverage. The percentage of insurance covered claims increased from 39% (in Q2) to 63% in the 3rd quarter and reached a level of 70% in October. The company plan to discount the full buydown program (assumes that the cost of the drug was fully covered by Incyte or by payors) and plans to switch to a free drug bridging program. In this scenario, the impact of this transition will be on COGS, and not on the gross-to-net discount as it is now. The gross-to-net discount narrowed from 81% (Q2) to 71% (Q3). The company expects that the discount will be reduced to the level of 40-50%.

The drug received the US approval for the vitiligo treatment in July 2022. In the US, the addressable number of vitiligo patients is about 1.5 million, 200,000 of which are seeking treatment. The remaining 1.3 million are not seeking treatment. The company’s goal is to try to convert them into patients. Management expects vitiligo patients to use an average of 10 tubes of the drug per year, while atopic dermatitis patients use an average of 2-3 tubes. Given the average price of $1,950 per tubes and gross-to-net discount of 50%, the annual sales will be around $10 million for every thousand patients. Another 2 million addressable patients live in EU. Opzelura’s EU approval decision is expected in the first half of 2023 for the vitiligo treatment.

Other drugs

Iclusig’s sales in Europe were $26 million (-9% YoY, -1% QoQ), 7% worse than consensus expected. Pemazyre’s revenue was $23 million (+33% YoY, +23% QoQ), 11% better than expected. The sales growth was successfully stimulated by the launch in Europe and Japan. In the third quarter, Incyte received approval for pemazyre for the treatment of myeloid lymphoid neoplasm with FGFR1 rearrangement, a particularly rare and aggressive form of blood cancer. Olumiant royalties were at $20 million (-76% YoY, -33% QoQ), 57% worse than consensus. The decline is due to reduced use of the drug in covid-19 patients and a one-time deduction on IP rights.

The 4th quarter results preview

The Q4 revenue consensus forecast is $878 million, which implies 2% YoY and 7% QoQ growth. Jakafi’s sales are expected at $634 million (+7% YoY, +2% QoQ) and royalties for Jakafi at $92 million (-3% YoY, +7% QoQ). Pemazyre’s revenue is expected at $23 million (+15% YoY, unchanged QoQ). The consensus forecast of Olumiant’s royalties is $31 million (-53% YoY). Iclusig sales are expected at $26 million (-4% QoQ). Separately, I note the expectations for Opzelura’s sales, which are at the level of $57 million, which assumes QoQ growth of 50%.

Regarding the drug revenue breakdown, the key point in the report will be the actual Opzelura sales numbers. Equally important will be management’s comments on the launch of Opzelura for the vitiligo treatment in the US, as well as on the pace of expansion of its insurance coverage of Opzelura.

Final thoughts

Incyte remains an attractive value story in the biotech sector with strong free cash flow (average FCF margin in 2022 was at 26%) and solid cash balance of $3 billion. The key point in the company’s investment case remains the issue with Jakafi’s LOE. I see several options to solve this problem. The possible approval of Jakafi with a frequency of once a day oral administration (now – twice a day) will partially help mitigate the issue. PDUFA announcement is on March 23. However, this will not completely solve this problem, so the company needs successful data from trials of Jakafi combo therapies with other drugs in development, which will help expand patent protection.

I also expect Opzelura to help to move away the company’s revenue dependence on Jakafi. An important driver will be the possible approval of Opzelura for the treatment of vitiligo in Europe in H1 2023. As a result, I maintain my positive view on the company’s shares. Separately, I recommend that you familiarize yourself with all the risks that the company may face in INCY’s annual report (10-K) .