A drug with an almost certain approval and immediate sales potential of hundreds of millions of dollars is an asset very few biotech companies possess. In that sense, Incyte (INCY), which is developing a breakthrough drug for blood disorders, represents a unique opportunity in an industry plagued by risk and uncertainty. Incyte is also unique in its problematic capital structure, which makes an otherwise simple investment decision into a tricky one.
Incyte’s lead drug is INCB18424 (aka 424), currently in two registration trials in myelofibrosis (MF). Myelofibrosis is a blood disorder in which the bone marrow becomes dysfunctional. MF Patients, who often have enlarged spleen and anemia, suffer from a myriad of symptoms including infections, chronic fatigue, fever and weight loss. On average, patients survive five years from diagnosis as a result of infection, bleeding and organ failure. There are currently no approved drugs for MF and most patients are treated with drugs that alleviate symptoms, but typically have little impact on the course of the disease.
Quantifying the opportunity in myelofibrosis is difficult, as there are only rough estimates as to the actual number of patients who are living with MF. According to Incyte, there are approximately 14 thousand MF patients in the US. This figure is substantially lower than other sources such as the MPD foundation, which suggests a prevalence of 40 thousand patients in the US. Sticking with the company’s estimation, and assuming an average price of ~$15k per patient per year (which is consistent with other drugs for chronic diseases), the market potential for 424 as a MF drug is $210 million in the US. Together with Europe and Japan, the market potential in MF could reach $500M annually.
424 is also being evaluated in two phase II trials for additional indications. The first phase II study is in additional blood disorders that are similar to MF, but are more common, with a prevalence of ~175k patients in the US. The company will present updated data from this phase II trial at the ASH meeting this December, and according to management remarks during the recent quarterly call, results are encouraging. The drug is also in a phase II trial in psoriasis, where a topical version is used. Initial data read out from the trial is scheduled for September.
Incyte’s development strategy
424 belongs to a novel class of drugs called Jak inhibitors. These drugs inhibit the protein Jak, which is implicated in the development of many diseases, including autoimmune disorders and blood cancer. The most prominent Jak inhibitor in development is Pfizer’s (PFE) CP-690,550, currently in a pivotal study in Rheumatoid Arthritis (RA).
424 also has activity in RA, but Incyte chose MF as a primary indication. The market opportunity in RA is much greater, but it is also a crowded market characterized by a long and expensive development path. In contrast to RA, MF seems like an ideal indication for small companies such as Incyte, as it represents a substantial commercial opportunity coupled with a cheap and fast route to market. The allure of MF as an indication is further enhanced by the lack of approved drugs, which could make patients and physicians very receptive towards new treatment options. Lastly, there was a strong scientific rationale to start with MF, since 50% of MF patients carry a mutation in a gene for a specific Jak subtype called Jak2. 424 hits primarily Jak2 whereas Pfizer’s compound primarily inhibits a different subtype – Jak3.
So far, Incyte’s strategy proved successful. If everything goes according to plans, 424 will be the first ever Jak inhibitor to reach the market as well as the first ever approved drug for MF, thanks to unprecedented efficacy and a reasonable safety profile.
A fixed fight
Incyte is regarded as an attractive investment because it can offer investors what only a handful of biotech companies can: An extremely high likelihood of approval. Obviously, there is never a 100% guarantee in a clinical trial, but given the specific study design and the data 424 has generated to date, the drug’s approval is almost inevitable.
The company is enrolling patients in two registration trials, one in North America and the other in Europe. The two studies are similar in terms of patient population and endpoints with several minor differences. The most notable difference is treatment duration, as the US trial will evaluate spleen size after 24 weeks and the EU trial will evaluate spleen size after 48 weeks of treatment. As a result, Incyte hopes to file for FDA approval during the fourth quarter of 2010, followed by European filing in the second half of 2011.
Clinical benefit in MF can be measured based on three main criteria: reduction in spleen size, improvement in symptoms, and resolution of anemia. So far, 424 has been given to more than 200 patients at multiple doses and had a dramatic effect on spleen size, with a rapid and significant reduction. The drug also generated a dramatic improvement in disease symptoms, but unfortunately had little effect on the anemia associated with the disease. The most promising drug for MF related anemia is Celgene’s (CELG) pomalidomide, which showed very encouraging resolution of anemia. Consequently, there is a strong rationale for combining the two drugs.
The regulators on both sides of the Atlantic agreed to approve Incyte’s drug based on reduction in spleen size. The primary endpoint of the studies is the percentage of patients achieving a 35% reduction in spleen size following a predefined treatment period. It is important to note that the ultimate goal in myelofibrosis is increased survival, however, in order to prove that, very long and large studies are needed. Fortunately for Incyte, the FDA and the EMEA agreed to settle for short term endpoints and quality of life assessments.
As there are no approved drugs for myelofibrosis, 424 is being compared to placebo, which is always better than being tested against another drug with proven activity. Patients in the placebo arm may continue to receive other standard treatments, such as hydroxyurea and infusions, through the course of the studies. The same supportive treatments will also be given to patients in the 424 arm, so that any additive benefit of 424 would be easily observed.
In addition, based on the available data, 424’s ability to reduce spleen size was so profound and dramatic that the trial looks like a “fixed fight”. According to the company, 424 led to a durable 35% reduction in spleen size in about half of the patients. Patients in the placebo arm are very unlikely to experience such a dramatic benefit, even with supportive care.
The registration trials will also evaluate 424’s ability to alleviate disease symptoms, which will be assessed based on patient self reporting. Subjective metrics are always more prone to a “placebo effect”, as can be seen in Rheumatoid arthritis trials. Nevertheless, according to physicians, the placebo effect in MF is expected to be marginal, based on previous trials with ineffective drugs.
Incyte is not alone in the MF arena, as there are additional Jak inhibitors in development for this indication. The most advanced of Incyte’s competitors is TargeGen, a private company which is approximately 18 months behind Incyte. Other companies, including Astra Zeneca (AZN)and Cephalon (CEPH) are joining the race as well, but Incyte will probably enjoy a first mover advantage for at least a couple of years.
But Incyte’s lead is not only in the time to market but also in the clinical activity as well as in the safety profile of its drug. As MF is a chronic disease that requires prolonged treatment, MF drugs must be very well tolerated with minimal side effects. Developing a MF drug that is both safe and effective could be challenging, even for experts such as Exelixis (EXEL), which scrapped its Jak inhibitor earlier this year due to toxicity issues. Incyte’s compound has been given to over 200 patients, so its safety profile is established and seems very different from TargeGen’s and Cephalon’s (CEPH) compounds in terms of toxicity. While 424’s side effects include primarily bone marrow toxicity, the other two involve a high level of additional toxicities (especially gastrointestinal side effects), which might hamper their chances of approval and future market acceptance.
Incyte has only one cardinal disadvantage – its cash balance. The company has a market cap of almost $550M, a cash position of $147.5M and debt of $420M in the form of convertible notes. Such an issue can weigh down on any company, regardless of how promising its pipeline is. In Incyte’s case, the debt could theoretically bring the company to the brink of bankruptcy in 2011, when the debt is due.
In order to solve the huge debt overhang, Incyte will probably have to orchestrate a complex move that includes licensing of several of its programs (including ex US rights for 424), debt recycling and fund-raising.
Business development activities
Incyte’s mission looks particularly challenging since each of the different variables in the equation have an effect on each other. For example, a licensing deal could lift the stock price and consequently allow the company to raise capital under better terms. On the other hand, the company will have a problem getting the licensing deals it wants with the current balance sheet as potential partners will try to take advantage of its delicate situation. The only way to improve capital structure prior to the licensing deals is selling equity, but the stock price will not fully reflect the large 424 licensing deal. Lastly, because there are several drugs the company could license, including a mid stage diabetes drug, a mid stage autoimmune program and a couple of early oncology agents, there is the issue of sequencing the licensing deals in an optimal manner.
It appears that Incyte decided to start with a licensing deal for 424, as the company hired Goldman Sachs in order to license the compound as early as possible. The deal is expected to include only oncology indications, as Incyte is trying to license another Jak program for inflammatory and autoimmune diseases.
Compounds like 424 are in high demand these days, as pharmaceutical companies are eager to find near term revenue sources. The drug has potential in multiple blood disorders as well as blood cancers, thus leaving a lot of upside for potential partners. From what we are hearing, Goldman’s bankers are working diligently with Incyte in order to finalize a deal already this quarter.
The MF program is Incyte’s only opportunity to create a recurring revenue stream in the near term, which is why the company insists on retaining the US commercialization rights for 424. This is similar to what Seattle Genetics (SGEN) is doing with its lead drug, SGN-35, which could become approved as early as the first half of 2011. Seattle Genetics also encountered some challenges in retaining the US rights for the drug, which forced it to do a secondary offering earlier this year. Today, Seattle Genetics enjoys a better cash position as well as a nice flow of future milestone payments from various partners, putting it in a favorable position to strike the deal it wants. Incyte’s advantage is the larger market potential 424 has, as opposed to the niche opportunity SGN-35 represents. Seattle Genetics is also expected to strike a lucrative licensing deal in the coming months.
Portfolio update and performance
Incyte represents a dilemma for investors. On the one hand, it has a promising phase III program with an extremely high likelihood of success and a revenue stream starting in 2011. On the other hand, the company is in a challenging financial position that requires a multi-step strategy for reducing debt in parallel to out-licensing activities.
According to the company’s management, the debt issue will be solved in the coming months, which implies the company is in advanced negotiations on multiple fronts. The recent flood of public offerings in the biotech arena reflects a revival in the capital markets, which could make Incyte’s mission easier.
We are initiating a position in the company since we believe it is clear that by this time next year, Incyte will be a much stronger company, with at least two corporate partnerships under its belt, lower debt and a higher number of outstanding shares. Until a deal is struck, the stock could fluctuate, but the deal could drive shares higher.
The next article will discuss the recent developments at Micromet.
Portfolio Holdings as of Aug 9th, 2009