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Morningstar | Incyte Remains Undervalued Following in Line 1Q; Multiple Data Catalysts Expected Through 2020

Incyte's first-quarter results were in line with our expectations, and after adjusting for lower expected Olumiant royalties and the advancement of ruxolitinib cream into a second late-stage indication, we're maintaining our $97 per share fair value estimate. Incyte reported 20% growth in Jakafi, driven mostly by volume, and we're keeping our full-year estimates for Incyte revenue at $1.63 billion. We're slightly adjusting down our estimate for research and development costs for the year and lowering our assumed Olumiant royalties in the long run, after Incyte opted to end its funding for further development of Olumiant. With several internal pipeline programs to fund, we think this is a logical choice, as this decision does not impact the 11%-20% tiered base Olumiant royalty, and incremental royalties could decline slowly given the amount of R&D funding for the program that has already passed. In addition, we think further investment in Olumiant is difficult to justify, given the drug's side effect profile and the competitive landscape for oral JAK inhibitors in immunology. We think Incyte's Jakafi supports a narrow moat, and a strong pipeline in oncology and immunology supports a positive moat trend. Incyte should receive approval for Jakafi in a new indication, steroid-refractory acute graft versus host disease, in May, with more data from larger studies in both chronic and acute GVHD coming later this year. Next-generation JAK1 inhibitor itacitinib is also in phase 3 studies in GVHD, but as a first-line treatment, and should produce data from acute disease in 2019.

In immunology, Incyte announced positive phase 2 results for ruxolitinib cream in vitiligo (data coming later this quarter), a dermatological autoimmune condition with no effective treatments. With vitiligo phase 3 trials to commence likely later this year, and phase 3 already underway in atopic dermatitis, we're encouraged by the potential of this program, and we've increased our assumed probability of approval from 40% to 60%, and we see potential sales approaching $1 billion by year 10 of our model.

Incyte also plans to file for approval of pemigatinib later this year in cholangiocarcinoma with FGFR alterations, which is a niche indication but could bode well for use in patients with these alterations who have bladder cancer or other tumors. Beyond pemigatinib, Incyte has a growing early-stage pipeline in immuno-oncology, including PD-L1/CD137 bispecific antibody MCLA-145 (entering clinical trials this quarter) and oral PD-L1 drug INCB86550 (recently entered clinical studies). We think it's too early to model sales from these therapies but look forward to data in 2020 that further improve our growth forecast, which is already ahead of consensus.