Summary
- Incyte has seen a continued increase in sales, yet real diversification efforts have not paid off just yet.
- I like the compression of the valuation multiples and the fact that the company is now solidly profitable already.
- Further upside requires continued growth and conversion of some of the pipeline which has seen some ups and downs.
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Incyte (INCY) is a name which I have covered in the past as I have been attracted to the stock given the cash flow provided by Jakafi/Jakavi and the company's efforts to diversify the product line-up.
In August of 2018 I concluded to add to a small residual position in the low $70s and fast forwarding one and a half years in time, shares are trading largely unchanged, now trading near the $80 mark.
The Thesis
The investment case around Incyte really started to develop after the company obtained FDA approval for Jakafi back in 2011, thereby having a product to treat patients suffering from myeloproliferative disorders, while approval for polycythemia vera was obtained in 2014.
The company only has the US rights for Jakafi, yet it receives royalty payments on international sales following a deal with Novartis (NVS) as those revenues are classified as Jakavi. Jakafi net product sales advanced 22% to $1.39 billion in 2018 and came in at a run rate of $1.5 billion in the final quarter of the year. The royalty streams on Jakavi abroad totalled $195 million for all of 2018, a 28% increase on an annual basis.
To diversify the company, Incyte acquired ARIAD for $140 million in 2016 in an effort to acquire Iclusig in Europe and other international markets. This has been a reasonably good bet as well with sales of Iclusig advancing 19% in 2018 to $80 million, although sales were flattish in the final quarter of the year.
The third approved product is Olumiant (Baricitinib) which is a rheumatoid arthritis drug co-developed with Eli Lilly (LLY) and was given approval in 2017. While the company only gets royalty payments, these quadrupled to $40 million in 2018 and came in at an annual rate of $55 million in the final quarter of the year.
The company furthermore generated $180 million in milestone revenues in 2018 for a total revenue number of $1.88 billion. With total revenues up 22% in 2018, the company was finally profitable as it reported operating earnings of $129 million vs. a loss which was nearly twice that amount a year before. This was driven by sales leverage and R&D expenses actually down slightly to a still very heavy $1.2 billion.
The Trends, 2019 Outlook
A diluted share count of 216 million shares values Incyte at $15.1 billion at $70 per share, levels at which shares started trading in 2019. This includes a net cash position of around $1.5 billion, for around a $13.6 billion operating asset valuation, at about 7.5 times sales if milestone revenues are included.
The company guided for relatively lacklustre growth in 2019. Jakafi net revenues were seen at $1.58-1.65 billion, while Iclusig revenues are seen at just $90-100 million.
In April the company reported first-quarter results with shares trading in the mid-$80s at the time. Total sales rose 30% thanks to strong milestone revenues while product revenues were up 20% to $458 million. Iclusig was flat at $20 million which is disappointing, while Olumiant grew nicely to more than $16 million in revenues. Combined revenues of Jakafi/Jakavi grew to $420 million. The company furthermore met its primary endpoint in Phase 2 trials of ruxolitinib cream and no longer will co-fund development of baricitinib with Eli Lilly (NYSE:LLY), yet will still see royalty streams on this product.
In May, the company obtained FDA approval for Jakafi in treatment of steroid-refractory acute GVHD in patients twelve years or older. Despite the news and some other upbeat news, shares were rather stagnant around the $80 mark this summer.
Second-quarter sales rose just 2% to $530 million, yet that was mostly because a volatile milestone revenue contribution fell from $100 million to just $20 million. Product sales were up nicely by 21% to $510 million. Iclusig, which was flattish in recent quarters, ticked up nicely to $24 million and Olumiant grew to $19 million. Jakafi/Jakavi sales grew to $466 million. With costs under control, the company is very profitable as well, generating about $100 million in quarterly operating earnings, or about $0.50 per share.
During the autumn the company announced some reasonably good research results across the board and reasonable third-quarter results. Iclusig sales fell back to $20 million, yet Olumiant nearly hit the $22 million mark for the quarter. Jakafi/Jakavi grew to a combined $492 million number as the company is now comfortably running at a $2 billion product revenue guidance for the year. Current profits made that net cash balances have risen towards the $2 billion mark, equal to about $9 per share.
