Incyte's Great Expectations

At some point, all successful companies end up being the target of scrutiny. Wall Street is a fickle place, with (silly) ramping quarterly financial expectations and an army of analysts publishing analyses with the vacuousness and accountability of a Tom Friedman column. In that regard, Incyte is now moving into the stage wherein deserved (and undeserved) criticism is directed at the company.

In general, management has done a rather competent job in developing ruxolitinib to the point where it is now a blockbuster. Outside of a hiccup wherein they chased an LDH subgroup through various trials, they’ve done well to expand indications for the drug. Expansion into polycythemia vera came methodically, and further testing into essential thrombocytopenia and graft versus host disease (where the drug is already receiving anecdotal use) may incrementally increase sales. The next challenge for the company is the proverbial diversification of the revenue stream. Baricitinib was on track to aid in this process, but suffered a recent setback. Nonetheless, the company is working on a broad pipeline, with some agents for well-defined targeted indications (FGFR1-3 inhibitor INCB054828) and some with no clear early direction (PIM Kinase inhibitor INCB053914). There are even a series of programs from the Merus collaboration that remain to be publicized, and a cMET molecule being developed by Novartis (INCB028060).

Outside of ruxolitinib, the major value driver for the company appears to be the IDO inhibitor epacadostat (INCB024360). I’ve written about it previously, as the molecule engenders every assessment from strong support to borderline mockery from the biotech community. Fueling this broad range of sentiment are clinical results to date that have ranged from encouraging (melanoma) to ambiguous (nonsmall cell lung cancer) to inactive (colorectal cancer) depending on the indication. Investors should be mindful to treat upcoming clinical data releases with rigour and skepticism, as is required for any compound. Further, hedges and protection going into the pivotal ECHO-301 melanoma data release are always wise safeguards for long term investors.

But arguably, some of the skepticism towards the company relates to the perceived valuation of epacadostat within Incyte’s market capitalization. However, this frustration appears misdirected. Investors are free to buy and sell shares on the open market, so that valuation is out of management’s hands. And despite management’s unappreciated piece-meal trickle of epacadostat data, overall they’ve not been unduly promotional or unrealistically boastful in their expectations for this or any other program. Nonetheless, moves by management to raise money through public offerings while selling their own shares simply add to the skepticism. All of these data points should be assimilated into an investor’s view of the company.

Conversely, a point in favour of management in the IDO discussion is perhaps one of opportunity and execution. With ruxolitinib, Incyte management have shown themselves to be competent in expanding indications once a molecule is on the market. If they’re able to demonstrate efficacy for epacadostat in ECHO-301 and receive marketing approval, a 1-2 year head start and a methodical approach by management may be able to expand use for the drug. And although those indications may not be front line NSCLC and may not appease valuation critics overnight, steady revenue building along with a developing pipeline may make long term investors happy despite the gnashing of teeth amongst the analyst class.

In my experience, the best companies become richly valued early and remain richly valued for a long time. The key is to assess new data as skeptically as possible, keep a level-headed view of the long term picture, and if warranted, dispassionately jump ship before the captain sounds the horn.