Incyte Corporation (INCY) Earnings Call Transcript & Summary

Good morning, everyone, and Happy New Year. And thank you so much for joining us. I'm sorry for not being there in person, as I've contracted COVID. But I'm pleased to introduce the first speaker of the day, Herve Hoppenot, Chairman, President and CEO of Incyte. Herve, thank you for joining us. And with Herve on stage is Matt Dellatorre, who's been following this story for a very long time.

To start here, Herve, a big picture question. Product diversification continues to be a key focus for Incyte. And as we stand today with Jakafi and Opzelura, and the current pipeline, notably, where you do have some later-stage assets such as povorcitinib and axatilimab, what is your outlook for the business and growth in 2024 and longer term?

No, I mean good to see you. I was hoping to be able to blame you for infecting everybody at JPM next week. But -- so it's not the case, but somebody will have to be blamed. So that will be funny. Okay. Speaking about Incyte. I mean -- as '24 is obviously starting. So now we are more or less seeing what's going to happen in some of the big events. And the long term is where there are a lot of interesting perspective. I must maybe step back for a 1/10 of a minute here to remind everybody, I mean Incyte is a discovery-based company. We have a fairly large R&D team and an investment in R&D, and we believe value creation is coming from the quality of that R&D effort that we are doing. And I must say, we have had over a period of 10 years. If you look back, we have had waves of innovation that were very productive, and we have 5 products coming from our own research that are today commercial, which is very rare in the biotech world, when you look at having sequential success with a number of products that you have discovered yourself. We had a period, and I must say, it was a period that was driven by the IDO story where IO was our driver. We had a fairly large investment immuno-oncology for a period of time with new targets that ended up not being successful. And what you are seeing today is a new wave of products that was basically 3, 4 years ago, when we reallocated our research resources to new targets. And what you see today are basically these products that are coming from this new wave of innovation that is coming from our own R&D. And I am, frankly, very, very optimistic about the success of this. I mean there will be certainly some that will not be successful, but these products that are coming now to the clinic are products that have a fairly different profile maybe from what we have had in the years before and are fairly exciting. And you saw that at ASH. I mean we had 2 of them that were presented in the field of hematology. One is a CALR antibody, another one is V617F small molecule targeted, very innovative in a field where people have been trying to develop that type of product and where Incyte is the first to really come to the clinic with it and where I think it will have a big impact on the long term. So the long-term part, I think we should speak about. I mean, long term, I'm speaking of '27, '28, which is important because in the portfolio mix, it's a date that is when Jakafi patent expiration could be happening around '29. And we have before that, a number of projects. In fact, there are -- we call them the high-impact project. We have 8 of them that we think could be contributing to the revenue between today and 2028 and '29. And that's obviously what we are watching in terms of progress on the clinical side. On the commercial side, and that's the sort of shorter term, if you look at '24, now coming back to the short term. Obviously, there is a Jakafi franchise, and we can spend time discussing about that because there are 3 different dynamics in 3 different indications. And then we have the launch of Opzelura, which has been, as you know, one of the big events for Incyte, diversifying into dermatology with high technology type of indications, being first to develop a new product for vitiligo, having a very unique profile in atopic dermatitis. And the growth there is obviously something that is driving this diversification that you were speaking about at the beginning. So that's the 2 big components for us. Axatilimab is interesting because it's a first of this product that will be working in the Jakafi franchise. We had this LIMBER concept of saying -- replacing Jakafi with better product for each of the indications where it's approved. The first that will be crossing the line is axatilimab in GVHD. It was a plenary session at ASH. It's a very interesting profile, and it has the potential to be more than just replacing Jakafi, but certainly expanding our franchise in the next few years and the submission at the FDA is done. So now we are in the review phase and it should be approved in 2024.

While we will discuss Jakafi life cycle management in more detail shortly. What were the key takeaways from ASH that you just mentioned here? And can you speak to your level of conviction that you'll be able to manage this Jakafi 2027, 2028 loss of exclusivity?

I think ASH was multiple things. It was not like one big thing that ended up changing everybody's mind. I think there is axatilimab in the plenary, and that meant that this is a practice-changing kind of product -- is that the mechanism is such -- it's dealing with inflammation, it's dealing with fibrosis, that it should be some of the main component of combination treatment for chronic GVHD. So we have the third line data that was presented, which is very good in terms of safety and efficacy. So that would be the first submission and then it will be developed in combination with Jakafi and in combination with steroids for the first-line treatment of patients with chronic GVHD. And if you calculate the number of patients, you can see that, that could be by itself bigger than Jakafi in GVHD. So it would fulfill the requirement of saying we can certainly manage the patent expiration from that standpoint. I think the second piece is the BET inhibitor, the ALK2 are two mechanisms that we are developing for myelofibrosis. In the case of BET, as you know, there was data from other companies showing that, in fact, that mechanism seems to have activity. So that may be -- derisking of the BET project, so that could be one aspect. But frankly, what I think was the most impactful was this concept that with both CALR and 617F. We are not just like replacing Jakafi. We are, in fact, expanding this market drastically by addressing new populations that were never addressed by Jakafi. So it's not any more like manage the cliff kind of situation. It's literally making it something where we could be expanding this potential opportunity in a way that will be way beyond the size of Jakafi today.

And then business development, just pivoting here. You've recently spoken about your interest in pursuing more significant business development. Can you talk about the key considerations and the overall approach you were taking specifically noting your $3.5 billion in cash and debt, how much total capacity do you have? And are you prioritizing certain disease areas just given where you're focused right now?

So the capacity, as you said, it's like we have today, $3.5 billion more or less, $3-plus billion. We have no debt. So you can calculate, I mean, there is a range we could take some. I mean we are not looking forward to doing that, but that's a possibility. So we are in this range that could go a little above that or not. I think the key criteria for us is not the therapeutic area. I mean, it has to be close to something that we are doing. So we are in onco, hemato, dermato. So that gives us the scope of what we would be looking for to take advantage of synergies on the commercial side. And we are looking for diversification between '26, '27, '28, '29. So the second half of the decade is where we would like to have revenue growth, and that gives you the profile of what we are looking for. And that's something we are very aligned in the leadership team and the Board in saying if we could find opportunities that fit this criteria, it will be a good addition to what we have. And I think it's fairly obvious because it's back to the diversification of revenue question you were asking at the beginning.

And we've seen M&A pick up significantly. Could you just speak to how competitiveness the process is now? Is it difficult to compete with these large pharmas and their pockets? And is this impacting your strategy or focus here? Are you looking to go earlier stage?

Yes. D*** large pharmas with deep pockets. I don't know. I don't know. I think -- I mean, if you are looking for a product with 100% probability of success, already commercialized with a multibillion potential, then yes, there is no reason for Incyte to be winning that bidding. I think we have some views about certain type of disease where we have the expertise. So that may give us a sort of a competitive advantage. It also leads to saying we could be interested in earlier projects, maybe than the fully proven project and do multiple deals that will be -- each of them with a certain -- maybe a lower probability of success, but overall, contributing to our goal, which is, as I said, 2027 and beyond and the product diversification by then. But yes, I don't think there is -- I don't think it's impossible for a company of our size with the resources that we have to do that kind of deal. So that's something we are working on as we speak.

And Herve, just given your 2 large revenue drivers in the pipeline here, do you view yourself as a potential target? And how do you think large pharma views your portfolio?

I literally don't know. So I will pass on that one.

Perfect. Matt, let me turn it over to you to ask questions on margins and Jakafi here.

Yes, sure. So Herve, I think your margins are right now in like the high teens or so, operating margins from like a GAAP or non-GAAP perspective. How do you see that evolving towards the end of the decade? Do you see any changes to that given maybe the shift to more dermatology?

I think -- so the margin is really very simple. The operating margin, I mean there are a lot of other components that make the number fairly different from what you are speaking about here. But what we have is an investment in R&D which is around $1.6 billion per year. We have a revenue that is around -- total revenue close to $4 billion, let's say, or somewhere around there. And we have the commercial investment, which is around $1 billion. And what we have done in the past is make sure that the R&D budget or spending, investment is growing at a rate that is slower than the rate of the revenue so that we are basically improving leverage. And you can see it's very consistent over 10 years. It's two lines that are slowly diverging. And we had an investment in our commercial team in dermatology 2 years ago that now is behind us. So we are at a stage where what we will be starting to see is an expansion of the margins or the leverage because we will be amortizing our commercial investment in dermatology with revenues that would be large enough to compensate for that investment. So what you can expect there is to continue to see a relatively stable commercial spending, slowly growing, investment in R&D and therefore, an improvement of the leverage over time. As we have said and as we have done very consistently over the past years.

And then going back to maybe ALK2 and QD for Jakafi, is -- the delay is 2 years. Is that 2 years from the announcement I think, earlier this year? Or was it 2 years from now?

So it's not super precise, but it's basically, we have to develop a new formulation that is basically a higher dose of the existing formulations that we have. We have to test it in very small PK studies, and we have to put it in stability and the stability is 12 months. So we are expecting 2 years from sometime this year. So I don't know whenever we spoke about it, but I would say it's like September plus 2 or something like that.

Okay. Got it. And then for ALK2, what are -- I mean you've had to work a bit on dose optimization. Is it straightforward in the sense that you can really just maybe keep upping the dose for ALK2? Or what do you really have to optimize there?

Yes. So ALK2 is a complicated product. I mean what we are basically trying to do is to manage anemia through the hepcidin pathway. And what we have already demonstrated, and it's very well established is that, in fact, our ALK2 inhibitor is impacting the hepcidin pathway. What we have not yet fully demonstrated is that, that impact is, in fact, changing consistently the anemia profile of patients treated with Jakafi plus ALK2 in the first-line setting because that's a cohort of patients where we don't have enough patients yet. So that's a very important data that would be coming in 2024. We all know the anemia profile of patients started on Jakafi is very typical is that there will be an effect and that effect will go away after 20-some weeks, but there is a dip and that dip in hemoglobin has an impact on the outcome of these patients because it's leading to dose reduction and lower dose of Jakafi is bad for patients. So that's -- the whole idea is to maintain the dose of Jakafi at its best level. It's a little bit like G-CSF and chemo by preventing that anemia that is coming from Jakafi and is also adding to the anemia coming from MF. So we are not there yet. We are -- as you have seen, the fairly promising, but we need to see what's happening now with patients in the front line. And if we can show that we are maintaining hemoglobin while we are treating with Jakafi, then we have a good case to develop that product in that setting. So that's the way we're thinking about. It should be happening during the '24. So mid-'24 or end of '24, we'll have enough data.

I see. And so it's really about the front-line patients because I think you said before that -- if the FDA asked you to go into later-stage patients would you...

Yes, we had to test it into -- first, we had to test it as a single agent, which frankly, was very difficult to find patients for this. Then we combine it with Jakafi in patients who have advanced disease and now we are doing it in the first line. And that's where it would be the real test for the product.

I see. Salveen, do you want to switch to Opzelura or...

Let me just jump in here just with a few more questions. So when you look at the ALK2 and you look at the BET and CALR, just help us understand how you're thinking -- and then QD coming in, how you're thinking of kind of solving the Jakafi LOE aspect? Like how are you kind of parsing out the market to these other drugs?

So the once a day of use, I mean that's something that can be used instead of Jakafi. But it's also very important because it can be used as a combination partner for all of these combinations that are being done with Jakafi. And as you know, many of these combinations are, in fact, once-a-day product. So that's the reason to -- also to have it. In our own portfolio, the once a day will be combined with once-a-day ALK2 and once-a-day BET in a way that will be very powerful commercially because we will be able to basically price the combination in a way that cannot be done by other companies. So that's important, and that's once aspect of the once a day. The BET as you know, is potentially helping in myelofibrosis improve patient outcome in the first-line setting. And the data from MorphoSys is fairly interesting because the effect on spleen is very visible, it's not subtle. And so that now sort of a path that we have well identified and where we can work with our own product. And ALK2, as we said, is a little behind. And we still need to establish the exact way to use it in the first line. But assuming it's happening, it would be the same ability to combine once-a-day Jakafi with once-a-day ALK2. The CALR and 617F are fundamentally different. They are disease-modifying strategies, and we are basically speaking about reducing allele burden very quickly, which is not the case with any of these other products that we are speaking about. And it's a functional cure for patients. And what we know is that not only in MF, but also in PV and ET, north of 90% of patients have either a CALR mutation of V617F JAK2 mutation. So now we are speaking about hundreds of thousands of patients instead of tens of thousands, where we are basically trying to develop with all the caveats of early -- we are just starting, but trying to develop strategies that will be changing the way people are thinking about this disease where it would be looking at the mutation and depending on the mutation, treating with products that have the ability to reduce allele burden very quickly, and therefore, could be some -- in brackets, but could be curative for these patients. So we see CALR and 617F as qualitatively very, very different from BET, ALK2 once a day. BET, ALK2 once a day are like managing the life cycle of Jakafi when in some ways, these other products are expanding the market very significantly.

When could we [indiscernible] data from CALR and 617F?

So CALR, we are treating patients as we speak. So we are in the Phase I. Phase -- 617F, the IND is basically being done now. So we will be starting clinical trial in the first half of this year. It depends, I mean, you know in Phase I, sometimes you have to slow down for some reason. So it's very difficult to predict. But I would say by -- for CALR, we should have some patients being treated by the end of '24 that we'll be able to speak about. We have patients treated now.

And just back to QD for a sec, let's say, maybe you don't get the combos to work, but you still get QD, is that in itself enough to extend Jakafi at all? Or is it not compelling enough...

It will help. I think it will help. Is it going to protect the franchise? No. I would say it's going to change the curve, but it's not going to be like the magic bullet to protect the franchise. Our goal for this franchise is to change the clinical outcome of patients with better products.

Right. So the goal is basically Jakafi. Maybe it gets extended, but you instead replace it as it's coming off patent with multiple products. But in -- just back to QD in the sense that would providers would they -- I mean would insurers cover a QD instead of twice a day after patent...

Well, in 2029, I don't know. I mean what's going to happen then with the payer is fairly unpredictable. I think it will help. I think switching patients back -- patients with cancer, switching them back to a different product, it's always problematic. So as I said, I don't think QD as a solution to the life cycle question of Jakafi. I think it's a contributor, and it's helping for the combination with other QD product because having a twice a day with a once a day in combination is dangerous because people make mistakes. So that's what we are looking at.

Herve, just going back to axatilimab, the Syndax-partnered asset here. When you look at chronic GVHD market, how big do you think this really is and what proportion could be addressed by that drug? And how does it kind of overlap with Jakafi?

So in the third-line setting, the first indication -- in fact, we have a good surrogate with Rezurock because that's where it's being used. You know you have seen maybe the last quarterly business from them was, I think, around EUR 85 million or EUR 90 million, something like that. So it gives you an idea of the size of that opportunity in third line. And where I think axa will have a very competitive profile. And if it's Rezurock versus axa, it could be used one after the other. As you have seen in the axa data at ASH, one of the key aspects was the pretreatment with either Jakafi or Rezurock has no impact on the efficacy of the product. So the mechanism is totally independent, and there is no cross resistance. So that's really important. So that gives you the idea of the third line and what it could be. In the first-line setting, there are 14,000 patients with chronic GVHD in the U.S. There are as many in Europe. And if you look at the way the Jakafi business has been evolving and the price of Jakafi, the way it's used, we think the first-line indication for axa can be north of $1 billion. So that would be meaningful for us.

And just one final question here. Jakafi, you tightened guidance for the year on the 3Q '23 call. What trends have you been seeing across different indications and just talk about the growth outlook for this asset.

So as you know, we have a long-term guidance of $3 billion. We have a short-term guidance for this year of $2.6 billion, $2.59 billion or something. And so that's a big picture. We have 3 different trends in Jakafi. So that makes it a little complex. You have the MF trend, which is a trend of saturation and plateauing. I mean that's something we have already seen for a while. You have the chronic GVHD and acute GVHD, GVHD overall, that has been growing very fast, but now it's starting to get out of the launch phase. So it's growing at a lower pace. And you have the PV business that has been expanding very steadily over the years. What's really important to realize is that IRA is going to have an impact on Jakafi, a positive impact on Jakafi. And the implementation of IRA is starting in '24 with a limitation on the co-pay for patients and in '25, we'll have a very dramatic reduction of the out-of-pocket for Medicare patients. And most of the business for Jakafi, more than 50% is Medicare and out-of-pocket payments for Jakafi is one of the reason why it's not used more broadly because some patients are unable or not willing to contribute, specifically in PV. So the way I see it for the next -- let's say, between today and '28, which is what we are all looking at is that you should assume that MF would be on a more stable level. I think chronic GVHD and GVHD in general will continue to grow at a lower pace, but I think PV could be accelerating in terms of growth, and that's what's leading us to the $3 billion overall that we have in our long-term guidance.