Incyte Corporation (INCY) Earnings Call Transcript & Summary

Good morning, everyone. My name is Eric Schmidt. I'm one of the analyst over at Cantor Fitzgerald. Welcome, everyone, to our Global Healthcare Conference. Thank you all for waking up early. I think you'll be rewarded with a special session. We actually have, for the first time at an investor conference, the company's relatively new CEO, Bill Meury. Thank you, Bill, for joining us. Many of you also know Bill from his prior roles in the industry as an esteemed leader, and many of you also know Incyte's President and Head of R&D, Pablo Cagnoni. Thank you, Pablo, for being here. In the audience, I see the IR team from Incyte as well. We've got [ Alexis Smith ] and Greg Shertzer. Thanks, guys.

Bill, let's jump right into it. You've been on the job a little over a month, 2 months now. And why don't you just share with us a quick snapshot of where you think Incyte is today and what needs to happen going forward to make this a successful organization?

Yes. Thanks for being here. Yes, I've been here 60 days. I can tell you the reasons I joined, and there have been really no major surprises since I've gotten into the role. I think the company has got the potential for meaningful product flow. That was sort of the first threshold question that I asked and answered. I think that's the same question an investor would ask, a strategic would ask and any incoming CEO should ask. And I think about that in terms of both the marketed product line, that is ex Jakafi, as well as the early to late-stage pipeline. That's number one. Number two, I think the company operates in the 2 most structurally attractive markets in biopharma, oncology and immunology, more specifically MPNs and immune-mediated skin conditions. And three, the company has got a strong financial profile in the short to medium term in terms of cash flow and a growing balance sheet. Focus right now is building a business for the post '29 period, where you can -- you look out, you see a double-digit growth business on a CAGR basis, let's say, minimal LOE exposure, multiple products as opposed to just one with $1 billion plus in potential and really healthy operating margins. And I think the 3 areas we're focused on hematology, oncology and immunology can all play meaningful roles in sort of building that profile in the next decade.

Okay. We were chatting earlier today about the Jakafi 2029 patent cliff, which it seems investors are exclusively focused on these days. So what needs to happen to successfully overcome that cliff and have long-term growth in this industry?

Yes. And I said this during the first earnings call. I definitely look at this as about more than building or filling a revenue gap and you literally try to build a product line that can produce these sort of durable cash flows. The core business is important, and I never take it for granted. And right now, ex Jakafi, that's Opzelura, Nktimvo and Monjuvi namely. And fortunately, we're having a very good year. I think the fundamentals of the business are very strong. There should be no surprises in the third and fourth quarter, and I like the way that business looks. I'd point out that I think the launch of Nktimvo is very encouraging. It's a launch, and so it can be unpredictable. But our third and fourth quarter numbers, I expect to be positive. The next piece of the puzzle is the late-stage pipeline. And there -- I call it the mid- to late-stage pipeline. There, we're focused on povorcitinib, and we'll submit an NDA for that in the first half of 2026. And then 989, the key there is to convert Phase I results into a Phase III program and FDA approval and then a really successful product. And then we have an earlier-stage pipeline with select solid tumor programs in pancreatic, ovarian and colorectal. Those programs will become clear as data are available at the end of the year. When you step way back from this, I think a priority for us internally, and I think Pablo and I spend most of our time on this, is we have an asymmetrical advantage or differentiated knowledge and capabilities in MPNs. And if you look at companies of our size, scale and stage that are successful, often, you probably know this as well as I do, they have super focus in a specialized high-value segment and usually win through serial innovation. So what does that mean at Incyte? And we have 5 different targeted therapies at various stages of development for MF, PV and ET. Not all of them are going to work, but not all of them have to work. You get 2 or 3 of those targeted therapies to market in that space. You could 2x Jakafi in a success scenario. Even if I'm half right, being successful with 989, 617, the bispecific maybe bet, we have an undisclosed discovery program is a priority for the company. We know that space better than anybody. We can be first only early and defend it. And I think that's key to sort of building this growth profile into the next decade.

Okay. Very clear in terms of your internal capital allocation and resource and where things are going to go. Thank you. What about external development and resource?

Yes, it's a good question. It's got to play at a part of our growth strategy. That's true at any company. I think it will become more prominent at Incyte. There are very few, as you know -- and I said this earlier, there are very few asymmetrical opportunities out there and derisked assets are -- can be quite expensive and it leaves little return for the buyer. We will think broadly about business development. The key to success here is high throughput. You see a lot of things, create a framework. And then when you see something that makes sense, you're going to be prepared to act. We'll focus primarily on hematology and immunology, not looking to borrow a lot of unbounded downside risk and not rushing to do anything. As our pipeline continues to sort of advance and programs become more transparent and less opaque, that will sort of instruct how we approach business development. Acutely aware of how easy it is to turn $1 into $0.50 or less. But we'll be bringing in a new Head of Corporate Development in the third week of September and make sure that we see a lot of opportunities. And it requires, as you know, sort of this contradictory combination of patience and aggression. But you can only be ready to act if you see a lot of stuff, okay?

So that framework, it sounds like, isn't quite yet in place, but that is being recreated within itself?

I think it's going to be accelerated. There's a good business development group, solid people, a lot of commercial assessment group, just going to bring in a new head.

Okay.

And I have one follow-up question on that. You talked before this morning about how it is too expensive to get fully derisked assets, potentially the premium you have to pay, but then also you don't want to take the risk. So what's the sweet spot?

You know it when you see it. Look, I'd like to be 100% cautious versus 1% incautious. It's just like in R&D, business development is no different. You have to call balls and strikes and understand what you think the intrinsic value of a business is in your hands. And when you configure the portfolio, you're looking for a balance between some high-risk and high-reward assets and some things that have or kind of sure bets. I think when it comes to business development, we're going to focus on things that are mid- to late stage, near revenue in areas that we know so that we can actually assess the risk, operationally should be seamlessly integrated. And I think in hematology and immunology, we can do that.

So maybe coming back to your internal resource allocation. We understand the focus on MPNs, heme, et cetera, your core areas of strength. How do we think about the overall spending levels? Historically, Incyte has spent aggressively in R&D. And Pablo, we can bring you into this discussion, too. I'm sure you guys discuss and debate what the appropriate level of resourcing is for the internal pipeline?

Yes, it's a good question. And we are right now in the process of looking at operating expenses across the board. And I think it's not because we're getting ready for '29. It's because that's just good corporate hygiene. And I don't think you can hard code R&D as a percentage of revenue. But clearly, that percentage has got to come down. And it comes down 1 of 2 ways. Sales go up and you get leverage. Or if sales don't go up, you have to start reprioritizing and looking very carefully at the investment. We're at a point right now where we're looking to generate real product flow, which is an unforgiving pressure, not just at Incyte, but at any company. And R&D prioritization is a daily responsibility. In terms of SG&A, you got to look at it the same way. Every investment has got to be looked at carefully. And so as we get into 2026 and provide guidance, we'll provide our rationale for whatever our OpEx guidance is going to be. And then as we migrate through the '27, '28, '29 period, what I can tell you is it's going to be looked at very, very carefully. And whatever we come out with, we'll explain it.

Anything you want to add?

Well, I mean, I think the way I look at it, when people ask about what's the right number for R&D, I don't ever think there is a specific answer for that. I think it depends at a point in time. It depends on your pipeline. It depends what you're trying to address. I can tell you, Eric, in the past 2 years, we terminated 15 programs, including ALK2, oral PD-L1, LAG-3, LAG-3 bispecific, TIM-3. These were all clinical programs plus a number of earlier-stage programs that we have not disclosed. So we're going to continue to have that discipline and probably get a little bit -- either raise the bar a little bit because we have a lot of programs, many of which I think are very interesting. I'm sure we'll talk about it in a few minutes. We're going to look at every program to see, can this address an existing medical need? And two, does it have a positive return on investment and there are different set of scenarios. If it clears those 2 things, we're going to try to fund it. If it doesn't, we're going to terminate it. And for that, we're going to -- we are constantly looking -- it's not that we run a process at a specific point in time in the year. We're constantly looking at these programs, looking at the competitive landscape and addressing those 2 questions. Is there still a need that we can address? And do we have a path to have a good return on investment? If the answer is yes, we go. If the answer is no, we stop.

Okay. Let's at least briefly touch on the commercial side of the business. I know we want to spend a fair bit of time on the pipeline where there's a ton of investor interest these days. But before we get there, just on the MPN franchise and Jakafi in particular, how do you think about preserving value beyond 2029? I think we all see the great commercial trajectory that you're on right now through probably 2029. But what are your thoughts post patent exclusivity?

Yes. Obviously, the best way to preserve value in the MPN franchise is 989 and the other targeted therapies. As it relates to Jakafi XR, we'll resubmit to the FDA at the end of the year. Look, XR conversions fit into sort of a ZIP code, as you know. And you could sort of think about it on the low end of 10% or you could -- I would think about the high end of like 30%. Take the midpoint, 20%, where you're able to maintain $0.5 billion to $0.75 billion in revenue. That would be it working, okay? And obviously, the payer environment is constantly evolving. We have several years where we can introduce a once-a-day Jakafi. And so it's a part of the formula, but obviously not a major part of the formula. And I think I'm very sober about how XR strategies work today as opposed to if you want to rewind 10 years ago, and that's how we think about it right now.

And then how do you think about the Opzelura franchise providing value? I know you got a PDUFA date this month even coming up. So let's talk about pediatric AD, but also just more how big a nut this provides you in terms of keeping revenue?

Yes. If you look at the current growth rate in the United States, and I'm just talking about AD and vitiligo, and you can throw pediatric in there, which I think is a safety signal, a positive safety signal. And you look at what we're doing in Europe, this business over the next 5 years should grow at about a 10% CAGR, which means you almost 2x -- roughly 2x the business over the next 5 years. That would be Opzelura working. We're going to face -- in Europe, we're going to be launching it in AD for moderate AD. And we did $120 million in Europe with vitiligo. And so I'd expect AD could be 2x that, right? So that's going to be -- if you bridge from $650 million to call it, $1.1 billion, $1.2 billion, that's one piece of it. And then, of course, in the United States, most of the growth in the topical AD market is coming from migration of topical corticosteroids to nonsteroidal branded topicals. And that topical corticosteroid market is very, very large, and we're not the only ones benefiting from. There are other nonsteroidal topicals out there. And so I think between those 2 pieces, we have a 2x story here. And we got to keep it on track. It's a daily job. I think the numbers for the third and fourth quarter are going to be right in line with our guidance. We may get an indication for HS, which would be an incremental driver. But I think with AD and vitiligo, that's what we're thinking about.

Okay. And then the other product that you have that's doing quite well, axatilimab or Nictinvo. You already mentioned, Bill, that you're expecting better sales in the second half. How has your view on the overall size of this opportunity changed?

I think that in third line plus, you have Rezurock doing $500 million. In an order of entry analysis, you'd say you do somewhere south of that, maybe not much south, but call it, $300 million to $500 million if you keep this business on the current trajectory. And I always sort of point out, and you know this, product launches are very unpredictable. One quarter, they look good and the next quarter, they don't. And so we're still very much in the early innings here. I think the key to success with Nktimvo long term, when you think about the size of the product will be the subcu and data in combination with a steroid or with Jakafi, which would move you into second line or earlier. Those studies are being done right now. So we have to see the data. I will tell you the response to therapy is really -- when you talk to BMT centers, high response rates, it's working across multiple organs, persistency with the drug is good. And so we're off to a good start. But I think long term, subcu in the 2 indications and all of a sudden, this becomes a very relevant part of that next decade growth profile.

Could you remind us when we're going to see some of that data moving earlier line? And do you think that an NCCN listing would be possible before approval?

It's a good question. In terms of the timing of the combination studies, I believe we're looking at end of '26, early '27 for both the combination with Jakafi and with the steroid.