What's Next for Incyte?

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Incyte (NASDAQ: INCY) tanked last week after failing a phase 3 trial for one of its key pipeline drugs, IDO inhibitor Epacadostat. In this Industry Focus: Healthcare podcast segment, host Michael Douglass and Motley Fool contributor Shannon Jones take a look at what comes next for the company.

Incyte reported plans to do some retrospective subgroup analysis of the trial, which isn't all that promising. But other drugs in its pipeline are, and it has one blockbuster drug on the market already. Could Jakafi be a buyout candidate? Listen in to find out more and, of course, get the analysts' final takeaways on the company's valuation today.

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A full transcript follows the video.

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This video was recorded on April 11, 2018.

Michael Douglass: There are a number of other combo trials being conducted, where they're in process right now. The CEO has basically said it's, I'm quoting here, "an open question," as to what happens next. What's your two cents here?

Shannon Jones: The company is planning to go back and do a subgroup analysis, look to see if there are any patients that maybe did respond a little bit better than others. As you and I both know, Michael, and probably many of our listeners, retrospective subgroup analysis is usually not a good sign of confidence in the biotech industry. So, not feeling particularly confident about their decision to keep this an open question. They do have a pretty robust pipeline, and I'd rather see them focus their efforts on some of these other therapies that they're going after, some of these other indications.

But, in particular, just looking at Incyte with IDO right now, in addition to melanoma, there were four other indications. There was lung cancer, renal cancer, head and neck cancer, bladder cancer, and these were being studied with other companies, too. AstraZeneca with their Imfinzi, Bristol-Myers Squibb with Opdivo. So, this will have ripple effects. I'd be really curious to see what they may get out of some of these analyses moving forward, but I'm not hopeful overall.

Douglass: No, I think that's very fair. Post hoc is never a great spot to be, because there are all kinds of artifacts in the data. So, Incyte got slammed --

Jones: Yeah, to say the least.

Douglass: -- when they announced this data. With that in mind, the market cap is a lot smaller. But, as you pointed out, there's a lot more that the company still has in the pipeline. In fact, it already has a drug on the market, Jakafi, which did just over a billion dollars last year in sales. So, there's certainly still plenty of reason, potentially, to like the company. Personally, I think it's a little bit overvalued, because to some extent, I think that IDO looks like it's maybe dead on arrival. Maybe not dead on arrival, we can always hold out hope, but I'm not holding a lot of hope right now. But, they do have a number of other pipeline candidates.

Jones: They do. In particular, and coming up in just a couple of weeks, Olumiant, which is an Eli Lilly-partnered rheumatoid arthritis drug that is currently already approved in Europe, is set to have its day with the FDA here. They'll be having an advisory committee meeting on April 23rd. This drug has had its history, for sure. It sounds like, though, analysts are expecting that this particular advisory committee will go well. So, this could be some short-term boost for revenue for Incyte.

As you mentioned, Jakafi, they do have a blockbuster cancer drug that you can't deny. Peak sales right now, estimated to be about $3 billion annually. And really, they have a pipeline with 10 different targets. So, I think, really, Incyte makes the case for a lot of these revenue-starved big biopharmas that are needing some short-term boost in cash. This could actually be a really good opportunity for them to pick up Incyte.

Douglass: Yeah. I think that's good insight on Incyte. I'm sorry. I warned you beforehand that I was going to do that at least once.

Jones: This is true, ladies and gentlemen. Michael Douglass will be here all day, on his birthday. [laughs]

Douglass: Yeah, bad puns, I've built a career out of them. [laughs] But, let's talk about that. One of the things that you mentioned before we got on the show was, you saw Incyte as a potential takeout candidate for one of these late-term, pipeline-starved, bigger biotechs. Gilead Sciences is one that comes to mind. Biogen is certainly somewhat pipeline-starved, but maybe not as good of a fit. I think Amgen was on your list, as well.

Jones: Yes.

Douglass: My big question, though, when I look at Jakafi, let's say it hits $3 billion in peak sales. That would imply that Incyte is priced at just under 5X peak sales. That works. That valuation works just off there, because usually we see takeouts in 3-5X peak sales. So, that's reasonable. And you've got some additional upside in this pipeline. We've talked primarily about two drugs now, but they have a PI3K inhibitor. Now, Gilead shareholders will remember, PI3K inhibitors have kind of a mixed history, with Gilead's Zydelig having a big, nasty black box warning for a lot of really terrible side effects. Most of the rest of the stuff is early to mid-stage, but it's a pretty deep and diverse pipeline. And you've actually turned me into a believer that it could reasonably be a buyout candidate.

Jones: As you and I both know, for a lot of these biopharmas that are strapped for some late-term revenue-driving drugs, they're generally not going to also look for bargains. They're sometimes going to go for really overpriced assets. I definitely don't think that Incyte, by any means, is a slam dunk M&A target. But now, with the market cap down over 50% just from a year ago, I think it becomes that much more attractive, especially for the Gileads that have an oncology pipeline that Jakafi could sneak right into and do really well.

Douglass: Yeah, especially because the drug is, to some extent, plug and play. It's already on the market, it's already gotten some scale, hopefully not as much scale as it will ultimately get, but it's certainly in a good spot in a lot of ways and there's a lot of opportunity there, as well, across the pipeline.

That's our take. I think, if you are an Incyte shareholder right now, you're probably doing some soul searching. I would be. I'm not. I don't think this is a stock that's a compelling buy on the dip, and we certainly don't believe in purchasing stocks based on potentially becoming an M&A target. That said, for me, the market reaction felt about right. So, I feel about Incyte now as I did then, which is, could be interesting, a little bit rich for my blood, personally.

Jones: Yeah, I have to agree there. Incyte, without this clear combination strategy, leaves a lot of question marks for me. Until the company figures that out, I think I'll stay on the sidelines.

Michael Douglass owns shares of Gilead Sciences. Shannon Jones has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short May 2018 $85 calls on Gilead Sciences. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.