Incyte – Life After Debt (Part I)

Last week, Incyte (INCY) sold over $130M worth of stock and $400M worth of convertible debt in an effort to solve its balance sheet issues. Thanks to the stronger cash position, the company can finally be evaluated based on its promising pipeline rather than its capital structure. More importantly, it will be able to complete a series of business development deals and focus on becoming a commercial stage company.

As I explained in a previous article, the company presented investors with a dilemma. Fundamentally, it had a potential blockbuster with a high likelihood of reaching the market in 2011, whereas financially, it was heading for insolvency, with ~$150M in cash and more than $400M in debt (due 2011) as of the end of Q2. To make things more complicated, Incyte was trying to get a lucrative deal for its lead drug candidate, INCB18424 (424), but the company’s shaky financial position diminished its negotiation leverage. The debt overhang also put pressure on the stock, which prevented Incyte from raising the necessary funds without substantially diluting its shareholders. Consequently, Incyte had to compromise on the terms of the offering or those of the licensing deals. 

Bitter-sweet pill 

Based on last week’s offering, Incyte chose to dilute its shareholders over lowering the price tag of its pipeline. It sold $400M worth of new convertible notes, stating the proceeds will be used to recycle the original debt in the same amount. The new bonds carry a 4.75% annual interest and a conversion price of $8.78 per share. This compares unfavorably to the terms of the original bonds, which carried an interest rate of 3.5% and a conversion price of $11.22 per share.


The new bond holders made an excellent deal. With the strengthened balance sheet, Incyte could secure better deals for 424 in oncology as well as several other programs, which will instantly translate into a higher share price. In the long run, what seems like the inevitable approval of 424 in myelofibrosis (expected in 2011) could push shares much higher than the conversion price for the bonds, which are due in 2015.


Therefore, it seems that the company exchanged the debt overhang with a dilution overhang. Assuming Incyte’s share price exceeds the conversion price, the current shareholders are looking at an addition of approximately 45M shares, not including the recently issued 20.7M stocks in the secondary offering. As of June 2009, Incyte had ~98M shares outstanding, so the combined offering could increase that number by approximately two thirds. Looking at the bright side, by this time next year, Incyte will probably become a rich, debt free company. 

Based on the stock’s behavior, investors were willing to swallow the bitter pill in return for financial stability and a better negotiating position. Although the merits of doing the offering prior to the licensing deals are debatable, this sequence makes sense given 424’s substantial and immediate commercial potential. For example, assuming 424 reaches sales of $180M in hematological indications in the US, Incyte’s ability to retain as much US rights as it can, could translate into a difference of tens of millions of profit every year. This, in turn, could add hundreds of millions of dollars to the company’s market cap, using standard industry multiples.

A shift towards business development 

After solving the debt issue, Incyte is shifting its focus to business development. In the coming 12 months, the company is expected to announce several out-licensing deals which could support the stock during 2010, prior to data release from 424’s pivotal trial in myelofibrosis. The deals will enable Incyte to be involved in multiple late stage programs without the need to finance most of them. They will also serve as a validation for the quality of assets Incyte has been developing and brought to a stage of clinical proof of concept. Overall, the imminent deals should position Incyte as a mature, versatile and low risk biotech play.


If everything goes according to plans, Incyte will license all of its clinical stage programs. Assuming all deals are carried out, they could add as much as $180M to Incyte’s balance sheet and offload development costs. The company hopes to out-license its JAK program (in two separate deals), its diabetes drug, INCB13739, and its sheddase inhibitor for oncology.




INCB18424 for oncology

Incyte intends to split its JAK program between oncology (including hematologic disorders) and inflammatory diseases. 424 is currently in two phase III studies in myefofibrosis (MF), a blood disorder for which there is no approved treatment. Because MF is a relatively small indication, Incyte intends to market the drug in the US and sign an ex-US deal with a large pharmaceutical company. Depending on the exact deal structure, this deal could include an upfront payment of $70M-$90M.


Exclusion of the US market is something pharmaceutical companies find difficult to accept, however, Incyte might succeed where others have failed thanks to 424’s high chances of approval, the highly unmet need in MF and the likely label expansion into additional indications. These indications include two additional blood disorders that are believed to be driven by JAK, the enzyme 424 inhibits. According to the company, encouraging results from a phase II study in these indications will be presented in December at the ASH 2009 meeting, but a licensing deal could be signed prior to that.

 Inflammation programs 

The size and competitive landscape that characterize inflammatory diseases such as rheumatoid arthritis (RA) or Crohn’s disease require very long and expensive clinical programs. For example, the two pivotal trials in MF are expected to cost the potential partner less than $40M, while in order to get 424 approved for RA, a $300M development program is warranted. Consequently, Incyte will strive to sign a global partnership for 424 or its other Jak inhibitor, INCB28050, for these indications.


To date, Incyte published positive results for 424 in RA and psoriasis. The RA study included 50 patients and demonstrated excellent dose dependent efficacy. The RA market is currently dominated by biologics that have to be injected to patients several times a year. 424 is an oral drug, which could be an important differentiator going forward.


Anti-inflammatory drugs that can be taken orally have become a hot area in the pharmaceutical industry, led by Pfizer (PFE) and its JAK inhibitor, CP- 690550. In terms of efficacy, 424’s results were comparable to those of CP- 690550, however, the latter has data from larger and longer studies, making it the most promising RA drug in development.


Incyte is enrolling patients in a 3-month study for 050 in RA, which is expected to generate top line results next year. If positive, this trial could serve as the basis for a global licensing deal. Nevertheless, Incyte will have trouble getting anything beyond a double digit royalty rate and an upfront payment of ~$40M without a larger study. 


Last month, Incyte published positive results from a phase II trial in psoriasis. When applied topically, 424 demonstrated superior activity compared to placebo and an excellent safety profile. Although the trial did not compare 424 to standard of care drugs, it seems quite effective in reducing disease symptoms without the safety issues that are associated with the mainstay treatment for psoriasis, steroid ointments. As a result, 424 could be given for longer duration, as opposed to steroids that are limited in treatment duration. This might enable Incyte to position 424 as an equally effective but safer topical treatment for mild to moderate psoriasis, an indication with a prevalence of 5 million in the US alone.

 Portfolio updates 

Since its inception one year ago, the biotech portfolio, co managed by Ran Nussbaum and myself, generated a return of 51.6%, better than other healthcare and biotech oriented ETFs.

Last week, following the acquisition of Curagen by Celldex (CLDX), our two positions in Curagen were converted into a single position in Celldex we intend to keep for now. We are selling Crucell (CRXL) with the intention of buying more Incyte and Immunogen (IMGN) in the coming weeks.


                                           The biotech portfolio as of Oct 11th, 2009








21 thoughts on “Incyte – Life After Debt (Part I)

  1. Hi Ohad,

    I really look forward to your articles, And so I was thrilled to see a new entry today. I got some Incyte shares in my portfolio after the last dilution, and am glad to see you predict good things for this company.

    Also, would you happen to have an opinion regarding Prolor Biotech. (PBTH.OB) ?
    it’s a relatively new, small market cap (about 50M~), Israeli biotech company.
    With Dr. Phil Frost backing it up, I think some positive clinical results could lift this one up significantly higher (maybe to a similar situation as Protalix).

    Sorry for the long post, and thanks again for sharing your valuable thoughts with us all.


  2. Hello Ohad,

    congratulations to the performance of your portfolio and your helpful comments.

    Interesting to see that you intend to keep Curagen after the merger with Celldex. Your opinion to Curagens pipeline is published. What are your thoughts about the Celldex pipeline? Merriman Curhan Ford sees very much potential.

    Kind regards


  3. Its unfortuante that we couldnt buy those convertible notes that pay interest and convertible to stock in the future.

    Immunogen has almost tripled. Why do you plan on buying more immgn in the future? Do you expect a catalyst to move the stock soon?


  4. Thanks Toby,

    The decision is based primarily on the value of Curagen’s pipeline and the cash dowry it brought to the merger. With respect to CLDX’s programs, I didn’t delve too deep into their pipeline. I am not a big fan of cancer vaccines, but their lead program looks pretty good, including the rationale and the clinical data. They also seem to have good antibody capabilities, I wish they focused more on that side and just vaccines.



  5. I am trying to figure out how much T-DM1 is worth to imgn’s maket cap.
    What are the terms between roche and imgn on T-DM1?
    How much can one expect for imgn’s stock price to appreciate with positive results?


  6. disregard last question…i am reading previous imgn articles you have written (unless something has changed since your previous articles about imgn)


  7. Following the blog for awhile, thanks for all the good information posted. I have been following spectrum (SPPI), looks like a good entry point, was wondering your thoughts?
    Also, do you ever plan on revisiting RIGL, it also looks like a good entry point. Keep up the good work.


  8. Hi Jason

    SPPI depends on Zevalin, which is a very frustrating drug because it shows great activity but physicians and patients choose not to use it due to its radioactivity. I certainly hope things will change following the recent data and first line approval, but I am not sure about that.
    Financially, the company looks cheap with half of its market cap in cash, but a lot of that is going to be invested in marketing.

    RIGL – Another tough decision. With the mixed negative data in TNF failures, it seems less attractive even though the potential for a drug like R788 is in TNF-naive patients.
    There is probably going to be a licensing deal next year so buying ahead of that might prove wise. I am still on the sidelines.



  9. Hi Ohad,

    What do you think about Genvec(GNVC). It has started moving.

    Its lead product, TNFerade, is in late stage development for pancreatic cancer with positive clinical data to date and potential in other indications. On the other hand, the company’s underlying technology for vaccine and gene delivery has established a promising long term pipeline for multiple therapeutic indications.



  10. Hi,

    As you might know already I enjoy your blogs 🙂 Ive not bought INCY as of yet, nervous I guess, but I was watching ARQL and was considering buying in under $4, but it got a pop today from UBS upgrade although volume wise, it wasnt a high and most buying was early. BVF, a major investor sold a chunk of their shares last month. Any opinion on its current valuation?


  11. Thanks, Manish.

    I really like ARQL at the current valuation and think it has a lot more to offer with the AKIP platform, but you have to remember that for now, it is still a one drug company.
    The next big catalyst is results from the Tarceva combination study. It’s hard to predict but the data on this combination at the World Conference on Lung Cancer is pretty encouraging.



  12. Ohad,

    What is your take on ARRY. Are you selling it or still keeping it. Its in 52 week low right now.

    I always look forward to read your articles. Keep up the good work.



  13. Hi Ohad and people,

    Regarding Incyte, An interesting Filing on 16 October, you can watch it under Incyte->Investor relations -> SEC filings.
    what’s interesting about it is, and I quote:

    “The Board of Directors has adopted, subject to stockholder approval, an amendment to the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 200,000,000 to 400,000,000. The Board of Directors recommends that the Company’s stockholders approve this amendment.”

    Ohad, I would love to hear your thoughts on the matter.


  14. I assume that is due to the convertible debt offering. If you read the filing on the debt, the company needs to have enough authorized shares to account for the converitble debt. If it does not happen by the end of the year (I can’t remember the exact timing), then the interest rate on the increases. They have about six more months before after that or the rate increases again and so on and so on. So this filing is not surprising.


  15. Thanks Denny,

    ARRY suffered some blows with its RA drugs but I still think they have a very broad and diverse pipeline. With platform companies such as ARRY, the most important thing is patience- statistically, they should have good news as well.



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