At first blush, Incyte (INCY 0.17%) might look like just another young biopharma name that stumbled its way into an effective cancer treatment, but one with limited potential. Though its drug Jakafi has proven marketable enough to pull the company to profitability, its fairly short list of approved uses doesn't suggest a great deal of revenue growth lies ahead. That may, in fact, be an important reason why shares are trading where they were priced in early 2015, roughly half the high the stock hit in early 2017.
Investors are looking past an important but subtle detail about Incyte, though. While the top line may not be moving forward at a blistering pace, 2019 is the year the company's steady revenue growth is expected to begin generating meaningful profits. This transition should inspire the kind of attention that's been missing up until this point.
Incyte's Jakafi reaches critical mass
By most standards, the numbers could be considered as a disappointment. Last quarter's revenue of $529.9 million was only 1.6% better than the year-ago comparison of $521.5 million. Jakafi did more than its fair share of heavy lifting for the quarter, with its $410 million in sales making up more than three-fourths of Incyte's total revenue. However, even then that figure was only up 18.5% year-over-year. Given the drug's young age and well-metered pace of additional approved usages, one could expect more impressive progress.
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Jakafi, the branded version of a therapy called ruxolitinib, is a tyrosine kinase inhibitor that helps treat certain types of blood cancers. In collaboration with Eli Lilly (LLY -1.81%), it was first approved in 2011 as a treatment for a bone marrow disease called myelofibrosis. It's since won the U.S. Food & Drug Administration's (FDA) approval as a means of treating polycythemia vera, and in May of this year it was given the green light as a therapy for acute graft-versus-host disease. It's still the only drug approved in the U.S. as a therapy for myelofibrosis, which, as Morningstar analyst Karen Anderson noted in late July, means Incyte "has significant pricing power and has a first-mover advantage over competing pipeline treatments."
Meanwhile, Novartis (NVS 1.10%) is carrying the polycythemia vera torch for Incyte in Europe, where the drug is called Jakavi, driving easy royalties for the treatment's initial developer.
In that light, the lackluster top line growth of late is discouraging to interested investors. The company's impressive progress isn't being made on the top line, though. The big leaps are being made on the bottom line. This year's Q2 net income of $105.3 million, for instance, was a little more than twice the total GAAP profit of $52.4 million reported for the second quarter of last year.
It's a microcosm of the kind of progress is expected going forward too, with this year serving as the proverbial tipping point for a margin explosion. After turning only 11.9% of 2018's revenue into operating income, this year's margins are on pace to reach 26.1%. By 2021, analysts are modeling profit margins of 32.7%. Even on a true GAAP income basis, this year is a turning point. Last year's GAAP income margins of 5.8% are expected to rise to 17.2% this year, and move to 24.9% by fiscal 2021.
Data source: Thomson Reuters. Chart by author.
The key has been scale, and Incyte is gaining it. With some costs being fixed and others rising slower than drug-based revenue, the company is able to retain more profits from each dose administered. Research and development costs have been particularly well contained, although relative selling and administrative costs have room for improvement.
The future looks bright, to those who bother looking
To be clear, Jakafi isn't the only profit center for Incyte. Last quarter, sales of its Iclusig improved 20% year over year, and royalties for its Olumiant soared 111%. They still only added $24 million and $19 million, respectively, to the revenue mix, though. Jakafi is clearly the breadwinner, with JMP Securities analyst Reni Benjamin forecasting peak annualized sales of the drug in excess of $3 billion.
Normally such a top-heavy revenue mix would be a concern. And, it will eventually turn into a challenge for Incyte and its Jakafi. But, it's a concern for years down the road. Morningstar's Anderson notes that Jakafi's most important patents won't expire until 2026, adding "Pipeline competition has thinned out in recent years, and we do not foresee any significant near-term threats to Incyte's Jakafi franchise..." A year ago, for instance, Johnson & Johnson (JNJ -0.69%) discontinued its development of Imelstat as treatment for myelofibrosis.
In other words, Incyte has several years to inflate its profitability on the back of Jakafi. The bulk of that inflation, however, is set to happen this year. Investors don't seem to have noticed yet.
