Biotech investing is very risky -- failures outnumber successes. Pundits like to joke that small and mid-sized biotechs should come with a black box label: WARNING: A wrong decision can cost you 90% of your investment.
On the other hand, what other industry is so susceptible to "good news pops" that can catapult a stock upward? The timing of those good news pops is even possible to determine--since they typically correlate closely with FDA events, such as FDA approval, or PDUFA dates. Believe it or not, the FDA pretty much stays on track with its calendar, so the decision tends to come in close to the scheduled date. If it's a thumb's up, it's an exciting event that signals a drug has successfully come to the end of a long journey.
In addition, an FDA panel can give investors a good idea what the final decision will be ahead of time. It has happened that the advisory panel says "yeah" and the FDA's ultimate decision is "nay," but that's fairly uncommon.
Pop and drop--expect it and don't be fooled
Ideally, investors are buying biotech stocks for more fundamental reasons than a hoped-for FDA approval. But these events are important catalysts, and investors should know when they're coming. One thing to be aware of is that the "pop" that comes with a positive FDA decision is often followed by a "drop," because it is a long way from FDA approval to a successful drug launch. As reality sets in, investor exuberance can quickly fade. When that happens, the very same stock that got caught up in FDA catalyst momentum often rapidly returns to earth.
All that said, there's one stock that I am particularly watching this month. Incyte Corporation (NASDAQ:INCY) is an emerging biotech with a market cap slightly over $12 billion. It has a very significant PDUFA decision date on December 5th for its lead drug Jakafi (ruxolitinib).
Incyte stole a march on competitors in 2011 when it got Jakafi -- the first-ever JAK1/JAK2 inhibitor on the market. Three years later, Jakafi is still the only FDA approved drug for a rare and severe bone-marrow cancer, myelofibrosis (MV).
But while Jakafi has a monopoly in MV, the market has remained small -- fewer than 14,000 patients.
That could all change because the FDA granted Jakafi priority review for use in another indication--patients with polycythemia vera (PV) in August. Incyte had promising late-stage results for Jakafi against this much more common blood disorder and is now up for FDA approval. PV affects about 100,000 patients in the U.S.
Jakafi could also achieve blockbuster status if approval for PV comes through. Safra Sarasin analyst David Kaegi projects it will increase Jakafi's peak sales to over $1 billion. Incyte holds domestic right to Jakafi, while co-developer Novartis reaps worldwide profits.
There's no immediate competition forthcoming for Jakafi, but Gilead Sciences (NASDAQ:GILD) is working on a long-term spoiler. Currently, Gilead's JAK inhibitor (momelotinib) is going head-to-head with Jakafi in a clinical trial for MV.
On the other hand, Gilead seems determined to expand into oncology, and synergies with the internal pipelines could make Incyte a Gilead take-over target.
In addition, Incyte has a good chance of eventually expanding Jakafi to treating more major cancers, including pancreatic, where Jakafi's mid-stage studies showed the drug significantly boosted overall survival in a subset of patients. The FDA has granted Jakafi fast track status as a treatment for second-line pancreatic cancer. Three additional Phase II proof-of-concept trials focusing on Jakafi's effect on survival in breast, colon and non-small-cell lung cancer are enrolling patients.
Incyte has another potential blockbuster in its garage
Another catalyst could be coming for Incyte this December. Topline Phase 3 data is expected for baricitinib, its novel all-oral rheumatoid arthritis treatment, before the end of the year.
Baricitinib was co-developed with Eli Lilly, a company that badly needs a win after its lupus drug flopped in a Phase 3 program a few months ago. Fortunately, recent events have been going in baricitinib's favor. The drug was once expected to be the third oral treatment on the market for rheumatoid arthritis, but AstraZeneca halted development of its competing product (fostamatinib) based on weaker-than expected Phase III data.
Baricitinib still has a rival in Pfizer's Xeljanz, but that drug failed to gain regulatory approval in Europe. Pfizer's drug is also dosed more frequently than baricitinib (twice a day, versus once a day).
Peak sales for baricitinib are now estimated at around $2.3 billion by Morningstar. In addition, Morningstar assigned a 100% probability to Jakafi being approved for PV.
Baricitinib also has potential in treating psoriasis or diabetic nephropathy, where it is currently being evaluated in Phase 2 trials.
Incyte's Q3 results showed 97.8 million net product revenues from Jakafi, representing 63% growth over the same period last year. Guidance came down for Jakafi to increase to a range of $350 to $360 million, driven by continued strong underlying demand. The company is not yet profitable, since it is plowing all its profits from Jakafi into its pipeline.
It looks pretty good for Incyte this month, since it should catch a second wind if good baricitinib results come in. But let's be clear: small and mid-sized biotechs are not for those afraid of a wild ride.
Cheryl Swanson owns shares of Gilead Sciences and Incyte. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.