Source: Incyte.
Incyte (INCY -0.94%) investors have enjoyed astronomical gains over the past few years. Most of the company's success hinges on its sole marketed product, Jakafi. The oral janus kinase, or JAK, inhibitor has been popular among myelofibrosis patients, sending the company's shares up more than sevenfold since the drug's approval.
Efforts to gain new revenue streams are going as well as can be expected, but nearly four years following FDA approval, Jakafi is still responsible for nearly all of Incyte's revenue. With several clinical-stage assets in development, the company needs every penny.
Jakafi's label has recently expanded to include the larger polycythemia vera indication, but pressure to develop another revenue stream is building now that a potential competitor for the limited myelofibrosis indication is approaching the development finish line. Partnered with Baxalta, CTI BioPharma (CTIC) has a JAK inhibitor named pacritinib that posted promising data recently, but a pivotal trial under way isn't supposed to conclude for over a year.
This might have given Incyte enough time to bring another product to market, but even this consolation rings hollow. It appears the FDA is willing to allow CTI to speed up the process by submitting a rolling new drug application, or NDA. In other words, CTI can submit the results it has so far, giving regulators something to chew on while the final data sets are completed.
Dilution likely
Young biotechnology companies typically circle their wagons around a single candidate, funding its development with equity and, in Incyte's case, lots of debt. Following approval of a first product, its sales are generally used to fund development of several new drugs.
Following the approval of Jakafi, Incyte has passed the first stage and is using revenue from its sole marketed product to fund development of several promising compounds at no small expense. The $231 million spent on research and development in the first half of the year consumed 72% of revenue recorded during the period.
Incyte's investment in Agenus stock grew dramatically in the second quarter, allowing the company to report its first profit. Now that Agenus stock has fallen, even that modest profit will probably be wiped out.
This is especially troubling for Incyte investors because it's sitting on about $660 million in convertible notes due over the next several years. During the first half of the year, some investors converted just $47.1 million into 5.4 million shares of Incyte stock. With 186 million shares outstanding at the end of the second quarter, converting just a fraction of the existing notes would significantly reduce current shareholders' slice of future profits.
If investors didn't have enough to worry about, Jakafi's position as the only FDA-approved treatment of people with intermediate or high-risk myelofibrosis -- and eventually the larger indication of polycythemia vera -- could soon be challenged by CTI BioPharma's pacritinib.
A niche within a niche
Late-stage testing for pacritinib included two phase 3 trials titled Persist-1 and Persist-2. Results from Persist-1 suggest it is far more effective at reducing spleen volume -- enlarged spleen is a common symptom of myelofibrosis -- than the best available therapy excluding Jakafi.
The ongoing Persist-2 trial is structured in a similar manner, but patients in the control group will include, but not be limited to, those on Jakafi. So while it isn't a head-to-head trial, it should give us a better idea of how well pacritinib could compete with Incyte's therapy.
Even without head-to-head data, pacritinib has already differentiated itself from Jakafi. Myelofibrosis often results in an enlarged spleen, and patients with low platelet counts taking pacritinib showed a significant reduction in spleen volume. Since lowered platelet count is a listed side effect on Jakafi's label, these patients represent an unmet need.
That's the sort of situation that gets the FDA's attention. Last month CTI BioPharma announced a plan to submit a rolling NDA after meeting with regulators. Rather than seeking the wider myelofibrosis population, CTI will request accelerated approval for patients with low platelet counts using data from Persist-1, earlier clinical data, and incoming results from Persist-2. According to CTI, this could result in pacritinib reaching pharmacy shelves 14 months earlier than expected.
Precarious indeed
Since CTI's rolling submission is basically for treatment of patients unable to take Jakafi, this isn't a direct threat to Incyte, yet. Investors will want to keep an eye on data from the Persist-2 trial, which includes Jakafi patients.
It will be over a year before we can gauge just how much of a threat pacritinib poses, but Incyte really can't afford to lose any portion of Jakafi's market. Because its enormous debt load is in the form of convertible notes, insolvency isn't as much of a problem as share dilution. Investors should be wary of seeing the company develop its rich pipeline, only to receive a minuscule share of the profits.
