Sales up 52% in 2014 but It's Still the Pipeline That Counts at Incyte

02/26/2015 11:31 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

When it comes to biotech companies, sometimes an investor gets both growing sales and a bulging pipeline, which is what MoneyShow's Jim Jubak thinks this biotech delivered in its 4th quarter report, so he’s raising his target price as of Wednesday, February 25.

I’d never say that sales don’t count for biotech companies. It’s just that in the early stages of a biotechnology company’s life, its pipeline counts for more. Sales are, of course, the ultimate test of the validity of the value that a market puts on that pipeline. Sales reflect, for example, all those nasty little details such competition from other new drugs, the cost of reaching the market for a specific drug, and the quality of the sales force a biotech—and any big drug company partners—can put behind a new drug.

Sometimes, though, an investor does get both growing sales and a bulging pipeline.

I think that’s what Incyte (INCY) delivered in its fourth quarter report on February 11.

For the quarter, product revenue grew to $106 million, an increase of 46%. For the full year, product revenue climbed to $358 million, up 52%. And the company guided Wall Street to expect 2015 product revenue of $525 million to $565 million.

That’s a solid revenue stream or at least the beginning of a solid revenue stream. It better be just the beginning since this biotech has a current market cap of some $14.6 billion. (And the company is estimating 2015 research and development spending of $450 to $500 million.)

I’d divide Incyte’s pipeline into three parts.

First, there’s the company’s approved JAK inhibitor drug, Jakafi, which has gained regulatory approval to treat the rare blood disorder myelofibrosis. Jakafi right now has a monopoly in this market after the discontinuation of a potential competitor from Sanofi (SNY), but drugs from Gilead (GILD) and Geron (GERN) are likely on the way. (JAK inhibitors work on genes that produce the JAK family of enzymes that regulate cell proliferation.) The Food and Drug Administration has recently approved Jakafi for polycythemia vera in which the body produces an excessive amount of red blood cells.

Second, there are other JAK inhibitor drugs. Farthest along is baricitinib that is now in Phase III trials for rheumatoid arthritis. The market for rheumatoid arthritis is huge—an estimated $15 billion currently—and current treatment options focus on injectable drugs. Until recently, baricitinib looked like it would be the third oral treatment to hit this market but recent setbacks for competing drugs at AstraZeneca (AZN) and Pfizer (PFE) look to have improved baricitinib’s position in the market. Another JAK inhibitor is projected to go into pivotal trials for pancreatic cancer in 2015.

Third, the company has a promising but early stage pipeline for oncology drugs. The company has recently begun Phase II trials for its IDO1 inhibitor. In addition, Incyte and Advaxis (ADXS) have recently entered into a collaboration to assess a combination of Advaxis’s Lm-LLO cancer immunotherapy candidate with Incyte’s epadadostat.

I particularly like the biotech sector in the current market. Absent huge swings toward fear by the market as a whole, biotech stocks tend to be driven by pipeline news rather than by trading on speculation on when the Federal Reserve will begin to raise interest rates or whether US GDP growth will be 2.9% or 3.1% for the quarter.

Incyte is trading well above my $68 a share target price, but on the pipeline momentum, I’m keeping the stock in my Jubak’s Picks portfolio and raising my target to $94 by June 2015.

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