Incyte Corporation (INCY)/ Merck & Co., Inc. (MRK) plan to take epacadostat (IDO inhibitor) plus Keytruda (anti-PD-1 inhibitor) into four pivotal trials in 2017. While most of the Street was expecting only one, if any, pivotal trial announcements in early 2017, this represents a major positive catalyst for INCY (+9.4% on the news).
With the addition of these indications at a 54% likelihood of approval (60% Ph3 success and 90% FDA approval) to BAC’s NPV analysis, BAC sees epacadostat worth $59/share. While BAC presumes MRK is splitting costs for the Phase 3 melanoma trial 50/50, INCY has not disclosed economics for the new indications. Data presentation of multi-tumor Phase 2 programs is anticipated at the American Society of Clinical Oncology (ASCO) in June. BAC will look to these presentations for more clarity on the efficacy and durability of epacadostat/Keytruda combinations. First Phase 3 ECHO- 301 data in melanoma is expected in 2018.
The US approval of baricitinib in rheumatoid arthritis (RA) is widely anticipated in early 2017. With a positive read-out in all four Phase 3 studies, BAC thinks baricitinib is well positioned and has the potential to be used before anti-TNF therapies. LLY will initiate a Phase 3 trial in psoriatic arthritis (PsA) in 2017, triggering a $30M milestone to INCY. For RA and PsA, INCY has opted in to co-develop, resulting in tiered royalties on global net sales between 20% and 29%. Initial Phase 2 data is expected for baricitinib in atopic dermatitis (2017) and systemic lupus erythematosus (2018), after which INCY will decide to opt in or not. Expansion of baricitinib into these new indications provides further upside for INCY.
BAC’s price objective of $137 is derived from a probability-adjusted NPV analysis including $40/share for Jakafi (called Jakavi ex.-US) in MF and PV, $1 for Jakafi in GVHD, $59/share for epacadostat (IDO inhibitor), $23/share for baricitinib, $1/share for Iclusig and $10/share for the early pipeline. BAC also included approx. $3/share for net cash. BAC used a 9.1% WACC and no terminal value.