Incyte Corp (INCY)

Incyte is a company that discovers, develops, and sells medicines. It is not a household name — most people will never hear of it unless they or someone they know is diagnosed with myelofibrosis or rheumatoid arthritis. But it is a real, profitable business that earns money by selling drugs to hospitals and pharmacies. The company sells roughly five main drugs, each one treating a specific blood cancer or inflammatory condition, and each one took years and hundreds of millions of dollars to develop and get approved by regulators.

What the company does

Incyte has a simple mission: find chemicals that fix broken biology, test them in sick people to prove they work, get the government to approve them for sale, and then sell them. That sounds straightforward. It is not. Finding the right chemical takes years of work in laboratories, testing thousands of compounds to find one that actually affects the disease. Testing it in people takes even longer — first a handful of volunteers to check if it is safe, then dozens, then hundreds, all while watching for side effects and measuring whether the drug actually improves the disease. If it works and is safe, the company asks regulators for permission to sell it. If permission comes, the company then manufactures the drug and sells it to patients through hospitals and pharmacies.

Incyte’s main focus is blood cancers and inflammatory diseases. Blood cancers are myelofibrosis and acute myeloid leukaemia — rare diseases that destroy the blood-forming cells in bone marrow. Inflammatory diseases include rheumatoid arthritis and a rare skin disease called vitiligo. These are not glamorous diseases. They do not affect millions of people. But the people who have them are desperate for treatment, and they will pay a lot for a drug that works.

The main drugs and the money

Incyte’s largest drug is Jakafi (ruxolitinib). It treats myelofibrosis and certain cases of acute myeloid leukaemia. When a person has myelofibrosis, their bone marrow stops making blood cells normally, and their spleen becomes enormously enlarged and painful. Jakafi quiets down the overactive immune system that is driving the disease. It does not cure it — the disease comes back if you stop taking the drug — but it makes the disease bearable for many people.

Jakafi costs thousands of dollars per month because it is patented, because it took Incyte a decade and hundreds of millions of dollars to develop and test, and because there are no cheaper alternatives. The company sells Jakafi to patients in the United States, Europe, Canada, and other wealthy countries where people and governments have money to pay for expensive drugs. That revenue — from Jakafi alone — is larger than the entire revenue of most companies.

The second drug is Opzelura (ruxolitinib cream). It is the same active chemical as Jakafi, but in a cream you rub on your skin instead of a pill you swallow. It treats vitiligo, a condition where the immune system attacks the cells that make skin pigment, leaving white patches. Opzelura works for some patients, and it is sold at a lower price point than Jakafi because it is used on a smaller number of people and treats a less life-threatening condition.

Pemazyre (pemigatinib) is a drug for a rare cancer called cholangiocarcinoma. Cholangio is a cancer of the bile ducts, a system inside the liver, and it is often deadly because it is usually caught late. Pemazyre targets a specific mutation that drives some of these cancers forward. Again, it does not cure the disease, but it slows it down for months or years.

The company also sells Calquence (acalabrutinib), a drug acquired through acquisition, which treats chronic lymphocytic leukaemia. And it is working on new drugs for other cancers and inflammatory diseases, though most of these are in early or mid-stage testing and will not make money for years.

How the money works

For patients in the United States who have insurance, the insurance company pays the bulk of the cost of the drug, and the patient pays a copay — typically a few hundred to a few thousand dollars out of pocket. The company gets paid by the insurance company. In other countries with government healthcare systems like Canada or the United Kingdom, the government negotiates a price and buys the drug in bulk. In very poor countries, Incyte often does not sell the drug at all, or it sells it at a steep discount, because the market is not large enough to matter to the company.

The gross profit margin on these drugs is extremely high — often 80 percent or more — because the company has already spent all the money to develop and test the drug, and making more pills is cheap. Manufacturing and shipping a month’s supply of Jakafi costs far less than one thousand dollars. The company charges thousands of dollars per month because the patient is willing to pay it (through insurance) and because there are no competitors offering a better alternative.

That high margin is what makes the biopharmaceutical business so attractive to investors. One successful drug can support an entire company, and the profits from one drug can fund research into five or ten new drugs.

The challenge: replacing drugs when they expire

All Incyte’s drugs are covered by patents that expire at some point. When a patent expires, other companies can make the same drug and sell it as a generic at a tiny fraction of the original price. Generics are much, much cheaper — often 80 or 90 percent cheaper — because they don’t have to spend billions researching and testing. Once generics arrive, Incyte loses the market for that drug.

This is the problem every pharmaceutical company faces. Jakafi’s patent will expire eventually — maybe in 10 years, maybe in 15. When it does, competitors will sell generic ruxolitinib for a fraction of Incyte’s price, and Incyte will lose most of that revenue. The company has to keep developing new drugs to replace the money it will lose. If Incyte cannot do that — if all its new drugs fail in testing or don’t work better than existing options — the company will shrink.

The long-term bet

Incyte is betting that it can keep finding and developing new drugs before the old ones lose patent protection. This is hard. Most drugs that enter testing do not work — they either do not effectively treat the disease or they are too toxic. The company spends hundreds of millions of dollars on drugs that never make it to market. But if enough new drugs succeed, Incyte remains profitable.

The company also tries to extend the life of existing patents by testing them in new diseases. Jakafi was approved for myelofibrosis, then for acute myeloid leukaemia, and the company continues testing it in other blood cancers. Each new approval creates a new patent window.

How to research Incyte

Start with the company’s annual 10-K filing (SEC CIK 0000879169), which lists all the drugs it sells, their recent revenue, and which ones are still in clinical trials. The quarterly earnings calls break down drug-by-drug sales and give updates on new drugs in testing. Watch the patent expiration dates for Jakafi and other major drugs — you can look these up in SEC filings or in the FDA’s approval letters.

Track clinical trial results for new drugs. When Incyte announces that a new drug failed a trial, the stock usually falls. When it announces a success, the stock rises. The details of the trial — how many patients improved, whether side effects were manageable — are published in medical journals and in SEC filings.

Also pay attention to the company’s cash position and spending on research. If cash is running low and new drug pipelines are weak, the company may be vulnerable. If cash is strong and the company has five promising drugs in testing, the long-term outlook is better.