Will Incyte's Blood Cancer Drug Bring Dividends?

Today, Incyte INCY announced that the FDA had approved their blood cancer drug Jakafi that's designed to treat myelofibrosis. The drug is the first to be approved to treat this condition, and is designed to less bone marrow scarring, as well as spleen swelling, which can crowd out other organs. "This drug is going to help patients and bring in a substantial amount of money, which gives us flexibility in the intermediate term to make decisions and do things that could propel the company far beyond where we are now with respect to market capital and stature," said Incyte CEO Paul Friedman. Myelofibrosis is a form of blood cancer where scar tissue replaces bone marrow, which results in blood cells to be produced in areas of the body such as the liver and the spleen. Patients can display symptoms such as rib pain, abdominal discomfort, fatigue, itching, and muscle pain. Jakafi treats the cancer by using enzymes which regulate blood and immunological functions. "Jakafi represents another example of an increasing trend in oncology where a detailed scientific understanding of the mechanisms of the disease allows a drug to be directed toward specific molecular pathways," says Richard Pazdur, the FDA's Director of Oncology Products. Jakafi was evaluated in a pair of clinical trials using 528 patients. The patients were selected on the basis that conventional treatments were not effective, such as traditional myelofibrosis therapy or allogeneic bone marrow transplantation. Patients were divided into three treatment groups; one received Jakafi, another received hydroxyurea (a chemotherapy agent), and the third received a placebo. The Jakafi group showed the greatest amount of improvement, as the largest proportion of patients saw more than a 50% reduction in myelofibrosis related symptoms. A larger concern for Incyte is the market potential for Jakafi. The company has indicated that it would be priced around $7,000 a month and myelofibrosis is not a common disease, affecting about 17,000 people in the U.S. 60 sales agents have been hired to market the drug within the next week. Incyte has also partnered with Novartis NVS to market the drug in Europe, upon which it hopes to receive approval. Incyte submitted a Marketing Authorization Application in June. The European trial consisted of 219 patients which compared Jakafi against the best available treatment. The trial was conducted over a period of 48 weeks and showed that spleen volume was reduced by 35% in 28.5% of patients taking Jakafi, while none of the patients in the BAT group showed that level of improvement. Some patients showed side effects such as appetite loss, insomnia, and fatigue. Jakafi is the very first treatment for myelofibrosis and has followed the FDA trend that has seen previous initial treatments approved before the PDUFA date. While the drug may face a limited market, it does benefit from being the first and only form of treatment for MF. This period of exclusivity will likely allow sales to remain steady in the short term. Incyte shares may seem a short term spike to account for the revenue, but the company needs to continue to develop its pipeline of other drugs to sustain long term growth. ACTION ITEMS:

Bullish:
Traders who believe in Jakafi's market potential will want to consider the following trades:

• Investors can purchase shares in Incyte as increased revenue will drive their prices higher.

• Investors can also consider purchasing shares of Novartis.

• Options players can also purchase longer term call options that expire when Incyte can ramp up sales.

Bearish:
Traders who think that Incyte will run into demand problems for Jakafi will want to consider the following:

• Short sell shares of Incyte. Biotech stocks often experience a post-PDUFA dropoff in their share price, as investors move onto stocks with pending catalysts.

• Novartis may also be short sold; however, given that the company is so large, a failure to successfully launch Jakafi will unlikely hurt the company that much.

• Options players can purchase put options with the belief that they will decline if Jakafi sales struggle out of the gate.

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