We believe that the stock price of Incyte, a global biopharmaceutical company, is undervalued at current levels of $75. INCY stock is down 21% over the last-twelve months period, despite revenue increasing 17% over the same period. Looking at a longer time period, INCY stock is also down 20% from the levels of around $95 seen toward the end of 2017, significantly underperforming the broader markets, with the S&P 500 rising 70%. Much of this decline can be attributed to unfavorable changes in its P/S multiple.
Looking at its fundamentals, Incyte’s total revenue actually surged 77% to $2.7 billion over the last twelve-month period, compared to just $1.5 billion in 2017. The revenue growth can largely be attributed to market share gains for its drugs – Jakafi, Iclusig, and Pemazyre. The company also issued more shares over the recent years, resulting in a 9% growth in total shares outstanding since the end of 2017. As such, on a per share basis, Incyte’s revenue grew 62% to $12.20 for the last twelve month period, compared to $7.50 in 2017. Despite a large 62% rise in revenue per share over the recent years, Incyte’s P/S multiple has contracted 50% to 6x currently, compared to levels of 13x seen in 2017. Our dashboard, ’Factors Driving Incyte’s Stock Returns’ has the underlying numbers.
Incyte has seen a strong growth in its product revenues, led by higher demand for its key drugs. Jakafi – used to treat certain bone marrow disorders – is a blockbuster drug with sales of nearly $2.0 billion in 2020, and its peak sales are estimated to be north of $3.0 billion. Continued growth in royalty revenues from Jakavi and Olumiant along with milestone revenues from Novartis and Eli Lilly has led to a strong growth in its top-line, a trend expected to continue going forward.
The company has multiple positives to look forward to. Firstly, the recent European Commission approval for Minjuvi – used for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma who are not eligible for autologous stem cell transplant – will result in further expansion of Incyte’s top-line, given its peak sales are estimated to be north of $1.0 billion.
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Secondly, despite the U.S. FDA extending the review period for Ruxolitinib cream for the treatment of atopic dermatitis, the company’s management believes that it is likely to get the approval and it has begun the rollout process. The U.S. FDA will make a decision on Sep 21, and if approved, this is further going to aid the revenue growth. This product is estimated to add over $700 million to the company’s top-line at its peak. Lastly, the company has a solid pipeline with a couple of dozen clinical candidates being studied.
There is not much to look at in terms of P/S multiple. Given the high growth, the company’s P/S multiple is also high, though it has declined from 13x in 2017 to 6x currently, and it may decline further to more reasonable levels over the coming years. That said, a decline in P/S multiple will be more than offset by growth in RPS, given the expected surge in revenues, and thereby resulting in higher levels for INCY stock. To add, the average of analysts’ price estimates for INCY currently stands at $102, reflecting a 35% premium to its current market price of $76.
While INCY stock may see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Freeport vs UnitedHealth UNH .