Incyte Corporation (INCY) Q1 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Incyte First Quarter 2019 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Booth, Vice President of Investor Relations for Incyte. Please go ahead, Mike.

Thank you, Kevin. Good morning, and welcome to Incyte's first quarter 2019 earnings conference call and webcast. The slides used today are available for download on the investors section of incyte.com. I am joined on the call today by Hervé, Barry, Steven and Christiana Stamoulis, who will deliver our prepared remarks. And by Dash who will join us for the Q&A session. Before we begin however, I'd like to remind you that some of the statements made during the call today are forward-looking statements, including statements regarding our expectations for 2019 guidance, the commercialization of our products and the development plans for the compounds in our pipeline, as well as the development plans of our collaboration partners. These forward-looking statements are subject to a number of risks and uncertainties that may cause our actual results to differ materially, including those described in our 10-K for the year ended December 31, 2018, and from time to time, in our other SEC documents. We'll now begin the call with Hervé. Hervé Hoppenot: Thank you, Mike and good morning, everyone. So we have excellent progress in the first quarter of 2019. Net product revenues of Jakavi continued to be strong, delivering 20% growth over the first quarter of last year and last week, Novartis reported strong sales of Jakavi, ex-US, also up 20% on a constant currency basis with continued double digit growth across all operators. Including Jakavi and Olumiant royalties, sales of Iclusig and the milestones from Innovent, we reported total revenue of 498 million, up 30% compared to Q1 last year. On the right side of slide 4, you will see some of the important progress from across our development portfolio. Our GVHD development work is on track and we recently completed recruitment in to the GRAVITAS-301 trial we tested in patient with treatment naive acute GVHD and we plan to announce the plan result from this trial before the end of 2019. We are also on track to submit the NDA seeking approval of Pemigatinib in cholangiocarcinoma in the second half of 2019. And we expect that the data supporting the NDA will be presented at the medical meeting in the second half of the year. This morning, we announced the successful completion of the phase 2 trial of Ruxolitinib cream in vitiligo patients, which represents a robust proof of concept in a second indication beyond atopic dermatitis, where we are already in phase 3. Based on the phase 2 results for Ruxolitinib cream in vitiligo, we are also moving forward with phase 3 developments in this indication and we look forward to sharing this data with you at the medical meeting in the coming weeks. Novartis continues to plan for the NDA submission for Capmatinib in the second half of the year and updated data from the GEOMETRY trial have been accepted for oral presentation at this year’s ASCO in June. Exciting data from two of our early stage projects were presented at AACR earlier in April, the presentations of our oral PD-L1 inhibitor program as well as a PD-L1xCD137 bi-specific, we’re developing in collaboration with Myers were very well received and I believe that unlimited of the importance of discovery science for long term value creation. Today, we also announced that we will no longer participate in co-founding pathogen development with Lilly. We intend to make a reallocation of this capital to late stage development program during 2019 and 2020, as we now believe that certain projects such as the acceleration and expansion of Ruxolitinib cream development and the acceleration of our opportunities in our later stage portfolio won’t increase funding. We continue to believe that pathogen has an impact place in the treatment of rheumatoid arthritis and potentially in other autoimmune and inflammatory conditions. But with our cumulative investment already earning us a substantial royalty rate, we believe that now is the right time to opt out and to reallocate capital to support exciting project to help us reach our strategic goals of diversification and growth. With that, I’ll turn the call over to Barry for an update on the US business.

Thank you, Hervé and good morning, everyone. Jakavi continues to perform well and Q1 performance was in line with our expectations and with full year 2019 guidance for net sales of $1.58 billion to $1.65 billion. Jakavi’s sales increased by 20% over Q1 of last year, driven by demand in both approved indications. We saw total MS and total PD patients grow by 8% and 18% respectively in the first quarter, versus the same period in 2018. Slide 7 shows the sales bridge for Q1 2018 to Q1 2019. The growth of Jakavi was mostly driven by volume. And you can see that amounted to an increase of $42 million compared to Q1 of last year. You'll remember that the negative effect on gross to net is highest in Q1. It is also important to note that drug manufacturers are now required to contribute 70% of the coverage gap or donut hole as compared to 50% in previous years. I'll finish by reminding you of the May 24 PDUFA date on our SNDA for Ruxolitinib in steroid-refractory acute GVHD and that we are ready to launch immediately should the FDA approve Ruxolitinib in this indication. Our field force has already been sized and structured to support the launch. Our REACH development program also continues as planned. The results from both REACH 2 and REACH 3, the global phase 3 trials of Ruxolitinib which we're running in collaboration with Novartis in steroid refractory acute and chronic GVHD are expected by the end of this year. I'll now turn the call over to Steven for the clinical update.

Thanks, Barry, and good morning everyone. Incyte is currently running six key late stage development programs, as summarized on slide 10. These have the potential to treat a significant number of patients across numerous indications. More broadly speaking, these programs aim to transform Incyte into a company with multiple approved products in the United States, Europe, and Japan over the next several years. Today, we are focusing our attention on four of them, as these are the projects that we expect to generate important updates during 2019. Barry has already highlighted our ruxolitinib program in steroid refractory graft versus host disease. And I will touch on the remaining three in my remarks. We are pleased to announce today that the phase 2 trial of ruxolitinib cream in patients with Vitiligo successfully reached its primary endpoint, and that the plans for phase 3 development are now underway. This was a randomized dose ranging and vehicle control phase 2 trial in more than 150 adults with Vitiligo, and we look forward to sharing the data with you at a medical meeting soon. Vitiligo is an inflammatory disease of the skin, which results in patches of de-pigmentation and the potential for significant impact on patient’s lives. It is estimated that there are 2 million to 3 million patients in the United States with this disorder and there are no currently approved FDA treatments. Many patients try steroids or phototherapy. But these options have not shown significant or long lasting re-pigmentation of the skin. We expect to initiate phase 3 development by the end of this year. And we are hopeful that ruxolitinib cream will be the first therapy approved by the FDA and will provide these patients with a meaningful improvement in their disease. We believe that there are significant opportunities within our pemigatinib program. We expect to file the NDA for second line FGFR2 translocated cholangiocarcinoma in the second half of this year. And we are also planning to share the data that supports the proposed NDA at a medical meeting in the second half of 2019. The second indication we are pursuing for pemigatinib is FGFR3 mutated bladder cancer. And we are currently recruiting the continuous dosing cohort of the pivotal phase 2 trial. We expect that this cohort will reach full recruitment by the end of this year and we are hopeful that the SNDA for this indication could be submitted in 2020. The first line phase 3 trial in cholangiocarcinoma is now open for recruitment and plans for first line bladder cancer study are also in preparation. We are also opening a registration directed phase 2 study in a tumor agnostic setting, which could further expand the number of patients eligible for the therapy and therefore the potential of the molecule. Moving back to our development efforts in graft versus host disease, and the GRAVITAS program, which is investigating itacitinib in first line treatment. GRAVITAS-301, a phase 3 trial in treatment naive acute graft versus host disease has now completed recruitment. And we expect results to be available before the end of this year. In January, we launched GRAVITAS-309, which will evaluate itacitinib in patients with treatment naive, chronic graft versus host disease. It is important to note that in major markets globally, approximately 15,000 new graft versus host disease patients are diagnosed each year. The unmet need here is clear and we are encouraged by the potential of JAK ambition to treat this often deadly disease. I’ll end my update by mentioning two very exciting opportunities in our early stage portfolio, both of which were recently highlighted at AACR. We have discovered a series of novel, orally available PD-L1 inhibitors, and the first molecule 86550 is now in the clinic. Its mechanism of action, which binds, [indiscernible] and internalizes PD-L1 is novel and could result in a differentiated clinical profile versus injectable monoclonal antibodies. We are in the early innings, but we look forward to sharing clinical data for this program next year. Through our collaboration with Merus, MCLA-145, a PD-L1, CD137 bi-specific antibody is ready to enter clinical development and we expect to have the first patient dosed with MCLA-145 this quarter. This is also a very exciting mechanism with the bi-specific direct CD137 agonist activity to the tumor micro-environment by its selectivity for PD-L1. This may limit systemic CD137 agonist activation, while targeting two important immune moderate pathways. With that, I'd like to turn the call over to Christiana for financial update.

Thanks, Steven and good morning, everyone. The financial update this morning will include GAAP and non-GAAP numbers. Before moving to our results for the quarter, I would like to discuss a change in our methodology for non-GAAP reconciliation. After reviewing our non-GAAP reconciliation and at the request of the SEC, beginning with the first quarter of 2019, we will no longer be adjusting our revenues or research and development expense for upfront consideration and milestones that are part of our collaboration agreements with new or existing partners. This new methodology is reflected in the GAAP to non-GAAP reconciliation on slides 25 and 26 in the backup section of the deck, and in the press release that we issued this morning, In addition, I’d like to further discuss our decision to end the additional co-funding of baricitinib development with Lilly. As you know, under our agreement with Lilly, we have the right to base their royalty of 11% to 20% on global net sales of Olumiant. We also have the right to receive a 9% incremental royalty if we could fund 30% of the post BOC development costs per baricitinib indication. Based on the cumulative investment made to date, we have already earned a substantial incremental royalty rate, especially in rheumatoid arthritis and have now reached the point, given the acceleration and potential of certain key internal projects, where we believe that the best decision is to add additional co-funding of baricitinib development and reallocate capital over the balance of 2019 and in 2020 to other projects. Through 2018, we were entitled to receive the full 9% incremental royalty in addition to the 11% to 20% base their royalty. With our decision to end our co-funding effective at the end of 2018, we expect the incremental royalty rate for rheumatoid arthritis to come down over time. The timing and the rate of decline in the incremental royalty rate will be based on Lilly’s additional development costs in this indication, and the pace at which those costs are incurred. The base royalty rate isn’t affected by levels of development spend, and as it is a key royalty structure, it is expected to grow over time as global net sales of Olumiant continue to grow. Moving on to our financial results. For the first quarter, we recorded $458 million of total product related revenues, an increase of 20% over the first quarter of 2018. This is comprised of $376 million in Jakavi and $21 million in Iclusig net product revenues, $46 million in Jakavi royalties from Novartis and $16 million in Olumiant royalties from Lilly. We also recognized $40 million in contract revenues from the upfront payment we received under our collaboration agreement with Innovent, resulting in total revenues for the quarter of $498 million. R&D expense for the quarter was $243 million on a non GAAP basis, driven by the progress across our development programs, as Steven has outlined. And in this quarter versus last year, this expense was partially offset by the impact of our decision to stop co-funding baricitinib development and lower costs related to the applicator set program. The net effect was a 9% decrease in ongoing R&D expense for the quarter compared to the prior year period. SG&A expense for the quarter was $111 million on a non-GAAP basis, relatively flat in comparison with the prior year. The increase in total revenues and decline in non-GAAP costs and expenses has resulted in operating income for the quarter of $127 million on a non-GAAP basis as compared to an operating loss of $19 million in the prior year period. Moving now to our guidance for 2019, we are re-iterating our revenue guidance for the full year as well as our SG&A guidance. We have received our GAAP -- we have revised our GAAP R&D guidance from a range of $1.185 billion to $1.255 billion to a range of $1.145 billion to $1.195 billion, which largely reflects our decision to discontinue co-funding baricitinib development and the timing of resource reallocation. Please note that this guidance does not include any additional potential future strategic transactions beyond agreements previously announced. I will now turn the call back to Hervé. Hervé Hoppenot: Thank you, Christiana. Our next slide outlines the key newsflow events we expect during 2019, including news from our partner. With this list of exciting late stage program, we are taking important steps throughout our strategic goals of diversifying and accelerating revenue growth. We look forward to keeping you updated on our program. And for now, we are happy to take your questions. Operator, that concludes our prepared remarks. Please give your instructions and open the call for Q&A.

[Operator Instructions] Our first question is coming from Marc Frahm from Cowen and Company.

Maybe first just a kind of housekeeping one for Barry. Can you disclose the gross to net in the quarter? Just how it worked out with the new rules around the donut hole and do you still think the full year is going to be about 15%.

Yes, the full year gross to net is going to be about 15%. The gross to net, as you know, is highest in the first quarter, the additional 20%. So going from 50% of the donut hole to 70% of the donut hole amounted to about $5 million we estimate.

Okay, thank you. And maybe just turning to the topical ruxolitinib, so for Steven, one, so that there's a new maximum use trial that's on clinical trials like, is there anything else that needs to be done other than reading out that and reading out obviously the phase 3 data in atopic dermatitis for filing? And then maybe initial thoughts on the design for phase 3 trial in Vitiligo, does it need to be as large as atopic dermatitis or can you leverage a lot of the safety data?

Marc, it’s Steven. Thanks for your questions. So, for atopic dermatitis for the entirety of the filing package, there will be nothing additional that needs to be done other than obviously completing both phase 3s. And the maximal use study that's done per the guidance for dermatological products. And that, we have high confidence in atopic dermatitis data based on our very strong proof of concept with the cream. In terms of Vitiligo, obviously, we've just delivered the proof of concept data. We’re very, very encouraged by, it'll be presented at a medical meeting soon, obviously been thinking about the Phase 3 designs all along and have relatively well developed concepts, which we’re now at an end of phase 2 meeting with the FDA, discuss with them and come to decisions on the endpoints and the size. And as we said, our intent is to start those before the end of the year. In terms of what I think you're alluding to, will the safety package be able to be leveraged from atopic dermatitis for Vitiligo? We expect that would be the case, but there will be a discussion point with the regulatory authorities. Having said that, the Vitiligo studies will still have to be appreciable in size, it's a different area from oncology and you require larger studies, but we expect that the safety package from atopic dermatitis will be very helpful for the Vitiligo file.

Okay, great. And then maybe a bigger picture for Hervé, in the past, with these mid-stage dermatology projects, you mentioned that you'd have a decision to make ultimately about whether it's right for Incyte to market them and build a whole commercial infrastructure in that space, versus ultimately partnering these out. Now that you kind of have randomized data in house, at least in two indications, are you ready to make that decision? Do you have an answer on that? Hervé Hoppenot: So, obviously, you know, our approach was, in terms of commercialization, was driven by cancer portfolio and we decided to commercialize ourselves in North America, Europe and Japan. That was like two years ago, three years ago, four years ago, we have built that infrastructure now. So we have a new question here is, does this apply to dermatology? And the answer is, it's very different in terms of size of the opportunities by -- for each of the regions, so we are looking at it on a regional basis. And from that first review, what we see is that there is a lot of attractiveness to doing it ourselves in the US. There is certainly less of that for Japan, where it's a complicated and different market from what we see in cancer. And we are basically reviewing also for Europe, what would be the best approach and it could be either to commercialize alone fully or to find a co-commercialization partner and book the revenue or to out license completely and book milestones and royalties. And frankly, we are looking at each of the three opportunities, and what will make the most sense from the Incyte standpoint financially and in terms of investment and risk. So it's quality upon, we have time because of phase 3 results from atopic dermatitis are anticipated at the beginning of – in 2020. So we are planning to use the next six months to have an in depth analysis of what makes sense with our board. And we will probably be already by the time we get the phase 3 data. And after the phase 3, there will be another year before the commercialization is starting. So we are basically on a good track to be able to make the decision based on valuation or financial analysis.

Thank you. Our next question is coming from Michael Schmidt from Guggenheim.

I had a couple on pemigatinib, specifically regarding bladder cancer, can you just help us frame the opportunity here in context of some news recently around, approval of erdafitinib from J&J and DCL Genetics, top line data as well. How do you think about the opportunity here and help us understand if there will be any updates from your phase 2 study in bladder cancer this year? And then the other question was regarding Jakafi, I guess what was the gross to net in the first quarter, how should we think about that in the second half of the year.

It’s Steven and Barry will answer your gross to net question. So, as I said in my prepared remarks, this is the second indication we’re pursuing, obviously, a very important indication and quantitatively bigger than FGFR4 translocated cholangiocarcinoma, this is the FGFR3 mutated or fusion patients with bladder cancer and the opportunity is large in the 15,000 to 20,000 patient range. We view the J&J erdafitinib approval very positively. It's -- it gives us proof of concept that the pathway is important that hitting the striving mutation is effective, we're always ahead, although we have caught up substantially, we do in our continuous dosing. Now, we expect to complete that continuous dosing cohort around the third quarter of this year, but you’re only likely to see data from us next year in 2020 and in addition, that's where we'll be filing as well, should the data be supportive of filing. The Seattle conjugated monoclonal is a different target, probably, in some respects, mutually exclusive and, potentially important drug in bladder cancer as well. So it doesn't affect anything in terms of our program at all. And then obviously, we have the ongoing MPN 8P11 FGFR1 driven study that's actually accruing very well after ASH update. And then very importantly, the tumor agnostic program, which substantially expands the potential population in areas like endometrial cancer, glioblastoma, et cetera. This could be upwards of another 15,000 patients, if we deliver efficacy in all these populations. So, as you outlined, extremely important program to us, that's going very well, we view that approval, that's important proof of concept for the pathway. We think the safety may ultimately be something that's important. We note the J&J label, and we'll see what our data shows in terms of safety down the pipe. I’ll turn it over to Barry for your gross to net question.

Yeah. Michael, so the gross to net, we estimate for the first quarter, full first quarter at 17%. I was going to imagine, it's much higher in January and then settles down in February and March. And generally speaking, gets a little bit better each subsequent quarter after that, and as I said before, for the full year, we estimate the gross to net to be 15%.

Our next question is coming from Brian Abrahams from RBC.

What's the right way to think about the cost savings from the bari restructuring? I guess for this year and beyond, once we net out the effect of some of those accounting changes, for provoking milestones and how are you guys thinking specifically about allocating that funding? Will that be for new projects, new indications for some of the late stage programs, moving other early stage pipeline programs forward into the late stage, what’s the right way to think about that?

Hi, Brian. This is Christiana. So in terms of baricitinib, first of all, the revised guidance that we provided implies a 40% to 60%, sorry $40 million to $60 million reduction in R&D spend in 2019. That, as we indicated, includes the decision to opt out from baricitinib development and the partial reallocation in 2019 on some of the funds that we had earmarked for baricitinib to other internal programs. Also as we indicated, the decision to opt out was really driven by the opportunity that we see in some late stage programs and the desire to accelerate or augment the development of those programs like rux cream. So in 2019 through the rest of 2019 and in 2020, we would be looking to reallocate the capital that otherwise would have been allocated to baricitinib to those late stage programs.

Got it. And then one more question for me, what's the right way to be thinking about the bar for clinical meaningfulness in the Vitiligo setting and the potential readthroughs between Vitiligo and atopic dermatitis pathophysiologically, do you view this as sort of an additional endorsement of the potential for rux cream in atopic derm beyond the phase 2 you've already reported in AD or should we think about this as very -- as completely separate from a scientific standpoint.

It’s Steven. Thanks for your question. In terms of the, what is clinically meaningful in Vitiligo, obviously, there's no approved therapies and there's actually being a dearth of clinical work to date. This is the biggest study done, ever in Vitiligo. The primary endpoint in this proof of concept study was the percentage of patients treated with ruxolitinib cream to achieve a 50% or greater improvement in the facial assessment of the Vitiligo area and severity index scored, called score compared to vehicle and that measures the activity of the compound. In addition as we've said and as the field keeps telling us, this is a disease with a large psychosocial burden on patients and we'll be measuring that through appropriate patient reported outcomes during the study because we would have to document clinical benefit in that respect. The big caveat, as we need to discuss with the agency what the primary endpoint will be for the Phase 3 studies, will it be a vacy [ph], will it be a face vacy, will it be a total body vacy and to what degree will they accept as the primary endpoint in addition to measuring patient reported outcomes. It's 150 patient study, you'll see the data at a major meeting in the middle of this year. And obviously, we're very encouraged by are we going to face 3. The read through for me is, in terms of inhibiting interferon gamma signaling in Vitiligo, stopping this [indiscernible] and then getting the re-pigmentation in important areas to patients like the face and hand and hands which are visible externally. And it’s a similar mechanism to AD, but I don't -- they are just separate indications that we pursue separately. There are potentially other diseases over the years, we've looked at like psoriasis, which have some overlap in terms of pathophysiology, but the current program in terms of registration direction is towards atopic dermatitis and Vitiligo.

Our next question is coming from Carter Gould from UBS.

Just wanted to, I guess, dig in a little bit more into the decision to stop the co-funding. You gave some rationale for that, but I guess you've been pretty persistent on this front that you would keep up that effort, I know you get -- conducted multiple internal analyses, so I guess sort of what changed and if there was any sort of shift either in kind of how you guys were viewing, maybe the systemic market for AD or specifically you mentioned some of the other assets in your pipeline, anything specifically you would call out. Hervé Hoppenot: Maybe I can start and Christiana can complement it. I think it's important to realize that this decision is not about the way we see the future of baricitinib, it's about 2 other things. One is, the way the additional royalty rate is calculated is based on the cumulative investments that we have already made in baricitinib, so you can imagine that the return on the marginal investment that we make is always lower than the return on the previous investments, so there is a point that we believe we have reached where in fact we see that there is a better return on that investment in our internal project as we have seen a number of them that requires or give us the opportunity to accelerate and expand like we discussed about itacitinib, pemigatinib and ruxolitinib cream. So we came to that conclusion that in term of marginal investment that we make in R&D, it would be a better allocation to do it to our internal programs that have been progressing very well and are very promising, so that's really how we came to that conclusion. As you know, we have told you regularly that we are reviewing over the time every quarter, we are reviewing the way R&D resources are allocated and that's the, basically the time came where it made sense for us to reallocate these resources to internal programs.

And if I could just ask a follow up, appreciate all the color Hervé, just in terms of, I guess, there has been sort of increased talk around you guys potentially be an acquirer in the marketplace and just in terms of your capacity for M&A based on your current cash position and future cash flows kind of how you're viewing that. Hervé Hoppenot: I mean what we are looking at is really the two strategic goals to our growth and diversification. So growing our revenue, which is obviously translating into the P&L and going through the bottom line in some way, but growth is important and diversification is important. So that's why there is always this possibility for us to do some business development that will add to our top line over the next the next year. It's clear that we have, I think at the end of the quarter, the cash position is 1.6 billion. The P&L structure that you can see this quarter, it’s very strong in term of cash flow and that gives us more ammunition for potential business development opportunities. At the same time, our internal portfolio is also very strong and progressing very well, so we are basically looking at both as potential ways to get to our strategic objectives.

Our next question is coming from Salveen Richter from Goldman Sachs.

For Vitiligo, in terms of the commercial opportunity, are the 2 million to 3 million patients in the US all targets and where should we expect that data set in 2Q?

It’s Steven Stein. So the incidence is around 1%, so 1% to 2%, if you have a 300 million population, that's how many total patients there are and it's just -- that's just the potential opportunity. The amount to seek treatment currently is much, much smaller, it's around 150,000 patients we can best estimate who actually currently seek treatment. That could be for multiple reasons as you well know in terms of a lack of available therapy, the fact that therapies that are available are somewhat cumbersome hard to give and require high compliance in terms of steroids and phototherapy and also for patients who just don't feel they need treatment. So, the population that is ultimately targeted will be for the ones that feel they have to treat areas that are causing the visual disfigurement plus the psychosocial implications of the disease. Obviously, we will have to demonstrate the efficacy benefit in the areas that are concerning, particularly as I said earlier, the ones that are visible externally like face and hands and we are not that population that ultimately will need, treatment from us could be in the range of 150,000 or so. It's hard to estimate currently.

Thanks. And just a housekeeping follow up, where did Jakafi inventory levels stand, exiting the quarter.

So, this is Barry. Actually, their normal levels are below three weeks.

Your next question is coming from Alethia Young from Cantor Fitzgerald.

Two for me actually. One, I know the PI3 kinase program doesn't get a lot of love. But, I think there are some PI3 kinase just coming back on the scene, including yours with data. So I just wanted you to talk a little about how you’re seeing your current molecule may be differentiated from others. And then my second question, and maybe it's asking the question another way, obviously, you guys have a core JAK capability. And I'm just kind of wondering how long it would take for you guys to kind of generate a return on invested capital, if you were to invest in dermatology? It seems like there's a lot you could do internally in the pipeline that you have, and obviously you have the top of the programs with your ongoing thing.

So, it’s Steven, I'll do your first question. So, the reason I think we [indiscernible] this is the year of enrolling the studies that are registration directed in follicular lymphoma, mantle cell lymphoma and marginal zone lymphoma and the Rolodex is really going well this year, it'll complete and then we'll have data next year. And hopefully be again of submission quality in those indications. This is a second generation PI3 kinase inhibitor. The chemical changes that were done to this generation of compounds seem to have dialed out the liver toxicity for the most part. So you don't see the transaminitis that you used to see for the first generation compounds like listed from Gilead initially. But what is the concern with this degree of PI3-kinase inhibition, over the long term, our safety concerns like colitis, so we made a very conscious decision in a little over a year ago, to try and thread that therapeutic benefit more cleverly, we know the compound is highly active, it's incredibly active in B cell disease, as we've shown that data repeatedly. But to get that activity at the same time, to make it more tolerable is to look at different ways of doing dosing and scheduling. So, we do the high dose up front, 20 milligrams weekly for the eight weeks to get to the efficacy bar we want. And then we look to different ways of either weekly or daily dosing at lower doses. And it looks like early days that we've been able to dial out with many caveats because the small numbers, a lot of the longer term toxicity that colitis, so that's a pretty exciting place to be from a therapeutic benefit point of view. And now we’re executing those studies to a substantial numbers of patients in marginal mantle and follicular to see if it's true, what we say. So have the high activity and much more tolerable profile. And then filing those indications, all of those indications remain to date as not curable diseases. So despite there being BTK inhibitors, B cell 2 inhibitors, CART therapies, there's still a lot of unmet need in these entities. And that's why we’re very encouraged by this program. Hervé Hoppenot: I speak about the ROI in dermatology. As I said, I mean, it's an open seat for us. So we are looking at it and making decisions based on what seems to be aligned with our goals of diversification and growth. And that's important to look that this dermatology has fairly high potential indications for Incyte. When you look at the number of patients on both at the big derm and Vitiligo, if you look at the therapeutic profile that we get from a topical administration, where the risk benefit and the side effects that you can observe, have a very different rate than what you have with systemic treatment. We believe there is a real opportunity that could be very meaningful for Incyte in both indications. That being said, as we discussed, we are looking at the commercial cost of having infrastructure for dermatology. It looks like specialty dermatology products in the US do not require an enormous size the type of team, so that one seems to be leaning in the direction where we would be doing it ourselves. And as I said, in Japan and Europe and the rest of the world, it's a plan and we will see what makes the most sense and ROI is certainly a very important criteria and the speed at which we can show cash flow positivity coming from the dermatology franchise, if you look at it that way, is very important. At the same time, being able to book the revenue and to diversify the top line is also very important. So that's the two criteria we will be looking at to make that decision.

Our next question is coming from Cory Kasimov from JP Morgan Chase.

I have just a couple of earlier stage clinical ones for you. So, first of all, the phase 2 tumor agnostic study for pemigatinib, is three an agreement with regulators or any sort of minimum number of different tumor types you need to enroll in that program.

It’s Steven. So the precedent for it comes from both what other companies have done before in the setting. Plus, in an FDA opinion piece that was written recently around, this is a reasonable approach when you already have a drug that's approved in at least one or two indications that the pathway is validated in this case, if you're far inhibition, and you can look at areas like MSI high for the checkpoint inhibitors as sort of a proof of principle, if you will, for doing a study this way. So we don't have and we won't be obtaining strict regulatory approval for the exact numbers required each time. But what you want to see is in a particular disease, like say, endometrial or glioblastoma, something where, you have the selection for the particular FGFR mutation of fusion, a very high degree of activity that's robust and durable. In the setting, we already have approvals elsewhere in a validated pathway. And that's the idea behind it. And as I said, there's regulatory precedent already.

And then for the second question, curious about your clinical plans for MCLA 145. Can you talk about the overall strategy there with the initial trials and how enriched those phase 1 studies will be?

I think it's best to say we’re working in collaboration with Merus here, it's early days. As I said in my prepared remarks, it's a very interesting bispecific paradigm here. There's been precedent before with mono use of CD137 and unfortunately, quite a lot of toxicity in terms of liver toxicity and transaminitis. So the idea here is to direct it with a bispecific via the PD-L1 enrichment straight to the area where it’s needed and try and subvert that toxicity and we'll see. Right. The second thing is, should these both mechanisms work together, as we expect from theoretic and our preclinical data, we think there will be potential plans for areas where sort of checkpoint refractory patients exists in that, but that's something we'll have to prove to you. I think it's too early just to talk about, because we’re only about to start dosing in a way that will have a lot of activity data early on, we're not enriching early on for any particular to answer your question directly, receptor or biomarkers, it’s more standard phase 1 first time in man, just to get to a safe -- the safety principle first.

Our next question is coming from Christopher Marai from Nomura Instinet.

Hi, good morning. Thank you for taking the questions. I'm just wondering if you could elaborate perhaps on the opportunity for topical rux in atopic derm. Would you be looking at expanding a label, perhaps to the pediatric setting? And then secondarily, with respect to the clean formulation, I Recall previously, there was a rather breezy formulation that you've been using. And this may have been a problem until ago, I was wondering, have you -- remind me, have you updated or modified that formulation to make it a little bit more patient friendly? And then secondarily, how does this cream differ from the ointment formulation used for Eucrisa? Thank you.

Christopher, it’s Steven. So it's good to bring up the pediatric part of the population here. So, the studies that we’re doing currently and we have permission to do from the regulators are in 12 years and above, in mild to moderate atopic dermatitis, which covers the majority of the population. In terms of the population below 12, so 2 to 12 years of age, that's something we’re still working on the regulators with things like safety margins, et cetera. And it’s something we will be interested in down the pipe, but the program at the moment is 12 years and above and that covers the vast majority of patients who are interested in treating with mild to moderate atopic dermatitis. In terms of the formulation question, we have not changed it. It's a cream. It's in terms of the data we have and we've used it extensively, if you just heard in atopic derm already in Vitiligo, it's been very well received. There's no greasiness, no burning, no stinging. When you allude to you, Chris, one of the things we've been told and we've seen from real world data is that seems to be the problem with that particular agent and that it induces both burning and stinging, and then maybe why it’s not used as wide as people wanted to be used. But we haven't had that at all a problem with our formulation to date, and we don't expect it to be, given that we've already treated hundreds of patients.

Okay, thank you. And then with respect to perhaps the moderate to severe setting for atopic derm, have you started or do you have any plans to explore the topical formulation there, given, of course, also the potential for the safety concerns or perhaps better efficacy there?

Yes. So our program is mild to moderate. The moderate to severe is particularly more on the severe range have been reserved for oral therapies. And as you know, baricitinib has a program there and others and then other targets that maybe have a different safety margin and are more acceptable for severe, that's not a population we targeted. There is some overlap in terms of the moderates. And we are expecting the clinical data will dictate how physicians and patients then use the therapies there in terms of degree of disease they have and what they’re trying to achieve in terms of the clinical results. One very important endpoint we saw, which was a good surprise was relief of itch with our product was dramatic and occurred very, very quickly within two days. And that's something that really is important to patients. And so we think, if that's a particular goal of physicians and patients, and we document that in our clinical trials, that will be an important endpoint. But for the most part, we don't think there's overlap. And again, we target in mild to moderates only with the cream.

Our next question is coming from Geoff Meacham from Barclays.

This is Jason on for Geoff. Just real quickly on Jakafi, if you could give us a sense of your expectations for the mix of price and volume moving forward, especially considering the gross to net hit in first quarter. And then I have a quick follow up.

It’s Barry. We continue to grow volume mostly. And as you can see from this quarter, in fact, or this year, Q1 2019 over Q1 2018, most of our growth, in terms of net sales, was for volume, and we see that continuing in the future.

And in terms of duration of therapy, and in terms of moving up earlier up line, is that factoring in as well? Or do you expect to see that more kind of as a longer term influence.

We always tried to improve duration of therapy, we want patients to stay on as long as they continue to benefit from Jakafi. And that's true in both PD and MS. When we talk about duration of therapy, we really go back to the clinical trials and we look at the trials for example, where at least 50% of the patients were still on it three years. And at the five year follow-up of the response, you had 66% of patients still on therapy at five years. So, the duration of therapy, we always want to try to improve on and work together with our healthcare professionals. So they suggest those down based on increased efficacy or decreased toxicity. And, again, we want them to stay on therapy as long as they continue to benefit from it.

And then with regards to REACH 1, now that we're in the homestretch here and can – to the extent that you can, can you provide some color on how those discussions with FDA are moving and kind of what are your expectations for read through to REACH2 and REACH3 when we get to that point?

Jason, it's Steven. So you're right, the PDUFA data, as Barry said, is May 24. We’re still extremely confident in our data and we look forward to the PDUFA date, we don't give granular details on back and forth discussions with the FDA. But we are in a place where we're confident in our data and look forward to the PDUFA date. Of course, because of what I just said, we expect the read through to reach 2, which is the same population, steroid refractory acute graft versus host disease to be similarly positive. It's a randomized study against best available therapy. And then in terms of chronic graft versus host disease, REACH3 against randomized against BAT, we have strong proof of concept in that area. And we will have data by the end of this year in both REACH2 and REACH3 and similarly confident in it and wait for the data.

[Operator Instructions] Our next question is coming from Tyler Van Buren from Piper Jaffray.

Thanks for the updates and the reallocation of baricitinib funding makes a ton of sense. I guess the, my question is related to the long term Jakafi guidance that you guys provided in February of last year of 2.5 billion to 3 billion by 2027. Are you guys -- can you reiterate your confidence in that, based upon what you're seeing in MF and PV and the development, GVHD programs, and also with respect to ET, how should we think about that program that's ongoing and when that indication could come to market?

So yes, we're fully confident in 2.5 billion to 3 billion and that as we've said before, includes MF, PV and GVHD indications, we really didn't estimate for ET, we're fully confident we have almost 10 years actually left on the patent and you can see the growth year-over-year and the contribution that we give to the top line, I think we can make it there. I don't know if Steven wants to comment on ET.

Obviously, that's the remaining [indiscernible] that’s not BCR able driven. And because of the pathophysiology, again, every expectation that JAK inhibition should work there and we know we have some spontaneous use there. The issue with the study there is, it's very difficult to enroll. Dominant first line use is hydroxyurea and the study required as you can see on clinicaltrials.gov, for patients, to have high white blood cell counts at initiation of the study and then to be randomized to the approved therapy for central thrombocytopenia, which is a negative light. So both the high white count and the negative non randomization is to continue to make this study difficult to accrue and we will continue to examine ways to try and improve that recruitment. It may end up being an entity that we end up doing a publication on -- before completing the entire recruitment, but an important disease for JAK inhibition and obviously one we're trying to address with a formal study.

Our next question is coming from Ying Huang from Bank of America Merrill Lynch.

This is Alec on for Ying. Thanks for taking our questions. I guess I just have one on the differences between the various REACH studies. You alluded to this the FDA for Jakafi and steroid refractory, acute GVHD was based on the single arm REACH1 study? And do you see any risks in REACH2 and 3, comparing Jakafi, the best available therapy in terms of superiority, since some patients do actually respond to be at the and where the study is towered with this in mind?

It’s Steven again. Obviously, whenever you conduct a study, there's risk attached in that, you may have a negative outcome. And as you allude to the fact that best available therapies, and there's a different list for REACH2 and REACH3, or active therapies and can have upwards of 30%, 40% response rate, they tend though not to be durable. And so we have confident in the data we've seen to date in our proof of concept work, that we can differentiate both in terms of the upfront activity, and then the durability of response, but the outcome will be on how the studies report out. And obviously, there's always some risk with randomized studies.

Our next question is coming from Jay Olson from Oppenheimer and Company.

I was curious if there was any update on Jakafi lifecycle management. I know in the past, you've talked about extended release formulations and potential fix to those combinations. So, any update there will be great. Thank you.

Hi. It's Steven again. Yeah. As Barry said, despite there being 10 approximate years of patent life left, it's an extremely important compound to us with a very large team working on active lifecycle management. Currently, there are three pillars to that. The formulation side, as you alluded to, and we've already published data with one stint of ruxolitinib, XR, and we busy developing other stints to go forward in that arena, that may be along a BA, bio-available bio-equivalents route plus minus a safety play, because it may have a different profile in terms of an anemia induction. So you'll have to just wait on those, but it's very active and it's underway as we speak, in terms of the XR formulation. In terms of combinations, both us, Novartis and external world are investigating multiple combinations in the second line setting and beyond which this theoretic and sometimes very strong preclinical evidence and some clinical evidence. The combinations that we are investigating are Rux plus PI3 kinase delta, we presented the first set of that data at ASH last year. And we’re doing that experiment further this year with continuous dosing rather than the weekly dosing and we were encouraged by the activity we saw in patients that had been on rux for a long time hadn't withdrawn from it, and then had clinic responses as well as symptom improvement, that there was some withdrawal of that when we went to weekly dosing. So we want to do that, it continuous experiment this year. The two other combinations we do in our rux plus perm, which is a very strong preclinical rationale and then ruxolitinib plus our JAK1 inhibitor, itacitinib in patients who can't tolerate sufficient doses of rux or can't tolerate it at all and then are switched to itacitinib. So those are all ongoing. Novartis have combinations that are ongoing in an external world as well. But so combination is very important, and it's both an efficacy play and a safety play. And then the third arm of that is more and Dash can speak to this is around the research arena and targets. So we have a very important collaboration in terms of looking for further targets here. And then internally, ourselves. Obviously, it's an area we know extremely well and are there better ways of potentially tackling the drivers of these conditions. I don’t know if Dash wants to add anything here?

So, absolutely right. There are a number of approaches one can think about going further than what we regard in terms of, as Steven was talking about the first two aspects of the pillars. And we have a number of discovery programs ongoing, both internally and in collaboration with academic institutions as well as biotechs nationally and internationally around probing really the fundamental underlying mechanisms, in addition to JAK inhibition that won't go after.

Our next question is coming from Peter Lawson from SunTrust Robinson Humphrey.

Just on the oral PD1, the next readout is at next year. What can we see and where would you position that drug indications?

It’s Steven. We filed our IND in October, we went into patients in December last year, it's going really well. There's a lot of interest and excitement in the compound being that it's oral with it potentially very interested in mechanism of action and internalization of the receptor, and will that translate to a clinical differentiator, but this year, the execution of the phase 1, getting to a recommended phase 2 dose, and it's going well, in that regard. Looking at benchmark areas of like lung cancer and melanoma to see what kind of activity there to see if this is efficacy differentiator, and we -- that'll take the most better part of this year, and we would love to show you some clinical data next year. As soon as we have a safe dosing schedule, we will also be pursuing combinations that are relevant in terms of having an oral PD-L1 inhibitor, but you will not see data till 2020.

Our next question is coming from Reni Benjamin from Raymond James.

I guess just regarding GVHD, the way I kind of look at it is itacitinib coming on board after rux, which will likely be off label quite a bit. Do you guys envision a launch where rux is kind of laying the groundwork in GVHD and when itacitinib comes on board, it just takes over, both at the steroid refractory and steroid naive or can you keep the two indications quite separate to each individual drug? How are you thinking about the commercialization?

Well, we think we have an advantage because we're able to launch, we will be able to launch ruxolitinib Jakafi in GVHD. So we're understanding that market very well right now. So, we've gotten to know the BMT treaters, we've gotten to understand exactly what drugs they're currently using. But then itacitinib, when it gets approved, it really does, in fact, should have a better profile, at least in terms of cytopenias. So we really think that we could continue to develop rux or people will use rux in that setting, but ultimately, itacitinib should be the drug of choice in steroid refractory and acute GVHD.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments. Hervé Hoppenot: Okay, thank you all for your time today and for your questions. We look forward to seeing you at the upcoming investor and medical conferences, but for now, we thank you again for your participation in the call today. Thank you and good bye.

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.