Two developments could put Incyte Corporation (INCY, Financial) into the realm of value stocks, in my opinion. First, it eliminated its long-term debt in 2018 (it had carried little or no short-term debt). Second, its price has fallen significantly over the past 11 months.
About Incyte
In its 10-K for 2021, Incyte described itself as “a biopharmaceutical company focused on the discovery, development and commercialization of proprietary therapeutics.”
It operates in two areas. The first is Hematology/Oncology, which includes Myeloproliferative Neoplasms (MPNs), Graft-Versus-Host Disease (GVHD), solid tumors and hematologic malignancies.
The second therapeutic area is Inflammation and Autoimmunity (IAI), which includes its newly established Dermatology commercial franchise.
Incyte also receives milestones and royalties on molecules licensed to third parties.
Although it has a variety of products, about three-quarters of its revenue comes from one Hematology/Oncology drug, JAKAFI (ruxolitinib). Novartis (NVS, Financial) has a license to market JAKAFI in international markets, using the name JAKAVI.
Incyte’s patent on JAKAFI expires in 2027, and the company is actively searching for new products that will maintain and grow its revenue. One of those is Opzelura (ruxolitinib) cream, which the company describes as “a novel cream formulation of Incyte’s selective JAK1/JAK2 inhibitor ruxolitinib, is the first and only topical JAK inhibitor approved for use in the United States for the topical short-term and non-continuous chronic treatment of mild to moderate atopic dermatitis (AD) in non-immunocompromised patients 12 years of age and older whose disease is not adequately controlled with topical prescription therapies, or when those therapies are not advisable.”
The company summarized its pipeline in this slide from its Q1 2022 investor presentation:
Competition
The company reported “intense competition” in its drug discovery, development and commercialization activities. Its competitors include pharmaceutical and biotechnology companies, academic and research institutions as well as government agencies. In particular, it points to fully integrated pharmaceutical companies.
One company offers an alternative to JAKAFI for Myelofibrosis patients: Bristol-Myers Squibb (BMY, Financial) subsidiary Celgene, which won approval from the Federal Drug Administration for fedratinib (Inrebic) in 2019.
Financial strength
The key area of strength for Incyte that investors are overlooking is how it got rid of its debt. In its 2017 annual report, the company made only one reference to this significant change: “We also greatly improved our balance sheet this year with the retirement of over $700 million of convertible debt and a year-end balance of cash, equivalents, and marketable securities of $1.2 billion.”
This wording raises a red flag that the company may have eliminated its debt with massive share issuances, but as the chart below shows, that was not what happened:
One other observation about financial strength deserves attention, and that is the weighted average cost of capital vs. return on invested capital comparison. The company’s current weighted average of cost of capital is 6.48% while its return on invested capital is many multiples higher at 55.49%.
Profitability
Incyte receives a ranking of only 6 out of 10 for profitability from GuruFocus, despite all the green on the profitability metrics shown above. Checking the criteria for the GuruFocus profitability ranking, we see the company does not do well on all five of the profitability ranking criteria:
- Operating margin: Strong.
- Piotroski F-Score: Not strong, just 4 out of 9.
- Trend of the operating margin over the past five years: It declined in two of the past five years.
- Consistency of the profitability: The company has only been profitable in five of the past 10 years.
- Predictability rank: Only 1 out of- 5 stars.
Given these criteria, it comes as no surprise that the overall profitability ranking for Incyte is not as strong as first suspected from things like high operating margins and returns on capital.
In terms of growth, the company posted the following per-share growth rates:
- Three-year revenue per share growth rate: 15.5%.
- Three-year Ebitda per share growth rate: 52.7%.
- Three-year EPS without NRI growth rate: 103.1%.
We can see earnings per share is growing six times faster than revenue, meaning every additional dollar of revenue has a significant impact on earnings per share.
Incyte does not pay a dividend, and the number of outstanding shares has grown an average of 1.2% each year for the past three years.
Valuation
Ironically, as Incyte was eliminating most of its debt in 2017, the market was losing confidence. The price plunged from $150.21 on March 13, 2017 to $61.67 on April 30, 2018:
The GF Value chart now considers the stock to be significantly undervalued:
When we see the words “significantly undervalued," we should always ask a follow-up question: “Is this stock a value trap?” Is the market telling us this stock has no future?
That seems unlikely, in my opinion. This is a company with significant revenues and earnings. Its principal drug is a market leader and brings in more than half a billion a year in revenue. Its pipeline also has good potential, with multiple new or recent drugs.
Perhaps the strongest argument against it being a value trap is its lack of debt. Inability to pay interest or repay principal is the most common cause of corporate death (or should we call it suicide?).
Incyte’s price-earnings ratio is 17.59, which is better than 68% of the 281 companies in the biotechnology industry. The PEG ratio would be unreliable because of the wide variation in Ebitda growth over the past five years. Its one-year growth rate is 5.5% while the three-year growth rate is 52.70%.
GuruFocus research has found that stocks with higher GF Scores are “closely correlated to the long-term performances of stocks." Incyte earns an 83 out of 100 for its GF Score, so it is a strong, but not a top-rated stock:
Gurus
Eleven gurus own shares of Incyte; the three with the largest holdings at the end of the first quarter were:
- Dodge & Cox, which grew its stake by 8.42%, to 18,060,290 shares, now representing 8.15% of Incyte’s shares outstanding and 0.87% of the fund family’s assets under management.
- Vanguard Health Care Fund (Trades, Portfolio) made no changes during the quarter and finished with 9,000,425 shares.
- Jim Simons (Trades, Portfolio) of Renaissance Technologies increased his firm's holding by 2.33% to end the quarter with 4,697,633 shares.
Conclusion
Could Incyte could be a value stock? With no debt and a significantly undervalued price by several metrics, as well as a strong product family and pipeline, I do indeed believe this is the case.
