Incyte Corp (INCY) — Q4 2017 Earnings Call Transcript

Thank you, Kevin. Good morning and welcome to Incyte's fourth quarter and year-end 2017 earnings conference call and webcast. The slides used today are available for download on the Investors section of incyte.com. And I'm joined today on the call by Hervé, Barry, Steven, Dave, and Reid. Before we begin, 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 2018 guidance, the commercialization of our products, and our development plans for the compounds in our pipeline, as well as the development plans for 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, included those described in our 10-Q for the quarter ended September 30, 2017 and from time to time in our other SEC documents. I'd now like to pass the call to Hervé for his introductory remarks.

Thank you, Mike, and good morning, everyone, thank you for attending this call. So there are really three themes to discuss on today's call. First is Jakafi commercialization plan, and the near-term developments that we expect and our decision to report after non-GAAP accounting measure starting in Q1 2018. So first, the number of patients taking Jakafi continues to grow very nicely, and Jakafi net sales for the full year were close to the upper end of our guidance range. As we told you last quarter, Jakafi sales in Q3 included some inventory build, and this has now been corrected in Q4. And Barry will speak about this in more detail later. Steven will cover our four upcoming clinical and regulatory capabilities, its Jakafi in GVHD, FGFR in cholangiocarcinoma, baricitinib in rheumatoid arthritis, and the ECHO-301 trial with epacadostat in advanced melanoma. You will also see that our SG&A guidance for 2018 includes an estimate of our global prelaunch costs for epacadostat. Dave will also cover our decision to adopt non-GAAP accounting measures and detail our framework for what will be included and excluded from these figures. Okay, so with that preamble, let me say a few words about the significant progress we made over the course of the last 12 months. In 2016, we surpassed $1 billion in total revenue for the first time, while this year, we surpassed $1.5 billion in total annual revenue, representing growth of almost 40%. Using the graphic of Slide 4, I'd like to highlight 5 areas we believe to be crucial to the successful growth of a biopharmaceutical company. Each of these areas are important and contribute to our long-term success in a different way. First, the dynamic top line supporting our future growth objective; then an expanding number of different sources of product-related revenue; the breadth of our clinical development portfolio; adding to our discovery capabilities; and obviously, the geographic reach of our organization. You can see the total revenue growth of 2017; we progressed in each of these areas, notably the total revenue growth was at a record level, but we added another source of royalty revenue with the ex-U.S. launch of Olumiant. We have also added two clinical candidates to our later-stage development portfolio, and we added an additional drug discovery platform with our bispecific collaboration with Merus. 2017 also saw Incyte establish a footprint in Japan as we rounded out our geographic expansion. I believe that we are now in an excellent position to execute on our upcoming development and commercialization plan. On Slide 5, you see our strong growth in product-related revenue comes from 4 sources: sales from Jakafi, sales from Iclusig, and royalties from both Jakavi and Olumiant. Barry will discuss Jakafi in a few minutes, and Steven will provide a quick update on Olumiant. So let me briefly touch on Iclusig. We are pleased that Iclusig sales have not only supported our rationale to invest in Europe, but it's also fair to say that sales are growing more rapidly than we had initially expected. In Q4, for example, sales of Iclusig grew by 51% over the same period last year, and I believe that this speaks to the quality of our European organization and should bode well for the future. In addition, for the year, we have recognized $152 million in Jakavi royalties from Novartis, representing 37% growth over last year and adding significantly to our top line momentum. Slide 6 illustrates the growth in our development portfolio and emphasizes our later-stage candidates. Since last year, we have progressed itacitinib, our JAK1 selective inhibitor and added MGA012, the PD-1 antagonist, into our later-stage portfolio. We also worked hard to expand the development scope of our existing portfolio candidates. And as you can see on the right-hand side of Slide 6, we have moved many of them into trials in multiple additional indications. So I'd like to finish this segment with what makes Incyte a special place to work and why we are so excited about the years ahead. Incyte is not only a company of rapid revenue growth, as seen by the almost 40% growth in our top line, but it is also a company with an expanding portfolio and enhanced discovery capabilities. As illustrated on the right-hand side of Slide 7, we have a multitude of opportunities as we seek to transform Incyte into a sustainably profitable biopharmaceutical business over the next several years. We now have more than 1,200 employees across the U.S., Europe, and Japan, and our balance sheet has been greatly improved with the retirement of over $700 million of convertible debt and with a balance of cash and equivalents totaling $1.2 billion. We therefore believe that we have both the geographic reach and financial resources to bring our new therapies to patients that need them. With that, I'll pass the call to Barry for an update on Jakafi.

Thank you, Hervé. And good morning, everyone. The three charts on Slide 9 are intended to give you the full picture of current Jakafi trends. Our Jakafi business grew well in the fourth quarter, as measured by the continued and consistent growth in patient demand as shown in the figure on the left side of Slide 9. Total patients on Jakafi are up 22% over the same period last year. Reported net Jakafi revenues were $302 million, up 27% from Q4 of last year. Net sales in Q4 were impacted by a reduction in inventory held by distributors. As you recall, we exited the third quarter with inventory build, and we exited the fourth quarter back in the normal range of inventory. This correction in inventory amounts to approximately half a week of product held at distributors, which equals approximately $12 million of Jakafi net sales. The right-hand panel plots Jakafi net sales by 6-month periods. This washes out these quarter-to-quarter inventory fluctuations and provides a normalized picture of Jakafi growth. Jakafi sales in the second half of 2017 were 31% higher than the same period last year. Slide 10 illustrates the annual revenue progression of Jakafi over the last 6 years, which shows a remarkable trend of strong growth. For the full year 2017, Jakafi net sales grew to $1,133,000,000, a 33% increase over the full year in 2016. We are also seeing strong and consistent growth in the number of patients on therapy, and the chart on the right of the slide shows this annual growth very clearly. We estimate that there were approximately 11,000 patients taking Jakafi in the United States during the fourth quarter of last year. The largest proportion of patients taking Jakafi have myelofibrosis, but the proportion with polycythemia vera continues to rise. And as the PV proportion in the patient mix rises, so does persistency, which of course has a positive effect on revenue. Today we announced our net product revenue guidance for Jakafi for 2018, which we expect to be in the range of $1.35 billion to $1.4 billion, with the midpoint representing more than 20% growth over 2017. Based on strong demand for Jakafi, the continued appreciation in the medical community that earlier intervention leads to better patient outcomes, and increasing persistency, we have recently raised our long-term net product revenue guidance to a range of $2.5 billion to $3 billion. This long-term guidance includes the potential for new indications, including GVHD, which Steven will address next.

Thanks, Barry, and good morning, everyone. Before coming to Jakafi in graft-versus-host disease, I'd like to begin by reminding everyone of our development portfolio. Hervé highlighted our 6 later-stage product candidates that have progressed beyond proof-of-concept development. But it's important to remember that we also have earlier-stage product candidates against 10 discrete targets, the majority of which have been created by in-house efforts and through our discovery alliances. The three candidates, which are expected to enter the clinic this year, are examples of that. The antibodies against TIM-3 and LAG-3 come from our discovery alliance with Agenus, whereas the dual AXL/MER inhibitor is the product of a 3-year effort from our world-class medicinal chemistry team. So back to Jakafi in graft-versus-host disease, and a reminder that the first pivotal trial for Jakafi in graft-versus-host disease is expected to read out in the first half of this year. REACH1 is a single-arm trial in patients with steroid-refractory acute graft-versus-host disease. If the trial is successful, we expect to submit a supplemental NDA later this year. The incidence of graft-versus-host disease has been growing due to an increase in the number of allogeneic transplants. Unfortunately, approximately 50% of these transplant patients develop graft-versus-host disease, and mortality rates in GVHD patients can be very high. In the first year, mortality rates can be between 25% and 75%, depending on the grade. So the unmet need here is very clear. A few words next on the ECHO-301 trial, evaluating epacadostat in combination with pembrolizumab in advanced or metastatic melanoma. As you should all know, the ECHO-301 trial is fully enrolled, and we are expecting the PFS results in the first half of this year. We are already planning our global prelaunch activities for later this year and pending the PFS results, of course, intend to submit an NDA seeking approval of epacadostat in the second half of 2018. Melanoma is a sizable opportunity for us, with over 20,000 metastatic melanoma patients in the U.S., Europe, and Japan each year. It is important to note that PD-1 monotherapy is the standard of care for first-line melanoma. Let's move on to our FGFR1/2/3 inhibitor. FIGHT-202, our study of patients with cholangiocarcinoma has been enrolling very well and we expect to be able to present initial data from the study this year. The trial has 3 open-label arms. Group A is recruiting 100 cholangiocarcinoma patients with FGFR2 translocations. It is these patients where we expect to see the benefits of 54828. Recruitment of the 20 patients needed in each of the other 2 arms has been completed, and we expect these arms to act as negative internal controls in the study. If the study meets its primary endpoint for good durability of response, we expect to submit an NDA seeking approval of 54828 in cholangiocarcinoma patients with FGFR2 translocations. Cholangiocarcinoma is an orphan indication and has significant unmet need. In the second-line setting, post-first-line chemotherapy, overall response rates to second-line therapy are approximately 10% with only a 2-month progression-free survival. I'll finish with a quick update on baricitinib. Lilly confirmed in December last year that it had resubmitted the rheumatoid arthritis NDA, which the FDA subsequently accepted as a Class II resubmission. This results in a review time of 6 months, during which we and Lilly expect the FDA to call an advisory committee to discuss the data publicly. Beyond rheumatoid arthritis, Lilly has already initiated a Phase III program of baricitinib in atopic dermatitis and expects to initiate a Phase III program in psoriatic arthritis later this year. Lastly, Lilly has also stated that the results from the Phase II trial of baricitinib in patients with systemic lupus erythematosus are expected to be presented at a medical meeting later this year. With that, I'll pass the call to Dave for the financial update.

Thanks, Steven, and good morning, everyone. Our financial performance for the fourth quarter was very strong. We recorded $444 million of total revenue. This was comprised of $302 million Jakafi net product revenue, $19 million in Iclusig net product revenue, $48 million in Jakavi royalties from Novartis, $5 million in Olumiant royalties from Lilly, and $70 million in milestone revenue. For 2017, we recorded $1.5 billion of total revenue. This was comprised of $1.1 billion of Jakafi net product revenue, $67 million of Iclusig net product revenue, $152 million of Jakavi royalties from Novartis, $9 million of Olumiant royalties from Lilly, and $175 million in milestone revenue. Our gross net adjustment for Jakafi for 2017 was approximately 13%. Our cost of product revenue for the quarter and the full year was $22 million and $79 million respectively. Our R&D expense for the quarter was comprised of $297 million of ongoing R&D expense and $150 million upfront payment under the license agreement with MacroGenics for a total R&D expense of $447 million, which includes $23 million in non-cash stock compensation. Our R&D expense for the full year was comprised of $955 million of ongoing R&D expense, $12 million related to an in-process R&D asset impairment, and approximately $359 million in upfront consideration and milestone expenses related to our collaboration agreements, for total R&D expense of $1.3 billion, including $90 million in non-cash stock compensation. Our SG&A expense for the quarter and the full year was $98 million and $366 million, respectively, including $11 million and $43 million in non-cash stock compensation for the quarter and full year, respectively. For our expense related to the change in fair market value with contingent consideration for Iclusig royalty liability for the quarter, we recorded $10 million and $8 million, respectively. Moving on to non-operating expenses. We recorded a $22 million unrealized loss on our long-term investments in Merus and Agenus for the quarter, and a $24 million unrealized loss on these same investments for the full year. Our net loss for the quarter and the full year was $150 million and $133 million, respectively. Recall, these amounts include expenses related to our collaboration agreements of $150 million for the fourth quarter and $359 million for the full year. Looking at the balance sheet, we ended the year with $1.2 billion in cash and marketable securities. To summarize, we're extremely pleased with the performance in 2017. Jakafi delivered strong revenue growth. We ended the year with a strong cash position. We retired over $700 million of debt from our balance sheet. We entered into development agreements with Calithera and MacroGenics, which added to our already extensive product pipeline, and we continue to make significant advancements in our clinical development programs. Before moving on to 2018 guidance, I'd like to briefly discuss the impact of the recent passage of the Tax Cuts and Jobs Act on our business. We expect significant reductions to our future tax liabilities after we have fully utilized our net operating loss carryforwards and tax credit carryforwards. Given our geographic mix of income, such as Jakafi U.S. revenue, Jakavi ex-U.S. royalties and our Swiss tax filing, we estimate our long-term effective tax rate for GAAP and non-GAAP will be in the range of 17% to 18%. Beginning in 2018, we'll include non-GAAP financial metrics in our financial disclosure. We believe this will provide useful information for understanding our ongoing business performance and align us with our industry peers. On the next slide, I'll detail the specific non-GAAP adjustments that Incyte intends to make on a go-forward basis. Our non-GAAP financial results will exclude the impact of the following: certain items related to our collaboration agreements, such as milestone revenue, upfront consideration and milestone expense; and changes in the fair market value of equity investments. For example, the milestones recognized from Novartis and Lilly will be excluded; non-cash stock compensation; certain impacts of purchase accounting, such as the amortization of product rights and changes in the fair market value of contingent consideration. For example, the change in the fair value of the contingent consideration and the amortization of acquired product rights related to Iclusig product acquisition will be excluded; and other items, such as non-cash interest expense, non-routine items and the tax effect of non-GAAP adjustments. Going forward, you will always be able to refer to our 8-K and earnings release for a full reconciliation of GAAP to non-GAAP items. The numbers I previously discussed relating to our 2017 performance were GAAP numbers. If we were to apply these non-GAAP adjustments to the quarter and the full year 2017 income statements, non-GAAP net income would be $4 million for the quarter and non-GAAP net income would be $131 million for the full year. Moving on to 2018, I'll now discuss the key components of our 2018 guidance on both a GAAP and non-GAAP basis to assist in our transition. Please note that the guidance we provided today does not include any potential future strategic transactions beyond the agreements previously announced. For the full year 2018, we expect GAAP and non-GAAP net product revenue from Jakafi to be in the range of $1.35 billion to $1.4 billion. For Iclusig, we expect GAAP and non-GAAP net product revenue to be in the range of $80 million to $85 million. We will not be providing guidance from milestone or royalty revenue from Lilly or Novartis. We expect our gross net adjustment for 2018 to be approximately 14% for Jakafi. We expect GAAP cost of product revenues to be in the range of $85 million and $95 million, and non-GAAP cost of product revenues to be in the range of $64 million to $74 million. The GAAP cost of product revenues includes the cost of goods sold for Jakafi and Iclusig, the payments of royalties to Novartis on U.S. Jakafi net sales and the amortization of acquired product rights relating to the Iclusig product acquisition. On a non-GAAP basis, we'll exclude the amortization of acquired product rights related to the Iclusig product acquisition. We expect GAAP R&D expense to be in the range of $1.2 billion to $1.3 billion. This includes stock-based compensation of $110 million to $115 million and a $13 million upfront consideration related to the Syros collaboration agreement. On a non-GAAP basis, we'll exclude stock compensation and the upfront consideration related to the Syros collaboration. Therefore, on a non-GAAP basis, we expect R&D expense to be in the range of $1.077 billion to $1.172 billion. On an adjusted basis, our increase in R&D year-over-year is largely driven by the advancement of epacadostat Phase III studies, our portion of the expense for new studies and additional indications for baricitinib, advancement of the Phase III study of itacitinib in GVHD, and the advancement of our other compounds in development. We expect SG&A expense to be in the range of $515 million to $534 million. This includes approximately $125 million of epacadostat prelaunch expenses, which we expect to incur in the second half of the year. This will also include stock-based compensation of approximately $50 million to $55 million. On a non-GAAP basis, we'll exclude the stock compensation and, therefore, on a non-GAAP basis, we expect SG&A expense to be in a range of $465 million to $480 million. Adjusting for the epacadostat prelaunch expenses of $125 million, our 2018 SG&A guidance is a modest increase over 2017 actual SG&A expense. We expect the change in the fair market value of contingent consideration for the Iclusig royalty liability to be approximately $30 million on a GAAP basis, and we'll remove this entire amount on a non-GAAP basis. Lastly, we expect to end the year with approximately the same level of cash and marketable securities compared to our current balance. Operator, this concludes our prepared remarks. Please give your instructions and open up the call for Q&A. Thank you.

Hi. Thanks for taking the question. This is actually Kerry on the line. Congrats on the progress. Just have a few questions. First, in terms of the model, in first quarter Jakafi sales, should we anticipate any deviation from the usual seasonal inventory and donut hole impact on sales? And then just in terms of SG&A, I know there's a significant jump related to the epacadostat prelaunch part. Can you give us some more details on the breakdown of where this is going?

Yes, so this is Barry. So as far as Q1, yes, you'll see the impact, certainly, of the donut hole. So our gross to net will be at the highest point in Q1 or beginning of Q1 as compared to the rest of the year.

Let's speak about the launch costs for epacadostat on the SG&A number for next year. So the way it will work is that we will have an expansion of our commercial team both in the U.S. and Europe because that's the 2 areas where we will have the first launches. Japan will come later, and melanoma is a fairly small opportunity in Japan. We will have an increase of our activities with medical affairs, so there is a number of medical affairs infrastructure and cost that would be incurred in this one half of the year related to the launch. And then there are a few other things in terms of expanding in some countries in Europe that will be also necessary. I mean, the way you can think about it is that the timing is such that if we have a submission in the second half of the year, we will have an approval, let's say, somewhere early maybe in the U.S., and a little later in Europe in 2019. And that's what we are getting competitively prepared for in the second half of 2018. So the calibration of $125 million is based on the current plan that we have.

Thank you. I have a quick follow-up question about the upcoming ECHO-301 study. Besides PD-1 and BRAF at high levels, what other genetic biomarkers are you considering? I understand you're also looking at tumor mutational burden. Was that implemented retroactively, or was it a specified biomarker? Thank you.

Thanks for your question, this is Reid. So there are 4 core components to the biomarker program for the ECHO-301 study. Those include PD-L1 status; the expression status of IDO1; tumor mutational burden, as you mentioned; and also RNA sequencing. I'll remind you that PD-L1 status was, in fact, the stratification factor for patients randomized into the study. So those data are available at the time of patient entry and first dose. The other 3 components of that biomarker program are all datasets that are not required at randomization, but we have activities with Merck ongoing now to generate all of those data. They were all planned upfront in terms of being core components to the biomarker program. And as you know, we don't discuss any statistical plans around that, so I don't want to get into those details. I think what you should think about when you think about that biomarker program rolling out over the year is that, obviously, PD-L1 status will be available upfront, and that will be an aspect of the data that we'll consider at the time of primary analyses. The other 3 components, IDO1 expression, tumor mutational burden, and RNA sequencing will read out over the course of the year, probably beginning first in the first half of the year, and for some of those analyses, extending into the second half of the year. Any decision to present those data, of course, will be dictated first by considerations with our collaborator, Merck, and our principal investigators, but obviously they'll also be dependent on the timing of data availability, the correlative efficacy analyses, and the timing of those results and, finally, meeting frequency itself.

Great. That’s very helpful. Thanks for the color.

Hey. Thanks for taking my question, guys. Alethia, short name. One probably for Steve and another for Reid. On the ECHO-301, I guess we're all trying to figure out how to think about this PD-1 monotherapy control arm. And so maybe can you comment on some of the similarities, differences in the population, those for KEYNOTE-006, CheckMate 027, and how those patients or those populations compare with ECHO-301? And my second question for Reid is just talking a little bit more about CAR-T and IDO therapy and what you see there kind of initially with preclinical work? Thanks.

Hi. This is Steven. So in terms of your first question in ECHO-301 and the PD-1 control arm, in this case pembrolizumab, you're correct, we used KEYNOTE-006 primarily as the modeling control arm. In addition, the regulatory labels reflect the data from KEYNOTE-006 as well as the New England Journal publication related to that. It's felt that PD-1 monotherapy in this setting results in a progression-free survival of around 5.56 months, and that's been pretty consistent in all their datasets, including the ones I just mentioned, and their publications and their label. There's every expectation that, given that the study enrolled 700 patients globally, the demographics will absolutely reflect similarly what we were seen in their registration study KEYNOTE-006, there should be no differences. I'll also remind you that we did a very close comparison of our ECHO-202 dataset at ESMO last year and caused all the demographics and the prognostic factors to make sure they were both similar to KEYNOTE-006 and CheckMate 067, and they were. If anything, our rate of liver metastases was a little higher in the ECHO-202 population, so there's no expectation in any demographic difference. The only thing that will have changed over the years is post-approval therapy availability, but they won't affect the primary read-out for this half of the year. For your CAR-T question, I'll hand over to Reid.

Yes, Alethia. So it's an interesting space, to be frank. And we're interested in how various aspects of our I/O portfolio may be able to help augment CAR-T therapy. IDO1 is probably one of the most interesting ones, and there's certainly data that have been presented at medical meetings and published that reflect the impact that IDO1 activity can have on attenuating autologous cell therapy. Some of the most elegant work in that respect has been done in preclinical models of diffuse large cell lymphoma. As you know, when autologous cell therapy is active and engages in their antigen targets, that leads to expansion of the T cells; a tremendous amount of interferon gamma is produced, and it would make sense to have counter-regulatory mechanisms engaged to try to dampen that response. We and others feel that IDO1 could be one of those more important mechanisms. So exactly how we go about doing that then is a question around collaboration. And obviously, we're not in a position get to talk about that other than to say that it's an area of interest to us, it's an area of interest to several other CAR-T players. I suspect that we'll find a way to work together to bring that sort of a study forward, recognizing, of course, the unique patient safety considerations one has to have in the CAR-T space.

Great. Thanks.

Hey. Good morning, guys. Thanks for taking my questions. I have two of them for you. So I guess, first of all, curious what we should be expecting with regard to the amount of detail you may potentially include in the initial top line ECHO-301 press release. Do you plan to just tell us the trial was positive or negative and withhold data for a medical meeting? Or might you provide actual details or maybe you're just not sure yet? And then the second question I have is on the Jakafi front. Now that a month or so has passed since Celgene acquired fedratinib, I'm curious if you have any updated thoughts on that asset in their hands in terms of the potential competitive positioning and whether this factors into your long-term Jakafi guidance. Thank you.

Cory, it's Hervé. Regarding the press release, it's not yet clear. We need to consider the materiality, as well as our partnership with Merck, which means decisions will be made collaboratively. Additionally, we must take into account the data that will be available during the initial analysis. Our goal will be to protect the publication, which involves balancing what can be disclosed from a study prior to publication and what should be reserved for the first scientific publication. Typically, in the industry, the initial press release is guided by the materiality aspect and what is crucial to communicate, which will likely be the approach we take for our own press release regarding 301. Now, about fedratinib, I think it's important to ask how this product will complement the existing Jakafi. There are noted differences from a safety perspective, and we are also exploring what options are available for patients after they stop using Jakafi. There is substantial data indicating that resistance to JAK inhibitors allows for the possibility of re-treatment with a JAK inhibitor, and that is part of our investigation. Barry, do you want to add something?

Yes, so as far as competitiveness, Cory, we actually don't see it as a competitor. We do believe that there is an unmet medical need if patients for some reason no longer respond or come off of Jakafi. But the profile, as Hervé was saying, of fedratinib, as we know it and has been published, doesn't really seem to be that safe and effective drug that you're looking for. Hervé talked about we're developing our combinations with Jakafi in myelofibrosis, including PIM, our JAK1 inhibitor delta, and we think we can improve upon that. We're curious about Celgene's purchase of this company. But nevertheless, we'll see what their filing strategy is, whether it's going to be for patients with platelets less than 100,000. But there, we're confused because we actually have dose in schedule in our label for patients that have between 50,000 and 100,000 platelets. So I'm not really sure where they can go there. In the second-line setting, if a drug does come there, we think that starting Jakafi earlier for myelofibrosis patients and not saving it for later could be a very good thing for patients in terms of their survival.

All right. Great. Thanks for taking the questions.

Hey, guys. Thanks for the question. Just have a couple. When I look at the R&D expense guidance, is the step-up this year mostly a continuation of your later-stage development? Or is there an assumption of moving one of the main targets like GITR or bromodomain, arginase, et cetera, into the later-stage category? And I always ask about R&D capacity, so this is related. And then one for Reid. On 301, what, if any, has been the correlation between TMB and the tumor microenvironment? I'm just trying to link the science that Bristol's validated recently with what you guys have talked about in the past on IDO?

Let me address the R&D guidance. Most of what you see is driven by the progress of our late-stage portfolio, which includes epacadostat and itacitinib for GVHD, where we are conducting a Phase III study. We must also consider the new indications for baricitinib that are developing, as we are co-funding a portion of the study costs, impacting this year's guidance. Regarding earlier-stage projects like GITR, arginase, or OX40, we do not expect these to enter large-scale clinical trials this year. While the increase in projects does contribute to higher activity and costs, the R&D budget's growth from 2017 to 2018 primarily reflects a few later-stage projects, full-year costs associated with epacadostat and GVHD, as well as some new baricitinib indications.

Geoff, this is Reid. I'll take your tumor mutational burden question. I think we're still in the early days as to understanding exactly how and when tumor mutational burden can predict response to checkpoint blockade or how it would be therefore relevant, let's say, to a doublet like epacadostat plus PD-1. The cut point is likely going to matter. I think it's likely to be histology dependent in some respects. And I'd point to melanoma, the data that we have in the public domain thus far suggests that, in general, it's a tumor histology with quite a high tumor mutational burden relative to other tumor types. So the typical cut point you have around 10 mutations per mega base, well, that's over half the population in melanoma. In fact, it might be closer to 70%. We'll be evaluating tumor mutational burden, including the degree of mutations as part of the correlative efficacy analyses. I think there's some interesting questions that we'll try to address as to how TMB may relate to other factors, such as IDO1 expression. The available data suggests that it actually doesn't relate really well to PD-L1 levels. So we'll be testing that with respect to IDO1 activity. And I think there's an interesting question as to whether or not combinations of these biomarkers may, in fact, be superior to any one biomarker, and those will be things that we'll start to explore in the 301 study. So if you take a step back, our ability to ask some of these questions and get some preliminary answers in melanoma will also be true in non-small cell lung cancer, in head and neck cancer, in bladder cancer, renal cancer, et cetera. So I think it's a very exciting time for the space. And certainly, the ECHO program is a very interesting one in that respect.

And then just real quick on the guidance for Jakafi. The long-term guidance is pretty impressive. GVHD, I suspect, there's a big addition. But what are the other drivers in that? Is it just steady addition of patients, lengthening duration of therapy, things like that? Or am I missing something?

Yes, most of that growth really comes from continuing to treat patients in myelofibrosis and polycythemia vera as we penetrate that market further, along with patients staying on treatment for longer. Graft-versus-host disease is part of that, and essential thrombocythemia is part of that as well. However, the majority of the growth still originates from myelofibrosis and polycythemia vera.

Okay. Thanks.

Hi, good morning. Thanks for taking my questions. I have one maybe for Steve. When you do the primary analysis for PFS, would you also take a look at overall survival in this analysis? And then would you also release that maybe trend if you're seeing anything? Secondly, investors have always thought that the comparison for PFS will be the Bristol combo, which is OPDIVO plus YERVOY in melanoma, do you think that's the right comparison we should look at when you release the PFS data from ECHO-301? Thank you.

Ying, it's Steven. In terms of the primary analysis, obviously progression-free survival will come before overall survival. They are co-primary endpoints in the study. The actual analysis is conducted, as you know, by the Data and Safety Monitoring Board. It is common for them to look at overall survival at the same time, particularly to make sure the trend is in the right fashion, et cetera. Whether they will release that data to us or not, as Hervé said, upfront is uncertain at this point in time. It'll depend on maturity and other things. The actual overall survival analysis and final analysis will obviously come much later, and that's the co-primary endpoint. In terms of the relevant comparator beyond the comparator in the actual study, the nivo IPI data in melanoma has a progression-free survival of around 11.5 months, but it has to couple that with its tolerability profile with a high rate of Grade 3 for adverse events and a high rate of discontinuations. So all of those are relevant when you do risk-benefit analysis and comparative assessments. Obviously, it's always good to be in the same territory in terms of efficacy, as you then build in the tolerability profile and make decisions related to therapy. But the regulatory comparison is PD-1 monotherapy. The dominant clinical use in the U.S. and Europe in first-line is PD-1 monotherapy.

Thank you.

Morning and thanks for taking my questions. Maybe a couple of upcoming epacadostat milestone questions for Steven. When are we going to see the next sort of Phase I/II round of updates on PD-1 plus epacadostat? I think Bristol, for example, waiting for the results on nivo plus epa in non-small cell lung cancer. And then second, I think you also still have some go/no-go decisions with your partners and tumor types like HCC, gastric, MSI, colorectal, and DLBCL. When can we expect those? Thanks.

It's really about data availability and meeting schedules, as Hervé mentioned earlier. We will collaborate with our partners, whether it be Merck, BMS, or AstraZeneca, to determine the appropriate meetings to target for presentations. Over the course of this year, you can anticipate updates from the Phase I/II studies like ECHO-202 and ECHO-204 at major medical meetings, as that data will be ready for presentation. Regarding the datasets from those studies, there are additional histologies that were included later, such as hepatocellular cancer, MSI-high colorectal cancer, and diffuse large B-cell lymphoma. As this data becomes accessible, we will review it with our partners and investigators, utilizing historical controls to make our go/no-go decisions. The timing for this will extend through this year and possibly into next year as well. Currently, we have nine ongoing Phase III trials with epacadostat, and we will proceed carefully in making decisions related to those histologies.

Thank you.

Thank you. I have two questions. First, could you provide an update on the timeline for the events related to the two doses of baricitinib? From our analysis of the available data, the TEE rates for the 2-milligram dose appear to align with the background rates in rheumatoid arthritis. However, for the 4-milligram dose, we observe a range of values, some of which align with the background rates and some that do not. I would appreciate your insights on this. Secondly, regarding the ECHO-301 study and the biomarker analysis, if you find that patients expressing IDO or those with a high tumor mutational burden benefit more significantly, would you consider amending the protocol for other tumor types? Will randomization for these characteristics still be maintained?

So Ian, it's Steven. Thanks for your questions. Just to clarify, Lilly is handling the resubmission with our input, which is classified as a Class 2 resubmission and is currently under a 6-month review. Both us and Lilly anticipate an advisory committee meeting at some point. A significant part of this resubmission includes the submission of a much larger dataset, which naturally involves longer follow-up in the Phase III studies, the use of market data, especially from Europe and countries like Germany, and registry data. Lilly has confirmed that no new safety signals have been observed in any large datasets. Regarding the confirmed background rate of venous thromboembolism in rheumatoid arthritis patients, there are several sources for that data, which ranges from 0.3 to 0.8 per 100 patient-years, with the most commonly cited figure being 0.5 per 100 patient-years. The rate of venous thromboembolism in both the 2-milligram and 4-milligram treatment groups in our studies with baricitinib is approximately 0.5. We have argued with Lilly that this rate is consistent with the background rate in rheumatoid arthritis. You mentioned the specific analysis focused solely on the studies during the placebo control period, wherein events occurred in the 4-milligram arm but not in the 2-milligram arm; this requires an exposure adjustment. Without that adjustment, the calculated rate could be misleadingly higher, and there are numerous caveats to consider. This will certainly be a topic of discussion during the resubmission process and potentially at the advisory committee meeting. Regarding ECHO-301 and the insights from the biomarker analysis that Reid detailed, particularly about PD-L1, IDO1, tumor mutational burden, and RNA sequencing, we always learn from our studies, regardless of outcomes. If we identify specific subgroups with enhanced efficacy endpoints, we seek to incorporate that knowledge into future studies, keeping in mind the differences that may arise in particular histologies. We have the time to explore this further since all the Phase IIIs have just commenced over the past couple of months, allowing us to potentially utilize this data moving forward.

Thanks.

Good morning. Thanks for taking the questions. For Hervé, how should we think about the biomarker data from ECHO-301 potentially impacting your regulatory strategy for melanoma? And as far as timelines and data disclosures, it sounds like there is a potential scenario where you may not get quantitative details on the PFS results from ECHO-301 until, say, ESMO in October, is that unreasonable? Thank you.

So it's Steven, I'll take that question that you addressed to Hervé. So as Reid said when we outlined the biomarker plan, we're not commenting on the regulatory specifics around it or the statistics around doing that. In addition, we don't have the data yet to make that analysis. So I'm going to leave the answer to that as stated. In terms of PFS data availability, as Hervé said in the press release, we'll do what's required for disclosure, balancing the need to do full presentation at the scientific meeting and a full manuscript. So if you're looking for deep granular data, you'll have to wait for the actual presentation, and hopefully a manuscript that follows or even potentially at the same time. The press release data will be top line level data.

Thank you.

Good morning. I'm curious about your strategy regarding epacadostat as a foundational part of your immuno-oncology combinations, particularly in combination with PD-1 across various tumor types. It seems you're focusing on the anti-CTLA-4 and anti-PD-1 combination, which could offer similar efficacy and potentially improved safety. Given the recent collaboration between Nektar and BMS on IL-2, which has shown promising data in PD-L1 negative non-small cell lung cancer and other types, what are your thoughts on positioning the IDO1 franchise in light of this evolving landscape?

Hi, Katherine. This is Reid. I'll address your question. We've noted the Nektar announcement and are quite familiar with the compound, having monitored it closely. At a high level, it indicates two important aspects about the field. First, PD-1 monotherapy and PD-1/CTLA-4 antagonism are not providing enough benefit, highlighting the necessity to enhance these regimens. Although they've played a significant role in shaping the field, there are still many potential benefits to explore, which this collaboration exemplifies. The second point is that combination therapy will become standard practice rather than an exception. These observations align with our own portfolio and development programs involving epacadostat and other agents. Mechanistically, the Nektar product aims to increase the proliferation of immune effector cells in tumors. As we've discussed, this will lead to interferon-gamma production, which the tumor will then attempt to regulate to dampen the T cell response. If the Nektar product demonstrates activity and successfully integrates into the treatment landscape, I don't see it conflicting with the epacadostat program or other agents. Instead, it emphasizes the necessity for comprehensive regulatory coverage at the T cell level. In this context, epacadostat combined with PD-1 antagonism could serve as a foundational regimen, regardless of whether IL-2 and the Nektar product demonstrate activity. With regards to preparing for various scenarios of ECHO-301, apparently we know what's going to happen if 301 is actually successful. And also, there could be an intermediate scenario where there's some biomarker-defined population that could lead to a path forward, identifying a very good population that is responsive. I'm just curious, have you guys thought about how to prepare for a scenario where it's just a not-salvageable failure for ECHO-301?

I mean, obviously, the data, when it's available, will tell us what we have. I think based on all the assumptions we have from different tumor types and across a number of indications, we know that IDO1 inhibition is an important mechanism. So 301 will tell us, as we've said, what we can observe on the overall population as you described it, and it will also give us information from the subpopulation or the subgroup standpoint. When we have a lot of that in our hands, I mean, it will guide us how we go to the next step.

Hi, I wanted to ask about your FIGHT-202 study. Can you provide some reasoning for why it might be effective in the other patient groups you've identified, such as those without FGF mutations or with different alterations? I'm also interested in the timing for this study and how quickly you could enter the market, considering the unmet medical need. If the results are positive in at least one of these groups, what would your regulatory strategy be? Thank you.

Thank you for your question. The compound originates from our own chemistry group, and we believe it’s a strong candidate. We have a solid understanding of its pharmacokinetic and pharmacodynamic profile regarding phosphate elevations, and we've used the maximum allowable dose. This could provide us with a competitive edge compared to other FGFR inhibitors. When we chose to focus on cholangiocarcinoma, there was only one major competitor, and we have surpassed them through effective clinical trial execution. We are confident that we are leading in the cholangiocarcinoma space. The FGFR2 translocation, found in about 5% to 15% of cholangiocarcinoma patients globally, appears to be a significant oncogenic driver. Our ability to inhibit this with a well-understood compound might translate into clinical efficacy in terms of response rates and durability. In our study, we also examined other FGFR alterations to see if they might have an effect and to provide a regulatory baseline, which is why we included non-altered patients. There may be slight effects in the alteration population, but minimal or none in the non-altered group due to the targeted nature of the therapy. Overall, given the patient numbers and our execution capabilities, this could support an approval package in the U.S. and potentially in Europe, considering the unmet medical need and the study’s execution. Enrollment has gone well, and we expect to gather data this year. We will assess its stability for a regulatory submission package throughout this year and possibly early next year. We are very pleased with the progress of this program so far.

Okay, thanks. Interesting study design. And then just a last question from me. Where else would you see possible expansion of this molecule onto other tumor types? Thanks.

Yes. So the FIGHT program in general includes metastatic bladder cancer study that's driven by FGFR3 translocations. The third study within that suite of studies is in a rare myeloproliferative neoplasm that's driven by an 8p11 translocation, where it's FGFR1 driven actually. All three of those we're running sponsored studies. There are a host of other areas where FGFR biology may be important, which we're exploring, either in small studies on our own or with investigator collaborations. But it's really around FGFR as a driver. What I've discussed to date is all monotherapy and approval strategies, but there's obviously then opportunities to move into combinations, particularly in earlier-line settings for example, in bladder cancer or potentially in cholangio if we wanted to do. But it's all around the FGFR biology.

Thank you for taking my question. I have one for Barry about your perspective on real-world trends related to treatment duration and the number of patients who may be discontinuing therapy. Additionally, could you clarify the percentages regarding Jakafi usage? I believe Celgene mentioned that 60% of patients are on Jakafi, while Incyte has previously stated 30%. Can you help us understand what the actual figure might be? I also have a quick question for Steven regarding when the last DSMB meeting was held and how frequently you receive updates on ongoing events, ensuring you are confident about developments in the first half of 2018. Lastly, Reid, if you could highlight a pipeline product that hasn't received much attention but you think could gain traction in 2019 or 2020, which would that be? Thank you.

So I'll go first and then hand it off to the rest of the guys. So as far as real-world goes, we talk about persistency all the time; we know that persistency for both myelofibrosis and polycythemia vera patients gets better all the time. But the best evidence is really turning to the clinical trials, where in our RESPONSE study, 80% of the patients were still on drug at 2 years; and from our COMFORT trials in myelofibrosis, 50% of patients are still running on for 3 years. Real-world data may be less than that, but we know because of the growing total number of patients on Jakafi at any given time continues to grow nicely, that persistency is growing as we continue to add new patients to that. What Celgene was talking about, I think, was just saying that of the patients who are eligible to receive Jakafi for myelofibrosis, that maybe 10% to 20% of them came off of the drug because of intolerability or non-response, and then another percent that weren't able to get the drug because they had less than 100,000 platelets. What I said before was in fact that, in fact, we do have dosing and scheduling for patients between 50,000 and 100,000 platelets in our label and that was a result of an sNDA that we sent to the FDA after our original indications. So that doesn't hold up very well. Plus we didn't talk about fedratinib; it actually has just as much thrombocytopenia as Jakafi does and maybe perhaps even more Grade 3/4 thrombocytopenia. So that didn't make very much sense. And I'll turn it over to Steven.

It's Steven. In terms of the Data and Safety Monitoring Board, we don't comment on either the frequency or timing of meetings. In terms of the event rate, we are absolutely confident that the PFS analysis will take place in the first half of this year.

Ren, this is Reid. I have to be really careful about trying to pick favorite children amongst a pretty interesting crop. But I think one of the areas that people aren't paying that much attention to, and I think it's very important to us, is the early development work that we're doing in combination with ruxolitinib in myelofibrosis. There's some very compelling preclinical data and translational data that we've generated along with some of our academic collaborators, including at Moffitt. I think those data support very well a strategy to try to improve the clinical benefit that MF patients received on ruxolitinib, and that could include things like the allele burden itself. We have a very exciting group of trials now that Steven's team is executing that includes JAK1 combination, PI3-kinase delta combinations, PIM combinations, and, potentially soon, also bromodomain inhibitor combinations. That’s a collection of science in a space that we understand very, very well. From a regulatory standpoint, we could move on aggressively. You can appreciate what that can mean both to our longer-term revenue prospects in myelofibrosis. It runs a very stark counterpoint to where fedratinib is and what Celgene is trying to do with a slightly inferior JAK2 inhibitor. Also, it has its own fixed-dose combination potential since we're talking about oral therapies on top of rux. There’s a lot of work to do, and it's still all potential and no data, but I'm excited by the prospects there.

Great. Thanks, guys and good luck.

Okay. Thank you. Thank you all for your time today and for your questions. We look forward, obviously, to seeing some of you at upcoming investor and medical conferences. But for now, we thank you again for your participation in the call today. Thank you, and bye-bye.