Incyte Corp (INCY) — Q1 2019 Earnings Call Transcript

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.

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 into the GRAVITAS-301 trial we tested in patients with treatment naive acute GVHD and we plan to announce the primary 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 a 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 Merus, were very well received and I believe that exemplifies the importance of discovery science for long-term value creation. Today, we also announced that we will no longer participate in co-funding pathogen development with Lilly. We intend to allocate that capital to late-stage development programs 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 warrant increased funding. We continue to believe that pathogen has an important 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 reallocate capital to support exciting projects 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.

Thank you, Barry, and good morning everyone. Incyte is currently managing six important late-stage development programs, which have the potential to benefit a large number of patients across various conditions. Our goal is to transform Incyte into a company with several approved products in the United States, Europe, and Japan over the upcoming years. Today, we are concentrating on four of these programs, as we anticipate important updates in 2019. Barry has mentioned our ruxolitinib program for steroid-refractory graft versus host disease, and I will address the other three shortly. We are excited to report that the phase 2 trial of ruxolitinib cream in patients with Vitiligo successfully achieved its primary endpoint, and we are moving forward with phase 3 development plans. This was a randomized, dose-ranging, and vehicle-controlled phase 2 trial involving more than 150 adults with Vitiligo, and we look forward to presenting the data at an upcoming medical meeting. Vitiligo is an inflammatory skin condition that causes depigmentation and can significantly affect patients' lives. There are an estimated 2 million to 3 million individuals in the United States with this condition, and no FDA-approved treatments are currently available. Many patients resort to steroids or phototherapy, but these have not produced significant or lasting skin repigmentation. We aim to begin phase 3 development by the end of this year, and we are hopeful that ruxolitinib cream will become the first FDA-approved therapy, offering meaningful improvement for these patients. In our pemigatinib program, we see substantial opportunities ahead. We plan to file the NDA for second-line FGFR2 translocated cholangiocarcinoma in the latter half of this year and will present supporting data at a medical meeting later in 2019. Additionally, we are pursuing pemigatinib for FGFR3 mutated bladder cancer and are currently recruiting patients for the continuous dosing cohort of the pivotal phase 2 trial, which we expect to complete recruitment by the end of this year. We are optimistic that the SNDA for this indication could be submitted in 2020. The first-line phase 3 trial in cholangiocarcinoma is now recruiting, and we are also preparing for a first-line bladder cancer study. Furthermore, we are initiating a registration-directed phase 2 study in a tumor-agnostic setting, which may broaden the number of patients eligible for treatment and enhance the molecule's potential. Turning to our graft versus host disease initiatives and the GRAVITAS program, which examines itacitinib in first-line treatments, the GRAVITAS-301 phase 3 trial for treatment-naive acute graft versus host disease has successfully completed recruitment, and we expect results by the end of this year. In January, we launched GRAVITAS-309, which will assess itacitinib in treatment-naive chronic graft versus host disease patients. It's important to note that around 15,000 new graft versus host disease cases are diagnosed annually in major global markets. The unmet need is apparent, and we are encouraged by the potential of JAK inhibition for treating this challenging disease. Finally, I would like to highlight two exciting opportunities in our early-stage portfolio, both of which were recently discussed at AACR. We have identified a series of novel, orally available PD-L1 inhibitors, with the first molecule, 86550, currently in clinical testing. Its unique mechanism of action, which binds and internalizes PD-L1, may lead to a distinctive clinical profile compared to injectable monoclonal antibodies. While we are in the early phases, we anticipate sharing clinical data from this program next year. Moreover, through our collaboration with Merus, MCLA-145, a PD-L1, CD137 bi-specific antibody, is ready to commence clinical development, with the first patient set to be dosed this quarter. This mechanism is promising as it provides direct CD137 agonist activity to the tumor microenvironment while selectively targeting PD-L1, potentially minimizing systemic activation of CD137 while addressing two critical immune-modulatory pathways. With that, I'll turn the call over to Christiana for a 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 end 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 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 decrease 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 to 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 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.

Thank you, Christiana. Our next slide outlines the key news flow events we expect during 2019, including news from our partner. With this list of exciting late stage programs, we are taking important steps toward our strategic goals of diversifying and accelerating revenue growth. We look forward to keeping you updated on our programs. 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.

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 the 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?

So, obviously, you know, our approach was, in terms of commercialization, was driven by the 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, and 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 the size of the opportunities by for each of the regions, so we are looking at it on a regional basis. 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. 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. 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 2020. We are planning to use the next six months to have an in-depth analysis of what makes sense with our board. We will probably be ready by the time we get the phase 3 data. After the phase 3, there will be another year before commercialization starts. We are basically on a good track to be able to make the decision based on valuation or financial analysis.

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 the 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 address your gross to net question. As I mentioned in my prepared remarks, we are pursuing a second indication, which is significant and larger in quantitative terms than FGFR4 translocated cholangiocarcinoma. This pertains to FGFR3 mutated or fusion patients with bladder cancer, representing a substantial opportunity in the range of 15,000 to 20,000 patients. We view the approval of J&J's erdafitinib very positively as it provides proof of concept that this pathway is important and that targeting the driving mutation is effective. While we have made considerable progress, we remain ahead with our continuous dosing. We expect to complete the cohort for continuous dosing around the third quarter of this year, but you should expect to see our data next year, and that is also when we plan to file, contingent on supportive data. The Seattle conjugated monoclonal targets a different area, which may be mutually exclusive while also being a crucial drug for bladder cancer. This does not impact our program in any way. Additionally, we have the ongoing MPN 8P11 FGFR1 driven study, which is accruing well after the ASH update. Importantly, the tumor-agnostic program significantly broadens our potential patient population in diseases like endometrial cancer and glioblastoma, which could add another 15,000 patients if we achieve efficacy in these groups. As you emphasized, this is an extremely important program for us that is progressing well, and we consider that approval as a critical proof of concept for the pathway. We think safety may ultimately be a significant factor. We're considering the J&J label, and we will evaluate our data for safety in the future. I’ll now hand it over to Barry for your gross to net inquiry.

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. Generally speaking, it 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%.

What's the right way to think about the cost savings from the baricitinib restructuring? I guess for this year and beyond, once we net out the effect of some of those accounting changes, 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 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 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 ruxolitinib 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 connections between Vitiligo and atopic dermatitis pathophysiologically? Do you view this as an additional endorsement for the potential of ruxolitinib cream in atopic dermatitis beyond the phase 2 results already reported in AD, or should we think about this as completely separate from a scientific standpoint?

It’s Steven. Thank you for your question. In terms of what is clinically significant in Vitiligo, there's currently no approved treatments, and there has been a lack of clinical research so far. This study is the largest ever conducted on Vitiligo. The main goal of this proof of concept study was to determine the percentage of patients using ruxolitinib cream that achieved a 50% or greater improvement in the facial assessment of the Vitiligo area and severity index score compared to the control, which evaluates how effective the compound is. Moreover, as we have mentioned and as the field emphasizes, this is a condition that imposes a significant psychological burden on patients. We will measure that through patient-reported outcomes during the study since demonstrating clinical benefit in that area is essential. A key point to consider is our need to consult with the agency regarding what the primary endpoint for the Phase 3 studies will be, whether it will focus on facial improvement, total body improvement, and how they will define an acceptable primary endpoint in addition to measuring patient-reported outcomes. This study involves 150 patients, and you can expect to see the data presented at a major conference in the middle of this year. We are very optimistic about the findings and are moving towards Phase 3. For me, the important aspect is inhibiting interferon gamma signaling in Vitiligo, halting the condition, and achieving repigmentation in critical areas for patients, such as the face and hands, which are clearly visible. While the mechanism is similar to that of atopic dermatitis, we treat these as separate indications. Over the years, we have also explored other conditions like psoriasis, which share some pathophysiological similarities, but our current registration focus is on atopic dermatitis and Vitiligo.

I would like to explore further the decision to halt the co-funding. You provided some reasons for that, but it seems you had been quite committed to maintaining that effort. I know multiple internal analyses have been conducted, so I’m curious about what changed and if there has been any shift in how you view the overall market for AD or if there are specific other assets in your pipeline that you would like to highlight.

I mean, what we are looking at is really the two strategic goals for 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 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 is very strong in terms 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.

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. The incidence is around 1% to 2%, which translates to a significant number of total patients within a population of 300 million. However, the actual number of patients currently seeking treatment is much smaller, estimated at about 150,000. This lower figure could be attributed to several factors, including the limited availability of effective therapies, the complexity of existing treatments that require high compliance with steroids and phototherapy, and some patients not feeling the need for treatment. We will primarily target those who believe they need to address the areas causing visible disfigurement and psychosocial issues. We will need to demonstrate the effectiveness of our treatments, especially in noticeable areas like the face and hands, and we estimate that the number of patients who will ultimately seek our treatment could be around 150,000, although this is difficult to assess at present.

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.

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 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.

It's Steven, and I'll address your first question. This year, we are focusing on enrolling studies that are aimed at registration in follicular lymphoma, mantle cell lymphoma, and marginal zone lymphoma, and our progress has been quite positive. We will have the data next year, which we hope will be submission-ready for those indications. This is a second-generation PI3 kinase inhibitor, and the chemical modifications made to this generation have largely reduced liver toxicity. Unlike the first-generation compounds from Gilead, we are not seeing the same level of transaminitis. However, with this level of PI3-kinase inhibition, we do have long-term safety concerns, such as colitis. Consequently, we made a deliberate decision over a year ago to find a more effective way to balance therapeutic benefits. We know this compound is highly effective in B cell diseases, as we have demonstrated multiple times. To achieve that efficacy while making the treatment more tolerable, we are exploring various dosing and scheduling strategies. Initially, we administer a high dose of 20 milligrams weekly for eight weeks to reach our desired efficacy level, and then we consider different approaches for lower dose weekly or daily regimens. In early assessments, we've managed to reduce some of the longer-term toxicities, particularly colitis, though we proceed with caution due to the small sample sizes. This is an exciting development in terms of therapeutic benefits. We are now conducting studies with a significant number of patients in marginal, mantle, and follicular lymphoma to validate our claims regarding high activity and improved tolerability. We also plan to file for those indications, all of which currently remain incurable despite existing treatments like BTK inhibitors, B cell 2 inhibitors, and CAR-T therapies. This underscores the ongoing unmet needs in these areas, which is why we are very optimistic about this program.

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 at that 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 of 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.

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 there 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 for FGFR inhibition. 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. 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 or 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. 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?

We are collaborating with Merus, and it's still early in the process. As mentioned, this bispecific approach is quite intriguing. There has been previous experience with the mono use of CD137, which resulted in significant liver toxicity and transaminitis. Our goal is to use a bispecific mechanism via PD-L1 enrichment to precisely target the affected area and mitigate that toxicity. We are optimistic about the synergy between these two mechanisms, as supported by our theoretical and preclinical data, and we anticipate potential strategies for checkpoint-refractory patients. However, it is too soon to draw conclusions, as we are just beginning to dose and will gather substantial activity data shortly. Initially, we are not focusing on any specific receptors or biomarkers; it's primarily a standard phase 1 trial aimed at establishing safety first.

Good morning. I appreciate the opportunity to ask questions. Could you provide more details on the potential for topical rux in atopic dermatitis? Are you considering expanding the label to include pediatric patients? Additionally, regarding the cream formulation, I remember there was a quite greasy version in the past. Have you updated or improved that formulation to be more user-friendly? Also, how does this cream compare to the ointment formulation 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 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, from 2 to 12 years of age, that's something we’re still working on the regulators with things like safety margins, etc. 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, in terms of the data we have, and we've used it extensively. If you just heard in atopic dermatitis as well as 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 it to be used. But we haven't had that problem at all 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. 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. That's something that really is important to patients. 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. We target mild to moderates only with the cream.

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 the 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 try to improve duration of therapy; we want patients to stay on as long as they continue to benefit from Jakafi. 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 where at least 50% of the patients were still on it three years. 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. 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 home stretch here and can – to the extent that you can, can you provide some color on how those discussions with the FDA are moving and kind of what are your expectations for read-through to REACH 2 and REACH 3 when we get to that point?

Jason, it's Steven. So you're right, the PDUFA date, 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. In terms of chronic graft versus host disease, REACH3 against randomized against BAT, we have strong proof of concept in that area. We will have data by the end of this year in both REACH 2 and REACH 3, and similarly confident in it and wait for the data.

Thanks for the updates and the reallocation of baricitinib funding makes a ton of sense. I guess 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. 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?

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.

The remaining aspect that’s not BCR driven is challenging due to the pathophysiology. We expect that JAK inhibition should be effective, and we know there's some spontaneous use in this area. However, the study is hard to enroll participants in. The primary treatment in first-line use is hydroxyurea, and the study requires patients to have high white blood cell counts at the start and then to be randomized to the approved therapy for central thrombocytopenia, which complicates the process. Both the high white count and the non-randomization negatively impact recruitment, and we will continue to look for ways to enhance enrollment. It is possible that we might publish findings before fully completing recruitment, but this is a crucial disease for JAK inhibition, and we are focused on addressing it through a formal study.

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 REACH 1 study? Do you see any risks in REACH 2 and REACH 3, comparing Jakafi to the best available therapy in terms of superiority, since some patients do actually respond to the BAT, 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. As you allude to, the fact that best available therapies, and there's a different list for REACH 2 and REACH 3, or active therapies can have upwards of 30%, 40% response rate; they tend though not to be durable. We have confidence 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. Obviously, there's always some risk with randomized studies.

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 fixed dose 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're busy developing other stints to go forward in that arena, that may be along a BA, bio-available, bio-equivalent route plus minus a safety play, because it may have a different profile in terms of 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 the external world are investigating multiple combinations in the second-line setting and beyond which have theoretical 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. 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’s a continuous experiment this year. The two other combinations we do are ruxolitinib 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. Those are all ongoing. Novartis has combinations that are ongoing in the external world as well. Combination is very important, and it's both an efficacy play and a safety play. The third arm of that is more, and Dash can speak to this; it's around the research arena and targets. We have a very important collaboration in terms of looking for further targets here. Internally, ourselves, obviously, it's an area we know extremely well and are there better ways of potentially tackling the drivers of these conditions.

Just on the oral PD1, the next readout is 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 its potentially very interesting mechanism of action and internalization of the receptor. Will that translate to a clinical differentiator? But this year, the execution of the phase 1, getting to a recommended phase 2 dose, is 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 an efficacy differentiator. That will 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 until 2020.

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. 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. 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.

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.