Michael Charles A. Booth - Vice President-Investor Relations Hervé Hoppenot - Chairman, President & Chief Executive Officer Barry P. Flannelly - Executive Vice President & General Manager Steven H. Stein - Chief Medical Officer & Senior Vice President David W. Gryska - Chief Financial Officer & Executive Vice President Reid M.

Huber - Chief Scientific Officer & Executive VP.

Brian Abrahams - Jefferies LLC Salveen Richter - Goldman Sachs & Co. Michael Schmidt - Leerink Partners LLC Morgan T. Haller - JPMorgan Securities LLC Ying Huang - Merrill Lynch, Pierce, Fenner & Smith, Inc. Eric Schmidt - Cowen & Co. LLC Liisa A. Bayko - JMP Securities LLC Reni Benjamin - Raymond James & Associates, Inc.

Andrew Scott Berens - Morgan Stanley & Co. LLC.

Greetings, and welcome to Incyte Corporation First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mike Booth, Vice President of Investor Relations. Thank you. You may begin..

Thank you, Diego. Good morning, and welcome to Incyte's first quarter earnings conference call and webcast. The slides used today are available on the Investors section at incyte.com.

Speaking on today's call will be Hervé Hoppenot, our CEO, who will begin with a strategic review and provide further detail on our acquisition of ARIAD European business announced this morning; Barry Flannelly, who leads our U.S.

organization, will provide some detail on Jakafi sales during Q1; Steven Stein, Incyte's Chief Medical Officer, will give a brief update on our clinical portfolio; and Dave Gryska, our CFO, will summarize our first quarter financial results, the impact of the ARIAD transaction, as well as our upcoming news flow for 2016.

We'll then open the call up for Q&A, for which we'll be joined by Reid Huber, our Chief Scientific Officer.

We'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 2016 guidance, our expectations regarding the planned acquisition of ARIAD European operations, the commercialization of Jakafi, and our development plans for the compounds in our pipeline.

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 quarter ended – for the year ended December 31, 2015, and from time to time in our other SEC documents.

I'd now like to pass the call to Hervé for some introductory remarks..

Thank you, Mike, and good morning. So, moving to slide five, let me start with a reminder that Incyte has a very unique profile within the biopharmaceutical industry.

As we have a fast-growing top line, we have been cash flow positive for each of the last four quarter, and we have the potential for second – (02:39) impact on source of revenue should baricitinib be approved in 2017. So, we have a very strong start to 2016.

Financially, Jakafi sales growth continued increasing by 59% year-over-year, and we are raising Jakafi net product revenue guidance for 2016. The big potential of the Jakafi brand may also be increased should we be able to successfully develop Jakafi for GVHD.

The latest output from our discovery and development teams was presented at ACR, positioning Incyte for future success. We now have a portfolio of 14 clinical candidates. We have just dosed the first patient in our LSD1 program, and we expect the clinical trial for our GITR program to begin in the next few weeks.

Our latest stage portfolio is also progressing well, and we expect to launch two pivotal programs in the coming months, ECHO-301, the Phase 3 trial studying epacadostat in combination with Merck's pembrolizumab in first line melanoma patients will begin shortly.

And in the second half of 2016, we look forward to initiating a registration program for ruxolitinib for the treatment of GVHD. So moving to slide six, with this perspective in mind, we were pleased to announce this morning an agreement to acquire ARIAD's European business.

As you know, Incyte has a diversified portfolio of exciting development project which represents one of the largest dermatology oncology pipelines in the industry. We also have a fully-integrated U.S. business that is very successful as evidenced by the continuous strong growth in Jakafi.

Our strategy is to do the same in Europe, and we face the technical choice of whether to build the European business or to buy one as we seek to maximize the chances of launch success of our products in Europe. Last year, we established our European headquarter in Switzerland, which is now home to a growing European clinical development team.

And upon closing of the ARIAD transaction which we expect to occur on June 1, Incyte will immediately have a fully-integrated European operation of 125 FTEs with medical and commercial teams in place across the continent.

The addition of the ARIAD team in Europe will not only accelerate the establishment of Incyte in Europe, it will do so in a manner that is financially efficient because revenue generated by sales of Iclusig will offset our European operating cost.

If other compounds from our portfolio are approved in Europe, the ability to leverage our fully-integrated European operation should allow us to maximize the chances of European launch success narrowing our operations in the U.S. So, slide seven is summarizing the Iclusig profile.

Iclusig is approved in Europe for the treatment of patient with CML and Philadelphia-positive ALL that are resistant or intolerant to dasatinib or nilotinib, Sprycel and Tasigna.

Iclusig is also approved for all patients with 315i mutation, and activity against the 315i mutation is important and is very unique to Iclusig among all these BCR-ABL inhibitors. Moving to next slide, slide eight.

Some of the financial components of the transaction, so upon closing which now is planned at the end of the month, Incyte with pay $140 million cash upfront to ARIAD and will pay additional considerations through tiered double-digit royalty on Incyte sales of Iclusig in Europe.

We also expect to make two development cost-sharing payment to ARIAD of $7 million, one in 2016 and one in 2017. Additional potential milestone payment may also become due but only if additional indication for Iclusig are approved in Europe.

We forecast that the acquisition of ARIAD's European operation will be earnings accretive to Incyte beginning in 2018. With that, I'd like to turn the call over to Barry for an update on our Jakafi franchise..

Thank you, Hervé, and good morning, everyone. We continue to see strong growth in Jakafi sales in the first quarter. Net product revenue for the quarter was $183 million, an increase of 59% over the first of 2015.

As a result of this performance and a strong underlying demand for Jakafi, we are increasing our full-year net Jakafi product revenue guidance for 2016 from $800 million to $815 million to a new range of $815 million to $830 million. Slide 11 shows the sales bridge for Jakafi in Q1 versus Q4 last year.

Volume growth in Q1 was robust at 7% over Q4 2015, but this was offset by the typical increase in gross to net in the first quarter of each year. This is mostly driven by the 50% discount we make to the coverage gap also called the donut hole for Medicare Part D patients.

As patients move out of the donut hole, the gross to net stabilizes for the remainder of the year. Jakafi's standard of care for the treatment of intermediate and high-risk myelofibrosis patients in the U.S.

and the beneficial effect for patients is highlighted by the five-year survival data published at ASH last year from the COMFORT-II pivotal trial. Five-year data from the COMFORT-I trial is going to be presented at ASCO in June. The launch in PV is going well as evidenced by the strong flow of new patients beginning treatment with Jakafi.

The 80-week analysis of the RESPONSE trial recently published in Haematologica demonstrated that patients had durable control of hematocrit and spleen volume, and which is now included in the Jakafi label. As we have said previously, we are confident in reaching our long-term Jakafi sales target of $1.5 billion in MF and PV alone.

Patients who experience graft versus host disease represent a significant unmet medical need in the U.S. And if ruxolitinib is successful developed and approved by the FDA, it can provide us with a new indication for Jakafi and provide yet further growth to the brand. With that, I'd like to pass the call over to Steven for a brief clinical update..

we expect about 600 patients to be enrolled into the Phase 2 expansion cohorts by the end of the year. And we expect data to become available from some of these cohorts in the second half of 2016.

ECHO-301, the Phase 3 trial of epacadostat in combination of pembrolizumab for the first-line treatments of patients with advanced or metastatic melanoma is expected to begin enrolling in the coming weeks. The clinical trials (11:45) record is now available to view.

The trial will have co-primary endpoints of progression-free survival and overall survival, and is planned to enroll 600 patients, randomize one to one into two cohorts of pembrolizumab plus-minus epacadostat. We anticipate initial data from ECHO-301 in 2018.

I will finish my segment with a portfolio slide, which illustrates Incyte's balanced and diverse portfolio of small and large molecules across various development stages.

The quality of our drug discovery work was demonstrated at the AACR meeting last month where Incyte candidates were featured in 10 abstracts in both mono and combination therapy settings. With that, I'll pass the call to Dave for the financials..

Thanks, Steven. And good morning, everyone. I'd like to start by covering the details of the acquisition of ARIAD's European business, and then turn to Incyte's first quarter performance. The planned acquisition of ARIAD's European business is an important step in executing our strategy of expanding outside of the U.S.

We already have the nucleus of the European organization. And this transaction accelerates a planned European expansion while adding a commercialized product to offset future operating expenses.

We anticipate the transaction closing on June 1, 2016, at which time, we'll begin to record revenue for Iclusig in Europe and recognize expenses related to the European business.

To provide financial guidance on the ARIAD European business for the remainder of 2016 post closing, we expect net product revenue for Iclusig to be in the range of $25 million to $30 million. This assumes that the transaction closes on June 1 as planned, and that ARIAD records the outstanding deferred revenue relating to Iclusig sales in France.

We expect 2016 R&D expenses to be in the range of $15 million to $20 million. This includes the first of two $7 million payments to ARIAD, relating to development of Iclusig. The second payment will be in 2017. And lastly, we expect SG&A expenses to be in the range of $30 million to $35 million.

This guidance includes operating expenses for the operations in Europe and the non-cash purchase accounting expense of approximately $10 million.

So, this transaction will be considered the purchase of a business will value the product rights of Iclusig as an asset under balance sheet at June 1, and amortize the product rights over the life of the patent.

For the remainder of 2016, the product rights amortization is estimated to be approximately $10 million, these were recorded as cost of product revenue. Looking further ahead, we will seek to strategically invest in our expanded European organization and expect the acquisition to be accretive to our earnings on a GAAP basis in 2018.

Now, turning to the first quarter. We continued to deliver strong financial performance while increasing investments in our long-term growth.

We recorded $264 million in first quarter revenue, this is comprised of $183 million of Jakafi net product revenue, $22 million in Jakafi royalties from Novartis, and $59 million in contract revenue including two milestones paid by Lilly related to the FDA and EMA submissions seeking approval for baricitinib in rheumatoid arthritis.

Jakafi net product revenue of $183 million represents 59% growth over the same period last year. Based on Jakafi's performance, we are increasing our full-year Jakafi net revenue guidance to a range of $815 million to $830 million.

As with similar oral oncology drugs, our gross net adjustment is higher in the first quarter of the year than the rest of the year, primarily because of our share of the donut hole for Medicare Part D patients. We expect that our gross net adjustments for the full year to be approximately 12%.

Our cost of product revenue for the quarter was $6 million, this includes the payment of royalties to Novartis on Jakafi sales. Our R&D expense for the quarter was $157 million, this includes the $35 million milestone to Lilly in payment for the rights to develop ruxolitinib in GVHD and $12 million in non-stock compensation.

Looking at our projected R&D expense for the full year. We are updating our current guidance to a range of $635 million to $660 million, this includes the addition of the ARIAD European business and several changes in the components of R&D expense forecast related to our existing portfolio.

Specifically, we have added the $35 million milestone payments to Lilly for the rights to develop ruxolitinib in GVHD to our forecast. This increase is offset by increased projected savings related to discontinuation of ruxolitinib in solid tumors and by the removal from our 2016 forecast of development of baricitinib in diabetic nephropathy.

Our SG&A expense for the quarter was $65 million, this includes $8 million in non-cash stock compensation and an increase in our donations to independent charitable foundations, which are typically higher in the first quarter and lower as the year progresses.

As far as our projected SG&A expense for the full year, we are updating our guidance to a range of $285 million to $310 million, this includes the addition of the ARIAD European business previously mentioned. Turning now to net income and earnings per share for the first quarter.

We delivered $24 million in net income or $0.13 per share basic and $0.12 per share diluted. For the full year, and driven primarily by our increased revenue guidance for Jakafi, we expect net income to be in the range of $10 million to $20 million. Looking at our balance sheet, we have the first quarter with $811 million in cash and cash equivalents.

During the first quarter, we experienced strong positive cash flow from operations and milestone payments from Lilly.

We expect positive operating cash flow from operations to continue through 2016, but expect to be offset by upfront payment to acquire the ARIAD European business as previously discussed and planned capital spending on our Delaware campus. We expect to end the year with over $600 million in cash and cash equivalents.

With our current cash balance and multiple sources of cash flow, we are in an excellent position to continue to make important investments in our long-term growth. I'll end our prepared remarks with news flow slide. We have just dosed the first patient in our LSD1 program.

In the next several weeks, we expect to initiate a clinical trial for the GITR program and dose the first patient in the pivotal Phase 3 trial of epacadostat in first-line melanoma.

Later in 2016, we expect additional proof-of-concept data from the ongoing Phase 1, Phase 2 trials of epacadostat in combination with PD-1 and PD-L1 antibodies to become available as well as initial clinical results from our FGFR and BRD programs.

The initiation of the OX40 Agenus clinical trials are slated for the second half of 2016, as is the initiation of the registration program for ruxolitinib in GVHD. In summary, we are well positioned with a robust and diversified product portfolio.

We have the financial resources to enable us to build a global biopharmaceutical company and create long-term shareholder value. Operator, that concludes our prepared remarks, please give your instructions and open the call for Q&A. Thank you..

At this time, we will be conducting the question-and-answer session. Our first question comes from Brian Abrahams with Jefferies. Please state your question..

Hey guys. Thanks for taking my question and congrats on all the progress.

I guess, my question would be, in terms of timing, what prompted you to seek to expand the European infrastructure at this time versus in a couple of years once some of the Phase 3s for epacadostat and the other programs are a little bit more advanced? And I'm curious if you have any other plans for Iclusig development other than the cost sharing that you suggested.

And then, I guess lastly on that front, as we look towards sort of future investment, you mentioned the potential to expand out that infrastructure, what's the right way to be thinking about the potential SG&A impacts going forward? I know ARIAD has mentioned that they plan to save $65 million in expenses next year.

Should we be thinking about an additional $65 million sort of an exact offset or other potential synergies or conversely additional investments that you might make that might increase the impact to SG&A beyond that? Thanks..

Okay. Thank you, Brian. Let me try to take it through your question. I think the timing is a very important question, and thank you for asking that.

The way we look at our maturation of the portfolio is obviously the initiation of the Phase 3 study with epacadostat is an important milestone, but we're also looking at the advancement of many of our own projects including our JAK1 selective inhibitor 110 in multiple indication, as you know.

We also – and you saw some of the data at ACR, moving our Phase 3 kinase delta and our EGFR inhibitor is also now reaching in the Phase 1 stage where we are looking at the next step.

So, it's not just one, but I think there are a number of ways where we will be in a mode where we need to be more active in Europe to maximize the potential of these launches, any of these make it through the entire process. So, we are now in mid-2016.

We're obviously looking for some of these projects at somewhere around 2019 maybe, and I think it's the right time to be ready not only to prepare the launch, like the commercial aspect, but as you know in – there is also involvement of European centers, so part of the ARIAD acquisition includes medical teams that I think will be very important to maximize our activities in Europe, and obviously, the market access and all the work that needs to be done to be able to go through the reimbursement process very quickly.

So, the way we think about it is that we are now at this stage where we will have a team in place.

And as you have heard, I mean, the way – and I will answer your question about the SG&A impact, but what we are looking at is that the Iclusig potential, it's a product that is growing relatively fast, will allow us to be in a position where in fact the team is self-funded for this time, we have between now and whenever the next product is coming.

In terms of the plans for new indication for Iclusig, the current situation is obviously we have a best plan based on the current indication. You know there is an effort ongoing, and we would be participating to that of doing two things.

One is to try to optimize the dose, and as you know, the dose of Iclusig is something that is still under review and there is a study ongoing to try to see if a different dose would have a better therapeutic window. And there is a study to compare it to nilotinib in second-line CML. So, both of these are ongoing.

And obviously, based on the results, we would be including this data in our European label. For other indications, there is no specific plan that we are pursuing at all.

For the $65 million, the way you have to think about it is that we have, in fact in our plans for 2016, expenses that we were anticipating at Incyte to try to stop to have infrastructure in some of the European country to do what I was just describing, which is help the epacadostat delta, JAK1, FGF programs work locally with the three academic centers, et cetera.

And all of that costs that we are planning to have starting in 2016 and in 2017 is obviously not going now to be happening in addition to the IR team, in fact the IR group, the medical group will take some of that workload on the – based on the current infrastructure.

So, you have two things happening, it's that you have an offset of cost that would have happened if we had not done the transaction and you have obviously the management of the cost going forward between the Iclusig dedicated team and the teams that would be working on other projects.

And as we said, we see this to be completely balanced starting – or in fact, accretive to our business starting in 2018.

Now, we have no plan in the very short term to expand the infrastructure that we are acquiring from ARIAD, so you should not think of another wave of new SG&A coming from Europe because we think the size is in fact exactly what we are shooting for if we have to do it by ourselves.

I think that answered most of the question you were asking, right?.

Thanks, Hervé. That's really helpful. I appreciate it..

Our next question comes from Salveen Richter with Goldman Sachs. Please state your question..

Thanks for taking my question. So, I just want to follow up on the earlier question regarding the ARIAD transaction.

So, we should assume at this point you're comfortable in the size of investment in the European operations? And could you also give us some color on the $135 million in milestones and what the breakdown is and the threshold levels here? And I have a question on the pipeline to follow up with..

Yes, I'll take these two. Starting with the milestones, the way all the milestones that we have are attached to new indications, some of them are related to the second-line potential indication based on the study versus the nilotinib. And some of them are attached to potential indications that could be in oncology or outside of oncology.

So, it's a very broad field, obviously we don't know yet if there is there is or will be any effort in any of these indications. So, that's where the – except for the second-line Tasigna that we discussed.

I don't think we will be disclosing exactly the details by indication, so that gives you the perspective, which for us, is basically that we have a base case based on the current indication that works for us, and we see everything else coming in addition to that as a upside from that base case.

In terms of the size of the infrastructure in Europe, which was your first question, we are very comfortable with where it is.

It's well spread across a number of countries where we want to be able to actively develop our products, and that will be the core of the launch program for our new products in Europe and it's as usual Italy, Spain, France, Germany and UK. So, it gives us the right footprint that we would have created by ourselves if we didn't do this transaction..

Thanks, Hervé.

And then, with regards to IDO program that's going to read out in the second half, can you help us understand which tumor types would we read out first? And with the Keytruda plus IDO1 melanoma study, the ECHO-202, the Phase 2 portion of that study, will we see more patient data over the data seen at SITC or is it just going to be more scans? And then, just one question on Jakafi guidance, is the increase really driven here by PV upside or expectations of future MF upside? Thank you..

Salveen, thanks. It's Steven. So, as you know, we presented at SITC and SMR in the fourth quarter of 2015 on the initial data sets which we now have additional scans in those patients, which has reinforced our confidence in epacadostat-pembrolizumab combination in first-line melanoma and our decision to initiate the Phase 3 program.

However, there is not enough new data to justify a presentation at this time.

So, I think it's the meat of you question, if you look across the four PD, PD-L1 combinations, as we said on the call, we'll enroll about 600 patients across 13 tumor types, so it's too early to say what tumor types will have available data win, but we will be getting data over the course of the year, and that's is the most I can say about it at this point in time..

And your question about Jakafi guidance is – it's driven both by MF and PV. In fact, we continue to add new patients in both PV and MF, and the other part of it is many of these patients are staying on drug for a long period of time. So, that's where our guidance comes from..

Thank you..

Thank you. Our next question comes from Michael Schmidt with Leerink Partners. Please state your question..

Hey, good morning. Thanks for taking my questions. Hervé, I had a follow-up on the ARIAD transaction.

Given that there is still some time, as you mentioned, until your in-house sort of products could come online in Europe, how do you think about adding additional commercial or new commercial products to that existing infrastructure via business development?.

Yeah. Thanks, Michael. You're right. I mean it's something we don't sort of predict because, as you know, every BD&L is always an adventure on the anniversary of the result, but it has been the case that when we were looking at opportunities in the past, just having a footprint in the U.S.

only was in fact a problem for the partners who were looking for somebody to commercialize their product on a broader basis. So, it was a little bit of a catch-22 where you don't have the team, you don't get the product. And if you don't have the product, you don't have the team.

So, what we have now is a very efficient way to have a high-quality group of people, an interesting product that is growing and obviously, it will open new opportunities. And as we have always said, I mean we look at different options and if something seems to make sense from the strategic and financial standpoint, we will do it.

But we don't need to do it, I mean, the way we are now deployed in Europe and the U.S., we have teams that obviously in the U.S. generating a lot of income from Jakafi. And in Europe, we'll have a team with a growing top line and interesting product and covering most of the cost from that Iclusig business.

If we can have something else, it would be in addition to some upside on that scenario. But the best scenario now is very good and I think will help us maximize our launches when they come..

Okay. Thanks. And then, a question on the GVHD opportunity.

You had some information there on an incident prevalence, I mean just – could you share some more information on the size of that opportunity, and especially is that a chronic type of therapy paradigm? Or is it a sort of a one-time treatment? And also what duration of Phase 3 development do you foresee for that product?.

Well, this is Barry. And maybe I'll hand it over to Steven for more information. But in terms of the opportunity, there's 21,000 stem cell transplants in the United States alone, about half of those are autologous, another half are allogeneic.

If the allogeneic patients that end up having the GVHD, fewer patients have acute GVHD, and then more patients have chronic GVHD. And the way it generally breaks down is that then those patients who have acute GVHD might have a shorter duration of therapy and chronic GVHD might have a longer duration of therapy.

We think it's an exciting opportunity, and we hope to help a lot more patients with GVHD as we hopefully successfully develop this drug. And I'll hand it over to Steven to answer the question about Phase 3 development..

Yeah. Thanks, Barry. And then, just in terms of the question, one of our slides in the presentation alluded to incidents in the U.S. of new patients of 7,000, about half acute, half chronic. And then in terms of prevalence, about 10,000 patients with chronic GVHD.

In terms of development plans, obviously as Hervé said, we have an ongoing study with our JAK1 inhibitor 39110 which is in Phase 1 safety tolerability at the moment in GVHD. And now with the acquisition of the ruxolitinib rights and already having achieved, if you will, a proof-of-concept with the external data, we're developing registration plans.

The ruxolitinib proof-of-concept data is in steroid refractory, acute on chronic graft versus host disease. So, that's the likely area of development there. And then, we will discuss our own 39110 development plans because there are other entities to consider.

There is still first-line acute GVHD, and there's still potential for prophylaxis in this setting. So, those are the areas we're considering at the moment..

Okay. Great. Thanks very much..

Thank you. Our next question comes from Cory Kasimov with JPMorgan. Please state your question..

Hey. Good morning, guys. This is Morgan on for Cory. Actually, a quick question on the further development of Iclusig. How does that kind of fit into what the rest of everything you have going on with the pipeline, just with the bandwidth you have? And then, I've a follow-up..

Yeah. It's Steven answering you, Morgan. In terms of Iclusig, as Hervé said, there is ongoing work to do in the actual indication within chronic myeloid leukemia. There is a reasonable amount of safety evidence that dose ranging work may alleviate some of the toxicity as regards arterial occlusive disease.

So, executing that study will be very important across three dose ranges. And then, there is ongoing effort, as Hervé always said as well, in second-line chronic myeloid leukemia head-to-head against nilotinib.

In terms of further development, it's a relatively promiscuous agent in terms of different kinases that it does hit, and what's now the setup of a joint development committee with areas, we'll have to discuss those opportunities going forward, whether they're areas of interest to explore or not.

But it's really too early to say more about that at the moment..

(37:05)..

And maybe just to complement that in terms of how does it fit with the rest of the portfolio, we don't see – there is no overlap. I mean, these two studies are already ongoing, and it's not going to compete with the rest of the portfolio. It's a project that would be managed in a totally separate manner than the rest..

Okay. Great.

And then, I just want to confirm that the guidance of $25 million to $30 million is for post close, is that correct?.

Yes..

Okay. Great. Thanks a lot. I appreciate it..

Our next question comes from Geoff Meacham with Barclays. Please state your question..

Hey, good morning, guys. This is Carter on for Geoff. Thanks for taking our questions. I've got one on strategy. I appreciate the cost efficiency on today's deal and sort of the optionality it gives you in terms of involving EU sites and maximizing the launches.

Was there any sense given to how this maybe changes prioritization of certain indications and thinking specifically on IDO? And then, on the GVHD opportunity, could you speak about the strategy of moving forward to both the 110 and ruxolitinib, given your motivations and – on the economics and the partnership with Novartis? Thank you..

Maybe on the first one, no, it has absolutely no impact. I'm sorry, I was – it has absolutely no impact on rethinking the IDO indication between hematology and oncology. I mean these are completely separate.

I think there is – obviously, a lot of our pipeline that is in hematology, there are a number of solid tumor indication where we are looking at it. And Iclusig is not changing any of the balance between oncology and hematology in our pipeline. And maybe, yeah, if you can speak about the GVHD development..

Sure. It's Steven again. Thanks, Hervé. So, just to reiterate and maybe go a bit slower, in terms of graft versus host disease, there are at least four entities. There is steroid refractories. Steroids, particularly prednisone, is first-line treatment.

But if you get steroid-refractory acute graft versus host disease and after about 100 days of this devastating medical condition, you can get what's called chronic graft versus host disease which is also steroid refractory. So, those are two separate entities.

And then, there is also first-line acute graft versus host disease when patients are treated for the first time before they become refractory to steroids.

And then, there is a fourth potential entity where you can actually think about prophylaxing for the condition in people post allogeneic bone marrow transplant who had high risk to develop graft versus host disease. So, all four of those are being considered.

What I said in my earlier comments with ruxolitinib that the data published last year in Leukemia and presented at ASH, they have presented, if you will, proof-of-concept data for ruxolitinib in both of the first two entities, steroid-refractory acute and steroid-refractory chronic graft versus host disease.

So, those are the likely areas of the development for ruxolitinib. And then for 39110, we would be considering the other entities. And that's where we are at the moment. And I hope that answers your question..

Just a quick follow-up. Does the Novartis deal preclude from moving forward with 110 in those earlier settings? Thank you..

No, it does not..

Thank you..

Our next question comes from Ying Huang with Bank of America Merrill Lynch. Please state your question..

Hey, good morning. Thanks for taking my questions. I have one for housekeeping question. Does your Jakafi revised guidance for 2016 include any pricing increase for the rest of the year? And then secondly, how important is the second-line CML indication for Iclusig in Europe for you in terms of decision making in license their rights? Thanks..

So, it's Barry. Obviously, we took price increase on April 1, and we don't really discuss our pricing strategy going forward after that..

So, let me take that one on the second-line indication. The way our deal is constructed in fact makes it such that it works with and without the second-line indication. It works differently with the current indications that we have.

And Iclusig is growing relatively fast in Europe, it's still in the launch – prelaunch mode in many of the countries as it is being reimbursed. And assuming there is no second-line indication, it will give us enough resources to cover the costs of the infrastructure.

If we get the second-line indication, it's going to trigger our milestone payments as we have discussed and it's going to obviously increase the potential top line and it would be an upside to the base case, but both base case and the upsize case reaching our strategic objective which is to get the team in Europe to be self-funded in some way..

Thanks, Hervé. And then, if I may just squeeze in one follow-up on the data release.

So, it doesn't sound like you guys have any significant update at ASCO, should we assume the next meaningful update for epacadostat at ESMO?.

Yeah, it's Steven. So, you're right in that we are leading to the second half and we can't comment on what will be at ESMO until the abstracts are released, but that is the second half of the year is where we're targeting presenting more data..

Thank you for the color..

Thank you. Your next question comes from Ian Somaiya with BMO Capital Markets. Please state your question..

Hi, this is Nathan for Ian. Thanks for taking the question.

So, starting off with the ARIAD deal, how should we think about the buyback contingency plan within the deal? And then, could you comment on any tax implications of the deal and whether you may be able to see any tax advantages from an EU operations perspective? And then, I have a question on the pipeline..

Okay. Thank you. I'll take the buyback. I mean obviously, you can – you'll realize, and I think it's very rational that it was very important to ARIAD because in their overall strategic approach to the company which is basically we group resources in the U.S. territory.

It makes sense to have this transaction about the European business done because it will reduce their spending and it just happened and it's also a very good deal from our side for all the reasons that we have discussed. So, I think it's a case of complementarity.

And then, came this issue of what if somebody is willing to acquire ARIAD, so it's based on the charge of control of ARIAD, and is interested in the European business.

So, we came up with this buyback option that is part of our agreement and the buyback option is obviously responding to their needs and is built in such a way where there is timing, so it can happen basically between three year and six year of that (44:45) signature of the deal.

So, it gives us a certain amount of time to get prepare for that in case it were to happen, and it's based on financial terms that have been discussed, where there would be all the milestones that have been paid plus additional milestone based on the past 12 months of sales plus forward royalties of 20% to 25%.

So, in some way, it was sort of meeting everybody's needs where there is a delay of a number of years, it's still allowing a potential buyer of ARIAD to have access to Iclusig, and it's giving us financial condition that would be certainly somewhat favorable.

So, that's how it was built, and I think it's meeting everybody's needs in this transaction..

On your second question, it's Dave, on the tax, there will be some tax efficiency because ARIAD does have some net operating losses that we will carry forward to us on the acquisition of the entity.

And to the extent that the profits that this enterprise creates in the future are enough to offset the NOLs, we do have some NOLs in our entity that we started in Switzerland, so there is some tax efficiency that will be – that will benefit from by this acquisition..

Great. And then, on the pipeline, can you help us understand, how your early-stage oncology portfolio fits together and how you plan to develop these drugs, and what data you have generated so far that could help direct development of combinations within the pipeline? Thank you..

Yeah. Hi. This is Reid. Thanks for the question. So, as we've brought forward discovery programs and now into early development programs over the last four years to five years, there has been a concerted effort by the team to build and nucleate around certain aspects of the portfolio.

One of those is really around JAK inhibition where we've had, I think, a long-standing leadership position beginning with ruxolitinib and baricitinib in JAK1 and JAK2 inhibition, but now more recently into more evolved profiles like JAK1 selective inhibition.

Those agents with, I think, clear opportunity in hematologic malignancies offer us the opportunity to build around them and bring forward other agents which are very interesting in their own right and have their own potential development programs, but also leverage the JAK inhibitor space.

And one example of that is PI3Kδ, and we've presented over the years a lot of the pre-clinical data and even some clinical data last year at ASCO that helps to reinforce the interest in that particular doublet, and that will be one that we continue to explore in the clinical setting.

Beyond just JAK1 and delta, it's also given us the opportunity to bring forward mechanisms like PIM inhibition which really works as it correlate to delta inhibition, they are active on the exact same pathway and are sort of reciprocally regulated.

And so, a PIM inhibitor in our portfolio makes a lot of sense and would allow us to do interesting things in the combinations base, again much of which we've presented over the years publicly.

And finally, LSD1 and BRD, two epigenetic mechanisms both with a potentially important role in leukemias and potentially also in lymphoma for BRD again just build around that portfolio philosophy quite well. And the exact same thing is happening on the immuno-oncology side.

Again, they are nucleated around IDO inhibition where we now have brought forward our first GITR agonist, soon an OX40 agonist and also in licensed a PD-1 inhibitor, and from a small molecule side began to explore some very novel biology around JAK and PI3-kinase delta inhibition on modulating the local inflammatory environment to provoke immune cell function.

So, I think that you can look at our portfolio and hopefully see that around targeted therapies and immunotherapies, there is actually a very strong effort to bring forward mechanisms, which not only have their own potential monotherapy approaches, but also very much leveraged the adjacent molecules in our portfolio.

And the idea frankly is to create a portfolio where the value and the totality is much greater than the simple some of the parts..

Great. Thanks for the color and congrats on the deal..

Thank you. Our next question comes from Eric Schmidt with Cowen & Company. Please state your question..

Thanks. Good morning. Just a quick clarification question for Barry on the volume growth of Jakafi in the quarter. I think the slide says 13% growth.

You autobold in your scripts 7% quarter-on-quarter growth, was there also some inventory stocking going on?.

No, the slides are referring to millions of dollars, so it's $13 million one way, $12 million the other way..

(49:56) Thank you. And....

So, a 7% demand growth, I should say, as I said in the script..

Got it. And then, maybe for Steven, as you think about making a go, no-go decision and something like lung cancer for epacadostat, I think you've committed doing that before year end.

Do you need to see the data from the ongoing PD-1 studies and first-line lung cancer given maybe dynamic nature of that tumor type?.

Eric, Yeah, it's Steven. Thanks for your questions. So, again, 600 patients, 13 histologies, we'll have data availability across the second half of this year, and lung is one of those histologies where we will be looking closely and making decisions based on data.

I – in terms of your question where we need to see first-line data to make decisions, to be honest here, it would be helpful. But I don't think we have enough historical controls and enough date already across many, many agents that I think we have to be able to make rational comparisons using things like response rate, so it's not an absolute..

Thank you..

Our next question comes from Liisa Bayko with JMP Securities. Please state your question..

Hi there. Just strategically, I was wondering if you could kind of compare contrast the idea of acquiring ARIAD versus perhaps doing an acquisition like this, and might this be part of a longer-term strategy with respect to acquiring ARIAD? And any tax implications too would be helpful. Thank you..

I think, I mean you have to do – to put it from our needs standpoint. I mean we have already a very large portfolio of projects in our pipeline. I think we have a strong discovery team for small molecule. It has been very productive over a number of years.

So, our discussions were very much about what we need and we don't have, which is an organized European platform with infrastructure with medical team across the different countries, commercial team, and market access. I think it just happened that it was strategically something that ARIAD was interested in discussing for the reason I was explaining.

And I think for the reason they have also communicated this morning that they are trying to concentrate their resources into U.S. to be ready to not only grow Iclusig, but also some of the pipeline products that may be coming soon. And that's where the discussion was centered, in fact.

So, I see it as a deal that has a lot of win-win qualities for both organization and where we get really what we were looking for, which is related to our European infrastructure and being able to maximize our products there..

Okay, thank you. That's helpful.

And then, just a technical question, you mentioned amortizing the product rights for Iclusig, what period of time should we think about that over?.

That will be over – it's Dave speaking. Liisa, it will be over the life of the patent, and it will straight line..

And when do the patents end, can you remind us your assumptions are there?.

The patents end in 2026..

Okay. Thank you. And then, if you could just comment at all on – I know Concert put forward this oral JAK molecule that's (53:45) for alopecia, can you comment on any IP and kind of plus minus benefits on topical versus oral for that alopecia indication? And that's my final question. Thank you..

Yeah. Sure, Liisa. This is Reid. Just – so on the IP side, so our patent applications for ruxolitinib do disclose an embodiment that includes all isotypes – isotopes of atoms occurring in the compounds for the invention, and that specifically includes isotypes (sic) (isotopes) (54:18) of hydrogen such as tritium and deuterium.

So, we're very confident in the patent, at this state, we have around ruxolitinib. And we'll clearly look to protect that if it makes sense.

In terms of the oral versus topical, we're doing a study right now with topical ruxolitinib, so we'll answer that question clinically in terms of how that formulation looks in that method of delivery relative to oral therapy.

Obviously, on any oral therapy particularly in a condition like this one has to be particularly cautious around safety implications in this sort of a disease, and that's really what drove our interest in the topical formulation.

And there's a considerable proportion of the patient population where a topical formulation could address the significant unmet need.

Obviously, an oral therapy could be more appropriate for much more widespread disease and maybe effective there but it has to be balanced with the safety risk that come from oral JAK inhibition in those types of patients..

Thank you..

Our next question comes from Ren Benjamin with Raymond James. Please state your question..

Hi. Good afternoon – good morning, guys. Thanks for taking the questions. I guess just one for me regarding the ECHO-301 study. Can you just talk a little bit about obviously the co-primary endpoints.

Do both need to hit for an application or is there a potential strategy for – if you get the PFS first and application going in and waiting for the OS, or how are you thinking about it?.

Hey, Ren, it's Steven. The ECHO-301, as you – the Phase 3 in first-line melanoma does have co-primary end points of progression-free survival and overall survival, and it doesn't have to be both. We could fall with a benefit in either. So, that's why we estimate data availability in 2018, and obviously that's based on the PFS endpoint..

Got it.

And then, maybe just going back to the ARIAD deal real quick, how many countries is Iclusig approved in, and as part of the strategy to either expand further in terms of building sales forces in individual countries?.

So, I can speak with the territories that we have organized this transaction around. So, it's approved at the European Union level, so that's where the technical approval is taking place. And then, there is a reimbursement that is done country by country.

So, in term of the European Union, the reimbursement is obtained now in some of the large counties like Germany, but it still work – and Italy, which is obviously a very fast-growing country for Iclusig.

But it's still not fully obtained, as you know, in France, there is a situation where you can have an ETU, you can basically sell the product before it is fully reimbursed but there is a clawback that is taking place at the time of reimbursement, and it's anticipating – anticipated to be happening relatively soon.

And some of the other countries are still in the process of getting reimbursement, inside the EU. And then, in our agreement, there are countries outside of the European Union, like Russia is one of them, where we will have to find a partner which is probably what we will be doing to go through the entire process of approval and reimbursement..

Great. Thank you, guys..

Thank you. Our next question comes from Andrew Berens with Morgan Stanley. Please state your question..

Hi. Thanks. Good morning, guys. Two questions, one on epacadostat and then one on Iclusig.

As we prepare for the PFS data in melanoma later this year, I guess the first quarter of next year, how should we think about the benchmark commercially for the combination therapy, not just versus Keytruda but also maybe some of the other data that are out there for combination IO therapy?.

Yeah. Hi, Andrew. It's Steven. So, just to be clear, so we – the ECHO-301 PFS data will be most likely 2018. Later this year, as I said earlier, we hope to be able to update our Phase 1 data that we presented at SITC and SMR last year. We'll have enough additional scan data to update that.

In terms of the benchmarks, obviously, there is regulatory and then there is the clinical benchmark and you alluded to the latter.

From a regulatory point of view, we will have to beat the labeled pembrolizumab monotherapy PFS of around six months, but the de novo of AP (59:23) clinical benchmark in the same setting is around 11.5 months, So, those are the sort of numbers we're thinking off.

And then, there is a bunch of new answers around PD-L1 positivity, et cetera, which can come in. You just have to be really careful that you compare in an apple-to-apple in terms of the data sets and the staining that you're using. But we think about it mostly in terms of those two numbers I just alluded to..

Okay. And we're not going to get any of the PFS data from the Phase 1, Phase 2 trial? I had thought that we are expecting at the end of this year maybe..

No. You are correct. We will have updates on the scans available to us in appreciable amounts sometime in the second half of this year and we hope to be able to present it to you, that is our intent..

Okay.

So, we will see PFS from that trial?.

Yes..

Okay. Great.

And then in terms of Iclusig, guys, those of us who don't cover ARIAD, think about modeling the EU opportunity, have they experienced any reference pricing in Germany yet and what's the status in UK with these assessment?.

So, maybe I can take some of that. So, in Germany, the price went through the entire review and is a price study approved by the government. In the UK, most of the usage is funded through the cancer fund. So, it's not a nice reviewed kind of situation, it's a cancer fund.

Remember, it's a relatively rare form of CML because the product is approved for two groups of patients, the one who are resistant or refractory or intolerant to nilotinib or Sprycel, and a group of patients with 315i mutation.

And the 315i mutation is relatively rare in the first-line setting, but the incidents of 315i mutation is increasing with the lines of treatments that you are receiving. So, it becomes more and more frequent on the smaller number of patients, as patients are going from first-line to second-line to third-line.

So, in the UK, it's going through the cancer fund. In Germany, it went through the entire process. It's ongoing in France. And we are anticipating – or ARIAD is anticipating the resolution of the negotiation in France. It's already approved and reimbursed in Italy, and the other countries are still in the reimbursement process now..

Great. Thanks for the color. I appreciate it..

Ladies and gentlemen, we are out of time for questions. I will now turn the conference back over to Mr. Hoppenot for closing remarks. Thank you..

Okay, Yes, thank you. Thank you all for your time today and for your questions. I think it's a day today where we're sure that we have made three bigger steps for a while. I mean, one is obviously the growth of Jakafi in the U.S.

because it's important to see that now we are a year after the launch in PV, and we are still growing very dynamically with both in PV and in MF.

I mean, we spoke about second big step which is a progress of our pipeline, we are planning to initiate two pivotal study soon or over the next few months with epacadostat in first-line melanoma and with ruxolitinib in GVHD, and I think it's really important.

And as you see, the third big step was now establishing Incyte firmly as a transaction-fee company with an organization in Europe. And as I said at the beginning, our goal with that organization is really to narrow the powerful and successful organization that we have in the U.S.

with established now five years or six years ago, and be able to make sure that we maximize our launches when our products are maturing, and also grow Iclusig that has a lot of potential to grow as it's still in a phase of the launch that is relatively early.

So, I think, it was a very exciting few weeks and months for us in the beginning of the year, and I'm looking forward to sharing our progress with you later this year or with Q2 call by midyear. Thank you..

Thank you. This concludes today's conference. All parties may disconnect. Have a good day..