Michael Charles A. Booth - Incyte Corp. Hervé Hoppenot - Incyte Corp. Barry P. Flannelly - Incyte Corp. Steven H. Stein - Incyte Corp. David W. Gryska - Incyte Corp. Reid M. Huber - Incyte Corp..

Brian Abrahams - Jefferies LLC Kennen Mackay - Credit Suisse Securities (USA) LLC Ying Huang - Bank of America Merrill Lynch Cory W. Kasimov - JPMorgan Securities LLC Salveen Richter - Goldman Sachs & Co. M. Ian Somaiya - BMO Capital Markets (United States) Geoffrey C. Meacham - Barclays Capital, Inc. Tony Butler, Ph.D.

- Guggenheim Securities LLC Eric Schmidt - Cowen & Co. LLC Liisa A. Bayko - JMP Securities LLC Peter Lawson - SunTrust Robinson Humphrey Reni Benjamin - Raymond James Financial, Inc. Michael Schmidt, Ph.D. - Leerink Partners LLC.

Greetings and welcome to the Incyte Corporation Fourth Quarter and Year End Financial Results. 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, Mr.

Mike Booth, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Diego. Good morning and welcome to Incyte's fourth quarter and year end 2016 earnings conference call and webcast. The slides used today are available for download on the Investors section of incyte.com.

Speaking on today's call will be Hervé Hoppenot, our CEO, who will begin with some comments on both our long-term strategy and our recent business development activities. Hervé will then pass to Barry Flannelly, who leads our U.S. organization and he will provide an update on Jakafi sales and provide some detail on U.S. demand growth in MF and PV.

Steven Stein, Incyte's Chief Medical Officer, will highlight the depths of our late-stage programs and detail our key expected value drivers for the year.

Dave Gryska, our CFO, will summarize fourth quarter and full year results for 2016 as well as provide 2017 guidance, before opening up the call 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 2017 guidance, the commercialization of our products, 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-Q for the quarter ended September 30, 2016 and from time-to-time in our other SEC documents. I'd now like to pass the call to Hervé for his introductory remarks..

Thank you, Mike, and good morning, everyone. So we had a very productive year at Incyte in 2016 with total revenue growing at 47% year-on-year and during which we expanded our geographic footprint to include Europe and further advanced our clinical portfolio. We also added to our early-stage program in a meaningful way.

To start, I'd like to begin our discussion today by talking about the DNA of Incyte, which is innovation. We believe that innovation and the discovery of new products is where value is created in our industry and Jakafi's growth enables Incyte to make significant investments in our R&D portfolio.

In fact, more than 60% of 2016 Jakafi product revenue was reinvested into R&D during last year. We are in a strong position to drive our broad portfolios through the clinic and beyond and just yesterday, we announced with Lilly that baricitinib has been approved in Europe for the treatment of rheumatoid arthritis.

Baricitinib would be marketed as Olumiant and royalties from Olumiant has the potential to be a significant future revenue driver for Incyte. This next slide shows the evolution of our full year annual revenue since 2012. As you can see, we have had impressive growth since the launch of Jakafi both in the U.S. and ex-U.S.

with Novartis and we're pleased to announce today that for the first time ever, total annual revenue recorded by Incyte has surpassed $1 billion. Next, I'll talk about how we are reinvesting these resources in an effort to sustain and accelerate our future growth. As you can see on slide 7, we now have seven late-stage programs.

Baricitinib and capmatinib are partnered globally with Lilly and Novartis, respectively, and we intend to maintain our current rights for the other five candidates in major market.

Steven will provide update on the details of our late-stage plans showing that having this depth of late-stage candidates places us in a very good position for future growth. Within the early-stage portfolio, we have added our new clinical candidate, INCB62079, which is a selective FGFR4 inhibitor.

Last month, we added the first-in-class oral arginase inhibitor, INCB01158, to our portfolio through an alliance agreement with Calithera and in December, we further enhanced our discovery effort through a long-term collaboration with Merus. I'll discuss this collaboration further in the next slide. I'd begin with our Calithera collaboration.

We believe that arginase is an important target within the tumor microenvironment and could have a role in combination with other immuno-oncology therapies, including epacadostat. We are excited to have secured global rights to a first-in-class molecule, which is already in the clinic.

INCB01158 has shown an attractive preclinical profile, including potencies, selectivity or bioavailability and in vivo efficacy and safety. It's currently being studied in a monotherapy dose escalation trial and combination trials are planned.

Concerning Merus, our strategic collaboration with Merus is expected to provide us long-term access to their Biclonics Technology for up to 11 programs. We believe Biclonics is the leading bispecific technology for four main reasons.

It uses fully human antibodies, it uses a native IgG format, it allows for the functional screening of potential candidates and manufacturing of Biclonics is expected to be relatively simple. We have just had the initial – the first Scientific Kickoff Meeting and we very much look forward to working with the Merus team in the coming years.

I'll now pass the call to Barry for the update on Jakafi..

Thank you, Hervé, and good morning, everyone. Sales of Jakafi continue to perform well. On the left side of this slide, you see that Jakafi's revenue for the full year 2016 was $853 million, a 42% increase over the full year 2015.

In the fourth quarter, net product revenue from Jakafi was $238 million, a 6% increase over Q3 and a 30% increase over the fourth quarter revenue of 2015. In the next slide, we'll provide more detail on the 30% growth we saw from Q4 2015 to Q4 2016. On slide 11, you can see that growth in Jakafi is substantially driven by patient demand.

The bar graph on the left shows that the number of patients on Jakafi at the end of Q4 2016 grew 28% over Q4 2015. In comparison, revenue growth in the same period was 30%. The bar graph on the right shows how the 28% growth in total patients is split by total and new patients in each indication.

Both indications are contributing to growth of the brand and PV growth is greater than MF growth.

This is due to the significantly larger established patient base in myelofibrosis, and we expect polycythemia vera to be a major long-term driver of Jakafi growth, due to the larger potential patient population and the potential for longer duration of treatment. Next, I'd like to talk to you about Jakafi guidance for 2017 and in the longer-term.

As we announced about a month ago, we expect long-term peak sales of Jakafi to reach $2 billion. This guidance includes revenue from myelofibrosis and polycythemia vera indications and the potential GVHD indication, but does not yet reflect estimates for the potential approval of Jakafi in essential thrombocythemia.

Today, we announced that our 2017 Jakafi net product revenue guidance is a range of $1.02 billion to $1.07 billion. This reflects what we believe will be continued patient demand growth in both approved indications. With that, I'll pass the call to Steven for a clinical update..

Thank you, Barry, and good morning, everyone. We have a broad and deep portfolio, here at Incyte. We have multiple late-stage assets that are in or are expected to begin pivotal trials this year. I'll provide more details on slide 15, the next slide.

The pivotal program of ruxolitinib in steroid-refractory graft versus host disease is underway and the pivotal programs that we expect to begin this year include those of ruxolitinib in essential thrombocythemia and itacitinib in treatment-naïve graft versus host disease.

In addition to the ongoing Phase 3 trial of epacadostat plus pembrolizumab in Melanoma, we expect to begin pivotal trials of epacadostat plus pembrolizumab in non-small cell lung cancer, bladder cancer, renal cancer and head and neck cancer during 2017.

We are also currently running three Phase 2 trials, that if successful, may be registration-enabling. The FGFR1/2/3 inhibitor, INCB54828 in patients with bladder cancer, cholangiocarcinoma and an 8p11 translocated myeloproliferative neoplasm.

A fourth Phase 2 trial that may also be registration-enabling is with our PI3 kinase Delta inhibitor, INCB50465 in patients with diffuse large B cell lymphoma. This trial is expected to begin in the first half of 2017.

In addition, we have two late-stage assets, the JAK1/JAK2 inhibitor, baricitinib, and the c-MET inhibitor, capmatinib, which are partnered with Eli Lilly and Novartis, respectively. Baricitinib is now approved in Europe and other global regulatory reviews for rheumatoid arthritis are ongoing.

Lilly announced that it plans to begin a Phase 3 trial of baricitinib in patients with psoriatic arthritis during 2017. We have opted into co-development for this indication as well as for co-development of axial spondyloarthritis and atopic dermatitis, should Lilly also progress these indications into pivotal development.

Novartis expects data from the trial of capmatinib in combination with EGFR inhibition in patients with non-small cell lung cancer to readout later in 2017, and also expects to submit an NDA to the FDA for capmatinib in non-small cell lung cancer in 2018. Next, I'd like to move to our epacadostat program.

As we announced with Merck last month, we have decided to expand the combination of epacadostat plus pembrolizumab into four additional tumor types, and we expect to begin these pivotal programs during 2017. Of the nine total tumor types studied in ECHO-202, five are now in or being moved into pivotal development.

We continue to collect data for the diffuse large B cell lymphoma, and microsatellite instability-high colorectal cancer cohorts, and have no current plans to move ahead with either ovarian cancer or triple-negative breast cancer. Slide 17 shows our current portfolio.

Over the course of 2016, our portfolio has evolved significantly, and is now nicely balanced between early-stage versus late-stage assets. Since our call this time last year, we've added five new clinical candidates and have moved more than half of that existing portfolio into the next stage of development.

We believe that our portfolio is unique and unparalleled for a company of our size and contains both first-in-class and best-in-class candidates. We intend to pursue development of our product candidates in both mono and combinatorial settings further enhancing the optionality of our opportunities.

The agreements of Merus and Calithera are both additive to and potentially synergistic with our in-house discovery and development efforts. And the agreement we have reached with Agenus to restructure our collaboration gives Incyte control of the global development and commercialization of our two lead large molecule therapeutics.

I'll now finish my section on our expected news flow. On slide 18, you can see the progress we expect to make in our portfolio over the next year. Much of this has already been communicated with our previous slides. So, I'd like to highlight just a few things.

First, we are preparing to present first-in-man data for INCB54828, our FGFR1/2/3 inhibitor, during the first half of 2017, with the data from the BRD and PIM programs potentially later in the year.

We plan to begin the new pivotal programs of epacadostat in non-small cell lung cancer, renal cancer, bladder cancer and head and neck cancer during 2017. And we also expect to initiate a proof-of-concept trial of topical ruxolitinib in patients with vitiligo.

We expect 2017 to be a busy year at Incyte and we look forward to keeping you updated on our progress. With that, I'll pass the call to Dave for the financials..

Thanks, Steven, and good morning, everyone. I'd like to start by discussing our fourth quarter and 2016 performance and then provide guidance for 2017, which will include the accounting for Agenus, Merus and Calithera agreements. In the fourth quarter, we recorded $326 million in total revenue.

This was comprised of $238 million in Jakafi net product revenue, $13 million in Iclusig net product revenue, $33 million in Jakavi royalties from Novartis and $43 million in contract revenue, including a milestone paid to us by Novartis, related to pricing approval of Jakavi for PV. For 2016, we recorded $1.1 billion of total revenue.

This was comprised of $853 million in Jakafi net product revenue, $30 million in Iclusig net product revenue, $111 million in Jakavi royalties from Novartis and $113 million in contract revenue. Our gross to net adjustment for Jakafi for 2016 was approximately 12%.

Our cost of product revenue for the quarter and full year was $20 million and $58 million, respectively. This includes the cost of goods sold for Jakafi and Iclusig, the payment of royalties to Novartis for U.S. Jakafi net sales and the amortization of acquired product rights related to the Iclusig product acquisition.

Our R&D expense for the quarter was $162 million, including $17 million in non-cash stock compensation. For the full year, our R&D expense was $582 million, including $60 million in non-cash stock compensation. Our SG&A expense for the quarter was $96 million, including $10 million in non-cash stock compensation.

For the full year, our SG&A expense was $303 million, including $36 million in non-cash stock compensation. We recorded $7 million in expense related to the change in the fair market value of the contingent consideration for the Iclusig royalty liability in the fourth quarter and $17 million for the full year.

As for net income for the quarter and full year, we reported $9 million and $104 million, respectively. Looking at our balance sheet, we ended the fourth quarter with $809 million in cash and marketable securities. To summarize, we are extremely pleased with our performance in 2016. Jakafi delivered strong revenue growth.

We grew our cash position by over $100 million for the year and continue to make significant advancements in our clinical development programs. Turning to slide 21, I would like to highlight some key drivers of our 2017 guidance. We anticipate that milestone payments may add significantly to Incyte's total revenue during 2017.

The events which may trigger these milestones are laid out on the left hand side of slide 21. We announced that yesterday of the European approval of baricitinib, which will be marketed as Olumiant is the first of what we expect will be several global approvals of baricitinib.

In addition, Lilly moving baricitinib into Phase 3 in new indications would also trigger milestone payments to Incyte. We also anticipate that development and commercialization milestones on Jakavi may be triggered by Novartis.

On the expense side, we anticipate epacadostat and baricitinib to be drivers of ongoing R&D expense, and the recently signed agreements with Agenus, Merus and Calithera will add one-time items to our R&D expense in 2017. In terms of SG&A expense, 2017 will be the first full year that we include our European operations.

Moving on, I'll now summarize the key components of our 2017 guidance. Please note, that the guidance we provide today does not include any additional potential future strategic transactions beyond the Merus and Calithera collaborations already announced.

For 2017, we expect net product revenue from Jakafi to be in the range of $1.02 billion to $1.07 billion. For Iclusig, we expect net product revenue to be in the range of $60 million to $65 million. And as I detailed on the previous slide, we expect to receive up to $300 million in milestone payments from our collaboration partners.

The most significant portion of the $300 million milestone payments will be $165 million in milestone payments from Lilly for baricitinib approvals in the U.S. and Europe. We anticipate receiving royalties from Lilly after the approval of Olumiant, and will continue to receive royalty payments from Novartis on Jakavi in 2017.

We are not providing guidance on these royalties. We expect our gross to net adjustment for 2017 to be approximately 13% for Jakafi.

Jakafi is the main driver of our gross to net adjustment and as with similar oncology drugs, our gross to net adjustment is higher in the first quarter than the rest of the year, primarily because of our share of a donut hole from Medicare Part D patients. We expect total cost of goods sold to be in the range of $75 million to $80 million.

This includes the cost of goods sold for Jakafi and Iclusig, the payment of royalties to Novartis on U.S. Jakafi net sales and the amortization of acquired product rights, related to the Iclusig product acquisition.

2017 R&D expense guidance is made up of two parts; one-time expenses associated with Agenus, Merus and Calithera collaborations, and ongoing expense associated with development of our extensive product pipeline. The Merus collaboration consisted of $120 million upfront cash payment and an $80 million stock investment.

We will recognize the $120 million payment along with approximately a $2 million premium on the stock purchase as R&D expense in the first quarter. The Calithera collaboration agreement consisted of a $45 million upfront cash payment and an $8 million stock investment.

We will recognize the $45 million payment along with an approximate $4 million discount on the stock purchase as R&D expense in the first quarter. This will result in $41 million of R&D expense in the first quarter for this particular collaboration.

The amendment on the Agenus agreement consists of $20 million in accelerated milestone payments and a $60 million (21:21) stock investment. We'll recognize the $20 million payment along with approximately $20 million premium on the stock purchase as R&D expense in the first quarter.

We therefore expect these one-time expense items to be approximately $205 million and we expect ongoing R&D expense to be in the range of $785 million to $835 million, including non-cash expense related to employee equity awards.

The increase in our ongoing R&D expense year-over-year is mainly driven by the advancement of our products in the pipeline, including the previously announced plans to move into multiple Phase 3 studies of epacadostat and an opt-in to co-fund additional indications for baricitinib with Lilly.

We expect SG&A expense to be in the range of $340 million to $360 million, including non-cash expense related to employee equity awards. As I mentioned earlier, the increase in our SG&A expense year-over-year includes a full year of expense for our recently acquired European operations versus seven months in 2016.

We expect total non-cash expense related to employee equity awards to be in the range of $130 million to $140 million. In addition, we expect a change in the fair market value of a contingent consideration for the Iclusig royalty liability to be in the range of $30 million to $35 million.

And finally, we expect net income to be in the range of $50 million to $70 million. I would note however that the inherent uncertainty with respect to achievement and timing of milestones I detailed earlier may create variability in our net income on a quarterly basis.

I'll finish on slide 23, which provides a summary of our clinical and strategic goals. Incyte is very well-positioned from a cash and operating income perspective to execute on our strategies for growth, which we are confident will deliver significant long-term shareholder value in 2017 and beyond.

Incyte has a broad portfolio of late-stage assets, which have the potential to drive significant momentum and value over the next several years. We also have plans for further geographic expansion into the Asia Pacific region to enable us to maximize the potential of our product portfolio. Operator, that concludes our prepared remarks.

Please give your instructions and open up the call for Q&A. Thank you..

Thank you. Our first question comes from Brian Abrahams with Jefferies. Please state your question..

Hey, guys, thanks very much for taking my question and congrats on all the progress. I guess on epacadostat, I was wondering if you could maybe talk to some of the considerations in designing a Phase 3 for epacadostat plus pembro in non-small cell lung.

Any learnings from the biomarker data and evolving clinical results that might shape the trial design or patient selection for lung or other indications? And then, I'm curious if you've yet established economic terms around the future Phase 3 trial conduct with Merck? Is there any consideration to an exclusivity arrangement akin to melanoma? Thanks..

Brian, hi. It's Steven Stein. Thank you for your question. I'll do the first part and Hervé will address your second part of your question. I can't give you any granular details. They're still being worked out.

The data that enabled the decision has been submitted to a major meeting and the abstracts for that meeting will be released in middle of May and until then we bound by the rules, embargo rules related to that.

But we do take into consideration in any histology all of the above that you mentioned; response, duration of response and the biomarker piece.

Just to end on the lung one, because that's the one you highlighted, obviously that's an area that is moving quickly, both in the first-line, second-line setting, PD-L1-positive, PD-L1-negative and has numerous report-outs this year as well.

So, it's an area, we'll be obviously paying very, very careful attention to, in terms of the study design and that will be shared with you on ClinicalTrials.gov when it goes live. In terms of the terms, I will let Hervé speak to it..

Like Steven said, I mean the work today, most of the work today that is ongoing is related to the design of the study and the way we're going to organize the teams to manage the studies at the same time in parallel, we are discussing with Merck on the term and the economics.

I mean the basic assumption is that, we have drugs that will be provided by each of the company to contribute to the study. Then one of the company would be leading the execution of the study for some of them, there would be cost sharing for all of them.

We don't know yet exactly how that would be done for the pembro program and we have no further information of discussion related to exclusivity. So that's really where we're and it's ongoing, and we expect that to be running in parallel with the clinical work and sort of coming to conclusion over the next few weeks as a target..

Thank you..

Our next question comes from Kennen Mackay with Credit Suisse. Please state your question..

Thanks so much. Maybe one for Barry, just on the guidance. I was just wondering if the Jakafi guidance included any pricing increase assumptions and maybe just sort of in line with what we've seen in terms of sort of a timing of historical price increases or if this was purely based on volume growth? Thank you..

Well, most of it's based on volume growth. We don't really talk about price increases at all. Going forward, we might assume modest price increases. But, as you can see from the slides for 2016, we have nice uptake in total patients and new patients both for MF and PV..

And then again maybe just a follow-up for Barry.

Is there anything you can – any sort of color you can provide on the sort of duration of treatment we're seeing in polycythemia vera versus in myelofibrosis?.

What we said is that it's longer. Getting an accurate reading on persistency for an oral drug over time is not that easy. But PV has been longer than MF, but even our MF patients, we have many of them that have been on for five years or more. But when you look at a 12-month cohort of patients, PV patients are longer than MF patients..

Okay. Thanks so much for taking my questions..

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

Hi. Good morning. Thanks for taking my questions. My first question is for Mike. My team loves your music selection.

How do you choose those?.

I'm pleased you like it. Next question, please..

Okay. I have a serious question here. So for Steve, on slide 18, it seems that you've put the timing for initiation of additional pivotal trial for epacadostat in combination with pembrolizumab towards the end of this year.

I was wondering what is the gating factor here since you already have the data from Phase 2 in-house? And then secondly, also you guys are starting to recruit for the Phase 3 for ET.

Can you tell us about the addressable size for ET?.

Yes, hi, it's Steven Stein. Thanks for your questions, Ying. In terms of, you know we said 2017, because it's hard to give precision in terms of you know exactly when a first patient will be enrolled. The things that go into are, obviously, the standard stuff in terms of writing a protocol.

But the real critical path is getting the regulatory meetings done and the regulatory feedback and get an agreement on the design and the endpoints. And I would say, in answer to your question at a high level, that's the critical piece.

The plan though is very much to get, hopefully, every one of the Phase 3s started in 2017, but a lot will depend on the regulatory feedback. Your second question related to ruxolitinib in essential thrombocythemia, you know it's an indication we've been interested in obviously for a while, given that it is one of the myeloproliferative neoplasms.

There is a Phase 2 dataset that was presented and published by Incyte in 2014 in 39 patients, looking at various aspects, but including endpoints in terms of control of platelet count, white blood cell count, and in a few patients that had splenomegaly, in fact four of them, three of them got resolution of that splenomegaly.

So, we know we have activity in terms of the endpoints of interest. Only thing we've guided to is to start the study in 2017 and nothing further at this moment..

Thank you..

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

Hey, good morning, guys. Thanks for taking my question. I have two of them for you as well.

First of all, was the Agenus amendment driven by any new or additional data you've seen on the GITR or OX40 programs?.

Yes. Hi, Cory, this is Reid. Thanks for the question. No. Really the Agenus amendment is one that is really designed to, as Steven said, give Incyte the control of the global development and commercialization of those two programs, which had previously been structured as a 50%/50%.

We think that's going to significantly simplify the decision-making process and really increase the flexibility around the conduct of the current trials, as well as help speed the initiation of any new clinical trials. That's nothing to do with any emerging data with respect to those two programs..

Okay. And then the second question I have is, I'm curious about the difference between ruxolitinib and INCB39110, or I guess itacitinib I think it's called now, in treating GVHD.

Curious why one is specifically geared towards steroid refractory patients and the other targeting treatment-naïve patients? Is there something in particular about the two molecules that leads you in this direction? Thanks..

So, Cory, I will start off and Reid may want to add something about the biology. But INCB39110, which is now called itacitinib, is, if you take rux as your reference for JAK1/JAK2 and use a 1:1 ratio there, then INCB39110, it's itacitinib now, is about 20-fold more selective for JAK1.

So, there was always a feeling, at least theoretically, that because of its potential to be more sparing, in terms of cell counts, that it may have a different utility in certain settings.

If you look at our dataset from our proof-of-concept study that we presented at the American Society of Hematology at the end of 2016, you will see that in fact, in the steroid-naïve acute setting, itacitinib had an 83% response rate.

In the latter (33:21) steroid-refractory chronic setting, it was 63%, and so we feel that data is supportive of doing steroid-naïve acute development, which is where we're heading with the compound, which is an area by the way where you may want to be more sparing given that people have just received transplants and may have more trouble in terms of cytopenias.

So, that's what I'll say about why we headed that way..

All right. Thank you..

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

Thanks for taking my question. So, firstly, with regard to on the 2016 results, we see about 28% growth in patients on drug, but only 30% revenue growth. So does this mean that you're netting 2% of price increases? And then on the SG&A expense side, your 4Q run rate is about $24 million above the top end of your 2017 guidance.

So were there any one-time items in 4Q that should not recur in 2017 or what does this trend suggest?.

Salveen, it's Barry. Just to clarify, I'll take the first part of your question and then I guess, Dave will take the next part of your question. First of all, it's 42% net sales growth full year 2016 over 2015.

And then, what you're referring to as 28% is just new patient growth on Jakafi and it doesn't necessarily correlate directly with net product revenue because patients get fewer or greater number of bottles in a given quarter as they come on. And then you have the effect of inventory and burning off of inventory from one quarter to the next quarter..

Salveen, it's Dave. I'll take your second question on the SG&A expense. The reason it's slightly higher in Q4 is just the artifact of timing between Q3 and Q4. So that was just a timing issue and on a go-forward basis, if you look into 2017, we wouldn't expect to see that kind of a difference between Q3 and Q4..

And then just on the pipeline, you've previously suggested that your Phase 3 go-forward decisions with Merck were in part due to the Phase 2 starting first.

So, when should we expect data from the other three partnerships to be sufficient, decide on next steps? And then essential thrombocytopenia, I think in the past, you opted not to move forward with this program, so what's changed on this front?.

Salveen, hi, it's Steven. In terms of the collaboration, you're absolutely right. It's an effective timing. So, the Merck collaboration with IDO, the ECHO-202 program, was first to begin and that's why that dataset matured first.

The other datasets across the other collaborations are as we've always said, maturing as we speak, so over the next weeks and months. Those, who will come in, we'll be looking at them and making further decisions there. So, you're right, it's just an operational timing issue, but those are coming in.

Essential thrombocythemia, it was around what to do in terms of the endpoint. So, the first-line treatment is commonly hydroxyurea. There is an FDA-approved drug for second-line treatment, anagrelide, which can lower platelet counts.

The dataset that I quoted earlier with ruxolitinib in essential thrombocythemia patients, shows that we can both lower platelets, lower white blood cell counts and resolve splenomegaly when it's present. So, the ability to use those as a regulatory endpoint in a setting that's post-hydroxyurea is where we're interested now.

And it was just an evolution in terms of the understanding of our own dataset and the opportunity with regulators to design the correct study..

Thanks, guys..

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

Thanks. Maybe just wanted to get a couple of clarifications.

So, on the decision to move forward with the IDO/pembro combo in the four different tumor types, just wanted to clarify that doesn't limit it to four Phase 3 studies, that you could run multiple studies, multiple Phase 3 trials in a given tumor type? And separately, just wanted to ask if a decision to evaluate pembro/IDO chemo combo, would that need to be preceded by Phase 1, Phase 2 data or do you feel like you've learned enough to maybe sort of – maybe a little bit of leap of faith, but move that into pivotal trials as well?.

Ian, hi. It's Steven. Thank you. So, you are absolutely correct. In terms of the histology, they stand on their own. But there are opportunities to do different settings. So for example, a first-line setting, a second-line setting, and then as you alluded to, in the second part of your question, with or without chemotherapy combinations.

And then the nuances for example in some cancers, people can't receive chemotherapy first-line for various reasons, either age or intolerability. So, you are absolutely correct. This is not limited to a finite number of Phase 3 studies in any histology. In terms of chemotherapy combinations, it's safety that needs to enable it, as you alluded to.

We do have and are about to open studies looking at combinations of the triplets, PD-1 and IDO1 inhibitor plus chemotherapy, but there is also the opportunity to potentially do safety run-ins within either Phase 2 or Phase 3 studies that will satisfy either regulatory requirements or IRB requirements to get the safety data you need to enable the chemotherapy combination.

And we will explore both in terms of the most efficient way to get the data we need and then obviously safety first and making sure these combinations are safe..

Should we assume then that the potential chemo combos would start a little bit later, so they potentially might not be in 2017. And then, just a separate question, if I just can ask, on baricitinib, I thought the opt-in decisions were contingent on Phase 2 data.

So have you seen the atopic dermatitis Phase 2 data for baricitinib already?.

So, just to again your first question and it's Steven again, Ian. I don't think it's gated particularly to time, because you can start the Phase 3 with the safety run-in and the required number of patients may not be large. So, you could end up doing 10 patients' to 20 patients' worth of data and not incur a tremendous time hit.

So, I don't feel that the case would mean any substantial delay. The opt-in decisions are something we work carefully with, obviously, with Eli Lilly. The one that is absolutely going forward currently is the psoriatic arthritis one.

We have communicated that we were opting in to atopic dermatitis and then axial spondyloarthritis, but we've yet to go through in detail those data packages with Lilly..

Okay. Thank you..

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

Morning, guys, and thanks for the question. I had a few quick ones for Reid, and then a follow-up. Just want to get some perspective on epacadostat in breast or ovarian cancer.

Should we interpret your Phase 3 as evidence that IDO value is more correlated to PD-L1, PD-1 access? And what does the science tell you about whether other mechanisms like arginase synthesis can turn cold tumors hot?.

Yes, Geoff, this is Reid. Thanks for the question. I think we're obviously learning in real-time with epacadostat as the data from the ECHO program comes in.

But as you alluded to the fact that we have go-forward decisions now and data to support those in myeloma, renal cell, head and neck, lung and bladder, those would all be classified as the inflamed tumor types. Those with a resident T-cell population and ones which are generally responsive even to single-agent PD-1.

The lack of activity thus far in triple-negative breast and ovarian cancer would be consistent again with IDO being active there. Love to see how the data comes in for the other tumor types, but that's certainly where we're leaning and what the data supports.

In terms of arginase, completely different mechanism targeting the myeloid cell population, could be subject to very different rules in terms of which patients are more likely to respond, and that's something that will be studied very carefully in the Phase 1, Phase 2 development program for INCB01158..

Okay. That's helpful. And then bigger picture question for Hervé or Dave. So, when I look at your guys' pipeline, obviously a lot going on in oncology with partnered and wholly-owned programs.

I guess the question is how do you think about capacity constraints, either, say, capital or personnel as more and more programs move from proof-of-concept to Phase 3? Thanks..

Hervé here. I can start. And maybe in terms of capital, we are really managing the P&L in a way where we are careful that we are allocating resources to the program that we believe are the most promising. So, that's the first discipline and it's really applied to every program that we have. You can see from the numbers, that we are cash flow-positive.

We have a cash position at the end of Q4 that was around $800 million.

So, we are in a position where we can do in parallel epacadostat Phase 3 and as we discussed, some of this Phase 3 will be, could be co-funded by some of the partners we're working with and at the same time, the baricitinib opt-in, which is financially relatively significant, but we believe is an excellent, excellent investment for the corporation.

The rest of the portfolio assuming some of these products are going to move forward into later stage and Phase 3 studies would be at this stage that from the capital standpoint we can afford that.

From the personnel standpoint, obviously the baricitinib programs are – we are not dedicating any head count to this program, they are all conducted by Lilly. As we discussed with epacadostat, some of these programs hopefully will be done with a partner involved, which could also help from that standpoint.

And for the rest, we have become over the past few years, a company that is attracting some of the top talent in the industry. We are increasing our capabilities in clinical research across Europe, thanks to the acquisition of the ARIAD Europe team.

We have a medical team in place on top of the existing medical team we were building in Geneva over the past few years. And in the U.S., we have a team now that is fully fledged and is really operating at capacity. There is no (44:46) situation yet as we are growing in parallel with the portfolio.

Obviously in Japan, we've not yet established our own team there. It's something that I would like to do over the next few months in a progressive way, nothing crazy.

But where we will have the opportunity to do our own clinical development, regulatory pharmacogenomic (45:10) activities in Japan and that from the financial standpoint will be, in fact, cost saving versus using CROs. So, it's something that we'll be sort of replacing internal capabilities versus external CROs.

So, overall, we are managing the cash flow, that's really important. And we are looking at how to grow the teams as we need through the portfolio evolving and frankly the past two years have shown that it can be done in parallel in a way that's pretty effective. So, that's where we are. It was a long answer, but it's a very important subject for me..

Yes. Okay. Thank you..

Our next question comes from Tony Butler with Guggenheim Securities. Please state your question..

Yes. Good morning and thank you. A couple of questions. One for Reid. You made a comment about the Agenus agreement and it not changing based on OX40 or GITR, but I noticed an abstract at the AACR, which seems to be quite interesting utilizing epacadostat plus OX40 and GITR, suggesting that OX40 GITR potentiate epacadostat.

So, I am curious if you might want to, or if you can spend a minute just discussing that. Does it require both and therefore not either to potentiate epacadostat? And then a question around the paired biopsies.

Do you actually have data and a biopsy post-dose that illustrates clonal T-cell to the tumor? Can you actually comment around that? And finally, can you give us the average dose of MF and PV currently? Thanks very much..

Yes, hi, Tony. This is Reid. I'll take your first two questions and then I'll turn it over to Barry.

In terms of the AACR abstract, obviously, we'll have to wait till those data are presented to discuss them in more detail, but suffice it to say that as two co-stimulatory receptors that can have activity at the level of a T-cell, it's an interesting scientific concept to be able to use OX40 and GITR agonism in concert with checkpoint blockade, such as PD-1 or PD-L1 inhibitions, or with IDO1 inhibition, and so that's been an area of active research that we've had over the past year and we're excited to be able to share those data.

In terms of the other question, on paired biopsies, this is an active effort of research in our Translational Sciences and Steven's Clinical Group.

We now have trials ongoing that we call platform trials, where the PD-1 antagonist is dosed with JAK1 or with PI3 kinase Delta inhibition and similarly all-oral doublets on the backbone of JAK1 inhibition to study exactly what you alluded to which were paired biopsies where the on-treatment biopsy is really designed to tell us, how we may be affecting the quality and the quantity of the immune cell infiltrate.

So, these are clinical studies and translational studies that are ongoing as we speak.

Barry?.

So, Tony, I think you asked the average dose in MF and PV. So, for the entire brand, the average dose is 10 milligrams, the average bottles that we shipped is 10 milligrams. It's about 60% of the bottles shipped. That's mostly because of PV. MF patients on average, it's more than 10 milligrams b.i.d., but for the brand it's 10 milligrams b.i.d..

Thank you..

Our next question comes from Eric Schmidt with Cowen and Company. Please state your question..

Good morning. Couple of big picture questions maybe for Hervé. Could you characterize Bristol, AstraZeneca and Roche's current interest in moving forward with epacadostat? I think in the past you've said that Roche might be a little less interested than the others.

And then I've noticed you've got a lot more going on in dermatology, both topical and systemic than you have in the past. Is Incyte ready to kind of commit to dermatology as a new focus indication of interest? Thanks..

Okay. No, I think as we said, I mean the sequence of available data is different for each of the partners. So, if you assume that the availability of data is raising their excitement about the potential of the combination, it's also coming with time and depending on when the data is available.

So, I would not characterize any of the interest as being different. It's true that with Genentech Roche, we started a little bit later with (50:01) programs. So that's the only thing I would say related to that. But there is certainly a lot of interest as you know in the target and in – certainly also in working with us for some of these programs.

Regarding dermatology, I must say there is no strategic great vision about moving Incyte into dermatology as we have said multiple time, we are – the products are leading us in different therapeutic areas. It's not really us trying to drive them into one place or another.

It's just happened that obviously with the JAK inhibition, we have a number of indication in dermatology. So, Lilly programs will be done independently by Lilly and we are not involved more than the co-funding that we discussed and the ability to receive royalties or milestone.

On the topical side, we have decided now, it was a little bit more than a year ago, to go through the program, the Phase 2 program to establish the right dose and find where it works, where it doesn't work.

There are number of indication now where we are doing some level of Phase 2 studies, and obviously we will see after that where we go with that, there is no decision that has been made yet..

Thank you..

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

Hi. I was wondering if you could just expand a little bit more on the opportunity for Jakafi in ET.

So you'd be looking, it sounds like post-hydroxyurea, could you maybe quantify that patient population a little bit better and where you – just trying to understand the opportunity?.

Yes, hi, Liisa. It's Steven Stein. So, you're correct that the study is most likely to be in a post-hydroxyurea setting, and with the endpoints I discussed. What we do know at a very high level is that it's smaller than an MF and PV in terms of the opportunity. Beyond that, it's hard to say anything more at this stage to you in terms of its size..

Okay. Fair enough. And then for capmatinib, can you please remind us of the economics that surround that for yourselves? I noticed that, that will be reporting out Phase 3 data this year..

Yes. So, capmatinib is licensed to – Hervé here, is licensed to Novartis. So it basically is a very traditional the kind of deed where there are milestones, which I don't think we have disclosed precisely and the royalties. And the royalties have been disclosed and they are 12% to 14% depending on the cumulative sets per year (53:08)..

Thank you..

Our next question comes from Peter Lawson with SunTrust. Please state your question. Mr. Lawson, your line is open..

Question for David or Barry, just around any timing issues or inventory burn or stocking we should think about for Jakafi for 1Q.

And anything around, any color around the milestones for 2017 around the timing, if that's kind of back-half loaded?.

Hi, Peter, Barry. Just try to understanding your question, so inventory in Q1, our inventory has been relatively consistent between 2.8 weeks and 3 weeks of inventory.

I don't see any change in Q1 for inventory, but of course we do know that the gross to net is impacted by our ability for all-oral oncology drugs because of closing the donut hole, but inventory is not going to affect that..

Hi. It's Dave. I'll try to attempt to answer the question on the milestones. We announced today that obviously with the approval of baricitinib in Europe, we will get a $65 million milestone that will come through in Q1. And Lilly has stated on the U.S. approval, one should look to that in terms of the Q2 timeframe.

So, it's safe to say that there will be at least a goodly amount of milestones in Q2, but Q1 there is just one so far, as a result of that plus it would be additional programs we talked about collaborations between Agenus, Merus and Calithera there will be a loss in Q1, because there won't be enough milestones to offset those one-time R&D costs.

And after that in Q2, there'll be another substantial milestone and then some smaller ones that carry in Q3 and Q4..

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

Hi. Good morning, guys. Thanks for taking the questions and congratulations on the quarter. Maybe the first question, can you give us any color or an update to the PD-1 inhibitor program and how you're thinking about that going forward and what the profile is that you've assessed so far.

And then the second question is just pertaining around baricitinib.

Do you have any color regarding what the additional data that might've been submitted by Lilly to the FDA? And just kind of in a bigger picture sort of question, not focusing in on royalties per se, but thinking about your internal expectations for kind of the growth ramp and how you're viewing sales coming in for baricitinib?.

Hi, Ren. It's Steven Stein. I'll address your first question and a little bit of your second, but Hervé will take the backend piece.

In terms of our PD-1 program in the INCSHR1210 compound, we are this quarter looking through the data we gathered through dose escalation, last year and completed and trying to understand the product's profile in terms of its PK et cetera.

We'll point you towards the meeting we submit an abstract to and when we present it for any further detail on that. But we're in the midst of doing that exercise right now. In terms of the baricitinib negotiations with Food and Drug Administrations and what's going on, I'll just have to refer you to Lilly on that.

But Lilly did say in their public remarks that they expect to get to a good point with the FDA sometime soon and I'll leave it at that..

Now, regarding the economics of baricitinib obviously for us, it's very important because – so there is a milestone, which we expect in fact and what we described today, we expect that to reach us this year. And then there are royalties in the 20% to 29% tranche that will be coming over the next 10-plus years.

So, it's going to 2030 for the first patent expiration. So we look at it as a product that can become very significant for us over the years.

We are very happy to see really moving into a number of new indications, where obviously and that's why we are also opting-in for these programs, because it will obviously grow the top line potential and therefore the royalty potential for this product over the years.

In terms of calibration in each of these indications, frankly, we need to see the guidance from Lilly and I would not comment more than what they have said about the fact that it's a very promising and very important product for patients with rheumatoid arthritis..

Maybe just, Hervé, if you don't mind a quick follow-up..

Yes..

How do you guys think about the Pfizer drug already being out there, or a run rate established of about $1 billion and a quick second-to-market JAK inhibitor coming in? How are you guys thinking about that potential?.

So, the way we look at it is we look at the U.S. and that's what you're describing and then we look at the rest of the world and they are fairly different situations there. In fact the markets, if you think of it that way, for these type of products, are not very homogenous worldwide, so you have to take that into account.

If you look at the profile of the product, what we think is that in the JAK1/JAK2 category, baricitinib is fairly unique, (59:21) different profile, including the JAK3. We also see in the U.S. that there is a (59:30) situation that is totally unique in the world and it has a huge impact on the way these patients are treated.

So, all of that can lead to the right position for baricitinib. There will be fairly significant changes in this market over the next years with availability of different types of products on top of the existing ones. So I really think there is a huge opportunity.

The clinical profile that came out of the Phase 3 studies was really better than expected from a lot of standpoint, and we are – I mean, I am personally very confident that there is lot of room to make it a big success..

All right. Thank you..

But don't think that the U.S. picture is the same everywhere in the world. In fact you see very different types of who is the market leader by country, and the potential (60:24) U.S. on top of the U.S. potential is certainly important or so for baricitinib..

Got it. Thank you..

Ladies and gentlemen, we have now reached our hour duration for this call. But we do have time for one more question. And that last question will come from Michael Schmidt with Leerink. Please state your question..

Hey. Good morning and thanks for squeezing me in. I guess one bigger picture question. You've been obviously very active in terms of augmenting your pipeline and discovery capabilities in the first quarter here with some VD and licensing (61:01) agreements.

What role do you expect VD (61:05) to play going forward, in particular, if you think about building out operations in Asia? Thank you..

Okay, Hervé here. So, I think, our priorities are our own internal discovery programs. So that's something that is a core of what we do at Incyte. So we are not in a mode of sort of changing that in a way that would be dilutive in any way.

And we have protected the team very much in a way we have the partnership we did, where in technologies that we are different. So that was Agenus and Merus antibodies that where we didn't have the internal capabilities.

And what we plan is to continue to rely on our internal discovery capabilities and just complement them in the technologies, where we're not present.

Concerning Asia, frankly, when I look back at 2016 and we can see a number of things that were very successful, including the approval of baricitinib just yesterday, which is the second product from Incyte being approved after ruxolitinib. So it tells you something about our discovery capabilities.

But when I look back, there is one thing that has been also very successful is the expansion in Europe through the acquisition of the ARIAD team and it was done in a very economically reasonable way for us. So we would love to have a similar situation in Asia. We have not found it yet.

So what we're doing now is starting the planning again in a careful way, where we would be establishing a team in Japan to start with, to take care of the pipeline, the late-stage pipeline and make sure that we are putting that on a ramp to approval in Japan.

If there were an opportunity to do it through a small transaction, I will not be against it, but we have not found that yet..

Okay. Great. Thanks and congrats on all the progress..

Ladies and gentlemen, that was our final question. I'll now turn the conference back over to Mr. Hervé Hoppenot for closing remarks. Thank you..

No. Thank you. Thank you for the time today and for your question.

As I said, I look back at 2016 in a way – with a lot of pride, because we spoke about the geography, I think that baricitinib moving forward is an important milestone now our company that has discovered two new products and that have been approved by health authorities and it would just be the fact that we for the first time crossed the revenue line of $1 billion, is also symbolically an important milestone.

So we look forward to seeing some of you at upcoming investor and medical conferences. And for now, I would thank you again for your participation in the call today. Thank you, bye, bye and Happy Valentine's Day..

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