Select Page

On December 4 MacroGenics (MGNX) announced that it had closed on its previously announced (October 25) license agreement with Incyte (INCY). For an upfront payment of $150 million and up to $420 million in milestone payments Incyte gained the exclusive global rights to develop and commercialize MGA012, an anti-PD-1 monoclonal antibody. (PD-1, also know as programmed cell death protein 1, helps regulate the immune system by suppressing T cell activity to prevent autoimmune disease, where the body attacks its own cells. One problem that can occur is that PD-1, while preventing autoimmune disease, also can prevent the immune system from killing cancer cells. A very hot new class of drugs that block PD-1 called PD-1 inhibitors, activate the body’s immune system to attack tumors.) Incyte has been building a deep pipeline of PD-1 inhibitors both through collaborations with larger drug companies and by acquisitions of rights to promising PD-1 inhibitors from smaller biotechs.

This would seem to make perfect sense yet since it does change the risk/reward profile of Incyte, biotech investors aren’t sure that they like this strategy. By acquiring the rights to a PD-1 inhibitor from a smaller biotech Incyte takes on the risk that the inhibitor won’t work as hoped and in addition takes on responsibility for funding the development of a commercial drug from that research. When it partners with a larger drug company, Incyte receives research milestone payments and the big drug company agrees to develop the drug for market. In these deals Incyte typically gives up the rights to most future revenue from the drug, receiving instead a defined royalty payment on revenue. In the MacroGenics deal Incyte has switched roles to that of the funder and larger risk taker. MacroGenics will receive royalties of 15% to 24% on sales (if there are any.)

This switch in roles also means that Incyte will raise capital in the financial markets by selling shares, as it did this September in an offer that sold 5 million new shares. (Incyte now has 211 million shares outstanding.) Any sale of shares, of course, dilutes the stake in the company held by existing shareholders. And right now the market isn’t sure how many more times or on what schedule Inctye will head back to the market to raise new cash.

Traditionally the financial market likes small biotechs like MacroGenics (market cap $720 million) and big biotechs such as Celgene (market cap $80 billion) and Amgen (market cap $130 billion) because it understands the place that these companies have in the biotech ecosystem. The markets are less enthusiastic about companies like Incyte (market cap $20 billion) that, on the one hand, are sellers of promising drug candidates to big drug companies, but that, on the other hand, seem to have ambitions to become big drug companies themselves one day.

The markets seem to think of Incyte as an awkward adolescent. I’d just note, as the parent of one current 16-year-old and one current 23-year-old, that adolescents do grow up.