Incyte Annual Report 2005

FY2005 Annual Report · Incyte

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THE DRIVE TO DISCOVER. THE EXPERIENCE TO DELIVER.

Incyte Corporation
Experimental Station
Route 141 & Henry Clay Road
Wilmington, DE 19880
T: 302.498.6700
www.incyte.com

2005 ANNUAL REPORT

Company Profile

Incyte is a Wilmington, Delaware based drug discovery
and development company with a growing pipeline
of compounds to treat oncology, inflammation, HIV
and diabetes.

Discovery

Preclinical

Phase I

Phase II

Phase III

Pfizer

INCYTE PIPELINE

Indication

Oncology

Sheddase Inhibitor

New Program

CCR2 Antagonists
Rheumatoid Arthritis
Diabetes
Multiple Sclerosis
Undisclosed

New Program

CCR5 Antagonist

11ßHSD1

Inflammation

HIV

Diabetes

Board of Directors

Executive Management

Richard U. De Schutter
Chairman of the Board
Formerly Chairman
and Chief Executive Officer
DuPont Pharmaceuticals Company

Paul A. Friedman, M.D.
President and Chief Executive Officer
Incyte Corporation

Barry M. Ariko
President, Chief Executive Officer
and Chairman
Mirapoint, Inc.

Julian C. Baker
Managing Member
Baker Bros. Advisors, LLC

Paul A. Brooke
Chairman and Chief Executive Officer
Ithaka Acquisition Corp.
Managing Member, PMSV Holdings, LLC
Advisory Director, Morgan Stanley
Venture Partner, MPM Capital

Frederick B. Craves, Ph.D.
Managing Director
Bay City Capital, LLC

Roy A. Whitfield
Formerly Chairman of the Board
and Chief Executive Officer
Incyte Corporation

Paul A. Friedman, M.D.
President and Chief Executive Officer

David C. Hastings
Executive Vice President
and Chief Financial Officer

John A. Keller, Ph.D.
Executive Vice President
and Chief Business Officer

Brian W. Metcalf, Ph.D.
Executive Vice President
and Chief Drug Discovery Scientist

Patricia A. Schreck
Executive Vice President
and General Counsel

Paula J. Swain
Executive Vice President,
Human Resources

Transfer Agent and Registrar
Mellon Investor Services LLC
PO Box 3315
South Hackensack, New Jersey 07606
or
480 Washington Boulevard
Jersey City, New Jersey 07310
Phone: 800/522-6645
TDD for Hearing Impaired:
800/231-5469
Foreign Shareholders:
201/680-6610
TDD Foreign Shareholders:
201/680-6578
www.melloninvestor.com/isd

Annual Meeting
The Annual Meeting of Stockholders
will be held May 23, 2006, at 1:00 p.m.,
Eastern Daylight Time, at the
Hotel du Pont, 11th and Market Streets,
Wilmington, Delaware.

Outside Counsel
Pillsbury Winthrop Shaw Pittman LLC

Independent Registered
Public Accounting Firm
Ernst & Young LLP

Market Information
Incyte’s Common Stock trades on
The Nasdaq Stock Market under the
symbol INCY.

Investor Relations
You can obtain recent press releases
and other publicly available information
on Incyte by visiting our web site at
www.incyte.com.

Contact
Pamela Murphy
Vice President, Investor Relations and
Corporate Communications
Email: pmurphy@incyte.com

Corporate Headquarters
Incyte Corporation
Experimental Station
Route 141 & Henry Clay Road
Building E336
Wilmington, Delaware 19880
302/498-6700

Forward-looking Statements
Except for the historical information contained herein, the statements contained in this letter, including statements relating to expectations about the value
produced by our discovery and development efforts, the timing of the Phase I clinical trials for our CCR5 and CCR2 antagonist compounds, the completion of
IND-enabling studies for development candidates from our new inflammation and cancer programs, the timing and focus of clinical trials for our oral sheddase
inhibitor, the timing of the initiation of clinical testing for our lead compound in our diabetes program, partnering our diabetes program, our positioning and
our strategies toward alliances and future commercial plans, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties
may cause actual results to differ materially, and include the high degree of risk associated with drug development and clinical trials, results of further research
and development, the impact of competition and of technological advances and our ability to compete against parties with greater financial or other resources,
unanticipated delays, our ability to enroll a sufficient number of patients for our clinical trials, and other risks detailed from time to time in our filings with the
Securities Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2005. We disclaim any intent or obligation to
update these forward-looking statements.

DEAR SHAREHOLDERS:

We made excellent progress advancing and expanding our pipeline
in 2005. Therefore, it was disappointing that it was necessary to
discontinue development of DFC (dexelvucitabine, formerly Reverset),
our Phase II compound for HIV.

We reached this decision because the frequency of grade
4 hyperlipasemia, a marker of pancreatic inflammation,
was, in Incyte’s view, unacceptably high in patients taking
200 mg DFC in the manner in which we envisioned it
would be used -- in drug combinations without 3TC
or FTC. While DFC was our most advanced product
candidate and its approval and commercialization had
the potential to expedite our growth, I believe it is in
the best interests of our shareholders to redirect our
resources to our other programs, the lead compounds
for which currently all come from internally developed
compounds. As we look forward to the next 12 to
18 months, I expect that the value produced by our
discovery and development efforts will become
increasingly visible as these compounds continue to
advance and new ones are added to the current pipeline.

Despite the recent news on DFC, a series of significant
achievements occurred in 2005 including:

> Signing a collaborative research and license agreement

with Pfizer worth up to $803 million for CCR2
antagonists, our first internally-generated program;

> Advancing our first oncology compound into clinical

development; and

> Selecting development candidates from new programs

in HIV and diabetes.

HIV
DFC: As previously
mentioned, because of
recently observed increases
in the frequency of grade
4 hyperlipasemia, a
marker of pancreatic
inflammation, in patients
receiving the 200 mg dose
of DFC and not receiving
3TC or FTC, we announced
that the clinical development
of DFC in treatment-
experienced HIV patients
has been discontinued. This
outcome is unfortunate
given that we had seen
potent antiviral effects of
DFC in prior studies, but
we believe discontinuing the development of DFC is in
the best interests of patients. With this decision, our
focus in HIV drug development has shifted to a currently
promising new class of compounds called CCR5
antagonists.

Our CCR5 antagonist
program has
compounds that we
believe have the
potential to be best in
class. We also believe
this mechanism has the
potential to be an
important addition to
the HIV treatment
armamentarium.

CCR5 antagonists block the virus from entering and
infecting healthy cells, and, because this is a new
mechanism, they are active against strains of the virus
that are resistant to currently used anti-HIV drugs.

Before commenting more broadly on our future plans,
I will review in greater detail our achievements in 2005
and the progress we expect to make in 2006.

During 2005, we selected an internally discovered oral
CCR5 antagonist for clinical development. We filed an
IND in March 2006 for the lead compound, INCB9471,

We firmly believe that
long-term success
requires us to build a
deep and sustainable
pipeline in our core areas
of therapeutic focus.

CCR2 antagonists work
by selectively interfering
with the migration of
monocytes from blood
to inflamed tissue,
where they differentiate
into macrophages.
The presence and
severity of disease has
been correlated with
the presence of
macrophages in
inflamed tissue in
multiple sclerosis,
rheumatoid arthritis,
diabetes and
atherosclerosis.

and expect to begin
Phase I testing in the
first half of this year.

Inflammation Portfolio
CCR2: In November 2005,
we established a major
alliance with Pfizer for our
CCR2 antagonist program,
which provides up to
$803 million in potential
payments, including $40
million upfront and $10
million received from the
issuance of a convertible
subordinated note to
Pfizer. In 2005, prior to
establishing this alliance,
we advanced the lead
compound, INCB3284,
into two Phase IIa studies,
one in patients with
rheumatoid arthritis and
one in obese subjects
with insulin resistance.

The alliance with Pfizer allows us to retain exclusive
rights to pursue development in multiple sclerosis and
an additional high-value specialty indication, along with
certain compounds for our independent pursuit in these
indications. We expect to initiate Phase I testing for
one of our compounds in the second half of this year.

New Program: We have also identified a development
candidate from a new inflammation program, and expect
to complete IND-enabling studies for this compound
by year-end.

Oncology Portfolio
Sheddase: In 2005, we initiated and completed a Phase I
study in healthy volunteers with our oral sheddase
inhibitor, INCB7839. Currently, we are conducting a
Phase I/II trial in cancer patients who have solid tumors,
and we expect to complete this study in the second half
of 2006. We then intend to initiate one or more Phase II
studies in 2006 to assess the efficacy of this compound
against specific solid tumors. These studies could include,
for example, breast and/or non-small cell lung cancers.

New Program: We expect to complete IND-enabling
studies by the end of 2006 for a compound from a new
cancer program with a target distinct from sheddase.

Diabetes
Our program in diabetes focuses on a very interesting
emerging target -- 11 beta-hydroxy sterol dehydrogenase
1, or 11ßHSD1. This enzyme is responsible for the
conversion of cortisone to the hormone cortisol, which,
when formed in metabolically important tissues such as
fat, muscle, and liver, essentially counteracts the function
of insulin. The lead compound, INCB13739, is scheduled
to enter clinical testing in the first half of 2006.

Building a Solid Foundation for the Future
We have made substantial progress over the past year
and are well-positioned to address the key challenges

faced by companies of our size and stage of
development, specifically:

> Establishing the basis for sustainable growth
> Managing the uncertainties of the capital markets
> Maximizing shareholder value

I believe it is timely to review our approaches to address
these issues.

Establishing the Basis for Sustainable Growth
Our decision to discontinue the development of DFC is
a reminder that long-term success requires us to build a
deep and sustainable pipeline in our areas of therapeutic
focus. As you can see from what we have done in 2005
and what we expect to achieve in 2006, we are making
solid progress in that regard.

In addition to creating continuous value from our
pipeline and maintaining a state-of-the-art R&D
organization, we are planning a future in which Incyte
will have commercial capabilities in the U.S. for specialty
indications, such as oncology, multiple sclerosis and/or
HIV. The exact composition and size of this commercial
arm will obviously be determined by our levels of success
in bringing drugs to market for these specialty indications.
In primary care areas, such as diabetes, where development
and commercialization requirements exceed what we can
reasonably establish, we will seek high-value alliances.

Managing the Uncertainties of the Capital Markets
We are fortunate to have started 2006 with a
strong cash position of approximately $395 million

(including the proceeds
from initial payments
under the Pfizer
collaboration). This
provides us with the
resources to expand and
advance our pipeline
without the constant
pressure and distraction
of seeking access to new
capital. We are confident
that progress in our drug
development programs
will provide the value-
creation events necessary
to efficiently raise
additional funds to
support the anticipated
growth of our pipeline.

Drugs that target
certain epidermal
growth factor signaling
pathways, such as
Herceptin®, Erbitux®,
and Tarceva®, have
already established
themselves as effective
cancer therapies. Our
oral sheddase inhibitors,
which target these
pathways in a distinct
fashion, are effective
as monotherapy and
synergistic with other
anti-cancer agents in
preclinical models.

Maximizing
Shareholder Value
Our experienced scientific
team remains one of
our most important
competitive advantages; with the expansion of our
internally generated pipeline, the results of their
productivity are becoming increasingly visible. In
addition, we will continue to selectively seek high-quality
in-licensing opportunities to bolster our late-phase
portfolio. We will also seek to establish additional
strategic alliances to maximize the value and reduce the
resource requirements of those programs which exceed

HSD1 addresses a major
medical need -- diabetes
-- that lies outside our
areas of therapeutic
focus but which our
medicinal chemists
were able to approach
effectively. We would
expect to partner the
program at an
appropriate value-
creation point, as we did
with our CCR2 program.

our current or anticipated
internal capabilities. With
these assets and strategies
in place, I believe Incyte
is in a strong position
to bring important new
medicines to market and
to create significant and
sustainable value for
our shareholders.

In closing, I would like to
thank Fred Craves, Ph.D.,
who is retiring from our
board of directors, for
his many years of service.
Fred, who has a scientific
background in pharma-
cology and is as well
a very successful and
experienced venture

Pharmaceuticals Group plc, has also agreed to stand for
election and join the board. Before joining Shire in 2003,
Matt held a number of high level management positions
at leading pharmaceutical firms including: president
of Merck KGaA’s global prescription pharmaceuticals
business, president and chief executive officer of
EMD Pharmaceuticals, Merck KGaA’s U.S. prescription
pharmaceutical business, chief executive officer of Astra
Merck, Inc., and various positions at Merck and Co., Inc.
Both Matt and John bring a wealth of expertise and
relevant experience to our board; their addition reflects
our commitment to building a world-class drug discovery
and development company.

I truly appreciate your support and look forward to
keeping you updated on our progress.

Sincerely,

capitalist, has consistently provided Incyte with invaluable
direction and support. We are fortunate that John
Niblack, Ph.D., former vice chairman and director of
Pfizer Inc., has agreed to stand for election at our 2006
annual stockholders’ meeting and, if elected, to join
our board. John’s 35-year tenure at Pfizer included a
succession of scientific positions of increasing responsibility
in the areas of virology, cancer and autoimmune
disorders, culminating in his serving as the president
of Pfizer Global Research and Development. We are also
fortunate that Matthew Emmens, chief executive officer
and chairman of the executive committee of Shire

Paul A. Friedman, M.D.
President and Chief Executive Officer

April 2006