Barrons goes after INCY. Classic hachet job. What a bunch of BS. Paul Kelly has had a bug up his ass on INCY for a ong time. And he has been consistantly wrong. I guess they ignored the VRTX deal on Monday. Many more like to come IMO.I must be getting cynical but the shorts must be getting desperate to feed Barons this crap.
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03/01 8:00A (DJ) =DJ BARRON'S ONLINE: Incyte's High Price May Not Be Genetic
By Evelyn Ellison Twitchell
Weekday Trader
(This item was originally published late Tuesday)
NEW YORK (Dow Jones)--To say it's been a banner year so far for Incyte
Pharmaceuticals would be an understatement: The stock has more than quadrupled
since December 31, to a price late Tuesday of 275 9/16.
Incyte has profited from investors' recent love affair with anything
genomic. The Palo Alto, Calif., company markets databases of gene information
that other companies can use to develop drugs. Just last week, Deutsche Banc
Alex. Brown analyst Kevin Tang raised his 12-month price target for Incyte to
$374 a share from $235.
But as the stock zooms ever higher, some analysts wonder if the fundamentals
support the stratospheric price.
Incyte's database operations face stiff competition, they point out. And
pending publication of information about the human genome could make the
company's proprietary knowledge less valuable. Plus, the crucial issue of
patents for the genes Incyte maps is a bit clouded, they say.
"We have some concerns about Incyte," says Albert Rauch, an analyst at First
Union SecuritiesRauch, who rates the stock Hold (Wall Street's equivalent of a "gentleman's
C"), notes that Incyte competes in the gene database market against Celera
Genomics.
Last month Celera said it would complete sequencing of the human genome by
this summer. Rauch also says Celera "has the inside track" to high-powered
gene sequencing machines made by PE Biosystems, since both companies are
divisions of PE Corp.
True, Incyte's more established LifeSeq Gold database has attracted roughly
20 companies, such as Bristol-Myers Squibb, Johnson & Johnson and Pfizer-many
under multiyear contracts worth an estimated $10 million each. Customers get
information on thousands of genes, and can even buy clones for their own
research.
But to grow its sales, the company now must reach out beyond big
pharmaceutical firms to biotechnology companies and academic institutions.
That will mean selling limited access to the database at a lower price, which
could hurt future earnings growth.
Recent agreements with Millennium Pharmaceuticals, Biogen and Bayer are
"narrower in scope than Incyte's traditional LifeSeq deals and carry
correspondingly lower fees," asserts Paul Kelly, an analyst with ING Barings.
(Kelly, whose firm recently co-managed a secondary stock offering archrival Celera, rates Incyte Sell.)
Another risk to Incyte: the Human Genome Project, the government-sponsored
program to decode all the DNA in the human organism, plans to publicize its
findings as early as this summer. Such free information means Incyte's
database "is somewhat viewed as a depreciating asset," Rauch says.
Incyte President Randal Scott tells Barron's Online he expects the company
to more than make up for lower fees by selling its databases to additional
customers. And he says companies will likely use Incyte's information along
with data from the Human Genome Project.
The company's customers "all know that the complete draft of the genome will
be out in May, but they still want access to Incyte's information," Scott
says.
Still, the company admits in a recent filing with the Securities and
Exchange Commission that public availability of gene sequences could "impair
our ability to realize royalties or other revenue" from the sale of products
based on its databases.
Incyte has filed patent applications covering some 50,000 genes - more than
any other company.
But Kelly claims those patents relate primarily to gene sequences, providing
little information about the genes' use in medicine. That means that other
little information about the genes' use in medicine. That means that other
companies' patents related to therapeutic uses of genes could ultimately
supersede Incyte's, he says.
Larry Millstein, an attorney at LSM Technology and Intellectual Property Law
Practice in Washington, D.C., who specializes in biotechnology patent law,
says "it's certainly possible" that some later patents would affect the value
of genomics companies' gene sequence patents.
Whether or not those patents hold up, Incyte executives "do not expect
royalty payments to contribute to revenues for a substantial period of time,"
the company said in an SEC filing.
Meanwhile, the company is fighting a court battle over its microarray "gene
chips" that display DNA samples for use in research.
Competitor Affymetrix won a patent-infringement case against Incyte last
fall. Incyte has appealed, but Scott says the company would like to settle.
Incyte, which was profitable two years ago, lost 95 cents a share on revenue
of $157 million in 1999. And the company expects to continue losing money for
at least the first three quarters of 2000 - making the stock difficult to
value by traditional earnings measures.
Alan Auerbach, an analyst with First Security Van Kasper, values genomics
stocks by using a "PSG" methodology (price-to-sales/sales growth): He takes
the familiar price-to-sales ratio, then divides it by actual and projected
compound annual revenue growth rates over three years.
Incyte, which has a market capitalization of about $7.8 billion, was trading
early this week at about 41x Auerbach's 2000 revenue projection of $190
million. That's 2.11x the company's anticipated annual sales growth of 19.5%
from 1998 and 2001 - nearly twice the 1.07x average PSG of six of its peers,
Auerbach estimates.
He rates the stock Hold, saying that he is "not comfortable" with that
valuation.
Even Robert Toth, an analyst at Prudential Vector Healthcare who has a
Trading Buy recommendation on Incyte, is wary of the stock's lofty price. The
huge surge in genomics stocks "leads us to believe that INCY shares may be
ahead of themselves and are now trading more on perception than on fundamental
performance," he wrote in a recent report.
(Incidentally, Weekday Trader first warned readers about high-flying
genomics stocks on December 6, 1999. Human Genome Sciences has since
skyrocketed 250%, and Millennium Pharmaceuticals, 148%.)
The market's enthusiasm for genomics stories might continue for a while. As
long as it does, Incyte should shine.
But if investors come back down to earth, so could Incyte. And it would be a
But if investors come back down to earth, so could Incyte. And it would be a
long, hard fall.
Biotech Craze Could Go On
Biotech stocks have had an extraordinary run in 2000: The Standard & Poor's
Biotechnology Index is up nearly 70% in the past 13 weeks.
So, what's next?
Weekday Trader talked to 14 pros, from both the buy and sell sides, and
overwhelmingly they believe that most biotech stocks are overvalued - but the
stocks still may have more room to run.
"Even though these investors will agree when you tell them that you think
these stocks are overvalued, they're still playing them," says Robert Toth, an
analyst at Prudential Vector Healthcare.
Stocks such as Amgen and Biogen are trading at price/earnings multiples of
around 60 times forward earnings, although their projected long-term earnings
growth rates are just a respectable 16% and 25%. Companies that don't even
have earnings, such as Human Genome Sciences, have market capitalizations
hundreds of times their revenues.
Meanwhile, initial public offerings of biotech companies such as Sequenom
and Maxygen have been smash hits; even secondary stock offerings are greeted
by feeding frenzies.
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