Larry,
I still think INCY is undervalued and underappreciated, particularly as a long term hold it play. Short term is just a lot harder to judge. Plus, they still have the lay low and avoid the PR Hype attitude, which I think doesn't get them the high share price of HGSI or CRA. Why is INCY like this? Because they have a very long term view of the business, and don't really look to drive the share price by garnering press.
Do I think INCY blew it by not developing drugs?
Nope! Actually, INCY was originally in the drug development business, but when the big sepsis drugs blew up in 1992 (Centocor and XOMA), Roy and Randy came to the realization that it is just too damn expensive and high risk to develop drugs when you don't have really deep pockets, and that it would be better to leave this to the Big Pharmas while providing them with sequence info and later software as a service company. They were developing BPI for sepsis at the time, which XOMA is STILL trying to get to market. It also puts them in the position of not competing with their customers. Yes, HGSI is more highly valued at the moment, but that does not mean that their drugs will ever make it to the market. There are far more failures in drug devo than successes. If you play like a VC and spread your bets you can hope your winners will offset your losers, but you will certainly have some of both. Being a service company is simply lower risk, but with lower risk there is lower home run potential. Plus, the FDA is really screwed up. Just a look at Aviron, who should have had their drug to market 2+ years ago. Or CRXA Bexxar, another FDA circle-jerk. The fact that you list a bunch of the others you hold who are in the drug devo business, it might make sense to continue to hold a services company like INCY.
As is usually forgotten, INCY has a big chunk of their JV Diadexus who is developing diagnostics. Not as exciting as drugs, but a lot easier to develop and get to market. Their Diadexus holding is basically ignored by the markets. The natural progression in genomics is that revenues first will come from R&D oriented stuff, then from diagnostics, and finally from drugs. INCY has a piece of all of it, direct revenues from the R&D, a JV in diagnostics, and a potential royalty stream from a huge number of drugs from virtually every pharma in existence, and more and more biotechs too. They have also been ramping up their deals with the likes of Agilent, Merck, etc. who I would consider high profile firms.
Another nice thing to remember with INCY is that the majority of their revenues are from long term subscriptions, and they to my knowledge have never had a non-renewal from one of the pharmas. You can bet they make the subscription renewals more expensive and they keep adding more services to subscribe to, which will help expand the revenue stream. The long term nature of these deals will help insulate them for the revenue volatility that we are currently seeing in so many other sectors. They truly can look ahead and have a pretty damn good idea of how much cash is coming in the door, cash which is coming from some of the biggest and most stable long term entities on the planet. These are customers who will keep paying the bills and not default.
What will give INCY a big pop someday? The first successfully developed drug that pops them a royalty stream. Still a long time to wait for that I fear, but it sure makes it sound good for one of those long term buy it and forget about it plays. Of course given INCY's historical volatility, I'm sure there are some who have made a lot playing it up and down.
Enough rambling for now. Hope I answered your questions adequately.
Regards,
Rman |
