Investors believe Incyte is conceding that keeping up with its genomics competitors means investing a lot more than anyone expected.
.....let me know what you think about this article, and if you think incy will be a buy soon? when it breaks 20?
curtis
Top Stories: Gene-Mapping Plans Incyte Biotech Firm's Shareholders
By Jesse Eisinger
Senior Writer
8/25/98 12:40 PM ET
Incyte Pharmaceuticals (INCY:Nasdaq) inadvertently put the hex on itself.
Investors have been unloading Incyte in the week following its purchase of a privately held U.K. genomics company, Hexagen. Incyte's aim is to map what it regards as the key areas of the human genome, making it the third such commercial entrant in the race to record and trace the human code of life. Wall Street's worry is that Incyte, the leader in databases of genetic information, faces stiffer competition in selling access to such databases than expected, and that the investment needed to stay competitive in the burgeoning field of genomics will be greater than anticipated.
Incyte expects to finish its genome project in about a year, which puts it ahead of the competing efforts. Perkin-Elmer (PKN:NYSE) has formed a privately held company, Celera Genomics, with DNA decoder and media superstar J. Craig Venter of the Institute of Genomic Research to map the genome, a project they hope will be completed in about three years.
Incyte's project is more limited than the Celera effort, focusing on just the genes of the genome and the parts thought to instruct genes. The vast majority of the genome is called "junk DNA," and isn't thought to have medical or scientific value. The Celera mapping project and a separate effort sponsored by the National Institutes of Health are sequencing the entire human genome, including the so-called junk.
Genset (GENXY:Nasdaq ADR) has a competing project focused on mapping the regions of the genome associated with responses to pharmaceuticals. The company is collaborating with Abbott Labs (ABT:NYSE).
Nevertheless, all three commercial ventures plan to map the human genome more quickly than the big government effort, sponsored by the NIH, which is scheduled to be done by 2005.
Some of the problem in Incyte's stock has been short-term: A big institutional investor has steadily sold big chunks of Incyte in the last several weeks, analysts said, which begat more selling from other institutions worried that someone else had an insight they didn't.
Not all the selling may be attributable to company fundamentals. Denise Gilbert, Incyte's CFO, says that out of a total of 2.2 million shares issued in the deal to buy gene chip-maker Synteni, which closed in January, 1 million shares were unlocked in late July. The owners have until late October to sell if they want to. But she says she didn't know who was selling or if it was that stock that was being sold.
Jon Alsenas, of ING Baring Furman Selz, in upgrading Incyte on Monday said the company was the victim of one "large, dedicated seller," but that only a small portion of the Synteni stock has reached the market. There was one particularly large seller on Thursday, trading through Hambrecht & Quist. The stock is down from a 12-month high of 51 to trade at around 23 7/8 Monday after dropping 30% last week alone.
Alsenas, whose firm hasn't done any investment banking for Incyte, is the guy to watch on the stock: He downgraded it to hold in February when it was at 46 and change. (He also first upgraded on May 12 to buy when the stock was in the low 30s, but hey -- who's counting?)
BioCentury, a trade publication, reported unconfirmed rumors that the sellers included momentum players at Pilgrim Baxter. PBHG did not return a call seeking comment.
But it's more than one or two skittish institutions. Investors don't love the tracking-stock structure Incyte has proposed for its venture. And they believe that Incyte, by creating a new division with the tracking stock, is tacitly admitting that keeping up with its genomics competitors means investing a whole lot more than anyone expected.
Right now, Incyte sells access to a database of gene expression, which can tell which genes are switched "on" in a given sample. The company says it has sequenced about 90% of the genes in the human genome. Drug companies subscribe to the database and use the information to design drugs. Incyte has expanded the database to give similar information about bacteria, animals and plants, as well as protein analysis and full-length genes.
It's a nice little business. Incyte had $63.5 million in revenue in the first six months of the year and net income of $8.8 million, or 30 cents a share, compared with $39.4 million in revenue and net income of $1.7 million, or 7 cents a share, a year earlier.
CFO Gilbert says that based on feedback from pharmaceutical subscribers to that database, Incyte realized that "the market [for a genome database] is nice and we want to play in it. But it couldn't be done within the current business model." She downplayed the notion that the three genome projects represent a zero-sum game, suggesting that the market opportunity is big enough for multiple companies.
Investors are deeply concerned about Incyte's plan to create a new unit with a tracking stock to complete the project. Incyte paid $5 million in cash and about 1 million shares of Incyte stock to buy Hexagen, but that's just the start of things. The new unit, called Incyte Genetics, will require an investment of about $200 million in the first two years, the company says. Incyte will provide $20 million to $30 million and the rest will come from subscription revenues from drug companies that want access to the database, strategic partners and the stock market. The division is expected to turn a profit within four years.
Incyte is going to give the Incyte Genomics division its own tracking stock. Unfortunately for the company, biotech investors don't like tracking stocks. They regard them as something that shifts the investment and expenses a company is incurring to its money-losing subsidiaries. Analysts single out two companies in the world of biotech: Genzyme (GENZ:Nasdaq), which has two money-losing tracking stock divisions, and Agouron (AGPH:Nasdaq). Agouron plans to spin off its cancer pipeline, which investors feel is a gamble, to financially strengthen its AIDS franchise.
"What they're saying is, 'Really, the company is not earning money. It's a broken stock,'" according to a New York hedge fund manager who said he had no position in Incyte. He said he'd like to buy shares but he's waiting for "the next shoe to drop." He speculates there could be an announcement at the TIGR annual genomics conference in September in Florida that Perkin-Elmer has signed up pharmaceutical partners on its genome-mapping project.
Incyte fans say the balance sheet and profit concerns are misplaced. Furman's Alsenas says Incyte isn't looking for a way to take current expenses off its books: "It's much more legitimate than other companies that have used tracking stocks to diminish current expenses." He expects the company will have no trouble making its revenue and earnings numbers over the next few years. He expects the company to earn 80 cents a share this year, $1.05 a share next year and $1.60 a share in 2000 and is looking for a 40% EPS growth rate over the next five years.
Gilbert says, "We're sensitive to people's concerns, and our intent is not to play games." After rejecting other options, such as spinning off the new company, which would have limited Incyte's control, Incyte hit on the tracking stock idea, she said.
One analyst for one of the major health care hedge funds wrote in an email last week that Incyte "tanked because people are dumb. They think tracking stock is a sign of weakness and an attempt to hide losses. They think it creates dilution." But Incyte's profit statement "won't change when the tracking stock appears," the email continued. "There will be no stock representing the consolidated company. INCY won't own any INCY Genetics. Also, the expenses to be incurred for INCY Gen. are not currently being incurred by INCY. They are future expenses."
The analyst, who wrote on the condition of anonymity, says, "Suffice it to say that INCY Gen. will be hauling in corporate partner revenues when PKN's venture is still getting going. INCY has an incredible amount of data on which to build" the Incyte Genetics project.
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