Hope TWTI rocks for us Mark! Also might watch INCY given this article, especially the final paragraph discussing the low valuation at this level: One-Day Wonder
Incyte-ful Announcement
By Lawrence Carrel Published: November 21, 2005
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One-Day Wonder: Incyte-ful Announcement
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Incyte Corp. (INCY)
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Share price as of Friday's close: $4.80
Share price now: $5.86
Change: 22.1%
Volume: 11.9 million shares, daily average 1.3 million shares
Last time this high: Sept. 27, 2005
52-week high: $10.91
52-week low: $3.88
Forward P/E before announcement: n/a
Forward P/E after announcement: n/a
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A SMALL DRUG DEVELOPER announced a cure for its scant sales on Monday. Wilmington, Del.-based Incyte (INCY: 5.86, +1.06, +22.1%) entered a development and licensing agreement with drug giant Pfizer (PFE: 21.74, +0.14, +0.7%) that could be worth up to $803 million. Shares of Incyte jumped 22% to $5.86.
With Incyte's shares having shed half their value year-to-date through Friday, the announcement gave a much needed lift to the stock. It caught many on Wall Street by surprise. "The timing of the deal is ahead of expectations, as investors had expected a potential deal after the release of data from two ongoing proof-of-concept deals," wrote Piper Jaffray analyst Thomas Wei in a Monday note. (Wei doesn't own shares of Incyte; Piper Jaffray doesn't have an investment-banking relationship with the company.)
Under the agreement Pfizer gets exclusive world-wide rights to Incyte's portfolio of oral CCR2 antagonists, which includes treatments for rheumatoid arthritis, type-II diabetes and arteriosclerosis. Most advanced is the rheumatoid arthritis treatment, currently in Phase II trials. "CCR2" refers to a type of chemokine, or protein secreted at the site of an injury or inflammation. Chemokines attract white blood cells, including a type called macrophages, which remove foreign organisms or injured tissues. Excessive or unnecessary macrophages, though, can actually cause damage to tissue; joint damage that characterizes rheumatoid arthritis is an example. Incyte's antagonists bind to the CCR2 chemokine, thus preventing it from attracting macrophages.
Incyte hopes the drugs will prove useful in treating a broad range of inflammatory diseases, including the aforementioned three, plus multiple sclerosis, neuropathic pain and inflammatory bowel disease. Millennium Pharmaceuticals (MLNM: 10.74, +0.24, +2.3%) and Merck (MRK: 30.47, +0.05, +0.2%) are working on similar drugs.
Pfizer will make an upfront payment of $40 million and buy $20 million in interest-free notes convertible into Incyte stock for the right to commercialize Incyte's CCR2 antagonists for all but two indications: multiple sclerosis and another undisclosed disease. Half of the notes will be issued within 20 days of the effective date of the agreement; the other half, after Incyte files a new drug application for its CCR2 antagonists. Pfizer will also pay Incyte up to $743 million upon successful commercialization of the drugs for various diseases, and will provide an undisclosed amount of research funding toward expanding the CCR2 portfolio. The company will also pay royalties to Incyte on world-wide sales.
"In addition to the payments, the good news is we were able to keep two indications to develop on our own," says Incyte spokeswoman Pam Murphy. "This deal will help us advance all of our clinical compounds."
Incyte's other drugs in development include an HIV fighter in Phase II trials and a cancer drug in Phase I trials. For the third quarter, Incyte posted a net loss of $30.2 million on sales of $1.2 million. The company figures it'll use between $100 million and $105 million in cash this year. While it hasn't given guidance for 2006, Murphy says the company has indicated it will have a similar cash-burn rate next year. The company ended the third quarter with $364 million in cash and marketable securities.
"We don't know how the milestones break down because they didn't disclose much, and we don't know the royalty rates," says Jay Markowitz, biotechnology analyst at T. Rowe Price mutual funds. "But, when I look at this deal, the CCR2 looks like an attractive target, and Pfizer's due diligence says it's a good target. Also, the potential indications are a large market opportunity." (Markowitz doesn't own shares of Incyte; T. Rowe Price doesn't do investment banking.)
Markowitz says the deal shows that Pfizer isn't relying solely on its own internal research and development. "Pfizer spends about $7 billion a year on R&D, and this is just another R&D investment," says Markowitz. "There is a potentially large market opportunity here, and any big pharma needs to look at these opportunities."
Quote:
"With a partnership on CCR2 inhibitors in place, we expect Incyte to receive more visibility on other clinical programs," says Jefferies & Co. analyst Eun Yang. "This deal on CCR2 inhibitors validates Incyte's discovery and development program, and provides cash up front and milestones. The potential for the deal is $800 million, and I think what has been priced in today is just the $40 million upfront payment and the $20 million in notes — the things that are definite. I don't think the full $800 million has been priced in at all. I think there is still a lot of upside potential in the stock based on what Pfizer is doing." (Yang doesn't own shares of Incyte; Jefferies & Co. doesn't have an investment-banking relationship with the company.) |
