Don,
i wouldn't buy based on a Mike Murphy rec. About 10 months ago he was still reccomending HGSI and said INCY was too expensive. Well INCY is solidly profitable with earnings growing over 50% and the stock price has more than doubled. HGSI on the otherhand is flat to down. Back in the old days when the Rocketman used to post on a regular basis he posted this excellent analysis which is sill relavent albeit dated;
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To: Vector1 (84 )
From: Rocketman Saturday, Mar 8 1997 2:39PM EST
Reply # of 207
I am very biased towards INCY's strategy. That isn't to say that HGSI's won't work, but just that IMO it will be a lot longer, higher risk one, to achieve long-term profitability. Now that doesn't mean that an investor in bio needs profits to make money - we don't. A lot of people including myself have made a lot of money off non-profitable biotechs, but........
Company Descriptions from a '96 Press Release HGSI and a prospectus INCY (See SI's profile section for more):
"Human Genome Sciences, Inc. is a company with the mission to develop products to predict, prevent, detect, treat and cure disease based on its leadership in the discovery and understanding of human, microbial and plant genes."
"Incyte Pharmaceuticals, Inc. is a leader in the design, development and marketing of genomic database products, software tools, and related services."
These are completely different strategies, HGSI wants to be a drug company and INCY is a service company for the drug industry. Well at this point in time their market caps are: INCY $580 Million vs HGSI at $775 Million (before INCYs recent and in my opinion undeserved slide from $73 to $57, their market caps were nearly identical).
Now, how much more time and capital will they need to reach their goals?
Well, INCY has had a breakeven 3Q'96 (except for $3.3 Million in acquisition costs buying Combion and Genome Systems), a slightly profitable 4Q'96 and a predicted profit from this time out. In October '95 INCY did a secondary offering of about 1.7 Million shares, but since they have reached profitability, I doubt they issue more unless it is used as ammo to acquire more companies - they have enough cash ($43 Million) to last and a lot of guaranteed revenue consistently each and every quarter over the next three years from the clients they have on hand.
On the other hand: "Feb. 25, 1997-- Human Genome Sciences Inc announced today that it had filed with the Securities and Exchange Commission a registration statement relating to the public offering of 3,000,000 shares of Common Stock by the Company. The Company has also granted an over-allotment option to the underwriters for an additional 450,000 shares." Even with Cash and short-term and long-term investments which totaled $117.8 million, HGSI feels they need more cash.
2/21/97 HGSI reported revenues of $36.5 million and a net loss of $7.8 million, or $0.42 per share, for the year ended December 31, 1996. For the fourth quarter ended December 31, 1996, HGSI recorded a net loss of $9.5 million, or $0.51 per share. Revenues of $3.0 million in the fourth quarter of 1996 were from new collaborations entered into with Pharmacia and OraVax plus continuing revenues from Pioneer. In the first half of '96 HGSI had revenues of about $27 M, but in the last half this dropped to about 9.5 M. ie.) their quarter to quarter revenue is all over the map and very hard to predict and tends to be based on big lump sum payments, not consistent quarterly payments. HGSI's revenue stream makes for an ugly choppy graph and tough predictability.
INCY revenues have increased consistently quarter to quarter: 1Q'96 = $5.6M, 2Q'96 = $7.6M, 3Q'96 = $12.9M, 4Q'96 = $14.1M. This makes for a nice steadily uptrending graph, and a steadily increasing revenue stream that because of the way their deals are structured over three years, IMO will not drop off for many years.
Per Zacks, the 4Q Earnings consensus for HGSI was $-0.27, but came in at $-0.51 (a surprise of -46%), but a shortfall of $0.28 x 18.6 M shares = they came up short $5.2 M in 4Q'96 earnings per the analysts predictions.
Per Zacks, the 4Q Earnings consensus for INCY was $+0.05, but came in at $+0.02 (a bigger surprise of -60%), but a shortfall of only $0.03 x 11 M shares = they came up short $330,000 in 4Q'96 earnings per the analysts predictions (ie. IMHO INCY's $0.33 M shortfall is a lot less significant than HGSI's $5.2M shortfall).
The share prices of both got hammered on these earnings announcements. But, INCY went from 68 to 53 in two days, a loss in market cap of $165 Million (seems a bit of over-reaction to me for missing your target by a third of a million, even if it coincided with Greenspan saying the market is exuberant). Since I don't hold HGSI shares I'm not as sure how much market cap they lost from this event, but it too was significant (you can look it up if you'd like).
Now, earnings predictions of the future per Zacks:
HGSI: current quarter 0, current year $-1.39, next year $-1.34.
INCY: current quarter $+0.08, current year $+0.82, next year $+1.51.
I find it interesting that they predict HGSI to break even this quarter, but to still lose $1.39 for the year, (some ugly quarters ahead I guess) I think the analysts are having trouble predicting this one due to the inconsistent nature of their revenue stream, but per Melvin D. Booth, HGSI President and Chief Operating Officer, "Our fourth quarter and full year results were in line with management's expectations. Our research and development investment is now directed to drug discovery and preclinical development programs, as well as to maintaining a leadership position in gene sequencing."
Well, I've heard it said that for every 5000 potential drugs that enter preclinicals, about 10 make it to phase 1 clinicals, about 5 to phase 2 clinicals, about 2 to phase 3 clinicals and only 1 makes it to the market, and this is after many years and many 100's of million in development expenses. It is no wonder that with $117 Million in the bank HGSI feels the need to raise another $140 Million or so with another secondary offering. They plan to bleed red ink for many years to come and want to get the cash while the getting is good.
Now this doesn't mean that HGSI is not a good investment. I love the biotech industry, but 95% of the companies bleed red ink and will continue for years while they develop their drugs and get them to market, ahh, but when they get there they can be really profitable products. Well HGSI is another one of those biotech companies, INCY is not - they are done bleeding dollars. I predict that if INCY ever decides to develop drugs that they will spin off another company to do so and not bleed red ink out of the main company.
Here's a great analogy that used to go around INCY way back in the "old" days. "Genomics is like the gold rush, where you've got a bunch of companies standing around the mother lode, and those who dig the fastest are going to get the biggest pile of gold." Well, if you've ever studied the gold rush, there were a few who made some money mining gold, but the vast majority were losers who spent a lot more than they made. The real money makers in the gold rush were in the service industry - they sold shovels, Levi's, wagons, mules and sluicing equipment, or ran the hotels, bars and brothels. Well, INCY has mined a lot of gold (IMHO more gold and more efficiently than HGSI), but they are a service to those who need that gold desperately to design and develop new products (jewelry) more efficiently than the old ways in which drugs were developed (trial and error instead of by design). HGSI wants to design and sell jewelry - it takes longer and a lot more cash but it is a value added product, ultimately, maybe, if you make it past the FDA and to market. INCY is spreading the design risk among many other experienced jewelers (Big Pharma) and just asks you to toss them a 1% royalty when you maybe sell your jewelry down the road, plus that nice quarterly subscription fee while you are sorting through the gold.
Based on this, I don't compare HGSI to INCY, I compare HGSI to MYGN, SUGN, Geron, Gilead, Centocor, etc..... the typical product development driven biotechs. HGSI seems to want to be an Amgen.
INCY has no desire to be an Amgen, it takes too long, too many bucks, and in '92 when their strategy was developed (post-'92 Centocor debacle) it was too hard to get funded for drug development. INCY wants to be a Microsoft, and be the operating system that all drug and therapeutic researchers use to make their breakthroughs. It is no coincidence that they are followed by software analysts as well as biotech analysts. They have become a software company as well as being a biotech. Venture Capitalists love software companies these days for a good reason, the development costs are low and the profit potentials are high.
The other INCY strategy (which the market seems to have absolutely no appreciation for) is to acquire and lock up the future sequencing technologies, thus they have acquired Combion & Genome Systems, and part of Oncormed (for further developing clinical applications of genomics in addition to access to human tissue to sequence) and access to much much more technology, I quote from INCY's 4Q'96 press release of 2/26/97:
"During 1996, Incyte expanded its technical capabilities through both internal expansion as well as the establishment of a network of collaborations. Specifically, Incyte entered into agreements in the area of functional genomics, microarray technology, mass spectrometry, and data visualization. This includes agreements with: Affymetrix, Inc.; GeneTrace, Inc.; Oceania, Inc.; PerSeptive Biosystems, Inc.; Scriptgen Pharmaceuticals, Inc.; Silicon Graphics, Inc.; and Vysis, Inc. In addition, Incyte gained important expertise in the areas of gene mapping and microarray technology through its acquisitions of Genome Systems, Inc. and Combion, Inc."
Now does the stock market seem to have any appreciation for these deals? Not as far as I can tell. It seems like most times INCY announces a new database subscriber, the share price shoots up, but every time they announce a technology acquisition/collaboration deal the share price drops - go figure. I think it's because the market doesn't understand the progress of the technology of sequencing, (I built the labs, I do) and figures if they spent money on technology this quarter that it can't be good because they just won't have as good of earnings this quarter - well IMO the markets are generally clueless in this regard. This has now spread to the latest database subscriber, Ariad and Hoechst signing for two more years on top of their original three years - the stock dropped $2, (but HGSI has gone up). Go figure that one out.
IMO this is a unique and powerful strategy, not a "me too" develop biotech drugs approach to using genomic information. Of course in 1992, it was commonly held that it wouldn't work, because nobody in biotech had ever done non-exclusive data access deals. Well, the realization has hit that there really is much more genomic data than any one company can use.
So how will INCY milk this strategy? By continuing to develop more and better distinct products. Hence all the follow-on specialty databases, full length, pathology, microbial, etc....You can buy access to some or all, and some of the early customers, such as Abbott are now starting to come back and sign on for more of the products. Or you can now even buy just their Bioinformatics software for use with your own and publicly available data if you don't want to fork over for access to the databases. You can bet that the cost to access these databases also keeps going up every year (of course the databases get a lot bigger each year too, so you get more for your money).
Oh yeah, and think about INCY's potential 1% future royalty revenue. Let's say hypothetically that Pfizer picked something out of the database in '95 that they develop into a drug in the next 10 years and get on the market in 2005. Well, they then have to start paying INCY a 1% royalty, but INCY spent the money to earn that royalty in 1995, they don't have to do anything in 2005 except collect and cash the checks for that income. Granted this potential revenue stream is way down the road, kind of like HGSI's potential revenue stream from developing drugs - way down the road. I doubt that any analysts have considered this long term royalty potential into INCY's valuation, royalties will be gravy, icing on the cake, pennies from heaven, manna from the Gods, etc. and there are a lot of companies trying to develop products using the INCY data that may be feeding me (and maybe you too?) well into the next century. Am I long on INCY - you can bet on that.
Now, let's get to corporate attitude. INCY has always been run lean and mean, except where the money needed to be spent - more and better sequencing and bioinformatics equipment and personnel. HGSI has corporate art on the walls (to help CEO Haseltine et al be inspired), such as originals by (if I recall correctly) Picasso and other famous artists. Incyte has a couple of cheaply framed posters scattered about. Haseltine has had a chauffer driven limo on standby in the parking lot. INCY CEO Whitfield drives his old BMW with 160,000 miles on it (when it starts, I've jump started it myself twice).
And their Boards: HGSI has Beverly Sills of the opera on their Board of Directors, INCY has only bio and pharma and VC types on their board such as Fred Craves of Burrill & Craves Merchant Bank (ex-CEO of Codon and Berlex) and Barry Bloom formerly Exec VP of Pfizer R&D, and Jon Saxe, Pres. of Protein Design Labs. I guess INCY just doesn't have much appreciation of the arts, just getting the job done.
Let's see now, where do I want to put my investment dollars???? In an artsy company with a higher market cap, a lower inconsistent revenue stream that will be bleeding red ink and diluting shareholders until who knows when while they maybe get their drug candidates through clinical trials over the next decade, OR in a company with a lower market cap, a guaranteed revenue stream that seems to at least double every year, that will most likely be profitable from here on out and that will not need to dilute shareholders unless they are acquiring bigger and better technology, and with a potential royalty revenue stream based on work they already paid for last year, but who doesn't appreciate the value of having fine original artwork on the walls. I know where my $ are, how about you?
Oh yeah, you asked about AFFX too. If INCY is the Microsoft, AFFX is the Intel, enough said here. I'm going to comment on the AFFX Hyseq lawsuit on the AFFX thread shortly.
Gee, I guess I got a little verbose here, but if you got this far, I hope it helps you see things from my perspective, having been in the genomics business for 4 plus years and biotech for 12 years. And remember; I am admittedly definitely very biased towards INCY (cheap employee stock options sure help that bias along) and love to hype the company - sorry to all you anti-hype types out there, but while this hype above is somewhat one-sided, it is in my mind pretty factually based.
Best regards and may the market forces be with you, |
