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Presto-Chango
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November 29, 2001: 6:38 p.m. ET
From software maker to genomics play to drug king pin, Incyte attempts another makeover.
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - For much of past few years tech investors ignored biotech. The sector wasn't about silicon or the Internet, so it got short shrift. Then came the genomics craze -- the commercialization of efforts to map human gene sequences in order to develop drugs. Add this over-hyped event to the dot-com bust and, presto, investors care about biotech again.
Enter Incyte Genomics (INCY: up $0.76 to $19.11, Research, Estimates), whose name alone is a metaphor for the investment phenomenon. Until June 2000, Incyte Genomics was Incyte Pharmaceuticals, a software provider that owned a lucrative database of gene sequences. Big drug companies bought access to Incyte's software and database, a steadily growing business that will account for about $175 million in revenue this year.
Reading the investment zeitgeist, Incyte got hip to genomics by changing its name. Now it's out to remake itself again, this time as a drug-discovery company. In other words, it's going to take the intellectual property it's been selling to others and attempt to develop blockbuster drugs of its own. Just this week, it hired two senior research executives from DuPont Pharmaceuticals to boost its profile as a drug developer.
Wall Street reacted exactly as Incyte undoubtedly hoped it would. Traders bid up Incyte's stock 17 percent, to $18.99, on extraordinarily high volume Tuesday, the day after the announcement. Analysts obliged with hopeful commentary. The gist of their message is that now that Incyte will be developing its own drugs, it deserves the valuations of its genomics/drug-discovery brethren, namely Millennium (MLNN: Research, Estimates) and Human Genome Sciences (HGSI: down $1.44 to $41.48, Research, Estimates).
There are just a couple of problems with this plan. First is that Millennium and Human Genome began pursuing drug-discovery years ago, while Incyte is just getting started now. Plus, Incyte was probably already overvalued, with an enterprise value (market capitalization minus cash plus debt) of about three times its revenue. That makes its development plans all the more scary.
Consider, this year Incyte will spend $203 million on research and development, compared with $218 million in revenue and $72 million in administrative expenses, according to J.P. Morgan Chase Securities research. It will take up to a decade to bring drugs to market, a process that will cost hundreds of millions more.
"I would expect the stock to stay flat for five years, so why buy it now?" asks a seasoned biotech investor who knows people connected to Incyte's management.
"That's the risk-reward continuum," responds Rob Olan, an analyst with J.P. Morgan in New York, who has a "buy" rating on Incyte's shares with a $25 price target. "Do you want to get in at an early stage or wait until they've got something proven in the lab?"
Investors who jumped into Incyte's shares in early 2000, when it shot over a split-adjusted $138, probably wish they'd waited. Incyte's shares closed Thursday up 4 percent at $19.11.
Now what are we supposed to make of this?
"Faint Signs Suggest Chip Industry Has Bottomed Out"
-- The Wall Street Journal, November 29, 2001, Section B, p. 4.
"IBM to Lay Off 1,000 Employees Due to Weak Demand for Chips"
-- same paper, same day, same section, p. 13.
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