Insight into Incyte

07/25/2003 12:00 am EST

Focus:

John McCamant

Editor, Medical Technology Stock Letter

"Gilead and Genentech got the biotech sector off to a bang by reporting better-than-expected earnings, and offering positive guidance moving forward," notes John McCamant, editor of The Medical Technology Stock Letter.  Here's his latest new buy recommendation.

"Incyte Corp. (INCY NASDAQ) is poised for a major turnaround, as the company’s new management team continues to transition out of the genomics business and into drug discovery and development. We believe that the company has some interesting assets, including cash of $375 million (less $172 million in debt), a revenue producing genomic database business, and multiple small molecule drug discovery programs. While these assets are interesting and potentially quite valuable, the key to unlocking their value lies with management—the company’s currently underappreciated and possibly most valuable asset.

"Specifically, INCY’s CEO, Paul Friedman, MD, comes from Dupont Pharmaceuticals, where he led their small molecule drug discovery team. Additionally, he took advantage of Bristol Myers’ sloppy takeover of DuPont, cherry-picked over 100 of their best chemists and biologists, and hired them at INCY. Also of interest is the fact that Dr. Friedman and his team developed the successful HIV drug Sustiva while at DuPont. We like the fact that management has navigated a drug all the way from the bench to the market.

"During the second half of 2003, we believe that the management team will show their mettle as they continue the company’s transformation from a bloated genomics company to a lean and mean drug discovery and development company. The internal program with the most potential is the discovery and development of small-molecule drug antagonists aimed at inflammation. Disease targets for this program are vast and include chronic inflammation, rheumatoid arthritis, multiple sclerosis, inflammatory bowel disease, and atherosclerotic cardiovascular disease. The goal of this program is to create orally-active drugs that would compete with injectable biologics. We believe the large cost and the unattractive delivery of biologics by injection provides a significant opportunity for the company that can develop a cheaper and easier way to take anti-inflammatory drugs.

"We are stepping up in front of what we believe will be significant value-creating events. The long-term risk is modified by the company currently selling at what we estimate to be below its breakup value. We believe that this management team will deliver, and we are willing to be patient as they create additional shareholder value over the next 12 months. Buy under $7.50 with a 18–24 month target of $15."

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