By Randall Osborne
In the spring of last year, genomics was in bloom and investors could hardly stop to smell any other roses ¿ so eager were they to shovel more cash into what looked like the next sure thing.
That's when database powerhouse Incyte Pharmaceuticals Inc. changed its name to Incyte Genomics Inc. Nobody wanted to say the word "bandwagon" out loud but, if there was one, Incyte seemed to be jumping on it.
But Incyte had "wanted to change it very early on in the history of the company, but we had legal advice we couldn't do it," said Roy Whitfield, CEO of Incyte. Too many other comparably sized firms had "insight," spelled one way or another in their names. By the time March 2000 rolled around, though, Incyte was the largest of them all ¿ and the lawyers gave their nod.
In any case, with its microarrays, Incyte seemed to boast worthy genomics offerings. The company's product line became the subject of its complicated legal entanglement with Affymetrix Inc., pushing the GeneChip line ¿ thus demonstrating, perhaps as well as anything could, the weight and value of microarrays.
In early October, the U.S. District Court for the Northern District of California issued a summary judgment, granting Incyte victory regarding the remaining two disputed claims of a patent issued to Affymetrix. (At the same time, Affymetrix noted, the court denied an Incyte motion that one of Affymetrix's patents was not valid.)
Even as the two competitors were scrapping, though, genomics' Wall Street glow had begun to fade. Analysts were talking about the "post-genomics area." Investors clamored for delivery on what had been touted as the promise of data from the finally mapped human genome.
Pay up, said the deep pockets, or tell us when.
Before Incyte might fully savor its courtroom win over competitor Affymetrix, the company said it was backing out of "certain unprofitable custom genomics operations," laying off 400 of its 1,100 employees to focus on what it called the "core" business ¿ and take closer aim at drug development.
The disclosure came with Incyte's financial report for the third quarter, revealed late last month, showing record revenues, up 10 percent. Also in the report, some less favorable news: The company lost $17.8 million on revenues of $57.3 million, compared to a $7.6 million net loss on $52 million in revenues for the same quarter in 2000.
Incyte's database and partnership efforts didn't seem to falter. Third-quarter revenues from those programs jumped 13 percent to $45.2 million, as compared to $39.8 million for the same quarter last year. Third-quarter revenues for custom genomics totaled $12.2 million, consistent with the same quarter in 2000.
Yet the company said it would discontinue its custom genomics products, closing the Fremont, Calif., facility and the one in St. Louis, while making infrastructure changes and related personnel reductions at other locations.
Problem: The markets for microarrays, public domain clones, transgenics and contract-sequencing services have only gotten tougher. The trend seems permanent, Incyte said, and will mean too much of a drain on its main sources of bread and butter: the database and intellectual property operations. Solution: Get out, before it gets worse.
"It's not just us," Whitfield told BioWorld Financial Watch. "As I look across the 'physical' tools businesses, if you will, and bioinformatics landscape, it's been pretty slim pickings for everyone, not a lot of black ink around, not a lot of companies meeting their revenue numbers."
Many of the proliferating microarray makers are using such products as the Incyte LifeSeq Gold gene data to standardize their own technologies, Incyte noted ¿ thus letting Incyte make money from microarrays without making them.
Even such non-life sciences outfits as Motorola Inc. and Agilent Technologies Inc. have joined the microarray fray, but are Internet-linked to Incyte data, which could end up with some licensing deals related to genes under analysis.
In fact, noted Paul Chirico, director of investor relations for Incyte: "We're part of just about every chip they manufacture."
Whitfield said the Affymetrix litigation "has occupied a pretty small part of my brain for some time. One of the reasons we got into microarrays was so the content of the information business could be commercialized through the microarrays." Agilent and Motorola helped out ¿ in a manner of speaking ¿ there.
More changes lie ahead for Incyte. Its internal program on therapeutic single nucleotide polymorphisms in Cambridge, UK, will end, the company said. Despite the SNP project's help generating intellectual property for patent filings and target validation, Incyte reiterated that it wants to focus on "higher priority programs."
A major clue to what those might be came in a couple of recent Incyte deals. One 50-50 collaboration was made in mid-October with Medarex Inc., to develop antibodies using the latter's UltiMAb Human Antibody Development System. The firms did not disclose which indications would be targeted, but said they were focusing on "cancer and other life-threatening and debilitating diseases."
Joseph Dougherty, analyst with Lehman Brothers, called the Medarex deal Incyte's "first true foray into drug development," and said in a research note that work the company has done in identifying and validating targets will feed well into Medarex's monoclonal antibody effort and will dovetail with their preclinical and clinical expertise."
About a week after the Medarex deal, Incyte said it had signed a patent licensing agreement with Genentech Inc., which got rights to develop antibodies to four Incyte-discovered proteins for undisclosed applications. Genentech will provide clinical development milestone payments and royalties, but no further details were disclosed.
Dougherty found it "particularly significant that the first company to license antibody rights from Incyte was Genentech," and encouraging since Genentech has "always adopted a clear-eyed view of their [intellectual property] position, and we don't believe that they would have pursued licensing these patents if they believed them to be without value."
Chirico noted that, while the Genentech deal is "more related to the core [database] business," the Medarex pact "takes our intellectual property and moves it downstream."
Whitfield called the database storehouse "a huge wine cellar we've been building up over the years, and you'll see more people paying a visit to it."
Incyte's move signals the long predicted winnowing of companies, and portions of companies, in the genomics tools sector, Dougherty said.
"I have received a lot of junk mail offering used sequencing equipment," he told BioWorld Financial Watch.
Echoing Whitfield, Dougherty said the Incyte action "reflects the difficulties in the market. There's a lot of overcapacity. It's been pretty easy to get out there and start a microarray business, because the cost of capital was so low. Everybody stuffed their basements full of [sequencers]," even as Incyte continued to stuff its figurative basement full of data "wine."
Incyte, Dougherty added, is "clearly an efficient, large-scale sequencer of DNA but, with the human genome being mostly [mapped], there's a lot of capacity out there looking for something to do."
In contract sequencing, "Incyte is not an efficient provider, and if Incyte's not making money, other people aren't, either," Dougherty said, and in microarrays, Incyte's products "were probably not the state of the art."
Mass spectrometry has seen "cyclical demand," he noted, "but those are still areas where if you've got a good product, there's a real market."
Meanwhile, Incyte, as Whitfield sees it, is not so much changing direction as zeroing-in on what the company was about when it started.
"I hesitate to use the phrase 'drug discovery,' because that gets translated into, 'Incyte's going to spend $200 million next year, putting three or four things into clinical trials,'" he said. "We certainly won't be doing that."
Instead, the company ¿ which already has database deals with "every major pharmaceutical company" ¿ will be doing more partnering like the Genentech deal, in a cautious, directed way, Whitfield said.
"There's nothing to be read into the fact that they were the first for this type of agreement," he said, noting that it had to start somewhere. In conference calls related to first-quarter and second-quarter earnings, Whitfield recalled, he was already remarking to analysts that the now-jettisoned parts of the company were "not meeting their numbers."
Of the other firms with information to sell, Human Genome Sciences Inc. is "the closest [to Incyte], with a strong and powerful patent portfolio," Whitfield added, but Incyte is forging ahead.
"Our cost in [growing] the database business is virtually zero," he noted. "We just make some more CDs."
Chirico said that, while firms such as Celera Genomics Group ¿ which bought Axys Pharmaceuticals Inc. for $173.4 million to boost drug discovery ¿ might be described as "shifting" from its core plan, Incyte is taking a more direct route.
"We're doing just the opposite," he said. "We're using the core business as our platform."