By Randall Osborne


It's not news that genomics means money in biotech, but when a company such as Incyte Genomics Inc. starts signing up IBM Corp. and Motorola Inc. as partners, the time may be right for investors to take an even closer look.

Founded almost 10 years ago, before genomics became the industry's magic word, Incyte gets much credit for turning the realm of gene discovery into what it has become, and the company has been much in the news lately.

The deal with IBM, signed earlier this month, made Incyte the first collaborator for the just-established Life Sciences business unit of the computer giant, causing analyst Rachel Leheny (among others), with Lehman Brothers, to take respectful notice.

Incyte "is clearly gaining ground," Leheny wrote. It's becoming, she said, "the collaborator of choice" for other firms wanting to hop aboard the genomics bandwagon.

"They've got 20 of them, and [the collaborators] are paying an average of $10 million each," Leheny told BioWorld Financial Watch. "The stock is trading at a big discount to other stocks in the space. I would be a buyer here."

Under the terms of the IBM agreement, Incyte's new Genomic Knowledge Platform will incorporate IBM's DiscoveryLink data management software.

"It's part of a broader effort, and something we had been hearing [IBM] would do," Leheny said. Still, the fact that Incyte was first is significant, she added.

That new platform boasts an open architecture that lets researchers integrate more varied types of data. Its main weapon is Incyte's proprietary Biological Object Model technology, a mapper of biological functions and interactions, and its first product is expected to hit the market next year. Most likely, Leheny wrote, it will be an upgrade of the LifeSeq database.

The Motorola deal, signed in August, was made with that firm's BioChip Systems unit, and gives the company whose name is still associated by many with TV sets and includes LifeSeq Gold (a human gene sequence database) as well as rights to use Incyte's gene sequence databases and gene patent portfolio to commercialize bioarrays. It's the first such bioarrays deal Incyte has made.

Although no financial terms were disclosed, the "level of commitment [Motorola] is making is pretty huge," Leheny said.

Incyte made money in 1997 and 1998, and has been losing cash since then because of huge dollars poured into database-building equipment. But the company's projected revenues of $190 million foretell a bright future even given the increasingly crowded genomics field.

The company's hardly been immune to the woes that drain the bottom lines of other genomics firms. Patents galore means lawsuits unlimited, and Incyte which won its 500th gene-related patent in August, making it the leader in that realm, according to PricewaterhouseCoopers has ongoing court skirmishes with Affymetrix Inc. and with Gene Logic Inc.

Fights are inevitable. Incyte filed its second lawsuit against Gene Logic this summer, having lodged the first complaint late last year. In lawsuit two, Incyte claims infringement on a patent related to the company's database systems that classify genes based on protein function. The first litigation pertains, like the lawsuit against Affymetrix, to technology used in creating gene-expression data.

In both cases, Leheny noted, it was Incyte going after alleged infringers. The Gene Logic is the smaller of the two battles, and even the match between Incyte and Affymetrix is not a war of true competitors, she said. The companies have diverged so much that it's like comparing apples and oranges, Leheny said.

"Affymetrix is selling chips, and Incyte is really just using them internally," she said. "There was a point, about 18 months ago, when it looked like they might be competitors."

With a global distribution network made up of 19 firms for its products, disclosed in July, Incyte launched the same month, a web site for genomic researchers that the company expects will rival Genbank and other sources for data online.

Leheny said the network of sellers was nowhere near as important, in terms of investor consideration, as the deals with IBM and Motorola. "It's interesting, nice to know," she said. But she focuses more on the web site, which will allow Incyte to capitalize on a sort of "retail" genomics market, along with the "wholesale" market of database subscribers.

The web site is described by Incyte as "a user friendly version of Genbank with more transcribed gene information than can be found in the public domain and with commercial upgrades available to much more rare genomic information" from Incyte's storehouse.

"It's not so much a question of competing with Genbank, as broadening the customer base" into lone scientists in academic and national laboratories, searching for a particular bit of information, Leheny said.

"Those markets have been completely closed off, because of the way [Incyte] structures access to the database, and the best way to open those up is through a web-based system," she said.

"If you take an individual researcher at the [National Institutes of Health]," she said, "he doesn't care about 95 percent of what's in Incyte's database. He's working on a specific problem. If he can use it to find out what he's interested in, and pay only for that, that would be great. There are a lot more of these people. Incyte's probably missing out on about half the market."

She compared the situation to Invitrogen Corp., which targets similar customers, or targets its customers in a similar way.

"They sell gene-cloning kits, sort of like a cake mix, as opposed to making something from scratch," and make substantial profits vending the product piece by piece. In July, Invitrogen said it will purchase Life Technologies Inc. and Dexter Corp. in a deal worth about $1.9 billion, and the three-way merger was completed earlier this month.

The key is that Incyte is giving very little away in a zone where data is valuable. The company's stock (NASDAQ:INCY) began climbing one year ago, and gained a whopping 1,500 percent, reaping gains from genomics fever until March, when the pall fell over Wall Street and many high-tech stocks suffered.

Insiders lately may be on to something, Leheny said and then again, maybe not. In less than two months, six filed to sell a combined 535,108 shares for $40 to $50 per share.

"There's so much of that across the industry right now, and I'm not really sure what it means," she said. With 63.97 million shares outstanding, Incyte's stock was trading at $36 to $38 late last week. For the quarter ending June 30, the company had $438 million in cash, and a net loss for the period of $6.59 million.

Most compelling, Leheny said, is Incyte's undervaluation, as compared to the stock of other database or genomics companies.

"The closest competitor is Celera [Genomics], and if you look at the databases, they're very different a lot of [pharmaceutical companies] are buying both," Leheny said. "Particularly from a risk-reward perspective, Incyte is hugely attractive. It's the one I'd go with." *

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