By Lisa Seachrist

Washington Editor

Incyte Pharmaceuticals Inc.'s stock dropped 27 percent after the Palo Alto, Calif., company disclosed a second downward revision of its revenues this year.

The company's stock (NASDAQ:INCY) fell to $16.875, down $6.465, on news that it expected revenues for the third quarter to come in around $35.4 million and revenues for the entire year to range between $154 million and $157 million. That estimate is down from the $170 million the company said it expected to make this year in January, when it knocked down its revenue estimate from $190 million.

"It's fair to say we need to work on doing a better job forecasting," said Lee Bendekgey, interim chief financial officer for Incyte. "The answer to why we needed to lower our estimates now relates to short-term issues about timing."

Bendekgey said a longer-than-anticipated sales cycle for the company's core genomics database business, LifeSeq, and difficulties with the renewal discussion with one partner caused the database revenues to fall below expectation. Incyte hasn't had a new subscriber to LifeSeq this year, but Bendekgey said there should be an announcement soon about a new client.

In addition to database business, Incyte advised it was lowering the revenue expectations for the company's DNA microarray system from 10 percent of overall revenues to 7 percent or 8 percent, dropping the expected revenue from $17 million to $11 million or $12 million. That adjustment reflects the ongoing patent litigation with Affymetrix Inc.

Affymetrix., of Santa Clara, Calif., sued Incyte for patent infringement over DNA microarray technology. In September, the U.S. Patent and Trademark Office (PTO) ruled against Incyte. The company had requested Affymetrix's patents be found in interference with two pending Incyte patents, but the PTO denied the request, in effect endorsing the validity of Affymetrix's patents. (See BioWorld Today, Sept. 14, 1999, p. 1.)

Incyte's stock fell $14.125 that day after having run up to $41.375 the day before in anticipation of the PTO ruling. Incyte is continuing to fight the infringement suit, but Bendekgey said the suit may be making some potential clients for its DNA microarray chip business hesitant.

Despite the low revenues, Bendekgey said the company is still on track to see profitability in the second half of next year. He highlighted the first LifeExpress expression database program deal with Wilmington, Del.-based AstraZeneca. LifeExpress is a second-generation product that combines Incyte's RNA expression information with Oxford, UK-based Oxford GlycoSciences' high-throughput protein analysis.

Some analysts take a different view of Incyte's prospects. Paul Kelly, principal analyst with ING Barings Furman Selz LLC in New York, noted there is a "distinct" possibility Incyte will never return to profitability."

"I see their growth clouded by the ongoing patent litigation and increasing competition from other genomics companies, namely Celera and GeneLogic," Kelly said. "I paint a pretty bleak picture. In addition, I feel management has a big credibility problem."

Robert Toth, vice president and analyst with Prudential Vector Healthcare in San Francisco, agreed with Kelly's assessment that Incyte's management has credibility issues. Both analysts questioned whether part of the decrease in database revenues comes from price erosion caused by competition. Incyte denied such speculation in an analyst call.

"Management credibility is a concern now," Toth said. "If they do not achieve the goal of profitability by the second half of next year, they may face another negative announcement and another stock setback."

Toth views the LifeExpress program as the future for Incyte.

"I'm very cautious going forward but I see LifeExpress as a ray of hope for Incyte," Toth said. "Right now, I'm concerned for the company. The market is going to discount their story until they prove themselves."