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Incyte Earnings Indicate Sequence Database Sales Are Being Squeezed

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PALO ALTO, Calif.--The recent news that Incyte Pharmaceuticals is expecting a net loss in the range of $27 million for the year raised questions among industry observers about the viability of the genomic-data-selling business, and about the stability of the company that was the first in the genomics business to turn a profit.

Incyte's stock plunged 28 percent, touching a year-low of 16½, on October 4 after the company preannounced its third-quarter earnings. CEO Roy Whitfield blamed an expected $11 million third-quarter net loss on "longer than anticipated" database sales cycles and "delays in finalizing" two contract sequencing deals, and Lee Bendekgey, Incyte's interim chief financial officer, told BioInform he attributed the earnings disappointment to a "shortfall in microarray revenues." But throughout the industry, Incyte's announcement fueled speculation that the value of its human genome database product, LifeSeq, is declining in the face of increased competition and expanding banks of publicly available data.

One industry observer assessed Incyte's plight this way: "They're out there trying to sell these subscriptions and there's a lot of new competition. They're not able to command the price premium they were able to in the early days because of people like Celera Genomics, the public efforts, and in-house efforts whereby companies are starting to be able to do a lot of sequencing fairly cheaply."

To be sure, many observers stand by Incyte's business model and management, and at least two analysts continue to rate its stock a "strong buy." Bendekgey said Incyte's major pharmaceutical company customers still "attach a lot of value" to Incyte data. "We are still the leader, with 23 database customers, and we're still renewing customers who are willing to pay mid-seven figures per year for access," he said. Assuming that BASF, whose contract lapsed during the third quarter, agrees to renew, Bendekgey added, "We are batting a thousand."

But several analysts noted that, although nine existing Incyte customers expanded their LifeSeq subscriptions during 1999, the company has revised estimates for its overall database income to a number $10 million below initial projections for the year.

"This tells us that raw data is a very hard business to be in," remarked Paul Boni, a research analyst at Punk Ziegel. "Simply selling a list of genes quickly becomes a commodity business."

Paul Kelly, a director at ING Baring Furman Selz who rates Incyte stock a "sell," asked in a First Call Research Network report, "Are we witnessing price erosion in Incyte's core genomics information product?"

Big-pharma insiders generally think so. "I know they are cutting prices on their databases," said a source at a large pharmaceutical company, "because Randy Scott just flew out here to deliver a deal we couldn't refuse." (Scott is Incyte's president and chief scientific officer.)

A vice-president inside another large pharmaceutical firm that is not a LifeSeq customer said, "I get the sense they are interested in doing any kind of deal. They seem to be active about new ideas about how to structure things, and they're trying to use a little more imagination."

"I don't have direct evidence that their prices are going down, but their salespeople make comments that lead me to believe they are," said a source at a third large life sciences company. "I assume they've gotten the market penetration they'll get at their rates. They're certainly adding more value to the data they're selling now, and I assume that they're adding value without raising the price."

Bendekgey told BioInform that Incyte has "not seen dramatic price cutting," but conceded that, "over time you can expect that." He gave an example from the high-tech industry to explain the direction Incyte is headed. "When Intel introduces a new processor, it's typically relatively expensive, high-end, and is sold to a smaller group of customers who are willing to pay a premium to be on the leading edge. As the product matures, the average price per unit comes down, but they sell it much more broadly and their revenues from that product continue to grow for many years thereafter."

Incyte's expectation, according to Bendekgey, is that it will be able to increase its database revenues by more broadly distributing those products in deals with academic or biotech companies, such as one it announced three weeks ago with Millennium Pharmaceuticals or another it made in September with the Huntsman Cancer Institute. Added Bendekgey, "There are models that allow us to preserve much of the value at the high-end while still distributing more broadly to people who are not in the position to write seven-figure checks once a year."

To compete with Celera, some say Incyte will need to do more than broaden its market reach. The head of another genomics company predicted that Incyte will need to enhance its offerings: "It's the difference between raw data and value-added information, where you've made discoveries that increase the value and provide software systems that enable customers to access that information in intelligent ways, instead of just giving them a set of files." To do that, this source said, Incyte might be forced to demonstrate that there is less value in its old products in order to really show value in its new ones.

--Adrienne Burke

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