Incyte Evenly Poised - Analyst Blog

We are maintaining our Neutral recommendation on Incyte Corporation (INCY) with a target price of $13.

Incyte is a Wilmington, Delaware based drug discovery and development company with a focus on oral compounds to treat HIV, inflammation, cancer and diabetes. The company has transformed itself from a genomic-based information supplier to a fully integrated drug discovery and development organization. The company's lead compound, INCB18424, an oral janus-associated kinases (JAK) antagonist is in phase III development for the treatment of myelofibrosis (MF).

Incyte has a broad pipeline, with most of the compounds in early-to-mid stages of development. However, in 2009, Incyte decided to focus its resources on the programs with greatest near-term value due to the challenging economic environment.

The company reported strong second-quarter 2010 results based on a strong surge in revenues. Total revenues in the reported quarter jumped to $49.85 million from $789,000 in the year-ago quarter. The increase was driven by the receipt of $30 million from Eli Lilly (LLY), a $3 million milestone payment from Pfizer (PFE) and $16.7 million of revenues recognized under the company’s collaborative agreements with Novartis (NVS) and Eli Lilly.

Incyte, which possesses a diversified pipeline, made impressive progress during the most recent quarter. We are also impressed by its collaborations with big pharma players such as Pfizer, Novartis and Eli Lilly to develop its pipeline. We believe the association of big pharmaceutical companies will bolster the company with much needed financial strength as well as rich experience.

Even though we are impressed by the diversified pipeline at Incyte, which has huge potential, the early-to-mid stage status of the pipeline is a concern. A majority of the candidates are several years away from hitting the market. The debt burden of the company is another area of concern.

Given these headwinds, we believe that Incyte’s current valuation adequately reflects its fairly balanced risk/reward profile. Consequently, we see limited upside from current levels.

We have a Zacks #3 Rank (short-term Hold recommendation) on the shares. This implies that the stock is expected to perform in line with the broader US equity market over the next 1 - 3 months. We are Neutral on the stock in the long-term, which indicates that Incyte's shares are expected to replicate its short-term performance, but over 6+ months. Consequently, we advise investors to retain the stock over the time-period.
 
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