We have downgraded Incyte Corporation (INCY) to Underperform from Neutral following its lackluster showing in the final quarter of 2011.
The company incurred a wider-than-expected loss in the final quarter of 2011. Results were hurt by lower revenues and higher costs. Total revenue in the reported quarter plummeted 66.4% to $28.9 million mainly due to a 68.8% reduction in contract revenues.
Revenues in the fourth quarter of 2010 were boosted by the presence of milestone payments to the tune of $50 million and $19 million from partners Novartis (NVS) and Eli Lilly and Company (LLY), respectively.
(Read our full coverage of the earnings report at Drab Quarter at Incyte, Shares Down ).
We are also disappointed by the company’s decision not to provide 2012 sales guidance for its sole marketed product Jakafi. Jakafi has been available in the US for treating intermediate or high-risk myelofibrosis, a rare bone marrow disorder. We believe that this does not augur well for the long-term prospects of the product.
We are also concerned about Incyte’s dependence on a single product for growth. We note that the target population for MF in the US is small (only 16,000-18,500 patients according to management). Sales would be hampered further if the company does not succeed in gaining sufficient formulary coverage for the product.
Moreover, slower-than-expected ramp up of Jakafi sales would have a dampening effect on the stock. Any setbacks in Incyte’s label expansion efforts for Jakafi would be disappointing.
Incyte is investing heavily in its pipeline, which will result in a substantial increase in research & development expenses. Moreover, selling, general & administrative expenses will also increase due to increased commercialization costs for Jakafi. The escalated costs will dampen the bottom-line further. Increasing costs and lackluster revenues could make it challenging for Incyte to achieve profitability in the next couple of years.
In view of these negatives, we advise long-term investors to avoid the stock at current levels.
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