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Drab Quarter at Incyte, Shares Down

Zacks Equity Research

Incyte Corporation’s (INCY) fourth quarter 2011 loss of 44 cents per share was wider than the Zacks Consensus Loss Estimate of a loss of 40 cents. The company earned 24 cents per share in the year-ago quarter. Results in the final quarter of 2011 were hurt primarily by higher costs. The earnings miss pulled down the stock.

The Fourth Quarter in Details

Total revenues in the reported quarter plummeted 66.4% to $28.9 million mainly due to a 68.8% reduction in contract revenues. Revenues in the final quarter of 2011 however beat the Zacks Consensus Estimate of $25 million.

We remind investors that 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.

The fourth quarter of 2011 saw Incyte record revenues from product sales for the first time following the US launch of Jakafi for intermediate or high-risk myelofibrosis in November 2011. The company recorded net revenues of approximately $2 million from Jakafi sales in the final quarter of 2011. The US approval of Jakafi triggered a milestone payment of $10 million from Novartis.

Both research and development (R&D) expenses (up 58.3%) and selling, general and administrative (SG&A) expenses (up 96.5%) were on the upswing during the quarter. The company’s efforts to develop its pipeline coupled with higher stock-based compensation expenses pushed up the R&D expenses in the final quarter of 2011. Higher costs related to the US launch and marketing of Jakafi were primarily responsible for pushing the SG&A costs up.

Annual Results

For the full year 2011, Incyte suffered a loss of $1.49 per share as opposed to a loss of 23 cents suffered in 2010. The wider loss incurred in 2011 was attributable to lower revenues and higher costs. Revenues in 2011 slipped 44.4% to $94.5 million primarily due to lower contract revenues. The Zacks Consensus Estimate for 2011 hinted at a loss of $1.45 on revenues of $91 million.

2012 Outlook

Apart from disclosing financial results, Incyte also provided guidance for 2012. The company expects revenues of $67 million in 2012 excluding Jakafi sales and any milestone payments. Management refrained from giving any guidance for Jakafi since the product is very new to the market. The Zacks Consensus Estimate is $211 million for 2012.

R&D expenses for 2012 are expected in the range of $215 - $225 million as against $178.7 million incurred in 2011. The increase is attributable to Incyte’s efforts to develop its pipeline. SG&A expenses are expected in the range of $82 -$88 million in 2012 as opposed to $58.2 million incurred in 2011. The increase was attributable to increased costs of marketing Jakafi and higher non-cash stock-based compensation expenses.

Our Recommendation

Incyte currently carries a Zacks #5 Rank (‘Strong Sell’ rating) in the short run reflecting short-term pressure on the stock primarily due to the lack of visibility regarding Jakafi sales. We are however Neutral on the stock in the long run.

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