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No. of Recommendations: 36
Okay, this is the fourth message in what is becoming a drawn-out personal playoffs of biotech companies. The original message is at and the three subsequent to this one are at ,
, and

I'm sorry that I wasn't able to keep up my momentum, but as I suspect most of you know, 'life' sometimes gets in the way of stock analysis and portfolio management. At least it does for me -- one of the reasons I don't necessarily want the riskiest companies in the heap. Specifically, last week a theatre group I'm involved with had a near-collapse and a big pile of administration stuff, and then I had a lethal midterm in transport modelling.

Without further ado, here's the last of the preliminary round:

Chiron - CHIR (7) vs. Incyte Pharmaceuticals - INCY (10)
Products: Chiron's slogan is 'Science For Life', and they try to fulfill it with three main lines of products: biopharmaceuticals (mainly Proleukin, which helps fight some types of cancer; Regranex, which helps heal diabetic foot ulcers, and Betaseron, used to treat Multiple Sclerosis), vaccines (notably Menjugate, for meningitis; Ravavert for Rabies; and wide a range of European vaccines for commonly vaccinated-against diseases) , and blood testing products. On the other hand, Incyte (slogan: 'Genomics For Life') deals with genomic databases and the tools and reagents associated with them. Products include databases expressing profiles of the expressed genes of a variety of interesting creatures, including PathoSeq (34 bacteria and fungi), ZooSeq (mouse, rat and monkey for lab use) and LifeSeq, the human genome. They also have a division, GEM MicroArrays, which allows for high-speed assays of gene expression.
Cash/Debt: Incyte has no debt and $66 million in cash, 1.1% of market cap, and Chiron has a 0.26 debt/equity ratio, with a $1 billion war chest, representing 7.4% of market cap.
Profitability: Well, Chiron has it, and Incyte doesn't… yet. Chiron has a 16.8% profit margin, and a 11.9% operating margin. Incyte is currently running a 13.1% operating loss. While Chiron managed to grow earnings 87.8% annually for the last 5 years; this is projected to slow to 25%. Incyte's earnings are forecast to grow by 38% for the next 5. Looking at the financial statements, Chiron posted modest gains in income, but the biggest winner on the income statement was SG&A, up about 25% over the previous year. Incyte, on the other hand, went from a marginal profit to a $27 million loss, largely on the back of $50 million of additional R&D.
Valuation: Chiron currently trades at a PE ratio of 97.27, (price/sales of 16.55), which gives it a PEG of around 4. Incyte doesn't have positive earnings, but it does trade at a price/sales ratio of 42.26. Incyte's market cap is $7 billion; Chiron's is $12.2.
Other Stuff: Insider holdings is, as typical, pretty high at Chiron, with 49% insider holdings. Incyte is only at 18%. Of course, if my insider holdings shot up 1000% in a year, I'd sell some of them, too.
The Call: If you chart the five year of these two companies, it's interesting, because Chiron will appear as flat line, and Incyte jags up and down, until it goes basically vertical in December 1999. So, what is a better buy? Or a better fit for my portfolio? Well, Chiron seems to be running a middle-of-the-road or lower biopharm company, with Incyte one of the pioneers in the wild, wooly world of genomics. I've generally preferred companies that are less risky; in this case, though, Chiron doesn't seem to have much to recommend it, what with modest growth, a decent but not spectacular pipeline, and a rapidly growing front end. I want to have another look at some of the non database-based products of Incyte – GEM may turn out to be a bit of a jewel here. If it were against more stiff competition, Incyte's valuation and riskiness may well be their downfall, but in this case, Chiron isn't attractive enough to make me want to bother learning any more about it.
Winner: Incyte Pharmaceuticals – INCY (10)

Affymetrix - AFFX (2) vs. Biogen - BGEN (15)
Products: As I like to say, Biogen has an impressive bag of trick. Specifically, the trick is Avonex, a MS therapy that's approved in the US, Canada and Europe for relapsing MS and is in the approval process everywhere for any possible MS-related use that Biogen can think of. They don't have any of the rest of their pipeline beyond Phase II. They do have a handful of other products, related mostly to Hepatitis B, that are on the market as joint ventures with a bunch of big-name pharmaceutical companies. Sadly, nothing much in their joint-venture pipeline, either. Affymetrix is an interesting company with a good idea. They make the GeneChip, whose goal is to become the standard in high-speed sequencing. This is an amazing potential market. The bad news is that a bunch of other companies, notably Hyseq and Incyte (remember the GEM MicroArrays mentioned above?) that are competing in this same field. The good news is that Affymetrix seems to generally be winning in the courts, with patent decisions that are generally in their favour. If they can leverage patent protection into a market share, and if they can leverage research market share into clinical diagnostic testing, they will be huge. I did, however, use the word 'if' twice in that last sentence.
Cash/Debt: Biogen has a debt/equity ratio of about 0.06 and around $650 million in the bank, about 3.8% of market cap in cash. Affymetrix has a 1.13 debt/equity ratio and $225 million, 2.8% of market cap. This is a pretty high debt/equity ratio; they have since more than doubled their debt load. This is a cause for concern.
Profitability: Biogen has a nice, tidy 27.7% profit margin and 38.4% operating margin. Affymetrix has a significant loss, resulting in an operating margin of –36%, despite significant income growth. Long-term forecasts are for 37% earnings growth for Affymetrix and 25% for Biogen.
Valuation: Biogen has a 3.75 PEG ratio, based on an 84 PE ratio (with a 23 price/sales ratio). Affymetrix is losing money, but has an 82 price/sales ratio. Biogen has a $17B market cap; Affymetrix is half its' size, about $8B.
Other Stuff: 21% insider holdings for Biogen, 37% for Affymetrix.
The Call: Biogen is big, but it has precious little pipeline to show for it. Affymetrix, on the other hand, has almost too much potential to be ignored. If (and this is, admittedly an if) they can dominate their market, they'll have become a base company in one of the most spectacular growth areas of the history of mankind. Rapid gene analysis equipment may become the internet infrastructure of the 21st century. Or it may not. Affymetrix has a pretty moderate-to-poor set of financials. On the other hand, Biogen looks to be coasting on the strength of Avonex. There's nothing particularly compelling for Biogen – it looks to be okay. Now that I've damned it with faint praise, I'll pick Affymetrix. The potential of GeneChip is too big to be ignored, for the time being at least.
Winner: Affymetrix – AFFX (2)
Affymetrix will face Incyte in the semifinals and in the courtroom. :)

Still with me? Good. :)

Here's what the 'playoffs' look like so far.

\_GENZ_ _CRA__/
GENZ_/ \ / \__CRA
\__ __/
IMNX_ / \ / \ __PEB
\_IMNX_/ \ / \_MEDI_/
HGSI_/ \ / \_MEDI
\____ ____/
\_MLNM_ / \ _INCY_/
MYGN_/ \ / \ / \_CHIR
\__/ \__/
DNA__ / \ _BGEN
\_AMGN_/ \_AFFX_/

However, in the next round, I'm going to try something a little different. I'm going to look at all four companies in a 'half' (AMGN, GENZ, INMX, MLNM or AFFX, CRA, INCY, MEDI), rather than pairing them off. I'll look at two from each group in further detail afterwards. Also, if you have any suggestions as to what I should be looking at (R&D spending, pipeline, and a better look at financials and valuation are on my list so far), please feel free to put in your two cents in. It's what the Fool is about, after all. I'll also warn that I'm back in school, and I can't put together a few thousand words of research in my free time, so the next posts may be as late as... this one, I suppose.

Thanks for all your comments, support and criticism.

Kevin :)
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