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Hi. I'm a former associate analyst at a leading biotech hedge fund focused on genomics.

I recently read Tom Jacobs' commentary on Incyte Genomics. The comment begins by trashing Incyte and Prudential's Robert Toth. But surprisingly it finishes on a rather positive note and seems to acknowledge that not only is Incyte a player but probably the leader in the IP gene rush. What was the real message?

Often, like many others I know, I stop reading an article after the intro. I think Jacobs' comment does a disservice to anyone who didn't read the entire thing and only served to confuse many of those who did.

First of all, what makes Jacobs think that companies like CRA are any more likely to be good at developing drugs than they are to get value from their genomic intellectual property (IP)? Setting up a successful drug development pipeline is not a walk in the park.

Even established pharmaceutical companies like Bayer, which recently out-sourced a tremendous amount of its drug-discovery efforts in order to catch up with the rest of the industry, experience incredible barriers to success. Furthermore, American Home Products has shown us that uncertainty doesn't end with FDA approval. The pharmaceutical giant recently paid $12.25 billion to end the legal odyssey that has plagued it since 1997 when the company first came under pressure for side effects associated with its wait-loss drugs, Pondimin and Redux.

The value of genomic IP has yet to be fully proven. However, the recent ruling in favor of Amgen in the Amgen vs Transkaryotic Therapies case could be the emergence of a trend towards honoring what has heretofore been regarded as dubious IP, or what I like to call junk IP -- "JIP".

Perhaps the time has come for us to take genomic JIP more seriously. The AMGN/TKTX case reduces, if only marginally, the dubious nature of genomic IP. Certainly, as investors we should remain aware that IP is always contentious and can sometimes be lost or rendered worthless.

But the legal shenanigans are not going to be quite as bad as the pessimists, or the lawyers, think. Once a few genomic IP cases pass through the judicial system, most of the following cases will fall like dominoes. Smart business managers will seek to avoid crippling legal costs by settling their disputes out of court once the genomic playground rules get established.

I think a good way to value companies like INCY and CRA is to estimate the value of their patents as if they were valid, multiply that value by some “guestimate” factor, specifically a fraction which represents our subjective understanding of the uncertainty surrounding their genomic IP's validity.

In other words, as the likelihood of gemomic IP's validity increases (AMGN/TKTX) or decreases (Clinton/Blair) the Genomic IP factor, let's call it the GIP, can be adjusted. The closer the GIP is to 1 the more valuable INCY and CRA get.

If genomic IP does survive the coming legal litmus test, genomic stocks will probably become a conservative way to invest in pharmaceuticals. INCY and CRA will become the Bloomberg and Reuters of drug development with a significant improvement -- In addition to subscription fees, the genomic information giants will receive a portion of their customers' profits in the form of royalties. Meanwhile, they won't be susceptible to pipeline droughts or liability claims.

When comparing INCY with CRA, I think it's important to remember that we don't have to choose to own only one of the two stocks. After all, the future drug industry is valued in the hundreds of billions of dollars. Both of these companies can succeed handsomely and can surely exceed their March 2000 valuations.

With that said, since INCY has been around much longer than CRA and has more IP and more loyal pharmaceutical customers, doesn't it stand to reason that it will receive more royalties than CRA? Potentially, there are hundreds of INCY inspired drugs in various pipelines as I write this. How many CRA inspired drugs might be in development right now? Certainly not as many. Won't this still be true even if CRA signs up more academic institutions than INCY?

As a result, since INCY's valuation is less than CRA's, I must agree with Toth when he says that, Incyte is "an intriguing value play in the genomics sector." As far as I can tell, the difference in valuation between the two companies is more a reflection of Craig Venter's flair and notariety and INCY's relatively understated public relations strategy.

In Jacobs' defense, for those who have made it to the end of _this_ comment, Prudential's attempt to evaluate genomics companies based on present or near term earnings, is rather silly. However, the necessity of observing this practice at a large conservative firm like Prudential is understandable. Robert Toth, probably doesn't like doing it much more than Jacobs likes reading it.

FYI: I have owned shares of INCY and CRA since 1999.
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