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The annual meeting was somewhat informative. Without criticizing too much and since I don't know whether the persons attending were actual shareholders, one thing that struck me is that there were shareholders who seemed to be quite oblivious to many of the basic facts of the Incyte story. Of course, after saying that, please excuse any mistakes that may appear…

First, Roy Whitfield, CEO, gave a review of the current status of Incyte. In some cases, I've incorporated answers to questions that followed the presentation into my review of the presentation if it makes sense.

LifeSeq Gold is their EXPRESSED gene database. As most know, subscriptions to this database cover 18 of the top 20 largest pharmaceutical companies, representing 75% of the R&D spending of the pharmaceutical industry. Over the years, they have had only a single subscriber not renew. That company was BASF, a chemical conglomerate that may be de-emphasizing the pharmaceutical part of their business (check their website-they hardly mention pharmaceuticals anymore).

They currently have a staff of approximately 1,200 scientists, engineers, genomic specialists, etc. To support their programs, they have about $680 million in cash ($22/share) and $150 million in annual revenue. They of course have numerous sequencers, 3000 CPUs, and terabytes of storage to hold their data.

They have multiple products, information, and software, from gene sequence information to gene expression and proteins. Other companies boldly state that they will be starting proteomic efforts and the media have been talking about proteomics as the next phase of biotech. Since Incyte started their proteomic effort 2 YEARS ago at Oxford Glycosciences, they have a huge lead over other companies.

They currently have licenses on 30,000 plus drug targets that have been pursued by their pharmaceutical and biotech collaborators. Incyte will get small milestone payments as drug targets progress through trials and royalty payments on marketed drugs. A questioner mentioned the recent Financial Times article which talked about Incyte possibly doing a “David Bowie” type bond issuance based on their future royalty stream, but Whitfield didn't' comment on that. He did comment about their guesstimate in that article that future royalties could be in the $200 million to $1 billion annual range (I may off on the exact guesstimates he stated). He confirmed that these were Incyte's numbers. They are based on several things. First Novartis and other companies have stated that 50% of their drug targets are based on Incyte genomic information. Based on that information, assuming certain royalty rates, knowing that Incyte has had clients using their information since 1995, and using a more conservative 10% of drug targets based on Incyte genomic information, Incyte came up with their future royalty guesstimate.

In most cases, Incyte is contractually bound not to disclose information about pharmaceutical targets by their clients. With the recent genomics hoopla, however, many reporters have started calling pharmaceuticals and asking them how they've been making use of genomic data. So recently, companies like JNJ (last weeks' Wall Street Journal) have been talking about potential drugs in trials based on Incyte information. Incyte knew about JNJ awhile ago, but could not talk about it. Whitfield implied that there were others at similar stages.

One thing Whitfield mentioned is that since they started their products and licensing agreements in 1995 and since most drugs take an average of 10 years or so to go through testing and trials, they expect milestones and royalties in the 2002 to 2005 period. Now, the following wasn't stated by Incyte, but here's my guess. For Incyte to make a guess about this time period when there aren't any PUBLICALLY disclosed targets in trials to me means that Incyte knows that there are drugs actually in trials or close to starting trials. They just can't disclose this due to confidentiality agreements. One thing that would support this is that big pharma doesn't have to disclose what's going on in early trials since these trials are NOT material to their earnings. On the other hand, a single trial can be huge news for a small biotech (which is why you'll almost always see a press release when a biotech starts a clinical trial). So it is quite possible that a large pharmaceutical companies have already started or will soon be starting trials on drug targets subject to the Incyte licensing agreements, even though no public announcements have been made.

In answer to a question of evaluating the “value” of different genomic companies, Roy said that when he was with a Boston consulting company evaluating different companies, he looked at several areas. What kind of people and management does the company have? What are their products? What is their market share? What are their resources? In these respects, he feels that Incyte ranks highly in all these areas.

He mentioned a concern, a bit of paranoia in my opinion, about short sellers spreading false info about Incyte and that they've started to look at that.

He was asked about the fact that a few pharmaceuticals have signed agreements with both companies (Incyte and Celera). His feeling was that some of these pharmaceuticals signed their early access agreements when the HGP project's timetable for finishing was much further in the future. Over the last year, the public HGP has made tremendous progress, moving up their time table. It will be interesting to see what happens over the next few months now that CRA has nearly completed their gargantuan effort.

He noted a very special month: November 1994. Why was this a special month? That month, Merck, in collaboration with Washington University (St. Louis) announced that they would be depositing gene information in a public database. Incyte sales activity disappeared for a short time, because pharmaceuticals said, “Why should we pay you for free information?” A short while later, the pharmaceutical companies came back. Incyte had information that was not available in the public databases and they had the software tools to make sense of the information. So, Incyte has already successfully navigated through a period of time when investors were worried about “free” genomic information.

Roy Scott fielded a question about the recent NIH agreements of a few weeks back. At the time, some analysts talked about Incyte giving information away for “free” and the stock price dropped that day. Unfortunately, analysts didn't call Incyte for more info. This is a “very profitable” agreement, revenues of “multi-million dollars” largest custom sequencing effort, which they won in a competition vs. other sequencing centers.

What is Incyte doing beyond genomics?

They have been developing gene expression and protein expression databases. They want to catalog the responsee of every human gene to physical stimuli at different disease states and drug responses.

SNPs. Determine genetic diversity within drug targets.

Genomic Internet
Networking all medical researchers. Currently, Incyte serves big pharma. But if you look at research spending, big pharma is only 25% of R&D spending. The rest is by the 50 or so biotechs and 1500 or so research labs. Many can't afford the expensive servers required for holding the current Incyte products. By putting their info on the Internet, these smaller, price conscious companies can have access to the Incyte information. Some have asked why Incyte didn't do this before. Part of the reason is that the internet wasn't developed enough for this to work very well before. With the increase in power and bandwith available this is now an acceptable option.

The analogy that Whitfield gave for what they were doing vs. the HGP sequencing effort was the following. Imagine the following “paragraph”. Figuring out what each of these letters are in the human genome is what the HGP and Celera projects are working towards.

Asdfhe irtuvexcdrowqerterevolutionizeajsflkjas vukjrtueic ncmksl fjejkksdr utivh dksldkehealthcjfask mzpou izdhgcdexfbyuyn mvbxcer uiosfajsfl kleikjliwqoksd faiitu kflaksjffjcie ooskk fajlf iewlxzxkkprovidingjfasdfeka jdsflkjasdfk vmsdkeiewqklkjl akejtkasmf mvkelkajt kekjkask vjekfieopqopq wsecgenomiceikeflskadfiv ckjal kzediwox jdieoc kviejgajkm nop qrzdicdjwifjeyiadfjcinformationasdflkviekkasd ghlskdjfj iekajs lkfjalskdf kjvvmedkjafkjs dfieeidkjzzkjwlqoproductscxzwac gyeqsew awiopjkl mnbvctyerwty

Incyte finds the EXPRESSED genes, represented in bold.

Asdfhe irtuvexcdrowqerterevolutionizeajsflkjas vukjrtueic ncmksl fjejkksdr utivh dksldkehealthcjfask mzpou izdhgcdexfbyuyn mvbxcer uiosfajsfl kleikjliwqoksd faiitu kflaksjffjcie ooskk fajlf iewlxzxkkprovidingjfasdfeka jdsflkjasdfk vmsdkeiewqklkjl akejtkasmf mvkelkajt kekjkask vjekfieopqopq wsecgenomiceikeflskadfiv ckjal kzediwox jdieoc kviejgajkm nop qrzdicdjwifjeyiadfjcinformationasdflkviekkasd ghlskdjfj iekajs lkfjalskdf kjvvmedkjafkjs dfieeidkjzzkjwlqoproductscxzwac gyeqsew awiopjkl mnbvctyerwty

Their databases provide the expressed information in a coherent manner. The expressed information represents the specific genes that code for the proteins that are the drug targets or the drug products that pharmaceutical companies are looking for. The intervening letters may have potential value, but it's going to take a lot of work to figure that out.

Revolutionize health by providing genomic information products.

There was a question about the ongoing litigation with Affymetrix. Whitfield commented that Incyte is a database company. They aren't into selling microarrays. The market for microarrays has changed substantially in the 18 months or so since the lawsuits started. Now, Motorola, Agilent, and others are starting to or will be providing microarray products and Incyte has been talking to each of them about incorporating Incyte genomic information into these new microarray products. Whitfield stated that though they feel their chances of losing are small, losing the lawsuits would have little affect on their business due to the number of competing microarray products that have come about in the last year or so.

One thing that Whitfield did not spend much time on was patents. Instead, he emphasized how Incyte provides different information and resources such as sequencing data, gene and protein expression data, splice variants, tissue and donor information, and physical clones of genes in an integrated fashion to provide key information to clients.

He briefly described how CV Therapeutics, as described in Science, used the Incyte database to discover the Tangiers gene. This disease is characterized by an extreme HDL deficiency. A low HDL is accompanied by a 6x increase in chronic heart disease. By looking at gene expression in diseased tissue vs. normal tissue, and comparing with gene sequencing data, and chromosomal location data, CV and Incyte scientists were able to quickly find the ABC1 gene on chromosome 19.

After the business presentation, a technical presentation was provided on how customers actually use the Inycyte databases. Currently, Incyte provides their data to clients on CDs, and updates their clients every 2 months, typically adding 400,000 sequences. As noted earlier, by the end of the year, this info will be available over the internet.

A detailed example of how the prostate PSA related genes could be analyzed using the Incyte LifeSeq Gold database was walked through. In diseased tissue, the expression rate of different genes in different states can be sorted. Splice variants (i.e. different versions) of the same gene also show up, providing useful information (e.g., a diagnostic might have one version of PSA that it tests for. If there are splice variants, the test could be missing out on those susceptible to disease). Anyways, by going through an example with a known function and seeing how it naturally leads to the PSA gene validated the utility of the Incyte database for other discoveries.

One of the things that stands out in looking through the database are what are labeled Incyte Unique genes. Many of the genes shown are unique to the Incyte databases. Incyte continually sucks data from the HGP project. They suck the raw genomic sequencing data in and make it better by associating them with the genes that code for the proteins.
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