This qualifies as a horrendous six months for any stock: Shares of Incyte (INCY) are down from $152.66 on March 15 to $115.19 at the close today, October 2. The shares have been even lower, which is one thing giving me some hope that the pain is coming to an end. The shares traded at $109.15 on September 26.
What is frustrating about the plunge in this stock, a member of my Jubak Picks portfolio, is that it’s not based on a failure in the company’s drug pipeline or questions about its research program. Incyte raised $700 million by selling 5 million shares in a secondary offering. Five million shares and $700 million in cash aren’t big numbers for Incyte. The company has 211 million shares outstanding so 5 million shares represents a 2.4% addition to the company’s share count. And with a market cap of $26 million, the $700 million secondary is less than 1% of the company’s share value.
The problem for shareholders, though, is that the market has taken the capital raising as a sign that Incyte isn’t a potential acquisition candidate. And consequently we’re seeing the premium for a potential takeover come out of the share price. That speculation peaked in March with rumors, or maybe better we call them analyst fantasies, that Gillead Sciences (GILD) was about to bid for Incyte. That takeover talk is now just about dead–and so is any takeover premium.
If you turn the capital raising on its head, it becomes interesting to ask what Incyte raised the money for. One possibility is that the company raised the cash because it is facing a bulge of expensive late-stage clinical trials in its product pipeline. (A nice problem to have, by the way.) The thinking here is that Incyte decided to raise the capital while the stock was at a high so that it could fund as many of these trials itself rather than having to sell off pieces of future sales and profits to a deep-pocketed partner in order to pay the bills.
The other thinking is that Incyte is itself on the prowl for an acquisition, perhaps as a defense against an acquisition offer.
I favor the first alternative. But then that’s because the reason that I own Incyte is because I like its product pipeline. The other explanation–that the cash is part of an effort to fight any acquisition offer–just feeds into Wall Street’s disappointment that no one has yet offered to take out Incyte at a huge premium.
I continue to hold Incyte in my Jubak Picks portfolio with a target price of $142 a share. The stock is up 158.6% since I added it to the portfolio back on April 17, 2014.
Full disclosure: I own shares and call options on Incyte in my personal portfolios.