Too Early for deCODE to Deliver

deCODE genetics, Inc. (DCGN) is a biopharmaceutical company that uses genetics to develop drugs, diagnostics, and pharmacogenetics for the healthcare industry. We were pleased to see the positive phase II data on candidate DG-031 and the phase IIa data on DG-051.

However, the company announced the voluntary suspension of the phase III trial for DG-031 due to manufacturing problems in early October 2006. We believe DCGN will trend sideways over the next few months as investors await a partnership announcement for DG-031, DG-041 and DG-051. We would also like to see the financial performance of the diagnostics tests launched recently.

We believe the shares offer substantial upside potential, but do not expect significant upward movement in the near-term due to risks associated with the company’s drug development program. We believe that the risk/reward profile is balanced for investors in deCODE at the current level. We are optimistic that clinical results will demonstrate the viability of DG031 for reducing cardiovascular events, but we would like to see more large-scale data before we become bullish on the shares.

Our target price is $2, which represents a market cap of $150 million based on our 2010 shares outstanding of 75 million. The target price corresponds to a P/S multiple of 4.6x our estimated revenue of $110 million in 2010, discounted back two years using a discount rate of 25 per cent. We believe the high discount rate is warranted because commercialization of deCODE’s drug candidates is still a few years away.

Varun Parwal contributed to this report.

Read the full analyst report on DCGN.

Read the full analyst report on DCGN