deCODE to Trade Sideways

We believe deCODE genetics, Inc. (DCGN) will trend sideways over the next few months as investors await a partnership announcement for one or more of its clinical candidates. The company has launched as many as six diagnostics tests in the recent past; however, we maintain our Hold rating on the stock pending positive impact from the financial performance of these tests.

Incremental revenues from diagnostic tests coupled with cost savings from the reduction in staff will result in a lower cash burn in the coming quarters. 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 DG-031 for reducing cardiovascular events. The company has successfully reformulated the drug with the potential for use in prevention of myocardial infarction and is looking to partner the drug before moving it into phase III trials. We would like to see if deCODE can replicate the success which Monogram (MGRM) has enjoyed with the launch of its Trofile assay for HIV patients.

However, until then, we would like to remain on the sidelines and await a partnership announcement for one or more of the clinical candidates. Our target price is $1.50, which corresponds to a P/S multiple of 1.6x our estimated revenue of $110.0 million in 2010, discounted back two years using a discount rate of 25 percent. 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.

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Read the full analyst report on DCGN

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