Note to biotechs: You can change the way you recognize revenue. And you can issue guidance. But don't do both at the same time. Biotech investors understand drugs, clinical trials, Food and Drug Administration regulations, and what it takes to sell a drug.

But we don't do math.

Witness Incyte (NAS: INCY) , which fell 21% yesterday and another 5% today after announcing that its changing how it recognizes revenue of its myelofibrosis treatment Jakafi. The biotech is switching from a sell-through model, where revenue is booked after the specialty pharmacy sends the drug to the patient, to a sell-in method, where revenue is booked as soon as Incyte ships the product to the pharmacy.


That's the right thing to do, as the company has gained more confidence in rebates and potential returns. A sell-in model is how established biotechs recognize revenue. It would be easier to just start with the sell-in method, but most biotechs can't predict rebates and returns with a high enough confidence to start with that method. Incyte isn't the first biotech to have to go through the change a few quarters into its launch, and it won't be the last. Investors in Arena Pharmaceuticals (NAS: ARNA) , VIVUS (NAS: VVUS) , and Amarin (NAS: AMRN) should keep that in mind as the companies prepare to launch their drugs.

The problem Incyte has run into is that it issued guidance that net product sales will be between $120 million and $135 million this year. That'll include the sell-through sales in the first two quarters, the sell-in sales for the next two quarters (assuming the change is made next quarter), and a catch up amount for the drug in pharmacies when the change is made.

So far this year, Incyte had shipped $60.3 million of Jakafi and $53.1 million of product was sent to patients and recognized as gross revenue, so there's $7.2 million of deferred revenue. And then to get to the apples-to-apples comparison with the net product guidance, you have to look at the net to gross conversion, which puts net product revenue at $49 million. Subtract that and the deferred revenue out, and it looks like Incyte is expecting between $63.8 million and $78.8 million in net sales in the second half, which implies growth of 13.5% and 40% growth over the net sales in the first half adjusted for the deferred revenue.

Did I mention we don't like math? You could see how a few people might hit the sell button.

Biotechs might be best off just keeping their guidance to themselves, or Incyte could do like Regeneron Pharmaceuticals (NAS: REGN) has done and just blow through it.

Incyte's sell-off has shown, while the future looks bright for Arena, that there are still plenty of obstacles ahead. In our brand-new premium research report on Arena Pharmaceuticals, we walk investors through the must-know opportunities and threats facing the company. Since key news can develop quickly, we're also including a full year of updates for those who sign up. Learn more.

The article Biotech Investors: We Don't Do Math originally appeared on Fool.com.

Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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