Biotech Values

[DewDiligence]

Decoding Human Genome's Stock

[On HGSI, I lean slightly toward bearishness, especially after the CoGenesys spinoff, which I regard as value-destroying. I don’t dislike the stock enough to short it, but neither am I inclined to go long.]

http://wsj.com

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Could Hepatitis C Deal with Novartis
Help Company Realize Its Potential?

By WORTH CIVILS
June 14, 2006

Human Genome Sciences may never live up to the promise it showed several years ago, when founder William A. Haseltine talked of finding "the fountain of youth" in genetic therapies. But Human Genome continues to use the genetic map to develop less-lofty, but still potentially important, therapies. One of those is its Hepatitis C drug, Albuferon; a recently announced partnership with Novartis should help Human Genome get approval for the drug, some analysts say. [I’m not sure I understand the author’s reference to Albuferon being an example of HGSI’s using the genetic map.] But the deal may cut Human Genome out of future profits, others say. The company has other drugs in the pipeline, but has yet to gain approval for any of them and is still unprofitable. The stock, which shot above $100 in 2000, has fallen off dramatically in recent years and closed down eight cents at $9.95 Tuesday in 4 p.m. composite trading on the Nasdaq Stock Market.

The Bull Case

Vote of Confidence: Some analysts say Human Genome's deal with Novartis improves both its financial situation and its chances of getting approval for Albuferon, which treats Hepatitis C, a chronic blood-borne disease affecting an estimated 170 million people world-wide. Novartis will pay Human Genome an up-front licensing fee of $45 million and share the costs of developing Albuferon. Including milestone payments and royalties, the deal could be worth more than $500 million to Human Genome. "We believe Novartis will be a committed partner that sees Albuferon emerging as the backbone of future Hepatitis C therapy," wrote Bank of America's David Witzke. He thinks the drug, which requires fewer injections than other Hepatitis C drugs, has the "highest peak sales potential" and "lowest development risk" of any new drug in its class. Analysts say Novartis will see the drug's development through to successful completion. "Novartis has a leading global franchise and a clear commitment to Hepatitis C," wrote Edward Tenthoff at Piper Jaffray. "We believe Novartis' disease expertise and drug development experience will help get Albuferon approved." He expects the drug to launch in 2010, noting it could achieve market share of 45% on sales of nearly $2 billion by 2015.

Tackling the Tough Ones: Human Genome is also developing drugs for ailments for which there are few other treatment options, including lupus and anthrax. Analysts say positive results and eventual approval for such treatments could serve as a catalyst for shares of Human Genome and help the company become profitable. Dr. Witzke said late-stage clinical testing for the lupus treatment, known as LymphoStat-B, along with Albuferon, could lift Human Genome stock, making his $22 price target "prove conservative." The company will present data on recent LymphoStat-B trials at the upcoming European League Against Rheumatism meeting, a potential catalyst for the stock. Human Genome is set to meet with the Food and Drug Administration soon to set a timeframe for the next and final rounds of testing for the drug, which are expected to begin by the end of the year.

Citigroup's Yaron Werber wrote in a note that GlaxoSmithKline, a longtime partner of Human Genome, should share equally in the development costs for LymphoStat-B, given that GSK has been involved in the planning stages. The drug could reach the market by 2009 and achieve sales of $3.2 billion by 2015, according to Mr. Tenthoff. Human Genome is also in the running to produce its anthrax vaccine, ABthrax, under a U.S. government contract, which will be awarded in October, which Mr. Tenthoff says "could provide potential upside to" his $17 price target for Human Genome shares. Under the federal BioShield program, signed into law in 2004, the government plans to spend $5.6 billion to produce antidotes to anthrax and other infectious agents.

Lease on Life: Since Human Genome has yet to turn a profit and spends most of its cash developing drugs, anything to lighten its financial load is a boon. Recently, BioMed Realty Trust bought Human Genome's lavish] headquarters and lab facilities in Rockville, Md., for $425 million. The deal "improves Human Genome's overall financial health," noted Merrill Lynch analyst Hari Sambasivam, increasing cash balances to approximately $800 million. The sale, along with partnerships with Novartis and GSK, "could substantially reduce the need for Human Genome to seek additional financing," Mr. Sambasivam wrote. More recently, Human Genome spun off its CoGenesys research division as a standalone company [#msg-11556857], focusing on early stage drugs, potentially saving itself $35 million in the next three years, according to Mr. Tenthoff, "while retaining a focus on later-stage drug programs."

The Bear Case

No Risk, No Reward: While many analysts praised the Novartis deal, some chided Human Genome for partnering with a larger firm. "Although this deal removes much of the risk of Human Genome Sciences, it also decreases potential profitability," wrote Andrew McDonald at ThinkEquity Partners, who downgraded the stock to "accumulate" from "buy" and lowered his price target to $12 from $15. Dr. McDonald said Human Genome has essentially "given up" half of all U.S. Albuferon sales to Novartis and will only receive a royalty on international sales. He added that the benefits of sharing development costs with Novartis "do not offset the amount given up through revenue sharing and royalties" and cut his 2012 earnings-per-share estimate to $1.26 from $2.41. The Novartis partnership might also make Human Genome less likely to be taken over by GSK. "With Novartis as a partner as opposed to … GSK, which has partnerships with Human Genome on several other products… we believe a take-out premium that may have been in the stock may no longer be as well-justified," wrote George Farmer at Wachovia Securities when he cut his target price range for Human Genome shares to between $12 and $14, also citing a "lack of catalysts."

Mutating Market: Many biotech and big pharmaceutical firms are hard at work on new Hepatitis C treatments; by the time Human Genome's Albuferon comes to market, new remedies could exist that could "change the competitive market significantly," said Robert W. Baird analyst Christopher Raymond. Albuferon has already suffered one setback, failing to meet criteria allowing it to be injected just once a month instead of every two weeks, which would have served to set it more clearly apart from the competition -- including Roche Holding's Pegasys and Biolex's Locteron, which is still being tested, but could be as effective as Albuferon, with fewer side effects. Albuferon is also likely to face increasing competition from oral treatments in development by companies such as Anadys Pharmaceuticals and Idenix Pharmaceuticals, which Infinium Capital analyst Gil Aharon said could "fundamentally alter the future treatment" of Hepatitis C, possibly eliminating the use of drugs such as Albuferon.

No Products, No Profit: Human Genome remains a risky investment for the simple fact that it is unprofitable, with no approved products on the market. Its costs are also very high. In the first quarter, Human Genome's loss widened to $62.1 million from $59.6 million a year earlier, even as revenue rose to $6.8 million from $1.1 million, mostly on a milestone payment from GSK. Costs rose six-fold, mostly from research and development. "Human Genome Sciences is a biotechnology company with no approved products and is, therefore, fundamentally a high-risk/high-reward investment," noted Dr. McDonald. "The regulatory, competitive, and commercialization risks associated with Albuferon and LymphoStat-B are extremely high." Approval for both drugs -- if it occurs -- is years away, and the rest of the company's pipeline is relatively young. Several analysts remain skeptical of LymphoStat-B given mixed results in clinical testing last year. Mr. Schwartz said, "Human Genome must continue to grow into its valuation by demonstrating it has the wherewithal to bring several big products to market in the foreseeable future and become profitable on a sustainable basis thereafter."
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