Human Genome Sciences, Inc (HGSI)

[chmcnfunds]

Human Genome Sciences Could Jump Higher On Darapladib, Strong Pipeline

April 18, 2012

There are a lot of investors and analysts worried about Human Genome Sciences (HGSI) these days, but I think the company is going to be just fine. There are three reasons why I would still put money into HGSI, especially at around the going rate of $7.

First, the company is still going strong with its on-the-market drug. I always consider a company with an approved, marketed drug a great investment when the price is this low. Second, the competition in this price range has a different focus than HGSI. Finally, HGSI has a strong pipeline that I believe will turn it into a major contender in the coming years.

Even analysts who do not agree with my short-term outlook for HGSI have not written it off down the road. Patient investors should see a buy into HGSI pay off big in the long run.

The great thing about a long-term outlook on biotech stocks is that your entire existence is not predicated on FDA approval. HGSI investors will watch the FDA, of course, but a single negative announcement will not be a make or break scenario for the company. For starters, HGSI is incredibly affordable at the moment. It dropped steadily through 2011 and the first part of 2012, and most investors began to write it off as over with. The conclusions were hasty and I would consider now the best time to make a bid.

One of the biggest reasons is HGSI's drug Benlysta. It was approved in 2011, becoming the first lupus medication to be approved by the FDA in more than 50 years. As a side note, HGSI is also responsible for Raxibacumab, a treatment for inhalation anthrax. Obviously not all that commercially successful, the medication is sold to the government as part of its Strategic National Stockpile. This is good to know and it provides some security, but more of my focus is on Benlysta and the other promising components of HGSI.

One of the main reasons HGSI saw a price reduction with the approval of Benlysta is because it still owns the drug independently. Many drug developers have begun selling off products once the treatment receives approval. This avoids expensive marketing costs, but makes the company a one-time profit or provides ongoing royalty payments. HGSI is taking on more of the responsibility and cost of managing Benlysta, but it stands to earn steadily over the years because it is the only one making a profit from the drug. The drug did not sell as well as expected in 2011, but that is not to say it was not successful. Expectations were very high and now that the market has a better idea of what to expect, things can settle down. HGSI has also made a concerted effort to educate doctors about the product and the education efforts appear to be paying off. HGSI predicts a strong 2012, primarily based on the efforts it has made to market and educate Benlysta.

Perhaps of even more interest to investors is HGSI's stability. The company is in good financial shape, even though it has significant overhead from its full ownership of its products. It reported over $881 million in cash in 2011 and $562 million in convertible debt, due to mature in mid-November 2018 with an interest rate of 3%.

I divide my evaluation of HGSI's competition into two categories. The first is other companies focused on lupus treatment. In at least one case, the price for a competitor is so much higher than HGSI, it would hardly be a consideration at the moment. Eli Lilly (LLY) is in phase three trials of its lupus treatment that should be competed in early 2014. ImmuPharma (LMM) also has a lupus drug in phase three trials, which has received a fast-track from the FDA and has received special protocol assessment, meaning it is highly likely to be approved.

Obviously these developments could cause a threat to Benlysta, but there is enough time to position Benlysta solidly in the medical industry before there is a problem. ImmuPharma is going for more than the equivalent of $100 on the London Stock Exchange and Eli Lilly, one of the nation's drug development giants, clocks in around $40 at the moment. Investors expecting to pay less than $10 a share will not consider either of these an option. I would keep my eye on the companies strictly for what is being accomplished in regard to specific treatments and how these treatments will affect Benlysta.

The second category of comparison is biotech stock in the same price range. Three competitors that are in the same price range are Spectrum (SPPI), Achillion (ACHN), and Idenix (IDIX). Each focuses on different treatments, so there is no direct competition in regard to lupus treatment. Spectrum is developing cancer treatments and has primarily an oncology focus. Achillion has programs focused on HCV treatments and Idenix has its hands in HCV, as well as HIV and hepatitis B. These companies are in the same price range as HGSI, but none are focused on lupus.

Finally, HGSI has a strong pipeline, which I believe will ultimately keep it earning steadily regardless of the competition Benlysta faces. The company's goals include expanding the usage of Benlysta into other fields, including as a treatment for vasculitis. It is also developing Albiglutide in a partnership with GlaxoSmithKline. The drug is intended to treat diabetes, a market that is growing as fast as any and shows no signs of slowing down. Also in the pipeline is Darapladib, another drug developed with GlaxoSmithKline (GSK), in phase three trials for treating coronary heart disease. Like diabetes, heart disease is forecast to become an even greater problem in the coming years. As a matter of fact, there was a bump in all treatments intended to focus on obesity-related issues recently when a report was issued by the OECD.

Basically, HGSI is playing a role in a variety of different places. In addition to lupus, it intends to become a player in the growing market of treating obesity-related diseases. I believe HGSI is a great investment, especially for patient investors, at its current price, and I would recommend buying as soon as possible.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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http://seekingalpha.com/article/505441-human-genome-sciences-could-jump-higher-on-darapladib-strong-pipeline

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