Human Genome Sciences Awaiting Crucial Albuferon Data

Recent headlines that Susquehanna analysts have downgraded their rating on Human Genome Sciences (HGSI) from “positive” to “neutral”, whilst negative for sentiment, may have initially appeared relatively innocuous given the tough financial climate.

However, this “neutral” rating masked some pretty damming opinions from the analysts, including: “our enthusiasm for HGSI's products and our confidence in management's ability to execute has waned”. With HGSI’s shares losing 81% of their value this year and now trading at record lows of $1.95, shareholders will be desperate that the company’s first ever set of phase III results, due in December for hepatitis C drug Albuferon, prove doubters such as Susquehanna wrong and stimulates the return of some of the enthusiasm and confidence that clearly used to exist when the stock traded at $100 during the biotech-boom in 2000.

Albuferon needs to achieve its targets

Albuferon, developed using HGSI’s albumin-fusion technology, is a longer-acting form of Roche’s recombinant interferon alpha, Pegasys, which is already approved to treat hepatitis C and B and achieved sales of $1.37bn last year.

With Albuferon required to demonstrate non-inferiority to Pegasys as a bare minimum, HGSI is pinning its hopes for regulatory and commercial success on the fact Albuferon requires half as many injections as Pegasys and may offer the potential for improved quality of life and fewer lost days of work whilst on treatment.

Two phase III trials are ongoing for Albuferon: Achieve 1 in 933 treatment-naïve patients with genotype 1 chronic hepatitis C and Achieve 2/3 in 1,331 treatment-naïve patients with genotype 2 or 3 chronic hepatitis C. It is the top-line results from Achieve 1 next month that investors will be hoping provides a much-needed boost to HGSI’s ailing share price.

Commercial potential

Having struck a global development and commercialisation deal over Albuferon with Novartis in 2006, which included a $45m upfront fee, a further $508m in milestones and allows HGSI to co-promote and book US sales, the commercial infrastructure is already in place; the issue remains the delivery of positive clinical trial results and regulatory approval.

With a potential NDA filing in late 2009, consensus forecasts of $70m in 2010 are then set to rise to $726m by 2014. On a risk-adjusted basis, HGSI’s US sales could reach $376m by 2014 and coupled with rest-of-world royalties from Novartis, Albuferon is worth $1.33bn to the company, according to EvaluatePharma’s NPV Analyzer.

Compared to a market capitalisation of $264m, or an enterprise value of $690m, the potential for positive Albuferon data to dramatically improve HGSI’s market value is clear.

Safety concerns

Whilst the valuations for Albuferon may look compelling, a major setback to the drug’s chances of clinical success occurred in January when the highest dose of 1200-mcg had to be withdrawn from both trials due to a greater incidence of serious adverse pulmonary events in patients treated with the high dose.

HGSI’s shares plummeted 44% on the day this event was announced and failed to recover, before sliding a further 69% in just the past six weeks, albeit it in a very weak and depressed overall market.

With the withdrawal of the highest dose, hopes that Albuferon may prove to be superior to Pegasys have been dashed, leaving a more limited claim of non-inferiority as the basis for a regulatory filing. Therefore, with a major safety scare now associated with the drug and the FDA taking an increasingly hard line against ‘me-too’, and even ‘me-better’ drugs with delivery or dosing advantages, major question marks over Albuferon will remain unless both Achieve trials produce dramatically positive data.

Highly geared

With $280m in convertible debt due in 2011 and a further $230m in 2012, HGSI clearly needs to start generating some decent revenues over the next few years. As such, news that $120m in revenues for supplying anthrax antibody ABthrax to the US government would not be coming in this year overshadowed the fact that third-quarter losses were narrower than expected.

Although HGSI still believes it will receive $150m related to ABthrax in 2009, the vagaries of government contracts mean some commentators see this as an increasingly risky assumption.

As such, HGSI needs Albuferon data to be very positive next month, otherwise the recent trend for ailing biotech companies having to restructure their operations could become necessary.

Disclosure: no positions