Human Genome Sciences: Upgrade Precedes Data Report

Thursday morning, J.P. Morgan raised its rating on Human Genome Sciences (HGSI) to Overweight, two trading days ahead of Monday's much anticipated top-line data from the second Phase III trial evaluating Benlysta in lupus. Previously, the firm had a neutral rating on the shares and a $14 target on the stock, in comparison to the new price target of $25 on the shares.

After conducting a survey of 25 rheumatologists, Morgan has more confidence in the pending results due on Monday and assigns a 70% probablility of success. According to the firm, most of the physicians surveyed were "widely enthusiastic about Benlysta, but more interestingly 84% (21/25) predicted that Bliss-76 either had a 'good chance' of success or would 'absolutely' work. Assuming the drug gets approved, this sampling of doctors stated that they would initially treat about 28% of their patients with the drug.

As for what could go wrong, most doctors simply stated: "it's lupus," a reference to the disease's heterogeneity. According to Morgan, their biggest fear is the unknown ("something that no one has thought of yet").

Even with the biotech group floundering of late, HGSI shares have held up relatively well, trading near its 50-day moving average coming into Thursday's trading. Morgan's positive comments have certainly helped the stock, with shares currently trading up over 10% to $20.25 on heavy volume.

I am currently long a very small long position in the out of the money Nov. 23 calls and in the Nov. 17 puts, hoping that one side of this position should more than make up for the other leg of the spread before these options expire. With the inherent risk of owning the stock into this binary event, I feel that this small spread position is the most prudent way to play HGSI ahead of next Monday.

Disclosure: Long small call and put position in HGSI.