Human Genome Sciences (Nasdaq: HGSI) has a market cap of $2.4 billion. Its main asset is Benlysta, a newly approved lupus drug. Because HGS shares half of their gross profit from Benlysta with partner GSK, it is more appropriate to think about the “Benlysta market cap” of roughly $5 billion. WK sales data last month suggest monthly sales of $5 million for this asset. At a run rate of $60 million annually, this is a product trading at 83x sales. Even if the run rate increases substantially from here, as it did with the Remicade in its early years, this early base is much lower than expectations.
My modeling suggests a global peak sales estimate of $750 million, with fair value for HGS at $7 per share, or 40% downside. I think my peak sales and value estimates are generous to HGS. This product is simply not efficacious enough. Drugs like Remicade, Enbrel, Humira are “night and day” differences for their patients. Benlysta is much more like Provenge, where the medical community is skeptical of relevant efficacy as the data sets for both drugs suggest a modest benefit. Physicians will use their discretion as to which patients may benefit most from Benlysta.
Lupus is a highly symptomatic disease where unless a flare is prevented or the severity lessened, patients and physicians aren’t served. Benlysta doesn’t seem to do either, instead it seems to provide a very small benefit in a highly variable disease. Lofty sales estimates rely on Benlysta patients remaining on Benlysta, an unlikely to occur scenario as the large patient copay and insurance pressures limit “perpetual” revenue drugs from patients who are not clearly benefitting. I could see revenue for Benlysta peak soon and then begin to decline sequentially as patient time on drug shrinks.
Benlysta is also a very expensive product. In the new healthcare and macroeconomic environment, new drugs are being shunned, especially if they do not provide meaningful improvements over old standards. Expensive and new drugs are even more carefully scrutinized. My thesis is that when HGSI reports Q3 and Q4 earnings, the share price will nose dive just as Dendreon’s (DNDN) share price did. Reality is quickly setting in for HGS longs, mostly growth-oriented mutual funds who have just completed large purchases above $25 per share in Q2 2011.
I suspect these investors will exit as quickly as they entered, as the current $12 and declining share price creates a panic.
Additional disclosure: I and MSMB may change our position at any time without notifying SA.