Human Genome Sciences Inc.'s (HGSI) September quarter report announced after the close yesterday included sales figures for its lead BENLYSTA drug for lupus that imply a slower ramp-up than is currently built into Wall Street forward estimates. The company missed both revenue ($34 million versus $36.8 million) and earnings (45c loss versus 38c loss) estimates for the September quarter.
Furthermore, HGSI reported that BENLYSTA net sales increased from $7.8 million in the June quarter to $18.8 million in the September quarter, with weekly gross sales rising to $2.0 million in the last four weeks of September from $1.7 million and $1.4 million in the preceding four-week periods, respectively.
Although the company did not reveal December quarter or FY 2011 revenue and earnings guidance, a back of the envelope calculation starting with its cash guidance of $440 to $470 million (net of $79 payment for debt due), and other statements in its earnings release and conference call imply a higher loss than what is being currently projected for the December quarter. The cash guidance implies that cash use in the December quarter would be in the range of $90 million versus the $70 million that is currently built into Wall Street estimates.
Furthermore, the company has said that its guidance for 2011 SG&A and R&D expense has not changed, which leads us to conclude that BENLYSTA ramp-up may be worse than is currently being projected by Wall Street. This is further corroborated by the company’s statement in its conference call that it will now reach profitability in 2014, not 2013 as was announced at a prior investor conference.
The stock fell almost 15% in the after-hours yesterday, and will most likely open significantly lower today. While the drop is understandable based on the revenue and earnings miss, we believe that for long-term investors, the correction over the next couple of weeks will offer an attractive entry point to buy into the almost sure blockbuster potential of BENLYSTA at a discounted price.
BENLYSTA, approved by the FDA in March this year, was developed under collaboration with GlaxoSmithKline Plc (NYSE:GSK) for the treatment of adult patients with active, autoantibody-positive systemic lupus erythematosus (SLE) who received standard therapy. It was enthusiastically welcomed by the lupus patient advocacy groups as it marked a significant milestone, being the first drug approved for the treatment of SLE since Hydrochloroquine (HCQ) in 1955. Lupus is an autoimmune disease that results in inflammation and tissue damage that often harm the heart, joints, skin, lungs, blood vessels, liver, kidneys and nervous system, and it has no cure and can be fatal. As such, treatments for SLE are aimed at preventing flares and reducing their severity and duration when they do occur.
We believe that the long-term blockbuster potential for BENLYSTA remains unchanged based on its demonstrated efficacy and positive safety profile, with projected sales of $2 billion to $4 billion annually. Already, the drug has been approved by the U.S. FDA, and in Canada and the EU. It is now available in Germany, Canada, Austria, Denmark, Finland, Hungary, Norway and Sweden; with approval in Spain expected soon. Furthermore, in the U.S. where it was first launched, HGSI has already seen a steady increase in the number of key accounts that have begun to order BENLYSTA, including community-based and hospital accounts.
We believe that the problems with BENLYSTA are in execution and are part of the growing pains for biotech companies of going from a research and development to a commercialization stage. For one, BENLYSTA involves a novel mechanism that is largest unfamiliar to physicians who treat lupus. Furthermore, there are concerns related to physician reimbursement of physicians that are slowing down the ramp-up. We believe that these can be satisfactorily addressed by management, and ultimately the underlying science in terms of the efficacy of the drug and the lack of comparable alternatives will prevail.
The company has already started addressing these with a three-pronged strategy of a sales promotion program, scientific engagement to facilitate share of experience among lupus experts, and a consumer promotion program. We believe that with these initiatives and over time, positive physician experiences with the clinical responses and reimbursement experiences should lead to BENLYSTA sales growth acceleration over time.
At yesterday’s close of $12.73, HGSI trades at a market-cap of $2.4 billion, a discount given that biotech companies generally trade at three- to five-times peak sales. Furthermore, besides BENLYSTA, HGSI has drugs under development in phase 3 trials for Inhalation Anthrax, cardiovascular disease, and Type 2 diabetes, and many earlier stage trials. Furthermore, there was speculation last week that HGSI’s BENLYSTA partner GlaxoSmithKline may be preparing to purchase HGSI in a deal worth $25 per share.
Also, it was rumored at the time that there was buyout interest from Merck & Co. (NYSE:MRK) and Biogen Idec (NASDAQ:BIIB) as well. We believe that HGSI is a good buy at these levels, but we would buy it in stages to take advantage of any further weakness.
Other companies with lupus drugs under development that may be of interest include:
Immunomedics Inc. (NASDAQ:IMMU): IMMU develops monoclonal antibody-based products to treat cancer and autoimmune and other diseases, with its leading programs target pancreatic cancer, rheumatoid arthritis and lupus. Its lupus drug Epratuzumab is currently in phase 3 clinical trials, being developed by partner UCB.
Teva Pharmaceutical (NASDAQ:TEVA): TEVA is an Israeli developer of generic and branded drugs, and active pharmaceutical ingredients. Its Laquinimod drug is in phase two development for Crohn’s disease and lupus, along with other autoimmune diseases.
Amgen Inc. (NASDAQ:AMGN): AMGN develops therapeutics based on cellular and molecular biology to treat anemia, cancer and inflammatory diseases. Its AMG 557 compound is in phase one trials for the treatment of lupus.
Biogen Idec Inc. (BIIB): BIIB develops treatments for multiple sclerosis (NYSE:MS), cancer and autoimmune and inflammatory diseases. It has two compounds in phase one development that target lupus, one targeting SLE and the other targeting Lupus Nephritis.
Furthermore, the SLE market, prior to the approval of BENLYSTA, was largely generic with significant off-label use, mainly from Rituxan, co-marketed by Biogen Idec and Genentech, a division of Roche Holding (OTCQX:RHHBY), and from CellCept by Roche Holding’s and Myfortic by Novartis (NYSE:NVS). However, it is believed that the launch and uptake of BENLYSTA will increase the overall market for SLE drugs, including for the competing generics already in the market.
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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