4 Biotech Stocks With Strong Upside Potential

| About: GlaxoSmithKline (GSK)

The last twelve months have been a rocky ride for Human Genome Sciences (HGSI), once tipped as the bright young things of the Biotechnology industry. Since April 2011, shareholders have seen the value of Human Genome stocks fall from a healthy $30 to just under $8 per share, in a series of hair raising drops, fluctuations and partial recoveries. The darkest days for Human Genome Sciences came in early July 2011, when the stock value fell from around $25 to $15 in just a couple of days, with no subsequent recovery.

In recent days, there seems to be no let up in Human Genome Science's precipitous stock collapse. Between 12th and 21st March 2012, no less than 7.4% of its stock value was lost.

With a wildly erratic 52 week range of $6 to $30, investors may be forgiven for looking askance at a company which once led the field in biotechnology research. On the surface, this is an inexplicable fall from grace. Only in 2009, Human Genome Sciences was pulling in government contracts worth around $207 million for delivery of raxibacumab vaccines to the US Strategic National Stockpile for use against a potential anthrax based terrorist attack. At the same time, it was leading the field in phase 3 clinical trials for darapladib, a revolutionary new treatment for coronary heart disease, and albiglutide, a drug treatment for sufferers of type two diabetes - both commanding very handsome contracts and a secure future for the company's stocks.

So what went wrong? Did Human Genome Sciences overstretch itself? The answer to this question lies with an obscure autoimmune disease called Lupus, a potentially fatal condition that affects over 300,000 men and women in the United States. Prior to 2009, the only relief available to sufferers of Lupus was aspirin, the same prescription that had been available since 1955. This was lacking in many ways, and still led Lupus sufferers to experience chronic kidney and nervous problems, as well as complications during pregnancy.

In its trademark, revolutionary style, Human Genome Sciences pioneered a new drug that was potentially life-changing for sufferers of lupus. The new drug Benlysta, also known as Belimumab or LymphoStat-B, was developed in partnership with GlaxoSmithKline (NYSE:GSK) and put through clinical trials from July 2009. In March 2011 Benlysta was approved by the US Food and Drug Administration [FDA] for treatment of Lupus patients. I can hardly understate the significance of this breakthrough in treating Lupus, not least due to Benlysta being the first serious development in treatment for the disease in nearly sixty years. The price tag wasn't cheap, with the annual treatment bill for each patient expected to run to $35,000.

Accordingly, the stock value of Human Genome Sciences went through the roof, peaking at around $30 in early April 2011.

However, the root of Human Genome Science's problems lie in shares sold during Benlysta's development period between 11th July, 2009 and 20th November, 2010. The Biotech giant is currently fighting a lawsuit against purchasers of common stock during this class period. Scott & Scott LLP were appointed Lead Counsel for the prosecution on 22 March, 2012.

The pending lawsuit alleges that Human Genome Sciences and some of its directors made omissions and false and misleading claims about the efficacy of its lupus busting wonder drug Benlysta. Riding high among these omissions is the drug's poor success rate among African-American patients who participated in the clinical trials. Not only did patients of African-American descent not respond to treatment from Benlysta, but the trial group also reported increased levels of death, serious infection and non-fatal side effects, such as nausea and increased fatigue.

The lawsuit also alleges that Human Genome Sciences chose not to reveal the alarming link between Benlysta treatment and increased incidences of suicide among patients. During the time the company was allegedly concealing the shortcomings of the clinical trials, they were busy selling shares for between $14 and $15.50. In the class period concerned, Human Genome Sciences sold upwards of 44.5 million stocks to eager Biotech investors, making a very respectable profit of $850 million from the proceeds.

I did not find the market reaction surprising when the allegations of Human genome Sciences' misconduct broke in the press in March 2011. It is fair to say that the bottom fell out of the company's stock value, causing huge losses among the investors who had paid premium rates for stocks during the period of the clinical trials. It is also fair to say there were a lot of angry people wanting to hold the company to account for their losses, not to mention widespread dissatisfaction with the shortcomings of Benlysta among the medical community.

Unaffected by the allegations against Human Genome Sciences, GlaxoSmithKline continues to act as the principle sales agent of Benlysta throughout Europe and Canada, where the drug was approved for use with mild cases of Lupus in April 2011. In the last twelve months, GlaxoSmithKline's stock value has increased steadily, and at the time of writing, shares stand at around $46 and rising.

With the lucky exception of GlaxoSmithKline, the Benlysta scandal appears to have had a knock on effect in the wider biotechnology market, with share prices falling for big player Therevance (THRX) in the year from April 2011 and Volcano (NASDAQ:VOLC) experiencing a serious dip during the same period before staging a recent recovery. However, this could have been a lot worse, and investor confidence has remained strong in some sectors of the biotech market. Halozyme Therapeutics (NASDAQ:HALO), for instance, has experienced no knock on effects from the misfortune of its competitor, and may even have benefited from investment from disillusioned biotech shareholders who fled from Human Genome Sciences when the scandal broke. Halozyme has enjoyed a huge leap in stock value since October 2011. With a 52 week range of $5.50 to $12, shares now stand at over $12.

Although the Benlysta scandal has shaken the confidence of the market and a lot will still hinge on the outcome of the upcoming lawsuit, much of the uncertainty will hopefully have been resolved by the time Human Genome Sciences' directors face a major shareholder meeting in Gaithersburg, MD on 16th May 2012.

With new treatments still rolling out of the laboratories at a furious rate, investors still have every reason to have faith in the biotech industry, and to vote with their wallets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.