Human Genome Sciences' (HGSI) Benlysta isn't the first would-be blockbuster to disappoint investors with its initial launch, but it's one of the larger disappointments in recent memory. While there is still a good case to make for Benlysta eventually being a successful drug, it's starting to look as though Human Genome and GlaxoSmithKline (GSK) may do all of the heavy lifting and trailblazing in lupus only to ultimately get left behind.
Benlysta - Waiting For Trialing, Or Waiting For Godot?
At the time of its approval, Benlysta was hailed as a multi-billion dollar blockbuster drug in the making. What's more, reading sell-side research would lead one to think that the SEC passed a rule requiring all analysts to mention that Benlysta is the first new drug for lupus in 50 years.
As it turns out, though, no drug sells itself and Benlysta is having a difficult go of it. Whatever excuse investors buy into - stubborn rheumatologists, problematic reimbursement, disappointing efficacy - the fact remains that analysts have had to cut their sales projections time and time again.
At this point there are still reasons to believe that Benlysta can be a winner for both partners. For starters, the drug does help a meaningful percentage of patients who take it. Part of the problem seems to be, though, that it doesn't show the dramatic (or quick) impact of TNF inhibitors like Abbott's (ABT) Humira, Johnson & Johnson's (JNJ) Remicade, or Amgen (AMGN)/Pfizer's (PFE) Enbrel, and that's what these rheumatologists are most familiar with in their day-to-day practice.
It's also worth pointing out that the companies are pushing on in their efforts to get label extension for lupus nephritis - an indication that could expand the on-label addressable market by about two-thirds.
But Time Is Wasting
Unfortunately, time that should have been spent in building Benlysta into the incumbent drug for lupus is being frittered away on conservative trialing and slow adoption by doctors - many of whom don't seem to think the drug works well enough and/or believe their lupus patients are currently treated well enough. Keep in mind, these are surveys of the docs and not the patients.
Why this matters is that competitors are coming. Immunomedics (IMMU) could have pivotal data on its promising drug epratuzumab early in 2014, with data on Lilly's candidate coming out a year later. There's also Anthera Pharmaceuticals (ANTH) and its blisibimod, which is further back but offers easier administration. What's more, both Lilly and Anthera's drugs seem to block both soluble and membrane-bound BLYS, whereas Benlysta blocks just the soluble. It will be interesting to see what, if any, efficacy and safety trade-off there is with that, but the possibility exists that these other drugs will be more potent.
Any of these drugs could be a real threat to Benlysta if approved, and not just necessarily from a better efficacy or safety profile. There is a real risk that Benlysta is going to take all of the arrows involved in being the first over the wall, and rheumatologists will be increasingly willing to try new drugs as the market develops - dramatically shortening Benylsta's marketing prime.
The Rituxan Problem
One of the details about lupus therapies that does concern me is the fact that Rituxan (co-marketed by Roche and Biogen-Idec (BIIB)) is still frequently used in lupus. This comes despite the fact that clinical trials for the drug in this indication didn't go especially well, So here we have a drug (Benlysta) that was good enough to get through the FDA but is widely doubted in the medical community, and another drug that disappointed in pivotal trials but still gets pretty broad off-label trialing in real life.
Whether this is testament to the differences between clinical trials and real-life experience or the power of established therapies, I don't know, but it is concerns me all the same.
A Low-Potential Pipeline
Making matters worse for Human Genome is that its pipeline is not especially compelling. Syncria will probably get approved as a long-acting GLP-1 analog, but the efficacy numbers have not been strong relative to Amylin's (AMLN) Bydureon or Novo Nordisk's (NVO) Victoza. It will get tried out by FP/GPs and endocrinologists (due in part to Glaxo's marketing muscle), but I would be surprised if it surpassed a few hundred million in revenue and HGSI's relatively low royalty rate (single digits) mitigates the impact.
HGSI's other GSK-partnered drug darapladib is intriguing as a atherosclerosis drug that could reduce cardiac events like heart attack and stroke, but this is an indication that has chewed up a lot of once-promising drugs. What's more, even if Glaxo gets this drug approved (and Phase 3 data is on the way within a year), HGSI will be getting modest royalties as well.
HGSI also has some potential oncology drugs and additional Benlysta applications further back in development.
What's The Real Benlysta?
Human Genome doesn't have a perfect capital structure by any means, but only about $207 million of its debt is due soon (2012), and another $495 million is due in 2018. What's more, Glaxo is responsible for the clinical development expenses of those two pipeline drugs, so cash is not my most pressing worry.
For better or worse, Human Genome is all about Benlysta. Even if darapladib and Syncria were great successes, they wouldn't add much more than $2.50 per share in value (and that's with blockbuster success).
When it comes to Benlysta, expectations range from less than $600 million in peak sales to more than $2 billion. At $800 million in sales, Human Genome shares would arguably be worth about $10, while $1 billion in revenue would push it up to about $12. Late-stage failure at Lilly, Immunomedics, and/or Anthera would certainly improve the likelihood of the $1 billlion scenario, but even absent those failures I'm still cautiously optimistic that Benlysta can get there.
What I don't necessarily believe, though, is that Human Genome is a prime takeout candidate. The royalties that Glaxo owes for the pipeline drugs are fairly minor and the ramp for Benlysta wouldn't support a bid yet either. That said, if HGSI stock stays below $8 and Glaxo believes that Benlysta can be a $750 million-plus drug, it gets more compelling.
If HGSI's fair value is in the low teens, the stock today is admittedly interesting. That said, the technicals are iffy, the momentum is soft, and there's a large short interest. There are easier ways to make a buck in biotech, but I wouldn't write of Benlysta just yet.