Human Genome Sciences: Will A Strong Pipeline Create Profits?

| About: GlaxoSmithKline (GSK)

For a biotech stock to be a real winner, it takes more than just successful clinical trials and FDA approvals or the potential of a drug in development as a cure for a particular disease. A lot depends on the choice of target market and the demand for effective and safe treatment. For instance, many biotech companies have zeroed in on the baby boomer generation, and their health concerns and treatment requirements are what is catalyzing in the research and development of new drugs and more effective treatment. After all, the 76 million Americans who make up this generation represent a sizable chunk of the market. Regarded in this light, Human Genome Sciences (HGSI) could prove to be a promising investment.

The stock has a 52-week trading range of $6 to $30. The company has a close relationship with GlaxoSmithKline (GSK), which is one of the largest Pharma companies in the world and has financial rights to some GlaxoSmithKline products. While HGSI is not entirely a single product company, I believe that in the near future, the success of Benlysta is going to be critical to the returns that investors would receive. This is an injectable antibiotic treatment for lupus which works by inhibiting the production of a protein called BLyS. Benlysta is the first lupus treatment that has been approved by the FDA in 56 years [in March 2011] and does not have any competitors. It is currently undergoing phase 2 clinical trials for the treatment of vasculitis and patients and for use with patients who have undergone kidney transplants. The company is also researching more effective delivery systems for the product.

The company shares commercial rights with GlaxoSmithKline on Benlysta and the drug definitely has the potential to be a blockbuster and chalk up sales in the region of $1 billion every year. Indeed, many analysts expect 2012 revenues to be in the range of $300 million to $700 million. What sales revenues are actually achieved will determine the revenue growth of HGSI as well as its valuation. In an evolving process, the big Pharma companies have drugs going off patent on a continuous basis and need to acquire affordable companies in order to replace these products. With a market cap of around $10 billion, I believe that HGSI is going to be an affordable acquisition for any major Pharma company all of whom are sitting on mountains of cash. A possible acquisition by GlaxoSmithKline because of the potential of Benlysta is one of the major attractions and holding on to the stock or even acquiring more. I consider the company to be fairly valued at the current stock price.

An area of concern for any investor should be the pricing of Benlysta which could cost up to $35,000 every year and has resulted in doctors not been particularly enthusiastic about prescribing this medication. One of the chief worries is the concern about insurance reimbursement for its considerable expenditure. It is going to take years for HGSI to make money on the drug and I consider it extremely unlikely that it can afford to reduce prices significantly. The drug has been launched in Canada and several European nations such as Germany, Spain, Austria and Denmark and the deception is encouraging though revenue growth is slower than I would have liked to see.

It is time to turn our attention to some of the other pipeline drugs being developed by HGSI. HGSI is developing a drug for type 2 diabetes as part of its relationship with GlaxoSmithKline, and a recent news release has revealed that seven out of eight Harmony Phase 3 Trials have been successful. HGSI used its proprietary albumin-fusion technology to create Albiglutide and licensed it to GlaxoSmithKline in 2004. HGSI will receive payments of almost $200 million when it reaches specified milestones. In addition, if the drug is successful commercially, the company also stands to receive royalties in the single digits on global sales. GlaxoSmithKline has confirmed that it would push ahead with plans for approval and that the drug has not yet been approved for use anywhere in the world. Analysts expect yearly sales to be modest and in the region of about $250 million at the end of the next five years.

In May 2009, HGSI submitted a Biologics License Application [BLA] to the FDA for a pipeline of drug for the treatment of anthrax caused by inhalation and, in November 2009, FDA issued a Complete Response Letter. HGSI is working with the FDA towards approval though the process as always is time consuming and expensive and the outcome is uncertain. Raxibacumab is an injectable treatment that prevents the toxins from the anthrax bacteria from spreading through the body. The treatments presently available can kill the bacteria but are not effective if the toxin has already been released. Some revenue has already been earned from the US government emergency stockpile.

HGSI competes with a few companies which already have products on the market for treating lupus by suppression of the immune system. Biogen Idec (BIIB) produces a treatment for lymphoma called Rituxan, while the Swiss giant Roche (RHHBY.PK) produces CellCept an immune system suppressant. Both Immunopharma and Eli Lilly (LLY) have pipeline drugs in phase 3 trials in Lupuzor and BAFF. However, as I have noted, nothing competes directly with Benlysta and HGSI continues to be in the enviable position of having a monopoly.

No matter what happens, HGSI should continue to develop more successful pipeline drugs in order to continue to be an attractive investment candidate. Having a drug in a monopoly position is definitely worth something, but without translating into substantial sales revenues, the potential in terms of returns to investors is unlikely to be fulfilled. The company is meanwhile burning a lot of cash in pursuit of success but, in my opinion, continues to be fairly valued. I consider it unlikely that GlaxoSmithKline will make any acquisition moves in the current year. My recommendation is to hold if you already have an investment in HGSI, but do not take any new positions at this time.

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