Human Genome Sciences: Benlysta's Slow Start Will Hold Stock Down

Apr.19.12 | About: GlaxoSmithKline (GSK)

By Steven Edwards

Human Genome Sciences (HGSI) stock has been on a downward slide. A year ago, the price was approaching $30, but it closed recently around $7. Per usual, the drop has triggered a cascade of class action stockholder suits. Many of these allege that investors were misled because the management failed to disclose an unusual number of suicides in patients treated with its Benlysta drug, being developed in association with GlaxoSmithKline (GSK). The suicide association was revealed by the FDA in an internet filing in November 2010. Suicides notwithstanding, the drug was approved by the FDA in March 2011 for the treatment of autoantibody positive systemic lupus erythematosus, the first new drug approved for lupus in 50 years. A few months later, the European Union also granted approval and the drug has since been launched in Canada as well.

Benlysta is a monoclonal antibody drug (also known as belimumab) that targets a B-cell survival factor BLyS and prevents it from binding to its receptor. There is no obvious mechanistic link between the drug's action and suicidal ideation, though lupus patients are a high risk for suicide generally. Fever associated with drug treatment may aggravate existing depression. However, there were only three actual suicides among Benlysta-treated patients in clinical trials, so it is quite possibly a statistical aberration.

In any case, the major drop in HGSI's stock price did not begin until last summer, after the drug was already approved, so the stock's price drop was not triggered by the discovery of the suicide link-that is an invention of class-action attorneys seeking, as always, to profit from the market's vagaries.

HGSI is currently selling at about three times book value, which is not excessive for a biotech, but about 10 times revenues, which is somewhat pricey. So, a bullish case for the company would assume a ramp up in revenues. Last year's revenues were $131 million. The average analyst's estimate for 2012 revenue is more than double, $295 million. Revenues are expected to more than double again in 2013 to $619 million. These sound like great numbers, but they have actually been scaled back quite a bit from overoptimistic year earlier projections, which accounts for at least some of the decline in the stock price. Nobody is yet predicting profitability for the company.

But HGSI would seem to have a bright future. In addition to sales of Benlysta, it is in the process of supplying 65,000 doses of another monoclonal antibody, raxibacumab, to the Biological Research and Development Authority, a division of the U.S. Department of Health and Human Services (DoHHS). Raxibacumab blocks the actions of anthrax toxin, and DoHHS is stockpiling the drug against the possibility of a terrorist attack.

A third HGSI monoclonal antibody, mapatumumab binds to the Trail-1 receptor found on the surface of a number of different tumor cell types. Binding the receptor triggers apoptosis -- programmed cell death -- in tumor cell lines. The antibody is currently being developed to treat hepatocellular (liver cell) carcinoma.

In addition, HGSI has a financial interest in two drugs being developed by GlaxoSmithKline. One of these, Darapladib, is an orally active inhibitor an enzyme called phospholipase A2, the activity of which is a risk factor for coronary heart disease and stroke. The drug is currently in pivotal Phase III trials over seen by Glaxo. Another drug is Albiglutide, which is a modified glucagon-like peptide (GLP-1) peptide fused to human albumin using HGSI's technology. The drug helps to control appetite and maintain normal blood sugar. A Phase III trial is in progress to test its efficacy in treating type II diabetes. There is currently a worldwide epidemic of type II diabetes coincident with a corresponding explosion of obesity-a sad effect of American-style diets being adopted in emerging economies like India or Brazil.

For the most part, analysts are courageously neutral on the HGSI's stock. On April 12th, UBS AG started coverage with an $8 target price, close to current levels. Zack's has a neutral rating with an $8.25 price. Canaccord Genuity is more optimistic, with a $10 price tag, but still a hold rating. According to Reuters, 12 analysts have a hold rating, while 5 rate it a buy and 5 give it an "outperform" rank. One has an "underperform" ranking.

Right now, HGSI has no direct competitors for its current products. ImmunoGen (IMGN) is a similar company involved in developing monoclonal antibody-based drugs. It has a market cap of about $950 million, a price to book value of about 8 and a price to sales ratio of 43. Another monoclonal company, Seattle Genetics (SGEN) has a market cap of $2 billion, with a price to book of 9.7 and a price to sales of 22. A third company, Regeneron (REGN) has a market cap of $11.3 billion, a price to book of 25 and a price to sales of 23. So, HGSI is relatively cheap when compared to these peer companies.

When valuing biotechs that are not yet profitable, the future is obviously more important than the present. The future value of Benlysta could be tremendous. At one time, the average analyst forecast for Benlysta was about $4 billion annually. Given that there are about 300,000 patients likely to be eligible for the drug in the U.S. alone, with a price tag for a year's treatment at $35,000, it is not hard to believe that forecast. But new biotech drugs tend to ramp up slowly as a lot of physician education is required, and insurance companies are naturally resistant to the high price tag. It is not so much that the forecast was wrong, but that the time it would take to achieve those lofty levels was not appreciated.

HGSI seems cheap to me at present, although there is no immediate reason to rush into the stock. The key to rebuilding investor expectations will be a healthy rate of increase in revenues for Benlysta.

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