I believe there are many reasons why Human Genome Sciences (HGSI) is currently undervalued in the biotech sector. A skeptic could argue that the firm's stock price has been in a tailspin as of recently, but I consider that to be extremely shortsighted. For starters, the price of this stock has been hovering right around $7, consistently, and minor fluctuations are to be expected every now and then. Next, and more importantly, HGSI is taking an unorthodox approach with its new drug, Benlysta.
Benlysta is unique to the company for two major reasons. First, Benlysta is on the market already. This is immensely significant because Benlysta is the first drug approved by the FDA to treat Lupus since 1955. Since there are no current competitors, or past competitors for this drug, I do not see why Human Genome Sciences won't be able to take advantage of this near monopolistic situation. There were slight problems last year, as the market's expectations of Benlysta outpaced the real demand by a wide margin. However, after the market corrects itself, I know Human Genome Sciences will be better equipped to estimate the real demand and act accordingly on it.
Another reason I believe Human Genome Sciences is poised for a nice gain, is that it chose to hold on to the rights of Benlysta. Obviously this keeps the potential future profits in the HGSI coffers, and it shows the firm stands behind its product. However, Human Genome Sciences made a brilliant move to co-market the new drug with help of pharmaceutical giant GlaxoSmithKline (GSK). I see this as a power move that not only lends credibility to the marketing campaign, but also works to legitimize Benlysta in the eyes of skeptics. Finally, this partnership with GlaxoSmithKline will give Human Genome Sciences to tap into market segments that it would have never had the chance to beforehand.
However, I feel HGSI needs to be vigilant to maintain this competitive advantage. Though some companies have not yet done the research necessary to create a drug that can compete with Benlysta, one small southern California company is too close for comfort. Rigel Pharmaceuticals (RIGL) incorporated received FDA approval to conduct clinical trials for two possible Lupus treatment drugs. I know that it frequently takes time, even when the FDA fast tracks the development. However R333, and R548 have the potential to take market share from Benlysta.
Moreover, Rigel Pharmaceuticals is taking cues from Human Genome Sciences. I can see that it has learned that it is extremely beneficial to be associated with extremely large pharmaceutical juggernauts. It has partnered up with AstraZeneca (AZN), who is helping it in the production and marketing of a drug for rheumatoid arthritis. This is not a direct threat to Human Genome Sciences yet, but I can see it becoming a major issue eventually. Let's assume that the trials for R333 and R548 go reasonably well, and the drug hits the market in the normal amount of time it takes. AstraZeneca will see the potential to market drugs on behalf of Rigel Pharmaceuticals, and why not? The rheumatoid arthritis marketing and production have gone spectacularly thus far. Given the fact that these two firms have a working relationship already, I see no reason why the two could not establish oligopolies in the lupus drug market too. Therefore, Rigel Pharmaceuticals may be an extremely undervalued stock, also, at nearly $8 per share.
Pfizer (PFE) is another pharmaceutical competitor of Human Genome Sciences. Once again, I believe this company's stock price is devalued based on some poor decisions in the past. Though its price is hovering at right around $22 dollars per share, its recent performance has investors buzzing with excitement. This attitude is a result of several changes that Pfizer is looking to make. First and foremost, it is finally entertaining offers for its nutrition business. Current contenders for that sale include esteemed companies such as Nestlé. If the sale of the Pfizer's nutrition business happens, I believe it will be flush with much needed cash, which will inspire confidence within its investors. This is not the only project in the pipeline. Pfizer is looking to go public next year with an animal health business. Such big projects in such a short period of time could pay big dividends for Pfizer, as well as its investors. The added comfort of both projects occurring nearly simultaneously is priceless because it is hedging the risk of failure.
Finally, Biogen Idec (BIIB) is another competitor that Human Genome Sciences will have to deal with. This company is the market leader for multiple sclerosis treatment. ITs stock price is over $120 per share, so the investors who typically invest with companies like Human Genome Sciences may not dabble in large cap stocks like these. Nevertheless, each is a large biotech firm and therefore in direct competition with each other. I see Biogen losing market share to the smaller drug manufacturing companies, for multiple sclerosis treatment options. This would be terrible for it, but it is bound to happen unless it attempts to diversify its product line in some way. Regardless of how ironclad the drug may be, if it is prohibitively expensive companies like Amgen (AMGN) and Pfizer will be able to kick out a generic version within weeks. This has the potential to be the downfall of Biogen.
In conclusion, Human Genome Sciences has many competing companies, both in the biotech sector, and the drug manufacturing sector due to the unique nature of the business. Some of the companies are far behind Human Genome Sciences in producing a drug that attains pure monopolistic status, even if for only a short period of time. However, as more and more drug makers are drawn towards untapped markets, Human Genome Sciences may have very little time, if any, to rest on its laurels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.