Human Genome Sciences Will Soar As Benlysta Gains Traction

Apr.25.12 | About: GlaxoSmithKline (GSK)

With more than 300 new drugs approved by the FDA in the last decade, the biopharmaceutical sector in the United States is definitely the global leader in medical innovation. Significant progress has been made when it comes to fighting diseases such as HIV/AIDS, cancer and other rare diseases. These diseases, once considered incurable, now fall within the group of controllable diseases.

A substantial decline in death rates both in HIV/AIDS and cancer during the last decade serves as evidence that the developments within the biopharmaceutical sector give results. In fact, in 2011 alone, the FDA approved 35 new medicines that concentrate on unmet medical needs. These include Benlysta - the first new drug for Lupus since the 50s - developed by Human Genome Sciences (HGSI), two cancer drugs, eleven drugs for patients with rare diseases, and two new classes of drugs for Hepatitis C.

When it comes to investing in the biotech sector, some may consider it a risky business. My thoughts are quite the opposite. If you do your research right and pick a company that has less chance of failing, then investing in biotech may prove to be the perfect investment. What I mean by less chance of failing is a company that already has an approved drug on the market, has more products with potential in its pipeline, at least a couple of years of cash reserve, and what is most important, a product or products that are close to the end of the FDA approval process.

I would like to discuss some of the biotech companies that have already pushed some of their products on the market. Let's get back to Human Genome and its Benlysta, the famous Lupus drug. With a market cap of around $1.5 billion, this Maryland-based company has had its share of ups and downs since the drug was released in March last year. After an impressive run in 2010, Human Genome stock sank really low, with a 52-week trading range from around $6 to around $30. So what is happening here?

Human Genome suffered a substantial loss for a couple of reasons. The first reason is definitely the price of Benlysta. Even though this drug has monopoly market power since it is the only drug for Lupus approved in more than 50 years, its price tag is not so friendly. The annual price of Benlysta treatment comes to around $35,000, which is, in my opinion, a huge downside. The official statement given by the U.K.'s National Institute for Health and Clinical Excellence (NICE) did not contribute to the overall popularity of the Benlysta treatment in the UK either. NICE stated that Benlysta does not appear to be good value for money compared with standard care and therefore its cost should not be covered through the National Health Service.

Another downside is that Benlysta, while being the only treatment for Lupus released in a long time, was not directly recognized by doctors dealing with Lupus patients. In fact, doctors have been very slow in recommending this drug to Lupus patients and, due to its high price, were still prescribing the treatments they were used to.

Another possible reason that may have contributed to the overall stock drop is the discontinuation of the development of Zalbin - a drug for the chronic Hepatitis C - due to the FDA raising safety concerns about its proposed dosing. This drug was co-developed with Swiss pharmaceutical giant Novartis (NYSE:NVS), and apparently had high potential, which is why the termination of its development had such a high impact on Human Genome.

Even though Human Genome seems to be going through a tough period, the future looks brighter. Benlysta truly is a breakthrough drug and has helped many Lupus patients. Human Genome predicts profits will go up as doctors become more familiar with Benlysta and start prescribing it to their patients. Even though revenue did not live up to the expectations of investors and market observers in 2011, I think it has an excellent chance to grow by 2014. Even when we look at the sales in 2011, we can clearly see that net sales went from $8 million in the first quarter up to $26 million in the fourth quarter. This is a good sign.

Another good sign is the company's pipeline. The company's second product is Raxibacumab, an inhalation anthrax treatment developed under a contract with the U.S. government. However, the company has more in store. In GlaxoSmithKline's (NYSE:GSK) pipeline, there are two products that have advanced to Phase 3 development - Albiglutide for the treatment of Type 2 Diabetes and Darapladib for cardiovascular disease.

From an investor's point of view, Human Genome's close cooperation with GlaxoSmithKline should be considered as a big plus since GlaxoSmithKline is one of the largest pharmaceutical companies in the world. In fact, its relationship with Human Genome seems to be rock solid as recently the company announced that it plans to move forward with plans for approval of Albiglutide. Enough said.

When we look at the competitors, however, Human Genome does face some serious competition.

When it comes to companies that also plan to launch treatments for Lupus, one of the main competitors of Human Genome is ImmuPharma (IMM) based in London. Its product Lupuzor, which is a treatment for Lupus, is currently in Phase III trials.

Eli Lilly (NYSE:LLY), is another pharmaceutical company preparing to enter the market with LY2127399 for patients with systemic Lupus, which is also in Phase III trials. With a market cap of close to $46 billion and its stock trading around $39 per share, Eli Lilly is currently the 10th-largest pharmaceutical company in the world and I must say a serious competitor.

On the other hand, there are a couple of competitors with products already available on the market that have been used to treat Lupus.

Biogen Idec (NASDAQ:BIIB) manufactures the lymphoma treatment Rituxan. This biotech giant has many years of experience in creating drugs for cancer, autoimmune and neurological disorders. Biogen Idec has a market cap of over $30 billion and its stock is currently trading around $125 per share.

Roche Pharmaceuticals (OTCQX:RHHBY), a market leader in both pharmaceuticals and diagnostics, is another competitor when it comes to Lupus treatments. Roche manufactures a drug called CellCept, which is an immunosuppressant used for treating Lupus. As one of the world's largest pharmaceutical companies and a lead cancer drug manufacturer, Roche is a also serious competitor.

Regardless of the tough competition Benlysta faces, Human Genome Sciences has a strong pipeline and enough time to establish its products on the market. When a breakthrough drug is a approved after more than half a century it will definitely take time for the market to fully accept it and for doctors to get used to prescribing it. I think that, at its current price, Human Genome is a good investment, especially for long-term investors who fully understand the value of patience.

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