Human Genome Sciences (HGSI), has taken a beating in the market lately. The 52-week high of $30 per share (reached earlier in calendar year 2012), was fairly impressive. Also leaving an impression, but not in a good way, was the 52-week low of $6 per share.
Biotech research companies are notorious for rapid swings and shifts in the price of its stock. These swings are fueled by results of clinical trials, the actions of the FDA and other regulatory bodies, and just plain belief in, or loss of faith in, the drug(s) the company is developing.
The question for Human Genome Sciences is: why is it taking a beating now, and what does it have going for it that will allow it to recover and regain its former price point in the market?
The HGS "Positives"
At first glance, HGS seems to have a number of positives going for it, including a solid, four year, working partnership with GlaxoSmithKline (GSK). That partnership has brought one FDA approved drug, Benlysta, to the market, with several others coming down its pipeline. In addition to the joint drug development of Benlysta with GlaxoSmithKline, HGS also has an anthrax product, Raxibacacuma, on the market. In calendar year 2009, the company was awarded a three year, government contract to provide a rolling supply of its anthrax drug.
Going a bit further, the picture appears even rosier. The anthrax contract with the government is worth an estimated $207 million to HGS, with a potential sales value of $69 million per year. In addition, its drug, Benylsta, has gained regulatory approval for use in both the USA and Europe, and is the first drug in 50 years to be approved for the treatment of Lupus.
Lupus strikes about 1.5 million Americans and an estimated 5 million people worldwide, giving it a viable, robust market potential. Its only competition is the drug currently dubbed "Anti-Tweak", from Biogen Idec (BIIB). However, Anti-Tweak is still in the pre-clinical trial stage, so it may very well be years before it will reach the marketplace. This leaves Benlysta without direct competition in its market for the immediate future. Along with its two drugs, Raxibacacuma and Benylsta, which are already on the market, HGS has two more promising drugs coming down its pipeline. The two drugs, Darapladib and Albiglutide, currently moving through the development pipeline, address the treatment of heart disease and type II diabetes. HGS also has a number of other drugs which are still in the initial phases of development.
With multiple drugs in various stages of development, and with their development supported by two drugs already on the market, as well as a partnership with a giant in the pharmaceutical industry, is HGS poised to take off?
The Downside of HGS
HGS is probably not in a position to "take-off" for a number of reasons. While the picture gives the appearance of being rosy, its foundation has more of a resemblance to a house of cards than a solid base, built of steel.
Starting with a closer look at the Anthrax drug, Raxibacacuma, the first warning sign of problems is the non-renewal of its current government contract for a continuing supply of the drug. Emergent Biosolutions (EBS) competing drug, Bio Thrax, has been identified as the standard for anthrax treatment. It beat out HGS's product for a continued, three year contract with the Center of Disease Control and Prevention (CDC). While Raxibacacumab is a viable anthrax drug, having to overcome being passed over as the preferred supply source by the CDC, will be a steep hill to climb for the marketing and sales staff at HGS.
Even without market competition, Benlysta, has had its own development woes. A class action lawsuit is pending, claiming that the HGS upper management withheld clinical data which had poor outcomes for large segments of the patient population. The lawsuit alleges the information was withheld to keep the stock price inflated while HGS, and its management group, sold its shares for a profit of $850 million. But even without the legal woes, Benlysta has some difficult commercialization issues. While HGS's other pipeline drugs seem to be targeting diseases more prevalent among the fast-retiring baby-boomers, Benlysta is for the treatment of lupus. The average age onset for lupus is 31 years old, which takes the majority of its patients out of the Medicare arena, and places them into a market which has a much higher percentage (16.3%) of uninsured and underinsured patients.
With a price tag of $35,000 annually, Benlysta is not a treatment within range for patients without health insurance. In addition, sluggish sales could be attributed as much to an insurance plan's reluctance to authorize the treatments, due to its high price tag, as it is to the reticence of the 4,000 rheumatologists in the USA to prescribe it.
Sticker shock, especially for a drug under fire for being less than "up front" about undisclosed, severe side effects, was one of the reasons for a recent decision by the National Health Service (NHS) in the United Kingdom. On Oct 3, 2011, it announced that it would not cover Benylsta. So, while the drug may be approved for use in the United Kingdom, the national health insurance will not cover the cost.
With the two revenue streams needed to support the drugs in the pipeline weak at best, and in serious jeopardy at worst, HGS needs a quick win from its pipeline drugs. But the competition for plague-fighting drugs, including drug-eluding stents for patients who end up having heart procedures, is brimming with competition. It should also be noted that competition for type II diabetes drugs is an equally crowded field. Just as important, the underlying cause of the two diseases have as much cure in lifestyle changes (i.e. eating habits and exercise), as in a drug regimen.
Overall, a number of HGS's competitors in the biotech world are better bets. Emergent Biosolutions has HGS beat for the anthrax drug, and it has not taken as big a swing in its per share stock price (50%) over the past year (compared to the 70% swing in the per share stock price for HGS). Currently selling at about $14 per share, Emergent Biosolutions shows a price to equity ratio of 22.15, which is right in line with the industry average for biotech companies.
Also in line with the industry average is Biogen, with a price to equity ratio of 24.99. Currently selling at about $131 per share, Biogen is in hot pursuit of a new drug for ALS, or Lou Gehrig's disease. Even Vivus (VVUS), which has been operating in the red just as HGS, has a good prospect for a breakthrough drug in Qnexa. Qnexa is also a competitor for the type II diabetes market which HGS is hoping to be a player in with Albiglutide, one of its drugs still in development. However, in that crowded, competitive field for type II diabetes drugs, Qnexa is already on the FDA agenda for full approval, putting it far ahead of Albiglutide to be ready to market.
Buyout Offer by GlaxoSmithKline
HGS's brightest hope is to be bought by its partner, GlaxoSmithKline. Rumors of just such a buyout have been trickling through the market since August, 2011, and seemed to be the primary cause for the run-up in the HGS stock price to $30 per share in February, 2012. Recently, GlaxoSmithKline did indeed make an unsolicited, $13 per share offer, worth $2.6 billion. The offer was rejected by HGS. It did, however, result in a 100% increase in the stock price, driving the HGS stock to approximately $14 per share.
It's possible that GlaxoSmithKline may come back with another offer, and higher price including one for a higher per share stock price. However, the current price of HGS stock is already about 8% over the first offer from GlaxoSmithKline, so I don't see a good reason why a new offer would be that far from the current trading price. Keep in mind that GlaxoSmithKline did not make an offer when the price stood at $30 per share.
In addition, there are serious, underlying reasons for why buyout rumors have dogged HGS. These include its inconsistent history in meeting earning targets, its loss of the government contract for its anthrax drug, the legal issues with Benlysta, and missed sales forecasts. With all these on-going issues, and strong competition from companies such as Vivus, Biogen and Emergent Biosolutions, HGS should hope it gets a second offer from GlaxoSmithKline, and would do well to think twice before engaging in a second rejection.