How Does Human Genome Sciences Survive with Zero Products In the Market? (HGSI)

Includes: GSK
by: Eddy Elfenbein

Eddy Elfenbein submits: I honestly don’t know how Human Genome Sciences (HGSI) stays in business. The company is officially described as a biotech company, although it has exactly as many commercial biotech products on the market as Crossing Wall Street Global Holdings.

In other words, zero.

Last quarter, Human Genome Sciences had total revenues of $9.3 million, and they spent $81.4 million. Dear lord! Who’s their CFO? Willie Nelson?

Since they don’t have any products on the market, almost all their revenue comes from a licensing agreement with GlaxoSmithKline (NYSE:GSK). According to news reports, the company missed estimates by four cents a share. What I don’t get is how you can even make an estimate, and why would it matter if they hit it or not.

How does one put a price tag on this stock? The company doesn’t do anything. The stock is currently valued at about $10 a share, giving it a market cap of $1.4 billion. I have no idea where that comes from. For argument’s sake, let’s say that the stock is trading with a P/E ratio of 20. That would mean that they’d have to have revenues for 2005 of $410 million. Instead, they had revenues of $19 million.

The price of the stock is based solely on speculation of future products. Over the last four months, the stock is up about 30%. Here’s CEO H. Thomas Watkins the CEO in a press release on everything the company is about to do:

Progress toward commercialization was our priority focus throughout 2005, and we expect to accelerate our progress in 2006. Our lead products are moving towards Phase 3 clinical development, and we are making progress on our partnering objectives.

We reported positive Phase 2 results for Albuferon in hepatitis C in 2005. A larger Phase 2b trial of Albuferon in combination with ribavirin compared to Pegasys is currently underway. We plan to initiate Phase 3 development of Albuferon by year-end 2006, assuming that data emerging from the Phase 2b study in the first half of the year are positive. We are also considering a number of collaboration opportunities for Albuferon this year.

We completed Phase 2 clinical trials of LymphoStat-B in both systemic lupus erythematosus (SLE) and rheumatoid arthritis (NYSE:RA), and we expect to initiate Phase 3 development of LymphoStat-B in SLE in 2006. We are also working to secure an order from the U.S. Government to supply ABthrax for the Strategic National Stockpile under our current contract.

GlaxoSmithKline (GSK) has advanced relacatib, the small-molecule cathepsin K inhibitor that GSK discovered using HGS technology, to Phase 2 trials in the treatment of bone metastases. GSK has also filed an Investigational New Drug application seeking to initiate Phase 1 trials of GSK716155 (formerly Albugon) in diabetes. HGS received $12 million in payments during 2005 related to the progress of GSK716155.

We expect to complete the CoGenesys transaction in 2006, and we will continue to explore additional ways to monetize less critical assets that we are unlikely to develop internally. We will concentrate our efforts in 2006 on accelerating our progress toward commercialization, while at the same time remaining committed to ensuring the highest standards of quality throughout our Company.

HGSI 1-yr Chart

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