Lower Price of Benlysta Could Boost HGSI
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Human Genome Sciences (NASDAQ: HGSI), is a biotechnology company that develops sale-able drug treatments based on its genetic research. The company first came to notoriety in the late-1990’s with its effort to map the entire human genetic code. With a 52-week high above $28, a 52-week low under $7, and a current price around $15, it’s safe to say that the stock has been relatively turbulent.
In April, the company rejected the unsolicited takeover bid of British pharmaceutical giant GlaxoSmithKline (NYSE: GSK), with whom it has a licensing agreement to co-promote Human Genome Science’s largest drug, BENLYSTA, a systematic lupus erythematosus (SLE) treatment. The company has made it abundantly clear that it is open to purchase offers. Tom Watkins, Human Genome Sciences’ President and Chief Executive Officer, blatantly announced on its most recent quarterly earning’s conference call that it is, “…currently undergoing a strategic review of our alternatives, including a potential sale of the company.” Let’s review the company on its own merits and then dissect what we know about a potential buyout to arrive at an investment decision on Human Genome Sciences.
Drugs, drugs, and more drugs
Human Genome Science’s SLE drug, BENLYSTA, is, by any measure, a biotechnology success story. Sales of the drug have increased from around $8 million in the first quarter of 2011 to more than $31 million by the first quarter of 2012. I believe that the drug is in the relatively early stages of adoption, since it’s the first FDA approved treatment for Lupus in nearly 60 years. The high annual cost of the treatment, around $35,000, must also be overcome, which is apt to take time. In fact, the United Kingdom’s National Institute for Health and Clinical Excellence, or NICE, declared that the drug will not be covered under the government’s national health insurance program, making the drug nearly unmarketable in the UK.
In its partnership with GlaxoSmithKline, Human Genome Sciences only receives royalties on U.S. sales of the drug, so NICE’s decision has no direct impact on Human Genome Sciences. Even with these barriers to entry, BENLYSTA has shown impressive rates of growth into 2012, and the company’s CEO has projected a potential annual revenue for it of $7 billion, based on 200,000 viable candidates at an annual drug cost of $35,000. While I don’t think 200,000 patients are achievable at a cost of $35,000 per year, I do believe the drug, which currently has a monopoly in the SLE market, has tremendous upside. Annualizing the most recent quarter’s sales of $31 million, only puts BENLYSTA at a run-rate of about $120 million per year based off of conservative estimates of 300,000 active cases in the U.S. The most aggressive case estimates put the number at 1.5 million cases in the U.S. and 5 million worldwide, however, the earnings quality from sales to many foreign markets is likely going to be low if not non-existent. I think this could increase by a factor of five or ten within the next few years as physicians and patients become more familiar with the drug.
Beyond BENLYSTA, the company’s drug raxibacumab, for inhalation anthrax, is already a revenue producing drug, with sales to the U.S. government totaling around $6 million in the quarter ended March 31, 2012. They compete directly in this segment with Emergent BioSolutions (EBS), another Maryland-based biotech company.
Two promising drugs in Phase 3 trials are Darapladib and Albiglutide.
Darapladib has the potential to reduce the risk of heart attacks and strokes in patients with a history of heart disease. A GlaxoSmithKline marketed drug, Daraplaidib will give Human Genome Sciences 10% royalties on worldwide sales and up to 20% in North America and Europe, if the drug reaches the marketplace. The potential here is obvious. As of 2006, $5 billion a year was spent on drugs that treat various systems of heart disease.
Albiglutide is a diabetes drug first developed by Human Genome Sciences and licensed to GlaxoSmithKline in 2004. The potential here is much more limited when compared to Darapladib. Human Genome Sciences can collect an additional maximum of around $150 million in milestone fees, and single-digit royalty payments if the drug is commercialized.
With current quarterly revenues of under $50 million, I believe any of these drugs reaching just a portion of their potential would send the stock significantly higher. Although the company has a market capitalization of nearly $3 billion, it’s important to remember that its building off a small revenue base and any major gains will be met with applause and stock price appreciation.
To sell or not to sell? Is it even a choice?
In recent days, GlaxoSmithKline has turned its takeover attempt “hostile”, tendering an offer of $13 a share directly to Human Genome Sciences shareholders. As evidenced by Human Genome Sciences trading around $15 even after this announcement, the market does not think it likely that shareholders will accept this proposal. The management of Human Genome Sciences believes that the company is worth more than GlaxoSmithKline’s offer of $13, and they believe that GlaxoSmithKline knows this as well as anyone.
Outlook
If a deal gets done between the two, or an as-yet unknown third-party suitor, I believe that the final price will be north of $15 per share. It has been estimated that as much as 30% of the stock is owned by arbitrageurs hoping to get a piece of the pop, when the buyout is eventually consummated for more than its current trading price.
If a deal is not consummated with GlaxoSmithKline or any other large suitor, which I hope is the final outcome, I believe that Human Genome Sciences is poised for tremendous organic growth in the coming few years, which will send its stock price higher.
It’s not completely unbelievable to picture the company following a maturation process similar to that of the biotechnology giants Biogen Idec (NASDAQ: BIIB), which now does $5 billion a year in sales, or Amgen (NASDAQ: AMGN), which does $15 billion, two companies that were founded several years before Human Genome Sciences. Biogen and Amgen launched aggressive acquisition, branding and drug development platforms off of monopolies for Avonex and Intron (for multiple sclerosis), and EPO, respectively. It also helped that one of Biogen's founder's won a Nobel prize for his work with DNA sequencing. Thus, a monopoly in the SLE market cannot be understated. BENLYSTA is the first Lupus drug since the Eisenhower administration to be approved by the FDA. I could not find another company that is in clinical trials on a directed Lupus treatment.
I believe that as the manufacturing process is perfected, the price of BENLYSTA will decrease even with significant margin expansion. This will, in turn, lead to greater acceptance in the U.S. marketplace and propel the stock to new heights.
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