A Very Cautious Case Against Human Genome (HGSI, GSK)

December 9, 2010 · Filed Under analyst calls, Lupus 

It was just earlier this week in a broad call that Human Genome Sciences Inc. (NASDAQ: HGSI) saw a very positive research call in a sector initiation as its stock was initiated with an “Outperform” and a $31.00 price target by Credit Suisse.  Apparently, that was then and this is now.  A new research call almost reverses all of that with an opposite stance.  Cowen & Company initiated coverage of Human Genome Sciences with an “Underperform” rating this morning and the implied value puts the stock as being overvalued.

More important than a formal rating is the target.  Cowen’s Eric Schmidt (no relation to Google’s Eric Schmidt) says that Human Genome Sciences could have a share price that is overvalued by the tune of 30% or even 35%.

While expected to be a big winner with Benlysta against lupus, the new report is looking for peak worldwide sales of $1.7 billion against an implied consensus of roughly $3 billion to $5 billion.

The firm gives the good, the bad, and the ugly… The good is safety and efficacy with an unmet need with minimal regulatory risk and longevity to the brand (remember, it has been about 50 years for a lupus drug).  The bad is an expectation of a sales shortfall due to a smaller real target population with ‘physician conservatism.’  The ugly is that HGSI’s $5+ billion market cap is almost entirely tied to its 50% ownership of Benlysta with GlaxoSmithKline plc (NYSE: GSK) and that value may be closer to $11 to $12 per share for its stake and lower sales.

Schmidt gave a lower sum of the parts valuation in a much longer report than this summary of $16.78 per share.

A price target of $16.78 is far different than the $31.00 target from Credit Suisse earlier this week.  It is always interesting to see dual-analysis calls when the same information is available and the opinions are so different.  That is what makes a ballgame.

We have noted some concerns and possible second-guessing of our own opinion here because of the FDA concerns.  This drug seems like one which will receive approval.  Lupus has had no new treatments in two generations.  Frankly, the safety concerns seem low compared to the need and considering that some of the adverse effects could be argued as ‘coincidental’ rather than strictly due to the use of Benlysta.  Still, this is the FDA and making FDA predictions is a knife that cuts hard both ways.

JON C. OGG

Comments

One Response to “A Very Cautious Case Against Human Genome (HGSI, GSK)”

  1. BiotechInvest on December 9th, 2010 8:45 pm

    Benlysta lower efficacy rates for the U.S. and Canada as well as among African-Americans will substantially bring down U.S. sales of this drug. Both trials provided the “evidences of a difference in risks and benefits when patients were broken down by race and geography”. Thus, Benlysta already showed that it not work on many African American. What about other races, for example Asian?
    U.S. and Canada populations are mixtures of all races and nations. And it seems like that Benlysta showed lowest efficacy for this most heterogeneous population. So, for what race Benlysta is most effective? For Caucasian?
    Additional study that focuses on African-Americans and may be Asian should be done. We need the lupus drug that will be effective for all of us. Who will want to hear from doctor: “your baby has a lupus, we have some new drug but it effective only for Caucasian and may be for Asian”?

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