12:00 AM
 | 
Jan 28, 2008
 |  BioCentury  |  Finance

Ebb & Flow

Despite three analyst upgrades, Human Genome Sciences (NASDAQ:HGSI) ended last week down $4.61 (44%) to $5.86 after an independent DMC raised safety concerns about the higher dose in two Phase III trials of Albuferon albumin-interferon alpha to treat HCV.

The decline trimmed the company's market cap to $789 million from $1.4 billion. On Wednesday, the day of the announcement, HGS fell $4.40 (44%) to $5.62.

Mark Schoenebaum of Bear Stearns and Christopher Raymond of Baird both said the market overreacted, and each upgraded to outperform on Thursday with a $10 target.

Edward Tenthoff of Piper Jaffray also declared the selloff "overdone" and upgraded to buy, while at the same time lowering his target to $9 from $11 (see "Analyst Picks & Changes," A20).

The DMC review found that serious pulmonary adverse events were higher in the 1,200 µg arm in the ACHIEVE 1 and ACHIEVE 2/3 trials. It did not express safety concerns about the 900 µg dose.

Buysider Max Jacobs of Ridgemark Capital felt the stock's slide was understandable. "What looked like a low-risk product now looks like a high-risk product," he said. "People were viewing it like PEGylation - not like a novel biotech product, but a drug delivery story. Now with this severe pulmonary toxicity, people are questioning if maybe it won't have much more efficacy or be much more convenient"(see "Lower Dose Will Have to Work," A11).

Cash & debt

Jacobs also argued that the Albuferon dosing concerns put into question another HGS drug candidate, Syncria albumin-glucagon-like peptide-1 (GLP-1) (formerly Albugon), which is in Phase IIb trials to treat diabetes.

He added that the company's LymphoStat-B belimumab, a human mAb against BLyS (B lymphocyte stimulator protein), is in Phase III trials to treat lupus, which he dubbed "the graveyard of biotech development."

Jacobs also observed that HGS has a high burn rate compared with other biotechs. "They're still burning like it's 1999. It's a rare beast that burns this much money - it's like them and Vertex (NASDAQ:VRTX)," he said (see "Operating in the Red").

Jacobs also thinks the company's cash position isn't all that strong. "People are saying it's trading at cash, but only if you don't look at the debt," he said.

At Sept. 30, HGS had $226 million in cash and $409 million in long-term investments. In addition, the company is expected to get about $50 million for its 13% stake in albumin fusion technology spinout CoGenesys, which Teva (NASDAQ:TEVA) is acquiring for $400 million (see "Teva's Biosimilars Play," A10).

On the other side of the balance sheet, HGS has $753 million in long-term debt, with convertible notes of $280 million and $230 million coming due in October 2011 and August 2012, respectively.

If the short interest is any indication, Jacobs isn't alone in his skepticism. At Dec. 31, short interest stood at 24 million shares, or 18% of shares outstanding, which would require 13 days to cover.

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