HGS Revenues Slide but Partnerships Could Soon Bear Fruit

25 February 2002 00:00  [Source: ICB Americas]

As expected, Human Genome Sciences (HGS) has seen its revenue stream slow to a trickle following the expiration of the Human Gene Consortium, but the company now has the freedom to aggressively pursue its goal of becoming a fully integrated biopharmaceuticals firm. HGS is unveiling a new strategy for growth, which could include new drug development partnerships, out-licensing agreements, and possibly a small, product-focused acquisition.

HGS's full-year results reflected the gaping hole left by the end of the technology agreements. The company posted a pro forma net loss of $90.9 million in 2001 compared to a loss of $50.7 million in the prior year. Revenues plummeted to $12.8 million from $22.1 million in 2000. Fourth quarter revenues, which could provide a snapshot of what is to come in early 2002, had dropped to $600,000, compared to $5.3 million in the 2000 period.

Despite the lackluster results, the company has made significant progress toward establishing itself as a leading developer of gene-based drugs. Under the consortium, HGS partners paid for equal access to the company's technology and intellectual property for the development of small molecules and antibody drugs. No longer a fee-for-service firm, HGS has pushed a range of drugs into the clinical phase and is ramping up its investments in both R&D and manufacturing capabilities. In 2001, HGS had seven drugs in human clinical trials and filed an investigational new drug (IND) application with the Food & Drug Administration (FDA) for an eighth.

With a record number of compounds in the clinic and a slew of products in the discovery stage, HGS is now shopping for development partners. By out-licensing a product or forming a partnership, the company could share on costs and be better positioned to bring more drugs through the pipeline.

"We have a large collection of compounds making their way into clinical trials. We believe that provides an opportunity for finding partners to help us develop these drugs," said William A. Haseltine, chairman and CEO of HGS at a recent press briefing. "We hope this year to have one or more significant out-licensing deals concluded that involve a specific product or products."

A deal could also be made for an entire franchise area. He adds that GlaxoSmithKline (GSK) and Schering-Plough, both members of the consortium, have first-rights for codevelopment of "a minority" of the compounds.

Earlier this year, Mr. Haseltine told members of the press that HGS would also consider making a small, targeted acquisition to bolster its pipeline, but specified that "the company would have to have a drug in Phase III clinical development, or be approved in an area of interest to us, hopefully oncology, and it would have to have other products in its pipeline."

In addition to courting other firms, the company is bolstering its internal drug development efforts. Last year, HGS increased R&D spending by 60 percent and plans to up the budget by another 40 to 60 percent in 2002 to support its eight drugs in clinical trials and expand its manufacturing operations. The goal is to file for clinical clearance for three to four new candidates each year. Mr. Haseltine notes that the IND filing for LymphoRad, a treatment for B-cell tumors, announced in January but filed in December 2001, would not count toward its 2002 goal.

The HGS pipeline is focused on three types of compounds: new human proteins; new human antibodies; and developing proteins that enhance the half-life and/or lessen the toxicity of existing protein-based drugs. The company is working to establish franchises in oncology, diabetes and obesity, osteoporosis and bone remodeling, inflammation and autoimmune diseases, tissue repair and HIV/AIDS.

With five drugs in the clinic, oncology is, by far, HGS's strongest franchise. In addition to LymphoRad, HGS's oncology portfolio includes two human hormone drugs, Repifermin and Miro-stipen, in Phase II trials, and two drugs from its albumin fusion platform.

But analysts are not entirely confident of the portfolio's quality. "In 2002, we expect to see disappointing Phase IIa clinical data from Miro-stipen," says Jonathan Aschoff, analyst at Friedman, Billings, Ramsey Group Inc. "As with Repifermin, it is our belief that Mirostipen will prove safe but that it will prove highly ineffective in its indication (cancer supportive care, in this case)."

Analysts ultimately appear more impressed by the potential for drugs being developed by HGS's partners. HGS stands to enjoy a steady cash flow in the form of milestone payments for drugs entering clinical development and royalties on sales of marketed products from its partners, which include GSK, Schering-Plough, Takeda, Merck KGaA and Sanofi-Synthelabo. Combined, the partners are using HGS technology for about 460 research programs. The relationship with GSK, in particular, could be quite lucrative. Outside of collaborating with Repifermin, GSK has initiated Phase I trials for compound that inhibits lipoprotein-associated phospholipase, an enzyme associated with formation of atherosclerotic plaques.

Banc of America Securities analyst James Reddoch points to the progress with GSK as "the tip of the iceberg" for external productivity. "GSK's HGS-derived drug for atherosclerosis is the first genomics-derived small molecules product to reach clinical trials." He adds, "GSK's preclinical pipeline is HGS-weighted."

Overall, despite the steep slide in revenues and a greater operating loss, the company appears to be steadily gathering all the pieces necessary to become a fully integrated biopharmaceuticals company.

"The year saw much evidence of progress: four programs entered the clinic doubling the pipeline, growth to 1000 employees including significant builds in clinical/regulatory and manufacturing, facilities expansions for both, and an IP estate that now boasts 204 issued patents and filings for north of 7,000," says Craig West, an analyst at AG Edwards & Sons Inc.

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