This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
Is Human Genome Sciences (Nasdaq: HGSI) poised to pop? Investors seem to think so, bidding up the shares 4% today on the back of an upgrade from All-Star analyst R.W. Baird.

Arguing that a 21% decline in price this year has made the stock look attractive, while "compelling new survey data" suggest the company's Benlysta lupus drug could receive FDA approval as early as this year, Baird affirms it's now become a believer in the stock. It's raising estimates on the company's performance for fiscal 2012 and fiscal 2013, and predicting the shares (currently at $25 and change) could soon hit $30 or more. But, is Baird right? 

Let's go to the tape
After all, Baird's batting average on Biotech isn't exactly enviable. While ahead of the pack on biotech star (and Motley Fool Rule Breakers recommendation) Vertex Pharmaceuticals, Baird is bombing on a whole slew of biotech picks today. Surveying the 15 recommendations it has open, we find fewer than 30% of them currently beating the market: 

Nor is this a recent phenomenon. Over the nearly four years we've been observing the analyst, Baird remains a net loser on its biotech recommendations, with fewer than 44% of them beating the market over time. Worse still, Human Genome is one of the stocks dragging Baird's record down. After recommending the stock in January of '08, the analyst stuck with the stock for a 40-point loss to the market, before finally throwing in the towel.

From rags to riches?
So why is Baird picking the towel back up once again this week? Basically, after initially expressing skepticism over the prospects for Benlysta, Baird has become a convert to the cause. Baird apparently believes Benlysta is the drug to beat for beating lupus. After assuming a late-2010 approval, and a few years to ramp sales, Baird believes Benlysta could be generating revenues of as much as $679 million by fiscal 2012, and nearly twice that by 2013 -- numbers roughly 50% higher than Baird previously believed possible.

And yet, I cannot help but notice that in defending its newfound faith in Human Genome, Baird is relying pretty heavily on revenue numbers to lift the stock -- as opposed to more concrete measures of success such as profits and cash generation. That's where I part ways with the analyst. You see, after a brief, milestone payment-financed reprieve in 2009, when the company collected $75 million from Novartis (NYSE: NVS) for completing Phase 3 testing on its hepatitis C drug Zalbin, and a few million more from GlaxoSmithKline (NYSE: GSK) for beginning Phase 3 work on Syncria, Human Genome has since relapsed into its earlier pattern of burning cash.

The company burnt through nearly $75 million last quarter alone, and more than $150 million over the past 12 months. This steady cash burn forced Human Genome to issue new shares last year to raise cash. Cash reserves now stand at $567 million (against $355 million in long-term debt.) Between the debt and the continuing cash burn, I fear Human Genome could soon find itself right back where it started, with essentially no "net" cash, in just a little over a year.

Foolish takeaway
Human Genome backers will doubtless argue that it's normal for developmental biotech companies such as Human Genome to burn cash in the interests of fueling drug development. Granted. But I have to say -- I find it a bit disconcerting that 18 years after first setting up shop, the company still remains in the "we're not profiting; we're developing" stage of its life cycle.

Sure, if Benlysta goes blockbuster, that could, and probably will, change the equation. But remember -- until the FDA gives this drug the green light, Human Genome won't see green profits (nor even the sales on which Baird bases its recommendation.) Meantime it's burning through cash and raising more through dilutive offerings.

All of which leads me to this question: Last time around, the company's liquidity-saving share issuance diluted its long-suffering shareholders out of more than 36% of their ownership stake. How much more pain awaits them when the company is forced to return yet again to tap the capital markets for its next "tide-me-over?"