Human Genome Sciences (Nasdaq: HGSI ) is trading down about 5% today as the Dow Jones (INDEX: ^DJI) sits in the green after an analyst from Citi said HGS and GlaxoSmithKline's (NYSE: GSK ) new lupus drug, Benlysta, is getting a “lukewarm” welcome from doctors.
Earlier this month Dendreon (Nasdaq: DNDN ) fell 65% after management announced that its sales ramp for Provenge would be substantially flatter than expected. The new guidance is for "modest" quarter-over-quarter revenue growth.
But the thing is, the sales ramp -- how quickly sales increase -- is fairly meaningless for the long-term investor. Sure, bringing in revenue quickly and producing positive cash flow is important for biotechs launching their first drugs. But, assuming you're going to hold your shares for many years, the value of the biotech is based on what you think sales will look like at that point: the peak sales for the drug.
The question investors have to ask themselves is whether the relatively slow starts are a sign that peak sales might be lower. Are doctors just not prescribing it right now or will they not prescribe it at all?
Benlysta treats lupus, a disease that waxes and wanes. While the symptoms aren't pleasant, the disease isn't immediately life-threatening either. Doctors may put a few patients on the drug, see how they do, and then increase their prescribing habits as they gain confidence with the drug. AVANIR Pharmaceuticals' (Nasdaq: AVNR ) Nuedexta has run into the same problem.
For Provenge, it's possible that doctors aren't prescribing the prostate cancer treatment because they don't think it works or isn't worth the money, which would obviously affect peak sales. But the company's explanation that doctors are worried about having to buy the drug with the possibility of not being reimbursed seems completely reasonable. If that's the problem, once doctors are convinced insurance companies and Medicare will pay quickly, they'll increase their prescriptions and peak sales shouldn't be affected.
For both Benlysta and Provenge, the truth probably lies somewhere in the middle. The companies should be able to recover from slow starts; both are innovative medications. But the lack of enthusiasm, compared to a drug like Vertex Pharmaceuticals' (Nasdaq: VRTX ) Incivek that took off out of the gates, could mean that peak sales might be slightly lower and/or take longer to reach.