We continue Break Down August, our hunt for the next Rule Breaker stock, with a look at biotech start-up Human Genome Sciences (Nasdaq: HGSI).

On January 4, 2000, Kevin DeWalt (TMF GetFit of Soapbox.com), Greg Carlin (a best-selling author on Soapbox.com known as ElricSeven) and I visited the headquarters of HGS in the green hills of Maryland.

We spent a full day with a handful of company executives, including Dr. William Haseltine, Chairman and CEO, Dr. Craig Rosen, Executive Vice President of Research and Development, Steven Mayer, Senior Vice President and CFO, and David Stump, M.D., Senior Vice President of Drug Development. David Stump had recently decided to work at HGS rather than Millennium Pharmaceuticals (Nasdaq: MLNM), another Rule-Breaker candidate. I asked him why, and he replied that he greatly respected both companies, so the choice was partially personal.

Our coffee poured, the morning at HGS began in a conference room with an introduction from Dr. Haseltine. He explained what his company does (it creates medicines using the human body's genes, proteins and antibodies) and provided an outline of the company's history. HGS has been building a protein-centric genomic database since the early 1990s, and it has filed for 7,700 related, specific patents. The company has three promising drugs in human clinical trials, about a half dozen others in preclinical studies, and many other possible candidates in the wings. Dr. Haseltine launched HGS with Dr. Craig Venter, now the chairman of Celera Genomics (NYSE: CRA). Dr. Venter stayed aboard for five years, until 1997.

Following more than an hour of "conversation," which mainly consisted of them explaining to us how HGS's science works (we nodded to keep our brains from melting), they fired up the computers and showed us their extensive database. The company spent much of the 1990s analyzing genes to find those that were involved in relaying signals between cells on the assumption that these genes would have the greatest medical value. In the end, the company focused on the signaling proteins (as they're called -- more on them later) encoded by more than 10,000 genes. HGS ran in-house lab experiments to learn what each protein did for the body and developed a database based on the results of thousands of tests. This massive protein database is now central in the company's drug development program and led to most of the company's patent filings.

On the computer, HGS showed us how it can weed through thousands of proteins in order to find ones that perform different specific functions, such as those that stimulate T-cell (an immunity cell) production. Within a few minutes, they demonstrated how they can zero in on a single protein that stimulates T-cell growth without affecting any other cell types. Most proteins do affect several cell types when stimulating T-cell growth, but you don't want those proteins because they would likely have adverse effects on the patient. By identifying a protein that only affects T-cells and not other cell types (as HGS has done), the company essentially has discovered a potentially powerful and novel drug candidate. So, HGS filed a patent on this protein's function. The key in these protein discoveries is to be first, and apparently HGS has been in most cases.

Following lunch, we learned about the company's drug pipeline and we toured its new drug production facility, which was funded by the government of Maryland.

As dusk fell on this chilly January evening, the three of us finally said good bye and exited to the parking lot and Kevin's old, beat-up Ford Escort. Earlier in the day, Kevin had used his car to drive Dr. Haseltine around HGS's campus -- much to the amusement of Greg and myself, who were in Dr. Stump's shiny SUV. The funnier part of the story is that at first Kevin couldn't even find his car for several minutes, and it was raining. So, there Kevin was that afternoon, wandering the HGS parking lot in a steady rain with world-renown scientist Dr. Haseltine in tow. As Kevin anxiously searched in the rain for his car and apologized to Dr. Haseltine, he was hoping that the car would actually start once he found it.

Top dog and first-mover in an important, emerging industry...
I want to see this company succeed and thrive on a very large scale. Why? Partially because HGS operates in such an important, emerging industry, and partly because I liked everyone that I met at the company. Let's call HGS's industry that of natural or regenerative medicine. HGS's medicines use the body's natural substances -- genes, proteins and antibodies -- to fight or cure human health ailments, including anything from cancer to weakening arteries to deep skin wounds.

The company's genomic database focuses on the messenger RNA in cells, which is responsible for creating protein chains. This makes HGS's database different from Celera's or the Human Genome Project's because HGS did not sequence the DNA of the entire genome -- it focused on sequencing messenger RNA in order to learn about protein functions. So in the field of signaling protein databases and related drug development programs, HGS is undoubtedly the top dog and first mover. About 14,000 genes are thought to exist that produce signaling proteins. HGS has filed patent applications on 7,700.

Although we named Millennium Pharmaceuticals a genomic top dog due to market capitalization, research & development spending, drug pipeline (which was purchased in an acquisition) and contract revenue, Human Genome Sciences is the top dog in related patent filings, in protein-based drug research (which should become a very large part of the biotech industry), and in internally developed drug candidates. HGS's market capitalization is the second-largest among young, drug-less genomic biotechs. It stands at $8 billion versus Millennium's $12 billion. HGS has a goal of having a deeper product pipeline than Amgen (Nasdaq: AMGN), a $74 billion company, and more blockbuster drugs. Amgen has two -- Epogen and Neupogen, both of which are signaling protein drugs.

In the past week, outstanding content has been written about HGS on the Fool discussion boards. That content is where I send you now. As we continue our Break Down and make our purchase decision in the next few weeks, I will assume that you have read the following articles about Human Genome Sciences if you are indeed interested in the company. In other words, the following is your highly-suggested homework if you are considering the company...

Last week, Fool community member and physicist Ricaard Corrado (screen-name rcorrado) wrote a full explanatory analysis of Human Genome Sciences, including RB analysis, and offers many links to related analysis. 

Next, Soapbox author ElricSeven (seller of the report, Harvesting the Human Genome) posted his analysis of HGS's top dog and first mover status, which we offer here to flesh out our own analysis of this criterion.

Finally, Fool Mike Paquette (mpaque) compared Millennium vs. HGS on all RB critiera, including top dog and first mover analysis, which further fleshes out this criterion for us.

Other useful links are below. Tomorrow we'll conclude our Break Down of Human Genome Sciences and decide whether or not it's a Rule Breaker! If you have thoughts or questions about HGS today, post them now on the RB Companies board... and Fool on!

-Jeff Fischer, TMF Jeff on the boards.

More Suggested Links:

  • Human Genome Sciences FAQ, by ElricSeven
  • Human Genome Sciences discussion board
  • Human Genome Sciences website
  • Stocks Fools Love: HGSI, 02/08/00, by Jeff Fischer
  • Biotechnology Reports sold on Soapbox.com