Today we complete our Break Down of Human Genome Sciences (Nasdaq: HGSI) and draw a conclusion about the company in an effort to find our next purchase. If you didn't read part one, please click back. If you're ready, strap yourself in for today's ride...

RB Criterion #2: Sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition.
HGS has potential for vast sustainable advantages. The company's early focus on proteins has led to 8,000 patent filings. Importantly, HGS believes at least 80% of its filed patents are novel, meaning that in most cases other companies will not have prior rights or earlier patents than HGS. (So far, less than 200 of the HGS's filed patents have been reviewed and issued. It takes time, so guessing who was first is a science in itself.)

Human Genome Science's patents could prove very lucrative because drugs created by other companies based on HGS's patents (whether intentional or not) should result in royalty payments. The number of drugs that fall into this category could be large, because the company believes that it has filed patents on about half the signaling proteins in the human body. For more details, patent attorney Greg Carlin (a.k.a. ElricSeven) wrote four pages about HGS patents and biotech patenting in general. He wrote much more about HGS's patents in particular in his Soapbox research report, Harvesting the Human Genome.

Interesting Drugs in the Pipeline
HGS has started to develop its discoveries into drugs in its Functional Genomics Program. Under this end-to-end program, HGS collects data on full length genes, analyzes the data in a lab (not only on computers, as many other companies do) and catalogs results. It puts most promising compounds through more tests. HGS has three drugs in human clinical trials and several more potential drugs in the wings. (Remember, it usually takes a decade or more to develop a preclinical drug, although HGS does believe it can speed the process, partly because its drugs are not "artificial" -- they come from the body -- and should result in fewer side effects.)

HGS's goal is to create drugs that serve very large medical needs that are currently under-served. It has two drugs in phase II (of III) trials. One drug is a growth factor protein that rebuilds cells that make up almost one-third of the body. This drug is targeted to repair layers of skin (including chronic or severe wounds), the mouth and throat lining (including during chemotherapy), and the gastrointestinal tract and other organs. It is called repifermin, or Keratinocyte Growth Factor-2 (KGF-2).

Also in trials is Mirostipen, or Myeloid Progenitor Inhibitory Factor (MPIF) -- try saying that just one time fast. MPIF is also a human protein. In trials, it increases the safety of anti-cancer treatments by (from the website), "reducing their toxic effects on the blood-forming tissues in the bone marrow. Mirostipen may be one of the body's natural signals to stop making additional cells of the blood and immune systems because a sufficient number are present." So, when it is working properly, MPIF may regulate cells in the blood and immune system. Using it may make it possible to turn off blood-cell creation during chemotherapy, so that toxins don't kill the new cells, and then turn it back on soon after treatment. This blood-cell "protection" could significantly increase cancer survival rates.

Also in human clinical tests is Vascular Endothelial Growth Factor-2 (VEGF-2), another natural human protein. VEGF-2 stimulates the growth of blood and lymph vessels, so it may have great potential as a treatment for coronary artery disease or to grow new, life-sustaining blood vessels in otherwise dying limbs. Human trials, being monitored closely by the FDA, should soon resume.

Finally, a new HGS discovery is especially exciting: the identification of a B Lymphocyte Stimulator, or BLyS. From the company website:

"This human protein stimulates the body's immune system to produce antibodies, which are its first line of defense against infection. BLyS has the potential to treat many serious immune deficiency diseases and has moved quickly through pre-clinical testing. Plans are now in place to test BLyS with patients suffering from various forms of immunodeficiency. Our pre-clinical studies suggest that BLyS also may be useful in treating acquired immune deficiency that results from infection with the AIDS virus, as well as immune deficiencies caused by certain cancers, and as a consequence of medical procedures such as organ transplantation. In addition, BLyS may be used to boost function of the immune system of elderly adults."

The company's products (or pipeline) are described in detail on its website. Since these are all protein-based drugs, if you want to learn more about proteomics, consider the Soapbox report: Proteomics - The Coming Revolution?

RB Criterion #3: Good management and smart backing.
Chief Executive Officer Dr. William Haseltine has a doctorate from Harvard, has founded seven biotech companies since 1981 (each one in a different area of medicine and each one a success) and helped launch 20 others. Dr. Haseltine founded the first educational department for research on AIDS in 1984, at the Dana-Farber Cancer Institute, and is world-renown for his research on the virus. 

Last week, the L.A. Times published an excellent column about Haseltine and his company. Take five minutes to read the article, titled "An Ego in a Lab Coat." (Upon meeting Haseltine in January, he does display an air of arrogance, as critics complain, but it isn't overly brash. He's just very confident. In fact, I might wish that everyone were that way. I enjoyed the day with him and left with only good impressions.) Also, Fool contributor Mike Paquette (mpaque) took a closer look at Dr. Haseltine in a post.

In January, I also met the VP of research and development, the CFO, and the VP of drug development for a day -- all seemingly kind, smart people. I especially found the VP of drug development, Dr. Stump, to be a smart and sincere individual. He didn't hype the drugs that HGS is working on, although he could have. Instead, he was very realistic. Overall, I'm convinced HGS has strong management. The company's website has profiles of the team.

RB Criteria #s 4, 5, 6: Excellent past share appreciation, measured by relative strength of 90 or higher; the greater the consumer brand, the better; and a significant portion of the financial media has called it overvalued.
This stock has a relative strength of 96 as of August 28; the company doesn't have a consumer brand known by most consumers, so it loses points here; and, unfortunately, we don't have Barron's saying that HGS is worth just $3 per share, nor do we have other media moguls attacking this complex, young company. Another RB point is lost.

Conclusion on HGS
Measured on the most important RB metrics, in my opinion -- top dog and first mover in an important, emerging industry, sustainable advantage and great management and backing -- I believe that Human Genome Sciences is a Rule Breaker. 

Note that we did not address risks: HGS has raised over $800 million so it has enough cash for several years. This is vital because profits are nowhere on the radar. HGS will begin to resell its database of information in 2001, and eventual royalties may be considerable. However, the company needs drug sales, too, and all of its current drugs could fail to reach the market. So, the risks are very high. The potential long-term rewards are high, too.

So far, we have broken down Akamai (Nasdaq: AKAM), Ariba (Nasdaq: ARBA), USinternetworking(Nasdaq: USIX), (Nasdaq: PHCM), Lernout & Hauspie (Nasdaq: LHSP), Millennium Pharmaceuticals(Nasdaq: MLNM) and now HGS. My favorites are Millennium and Human Genome Sciences. (I have a biotech-bias when thinking many years ahead.) Do you agree that HGS is a Rule Breaker with strong potential? To discuss it, visit us on the RB Companies board.

Fool on!

Suggested Links:

  • Break Down: Human Genome Sciences, Part 1
  • 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
  • Harvesting the Human Genome, Soapbox report by ElricSeven (it analyzes HGS patents)
  • Proteomics - The Coming Revolution?, Soapbox report by IClimbRox