On a most beautiful April yesterday -- sun shining, trees leafing, blooms blooming -- a band of three Fools follied on up from Fool HQ to Human Genome Sciences' (Nasdaq: HGSI) world in Maryland. Buck Hartzell (TMF Buck), guru behind much of TMF Money Advisor, Foolish Finance Guy Ollen Douglass (TMF DaddyO), and I spent the morning and part of the afternoon with HGS management.
Putting ourselves in the able hands of Investor Relations Director Kate de Santis, we met with Chairman and CEO William Haseltine, Executive Vice President of Research and Development Craig Rosen, Sr. V.P. and CFO Steve Mayer, and Sr. V.P. of Drug Development Dr. David Stump -- the same four execs that portfolio co-manager Jeff Fischer (TMF Jeff) and his band saw in January 4, 2000. Jeff recapped the trip when this portfolio purchased HGS stock. I recommend that you read that report, along with our two-part interview with CEO Haseltine a year ago in March, to start off checking the company's progress.
That was then, this is now
To jog your memory a little: January 2000 was smack dab in the center of the genomics cyclone. The Nasdaq closed on January 4 at 3901.69, and HGS was valued at around $8 billion. Yesterday, the Naz closed at 1785.87, while HGS's stock closed at $17.58, for a market cap of $2.24 billion and a valuation approaching its almost $13 cash per share.
Yet, paradoxically, the company and its business are much, much stronger now than then. Yes, HGS is still several years at least from putting one of its own drugs on the market, but its survival until then is far, far more likely than before. At the end of 1999, the company had $455 million in cash and short-term investments, but as of December 31, 2001, it had a whopping $1.54 billion.
Two years ago, Jeff wrote, "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." Today, it shines with seven drugs in ten clinical trials, and a labload of preclinical candidates.
The company needs the cash to support its rising cash burn, estimated between $150 million and $180 million for 2002. Drug development is extraordinarily cash-intensive when you have negligible income and no currently marketed products. The $1.54 billion is healthy, even if you arch-conservatively subtract the entire amounts of the company's convertible debt and restricted cash (more on both of them in the next column). Even then, the company could survive with no income for three years or so at its estimated 2002 burn rate. That's security that most newer public companies using biotechnology can only dream about, but it still represents risk.
Steve Mayer, with 20 years at companies using biotechnology, observed how cash standards for biotech companies have changed. He recalled when having $100 million in cash was pretty sweet. Then the bar went up to $300 million. As the genomics craze took and some companies were able to tap the capital markets, $800 million to $1 billion appeared necessary for gene envy. Now, HGS is in the strongest cash position ever with a rich pipeline, and Mayer notes the irony that analysts tut-tut, "Wow, you're burning through $150-plus million a year, how will you survive?"
Steve explains the many splendors of cash. The company has made it from the year-to-year story of biotechs looking for operating capital to one for whom the cash is a strategic asset. That capital means HGS can compete for the best talent, build manufacturing facilities that allow the company to determine its own destiny in many ways, get better deals when it negotiates with big drug makers, and weather the storm when drugs fail -- as everyone we met reminded us will happen.
Stuffing the pipeline
When we spoke with William Haseltine a year ago, he said that his company wanted to put three to five new drugs in human trials each year. A year later, HGS has done that and expects to stay on course and even accelerate that rate. Drug development chief honcho David Stump told us that when he was at Genentech (NYSE: DNA) for 10 years before coming to HGS, they brought two new drugs a year into human trials and they thought they needed about four each year to sustain the business. Genentech does so some years and others not.
So consider this: Genentech has a $22 billion market cap, and HGS's is just over one-tenth of that, or $2.24 billion. Genentech is filling its pipeline no faster than HGS's and perhaps slower, and HGS can match or exceed drug for drug based on market size, competition, and unmet need. No profits today? Sure. A Genentech-like future? That's the potential, and HGS believes that its data on 10,000 secreted proteins give it more fertile possibilites for continued pipeline growth than any other drug maker.
A key component of HGS's pipeline comes from its year-ago purchase of Principia Pharmaceutical, a privately held company in Pennsylvania with promising albumin fusion technology to extend the half-life or proteins in the body. HGS is devoted to protein and antibody drugs, which are large molecules injected as opposed to small molecule "pill" drugs. It had been faced with the challenge that these drugs have short half-lives in the body -- imagine a very sideways compressed bell curve for blood levels of a protein or antibody. This means frequent injections, which nobody likes and which motivated Amgen (Nasdaq: AMGN) to come up with Aranesp, a less-frequent dosing version of its mega-hit, red blood cell stimulating protein Epogen. Principia's technology boosts all of HGS's drug development efforts.
Using albumin fusion technology, HGS is seeing better distribution of protein drugs in its testing . The technology stabilizes the protein, giving it in some cases a half-life of weeks, eliminating the need for daily injection. And you can apply it to any protein to make it work longer and better. Just a year and a half after announcing its purchase of Principia, HGS has three albumin-based drugs in Phase 1 human trials: albuferon (chronic Hepatitis C), albutropin (adult growth hormone deficiency), and albuleukin (cancer). More are on the way, too, including an albumin fusion version of erythropoeitin, the protein in Amgen's Epogen, and insulin.
The rest of the pipeline
Here are the 7 drugs in 10 clinical trials. Zeke Ashton's article "Clinical Trials and the FDA" explains what these stages mean.
Mirostipen (for chemo and radiotherapy patients, protect cells that give rise to red blood cells)
Repifermin (venous ulcers)
Repifermin (bone marrow transplant)
Repifermin (ulcerative colitis)
VEGF-2 (Vascular Genetics, taken off FDA clinical hold October 2001)
Phase 1 (or, IND accepted, to begin Phase 1)
LymphoStat-B (autoimmune disease)
Albuferon (chronic Hepatitis C)
Albutropin (growth hormone deficiency)
IND (Investigational New Drug application) filed with FDA
LymphoRad (cancer), filed January 2002
Drugs in testing for at least 19 indications
It wasn't great news last year that repifermin showed safety but not effectiveness in Phase 2 trials for mucositis. The stock took a major hit after the first repifermin news and has continued downward. But there were good Phase 2a results for the drug in treating venous ulcers -- a huge market -- and now underway are Phase 2b trials with the primary endpoint of complete healing those painful, debilitating ulcers.
The cash and the pipeline are the starting points for any discussion of a biopharmaceutical company with no drugs on the market. Satisfied that HGS has those under control, a future column -- almost certainly next week, barring other developments -- will detail the company's finances, its well-deserved Cheshire cat smile about worldwide protein and antibody manufacturing capacity starvation, some observations from CEO Haseltine about stock option plans, and more.
Portfolio update below. Because Total Return stopped being an accurate measure of performance after we started adding cash in July 2001, we no longer report it. To compare the portfolio's return with the market averages, we use compound annual growth rate using internal rate of return.
Until next week, stay Foolish!
Tom Jacobs (TMF Tom9) and his partner were on the Staten Island Ferry Saturday night watching the lights at Ground Zero. Do it if you get the chance; the lights apparently go off at 11 p.m. At press time, he owned no shares in companies mentioned in this story. To see his stock holdings, view his profile, and check out The Motley Fool's fine disclosure policy.
Rule Breaker Portfolio Returns as of 4/08/02 Market Close:
Period RB Port S&P 500 Nasdaq Week - 4.50% -1.85% -4.12% Month - 4.49% -1.93% -3.22% Year* -16.05% -1.99% -8.44% CAGR** since 8/4/94 26.44% 12.41% 12.55%
*We plan to add $25,000 in April: $12,500 for the quarter and $12,500 that we didn't deposit in Jan.
**Compound Annual Growth Rate using Internal Rate of Return. This performance measure accounts for the periodic deposits. Total return wouldn't be meaningful, because we started adding cash to the portfolio in July 2001. In a total return calculation, or (Current Value - All Cash Deposited)/All Cash Deposited, added cash shows up as positive returns. Not right.