Human Genome's Ambition
Human Genome Sciences is one of a handful of genomics-era biotech drug makers seeking to eventually build companies the size of big pharmas Pfizer, Johnson & Johnson, and Merck. Its current losses are less important than whether it can fund increasing drug development expenses until it brings products to market. HGS has $1.8 billion in cash, and currently appears able to survive without further financing until its first significant drug revenues flow.
By Tom Jacobs (TMF Tom9)
February 15, 2001
Human Genome Sciences (Nasdaq: HGSI) reported Q4 and year-2000 results this morning, guiding investors to expect huge increases in expenses for 2001 and beyond. This guidance aids the risk-tolerant biotech investor who wants to know how long development-stage HGS can survive on its current cash pile of $1.8 billion while waiting for drug products produce revenues.
First, a nod to the Q4 and 2000 results: HGS' year 2000 loss widened to $0.46 a share, excluding charges and one-time expenses, which was equal to last year's. Net loss including all items was $2.20 a share, against $0.46 last year. Total revenues dropped from 1999's $24.5 million to $22.1 million, though Q4's $5.3 million in revenues clobbered the prior year's $862,000. HGS does not yet have any drugs on the market, so revenues at this stage primarily represent payments from drug development partners.
HGS dreams big
HGS seeks to become a fully integrated drug company, to build a Pfizer (NYSE: PFE) or Eli Lilly (NYSE: LLY) or Johnson & Johnson (NYSE: JNJ) from the ground up. The barriers to entry are phenomenal. The established large drug companies -- big pharma -- sport the cash to hire and retain the best research scientists, access extensive computing capacity, the best combinatorial chemistry libraries and genomic and proteomic data, run human tests, deploy marketing and sales staff worldwide, whether in-house or, increasingly, outsourced. It's about three things: cash, cash, and cash. (Did I mention cash?)
What increased expenses?
So it makes sense that HGS (or any development-stage biotech drug maker) will, as stated in HGS's press release, be spending 50% to 70% more to "expand the number of clinical trials for its drugs now in clinical trials, increase the numbers of its drugs in the clinic, expand the operations of its manufacturing facilities and increase investment in fusion protein technology." On the general and administrative side, HGS attributes increases of 40% to 50% to "expand its patent portfolio, form new partnership agreements and increase its employee base by approximately 50 percent." This is what you have to do. To prepare, HGS raised well over $1.5 billion in 2000 through stock and convertible debt offerings.
What do the increased expenses mean?
HGS reported $1,775 million in cash, cash equivalents and short-term investments on hand at the end of Q4 2000. While there are many ways to figure a company's cash diet, a simple way is to add net cash flow from operations to any capital expenditures for property, plant, and equipment. It did not supply a cash flow statement with its press release, so to get a burn rate for 2000, we'll look at its first nine months for 2000 and annualize that amount, multiplying by 1.33. Here also are figures for previous years, showing HGS's accelerating expenses.
Cash Burn--------------------------------
1997 $ 8,500,000
1998 21,994,000
1998 3,165,000
9 mos. to Q3 2000 99,646,000
annualized for 2000 132,529,000
R&D Gen./Admin. -----------------------------------
2000 $ 91,456,000 $27,083,000
2001 146,314,000 39,270,350
increase 54,858,000* 12,187,350**
*Using 60%, middle of HGS estimate of 50-70%
**Using 45%, HGS estimate of 40-50%
We add the increases in R&D and general and administrative expenses to 2000 cash burn to get an idea of 2001 cash burn. Assuming no further increases in revenues -- which is being pretty conservative, because HGS could easily score further payments from existing or new partners -- its burn rate could easily hit $200 million in 2001, and increase thereafter.
Why do we care about annual cash burn rate? It tells you roughly how long a company can survive -- its "survival term" -- without having to increase revenues, decrease expenses and/or return to the capital markets for more dinero. The risk there is always that those capital markets may not be interested in funding more development.
Survival reduced from 13 years to 9
For HGS, the potential increase in annual cash burn from $132 million per year to about $200 million reduces HGS's survival term from 13 years to 9, assuming that costs and revenues from partners will both increase and cancel each other out. With drug candidates Repifermin (for wound care, mucositis, and ulcerative colitis), Mirostipen (for cancer treatment side effects), BLyS (for immunodeficiency), and Albuferon (for Hepatitis C) in or approaching human trials, HGS is on track to have at least one drug approved by the FDA on the market within nine years, though success in the marketplace is never guaranteed.
None of these drug candidates is in phase III trials -- the last stage before seeking FDA approval to market. (For more on the drug development process, check out our Pharmaceuticals InDepth page.)
HGS is doing everything right from a financial point of view for a company with its goals, but there is no guarantee of success. Investors need to know that time, patience, and risk tolerance are important if they choose any development-stage genomics-era drug company -- whether HGS, Millennium Pharmaceuticals (Nasdaq: MLNM), Hyseq (Nasdaq: HYSQ), CuraGen (Nasdaq: CRGN), or their siblings. |
