HGSI/MLNM Product Analysis:
URL: boards.fool.com
Author: SteveR1960 Number: 2184 of 2184
Recently, I performed an analysis of Millennium Pharmaceuticals (MLNM) for the 2001 Rule Breaker course here at TMF. The intent of my post was to determine the potential for 10 fold appreciation in 5 years (10x/5y) per the Rule Breaker criteria. I concluded: very unlikely. In this post, I attempt the same analysis for Human Genome Sciences (HGSI). I had a couple of interesting responses from my Millennium post reminding me to:
1) Consider that Millennium has a stated acquisition strategy and has a decent market cap and lots of cash to barter with.
2) If they only appreciated 5x/5y, that is still a good investment.
My previous post and a couple of the responses:
boards.fool.com
boards.fool.com
boards.fool.com
Now for the analysis. The table below is a repeat of the table in the Millennium post, but updated for current numbers. The four analysis points after the table are also mostly copied. A good portion of the rest is new, as HGSI is now the focus.
2000Ticker MC ($ B) Sales ($ B) MC/2000 Sales-----------------------------------------------------------------AMGN 70.7 3.63 19.5 DNA 29.3 1.65 17.8IMNX 16.5 0.86 19.2MLNM 6.4 0.19 33.7PFE 283.1 27.6 10.3MRK 179.6 32.7 5.5JNJ 133.5 27.5 4.9HGSI 4.9 0.022 223PHA 64.2 16.4 3.9SGP 61.5 9.2 6.7AVE 61.3 11.5 5.3
I think the table tells a pretty clear story:
1) Big biotech (which is really not that big) can sustain MC/Sales ratios near 20. Arguably, this is deserved. Biotech drugs, at least those that are proteins, are hard to copy when the molecule goes off patent. Everyone can synthesize a small molecule drug. Recombinant protein production is tricky and has a harder patent landscape to circumvent. Can you say Transkaryotic Therapies?
2) Big pharma shows no clear pattern vs. MC and gets to MC/sales=11 at best. PFE, the biggest of the biggest, oddly, also has the highest MC/Sales. I guess Viagara really makes them stick out.
3) Merck, arguably the hottest drug engine on the planet, has a mediocre MC/Sales ratio. I guess having 80% of your blockbusters near patent expiration can't help your market cap, but sure inspires discovery with gusto. Can you say COX-2 inhibitor (Vioxx)?
4) The little guys, MLNM and HGSI get the early benefit of the doubt owing to a promising pipeline, sexy technology or whatever. This is very typical for drug start ups early in their career. Roar like a tiger!
Based on the table, I fully expect Human Genome Sciences, as sales ramp up, to drop to a MC/Sales ratio around 20. If so, then they need to reach $3.4 B in sales to get that $68 B MC that represents 10x. To do that in 5 years they need to have at least 2 blockbusters launch in 2 years as it can take 3 years to reach blockbuster sales from launch. To complete the story we just have to:
1) Understand the time to launch of completed phase II and later pipeline drugs.
2) Assess the blockbuster potential of each.
3) Make sure they are not splitting revenues heavily with a marketing partner.
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1) Launch schedule: see www.hgsi.com and www.recap.com
Repifermin (Keratinocyte Growth Factor-2/KGF-2)
Mirostipen (Myeloid Progenitor Inhibitory Factor/MPIF)
B Lymphocyte Stimulator (BLyS)
These are their phase II or later products. Nothing to my knowledge has completed phase II. It is therefor unlikely any of these will launch before 2004, virtually assuring that $3.4 B in revenues will not be achieved by 2006. However, hot phase II results on 2 of these in large markets might still drive stock price in anticipation of launch. Note HGSI fans, I did not include VEGF-2 which has had testing halted while certain FDA concerns are dealt with.
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2) Blockbuster potential.
Repifermin (Keratinocyte Growth Factor-2/KGF-2) hgsi.com
Google search:"Repifermin market potential"
Hit #1: stockhouse.com dated 10/31/2000
"HGSI discovered that when Repifermin, a human growth protein, is applied to certain wounds, it promotes healing through cell growth. In clinical trials, Repifermin is being tested in three areas: venous ulcers, mucositis (a side effect of chemotherapy) and inflammatory bowel diseases. Although these conditions may not household words, they represent enormous markets, which, at present, are extremely underserved. Venous ulcers, for example, annually affect between 500,000 to 700,000 patients in the United States. Although Dr. Haseltine declined to give an exact aggregated market potential for Repifermin, he did state that by adding them up, "you would find the full range of indications is very significant."
That spells blockbuster. Apparently SmithKline Beecham [now Glaxo SmithKline], the British drug conglomerate, agrees. On October 16, it thought enough of Repifermin to exercise its option to jointly develop and commercialize the drug."
I love hearing about an underserved market of 500,000+ patients. If you consider all the stated applications the potential market swells considerably.
Mirostipen (Myeloid Progenitor Inhibitory Factor 1 or MPIF-1)
hgsi.com
Google search:"Myeloid Progenitor Inhibitory Factor market potential"
Hit #2: washingtonpost.com dated 6/3/1998
"One of the biggest problems in cancer treatment is that the powerful drugs used to kill tumor cells also kill other fast-growing cells, notably those in the blood and the intestinal tract. This is the cause of many of the dreadful side effects that cancer patients can suffer during treatment. Cells can be killed only when they are reproducing. In animal tests, the new compound was able to shut down reproduction of certain key blood cells long enough to protect them during chemotherapy. After the cancer drugs are excreted from the body, the cells "wake up," unharmed, and reproduce rapidly to restore the body's normal population of blood cells.
"I call it the Passover effect," Haseltine said. "When the angel of death passes over, these cells are snug in their beds." There is no evidence yet that this will work in people. But if it does, the consequences could be dramatic. The drug could eliminate some of the worst effects of cancer chemotherapy and might permit doctors to achieve better cure rates by using higher doses and longer treatments. Though Human Genome Sciences has made no projections about potential sales of the drug, saying that would be premature, the company is clearly shooting for a blockbuster. Amgen Inc. of Thousand Oaks, Calif., became the world's largest biotechnology company, with sales exceeding $2.4 billion a year, on the basis of two blood-signaling compounds whose uses are narrower than the potential uses of Human Genome Sciences' new compound."
Again, no firm numbers, but clearly helping chemotherapy sounds large.
B Lymphocyte Stimulator (BLyS) hgsi.com
From the HGSI web site:
"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."
AIDS, transplantation and 'certain cancers' sounds large. Unfortunately a Google search on 'blys market potential' or 'b lymphocyte market potential' was not revealing. I did not include the earlier in development anti-BLyS. Not enough BLyS and your immune system is underactive. Too much BLyS and you attack your own body (or so the theory goes). As a result BLyS is implicated as a cause of Lupus and Rheumatoid Arthritis. Enter anti-BLyS
Pipeline Summary: A most impressive set of drugs in development, and you should read about some of the ones still much earlier in development. HGSI is going after the biggies. The only biotech company I have seen that has AMGN potential based on the therapies they are driving towards and depth of the still early pipeline.
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3) Revenue splits
hgsi.com shows the partners.
Repifermin (KGF-2) 10/16/2000
hgsi.com
"As part of its June 1996 Agreement with SmithKline Beecham, HGS granted a 50/50 co-development and co-promotion option to SmithKline Beecham for HGS' human therapeutic products that successfully complete Phase IIa clinical trials. Clear to both parties at signing was that some products discovered by HGS with significant commercial potential would require the support of a successful large company with the expertise and infrastructure to maximize sales and profitability. Repifermin is the first HGS-discovered drug to be offered to SmithKline Beecham. HGS and SmithKline Beecham are now negotiating a definitive agreement to allocate responsibilities and resources. Unless otherwise agreed by both parties, SB and HGS will share equally in clinical development costs at Phase III and beyond."
Mirostipen (Myeloid Progenitor Inhibitory Factor 1 or MPIF-1) 2/25/1998
hgsi.com
"… announced today that Takeda Chemical Industries, Ltd., ("Takeda"), has exercised its exclusive option to develop and commercialize HGSI's first product candidate, Myeloid Progenitor Inhibitory Factor 1 (MPIF-1) , for the Japanese pharmaceutical market, the second largest in the world. "
B Lymphocyte Stimulator (BLyS)
No announcements at the HGSI web site regarding partners.
Revenue Splits Summary: HGSI splits Repifermin 50/50 globally, Mirostipen 50/50 for Japan. Well done. They get marketing partners but retain significant ownership.
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Overall Impression: Explosive potential but 4-7 years before launches of first two candidates if they survive. Maybe not 10x/5y, but certainly one of the must have (but not at any price) companies of early biotech based on deep pipeline, stunning early results and attacking underserved, high potential markets. Intangibles: 1) a positive announcement of early clinical results with anti-BLyS for rheumatoid arthritis. The potential to make rheumatoid arthritis another mild manageable condition, even if overhyped on early stage results, would capture enormous press and could possibly lead to a premature high valuation. 2) A negative announcement on their lead candidate KGF-2. That would lead to a great buying opportunity as it would surely damage their market cap. |
