Human Genome stock slumps on balance sheet concerns
Thursday October 17, 4:20 pm ET
By Toni Clarke
NEW YORK, Oct 17 (Reuters) - Shares of Human Genome Sciences Inc. (NasdaqNM:HGSI - News) fell 12 percent on Thursday after a brokerage report said the company may need to raise cash to operate and pay off debt by late 2003.
The report, from Boca Raton, Florida-based Sterling Financial recommended investors sell the stock or sell it short. Human Genome's shares fell $1.70, to $11.94 on Nasdaq.
Human Genome, based in Rockville, Maryland, denied it will need to raise funds by the time suggested by Sterling. Chief Financial Officer Steve Mayer said he felt "very comfortable" that the company has several years available.
The company was one of the first to begin developing drugs from advanced genetic discoveries. So far has it has nearly a dozen candidates in clinical trials but no products on the market.
Sterling concluded that Human Genome would have as little as $275 million available to it if federal accounting regulators implement changes -- sparked by the Enron debacle -- that would require certain intangible assets and liabilities to be recorded as tangible assets.
"It appears that this rule is effective immediately, implying that companies that are affected would have to make the adjustment in 2002 year-end financial statements," the report said.
Last year Human Genome Sciences entered two off-balance-sheet lease obligations with independent third-party trusts set up by banks to construct a new research, development and administrative space. Human Genome leases the property from the trusts.
As collateral for the loan, made by the banks to the trusts, Human Genome must set aside a portion of its cash to cover however much of the loan has been used during the construction process. That was $150 million at the end of the second quarter. It will rise to $541 million by 2004.
Sterling said that under new accounting rules, both the final debt of $541 million, and the same amount in collateral to protect the loan, would be recorded on the books and should be deleted from usable cash from the $1.6 billion the company currently has in the bank.
Mayer said that math is incorrect, since the collateral is set aside to pay off debt. Sterling has double-counted, he said. Moreover, Mayer said, whether or not the obligations are included on or off the balance sheet, it doesn't effect the amount of cash available for Human Genome to use.
"The change the way you account for something has zero impact on the cash available to you," Mayer said.
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