Tuesday, August 04, 2009

Human Genome Sciences (NASDAQ:HGSI): Upgraded to Buy at ThinkEquity; target raised to $26 (new Street high)

ThinkEquity is upgrading Human Genome Sciences (NASDAQ:HGSI) to Buy from Accumulate and raising their rating to $26 (prev. $18).

Firm notes they spent the past few days evaluating their model for Benlysta and conclude that their estimates are just too conservative. They believe BLISS-76 will, more likely than not, confirm the results seen in BLISS-52. Based on a revised model, they raise their price target to $26 per share, which justifies a raise of rating to Buy.

ThinkEquity revised their model after speaking with several people in the industry and the company, which has done extensive primary research. This analysis points to the fact that in the U.S., there are approximately 325,000 patients treated for some form of Lupus. They believe that at least two-thirds of that group are candidates for treatment with a biologic therapy, or approximately 200,000 patients with mild to severe Lupus (SLE). They pick what they believe is a modest price point of $25,000, between what patients are paying for TNF biologics on the low end and MS therapies on the high end. Firm also assumes market penetration over time of 35% share. Next, they assume the EU market is slightly larger than the U.S. market and apply the same assumptions

The result of these changes triangulating an EPS, sum-of-the-parts, and FCFF model points to $26 per share. At first blush, the firm notes they are surprised by the numbers, but what one must recognize is that Lupus is an unmet medical need and Benlysta is essentially a benign drug that has shown itself to be active, and therefore helps patients. Given the marketing power of Glaxo, they believe that patient awareness will grow rapidly and that physicians will prescribe it. Primary research conducted by the company points to a medical community that is very aware of and willing to use Benlysta. These assumptions point to Benlysta's potential to be a $2.7 billion dollar drug and may eventually prove to be conservative.

Next Event: BLISS-76. Given the similarities in trial design between BLISS-52 and BLISS-76 and the statistical significance of the recent BLISS-52 data, a 57.6% response rate at high dose versus control at 43.6%, they believe it's reasonable to assume that a positive outcome is likely.

Notablecalls: Note that the $26 target is the new Street high (by a mile). The logic behind the price target looks solid at first blush and I think will bring in the next wave of buyers.

I suspect the stock will trade over $15 level today and may even reach $15.50.

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