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A Genomics Pioneer Tightens Its Belt

By Amy Tsao In the years since the genomics boom and bust, Human Genome Sciences (HGSI) has been trying hard to find its way as a drug-development company. To hasten its march toward products and profits, the former highflier announced a major overhaul on Mar. 25 that includes paring down its drug-development pipeline by half and cutting 200 out of 1,000 jobs to conserve resources.

Perhaps more telling, CEO and founder William Haseltine will retire this year from the Rockville (Md.) company's helm. His departure coincides with Wall Street's intensifying focus on biotech companies' abilities to turn a profit. The slack granted genomic upstarts a few years ago is gone. Nowadays, even a one-time star like HGS -- with over $1 billion in cash and a highly respected leader in Haseltine -- has to bend to the market's demands.

Investors so far are lauding HGS's heavier emphasis on financial performance. "The company is exhibiting prudence, maturity, and stewardship," says Jay Markowitz, M.D., an analyst at T. Rowe Price, which is a significant HGS shareholder. The new CEO, who has yet to be named, would likely hail from the pharmaceutical industry and have a background in managing pipelines.

STILL TOO PRICEY? Though the restructuring could help HGS get more practical, it's no guarantee that the drugs in development will pan out. "There's plenty of risk to the story," Markowitz admits. Other analysts see a company that has yet to prove itself. In the last two years, two of its advanced experimental drugs were canceled in late-stage testing.

"The key to success is to advance something to the market, which [HGS] has been not able to do," says Ron Ellis, an analyst at Leerink Swann in Boston. Ellis has rated the stock at underperform since starting coverage in September, 2002, and says he still doesn't see much reason to raise his rating. (Ellis doesn't personally own the stock. His firm makes a market in HGS stock or has done banking for it.)

At around $12 as of Mar. 31 and with a market cap of $1.6 billion, many analysts think the stock still looks pricey. More than 80% of HGS'sarket value is based on the $1.3 billion it has in cash, so the market is paying only some $300 million for its drug pipeline.

AWAY FROM ACADEMIA. Investors remain skeptical about its future, partly because HGS recorded a loss of $185.3 million on $8.2 million in revenue last year, all of which came from a payment from a drug-company partner rather than from sales of its own products. In contrast. Millennium Pharmaceutical (MLNM) -- which has a $5 billion market cap and is also trading at a lofty premium -- generated revenues of $490 million in 2004 for two approved products.

Haseltine, who hails from academia, has said leaving was his own idea. He says he realized HGS's need for a leader with more experience in later-stage drug development -- whch involves working with the Food & Drug Administration and managing operations and budgets.

In any case, Haseltine's skill as savvy promoter will be lesscrucial to the future, analysts say. Pointing to Incyte (INCY) and Celera (CRA), two genomics companies that in recent years hired new leaders with backgrounds in drug development, Patrick Schnegelsberg-Patterson, formerly an analyst with Mehta Partners, calls Haseltine's departure the latest signal that among genomics companies the "time of [biotech CEOs from academia] is over. [Companies] now need to bring in people who are oriented to commercialization."

COMING ATTRACTIONS. Uncertainty about the company's leadership may be one factor weighing down HGS shares. Many analysts are now recommending that investors wait to see how the new CEO does. "For now, I would stay on the sidelines," says Schnegelsberg-Patterson. "It will probably be another half year before we know where the story is going." Mehta Partners is not recommending clients buy shares. (Schnegelsberg-Patterson does not own the stock, and neither does Mehta Partners' hedge fund.)

Ellis also questions the timing of HGS's pipeline. The company says it will focus its efforts on four drugs already in clinical trials. Those are the most advanced, but they still couldn't be approved before 2007 at the earliest. A fifth drug, for HIV/AIDS, is new to investors and even further from reaching the marketplace.

LymphostatB, for the treatment of lupus and rheumatoid arthritis, is HGS's most advanced prospect. It blocks a growth factor called BLyS, which occurs naturally in the body, but in patients with autoimmune diseases is often overactive. "It might be a target to slow down to reduce the affects of both diseases," says David Stump, HGS executive vice-president for drug development, adding that this treatment is the most advanced in its class.

"SHOT IN THE DARK." For the time being, none of HGS's projects are beyond Phase II trials. A drug for hepatitis C is in that stage, and two cancer drugs are in Phase I trials. Amgen (AMGN) and Genentech (DNA) are working on similar drugs targeting the same mechanisms in cancer, Ellis notes.

Speculation about the quality of its pipeline - and Haseltine's motives for departing - isn't limited to stock analysts. "Maybe [Haseltine] felt forced to develop drugs quicker and take a short cut because he had raised a lot of money in a short time," says Alan Walton at Oxford Bioscience Partners, one of HGS's original venture-capital backers. "But he took a blind, though perhaps informed, shot in the dark, and it's not working well. If he had blockbuster drugs, I don't see any reason for leaving."

But many analysts are holding out hope that a new CEO may be willing to make choices HGS has been unwilling to chance, such as buying an existing product to slow its cash burn over the next couple of years.

FAST BURN? "I would like to see someone who really can go in there and teach them how to develop and market products and think strategically," says Schnegelsberg-Patterson. Another possibility would be to bolster R&D capabilities by acquiring Britain's Cambridge Antibody Technology (CATG), with which HGS already has a research relationship, adds Schnegelsberg-Patterson.

One analyst who requested anonymity predicts that more heads would roll once HGS's new CEO takes his spot. And the five pipeline projects in focus could be trimmed yet further, to two. Stump says "there's no question the products we're choosing to develop are core assets," though HGS would keep an eye on opportunities to buy products or companies. "Our main focus would be to develop and bring to market as many products as we can."

Bulls on HGS say the $1.3 billion in cash on its balance sheet buys time. Still, without product revenues, the money could disappear fairly quickly. "If you think you may not have revenues until 2008 and you're burning $150 million a year, you start bumping into some problems," Ellis says. For that reason, analysts are betting that HGS's new leadership will press the pedal to the metal on acquisitions. Tsao covers financial markets for BusinessWeek Online in New York

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