Stock Option Advisory

What’s happening at Human Genome Sciences and How to Invest

The announcement that a clinical trial of BenlystaTM, the lupus drug from Human Genome Sciences, Inc. (HGSI), is showing positive results has sent the company’s stock soaring. This is good news for both lupus sufferers and investors, but can the company sustain its newly polished image?

After decades of disappointing results from apparently promising lupus drugs, optimism is finally warranted. Lupus is an autoimmune disease, in which the body attacks itself. The vast majority of sufferers are women, and symptoms include fatigue, rashes, joint pain and swelling, and lesions of the skin and mouth. The disease often attacks internal organs, eventually leading to death. Human Genome Sciences’ Benlysta significantly reduced patient symptoms, increasing quality of life and decreasing the need for steroids.

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There are up to 1.5 million lupus patients in the US, and millions more worldwide, who may benefit if a second trial, with results due in November, corroborates July’s preliminary results. If the FDA fast-tracks approval, Benlysta could be available by the end of 2010. Good news, indeed.

But a company cannot rely on a single blockbuster drug for long. And Human Genome Sciences is not counting on Benlysta alone to carry it into the future. HGSI’s stated goal is to “. . . create and develop novel therapies that can extend and improve the quality of life.” With multiple late-stage products and a promising mid-stage pipeline, Human Genome Sciences appears to be doing just that.

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HGIS has formed strategic collaborations with several prominent pharmaceutical companies, including Novartis (NVS) and GlaxoSmithKline (GSK), as well as the United States government. Benlysta is the result of one such agreement with GSK in which the companies agreed to co-develop and commercialize the product. HGSI will sell the drug in the US and GSK will market it outside the US.

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The two companies have licensing and co-promotion agreements for two additional drugs, also in Phase III trials. Commercialization of Darapladib, for coronary artery disease, would entitle HGSI to royalties from worldwide sales. Heart disease remains the number one killer in the US, and the World Health Organization reports that up to 7.2 million people worldwide die of the disease each year. This is a huge market.

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HGSI licensed Syncria®, a treatment for type 2 diabetes, to GSK in 2004 and is entitled to worldwide royalties if the drug is approved. Preliminary results in June 2009 suggest that Syncria improves control of glucose levels. Type 2 diabetes affects more than 250 million people worldwide.

Human Genome Sciences and Novartis have a co-development and commercialization agreement for Albuferon®, a hepatitis C treatment that has successfully completed Phase III trials. The companies plan to file marketing applications in fall of 2009, and if approved, Albuferon has the potential to be the leading hepatitis C treatment.

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HGSI is supplying the US Strategic National Stockpile with Raxibacumab (ABthrax TM), a drug for treatment of inhalation anthrax. This drug targets the anthrax toxins, which are the actual cause of death from anthrax infection. The initial shipment was delivered in April 2009, and in July 2009, the government placed an additional order. Governmental purchases alone could be worth several hundred million dollars.

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HGSI has produced numerous successes in 2009 and shows no signs of slowing down. Additional promising drugs in Phase II trials include drugs for cancer, rheumatoid arthritis and HIV/AIDS, suggesting that Human Genome Sciences is poised for growth moving forward.

Unfortunately, biotechnology companies can fall from grace just as fast or faster than their meteoric rise which sent their stock into the stratosphere. Investors taking long positions in biotechnology companies may wake up to find their company’s beloved stock hovering in the basement.

One way to invest in companies like Human Genome Sciences is to use stock options for protecting their positions. A put option for example operates just like home and automobile insurance, if something catastrophic happens, the insurance is there to protect the asset. Similarly if a stock protected by a put option plummets, the put option protects the asset.

Additionally, option investors can combine a protective put option with a covered call investing position to generate option collars for generating income which is protected from a catastrophic fall in the price of a stock.

For example, an option collars is available for HGSI for August stock options expiration with a potential return of 5.5% with a maximum risk of 7.7%. If the price of HGSI’s stock continues its blast-off performance an investor could make 5.5%, but if HGSI’s stock falls to earth, then the put option limits an option investors loss to 7.7%. Additionally, with a price increase in HGSI, an investor could roll the call option to a new strike price and generate additional income.

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[tags] Benlysta, lupus, autoimmune, steroids, Phase III trials, Darapladib, World Health Organization, Syncria, diabetes, Albuferon, US Strategic National Stockpile, Raxibacumab, ABthrax, Phase II trials, cancer, rheumatoid arthritis, HIV, AIDS, GSK, GlaxoSmithKline PLC, HGSI, Human Genome Sciences Inc., NVS, Novartis AG [/tags]

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