For all the debate about possible reform to the U.S. medical system, it is easy to forget that the majority of major innovations in drugs and medical devices come from America.  It is worth remembering that even with all the problems troubling the health care system, innovation continues to be a bright spot.  Three of the biggest gains among individual stocks on Monday were from U.S. companies in the pharmaceutical sector largely because of this sort of innovation.. 

The biggest winner in today’s action are investors in Human Genome Sciences (HGSI) which is up more than 30% in afternoon trading following the completion of their second successful late stage clinical trials for a treatment of Lupus.  We first wrote about this company after the completion of their first major trial on this drug in July (HGSI’s Lupus Drug Shows Great Potential), and the stock is up huge again after positive results for this difficult to treat disease.  The stock is hitting multi-year highs above $24, and the stock is up more than 600% since the first trial was completed.  With a lack of alternatives for those that suffer from Lupus, HGSI’s Benlysta could be a major source of revenue for the company if it can now get approval from regulators.

 Amylin Pharmaceuticals (AMLN) is also trading higher today by nearly 10% after this weekend the company announced that it has agreed to co-develop and commercialize compounds for obesity with Japan’s Takeda Pharmaceuticals.  Amylin will get $75 million up-front for the deal, but it could be much more lucrative if the partnership reaches certain benchmarks for sales of the compounds.  In addition to this partnership, the FDA approved extended use of Amylin’s Byetta as a standalone treatment.  Both of these developments are targeting treatment for those suffering from diabetes, an amazing 7.8% of the population according to the American Diabetes Association.  Amylin is positioning itself to gain market share in this huge area of need and we believe that this stock continue to have tremendous potential going forward.

 Vertex Pharmacueticals (VRTX) is the third drug company on the move today after receiving positive results from a Phase II trial of its experimental hepatitis C treatment Telaprevir.  The treatment was administered twice day as opposed to three times, which will be more convenient for consumers.  VRTX investors hope this will give it a competitive advantage over other treatments, and the stock has traded more than 8% higher on the day.  This drug is extremely important to the Vertex pipeline of drugs and they hope to seek regulatory approval 2H 2010 to possibly be available in 2011.

So, if Monday’s news is any indication America innovation in health care is alive and well, and at least today, investors are seeing the benefits.  As for Ockham, our valuation methodology has both HGSI and AMLN as Undervalued, but Vertex was recently downgraded to Overvalued.  While these events are unlikely to affect our rating going forward (because they have no impact on current fundamentals) this does illuminate what the future of these companies will look like.  It is extremely difficult to predict the outcome of these sorts of trials like HGSI and VRTX just went through, but for some investors this is a risk worth taking.

There hasn’t been a new drug approved for lupus since before we put a man on the moon. So today, we are witnessing one small step for a biopharma company but a giant leap for medicine. Shares of Human Genome Sciences are up more than 200%. Look at that, 213% on huge volume, while its lupus drug partner, GlacoSmithKline is up as well.” — CNBC’s Power Lunch 7/20/2009

There is a lot of excitement for Human Genome Sciences (HGSI) today after a late stage trial conducted by the company and the FDA met its objectives in treatment of lupus patients.  As the quote from CNBC says, this is one of the most hopeful signs for treatment of lupus in 50 years.  The drug will still need to complete one more similar study before going before regulators, but today’s announcement is a certainly a step in the right direction.  The stock has more than tripled from its closing price on Friday and is now trading for around $11 per share with less than two hours left in the trading day.

The new drug is called Benlysta, and it has the potential to be a blockbuster with Lazard Capital Markets estimating that there is $2.9 billion market opportunity.  With so few advancements in the treatment of lupus in the past this drug would certainly capture a large portion of that market share.  Interestingly, Lazard analyst Terence Flynn thought that the trial had a an 85% chance of failure in a note prior to the studies results, but he said if it did succeed the stock would pass $10.  When it becomes available the drug will be marketed in a deal with pharmaceutical giant GlaxoSmithKline (GSK), which has given birth to rumors that GSK might just buy Human Genome Sciences.  There has been no word from Glaxo on a possible deal, but there is nothing in their agreement that prevents them from buying shares in the smaller HGSI.

Our valuation methodology has a hard time with small biopharma companies like HGSI because they are often traded based on potential instead of fundamentals.  For example, Human Genome Sciences has traded for between 92x and 246x times revenue per share because the company hasn’t had much revenue until recently, as sales are supposed to more than quadruple in fiscal 2009.  Even with the better sales results and improving earnings couldn’t save the company from falling to well below one dollar just four months ago.  This is not the normal behavior of most stocks we follow, but small drug companies often do act this way.  So, taken with a grain of salt, our valuation methodology rates HGSI as Undervalued.  However, we are not recommending chasing today’s breakout performance, although it does greatly enhance the company’s earnings potential and attractiveness as a takeover target.  HGSI still has a fair amount of debt that is coming do in the next few years, so investors are placing a lot of faith in Benlysta to help pay down those obligations.  So far, it looks like that trust is being rewarded in a big way.