A first for HGS: A product

In ’08, Rockville biotech plans to deliver anthrax drug

HGS’s revenue stream increased by about 50 percent for the first three quarters of 2007, prior to an end-of-the-year flurry of advances, including positive test results of ABthrax announced late last month.

Financial analysts note that the company could be turning the corner in product development, with ABthrax and final clinical trials running throughout this year of potential blockbuster drugs for treating lupus and hepatitis C.

Meanwhile, H. Thomas Watkins, president and CEO, remains low-key, saying the Rockville company’s priorities and expectations have not changed. A foundation of 16 years of basic research in drug development — not to mention $750 million in cash — ‘‘has enabled us to pursue these opportunities and we have made excellent progress,” Watkins said.

For the first nine months of 2007, HGS, with nearly 900 employees, reported revenues of $29 million, up from $16 million in the prior-year period, primarily from milestone payments from partners.

Last month, the company announced that, after six years in research and development, ABthrax cleared its final major test hurdle. HGS plans to begin manufacturing 20,000 doses at its plant on the Johns Hopkins University’s Belward Research Campus in Rockville for delivery to the Department of Health and Human Resources.

In monkeys exposed to ‘‘massively lethal doses of anthrax spores,” a single ABthrax dose improved survival rates as much as 64 percent after the animals showed symptoms, according to HGS. As required by federal standards, the drug has now passed muster in two animal species: monkeys and rabbits.

Watkins said the company began anthrax research unilaterally immediately after five people were killed by anthrax powder mailed in 2001. ABthrax is a human antibody found by HGS to neutralize the anthrax toxin that was the lethal ingredient in the mailings.

In 2004, HGS continued hedging its bet as Congress passed the Project BioShield Act for developing medical countermeasures to bioterrorism for what’s called the Strategic National Stockpile. HGS stepped up ABthrax development after scoring the federal contract in 2006.

‘‘It made logical sense for us because we are a company that goes after proteins and antibodies” for new drugs, Watkins said.

ABthrax represents a third prong of the nation’s defense against future anthrax attacks, a defense that also includes vaccines to prevent infection and antibiotics to kill the anthrax bacteria in the body.

An existing vaccine is being manufactured and delivered to the government by Emergent BioSolutions Inc., also of Rockville. It requires several weeks of doses to build immunity. A new vaccine under development by other companies has been delayed. Antibiotics are effective against anthrax bacteria but not the toxin, which ABthrax blocks. Both can be administered together, Watkins said.

Experts consider it ironic that ABthrax will likely be HGS’s first product, because the company has worked much longer on other products. Also, as even Watkins noted, ‘‘this is not our main business, bioterrorism.”

It is also unusual for a biotech company to have three lead products at once, he said.

‘‘It‘s time to embrace” the company, said Joseph P. Schwartz, biotechnology analyst with Leerink Swann & Co. in Boston. HGS’s ‘‘core programs in [hepatitis C] and lupus are also advancing to the goal line, and each has the potential to be a blockbuster in its own right if ongoing phase 3 studies are successful in 2009.”

Leerink upgraded its stock target from $11 to $18 a share. After dipping near $9 in November, the ABthrax news had pumped the price to more than $11 by Thursday.

This year, ‘‘the biggest change will be delivering product,” Watkins predicted. ‘‘It feels great. We will be booking sales and delivering product for the first time.”

Cancer treatments also move forward

Equally significant are advances in HGS’s cancer drug program announced late in 2006, he said.

Last month, HGS teamed with Aegera Therapeutics Inc. of Montreal to develop and commercialize a new class of cancer cell-killing molecules. HGS acquired exclusive worldwide rights — except in Japan — to develop and commercialize the molecules into new therapies.

HGS also began mid-stage trials of an antibody therapy for patients with advanced non-small-cell lung cancer. The condition is currently incurable in most patients, Dr. Philip D. Bonomi of Rush University Medical Center in Chicago said in a statement. He is eager to evaluate the HGS treatment.

‘‘There is an urgent medical need for effective treatment options for non-small-cell lung cancer because current treatment strategies have only a minimal impact on survival,” Bonomi said.

While taking note of the Aegera deal, analysts at Robert W. Baird kept their rating of HGS at ‘‘neutral” while reducing estimates of the company with a target stock price to $12. Schwartz at Leerink set a higher target of $18 despite similar disappointment that HGS now estimates delivering only 70 percent of its ABthrax this year, less than the 90 percent Leerink said the company estimated previously.

Another analyst, Hanzhong Li of the Stanford Group Co. in Houston, gave HGS high marks for ’08 based on its strong global partnerships with drugmakers GlaxoSmithKline and Novartis. He was upbeat about the lupus treatment, calling it a likely breakthrough drug and a key player in the billion-dollar lupus market.

HGS currently has six experimental drugs in clinical trials and has financial rights to three products in the GlaxoSmithKline clinical development pipeline.