Description
Filed with the SEC from July 19 to July 25:
Human Genome Sciences (HGSI)
Gamco disclosed that it owns 10,147,848 shares (5.1%) of HGSI, after it bought 9,544,739 in the span from May 22 through July 19 at prices that ranged from $13.09 to $14.22 per share. Gamco also disclosed selling 60,400 shares on July 17 at prices of $14.20 and $14.21 per share.
BUSINESS OVERVIEW
Overview
Human Genome Sciences, Inc. (“HGS”, the “Company”, “we”, “our” and “us”) is a biopharmaceutical company that exists to place new therapies into the hands of those battling serious disease. Our lead products are BENLYSTA ® (belimumab) for systemic lupus erythematosus (“SLE”) and raxibacumab for inhalation anthrax.
BENLYSTA was approved on March 9, 2011 by the U.S. Food and Drug Administration (“FDA”) for the treatment of adult patients with active, autoantibody-positive SLE who are receiving standard therapy. We launched BENLYSTA shortly thereafter and recognized revenue from our first BENLYSTA sales in March 2011. On July 13, 2011, the European Commission granted marketing authorization for BENLYSTA as an add-on therapy in adult patients with active autoantibody-positive SLE, with a high degree of disease activity despite standard therapy. BENLYSTA is currently available in the United States, Canada and an increasing number of European countries, including Germany, Spain, Austria, Denmark, Finland, Hungary, Norway and Sweden. In addition, regulatory submissions are pending in other countries.
We are developing BENLYSTA with our partner, GlaxoSmithKline (“GSK”), under a 2006 co-development and co-commercialization agreement. In the United States we and GSK both have sales teams that are working together to commercialize BENLYSTA. In Germany, France and Spain, our team will work alongside GSK to commercialize BENLYSTA, and in the rest of the world GSK will lead local implementation of the commercialization of BENLYSTA. We recognize product sales revenue from BENLYSTA sales in the U.S., and GSK recognizes product sales revenue from sales in the rest of the world. We share profits and certain expenses with GSK on a worldwide basis. Under the agreement, we are responsible for the global supply of BENLYSTA.
We continue to deliver raxibacumab to the U.S. Strategic National Stockpile (“SNS”) for emergency use in treating inhalation anthrax. In July 2009, the U.S. Government (“USG”) exercised its option under our contract to purchase 45,000 additional doses of raxibacumab, with delivery to be completed over a three-year period. HGS expects to receive approximately $142.0 million from this second order as deliveries are completed, approximately $117.0 million of which has been recognized as revenue through December 31, 2011. In May 2009, we submitted a Biologics License Application (“BLA”) to the FDA for raxibacumab for the treatment of inhalation anthrax. We received a Complete Response Letter in November 2009, and we continue to work closely with the FDA to obtain approval. HGS will receive approximately $20.0 million from the USG if raxibacumab is licensed by the FDA.
In addition to our internal pipeline, we have substantial financial rights to two novel drugs that GSK has advanced to late-stage development. The first of these is darapladib, which was discovered by GSK based on HGS technology. In two Phase 3 trials, GSK is currently evaluating whether darapladib can reduce the risk of adverse cardiovascular events such as heart attack or stroke in patients with chronic coronary heart disease and acute coronary syndrome, respectively. The combined darapladib Phase 3 program spans 42 countries and has enrolled more than 28,500 patients. The second is albiglutide, for which GSK currently has eight Phase 3 trials in progress to evaluate the long-term efficacy, safety and tolerability of albiglutide as monotherapy and add-on therapy for patients with type 2 diabetes mellitus. Albiglutide was created by HGS using its proprietary albumin-fusion technology, and the product was licensed to GSK in 2004. We also have substantial financial rights to another novel drug that was discovered by GSK based on HGS technology, rilapladib, which GSK is currently evaluating in a Phase 2 trial for its effect on biomarkers and cognitive function in Alzheimer’s disease.
We are working on potential additional indications for BENLYSTA as well as additional methods of delivery. Currently, BENLYSTA is delivered by infusion at two-week intervals for the first three doses and every four weeks thereafter. In December 2011, we initiated dosing of patients in BLISS-SC, a Phase 3 trial of the subcutaneous formulation of BENLYSTA. If this trial is successful and regulatory authorities agree, the subcutaneous formulation will make it possible for patients to self-administer BENLYSTA by injection once a week. In 2012, we plan to initiate Phase 3 trials of BENLYSTA in vasculitis and active lupus nephritis.
We are also working to expand and advance our mid- and early-stage pipeline beyond BENLYSTA. A randomized Phase 2 trial is currently evaluating mapatumumab in combination with Nexavar ® (sorafenib) for the treatment of advanced hepatocellular cancer. Mapatumumab is a human monoclonal antibody to TRAIL receptor 1. In March 2011, we entered into an agreement with FivePrime Therapeutics, Inc. (“FivePrime”) to develop and commercialize HGS1036 (formerly FP-1039) for multiple cancers.
Strategic partnerships are an important driver of our commercial success. We have a co-development and co-commercialization agreement with GSK for BENLYSTA, and raxibacumab is being developed under a contract with the Biomedical Advanced Research and Development Authority (“BARDA”) of the Office of the Assistant Secretary for Preparedness and Response (“ASPR”), U.S. Department of Health and Human Services (“HHS”). Our strategic partnerships with pharmaceutical and biotechnology companies allow us to leverage our strengths and gain access to sales and marketing infrastructure, as well as complementary technologies. Some of these partnerships provide us with licensing or other fees, clinical development cost-sharing, milestone payments and rights to royalty payments as products are developed and commercialized. In some cases, we are entitled to certain commercialization, co-promotion, revenue-sharing and other product rights.
As of December 31, 2011, we had $881.4 million in cash and investments. With a strong cash position, a management team experienced in bringing products to market, an experienced drug development organization and significant capabilities in biologicals manufacturing, we believe HGS has the resources and capabilities necessary to achieve near-term commercial success while sustaining a viable pipeline that supports our long-term growth.
We are a Delaware corporation established in 1992, headquartered at 14200 Shady Grove Road, Rockville, Maryland 20850-7464. Our telephone number is (301) 309-8504. Our website address is www.hgsi.com. Information contained on our website is not a part of, and is not incorporated into, this annual report on Form 10-K. Our filings with the SEC are available without charge on our website as soon as reasonably practicable after filing. HGS, Human Genome Sciences and BENLYSTA are trademarks of Human Genome Sciences, Inc. Other trademarks referenced are the property of their respective owners.
Strategy
Over the last few years, we have made strategic decisions that have transformed HGS on multiple levels and contributed to our progress toward becoming a fully commercial biopharmaceutical company capable of generating sustainable revenues and sustainable growth into the future. Key strategies to help us achieve this goal include:
Execute the successful launch and commercialization of BENLYSTA.
With BENLYSTA now approved by the FDA, our first strategic priority is to continue our progress toward the successful global launch and commercialization of a drug that we believe represents an improvement in the standard of care for systemic lupus. We have hired, trained and deployed a specialized commercial team, including sales, marketing and medical affairs, which has a high level of experience and familiarity with rheumatology, biologics and infused products. The combined HGS and GSK team, including a U.S. sales force of approximately 150, is working closely together to communicate effectively with rheumatologists and other stakeholders to ensure that appropriate patients with systemic lupus who need BENLYSTA will have access to it. HGS and GSK are also supporting physicians and patients with reimbursement and access programs.
Under the terms of our 2006 co-development and co-commercialization agreement with GSK, HGS has responsibility for the global supply of BENLYSTA. We believe we have produced sufficient BENLYSTA inventory to meet anticipated global market needs for at least one year, and we believe our large-scale manufacturing facility has sufficient capacity to provide worldwide supply for the next two to three years. However, HGS and GSK also anticipate that additional capacity will be required. In 2010, HGS entered into an agreement with Lonza Sales AG (“Lonza”) that we believe will provide the additional capacity needed, with production expected to come on-line in 2013.
Make BENLYSTA globally available so patients with need will have access.
We and GSK received marketing authorization for BENLYSTA from the European Commission in July 2011, and BENLYSTA has been launched and is currently available in the United States, Canada, Germany, Spain, Austria, Denmark, Finland, Hungary, Norway and Sweden. We expect to launch in France, Italy and other markets in 2012. In addition, regulatory submissions are pending in other countries. We have built our own commercialization team to work alongside GSK in Europe, with HGS headquarters in Switzerland and local organizations in Germany, France and Spain. Elsewhere, GSK will lead local implementation, with HGS sharing costs and profits equally with GSK.
Work to achieve the full therapeutic and commercial potential of BENLYSTA by developing it for other B-cell mediated diseases.
We believe that BENLYSTA has potential beyond its initial market entry in SLE. We are committed to achieving the full therapeutic and commercial potential of BENLYSTA, both by continuing its development for SLE, and by developing it for other B-cell mediated diseases where patients need new treatment options and we have scientific evidence supporting BENLYSTA’s therapeutic potential and commercial viability. In May 2011, GSK initiated dosing of patients in a Phase 3 trial of BENLYSTA in East Asia, to be conducted in China, Japan and South Korea. In December 2011, we initiated dosing in BLISS-SC, a Phase 3 trial of the subcutaneous formulation of BENLYSTA. Initial results from this study are expected in 2014; if it is successful and regulatory authorities agree, the subcutaneous formulation would make it possible for patients to self-administer BENLYSTA by injection once a week. In 2012, we plan to initiate Phase 3 trials of BENLYSTA in vasculitis and active lupus nephritis. In addition, small investigator-initiated clinical studies are currently ongoing in Sjögren’s syndrome and Waldenstrom’s macroglobulinaemia.
Find and develop new therapies for our late-stage pipeline.
We will pursue external opportunities to acquire high-potential innovative products, with a priority given to products that have the potential to be first-in-class or best-in class, and address large markets or markets on the verge of escalating growth. Our primary therapeutic focus is on indications in which we have special expertise and which can be commercialized with small specialty sales forces. We will be open to both biologics and small molecule opportunities. We also look forward to GSK’s continuing progress with late-stage products to which we have substantial financial rights, such as darapladib for cardiovascular disease and albiglutide for type 2 diabetes mellitus.
Continue to build a robust mid-and early-stage pipeline.
Our mid- and early-stage pipeline is important to our long-term future growth. A randomized Phase 2 trial is currently evaluating mapatumumab in combination with Nexavar (sorafenib) for the treatment of advanced hepatocellular cancer. Mapatumumab is a human monoclonal antibody to TRAIL receptor 1. In March 2011, we and FivePrime Therapeutics announced a collaboration to develop and commercialize HGS1036 (formerly FP-1039) for multiple cancers. HGS1036 is a first-in-class biologic discovered by FivePrime that targets multiple fibroblast growth factor (“FGF”) ligands. FGF proteins are growth factors that play important roles in the growth and survival of a number of solid tumors. A Phase 1 study was completed in 2011, showing that HGS1036 was safe and well tolerated. In 2012, we plan to initiate Phase 1b trials of HGS1036 in combination with chemotherapy. Our new targets program is designed to increase the number of Investigational New Drugs entering our pipeline, and we have research collaborations ongoing to complement our internal efforts. We also look forward to GSK’s continued progress with rilapladib, to which we have substantial financial rights.
Remain strategically opportunistic and vigilant.
Strategically appropriate partnerships and collaborations will continue to play an important role in our future. We will continue our partnership with GSK as we explore the full potential of BENLYSTA. As we bring more products forward in the future that address large and international markets, other partnerships with leading companies may allow us to bring new therapies more quickly to patients who need them on a global basis. We will also pursue strategic acquisitions and collaborations to expand our portfolio of new drug candidates, provide access to complementary technologies, or reduce the cost and speed the early development of HGS-discovered targets.
Capitalize on our intellectual property portfolio.
We pursue patents to protect our intellectual property and have developed a significant intellectual property portfolio, with hundreds of issued patents covering genes, proteins, antibodies and proprietary technologies. We have also filed U.S. patent applications covering many additional discoveries and inventions. We will seek opportunities to monetize intellectual property assets that we do not plan to develop internally.
Build upon our core competencies in manufacturing and process development.
Our world-class manufacturing and process development capabilities represent a strategic advantage and allow us to control quality while maintaining flexibility.
Maintain a strong financial position.
A strong cash position is essential to our ability to commercialize new approved drugs, advance promising late-stage investigational therapies through Phase 3 trials, and continue to invest in our earlier-stage pipeline. We view a strong financial position as a strategic imperative. Maintaining it requires efficient operations, sound financial controls and the ability to raise funds in the public or private markets. It also requires a willingness to advance creative approaches such as our manufacturing alliance program, through which we have capitalized on our process development and manufacturing capability to generate revenues – or raxibacumab, which is sold to one customer, the U.S. Government, and to date has generated approximately $280 million.
Products and Clinical Programs
Marketed and Late-Stage Products
BENLYSTA was approved in March 2011 by the FDA for the treatment of adult patients with active, autoantibody-positive SLE who are receiving standard therapy. In July 2011, the European Commission granted marketing authorization for BENLYSTA as an add-on therapy in adult patients with active autoantibody-positive SLE, with a high degree of disease activity despite standard therapy. BENLYSTA has been launched and is currently available for the treatment of SLE in an increasing number of countries. We continue to develop BENLYSTA for SLE and new indications. Raxibacumab for inhalation anthrax continues to generate revenue under our contract with the U.S. Government as we complete deliveries to the Strategic National Stockpile, and we continue to work closely with the FDA to achieve licensure.
BENLYSTA (belimumab)
BENLYSTA is a human monoclonal antibody and the first in a class of drugs known as BLyS-specific inhibitors. BENLYSTA inhibits the biological activity of a naturally occurring protein known as B-lymphocyte stimulator (BLyS), which was first discovered by HGS in 1996. In lupus and certain other autoimmune diseases, elevated levels of BLyS are believed to contribute to the production of autoantibodies – antibodies that attack and destroy the body’s own healthy tissues. BENLYSTA is being developed by HGS and GSK under a 2006 co-development and co-commercialization agreement (described below under “Lead Commercial Collaborations”).
In May 2011, GSK initiated dosing of patients in a Phase 3 trial of BENLYSTA in East Asia, to be conducted in China, Japan and South Korea. In December 2011, we initiated dosing in BLISS-SC, a Phase 3 trial of the subcutaneous formulation of BENLYSTA. In 2012, we plan to initiate Phase 3 trials of BENLYSTA in vasculitis and active lupus nephritis. In addition, small investigator-initiated clinical studies are currently ongoing in Sjögren’s syndrome and Waldenstrom’s macroglobulinaemia.
Raxibacumab
Raxibacumab is a human monoclonal antibody that targets and blocks Bacillus anthracis protective antigen, which research has shown to be the key facilitator of the deadly toxicity of anthrax infection. Raxibacumab represents a new way to address the anthrax threat. While antibiotics can kill the anthrax bacteria, they are not effective against the deadly toxins the bacteria produce. Raxibacumab targets anthrax toxins after they are released by the bacteria into the blood and tissues. In an inhalation anthrax attack, people may not know they are infected with anthrax until the toxins already are circulating in their blood, and it may be too late for antibiotics alone to be effective.
We are developing raxibacumab under a contract entered into in 2006 with BARDA. The U.S. Government is currently our only customer for raxibacumab and has the right to terminate our contract at any time. In 2011, HGS continued delivery of raxibacumab to the U.S. Strategic National Stockpile. In July 2009, the U.S. Government exercised its option to purchase 45,000 additional doses of raxibacumab for the Stockpile for emergency use in treating inhalation anthrax, with delivery to be completed over a three-year period. HGS expects to receive approximately $142.0 million from this second order as deliveries are completed. In 2011, we recognized $52.5 million in raxibacumab product sales revenue. Also under our contract, HGS submitted a BLA to the FDA for raxibacumab for the treatment of inhalation anthrax in May 2009. We received a Complete Response Letter in November 2009, and we continue to work closely with the FDA to obtain approval. HGS will receive approximately $20.0 million from the U.S. Government if raxibacumab is licensed by the FDA. Raxibacumab revenue accounted for 42% and 31% of our total revenue for 2011 and 2010, respectively.
Mid- and Early-Stage Pipeline
Our mid- and early-stage pipeline is important to our long-term future growth.
Mapatumumab
Mapatumumab is a human monoclonal antibody that specifically binds to TRAIL receptor 1 and causes it to induce apoptosis in cancer cells. A randomized Phase 2 trial is currently evaluating mapatumumab in combination with Nexavar (sorafenib) for the treatment of advanced hepatocellular cancer.
HGS1036
In March 2011, we and FivePrime Therapeutics entered into a collaboration to develop and commercialize HGS1036 (formerly FP-1039) for multiple cancers. HGS1036 is a first-in-class biologic discovered by FivePrime that targets multiple fibroblast growth factor (“FGF”) ligands. FGF proteins are growth factors that play important roles in the growth and survival of a number of solid tumors. A Phase 1 study was completed in 2011, showing that HGS1036 was safe and well tolerated. In 2012, we plan to initiate Phase 1b trials of HGS1036 in combination with chemotherapy.
CEO BACKGROUND
Allan Baxter, Ph.D.
62 2011
Member of our Nominating and Governance Committee. Dr. Baxter is chairman of Stevenage Bioscience Catalyst, an open innovation bioscience campus; chairman of TopiVert, LTD; and Strategy Officer for Ascletis, a Chinese pharmaceutical company. From 1980 to 2010, Dr. Baxter served in a variety of scientific roles with GlaxoSmithKline (GSK) (and its predecessors Glaxo Group and Glaxo Wellcome); from 2006-2010, he was Senior Vice President, Medicines Development with accountability for GSK’s late stage pipeline; from 2001-2006, he was Senior Vice President, Drug Discovery, with accountability for GSK’s early pipeline. Dr. Baxter is a non-executive director of Vernalis plc and of Autifony Therapeutics. He is chairman of the Wellcome Trust Seeding Drug Discovery investment committee and a member of the Wellcome Trust Technology Transfer Strategy Panel. He holds a Ph.D. in Biochemistry and honorary D.Sc. from Glasgow University and an honorary D.Sc. from the University of Strathclyde, where he graduated B.Sc. in Chemistry.
We believe that Dr. Baxter’s qualifications to serve on our Board of Directors include his significant experience in the drug discovery and development field, including his various positions with GSK.
Richard J. Danzig
67 2001
Member of our Audit Committee and Finance Committee. Consultant to U.S. government on biological terrorism and Chairman of the Board of Directors of The Center for a New American Security. Mr. Danzig is a Senior Fellow of Yale University’s Jackson Institute for Global Affairs, and a Senior Advisor to the Center for Strategic and International Studies and the Center for Naval Analyses. He is also a member of the Defense Policy Board, the President’s Intelligence Advisory Board, and the U.S. Military European Command Advisory Board. He serves on the Boards of Directors of Saffron Hill Investors Guernsey and the RAND Corporation. He served as Secretary of the Navy from 1998 to 2001 and as Under Secretary of the Navy from 1993 to 1997. He was a Traveling Fellow of the Center for International Political Economy and an Adjunct Professor at Syracuse University’s Maxwell School of Citizenship & Public Affairs between 1997 and 1998. He was a partner in the law firm of Latham & Watkins from 1981 to 1993. Mr. Danzig received a B.A. degree from Reed College, a J.D. degree from Yale University, and Bachelor of Philosophy and Doctor of Philosophy degrees from Oxford University.
We believe that Mr. Danzig’s qualifications to serve on our Board of Directors include his experience in government, including his prior role as Secretary of the Navy, his prior legal experience and position as a director of another public company.
Colin Goddard, Ph.D.
52 2010
Member of our Compensation Committee. Dr. Goddard has served as Executive Chairman of Coferon, Inc., a private biotechnology platform company, since April 2011. From October 1998 until its acquisition by Astellas Pharmaceuticals, Inc. in July 2010, Dr. Goddard served as Chief Executive Officer of OSI Pharmaceuticals, Inc. and member of its Board of Directors. He joined OSI as a scientist in 1989 and held positions that included Director of Drug Discovery, Chief Operating Officer and President. He also chaired the OSI board from 2000-2002. Prior to his employment at OSI, Dr. Goddard was a research fellow at the National Cancer Institute in Bethesda, MD. Dr. Goddard also chairs the board of Merganser Biotech and serves on the boards of PanOptica, Inc. and Agendia NV, all private biotech companies, and Abilities! Inc., an internationally recognized charity for the disabled. He received his Ph.D. in Cancer Pharmacology from the University of Aston in Birmingham, U.K. and a B.Sc. (Hons) in Biochemistry from the University of York, U.K.
We believe that Dr. Goddard’s qualifications to serve on our Board of Directors include his previous position as Chief Executive Officer of a public biopharmaceutical company and his extensive drug discovery and research experience both at a biopharmaceutical company and at the National Cancer Institute.
Maxine Gowen, Ph.D.
54 2008
Member of our Nominating and Governance Committee. Since 2007, Dr. Gowen has been the President and Chief Executive Officer of Trevena, Inc., a privately-held drug discovery company. Prior to joining Trevena, Dr. Gowen held a variety of leadership roles at GlaxoSmithKline (GSK) over a period of fifteen years, most recently as Senior Vice President of GSK’s Center of Excellence for External Drug Discovery. In that position, Dr. Gowen built and led a new R&D division with a mission to create a drug discovery portfolio through business development alliances with innovative healthcare companies. She joined GSK in 1992 to lead the Musculoskeletal Diseases Division, where she initiated and led a number of preclinical and clinical development programs. Before GSK, Dr. Gowen was Senior Lecturer and Head, Bone Cell Biology Group, Department of Bone and Joint Medicine, of the University of Bath, U.K. Dr. Gowen has been honored with a number of research awards and prizes, has authored more than 125 peer-reviewed publications, reviews and book chapters, and holds a number of patents. She received her Ph.D. from the University of Sheffield, U.K., an M.B.A. with academic honors from The Wharton School of the University of Pennsylvania, and a B.Sc. with Honors in Biochemistry from the University of Bristol, U.K.
We believe that Dr. Gowen’s qualifications to serve on our Board of Directors include her significant experience in the drug discovery field, including her position as Chief Executive Officer of Trevena, Inc. and her prior drug discovery and development positions at GlaxoSmithKline.
Tuan Ha-Ngoc
60 2005
Chair of our Audit Committee. Since 2002 Mr. Ha-Ngoc has been President and Chief Executive Officer of AVEO Pharmaceuticals, Inc., a public biopharmaceutical company focused on the discovery and development of novel cancer therapeutics. From 1999 to 2002, he was co-founder, President and Chief Executive Officer of deNovis, Inc., an enterprise-scale software development company for the automation of healthcare administrative functions. From 1998 to 1999, Mr. Ha-Ngoc was Corporate Vice President of Strategic Development for Wyeth, following Wyeth’s acquisition of Genetics Institute, where Mr. Ha-Ngoc served as Executive Vice President with responsibility for corporate development, commercial operations and European and Japanese operations. Prior to joining Genetics Institute in 1984, Mr. Ha-Ngoc held various marketing and business positions at Baxter Healthcare, Inc. He received his M.B.A. degree from INSEAD and his Master’s degree in pharmacy from the University of Paris, France. Mr. Ha-Ngoc serves on the Board of Directors of AVEO Pharmaceuticals, Inc., and on the boards of directors of a number of academic and nonprofit organizations, including the Harvard School of Dental Medicine, the Tufts School of Medicine, the Boston Philharmonic Orchestra and the International Institute of Boston.
We believe that Mr. Ha-Ngoc’s qualifications to serve on our Board of Directors include his significant experience in the cancer research field and corporate strategy development, including his leadership role as Chief Executive Officer at AVEO Pharmaceuticals, Vice President for Strategic Development at Wyeth and his experiences in commercializing potential drug candidates at Genetics Institute and Baxter Healthcare, including his international commercialization experience in Europe and Japan.
A. N. “Jerry” Karabelas, Ph.D.
59 2002
Chairman of the Board, Chair of our Finance Committee and member of our Compensation Committee. Dr. Karabelas has been a Partner of Care Capital LLC since 2001. He served as Founder and Chairman of Novartis BioVenture Fund from 2000 to 2001, Head of Healthcare and CEO of Worldwide Pharmaceuticals at Novartis, AG from 1998 to 2000, Executive Vice-President, Pharmaceuticals at SmithKline Beecham from 1997 to 1998, President, North American Pharmaceuticals at SmithKline Beecham from 1993 to 1997, and Vice President of U.S. Marketing, SmithKline Beecham, from 1990 to 1993. Dr. Karabelas is a Visiting Committee Member of MIT Health Studies & Technology. He received his B.S. in biochemistry from the University of New Hampshire and his Ph.D. in pharmacokinetics from the Massachusetts College of Pharmacy.
We believe that Dr. Karabelas’s qualifications to serve on our Board of Directors include his substantial experience in business development and clinical development and his prior roles at Novartis and SmithKline Beecham where he was responsible for the marketing and commercialization of new drug candidates.
John L. LaMattina, Ph.D.
62 2008
Member of our Compensation Committee and Finance Committee. Dr. LaMattina served as Senior Vice President, Pfizer Inc., and President, Pfizer Global Research & Development from 2003 to 2007. Dr. LaMattina joined Pfizer Inc. in 1977 and held positions of increasing responsibility for Pfizer Central Research, including Vice President of U.S. Discovery Operations in 1993, Senior Vice President of Worldwide Discovery Operations in 1998 and Senior Vice President of Worldwide Development in 1999. Dr. LaMattina is a Senior Partner at PureTech Ventures and a member of the Board of Directors of Ligand Pharmaceuticals Incorporated, a public company. He also serves on the Board of Trustees of Boston College, the Board of Directors of the Terri Brodeur Breast Cancer Foundation and the Scientific Advisory Board of Trevena, Inc. He holds a number of U.S. patents and is the author of a number of scientific publications, including a book entitled: “Drug Truths — Dispelling the Myths of Pharma R&D.” He graduated cum laude from Boston College with a B.S. in Chemistry and received a Ph.D. in Organic Chemistry from the University of New Hampshire. He previously served on the Board of Directors of Thermo Electron Corporation from 2004 to 2006 and Neurogen Corporation from 2008 to 2009.
We believe that Dr. LaMattina’s qualifications to serve on our Board of Directors include his substantial experience in drug discovery and development, including his prior positions with Pfizer, Inc.
Augustine Lawlor
55 2004
Chair of our Compensation Committee and member of our Finance Committee. Mr. Lawlor has been a managing director of HealthCare Ventures LLC since 2000. Prior to joining HealthCare Ventures, Mr. Lawlor served as Chief Operating Officer of LeukoSite from 1997 to 2000. Before joining LeukoSite, Mr. Lawlor served as Chief Financial Officer and Vice President of Corporate Development of Alpha-Beta Technology. He was previously Chief Financial Officer and Vice President, Business Development, of BioSurface Technology. Mr. Lawlor serves on the Board of Directors of Cardiovascular Systems, Inc., a public company, and a number of private companies, including Catalyst, GlobeImmune, Inc., Synovex, U.S. Genomics, Inc., VaxInnate, Corp., GITR Inc. and Tensha Therapeutics Inc. He received a B.A. degree from the University of New Hampshire, where he was elected to Phi Beta Kappa, and received a master’s degree in management from Yale University.
We believe that Mr. Lawlor’s qualifications to serve on our Board of Directors include his significant experience in venture financing, his financial and operational experience with other public pharmaceutical companies and his experience in new drug development through his portfolio companies and at LeukoSite and Alpha-Beta Technology.
George J. Morrow
60 2011
Member of our Nominating and Governance Committee. Mr. Morrow served as Executive Vice President, Global Commercial Operations at Amgen Inc. from 2003 until his retirement in 2011. Prior to that he served as Executive Vice President of Worldwide Sales and Marketing at Amgen from 2001 to 2003. From 1992 to 2001, Mr. Morrow held multiple leadership positions at GlaxoSmithKline Inc. and its subsidiaries, last serving as President and Chief Executive Officer of Glaxo Wellcome Inc. Mr. Morrow serves on the Board of Directors of Align Technology, Inc., a public company, and is a member of the Duke University Medical Center Board of Visitors. Mr. Morrow holds a B.S. in Chemistry from Southampton College, Long Island University, an M.S. in Biochemistry from Bryn Mawr College and an M.B.A. from Duke University.
We believe that Mr. Morrow’s qualifications to serve on our Board of Directors include his considerable business experience in the biopharmaceutical industry at Amgen and GlaxoSmithKline, including his particular experience in the marketing and commercialization of new drug candidates.
Gregory Norden
54 2011
Member of our Audit Committee. From 1989 to 2010, Mr. Norden held various senior positions with Wyeth/American Home Products Corp., most recently as Wyeth’s Senior Vice President and Chief Financial Officer. Prior to his affiliation with Wyeth, he served as Audit Manager at Arthur Andersen & Company. Mr. Norden also serves on the Board of Directors of WelchAllyn, a leading global provider of medical diagnostic equipment. Mr. Norden received an M.S. in Accounting from Long Island University — C.W. Post and a B.S. in Management/Economics from the State University of New York — Plattsburgh.
We believe that Mr. Norden’s qualifications to serve on the Board of Directors include his extensive financial and accounting expertise and experience at Wyeth and at Arthur Andersen & Company and his significant experience in the biopharmaceutical industry.
H. Thomas Watkins
59 2004
Serves as our President and Chief Executive Officer and as a member of our Board of Directors. Mr. Watkins joined us in 2004. From 1998 to 2004, he served as President of TAP Pharmaceutical Products, Inc. He was employed by Abbott Laboratories from September 1985 to August 1998 in various positions in the Pharmaceutical Products Division, Diagnostics Division and Health Systems Division. Mr. Watkins serves on the boards of directors of Vanda Pharmaceuticals, Inc., a public company, the U.S. Chamber of Commerce, the Biotechnology Industry Organization (BIO) and the National Symphony Orchestra. Mr. Watkins is a Trustee of The College of William and Mary Foundation and a member of the Board of Trustees of The Mason School of Business of The College of William and Mary. Mr. Watkins holds an M.B.A. from the University of Chicago Graduate School of Business and a B.A. in business administration from the College of William & Mary.
We believe that Mr. Watkins’s qualifications to serve on our Board of Directors include his position as our President and Chief Executive Officer and his significant experience in the biopharmaceutical industry.
Robert C. Young, M.D.
72 2005
Chair of our Nominating and Governance Committee. Since 2009, Dr. Young has been President of RCY Medicine, a health policy consulting firm. He formerly served as Chancellor of Fox Chase Cancer Center in Philadelphia, Pennsylvania from 2007 to 2009, and as President of Fox Chase from 1988 to 2007. From 1974 to 1988, he was employed at the National Cancer Institute as Chief, Medicine Branch. Dr. Young was Chairman of the Board of Scientific Advisors of the National Cancer Institute (NCI) from 2004 to 2009 and formerly served on the National Cancer Policy Board at the Institute of Medicine. He is a past President of the American Society of Clinical Oncology
(ASCO), the American Cancer Society and the International Gynecologic Cancer Society. He was awarded ASCO’s Distinguished Service Award for Scientific Leadership in 2004 and was co-recipient of the 2002 Bristol-Myers Squibb Award for Distinguished Achievement in Cancer Research for his research in ovarian cancer. He also serves on the boards of directors of West Pharmaceutical Services, Inc. and AVEO Pharmaceuticals, Inc., public companies, and is past Chairman of the National Comprehensive Cancer Network. Dr. Young serves as Chairman of the editorial board of Oncology Times. Dr. Young received his B.Sc. degree in zoology in 1960 from Ohio State University and his M.D. in 1965 from Cornell University Medical College. Following his internship at New York Hospital, he completed his residency at NCI and Yale-New Haven Medical Center. He is board-certified in internal medicine, hematology and oncology by the American Board of Internal Medicine.
We believe that Dr. Young’s qualifications to serve on our Board of Directors include his substantial experience in cancer research as head of the Fox Chase Cancer Center and as Chairman of the Board of Scientific Advisors of the National Cancer Institute as well as his prior role with the National Cancer Policy Board at the Institute of Medicine, as well as his accomplished background as a board-certified physician.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
Human Genome Sciences, Inc. (“HGS”) is a biopharmaceutical company that exists to place new therapies into the hands of those battling serious disease. Our lead products are BENLYSTA ® (belimumab) for systemic lupus erythematosus (“SLE”) and raxibacumab for inhalation anthrax.
BENLYSTA was approved in March 2011 by the U.S. Food and Drug Administration (“FDA”) for the treatment of adult patients with active, autoantibody-positive SLE who are receiving standard therapy. We launched BENLYSTA shortly thereafter and recognized revenue from our first BENLYSTA sales in March 2011. In July 2011, the European Commission granted marketing authorization for BENLYSTA as an add-on therapy in adult patients with active autoantibody-positive SLE, with a high degree of disease activity despite standard therapy. BENLYSTA is currently available in the United States, Canada and an increasing number of European countries, including Germany, Spain, Austria, Denmark, Finland, Hungary, Norway and Sweden. In addition, regulatory submissions are pending in other countries.
We are developing BENLYSTA with our partner, GlaxoSmithKline (“GSK”), under a 2006 co-development and co-commercialization agreement. In the United States, we and GSK both have sales teams that are working together to commercialize BENLYSTA. In Germany, France and Spain, our team will work alongside GSK to commercialize BENLYSTA, and in the rest of the world GSK will lead local implementation of the commercialization of BENLYSTA. We recognize product sales revenue from BENLYSTA sales in the U.S., and GSK recognizes product sales revenue from sales in the rest of the world. We share profits and certain expenses with GSK on a worldwide basis. Under the agreement, we are responsible for the global supply of BENLYSTA.
We continue to deliver raxibacumab to the U.S. Strategic National Stockpile (“SNS”) for emergency use in treating inhalation anthrax. In 2009, we completed the delivery of 20,001 doses of raxibacumab to the SNS under an initial order and as a result recognized $162.5 million in product sales and manufacturing and development services revenue. In July 2009, the U.S. Government (“USG”) exercised its option under our contract to purchase 45,000 additional doses of raxibacumab, with delivery to be completed over a three-year period. HGS expects to receive approximately $142.0 million from this second order as deliveries are completed, $117.4 million of which has been recognized as revenue through December 31, 2011. In May 2009, we submitted a Biologics License Application (“BLA”) to the FDA for raxibacumab for the treatment of inhalation anthrax. We received a Complete Response Letter in November 2009, and we continue to work closely with the FDA to obtain approval. HGS will receive approximately $20.0 million from the USG if raxibacumab is licensed by the FDA.
In addition to our internal pipeline, we have substantial financial rights to two novel drugs that GSK has advanced to late-stage development. The first of these is darapladib, which was discovered by GSK based on HGS technology. In two Phase 3 trials, GSK is currently evaluating whether darapladib can reduce the risk of adverse cardiovascular events such as heart attack or stroke in patients with chronic coronary heart disease and acute coronary syndrome, respectively. The combined darapladib Phase 3 program spans 42 countries and has enrolled more than 28,500 patients. The second is albiglutide, for which GSK currently has eight Phase 3 trials in progress to evaluate the long-term efficacy, safety and tolerability of albiglutide as monotherapy and add-on therapy for patients with type 2 diabetes mellitus. Albiglutide was created by HGS using its proprietary albumin-fusion technology, and the product was licensed to GSK in 2004.
We are working on potential additional indications for BENLYSTA as well as additional methods of delivery. Currently, BENLYSTA is delivered by infusion at two-week intervals for the first three doses and every four weeks thereafter. In December 2011, we initiated dosing of patients in BLISS-SC, a Phase 3 trial of the subcutaneous formulation of BENLYSTA. If this trial is successful and regulatory authorities agree, the subcutaneous formulation will make it possible for patients to self-administer BENLYSTA by injection once a week. In 2012, we plan to initiate Phase 3 trials of BENLYSTA in vasculitis and active lupus nephritis.
We are also working to expand and advance our mid- and early-stage pipeline beyond BENLYSTA. A randomized Phase 2 trial is currently evaluating mapatumumab in combination with Nexavar ® (sorafenib) for the treatment of advanced hepatocellular cancer. Mapatumumab is a human monoclonal antibody to TRAIL receptor 1. In March 2011, we entered into an agreement with FivePrime Therapeutics, Inc. (“FivePrime”) to develop and commercialize HGS1036 (formerly FP-1039) for multiple cancers.
We and Novartis were developing ZALBIN TM for the treatment of patients with chronic hepatitis C. In 2010, the FDA expressed concerns regarding the risk-benefit assessment of ZALBIN dosed at 900-mcg every two weeks. Based on the FDA and similar European Medicines Agency feedback, we and Novartis decided to end further development of ZALBIN in 2010.
Strategic partnerships are an important driver of our commercial success. We have a co-development and co-commercialization agreement with GSK for BENLYSTA, and raxibacumab is being developed under a contract with the Biomedical Advanced Research and Development Authority (“BARDA”) of the Office of the Assistant Secretary for Preparedness and Response (“ASPR”), U.S. Department of Health and Human Services (“HHS”). Our strategic partnerships with leading pharmaceutical and biotechnology companies allow us to leverage our strengths and gain access to sales and marketing infrastructure, as well as complementary technologies. Some of these partnerships provide us with licensing or other fees, clinical development cost-sharing, milestone payments and rights to royalty payments as products are developed and commercialized. In some cases, we are entitled to certain commercialization, co-promotion, revenue-sharing and other product rights.
Critical Accounting Policies and the Use of Estimates
A “critical accounting policy” is one that is both important to the portrayal of our financial condition and results of operations and that requires management’s most difficult, subjective or complex judgments. Such judgments are often the result of a need to make estimates about the effect of matters that are inherently uncertain. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. See Note B, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements for further discussion.
We currently believe the following accounting policies to be critical:
Investments. We account for investments in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“FASB ASC”) Topic 320, Investments – Debt and Equity Securities . We carry our investments at their respective fair values. We periodically evaluate the fair values of our investments to determine whether any declines in the fair value of investments represent an other-than-temporary impairment. This evaluation consists of a review of several factors, including but not limited to the length of time and extent that a security has been in an unrealized loss position, the existence of an event that would impair the issuer’s future repayment potential, the near term prospects for recovery of the market value of a security and our intent to hold the security until the market value recovers, which may be maturity. We also evaluate whether it is more likely than not that we will be required to sell the security before its anticipated recovery. If management determines that such an impairment exists we would recognize an impairment charge. Because we may determine that market or business conditions may lead us to sell a marketable security prior to maturity, we classify our marketable securities as “available-for-sale.” Investments in securities that are classified as available-for-sale and have readily determinable fair values are measured at fair market value in the balance sheets, and unrealized holding gains and losses for these investments are reported as a separate component of stockholders’ equity until realized, or an other-than-temporary impairment is recorded. We classify those marketable securities that may be used in operations within one year as marketable securities. Those marketable securities in which we have both the ability to hold until maturity and have a maturity date beyond one year from our most recent consolidated balance sheet date are classified as non-current marketable securities.
For investments carried at fair value, we disclose the level within the fair value hierarchy as prescribed by FASB ASC Topic 820, Fair Value Measurements and Disclosures . We evaluate the types of securities in our investment portfolio to determine the proper classification in the fair value hierarchy based on trading activity and the observability of market inputs. We generally obtain a single quote or price per instrument from independent third parties to help us determine the fair value of securities in Level 1 and Level 2 of the fair value hierarchy.
Accounts receivable. Trade accounts receivable are recorded net of allowances for prompt payment discounts and doubtful accounts.
Inventories. Inventories, which are recorded at the lower of cost or market, include materials, labor and other direct and indirect costs and are valued using the first-in, first-out method. We capitalize inventories produced in preparation for product launches when the related product candidates are considered likely to receive regulatory approval and it is probable that the related costs will be recoverable through the commercialization of the product. Inventory is evaluated for impairment by consideration of factors such as lower of cost or market, net realizable value, obsolescence or expiry. Our inventories have carrying values that do not exceed cost nor do they exceed net realizable value. We believe BENLYSTA has limited risk of obsolescence at this time based on our market research, which is used to estimate future demand.
Inventory that is not expected to be utilized until more than 12 months from the balance sheet date is classified as non-current. Estimating the level of inventory utilization for the upcoming 12 months requires management to exercise significant judgment. We maintain inventory levels in excess of 12 months to mitigate risks such as product shortage due to higher than anticipated product demand, long lead times for manufacturing finished goods, supply interruptions for raw materials and risks of production disruptions at our sole U.S. FDA-approved manufacturing site due to contamination, equipment failure or other facility-related issues. Carrying such levels of inventory impacts our liquidity and cash flows since the inventory will not be converted to cash for more than one year from the balance sheet date.
We evaluate our expiry risk by evaluating current and future product demand relative to product shelf life. We build demand forecasts by considering factors such as, but not limited to, overall market potential, market share, market acceptance and patient usage. Currently, the shelf life of our raw materials and work in process is approximately one to five years and three years, respectively. The shelf life for finished goods is three years. The product shelf life resets as inventory moves through each stage of completion.
We do not expect changes to current BENLYSTA demand estimates that would result in any material excess or obsolete inventory.
Deferred revenue. Deferred revenue consists primarily of amounts related to raxibacumab and certain BENLYSTA shipments. We recognize raxibacumab revenue based on the average contracted price as shipments occur and record the difference between the invoiced price and the average contracted price in deferred revenue. Revenue relating to BENLYSTA shipments to specialty distributors is deferred and recognized as revenue once product has been sold-through to healthcare providers.
Leases. We lease various real properties under operating leases that generally require us to pay taxes, insurance and maintenance. During 2006, we entered into a 20-year lease agreement with BioMed Realty Trust, Inc. (“BioMed”) for our Traville facility. We account for the Traville lease with BioMed as an operating lease.
In 2006 and as described further in Note F, Long-Term Debt, of the Notes to the Consolidated Financial Statements, we sold our large-scale manufacturing facility (“LSM”) and headquarters land to BioMed, and simultaneously agreed to lease such assets back over 20 years. We recorded the sale and leaseback of these assets as a financing transaction and accordingly recorded the allocated sale proceeds as outstanding debt on our balance sheet. We account for lease payments under the related lease agreements as principal and interest payments on this debt.
Impairments of long-lived assets . Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. Determination of recoverability is based on an estimate of undiscounted cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount the assets, the assets are written down to their estimated fair values. Long-lived assets to be sold are carried at fair value less costs to sell.
Product sales. Product sales consist of U.S. sales of BENLYSTA and raxibacumab. Revenue from product sales is recognized when persuasive evidence of an arrangement exists, delivery has occurred and title to product and associated risk of loss have passed to the customer, the price is fixed or determinable, collection from the customer is reasonably assured, all performance obligations have been met and returns can be reasonably estimated. Product sales are recorded net of accruals for estimated rebates, chargebacks, discounts and other deductions (collectively, “sales deductions”) and returns. Amounts accrued for sales deductions and returns are adjusted when trends, significant events, or actual results indicate that adjustment is appropriate. With the exception of allowances for prompt payment, allowances for sales deductions and returns are included in accounts payable and accrued expenses in the accompanying consolidated balance sheet as of December 31, 2011.
We do not record sales deductions and returns for sales of raxibacumab due to the absence of discounts and rebates and no right of return under our contract with the USG. Aside from product recall, once delivery has occurred, product may not be returned for any reason, including failure to obtain FDA approval. Furthermore, we have no obligation to replace existing SNS doses if the formulation changes during the FDA approval process.
We estimate BENLYSTA sales deductions and returns utilizing actual sales data, contracts with distributors and wholesalers and third-party market research. Our estimates and assumptions are subject to inherent limitations and may need to be adjusted accordingly on a prospective basis. Specific considerations for BENLYSTA sold in the U.S. are as follows:
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With respect to BENLYSTA, we have determined that we qualify as the principal based on various elements of our agreement with GSK, including responsibility for manufacturing product for sale in the U.S., inventory risk and primary responsibility for changes to the product, including product specifications. We have an agreement with GSK whereby GSK provides distribution services.
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BENLYSTA is distributed in the U.S. using specialty distributors and wholesalers. Under this model, exclusive distributors purchase and take physical delivery and title of product, and then sell to physicians or their clinics. Because we received FDA approval in the first quarter of 2011, we currently cannot make a reasonable estimate of future product returns when product is delivered to distributors. Therefore, we currently do not recognize revenue upon product shipment to specialty distributors, even though the distributor is invoiced upon product shipment. Instead, we recognize revenue through the specialty distributor channel at the time of shipment to the physicians or their clinics. As of December 31, 2011, we have deferred Distributor / Wholesaler deductions. U.S. specialty distributors and wholesalers are offered various forms of consideration including allowances, service fees and prompt payment discounts. Distributor allowances and service fees arise from contractual agreements with distributors and are generally a fixed rate per vial purchased. Wholesale customers are offered a prompt pay discount for payment within a specified period. Distributor allowances and service fees and wholesaler prompt payment discounts recorded in our 2011 statement of operations are based on actual product sales and are not estimates.
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Co-pay assistance. Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. We accrue a liability for co-pay assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators. For reference, a 10% change to the co-pay allowance percentage for 2011 would result in a negligible impact to net product sales for 2011.
Results of Operations
Years Ended December 31, 2011 and 2010
Revenues . We had revenues of $131.0 million and $157.4 million for 2011 and 2010, respectively. Revenues for 2011 primarily included $52.3 million in BENLYSTA product sales ($59.2 million in gross sales before sales deductions and returns), as well as $52.5 million in raxibacumab product sales and $24.8 million in manufacturing and development services revenue. Revenues for 2010 consisted primarily of $82.8 million recognized from Novartis with respect to ZALBIN, as well as $47.2 million in raxibacumab product sales and $22.7 million from manufacturing and development services revenue. No revenue with respect to ZALBIN has been recognized beyond September 2010 due to our decision to end further development of ZALBIN based on regulatory feedback. BENLYSTA revenue in future periods is expected to increase as BENLYSTA sales progress. In addition, product sales in 2012 are expected to include approximately $25.0 million of raxibacumab sales related to the second USG order.
Cost of product sales . Cost of product sales was $47.1 million and $29.9 million for 2011 and 2010, respectively. The increase in cost of product sales for 2011 is primarily related to BENLYSTA royalties, increased raxibacumab product cost and royalties and expenses related to rejected or terminated production batches. Cost of product sales and gross margins for 2011 benefited from BENLYSTA product sales with no related cost of sales, other than royalties and distribution costs, because such inventory was manufactured prior to our capitalization date and charged to research and development expenses in the period manufactured. As of December 31, 2011 and 2010, we had BENLYSTA inventory which cost approximately $92.8 million and $112.8 million, respectively, with no carrying value, and accordingly, we expect our future cost of product sales and our gross margins to benefit from utilization of this inventory, which is sold on a first-in-first-out basis, to the extent it is used commercially rather than clinically.
As of December 31, 2011, our current inventory includes an aggregate of $10.8 million of raw materials and work in process relating to anticipated future orders for raxibacumab beyond that which is required to fulfill the second order from the USG. We currently expect to recover the cost of this inventory through future sales of raxibacumab. If we do not receive additional orders for raxibacumab, we would need to record a charge to cost of product sales for this amount of inventory. In addition, we would need to expense 2012 costs attributable to raxibacumab.
Cost of manufacturing and development services. Cost of manufacturing and development services was $29.0 million and $15.0 million for 2011 and 2010, respectively. Our manufacturing and development services costs include costs associated with contract manufacturing services and raxibacumab development services costs. Our costs with respect to contract manufacturing services can represent a significant portion of revenues, depending upon production volumes, efficiencies and product mix. During 2011, we expensed certain quarantined or terminated production batches that were manufactured. After briefly suspending production, we resumed production in September 2011 and returned to a normal production level with respect to this contract in late 2011.
Manufacturing capacity. To the extent our commercial production levels are below normal capacity and we are not manufacturing commercial product during any portion of a year, the costs attributable to this excess capacity would be recorded as cost of sales in the period incurred. Based on our current plans, we anticipate that our large-scale manufacturing facility will be operating below normal capacity during portions of 2012 and that such excess capacity costs could range between $35.0 million and $40.0 million.
Expenses. Research and development net expenses were $196.2 million for 2011 compared to $196.4 million for 2010. Our research and development expenses for 2011 and 2010 are net of $27.9 million and $61.6 million, respectively, of costs reimbursed primarily by GSK and Morphotek in 2011 and primarily by GSK and Novartis in 2010.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
Human Genome Sciences, Inc. (“HGS”) is a biopharmaceutical company that exists to place new therapies into the hands of those battling serious disease. Our lead products are BENLYSTA ® (belimumab) for systemic lupus erythematosus (“SLE”) and raxibacumab for inhalation anthrax.
BENLYSTA was approved in March 2011 by the U.S. Food and Drug Administration (“FDA”) for the treatment of adult patients with active, autoantibody-positive SLE who are receiving standard therapy. We launched BENLYSTA shortly thereafter and recognized revenue from our first BENLYSTA sales in March 2011. In July 2011, the European Commission granted marketing authorization for BENLYSTA as an add-on therapy in adult patients with active autoantibody-positive SLE, with a high degree of disease activity despite standard therapy. BENLYSTA is currently available in the United States, Canada and a number of European and other countries. In addition, regulatory submissions are pending in other countries.
We are developing BENLYSTA with our partner, GlaxoSmithKline (“GSK”), under a 2006 co-development and co-commercialization agreement. In the United States, we and GSK both have sales teams that are working together to commercialize BENLYSTA. In Germany, France and Spain, our team is working alongside GSK to commercialize BENLYSTA, and in the rest of the world GSK is leading local implementation of the commercialization of BENLYSTA. We recognize product sales revenue from BENLYSTA sales in the U.S., and GSK recognizes product sales revenue from sales in the rest of the world (“ROW”). We share profits and certain expenses with GSK on a worldwide basis. Under the agreement, we are responsible for the global supply of BENLYSTA.
We continue to deliver raxibacumab to the Strategic National Stockpile (“SNS”) for emergency use in treating inhalation anthrax. In July 2009, the U.S. Government (“USG”) exercised its option under our contract to purchase 45,000 additional doses of raxibacumab, with delivery to be completed over a three-year period. HGS expects to receive approximately $142.0 million from this second order as deliveries are completed, $130.0 million of which has been recognized as revenue through June 30, 2012. In May 2009, we submitted a Biologics License Application (“BLA”) to the FDA for raxibacumab for the treatment of inhalation anthrax. We received a Complete Response Letter in November 2009, and we continue to work closely with the FDA to obtain approval. In June 2012, we submitted a supplemental BLA to obtain approval and the FDA has set December 15, 2012 as the Prescription Drug User Fee Act (“PDUFA”) action date. HGS will receive approximately $20.0 million from the USG if raxibacumab is licensed by the FDA. In June 2012, the USG released a Request for Proposal for additional orders of anthrax antitoxins, such as raxibacumab, to which we plan to respond.
In addition to our internal pipeline, we have substantial financial rights to two novel drugs that GSK has advanced to late-stage development. The first of these is darapladib, which was discovered by GSK based on HGS technology. In two Phase 3 trials, GSK is currently evaluating whether darapladib can reduce the risk of adverse cardiovascular events such as heart attack or stroke in patients with chronic coronary heart disease and acute coronary syndrome, respectively. The combined darapladib Phase 3 program spans 42 countries and has enrolled more than 28,500 patients. The second is albiglutide, for which GSK announced that it has reviewed primary endpoint data from all of the Phase 3 studies designed to evaluate the efficacy and safety of albiglutide, versus placebo and active controls in type 2 diabetes. GSK also announced its intent to commence global regulatory submissions of albiglutide as a possible once-weekly treatment for this disease in early 2013. Albiglutide was created by HGS using its proprietary albumin-fusion technology, and the product was licensed to GSK in 2004.
We are working on potential additional indications for BENLYSTA as well as additional methods of delivery. Currently, BENLYSTA is delivered by infusion at two-week intervals for the first three doses and every four weeks thereafter. In December 2011, we initiated dosing of patients in BLISS-SC, a Phase 3 trial of the subcutaneous formulation of BENLYSTA. If this trial is successful and regulatory authorities agree, the subcutaneous formulation will make it possible for patients to self-administer BENLYSTA by injection once a week. In 2012, we initiated active lupus nephritis Phase 3 trials of BENLYSTA and plan to initiate Phase 3 trials of BENLYSTA in vasculitis.
We are also working to expand and advance our mid- and early-stage pipeline beyond BENLYSTA. A randomized Phase 2 trial is currently evaluating mapatumumab in combination with Nexavar ® (sorafenib) for the treatment of advanced hepatocellular cancer. Mapatumumab is a human monoclonal antibody to TRAIL receptor 1. In March 2011, we entered into an agreement with FivePrime Therapeutics, Inc. (“FivePrime”) to develop and commercialize HGS1036 (formerly FP-1039) for multiple cancers.
Strategic partnerships are an important driver of our commercial success. We have a co-development and co-commercialization agreement with GSK for BENLYSTA, and raxibacumab is being developed under a contract with the Biomedical Advanced Research and Development Authority (“BARDA”) of the Office of the Assistant Secretary for Preparedness and Response (“ASPR”), U.S. Department of Health and Human Services (“HHS”). Our strategic partnerships with a number of pharmaceutical and biotechnology companies allow us to leverage our strengths and gain access to sales and marketing infrastructure, as well as complementary technologies. Some of these partnerships provide us with licensing or other fees, clinical development cost-sharing, milestone payments and rights to royalty payments as products are developed and commercialized. In some cases, we are entitled to certain commercialization, co-promotion, revenue-sharing and other product rights.
On July 16, 2012, GSK and HGS announced that the companies have signed a definitive merger agreement (“Merger Agreement”) providing for the acquisition of HGS by GSK for $14.25 per share in cash. The transaction was approved by the board of directors of both companies. Under the terms of the definitive merger agreement, GSK amended its ongoing cash tender offer (“the Offer”) on July 16, 2012, to purchase all of our outstanding shares for $14.25 per share in cash. The closing of the tender offer is subject to customary conditions, including that there shall have been validly tendered and not validly withdrawn prior to the expiration of the Offer, when added to the number of Shares already owned by GSK, a majority of the Shares outstanding (determined on a fully diluted basis).
As a result of the Merger Agreement, we expect to pay our financial advisors (Goldman Sachs and Credit Suisse) a transaction fee payable at the closing of the transaction of approximately $25.0 million each based on the offer price of $14.25 per share.
Critical Accounting Policies and the Use of Estimates
A “critical accounting policy” is one that is both important to the portrayal of our financial condition and results of operations and that requires management’s most difficult, subjective or complex judgments. Such judgments are often the result of a need to make estimates about the effect of matters that are inherently uncertain. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. There were no significant changes in critical accounting policies from those at December 31, 2011, however the following information is in addition to, and should be read in conjunction with, the accounting policies included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.
Product sales. Product sales consist of U.S. sales of BENLYSTA and raxibacumab. Revenue from product sales is recognized when persuasive evidence of an arrangement exists, delivery has occurred and title to product and associated risk of loss have passed to the customer, the price is fixed or determinable, collection from the customer is reasonably assured, all performance obligations have been met and returns can be reasonably estimated. Because we received FDA approval in the first quarter of 2011, we cannot yet make a reasonable estimate of future product returns when product is delivered to distributors. Therefore, we currently do not recognize revenue upon product shipment to specialty distributors, even though the specialty distributor is invoiced upon product shipment. Instead, we recognize revenue through the specialty distributor channel at the time of shipment to the physicians or their clinics. As of June 30, 2012, we have deferred revenue of approximately $3.9 million with respect to BENLYSTA, which represents product shipped to specialty distributors but not yet sold through to physicians or clinics. As of June 30, 2012, the cost of product at the specialty distributors is negligible, as it was manufactured prior to our capitalization date in 2010. Wholesalers supply product to all other healthcare providers (e.g. hospitals, pharmacies), however they do not take physical delivery of product. All wholesaler orders are drop-shipped directly to the healthcare providers. For wholesaler purchases, we currently recognize revenue upon shipment to the healthcare provider.
Product sales are recorded net of accruals for estimated rebates, chargebacks, discounts and other deductions (collectively, “sales deductions”) and returns. With the exception of allowances for prompt payment, allowances for sales deductions and returns are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Results of Operations
Revenues . Revenues were $60.3 million and $24.9 million for the three months ended June 30, 2012 and 2011, respectively. Revenues were $107.5 million and $51.4 million for the six months ended June 30, 2012 and 2011, respectively. Total revenues include net product sales, revenues from manufacturing and development services and research and collaborative agreements.
Higher BENLYSTA revenue for the three and six months ended June 30, 2012 reflects increased demand, as BENLYSTA was approved for sale in the U.S. in March 2011. The decrease in raxibacumab revenue primarily reflects reduced shipments during the current year as we fulfill our contract obligation under the second USG order.
Manufacturing and development services revenue increased to $15.5 million for the three months ended June 30, 2012 from $4.0 million for the three months ended June 30, 2011. Manufacturing and development services revenue increased to $25.0 million for the six months ended June 30, 2012 from $16.3 million for the six months ended June 30, 2011. The increase is primarily due to certain contract manufacturing activity that occurred and concluded during the three months ended June 30, 2012.
Cost of product sales . Cost of product sales was $7.9 million and $11.6 million for the three months ended June 30, 2012 and 2011, respectively. Cost of product sales was $16.2 million and $21.6 million for the six months ended June 30, 2012 and 2011, respectively. The decrease in cost of product sales for the three and six months ended June 30, 2012 is primarily related to lower raxibacumab product sales, partially offset by increased BENLYSTA royalties and other incidental costs. Cost of product sales and gross margins for the three and six months ended June 30, 2012 and 2011 benefited from BENLYSTA product sales with no related cost of sales, other than royalties and other incidental costs, because such inventory was manufactured prior to our capitalization date and charged to research and development expenses in the period manufactured. As of June 30, 2012 and December 31, 2011, we had BENLYSTA inventory that cost approximately $69.7 million and $92.8 million, respectively, with no carrying value, and accordingly, we expect our future cost of product sales and our gross margins to benefit from utilization of this inventory, which is sold on a first-in-first-out basis, to the extent it is used commercially rather than clinically.
Cost of manufacturing and development services . Cost of manufacturing and development services was $21.8 million and $6.7 million for the three months ended June 30, 2012 and 2011, respectively. Cost of manufacturing and development services was $41.3 million and $18.3 million for the six months ended June 30, 2012 and 2011, respectively. The increase is primarily due to unabsorbed manufacturing costs, along with an increase in contract manufacturing activity in 2012. During the three and six months ended June 30, 2012, we expensed $7.0 million and $15.0 million, respectively, of unabsorbed manufacturing costs as a result of operating below normal capacity in our large-scale manufacturing (“LSM”) facility. Our manufacturing and development services costs include costs associated with contract manufacturing services and raxibacumab development services costs. Our costs with respect to contract manufacturing services can represent a significant portion of revenues, depending upon production volumes, efficiencies and product mix.
Expenses. Research and development net expenses were $35.4 million for the three months ended June 30, 2012 compared to $33.4 million for the three months ended June 30, 2011. Research and development net expenses were $75.0 million for the six months ended June 30, 2012 compared to $117.9 million for the six months ended June 30, 2011. Our research and development expenses are net of $8.1 million and $7.7 million for the three months ended June 30, 2012 and 2011, respectively, of costs reimbursed primarily by GSK. Our research and development expenses are net of $13.7 million and $14.3 million for the six months ended June 30, 2012 and 2011, respectively, of costs reimbursed primarily by GSK.
We track our research and development expenditures by type of cost incurred – research, pharmaceutical sciences, manufacturing and clinical development.
Our research costs decreased to $5.9 million for the three months ended June 30, 2012 from $7.5 million for the three months ended June 30, 2011. Our research costs decreased to $12.5 million for the six months ended June 30, 2012 from $13.8 million for the six months ended June 30, 2011. This decrease in activity for the three and six months ended June 30, 2012 is primarily due to decreased activity associated with products that were discontinued in December 2011, partially offset by increased HGS1036 activity. Our research costs for the three months ended June 30, 2012 and 2011 are net of $0.5 million and $0.8 million, respectively, of cost reimbursement primarily from GSK and Morphotek under cost sharing provisions in our collaboration agreements. Our research costs for both the six months ended June 30, 2012 and 2011 are net of $1.2 million of cost reimbursement primarily from GSK and Morphotek under cost sharing provisions in our collaboration agreements.
Our pharmaceutical sciences costs, where we focus on improving formulation, process development and production methods, increased to $5.3 million for the three months ended June 30, 2012 from $4.9 million for the three months ended June 30, 2011. The increase is primarily due to an increase in BENLYSTA subcutaneous development costs, partially offset by decreased activity related to contract manufacturing services. Pharmaceutical sciences costs decreased to $10.8 million for the six months ended June 30, 2012 from $11.0 million for the six months ended June 30, 2011. Pharmaceutical sciences costs for the three months ended June 30, 2012 and 2011 are net of $1.1 million and $1.0 million, respectively, of cost reimbursement primarily from GSK under cost sharing provisions in our collaboration agreements. Pharmaceutical sciences costs for the six months ended June 30, 2012 and 2011 are net of $2.4 million and $2.2 million, respectively, of cost reimbursement primarily from GSK under cost sharing provisions in our collaboration agreements.
Our research-related manufacturing costs were $6.8 million for both the three months ended June 30, 2012 and 2011. Our research-related manufacturing costs increased to $14.8 million for the six months ended June 30, 2012 from $11.5 million for the six months ended June 30, 2011. This increase is primarily due to HGS1036 activity, partially offset by a decrease in BENLYSTA subcutaneous and new target manufacturing costs. Our research-related manufacturing costs for the three months ended June 30, 2012 include $1.2 million due to GSK under cost sharing provisions in our collaboration agreement. Research-related manufacturing costs for the three months ended June 30, 2011 are net of $2.6 million of cost reimbursement from GSK under cost sharing provisions in our collaboration agreement. Our research-related manufacturing costs for the six months ended June 30, 2012 include $3.2 million due to GSK under cost sharing provisions in our collaboration agreement. Research-related manufacturing costs for the six months ended June 30, 2011 are net of $3.7 million of cost reimbursement from GSK under cost sharing provisions in our collaboration agreement.
Our clinical development costs increased to $17.4 million for the three months ended June 30, 2012 from $14.2 million for the three months ended June 30, 2011. This increase is primarily due to BENLYSTA subcutaneous clinical trial costs, partially offset by decreased mapatumumab activity along with decreased activity associated with products that were discontinued in December 2011. Our clinical development costs decreased to $36.9 million for the six months ended June 30, 2012 from $81.6 million for the six months ended June 30, 2011. This decrease is primarily due to the payment of a $50.0 million upfront license fee to FivePrime which was expensed during the six months ended June 30, 2011, partially offset by an increase in BENLYSTA subcutaneous clinical trial costs. Our clinical development costs for the three months ended June 30, 2012 and 2011 are net of $7.7 million and $3.3 million, respectively, of cost reimbursement primarily from GSK under cost sharing provisions in our collaboration agreements. Our clinical development costs for the six months ended June 30, 2012 and 2011 are net of $13.3 million and $7.2 million, respectively, of cost reimbursement primarily from GSK under cost sharing provisions in our collaboration agreements.
Selling, general and administrative expenses increased to $51.2 million for the three months ended June 30, 2012 from $39.4 million for the three months ended June 30, 2011. Selling, general and administrative expenses increased to $91.5 million for the six months ended June 30, 2012 from $74.6 million for the six months ended June 30, 2011. This increase is primarily due to increased commercial activities, such as marketing and educational programs and materials along with costs related to our response to a tender offer.
CONF CALL
Tom Watkins
Thank you, Operator, and good afternoon, everyone. Before we begin, I would like to point out that we will be making forward-looking statements, which are based on our current intent, belief and expectations. These statements are subject to certain risks and uncertainties, and I encourage everyone to consult our SEC filings for additional detail.
We reported our first quarter financial results earlier this afternoon and the press release that we issued, as well as several slides that we will be discussing in this call are both posted on our website and that’s www.hgsi.com.
Now we do not plan to take you through the financial results in today call. Although, we will take any questions that you may have on the first quarter later in this call.
So following my opening remarks, Barry Labinger, Executive Vice President and Chief Commercial Officer; David Southwell, our Executive Vice President and Chief Financial Officer, and other members of our senior management team will join me for the Q&A session.
So I’m going to refer a couple of points here to the slide number that is available and you can consult that. So slide three, in light of recent events, we plan to use this call today to refocus the conversation on the potential of BENLYSTA, the potential of darapladib and our other product candidates and other assets.
We are in a situation where our long-term partner GlaxoSmithKline has offered $13 per share for HGS. As you know, the HGS Board of Director in consultation with the independent financial and legal advisors has determined that this unsolicited offer does not reflect the value inherence in HGS.
However, based on this offer, it is clear that GSK shares are viewed that the market has been overly focused on the short-term sales results of our company. We also can conclude that GSK shares are viewed that there are significant value in BENLYSTA as it achieves it potential overtime.
We remain very confident in blockbuster potential of BENLYSTA or SLE. So on today’s call, we want to review our assessment of the SLE market. We want to discuss some new underlying trends we have seen since launch. It gave us confidence that BENLYSTA is gaining real traction in the marketplace.
We also want to address why we believe that HGS holds great potential to generate shareholder value beyond the BENLYSTA, including products in the GSK clinical pipeline to which we have substantial financial rights, as well as product candidates in our own internal product pipeline.
This is view we conclude GSK must also hear, since GSK controls the development of our several of our partnered pipeline programs, including darapladib for cardiovascular disease, albiglutide for type 2 diabetes, both of these in Phase 3 development and Rilapladib in Phase 2 development for Alzheimer’s disease.
Of the most notable of these assets is darapladib, which has the potential to be a future blockbuster and a significant value driver for our company. If successful approximately one-third of the value of darapladib will flow to HGS shareholders.
And I’ll point out, because there has been some confusion on this important point, I want to be clear. All of the rights and economics to these programs are fully transferrable should there be a change in control in ownership of our company.
As you know, our Board has authorized the exploration of strategic alternatives, including a potential sale of our company. We will not be commenting on the process that’s being undertaken in today’s call, and we’ll not be doing that unless and until a decision is being reached by our Board in that regard.
So I’m going to be referring now to items on slide number four. We remain very confident in the blockbuster potential of BENLYSTA for SLE, given its broad label and its benefit to patients. SLE is a unique and complex disease, and as we will explain shortly, we believe the unique complexity has impacted the more recent and slower rate of adoption by physicians.
We expect this to change going forward. Our conviction in BENLYSTA’s prospects is influenced by feedback we are receiving from physicians who are telling us how it is working in their patients.
All indicators from our market research point to increasing rates of adoption. 90% of rheumatologists we have surveyed intend to use BENLYSTA. Over 75% of physicians we surveyed have already prescribed the drug.
In addition, BENLYSTA has brought promise beyond its initial market entry in SLE and we continue to make significant investments in its full therapeutic and commercial potential. We have initiated Phase 3 study in another dosage form of BENLYSTA, the subcutaneous dosage form, which we believe will be advantageous to some patients. And as we have indicated before, we are on our track to start Phase 3 vasculitis and lupus nephritis studies in the second half of this year.
Slide five. Let’s take just a moment to review where BENLYSTA fits in the treatment of SLE. It often takes a few years for SLE patients to be diagnosed as the disease is complex, affecting multiple organ systems and having a broad set of symptoms. In addition, patient symptoms were often waxed and waned, which further complicates the treatment algorithm.
Given the uniqueness and complexity associated with SLE, unlike many other diseases, it takes time for physicians both to identify patients that would benefit from certain treatments and then to optimize the timing of the treatment.
This is why we believe and our market research validates this, that physicians wait to prescribe BENLYSTA until they believe their patients will benefit and even then they will first try BENLYSTA on a few patients to examine its efficacy.
It turns out that it’s not until physicians determine that BENLYSTA helps these patients, they begin to adopt the drug more broadly amongst the broader patient population they treat. Given the benefits, patients experience following BENLYSTA treatment, we believe it will increasingly become an appropriate option for both patients and physicians.
Slide six. What I have just described is corroborated by recent market research we have conducted. The difficulty we’re having in the first drug to be approved as the disease modifying agent for disease like lupus is that you’re really changing the paradigm of how rheumatologist treat the disease. As a result, the adoption curve is unique.
The first step for the process is illustrated in the top left of the slide. It shows how physicians wait to identify patients, who will benefit, gather more information on BENLYSTA and they hear what peers are experiencing.
Our physician education programs and speaker series have shown success in educating and encouraging physicians to initiate treatment. At the early stages of launch, we were at the step.
The second step, the trial phase is that which physicians use as they BENLYSTA on a select subset of patients who fully understand its benefits in their practice. We found that physicians often select between one and three patients who observe for sometimes up to six to nine months before they expand their adoption. For the first few quarters, we believe that most accounts had been this trial phase.
The third step is that if BENLYSTA works in their patients, physicians increase their rate of adoption and prescribe the drug to more of their eligible patients. We call this the adoption phase.
As you can see with the graph at the bottom left in slide six, what we describe here is borne out by the data. 76% of physicians are reporting that they have prescribed BENLYSTA and is they – and if they are trying. This compared to 30% in the early stages of our launch. The prescription rates are a leading indicator of accounts generating sales.
There is often a two-month or longer lag between prescribing BENLYSTA for patient and implementing the infusion that generates the sale. Market data show that more than 50% of key accounts have generated sales of BENLYSTA as of the end of March 2012. This is up from 40% as of the end of December 2011 and we expect this will approach 76%, given the physician feedback, I have just described.
Now what you see in the bottom right of this chart is that physician adoption is clearly increasing. As physician see the BENLYSTA benefits their patients, they are beginning to prescribe it more broadly within their eligible patient base.
In the first quarter of 2012, we saw a 42% increase in accounts generating over $15,000 within a four-week rolling average, which is approximately -- translates approximately five patients versus 16% growth of account with more than five patients in the prior quarter.
We believe this is early evidence that more accounts are beginning to move to the adoption phase of their use of BENLYSTA. So we won’t speculate on the next quarter or any quarter. You can see why we continued to have conviction in BENLYSTA prospects.
Now we are still in the early stages of launch but we expect that the recent slow launch impacted by the wait and try approach that physicians are exhibiting will shift to a more rapid take as physicians BENLYSTA more broadly.
Slide seven, now regarding my point that BENLYSTA is benefiting patients. Take a close look at the information on slide seven. We’ve had BENLYSTA on market for about a year, so we do have the ability to go out and see how lupus treating physicians believe their patients are doing.
Recent market research captured the clinical experience for 270 patients treated by 80 rheumatologists. The data show of 127 patients who had been treated with BENLYSTA for greater than three months, showed that physicians perceived that 90% of patients, who had been treated for at least three months are showing improvement in at least one aspect of the diseases manifestation.
In our review, physicians looked at all of the different points of symptom reduction that are listed on the left side of chart number seven and there is a consistent improvement across the Board, including symptom such as Fatigue, Arthritis, Rash and others. This data demonstrate that with use physician will perceive the strong real world benefits of BENLYSTA to patients. This will continue to drive increase adoption of BENLYSTA use.
Slide number eight, what also hasn’t changed is that the addressable market for the treatment of lupus and therefore BENLYSTA because it is the only approved remains very large. And we’ve been looking at the market for BENLYSTA as you know for years and believe the market opportunity is not only large but certainly compelling in it size.
In United States there are approximately 1.5 million patients that are deemed to have lupus in related condition, if you narrow this to those patients that are both diagnose with systematic lupus and under the care of rheumatologist, we get to a number of approximately 325,000, about two-thirds of this number will have moderate to severe disease activity sometime during the course of their disease, so we see the initial market to be about 200,000 of this patients.
At a price of about $35,000 this translates to a market opportunity of about $7 billion in the U.S. alone, and this does not include patients with mild disease, some of whom might become candidates for BENLYSTA at some point in the future, and this why we have world conviction in BENLYSTA blockbuster potential.
Slide nine, beyond BENLYSTA we have several other exciting compounds that provide upside opportunity for our shareholders. Let’s take raxibacumab for inhalation anthrax, which currently generates revenues under U.S. government contract. Also we have substantial rights to two late-stage compounds currently in Phase 3 trials and being developed by GSK, darapladib for cardiovascular disease and albiglutide for type 2 diabetes.
We also have an attractive mid-stage pipeline with two oncology candidates mapatumumab, HGS1036, as well as Rilapladib for alzheimer’s disease. These programs target very attractive markets and if successful in the clinic represent significant economic value to our shareholders.
Slide nine, a potentially big value driver for us, darapladib is a Lp-PLA2 inhibitor developed by GSK using HGS technology. And it essence in large epidemiological trials Lp-PLA2 has been identified as an independent risk factor, independent from LDL cholesterol, for example, for hypertension, for coronary heart disease and stroke. Inhibition of Lp-PLA2 may reduce future cardiovascular events in patients.
Clearly, if it is successful, darapladib targets a large and lucrative market, and we have attractive economics on this drug, which includes a 10% royalty on worldwide sales and additionally, a 20% profit sharing co-promotion arrangement or option on sales in North America and Europe. If successful approximately one-third of the value of this drug would flow to Human Genome Sciences shareholders.
Now GSK is investing very heavily to develop darapladib, and the combined Phase 3 clinical program is one of the largest ever conducted to evaluate any cardiovascular medication. GSK is running about 28,000 patients in two large Phase 3 trials at the current time. Each of these studies is event driven and will end when 1,500 patients have a major adverse cardiovascular event, which is typically a heart attack or stroke.
Darapladib data are expected to be available some time next year depending on the accumulation events in the trials. Although, we are not involved in darapladib s development, given our very significant financial interest, we are watching its progress very closely.
Slide 11, to expand on my statement that darapladib targets very large market, let’s talk a little further about this. There is a potential population of well over 30 million, including statin patients, statin intolerant patients and acute coronary patients.
Now assuming the success of the Phase 3 program, the economic value to our shareholders of darapladib is substantial, which is why we continue to focus on it and also why we have asked our partner GSK for additional information.
Slide 12, in addition to BENLYSTA and Dapapladib, we have several other interesting compounds in our pipeline. Raxibacumab is a monoclonal antibody for inhalation anthrax that provides revenue under our government contract for the U.S. Strategic National Stockpile.
Albiglutide is the another long acting form of GLP-1, glucagon-like peptide-1, which was created by HGS using our proprietary albumin-fusion technology and licensed GSK when it was a pre-clinical candidate in 2004.
GSK’s Phase 3 program to evaluate albiglutide for the treatment of type 2 diabetes continues to move forward and GSK has indicated that Phase 3 data is expected to be available in mid-2012. If albiglutide is commercialized milestone payments could amount to as much as $180 million, including $33 million already received in addition to net single-digit royalties to HGS.
Our oncology program continues to progress as well. In March 2011, we announced the new collaboration with FivePrime Therapeutics to develop and commercialize HGS1036 for multiple cancers. In 2012, we plan to initiate Phase 1b studies of HGS1036 in combination with chemotherapy.
Another compound in our oncology portfolio mapatumumab is undergoing a randomized Phase 2 study in combination with Nexavar, which is currently ongoing in hepatis -- advanced hepatocellular cancer.
We also have substantial financial rights to Alzheimer's disease Phase 2 candidate Rilapladib, which is another novel drug that was discovered by GSK based on HGS technology. Similar to darapladib we are entitle to 10% worldwide sales royalties and an additional 20% profit sharing co-promotion option based on sales in North America, Europe, if this program reaches the market. So we look forward to GKS’ continued progress here as well. Each of these opportunities represent potential upside for HGS shareholders.
Slide 13. In addition to our products and pipeline opportunities, we have notable operational and financial assets. We have $2.1 billion in net operating losses which are valuable tax assets for our company. We also have $799 million in cash as of the end of March 2012.
On the operational side, we have world-class biologics manufacturing capabilities, which includes two times 20,000 leaders in-house facilities located here in Maryland, which in addition to manufacturing capacity for BENLYSTA are capable of supporting the developments and early commercialization of multiple monoclonal antibodies.
Slide 14. There has been some misrepresentation in the media in terms of our collaboration with GSK. So I want to be clear about this and any change of control, all of our rights, that is all operational and financial rights including our co-promotion agreements, profit-sharing agreements, royalty agreements with the GSK Partner programs of BENLYSTA, darapladib, albiglutide and rilapladib are fully transferrable to a potential third-party acquirer.
So in summary, we remain as confident as ever in the future potential of HGS. And our board has committed to maximizing value for our shareholders. BENLYSTA is a blockbuster in progress. Darapladib is a blockbuster in the making. And the other compounds in our pipeline represents additional upside for our shareholders.
Our financial and commercial rights are fully transferrable upon a change in control. The unsolicited GSK proposal does not capture the inherent value of the company. And we are currently undergoing a strategic review of our alternatives, including a potential sale of the company.
And as I mentioned, we do not intend to discuss the status of the process unless and until our specific transaction has been recommended for approval. So on that note, we will open the call to questions.
Operator, if you would please review the procedures for that and thank you very much.
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Fund Letters
