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Small Biotech Partnering With Big Pharma for Major Projects

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As Human Genome Sciences' hepatitus C drug is pulled, the company will focus on its new lupus treatment instead.

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In the new world of drug research, efficiency is the operative word. Just ask Human Genome Sciences Inc. (HGSI).

The Rockville, Maryland-based biotech company and big pharma partner Novartis AG (NVS) announced today that they are scrapping plans to develop a hepatitis C drug, Zalbin, after US officials raised concerns about risks to patients. Zalbin was in late-stage development for Human Genome and the company had identified it as a leading experimental drug.

Big pharmaceutical companies are partnering with smaller companies such as Human Genome to co-develop new treatments. But shareholders are demanding that big drug companies get the biggest bang for their research bucks. So Novartis is writing off $230 million related to its costs of developing Zalbin, leaving Human Genome with one less drug to drive future sales.

Such agreements can be advantageous for the smaller companies. They share the development and marketing costs with the larger partner along with the risk. Human Genome was paid almost $208 million by Novartis from 2006 through the end of June this year, according to the company's quarterly securities filing. It stood to make about $508 million from the deal and would share future profit. The Novartis payments were booked as revenue.

In April, Novartis announced it was withdrawing an application to sell the drug in Europe (where the product is called Joulferon). In June, Human Genome said the US Food and Drug Administration raised concerns about risks to patients taking Zalbin under the proposed dosing of the drug (every two weeks). At the time, Human Genome said it was considering working on a once-every-four-weeks dosing of the drug. The development time for the drug was pushed back four years til the end of 2014.

With Zalbin now thrown on the scrap heap the company is primarily focused on Benlysta, a treatment for lupus, which is getting a speedy review by the FDA. If approved, it would be the first new treatment for the disease in almost half a century. As it did with Zalbin, Human Genome is developing Benlysta with a partner. In this case, it's British drug maker GlaxoSmithKline (GSK). Given the excitement about Benlysta's chances of approval, Human Genome shareholders are trying to sort out today's news. The shares bounced up and down all morning and were up more than 2 percent to $30.19 in late-morning trading.

"We continue to view Benlysta, for the treatment of lupus, as the main value driver for Human Genome Sciences," Stifel Nicolaus analyst Maged Shenouda says in a note to clients. He predicts the drug will top $3 billion in sales by 2014.

Shenouda predicts an FDA advisory committee in November will give Benlysta a positive review. That would bode well for approval of the drug by the FDA. Shenouda rates the stock a buy.

As for today's announcement, "we are also not surprised that the companies have discontinued future development of Zalbin, with its complicated risk/benefit profile," Shenouda says.

All will be forgiven as long as Benlysta indeed sails through the regulatory process.

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No positions in stocks mentioned.
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