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Wednesday, July 22, 2009

HGSI - Genormous 325% Gain

Human Genome Sciences: Big Surprise Leads to Big Gain

Source: here!

Most investors were not expecting good news. That is why shares of Human Genome Sciences (NASDAQ:HGSI) are soaring after the company released its latest Phase III results.

It has turned out to be my mantra over the past several weeks: big surprises lead to big gains.

Last Thursday, my colleague, Laura Cadden, and I got into a discussion of Human Genome Sciences (NASDAQ:HGSI) and its investment potential.

Knowing that I started in the industry by tracking and trading unique volume patterns, she came to me after noticing a strong up-tick in trading activity last week.

At a company that normally trades just shy of eight million shares each day, a sudden surge to the fifty-million level is going to get attention.

As the group’s in-house genomics expert, Laura knew the company was closing in on a pivotal announcement concerning its lupus drug Benlysta.

After sizing up the charts, reviewing the company’s massive debt and calculating the risk/reward structure, we decided to pass on the move. Why chase a stock (it was already up by 600% from recent lows), especially one filled with risk.

We were wrong.

Shares of the company soared yesterday when Human Genome announced the results of Benlysta’s first Phase III trial.

Judging by the 325% surge in share price, the market was just as wrong as we were. Share price doesn’t soar on news that is widely expected.

Surprise! We’re still in business

Human Genome says 51.7% of the patients taking 1 mg of Benlysta experienced improvement. The folks taking 10 mg experienced an improvement rate of 57.6%. Of the patients receiving a placebo, 43.6% noticed improvement

While statisticians are right to doubt the significance of a study this close with just 865 patients, the market appears to believe the company’s next major hurdle, a second Benlysta Phase III trial, will be equally successful and the drug will hit the market right on schedule towards the end of 2010.

Unfortunately, lupus is not an easy drug to beat. If it were, there would not be a half-century lack of new drugs targeting the disease.

Many lupus sufferers tend to relapse after showing signs of significant improvement. If this is the case with Benlysta, it will show in the November trial results.

If bad news breaks, shares will give back even more than they made over the past two days.

Really, the action has nothing to do with the nearly billion-dollar revenue stream the drug’s eventual approval could bring Human Genome. Instead, investors are aiming for a price target they believe GlaxoSmithKline (NYSE:GSK) would be willing to pay to make the company its own.

Glaxo has a 50% stake in the drug. After telling analysts it is open to “bolt-on” acquisitions, the market is almost positive the company would be willing to pay a hefty premium to make its stake whole.

The key variable is the November trial. After yesterday’s announcement, the Street appears to believe approval is a sure thing. But careful investors know the FDA process is filled with some very large, very expensive hurdles.

If the above-mentioned statistics narrow their range by even the slightest of margins, the statistical data could fall into debate, pushing Benlysta’s approval back indefinitely.

Another surprise could be just around the corner.

If you missed your shot at the triple-digit profits like the rest of us, don’t start chasing Human Genome’s shares trying to get in on the action.

As uncertainty creates volatility over the next few months, you will have plenty of opportunities to get your hands on the shares at prices much cheaper than today.

Just as we picked up on unusual trading volume last week, savvy investors will keep an eye on the bottom of the chart, watching for big trades as word leaks out about possible trouble.

Remember, shares of the company were as low as $0.48 in March. Today’s investors are just one press release away from seeing that level once again.

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