This Just In: More Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

"None of the above"
This morning, though, the rating we're going to look at comes from an analyst that's neither obviously best, nor odiously worst. I guess you'd have to call Canada's Citadel Securities "none of the above." That poses a particular problem for shareholders of Human Genome Sciences (NAS: HGSI) . We know Citadel initiated coverage of the stock. We know they think it's a "buy." But we don't know whether that advice is worth the virtual paper it's printed on.

Citadel, you see, doesn't report its recommendations through ratings aggregator Briefing.com. As a result, these ratings don't show up on our CAPS system for scoring (indeed, had the good folks at StreetInsider.com not reported the rating, we'd probably not even have known it happened). So while we know the banker likes Human Genome, we don't have any idea how well its similar recommendations have fared in the past.

What we do know
Here's what we do know: Human Genome is currently unprofitable. It's not expected to earn a penny this year, nor next year. Wall Street thinks the company's going to post blockbuster growth of nearly 90% annually ... but with no profits to start with, it's hard to say exactly what will be growing.

Whatever it is that's growing, Citadel thinks it's going to be big. According to the analyst, growth expectations for Benlysta (Human Genome's new lupus drug) are "conservative." The drug's been approved by the FDA, and its launch is "progressing" through H2 2011. Citadel thinks we will see "significant revenue contribution from the drug ... begin in 2012." It's possible, therefore, that Human Genome will begin booking profits sooner than most people think. (Although, as fellow Fool Brian Orelli has pointed out, Human Genome will have to share those profits with Benlysta launch partner GlaxoSmithKline (NYS: GSK) .)

The sooner, the better
How profitable will Benlysta be? It's hard to say what the profit margin will be once full-scale production kicks in. Human Genome's current $123 million level of annual sales probably doesn't do justice to what the company will be able to earn once, as analysts predict, the company reaches peak Benlysta sales of anywhere from $3.6 billion to $7 billion annually.

What is clear is that if sales reach that level, Human Genome's current market cap of $2.8 billion is going to rise significantly. A market cap of $2.8 billion might be appropriate for a $123 million annual seller "with a bright future ahead of it." But $2.8 billion is only about 0.8 times the lowest level of Human Genome's projected annual sales. For comparison, leading biotechs such as Amgen (NAS: AMGN) and Gilead Sciences (NAS: GILD) routinely sell for more than three times annual sales.

The big question is whether Human Genome will ever achieve multibillion-dollar sales, and the market cap multiple that comes with such success. Already, rivals like Immunomedics and Eli Lilly (NYS: LLY) have drugs in phase 3 trials aiming to duplicate Human Genome's success. Further out, AstraZeneca (NYS: AZN) and Teva's (NAS: TEVA) new subsidiary Cephalon have phase 2 candidates waiting to pounce on the lupus market.

Foolish takeaway
Granted, Citadel reminds investors not to "singularly focus ... on Benlysta," and notes that Human Genome has a whole pipeline of new drug candidates waiting to come to market after this one. But for the immediate future, Human Genome must be considered a play on Benlysta's success.

If the company can achieve $3.6 billion in sales -- or more -- by 2015, as predicted, then I see no reason why the stock should not double (or more) in price over the next four years. Then again, other companies have made brave promises about what they're going to achieve "soon." (Yeah, I'm talking to you, Dendreon.) Whatever Citadel may tell you, success in this business is far from guaranteed.

My advice: If you're optimistic, go ahead and bet on Benlysta. The odds seem to favor it. Just make certain to "bet small, lose small," just in case the unexpected happens.



At the time this article was published Fool contributorRich Smithowns shares of AstraZeneca. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 415 out of more than 180,000 members. The Motley Fool has adisclosure policy.The Motley Fool owns shares of GlaxoSmithKline and Teva Pharmaceutical Industries.Motley Fool newsletter serviceshave recommended buying shares of Teva Pharmaceutical Industries, GlaxoSmithKline, and Gilead Sciences.Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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