Biotech company's loss tripled in quarter

Human Genome Sciences in sound health, CFO says

October 30, 2002|By Julie Bell | Julie Bell,SUN STAFF

Human Genome Sciences has an enviable $1.55 billion in cash, but as the company released its third-quarter earnings report yesterday, its executives once again were dogged by questions about how long even that amount will last.

The reasons: The Rockville-based company is spending heavily to develop eight drugs in clinical trials; simultaneously, it has acquired or is constructing buildings for research, administration and manufacturing, requiring it to set aside a growing amount of its cash as collateral for the off-balance-sheet borrowings that back them.

"Human Genome Sciences is in sound financial health," Chief Financial Officer Steven A. Mayer said in an earnings conference call yesterday, making the first of many statements designed to reassure investors.

HGS said its third-quarter loss grew threefold to $75.1 million, largely because of a one-time charge and increased costs for developing its experimental drugs. The company said the loss amounted to 58 cents a share, compared with 19 cents share, or $24.9 million, in the third quarter of 2001.

Third-quarter revenue was flat at $1.6 million.

Excluding a $32.2 million noncash charge, which the company took to reflect the decreased value of Cambridge Antibody Technology PLC shares it bought in February 2000, the per-share loss was 33 cents.

Analysts had expected a loss of 38 cents, according to Thomson Financial/First Call.

A number of the questions analysts asked during yesterday's earnings conference call related to cash reserves. Such reserves are immensely important for young biotechnology companies such as HGS, which has yet to put a product on the market and uses the cash to pay for drug development.

The questions have been coming since a disputed Oct. 17 report from a Florida-based investment bank, Sterling Financial Investment Group. Sterling said that debt obligations and a coming accounting change that may govern off-balance-sheet lease arrangements would force the company to restrict more of its cash. The report said that could leave just $275 million to $300 million available for other uses by year's end.

HGS has said that Sterling presumes the company has near-term debt-repayment obligations. But HGS said these obligations don't exist. The report also presumes that putting the lease obligations on HGS' books will affect available cash reserves, which Mayer emphatically said it will not.

The controversy - which has helped push HGS stock down 25 percent from $13.64 on Oct. 16 to a six-month low of $10.20 yesterday - has Mayer "spitting nails," said analyst Alexander A. Hittle of A.G. Edward & Sons. The off-balance-sheet lease obligations, which Mayer has disclosed since their inception, are allowing HGS to - among other things - build a manufacturing plant while paying a much lower interest rate than it would on a conventional loan.

"The strategies Human Genome Sciences set up made financial sense when they were set up and they make financial sense now," Hittle said. But, he said, there's "a broad witch hunt for off-balance-sheet financing" in the wake of the Enron accounting scandal.

Human Genome has said its agreements call for it to have $541 million of its cash restricted as collateral by 2004, up from $195.7 million as of Sept. 30. But Chief Executive Officer William A. Haseltine said yesterday that the company is in the process of refinancing the loans and is redesigning its manufacturing plant so it costs less. Both steps would reduce the amount of cash to be restricted in the future.

"You should not regard that cash as unavailable" to the company, Haseltine said in the conference call.

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