Human Genome Sciences Inc. has a treasure trove of cash, a highly respected management team and as many drug prospects as some of the world's top pharmaceutical companies.
But you would never know it from what Wall Street has been doing to it lately.
Over the past 11 months, the company's shares have plummeted nearly 68 percent, from $32.79 in January to $10.65 on Friday.
So why is the Rockville-based company being hammered?
The problem largely relates to cash. That may seem incongruous since the company has a stunning $1.55 billion, most of it left over from stock and debt offerings two years ago at the height of investor excitement over the mapping of the human genome.
But the company has turned heads lately by racking up financial obligations with the gusto of a profit-making powerhouse.
Instead, Human Genome Sciences is unprofitable and has no products on the market. Yet it is in the middle of a building binge.
Since last year, the company has initiated $526 million in acquisition and construction projects on three separate campuses, including a glimmering $250 million headquarters.
And while other biotechnology companies are slashing staffs and research programs because they can't raise money from investors who increasingly consider them too risky, Human Genome has been adding employees. It now has 1,100 workers, more than all but two other biotechnology companies in Maryland.
It also has pushed eight of its experimental drugs into expensive clinical trials.
By the end of next year, ThinkEquity Partners analyst Edward A. Tenthoff recently wrote, the number of Human Genome Sciences drugs in trials should grow to as many as 14 - a "pipeline [that] rivals most big pharma and biotech companies."
Still, some analysts question whether all the drugs HGS currently spends $200 million a year to develop are the right ones, given that some are targeted at helping people with rare diseases - "niches" - that don't always offer huge financial rewards.
But perhaps the biggest reason for Human Genome's recent stock-market pummeling has been the way it is paying for the building expansion: keeping the costs off the books, which allows the company to preserve cash for drug development now but which potentially comes at a greater cost later.
Human Genome has gotten others to borrow money to build or buy the buildings, costing the drug developer only what its pays to lease them.
Although the arrangements have always been disclosed to the Securities and Exchange Commission, they are receiving new scrutiny from some investors in the post-Enron environment.
"In a market like this, all you need is a little noise, and people will be piling on," said Christopher Raymond, a Robert W. Baird & Co. analyst who said Human Genome's accounting is proper. "All you have to do is raise the issue: Anyone has off-balance sheet [financing] of any kind, and people get crazy."
Human Genome's first off-the-books construction project came in 1998 when the company faced a financial challenge common to many young biopharmaceutical companies. It wanted to build a manufacturing plant, but it didn't have enough money to do that and continue to develop its drugs.
Biopharmaceutical companies can hire a contract manufacturer to do the work for them, but risk not being able to book space in the contract manufacturer's plant when they need it - leading to delays that might give advantage to a competing drug.
They can build a plant themselves, but risk being left with an expensive albatross that could sink the company if their first drugs aren't marketable.
"You're always betting on the come" in biotech, said A. Gregory Kelly Jr., a KPMG accountant and senior manager of its technology and life sciences practice. "There's not much you can do about it."
Several years ago, Human Genome's Chief Financial Officer Steven C. Mayer came to the conclusion that it was a better bet to build than to rely solely on contract manufacturers. But how? At the time, the company had only about $180 million in cash - and it needed the vast majority of that to spend on its drugs.
Mayer, a Washington lawyer's son who grew up perfecting self-made go-carts and - later - expertly speeding down Utah's mountain ski slopes, had an entrepreneur's penchant for taking calculated risk.
A Stanford University MBA who joined Human Genome in 1996, he already had spent several years overseeing finances at small biotechs that were often short on cash. He didn't want a repeat experience. At Human Genome, cash preservation would be king.
Mayer was in luck as he started exploring Human Genome's options. The state of Maryland badly wanted to prove it was a place where drugs were not only discovered, but made.
So when Human Genome contacted the state's Department of Business and Economic Development, officials there excitedly referred the company to Hans F. Mayer (no relation)-the head of a nonprofit charged with facilitating in-state economic development.
