Is There Time Left To Buy Human Genome Sciences?

Jul.16.12 | About: GlaxoSmithKline (GSK)

Last weekend, Reuters reported that Celgene (CELG) was mulling a bid for Human Genome Science, Inc. (HGSI). This weekend, Reuters reports that GlaxoSmithKline (GSK) is engaging in talks over the weekend with Human Genome Sciences with a deal possible as soon as Monday. Late Sunday, July 15, Reuters was reporting that GlaxoSmithKline would pay $14 per share. GlaxoSmithKline was the original suitor in what became a hostile takeover. GlaxoSmithKline is also a Human Genome Sciences partner. According to Reuters, it was suggested that Celgene was no longer interested because of analyst and shareholder backlash. Human Genome Sciences had set a deadline for bids of July 16, 2012. The original tender offer by GlaxoSmithKline expires July 20, 2012, after the Human Genome Sciences deadline.

Acquisition of Human Genome Sciences by GlaxoSmithKline seems to make sense. They share sales of Benlysta, the first new Lupus drug in decades. Other new information since the hostile takeover began was reported by GlaxoSmithKline in a press release July 11, 2012 on the cardiovascular risk of Albiglutide, a type 2 diabetes drug. The FDA requires cardiovascular risk trials on all new type 2 diabetes drugs. This requirement resulted in large part due to GlaxoSmithKline's blockbuster drug Avandia, which is associated with Myocardial Infarctions. Sales of Avandia have since plummeted. Avandia is only available under a special use program. No doubt GlaxoSmithKline would like to replace this revenue loss in the lucrative area of Type 2 Diabetes treatment. From the Harmony 8 trial, it was reported that Albiglutide does not have cardiovascular risk; "This analysis has now been completed and rules out excess cardiovascular risk according to a threshold pre-specified by the FDA". Also, based on recent efficacy findings, GlaxoSmithKline intends to seek approval of Albiglutide in early 2013.

Although Human Genome would only share part of the revenue from Albuglutide if it is approved (single-digit royalties on worldwide sales), it could be a very successful drug. It would be the third drug in the class of Glucagon-Like Peptide-1 (GLP-1) agonists. But only Bydureon, which is formulated as a once weekly injection of Exanatide, would really compete against Albiglutide. Albiglutide would compete in this once weekly injection niche. Moreover, the GLP-1 agonists are likely to become the favored class of drugs to be added to Metformin therapy. GLP-1 agonists are associated with weight loss or are weight neutral and GLP-1 agonists have a low risk of causing hypoglycemia. There is general consensus emerging with most guidelines that Metformin is the first drug of choice, because of its efficacy and safety. Metformin is also associated with weight loss. Type 2 Diabetes is progressive, so treatment eventually requires multiple drugs. The potential for once a week GLP-1 agonists to become blockbuster drugs is high.

Obesity contributes substantially to the risk of Type 2 diabetes. Also up this week, July 17, 2012, is an expected decision on approval of Qnexa, by Vivus (VVUS). This is on the heels of the recent approval of the first new obesity drug in a decade, Lorcaserin, developed by Arena (ARNA). Orexigen's (OREX) drug, Contrave, is in Phase 3 trials testing cardiovascular risk.

It seemed evident that GlaxoSmithKline is unlikely to just walk away. If Human Genome Sciences' shares still trade for around $13.50 or less early Monday, July 16, then, likely, it is still worth buying. According to what Reuters is reporting, the upside potential, may now be limited to around $14 per share. There is downside risk, if GlaxoSmithKline walks away and another bidder does not materialize, Human Genome Sciences shares are extremely likely to fall more than 10%. Human Genome Sciences shares were trading around $7-8 before the GlaxoSmithKline bid. Time is running out, the price early Monday July 16 should determine whether you can still buy Human Genome Sciences.

Chart forHuman Genome Sciences Inc.

Disclosure: I am long HGSI, ARNA.

Additional disclosure: and may sell HGSI if a bid is accepted