A Possible Bidding War For Human Genome Sciences, But Celgene Is The Real Gem

| About: Celgene Corporation (CELG)
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Reuters announced late Friday July 6, 2012 that an unnamed source said Celgene (CELG) may be mulling a bid for Human Genome Science, Inc. (HGSI). Late Sunday July 8, 2012, The Street, also referencing an unnamed source, wrote "Celgene has no interest in an acquisition of Human Genome or a merger of equals between the two companies, according to my source, contradicting the Reuters story. More likely, bankers working for Human Genome are planting speculative rumors in the press to compel Glaxo to raise its offer price, my source adds." It certainly will be interesting to see how this plays out between Reuters, the world's largest international multimedia news agency, and The Street, a digital financial media company. But are Celgene and Human Genome Sciences a good fit? Maybe, Human Genome Science's approved product, Benlysta, is the first new drug in years approved for treating systemic Lupus (systemic lupus erythematosus) and Celgene has a drug approved for treating erythema nodosum leprosum (ENL) and multiple myeloma, but is used off label for a different form of Lupus, lupus erythematosus.

Human Genome Sciences is tied closely with GlaxoSmithKline. The costs and revenues for Benlysta are shared equally with GlaxoSmithKline (GSK). Human Genome has two other products in development that are shared, predominantly, with GlaxoSmithKline. One of drugs, Albiglutide, is a GLP-1 agonist in development for diabetes. GLP-1 agonists are an already approved class of drugs. The approved GLP-1 agonists are Byetta and Bydureon sold by Amylin (AMLN) and Victoza sold by Novo Nordisk (NVO) (see Seeking Alpha for a discussion on GLP-1 agonists). The other drug being codeveloped by Human genome Sciences and GlaxoSmithKline is Darapladib for heart disease (discussed in another Seeking Alpha article). There is obviously synergistic potential between Human Genome Sciences and GlaxoSmithKline for marketing and drug development.

But is there potential synergy for development and sales between Celgene and Human Genome Science? Celgene has some approved drugs which are in related areas to Benlysta. For example, Celgene's Thalomid (which is thalidomide) is indicated for newly diagnosed multiple myeloma and also "is indicated for the acute treatment of the cutaneous manifestations of moderate to severe erythema nodosum leprosum ". But, it has been used off label for lupus erythematosus. Both Human Genome Sciences and Celgene are developing drugs for cancer. Human Genome is developing Mapatumumab, which is a monoconal antibody that induces cancer cell death. Celgene has an approved cancer drug for metastatic breast cancer, Abraxane (which is an improved formulation of paclitaxol). Celgene is seeking to expand indications for Abraxane. Celgene is also developing other drugs for Lupus diseases (see Celgene's product pipeline) and cancer indications. Perhaps there is a good fit between Celgene and Human Genome Sciences for marketing and perhaps drug development.

Setting a possible merger aside, Celgene may be a buy. Celgene has a rich product pipeline and annual revenues that are growing. Do due diligence, Celgene's last three quarter's revenues have been closer to flat (not shown). Yahoo finance has the PE ratio for Celgene at about 20. Price to sales is about 6. Celgene has announced a share repurchase program, which is sometimes a positive indication for future share value. Revenue and earnings guidance from Celgene from January 9, 2012 predicts "Non-GAAP Diluted EPS Expected to Increase Approximately 25 Percent Year-Over-Year to a Range of $4.70 to $4.80, this guidance assumes a constant share count from 2011 to 2012". Take a look at the press release and the outlook for 2015. If the outlook is correct for 2015, it is bullish for the share price of Celgene at the current price.

Celgene Annual Revenue, from Yahoo Finance.

View: Annual Data | Quarterly Data All numbers in thousands
Period Ending Dec 30, 2011 Dec 30, 2010 Dec 30, 2009
Total Revenue 4,842,070 3,625,745 2,689,893
Cost of Revenue 425,859 306,521 216,289
Gross Profit 4,416,211 3,319,224 2,473,604
  Operating Expenses
  Research Development 1,600,264 1,128,495 794,848
  Selling General and Administrative 1,083,968 997,863 753,827
  Non Recurring - - -
  Others 289,226 203,231 83,403
  Total Operating Expenses - - -
Operating Income or Loss 1,442,753 989,635 841,526

Celgene has five approved drugs and is trying to aggressively expand indications for Revlimid and Abraxane. The Celgene pipeline in clinical trials is rich, as also is the pre-clinical pipeline.

There may be short term potential in buying shares in Human Genome Sciences if a bidding war develops, but Celgene is the real gem for long term return on investment.

Disclosure: I am long HGSI.

Additional disclosure: and may initiate a long position in CELG over the next 72 hours and may sell HGSI over the next 72 hours.