Odds-Making on a Human Genome Sciences Acquisition (HGSI, GSK, BIIB, MRK)

October 18, 2011 · Filed Under Financial, Lupus, M&A, Rumor · 3 Comments 

Human Genome Sciences Inc. (NASDAQ: HGSI) is surging on reports that GlaxoSmithKline PLC (NYSE: GSK) could be set to make a $25.00 per share offer to acquire the company.  The report surfaced in the Daily Mail out of the United Kingdom, and we would note that this publication pushes out enough rumors that it could be called the Daily Rumor (or Rumour for the Brits).  It also has a spotty track record.

The reason for the speculation is simple… GSK was long thought of to be the natural buyer because of the long pacts that are in place already.  The two already have Benlysta as the lupus treatment under a collaboration pact.  Then there is the issues of HGS’s pipeline.

What is interesting is that the Daily Mail also threw out Biogen Idec Inc. (NASDAQ: BIIB) and Merck & Co. (NYSE: MRK) could also be suitors.  Our caution here is that those companies would have to want to be involved in collaboration pacts with GSK either way.

It is always interesting when you see a rumor of a 100% buyout premium.  Sadly, even a 100% premium is not an assured price that would get a deal done.  It would seem likely, but others may still fight it as the 52-week high is $30.15.  The thing that would make a deal simple is that the market cap is only about $2.4 billion. 

One issue that current investors could make for undervaluing the company is that the consensus price target from analysts is still above $24.00.  If the stock is worth that on its own, investors could argue a buyout should make it worth even more. 

A deal would make sense for GSK here, but we would be a bit more cautious on betting the farm that another large player would want to buy the company.  It would be normal that GSK would not allow itself to be stuck in a new deal under a change of control if it found the buyer to be difficult or incompetent.  That being said, anything is possible.  This is not the first time buyout rumors have circulated around Human Genome Sciences.

Shares are up almost 13% at $12.68 and the 52-week trading range is $10.40 to $30.15.

Since this is probably the fourth or fifth time we have heard “HGSI Buyout Rumors,” our odds would automatically put the chance under 50% that a deal is imminent just because of the history of rumors.  Still, an acquisition would make sense for GSK or for a large player that GSK would want to work with.  That being said, we’d assign a 33% to 40% chance of a deal… 1-in-3 or 2-in-5.

JON C. OGG

Large Fund Manager Sticks With Valeant (VRX)

June 9, 2011 · Filed Under analyst calls, Financial · Comment 

Valeant Pharmaceuticals International, Inc. (NYSE: VRX) is trading higher this morning by 1.5% at $53.15 against its 52-week range of $13.84 to $55.00.  This company is one which does not show up on most drug, biotech, and Pharma screens because its shares have risen, its analyst coverage is mixed, and its value is massive at $15+ billion.

Fund managers often can influence investing decisions by the public and one top fund at the moment is the $4+ billion Sequoia Fund (SEQUX).  That fund has performed very well, it makes concentrated equity bets, and its biggest bet at the moment is Valeant.  This fund goes after companies that it believes have attractive long-term economic prospects in America or internationally.

Waiting on a FDA decision is always tricky, but the FDA has a pending review on Potiga for epileptic seizures along with GlaxoSmithKline (NYSE: GSK).

The fund’s manager just made a brief CNBC appearance this morning and he gave some quick hits on why Valeant the fund’s largest holding.  He noted that the company is more focused on acquisitions rather than being focused on expiring patents as many other giants.  As this fund have averaged almost 14.5% through time versus 10.6% for the S&P 500 Index, investors care.  It should be noted that the fund sometimes has large overperformance or big underperformance due to its concentrated bets.

Our only concern here is that the performance has been massive and the stock is now trading above the consensus analyst target of $52.38.

JON C. OGG

Benlysta Approval Cheat Sheet: What You Need to Know (HGSI, GSK)

March 9, 2011 · Filed Under analyst calls, Cancer, fda, genomics, Lupus · Comment 

It is official… The FDA has approved Benlysta as the first new drug regimen for systemic lupus in  over 50 years.  Human Genome Sciences, Inc. (NASDAQ: HGSI) and partner GlaxoSmithKline plc (NYSE: GSK) are sure to have a Blockbuster on their hands.  The treatment is for the treatment of adult patients with active, autoantibody-positive systemic lupus erythematosus who are receiving standard therapy.

We want to stress that analyst data is going to change greatly and we want a snapshot here of what this looks like before the change.  The side-effects have taken a lot of space, and those are just verbatim.  The rest after that is where the guts of the outlook is.  We have been keeping tabs on a few side-bar issues going into this approval and here is are some of the key issues we think you need to know:

First is that we have been expecting Human Genome Sciences to win approval.  Not everyone was, but this is not an issue we see being negative for Human Genome regardless of how this stock acts in the first few days.  By now you know FDA approval stocks can have mega-moves up down and back and forth. The cost is currently aimed at $35,000 per patient per year.  There will be discounts and exceptions but this is within the range we were expecting.

THERE ARE SOME LIMITATIONS… The efficacy has not been evaluated in patients with severe active lupus nephritis or severe active central nervous system lupus.  It has not been studied in combination with other biologics or intravenous cyclophosphamide. Use is therefore not recommended in these situations.  What you need to know: Like it or not, off-labeling will occur here.  Think about it, 50+ years since the last approval…

TIMING & REVENUE HOPES… The companies are aiming for deliveries to begin to doctors within a couple of weeks, which of course will be an average.  That means that revenues can actually start sneaking in during this first quarter.  Do not expect much… Thomson Reuters only had estimates of $21.77 million in Q1 and $30.64 million in Q2 for revenues.  The current estimates of $172.37 million for 2011 revenues are fair and the estimates of $495.96 million for 2012 may need to be adjusted.  For 2012 the range is $295 million to $736 million, so it is not like there aren’t some differing opinions.  Our guess is that estimates on the lower end will come up.

SIDE-EFFECTS & MORTALITY RISKS… “Out of 2133 patients in 3 clinical trials, a total of 14 deaths occurred during the placebo-controlled, double-blind treatment periods: 3/675 (0.4%), 5/673 (0.7%), 0/111 (0%), and 6/674 (0.9%) deaths in the placebo, belimumab 1 mg/kg, belimumab 4 mg/kg and belimumab 10 mg/kg groups, respectively. No single cause of death predominated. Etiologies included infection, cardiovascular disease, and suicide. Serious and sometimes fatal infections have been reported in patients receiving immunosuppressive agents, including belimumab. In controlled clinical trials, serious infections occurred in 6.0% of patients treated with belimumab and in 5.2% of patients who received placebo. The most frequent serious infections included pneumonia, urinary tract infection (UTI), cellulitis, and bronchitis. The most frequent infections (≥5%) were upper respiratory tract infection, UTI, nasopharyngitis, sinusitis, bronchitis, and influenza.” Hypersensitivity reactions were reported in 13% of patients receiving belimumab and 11% of patients receiving placebo, and included anaphylaxis (0.6% with belimumab and 0.4% with placebo). Infusion-associated adverse events were reported in 17% of patients receiving belimumab and 15% of patients receiving placebo. Psychiatric events (primarily depression, insomnia, and anxiety) were reported more frequently with belimumab (16%) than with placebo (12%). Serious psychiatric events, serious depression and two suicides were also reported (0.8% for belimumab and 0.4% for placebo).

Analyst estimates… Thomson Reuters has a consensus price target objective of about $34.00 today, with a low of $23 and a high of $45 per share from analysts.  Over the last year shares have traded in a range of $20.56 to $34.49.  Earnings estimates are -$0.43 EPS and $21.77 million in revenues for this quarter; -$0.41 EPS and $30.64 million in revenues next quarter; -$1.47 EPS and $172.37 million in 2011; and -$0.60 EPS and $495.96 million in revenues in 2012.

Buyout or independent… Some still consider HGSI a buyout candidate.  We ONLY consider it a buyout target if GSK wants to acquire it.  Buying the company only gives a half-share of Benlysta and come-along partners do not always work as well in biotech and drug deals.

Company stats… The market cap is $4.85 billion.  Assets in cash and other we are looking at as hard assets are $155.7 million in cash and equivalents, $282 million in other short-term investments, and $448.6 million in long-term investments.  It also has $253 million in plant and equipment. Long-term dent is $434.7 million.

Trading patterns… Average daily volume is down to only 2.3 million shares and March 1 was the most recent day with 5 million shares traded.  That volume will be explosive Thursday.  March options show an open interest of over 100,000 CALLS for MARCH and over 70,000 contracts for MARCH only.

More analyst calls… Gleacher was very positive at the end of December.  Cowen & Co. took a very negative stance.

We will get to see how this begins trade indications early-early tomorrow after the NASDAQ releases its halt time.  Again, trading may very well be all over the place for the next few days.

The links throughout will offer more insight to individual sales targets, but hopefully this offers a bit of a cheat sheet. By morning, much of the analyst data will have changed… that part never changes.

JON C. OGG

A Very Cautious Case Against Human Genome (HGSI, GSK)

December 9, 2010 · Filed Under analyst calls, Lupus · 1 Comment 

It was just earlier this week in a broad call that Human Genome Sciences Inc. (NASDAQ: HGSI) saw a very positive research call in a sector initiation as its stock was initiated with an “Outperform” and a $31.00 price target by Credit Suisse.  Apparently, that was then and this is now.  A new research call almost reverses all of that with an opposite stance.  Cowen & Company initiated coverage of Human Genome Sciences with an “Underperform” rating this morning and the implied value puts the stock as being overvalued.

More important than a formal rating is the target.  Cowen’s Eric Schmidt (no relation to Google’s Eric Schmidt) says that Human Genome Sciences could have a share price that is overvalued by the tune of 30% or even 35%.

While expected to be a big winner with Benlysta against lupus, the new report is looking for peak worldwide sales of $1.7 billion against an implied consensus of roughly $3 billion to $5 billion.

The firm gives the good, the bad, and the ugly… The good is safety and efficacy with an unmet need with minimal regulatory risk and longevity to the brand (remember, it has been about 50 years for a lupus drug).  The bad is an expectation of a sales shortfall due to a smaller real target population with ‘physician conservatism.’  The ugly is that HGSI’s $5+ billion market cap is almost entirely tied to its 50% ownership of Benlysta with GlaxoSmithKline plc (NYSE: GSK) and that value may be closer to $11 to $12 per share for its stake and lower sales.

Schmidt gave a lower sum of the parts valuation in a much longer report than this summary of $16.78 per share.

A price target of $16.78 is far different than the $31.00 target from Credit Suisse earlier this week.  It is always interesting to see dual-analysis calls when the same information is available and the opinions are so different.  That is what makes a ballgame.

We have noted some concerns and possible second-guessing of our own opinion here because of the FDA concerns.  This drug seems like one which will receive approval.  Lupus has had no new treatments in two generations.  Frankly, the safety concerns seem low compared to the need and considering that some of the adverse effects could be argued as ‘coincidental’ rather than strictly due to the use of Benlysta.  Still, this is the FDA and making FDA predictions is a knife that cuts hard both ways.

JON C. OGG

Top BioHealth Analyst Upgrades & Downgrades (AMGN, AZN, BAY, BIIB, CELG, EXAM, GILD, GSK, HGSI, LH, NVS, PFE, UTHR, WCRX)

December 7, 2010 · Filed Under analyst calls, Research · 9 Comments 

We have seen many research calls from Wall Street analysts with upgrades, downgrades, and initiations this Tuesday in the world of biotech, pharmaceuticals, and biohealth.  Some of the key calls we have seen are as follows:

Amgen Inc. (NASDAQ: AMGN) Started as Neutral w/ $58 target at Credit Suisse.
AstraZeneca (NYSE: AZN) Cut to Underperform at Credit Suisse.
Bayer AG (NYSE: BAY) Raised to Outperform at Credit Suisse.
Biogen Idec Inc. (NASDAQ: BIIB) Started as Neutral w/ $68 target at Credit Suisse.
Celgene Corporation (NASDAQ: CELG) Started as Neutral w/ $60 target at Credit Suisse.
Celgene Corporation (NASDAQ: CELG) Maintained Buy with $68 price target at BofA/ML.
Examworks Group Inc. (NASDAQ: EXAM) Started as Outperform w/ $22 target at Credit Suisse.
Gilead Sciences Inc. (NASDAQ: GILD) Started as Outperform w/ $52 target at Credit Suisse.
GlaxoSmithKline plc (NYSE: GSK) Raised to Neutral at Credit Suisse.
Human Genome Sciences Inc. (NASDAQ: HGSI) Started as Outperform w/ $31 target at Credit Suisse.
Lab Corporation of America (NYSE: LH) Started as Neutral w/ $89 target at Credit Suisse.
Novartis (NYSE: NVS) Raised to Outperform at Credit Suisse.
Pfizer Inc. (NYSE: PFE) Maintained Outperform at Credit Suisse.
United Therapeutics Corp. (NASDAQ: UTHR) Started as Neutral w/ $57 target at Credit Suisse.
Warner Chilcott plc (NASDAQ: WCRX) Reiterated Buy at BofA/ML.

You can join our free daily email distribution list from 24/7 Wall St. to hear more about broader analyst upgrades and downgrades, top day trader and active trader alerts, news on Warren Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

FDA Brings More Doubt Over BENLYSTA Against Lupus (HGSI, GSK)

December 3, 2010 · Filed Under fda, Lupus · 2 Comments 

More problems for those suffering from lupus!  The FDA has decided to delay its review of the proposed lupus treatment BENLYSTA.  Human Genome Sciences, Inc. (NASDAQ: HGSI) and GlaxoSmithKline PLC (NYSE: GSK) announced after the close of trading today that the FDA has extended the Prescription Drug User Fee Act target date for its priority review of the Biologics License Application (BLA) for BENLYSTA.

The review extension just went from December 9, 2010 all the way out to March 10, 2011.  The companies noted, “After the FDA Arthritis Advisory Committee met on November 16, 2010 to consider the BENLYSTA BLA, the FDA requested some additional information from HGS, which has been submitted.

BENLYSTA is an investigational drug and the first in a new class of drugs called BLyS-specific inhibitors. The drug is under a co-development and co-commercialization agreement that the companies entered into in 2006.  This would be the first new lupus treatment in roughly 50 years if the FDA approves the drug.

We have reviewed the FDA’s request and looked at the side effects that are part of the concern.  Our own take is that the FDA will approve BENLYSTA and make it have either Black Box warnings or make the companies make all sorts of disclosures.  The problem is that with each new delay comes a new round of questioning your own judgment.

Predicting FDA action is often more than difficult.  Sometimes the FDA does things that just don’t make sense, and sometimes it is accused of being very conflicted in its decisions.  Others argue that it is far too conservative in approvals.

Human Genome Sciences closed up 2.4% at $25.60 and its shares are down 3.9% at $24.60 in the after-hours session.  The 52-week trading range is $20.56 to $34.49.

The plot thickens, yet again.

JON C. OGG

Something Brewing at Genzyme, M&A and More (GENZ, SNY, GSK)

November 20, 2010 · Filed Under Acquisitions, M&A · Comment 

Genzyme Corporation (NASDAQ: GENZ) may have some signs of life.  On what felt much like a directionless Friday, the biotechnology company under a turnaround and under an M&A tree may actually have some interest.

The company rose Friday on news that it expects to meet the November 28, 2010 deadline to move the finishing and filling operations out of its Allston, Massachusetts plant for U.S. products.

Genzyme has suffered as a result of a virus and contamination at its Allston plant, which is one of the key factors that bruised the stock over the last year before Sanofi-Aventis (NYSE: SNY) stepped in with a buyout offer.

Reports were out this week that GlaxoSmithKline plc (NYSE: GSK) wasnit interested in making a competing bid for Genzyme.

While a $1.00+ gain might not be out of the ordinary, this stands out like a sore thumb for M&A investors.  Genzyme wants more than $69 from Sanofi-Aventis and the news flow on other potential bidders has been fairly mum.

The $1.04 gain to $71.31 is the highest closing price since November 5 when it closed at $71.69.  The trading volume of 4.583 million was also the highest since November 5.

The $72.50 NOV10 CALLS expired worthless on Friday and we saw more than 10,000 of those contracts trade.  Here was the action in the DEC10 CALLS:
Strike    Volume    OpInt
70.00    3,613    20,711
72.50    6,999    22,428
75.00    4,020    8,934

Even the JAN11 $75 CALLS traded 3,202 contracts versus an open interest of over 81,000 contracts.

This might not seem like much to major screening efforts, but for M&A and special situation and turnaround investors, it feels like something may be coming down the pipe soon.  Stay tuned.

JON C. OGG

Vindication for Human Genome… Takeover Chatter to Resume? (HGSI, GSK)

November 16, 2010 · Filed Under fda, Lupus, M&A · Comment 

Human Genome Sciences Inc. (NASDAQ: HGSI) has some vindication for its BENLYSTA as a treatment for lupus.  The company announced that it and partner GlaxoSmithkline plc (NYSE: GSK) received FDA panel backing from the Arthritis Advisory Committee.

The company noted that a vote tally of 13 approval recommendations was above the 2 that recommended against approval.  The FDA does not always follow its panel recommendations, but generally it does and a wide vote like this makes the winds favor an approval over a blockage.  If approved as a treatment for autoantibody-positive patients with active systemic lupus erythematosus, this would mark the first treatment in about two generations.

The FDA’s committee is convened to provide the FDA with independent expert advice on a broad range of issues related to rheumatology drug products, and these are non-binding recommendations.  The decision on final FDA approval of BENLYSTA a Prescription Drug User Fee Act was given a target date of December 9, 2010.

Human Genome Sciences and GlaxoSmithKline are developing BENLYSTA under a definitive co-development and co-commercialization agreement which was entered into back in 2006. The two companies will share equally in Phase 3/4 development costs, sales and marketing expenses, and profits of any product commercialized under the current agreement.

Cautious FDA comments over the safety and efficacy had recently caused a stir and had put pressure on the shares.  Over the weekend we issued a note that despite the concerns voiced, FDA approval seemed very likely here for BENLYSTA because the incidence of side-effects seemed low and it also is hard to know if those suicides had anything to do with the drug.   Human Genome Sciences had been at $25.88, and in the post-halt trading the stock is up 9% at $28.28.

The ultimate proof in the pudding will come from the FDA formal decision.  The FDA itself does not always follow the panel recommendations.  Still, our bet is that Human Genome Sciences wins FDA approval.

The big question now is rather simple… Will takeover chatter return when it comes to Human Genome Sciences?  The issue in saying that M&A is likely is that the market cap is almost $5 billion even before the effect of the after-hours pop.  To top that off, this one has traded north of $34.00 and the company would likely need a high premium to secure shareholder backing.  Anything is possible in the world of M&A, but a split here on the costs and the expenses for a split of the profits may have been a cheaper way to acquire the company than a buyout.

Human Genome Sciences was briefly a $1.00 stock.  Then it began its monumental climb.  For a company to justify acquiring the company at a major premium now, management of the acquirer might have to do some deep explaining to shareholders who wonder why a chance was not taken before the market cap got too high here.

FDA approval seems close to a certainty.  A buyout does not seem so certain here.

JON C. OGG

Neurocrine, Depressed Over Major Depressive Disorder (NBIX, GSK)

September 15, 2010 · Filed Under Depression, R&D · 2 Comments 

Neurocrine Biosciences, Inc. (NASDAQ: NBIX) just got a black eye.  The company announced on Tuesday evening that its potential treatment for major depressive disorder was ineffective in a mid-stage study. The study on GSK561679, conducted with GlaxoSmithKline (NYSE: GSK), involved 150 patients and was lined up against and compared with a placebo.

This won’t make much difference now, but Neurocrine plans to hold a meeting with GlaxoSmithkline in the coming months after the full clinical data is avaialble and is reviewed.  Then it will discuss the next steps for the program.  Unfortunately, when drug trials are ineffective the next steps usually involve a handshake and a walking away.

The company further noted that CRF1 remains a difficult drug target for depression.

Shares closed at $6.25 on Tuesday and the after-hours session had shares down some 9.6% at $5.65 on more than 300,000 shares.

JON C. OGG

GSK Gets Boost As Shingles Vaccine Enters Late Stage. AGEN Goes Along For Ride. (GSK, AGEN)

August 26, 2010 · Filed Under shingles · Comment 

GlaxoSmithKline’s (NYSE: GSK) new shingles recently entered phase III trials, and is expected to breeze through these as well. Meanwhile, Antigenics Inc. (NYSE: AGEN) the company responsible for the vaccine’s adjuvant, also experienced a major jump yesterday. Shares of GSK are up .56% today to $37.63. Shares of AGEN are down 3.68% to $0.82, but this should be seen as more of a minor correction after gaining nearly 12% yesterday.

AGEN has traded 508 thousand shares today so far, with an average volume of 557 thousand.

-Michael B. Sauter

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