Human Genome Sciences, Inc (HGSI)

[chmcnfunds]

VFC's Take: Is HGSI Still A Decent Pick When Not Factoring In The Buyout Potential?

Posted by Posted by VFC on Mar 26, 2012

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A question from Mark regarding Human Genome Sciences (HGSI) and the potential of the company if we take a potential buyout from the equation:
I wonder if you still have any warm feelings for the stock [HGSI] if it is not a prospect for takeover.

VFC's Take: When Human Genome Sciences received approval for the lupus-treating drug Benlysta just over a year ago, many predicted that the new drug would become an instant blockbuster, given that it was the first new lupus drug to be granted approval by the FDA in over a half century. It also helped that HGSI already had a powerhouse partner on board with GlaxoSmithKline (GSK) to lead the commercialization and marketing strategy.

Benlysta was slow to gain sales momentum on the market, however, so after seeing shares of HGSI soar to thirty dollars on hype and speculation, they quickly fell to the current levels of eight bucks and below.

That said, the Glaxo buyout rumors are brought up enough to lead to some short term spikes, and some believe that the share price won't fall too far below the current levels because of the persistent buyout potential that needs to be priced in, even with Benlysta struggling.

It's my opinion that one should never buy into a stock based on buyout potential alone. Such speculation will be thrown out there time and time again and most of the time a deal never materializes. If a company has a solid enough foundation to where one considers it a solid short or long term investment, then any buyout talk should be taken as icing on the cake, as a bonus, but it should never be the sole reason for buying in, in my opinion.
In the case of Human Genome, there's always a chance that Glaxo will finally step in for a buyout. It makes sense with the existing partnership, but up until this point the rumors and headlines have been used to spark mini-runs in the share price and have not amounted to anything tangible. If a buyout happens, I think it would happen when the share price is depressed and no one is paying attention.

So back to the original question, do I like HGSI when not factoring in the buyout potential?

I do, as a long term investment that gives Doctors time to become convinced that Benlysta works, since many still consider this a 'trial period' for the drug, as described in the company's most recent earnings report. Being the only approved lupus treatment in over fifty years also comes with its detriments. There's a reason why drug companies are not vigorously testing new lupus treating drugs, and there's a reason why there have been no approvals in so long - lupus is such a mysterious ailment that many of the big boys in the pharmaceutical industry do not see dollar signs or good risk/reward when considering new treatments and many medical professionals are still unconvinced that we are near a cure - hence this trial period of convincing.

Once (if), after the 'trial period' for Doctors is completed and they are convinced of the benefits of Benlysta, then the drug could move forward to its blockbuster potential. That's what an investment in HGSI is all about. While the bonus buyout rumors or a surprise spike in sales could lead to some short term upside movement, it's also smart to respect the prospects of short term downside, too.

The company currently trades with a market cap of one point five billion - when earnings are a mere fraction of that cap. If a market correction takes place, or if investors become unconvinced that Benlysta still has its blockbuster potential, then a decline in the HGSI share price could come pretty quick.
On the other hand, the lower the price goes, the better deal it looks like for a potential buyer, which again adds the buyout factor to the equation.

Right now I'd expect volatility until we know one way or another if Doctors believe that Benlysta is the real deal. That makes HGSI a long term patience play, with potential short term catalysts (to the up and downside) also in the mix.

When discussing the long term, however, also consider the rest of the HGSI pipeline.

Disclosure: Long HGSI. Opinions of VFC's Stock House are not intended to be construed as investment advice. Each investors should conduct his or her own DD and/or consult a personal Financial Advisors for any invsting advice.
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