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Analysts Don't See Human Genome Sciences Takeover On Horizon

By Val Brickates Kennedy Despite rampant speculation that GlaxoSmithKline PLC may be readying a lucrative bid for Human Genome Sciences, two biotech analysts said Wednesday that they don't see a takeover of HGS on the immediate horizon. A key obstacle, they said, is HGS's (HGSI) sinking stock price, which slid below $10 a share to close at $9.88 on Wednesday after the biotech group reported weaker-than-expected quarterly sales for its new lupus drug Benlysta. The drug, the first to be approved to treat the disease in more than 50 years, is co-marketed with Glaxo (GSK). Wednesday was a particularly ugly day for HGS shareholders as the stock plunged 22% on the lackluster sales report after gaining ground in recent days on rumors that Glaxo, long considered a potential acquirer, was readying a $25-a-share bid. But Wednesday's drop was just the latest setback for shareholders this year, as both investors and industry watchers began to worry that expectations for Benlysta had been set too high. After an impressive run last year, the stock is now down almost 60% year to date, losing nearly 20% in October alone. In comparison, the S&P 500 is up 1.5% this year, and up almost 13% for the month as of midday Thursday. According to Brean Murray analyst Brian Skorney, the swift sell-off was largely in reaction to Wednesday's news that the company now doesn't see reaching profitability until 2014. In April, it said it hope to turn the corner in 2013. "This is the main reason the stock is down," said Skorney of Wednesday's trading, adding that his firm has dropped the stock's rating to hold from buy, and has withdrawn its prior valuation of $20 a share. The selloff also further dims the prospect of a Glaxo buyout, said Skorney. "That buyout rumor is floated out there every three to six months," said Skorney. "The problem is an acquisition is a structural impossibility given how far the stock has fallen." Skorney said he believes the board of HGS, which many industry watchers still consider a rising star, would never agree to a deal based on the stock's current valuation. And Glaxo wouldn't be able to justify playing a massive premium under current market conditions. The only way for a deal would be for Glaxo to launch a hostile bid, Skorney said. Michael Yee, an analyst for RBC Capital, said that HGS was further hurt Wednesday by comments from Glaxo's chief executive that the U.K.-based pharmaceutical titan was pursuing a stock buyback program because it hadn't found any suitable takeover candidates. Yee agrees that HSG's board would be unlikely to entertain a bid at the stock's current valuation, especially as Benlysta still has the potential of becoming a blockbuster product. "There's no change in the long-term opportunity," said Yee, whose firm dropped its price target on Wednesday to $15 from $25 to reflect slower-than-expected Benlysta sales. He said he sees Benlysta achieving peak sales of $1.5 billion to $2 billion worldwide by 2019. "There's no rush for them [Glaxo] to buy HGS," Yee added. Glaxo's close relationship with HGS also makes it more difficult for other suitors to pursue a takeover. Under their partnership agreement, the companies split profits from Benlysta, which is expected to become HGS' main revenue driver. HGS is also co-developing two other compounds with Glaxo: darapladib, for the treatment of heart disease and albiglutide, for diabetes. Both are in late-stage testing. Because of this, said Skorney, any potential bidder would worry it would eventually be outbid by Glaxo. And conversely, any bidder would be suspicious if Glaxo, which has deep knowledge of HGS' programs, failed to make a credible bid. "Their relationship makes it difficult. These two companies are integrated on many levels," added Skorney. -Val Brickates Kennedy; 415-439-6400; [email protected]

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