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Prohost Biotech - Sunday, April 22, 2012

These days all the focus, the talk, the debates, and the confusion are, and will certainly continue for a while to be, about Illumina’s (ILMN) and Human Genome’s (HGSI) rejection of the acquisitions offers. The truth is that the offers were not as generous as they are said they are.




In Illumina’s case, the hostile offer came at a time when the stock had bottomed for reasons mostly unrelated to any bad news about the firm’s activities, plans, strategies, or failures of any kind. The stock’s tumbling was caused by external reasons related to the bad economy and tight budgets, which led investors’ to adopt a pessimistic attitude about the company’s sales, and double pessimism about its growth potential in the short-term. Dips based on such external circumstances are usually temporary and expected to evaporate as soon as the strenuous conditions are reversed.


Illumina has reasons to believe the offer does not represent its real value. It is the #1 gene sequencer and gene analysis firm, developing and selling state-of-the-art, extremely rapid and powerful equipment used by researchers in academic centers and by drug developers. One can fairly state that Illumina’s tools have contributed more than any other technology towards the revolution in biological information and development of targeted therapeutics.


Having said that, many fair analysts believe that brushing off this acquisition would be favorable news for Illumina and its loyal shareholders. Impartial analysts are also convinced that stock selling could take place in the event that the acquisition does not materialize, but the decline in the share’s prices, they expect, will be short-lived. The stock will rebound as the economic conditions improve for research and, the stock will probably return to its 52-week high and beyond. The reason for optimism is the uniqueness of Illumina’s tools, which are becoming more and more indispensable to scientific research and to the pharmaceutical industry. Like the speed of its analyzers and sequencers, the firm is rapid updating and upgrading its equipment, a good reason for its distinctiveness. Its technologies have become the heart of biotechnology research and industry. With regard to the diagnostics business, this new supplement to its main programs is expected to add more revenues.


We believe the sky’s the limit for this firm. If left alone, its market cap should equal the market caps of the top-tier biotech firms, the lowest of which is over $30 billion, i.e., more than five and a half times Roche’s estimation of the firm’s value.   


While true for Illumina, the reasons that entice GSK to acquire Human Genome are mostly different. The only fact the two companies share is that both stocks fell way below their 52-week highs – $79.40 for ILMN and $30 for HGSI, when the acquisition offers were made. The genomic experience similarity between the two firms also exist, but as history in the case of Human Genome.  Before it decided to become a drug developer, HGSI was a genomics firm, i.e., in the same business as Illumina. History or no history, the great experience is still there and might suggest that large drug developers have reached a stage where they felt the necessity of adding genomics capabilities in-house. That’s one of two reasons that made Roche determined to acquire Illumina. The second reason is, of course, the fact that Roche is a major player in the clinical laboratory diagnostics business. Having the world’s top provider of gene analysis and sequencing in-house would certainly, and tremendously, benefit this business.




So, What could be the reasons behind GlaxoSmithKline’s (GSK) decision to acquire Human Genome? There surely must be relevant reasons for this decision. Nobody knows Human Genome Sciences better than GSK, including Human Genome itself. GSK has had a close relationship with this firm for around 20 years, during which time it tested its molecules and developed a product pipeline with its molecules. Benlysta (belimumab), the first new approved drug for systemic lupus erythematosus (SLE), in more than 50 years is their first marketed product from that pipeline. Two other products being developed with or by GSK comprise darapladib for chronic coronary heart disease and albiglutide for type II diabetes mellitus. It is GSK that is currently conducting Phase 3 clinical trials on both drugs. 


So, what might all of this be telling us? The first idea to cross our mind is that there must be upcoming good news from the two products being developed by GSK, or at least from one of them. Acquiring HGSI before the announcement of results from Phase 3 trials, at the time HGSI is bottoming, might be the last opportunity to acquire this biotech firm at a far less than reasonable price. Added to that is the fact that, while Benlysta has had a hard time penetrating the market, many experts believe that the sales are set to increase as specialists settle on the optimal use of the drug. Additionally, the firms are working on a subcutaneous version of Benlysta, which is easier and more practical than the I.V. route. Moreover, trials with Benlysta have been initiated for another condition, vasculitis. The drug is also expected to be beneficial in treating other diseases. 


Impression: Human Genome’s initial rejection can be overturned by a new, more generous offer from GSK. As a matter of fact, HGSI is taking steps towards enticing another firm that would offer a better deal, which could motivate GSK to raise its offer. Yet, when it comes to numbers, the devil has always been in the details, including, in this case, how much generous would be the new offer, or offers, if any, and how much time it would take the firm to be in an acceptable financial condition.  As for now, the only confirmed great news is that the stock price has doubled   since we wrote, not long ago, an article stating the Human Genome has bottomed. This excellent news is a guaranteed bird in the hands of investors who happen to buy the stock at the time. We cannot blame those who prefer to follow the famous proverb, which states that “A bird in hand is worth two on the bush.”  




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