'No Swimming' Sign Comes Down at Human Genome's Gene Pool - TheStreet

On Saturday, five drug companies will stop fishing from a gene pond built by

Human Genome Sciences

(HGSI)

, giving investors a chance to see if the company's genetic waters are stocked with trophies worth fighting for.

For the past few years, the drug companies --

GlaxoSmithKline

(GSK) - Get Report

,

Schering-Plough

(SGP)

,

Takeda

,

Merck KgaA

and

Sanofi-Synthelabo

-- have been granted exclusive access to Human Genome Science's genetic database, searching for potentially lucrative drug targets. Those agreements give companies the database information on those genes presumed to play a role in a disease.

That exclusive access -- dubbed the Human Gene Therapeutic Consortium -- ends Saturday. All genetic targets not yet claimed by the drug companies revert back to Human Genome Sciences, which will be free to negotiate new drug development deals with partners. Analysts see this as a watershed event for the Rockville, Md.-based company because these new deals could bring in billions of dollars in potential long-term revenue.

But all this depends on the value that future partners see in HGS' enormous genetic database, estimated by the company to contain between 90,000 and 100,000 human genes. (This is a controversial number because other scientists believe there are only 30,000 human genes.) On Monday, the company is expected, for the first time, to disclose the number of drug targets claimed by its partners so far.

Shares in HGS have traded lower in the past week, representing investor concern about just what the company says on Monday and how it will impact future business deals. But shares in the company were up $2.28, or just under 4%, to $60.64 on Friday.

Banc of America

biotech analyst Jim Reddoch is looking for the company to announce that about 500 drug targets have been claimed. "The only potential negative we can envision is if the total number of claimed targets is around 200 to 300 or less," he writes in a research note. Reddoch rates Human Genome Sciences a buy and his firm hasn't done banking for the company. (Reddoch also gets credit for thinking up the gene fishing analogy.)

Takeda, Japan's largest pharmaceutical company, has been the only partner to publicly disclose its take from HGS' gene pool so far -- about 100 targets, although the company did not say which genes were chosen.

"If the number of claimed targets is proportional to the companies' R&D budgets, Takeda, Merck KgaA and Sanofi should all have roughly 100 targets each and Glaxo and Schering-Plough should have many more, putting the total over 500," Reddoch writes.

The upside to HGS, of course, is that 500 drug targets represent an equal number of drugs that could potentially make it to market (although, on average, only 10% of experimental drugs are ever approved.) Under terms of its licensing deals, the company gets a 10% royalty on sales of any drug that does get approved by its pharmaceutical partners.

With its genetic database back in its hands, HGS is expected to ramp up its own internal drug development efforts. The company already has five experimental drugs that are approved for the start of human clinical trials, and another 14 potential products being tested in the laboratory.

Robertson Stephens

biotech analyst Mike King believes the company's proven genetic database will also allow it to ink new drug development partnerships on even more lucrative terms. King, who rates HGS a strong buy, believes those deals are similar to ones struck by

Millennium Pharmaceuticals

(MLNM)

, a genomics rival.

"Since HGS originally sold rights to its database with SmithKline back in 1993, Millennium has entered into partnerships and collaborations for a total value of $2 billion," King writes in a research note. "We believe this serves as a measuring stick for the kind of value HGS could expect to receive for its database." King's firm doesn't do banking for the company.

At a recent analyst meeting, HGS executives cautioned Wall Street analysts not to expect an immediate flurry of new partnership deals. And with $1.8 billion in cash in its corporate coffers, the company is not looking for short-term revenue, but would rather hold out for more lucrative long-term payouts if and when drugs actually hit pharmacy shelves.

On Monday, investors will wait with baited hooks to see if HGS's shares are biting.