Glaxo Avoids Market for Lemons by Buying Collaborators

GlaxoSmithKline Plc (GSK) may find its next acquisition target where the U.K. drugmaker found the last two: among more than a dozen companies it collaborates with to develop new treatments.

Glaxo has stakes in more than 10 publicly-traded companies, including DiaDexus Inc. (DDXS), which develops diagnostics for detecting heart attack and stroke risk, according to data compiled by Bloomberg. The London-based company also has stakes in an undisclosed number of closely held businesses.

Glaxo this year has agreed to buy the 80 percent share of Cellzome it didn’t own, made a hostile bid for Human Genome Sciences Inc. (HGSI), and increased its stake in Theravance Inc. (THRX) Glaxo had existing relationships with all three companies. Boosting revenue and profit growth by looking to smaller rivals with promising products or technologies is an industry-wide trend as large companies face generic competition.

“This is one of the smartest things that can be done with M&A strategy,” said Gbola Amusa, a health-care analyst at UBS AG. “As innovation-based M&A is sometimes a market for lemons, a buyer is typically at an information disadvantage to a seller. When there is a collaboration, however, there’s the potential to have the same information or more than the target.” Amusa said he sees Glaxo continuing with this strategy.

Acquisition Strategy

Glaxo didn’t already own a stake in Sirtris Pharmaceuticals Inc. when it acquired the U.S. company for $720 million in 2008. Two years later, Glaxo stopped development of Sirtris’ leading drug candidate, designed to mimic the benefits of red wine, after studies showed minimal efficacy against cancer and some patients developed kidney damage. Glaxo is conducting trials of other compounds acquired through Sirtris.

Glaxo shares rose 1.3 percent to 1,409.50 pence in London. The stock has returned 13 percent in the past year, compared with a 9.1 percent gain in the Bloomberg Europe Pharmaceutical Index of 18 companies.

The company said it considers smaller acquisitions that fit its business and provide an attractive return compared with share repurchasing or dividends.

“Within R&D we have multiple alliances including equity holdings with external partners both publicly listed and privately owned,” Glaxo said in a statement. “Occasionally, we choose to acquire R&D platform technology companies which provide significant additional scientific capability for drug discovery.”

Glaxo’s Stakes

Among companies Glaxo has stakes in are Anacor Pharmaceuticals Inc. (ANAC), with which it’s developing an antibiotic for infections caused by Gram-negative bacteria, and Octoplus NV (OCTO), which offers drug-delivery technologies for biological compounds. Glaxo in August agreed to buy a 25.4 percent stake in closely held Autifony Therapeutics Ltd., which is studying hearing-loss treatments.

Glaxo isn’t the only company to use the strategy of taking over companies in which it owns a stake. Novartis AG (NOVN)’s purchase of eye-care company Alcon Inc., completed last year, was carried out over three stages. Roche Holding AG (ROG) already owned 56 percent of Genentech Inc. before it bought out the rest of the company in 2009.

“The fact that a company has shares does allow them the flexibility of going out and bidding for the rest of the shares they don’t hold,” said Savvas Neophytou, an analyst at Panmure Gordon & Co. in London. “Ultimately, what determines whether a bid transpires is whether the underlying asset is strong or whether the platform is absolutely necessary to a pharma company.”

Recent Deals

Last week’s 61 million-pound ($96 million) acquisition of Cellzome gives Glaxo technologies that will boost its drug- discovery efforts.

Glaxo agreed last month to pay $212.9 million to boost its stake in Theravance to almost 27 percent from 18 percent. The two companies started collaborating a decade ago to develop new respiratory drugs that will help replace Glaxo’s best-selling Advair drug, whose U.S. patent expired in 2010.

While Glaxo’s $2.6 billion hostile bid for Human Genome centers around the Benlysta drug for lupus, the two companies are also developing albiglutide for diabetes and darapladib for hardening of the arteries. Human Genome’s board last week rejected the offer as “inadequate” and said it’s in talks with other potential suitors.

By collaborating with companies such as Human Genome to develop new products, Glaxo reduces the risk that a rival drugmaker will make a competing bid, Amusa said. Any other bidder would only receive half of the revenue from Benlysta sales that Human Genome receives, according to the company.

“It’s a better strategy to buy when you have the information as opposed to when you don’t,” Amusa said. “You also have a better idea of when it’s best to simply walk away.”

To contact the reporter on this story: Makiko Kitamura in London at mkitamura1@bloomberg.net

To contact the editor responsible for this story: Kristen Hallam at khallam@bloomberg.net

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