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Glaxo’s $2.6 Billion Cash Offer Rejected by Human Genome

Glaxo Makes Unsolicited $2.6 Billion Offer for Human Genome
The headquarters of GlaxoSmithKline Plc stand in Brentford. Source: GlaxoSmithKline Plc via Bloomberg

Human Genome Sciences Inc. almost doubled in trading as the biotechnology company put itself up for sale after rejecting a $2.59 billion acquisition bid from GlaxoSmithKline Plc.

Human Genome, the partner with London-based Glaxo on the lupus treatment Benlysta, rose 98 percent to $14.17 at 4 p.m. New York time. Glaxo’s $13-a-share cash offer, an 81 percent premium to yesterday’s closing price of $7.17, doesn’t reflect the drug developer’s value, Human Genome said today in a statement that indicated the company may shop itself to others.

The bid was rejected partly out of concern for Human Genome stockholders who bought shares at an average price that’s higher than the offer, said two people with knowledge of the matter. All but three of the 25 largest shareholders acquired stock at a higher average price, said the people, who asked not to be named because the talks are private.

Glaxo’s interest “makes real sense,” said Sven Borho, a partner with OrbiMed Advisors in New York, by telephone. “Glaxo has the inside track on the pipeline,” sharing in development of Benlysta and two other drugs in final-stage testing. “Nobody is going to go into a bidding war with them.”

Borho, whose company owns 1.7 million shares of Rockville, Maryland-based Human Genome shares, said he supports a sale.

Human Genome decided to go public with Glaxo’s offer and put itself up for sale, anticipating interest from large pharmaceutical companies may drive up the price, the people said.

Glaxo’s Move

By moving to try to acquire Human Genome now, Glaxo is taking advantage of a 76 percent slide in the biotech’s shares from their 2011 peak. Sales growth for Benlysta, Human Genome’s first drug on the market, has disappointed investors, and the company may not become profitable for years.

“We are disappointed that Human Genome Sciences has rejected our offer without discussion and are confident that our offer is in the best interest of shareholders of both companies,” Glaxo Chief Executive Officer Andrew Witty said in a follow-up statement. shares traded between $20 and $30 until about August of 2011.

Glaxo first learned of Human Genome’s rejection of the $2.59 billion offer through a phone call earlier today, another person familiar with the situation said. Human Genome Chief Executive Officer Thomas Watkins called Glaxo’s Witty at about 5 a.m. New York time, saying that the offer didn’t reflect Human Genome’s value and that the company would be making a public statement shortly, the person said. The statement was released at 5:12 a.m.

A “Good Deal”

Liisa Bayko, an analyst with JMP Securities who has an outperform rating on Human Genome, called the $13 offer a “good deal,” given Glaxo’s agreements with the company and the likely lack of a competing bidder.

“It’s not that appealing to anyone other than Glaxo,” she said in a phone interview from Barcelona. “I could see $15 a share. Given where the stock is, I was happy when I saw $13 a share. Anything above that I’d be even more happy with,” Bayko said.

The offer by Glaxo, which gained less than 1 percent to 1,454 pence in London trading, values Human Genome at 11 times estimated 2012 sales. Acquirers paid a median of 20.3 times sales for biotech companies in the past year, according to data compiled by Bloomberg on acquisitions of $100 million or more.

Three Drugs

Jerry Parrott, a spokesman for Human Genome, declined to comment by telephone beyond today’s statement. A Glaxo spokeswoman also declined comment beyond the drugmaker’s statement.

The two companies collaborate on three drugs, the lupus treatment Benlysta, approved for sale last year, and experimental medicines for diabetes and hardening of the arteries that are in late-stage testing.

“When you have so many projects together in late-stage development, it makes sense to want to integrate 100 percent of their value,” said Eric Le Berrigaud, an analyst at Bryan, Garnier & Co. in Paris, by telephone. “It means Glaxo thinks these projects have a potential.”

Investors had high hopes for Benlysta, the first drug to combat lupus in more than 50 years and Human Genome’s first product to market. Analysts in 2010 estimated the drug could reach $1.5 billion in annual sales.

Benlysta Forecasts

Instead, sales got off to a “slow start” after winning approval last year, Deutsche Bank analysts said, leading the bank to cut forecasts for the drug. Benlysta probably will generate $234.4 million in 2012, based on the average of 19 estimates compiled by Bloomberg, and Human Genome is likely to report its first annual profit in 2015.

The experimental diabetes therapy being jointly developed, called Syncria, is a “very, very promising” new treatment, Glaxo’s Witty said during a call in February. “And we’ll see when the full data comes in before we can really articulate the full picture to you.”

The U.S. biotechnology company has hired Goldman, Sachs & Co. and Credit Suisse Securities (USA) LLC as financial advisers and Skadden Arps Slate Meagher & Flom LLP and DLA Piper LLP as legal counsel.

Lazard Ltd. and Morgan Stanley are acting as financial advisers to Glaxo, and Cleary Gottlieb Steen & Hamilton and Wachtell, Lipton, Rosen & Katz are providing legal advice.

“There can be no assurance that any transaction will occur,” Human Genome said. “HGS does not intend to discuss the status of its evaluation unless and until a specific transaction has been approved.”

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