Drug companies are in such need of the latest experimental therapies to replace medicines losing patent protection that even a 68 percent takeover premium for Human Genome Sciences Inc. isn’t enough.
Acquirers have been willing to pay 71 percent more than a biotechnology company’s average 20-day stock price in deals greater than $500 million this year, the highest average premium since at least 2000, according to data compiled by Bloomberg. After rejecting GlaxoSmithKline Plc’s $13-a-share bid and starting a sale process last week, Human Genome closed 12 percent above the offer yesterday as traders wager it will secure the steepest price increase of any pending U.S. deal.
Takeover prices are on the rise as the world’s 10 largest drugmakers race to replace medicines facing generic competition in the U.S. this year and next. The 126 percent premium in January for Inhibitex Inc., the maker of a hepatitis C therapy, set a record among biotechnology deals of at least $500 million, and AstraZeneca Plc agreed yesterday to pay a 51 percent premium for Ardea Biosciences Inc. With the bid for Human Genome at less than half of the stock price a year ago, Robert W. Baird & Co. says Glaxo needs to pay more to win over the largest investors.
“It’s a good time to be a seller if you’re a biotech company,” Walter Todd, who oversees about $950 million as chief investment officer at Greenwood Capital in Greenwood, South Carolina, said in a telephone interview. “These bigger pharma companies are trying to fill in the gaps in their portfolios. Human Genome has come out and said it undervalues the company, so the assumption is that Glaxo is going to have to raise the offer or somebody else could step in.”
Drug Patent Expirations
Jerry Parrott, a spokesman for Rockville, Maryland-based Human Genome, declined to comment on what would be an acceptable takeover price and whether it has received other interest.
A spokesman for London-based Glaxo declined to comment on whether the drugmaker will raise its bid. In a statement last week, Glaxo said the offer was “full and fair.”
Shares of Human Genome rose for a fourth straight day, adding 5 cents to $14.64.
Of 104 drugs with U.S. patent protection expiring between 2012 and 2016, 44 percent will lose exclusivity this year and next, according to data compiled by Bloomberg. The world’s 10 largest drugmakers by sales have U.S. patents expiring this year or next, the data show.
Drugs with more than $170 billion in revenue are confronting potential generic competition from 2010 to 2016, with the greatest impact this year at almost $50 billion, data compiled by Bloomberg show.
Patents are expected to expire in one or more developed countries for six of the top 10 medicines on the market between 2011 and 2015, including Pfizer Inc.’s Lipitor last year, Plavix from Sanofi and Bristol-Myers Squibb Co. this year and AstraZeneca’s Nexium in 2014, according to data from the IMS Institute for Healthcare Informatics.
The upcoming patent expirations are driving the need for acquisitions and the resulting premiums, Todd Lowenstein, a Los Angeles-based fund manager for Highmark Capital Management Inc., which oversees $17 billion, said in a telephone interview.
“Big pharma are finding they have holes in their portfolios they need to fill,” Lowenstein said. “There’s a dearth of internal pipeline drugs to meet some of the gaping holes. That’s why I think you’re seeing a ramp up in the interest level and activity and they’re paying steep premiums, reflecting the short-term desperation that they feel.”
Record Biotech Premiums
Targets valued at more than $500 million in the biotechnology industry have fetched an average premium of 71 percent this year, topping the previous annual high of 66 percent in 2006, according to data compiled by Bloomberg that excludes terminated deals. The 68 percent premium for Human Genome would rank sixth highest, the data show.
Through yesterday, shares of Human Genome had more than doubled since April 19 when it rejected Glaxo’s $2.6 billion unsolicited offer and said it will explore alternatives, including a potential sale. Glaxo was invited to participate in the process.
The bid was refused partly out of concern for Human Genome investors, two people with knowledge of the matter said last week. Of the 25 largest shareholders, about 22 acquired stakes at a higher average price than Glaxo’s offer, said the people, who asked not to be named because the discussions were private.
The stock closed yesterday at $14.59, 12 percent higher than the $13-a-share offer price, a bigger gap than any other pending deal in the U.S., data compiled by Bloomberg show. The trading signals investors are anticipating a higher offer, said Christopher Raymond, an analyst for Robert W. Baird in Chicago.
“There’s a great case to be made that they’ll increase the bid,” he said. “I do think the bid is going higher.”
Glaxo should pay at least $15 a share if it wants to own the drugs for which it already partners with Human Genome and no longer split the sales, Raymond said in a phone interview. The companies collaborate on three drugs: the lupus treatment Benlysta that was approved for sale last year and experimental medicines for diabetes and hardening of the arteries that are in late-stage testing.
Glaxo’s top-selling asthma drug Advair will lose patent protection in Europe next year after it already lapsed in the U.S. in 2010, though a generic rival has yet to enter the market.
At $15 a share, Glaxo would be paying a 94 percent premium to the stock’s 20-day average before the proposal was made public. It’s also the same level that analysts project the stock will reach in the next 12 months if Human Genome remains a standalone company, estimates compiled by Bloomberg show.
Rajesh Varma, who helps manage 5 billion euros ($6.6 billion) for Human Genome shareholder DNCA Finance SA in Paris, says Glaxo should raise its bid to at least $16 a share. Human Genome closed as high as $29.70 last year.
“Glaxo is offering a price that seems high, except it’s significantly below where it was this time last year,” Varma said in a phone interview.
While Echo He, a New York-based analyst for Maxim Group LLC, said Glaxo is the most logical buyer because the two already partner on certain drugs, Robert W. Baird’s Raymond said Abbott Laboratories would also make sense as a suitor.
The $95 billion company’s top seller is Humira, which is used to treat rheumatoid arthritis and Crohn’s disease and brought in $7.9 billion in sales last year, data compiled by Bloomberg show.
“Glaxo’s always been the most likely buyer, but I think anybody with a sizeable rheumatology franchise like Abbott could be interested,” Raymond said in a phone interview. “Abbott’s got Humira and so that’s definitely a possibility.”
The heart disease treatment that Human Genome and Glaxo partner on, which is undergoing clinical trials, would also fit with Abbott’s cardiovascular unit, Raymond said.
Adelle Infante, a spokeswoman for Abbott Park, Illinois-based Abbott, said the company doesn’t comment on speculation, when asked whether it was considering a bid for Human Genome.
While Glaxo’s offer at a 68 percent premium “looked huge,” the proposal actually undervalues the company after the shares fell 75 percent in the year before the bid was disclosed, said Maxim Group’s He. Human Genome’s Benlysta may reach peak U.S. sales of $1.4 billion, making the drug alone worth $20 to $25 a share to Glaxo if operating costs can be reduced by 50 percent, she said.
AstraZeneca’s Upcoming Deals
Human Genome isn’t the only biotechnology firm fetching higher premiums. Bristol-Myers’ agreement to acquire Inhibitex at a 126 percent premium to its prior 20-day average set a record for deals in the industry valued at a minimum of $500 million, the data show. Bristol-Myers, which will lose patent protection for three of its top four drugs within three years, closed the $2.1 billion deal in February, beating out at least five other suitors for Alpharetta, Georgia-based Inhibitex and its experimental hepatitis C drugs, regulatory filings show.
Yesterday, Ardea, the maker of experimental gout and cancer treatments, announced that it will be bought by AstraZeneca for $32 a share, a premium of about 51 percent, for an equity value of about $1.2 billion, data compiled by Bloomberg show. The U.K.’s second-biggest drugmaker, which has two of its best-selling drugs facing generic competition by 2014, said the Ardea purchase may be the first in a series of deals.
Some bids for biotechnology companies weren’t successful this year even after exceeding the historic average premium of 38 percent. Last week Roche Holding AG abandoned a $6.7 billion bid for Illumina Inc., the maker of gene-mapping tools. The final offer of $51 a share was 53 percent higher than the stock’s 20-day average before Roche’s first bid in January.
‘Paying Steep Premiums’
Amylin Pharmaceuticals Inc., the maker of diabetes drugs, rejected a $3.5 billion unsolicited takeover bid from Bristol-Myers in February, people with knowledge of the matter said last month. The bid was about 43 percent higher than Amylin’s share price before Bloomberg reported the news. Amylin is now seeking a buyer, two people with knowledge of the matter said this week. Amylin declined to comment on the speculation.
It’s still worth it for large drugmakers to offer higher takeover premiums for companies with treatments on the market or in late-stage testing, rather than developing their own new products, said Michael Mullaney, who helps manage $9.5 billion as chief investment officer at Fiduciary Trust in Boston.
“The biotech companies have become the research arms of a lot of these large pharmaceutical companies,” he said in a phone interview. “While they’re paying steep premiums, it’s probably cheaper for them to do this. They’re willing to let the biotech companies do the leg work to start out and then they’re swooping in with large premiums.”