Human Genome Sciences, Inc. (HGSI) recently rejected GlaxoSmithKline‘s (GSK) offer to acquire the company for $13 per share in cash. Human Genome’s board of directors rejected the offer as they believe that the offer price undervalues the company. The offer price of $13 per share represents an 81% premium over Human Genome’s closing share price on April 18, 2012.
Human Genome is currently evaluating options regarding its future, including its potential sale. Glaxo has been invited to take part in the proceedings to determine Human Genome’s future.
We note that Human Genome and Glaxo are no strangers to each other. They have an agreement regarding Human Genome’s sole marketed drug, Benlysta, for treating systemic lupus erythematosus (SLE). The drug, which has significant potential, being the first lupus drug to hit the market in more than 50 years, has performed below expectations since launch.
The US Food and Drug Administration (FDA) cleared Benlysta in March 2011. The drug is also available in Canada and several European nations. EU approval came in July 2011.
Moreover, Human Genome possesses substantial financial rights to multiple candidates from GlaxoSmithKline’s pipeline notably late-stage candidates darapladib (cardiovascular disease) and albiglutide (type II diabetes). Glaxo would get exclusive rights to Benlysta as well as other candidates such as darapladib and albiglutide if it is succeeds in acquiring Human Genome.
What does Glaxo Gain?
We believe that the offer to bring Human Genome under its wings has stemmed from the high exposure to generic risk on many of Glaxo’s leading franchises. Products such as Valtrex, Lamictal, Imitrex, Combivir and Epivir are already facing declining sales due to intense generic competition. Going forward, a major part of Glaxo’s revenues will be exposed to generic competition as multiple drugs are scheduled to lose exclusivity in the next few years.
We expect the company’s top line as well as gross margins to remain under pressure in the coming quarters. In addition to generic competition, the US health care reform and EU pricing pressure will continue to affect sales.
Will Glaxo Raise its Offer?
With Human Genome refusing Glaxo’s offer, the big question that remains is how far Glaxo will go to acquire Human Genome. We believe that the offer price could be raised to $14- $16. We don’t think Glaxo will go beyond that range to acquire Human Genome, as we don’t think many more companies will be queuing up to buy Human Genome after the disappointing sales of Benlysta. The disappointing initial sales ramp of Benlysta has had a negative impact on Human Genome’s stock price.
Neutral on Glaxo & Human Genome
We currently have a Neutral recommendation on Glaxo, which carries a Zacks #2 Rank (short-term “Buy” rating). Our biggest concern for Glaxo is the high exposure to generic risk on many of its leading franchises. We expect the company to look to grow revenue through partnering deals and acquisitions.
We believe that the biggest challenge for Human Genome, which carries a Zacks #3 Rank (short-term “Hold” rating), is to improve the sales of Benlysta.
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