By Peter Loftus
Human Genome Sciences Inc. (>> Human Genome Sciences) is holding out for more than GlaxoSmithKline PLC's (GSK) unsolicited $2.6 billion takeover offer, but it could be tough to get a significantly higher bid.
The appetite to value Human Genome much higher could be limited because sales of its Benlysta lupus drug, which Human Genome co-developed and co-markets with Glaxo, haven't been as high as expected since it was introduced last year.
More broadly, Human Genome's ability to be at the forefront of translating genetic research into new medicines hasn't kept up with the hefty expectations that pushed the stock price over $100 more than a decade ago. Human Genome was formed in 1992 amid high hopes that its gene-mapping research would lead to new drugs, but it wasn't until last year that the company received its first U.S. product approval, for Benlysta.
The disappointing sales of Benlysta have been reflected in Human Genome's stock price, which is down nearly 50% over the past year, even after Thursday's near doubling to $14.16 in recent trading.
Glaxo made an unsolicited bid of $13 per share cash for Human Genome, which the company has rejected as inadequate. Human Genome has, however, hired bankers to explore a sale and other options and invited Glaxo to participate in the process. Glaxo's offer was more than an 80% premium to Human Genome's closing price Wednesday.
Even if Glaxo ultimately raises its offer by a few dollars per share to the mid- or high-teens--as some analysts expect--it would still be at a discount to where Human Genome was trading a year ago, around $30. On the other hand, an offer in the high teens would represent a solid premium to Wednesday's closing price, not to mention the stock's trough below $1 in 2009.
Other companies, though, may be hesitant to step in with a rival bid because of Human Genome's existing partnership with Glaxo. Their ties include not only Benlysta, but also experimental diabetes and cardiovascular drugs in Glaxo's pipeline in which Human Genome has financial interests.
"Any other non-GSK acquirer would only get half of the various assets, and in most cases acquiring companies want full control--not partial control--over what they are buying," Bernstein analyst Tim Anderson wrote in a research note.
Human Genome shareholders might not be happy about the Glaxo offer, but some analysts think they will have to settle. Without a rival bidder, Glaxo may not be motivated to raise its offer aggressively.
"The stock was in the twenties for much of the prior two years, so it may be tough to convince shareholders that this is adequate," Leerink Swann analyst Joseph Schwartz wrote in a research note. "However, without an acceleration in Benlysta sales, HGSI may have to take what it can get without being too aggressive."
"Unless multiple other bidders step in," Schwartz said, "we believe HGSI may have to settle for a high teens valuation."
S&P Capital IQ analyst Steven Silver sees Glaxo as the sole suitor, and any increase to its offer would be limited by Benlysta's slow rollout. He raised his target price to $15 from $13 for Human Genome shares.
Benlysta was the first new treatment for lupus in 50 years when it was cleared by the Food and Drug Administration last year. But Human Genome recognized only $52.3 million in Benlysta sales last year. The drug costs about $35,000 per year per patient, and Human Genome has said there are about 325,000 U.S. lupus patients, implying a market opportunity of about $7 billion.
"Doctors weren't as excited about the therapy as we thought they would be," said Andy Acker, portfolio manager of the Janus Global Life Sciences fund who sold his position in Human Genome after the weak initial sales.
Leerink Swann estimates Human Genome's share of Benlysta sales will rise to $164.4 million in 2012.
Human Genome has said it is making progress promoting wider use of Benlysta. On Thursday, the company said the Glaxo offer "does not reflect the value inherent" in Human Genome.
Many investors have questioned the value of Human Genome's stock as proven by the 22% of shares sold short, meaning those shares profit when the stock price declines. The near doubling of Human Genome's stock price Thursday has probably forced many of those investors to scramble to close those positions.
-By Peter Loftus, Dow Jones Newswires; +1-215-982-5581; [email protected]