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May 10, 2012

GSK, HGS Saddle Up for Acquisition Battle Valuing HGS at $2.6B

  • The latest drama in Human Genome Sciences’ (HGS’) history of ups and downs comes from its long-time partner, GlaxoSmithKline (GSK). The companies are suiting up for what could be another interesting saga on the M&A battle ground.

    GSK today initiated a hostile takeover bid at $13 per share, or $2.6 billion total. That means the company is taking its offer straight to shareholders, sidestepping the HGS board, which rebuffed GSK’s previous advance. GSK’s price represents an 81% mark-up on HGS’ value the day before it went public with GSK’s proposal.

    GSK’s eye is on gaining full control of their shared pet project, Benlysta. The drug gained the accolade of first new lupus therapy in 50 years when it received FDA approval in March 2011 for systemic lupus. EC and Health Canada followed suit. Despite being hailed as a breakthrough, market adoption has been slow, though. Over the last couple of weeks, healthcare cost watchdogs in Germany and the U.K. rejected Benlysta.

    But with the 81% premium GSK is offering, the company must have some faith in the drug even if doctors and payors don’t feel the same way just yet. HGS, of course, believes in its blockbuster potential and will vie for more than $13 per share.

    “HGS may be able to get GSK to pitch in another couple dollars per share, but we lack conviction in greater upside than that, given current business trends and no emergence of other bidders yet,” remarks Joseph P. Schwartz, Ph.D., and Michael Schmidt, Ph.D., biotechnology analysts at Leerink Swann Equity Research. “HGS's current market cap of just under $3 billion also seems like a lot to us for 50% terms on Benlysta, which may have peak sales of a similar magnitude in a very optimistic scenario today given current trends.”

    Benlysta costs $35,000 per year, and CDC reports that SLE prevalence in 2005 could have been as high as 322,000. Additionally, HGS has Phase II trials involving Benlysta in vasculitis and active lupus nephritis.

    GSK and HGS are also partnered on the cardiovascular disease drug candidate darapladib and antidiabetic albiglutide. Both these biologics are reportedly in Phase III development. Data from albiglutide in type 2 diabetes is expected by the end of this year, GSK said in December 2011. Albiglutide is also being studied in Phase II as a treatment for heart failure. Darapladib is being tested against atherosclerosis (Phase III) and diabetic macular edema (Phase II).

    Battle Tactics
    Since HGS publicly reported GSK’s offer, the usual arguments for and against the merger from GSK and HGS supporters, respectively, have emerged. GSK says its proposal is “full and fair,” while HGS finds it “undervalued and opportunistic.”

    If you feel like you’ve heard this all before, you’re right. You have. Several recent multibillion-dollar acquisitions have followed the same warpath. Most blockbuster buyers have succeeded by sweetening the deal, including Roche when it bought Ventana and Genentech and Sanofi when it purchased Genzyme.

    The big question is: Will GSK do the same, or will it sit it out? After coming forward with GSK’s intentions, HGS enlisted Goldman Sachs and Credit Suisse Securities to find strategic alternatives; in other words, a better offer than GSK. That was over three weeks ago.

    GSK has said that it will not take part in the review. Probably smart, because if it did, HGS’ stock price would likely see a push in the upward direction still further above GSK’s initial bid. Instead, GSK will commence its hostile tender offer.

    GSK is banking on the fact that HGS will not look as lucrative to other companies on acquisition parole. HGS’ main marketed product is Benlysta, and any buyer other than GSK would only have partial control of it. The companies share profits in the U.S., and GSK pockets sales from the rest of the world.

    HGS’ only other commercial product, anthrax therapy raxibacumab, is supplied to the U.S. Strategic National Stockpile. As far as HGS’ pipeline, GSK is in charge of the two most advanced candidates, darapladib and albiglutide. HGS also has anticancer agents; mapatumumab is in Phase II and HGS1036 in Phase I.

    HGS said on May 9 that it would review GSK’s unsolicited offer. It noted that that $13 per share bid was the same as that proposed on April 11 and rejected by HGS’ board, advising shareholders not to tender their shares until it HGS finishes its review. The company has promised to do so within 10 days. GSK’s offer will remain open for 20 days.

    HGS’ Business
    HGS made $131 million in revenues during 2011 compared to $157.4 million during 2010. The decrease reflected $82.8 million recognized from the Zalbin agreement with Novartis; Zalbin was an HCV drug candidate that was terminated in 2010. Benlysta accounted for $52.3 million of 2011’s revenue, or almost 40%. The rest of HGS’ revenues came from raxibacumab ($52.5 million) plus manufacturing and development services other than raxibacumab ($22.0 million).

    Benlysta had three full quarters on the U.S. market last year and almost two quarters in Europe. GSK reported a turnover of £15 million related to its share of gross profit in the U.S. and total sales in all other markets. Benlysta revenues for HGS increased 21% in the first quarter of 2012 from Q4 2011, reaching $31.2 million. “We believe that consensus expectations for U.S. Benlysta sales are $176 million, $331.6 million, $494.7 million, and $695 million in 2012–15, respectively,” Drs. Schwartz and Schmidt state.

    HGS saw its net loss rise from $233.2 million in 2010 to $381.1 million last year, mainly because of increased expenses related to the commercialization of Benlysta. As of December 31, 2011, cash and investments totaled $881.4 million, of which $801.2 million was unrestricted and available for operations.

    HGS was founded in 1992 by Harvard professor William Haseltine. It was one of the early biotech darlings among investors but did not deliver on initial promises; between 1999 and 2002, the company’s stock price fluctuated between $20 and $108. Since then the markets cooled to HGS. The company was trading as low as $2.53 as recently as July 2009. By the end of that month, the company was up to $14.64 and reached a high of $32.86 in April 2010.

    HGS’ share price last year was at its peak ($29.47) soon after the March FDA approval in SLE. The company first tried Benlysta as a treatment for RA after its discovery in 1996. In 2005, HGS and GSK started to focus instead on lupus. Benlysta acts by blocking the antibodies that cause lupus symptoms in a subset of patients.

    GSK’s Strategy
    GSK has stated that now is the appropriate time in the evolution of the GSK/HGS relationship for the companies to combine and that GSK is uniquely positioned to deliver on the promises of Benlysta, albiglutide, and darapladib. A key factor for GSK is that its offer is not conditioned on due diligence or financing. GSK says that it has provided HGS with the limited additional clinical information available to GSK that can be shared consistent with regulatory and legal constraints. 

    The top 10 investors in HGS together own 78% of the shares, according to Reuters. For them, selling their shares for $13 a share could be a windfall if Benlysta’s performance doesn’t improve. On the other hand, it could also be a sellout if Benlysta takes a turn for the better.
    “HGS shares are already trading about $1.50 above the $13 price that GSK has offered twice,” Drs. Schwartz and Schmidt note. “While many HGS shareholders may not tender their shares at $13, which is what HGS's board will likely recommend, we believe the high teens, which would justify an Outperform rating for us from here, is a big jump for GSK to make.”

    For GSK, HGS’ biologic pipeline will broaden its footprint in this segment of drug development. GSK would be following its big pharma brethren like Merck & Co., Pfizer, Roche, and Sanofi. All have doled out major mullah for biotech companies over the last few years. This strategy has been viewed as key to diversification as well as a parachute to ease the jump off the patent cliff created by their blockbuster small molecule drugs coming off protection.

    GSK’s notorious antidiabetic Avandia loses protection this year. It brought in £123 million last year compared to £440 million in 2010. The medication has faced a lot of slack due to its link to stroke. GSK’s Avodart, which comes off patent protection for benign prostatic hyperplasia in 2015, made £748 million in 2011 and was a major driver of growth.

    GSK will have to up its bid for HGS or persuade shareholders that its offer is truly fair. Shareholders will consider that their shares were worth almost $30 a piece last year when Benlysta enthusiasm was its height but down to around $7 just before GSK’s offer. Putting an actual value on a biotech company with no or few marketed assets has always been tough, blowing hot and cold depending on Wall Street’s perspectives.


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