May 9, 2012 / 8:25 PM / 7 years ago

Glaxo needs slight sweetener to Human Genome bid: analysts

NEW YORK (Reuters) - GlaxoSmithKline will need to sweeten its $13 per share bid for Human Genome Sciences to about $15 per share to win over its top investors and get a deal done, according to a Reuters survey of analysts on Wednesday.

The number represents an average of predictions that varied from $13 to $18 by 13 analysts who follow at least one of the drugmakers. They were polled shortly after British-based Glaxo said it would take its $2.6 billion offer directly to shareholders after it was rejected by Human Genome’s board.

U.S.-based Human Genome disclosed Glaxo’s approach on April 19, saying it was launching an auction to solicit buyer interest. Its shares are trading above the offer at around $14.50, but are still worth only about half of a peak above $28 hit last May.

“The likely outcome is still a friendly solution at around $15 a share or so,” predicted Cowen and Co analyst Eric Schmidt.

“They must know that in order to get this done fairly expeditiously and on good terms they’re going to have to sweeten it up a little bit. The news today is more posturing than anything else,” he said of Glaxo’s decision to go hostile.

Complicating a hostile bid and any overtures by another potential buyer is a long-standing partnership between the two companies. Glaxo owns 50 percent of Human Genome’s lone marketed product — the lupus drug Benlysta — and has rights to the biotech’s most advanced drugs in development.

Some see that as giving the larger company leverage to play hardball, though it faces a formidable challenge in convincing Human Genome’s leading shareholders. Ten investors, including leading firms such as T. Rowe Price Associates and Fidelity Investments, together hold about 78 percent of the company, according to the most recent ownership filings.

But analysts did not expect an alternative suitor to emerge.

“Due to the partnership it’s a little scary for Human Genome Sciences if Glaxo walks away,” said Brian Skorney, an analyst with Brean Murray, Carret & Co, who doesn’t see a need for Glaxo to raise its bid at all.

“I really don’t think they’re going to find another higher priced suitor to come in,” he said. “Someone would basically be buying the 50 percent rights and walking into sort of a hostile situation with Glaxo.”

Morningstar analyst Lauren Migliore called the initial offer “very fair.”

“You could see $1 to $2 increase in the price to ease the deal, but for the most part we think the deal will get done near the initial offer, between $13 and $15,” she said.

BENLYSTA DISAPPOINTMENT

RBC Capital Markets analyst Michael Yee believes that once Glaxo’s tender to shareholders expires, the company “may raise its bid by some modest incremental amount, but nothing drastic in the near term. We don’t think there’s any rush for GSK to complete the offer immediately, so it may take some time.”

Yee agrees that there are no white knight bidders likely to come in with a meaningfully higher offer given Glaxo’s Benlysta partnership and rights to Human Genome’s most promising potential future products.

Human Genome has repeatedly maintained its confidence that Benlysta would become a multibillion-dollar drug despite increasing pricing and reimbursement pressure in Europe. The company reported first quarter Benlysta sales of $31.2 million.

Skorney characterized Benlysta sales as “unbelievably disappointing. Every quarter is a miss.” He said Glaxo could walk away from the deal and seek other acquisition targets.

But some analysts and investors believe that Glaxo may be more interested in gaining full rights to the heart drug darapladib than in the potential for Benlysta.

“The pipeline drug is worth at least $1 (above the offer price) and some arbitrage guys would argue even higher,” said an arbitrage source who is following the situation closely.

He said if Glaxo were to walk away the way Roche did after its hostile bid for Illumina Inc was rejected last month, Human Genome stock would likely fall back to $8 or $9.

“There’s really only one buyer here,” the arbitrageur said. “It gives Glaxo the leverage to determine the ultimate price. Let’s say most shareholders are looking for $15 to $17. When everyone realizes that Glaxo has all the leverage you’ve got to imagine that the price is going to end up on the lower end of that range.”

Robert W Baird analyst Christopher Raymond was far more optimistic that Human Genome investors would ultimately wrest a significantly higher offer.

“With the stock continuing to trade above (the offer price), we think HGSI shareholders are sending GSK a strong message that this bid is too low,” Raymond said in a research note, pegging a deal closer to his price target for the company of $19 per share.

Additional reporting by Ben Hirschler in London; Editing by Michele Gershberg, Bernard Orr

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