After collaborating on research with Human Genome Sciences Inc. for close to two decades, GlaxoSmithKline Inc. is looking to bring the drug developer, its Benlysta marketing partner, in house.

GSK went public on April 19 with a $13-per-share offer for HGSI, representing about $2.6 billion. HGSI’s board of directors promptly rejected the unsolicited bid, saying it does not reflect the inherent value of the company, and hired the investment banks Goldman Sachs & Co. and Credit Suisse Group to explore strategic alternatives for the firm.

HGSI doesn’t appear to have many options, however. The Rockville, Md., biotech’s only marketed drug, Benlysta (belimumab), and its near-term pipeline assets are jointly owned by GSK, making it doubtful another suitor will step in. The question now is if GSK will be willing to sweeten its offer.

The $13-per-share cash offer represents an 81% premium over the company’s closing share price of $7.17 April 18. It also represents a 66% premium over the 30-day trading average closing price of $7.83 and a 58% premium over the 90-day trading average, according to GSK. Nonetheless, while HGSI investors may be relieved to see an offer on the table that represents immediate and certain value, $13-per share is a far cry from where the stock stood on April 19, 2011, when it closed at $28.02. At that time, the company was riding high on FDA’s approval in March 2011 of Benlysta for systemic lupus erythematosus Also see "HGSI/GSK's Benlysta Gets BLySfully Clean Labeling, Escaping Feared Restrictions" - Pink Sheet, 10 March, 2011..

HGSI’s stock immediately shot above $13 in same-day trading to close April 19 at $14.17, suggesting investors expect the bidding price to rise. For a company with a long history, a marketed drug and several pipeline assets, the price is markedly less than some other recent sales in the biopharma space. The most notable examples have been in hepatitis C, where Gilead Sciences Inc. paid roughly $11 billion for Pharmasset Inc., a company with no marketed drugs but a potential game-changer in development, and Bristol-Myers Squibb Co. paid $2.5 billion for Inhibitex Inc. mainly for a promising Phase II asset Also see "HCV Buyup Continues As Bristol Offers $2.5 Billion For Inhibitex" - Pink Sheet, 9 January, 2012..

Bristol also reportedly has made an unsolicited bid for Amylin Pharmaceuticals Inc., which recently received FDA approval for Bydureon (exenatide), valuing the company at over $3 billion, an offer that was rebuffed by Amylin Also see "Weeks After Bydureon Launch, Amylin Looks Like A Takeout Target" - Pink Sheet, 29 March, 2012..

Weak Benlysta Launch Primes HGSI For Takeover

As the first new treatment for SLE in 50 years, many expected that Benlysta would be on a blockbuster track immediately, with some analysts projecting sales eventually of several billion dollars. HGSI reported fourth-quarter 2011 net sales of Benlysta of $25.7 million, however, with full-year sales $52.3 million, well below adjusted Wall Street consensus estimates Also see "HGS Calls For Confidence In Slow, Steady Ramp-Up For Benlysta" - Pink Sheet, 28 February, 2012..

Industry observers attribute the sluggish uptake to a mix of lackluster efficacy data from late-stage trials, poor physician messaging and the high $32,000 per-year cost of therapy. As HGSI reported weaker than expected sales quarter by quarter, investors have abandoned ship, sending the stock down from the mid-$20s a year ago.

The drop-off in stock price has made HGSI vulnerable to a takeover, even as its big pharma partner has been looking to gain control over the faltering drug launch and reap the full rewards if sales eventually take off. The companies have a complicated arrangement under the 2006 collaboration, but essentially split sales and profits from the drug 50/50. HGSI books sales in the U.S., while GSK books them in Europe, where Benlysta was approved in July 2011 and where GSK has taken the lead on sales. Both companies are selling the drug in the U.S.

By acquiring HGSI, GSK also would gain full control over two partnered pipeline assets: albiglutide, a once-weekly injectable GLP-1 agonist for type 2 diabetes, and daraplatib, an inhibitor of lipoprotein-associated phospholipase A2 (Lp-PLA2) in development for cardiovascular disease. Both are in Phase III development and are HGSI’s nearest-term pipeline assets, but neither so far appears to be a star to spur GSK’s buyout offer, and GSK only owes HGSI milestones and royalties on sales of each.

Abliglutide, which GSK has said it plans to file in late 2012, will enter a competitive class already dominated by well-entrenched rivals, and the data supporting it thus far do not appear to position it as best-in-class Also see "GSK Airs Phase III Data For Weekly GLP-1 Albiglutide, Plans To File By Year-End" - Pink Sheet, 3 April, 2012.. Daraplatib, on the other hand, is a potential first-in-class treatment but considered by investors to be high-risk. GSK is running two massive Phase III trials studying the effect of the drug on major cardiovascular events, the first of which is scheduled to end in late 2012.

GSK also said it expects to achieve $200 million in synergies through the merger by 2015. The company also reaffirmed its expectation to repurchase £1 billion to £2 billion in shares in 2012 regardless of the acquisition.

“GSK is uniquely positioned to realize the full value of Benlysta, albiglutide, daraplatib and Human Genome Sciences’ other assets for the benefit of physicians, patients and shareholders,” the company said in a statement. “We can simplify and optimize R&D, commercial and manufacturing operations to advance these products most effectively and efficiently while securing the full potential long-term value of the assets.”

In addition to the partnered GSK assets, HGSI also is developing raxibacumab for inhalation anthrax for stockpiling by the U.S. government and the potential cancer treatment mapatumumab, a monoclonal antibody that induces cell death by activating the TRAIL receptor 1 protein.

GSK’s $13 per share offer clearly values Benlysta over any pipeline agents. Deutsche Bank AG European pharmaceuticals analyst Mark Clark estimated that the net present value of Human Genome Sciences profit split on Benlysta amounts to roughly $12 per share. “My cursory valuation would suggest that Glaxo can justify the current price based on the likely profit-share arrangements on Benlysta,” he said during a call with investors. “Anything beyond that would depend on how much they want to throw into the pot on albiglutide and daraplatib.” Clark forecasts Benlysta sales could reach $1.2 billion by 2019.

Barclays Capital analyst Ying Huang speculated in a same-day research note, “While HGSI’s board rejected the initial $13/share offer, we doubt GSK will return with a materially higher bid given HGSI’s limited negotiating power.”

The history between HGSI and GSK dates back to SmithKline Beecham, which GSK later acquired. SmithKline Beecham partnered with HGSI in 1993 on rights to a gene-sequencing technology [See Deal]. The companies expanded on that original alliance several times over. In 2006, GSK paid HGSI $24 million for rights to belimumab [See Deal].

GSK’s Bid For Human Genome Sciences: A Deal Decades In The Making

More from Archive

More from Pink Sheet