Human Genome Sciences Inc. (Nasdaq: HGSI) investors betting on a sweetened bid from GlaxoSmithKline (NYSE: GSK) stand to reap a 13 percent return, even as their expectations of securing America’s biggest price increase diminish.
Human Genome, which makes treatments for lupus and diabetes, has traded above Glaxo’s $13-a-share bid every day since it was rejected in April, according to data compiled by Bloomberg. After less than 1 percent of investors tendered their shares before Glaxo extended the offer last week, the stock closed at $13.29 yesterday, signaling traders who profit from acquisitions still expect the U.K. drugmaker to boost the price.
While the spread has narrowed as no rival offers emerged so far during Human Genome’s sale process, WallachBeth Capital LLC and Piper Jaffray Cos. said Glaxo, which collaborates with Human Genome on three drugs, may raise its bid to $15 a share to overcome the company’s poison pill. That would be 13 percent higher than yesterday’s close. Glaxo’s $2.6 billion proposal was already 68 percent higher than Human Genome’s 20-day average before it was disclosed, twice the average premium for drug and biotechnology takeovers since 2006, before the financial crisis.
“The risk-reward is fantastic,” Yemi Oshodi, New York- based managing director of M&A and special situations trading at WallachBeth, said in a telephone interview. Human Genome shareholders “are willing to hold onto their shares and hold out for a higher offer. Glaxo’s got the motivation, they’ve got the money, they’ve got the synergies and so they’re the perfect strategic partner for Human Genome. You’re literally stopped out at $13. What are you going to lose?”
Today, Human Genome shares rose 1 percent to $13.42 at 9:57 a.m. in New York.
Glaxo’s “offer price is inadequate,” Human Genome’s board said in a press release June 8, in response to the tender offer being extended to June 29. The company’s exploration of strategic alternatives “continues to be active and fully underway.” A spokeswoman for Rockville, Maryland-based Human Genome declined to comment further.
London-based Glaxo declined to comment on whether it is considering raising its offer, a spokesman for the company said yesterday.
[GSK operates its U.S. headquarters in Research Triangle Park, N.C.]
Human Genome almost doubled on April 19 when the company said it rejected Glaxo’s $13-a-share cash bid and was exploring options including a sale, inviting Glaxo to participate in the process. Human Genome refused the offer partly out of concern for its investors, two people with knowledge of the matter said at the time. Of the company’s 25 largest shareholders, about 22 acquired stakes at a higher average price than Glaxo’s offer, the people said.
As traders placed bets on a competing offer, the shares traded 12 percent above Glaxo’s proposal on April 23, the widest gap of any pending U.S. deal, according to data compiled by Bloomberg. The stock ended as high as $14.71 the following week.
Glaxo went directly to shareholders with its offer last month, prompting Human Genome to adopt a poison pill to fend off hostile takeovers.
With no new offers emerging, Human Genome’s shares have since declined as traders pared back expectations for a rival bid. Even so, the stock, trading 2.2 percent higher than Glaxo’s bid, signals that some investors expect Glaxo to increase its offer to entice Human Genome shareholders.
As of last week, Human Genome investors had tendered 474,029 shares, just 0.24 percent of its outstanding stock, Glaxo said.
“The fact that not many people have tendered their shares and just extending the bid to the extent that they did tells you that we’re probably going to see a higher bid here soon,” Christopher Raymond, a Chicago-based analyst for Robert W. Baird & Co., said in a phone interview. “The stock traded off from where it was. But our conviction hasn’t changed.”
Glaxo collaborates with Human Genome on three drugs: the lupus treatment Benlysta that was approved for sale last year and experimental medicines, albiglutide for diabetes and darapladib for hardening of the arteries, that are in late-stage testing.
By acquiring Human Genome, Glaxo can capture all of the revenue from those drugs, including the potential $1 billion that Benlysta could draw in sales, said Ian Somaiya, a New York- based analyst for Piper Jaffray.
Glaxo would also be able to cut at least $200 million in costs through the acquisition by 2015, the company said in April when its proposal was made public. The current offer reflects those savings, it said.
Human Genome also has $2.6 billion in net operating loss carryforwards, a type of tax credit that a buyer could take advantage of, said Baird’s Raymond.
The revenue opportunity, so-called cost synergies and potential tax credits may compel Glaxo to boost its bid to $15 a share to secure a deal, Somaiya and WallachBeth’s Oshodi said. That’s a 15 percent bump from the current offer.
Glaxo’s $13-a-share bid was 68 percent higher than Human Genome’s average trading in the 20 days before the proposal. That’s already the third-highest premium paid in drug and biotechnology takeovers valued at more than $1 billion in the last six years and almost twice the average of 35 percent, data compiled by Bloomberg show.
“The fact that Glaxo was aggressive and made a public bid — was interested in paying a fairly high premium to begin with — that all speaks to the fact that they would raise the bid by a dollar or two,” Eric Schmidt, an analyst with Cowen & Co. in New York, said in a telephone interview. “I don’t think they have to bump, but it’s easier for them to do a friendly deal as opposed to an unfriendly deal.”
Schmidt also said Glaxo will likely raise the price to about $15 a share.
Rajesh Varma, who helps manage 5 billion euros ($6.2 billion) for Human Genome shareholder DNCA Finance SA in Paris, said Glaxo may resist a significant price increase.
“Human Genome doesn’t have much wiggle room,” Varma said. The Glaxos “of this world can just stand back and cancel their bids. Human Genome will go back, ask for a few percent higher probably, and then take it.”
Human Genome shareholders are unlikely to get more than a $2-a-share bump, Varma said. Based on the company’s 199.1 million shares outstanding, such an increase would raise the total purchase price by almost $400 million.
Instead of boosting its cash bid, Glaxo could decide to offer a so-called contingent value right tied to future drug sales, Piper Jaffray’s Somaiya said.
Glaxo plans to start a campaign to replace Human Genome’s entire board and has already started contacting potential nominees, Reuters reported May 30, citing unnamed sources familiar with the situation.
In a May 10 regulatory filing, Glaxo said it may solicit shareholder consent to remove Human Genome’s directors and elect its own nominees, if the board doesn’t take “all actions within its power” to satisfy its offer conditions.
Glaxo is still more likely to sweeten the offer than abandon the deal so that it can cut costs and retain all the revenue from the shared drugs, said Baird’s Raymond. He said Glaxo could even end up revising its bid to $17 to $20 a share, or as much as 50 percent above yesterday’s close.
“There is still some degree of expectation that the bid goes higher,” Raymond said. “I don’t think anybody expects that they’re just going to fold up their tent and walk away.”