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Glaxo and Human Genome bury the hatchet

by Ben Fidler | Published July 16, 2012 at 1:30 PM

It's taken a three-month hissing match and an extra billion dollars in cash, but GlaxoSmithKline plc and Human Genome Sciences Inc. have finally become consensual M&A bedfellows.

As long expected, GSK finally raised its offer for the Rockville, Md., biotech, and the two announced on Monday, July 16, that the U.K. pharma giant would pay $14.25 per share, on friendly terms, for its longtime business partner and the co-developer of lupus drug Benlysta. The deal values HGSI at $3.6 billion on an equity basis and $3 billion net of cash and debt.

Brentford, England-based GSK is paying a 99% premium to HGSI's $7.17 per share stock price on April 18, the last trading day before it made its unsolicited bid.

Both companies' boards have approved the deal.

"We are pleased to have reached a mutually beneficial agreement with [HGSI] on friendly terms and believe the combination of GSK and [HGSI] represents clear financial and strategic logic for both companies and our respective shareholders," said GSK chief executive Andrew Witty in a statement.

GSK expects to realize at least $200 million in cost savings by 2015 and believes the deal will be accretive to its earnings beginning in 2013.

The bid represents a $1.25 per share, $1 billion hike from GSK's original $13 per share, $2.6 billion offer, which HGSI's management said significantly undervalued the company and led to a public battle between the two over price.

GSK had maintained for months that its $13 per share bid was "full and fair value" for HGSI, while the biotech felt that its partner was using its deflated stock price -- HGSI's equity was worth between $25 and $30 per share during the first half of 2011 -- to attempt to buy it on the cheap.

HGSI rejected GSK's initially friendly bid, but it promptly opened up a sale process and invited GSK to join. The British drugmaker refused, however, and instead went hostile on the target. Both companies dug in their heels and exchanged public barbs as unconfirmed rumors began circulating that GSK was launching a plan to oust HGSI board members as part of a takeover plot.

HGSI had set Monday as the deadline for its board to make a decision on its sale process. GSK, meanwhile, warned that it might pull its tender offer for the company when it was to expire on July 20.

"After a thorough analysis of strategic alternatives, [HGSI] has determined that a combination with GSK is the best course of action for our company and the best way to maximize value for our stockholders," said HGSI president and CEO H. Thomas Watkins in the statement. "[HGSI] has had a long and productive working relationship with GSK, and together we will be uniquely positioned to achieve the full potential of Benlysta and other products in our pipeline for the benefit of those battling serious disease around the world."

Indeed, analysts and observers overwhelmingly felt that GSK and HGSI were destined for one another given their history and the series of profit-sharing agreements the two have on drugs. The relationship between the two companies began in 1993 when the U.K. pharmaceutical giant paid $125 million to form a research partnership with HGSI. The two brought Benlysta to market in 2011. It was the first approved lupus drug in more than 50 years, and they have shared the profits on the drug equally. They are also developing two other drugs together -- stroke and heart attack prevention drug darapladib and type-2 diabetes treatment albiglutide -- under profit-sharing arrangements. This meant that any potential buyer would have had to share the revenue of HGSI's drugs with GSK, while the British drugmaker had the advantage of bringing the economics of the three programs under one umbrella.

As a result, despite HGSI's assertion that it was shopping itself and had several interested buyers, analysts believed GSK was the company's only viable suitor and would eventually bump up its bid to get a deal done on friendly terms. The tender offer will now expire on July 27.

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Glaxo and Human Genome bury the hatchet

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Ben Fidler

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