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Human Genome Sciences Rejects GlaxoSmithKline's $2.6 Billion Takeover Offer

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Biotech puts itself on the block after spurning $13 per share offer, but Glaxo appears to have the edge.

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Human Genome Sciences (HGSI) wasted no time, putting itself up for sale after spurning longtime drug development partner GlaxoSmithKline's (GSK) $2.6 billion unsolicited takeover offer.

The $13 per share Glaxo is offering for the biotech company is much too low, Human Genome says today. "The offer does not reflect the value inherent" in the company, according to a statement. Anticipating a higher price, investors bid Human Genome's stock up to $14.45 in morning trading. The Glaxo offer was a more than 80% premium to the stock's closing price Wednesday.

This potential marriage has been speculated for years. The two companies have significant stakes in each other. Glaxo co-developed the lupus drug Benlysta, which was approved last year. The companies are in the late stages of developing a drug for heart disease (darapladib) and a diabetes treatment (albiglutide).

"Having worked together with Human Genome Sciences for nearly 20 years, we believe there is clear strategic and financial logic to this combination for both companies and our respective shareholders -- and that now is the appropriate time in the evolution of our relationship for our two companies to combine," Glaxo CEO Andrew Witty says in a statement.

Human Genome invited Glaxo to participate in the sale process (for the record, the company says it's looking at all strategic alternatives). Given the tie-ups between the two companies, it's difficult to see another bidder coming in as a white knight.

ISI Group analyst Mark Schoenebaum says the odds of additional bidders are low, though several companies may be interested in Human Genome, including Amgen (AMGN), Merck (MRK), Johnson & Johnson (JNJ), Bristol-Myers Squibb (BMY), and Abbott Laboratories (ABT).

In the end, Schoenebaum says he believes Glaxo will be the winning bidder for a higher price and probably an incentive that pays Human Genome shareholders more money in the future if certain milestones are met. Recall that Sanofi (SNY) used this tactic to successfully take over Genzyme last year. (See Sanofi Nabs Genzyme.)

Human Genome will likely sell in the high teens, Leerink Swann analyst Joseph Schwartz predicts. Even that high a premium may be unsatisfactory to some investors, Schwartz notes, given that the stock traded in the high $20s just a year ago.

However, Benlysta sales have been much slower than expected and that contributed to the huge decline in Human Genome's stock. (See Investors Flee Human Genome Sciences as Lupus Drug Sales Inch Higher.) Even with the big rise in shares today, the stock is still almost half what it traded at a year ago.

Schwartz says he thinks Glaxo can pay a bigger price than it is offering. For one thing, Glaxo proposes cutting $200 million from the combined operation by 2015, a target Schwartz calls conservative.

So it seems Human Genome doesn't have much leverage unless it can convince another company to top Glaxo's offer, which appears to be a long shot. The company has employed a lot of firepower to bring others to a potential auction; it hired Goldman, Credit Suisse, Skadden Arps, and DLA Piper. On the other side, Glaxo enlisted Lazard, Morgan Stanley, Cleary Gottlieb, and Wachtell.

If anything, it's a high-priced poker game. Expect Glaxo to win.

Twitter: @brettchase

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No positions in stocks mentioned.
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