Glaxo Fails to Impress HGSI

Human Genome Sciences Inc.’s () board of directors has advised its stockholders to reject GlaxoSmithKline’s (GSK - Analyst Report) tender offer. The offer to acquire all outstanding common shares of Human Genome for $ 13.00 per share was considered inadequate by the board.

Glaxo had offered to acquire Human Genome in April 2012 for $13 per share in cash. However, Human Genome’s board of directors had rejected the offer as they believed that the offer price undervalued the company. On the basis of this, Glaxo announced earlier that it will commence a tender offer to acquire the outstanding shares of Human Genome and will not take part in the strategic review being conducted by Human Genome.

The Human Genome board and management along with financial and legal advisors of the company came to the conclusion that Glaxo’s offer to acquire all outstanding common share of Human Genome was not adequate.

The board has recommended all stockholders to reject the tender offer of Glaxo and also advised them not to tender any of their shares to Glaxo. Moreover, the board declared a dividend of one share purchase right for each share of the company’s common stock at the close of business on May 29, 2012.

Offer Undervalues Human Genome

Human Genome’s board believes that Glaxo’s offer to acquire Human Genome undervalues the company’s stock. Human Genome is confident of Benlysta’s commercial potential. Benlysta is currently indicated for the treatment of systemic lupus erythematosus (SLE). Human Genome also has faith in Benlysta’s other potential indications besides the promise of its emerging pipeline.

The board also believes that the upcoming clinical and regulatory milestones in 2012 and 2013 for its potential blockbuster candidates - darapladib and albiglutide - will drive value further.

Will Glaxo Raise its Offer?

We think Glaxo will raise its bid slightly. We don’t expect Glaxo to go beyond a certain level as we believe Human Genome may find it challenging to find other suitors considering Benlysta’s lackluster performance since launch. The first lupus drug to hit the market in 50 years, Benlysta was approved in the U.S. in March 2011 and the E.U. in July 2011. Despite high expectations, Benlysta has failed to impress with first quarter 2012 sales coming in at $31.2 million.

Our Take

We believe the Glaxo takeover of Human Genome would be beneficial for the latter. Glaxo has been a long-time partner of the company. Apart from Benlysta, the companies are co-developing several pipeline products like darapladib (phase III), albiglutide (phase III) and rilapladib (phase II).

We currently have a Neutral recommendation on Human Genome which carries a Zacks #3 Rank (Hold rating) in the short run.