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Deal DNA

9 May 2012 By Robert Cyran

There’s a certain déjà vu to GlaxoSmithKline’s bid for Human Genome Sciences. Britain’s biggest drugmaker is bypassing its target’s board with a $2.6 billion offer – and has implied its price is firm. The strong links between the two companies probably rule out a white knight. But echoes of Roche’s 2008 tilt at Genentech suggest there may yet be a sweeter bid coming.

As it went hostile on Wednesday, GSK said it wouldn’t take part in Human Genome’s strategic review because its offer isn’t conditional on due diligence or financing. That seems to eliminate a page from the aggressor playbook. Typically, if the market doesn’t bite on the initial bid, the suitor takes a closer look and discovers reasons to justify a higher price. GSK is signaling to Human Genome holders there won’t be any more forthcoming.

GSK can afford to act antagonistically because it knows it’s unlikely to face competition. GSK already sells Human Genome’s treatment for lupus and is developing two of its other products under license. Pharmaceutical companies prefer unencumbered drugs and collapsing the partnership also means synergies, thereby justifying a higher price than rivals might pay.

History, however, suggests GSK may have to up the ante. Roche had a stronger lock over Genentech, owning a majority stake and licenses to its new drugs. And when Genentech’s board balked, Roche tried to put more pressure on shareholders by going hostile with a lower offer than its initial salvo. Yet Roche eventually caved and paid 7 percent more than its original bid.

The reasons are somewhat universal. Buyers in the industry don’t want to alienate scientists who own the stock. Approved drugs with blockbuster potential are few and far between. And while merger arbitrageurs are happy to lock in profits, traditional biotech investors tend to be an optimistic lot and often hold out for more. Only about 30 percent of Human Genome shares are owned by deal traders, leaving the majority concentrated in big funds that could wait GSK out.

The market obviously thinks that’s the case. Human Genome shares are trading 11 percent over the offer price. It’s one more reason to think this deal’s DNA might be mapped from Genentech’s.


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