Daily M&A Outlook: Rethinking Human Genome Sciences as Target (HGSI, GSK)

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As you would expect now that Benlysta has been approved as the first Lupus treatment in more than 50 years, some investors are wondering and perhaps hoping that Human Genome Sciences, Inc. (NASDAQ: HGSI) could be thrown around as a takeover candidate again.  Last night it and partner GlaxoSmithKline PLC ((NYSE: GSK) finally received the long-awaited FDA Approval.

We gave a full cheat sheet on the outlook, expectations, and the reality last night at Biohealthinvestor.com so we are going to skip all of that and just jump right into the possibilities and realities of the possible M&A situation.

First and foremost, the only likely buyer that would surface immediately would be GlaxoSmithKline itself.  That might not be true down the road and perhaps another Glaxo partner might consider this.  The problem is that integrating a drug company and biotech-genomics player is already a tough call.  The two companies split the benefits now for Benlysta.

Another issue is that the $35,000 price tag is within our expected range but is not entirely a slam dunk that all coverage will get full reimbursements in all cases.  That is not much of a concern of our own, but it would be to a buyer.

Minyanville highlighted the possibilities of a buyout this morning but we are not as hopeful.  In short, our stance has not changed since the buyout rumors resurfaced in late-2010.  This is not fair to the nth degree because predicting an FDA outcome is too difficult even for a big drug company that has what should be a shoe-in approval.  Still, can you imagine being a GlaxoSmithKline board member and having to answer the question “If you knew this was such a great deal with an assured outcome, why did you not just acquire the company outright when shares were well under $5.00 less than two years ago?”

In short, Glaxo’s team looks like a hero already when it comes to Human Genome.  They got half for what now may be a mere song.  Chasing the other half today may come with too many risks. Making a more calculated decision in the months or years ahead may be more realistic.  Our take is that investors should be evaluating Human Genome on its merits today and its other pipeline rather than as a buyout candidate.

After a 13% gain today to $29.08, HGSI shares are worth about $5.5 billion and the 52-week range is $20.56 to $34.49.  Analysts from Thomson Reuters had a consensus target of $34.00 before the news, but that figure will be higher after the higher price and estimate hikes that we have seen so far.

It is a safer bet that trading will be extra-volatile over the next couple of days.  We’ll look for the dust to settle next week before evaluating these possibilities further.

JON C. OGG

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