GlaxoSmithKline will take its $2.6 billion bid for Human Genome Sciences direct to shareholders this week, after its takeover offer was rejected last month by the U.S. biotech group's board.
The decision to go hostile with the $13 a share cash tender offer sets GSK up for a battle with those Human Genome investors who believe it is not offering enough.
"They will do fantastically well out of this — at $13 it is a steal," said Mark Evans, a fund manager at Taube Hodson Stonex, the sixth largest investor in Human Genome with a 5.6 percent stake.
"I still think it is very likely that they will have to pay more."
Human Genome's board spurned the approach from Britain's biggest drugmaker last month, saying it did not reflect the company's inherent value. GSK insists its bid, representing an 81 percent premium, is full and fair.
Human Genome shares closed at $14.62 on Tuesday - above GSK's offer price but still only half the peak touched in April last year, when investors' hopes were higher for its new drug for the autoimmune condition lupus, Benlysta.
GSK and the U.S. pioneer of gene-based drug discovery sell Benlysta together and the companies are collaborating on two other experimental drugs for diabetes and heart disease that could become significant sellers.
Buying Human Genome would give GSK full rights to these partnered drugs.
A spokeswoman for GSK declined to say exactly when this week the tender would be launched. It will remain open for 20 business days. The standard practice is for tender offers to proceed only if the buyer gets a majority of the shares, but there is scope to extend or amend the offer.
NO NEED TO JOIN REVIEW PROCESS
Human Genome has hired Goldman Sachs and Credit Suisse to explore strategic alternatives, including a possible sale of the company, and has invited GSK to join the process.
But GSK, which is being advised by Lazard and Morgan Stanley, said on Wednesday it would not participate in that strategic review.
"GSK's participation in the process is unnecessary as its offer is not conditioned on due diligence or financing and can be completed expeditiously," it said in a statement.
"It is important for HGS shareholders to understand that GSK is committed to proceeding with its offer."
GSK's partnership with the Rockville, Maryland-based company goes back two decades, and even though the deals between the two companies have no tricky change-of-control clauses, analysts doubt another company will emerge as a "white knight" bidder.
Any non-GSK acquirer would only get partial control of the key drugs, which could make it an unappetizing target.
GSK and Human Genome share rights to Benlysta, but GSK is in charge of developing both the new heart drug darapladib and albiglutide for diabetes.
As a result, the British-based company already owns most of the commercial upside to these products.
HOLDING THE CARDS
"Glaxo holds a lot of the cards in this story," said Navid Malik, an analyst at Cenkos Securities.
"I think Glaxo will have to raise its offer but probably not significantly ... the right price for shareholders in Human Genome would be in the mid to high-teens (dollars per share)."
Many shareholders bought into Human Genome when the shares surged from some $3 in July 2009 after impressive clinical trials results with Benlysta, when they may have paid around $15-18 a share.
Drugmakers around the world are seeking deals to get new drugs into the pipeline as older products lose patent protection, and GSK's bid for Human Genome is the latest in a recent wave of takeover activity in the sector.
AstraZeneca last month agreed to buy Ardea Biosciences for $1.26 billion to access a promising gout drug, while Roche made an ultimately unsuccessful bid for gene sequencing firm Illumina in January.
GSK said its preference was to complete the deal on "a friendly basis in a timely fashion" and it remained willing to discuss its offer with Human Genome at any time.
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