Investing in Biotech Stocks: The Latest Buyout Candidate

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The biotechnology buyout binge continued this week, driving profits for those investing in biotech stocks.

The sector's latest M&A news picks up a story that began in April, when Human Genome Sciences (Nasdaq: HGSI), the U.S. pioneer of gene-based drug discovery, rebuffed a $2.6 billion bid from Britain's GlaxoSmithKline (NYSE ADR: GSK).

Human Genome argued the unsolicited bid did not reflect the company's inherent value. GSK adamantly insisted its bid, an 81% premium when settled upon on April 18, is full and fair.

UK-based GSK is not taking the rejection sitting down.

On Wednesday, the pharmaceutical giant announced it is planning to go directly to Human Genome's shareholders this week. The move to go hostile with the $13 a share cash tender offer paves the way for an almost certain prolonged battle with the company's shareholders and board.

The Rockville, MD-based biotech's top 10 investors, as a group, own 78% of the shares. That solidly positions the bunch to have a major say in the company's fate.

Mark Evans, a fund manager at Taube Hodson Stonex, the sixth-largest investor in Human Genome, told Reuters, "[GSK] will do fantastically well out of this — at $13 it is a steal. I still think it is very likely that they will have to do more."

Why GSK Wants the Deal

Shares of the volatile Human Genome last month were trading at nearly half the peak reached in April of 2011, when investors' hopes were stoked for the company's drug Benlysta, a new treatment for the autoimmune condition lupus.

Benlysta is a huge reason behind this deal.

GSK and Human Genome sell Benlysta jointly. The two companies also are in the midst of collaborating on two other experimental drugs in late-stage trials for diabetes and heart disease. Both have the potential to be blockbuster sellers.

Acquiring Human Genome would give GSK full rights to all of these partnered drugs. GSK shareholders stand to reap the rewards of possible profit windfalls that GSK could bring in with these new treatments, and with the development of future epic drugs.

The bid highlights GSK's priority of boosting its product line and keeping shareholders happy with efficient spending.

The offer also underscores big drug makers' voracious appetite for more biotech products to stock their shelves.

As for what the deal would do for Human Genome, it gives the storied biotech company a stable parent with deep pockets to fund its cutting edge research.

The Next Step for Human Genome

Human Genome has hired Goldman Sachs and Credit Suisse to explore strategic alternatives, which include a possible sale of the company, and has extended an invitation to GSK to join the process.

GSK is working with Lazard and Morgan Stanley. In a statement the company said, "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 is important for HGS shareholders to understand that GSK is committed to proceeding with its offer."

It is unlikely that a "white knight" bidder will come to Human Genome's rescue, so GSK certainly appears to have the upper hand in this biotech battle.

But a higher price can be expected.

"I think Glaxo will have to raise this offer but probably not significantly…the right price for shareholders in Human Genome would be in the mid to high-teens," Navid Malik, an analyst at Cenkos Securities, told Reuters.

GSK has maintained that it wanted to play nice with Human Genome and complete the deal on "a friendly basis in a timely fashion."

But, friend or foe, GSK aims to get the deal done.

Investing in Biotech Stocks: A Big Buyout Year

Human Genome and GSK are among the big biotech names scrambling to secure profits and build a medicine chest of products this year.

You see, several of their most lucrative blockbuster drugs are coming "off patent," which means these drug giants face the prospect of losing billions of dollars in sales.

The M&A possibilities – as well as deep pipelines – have triggered surging investor interest in the biotech sector.

"Biotech stocks continue to do well around the world-not surprising, given the optimism that more FDA approvals may be in the works in 2012 than in past years," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.

"Personally, though, I'm far more excited by the potential for mergers and acquisitions, particularly when it comes to early-stage companies working in vaccines and oncology," Fitz-Gerald continued. "Both sectors are key acquisition targets for Big Pharma, offering quicker time to market and a bigger delivery pipeline."

Human Genome has soared 97% year-to-date. It slipped 0.21% Wednesday to close at $14.59. GSK fell 1.13% to $45.50.

[Editor's Note: Handicapping buyout targets is a tall order. But we've already done the hard work for you.

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