Was The HGSI Acquisition A Good Move For GlaxoSmithKline?

| About: GlaxoSmithKline (GSK)

GlaxoSmithKline (NYSE:GSK) has finally put one matter to rest, as it has reached an agreement to acquire Human Genome Sciences. This brings several new drugs to the company in areas where there should be significant benefits, but I am on the fence with regard to this deal. It is gaining some new products in important areas, but two of the three additions seem a little risky. GlaxoSmithKline stock is trading at an expensive price at the moment, and outside of a decent dividend and EPS, I don't see it rewarding investors any more than it already has. Let's see why.

GlaxoSmithKline is currently trading around $47, with a trailing P/E of 14.02. It has been a stable stock, although analysts are predicting median sales drops of 5% and 2.7% over the next two quarters, respectively.

Human Genome Sciences was trading around $14 at the time of the acquisition, making the price from GlaxoSmithKline quite fair to both parties. Its market cap was roughly $2.82 billion. Based on its numbers from the trailing 12 months (as of March 31), it was having some major problems. Its profit margin was -226.76%, and it had a diluted earnings-per-share of -$1.75. GlaxoSmithKline therefore did not get the best of companies, but it does gain some potentially significant products from the acquisition.

GlaxoSmithKline has enjoyed almost a 20-year relationship with Human Genome Sciences, and it has now acquired it for $3.6 billion, which equates to $14.25 per share. As a result of this deal, GlaxoSmithKline will gain complete ownership of two experimental drugs and another medicine that is already being marketed. The market medicine is Benlysta, which is the first medicine approved for Lupus in nearly half a century. As Lupus affects about 5 million people around the world, this will be beneficial. Analysts claim GlaxoSmithKline is aware that sales and profit margins will need to increase for this to help the company, though.

Another company may be coming on strong with its lupus treatment, making this even more important for GlaxoSmithKline. At the end of June, Anthera Pharmaceuticals (NASDAQ:ANTH) reported a failure of its Lupus treatment blisibimod, which led to huge drops in its share price. Around the same time as the acquisition, however, Anthera reported new results that showed great success and sent the stock skyrocketing. As this is a smaller company with no products on the market yet, one must wonder how great of a threat this is, but it certainly shows some potential competition rising in the lupus treatment market.

The situation does not necessarily look bad with regard to GlaxoSmithKline's Lupus treatment, but it does show that a lot of work remains before the company. It will also receive the experimental drug darapladib, which is a heart drug meant to prevent heart attacks and strokes. This will be helpful, as the older GlaxoSmithKline heart drugs, Coreg and Arixtra, now face generic competition and are struggling. When GlaxoSmithKline first looked to acquire Human Genome Sciences at the end of April, it claimed that it will not know if darapladib works for two more years. I can find no indication that this estimate has changed, so this is another risky addition to the company. Furthermore, it will not have a significant impact on GlaxoSmithKline for quite some time.

The most helpful addition to GlaxoSmithKline's products will likely be the experimental type 2 diabetes drug albiglutide. This follows the banning of GlaxoSmithKline's main diabetes drug in the European Union and large restrictions in the United States. This was because of its connection to a risk of heart attack. Albiglutide, on the other hand, has achieved success in its recent study on cardiac safety. This will make the drug a good replacement for the failed Avandia.

GlaxoSmithKline also recently announced that albiglutide led to a statistically significant reduction in blood sugar levels in comparison to Merck's (NYSE:MRK) sitagliptin. It plans to seek approval in early 2013, and the drug will compete with medicine from Novo Nordisk (NYSE:NVO) and Amylin Pharmaceuticals (AMLN), which is being acquired by Bristol-Myers Squibb (NYSE:BMY). It will also compete with experimental drugs from Eli Lilly (NYSE:LLY) and Sanofi (NYSE:SFY), so there are a lot of companies it will be competing against in the diabetes market. It is good news that it will be able to compete better in this growing market, but GlaxoSmithKline is certainly not guaranteed success from this drug when considering all the competition.

With all this in mind, one has to wonder if GlaxoSmithKline will actually be able to benefit from this acquisition. I am a little optimistic, as I like to focus on the success that albiglutide has been having thus far. Furthermore, GlaxoSmithKline already knows this company fairly well, having a long-standing business relationship. I do not know exactly what it plans to do to improve sales on profit margin on Benlysta, so this is a bit risky. With the relatively small amount of competition in the field, however, I think it could do it. Darapladib is simply a risk at the moment, but all experimental drugs are a risk to some degree. With the pharmaceutical industry expected to increase overall revenue by something like 24% this next year, it might be the time to take a risk and get a decent share of that growth.

With all these risks in mind, I think there has been too much positive hype over the deal thus far, but I do not think the company is doomed either. It is simply too expensive and facing too many risks. Therefore, I do not recommend investing in GlaxoSmithKline at the moment, but I do recommend keeping an eye on it to monitor the stock's movements and how things continue to develop with the new products the company has acquired.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.