Making the best of a bad situation

GSK forgoes partnership, makes surprise acquisition offer for Genelabs Technologies

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LONDON—With market conditions continuing to squeeze Big Pharma and small biotechs alike, longtime hepatitis drug discovery partners GlaxoSmithKline plc and Genelabs Technologies Inc. announced last month a definitive agreement in which GSK will acquire the Redwood City, Calif.-based firm for approximately $57 million through a tender offer of $1.30 per share in cash.

The acquisition offer—which GSK says will boost its work on small molecule hepatitis C virus (HCV) therapies—was as much a surprise to Genelabs as it was to financial analysts and the pharmaceutical community, as GSK quickly turned what had been discussions about a potential HCV partnership into a tender offer representing a 465 percent premium over Genelabs' 23 cents-per-share closing price on Oct. 29. Following news of the deal, Genelabs shares soared 430.4 percent to close at $1.22 on Oct. 30, a gain of 99 cents in one day.

Genelabs, which originally partnered with GSK in 1992 on a licensing deal for a hepatitis E vaccine, will become part of GlaxoSmithKline's infectious diseases drug discovery organization. GSK will gain full rights to the hepatitis E vaccine that was previously licensed, as well as a preclinical HCV program and a Phase III lupus treatment. Pending regulatory approval, the tender offer is expected to close this month.

"We decided to partner out one or more of our programs to a large pharma this year, and because of our previous relationship with GSK, we viewed them as a preferred partner," says Genelabs President and CEO Fred Driscoll. "GSK took the lead in those discussions, and at the last moment, they decided not to go forward with a research collaboration deal, but to acquire the company instead. GSK is a good fit for Genelabs because even though it is a giant company, its approach is very entrepreneurial and creative."

GSK declined to comment on the acquisition offer, but Zhi Hong, senior VP of GSK's Infectious Diseases Centre for Excellence in Drug Discovery, said in a statement that the arrangement, combined with the pharma's other collaborations, will give GSK a broad HCV drug discovery platform.

"Genelabs has demonstrated a strong track record in HCV drug discovery and identified numerous novel classes of inhibitors that target unprecedented mechanisms in the virus' life cycle," Hong said in the statement.

Driscoll says Genelabs views GSK's offer as a "landmark one in the small biotech space," especially in a troubled global economy.

"Wall Street has a big sign on it right now that says, 'Closed for the season," Driscoll says. "It's extraordinarily difficult for small companies like us to raise money. I think the 300 small biotechs out there will be facing some real challenges over the near term. Like Genelabs, most of them are not even being valued at the amount of cash they have in the bank. At the same time, if you're in Big Pharma and you don't have a deep enough pipeline, this is an opportune time to come in and cherry pick these companies and their assets in a very economical way." DDN

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