GlaxoSmithKline’s (GSK) share price took a dent yesterday, falling 7% on confirmation that rumours of a $5 billion+ cash buy-out of cancer-focused biotech company Tesaro were true. The huge acquisition, reported to be $5.1 billion all cash, represents the pharma giant’s first major deal under the stewardship of new CEO Emma Walmsley, who took over from Sir Andrew Witty following his retirement in March of last year.
GSK investors appear to believe that the agreed price represents a risky premium at a huge 200% above Tesaro’s share price prior to strong rumours beginning to circulate. The price GSK has agreed to pay is even 63% higher than the biotech’s closing market valuation of last Friday. GSK’s incentive to pay the premium is the promise of Tesaro’s Zejula cancer drug. It is PARP inhibitor which blocks an enzyme used by cancer cells to repair any damage to their DNA.
The class of biotech drug is being demonstrated to be particularly effective in the treatment of ovarian and prostate cancers and GSK believes it may also be effective for breast cancers and non-small cell lung cancer. Research into how PARP inhibitors might also work in combination with immunotherapy drugs is also currently ongoing. Tesaro expects to report sales of Zejula worth between $233 and $238 million for 2018.
Following a 2018 slowdown in major M&A deals involving promising biotech companies, the industry will hope the GSK-Tesaro deal will spark the sector back to life for 2019. A large part of the acquisition’s cost to GSK will be covered by the $3.75 billion sale of its consumer nutrition business to Unilever which was also confirmed yesterday. That move had buoyed the GSK share price prior to the announcement of the Tesaro acquisition, which knocked $5 billion from the company’s market capitalisation.
While more conservative investors in GSK are likely to be those who reacted negatively to yesterday’s news, others believe the price agreed is fair within the context of other deals. Merck agreed to pay up to $8.5 billion for a 50% stake in Lynparza, whose core product is also a PARP drug, a little over a year ago. GSK’s acquisition of Tesaro will be at a better price, if the drug class delivers on its promise. The Merck-Lunparza deal has a significant performance-based element whereas GSK have agreed to take on more risk with an all-cash, upfront price.
A unnamed major biotech investor was quoted in the Financial Times and commenting:
“GSK have taken advantage of low valuations in the sector and a dislocation that has existed for a few months as investors began to think that the big pharma companies had stopped buying up biotechs.”
GSK had reached a point where the company had to choose between settling for a medium term future as a dividend paying cash cow or taking on some risk to drive a growth strategy. Walmsley now appears to have set out her stall as a CEO who will take the latter approach.