Glaxo's $5 Billion Takeover of Tesaro Seen as Too Expensive

(Bloomberg) -- GlaxoSmithKline Plc Chief Executive Officer Emma Walmsley bolstered a thin roster of new treatments by agreeing to buy drugmaker Tesaro Inc. for $5.1 billion, gaining a foothold in the field of cancer for a price analysts deemed high.

After announcing a deal to pay $75 a share for Tesaro, about 62 percent more than the stock's Friday close in the U.S., the U.K. pharma giant saw its stock sink the most since 2008. Tesaro's biggest drug, Zejula, isn't expected by analysts to reach $1 billion in sales until 2023.

Glaxo fell as much as 7.4 percent in London, wiping off $7 billion in market value -- about $2 billion more than it's paying for Tesaro. The U.S. company gained as much as 59 percent in early New York trading.

Walmsley has been working to revitalize a lackluster pipeline of new drugs at Glaxo, culling programs to focus on those that look most likely to succeed and bringing in industry veteran Hal Barron to oversee research. Tesaro complements Glaxo's existing immune-oncology portfolio, and the company will be able to identify more patients for Zejula with targeted testing, Barron said on a conference call.

Glaxo needs to bolster its pipeline “but given the competition Tesaro faces with other PARP inhibitors and the relative lack of synergies with Glaxo's existing oncology pipeline, we are not convinced that this is the best way to do so,” Graham Doyle, an analyst at Liberum Capital, said in a note to clients.

The deal's high price means Tesaro will only add modestly to Glaxo's earnings while increasing debt, James Gordon, a JPMorgan Securities analyst, said in a note to clients.

Glaxo currently has the thinnest selection of late-stage products in development among Europe's top six drugmakers, according to Bloomberg Intelligence's Cinney Zhang. The company had sold most of its late-stage assets in the lucrative cancer field to Novartis in 2014 for as much as $16 billion.

The agreement came just hours after Glaxo agreed to sell a unit in India that produces the malted-milk drink Horlicks to Unilever for about $3.8 billion, and the deals are an indicator of how Walmsley wants to deploy capital at the U.K.'s biggest drugmaker.

Investors are also displaying nervousness around Glaxo's strategy and debt levels. The company had said in March that a review of Horlicks and other nutrition products was to support funding for its buyout of a consumer healthcare joint venture from Novartis.

‘Step Change'

As part of her management shakeup, Walmsley brought on Kevin Sin, known for overseeing oncology deals at Genentech. The Tesaro deal represents “a step change for GSK's pipeline” in cancer, Walmsley said in a conference call. “This is going to be part of the acceleration and the change in the growth prospects for the group.”

Zejula, approved to treat ovarian cancer, could work on multiple forms of the disease, including tumors of the lung, breast and prostate, according to Glaxo. It functions in a similar way to AstraZeneca Plc's Lynparza, by blocking a protein called PARP that also fixes damaged DNA; inhibiting the protein increases the likelihood that tumor cells with existing mutations will die, rather than repair the mistakes and continue growing.

Tesaro had been looking into a potential sale as early as last month, according to people familiar with the company. The Waltham, Massachusetts-based drugmaker has been under pressure as Zejula delivered disappointing data in lung cancer, one of the most lucrative areas in oncology, at a medical conference. The shares have lost 44 percent so far this year.

Glaxo is advised by PJT Partners and Bank of America Merrill Lynch, which is also acting as corporate broker. Legal advice is being provided by Shearman & Sterling LLP, with Slaughter and May advising on the acquisition facility.

Tesaro's financial advisers are Citi and Centerview Partners. Legal advice is being provided by Ropes & Gray and Hogan Lovells.

--With assistance from Marthe Fourcade, Naomi Kresge, Chitra Somayaji and Ruth David.

To contact the reporter on this story: John Lauerman in London at jlauerman@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, John Lauerman

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