Glaxo To Buy Zejula Maker TESARO For $5.1B, Stock Down 8%

GlaxoSmithKline plc (NYSE:GSK) has signed a definitive agreement to acquire small cancer biotech, TESARO, Inc. (NASDAQ:TSRO) for $5.1 billion including the latter’s debt. The acquisition price of $75 per share in cash represents a premium of 110% to TESARO’s 30-day average price.

Emma Walmsley, the U.K pharma giant’s chief executive officer, has since long made it clear that Glaxo will focus on growing its pharmaceuticals business. The acquisition of TESARO will add its ovarian cancer drug, Zejula to Glaxo’s product portfolio and strengthen the latter’s position in the oncology market.

Zejula, an orally-available PARP inhibitor, was approved in the United States and EU last year as a second-line maintenance treatment of recurrent ovarian cancer patients. Zejula recorded sales of $166 million in the first nine months of 2018.

Meanwhile, TESARO is looking to expand Zejula’s label into other treatment settings for ovarian cancer and additional cancer types like lung, prostrate and breast, which, if approved, can increase the drugs’ sales prospects. In addition to Zejula, TESARO has three other candidates in its pipeline, which are being evaluated in early-stage studies in multiple tumor types.

Glaxo’s shares declined around 8% on Monday as the investor community felt Glaxo is overpaying for TESARO considering that Zejula is at an early stage of commercialization in a fiercely competitive market. So far this year, Glaxo’s shares have underperformed the industry, rising 8.8% compared with an 11.3% increase for the industry.

While the ovarian cancer market provides immense commercial potential, competition in the PARP inhibitor segment is fierce with two other PARP inhibitors also marketed for the ovarian cancer indication — Merck/AstraZeneca’s (NYSE:AZN) Lynparza and Clovis Oncology, Inc.’s (NASDAQ:CLVS) Rubraca. Importantly, Lynparza is already approved to treat breast cancer while Zejula is not. Pfizer’s Talzenna (talazoparib), also an orally-available PARP inhibitor, was approved recently for advanced breast cancer. Meanwhile, several companies are developing PARP inhibitors including AbbVie’s veliparib. Moreover, the market share of PARP inhibitors, a fairly new class of cancer medicines, has also stagnated in the ovarian cancer market recently.

Shares of TESARO, which has long been seen as a potential takeover target, shot up 58.5% on Monday. Earlier on Monday, Glaxo announced that it is divesting its Horlicks and other nutrition products business in India and Bangladesh to Unilever (LON:ULVR) for 3.3 billion euros ($3.8 billion) in a cash and stock deal. The cash from the divesture is expected to be used to fund the purchase of TESARO.

Glaxo said the acquisition will hurt its adjusted earnings per share (EPS) by a mid to high single-digit percentage in the first two years. By 2022, however, the TESARO deal is expected to be accretive to adjusted EPS. Though Glaxo maintained its 2018 adjusted EPS growth expectations in the range of 8-10% at constant exchange rates (CER), it lowered its long- term earnings growth expectations. It now expects to be at the bottom end of the mid-to-high single digit adjusted earnings growth expectations in the 2016-2020 period. The transaction, expected to be completed in the first quarter of 2019, already has the approval of TESARO’s board of directors. However, consent of regulators and shareholders is required before it can be closed.

Glaxo currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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