TESARO Shares Rally On Glaxo's $5.1 Billion Buyout Offer

TESARO, Inc. (NASDAQ:TSRO) announced that it has entered into a definitive agreement with GlaxoSmithKline (NYSE:GSK) per which the latter will acquire TESARO’s outstanding shares and net debt for $5.1 billion (£4.0 billion)

Glaxo has offered TESARO’s investors $75 for each share in cash, which represents a 110% premium on the 30-day volume weighted average price of $35.67. Reportedly, TESARO had been on a lookout for a prospective buyer since last month and shares rallied late last month on buyout rumors. Although, Gilead (NASDAQ:GILD) was a front runner among prospective buyer, Glaxo’s offer comes as a surprise.

A tender offer will be made to acquire all of the issued and outstanding shares of TESARO common stock in the next 10 days. The deal is expected to be closed in the first quarter of 2019 subject to clearance from regulatory authorities. Shares of TESARO rallied 58.5% on Dec 3, following announcement of the news. Shares of the company recovered significantly following the news, with the stock down 11.3% compared with the industry’s decline of 7.6% in the year so far.

Shares of the company have been declining owing to rising competition in the PARP inhibitor segment where TESARO sells its sole marketed drug, Zejula. The drug, a PARP inhibitor, is approved as a second-line maintenance treatment for ovarian cancer irrespective of BRCA mutation. The buyout offer is a significant relief for its investors as they can sell their stake in the company at a higher price.

Although the drug has seen strong uptake since its launch, rising competition and stagnating market share of PARP inhibitors in the ovarian cancer market are concerns. AstraZeneca (NYSE:AZN) and Merck’s Lynparza and Clovis Oncology’s (NASDAQ:CLVS) Rubraca compete with Zejula in the PARP inhibitor segment. In October, Pfizer (NYSE:PFE) received approval for its PARP inihibitor, Talzenna, for treating breast cancer. Meanwhile, several other companies are also developing their PARP inhibitor candidates, including AbbVie’s veliparib, suggesting that competition will increase going forward.

Glaxo’s strong balance sheet should help to accelerate Zejula development and enable it to compete better with Lynparza, which is being developed by two of the large-cap pharmaceuticals companies. Although Clovis’ Rubraca may now be at a disadvantage due to limited availability of funds, its shares increased 10% probably on speculation of a potential buyout following TESARO’s acquisition offer.

The acquisition offer was made as part of Glaxo’s strategic review to boost its pharmaceutical business and its oncology pipeline. Earlier this week, Glaxo sold its Horlicks brand to London-based consumer giant Unilever (LON:ULVR) for $3.8 billion to focus on pharma business.

We note that Glaxo’s investors were not happy with the acquisition offer for TESARO as it seemed expensive with respect to Zejula’s future prospects. It also adds to the company’s debt, which is likely to put pressure on its margins.

Zacks Rank

TESARO 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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