Glaxosmithkline’s Tesaro move: start of a new acquisition wave?

The $5bn transaction was surely only made possible by shrinking valuations, but investors in both Glaxo and Tesaro have reasons to be unhappy.

Glaxosmithkline’s takeout of Tesaro has set a new benchmark for biopharma M&A, and it is one that will not please many investors – the $75-a-share price is a 61% drop from its peak nearly two years ago.

This level of correction may be what it takes to get big pharma, which has complained about ambitious target valuations for years, back in the game. There is no doubt that the biggest players are eager to beef up their pipelines, and 2018’s tepid biotech investment environment may be providing other opportunities – Clovis, Puma, or Agios could be next.

A premium of sorts

The transaction values Tesaro at $5.1bn, a 110% premium over the 30-day volume weighted average price. That latter number would normally be a pleasing one to shareholders, if not for the fact that many probably bought in for more than the $75 Glaxo is offering.

Not that Glaxo investors were happy today – shares in the company plunged 7%, with concerns that it has still overpaid surely weighing. 

At $5.1bn, Glaxo is still paying above the $3.4bn net present value of Tesaro’s marketed products, Parp inhibitor Zejula and chemotherapy anti-emetic Varubi. The UK big pharma is keen on potential Zejula expansions beyond the ovarian cancer maintenance setting in which it is now approved.

Possible expansions include first line maintenance in all-comers, the first data point that will determine whether this is a smart transaction for Glaxo. The Prima trial is expected to read out in the second half of 2019 – interim data at Esmo showed a favourable side effects profile.

Beyond that there are combinations, first with VEGF inhibitor Avastin and with immuno-oncology agents Tecentriq, both Roche products, and in-house candidate TSR-042 (dostarlimab), an anti-PD-1 agent that can only be plausibly viewed as something to be used as part of a combo approach.

It is in a race against Astrazeneca’s Lynparza in achieving label expansions. For example, Astra’s agent has already scored a win in the first-line maintenance study with the Solo-1 trial (Esmo 2018 – Lynparza delivers a huge result in first-line ovarian cancer, October 21, 2018).

In VEGF combinations it is being tested with Avastin and its own cediranib, now known as Zemfirza. Astra curiously has not been aggressive on immuno-oncology combinations, but that is starting to change as it is planned to be part of the Engot-ov43 trial combining it with chemotherapy and Keytruda.

Achieving these label expansions will be key to keeping Glaxo’s shareholders happy with the short-term pain involved with the Tesaro transaction. Finance chief Simon Dingemans said the price will lower the pharma division’s operating margins 3% in 2020, and the deal will not become accretive until 2022.

Come out and play

Beyond Tesaro investors, if this deal heartened anybody it was Clovis shareholders. The Colorado-based company is the third contender in the Parp race with its agent Rubraca, and like Tesaro it had a similar profile in that it has also conducted a solo launch that has led to significant value destruction. Its shares had fallen 82% since mid-2017 through Friday’s close, but were up 17% in early trading today.

Likewise, big pharma business development departments, which have found themselves torn between the need to update pipelines and expensive-looking biotech valuations, may be feeling a little more comfortable as they look ahead to 2019.

M&A has ground to a near-halt in 2018, bolstered only by Takeda’s move for Shire (Few biopharma buyouts in quiet third quarter, October 3, 2018). Acquisitions are crucial to the sector’s innovation ecosystem, and there is probably some pent-up demand for more deals like this one (Patience is a virtue for big pharma buyers, November 20, 2018).

Glaxo has shown how to get the job done, albeit by damaging its own valuation. Its counterparts will be looking at Tesaro and updating term sheets.

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