Has Glaxo paid too much for Tesaro?

Pharma giant Glaxo is going back to basics by buying biotech company Tesaro. But was the $5bn price tag too steep? Matthew Partridge reports.


GSK's Walmsley: succumbed
(Image credit: © Charles Best Photography Ltd)

The pharma giant is going back to basics by buying biotech company Tesaro. But was the $5bn price tag too steep? Matthew Partridge reports.

Emma Walmsley, boss of GlaxoSmithKline (LSE: GSK), has previously said she is determined to avoid the tendency of big company CEOs to drift "into areas of drug research and development that prove pricey and unproductive", says Lex in the Financial Times. However, "she seems to have succumbed to it in buying Tesaro". The $5bn that GSK paid for the biotech company "is a steep 110% above the average price of the past 30 days". So it's perhaps no surprise GSK's stock slipped by 8%, "despite a crowd-pleasing and unrelated announcement of the $3.8bn divestiture of the Horlicks consumer brand to Unilever".

The takeover premium on the Tesaro deal "looks enormous", agrees The Guardian'sNils Pratley. And the cost of the deal will reduce earnings over the next two years while many benefits "won't be felt until 2022". By contrast, "the Horlicks collection offered the warm glow of predictable cash flows". Nonetheless, shareholders "cannot grumble" about Walmsley's decision, since biotech is the kind of industry where big pharma "has to swallow hard and pay up to back its scientific analyses".

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Building up the oncology pipeline

The acquisition also makes sense given Walmsley's plans to reverse her predecessor's strategy of "swapping cancer drugs for toothpaste" by taking "a bigger bite of the oncology market", says Alex Ralph in The Times. In particular, the deal "fast-tracks the development of Glaxo's oncology pipeline by giving it access to an ovarian cancer treatment called Zejula". The drug "is among a cutting-edge class" of new treatments known as PARP inhibitors. Indeed, this takeover could be compared to AstraZeneca's decision to buy MedImmune in 2007. Although Astra was criticised for overpaying, the deal has "shown signs of paying off, with the Cambridge-based company boasting an emerging pipeline of drugs, particularlycancer treatments".

Don't get too excited, says Bloomberg's Max Nisen. Zejula has "sluggish sales" and the rest of Tesaro's pipeline is "unproven". And it's not the only firm working in this area. A competitor drug, AstraZeneca's Lynparza, has already generated "formidable data", in contrast to Zejula's "issues" with side effects. What's more, Glaxo's commitment to its dividend and significant debt load means the deal "will have it walking something of a financial tightrope", especially given any increased spending on clinical trials.

But for biotech investors, says Charley Grant in The Wall Street Journal, the deal is definitely good news. It suggests biotech is rebuilding momentum after a sharp decline in share prices since September. Two biotechs also managed to "raise significant money... last week" more evidence that "the recent selloff hasn't [affected]demand for promising biotech projects".

Shell bosses' bizarre incentive scheme

Shell's latest plan sounds "stark staring bonkers", says James Moore in The Independent. The oil giant's main product is a key cause of global warming. But it says it will link bosses' pay to carbon footprint reduction targets.

This sounds "a bit like linking the pay of the bosses of pest control company Rentokil Initial to killing fewer cockroaches".Net carbon footprint targets for three to five year periods will be incorporated into a new executive pay plan.

"Its easy to be cynical" about this move, says Management Today. After all, "if Shell really wanted to cut carbon emissions, it'd simply get out of the oil trade and open a few thousand wind farms". Nevertheless, "linking pay to specific, short-term emission reduction targets is proof those targets aren't mere greenwash". After all, "incentive-based remuneration does have a habit of focusing the mind". With carbon emissions "in the mix", this is a "clear commitment to challenge the status quo". Both Shell and the investors who persuaded the board of the move "should be applauded".

Hang on, says Liam Proud on Breakingviews. The plan is still "too vague to judge whether Shell's serious". There won't be a specific proposal on carbon-linked pay put to hareholders until 2020.

Shell's broader aim of halving its net carbon footprint is "expressed relative to the amount of energy it produces". This means the oil major "could ramp up output, pollute just as much and still claim success". Overall, the group is merely "taking baby steps" towardsa greener future.

City talk

One of the best bets for clients of spread-betting firm IG Group early this week "would have been to short the company's own shares", says Lex in the Financial Times. They have since fallen by more than 10% on the news that the number of new bettors had slumped by almost a fifth year-on-year in the six months to the end of November. The decline was due to European regulations increasing the amount of margin that clients need to put up and bans on products such as binary options. Still, the reaction seems "overdone" given the company's skew towards "opportunities that may not be spoilt by regulatory intervention", such as foreign exchange.

Unilever's Paul Polman (pictured) has stepped down as CEO after ten years, with his "dreadful" plan to move to the Netherlands, now ditched, still "fresh in the memory", says The Guardian's Nils Pratley. Still, he had "a terrific innings". The shares rose "twice as fast as the FTSE 100 index" and he fended off Kraft Heinz's takeover bid with a "brilliant counterattack against a previously feared corporate raider". No-one would want to alter his "long-termist strategy".

Shares in Thomas Cook plunged 15% early this week, and are now down by 80% since the end of May. This week's decline occurred despite there being "little fresh news" after a profit warning last month, says Jim Armitage in the Evening Standard. Short-sellers have rushed in, anticipating a discounted rights issue to raise cash: analysts at Berenberg think the group, which owes £389m, needs £400m to survive. "But they could be wrong." Banks have just approved a new debt package and auditors are checking the balance sheet for "nasties". Time for "a punt"?

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri