What's going on?
British pharmaceutical company GlaxoSmithKline (GSK) announced on Monday that it was dropping $5 billion on American biotechnology firm Tesaro – and its stock sank while Tesaro’s skyrocketed.
What does this mean?
Tesaro develops drugs for treating cancer. Its flagship ovarian cancer treatment, Zejula, is expected to bring in around $235 million in sales next year, rising to $1 billion by 2023. As well as having a bunch of other drugs in the works that could strengthen GSK’s oncology offering, Tesaro’s currently investigating whether Zejula might be effective at fighting other types of cancer.
Although Tesaro is “commercial-stage” (i.e. it’s actually selling approved drugs to the public), as a biotech company its primary focus remains research and development of new medicines – GSK doesn’t expect it to contribute profit until 2022.
Why should I care?
For markets: GSK’s gambling to win.
GSK is paying a serious premium for Tesaro: 110% more than its average stock price over the past month. Tesaro shareholders loved the deal for obvious reasons, sending its stock soaring 59%. GSK shareholders, on the other hand, were feeling the fear: they sent its stock down 7%. There are a number of risks: Zejula is currently approved in Europe and the US, but GSK would need to obtain more permissions to sell it further afield. The drug is also still undergoing clinical trials before it can be rolled out beyond certain particular cases of ovarian cancer (i.e. to more people). Plus, there’s no guarantee the other drugs in Tesaro’s pipeline will pan out.
The bigger picture: A GSK trade-in.
In other GSK news on Monday, the company confirmed that it’s selling its Indian nutrition business – generating cash that’ll help it pay for Tesaro. Whereas consumer healthcare products like Horlicks or branded toothpaste are, to some extent, luxuries that might get ditched if the global economy heads south, cancer treatments are likely to remain in demand. This could attract stability-seeking investors and help GSK better navigate through tough times.