Stock Analyst Update

The Impact of Glaxo's Divestment and Acquisition Plans

Damien Conover, CFA

 GlaxoSmithKline (GSK) announced the acquisition of Tesaro along with the finalized details of its divestment of consumer healthcare products, neither of which has a major impact on our fair value estimate. Despite the market moving Glaxo's stock price significantly lower following these announcements, we expect to keep our fair value estimate largely the same. The stock looked undervalued even before these announcements; we believe the market is underappreciating the company's solid positioning across several drug areas, vaccines, and consumer healthcare, all of which also support the company's wide moat.

The $5 billion acquisition of Tesaro gives Glaxo solid entrenchment in the PARP oncology setting by gaining cancer drug Zejula; we view the deal as largely neutral to Glaxo's valuation. While the PARP class is competitive, as Astra, Clovis, and Pfizer all have approved drugs, we believe Zejula will still represent a key treatment option in the space. In particular, if the PRIMA study with Zejula in the broader ovarian cancer population is successful in late 2019, Zejula will be differentiated by being able to treat first-line patients beyond BRCA mutations. Based on the NOVA study, the drug looks effective in non-BRCA patients, which we expect will more than double the market potential for the drug. We model annual peak sales of the drug over $1 billion. Additionally, we don't model in Zejula sales in non-small-cell lung cancer, which could significantly expand the drug's potential.

On the divestment side, Glaxo sold consumer healthcare products (including Horlicks) to Unilever for GBP 3.1 billion, which looks like a solid sale price based on other consumer healthcare asset sales. The divestment of the noncore consumer assets should allow Glaxo more focus on other consumer products with strong brand power as well as assets in the drug and vaccine segments.

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Damien Conover, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.