ii view: GlaxoSmithKline buys US biotech Sierra for $1.9 billion

With a separation of its Consumer business pending, this acquisition is aimed at boosting its drug portfolio. We assess prospects. 

Acquisition of Sierra Oncology for $1.9 billion in cash

ii round-up:

FTSE 100 pharmaceutical and consumer healthcare company GlaxoSmithKline (LSE:GSK) today announced the acquisition of US biotech company Sierra Oncology (NASDAQ:SRRA) for $1.9 billion (£1.5 billion) in cash.

California-based Sierra looks to develop and deliver targeted therapies that treat rare forms of oncology or cancer. GSK is paying $55 per share, a 39% premium to Sierra’s closing price prior to the acquisition announcement. 

GSK shares were little changed in early UK trading having risen by almost two-fifths over the last year. Shares for Covid vaccine and cancer drug maker AstraZeneca (LSE:AZN) are up by close to 50% in that time, and veterinary drug maker Dechra Pharmaceuticals (LSE:DPH) has gained around 10%, similar to the FTSE 100 index. 

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Sierra’s core product, momelotinib, which remains under phase III clinical trials, treats Myelofibrosis, a fatal disorder of bone marrow which limits its ability to make blood cells. That complements and strengthens GSK’s own existing expertise in haematology and blood cancers.

Momelotinib offers a differentiated treatment option that could address the significant unmet medical needs of myelofibrosis patients with anaemia, the major reason patients discontinue treatment. If, as expected, momelotinib is approved by the US in 2022, sales will begin in 2023.  

Nasdaq-listed Sierra Oncology made a net loss of $95 million in its 2021 financial year.

Glaxo continues to pursue plans to demerge its Consumer Healthcare business later this year. Its first-quarter results are scheduled for 27 April. 

ii view:

GlaxoSmithKline employs over 90,000 people globally. Pharmaceutical sales including speciality medicines currently dominate at around 52% of overall turnover, followed by Consumer Health at 28% and Vaccines the balance of 20%. Geographically, the US accounts for around half of both Pharma and Vaccines sales, and a third at the Consumer Healthcare division.  

GSK’s potential new R&D product pipeline detailed in 2021 full year results consisted of 21 vaccines and 43 medicines, of which 22 were in pivotal trials. It achieved three new major product approvals during 2021, including Jemperli for endometrial cancer.

For investors, a separation of its Consumer Healthcare division reduces business diversification, adding pressure on its pharma and vaccine business to deliver new profitable drugs over the longer term. Its HIV business is facing competition from rival Gilead (NASDAQ:GILD), while the planned separation of the Consumer business will see the dividend payment adjusted across the two companies. 

More favourably, the acquisition of Sierra supports its development of a portfolio of new specialty medicines and vaccines. A separation of its Consumer Healthcare business adds sharper management focus to each and could also make them an easier and more attractive takeover target. Cost savings remain a management focus, while an estimated future dividend yield of 3% is not to be dismissed in the current environment of still low if rising interest rates. For now, and with significant change pending in 2022, Glaxo shares look to remain worthy of continued investor support. 

Positives

• R&D pipeline comprises 64 vaccines and specialty medicines
• Defensive qualities. Consumers need medicines even in a recession

Negatives

• Vaccine sales fell 3% over the full year 2021
• Currency movements can hinder

Market Consensus:

Strong hold