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Is Glaxo’s $5bn cancer investment about to pay off?

Karl Loomes
Scientist filling a needle

Drug companies often have a strange relationship with investors, and the public more broadly. On the one hand, they are simply companies trying to make a profit, increasing shareholder value, as any good company should. On the other hand, and I believe a far more important one, they are creating vaccines and treatments that can change the face of medicine and save lives.

This week, GlaxoSmithKline  (LSE: GSK) announced the success of a cancer drug (that it acquired in a controversial deal at the end of last year) in stopping the spread of ovarian cancer – a disease that impacts about 300,000 women a year.

Controversial purchase

In its first major acquisition under new CEO Emma Walmsley, the $5.1bn purchase of the US biotech firm Tesaro caused some concerns for investors when it was announced in December 2018. GSK was paying a massive 200% premium for the shares, the cost being such a hit that it wiped about £5bn from Glaxo’s market value the day it was announced.

The purchase was taken as a move for Glaxo into a class of drugs know as PARP inhibitors – Tesaro’s flagship drug Zejula being seen as the main target of the purchase. GSK said at the time that it believed it could build on the drug’s success, and saw potential to expand the number of women this treatment may be able to help.

One of the main investor concerns surrounding the acquisition, aside from the expense itself, is that the Zejula treatment has fierce competition, particularly from AstraZeneca’s Lynparza drug. This competition was already causing large volatility in Tesaro’s share price and remains, to some extent, a cloud over the commercial aspects of the treatment.

Making money, saving lives

Currently only about 15% of women who suffer from ovarian cancer have a particular gene mutation that allows this PARP inhibitor treatment to be effective. These latest results, according to GSK’s Chief Scientific Officer Hal Barron, “demonstrate that Zejula has the potential to significantly benefit even more women with this devastating cancer”. This once again seems to be an example of Big Pharma making money by saving lives.

But is this enough to make Glaxo a good investment?

Not in its own right, perhaps, but taken in context, I think there are definitely some good signs. The news certainly seems to suggest the large acquisition was a smart move on the part of management, something always worth considering in a potential investment. Meanwhile, its latest quarterly results also showed some decent numbers, including increased sales, higher earnings and a number of successes with the money its current treatments are bringing in.

As with all the large pharmaceutical companies, there are concerns over the increasing market for cheaper, generic medications. Glaxo specifically said its asthma drug Advair is likely to see sales falling after a cheaper generic alternative was recently approved by the FDA.

I think even taking this into account however, there are some positive indications that GSK’s share price has room to move up — most notably its partnership with Pfizer, which has the two companies pooling their research and development for the treatment of HIV. With a current dividend yield just under the 5% mark, Glaxo is certainly going to be one I keep my eye on.

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Karl has no positions in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019