GlaxoSmithKline investors cheered when the company said it would finally spin off its consumer unit after swallowing Pfizer’s. But the company’s other December deal, for Tesaro, didn’t sit quite so well at first.
When GSK first unveiled the $ 5.1 billion pact—which closed Tuesday—investors weren’t surprised that the company had made a move in pharma, which it’s called its top priority. But “they were initially a little bit surprised that it was Tesaro,” chief strategy officer David Redfern said in an interview at the J.P. Morgan Healthcare Conference.
The PARP drugmaker “was seen as a little bit of a fallen angel,” after phase 1 data on an immuno-oncology combination underwhelmed investors and sent shares tumbling in November. And investors wondered what the company was doing “kind of buying something that wasn’t a big story” and “had its issues”—one of those being a behemoth PARP competitor in AstraZeneca and Merck’s Lynparza.
Since then, though, they’ve come around, Redfern said, in part because Glaxo’s been able to make the case that the buy was “really a bet on the PARP market and the opportunity being much bigger than people currently think.”
The treatment paradigm in ovarian cancer, the first PARP battleground, “has still got a long way to evolve,” Redfern said, and “it’s not really clear” yet what’s best in terms of treatment. And the idea that Tesaro’s Zejula could make a bigger splash than anticipated has “definitely started to resonate with investors,” he said.
The other reason investors balked at first? They feared changes to the company’s hallowed dividend, but those worries have “subsequently been mitigated by the Pfizer deal,” which followed just a couple of weeks later. And that pickup has faced “very little pushback on any aspects of it,” Redfern said, noting that 2019’s JPM meetings were “the best set of investor meetings I’d had in 10 years.”
While investors have been clamoring for a consumer spinoff for years, they’re now happy to wait for one on GSK’s three-year timeline, particularly because the company knows what it’s doing when it comes to consumer health mergers. After integrating Novartis’ OTC assets, delivering cost savings and upping the business’ margins, Redfern figures GSK has gained credibility in that regard.
“I think if we had tried to argue that having a world-leading group of that scale and value inside GSK, when it isn’t the main priority and we’re saying capital allocation to pharma is the main priority, that would have been a much tougher message,” he said. “The fact that we’re prepared to say up front, ‘We’re going to spin it in three years,’ I think, that got a big tick. That’s resonated.”