Barclays downgrades Glaxo on Tesaro acquisition

Barclays has cut GlaxoSmithKline to 'equalweight' from 'overweight' and trimmed the price target to 1,600p from 1,750p after the pharmaceuticals giant announced earlier in the week that it was selling its Horlicks business and other consumer health brands to Unilever for £3bn and buying US drug company Tesaro for $5.1bn.

It said that while the share price reaction to the Tesaro deal was "too severe" as it fails to attribute any long-term net present value accretion from the deal, it reflects the "near-term truth of significant earnings per share dilution".

"In context of generic Advair looming, softening HIV trends, Shingrix hitting defined capacity constraints and a lack of meaningful R&D catalysts before H2’19 that will compound 2019-20’s outlook challenges," it said.

Barclays said that not only will the deal defer the return to EPS/dividend growth but it now seems clear that next year will be a down year before 2020 brings us broadly back to where 2018 will end.

"Broader macro/Brexit concerns may continue to offer some short-term support, but with GSK having been one of 2018’s better performers we cut to EW post January’s upgrade."

Barclays said the stock's valuation remains appealing, but 2019 will likely see better chances to revisit the story.

GSK said on Monday that the acquisition of Tesaro would accelerate the build of its pipeline and commercial capability in oncology. Tesaro's major marketed product is Zejula (niraparib), an oral poly ADP ribose polymerase (PARP) inhibitor currently approved for use in ovarian cancer.

However, Barclays argued that there is no easy route for Zejula to displace AstraZeneca's Lynparza as best-in-class PARP.

At 1500 GMT, Glaxo Shares were down 2.5% to 1,473.20p.