GSK’s $11 bln cancer punt is worth the risk
BREAKINGVIEWS-GSK’s $11 bln cancer punt is worth the risk The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Aimee Donnellan
DUBLIN, June 9 (Reuters Breakingviews) - GSK's GSK.L swoop on Nuvalent NUVL.O is less of a gamble than it looks. On Tuesday, the UK drugmaker snapped up the U.S. lung cancer specialist for nearly $11 billion, multiples of what new CEO Luke Miels had planned to spend on any single deal. But he also looks to be paying a fair price for two key drugs expected to win U.S. regulatory approval this year — which could plug a looming revenue hole.
Miels took the reins from Emma Walmsley in January at a difficult moment. GSK faces a painful 2028 patent cliff when its star HIV treatment, which accounts for over 15% of the company's £33 billion in annual revenue, loses some U.S. protection. A string of disappointing trial results has left the stock trading at just 10 times expected earnings, well behind AstraZeneca AZN.L and Novartis NOVN.S at 17 and 16 times respectively. Given Miels said in February he would target relatively modest deals in the $2 billion to $4 billion range, pouncing on Nuvalent is something of a departure.
Biotechs are, meanwhile, notoriously hard to value. Nuvalent has no sales or profits yet, complicating relative valuation metrics. Skewed results from small changes in input assumptions also make bankers wary of using discounted cash flow analysis for pharma deals. A simpler approach is to estimate when the group will hit peak sales. Analysts polled by Visible Alpha expect the Massachusetts-based company to generate $4.2 billion in revenue by 2035. Divide that into the $10.6 billion purchase price and Miels is paying roughly 2.6 times forward sales, slightly below the 2.7 times 2035 sales that GSK itself trades on.
Other factors support the idea of a fair price. Miels' 40% premium looks pretty modest compared to the 159% one Pfizer PFE.N paid for Metsera last year or the near 90% premium Biogen BIIB.O paid for immunology and rare disease expert Apellis in March. And in pharma, blockbuster drugs — those generating $1 billion or more in annual sales — are typically valued by bankers at up to 5 times revenue. If Nuvalent’s late-stage treatments hit that milestone, each one alone could be worth $5 billion or more. That makes a $10.6 billion price tag look reasonable given Miels is also buying earlier stage drugs too.
The bigger prize is what this does to the sales outlook. Miels has promised over £40 billion in revenue by 2031, which means generating another £7 billion while simultaneously plugging the hole left by expiring HIV patents. Before his latest deal, analysts polled by Visible Alpha had him falling well short at £35 billion. Assuming that Nuvalent's drugs aren't duds, he is going some way to solving the problem.
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CONTEXT NEWS
GSK on June 9 agreed to buy U.S.-listed cancer drug developer Nuvalent for $10.6 billion.
The all-cash deal values Nuvalent at approximately $124 per share, a 40% premium to its last closing price.
The deal is expected to add to the drugmaker's existing sales target, the company said.
Net of cash acquired, GSK's aggregate investment is estimated to be $9.4 billion, the British company said, adding that the deal is expected to add to sales and operating profit in 2027 and core earnings per share in 2029.
Shares in GSK were down 2.7% by 0811 GMT on June 9.
(Editing by George Hay; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on DONNELLAN/Aimee.Donnellan@thomsonreuters.com))