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Barclays downgrades GSK; warns of “significant EPS dilution” from Tesaro acquisition

Barclays reckons the GSK valuation remains appealing, but is waiting until 2019 before piling back in, as it thinks the shares might drift a little lower yet

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Tuesday was a busy day for GSK and its bosses

GlaxoSmithKline PLC (LON:GSK) shares were under pressure once again on Wednesday after Barclays cut its price target and downgraded the drugs giant to ‘equal weight’.

The changes came on the back of a busy day for Glaxo, which announced the sale of its Horlicks drinks brand to Unilever PLC (LON:ULVR) for £3.1bn, as well as the £4.0bn acquisition of cancer drug developer Tesaro Inc (NASDAQ:TSRO).

It was the latter which the analysts really took issue with, although they did concede that the immediate share price reaction on Tuesday – shares dropped more than 8% – was perhaps too “severe”.

READ: GSK to buy Tesaro

“We view the TSRO deal reaction as severe since it fails to attribute any long-term net present value accretion and implies total value destruction from the transaction,” read a note to clients.

“However it also 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.”

One of the main reasons for the Tesaro purchase is that it beefs up GSK’s presence in the lucrative cancer field, with the addition of Zejula, a PARP inhibitor.

But Barclays doesn’t think this treatment, which has already been approved for use in ovarian cancer, will be able to displace Lynparza, AstraZeneca PLC’s (LON:AZN) current best-in-class PARP.

As for Advair, the once-blockbuster chronic lung disease inhaler, Barclays still expects Mylan’s generic version to hit the market before the year is out, which will dent revenues somewhat.

Unfortunately for investors, all these means 2019 is likely to be another “down year” before 2020 brings things back to roughly where this year will finish.

“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 ‘equal weight’ post January’s upgrade. Valuation remains appealing, but 2019 will likely see better chances to revisit the story.”

Shares were down almost 3% to 1,470p.

Quick facts: GlaxoSmithKline PLC

Price: 1632.6 GBX

Market: LSE
Market Cap: £81.9 billion

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