Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

GlaxoSmithKline - agrees to buy Sierra Oncology for $1.9bn

GSK has agreed to buy Nasdaq-listed Sierra Oncology for $55 per share in cash, a 39% premium to the close...

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 2 years old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

GSK has agreed to buy Nasdaq-listed Sierra Oncology for $55 per share in cash, a 39% premium to the closing price on 12 April. Sierra's treatment, Momelotinib, focusses on targeted therapies for the treatment of rare forms of cancer. Momelotinib has not yet been approved by regulators. US regulatory submission is expected in Q2 this year and EU submission in the second half of 2022.

The merger's subject to shareholder and regulatory approval. If the transaction goes ahead, ''sales [are] expected to begin in 2023, with significant growth potential and a positive benefit to the Group's adjusted operating margin in the medium term'' for GSK.

GlaxoSmithKline shares were unmoved following the announcement.

See the latest GSK share price, charts and how to deal

Our view

GlaxoSmithKline is starting to look a bit more orderly.

GSK's on track to separate its Consumer Healthcare business in a demerger in mid-2022 that will hand existing GSK investors shares in the new Consumer company. New GSK is what's left behind and will house the Pharmaceutical and Vaccines businesses. It will retain a stake in the newly listed Consumer company, but this will eventually be sold off to help shore up the balance sheet.

A considerable quantity of GSK's sizeable debt pile will be passed on to the new consumer business. The consumer business will start life with a net debt to cash profits (EBITDA) ratio of up to 4.0, compared to the 2.0 times planned for New GSK. That makes sense - the consumer business is capital light and revenues should be relatively stable over the long term, unlike pharmaceuticals, allowing it to service a larger debt pile. Nonetheless the balance sheet set up means the Consumer business will probably start life with a pressing need to cut debt.

It's this need to clear up the balance sheet that's led to a 31% cut in the forecast dividend in 2022. And with the New GSK dividend expected to tick along at a lower level from 2023, and the Consumer business likely to be cutting debt at least initially, it could take years for the overall dividend to return to its current level. As with any dividend there are no guarantees.

There is, however, slightly better news on guidance for New GSK over the next five years. Operating profit growth is expected to average around 10% a year, driven by growth in Vaccines and Speciality Medicines - while more mature treatments are expected to be broadly stable over the period.

Management plans to exceed that target in 2022. The group's been helped by the moderation of Seretide/Advair sales declines, and is looking to capitalise on recently approved HIV treatments, a growing pipeline of oncology drugs and a strong vaccines business.

GSK seems to be getting its ducks in a row ahead of the break up. Still, a dividend cut in the future and a number of asset sales ahead of the spin off don't make for a promising long-term strategy. The ambitious growth targets for the future are predicated on successful trial results, but drugs fall at the final hurdle all too often. We're pleased to see progress at GSK, but uncertainty is clouding the long-term investment case.

GlaxoSmithKline's key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results (9 February 2022)

Full year revenue rose 5% to £34.1bn, excluding the impact of currency movements. This was driven by double-digit growth in Pharmaceuticals and a smaller increase in Vaccine sales. Consumer Healthcare income was flat, reflecting the impact of asset sales.

Underlying operating profit, which strips out the impact of asset sales, rose 9% to £8.8bn, helped by pandemic-related tailwinds and the benefits of cost control. This offset a 7% rise in research and development spend.

GlaxoSmithKline declared a fourth quarter dividend of 23p per share, bringing the total for the year to 80p.

The Consumer Healthcare spin-off is on track to complete in mid-2022 and more details on the stand-alone company will be available on 28 February. New GSK will remain, and management expects to see sales growth of 5-7% in 2022 and a 12-14% increase in underlying operating profits.

Revenue in Pharmaceuticals rose 10% to £17.7bn, helped by nearly £1bn in sales for the Covid-19 monoclonal antibody treatment Xevudy. Sales in the US and International divisions rose 21% and 4% respectively, while Europe saw a decline of 2% as generic competition weighed. Strong growth in New and Specialty products and ongoing cost control fed into a 15% rise in operating profits to £8.2bn.

Vaccines sales rose 2% to £6.8bn, driven by pandemic adjuvant sales. Excluding the impact of pandemic vaccines, sales declined 5% driven by lower demand for routine adult vaccinations. Operating profits fell 11% to £2.3bn, due to research and development spend and increased supply chain costs.

Declines in both the US and Europe meant Consumer Healthcare sales were flat at £9.6bn. This was largely due to the sale of some businesses, but the historically low cold and flu season also weighed on Respiratory health sales. Operating profits rose 9% to £2.2bn, reflecting the benefits of price and volume increases and the benefits of a one-time legal settlement. Free cash flow declined 18% to £4.4bn, primarily reflecting unfavourable exchange rate movements. Net debt fell by £1bn to £19.8bn.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 13th April 2022