Glaxo Responds to Elliott’s Broadside, Announces $700M Deal for 2 Brain Drugs

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Emma Walmsley, CEO of GlaxoSmithKline.


Mandel Ngan/AFP via Getty Images

A day after the activist hedge fund Elliot Advisors made its first public sally against the management team at

GlaxoSmithKline,

the company is swinging back, issuing a lengthy response and announcing a deal to develop two new drugs as potential treatments for a range of neurodegenerative disorders.

Glaxo (ticker: GSK) announced the new deal with the biotech

Alector

(ALEC) early Friday, saying that the two companies will collaborate on development of two of Alector’s drugs. One of the drugs is currently in clinical trials in patients with forms of frontotemporal dementia caused by gene mutations. The other is in an earlier-stage clinical trial, and is intended for use in more common neurodegenerative diseases.

Glaxo will pay Alector $700 million up front, with the potential for milestone payments, profit sharing, and royalties worth up to $1.5 billion.

Alector’s market value was $1.7 billion as of the close of the market on Thursday, and the stock was up 48.1% so far this year. Alector shares jumped 13.3% in the wake of the announcement on Friday.

“Working with Alector’s world class scientists will allow us to investigate the potential of these immuno-neurology therapies to help patients with frontotemporal dementia, a devastating disease without any currently approved treatments, as well as explore their ability to help patients with other neurodegenerative diseases, such as ALS, Parkinson’s and Alzheimer’s,” said Glaxo’s chief scientific officer,
Dr. Hal Barron,
in a statement.

The news comes in the wake of a broadside from Elliott, which said in a letter on Thursday that Glaxo should appoint new board members, and then “run robust processes” for choosing executives for the two companies that will emerge from the spinoff of Glaxo’s consumer-health division scheduled for next year. Elliott said it had a “significant” holding in Glaxo stock, confirming media reports that it had been buying up shares.

Glaxo’s current CEO,
Emma Walmsley,
is now slated to run so-called New GSK, the pharmaceutical company that will remain after the spinoff.

“I am a change agent, I am a business leader, and I am very excited about the new plans for a new GSK that we’re laying out today,” Walmsely told reporters on June 23, when asked about calls for her not to lead New GSK. “My focus is resolutely on leading us through this transformation, through a successful separation, and with momentum beyond that.”

In a lengthy response to the Elliott letter issued on Friday, Glaxo highlighted the plans for growth it had laid out during an investor update on June 23. “The Board and the Executive team believe that focus and stability are now critical to deliver a successful separation and the key innovation, commercial and financial targets expected for New GSK as a growth-focused company,” the company said.

Glaxo’s American depository receipt was up 0.9% on Thursday, and down 0.2% in premarket trading on Friday. The stock has been a laggard for years, and is currently down about 5% over the past three years, a period in which the S&P 500 has climbed 58.4%.

In the Thursday letter, Elliot said it believes that Glaxo “has an opportunity to generate up to 45% upside in its share price” in advance of the spinoff.

In a note early Friday, issued before the Alector deal was announced, SVB Leerink analyst Geoffrey Porges wrote that he largely agreed with the comments in the Elliott letter, but said that he disagreed with Elliott’s suggestion that Glaxo should spend more on internal research and development.

Porges, who has argued that the company’s vaccine business would be worth more on its own, wrote that the internal R&D budget has been misallocated, saying that the company has spent too much on its pharmaceutical R&D, and too little on its vaccine R&D.

“We would be more amenable to increases in pharma R&D if there were tangible, high probability, near-term, needle-moving assets in the pipeline,” Porges wrote. “In their absence, we would recommend increased investment in vaccines, and future vaccine capabilities, improved profitability, and increased return of capital to shareholders.”