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Why Is GlaxoSmithKline Selling Its Income Stream to Royalty Pharma?

By Brian Orelli, PhD and Keith Speights - May 9, 2021 at 1:06PM

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Apparently, up-front capital is better than royalties on drugs the pharma doesn't have control over.

GlaxoSmithKline (GSK -0.17%) announced plans to sell the royalties it receives on sales of Exelixis' (EXEL -0.47%) Cabometyx and Cometriq to Royalty Pharma (RPRX -0.65%). In this video from Motley Fool Live, recorded on April 5, Contributors Brian Orelli and Keith Speights discuss the deal and why the British pharma would want to monetize its royalty stream.

Brian Orelli: Royalty Pharma raised $2.2 billion last year through its IPO. They're spending some of that to buy the royalties that GlaxoSmithKline gets from Exelixis' cancer drugs Cabometyx and Cometriq. Glaxo will get $342 million up front and then gets up to $50 million in payments contingent on approvals for the drugs in the U.S. and Europe for prostate and lung cancer. We often see smaller biotech companies doing deals with the Royalty Pharma to raise capital so that they can launch their next drug. But I was a little surprised with Glaxo doing it with Royalty Pharma, given how big it is and how much other options for access to cash it has. Any thoughts on why?

Keith Speights: Well, yeah. First, I was curious, like you, Brian. Royalty Pharma tends to do deals primarily with small biotech and I was just curious, had they done any royalty deals with larger companies in the past? And I find out they had. They have done a few deals where they bought royalties from some big drugmakers, including Pfizer and AstraZeneca. So it's not absolutely out of the norm for Royalty to make some deals with big drugmakers. But it's certainly not what they usually do. They that usually do business with smaller biotechs.

Probably the best explanation for why GlaxoSmithKline wanted to do this was given in a recent Endpoints News article, where they quoted an unnamed spokesperson from GSK that said that the company plans to use the proceeds to help fund its consumer health spinoff. In that article, the spokesperson said that Glaxo sees this as a good move because the company isn't involved in the commercialization or the development of these drugs at all. So it thought, why not monetize its interest in the drugs? That makes sense to me that that's what GlaxoSmithKline would want to do.

Their spinoff, by the way, of the consumer unit is planned for 2022. That will come pretty quickly. I guess it does make sense to some degree that GlaxoSmithKline said, "Hey, we have a better use for money with this spinoff that we're planning to do next year. We're really not involved with these Exelixis drug, so let's take the money and run." That's what they did.

Orelli: Glaxo had an option to license this drug, and I think it was part of a larger deal. Then they didn't end up taking that option. This was back in 2008. But as part of the larger deal, they get royalty on it. Basically, as you said, they have no ability to make any decisions on the drug, they just get the royalty and that's it.

Brian Orelli, PhD has no position in any of the stocks mentioned. Keith Speights owns shares of Pfizer. The Motley Fool recommends Exelixis and GlaxoSmithKline. The Motley Fool has a disclosure policy.

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Stocks Mentioned

GSK Stock Quote
$34.25 (-0.17%) $0.06
Pfizer Inc. Stock Quote
Pfizer Inc.
$48.58 (-1.40%) $0.69
Exelixis, Inc. Stock Quote
Exelixis, Inc.
$19.22 (-0.47%) $0.09
AstraZeneca PLC Stock Quote
AstraZeneca PLC
$66.50 (0.12%) $0.08
Royalty Pharma plc Stock Quote
Royalty Pharma plc
$44.17 (-0.65%) $0.29

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