GlaxoSmithKline (GSK) recently announced its decision to increase its holding in its consumer healthcare subsidiary in India from 43.2% to up to 75%. Glaxo plans to increase its stake through a voluntary open offer. The offer, worth approximately £591 million, represents a premium of about 28% over the market price of the Indian subsidiary (closing price as on November 23, 2012 in the local stock exchange). Glaxo plans to initiate the offer, in January 2013, subject to the fulfillment of certain regulatory conditions.
The Indian consumer healthcare subsidiary generated revenues of approximately £380 million in 2011 and demonstrated compound annual growth rate (CAGR) of 19% p.a. in the last 5 years. We are positive on the deal, which is in line with the company’s plans to expand its Consumer Healthcare segment in emerging markets.
The deal will not have any impact on the earnings in the first year, but will be accretive thereafter. Glaxo plans to fund the deal with its existing cash resources and remains on-track to buy back shares worth between £2 billion and £2.5 billion in 2012.
Our Recommendation
We currently have a Neutral recommendation on Glaxo. The stock carries a Zacks #3 Rank (Hold rating) in the short run.
Several products in Glaxo's portfolio are facing declining sales due to intense generic competition. We expect the company's top line and gross margins to remain under pressure in the coming quarters. EU pricing pressure will continue to affect sales as well.
Glaxo is aiming to maximize the potential return from its pipeline. The company is looking toward deals and acquisitions to drive growth. Further, the company is focusing on increasing the rights on its partnered products and promising pipeline candidates, so that it stands to benefit more from their success.
Glaxo's acquisition of Cellzome and Human Genome Sciences, increasing investment in Theravance Inc. (THRX) and Amicus Therapeutics (FOLD) and amended agreement between ViiV Healthcare and Shionogi indicate its efforts to expand the pipeline.
Apart from this, Glaxo continues to progress on its cost-cutting initiative, which should help reduce the impact of increasing generic competition over the next few years and boost earnings.
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