GlaxoSmithKline offer signals MNC appetite for Indian menu

fe Bureau Posted online: Tuesday, Dec 17, 2013 at 0000 hrs
Mumbai : Flush with funds, multinational corporations (MNCs) are snapping up shares in their Indian subsidiaries, clearly convinced the India growth story is only going to get better. With access to cash easier in a global economy awash with liquidity, MNCs evidently foresee better returns on investments in markets like India and are putting their money to work here.

After Unilever Plc said, in April, it was ready to spend as much as $5.4 billion to buy shares in its Indian outfit, GlaxoSmithKline Plc announced on Monday it was willing to fork out $1 billion (R6,400 crore or £629 million) to buy shares of Glaxosmithkline Pharmaceuticals Ltd from non-promoter shareholders; the price offered was a mouth-watering R3,100 apiece, a 26% premium to its closing price of R2,460.15 on Friday.

GSK Plc’s cash flow statement for the nine months ended September 30, puts its cash at £2.906 billion (about $4.5 billion); the firm said it is looking to fund the offer with its existing cash resources.

GSK Plc said it was open to buying up to 20.6 million shares which would take its stake to 75% from the current 50.7%, adding it intended to keep the Indian entity publicly listed.

The announcement sent the GlaxoSmithKline Pharmaceuticals Ltd stock soaring to its lifetime high of R2,927.40, up 18.6% up on the BSE; in intra-day trades, the stock hit R2,952 up 19.59%. In February, GSK Plc upped its share in GSK Consumer Healthcare to 72.46% from 43.16%, paying R4,800 crore after an open offer announced in December 2012.

“It is really about the parent obtaining more of the economics of the future growth of the business,” GSK Plc chief strategy officer David Redfern told FE in a candid comment, adding his company was well placed to capture the Indian opportunity.

“For GSK, this transaction will increase exposure to a strategically important market and for our Indian pharmaceuticals subsidiary’s shareholders we believe it offers a good liquidity opportunity at an attractive premium,” Redfern said.

According to the 2012 annual report, sales from emerging markets constituted 26% of GSK Plc’s total revenues. GlaxoSmithKline Pharmaceuticals Ltd’s revenues from pharma and vaccines in 2012 were 304 million pounds, a mere 1.15% of GSK Group revenues of 26.4 billion pounds. Revenues from China accounted for 2.87% while those from Latin American countries accounted for 4.76%.

Analysts believe the price of Rs 3,100 being offered is attractive given that it discounts CY14 earnings by about 38.7 times, assuming an earnings per share of Rs 80. “The business has been patchy; so, this is a good price. The company would have to do something extraordinary for there to be significant upside from these levels,” observed an analyst. GlaxoSmithKline Pharmaceuticals Ltd has been embroiled in a dispute with wholesalers and retailers over commissions; Q3CY13 sales fell 7% y-o-y to Rs 620.54 crore while net profits fell 33.7% y-o-y to Rs 100.95 crore.

However, GSK Plc CEO Sir Andrew Witty has not been critical of India’s change in drug pricing policy: “What you will continue to see is governments intervene periodically on pricing; I don’t think that is unexpected or surprising. I continue to believe that the underlying demographic momentum of most of these countries means that over a period of two or three years, very often, the volume compensates for that price effect.”

With their revenues tapering off in developed markets due to patents expiring, global drug majors are now hoping to cash in on the Indian pharmaceutical market which grew 16.6% in CY2012. “India has always been important for Glaxo and it seems to be focusing on long-term prospects. Overall, all foreign companies are looking at emerging markets positively,” Motilal Oswal analyst Alok Dalal observed.

“We made an offer for GSK Consumer last year, that was the priority then. We were very pleased with how that offer went...We continue to review at the centre of GSK capital allocation across the world and we decided this is the moment to bring a further billion dollars into India through GSK Pharmaceuticals,” Redfern said.