GSK Plc’s open offer proposes to pay a 26 per cent premium over the going market price to acquire an additional 24.3 per cent stake in its Indian subsidiary GSK Pharma (India). This values GSK Pharma (India) at 38 times its expected 2014 earnings, twice that of the BSE Healthcare Index.

What explains this hefty premium, especially since the Indian operations are facing growth challenges? The fact that India among the major growth drivers for the parent is likely to be a key contributor in the years ahead.

Challenges The open offer announcement comes at a time when GSK Pharma (India) is grappling with slow growth and margin pressure. Competitive pressure in the domestic market, sluggish product launches from its parent pipeline, and launch of low-margin generic drugs caused the company’s margins to slip from almost 36 per cent in 2010 to 31.5 per cent in 2012.

The new drug pricing policy announced in May further dampened the company’s prospects, with the flagship antibiotic brand Augmentin coming under the price control. The company may see revenues dip more than 10 per cent due to this.

India, a key market GSK Pharma (India)’s latest September quarter results substantiates this with operating margin falling to around 18 per cent.

But despite these challenges, GSK Pharma (India) will continue to remain key to the parent’s prospects. Data from Bloomberg shows that, in 2012, the company saw revenues in markets such as Europe and the US declined on account of patent expiries and pricing pressure. But the Chinese and Indian subsidiaries grew 10 per cent and 17 per cent, respectively. Though growth at GSK Pharma (India) may moderate, it is still expected to be ahead of the US and Europe. A bigger share in the growing pie when others are shrinking seems to be the motivation for the parent offering a tidy premium.

>nalinakanthi.v@thehindu.co.in

Related Topics