Potent Combination

What does the Glaxo Wellcome-SmithKline Beecham merger mean for the Indian subsidiaries? A report

Last week, the two UK-based companies Glaxo Well-come plc (GW) and SmithKline Beecham plc (SB) announced that they are considering a possible merger. Since both these companies have a strong presence in the domestic pharmaceutical industry, the Indian subsidiaries felt the ripples.

In India, SB is represented in the pharmaceutical business by Smithkline Beecham Pharmaceuticals (India) (SBPIL) and a one hundred per cent subsidiary Smithkline Beecham Asia Pvt (SBAPL). SBs food products division is under Smithkline Beecham Consumer Healthcare (SBCHL). On the other hand, GBs pharmaceutical business in India is under Glaxo India (GIL) and Burroughs Wellcome India (BWIL). On February 2 with speculations about the merger, GIL moved up from Rs 334 to Rs 359 and BWIL went up from Rs 269 to Rs 296. SBPIL shot up from Rs 536 to Rs 580 and SBCHL moved up to Rs 347 from Rs 381.

 

Earlier SB was talking to American Home Products (parent of the Wyeth Lederle) for a possible merger, but the move failed. Even in this case, the global alliance is yet to take concrete shape. As such, it will take at least a year or so for the merger to materialise in India. In addition, the impending merger of BWIL with GIL will pose a major hurdle for the merger of SB plc group companies in India with GIL.

As such the first job on hand for GIL is to sort out the merger of BWIL. If the merger of SB group companies with GIL precedes that of BWIL, then it will have an impact on the valuations and merger ratio as and when GIL goes for the merger of BWIL. This in turn will affect the interests of the shareholders of BWIL.

There is also the issue of the parents stake in the Indian ventures. Glaxo had a 51-per cent stake in Glaxo India and Burroughs Wellcome held 32 per cent in the Indian arm. In order to maintain the same holding, GB plc had hiked its stake in BWIL to 51 per cent.

Similarly SB plc holds a 40-per cent stake in both SBPIL and SBCHL. Since the parent would naturally like to retain its stake in the merged entity, one could expect it to consolidate its stake in these two subsidiaries to 51 per cent before proceeding with the merger of the Indian subsidiaries. This to some extent depends on the valuations of SBAPL, in which SB plc has one hundred per cent stake.

There is also the SBCHL issue. Will it be part of the merger, whether it will be kept separate or will it be divested? This is because SBCHL derives most of its revenue from foods (malted milk foods), which would not gel with GILs pharmaceutical business. In fact, GIL sold its food products division in 1995 to Heinz India to focus on its core business of human healthcare. As such, it makes sense to keep SBCHL as separate entity.

However, if the merger happens after overcoming all these hurdles, then it will have a lasting impact not only on the companies concerned but also on the other players in the domestic pharmaceutical industry.

The major advantage for the new entity will be in the form of combined strength of the two parents. GW plc is already the number one player globally and will further consolidate its position after the merger with SB plc. The combined turnover of GW-SB plc at $20 billion for the year 1996, will give it a market share of 7 per cent. This will leave the number two player Zeneca way behind with a turnover $3.8 billion and market share of just 1.5 per cent.

With a combined annual drug development spending of a staggering $2.8 billion by GW-SB plc, the parent boasts of rich product portfolio. The new entity will be immensely benefited by the widened product portfolio, with GWs strength in gastrointestinal and respiratory segments and SBs major presence in antibiotics and vaccines.

In the Indian context, apart from a broader product portfolio, size will be a major gain for the new entity. The cumulative annualised turnover of the merged entity (GIL, BWIL, SBCHL and SBPIL) is estimated at around Rs 1600 crore.This will displace Ranbaxy, with a turnover of Rs 1,302 crore from the number one slot.

The turnover will be more if one includes the contribution from SBACL and GILs recent acquisition of the Biddle Sawyer group companies. However, one also has to take into account whether SBCHL will be part of the merger or not.

Another major advantage for the Indian companies is that the product profile of GIL and SBPIL are highly synergistic. GILs major thrust areas are dermatology, vitamins, antiulcerants and cephalosporins. Whereas SBPILs main focus is on vaccines and the anti-rheumatic segment .

Shedding of interests in non core areas and slowing down of new product launches has put a brake on GILs volume growth of late. As a result GIL has been overdependant on old molecules and brands in the recent years.

For instance, corticosteroid brands Betnovate and Betnesol accounting for 8 per cent of GILs 1996 sales were launched way back in 1970s. The same holds good in the case of vitamins Ostocalcium and Cobadex Forte. Even in the cephalosporincephalexin segment, GILs growth is affected by intense competition from new molecules like Cefadroxil and Cefotaxime. The recent slash in the price of anti ulce- rant drug - ranitidine by 30 per cent to Rs 1,203 a kg will also pose problems for GIL.

In fact, in this segment its molecule is already facing increasing competition from new products like Omeprazole and Lansoprazole.

To step up the volume growth GIL is currently looking at brand acquisitions and planning to make a foray into OTC products. GW plc has already launched its anti ulcerant brand Zantac as an OTC product to counter the impact of the expiry of its product patent.

On this front, SBPIL and SBAPLs strong presence in the OTC segment with their popular brands -Iodex, Crocin, Tums and Eno will prove to be beneficial for GIL.SBAPs dedicated strong marketing network for OTC products will prove to be handy for the new entity.

SBPILs other strong area is vaccines segment. Here SBPILs hepatitis B vaccine brand Engerix is currently cashing in on the increasing threat of this disease in the country. This brand is the second largest contributor to SBPILs total revenues. In this segment, the only major player is SBPIL. Though new entrants are entering, it will take some time for them to establish a marketing network and prove their product efficacy and safety. With the probability of this vaccine being included under the national vaccination programme, this segment will provide major thrust to the growth of the new entity.

On the valuations part, with lot of restructuring happening in the last few years, one can not go by the financial results of the past few years. For instance GILs net profit grew by 677 per cent in the year 1995 due to one-time non recurring income of Rs 210 crore from the sale proceeds of its foods division. In the following years provision for voluntary retirement scheme and issuance of bonus shares brought down its earnings per share. In addition the merger of BWIL will also alter the equations drastically in terms of swap ratio. However both the parties will go all out to improvise their valuations before going ahead with the merger.

On the capital market, the new entity with its enormous size in terms of market capitalisation at Rs 4371.35 crore will create quite a stir.

The merger talks have pushed other companies in India and abroad with no alternative but to go for further consolidation. In fact, the expectations of the same have seen pharma stocks soar in the stock market worldwide. Soon one may see the emergence of a suitable competitor to take on this Goliath.