Glaxo Invests in Nigeria

GlaxoSmithKline (GSK - Analyst Report) recently announced that it has reached an agreement with GlaxoSmithKline Consumer Nigeria plc regarding its proposal to increase its holding in the latter from 46.4% to 80%. Glaxo plans to increase its stake by acquiring shares on a pro rata basis. The offer, worth approximately £62 million, represents a premium of about 28% over the market price of the Nigerian subsidiary (closing price as on November 23, 2012 in the local stock exchange).

Glaxo Nigeria generated revenues of approximately NGN 21.5 billion in 2011 and demonstrated compound annual growth rate (CAGR) of 21% p.a. in the last 4 years.

On closure, subject to certain regulatory conditions, the deal will be immediately modestly accretive. 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.

Meanwhile, Glaxo also announced its decision to increase its holding in its consumer healthcare subsidiary in India from 43.2% to up to 75%. 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).

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 also continue to affect sales.

Glaxo is aiming to maximize the potential return from its pipeline. The company is looking towards 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 - Analyst Report) and Amicus Therapeutics (FOLD - Snapshot Report) 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.