Glaxo pays a reasonable price to diversify

GlaxoSmithKline goes down the diversified pharmaceutical route with the purchase of Stiefel

Damien Conover, CFA 21 April, 2009 | 10:56AM
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GlaxoSmithKline has agreed to purchase private dermatology company Stiefel for $3.6 billion, including the assumption of $400 million of Stiefel's debt. We believe Glaxo has paid a reasonable price for the business and we don't expect any major changes to our fair value estimate. Also, with close to $10 billion in cash on Glaxo's balance sheet, we don't expect any funding challenges in completing the deal.

For the minority of investors still wondering if Glaxo will sell its consumer product group, this deal sends a strong signal that Glaxo is going down the diversified pharmaceutical route, similar to Abbott Laboratories. Given Glaxo's weak productivity efforts in developing new branded drugs, we believe the increased diversification will help the company through patent losses, including the near-term loss on herpes drug Valtrex.

Glaxo expects to achieve annual cost savings of $240 million by 2012 from this deal, which we believe is manageable. Glaxo already derives more than $500 million in prescription dermatology sales, setting up some employee overlap that could be cut. Also, Stiefel appears a little heavy on staff, as it employs about 4,000 people. We believe the majority of Stiefel's administrative staff and a good portion of its salesforce will be let go to facilitate the cost savings.

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Damien Conover, CFA  is an equity analyst and associate director at Morningstar.

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