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Friday, November 17, 2006

Divergent Paths - 3

Glaxo Smithkline Beecham

Coincidentally, I started buying Glaxo also on the same day. Glaxo was also a de-regulation play, in a sense. Most of the medical drugs in India at the time were under the Drug Price Control Order (DPCO), whereby the government controlled the prices at which drug companies could sell their products to consumers. As a result, the profits were depressed artificially. I looked at Glaxo and there was not much in the form of book value for my downside protection. It was around 66 and the share was trading around 400 at the time. The book value did not include the value of drug patents available in the quiver of its parent, which held controlling interest in the Indian company. The company had grown its book value @ 6% per year for the last 8 years and had an ROE of 13% pre-merger.

Glaxo came to my attention for one reason. I used to buy diabetes medicine for my grandmother on a regular basis. She swore by a pill called Diaonil prescribed to her by her doctor. If this was the case for a 70-odd year old lady with only basic education, I wondered about the rest. I found out that Glaxo marketed this drug. Later, talking to a friend who was a medical representative, I got a good understanding of the business model of the drug companies operating in India.

There were some other metrics that pointed to the direction the company was taking. There was also the proposed merger with Smith-Kline Beecham during the year. And a quick growth was in sight. I admit, there was nothing much in the balance sheet pointing towards a great share. Despite that I ended up buying it at an average cost of around 318 till Jan 03. By the end of 2003, I had a two-bagger in my hand and by March 06, it was at 1450. I had sold part of my holdings by the end of 2004 to retrieve capital. Looking at values till March 06, I had an IRR of 43.74% and an NPV of 23,143 on an investment much less than that.

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