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Parke Davis: Uncertainty affects valuation

Dec 20, 2000

That international mergers create uncertainty is a given. This holds good for the management, the employees as well as the shareholders. A recent example is that of Parke Davis. The company till recently was an affiliate of the $ 9 bn Warner Lambert which held 40% in its Indian arm. The takeover of Warner Lambert by Pfizer and the presence of a two parallel 100% subsidiaries in India has led to a uncertainty about the prospects of Parke Davis and this has affected the valuation of the company.

International media reports have mentioned that Pfizer has cleared out several layers of Warner Lambert management leaving hardly any senior positions for the Warner Lambert staff as it consolidates its acquisition. What way the merger pans out in India remains to be seen.

In India, Parke Davis has a presence in gynaec care, cardiac care, pediatric care and neuro care. It’s cough syrup Benadryl is the third largest brand in the Rs 4.8 bn cough and colds market after Corex (Pfizer) and Phensedyl (Rhone Poulenc). Its over–the–counter products include Waterbury’s Compound (a health tonic), Gelusil (an antacid), Neko (a bath soap) and Listerine (an oral hygiene product). These contributed nearly 20% to the company’s turnover of Rs 1,793 m last year.

Over the past two years Parke Davis also launched products such as Walcillin (an amoxycillin based antibiotic), Atpark (cardiovasdcular) and Calcal (a calcium supplement). Though these products are based on much older molecules, they have done well and account for almost 12% of the company’s sales.

Last year the company sold its Saki Naka plant (in Mumbai) for Rs 493 m. However, the company has still not received the full payment for the same. (The workers of the plant were paid off via a Voluntary Retirement Scheme.)

Also, the company does not have a reputation for being minority shareholder friendly. A prominent example was the transfer, in the past, of cough lozenges ‘Halls’ and ‘Chiclets’ to the 100% subsidiary of its parent Warner Lambert India.

Coming to the financials, the company reported a 15% growth in its net profit in the first half of the current year. The write off of VRS expenditure was completed last year and this has led to a higher tax payment in the current year. At the current price of Rs 267, the stock price implies an earning multiple of 17 times its annualised earnings of FY01. This is relatively lower than the earnings multiples enjoyed by its peers. Keeping in mind the uncertainty regarding the merger and the way Pfizer has gone about the management changes, we don’t expect a favourable ratio for Parke Davis.

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