GlaxoSmithKline has decided to spend roughly US$1 billion to raise its stake in its Indian pharmaceutical unit, betting on rising demand in emerging markets as sales in developed economies slow due to a wave of patent expirations.
With the latest India deal, GSK is set to spend close to US$2 billion in roughly a year to increase its holdings in two listed Indian companies.
Emerging markets such as India and Brazil are an important plank of GSK chief executive Andrew Witty's growth strategy as he grapples with slower uptake of the company's products in the developed world.
GSK said yesterday that it planned to raise its stake in its Indian pharmaceutical unit, GlaxoSmithKline Pharmaceutical, up to as much as 75 per cent from 50.7 per cent through an open offer in a deal worth about £629 million (HK$7.95 billion).
In February, GSK lifted its stake in its publicly listed Indian consumer health-care subsidiary, GlaxoSmithKline Consumer Healthcare, to 72.5 per cent from 43.2 per cent for US$901 million.
"What they are trying to indicate is that this market can reward them nicely in the future," said Sarabjit Kour Nangra, a sector analyst at Angel Broking. "India is a growing market and GSK cannot afford to lose its hold."
Western drugmakers like GSK, Pfizer and AstraZeneca covet a bigger share of India's fast-growing US$13 billion drug market, but have been frustrated by a series of decisions on intellectual property and pricing.
In August, India revoked a patent granted to GSK for its breast-cancer drug Tykerb, a decision that followed a landmark court ruling disallowing patents for incremental innovations that was a blow to global pharmaceutical firms.
Despite the challenges, Western drugmakers have been looking to raise their exposure in Asia's third-largest economy, betting on an increase in health-care spending. India currently spends about 5 per cent of its gross domestic product on health care.
"This really reflects the opportunity we see here in India, particularly the volume opportunity," GSK chief strategy officer David Redfern said. "We have a broad range of medicines and vaccines and we really think over the next few years as India develops we can drive a substantial increase in volume to make more medicines and vaccines available to the Indian population."
The deal adds to the growing list of multinationals raising their holdings in local units as they look to reduce reliance on traditional markets, even as the Indian economy grew at its slowest pace in a decade in the last financial year.
In July, Anglo-Dutch consumer goods company Unilever completed a deal to increase its stake in Indian unit Hindustan Unilever to 67.28 per cent from 52.48 per cent in a deal worth about US$3 billion.
GSK will buy up to 20.6 million shares of GlaxoSmithKline Pharmaceutical at 3,100 rupees (HK$387) each, a premium of 26 per cent over the stock's closing price on Friday.
Nangra said the premium was attractive for investors who were planning to exit the stock in the near term, but long-term investors were likely to keep betting on the firm's growth potential.