GSK Pharma parent makes `6,400 crore open offer

Mumbai: GlaxoSmithKline Plc (GSK) has decided to spend as much as 6,400 crore to increase its stake in its Indian pharmaceuticals unit to 75%, seeking to strengthen its presence in the world’s second most populous nation as sales in developed countries slow with patents of brand-name drugs nearing expiry.

The UK’s biggest drug maker on Monday made an open offer to buy back as many as 20.61 million shares, or 24.3% of the shares outstanding of its publicly traded GlaxoSmithKline Pharmaceuticals Ltd unit, at a price of ₹ 3,100 per share, a 26% premium to the Indian unit’s closing share price on 13 December.

GSK intends to keep the Indian firm publicly listed, the company said. Local regulations require a minimum public shareholding of 25% for a listed company.

The offer to increase its stake in the pharmaceuticals unit follows GSK’s ₹ 5,222 crore investment in the company’s Indian consumer health business that was completed in February. Foreign drug makers such as GSK are investing in their local units as they seek to ensure a bigger share of India’s $13 billion drug market that is poised to double by 2016, driven by an expected surge in health insurance, according to the latest market prognosis report by drug market researcher IMS Health.

India is a strategically important market, and the transaction will increase GSK’s exposure to it, said David Redfern, chief strategy officer of GSK.

In February, GSK raised its stake in GlaxoSmithKline Consumer Healthcare Ltd through an open offer from 43.16% to 72.46% by investing ₹ 5,222 crore.

On Monday, shares of GSK Pharma rose 18.6% to end trading at ₹ 2,927.4 on BSE, the highest closing price since at least January 1991. In comparison, the exchange’s benchmark Sensex fell 0.27% to 20,659.52 points.

The stock had already gained by about 20% in the 12 months ended 13 December.

“The price being offered is attractive both to investors and the company given the track-record of (the) stock,” said Sunil Sanghai, head of global banking at HSBC Holdings Plc.’s India unit. “In the last one year, shares of GSK Pharma have already risen by about 20% and the company is offering a premium of 26% on top of that price. GSK has taken into consideration several factors before arriving at this price and its management has made it clear that it has no intention of revising the price.”

The open offer is being managed by HSBC Securities and Capital Markets (India) Pvt. Ltd.

GSK has priced the offer keeping in mind the strong performance of the stock, said analysts.

“The buyback of the shares is at an attractive price, much above the current market price, and is a strong indicator of the management’s (confidence) towards the listed entity, especially coming after the recent ₹ 864 crore investment plan announced by the company to further its growth prospects in the Indian pharmaceutical markets,” said Sarabjit Kaur Nangra, an analyst with Angel Broking Ltd.

The transaction will be funded through GSK’s existing cash resources. It will be earnings-neutral for the first year. The transaction will contribute to its earning thereafter and will not affect expectations for the group’s long-term share buyback programme, the statement said.

Redfern said that GSK was bullish on India despite the present economic situations as the long-term view remains intact. “GSK has taken a long-term view on India and the fundamentals remain strong. Going forward, the country will witness significant GDP (gross domestic product) growth and rise in demand. We are well-placed in the Indian market and the open offer will further allow us to strengthen our position in the country.”

After the completion of the latest transaction, GSK will have invested close to $2 billion through open offers for its consumer and pharma business within a 12-month time span.

The move to consolidate its position in India comes at a time when several patents of global pharmaceutical firms are nearing expiry in the developed economies, which in turn will reduce their revenues generated from these markets owing to tough competition from generic drug makers.

While issues such as price control have been a dampener for western drug makers in India, the market size and growth potential have provided assurance of high returns to these firms.

“GSK has been in India for long enough to understand the short-term challenges including price control. But the volumes are big enough to make up for the short-term challenges,” Redfern said. We are taking a responsible approach in pricing the drugs and vaccines, he said.

In August, GSK’s patent for its breast cancer drug Tykerb was revoked by the India’s Intellectual Property Appellate Board following which patents for incremental innovations have been disallowed.

GSK’s Indian pharmaceuticals unit manufactures, distributes and commercializes pharmaceuticals and vaccines across multiple therapeutic areas including respiratory, cardiovascular, oncology, anti-infectives and dermatology. The Indian unit employs more than 5,000 people across its operations and generated more than ₹ 2,600 crore in revenue in the year ended 31 December 2012 .

The open offer is expected to begin in February, subject to regulatory clearance.