The report lifted Dr Reddy’s shares to a 3.5-year high.

Analysts said such a move would fit well with British-based GSK’s declared strategy of building up its presence in key emerging markets and provide a fillip for Dr Reddy’s.

Dr Reddy’s and GSK, the world's second biggest drugmaker, declined to comment on the story in the Economic Times, which cited sources privy to the development.

A transaction could be clinched in two months if talks stay on track, the newspaper said, adding GSK could get the first right of refusal if the founders of the Indian firm decide to sell their stake in the future.

Mr Dominic Valder, an industry analyst at Evolution Securities in London, UK, said buying a stake in Dr Reddy’s looked a sensible move for GSK and in keeping with the British group's strategy of taking a minority position in partner companies.

Dr Reddy’s shares gained 3.6%, after earlier rising as much as 7.8%, while GSK added 2%.

“Both the parties, Dr Reddy’s and GSK, will benefit from a deal. There are a lot of synergies between the two companies,” said Mr RK Gupta, Portfolio Manager at Tarus Asset Management Company, which holds Dr Reddy’s shares in its portfolio.

“Dr Reddy’s will get a lot of mileage in terms of selling their products in new markets, while GSK will get access to a basket of generics at a time when a large number of drugs are going off patent.”

The two companies already have close ties, reflecting the increasingly friendly connections between Western makers of branded drugs and Indian generic producers.

In June 2009, GSK and Dr Reddy’s entered an alliance to develop and market a range of products across a large number of emerging markets, excluding India. Under the terms of the agreement, GSK is expected to gain exclusive access to Dr Reddy's portfolio and future pipeline of more than 100 branded pharmaceuticals in the cardiovascular, diabetes, gastroenterology, oncology, and pain management segments. GSK also acquired Bristol-Myers Squibb’s branded generics business in Jordan, Lebanon, Libya, Syria and Yemen in July 2009.

India’s drug industry, which is dominated by home-grown generic firms, is drawing overseas firms as they look to sustain growth and quickly build a generic presence.

The Indian firms had thrived on booming global demand for generic drugs as nations around the world battle rising healthcare costs, but they are now facing stiff pricing pressure as more drugmakers jump into the generics.

Increased scrutiny of manufacturing standards by overseas regulators is also a worry as it could delay new launches.

“There is a lot of consolidation happening in the global pharma sector because of the changing business model, and India will be a key part of that,” said Mr Manoj Garg, Drug Research Analyst with brokerage Emkay Global Financial.

“The growth in the sector is going to shift from the western part of the world to the eastern part of the world and any company offering a strategic fit in the emerging markets for the multinational firms will be a target,” he said.

GSK has also been spreading its wings in Africa. In May 2009, it bought a 16% stake in Africa's biggest generic drugmaker, Aspen Pharmacare (subject to competition authority approval), in an asset-transfer deal worth Rand 3.47 billion (Euros 321.36 million).

“The deal they did with Aspen included them taking an equity stake, so if you use that as a model then taking a stake in Dr Reddy’s would be entirely consistent,” Evolution's, Mr Valder said. Drug sales in emerging markets are expected to grow at a mid-teens percentage rate through 2013, against low single-digits for mature markets, according to IMS Health, the leading tracker of prescription drug data.

References
Scrip News 18 September 2009. Is GSK set to have a foothold in Dr Reddy's?

Reuters 18 September 2009. UPDATE 2-Glaxo seen eyeing 5 pct stake in Dr Reddy’s.