8 April 2014
Mumbai: Sun Pharmaceutical Industries Ltd, India’s biggest drug maker by market value, has agreed to acquire Ranbaxy Laboratories Ltd, controlled by Japan’s Daiichi Sankyo Co. Ltd, in an all-stock deal worth $3.2 billion that will create the world’s fifth largest generics (or off-patent) drugs company by revenue and India’s largest pharma firm by market share.
The deal, which will also see Sun assume $800 million of debt on Ranbaxy’s books, needs shareholder and regulatory clearances.
For Daiichi, the deal is a continuation of its bet on the Indian generics market, one it has been unable to translate into profits, with Ranbaxy, in which it holds a 68% stake, running into trouble with the US Food and Drug Administration (FDA). The US regulator has banned imports from all of Ranbaxy’s manufacturing plants into the US.
Sun too has run into some trouble with FDA (imports from one of its plants in Gujarat to the US have been banned), but the impact of this is marginal.
Under the transaction, expected to be completed by this year’s end, shareholders of Ranbaxy will receive four shares of Sun Pharma for every five they hold. Daiichi will become the second-largest shareholder in Sun Pharma with around 8.9% stake.
The share-swap ratio values Ranbaxy at Rs.457 per share, a premium of 18% to the company’s 30-day volume-weighted average share price and an increase of 24.3% to its 60-day volume-weighted average share price as on Friday, 4 April.
On Monday, Sun Pharma shares gained 2.68% to Rs.587.25 on the BSE while Ranbaxy shares dropped 3.12% to Rs.445.20 on a day the benchmark Sensex ended little changed at 22,343.45 points. Last week, Ranbaxy shares gained 26%, the biggest rise since August, indicating that the market suspected a deal was in the works.
Daiichi Sankyo paid 61% more for Ranbaxy five years ago at Rs.737 rupees a share.
Goldman Sachs was the adviser to Daiichi Sankyo and ICICI Securities Ltd advised Ranbaxy Laboratories. EY, the consulting firm formerly known as Ernst and Young, did the valuation.
The acquisition, the 14th since 1997 for Sun Pharma, controlled by billionaire Dilip Shanghvi, will allow the company to expand in countries where it hasn’t ventured so far and give it access to Ranbaxy’s product pipeline in the US and large distribution network in India.
“Ranbaxy has a significant presence in the Indian pharma market and in the US where it offers a broad portfolio of Andas (abbreviated new drug applications) and first-to-file opportunities,” said Shanghvi in a call with analysts.
“It provides a strong platform, which is highly complementary to Sun Pharma’s strengths. We see tremendous growth opportunities and are excited with the prospects to create lasting value for both our shareholders through a successful combination of our franchises,” he added.
The combination of Sun Pharma and Ranbaxy will have operations in 65 countries, 47 manufacturing facilities across five continents, and a significant platform of specialty and generic products marketed globally, including 629 new generic drug approvals in the US.
The combined entity’s revenues are estimated at $4.2 billion with an operating profit of $1.2 billion for the 12 months ended 31 December 2013.
“While we will be able to grow stronger in the US and Indian markets, Ranbaxy will also allow us to venture into high growth emerging markets like South Africa, Malaysia, Romania and Ukraine,” Shanghvi said.
Sun will stand to benefit from Ranbaxy’s distribution network as well.
“Our distribution network is not as strong as Ranbaxy’s which has a strong reach in the rural markets. We can leverage their distribution network and their strengths in over-the-counter drugs, chronic therapy and hospitalization products,” said Shanghvi.
The deal has been approved by the boards of both the companies and Daiichi Sankyo.
Sun Pharma said it has to obtain approvals for the deal from the central government, state governments, high courts of Gujarat, Punjab and Haryana, the Competition Commission of India and antitrust bodies in the US.
“We believe this transaction brings significant value to all Ranbaxy shareholders,” said Arun Sawhney, chief executive and managing director of Ranbaxy.
Sun Pharma has a proven track record of creating significant long-term shareholder value and successfully integrating acquisitions into its growing portfolio of assets, he added.
“It is positive for both sets of shareholders,” said Shriram Subramanian, founder of InGovern Research Services, India’s first proxy advisory and corporate governance research firm, with specific reference to the swap ratio.
“Sun Pharma is taking on some regulatory risks, but it may be able to tide over this,” added Subramanian.
Shanghvi said the creation of value for shareholders was the main reason for doing an all-stock deal.
“We want to create value for all shareholders. A cash deal would have turned out to be expensive for the investors. Moreover, we also want Daiichi as our shareholder,” Shanghvi said.
Sun Pharma has followed a strategy of acquiring poorly performing companies and turning them around. It did this with Caraco Pharmaceutical Laboratories Ltd and Taro Pharmaceutical Industries Ltd, and will try to do the same with Ranbaxy.
Ranbaxy has been facing serious issues with exports to the US, its most important market, since 2009. All its Indian facilities exporting drugs to the US have been barred from doing so by the US drug regulator for failing to comply with manufacturing standards.
Last year , Ranbaxy pleaded guilty to felony charges related to drug safety in the US and paid $500 million in civil and criminal fines under a settlement agreement with the department of justice.
“Our primary focus will be to comply with regulatory standards; it is the key issue that Ranbaxy is facing now, and to get the company out of the US ban and make it healthy before jumping into the business priorities,” Shanghvi said.
“At this point I would not prefer to talk about the profitability of Ranbaxy business as the priority of the management will be to achieve the compliance and I don’t think the acquired business will turn profitable in the next one or two years.” Shanghvi said.
The merger fits into Sun Pharma’s business outlook and the long-standing dream of Shanghvi to make it one of the largest generic companies in the world.
Shanghvi, with $13.1 billion of personal wealth, is ranked the fifth richest person in India and 83rd in the world as of 7 April, according to the Bloomberg Billionaires Index. He started Sun Pharma in 1989 as a distribution company, selling the drug Lithosun to cure bipolar disorder. Even today, psychiatric therapies dominate the product portfolio of Sun Pharma, followed by cardiology.
The firm had Rs.6,327 crore of cash in hand as of 30 September 2013, enough to sustain the spree of acquisitions that has propelled its rapid growth in recent years.
Sun Pharma made 13 acquisitions between the 1997 and 2012, starting with the purchase in 1997 of Detroit-based Caraco Pharmaceutical Laboratories. That was the year in which it also bought stakes in two Indian pharma firms—Tamilnadu Dadha Pharmaceuticals Ltd and MJ Pharmaceuticals Ltd.
In 2010, it acquired a majority stake in Israel-based Taro Pharmaceutical Industries, a move that more than doubled its revenue in the US to $1.1 billion from $484 million. Within two years, Sun Pharma bought two more drug makers in the US—Dusa Pharmaceuticals Inc. and the generic business of URL Pharma Inc.
Apart from India and the US, Sun has manufacturing facilities in Israel, Mexico, Hungary, Canada, Bangladesh and Brazil. In India, the firm has 10 manufacturing facilities spread across Gujarat, Jammu and Kashmir, Sikkim, Tamil Nadu, Maharashtra and Dadra and Nagar Haveli. Sun has eight plants in the US.
“In addition to size and scale benefits, the domestic portfolios of the two companies complement each other well,” said V. Krishna Kumar, partner-transaction advisory services (life sciences & healthcare), at EY. “Sun’s domestic portfolio has a bias towards specialities including cardiovascular and oral anti-diabetes while Ranbaxy’s domestic portfolio has large primary care and over-the-counter segments as well.”
With the Ranbaxy acquisition, Sun Pharma joins the club of the world’s top generic drug makers that includes Teva Pharmaceutical Industries Ltd, Sandoz Inc. and Mylan Inc.
For Daiichi Sankyo, the acquisition is an opportunity to exit Ranbaxy, which has not only fallen short of its revenue expectations from the 2008 deal but also took a toll on the company’s reputation and stock valuation back home in June due to serious compliance issues with FDA.
Daiichi also gains a stake in a company with a higher valuation and healthier fundamentals.
Although Daiichi had always maintained that it would support the Indian company, it has been under severe pressure from investors and has been looking for a way out, said an industry advisor who spoke on condition of anonymity.
“I wouldn’t call this an exit. It’s an ownership transfer,” said Jefferies and Co. analyst Naomi Kumagai. “Another company will take over control for them (Daiichi) of a place that had a lot of issues. In that sense, it should be a good thing.”
Sun had successfully resolved operational issues at cash-strapped Israeli drug maker Taro Pharma after it took control of the company in 2012 following a 2009 deal and a four-year legal battle. Taro Pharma shares, which traded at an yearly average price of $9.06 a unit in 2009, were traded at $110.58/share on Monday on the New York Stock Exchange at the time of going to press.
Reuters and Bloomberg contributed to this story.