Starting the new financial year with a bang, Sun Pharmaceutical (Sun Pharma) announced the acquisition of Ranbaxy laboratories. The biggest deal in two years, Sun Pharma plans to fully acquire Ranbaxy in an all-stock transaction which is being valued at $ 3.2 billion. As an immediate reaction to the acquisition, stock price of Sun Pharma surged by 2.68 per cent to Rs587.25 per share on Bombay Stock Exchange but share price of Ranbaxy fell by 3.12 per cent to Rs445.20 per share.
At a time when both the companies are tackling quality compliance with the US health regulator, the deal would help create the fifth largest specialty generic pharmaceutical company in the world and the largest in the country.
Currently owned by Daiichi Sankyo of Japan, Ranbaxy shareholders will receive eight shares of Sun Pharma for every 10 shares of Ranbaxy at a premium price of Rs457 per share. In a joint statement issued by both the companies, “The transaction has a total equity value of approximately $ 3.2 billion.”
The combined entity’s revenues are estimated at $ 4.2 billion with operations in 65 countries, 47 manufacturing facilities across five continents, and a significant platform of specialty and generic products marketed globally, including 629 abbreviated new drug applications (ANDA).
Commenting on the acquisition, Sun Pharma’s Managing Director Dilip Shanghvi said, “There is very little product specific overlap between Ranbaxy and Sun products. So there is enormous amount of opportunity. It gives us leadership position in chronic therapy, in acute care, hospitals. In the US which is the largest market for Sun Pharma, we can now further strengthen, with many more ANDAs waiting approval and also first to file opportunities.”
Sanghvi, however, declined to put a timeframe on expected approvals for Ranbaxy’s applications in the US. “The first important issue for us is to focus on achieving compliance. Only once the facility is re-certified we can look at new product approvals from this facility,” Sanghvi added.
When asked if Sun Pharma has decided to pay a premium price for acquisition despite all the quality issues Ranbaxy is facing, Sanghvi said, “We’ll have to look at the overall business and not at any temporary one time cost. We believe that valuation is justified and I am confident of future for combined shareholders. The quality of business of Ranbaxy from whatever we have seen is no way inferior to the quality of Sun Pharma. So, it should be possible for us to find a way to make the business profitable.”
In 2013, the company agreed to pay $ 500 million fine after pleading guilty to felony charges over manufacturing and distribution of adulterated drugs in the US. Sun Pharma said it expected to realise revenue and operating synergies of $ 250 million by third year post closing of the transaction.
These synergies are expected to result primarily from topline growth, efficient procurement and supply chain efficiencies. The statement by the two companies said Ranbaxy has recently received a subpoena from the United States Attorney for the District of New Jersey asking it to produce certain documents relating to issues previously raised by the FDA with respect to Ranbaxy’s Toansa facility.
Clarifying that this recent development would not hamper the deal, the joint statement added, “In connection with the transaction, Daiichi Sankyo has agreed to indemnify Sun Pharma and Ranbaxy for, among other things, certain costs and expenses that may arise from the subpoena.”
Expecting the deal to bring significant value to all stakeholders of Ranbaxy, Arun Sahwney, Managing Director and CEO of the company said, “Sun Pharma has a proven track record of creating significant long-term shareholder value and successfully integrating acquisitions into its growing portfolio of assets. We are confident that Sun Pharma is the ideal partner to help us realise our full potential and are excited to participate in future value creation opportunities.”
Shanghvi said the acquisition of Ranbaxy will help the combined entity strengthen its presence in emerging markets like Russia, South Africa, along with Brazil and Malaysia. Moreover, the deal will also help in growing distribution network and penetrate deeper in rural India.
“The distribution part of Sun Pharma will grow significantly because we did not have significant presence in rural areas. It gives us platform to distribute our products in rural markets and allow us to capture market which we were unable to do due to lack of distribution,” he added.
When asked if it is the most challenging acquisition by the company, Shanghvi said, “It will be the largest one for sure and I would not say challenging. It is going to be an interesting validation of many of my basic principles.”
The combined entity will have a market share of around nine per cent in the domestic market, he said, adding, the deal would now have to pass the scrutiny of Competition Commission of India. “I think we won’t overlap in terms of major products so we are not expecting any major objection,” Shanghvi said.
Despite catering to almost all the developed countries, Sun Pharma still only has a marginal presence in the Japanese markets which now is expected to change. “We will work with Daiichi and also take their inputs for developing a future strategy for Japan because clearly they would have much better understanding of the market then what we have and if Daiichi is interested in developing business and if they think that the combined company could be an important source of products for them we will be very happy to work on this,” Shanghvi said.
Both Daiichi Sankyo, which holds about 63.4 per cent of Ranbaxy’s outstanding shares, and the promoters of Sun Pharma, who hold a 63.7 per cent stake, have agreed to vote in favour of the transaction. After completion of the deal, Daiichi Sankyo will become the second-largest shareholder in Sun Pharma and will have the right to nominate one director to the board.
The acquisition comes at a time when Ranbaxy is struggling with quality compliance issues as all its four plants in the country have been banned by the US Food and Drug Administration from exporting products to the US. Similarly, Sun Pharma’s Karkhadi plant is also barred from shipping products to the US for violation of good manufacturing norms.
The deal will also mark another transition in ownership for Ranbaxy. In 2008, Japan’s Daiichi Sankyo had acquired a majority stake in Ranbaxy for Rs22,000 crore from its then promoter promoters Malvinder and Shivinder Singh.
Once the acquisition is complete, it would the biggest in the domestic pharmaceutical sector. Other big-ticket acquisitions include the acquisition of Strides Arcolab’s division, Agila Specialities by Mylan laboratories for $ 1.75 billion in 2013 and Torrent Pharmaceutical buying the formulations business of Elder Pharmaceutical in India and Nepal for Rs2,000 crore.
