Sun Pharma en Route to Become Market Leader

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Edited by Vani Rao

Corners 9% share in the fast-growing domestic drug market

Sun Pharmaceutical Industries Ltd., India’s largest drug maker by market value, has agreed to buy rival Ranbaxy Laboratories Ltd.  in an all-stock deal worth $3.2 billion from Japan’s Daiichi Sankyo Co., which currently controls 63.9% stake in Ranbaxy, according to Bloomberg. Sun Pharma will also take over $800 million of debt on Ranbaxy’s books, taking the total value of the deal to $4 billion.

If the deal comes through, Sun Pharma would emerge as the leader in the Rs.78,000-crore Indian pharmaceutical industry with a market share of over 9%, overtaking Abbott Laboratories’ 6.5%.

Market Share
Source Sun Pharma Investor Presentation

The merged entity will create the world’s fifth-largest generics company with over $4.2 billion in global sales and a market capitalization of Rs.80,000 crore.

Under the proposed deal, Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each Ranbaxy share that they own, for about Rs.457. This translates into a premium of 24.3% to Ranbaxy’s 60-day average share price as on April 4, 2014, the two companies said in a statement released on April 7, 2014. The transaction will need the approval of 75% of the shareholders each of Sun Pharma and Ranbaxy as well as regulatory clearance from Indian authorities. Both Daiichi and the promoters of Sun Pharma have agreed to vote in favor of the deal. The acquisition comes at a time when the global pharmaceutical industry is witnessing significant growth in the US and emerging markets.

Is Ranbaxy a Distress Sale?

The pharma deal, the biggest in the APAC region this year, will provide a much-needed breather to Daiichi, which has been dogged with Ranbaxy’s regulatory hurdles and huge losses in recent years. Daiichi was looking to sell the troubled Ranbaxy for quite some time after Ranbaxy faced multiple regulatory issues with the US Food and Drug Administration (FDA), which banned drugs made at four of its domestic plants. Moreover, Ranbaxy incurred huge losses on foreign currency loans. Thus, Daiichi failed miserably to convert its Indian investments into profits and finally agreed to sell its stake to Sun Pharma at a nearly 40% discount to the Rs.737 a share that it had paid in 2008.

Moreover, Daiichi also wrote down $3.5 billion in 2009 to cover a drop in value of its initial investments after Ranbaxy faced regulatory issues in the US. These problems caused a drastic erosion of Ranbaxy’s share prices. The stock has since recovered, more than doubling since a March 2009 trough. For Daiichi, the deal would not mean a pullback from India, but is seen as merely an ownership transfer.

Deal Valuation

While the deal is expected to close at the end of 2014 and is pending regulatory approvals, it values Ranbaxy at 2.2 times its $1.8 billion revenues for 2013, which translates to about Rs.457 per share. According to data compiled by Bloomberg, the deal values Ranbaxy at 21.3 times trailing 12-month profit, compared with a median valuation of 22.3 times among nine similar transactions in recent years. Moreover, Daiichi retaining a stake of about 9% in Sun Pharma valued at about $2 billion, compared with the $4.2 billion it paid for a 63.9% stake in Ranbaxy in 2008.

Ranbaxy Gets a Booster Shot; Long-term Positive for Sun Pharma

Pills

As part of the deal, Daiichi has agreed to indemnify Sun Pharma and Ranbaxy for, among other things, certain costs and expenses that may arise from the recent US subpoena, which Ranbaxy received for the Toansa facility in North India over quality issues.

Looking ahead, buying Ranbaxy would give Sun Pharma control over the former’s pipeline of generic products and help it expand in markets including Russia and Brazil. The deal is seen to be a long-term positive for Sun Pharma because it will also give the company access to three major products that Ranbaxy has tentative FDA approval to sell in the US, namely the generics of blockbuster drugs Diovan, Nexium, and Valcyte. Since Ranbaxy was the first to file applications for these three products, it will be given 180 days of exclusivity if the FDA clears these drugs.

In a conference call with the media on April 7, 2014, Dilip Shanghvi, Managing Director of Sun Pharma, said, “This transaction helps us transition to our long-held ambition of becoming a successful Indian company in the global pharmaceutical space.” The combined entity will have increased exposure to emerging economies, which Sun Pharma can leverage for its own specialty portfolio.

Combined Entity to Create Generics Behemoth

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About 54% of Sun Pharma’s sales in the year ended March 2013 came from the sale of generic drugs in the US and another 26% came from the sale of generics in India, according to company’s annual report. The combined entity will also have operations in 65 countries, 47 manufacturing plants across five continents, and a huge share of specialty and generic products marketed worldwide, which includes 629 new generic drug approvals in the US.

Moreover, Sun Pharma has a track record of acquiring troubled companies and turning them around. For instance, in 2010, Sun Pharma bought US-based Caraco Pharmaceutical Laboratories when Caraco was faced with manufacturing quality concerns that led to the FDA banning its plants. Sun Pharma was able to quickly iron out those issues, after which Caraco plants resumed production in 2012.

Ranbaxy will indeed benefit from Sun Pharma’s strategy of successfully integrating acquisitions into its growing portfolio of assets. Since Ranbaxy has been facing serious issues with exports to the US, its most important market, Sun Pharma’s primary focus will be to comply with regulatory standards and get Ranbaxy out of the US ban. Moreover, Sun Pharma’s strong sales base in the US, along with its India supply chain management that has been tight enough to meet FDA standards in most cases will be key advantages that the merger has to offer.

In recent years, the global generic drugs market has witnessed many mergers with companies seeking economies of scale for selling low-cost, commodity products. Although major drug companies had a good run in the past decade selling copycat versions of blockbuster drugs, the FDA has cracked the whip by implementing stringent regulations for generic drug approvals. This has in turn made it harder for generic drug companies to launch new products. Adding to their woes is the dwindling number of patent expirations. Hence, mergers are seen as one way to improve efficiencies. Analysts estimate that recent deals in the global generic drugs market have led to savings of about 8% of sales.

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