Public scrutiny of $4 bn Sun Pharma-Ranbaxy Laboratories deal starts

Written by PTI | New Delhi | Updated: Sep 4 2014, 18:57pm hrs
Ranbaxy LaboratoriesCCI had asked the Sun Pharma and Ranbaxy on August 27 to make public specific details of their proposed merger. (Reuters)
In the first-ever public scrutiny of an M&A deal in India, fair trade watchdog CCI today invited comments from all stakeholders, including general public, on finer details of USD 4-billion merger of Ranbaxy Laboratories Ltd into rival drugmaker Sun Pharmaceutical Industries.

The comments need to be submitted to the CCI (Competition Commission of India) within 15 days, along with supporting documents on how the merger can adversely impact the concerned person or entity, the regulator said, while adding that it would not consider 'unsubstantiated objections' to the deal.

The CCI said the public consultation process has been launched "in order to determine whether the combination has or is likely to have an appreciable adverse effect on competition in the relevant market in India".

Widening its scrutiny of the multi-billion dollar deal, CCI had asked the two pharma majors on August 27 to make public specific details of their proposed merger.

This is the first instance where the CCI has ordered a public scrutiny of a proposed merger and acquisition (M&A) deal to ensure compliance to fair trade regulations.

Sun Pharma and Ranbaxy, which had announced a USD 4-billion deal in April this year, were asked to make public details of their proposed transaction in a "prescribed format", which has been now put in public domain for "comments/objections/suggestions" from any person adversely affected or likely to be affected by the combination.

CCI Chairman Ashok Chawla also said on August 29 that major issue in the deal is whether the combination would result in high market concentration of certain molecules.

"The major issues obviously are that in many of the molecules, the basic building block in the pharmaceutical industry, whether in some of those molecules there is high market concentration which will emerge as a result (of the consolidation). That is the matter," Chawla said.

The USD 4-billion deal would create the fifth largest speciality generics company in the world and the largest pharmaceutical company in India.

The combined entity would have operations in 65 countries, 47 manufacturing facilities across 5 continents, and a significant platform of speciality and generic products marketed globally.

In April, Sun Pharmaceutical Industries announced it would acquire troubled rival Ranbaxy Laboratories in a USD 4-billion deal that includes USD 800 million debt. The transaction has valued Ranbaxy at 2.2 times its USD 1.8 billion revenue for 2013, or about Rs 457 per share.

The deal has got 'no-objection' from the two exchanges, BSE and NSE, where the shares of two firms are listed, allowing them to file their scheme of amalgamation with the High Court for further clearance of the deal.

The details submitted by the two companies, on which public comments have been sought, state that the combination would "create a global pharmaceutical company with expanded geographical and therapeutic presence".

According to the CCI, the companies have shortlisted 37 molecules out of 246 molecules in which their combined market share is more than 15 per cent while in some cases it stands above 90 per cent.

Further, the individual market share of the firms with regard to the 37 molecules is greater than 5 per cent.

"The pharmaceutical sector in India is a highly fragmented and competitive market where there are a large number of players producing differentiated products with limited entry barriers," the CCI has informed the public.

"The pharmaceutical sector has more than 20,000 registered units, of which the leading 250 pharmaceutical companies control 70 per cent of the market," it added.

The fair trade watchdog has also noted that the industry has "significant degree" of regulation by the government and its agencies on the prices and drugs.

The two companies have submitted with the CCI that their combined market share post the merger would stand at about 9.2 per cent in the country's pharmaceutical sector.

Of this, Ranbaxy and Sun would represent 3.87 per cent and 5.35 per cent market share respectively.

As per the companies, due to presence of large number of international and domestic players in the pharmaceutical sector, the proposed deal "will not result in any appreciable adverse effect on competition".

The companies have submitted that Abbott has the largest share (6.43 per cent) in the sector, while other top drug firms besides Ranbaxy and Sun include Cipla, Glaxo and Lupin.

The public scrutiny has been ordered by the CCI under Section 29(2) of the Competition Act, 2002, which requires the parties to an M&A deal to make public details of their proposed combination in a certain format.

Under this section, if the CCI is "prima facie of the opinion that the combination has, or is likely to have, an appreciable adverse effect on competition, it shall... direct the parties to the said combination to publish details of the combination within ten working days of such direction..."

Such disclosure needs to be made "in such a manner, as it (CCI) thinks appropriate, for bringing the combination to the knowledge or information of the public and persons affected or likely to be affected by such combination."

Earlier, the CCI had sought specific details from the two companies before approving the proposed acquisition of Ranbaxy in an all-stock deal by Sun Pharma.

For the CCI, this is one of the biggest M&A deals and also the first major transaction from pharma sector and thus its decision in this case could have larger implications.

In case the CCI finds the deal in the current form could hurt fair competition in the domestic pharma market, it can even direct the companies to divest some assets as a pre-requisite for approval.