Sun Pharma and Ranbaxy said they will become the largest pharmaceutical company in India, with an estimated combined revenue of USD 4.2 billion, and the fifth-largest speciality generics company in the world.
Ranbaxy, controlled by Daiichi Sankyo of Japan, is struggling with quality compliance issues as all four of its plants in India have been banned by the Food and Drug Administration from exporting products to the US. Sun's Karkhadi plant is also barred from shipping products to the US for violation of good manufacturing norms.
As per their agreement, Ranbaxy shareholders will get 0.8 share of Sun Pharma for each share of Ranbaxy, representing an implied value of Rs 457 for each Ranbaxy share.
This is at a premium of 18 per cent to Ranbaxy's 30-day volume-weighted average share price and a premium of 24.3 per cent to Ranbaxy's 60-day volume-weighted average share price, in each case, as of the close of business on April 4, 2014.
"The transaction has a total equity value of approximately USD 3.2 billion," the two companies said in a joint statement.
The combined entity will have operations in 65 countries, 47 manufacturing facilities across five continents, and a significant platform of speciality and generic products marketed globally, including 629 ANDAs (abbreviated new drug applications).
Recent big-ticket acquisitions in the Indian pharma sector include Mylan Laboratories acquiring Agila Specialities from Strides Arcolab for USD 1.75 billion in 2013 and Torrent Pharma buying the formulations business of Elder Pharma in India and Nepal for Rs 2,000 crore.
Addressing a conference call, Sun Pharma Managing Director Dilip Shanghvi said the deal offered tremendous growth opportunities as Ranbaxy has a significant presence in India and the US, where it offers a broad portfolio of ANDAs and first-to-file opportunities.
"In high-growth emerging markets, it (Ranbaxy) provides a strong platform which is highly complementary to Sun Pharma's strengths. There is very little product-specific overlap between Ranbaxy and Sun products," he added.
Elaborating on the benefits of the deal, he said: "In the US, which is the largest market for Sun, we can now further strengthen our portfolio, with many more ANDAs waiting approval and also first-to-file opportunities," Shanghvi said, declining to put a time-frame on expected approvals for Ranbaxy's applications in the US.
"The first important issue for us to focus on is to achieve compliance...all I can promise is that it would be the most important thing for the management to achieve compliance," he said.
Asked about the premium paid despite issues faced by Ranbaxy in the US, he said: "We'll have to look at the overall business and not at any temporary one-time cost...we believe that the valuation is justified and I am confident of the 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, Ranbaxy agreed to pay USD 500 million after pleading guilty to felony charges over manufacturing and distribution of adulterated drugs in the US.
The deal will mark another transition in ownership for Ranbaxy. In 2008, Japan's Daiichi Sankyo acquired a majority stake in Ranbaxy for Rs 22,000 crore after erstwhile promoters Malvinder and Shivinder Singh exited the firm.