Sun Pharmaceuticals to buy Ranbaxy Laboratories in $3.2 bn Daiichi Sankyo deal

Written by PTI | Tokyo | Updated: Apr 7 2014, 20:58pm hrs
Ranbaxy shareRanbaxy shareholders to get 0.8 Sun Pharma share for each Ranbaxy share (Thinkstock)
At a time when both are up against quality compliance issues with health regulator in the lucrative US market, Sun Pharmaceuticals Industries today announced that it will fully acquire Ranbaxy Laboratories Ltd in an all-stock transaction deal valued at USD 3.2 billion.

Creating the fifth-largest speciality generics company in the world, the two companies said they will become the largest pharmaceutical company in India.

Check full statement: Sun Pharma announcement

The announcement comes at a time when Ranbaxy is struggling with quality compliance issues as all its four plants in India have been banned by the USFDA from exporting products to the US. Similarly, Sun's Karkhadi plant is also barred from shipping products to the US for violation of good manufacturing norms.

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Under the agreements announced today, Ranbaxy shareholders will receive 0.8 share of Sun Pharma for each share of Ranbaxy, representing an implied value of Rs 457 for each Ranbaxy share, 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.

Also read: Sun Pharmaceuticals Industries shares jump over 9 pct on bourses

"The transaction has a total equity value of approximately USD 3.2 billion," the two companies said in a joint statement.

The combined entity's revenues are estimated at USD 4.2 billion with 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).

Later addressing a conference call, Sun Pharma Managing Director Dilip Shanghvi said: "There is is very little product specific overlap between Ranbaxy and Sun products. So there is enormous amount of oopurtunity...It gives us leadership position in chronic therapy, in acute care, hospitals In the US which is the largest market for Sun, 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 is to achieve compliance. Only once the facility is re-certified we can look at new product approvals from this facility...all I can is promise is that it would be the most important thing for the management to achieve compliance," Sanghvi said.

When asked about 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 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 biz profitable. How long will it is a matter of time."

In 2013, the company agreed to pay USD 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 USD 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.

"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," it said.

Ranbaxy MD and CEO Arun Sahwney said the transaction brings significant value to all Ranbaxy shareholders.

"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," he added.

The proposed transaction has been unanimously approved by the Boards of Directors of Sun Pharma, Ranbaxy, and Ranbaxy's controlling shareholder, Daiichi Sankyo. Ranbaxy's board and Sun Pharma's board have recommended approval of the transaction to their respective shareholders.

The deal will need approval by majority in number representing 75 per cent in value of the shares present and voting at the shareholder meetings of each of Sun Pharma and Ranbaxy.

Both Daiichi Sankyo (which holds approximately 63.4 per cent of the outstanding shares of Ranbaxy) and promoters of Sun Pharma (who hold approximately 63.7 per cent in the firm), have agreed to vote in favor of the transaction.

The deal will mark another transition in its ownership for Ranbaxy. In 2008, Japan's Daiichi Sankyo had acquired majority stake in Ranbaxy for Rs 22,000 crore after the erstwhile promoters Singh brothers exited the firm.

On the relationship Sanghvi said: "We think that the transaction not only gives us a an opportunity to grow our business but also to do partnership with a global company with significant technical capability and strength and we continue to be strategic partners for Diacchi and all the agreements we have with them for the Indian market will continue to be maintained.

Daiichi Sankyo will also have an independent director on Sun Pharma board, so that gives that connectivity and that linkage would be used to strengthen the relationship going forward, he added.

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.

"We will have presence in 65 markets, the combined company will have sales exceeding USD 100 million. There is very little overlap of products and it will allow the combined entity the opportunity to utilise the infrastructure to sell each others products in these markets," he added.

Moreover, the deal will also help in growing distribution network and penetrate deeper in rural India.

"The distribution part of Sun will grow significantly because Sun 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 pass the scrutiny of competition watchdog CCI.

"I think we won't overlap in terms of major products so we are not expecting any major objection (from CCI)," Shanghvi said.

On whether the acquisition will help the Mumbai-based firm to establish business in the Japanese market, Shanghvi said: "Sun actually today does not have any significant Japanese presence I think we have to develop a better understanding of Ranbaxy's existing business in Japan."

"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.

Sun Pharma to buy struggling Ranbaxy for $3.2 bn

(Reuters) - India's Sun Pharmaceutical Industries Ltd has agreed to buy generic drugmaker Ranbaxy Laboratories Ltd for $3.2 billion, betting it can fix factory quality glitches that plagued the current owner, Japan's Daiichi Sankyo Co, and got Ranbaxy India-made drugs barred from the United States.

The all-share transaction, the biggest pharmaceutical sector deal in the Asia-Pacific region this year, will create the world's fifth-largest maker of generic drugs. The acquisition comes as the pace of consolidation increases in a market primed for growth in the US and emerging markets that could be worth $335 billion globally by 2017, according to Lucintel.

For Daiichi Sankyo, the deal marks a significant retreat and highlights the lingering quality problems facing India's drug industry. The value of the Japanese firm's investments in the country has been halved since it bought control of Ranbaxy in 2008.

For Sun Pharma, the relatively rare purchase by a leading Indian company of a local rival creates the biggest generic drug business by sales in India, with combined revenue estimated at $4.2 billion. Under terms of the agreed deal, Ranbaxy shareholders will get 0.8 of a Sun Pharma share for each Ranbaxy share they own.

"This transaction helps us transition to our long-held ambition of becoming a successful Indian company in the global pharmaceutical space," Dilip Shanghvi, managing director of Sun Pharma, India's largest drugmaker by market value, said in a conference call with analysts. Including Ranbaxy debt, the overall value of the transaction is $4 billion.

The deal comes against the backdrop of a slew of sanctions against Ranbaxy by the US Food and Drug Administration (FDA) due to concerns about manufacturing processes at its India plants.

The generic drugs sector has also seen a wave of mergers recently as companies seek economies of scale in an industry that sells low-cost, commodity products.

The sector has had a good run in the past decade selling copycat versions of medicines but recently times have got harder, thanks to a dwindling number of patent expirations. Mergers are seen as one way to improve efficiencies. Analysts estimate that recent deals in the sector have led to savings of about 8 percent of sales.

The deal relieves Daiichi Sankyo of a troubled subsidiary that has diverted resources and weighed on profits - at a price. Under the deal, expected to close by year-end, the Japanese company will end up with a stake of about 9 percent in Sun Pharma valued at about $2 billion, compared with the $4.2 billion it paid for a 63.9 percent stake in Ranbaxy in 2008.


The broader issue of the quality of drugmaking has become a major concern both inside India and across the industry. India is second only to Canada as a drug exporter to the United States, where it supplies about 40 percent of generic and over-the-counter drugs.

The FDA, which last month called for more collaboration with the Indian regulator to improve drug quality, has banned imports from all the Indian plants of Ranbaxy over production quality lapses.

Sun Pharma, whose plant at Karkhadi in the western state of Gujarat was banned from shipping products to the US last month, has been the subject of comparatively fewer regulatory actions in the past.

The company's managing director Shanghvi said the combined entity would focus on the fixing manufacturing quality issues at Ranbaxy so that facilities currently banned from shipping to the US, the biggest export market for both Ranbaxy and Sun, can resume exports.

"The quality of business at Ranbaxy is in no way inferior to business at Sun Pharmaceutical," he said. "Our focus will be to address the issue of achieving compliance. We are not looking at synergies of manufacturing; the focus is to achieve compliance."

Sun Pharma said it expects the acquisition to be accretive to earnings per share in the first full year.

The deal values Ranbaxy shares at 457 rupees apiece, representing an 18 pct premium to their 30-day volume-weighted average share price.

Sun Pharma shares rose as much as 4 percent in Mumbai on Monday. Ranbaxy, whose shares rose by nearly a quarter over the previous three sessions to close at 459.55 rupees on Friday, was trading down 4 percent at 440.55 rupees at 0601 GMT.

Shares in Daiichi Sankyo climbed as much as 5 percent in Tokyo to a two-and-a-half-month high of 1,844 yen. Analysts welcomed the deal, saying it doesn't necessarily signal a pullback from India by Daiichi Sankyo.

"I wouldn't call this an exit. It's an ownership transfer," said Jefferies & Co analyst Naomi Kumagai. "Another company will take over control for them of a place that had a lot of issues. In that sense, it should be a good thing."

In a separate statement, Daiichi Sankyo said the US Attorney's Office in New Jersey had issued an administrative subpoena to Ranbaxy seeking information related to the company's Toansa plant in India. Ranbaxy is cooperating with the information request.

Daiichi Sankyo is holding a news conference on the deal at 4:00 p.m. in Tokyo (0700 GMT).

Citigroup and Evercore Partners are advising Sun Pharma, while Daiichi is being advised by Goldman Sachs Group and ICICI Securities is the financial adviser to Ranbaxy, the statement said.