Ranbaxy will have to battle Teva, Sandoz for Merck unit

New Delhi, Jan 19 | Updated: Jan 20 2007, 05:58am hrs
Ranbaxy Laboratories Ltds plan to acquire German pharma major Mercks generic business is likely to face stiff competition from global generics giants Israels Teva and US-based Sandoz who could drive up valuations way beyond the $5.2 billion mark, analysts say.

With valuations soaring that high, Ranbaxys current balance sheet size may not be able to support a substantially higher bid.

For instance, Tatas race with Brazils CSN to acquire UK-based Corus has already raised the valuation 37.5% from around $8 billion to nearly $11 billion now. Though Teva and Sandoz spokespersons declined to comment whether the companies would bid for Merck, theres speculation in the market that they are likely suitors. For Ranbaxy, the stakes are very high. If successful, it could emerge as the world's third largest generics company after Teva and Sandoz.

But analysts say the Merck unit might fetch a price equal to between two to three times its annual sales of $2.5 billion. The company produces over 400 substances and claims to be the largest supplier of generic drugs in Australia, France and Scandinavia.

Given the kind of balance sheet Ranbaxy has, it is not easy to garner money required for a 100% stake in the target company. However, the task may be easy if it just pitches for controlling stake, Surya Narayan Patra, pharma analyst, at stock broking company Sharekhan told FE. He, however, said Ranbaxy would need to be more aggressive as Teva and Sandoz are already present in regulated markets. The challenge would stiff if Ranbaxy goes for 100% stake.

Ranbaxys balance sheet for fiscal year 2005 (it follows the calendar year) shows its cash reserves at Rs 2,430.2 crore (about $0.5 billion). Its total balance sheet is of Rs 4,737.7 crore (about $1 billion). Ranbaxy CEO and managing director in an interview to FE earlier had said that raising capital is not a problem given the kind of money chasing good bids currently.

Singh did not offer any comments on the valuation but said, we are examining all possibilities as it is an interesting opportunity for us. I believe due diligence would start by next month".

Ranbaxys chief financial officer Ram S Ramasundar said, we have board approval to generate $1.1 billion and would look for a combination of debt and equity to fund the acquisition. In October, the RLL board of directors had approved raising $1.5 billion of which RLL has already generated and exhausted $440 million to fund acquisitions including Terapia and Be-Tab.