Japanese drug firm Daiichi Sankyo might have exited its India investment last month, seven years after it entered the country through the acquisition of Ranbaxy, but the bitter aftertaste lingers.

Last month, Daiichi sold its entire stake in the Sun-Ranbaxy combine, posting a negative cash flow of ¥36.7 billion ($308.35 million/Rs 1,962.8 crore as per the current exchange rate) from Ranbaxy’s investing activities. One would think this marks an end to Daiichi’s attempts at cutting losses, but a clause may hold it liable for penalty payouts to the tune of $325 million for seven years.

“As per the contract between Sun Pharma and Daiichi Sankyo regarding the merger of Ranbaxy into Sun Pharma, Daiichi Sankyo could be required to indemnify Sun Pharma for 63.5% of penalties and damages,etc, arising from quality issues of Ranbaxy prior to the closing date, which are paid to US federal or state governmental authorities by Sun Pharma or Ranbaxy, with a maximum cap amount of $325million. This obligation lasts for seven years from the closing date (March 24, 2015)”, Daiichi Sankyo said.

Daiichi Sankyo had acquired Ranbaxy in June 2008 for $4.6 billion to foray into the generics market riding high global demand. In April 2014, it sold Ranbaxy to Sun Pharmaceutical in an all-stock deal worth $3.2 billion.

Following the merger’s completion in March 2015, Daiichi’s holding in the combined entity was 8.9%. Around three weeks later, on April 21, it sold all its shares in Sun Pharma for $3.2 billion via open market transactions.

Daiichi said the sale of Sun shares is not expected to impact profits materially. “The company had deliberated possible courses of action with regard to the Sun Pharma shares and reached the conclusion of disposing of all the shares from the perspective of increasing corporate value,” it noted.

Daiichi said it posted a gain on the merger,  with profit from discontinued operations  pegged at ¥275,646 million, but it overall reported a negative cash flow from investing activities of the discontinued operations, amounting to ¥36.7 billion.

“In the first quarter of fiscal 2015, due to the sale of ¥424,338 million in Sun Pharma shares recorded as other financial assets, negative ¥45,845 million is scheduled to be recorded as other comprehensive income,” Daiichi added.

Since 2009, Ranbaxy has been grappling with export restrictions in the US market due to regulatory issues arising from data integrity and quality concerns flagged by the US Food and Drug Administration (US FDA). Ranbaxy’s Indian manufacturing facilities, such as Paonta Sahib and Dewas, which were engaged in export of drugs to the US, have been banned by FDA for non-compliance with good manufacturing practices (cGMP). In fact, in 2013, Ranbaxy paid $500 million in civil and criminal fines under a settlement agreement with the US department of Justice and was forced to forego six months’ exclusivity for sale of three drugs in the US.

Even as Daiichi faced investors’ ire for lack of due diligence, it allegedly initiated legal action against Ranbaxy’s founders and promoters for misrepresentation of facts pertaining to Ranbaxy’s state of affairs.

Bitter pill
* In April 2014, Daiichi sold Ranbaxy to Sun Pharmaceutical in an all-stock deal worth $3.2 billion
* Following the merger’s completion in March 2015, Daiichi’s holding in the combined entity was 8.9%. Around three weeks later, it sold all its shares in Sun Pharma for $3.2 billion. It said the sale of shares was not expected to have a material impact on its profits

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