Japan's Daiichi Sankyo is the biggest gainer from Sun-Ranbaxy deal

India’s Sun Pharma, headed by billionaire Dilip Shanghvi, announced its decision to acquire the troubled Ranbaxy Laboratories from Japanese owners Daiichi Sankyo, in all-share deal valued at $3.2 billion.

There are clear positives for Sun Pharma due to Ranbaxy’s significant position in the domestic market (21 percent of Ranbaxy sales). The combined entity-the world’s fifth largest generic drug firm-will be more diversified with United States, Rest of the World and India contributing 47 percent, 31 percent and 22 percent of sales, respectively, initial analyst estimates reveal.

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

The acquisition could bring to an end a torrid phase for Ranbaxy, whose shareholders can now hope for better fortunes under Sun’s ownership. Ranbaxy last year decided to settle a lengthy lawsuit in the United States, over the sale of adulterated drugs in the US in 2005-06.

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Ranbaxy has set aside $500 million to cover for the legal costs.

The firm, started by Bhai Mohan Singh in 1961, after taking it over from two Amritsar-based cousins a decade earlier, was once India’s largest manufacturer of antibiotics in the 1980s.

Japan’s Daiichi acquired Ranbaxy from Mohan Singh’s grandsons Malvinder and Shivinder Singh in 2008, with the belief that its dominance in cheap generic medicines would boost the Japanese firm’s revenues.

But the acquisition only created a huge drain on Daiichi’s finances after Ranbaxy was slapped with several import bans from US regulatory authorities.

Daiichi stands to be the biggest beneficiary from the new deal by letting go of Ranbaxy ownership. It suffered losses for its Ranbaxy investment and failed to fully unlock Ranbaxy’s value.

On Monday, Daiichi’s President Joji Nakayama said “it learnt a lot of things” from its partnership with Ranbaxy.

Daiichi will hold 9 percent of the new firm and a right for a seat on the new board. Daiichi has also agreed to indemnify Sun and Ranbaxy for certain costs and expenses that may arise from the recent writ Ranbaxy still faces for the Toansa facility.

The acquisition is likely to get completed by the end of 2014 and will fully reflect in Sun Pharma’s FY2016 financials. But Sun’s optimism while taking over Ranbaxy is not misplaced, given its history of turning around its acquisitions (Caraco and Taro) in the past.