Decoder: What Sun Pharma's $4 bn buyout of Ranbaxy is all about

Shares of Indian drug giant Sun Pharmaceutical Industries on Monday were up 2 percent in morning trade after it greed to buy its troubled peer Ranbaxy for $4 billion in an-all stock deal, thereby ending the latter’s ill-fated six-year control by Japan’s Daiichi Sankyo. The combination of the two will create the fifth-largest generic pharma company in the world and the largest pharmaceutical company in India and leave Daiichi Sankyo with a significant stake in the combined entity. Sun Pharma expects to realise revenue and operating synergies of $250 million by third year post closing of the transaction.   [caption id=“attachment_76866” align=“alignleft” width=“380”] Reuters[/caption] The combined entity will have operations in 55 countries and will result in increased leadership in key emerging markets like Russia, Romania, South Africa, Brazil & Malaysia. Deal details: As per the deal, shareholders of Ranbaxy  will receive 0.8 share of Sun Pharma for each share of Ranbaxy.  According to Sun Pharma, this exchange ratio represents an implied value of Rs 457 for each Ranbaxy share, a premium of 18 percent to Ranbaxy’s 30-day volume-weighted average share price and a premium of 24.3 percent to Ranbaxy’s 60-day volume-weighted average share price, in each case, as of the close of business on April 4, 2014_._ What it means for Daiichi Sankyo:  Now that Sun Pharma has  acquired Ranbaxy, Daiichi is relieved of the burden of managing Ranbaxy’s problems. Daiichi bought Ranbaxy in 2008 in a cash deal valued at $4.6 billion, believing  the latter’s dominance in cheap generic medicines and developing markets would help the firm grow. However, in the last six months, the deal has already lost 40 percent of its value due to Ranbaxy’s regultory problems. Post the Sun Pharma deal, Daiichi will still hold 9 percent stake in Sun Pharma,  thereby becoming the  second largest shareholder in the company but is likely to sell its stake  eventually. As per the investor presentation, Daiichi Sankyo, which holds 63.4 percent stake in Ranbaxy, has agreed to vote shares in Ranbaxy in favour of Sun Pharma’s acquisition and the transaction is expected to close by December 2014, pending shareholder, court and regulatory approvals and other customary conditions. What the deal means for Sun Pharma:  “The combined entity ( Sun Pharma and Ranbaxy) will have increased exposure to emerging economies while also bolstering Sun  Pharma’s commercial and manufacturing presence in the United States and India,” Sun Pharma said in a statement Sun Pharma has a  proven track record of creating significant long-term shareholder value and successfully integrating  acquisitions into its growing portfolio of assets.  As a Mint report notes, “Sun Pharma’s chairman Dilip Shanghvi has acquired a reputation for acquiring companies in trouble at a good price, and then turning around their operations.” The Sun Pharma management in its conference call with investors justified the valuation of the Ranbaxy deal, and said it expected Ranbaxy’s operations to become profitable ‘in short term but did not give any specific timeline on how soon it expected this turnaround. The company said it would continue with the agreements that Daiichi Sankyo, has with Ranbaxy and that it’s first priority would be to ensure compliance with regulatory standards, and only after that would it be focusing on synergy benefits since Ranbaxy has been  facing quality issues for its drugs in the US market. Dilip Shanghvi, managing director of Sun Pharma in a statement said, “Ranbaxy has a significant presence in the Indian pharma market and in the US where it offers a broad portfolio of ANDAs and first-to-file opportunities. In high-growth emerging markets, it provides a strong platform which is highly complementary to Sun Pharma’s strengths. We see tremendous growth opportunities and are excited with the prospects to create lasting value for both our shareholders through a successful combination of our franchises.” In an exclusive interview to CNBC-TV18, Ajay Piramal, Chairman of Piramal Group,  said the deal with Ranbaxy is likely to give Sun access to Japanese market via Daiichi Sankyo. Post the acquisition, Sun becomes the third largest branded derma company in the US. According to brokerage HSBC Securities, “Sun Pharma gets access to Ranbaxy’s strong controlled substance pipeline which includes filing in tamper resistant formulations which we believe could emerge as a strong long-term opportunity for the company.” However, Sun Pharma will have tough task to shelve high overheads in Ranbaxy and improve profitability in the business. What it means for Ranbaxy: Ranbaxy is banned from exporting drug ingredients to the US. Earlier this year, the US Food and Drug Administration banned Ranbaxy from manufacturing and distributing drugs to the US market from its Toansa facility in Punjab. This is the company’s fourth facility to face such a ban. The company has also received a subpoena from the US Attorney for the District of New Jersey asking it to produce certain documents relating to issues previously raised by the FDA with respect to the Toansa facility. But as part of the agreement, , Daiichi Sankyo  has agreed to “indemnify Sun Pharma and Ranbaxy for, among other things, certain costs and expenses that may arise from the subpoena”. As of today, Ranbaxy has four plants under import alerts - Poanta, Dewas, Mohali and  Toansa. According to HSBC Securities, the emerging markets business for Ranbaxy is mostly loss making  and the  $4 billion deal will likely put Sun Pharma on hold for its other ambitions in the US. This article was first published in Firstbiz.com