Sun Pharma completes Ranbaxy deal

Deal’s closure comes after the receipt of multiple approvals; Ranbaxy shares will stop trading on 6 April


Shares of Sun Pharma rose as much as 2.4% in intra-day trade on Wednesday, while those of Ranbaxy jumped 2.1%. Photo: Hemant Mishra/Mint
Shares of Sun Pharma rose as much as 2.4% in intra-day trade on Wednesday, while those of Ranbaxy jumped 2.1%. Photo: Hemant Mishra/Mint

Mumbai: Sun Pharmaceutical Industries Ltd, India’s most valuable drug maker, has completed the $3.2 billion acquisition of Ranbaxy Laboratories Ltd after almost a year of navigating the regulatory gauntlet to create the world’s fifth-biggest generic pharmaceutical company by revenue.

The closure of the deal, announced on 6 April last year, will create an entity with almost Rs.30,000 crore in combined annual revenue and Rs.2.5 trillion in market value.

Deal closure came after the receipt of approvals from authorities including the courts, capital markets regulator and antitrust watchdogs in India and the US.

Sun Pharma and Ranbaxy also overcame allegations of insider trading that briefly cast uncertainty over the deal that will create India’s largest drug maker, with a local market share of 10%.

Both have also faced issues over compliance with the Food and Drug Administration, the US drug industry watchdog.

Sun Pharma managing director Dilip Shanghvi, one of India’s richest men with a fortune estimated at more than $20 billion, said restoring the confidence of regulators would be the company’s “most important focus”.

“Ranbaxy had some regulatory problems in some of the manufacturing facilities,” said Shanghvi.

“We are committed to ensure that we will do whatever it takes to bring back the confidence of the regulators so that they trust what we do and what we say,” Shanghvi said.

On Wednesday, shares of Sun Pharmaceuticals gained 1.29% to Rs.1,053.30 on BSE. Ranbaxy gained 1.63% to Rs.832.90 on a day the benchmark Sensex shed 0.2% to 28,111.83 points.

Shares of Ranbaxy Laboratories will stop trading on the BSE and NSE on 6 April when it is delisted.

A senior Sun Pharma executive said on condition of anonymity that Ranbaxy as a brand will eventually cease to exist, in line with Sun Pharma’s marketing strategy.

With the Ranbaxy acquisition, Sun Pharma joins the club of the world’s top generic drug makers that include Teva Pharmaceutical Industries Ltd, Sandoz Inc. and Mylan NV.

The combined entity’s manufacturing footprint covers five continents, with products sold in over 150 countries. About 40% of its sales comes from India and other emerging markets, and it has 45 manufacturing plants.

“(In) the US, Europe and other markets, we have several products awaiting regulatory approvals. And as we get these approvals, I believe that we will grow faster than the markets,” Shanghvi said.

Sun Pharma estimates $250 million of synergies accruing from the merger in three years.

“The merger creates a combined entity which has managerial capability that is significantly greater than either company alone,” said Shanghvi.

Sun Pharma agreed to acquire Ranbaxy from Japan’s Daiichi Sankyo Co. Ltd for $3.2 billion in stock in addition to assuming $800 million of debt.

Sun Pharma has made nearly 20 acquisitions since its inception in 1983.

In 2010, it acquired a majority stake in Israel-based Taro Pharmaceutical Industries, a move that more than doubled its revenue in the US to $1.1 billion from $484 million.

Within two years, Sun Pharma bought two more drug makers in the US—Dusa Pharmaceuticals Inc. and the generic business of URL Pharma Inc. Apart from India and the US, Sun Pharma has manufacturing facilities in Israel, Mexico, Hungary, Canada, Bangladesh and Brazil.

Quality issues at Ranbaxy’s US-dedicated manufacturing plants in Mohali, Dewas and Paonta Sahib resulted in the US Food and Drug Administration (FDA) imposing an import ban on drugs produced at these sites, hurting sales in the US, its most important market.

The Dewas and Paonta Sahib facilities were banned in 2008 and the Mohali plant in 2013.

The senior Sun Pharma executive cited above said both Sun Pharma and Ranbaxy faced problems with regulatory authorities. “Indeed, problem plus problem is problem square. But we will have to deal with it. We will be focusing on clearing these hurdles in next one year, though there is no timeline fixed,” he said.

Given Sun Pharma’s history of turning around acquired assets in the past, the company should be able to succeed with its purchase of Ranbaxy, according to Sarabjit Kour Nangra, an analyst with Angel Broking Pvt. Ltd.

“However, in the near term, the acquisition will dilute the reported return on equity from 27.9% to 27.5% in financial year 2016, which is healthy, given the low profitability of the acquired company and it would be at the higher end of its peers, which have an ROE (return on equity) of 17-25%. The operating ROE, which excludes the cash component, will still be higher at around 41%,” she said.

Shanghvi has set three top priorities for the combined entity—to achieve 100% compliance with manufacturing standards specified by the regulators, to increase its focus on research and development (R&D) and achieve strong business growth across the world.

Currently, both Sun Pharma and Ranbaxy invest around $250 million combined in R&D.

Shanghvi said the firm is looking at investing “close to 6-7% of our turnover on R&D, which would allow us to invest close to $500 million a year on R&D.

“Pharma business is linked with success in R&D,” he said.

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