New Delhi: In the biggest ever acquisition of a promoter family’s stake in a company, Tokyo-based Daiichi Sankyo Co. Ltd is acquiring a majority stake in Ranbaxy Laboratories Ltd, India’s largest drug maker, paying up to Rs19,780 crore ($4.5 billion) as it seeks to diversify a business that is mostly concentrated in Japan and the US.
This model, where a so-called innovative drug company—as patent-owning multinational pharmaceutical firms are called—has successfully managed a generic drugs business, has worked only for Europe’s third largest drug firm Novartis AG, among large firms.
/Content/Videos/2008-06-12/Josey on ranbaxy_MINT_TV.flv
As part of the transaction announced on Wednesday, Daiichi Sankyo, Japan’s third largest drug maker, will buy out the 34.82% stake held by the Singh family, Ranbaxy’s promoters at Rs737 a share— a 31.4% premium over Tuesday’s closing price valuing the firm at $8.5 billion.
This value, which also includes Ranbaxy’s stakes in other firms such as Terapia SA and Orchid Chemicals and Pharmaceuticals Ltd, almost equals that of German drug maker Schwarz Pharma AG, ranked 26 by market capitalization globally.
“Daiichi Sankyo’s strategy follows Novartis and it’s convincing,” said Fumiyoshi Sakai, a health care analyst at Credit Suisse Securities Ltd. “The essence of the deal is Daiichi Sankyo will seriously challenge generic business.”
Daiichi Sankyo’s shares rose 4.9% to 2, 975 Japanese yen on Wednesday. In contrast, Ranbaxy shares closed almost flat at Rs561 each after surging to a 52-week high of Rs592.7 in mid-day trades. Explaining this contrarian movement, in light of the Rs737 a share price to be offered by Daiichi Sankyo, Sarabjit Kour Nangra, vice-president of research at Angel Broking Ltd, said investors were factoring in the probability of their shares being bought at the Japanese firm’s offer price. The publicly held stake in Ranbaxy is 62.52%, while Daiichi Sankyo’s public offer, mandated under Indian takeover laws, will be just 20%.
Daiichi Sankyo’s board member, global strategy, Tsutomu Une, said Ranbaxy’s distribution reach, growing global demand for generic drugs and competitive Indian manufacturing costs were the top reasons behind the deal. “Our mission has been to expand globally. Ranbaxy has a presence in 150 countries; we’re just in 10,” Une told Mint. “Then, there is the opportunity to increase productivity.”
RANBAXY – A TIMELINE (Graphic)
GAINING VALUE (Graphic)
Ranbaxy’s sales in 2007 touched $1.6 billion.
The pharma market in emerging markets is growing at around 10%, compared with a less than 2% growth in developed markets.
Earlier this year, Daiichi Sankyo warned it expected profits to dip by 18% in the fiscal year leading to March 2009. The low penetration—10% of $65 billion—of generic drugs in Japan also presents an opportunity, Une said.
The combined entity will rank 15th in the world in terms of sales, said Daiichi Sankyo’s president and chief executive Takashi Shoda, up from 22 now. Under terms of the deal, Ranbaxy will become a unit of the Tokyo firm and will continue to be listed on the Indian market, said Malvinder Singh, chief executive officer of the local drug maker.
Singh will continue to head the business and assume additional responsibilities as chairman. The current management team of Ranbaxy will continue to run the business.
“It’s an emotional decision for me,” said Singh, 36. “But it makes best sense to leverage the strengths of the organization and merge as a far stronger and far larger organization.” Control of Ranbaxy, founded in 1937 as a medicine distributor, was acquired by Singh’s grandfather Bhai Mohan Singh in 1952.
Daiichi Sankyo, which began talks with Ranbaxy more than two months ago, will receive preferential allotment of shares up to 9.5% and warrants up to 4.9% of the Indian firm’s diluted equity. It aims to get at least 50.1% of the firm’s equity and its final shareholding will depend on the response to the open offer. It plans to finance the takeover through equal amounts from debt and equity, CEO Shoda said.
The preferential allotment and warrants will pump in $1 billion into Ranbaxy which it plans to use for expansion. Singh also said the firm was no longer spinning off its research unit despite announcing this in February. Ranbaxy has acquired seven firms in the past two years, the largest being its $324 million deal to buy Romanian Terapia SA.
Analysts said the merger represented a move by Ranbaxy into the more valuable branded drugs segment. “It will be difficult for Ranbaxy to go along only with the generic business,” said Awadesh Garg, who tracks the pharma business for brokerage Kotak Securities Ltd. “In the US, the (generic) opportunities are drying up...there is no major opportunity after 2011-12.” The US ranks at the top in the $550 billion global drugs market.
Integration, added Angel Broking’s Nangra, would be a key risk. “Ranbaxy is a generic company and Daiichi Sankyo is more of an innovator company. (Because of this,) in the integration process, there could be a conflict. It needs to be seen how Daiichi is able to extract the maximum benefit out of Ranbaxy.”
(Kanoko Matsuyama and Saikat Chatterjee of Bloomberg contributed to this story.)