Daiichi Sankyo Co. Ltd’s purchase of control in India’s Ranbaxy Laboratories Ltd is a great deal for both. Ranbaxy’s founding Singh family gets a hefty premium for an over-leveraged company, while Daiichi gets Ranbaxy’s cheap, high-quality manufacturing to help it attack the opening Japanese generic drug market.
Ranbaxy’s Malvinder Mohan Singh was thrown in at the deep end when his grandfather died in 2006—its 2005 profits were down 60%. He took the company on an acquisition spree, buying Romania’s Terapia, Bayer’s German generics business, GlaxoSmithKline’s generics businesses in Italy and Spain, and South Africa’s Be Tabs Pharma.
Unlocking value: Ranbaxy research headquarters in Gurgaon, Haryana. Photograph by Harikrishna Katragadda / Mint
This reduced Ranbaxy’s dependence on the US, which had accounted for 45% of its sales, but left the company overleveraged. Financial liabilities in December 2007 were 151% of equity including intangibles and goodwill, or 560% of tangible equity, compared with 59% and 292% at its rival Dr Reddy’s Laboratories Ltd. In spite of Ranbaxy’s growth, earnings per share in 2007 were lower than in 1998. So when Daiichi Sankyo offered 35 times prospective 2008 earnings for Singh’s controlling stake, it appeared attractive.
Daiichi is threatened domestically by the Japanese government’s determination to cut medical costs. The government’s Council on Economic and Fiscal Policy (CEFP)on 12 June reiterated its goal of cutting spending by 220 billion yen ($2.2 billion, or Rs9,416 crore) every year between 2007 and 2011. Moving to generic drugs rather than the branded drugs that currently predominate in Japan is a leader among the CEFP’s proposed cost saving measures. While India’s low-cost pharmaceutical manufacturing capability may be undermined by cheaper competition as the country grows richer, the current combination of a low-cost manufacturer and a major Japanese sponsor should be highly competitive in Japan.
Other Japanese pharmaceutical companies have gone for research capability in their international acquisitions, with Takeda Pharmaceutical Co. Ltd buying the US biotech company Millennium Pharmaceuticals Inc. and Eisai Inc. agreeing to buy MGI Pharma Inc. However, new drugs are increasingly difficult to find, a spate of blockbusters come off patent in the US in 2008-12, and incomes are growing rapidly in the huge potential markets of India and China. Daiichi may be right to bet that the global generic market offers more potential.