INDIAN INSTITUTE OF MANAGEMENT INDORE
Mergers & Acquisition
Term Paper: Acquisition of Ranbaxy by SunPharma
Submitted to:
Prof.D. L Sunder
Submitted by:
Section A Group 2
ASIT ARUNAV MOHAPATRA - 2013PGP085
ARANI SARKAR- 2013PGP067
AASHISH MANDRAH - 2013PGP081
ANSARI MOHD ASHHAR MAZHAR JALAL - 2013PGP058
BHAVYA TIRAMDASU -2013PGP103
BHAGAT OMKAR BHIMRAO2013PGP097
BHASKAR MANDELIA2013PGP101
VISHAL C. VISWANATHAN2013PGP448
Submission Date:
24th November, 2014
Contents
Introduction to the Players 3
Sun Pharma 3
Ranbaxy 3
Industry Background 4
Sun Pharma’s M&A activity 6
Acquisition of Ranbaxy by Daiichi Sankyo 8
Daiichi Sankyo 8
The takeover of Ranbaxy 8
Strategic objectives and Synergies behind the deal 8
Synergies 8
Market reactions to the acquisition announcement 9
Overview of Ranbaxy laboratories Valuation 9
Aftermath of Deal 9
The announcement and market reaction 10
Sun Pharma Ranbaxy Merger /Acquisition Process: 11
Pre-Acquisition Stage: 11
I. Making Decision to Buy - 11
II. Due Diligence/ Company Evaluation - 12
III. Process Initiation/ Proposal Phase - 13
IV. Structuring Business Deal - 13
V. Financial Settlement/ Exchange of Stocks - 13
Post-Acquisition Stage: 14
I. Merger Closing Phase and Post-Merger Integration Plans to Operate the Venture - 14
Valuation: 14
REGULATORY ISSUES 15
ANTICIPATED POST MERGER INTEGRATION ISSUES 17
Annexure 19
References 22
Introduction to the Players
Sun Pharma
Sun Pharmaceuticals was established by Mr.Dilip Shanghviin 1983 inVapiwith five products to treatpsychiatryailments. Cardiology products were introduced in 1987 followed bygastroenterologyproducts in 1989. Today it is the largest company in chronic prescription and a market leader in psychiatry, neurology, cardiology, orthopedics etc.
The 2014 acquisition of Ranbaxy will make the company the largest manufacturer of pharmacy products in India and the 5th largest in generics products globally
Over 72% of the Company’s Sales come from markets outside India. The US is the single largest market accounting for around 60% of the total revenues. Manufacturing operations are in 26 locations including countries like US, Canada, Brazil and Israel.
In the US, the company markets a large basket of generics, with a strong pipeline awaiting approval from the U.S.Food and Drug Administration(FDA)
The company was listed on the stock exchange in 1995 and was back then oversubscribed 55 times. Today it is one of the most profitable pharma companies in India.
Acquisitions and Joint Ventures
In 1996 Sun Pharma purchased a bulk drug manufacturer Kohli pharmaceuticals. In 1998 Sun Pharma acquired a number of respiratory brands from Natco pharma. In 2010, the company acquired a large stake inTaro Pharma, Inc.amongst the largest generic derma companies in the US, with operations across Canada and Israel.In 2011, Sun Pharma entered into a joint venture with MSD to bring complex or differentiated generics to emerging markets
Ranbaxy
It’s an Indian multinational pharmaceutical company that was incorporated in 1961.The Company went public in 1974 and Japanese pharmaceutical companyDaiichi Sankyoacquired a controlling share in 2008. The company was started by Ranbir Singh and Gurbax Singh as a distributor for a Japanese company in 1937.
Ranbaxy has been involved in several issues with FDA. In 2009 the US Food and Drug Administration said it halted reviews of all drug applications including data developed at Ranbaxy'sPaonta Sahibplant in India because of a practice of falsified data and test results in approved and pending drug applications. In 2012 Ranbaxy halted production and recalled forty-one lots ofatorvastatindue to glass particles being found in some bottles. In 2013 US FDA fined 500 million for manipulation generic data and selling adulterated drugs to United States.
Acquisition
In June 2008, Daichi Sankyo acquired a 34% stake in Ranbaxy for 2.4 billion USD. In November 2008 Daichi Sankyo completed the takeover of the company from the Singh family. Ranbaxy's Malvinder Singh remained as CEO after the transaction. In the same year, it reached settlement on the world's two highest selling drugs - Lipitor (with Pfizer) and Nexium (with Astra Zeneca).
Industry Background
India’s pharmaceutical sector has seen unwavering growth in the past few years, going up to 23 billion USD in 2012 from 23 billion USD in 2002. The pharmaceutical sector in India has been growing consistently at the rate of 13-14 % every year since the last five years and is expected to touch 55 billion USD by 2020. Generics are expected to continue to dominate the market while patent-protected products are likely to constitute 10 per cent of the market till 2015.
Indian pharmaceutical industry companies can broadly be classified as domestic companies and foreign companies (MNCs). Some of the major players include GlaxoSmithKline, Cipla, Dr. Reddy’s Laboratories, Ranbaxy, Pfizer etc. Financial year 2013 was challenging on the domestic front and witnessed sluggish growth owing to acute competition from unlisted players and so on. Growth in the sector is expected to be boosted this year due to increasing consumer spending, rapid urbanization et al.
Over the past few years, there has been a paradigm shift in the attitude of people in India towards healthcare. Alarming rise in cases of cardiovascular problems, nervous system disorders, diabetes and many other diseases as well as disorders has created more awareness in the growing population about the need of improvement in medical sector. Therefore, there is a great need for pharmaceutical companies to invest their time and resources in research and development of new, efficient and cost effective drugs.
India has an organized pharmaceutical market of its own, which is being considered as a potential partner by other countries. The Indian Pharma Market is ranked number 3 in terms of volume and 10th in terms of market value. Indian pharma companies are also proving to be global leaders in production of generics and vaccines.
India has attracted Direct Foreign Investment of US$ 11,391.03 million from April 2000-2013 and will see an upsurge in the years to come. Biopharmaceuticals is also increasingly becoming an area of interest given the complexity in manufacture and limited competition.
The domestic pharmaceutical market has seen a growth of 13.5 % and recorded total sales of Rs 6,883 crore (US$ 1.12 billion) in the month of July 2013. The major reasons for this growth can be attributed to continual growth in prolonged therapies, increasing sales of generic medicines and strengthening hold over rural markets.
The need of skilled manpower in the pharmaceutical industry ranges widely from R&D, Quality Assurance (QA), Intellectual Property (IP), manufacturing to even sales and marketing. What the pharma industry needs is to have better policies to retain and nurture the existing talent and equip them with necessary skills. However, this sector is emerging as a popular choice amongst Gen Y, since the nature of work, primarily treating patients and research for new drug discoveries plays an integral role in meeting their key career aspirations.
Sun Pharma’s M&A activity
Sun Pharma has gone through a number of domestic and international M&A activities through its inception. Some of the activities have been listed in the table below. Exhibit 1 shows successful turnaround of 16 acquisitions.
Year / Target Company / Acquisition Details2013 / Generics Business of URL Pharmaceuticals / Acquired a comprehensive list of ANDAs and generic products from Takeda Pharmaceuticals
2012 / Dusa Pharmaceuticals / Acquired a developer of a dermatological device used to treat actinic keratoses
2011 / Joint Venture with MSD / Joint Venture with a focus on emerging markets
2010 / Caraco Pharmaceutical Laboratories / Initial stake investment in 1997, 100% takeover in 2010
2010 / Taro Pharmaceutical Industries Limited / Acquired majority stake in a multinational generic manufacturer with established North America presence and a strong dermatology franchise
2009 / Products from Forest Lab's Inwood Division
2008 / Chattem Chemicals Incorporated / Acquired a manufacturer of controlled substances with an API facility
2005 / Assets of Able Laboratories / Acquired controlled substance manufacturing assets.
2005 / Hungarian Operations and Formulation Plant of ICN / Acquired Alkaloida’s controlled substance APIs and dosage form manufacturing plant.
2004 / Products from Women's first Healthcare
2004 / Phlox Pharma / Acquired manufacturer of cephalosporin API holding USA and European approvals
2002 / MJ Pharma / Initial stake investment in 1996, 100% takeover in 2002. Acquired plant with USFDA and UKMHRA approvals for oral dosage forms
2000 / Pradeep Drug Company / Chennai based API manufacturer is merged with Sun Pharma.
1999 / Milmet Laboratories / Helped initiate entry in ophthalmology
1999 / Gujarat Lyka Organics / Initial stake investment in 1996, 100% takeover in 1999. Acquired Cephalexin and 7ADCA actives manufacturing site
1998 / Products from NatcoPharma / Helped initiate entry in chest and respiratory therapy areas
1997 / TamilnaduDadha Pharmaceuticals Limited / Helped initiate entry in oncology and gynaecology
1996 / Bulk Drugs Plant from Knoll Pharma / Acquired an API plant in Ahmednagar, Maharashtra
Acquisition of Ranbaxy by Daiichi Sankyo
Daiichi Sankyo
Daiichi Sankyo Company Ltd is a global pharmaceutical company and the second largest pharmaceutical company in Japan. It was established in 2005 through the merger of Sankyo Company, Limited and Daiichi Pharmaceutical Company, Limited. It achieved JPY 1,148.2bn in revenues in 2013.
The takeover of Ranbaxy
On Jun 11, 2008 Ranbaxy announced that a binding share purchase and share subscription was entered between Daiichi Sankyo and Ranbaxy. With a purchase price Rs. 737 per share, the transaction is valued at US $4.6 billion. Daiichi Sankyo acquired 34.8% stake. It made an open offer to Ranbaxy shareholders for another 20%. It picked up another 9.12% through preferential allotment. It was an all-cash transaction. It was funded through a mix of bank debt facilities and existing cash reserves of Daiichi Sankyo. The debt was of value US$ 2.6 billion which is almost 50% of total funding required for the deal.
The Nomura Securities Co Ltd, the japan headquartered investment bank, acted as the exclusive financial advisor. Jones Day as the legal advisor outside India. Mehta Partners LLC as the strategic business advisor and Ernst & Young as the accounting and tax advisor. The Religare Capital markets Limited acted as exclusive financial advisor to Ranbaxy and the Singh family. Vaish associates were the legal advisors
Strategic objectives and Synergies behind the deal
Daiichi Sankyo wanted to diversify geographically and especially paving its way into emerging markets like India. The deal would help Daiichi Sankyo to enter into non-proprietary drugs and take advantage for Ranbaxy’s strong areas. The acquisition of Ranbaxy by Daiichi represents a major entry for the Japanese firm into the high growth business areas of generic drugs.
Synergies
a) Considering that Ranbaxy is a generic company and Daiichi Sankyo an innovator company, both businesses complement each other with negligible overlap.
b) Ranbaxy provides a low cost manufacturing set up to Daiichi Sankyo.
c) Ranbaxy has a small presence in the Japanese market where the generics market holds good opportunities
d) Also Ranbaxy incurred lower costs, as it became debt free company
e) Ranbaxy geographically diversified presence across the globe will enable it to provide a wider reach to Daiichi Sankyo’s portfolio, including India.
f) The deal made the amalgamated company to be the world’s 15th largest pharmaceutical company in the world.
g) Ranbaxy bypassed a lot of European an U.S companies that were unable to enter the Japanese markets due to its stringent safety and testing requirements.
Market reactions to the acquisition announcement
The share price of Ranbaxy Laboratories rose by 3.86% to Rs 526.40 on June 9th 2008. Daiichi Sankyo agreed to pay as much as $4.6 billion for a 50.1% stake in Ranbaxy. Later the stock ended almost at Rs 560.80 on June 11th 2008. On June 13th 2008 it spiked to Rs 660 and settled finally at 567.75 points, up a mere 0.15%
Overview of Ranbaxy laboratories Valuation
Daiichi Sankyo paid about 4.7x Ranbaxy’s sales for the acquisition, as against 2.7x in a similar deal between Mylan for Merck KGaA’s generic unit at a price of $ 7.6 billion in 2007. The higher valuation was due to Ranbaxy’s strong infrastructure, presence across geographies, a robust product pipeline, including upsides from the settlements
Aftermath of Deal
The EPS showed a double fold increase without much of increase in gross profit which indicated that the reserves & surplus should have been made available accordingly. The balance sheet of Daiichi Sankyo indicated that the current liabilities had increased to 161% when compared to current assets which had decreased by (15.43%). COGS significantly decreased in the year 2008 due to the increase in purchase of Investments owing to the acquisition. Three weeks after the deal, Daiichi Sankyo reported currency – exchange losses of Rs 9 billion in 2008 owing to the goodwill evaluation at the time acquisition.
On February 25, the U.S. Food and Drug Administration announced that a facility owned by India-based Ranbaxy Laboratories falsified data and test results in approved and pending drug applications. The agency halted review of drug applications from plant due to evidence of falsified data; invokes application integrity policy. Daiichi Sankyo though learnt about the US FDA invocation ignored it expecting it to get resolved. Daiichi, in its eagerness to tap the expertise of a generic drug maker, took the risk of buying Ranbaxy for a top dollar. Daiichi Sankyo though learnt about the US FDA invocation ignored it expecting it to get resolved. Ranbaxy shares have staged a huge rally since hitting a low 133 rupees in March 2009, trading at 465 rupees on March 14, 2011.
Daiichi lack of understanding of generic business in the valuation paid for acquiring Ranbaxy. The deal is a classic example of an acquirer paying top price without looking too closely at the quality of the goods.
The announcement and market reaction
The announcement by Sun Pharma on 6th April, 2014 that it would acquire 100% of Ranbaxy Laboratories Ltd. In an all-stock transaction, valued at $4 billion, marked one of the landmark deals of Indian Pharmaceutical industry which resulted in making Sun Pharma the largest pharmaceutical company in India, the largest Indian Pharma company in the US and the 5th largest generic company worldwide. On a pro forma basis, the combined entity’s revenues are estimated at US$ 4.2 billion with EBITDA of US$ 1.2 billion for the twelve month period ended December 31, 2013.The transaction value implies a revenue multiple of 2.2 based on 12 months ended December 31, 2013.