Ranbaxy sale a perfect match

Neeta Lal 

Many fear that with the Daiichi takeover of Ranbaxy, aggressive and pro poor posturing of generic medicines might get diluted. In recent years India’s pharmaceutical industry has challenged the established names because of its high quality production of generic medicines. This had helped the developing countries to combat diseases but with the new arrangement fears are setting in. 

India's pharmaceutical industry, noted for its high-quality production of generic, or off-patent, drugs woke up last week and took a fresh look at itself after Japan's third-largest drug firm, Daiichi Sankyo, snapped up Indian pharmaceutical giant Ranbaxy Laboratories for US$4.6 billion.

For the most part, the industry liked what it saw, with the deal marking recognition of its strengths and opening new opportunities for growth at home and overseas. Only a few naysayers questioned whether it marked the start of an influx of foreign investors and rivals keen to buy up local firms.

Ranbaxy's young billionaire chief executive and managing director, Malvinder Singh, 35, had reason to be happiest in the new dawn. He and his family were made $2.3 billion better off by agreeing to sell their 34.8% stake in the debt-burdened firm to Daiichi.

The takeover valued Ranbaxy, which will become a Daiichi subsidiary, at over $8.4 billion, while making the Japanese company the world's fifteenth-largest drug maker from its current rating of 22. Daiichi will raise its Ranbaxy holding to a minimum of 50.1% through an open offer to shareholders at 737 rupees (US$17) per share.

Malvinder's company now has an opportunity to expand its presence in the global mart while finding a much-larger partner to help shoulder its $600 million in debt, picked up during a spending spree this decade. That will give Ranbaxy more freedom to consolidate its position in other sectors, such as financial services and healthcare. It will also be able to channel to India new high-quality drugs from Daiichi, noted for its innovation and excellent research base.

Ranbaxy shares hit a three-year high last Friday after the deal was announced, bolstered by a Business Standard report, citing unnamed sources, that Pfizer, the world's largest drug company, was considering making a hostile bid to acquire the company.

The Indian business community feels the Daiichi purchase augurs well for the future of the global pharmaceutical industry. "The Ranbaxy deal is path-breaking because it will combine the might of two internationally strong companies to forge a new global force in pharmaceuticals," said Keerthi Reddy of Apollo Pharma Labs. Ranbaxy will add international clout and a strong Indian presence to Daiichi Sankyo, giving it access to 60 countries from the present 15, Reddy said.

Daiichi shares jumped 5% after the deal was announced, with investors believing the company will be able to capitalize on Ranbaxy's cheap and world-class manufacturing operations to gain more clout in the increasingly important Japanese generic drug market.

Ranbaxy has been in the doldrums since 2005, when its profits plummeted by 60%. Malvinder, who took over the company in 2006 and who will continue as managing director of Ranbaxy-Daiichi, embarked on an acquisition spree, snapping up Romania's Terapia, Bayer's German generics business, GlaxoSmithKline's generics businesses in Italy and Spain and South Africa's Be Tabs Pharma.

The acquisitions lessened Ranbaxy's dependence on the US, which accounted for nearly half its sales, but left the company over leveraged. Its earnings per share in 2007 were lower than they were in 1998, making Daiichi Sankyo's offer at 35 times prospective 2008 earnings for Malvinder's controlling stake appear generous. On Wednesday, the shares were trading at a p/e of 28.7.

Daiichi's addition of generic drugs to its interests on top of branded drugs that at present are the norm in Japan will help it grow in emerging markets and also respond to Japanese government efforts to slash medical costs. The country's Council on Economic and Fiscal Policy is seeking to whittle spending down by 220 billion yen (US$2.2 billion) every year between 2007 and 2011.

The Japanese government is promoting use of cheaper, off-patent drugs as its population ages and incurs rising healthcare costs. The share of generic drugs in the country's medical cabinet is only 17%, compared with 63% in the US and 56% in Britain.

The proposed transaction "provides the opportunity to complement our strong presence in innovation with a new, strong presence in the fast-growing business of non-proprietary pharmaceuticals," Daiichi chief executive Takashi Shoda said after the deal was signed. "Ranbaxy will also allow us to tap the emerging markets."

Those markets are needed to bolster Daiichi's lagging sales, which declined 10.4% in Japan in the year ended March 31, according to the company's annual report, while revenue from North America tumbled 7.1%. A 48.2% jump in sales to other regions, led by Asia and Latin America, helped to limit the fall in total sales to 5.3% in the period. The company cut its spending on research and development 4.2% in the year.

In contrast, Ranbaxy sales to North America climbed 16% in dollar terms in its most recent quarter compared with a year earlier, with the company claiming it increased its share in the US market for generic drugs in which it was represented to about 11.3% in the first three months of 2008 from 10.8% previously. Sales in the Asia-Pacific and Commonwealth of Independent States countries gained 22% in the quarter from the year-earlier period and in India 16%.

Overall, sales gained 15% in the quarter in dollar terms, although only 4% in rupee terms, as the Indian currency strengthened over the period.

From a global perspective, Daiichi's purchase of Ranbaxy is in line with efforts by leading drug makers to gain toeholds in emerging markets as markets in the US and eurozone shrink.

The positive aspects of the deal still left some in the Indian business community apprehensive that it might lead international investment bankers and others to view every Indian company as saleable and prompt a swathe of unsolicited proposals.

Analysts argued that this concern is unwarranted, with the takeover instead likely to act as a catalyst for domestic consolidations. "No foreign company can force itself on an Indian one," said a New Delhi-based industrialist. "It is for the company owner to decide whether he wants to do a Ranbaxy or not."

Even so, the domestic generic drug industry is attracting increased attention after Ranbaxy along with Cipla, Wockhardt, Aurobindo and others have made it a leader in supplying affordable drugs for millions around the world, not least to treat life-threatening ailments such as AIDS and cancer, along with lifestyle diseases like hypertension and high cholesterol.

India, with a 25% share of the global generic drugs market, exports nearly 70% of its medicine output to emerging markets.

Some fear that with the Daiichi takeover, Ranbaxy's overall aggressive focus on generic drugs may get diluted.