The takeover of Daiichi Sankyo owned Ranbaxy Labs by Sun Pharmaceuticals for $4 billion including a $800 million liability early this month surprised quite a few in the Indian pharmaceutical industry. There was hardly any indication of such a move in the industry circles especially when Ranbaxy has been grappling with a steady rise in losses over the years and mounting regulatory issues with the US FDA with regard to its exports to the US market. When Ranbaxy was first sold to the Japanese giant, Daiichi, in 2008 it gave a shock to the domestic pharmaceutical industry as the company has been doing extremely well and many thought that a sell off was uncalled for. Now with the management control shifting to Sun Pharma, consolidated net sales of both the entities could be above Rs. 26,000 crore in the current year. Under the transaction, expected to be completed by this year end, shareholders of Ranbaxy will receive four shares of Sun Pharma for every five they hold. Daiichi will become the second largest shareholder in Sun Pharma with around 8.9% stake. The merger of Sun Pharma and Ranbaxy will make the combined entity the fifth largest generics company in the world and the largest pharmaceutical company in India. The new entity will have operations in 65 countries, 47 manufacturing facilities across 5 continents providing a significant platform of specialty and generic products marketed globally, including 629 ANDAs. For Daiichi, the Sun’s acquisition has given a grand opportunity to exit the crisis ridden Ranbaxy with a fairly good return on its investments besides the stake.
Sun Pharma’s seemingly bold acquisition of Ranbaxy was hailed by several analysts and some of the corporate heads as they think Mr. Dilip Shanghvi’s strategy of acquiring poorly performing companies and turning them around may work this time also. Between 1997 and 2012 Sun Pharma made 13 acquisitions starting with the purchase of Caraco Pharmaceuticals. That was the year in which it also bought stakes in two Indian pharma firms namely Tamilnadu Dadha Pharmaceuticals Ltd and MJ Pharmaceuticals Ltd. But in the case of Ranbaxy take over, Sun is facing a different type of hurdle. A belligerent US FDA taking a tough stand on Ranbaxy’s exports from most of its Indian plants to the US market. Ranbaxy has been confronting serious issues with regard to exports to the US, its most important market, since 2009. All its Indian facilities exporting drugs to the US have been barred from doing so by the US drug regulator for failing to comply with manufacturing standards. Last year, Ranbaxy also pleaded guilty to felony charges related to drug safety in the US and paid $500 million in civil and criminal fines under a settlement with the department of justice. And its balance sheet has been disappointing for some time. Ranbaxy's consolidated net sales for the year ended December 2013 declined to Rs. 10,604 crore from Rs. 12,253 crore in the previous year and EBDITA to Rs. 1,066 crore from Rs. 2,211 crore. The company's net loss amounted to Rs. 1,012 crore in 2013 as against a net profit of Rs. 923 crore in 2012. The company skipped dividend and its share price declined steadily during this period. Another area of concern for the Sun management will be the handling of huge sales force of the two companies. Sun and Ranbaxy have a combined field staff of about 9,000. Once the merger is completed, many of the sales personnel will end up covering the same doctors, especially in the speciality areas. For Sun Pharma’s plan to turn around Ranbaxy with the operating synergy will have to trim the field force and integrate its supply chain. Layoffs in the sales force can only help to save on salaries and overheads by way of lower cost of travel, prescription promotion and administration costs. To address all these adverse and sensitive issues may not be that easy for the company management for some years.