India’s antitrust regulator Competition Commission of India (CCI) has cleared $3.2-billion Sun Pharmaceutical Industries’ purchase of Ranbaxy Laboratories on the condition that the companies divest seven brands of medicines within six months. As per the CCI order, antitrust regulator ordered Sun and Ranbaxy to sell seven brands in which the two merged companies would have “appreciable adverse effect” on competition in India as a result of their market share.

Both the companies have to appoint a senior management employee, within seven days of the date of the order, that is December 5, to oversee the transition. The representative will make a monthly report to CCI on the economic viability, marketability and competitiveness of the divestment product.

This is the first transaction in which the CCI has proposed any form of structural remedies, which would eliminate the adverse effects on competition which could be caused by a combination, in the opinion of the CCI. This is the first transaction in India which was examined in the more detailed “Phase II” by the CCI. Informed Avaantika Kakkar, partner, Khaitan & Co. who led the transaction, "This merger application involved a complex, first time, Phase II merger in India and involved a sector that is sensitive and subject to much public scrutiny."

Khaitan & Co led discussions with the CCI, in understanding the full meaning and scope of the law and the regulations – which were being tested for the first time. It also involved working very closely with the regulator in achieving a balance between the concerns of the regulator and the commercial expectations of the parties involved, not to forget, the many stakeholders that have an interest in ensuring that this merger goes through smoothly.

"This Order of the CCI sets a precedent with respect to procedure and substance that will be read closely and followed by all of us. It marks a milestone in the development of competition law in India," Kakkar added.

CCI had earlier ordered a so-called second-stage investigation into the merger of Sun Pharmaceuticals and Ranbaxy, citing the risk that the deal could harm national interest by resulting in significant market domination by the combined entity.

Telling Sun and Ranbaxy to sell some brands will help address the regulator’s concerns that the combined entity would have too much power in dictating drug prices in India. “The order of the CCI approving the deal is an important milestone for the transaction. It revalidates our view that the Sun Pharma and Ranbaxy businesses complement each other with limited product overlap, and will offer a comprehensive product basket to enable future growth. We are pleased with the open and transparent manner in which the matter has progressed,” Dilip Shanghvi, managing director of Sun Pharma, said in an official statement.

Arun Sawhney, chief executive officer and managing director of Ranbaxy, said the approval by CCI is a significant step forward and his company is confident that after closure the combined entity will enable sustainable long term growth and deliver immense value for all stakeholders. Sun Pharma will own nearly 54.7% of the equity share capital in the new entity set to be created. The merger is also subject to both companies divesting certain drugs.

One of the preconditions of the order is that parties divest seven products. These products constitute less than 1% of the combined entity’s revenues in India.

The antitrust watchdog suggested that Sun Pharma divest all products containing Tamsulosin + Tolterodine that are currently marketed and supplied under the Tamlet brand name. It has also suggested that Ranbaxy divest all products containing Leuprorelin that are currently marketed and supplied under the brand name Eligard. “In the event the divestiture of distribution rights of Eligard is not achieved within the first divestiture period, Sun Pharma shall divest its products containing Leuprorelin currently marketed and supplied under Sun Pharma’s brand name Lupride,” CCI said.

The first divestiture has to be done within six months from the effective date. The effective date is the date of the order, which is 5 December. Ranbaxy’s 46.79% equity shareholding in Zenotech Ltd, a listed company, will also vest with Sun Pharma. Within a week of the effective date, 5 December, each company is required to appoint a senior management-level employee to ensure that the divested products have “economic viability, marketability and competitiveness” till the closing date.

The closing date, as defined in its order, is the date when legal title of the divested products move to the purchaser. CCI has also asked the new entity to not acquire any direct or indirect “influence” in the divested products for five years from the closing date.