The consolidation process of the Indian pharmaceutical industry continues in its own pace. Most recently, the homegrown pharma takeover magician is all set to tango yet again with a bold ‘Sunny’ tune. The low profile creator of high value ‘Sun Pharmaceuticals’, that he painstakingly built from the scratch facing many turbulent weather over nearly three decades, is ready to go for the gold, yet again.
The cool, composed and the decisive business predator is now in the process of gobbling up, quite unexpectedly, the much ailing prey – Ranbaxy. This acquisition of a distressed asset, would make Sun Pharmaceuticals a pharma behemoth not just in India with a jaw-dropping 9.33 percent share of the Indian Pharma Market (IPM), but also would help catapulting the company to become the 5th largest generic pharmaceutical company globally.
Ranbaxy – A sad example of value destruction:
It is worth recapitulating that in 2008, Daiichi Sankyo paid reportedly US$ 4.6 billion to acquire 63.8 percent stake in Ranbaxy.
After Sun Pharma’s acquisition of Ranbaxy with US$ 3.2 billion in 2014, Daiichi Sankyo will hold just 9 per cent of Sun Pharma, which is currently worth US$ 2 billion. Such an example of value erosion of a pharma giant in a little over 5 year period is not just unique, but very sad indeed.
Keeping the “Sunny” side up”:
It is expected that post acquisition, Sun Pharma would continue to keep its ‘Sunny Side’ up, maintaining the corporate name of the merged entity as ‘Sun Pharma’.
Ranbaxy name, in any case, is not so popular, either inside or outside India after the US-FDA fiasco, casting aspersions on the quality of products that it manufactures.
Moreover, the history indicates that this is exactly what happened when Abbott acquired Piramal Healthcare, Zydus bought over Biochem or even Torrent took control of Elder.
Ranbaxy name could probably exist as a division of Sun pharma in future, if at all.
Post acquisition IPM league table:
According to AIOCD AWACS, extrapolating the post acquisition scenario on the league table (MAT February 2014) of the Top 10 Pharma majors in India, it looks as follows:
|Rank||Company||Value Rs. Crore||Market Share %||Growth %|
|1||Sun Pharma Group||6,741||9.33||8.8|
|9||Pfizer + Wyeth||2,150||2.98||3.0|
(Source: AIOCD AWACS)
Distancing from No. 2 by a mile:
With the above unprecedented chunk of the IPM, Sun Pharma would distance itself from the (would be) second ranking Abbott with a whopping 2.74 percent difference in market share, which would be equivalent to the turnover of the 10th ranking pharma player in the domestic pharma market.
In its pursuit of corporate excellence, Sun Pharma has made 13 acquisitions between 1990s and 2012. Post merger, the revenue of the combined entity is estimated to be around US$ 4.2 billion with EBITDA of US$ 1.2 billion for the 12-month period that ended on December 31, 2013.
Merger consolidates ‘Domestic Pharma’ market share:
This acquisition would also tilt the balance of ‘Domestic Pharma’ Vs. ‘Pharma MNC’ market share ratio in the IPM very significantly, as follows:
Current Market Share Ratio
Post Acquisition Market Share Ratio
Domestic Pharma Vs. Pharma MNC
73.4 : 26.6
77.2 : 22.8
(Source: AIOCD AWACS)
Further, this trend is also expected to allay the lurking fear of many about the robustness and future growth appetite of the domestic pharma industry, thus becoming an easy prey of pharma MNC predators. It is believed that such an apprehension was prompted by a series of large ‘Brownfield FDIs’ coming into the Indian pharma industry to acquire a number of important local assets.
Under the prevailing circumstances, it would indeed be a major challenge for Sun Pharma to place its own house in order first and simultaneously address the similar issues to get US-FDA ‘import bans’ lifted from four manufacturing plants of Ranbaxy in India that export formulations and API to the United States. This is quite a task indeed.
2. Pending Supreme Court case on Ranbaxy:
Prompted by a series of ‘Import Bans’ from US-FDA on product quality grounds, the Supreme Court of India on March 15, 2014 reportedly issued notices to both the Central Government and Ranbaxy against a Public Interest Litigation (PIL) seeking not just cancellation of the manufacturing licenses of the company, but also a probe by the Central Bureau of Investigation (CBI) on the allegation of supplying adulterated drugs in the country.
Ranbaxy/ Sun pharma would now require convincing the top court of the country that it manufactures and sells quality medicines for the consumption of patients in India. No doubt, all these issues were factored-in for relatively cheap valuation of Ranbaxy.
3. CCI scrutiny of the deal:
Out of the Top 10 Therapy Areas, the merged company would hold the top ranking in 4 segments namely, Cardiac, Neuro/CNS, Pain management and Gynec and no. 2 ranking in two other segments namely, Vitamins and Gastrointestinal.
Noting the above scenario and possibly many others, the Competition Commission of India (CCI), after intense scrutiny, would require to take a call whether this acquisition would adversely affect market competition in any of those areas. If so, CCI would suggest appropriate measures to be completed by these two concerned companies before the deal could take effect. This would also be a task cut out for the CCI in this area.
4. SEBI queries:
Securities and Exchange Board of India (SEBI), has sought information from Sun Pharmaceutical on stock price movement and the deal structure.
According to reports, this is due to “Ranbaxy shares showing good movement on three occasions: first in December, then in January and subsequently in March 2014, just before the deal was announced.” This has already attracted SEBI’s attention and has prompted it to go into the details.
That said, there are many opportunities for Sun Pharma to reap a rich harvest out of this acquisition. The most lucrative areas are related to Ranbaxy’s missed opportunities for ‘first to launch’ generic versions of two blockbuster drugs – Diovan (Novartis) and Nexium (AstraZeneca).
Despite Ranbaxy holding the exclusive rights to market the first generic valsartan (Diovan of Novartis and Actos of Takeda) for 180 days, much to its dismay, even after valsartan patent expired on September 2012, a generic version of the blockbuster antihypertensive is still to see the light of the day. However, Mylan Inc. has, now launched a generic combination formulation of valsartan with hydrochlorothiazide.
Ranbaxy had created for itself yet another opportunity to become the first to launch a generic version of the blockbuster anti-peptic ulcerant drug of AstraZeneca – Nexium in the United States, as the drug goes off patent on May 27, 2014. However, due to recent US-FDA import ban from the concerned plant of Ranbaxy, it now seems to be a distant reality. Unless…
Sun Pharma has reportedly 10 manufacturing plants in India and 8 in the US, besides having other production facilities in Israel, Mexico, Hungary, Canada, Bangladesh and Brazil. Post acquisition, the combined entity will have operations in 65 countries with 47 manufacturing facilities spanning across 5 continents, providing a solid platform to market specialty and generic products globally. With all these, the above key issues would perhaps be addressed expeditiously.
Leaving aside those two big opportunities, post merger, Sun Pharma is expected to have around 629 ANDAs waiting for approval, including first-to-file opportunities in the United States, besides the current ongoing businesses of the merged company.
What about cost synergy?
Though Sun pharma promoters have given an indication about the revenue synergy, nothing is known, as yet, about the targeted details of cost synergy after this acquisition.
I reckon, the consolidation process in the Indian pharmaceutical industry would continue, though with a different pace at different times, involving both the domestic pharma and MNCs as the predators.
Even before ‘The Breaking News’ of this brand new well hyped acquisition came from Reuters, in the ‘Corporate World’ of India, Dilip Shanghvi used to be known as an unassuming and astute self-made business tycoon blessed with a ‘magic wand’ deeply concealed in between his two ears, as it were. Folks say, at an opportune time, wielding this ‘wand’, he confidently turns distressed pharma assets into money-spinners and has proved it time and again with grit, grace and élan in equal measures.
Can he do it again? Well…Why not?
Thus, while acquiring the ailing Ranbaxy with a value for money, the takeover magician, prepares for his best shot ever, wielding the same magic wand yet again, to steer the new company from an arduous, dark and complex path, hopefully, to a bright frontier of sustainable excellence.
Let’s hope for the best, as the ‘Tango’ begins…on a bold new ‘Sunny’ tune.
By: Tapan J. Ray
Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.