Indian Pharmaceutical Industry-Overview • India currently represents U.S. $6 billion of the $550 billion global pharmaceutical industry with its share increasing at 10 % a year. • Indian sector represents 8% of the global industry total by volume, putting it in 4th place worldwide, it accounts for 13% by value, and its drug exports have been growing 30 % annually. • The “organized” sector of Indias pharmaceutical industry consists of 250 to 300 companies, which account for 70 % of products on the market, with the top 10 firms representing 30 percent. • Indias top 10 pharmaceutical companies were Ranbaxy, Cipla, Dr. Reddys Laboratories, Lupin, Nicolas Piramal, Aurobindo Pharma, Cadila Pharmaceuticals, Sun Pharma, Wockhardt Ltd. and Aventis Pharma.
Profile Of Both the CompaniesLargest in the India8th in largest in the global general 2nd largest in Japanpharmaceuticals 22nd Largest in the world Serving in over 125 Countries Operations in 50 countries. Ground operations in 49 countries Producer of high quality& Manufacturing in 11 countries. drugsStrong R&D Base. 15th Largest drug maker in the world Market Capitalization – 30 Billion Low cost production
Last 5 years - Annual results in brief (Figs in Crores) Dec 09 Dec 08 Dec 07 Dec 06 Dec 05 4,784.76 4,494.52 4,071.29 3,973.56 3,490.13 Sales 822.89 239.75 546.87 559.45 65.76Operating profit (109.85) 893.40 93.43 58.10 26.41 Interest 1,210.12 (562.40) 893.14 580.92 249.01 Gross profit 13.61 (24.56) 16.56 10.37 6.01 EPS (Rs)
Strategic Objectives Behind The Deal Presence in emerging markets for Daiichi-Sankyo (Geographical diversification). Entry into non-proprietary drugs for Daiichi-Sankyo (Product Extension). To develop new drugs to fill the gaps and take advantage of Ranbaxy’s strong areas. Realization of sustainable growth through a complementary business model. To overcome its current challenges in cost structure and supply chain. Acceleration of innovation drug creation by optimizing value chain efficiency. The acquisition of Ranbaxy by Daichi represents a major entry for the Japanese firm into the high growth business areas of generic drug. The acquisition shows that global pharma companies are making efforts to cope up with strong generic drug makers. To match the competitors strategy.
Nature of transaction All cash transaction. Specific nature of the transaction –Off Market Transaction Acquisition funded through debt and existing cash reserves. The deal was financed through a mix of bank debt facilities and existing cash resources of Daiichi Sankyo. Daiichi-Sankyo has taken short and long term loans of USD 2.6 billion which is almost 50% of the total funding requirement of the deal.
Involved Parties Daiichi-Sankyo• Nomura Securities Co., Ltd., the Japan headquartered investment bank, acted as the exclusive financial advisor• Jones Day as the legal advisor outside India• P&A Law Offices as the legal advisor in India• Mehta Partners LLC as the strategic business advisor and• Ernst & Young as the accounting and tax advisor
Contd…Ranbaxy Co Ltd• Religare Capital Markets Limited, a wholly owned subsidiary of Religare Enterprises Limited, is the exclusive financial advisor to Ranbaxy and the Singh family.• Vaish Associates are the legal advisors to Ranbaxy and the Singh family
Synergies Considering that Ranbaxy is a generics company and Daiichi Sankyo an innovator company, both the businesses complement each other with negligible overlap.(Daiichi will support Ranbaxys R&D efforts and contract research business) Ranbaxy provides a low cost manufacturing set-up to Daiichi Sankyo. Ranbaxy geographically diversified presence across the globe will enable it to provide a wider reach to Daiichi Sankyo product portfolio, including India. Ranbaxy has a small presence in the Japanese market where the generics market holds good opportunities. Ranbaxy incurred lower interest costs, as it became debt-free company.
Contd…. The deal strengthened the financials of Ranbaxy (making it debt free and cash rich) and help it grow aggressively -organic. Ranbaxy bypassed a lot of European and U.S. companies that were finding it difficult to enter the Japanese market, where safety and testing requirements are a lot higher. This deal made the amalgamated company to be the 15th largest pharma company in the world.The below equation solves for the minimum required synergy:Pre – Merger Value of both the firms + Synergy = Post – Merger Stock Price Post – Merger Number of shares
The Deal Daiichi-Sankyo acquired 34.8% stake in Ranbaxy on 11th June, 2008 It made an open offer to the Ranbaxy shareholders for another 20% Picked up another 9.12% through preferential allotment It was an all cash transaction. Size of the deal: US$ 4.9 Billion As per the deal, total value of Ranbaxy was US $ 8.5 Billion.
Anticipated Benefits Of the AcquisitionDaiichi-Sankyo• Strengthen the position of the company.• Acquisition will provide low cost manufacturing.• Market access to over 60 countries .Ranbaxy Co Ltd• Company will become one of the top 5 in generic business.• Access to Daiichi’s advanced R & D facilities.• Access to Japanese drug market• Infusion of an additional $ 1 billion into the company.• Surplus cash of Rs.3,000 crores flows in.• The market capitalization goes to $8billion & the net worth goes up.
Market Reaction To The Acquisition Announcement-2008 Share price of Ranbaxy rose from 3.86% to Rs 526.40 on June 9th Daiichi Sankyo agreed to pay as much as $4.6 billion for a 50.1% stake in Ranbaxy The stock ended almost flat at Rs 560.80 on June 11th . June 13- it spiked to Rs 660 and settled at 567.75 points, up a mere 0.15%.
How did Daiichi-Sankyo acquire Ranbaxy? Acquisition Nature of Transaction Consideration (in Crores)Open Market Share Purchase 7458Share Purchases from founding family 10169Share Purchases by issue of new Share 3742Direct acquisition related expenditures 131 TOTAL 21500 Rs 21,500 Crores (USD 4.9 Billion)
Valuation of Ranbaxy Value Assets and Liabilities attributed (Rs Crores)Book value of assets and liabilities (Cash, Inventory 3470etc.)Inventories (Increase in inventories to fair value) 88Tangible assets (Land) 440Intangible assets (Leasehold land) 260Intangible assets (Increase in current products, 1805etc. to fair value)In-process R&D expenses 304Deferred tax liability -881Minority Interests -1981Goodwill 17995 USD 4.01 Billion Total consideration 21500 USD 4.9 Billion
Interpretation Of Shares Held Pre & Post Acquisition SHARES HELD BY PRE % POST % CHANGE %SINGH 34.82 - (100)SINGH’S FAMILY 19 - (100)DAIICHI SANKYO - 63.92 63.92MUTUAL FUND 5.56 2.58 (53.59)BANKS 1.71 0.32 (58.47)INSURANCE COMPANY 14.39 9.19 (36.13)F.I.I 12.42 4.41 (64.49)GENERAL PUBLIC 12.1 19.53 61.40
Reasons for higher valuationThe deal values Ranbaxy at $8.42 billion - • An enterprise value to sales (EV/sales) of 3.5x the estimated earnings for 2008. • An EV/EBITDA of 23x the forward earnings for the current year.It was a very attractive multiple.Daiichi Sankyo paid about 4.7x Ranbaxy’s sales for the acquisition, asagainst2.7x paid by Mylan for Merck KGaA’s generic unit at a price of for$7.6 billion in 2007.The high valuation was due to Ranbaxy’s strong infrastructure, presenceacross geographies, a robust product pipeline, including upsides from thesettlements.
Impact Analysis of the deal on Daiichi’s Figures 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.
Where did Daiichi fail: Due Diligence Daiichi Sankyo though learnt about the US FDA Invocation ignored it expecting it to get resolved. Lack of proper due diligence. Daiichi, in its eagerness to tap the expertise of a generic drug maker, took the risk of buying Ranbaxy for top dollar. Three weeks after the deal, Daiichi reported currency-exchange losses of nine billion rupees in 2008 owing to the Goodwill evaluation at the time of acquisition.
The Final Verdict• Verdict: Failure This is a classic example of an acquirer paying top price without looking too closely at the quality of the goods. “ Daiichi continues to pay for the huge risk it took in the deal”• Stock market verdict Ranbaxy shares have staged a huge rally since hitting a low of 133 rupees in March 2009, trading at 465 rupees on March 14, 2011.
Acquisition AnalysisView of Daiichi on the FDA issue It termed the event as a “risk call” and decided to tackle it when presented with the problem rather than spend time evaluating the risk. Daiichi’s lack of understanding of generic business in the valuation paid for acquiring Ranbaxy. Inadequate due diligence done considering the size, scale and scope of the deal. Should have estimated the full extent of the legal risk arising out of the US FDA letters, In May 2009, Daiichi-Sankyo announced a one-time write-down of $3.45 billion of Goodwill. Daiichi worried about the financial losses and the FDA restrictions.
Regulatory/ Forex/ Legal Issues Involved Approval of Foreign Investment Promotion Board (“FIPB”) Approval under Press Note No. 1 (2005) from SEBI Daiichi was already holding equity stake in Uni-Sankyo Limited, a company engaged in ‘same’ business as Ranbaxy, prior approval of FIPB was obtained. Approval of Cabinet Committee on Economic Affairs (“CCEA” ) Final clearance was received from CCEA by Daiichi in the month of October, 2008.
Taxation Issues Involved• Slump in the financial markets - the prices of Ranbaxy dropped to around Rs.265 (approx).• Promoters sought SEBI approval to waive the +1% ceiling for this block deal.• Huge difference between the deal price and the existing market price - permission was not granted by SEBI• Off market deal was executed after paying the capital gains tax.
Corporate Law Issues Involved • Nomination of Independent Director as per the Agreement, post completion • The board of directors of Ranbaxy would consist of 10 directors, in a combination of – 4 independent and non-independent directors will be nominated by the Promoters – 6 independent and non-independent directors will be nominated by Daiichi.
Major M&As in the Global Pharma industry Company Target company $ billion Pfizer Wyeth 68 Merck Schering Plough 41 Bayer Schering 19.7 Schering Plough Organon 14.5 Takeda Nycomed 13.6 Sankyo Daiichi 7.7
Drivers of M&A In The Global Pharma Industry Lack of research and development (R&D) productivity Expiring patents. Participating in generics to maintain market share High profile product recalls Expansion into emerging markets Revitalizing growth in mature markets Leveraging operations to achieve greater economies of scale
India - Advantages Leveraging India’s low cost advantage by shifting manufacturing base to India Indian companies have superior biotech and drug synthesis skills, high quality and vertically integrated manufacturing assets, differentiated business models Acquired companies serve as an effective front end for Indian companies in developed markets. Price controls have been relaxed and there have been significant changes in the medicinal requirements of the Indians Manufacturing base in India is strong enough to support international pharmaceutical companies from performance perspective
Global Scenario Of M&A DealsFor large firms, mergers are a response to expected excess capacity that istriggered by patent expirations and gaps in the pipeline of follow-onproducts, which depresses expected future earnings growth.Mergers are in fact often rationalized as offering an opportunity to reduceoverhead and other costs, implying expectations of economies of scale.For small firms mergers appear to be primarily an exit strategy for firms thatare in financial trouble