Mergers, Acquisition and corporate restructuring- Case Analysis


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The report intends to analyze the Daiichi-Ranbaxy deal in
detail to fan out the benefits, synergies, issues and bottlenecks
arising out of the merger.

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Mergers, Acquisition and corporate restructuring- Case Analysis

  1. 1. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING TERM PROJECT – Daiichi & Ranbaxy 2/11/2008 Merger The report intends to analyze the Daiichi – Ranbaxy deal in detail to fan out the benefits, synergies, issues and bottlenecks arising out of the merger.
  3. 3. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING A NEWSPAPER SNIPPET “June 11, 2008 – Daiichi Sankyo Company, Limited (TSE: 4568.JP) (“Daiichi Sankyo”), one of the largest pharmaceutical companies in Japan, and Ranbaxy Laboratories Limited (NSE/BSE: Ranbaxy/500359) (“Ranbaxy”), among the top 10 generic companies in the world and India’s largest pharmaceutical company, today announced that a binding Share Purchase and Share Subscription Agreement (the “SPSSA”) was entered into between Daiichi Sankyo, Ranbaxy and the Singh family, the largest and controlling shareholders of Ranbaxy (the “Sellers”), pursuant to which Daiichi Sankyo will acquire the entire shareholding of the Sellers in Ranbaxy and further seek to acquire the majority of the voting capital of Ranbaxy at a price of Rs737 per share with the total transaction value expected to be between US$3.4 to US$4.6 billion (currency exchange rate: US$1=Rs43). On the post closing basis, the transaction would value Ranbaxy at US$8.5 billion.” 1 Page
  5. 5. INDIAN PHARMA INDUSTRY CURRENT SCENARIO India currently holds US$ 7.5 Billion of the $550 Billion global pharmaceutical industry; its share is increasing at 10% a year. As compared 7% annual growth for the overall world markets, this figure speaks of a very promising scenario. Domestic pharmaceutical companies will increasingly be looking for consolidation across the value chain by forming partnerships or mergers with companies of complementary strengths. As drug discovery becomes more expensive, and the costs of administration and regulatory compliance continuously rise, these partnerships will become more central to Pharma companies' business proposition. The Bio Pharmaceutical market is seeing a consistent growth trend since 2004, which saw record vaccine sales of US$ 386.3 Million. CUSTOMER SEGMENTS The present sales organization in many pharma companies is oriented towards three customer segments: (1) Physicians (2) Hospitals, wholesalers and pharmacies,
  7. 7. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING INDUSTRY COMPETITION Pharma industry is one of the most Another major factor that adds to the competitive industries in the country industry rivalry is the fact that the entry with as many as 10,000 different barriers to pharma industry are very players fighting for the same pie. The low. The fixed cost requirement is low rivalry in the industry can be gauged but the need for working capital is high. from the fact that the top player in the country has only 6% market share, and The fixed asset turnover, which is one the top five players together have about of the gauges of fixed cost 18% market share. requirements, tells us that in bigger Thus, the concentration ratio for this companies this ratio is in the range of industry is very low. High growth 3.5 to 4 times. For smaller companies, it would be even higher. prospects make it attractive for new players to enter in the industry. times average in India). Though volume growth has been consistent over a Many smaller players that are focused period of time, value growth has not on a particular region, have a better followed in tandem. hang of the distribution channel, making it easier to succeed, albeit in a The product differentiation is one key limited way. factor, which gives competitive advantage to the firms in any industry. An important fact is that pharma is a In pharma industry product stable market and its growth rate differentiation was not possible since generally tracks the economic growth India had followed process patents till of the country with some multiple (1.2 2004, with laws favouring imitators. 2 Page
  8. 8. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING BARGAINING POWER OF BUYERS However, on Jan 1st 2005, keeping in tune with WTO requirements, the industry switched to a product-patent regime. The unique feature of pharma industry In pharma industry, the buyers are is that the end user of the product is scattered and they as such does not different from the influencer (read wield much power in the pricing of the doctor). The consumer has no choice products. However, government with its but to buy what doctor says. However, policies, plays an important role in when we look at the buyer's power, we regulating pricing through the NPPA look at the influence they have on the (National Pharmaceutical Pricing prices of the product. Authority). BARGAINING POWER OF SUPPLIERS The pharma industry depends upon However, what can happen is that the several organic chemicals. The chemical supplier can go for forward integration industry is again very competitive and to become a pharma company. fragmented. The chemicals used in the Companies like Orchid Chemicals and pharma industry are largely a Sashun Chemicals were basically commodity. chemical companies, who turned themselves into pharmaceutical The suppliers have very low bargaining companies. power and the companies in the BARRIERS TO ENTRY pharma industry can switch from their suppliers without incurring a very high Pharma industry is one of the most cost. easily accessible industries for an entrepreneur in India. The capital 1 Page
  9. 9. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING requirement for the industry is very low, creating a regional distribution This model gives a fair idea about the network is easy, since the point of sales industry in which a company operates is restricted in this industry in India. and the various external forces that influence it. However, creating brand awareness and franchisee amongst doctors is the key Going forward, we foresee increasing for long-term survival. Also, quality competition in the industry but the regulations by the government may put form of competition will be different. It some hindrance for establishing new will be between large players (with manufacturing operations. economies of scale) and it may be possible that some kind of oligopoly or cartels come into play. This is owing to the fact that the This is one of the great advantages of industry will move towards the pharma industry. Whatever consolidation. The larger players in the happens, demand for pharma products industry will survive with their continues and the industry thrives. One proprietary products and strong of the key reasons for high franchisee. competitiveness in the industry is that as an on going concern, pharma The barriers to entry will increase going industry seems to have an infinite forward. The change in the patent future. regime, will see new proprietary products coming up, making imitation However, in recent times, the advances difficult. The players with huge capacity made in the field of biotechnology, can will be able to influence substantial prove to be a threat to the synthetic power on the fringe players by their pharma industry. aggressive pricing which will create hindrance for the smaller players. CONCLUSION 1 Page
  10. 10. SWOT ANALYSIS Strengths  New innovative therapeutic products  Globalization  Cost effective technology  Drug delivery system management  Knowledge based, low- cost manpower in science & technology  Increased incomes  High standards of purity  Production of generic drugs Non-infringing processes of Active  Contract manufacturing Pharmaceutical Ingredients (APIs)  Future growth driver Threats  Small number of discoveries Weaknesses Competition from MNCs  Low Indian share in world  Transformation of process patent to pharmaceutical market (about 2%) product patent (TRIPS)  Lack of strategic planni g n  Outdated Sales and marketing methods  Fragmented capacities  Non-tariff barriers imposed by  Low R&D investments developed countries  Absence of association between institutes and industry  Low healthcare expenditure KEY DRIVERS OF DEMAND: PUSH-PULL MARKETING STRATEGIES  Production of duplicate drugs The push aspect would be targeted  Opportunities towards the doctors and other medical practitioners, who are the drivers of  Incredible export potential demand in this sector. Drugs  Increasing health consciousness
  11. 11. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING prescribed to patients are normally Advertising and consumer awareness adhered to by them campaigns are gaining importance and we are increasingly witnessing The pull aspect would mean demand elaborate campaigns like say Cipla's from the consumers’side. Asthma TV commercials. Informing Traditionally, pharma companies have consumers about diseases in general targeted their marketing towards the and then introducing their drug in the push side, targeting doctors mainly. presentation is the new way to embed However, the last few years have drug names into the consumer's mind. ushered a new era. quot;OTC drugs are close to FMCG goods in a lot of ways,quot; says Asha Kapoor, The consumer is king, invest in the pull Executive Director, Sudler & Hennessey. and reduce the push. This is emerging But now it's the prescription drugs, take as the preferred marketing strategy of the GSK print media campaign for its pharma companies like Cipla, Dr Hepatitis A and B campaign, which was Reddy's, Sun Pharma for their supported by road shows and was prescription drugs, a route that over- launched in the hepatitis season. the-counter (OTC ) drugs took long back. quot;Vaccines are taken when people are well, as opposed to antibiotics, where Earlier, most companies used to the choice factor is much less present,quot; approach doctors with their a GSK spokesperson said. Hence it's prescription drugs, offering carrots like possible to urge consumers to exercise junkets for a particular number of a conscious choice. To keep to the prescriptions. Now they've realized the rules, vaccine names are not displayed. long-term benefits in building brands and creating informed, loyal The rules are limiting but now that consumers. companies have tasted blood they will find ways and means of keeping the 1 Page
  12. 12. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING consumer aware of their brands. At the industry has fallen to a record low. For end, that may be good for consumer the top 20 pharma companies, too. productivity has fallen from an average of 1.5 new products annually during According to AdEx India, Print most of the 1990s, to just under one product per company, since 2000. advertising of OTC sector grew by 9% during Jan-Sept '07 and 'Cipla I-Pill' With such poor productivity levels, it is was the most advertised new brand in not surprising that mergers and Print acquisitions have again risen to the forefront of many executives’ minds as an immediate route to strengthening RECENT TRENDS R&D pipelines and increasing shareholder value. Today, there is a global trend towards consolidation which going forward, will Apart from the patented pharmaceutical only gather steam, as pressure to and biotech companies scouting for synergize within the pharmaceutical acquisition in newer geographies to industry is increasing. The lack of launch their patented molecules, widen innovative research and development product basket and strengthen R&D (R&D), expiring patents, generic pipelines, the global generics market competition and high profile product has also undergone an unprecedented recalls are driving the mergers and consolidation wave in the past two acquisition (M&A) activity in the global years. Of the recent noted transactions pharmaceutical and biotech sector. are Sun Pharma’s (India) acquisition of Taro (Israel), DRL’s (India) acquisition of The most pressing need for many betapharm (Germany) and Barr’s long pharma companies in the world is to contested acquisition of Pliva (Croatia) create a pool of new products to secure future growth. According to Scrip, in The spate of mergers and acquisitions recent years, productivity in the pharma by Indian companies has ushered an 2 Page
  13. 13. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING era of the “Indian Pharmaceutical MNC”. especially via the inorganic route. After traversing the learning curve Companies such as Ranbaxy, through partnerships and alliances with Wockhardt, Cadila, Matrix, and Jubilant international pharmaceutical firms, have made one or more European Indian pharmaceutical companies have acquisitions, while others such as now moved up a step in the value chain Torrent are also scouting for potential targets. and are looking at inorganic route to grow through acquisitions. Many top- and mid-tier Indian companies have gone on a global “shopping spree” to Besides gaining a faster entry into the build up critical mass in International target market, one of the basic markets. Also, given the easy access to strategies behind the acquisitions global finance the Indian companies are remains that of leveraging India’s low finding it easier to fund their cost advantage by shifting the acquisitions. manufacturing base to India. At the Over the last two years, several Indian same time, the acquired companies companies have targeted the developed also serve as an effective frontend for markets in their pursuit of growth, Indian companies in these markets. 3 Page
  15. 15. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING leadership of its current CEO & Managing Director Malvinder Singh. The main benefit for Daiichi Sankyo from the merger is Ranbaxy’s low-cost manufacturing infrastructure and supply chain strengths. Ranbaxy gains access to Daiichi Sankyo’s research and development expertise to advance its branded drugs business. Daiichi Sankyo’s strength in proprietary medicine complements Ranbaxy’s leadership in the generics segment and both companies acquire a broader product base, therapeutic focus areas and well distributed risks. Ranbaxy can also function as a low-cost manufacturing base for Daiichi Sankyo. THE DEAL Ranbaxy, for itself, gains smoother access to and a strong foothold in the Daiichi Sankyo Co. Ltd. signed an Japanese drug market. The immediate agreement to acquire 34.8% of Ranbaxy benefit for Ranbaxy is that the deal Laboratories Ltd. from its promoters for frees up its debt and imparts more $2.4 billion at $17 per share. Daiichi flexibility into its growth plans. Most Sankyo expects to increase its stake in importantly, Ranbaxy’s addition is said Ranbaxy through various means such to elevate Daiichi Sankyo’s position as preferential allotment, public offer from #22 to #15 by market and preferential issue of warrants to capitalization in the global acquire a majority in Ranbaxy, i.e. at pharmaceutical market. least 50.1%. After the acquisition, Ranbaxy will operate as Daiichi SYNERGIES Sankyo’s subsidiary but will be managed independently under the The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their 2 Page
  16. 16. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING respective presence in the developed the gaps that exist in greater detail. and emerging markets. While Ranbaxy’s Ranbaxy has a greater share of the strengths in the 21 emerging generic entire set of patents filed by both drug markets can allow Daiichi Sankyo companies in the period 1998-2007. to tap the potential of the generics While Daiichi Sankyo’s patenting business, Ranbaxy’s branded drug activity has been rather mixed, development initiatives for the Ranbaxy, on the other hand, has developed markets will be significantly witnessed a steady uptrend in its boosted through the relationship. To a patenting activity until 2005. In fact, large extent, Daiichi Sankyo will be able during 2007, the company’s patenting to reduce its reliance on only branded activity plunged by almost 60% as drugs and margin risks in mature against 2006. markets and benefit from Ranbaxy’s POST ACQUISITION STRATEGIC strengths in generics to introduce OBJECTIVES generic versions of patent expired drugs, particularly in the Japanese In light of the above analyses, Daiichi market. Sankyo’s focus is to develop new drugs to fill the gaps and take advantage of Both Daiichi Sankyo and Ranbaxy Ranbaxy’s strong areas. To overcome possess significant competitive its current challenges in cost structure advantages, and have profound and supply chain, Daiichi Sankyo’s strength in striking lucrative alliances primary aim is to establish a with other pharmaceutical companies. management framework that will Despite these strengths, the companies expedite synergies. Having done that, have a set of pain points that can pose the company seeks to reduce its a hindrance to the merger being exposure to branded drugs in a way successful or the desired synergies that it can cover the impact of margin being realized. pressures on the business, especially in With R&D perhaps playing the most Japan. In a global pharmaceutical important role in the success of these industry making a shift towards two players, it is imperative to explore generics and emerging market the intellectual property portfolio and opportunities, Daiichi Sankyo’s 3 Page
  17. 17. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING acquisition of Ranbaxy signals a move Daichii, there might be certain on the lines of its global counterparts conflict of interest while taking Novartis and local competitors Astellas strategic long term decisions. Pharma, Eesei and Takeda POST MERGER ANALYSIS Pharmaceutical. Post acquisition challenges include managing the In summary, Daiichi Sankyo’s move different working and business cultures to acquire Ranbaxy will enable the of the two organizations, undertaking company to gain the best of both minimal and essential integration and worlds without investing heavily into retaining the management the generic business. The patent independence of Ranbaxy without perspective of the merger clearly hampering synergies. Ranbaxy and indicates the intentions of both Daiichi Sankyo will also need to companies in filling the respective consolidate their intellectual capital and void spaces of the other and emerge acquire an edge over their foreign as a global leader in the counterparts. pharmaceutical industry. Furthermore, Daiichi Sankyo’s INTEGRATION ISSUES portfolio will be broadened to Ranbaxy and Daichii have a include steroids and other completely different employee technologies such as sieving culture. This will pose some methods, and a host of therapeutic cultural integration issues. segments such as anti-asthmatics, Though Ranbaxy is an extremely anti-retrovirals, and impotency and well managed and process anti-malarial drugs, to name a few. oriented company, it will face Above all, Daiichi Sankyo will now problems in matching up with have access to Ranbaxy's entire Daichii’s relentless focus on range of 153 therapeutic drugs quality. across 17 diverse therapeutic Considerable Geographical indications. Barriers Additional NDAs from the US FDA on Though there is a strategic anti-histaminics and anti-diabetics alignment between Ranbaxy and is an added advantage. 4 Page
  18. 18. MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING Through the deal, Ranbaxy has company now. While Daiichi Sankyo has become part of a Japanese corporate stressed that it going ahead with the framework, which is extremely reputed deal, it raises some concerns over the in the corporate world. As a generics impending benefits and has in fact player, Ranbaxy is very well placed in already affected Ranbaxy’s share both India and abroad although its performance in September 2008. Post share performance belies its true the deal, Ranbaxy’s debt will be potential. Ranbaxy is also an emerging significantly reduced and will impart branded drug manufacturer possessing more flexibility to pursue growth tremendous clout in terms of strategic opportunities. The acquisition alliances with some of the biggest corroborates the strong possibility for players in the industry. Given Ranbaxy’s similar moves in the future, particularly intention to become the largest from Japanese players who have begun generics company in Japan, the displaying confidence in Indian patent acquisition provides the company with laws and respect for intellectual a strong platform to consolidate its property rights. Japanese generics business. From one of India's leading drug manufacturers, Ranbaxy can leverage the vast research and development resources of Daiichi Sankyo to become a strong force to contend with in the global pharmaceutical sector. A smooth entry into the Japanese market and access to widespread technologies including, plant, horticulture, veterinary treatment and cosmetic products are some things Ranbaxy can look forward as main benefits from the deal. However, the recent ban on the US imports of more than 30 Ranbaxy drugs is a major pain point for the 5 Page