The Hindu Business Line : Ranbaxy to serve Japanese generic ambitions

BL Research Bureau The Singh family’s exit as the promoters of Ranbaxy Laboratories, India’s largest pharmaceutical company by turnover, will help the new owner Daiichi Sankyo Company to realise its generic ambitions in the US, Japan and emerging markets.

The Indian pharmaceutical market, where growth is at best modest, seems unlikely to have been a chief reason for the Japanese firm’s decision to buy Ranbaxy.

The Ranbaxy-Daiichi deal is perhaps the first instance of an innovator company combining with a generic company to form a global pharma giant. The entity will have an extensive global reach in both proprietary as well as generic products, and a similar position of strength in mature and emerging markets.

Generic game

Daiichi Sankyo was established in 2005 after the merger of two leading century-old Japanese pharmaceutical companies. For the Japanese drug making company, the Ranbaxy buy brings in a strong generic business. It can leverage the Indian company’s manufacturing capabilities to sell products in the Japanese market, potentially one of the biggest markets expected to open up for generics, globally. Around 90 per cent of Ranbaxy’s revenues are from sales of generic drugs.

The Government of Japan is encouraging generic substitution, reflected in the growing volume of such drugs; generic medicines are estimated to account for 30 per cent of the total medicine market in Japan by 2012. It was estimated to be around 17 per cent in 2007. To ready themselves quickly for this, Japanese drugmakers, traditionally only into making new drugs, have been compelled to acquire additional capabilities and also expand their international presence.

Deal details

At the market value of Rs 36,550 crore, Daiichi Sankyo has valued Ranbaxy at 5.51 times its trailing twelve months sales of over Rs 6,600 crore.

This is at a mid-point of valuations commanded by other large-cap generic companies such as Sun Pharmaceutical Industries (8.63 times), Cipla (3.6 times) and Dr Reddys Laboratories (2.38 times).

Ranbaxy is expected to sharply ramp up its revenues and profits in the years to 2014, due to robust growth in the US business and the potential one-time upsides in US related to generic launches of Imitrex, Valtrex, Flomax, Lipitor, Diovan and Nexium. The price appears to factor this in.

Existing investors

For Ranbaxy investors, who can now look forward to an open offer at Rs737 possibly in July-August, there are certain aspects of the deal which should be of interest.

First, near term earnings could see dilution on account of equity expansion of about 30 per cent due to the proposed preferential allotment of warrants and shares, as well as expected conversion of previously issued foreign currency convertible bonds into equity . However, some savings may come in when Ranbaxy retires significant portion of its debt, as indicated.

Second, the deal has put a halt to Ranbaxy’s original plans of demerging its New Drug Discovery Research unit, named Ranbaxy Life Science Research, and the margin-accretive benefits supposed to have flowed to Ranbaxy. As per the de-merger scheme, shareholders were to get one share of the new entity for every four shares held by them in Ranbaxy.

Lastly, it would have to be seen how Ranbaxy will be able to gain from Daiichi’s pipeline of products after it becomes a subsidiary.