The Hindu Business Line : Ranbaxy promoters’ timely exit

Even in the rarefied world of business luck plays its role. Bhai Mohan Singh, a moneylender, found a pharma business, which later on burgeoned and morphed into a formidable company, falling on his lap when the original promoters of Ranbaxy failed to pay up the Rs 2.5 lakh that they owed him.

Lax patent regime

Aided by a lax patent regime that facilitated manufacture of generics even while the patent for the product was on, Ranbaxy Laboratories Ltd (Ranbaxy) in common with several other drug companies in India made hay while the sun (read lax patent protection regime) shone.

For this Indian drug companies had much to thank Indira Gandhi, who in her socialistic zeal changed the patent regime from product to process in 1970 which opened the floodgates of reverse engineering to the chagrin of the multinational drug majors but to the undisguised glee of Indian drug industry. In such a liberal milieu, Ranbaxy through its Calmpose, for example, not only calmed the frazzled nerves of blood pressure patients but also in the process was able to set its cash register happily ringing.

But then it would be rather uncharitable and churlish to ascribe Ranbaxy’s success story only to its formidable reverse engineering skills. To be sure, efficient management coupled with seizing the moment, like for example, by successfully challenging the patents in the US as also by focusing on off-patent drugs also paid it rich dividends.

WTO pressure

The wheel of patents protection came a full circle 35 years later, thanks to the relentless pressure applied by the WTO at the bidding of the developed world drug lobby. In 2005, the Indian patent law fell in line with the WTO norm and restored the product patent regime much to the relief of the American and European drug majors who invest time and money in research and development..

But the sale of 34.8 per cent stake held by the Singh family in Ranbaxy to the Japanese company Daiichi Sankyo has given rise to a strong feeling that perhaps the game is up for Indian drug companies unless they pull up their socks and beef up their research infrastructure.

Ranbaxy promoters have been quick enough to see the writing on the wall and get the best deal possible while the going is still good and make a decent exit in a manner of a cricketer retiring at the hint of his deteriorating abilities — the Ranbaxy promoters have decided to cash out on honourable and attractive terms, nearly Rs 10,000 crore for their stake reckoned at Rs 737 for a Rs 5 share.

Fortune thus has favoured them till the end. But they are holding out for more. They want the market to catch up with the price offered by Daiichi Sankyo because unless the market does so subject to a leeway of 1 per cent, they cannot unload their shares through a recognised stock exchange in India — a prerequisite to avoid payment of capital gains tax.

Yawning gap

It remains to be seen whether they ride their good fortune in the bourses as well though honestly the gap between the current market quotation of Rs 560 or so and the negotiated price of Rs 737 appears to be yawning and unbridgeable.

The public shareholders may not evince much interest in ramping up the quotations, especially in view of the imminent fear of dilution in EPS, due to increase in share capital enuring for the benefit of Daiichi Sankyo through preferential allotment, staring at them. Also our takeover regulations give the public shareholders a short shrift by giving them the benefit of the negotiated price only on 20 per cent of the share capital of the company even as the promoters negotiate a nice deal on their entire holdings.

In this context, it would be appropriate to raise a larger issue. Why should private deals be allowed to be consummated through bourses when a stock exchange exists essentially for deals done transparently through open bidding? The question assumes importance because small shareholders willy-nilly have to pay capital gains tax on gains earned from the one taking over, Daiichi Sankyo in this case.

The larger message

The Ranbaxy deal promises to engage media attention with greater intensity and for longer duration because it sends a rather depressing signal that the euphoria generated over a string of foreign acquisitions by Indian companies notably the house of Tatas is being reversed.

The larger message however is in days to come the Indian pharmaceutical companies may have to court foreign drug companies with deep pockets unless of course they reconcile themselves to producing and marketing off-patent items.

(The author is a Delhi-based chartered accountant.)