Ranbaxy has a good pipeline, can hope for a quick U-turn; Sun has got a good deal

Sun Pharma’s acquisition of a 100 per cent stake in Ranbaxy, valuing the latter at $4 billion, may seem mindboggling. But Sun has clinched the deal at a reasonable price. The timing of the buy is also just right as the worst could be behind Ranbaxy.

The price paid implies a value of ₹457 a share, valuing the company at just 2.2 times its 12-month trailing sales. This is less than half the 5.5 times premium over sales that Daiichi Sankyo paid in 2008 to acquire a 34.8 per cent stake from the Singh brothers. Likewise, this is just a fourth of the hefty 9 times sales that Abbott paid to acquire Piramal Healthcare’s domestic formulations business back in 2010.

The 24 per cent premium to the 60-day volume-weighted market price is largely because of the steep 30-per cent fall in the stock price in January following a ban on exports from its Toansa facility.

Smart buy

Even as uncertainties around re-approval of its four facilities — Paonta Sahib, Dewas, Mohali and Toansa — remain, and the deal may be earnings accretive only after a year, the buy can be justified on various grounds.

One, a good product pipeline in the US, which includes blockbuster exclusive generic opportunities such as Nexium, if approved, may better Ranbaxy’s prospects in the near term. Likewise, a strong branded portfolio in India across various therapies is another positive. The management’s view that Ranbaxy is not the most challenging acquisition only reinforces Sun’s confidence in improving the fortunes of Ranbaxy.

Two, Ranbaxy signed the consent decree with the US drug regulator in December 2011 to address the issues raised in the import alerts issued in 2008.

The import alerts issued recently regarding the Mohali and Toansa facilities are now a part of this consent decree. Ranbaxy is currently working on the remedial measures needed to ensure compliance with the conditions put forth by the US drug regulator and exports to US can resume post validation by the regulator.

Sun Pharma’s impeccable track record in turning around the operations of the companies it acquired in the recent past raises the hope of a speedy turnaround in the fortunes of the distressed Ranbaxy.

Sun managed to get its US subsidiary Caraco Pharmaceuticals back on track in less than three years, from the time of signing the consent decree.

Similarly, after being acquired by Sun, the profits of specialty dermatology company Taro Pharma and generic company URL Pharma have grown manifold within a short time.

The deal may hence be a win-win for investors in Sun Pharma and Ranbaxy. With Ranbaxy’s shareholders likely to get a 0.8 share of Sun Pharma for every share held, they still stand to benefit from a turnaround in the company’s prospects.

(This article was published on April 7, 2014)
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