Sun Pharmaceutical’s acquisition of Ranbaxy Laboratories, through an all-stock deal that merges the latter into the former, is replete with symbolic importance. Ranbaxy was billed as the first Indian drug multinational before it was bought by Japan’s Daiichi-Sankyo in 2008. This buy-out — along with Abbott’s of Piramal Healthcare, Mylan’s of Matrix Laboratories and Agila Specialties, Hospira’s of Orchid Chemicals, Sanofi-Aventis’ of Shantha Biotechnics and Fresenius Kabi’s of Dabur Pharma — was seen as leading to an eventual multinational takeover of the domestic pharma industry. It even spurred official moves to prevent any further foreign direct investments of such a ‘brownfield’ nature. Ranbaxy’s return to the Indian fold under Sun Pharma should put to rest fears of multinational dominance. It shows that takeovers are not mono-directional in a globalised industry that offers no dearth of opportunities for generic drug makers.
The $3.2 billion Sun-Ranbaxy deal is also important in the present context when a host of drugs worldwide are going off-patent, allowing firms other than the original inventor or licensee to introduce generic versions of the same. This year alone, drugs worth an estimated $39 billion in annual revenues are facing patent expiry; this figure will aggregate over $190 billion between now and 2018. While India has the potential to exploit the huge ‘patent cliff’ opportunity, Ranbaxy’s run-ins with the US Food and Drug Administration — which has blacklisted four of its plants here — have somewhat sullied the country’s reputation as a global generic pharma hub. The current management under Daiichi-Sankyo clearly has not been able to adequately address these quality control-related issues, which have implications beyond the beleaguered company. The record of the promoter of Sun in acquiring distressed companies and turning them around — making him a Lakshmi Mittal of the pharma industry — raises hopes of more focused attention to Ranbaxy’s problems that have been mischievously used to portray Indian-made drugs to be of substandard quality.
Sun Pharma’s buy-out of Ranbaxy is also interesting for being an all-stock transaction. It merely involves Sun ‘purchasing’ five Ranbaxy shares for every four of its shares. As a result, there will be no cash outflow from the company’s books. This has been made partly possible by the overall buoyancy in Indian markets, helping at least reasonably well-managed companies to command good stock valuations. In this case, Ranbaxy’s own beaten-down valuation from its regulatory troubles has also helped Sun Pharma’s cause: It is quite unlikely this deal would have happened when things were going much better for Ranbaxy. Whether there is the possibility of more such deals — high-valued companies enjoying strong growth using their stock for buying distressed yet potentially revivable firms — taking place remains to be seen.
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