India's Sun Pharma to buy struggling Ranbaxy for $3.2 billion as Daiichi Sankyo retreats

Mon Apr 7, 2014 7:20am EDT
 
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By Chang-Ran Kim and Zeba Siddiqui

TOKYO/MUMBAI (Reuters) - India's Sun Pharmaceutical Industries Ltd (SUN.NS: Quote) has agreed to buy generic drugmaker Ranbaxy Laboratories Ltd (RANB.NS: Quote) for $3.2 billion, betting it can fix factory quality glitches that plagued the current owner, Japan's Daiichi Sankyo Co (4568.T: Quote), and got Ranbaxy India-made drugs barred from the United States.

The all-share transaction, the biggest pharmaceutical sector deal in the Asia-Pacific region this year, will create the world's fifth-largest maker of generic drugs. The acquisition comes as the pace of consolidation increases in a market that's primed for growth in the U.S. and emerging markets and could be worth $335 billion globally by 2017, according to Lucintel.

For Daiichi Sankyo, Japan's fourth-biggest drugmaker by revenue, the deal marks a significant retreat and highlights the lingering quality problems facing India's drug industry. The value of the Japanese firm's investments in the country has been halved since it bought control of Ranbaxy in 2008.

The deal comes against the backdrop of a slew of sanctions against Ranbaxy by the U.S. Food and Drug Administration (FDA) due to concerns about manufacturing processes at its India plants. Sun Pharma's strong sales base in the U.S., along with India supply chain management that has been tight enough to meet FDA standards in most cases and a good record in managing troubled acquisitions, made the firm an attractive buyer for Daiichi Sankyo.

For Sun Pharma, the relatively rare purchase by a leading Indian company of a local rival creates the biggest generic drug business by sales in India, with combined revenue estimated at $4.2 billion. Under terms of the agreed deal, Ranbaxy shareholders will get 0.8 Sun Pharma shares for each Ranbaxy share they own.

"This transaction helps us transition to our long-held ambition of becoming a successful Indian company in the global pharmaceutical space," Dilip Shanghvi, managing director of Sun Pharma, India's largest drugmaker by market value, said in a conference call with analysts. Including Ranbaxy debt, the overall value of the transaction is $4 billion.

The global generic drugs sector has also seen a wave of mergers recently as companies seek economies of scale in an industry that sells low-cost, commodity products.

The sector has had a good run in the past decade selling copycat versions of medicines but recently times have got harder, thanks to a dwindling number of patent expirations. Mergers are seen as one way to improve efficiencies. Analysts estimate that recent deals in the sector have led to savings of about 8 percent of sales.   Continued...

 
A Ranbaxy office building is pictured in the northern Indian city of Mohali May 14, 2013. REUTERS/Ajay Verma