The boards of India’s two leading pharmaceutical companies, Sun Pharmaceuticals and Ranbaxy Laboratories, announced their merger in April 2014. In what is touted to be one of the biggest M&A deals in the Indian market, estimated at US$4 billion, Sun Pharmaceuticals will acquire all outstanding shares of Ranbaxy in an all-stock transaction. The shareholders of Ranbaxy will receive 0.8 shares of Sun Pharma for each Ranbaxy share. While at the time of the announcement the deal was expected to close by December 2014, delays in regulatory approvals pushed it to the next year. (For a better understanding of the process behind a merger, see: Mergers and Acquisitions: Doing The Deal.)
Both Ranbaxy and Sun Pharma are established names in the pharma industry worldwide and have operations in a number of countries. They also complement each other in their areas of expertise and efficiency, both functionally and geographically. While Sun Pharma is a major global specialty pharmaceutical company with expertise in complex and niche therapy areas and a proven record of turning around its acquisitions, Ranbaxy has a strong global footprint and presence in the generics segment. According to Sun Pharma’s annual report of 2013-14, the pro-forma revenues of the merged entity are estimated at US$ 4.2 billion for the CY (calendar year) 2013. The transaction will also make Sun Pharma the fifth-largest pharmaceutical company globally in terms of revenues, with operations in over 55 markets and 40 manufacturing facilities worldwide.
A Crucial Time for Ranbaxy
Ranbaxy Laboratories was established in 1961 and is a member of the Daiichi Sankyo group (Tokyo, Japan), a leading global pharma innovator. Daiichi Sankyo is also a majority shareholder of Ranbaxy, with 63.4% outstanding shares. Ranbaxy has ground operations in 43 countries and 21 manufacturing facilities located in 8 countries, and its impressive portfolio of products is sold in over 150 countries.
Although the company met its sales targets for the latest financial year, it has been incurring a net loss and suffering a decline in net worth since 2011, which can be attributed to a few key circumstances.. These include the settlement amount of US$ 515 million paid to the US Department of Justice (DOJ) in May 2013 after civil and criminal charges were brought against it for misrepresentation of data and irregularities found in two of its facilities in India, diminution in the value of its investments and a loss on foreign currency option derivatives. Thus, the merger of the company with Sun Pharma comes at a crucial time when Ranbaxy is struggling to improve its financial position. (For related reading, see: Evaluating Pharmaceutical Companies.)
- By August 2014, Sun Pharma and Ranbaxy had obtained clearances from both the stock exchanges in India (NSE and BSE) as well as from anti-competition authorities in all applicable markets except India and the U.S. (For more information on India's stock exchanges, see: An Introduction To The Indian Stock Market.)
- The CCI (Competition Commission of India) approved the acquisition of Ranbaxy by Sun Pharma on December 5, 2014 on the precondition that seven brands, constituting less than 1% of total revenues of the combined entity in India, be divested in order to prevent the merger from negatively impacting competition in the domestic market.
- On February 2, 2015, both companies announced that the U.S. FTC (Federal Trade Commission) had granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) on the precondition that Sun Pharma and Ranbaxy divest Ranbaxy’s interests in generic minocycline tablets and capsules to an external third party. As per the proposed settlement, Ranbaxy’s generic minocycline assets will be sold to Torrent Pharmaceuticals, which markets generic drugs in the U.S. (To learn more about the U.S. FTC, see: History Of The U.S. Federal Trade Commission.)
- As of February 22, 2015, the companies were awaiting approval of the High Court of Punjab and Haryana, India. Both Sun Pharma and Ranbaxy will also have to meet the pre-conditions set forth by the CCI and U.S. FTC for the merger to be closed.
The Outcome and Resulting Synergies
The annual report of Sun Pharma for FY 2013-14 highlights the following points of significance to note about this merger, and the opportunities that are to result from it:
- The new entity will be the world’s fifth largest specialty-generic pharma company with sales of US$ 4.2 billion on a pro-forma basis for CY 2013. The entity will have a presence in 55 countries and be supported by 40 manufacturing facilities worldwide, with a highly complementary portfolio of products for both acute and chronic treatments.
- In the U.S., the merged entity will be No.1 in the generic dermatology market and No. 3 in the branded dermatology market. It will also become the largest Indian pharma company operating in the U.S.
- The pro-forma U.S. revenues of the merged entity for CY 2013 are estimated at US$ 2.2 billion and the entity will have a strong potential in developing complex products through a broad portfolio of 184 ANDAs (Abbreviated New Drug Application) awaiting US FDA approval, including many High-value FTF (First to File) opportunities.
- The merger will make Sun Pharma the largest pharma company in India with pro-forma revenues of US$ 1.1 billion for CY 2013 and over 9% market share. The acquisition will also enable Sun Pharma to enhance its edge in acute care, hospitals and OTC businesses with 31 brands among India’s top 300 brands and a better distribution network.
- The merger will also improve Sun Pharma’s global footprint in emerging pharma markets like Russia, Romania, Brazil, Malaysia and South Africa, offering opportunities for cross-selling and better brand-building. The merged entity will have combined pro-forma revenues of US$ 0.9 billion for CY 2013 in emerging pharma markets.
- Pro-forma EBITDA of the merged entity for CY 2013 is estimated at US$ 1.2 billion.
- Synergy benefits of US$ 250 million are expected to be realized by the third year following the closure of the deal, driven by a combination of revenue, procurement and supply chain efficiencies and other cost synergies.
- Post-deal closure, Daiichi Sankyo (the majority shareholder of Ranbaxy) will become the second largest shareholder of Sun Pharma with a 9% stake.
- Daiichi Sankyo has also agreed to indemnify the merged entity for costs and expenses incurred in Ranbaxy’s recent settlement with the US Department of Justice in regards to its Toansa facility in India.
The Bottom Line
In one of the biggest M&A transactions in India and the pharma industry worldwide, Sun Pharma announced the acquisition of Ranbaxy Laboratories in April 2014 in an all-stock transaction valued at US$ 4 billion. Ranbaxy shareholders will receive 0.8 of a share of Sun Pharma for each Ranbaxy share. Daiichi Sankyo, the largest shareholder of Ranbaxy, will become the second largest shareholder of the merged entity with a 9% stake and the right to nominate one board member. The merger will create the world’s fifth largest specialty-generic pharmaceutical company and the largest player in the Indian pharma market. The pro-forma revenues of the merged entity for CY 2013 are estimated at US$ 4.2 billion, with 47% contribution coming from the U.S., 22% from India, and about 31% from the rest of the world and other businesses.
Although Sun Pharma has a robust track record of turning around its acquisitions, as highlighted by its acquisitions of Taro, DUSA and URL in the last decade, this one is by far the biggest and hence the most challenging, especially given the poor financial performance of Ranbaxy in recent years. Nevertheless, the company is hoping to generate synergy benefits of US$ 250 million by the third year after the closure of the deal. These benefits will mostly come from increased revenue, heightened procurement and supply chain efficiencies and other cost synergies. Most of the regulatory approvals, including those from the stock exchanges in India, CCI and the U.S. FTC, have been received with certain preconditions. The deal is estimated to close by early 2015 once it is approved by two courts in India and meets the preconditions set by the CCI and the U.S. FTC.