Daiichi Acquires Ranbaxy –
A New Dawn for India Inc.?

In one of its stranger ways, globalization has opened up a completely new form of business model for pharma industry. In a landmark deal, Daiichi Sankyo, the third largest pharmaceutical company of Japan, has acquired controlling interest in Ranbaxy Laboratories—India’s biggest and world’s 9th ranked generic drug maker.

Thus has been formed a hybrid drug house in an all-cash deal of $4.6 bn that priced each share of Ranbaxy at Rs 737, which is at a premium of 31% to the ruling price and 53% to the average price of the share in the preceding three months. Interestingly, it values the entire equity of the company at a whopping $8.5 bn. This acquisition catapults Daiichi—which is currently ranked 22nd by global sales—to 15th rank among the group of drug innovator companies that is crowned by the big names of pharma world, such as the $48 bn Pfizer and $44 bn GlaxoSmithKline.

The combined entity of a generics powerhouse from India that is known for low-cost manufacture of copy-cat drugs and a Japanese firm known for its strength in innovating and marketing premium-priced patented drugs will not only enable Daiichi to enter the emerging markets with “the fast-growing business of non-proprietary pharmaceuticals” but also makes it bigger than Teva, the world’s largest generics company. The acquisition of a non-proprietary drug manufacturer with a proven track record and with the added advantage of there being little or no product or geography overlap with Ranbaxy, that too at a time when a large number of patents are set to go off patent, makes a great business sense for Daiichi’s global expansion plans. It enables Daiichi to get immediate entry into Eastern Europe and Africa. Leveraging on Ranbaxy’s low-cost manufacturing and research skills in manufacturing generic drugs, it can encash on the recent thrust that the Japanese government—overburdened by rising healthcare costs owing to aging population—is giving for greater use of generics.

The current deal is indeed unique for more than one reason. It is a win-win deal, for Ranbaxy—a company saddled with many challenges such as global pricing pressures, high litigation costs, expensive drug-discovery efforts, and with on worthy patented drugs of its own—can leverage on Daiichi’s financial and research strengths. It enables Ranbaxy enter the Japanese market, which is world’s second largest pharma market. In one go, the present deal makes Ranbaxy a debt-free company, besides enabling it to use the surplus cash for funding its expansion and acquisition strategy. In a way, the deal, as Ranbaxy claims, enables it to “transform the company to the next level.”

There is, of course, a downside to the deal: Malvinder Mohan Singh—the owner of an Indian MNC—has simply transformed himself into a CEO of a Japanese subsidiary company. And that is what—the loss of an Indian multinational to a Japanese firm—has become a bitter pill for the India Inc to swallow. Even though it is a mutually agreed acquisition, it did challenge the national psyche. But the deal sets a new benchmark for Indian pharma companies in market valuation, besides paving the way for further such consolidations in an industry that is otherwise finding it difficult to push itself forward beyond a point in the fast changing global market dynamics. Secondly, it should be borne in mind here that so long as assets remain in India creating employment locally, it does not matter who owns the assets. And it should not be a cause of worry, particularly in today’s shrinking national boundaries. The deal also teaches Indian promoters how to exit from their companies sans emotions purely dictated by the business imperatives and alternate avenues available for investing the disinvestment funds.

In short, the deal reaffirms that business and sentiment are strange bedfellows.

- GRK Murty