* Japanese drugmaker hurt by Ranbaxy U.S. restrictions
* Will get 9 pct Sun Pharma stake in all-share deal
* Investors to get 0.8 Sun Pharma share per Ranbaxy share
* Ownership transfer positive for Japan firm - analyst
(Adds Daiichi Sankyo official comments, Sun Pharma M&A record)
By Chang-Ran Kim and Zeba Siddiqui
TOKYO/MUMBAI, April 7 India's Sun Pharmaceutical
Industries Ltd has agreed to buy generic drugmaker
Ranbaxy Laboratories Ltd for $3.2 billion, betting it
can fix factory quality glitches that plagued the current owner,
Japan's Daiichi Sankyo Co, 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
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.
The deal relieves Daiichi Sankyo of a troubled subsidiary
that has diverted resources and weighed on profits - at a price.
Under the deal, expected to close by year-end, the Japanese
company will end up with a stake of about 9 percent in Sun
Pharma valued at about $2 billion, compared with the $4.2
billion it paid for a 63.9 percent stake in Ranbaxy in 2008.
"Given Ranbaxy's problems, I'm sure Sun would have spent
some time doing their homework on this issue," Sujay Shetty,
pharmaceuticals leader for PricewaterhouseCoopers in India told
Reuters. "To me, as a layman, it's not obvious that it is going
to go away just now, but maybe Sun probably has assessed it to
be something they can get on top of."
Daiichi Sankyo Chief Executive Joji Nakayama said Daiichi
had learnt a lot about emerging markets through its relationship
with Ranbaxy and saw those lessons as valuable for its further
global expansion. The Ranbaxy deal was intended to establish a
'hybrid' business model offering generic medicines as well as
innovative brands sold by the Japanese firm.
The company wrote down 359.5 billion yen ($3.5 billion) in
2009 to cover a drop in value of its initial investment after
regulatory problems in the U.S. triggered a sharp fall in
Ranbaxy's share price. The stock has since recovered, more than
doubling since a March 2009 trough.
"We don't think we can make much progress in emerging
markets with just innovative medicines," said Nakayama, speaking
at a news conference in Tokyo. "So we are exploring many
different possibilities for emerging markets, including tying up
with local partners and we believe that will expand our business
The broader issue of the quality of drugmaking has become a
major concern both inside India and across the sector. India is
second only to Canada as a drug exporter to the U.S., where it
supplies about 40 percent of generic and over-the-counter drugs.
The FDA, which last month called for more collaboration with
the Indian regulator to improve drug quality, has banned imports
from all the Indian plants of Ranbaxy over production quality
Sun Pharma, whose plant at Karkhadi in the western state of
Gujarat was banned from shipping products to the U.S. last
month, has been the subject of comparatively fewer regulatory
actions in the past.
The company's managing director Shanghvi said the combined
entity would focus on the fixing manufacturing quality issues at
Ranbaxy so that facilities currently banned from shipping to the
U.S., the biggest export market for both Ranbaxy and Sun, can
"The quality of business at Ranbaxy is in no way inferior to
business at Sun Pharmaceutical," he said. "Our focus will be to
address the issue of achieving compliance. We are not looking at
synergies of manufacturing; the focus is to achieve compliance."
Sun Pharma, which will get access to Ranbaxy's new product
pipeline including a generic version of AstraZeneca's
heartburn drug Nexium, said the acquisition is expected to be
accretive to earnings per share in the first full year.
The deal values Ranbaxy shares at 457 rupees apiece,
representing an 18 pct premium to their 30-day volume-weighted
average share price.
Sun Pharma shares rose as much as 4 percent in Mumbai on
Monday before ending the day up 2.9 percent. Ranbaxy, whose
shares rose by nearly a quarter over the previous three
sessions, fell 3 percent to 445.75 rupees.
Bank of America Merrill Lynch upgraded Sun Pharma to buy
from neutral, saying that Ranbaxy's regulatory tangle was
already at its height. There was "significant scope for
operational improvement", it said, since Sun has a successful
track record of turning around distressed assets.
Sun Pharma in 2010 bought all the outstanding shares of
U.S.-based Caraco Pharmaceutical Laboratories at a time when
Caraco was struggling to address manufacturing quality concerns
that led to FDA bans on its plants. Sun was able to resolve
those issues and Caraco plants resumed production in 2012.
Shares in Daiichi Sankyo climbed as much as 5 percent in
Tokyo to a two-and-a-half-month high of 1,844 yen. Analysts
welcomed the deal, saying it doesn't necessarily signal a
pullback from India by Daiichi Sankyo.
"I wouldn't call this an exit. It's an ownership transfer,"
said Jefferies & Co analyst Naomi Kumagai. "Another company will
take over control for them of a place that had a lot of issues.
In that sense, it should be a good thing."
In a separate statement, Daiichi Sankyo said the U.S.
Attorney's Office in New Jersey had issued an administrative
subpoena to Ranbaxy seeking information related to the company's
Toansa plant in India. Ranbaxy is cooperating with the
Under the terms of the deal, Daiichi Sankyo has agreed to
indemnify Sun Pharma and Ranbaxy for, among other things,
certain costs and expenses that may arise from the subpoena, the
company's statement said.
Citigroup and Evercore Partners are advising Sun
Pharma, while Daiichi is being advised by Goldman Sachs Group
and ICICI Securities is the financial adviser to Ranbaxy,
the statement said.
($1 = 103.5750 Japanese Yen)
(Additional reporting by Sophie Knight, Dominic Lau and Edmund
Klamann in TOKYO, Denny Thomas in HONG KONG and Ben Hirschler in
LONDON; Writing by Sumeet Chatterjee; Editing by Kenneth