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The combination of Sun Pharma and Ranbaxy creates the fifth-largest specialty generics company in the world and the largest pharmaceutical company in India. The combined entity will have operations in 65 countries, 47 manufacturing facilities across 5 continents, and a significant platform of specialty and generic products marketed globally, including 629 ANDAs. On a pro forma basis, the combined entity's revenues are estimated at $4.2 billion with EBITDA of $1.2 billion for the twelve month period ended December 31, 2013. The transaction value implies a revenue multiple of 2.2 based on 12 months ended December 31, 2013, the statement from Sun Pharma and Ranbaxy said.
Dilip Shanghvi, Managing Director of Sun Pharma said, "Ranbaxy has a significant presence in the Indian pharma market and in the US where it offers a broad portfolio of ANDAs and first-to-file opportunities. In high-growth emerging markets, it provides a strong platform which is highly complementary to Sun Pharma's strengths. We see tremendous growth opportunities and are excited with the prospects to create lasting value for both our shareholders through a successful combination of our franchises".
"We believe this transaction brings significant value to all Ranbaxy shareholders. Sun Pharma has a proven track record of creating significant long-term shareholder value and successfully integrating acquisitions into its growing portfolio of assets. We are confident that Sun Pharma is the ideal partner to help us realize our full potential and are excited to participate in future value creation opportunities", stated Arun Sahwney, Managing Director and Chief Executive Officer of Ranbaxy.
The proposed transaction has been unanimously approved by the Boards of Directors of Sun Pharma, Ranbaxy, and Ranbaxy's controlling shareholder, Daiichi Sankyo. Ranbaxy's board and Sun Pharma's board have recommended approval of the transaction to their respective shareholders.
The combination will create a large specialty pharmaceutical company with strong capabilities in developing complex products and exploiting first to file opportunities. A combined Sun Pharma and Ranbaxy will have a diverse, highly complementary portfolio of specialty and generic products targeting a spectrum of chronic and acute treatments. The combined business will have a strong portfolio of specialty and generic products marketed globally, including 445 ANDAs. Additionally, the combination will create one of the leading dermatology platforms in the United States.
The combination creates the fifth-largest generic company in the world and the largest pharmaceutical entity in India. The combined entity will have 47 manufacturing facilities across 5 continents. The transaction will combine Sun Pharma's proven complex product capabilities with Ranbaxy's strong global footprint, leading to significant value creation opportunities. Additionally, the combined entity will have increased exposure to emerging economies while also bolstering Sun Pharma's commercial and manufacturing presence in the United States and India. It will have an established presence in key high-growth emerging markets. In India, it will be ranked No. 1 by prescriptions amongst 13 different classes of specialist doctors.
The acquisition is expected to be accretive to Sun Pharma's cash earnings per share in the first full year. Additionally, Ranbaxy's shareholders will participate in the value creation of the combined company through their ownership of Sun Pharma shares. Sun Pharma expects to realize revenue and operating synergies of $250 million by third year post closing of the transaction. These synergies are expected to result primarily from topline growth, efficient procurement and supply chain efficiencies. As part of the transaction, Sun Pharma intends to leverage the human capital that has supported both companies, in order to drive future growth.
Under the agreements, Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each share of Ranbaxy. This exchange ratio represents an implied value of Rs 457 for each Ranbaxy share, apremium of 18% to Ranbaxy's 30-day volume-weighted average share price and a premium of 24.3% to Ranbaxy's 60-day volume-weighted average share price, in each case, as of the close of business on 4 April 2014.The transaction has a total equity value of approximately $3.2 billion. The transaction is expected to represent a tax-free exchange to Ranbaxy shareholders, who are expected to own approximately 14% of the combined company on a pro forma basis. Upon closing, 3 Daiichi Sankyo will become a significant shareholder of Sun Pharma and will have the right to nominate one director to Sun Pharma's Board of Directors. Ranbaxy has recently received a subpoena from the United States Attorney for the District of New Jersey requesting that Ranbaxy produce certain documents relating to issues previously raised by the FDA with respect to Ranbaxy's Toansa facility. In connection with the transaction, 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 transaction will need approval by majority in number representing 75% in value of the shares present and voting at the shareholder meetings of each of Sun Pharma and Ranbaxy. Both Daiichi Sankyo (which holds approximately 63.4% of the outstanding shares of Ranbaxy) and promoters of Sun Pharma (who hold approximately 63.7% of the outstanding shares thereof), have irrevocably agreed to vote in favor of the transaction.
Additionally, the closing of the transaction will be subject to customary closing conditions, including approval by the Indian Central Government, approval by the High Courts of Gujarat and Punjab and Haryana, approval by the Competition Commission of India and expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act in the United States. Pending approvals, Sun Pharma anticipates that the transaction will close by the end of calendar year 2014.
Sun Pharmaceutical Industries' consolidated net profit surged 73.7% to Rs 1531.09 crore on 50.3% growth in net sales to Rs 4286.59 crore in Q3 December 2013 over Q3 December 2012.
Sun Pharmaceutical Industries is an international specialty pharmaceutical company with over 72% sales from global markets. It manufactures and markets a large basket of pharmaceutical formulations as branded generics as well as generics in US, India and several other markets across the world.
Sun Pharmaceutical Industries Ltd is buying Ranbaxy Laboratories Ltdthrough an all-stock merger in which five shares of Ranbaxy will fetch four shares of Sun Pharma. Based on their closing prices on Friday, a share of Ranbaxy valued at Rs.460 will get four-fifths of a Sun Pharma share valued atRs.458.
It seems a fair exchange ratio but Ranbaxy’s shares have risen sharply since 27 March. The market appears to not only have got wind of the deal but the ratio as well, since the share levels match the ratio so well. That is something for the market regulator to investigate, if the rise in Ranbaxy’s share price was a mere coincidence or if somebody had insider information on the deal and acted on it. If we consider the closing prices as on 27 March, Ranbaxy shareholders would have got a 29.3% premium, which seems fair.
WHO BENEFITS AND HOW
Daiichi Sankyo Co. Ltd: Daiichi is the parent company of Ranbaxy since it bought the Indian drug maker from its earlier promoters. Daiichi faced criticism after Ranbaxy’s plants came under the US Food and Drug Administration’s (FDA’s) scanner shortly after the acquisition. Even after so many years, Ranbaxy’s inability to overcome its FDA-related problems has put pressure on its promoters.
With Sun Pharma acquiring Ranbaxy, Daiichi is relieved of the burden of managing Ranbaxy’s problems. It will hold a 9% stake in Sun Pharma, as a result of its current stake in Ranbaxy, though one can expect it to sell that stake eventually. On a conference call, however, Sun Pharma’s management indicated they plan to work together with Daiichi to grow the business.
Ranbaxy: Along with the acquisition news, Ranbaxy announced that it received a subpoena dated 13 March (why this was not disclosed earlier is something that should bother shareholders) asking for information about its Toansa facility that recently received an import alert from the US FDA.
That this is material is evident from the fact that Daiichi has agreed to indemnify Sun Pharma from any costs or expenses that may arise from this subpoena. Eventually, this news would have emerged in the public domain and may have further damaged investor sentiment.
But things change now for Ranbaxy. This is the end of the road for Ranbaxy as it exists but it perhaps is the best outcome for the company and its shareholders, given the circumstances. Ranbaxy is a company with a very bright future in the US generics market, with a sizeable drug pipeline and some big product launches in the waiting, but for frequent run-ins with the US drug regulator.
The fact that these glitches continued even after a new management was in control was a big surprise for investors. It is now up to the new owners to ensure that the plants become and remain compliant with US FDA norms.
Sun Pharma: Sun Pharma’s managing director Dilip Shanghvi has acquired a reputation for acquiring companies in trouble at a good price, and then turning around their operations. Ranbaxy will certainly be a big challenge.
The merger will see Sun Pharma’s revenue jump by a healthy 40% but its operating profit will rise by a meagre 7.5%, based on pro forma 2013 financials. Its operating profit margin will decline from 44.1% to 29.2%. Thus, the merger will have a negative effect on its performance in the near term. Pro forma financial statements are designed to reflect a proposed change, such as an acquisition, or to emphasize some figures when a company issues an earnings announcement to the public.
In terms of size, Sun Pharma will now have a pro forma 2013 revenue ofRs.25,911 crore and an operating profit of Rs.7,577 crore, with a net profit ofRs.1,710 crore. Ranbaxy’s profits have been hit by provisions related to inventory write-offs and foreign exchange-related provisions.
So, what does Sun Pharma hope to gain from this acquisition? Sun Pharma has said it expects to get $250 million, or Rs.1,550 crore, in merger-related synergies by the third year after the acquisition is completed. That is fairly significant and these savings should be from sales growth, procurement and supply chain efficiencies. But this merger is not really about scale and its benefits.
In the Indian market, the combined entity’s portfolio becomes much larger, covering more therapeutic areas. The challenge is that Ranbaxy’s margins have been relatively lower and that is unlikely to satisfy Sun Pharma. The company management has said they will work on improving its margins. In the US market, the priority will be to resolve all of Ranbaxy’s FDA-related troubles to ensure that every major generic product in Ranbaxy’s pipeline makes it to market. These are crucial factors, in addition to their efforts to grow their combined business in Europe and emerging markets, to ensure this acquisition works out in Sun Pharma’s favour.