RANBAXY`s ACQUISITION BY DAIICHI SANKYO

Team Abhishek Kumar Abhishek Saxena Kushal Prakash Nihar Routray Suchitra Ravichander

Indian Pharmaceutical Industry-Overview

• India currently represents U.S. $6 billion of the $550 billion global pharmaceutical industry with its share increasing at 10 % a year.

• Indian sector represents 8% of the global industry total by volume, putting it in 4th place worldwide, it accounts for 13% by value, and its drug exports have been growing 30 % annually.

• The “organized” sector of India's pharmaceutical industry consists of 250 to 300 companies, which account for 70 % of products on the market, with the top 10 firms representing 30 percent.

• India's top 10 pharmaceutical companies were Ranbaxy, Cipla, Dr. Reddy's Laboratories, Lupin, Nicolas Piramal, Aurobindo Pharma, Cadila Pharmaceuticals, Sun Pharma, Wockhardt Ltd. and Aventis Pharma.

Profile Of Both the Companies

Largest in the India 8th in largest in the global general

pharmaceuticals Serving in over 125 Countries Ground operations in 49

countries & Manufacturing in 11 countries.

Strong R&D Base.

2nd largest in Japan 22nd Largest in the world Operations in 50 countries. Producer of high quality

drugs

15th Largest drug maker in the world Market Capitalization – 30 Billion Low cost production

Financial Data of Ranbaxy Laboratories Limited

Dec ' 09 Dec ' 08 Dec ' 07 Dec ' 06 Dec ' 05

Sales 4,784.76 4,494.52 4,071.29 3,973.56 3,490.13

Operating profit 822.89 239.75 546.87 559.45 65.76

Interest (109.85) 893.40 93.43 58.10 26.41

Gross profit 1,210.12 (562.40) 893.14 580.92 249.01

EPS (Rs) 13.61 (24.56) 16.56 10.37 6.01

Last 5 years - Annual results in brief (Figs in Crores)

Strategic Objectives Behind The Deal

Presence in emerging markets for Daiichi-Sankyo (Geographical diversification).

Entry into non-proprietary drugs for Daiichi-Sankyo (Product Extension). To develop

new drugs to fill the gaps and take advantage of Ranbaxy’s strong areas.

Realization of sustainable growth through a complementary business model. To

overcome its current challenges in cost structure and supply chain.

Acceleration of innovation drug creation by optimizing value chain efficiency.

The acquisition of Ranbaxy by Daichi represents a major entry for the Japanese firm

into the high growth business areas of generic drug. The acquisition shows that

global pharma companies are making efforts to cope up with strong generic drug

makers.

To match the competitor's strategy.

Nature of transaction

All cash transaction.

Specific nature of the transaction –Off Market Transaction

Acquisition funded through debt and existing cash reserves.

The deal was financed through a mix of bank debt facilities

and existing cash resources of Daiichi Sankyo.

Daiichi-Sankyo has taken short and long term loans of USD 2.6

billion which is almost 50% of the total funding requirement

of the deal.

Involved Parties

• Nomura Securities Co., Ltd., the Japan headquartered investment bank, acted as the exclusive financial advisor

• Jones Day as the legal advisor outside India• P&A Law Offices as the legal advisor in India• Mehta Partners LLC as the strategic business advisor

and• Ernst & Young as the accounting and tax advisor

Daiichi-Sankyo

Contd…

Ranbaxy Co Ltd

• Religare Capital Markets Limited, a wholly owned subsidiary of Religare Enterprises Limited, is the exclusive financial advisor to Ranbaxy and the Singh family.

• Vaish Associates are the legal advisors to Ranbaxy and the Singh family

Synergies Considering that Ranbaxy is a generics company and Daiichi Sankyo an

innovator company, both the businesses complement each other with negligible overlap.(Daiichi will support Ranbaxy's R&D efforts and contract research business)

Ranbaxy provides a low cost manufacturing set-up to Daiichi Sankyo.

Ranbaxy geographically diversified presence across the globe will enable it to provide a wider reach to Daiichi Sankyo' product portfolio, including India.

Ranbaxy has a small presence in the Japanese market where the generics market holds good opportunities.

Ranbaxy incurred lower interest costs, as it became debt-free company.

Contd…. The deal strengthened the financials of Ranbaxy (making it debt free and

cash rich) and help it grow aggressively -organic.

Ranbaxy bypassed a lot of European and U.S. companies that were finding it difficult to enter the Japanese market, where safety and testing requirements are a lot higher.

This deal made the amalgamated company to be the 15th largest pharma company in the world.

The below equation solves for the minimum required synergy:

Pre – Merger Value of both the firms + Synergy = Post – Merger Stock Price

Post – Merger Number of shares

The Deal Daiichi-Sankyo acquired 34.8% stake in Ranbaxy on 11th June,

2008

It made an open offer to the Ranbaxy shareholders for

another 20%

Picked up another 9.12% through preferential allotment

It was an all cash transaction.

Size of the deal: US$ 4.9 Billion

As per the deal, total value of Ranbaxy was US $ 8.5 Billion.

Transactional Process

Anticipated Benefits Of the Acquisition

• Strengthen the position of the company.• Acquisition will provide low cost manufacturing. • Market access to over 60 countries .

Ranbaxy Co Ltd

• Company will become one of the top 5 in generic business.• Access to Daiichi’s advanced R & D facilities.• Access to Japanese drug market• Infusion of an additional $ 1 billion into the company.• Surplus cash of Rs.3,000 crores flows in.• The market capitalization goes to $8billion & the net worth goes

up.

Daiichi-Sankyo

Market Reaction To The Acquisition Announcement-2008

Share price of Ranbaxy rose from 3.86% to Rs 526.40 on June 9th

Daiichi Sankyo agreed to pay as much as $4.6 billion for a 50.1%

stake in Ranbaxy

The stock ended almost flat at Rs 560.80 on June 11th .

June 13- it spiked to Rs 660 and settled at 567.75 points, up a

mere 0.15%.

Summary Of Structure

How did Daiichi-Sankyo acquire Ranbaxy?

How did Daiichi-Sankyo acquire Ranbaxy?

Nature of Transaction Acquisition Consideration

(in Crores)Open Market Share Purchase 7458

Share Purchases from founding family 10169

Share Purchases by issue of new Share 3742

Direct acquisition related expenditures 131

TOTAL 21500

Rs 21,500 Crores (USD 4.9 Billion)

Valuation of Ranbaxy

Assets and LiabilitiesValue attributed (Rs Crores)

Book value of assets and liabilities (Cash, Inventory etc.) 3470

Inventories (Increase in inventories to fair value) 88

Tangible assets (Land) 440Intangible assets (Leasehold land) 260Intangible assets (Increase in current products, etc. to fair value) 1805

In-process R&D expenses 304Deferred tax liability -881Minority Interests -1981Goodwill 17995

Total consideration 21500 USD 4.9 Billion

USD 4.01 Billion

Interpretation Of Shares Held Pre & Post Acquisition

SHARES HELD BY PRE % POST % CHANGE %

SINGH 34.82 - (100)

SINGH’S FAMILY 19 - (100)

DAIICHI SANKYO - 63.92 63.92

MUTUAL FUND 5.56 2.58 (53.59)

BANKS 1.71 0.32 (58.47)

INSURANCE COMPANY 14.39 9.19 (36.13)

F.I.I 12.42 4.41 (64.49)

GENERAL PUBLIC 12.1 19.53 61.40

Reasons for higher valuationThe deal values Ranbaxy at $8.42 billion -

• An enterprise value to sales (EV/sales) of 3.5x the estimated earnings for 2008.

• An EV/EBITDA of 23x the forward earnings for the current year.

It was a very attractive multiple.

Daiichi Sankyo paid about 4.7x Ranbaxy’s sales for the acquisition, as against2.7x paid by Mylan for Merck KGaA’s generic unit at a price of for $7.6 billion in 2007.

The high valuation was due to Ranbaxy’s strong infrastructure, presence across geographies, a robust product pipeline, including upsides from the settlements.

EV/Sales Band for Ranbaxy

Comparative Analysis Of Annual Financial Results

Base yr.

05

Dec. 07 % diff. Dec. 08 Impact on the

BS & PL

% diff. Dec. 09 % diff.

Sales 3490.13 4071.29 16.65 4494.52 Sales increased

owing to the

increased market

share

28.77 4784.76 37.09

Operating

profit

65.76 546.87 731.61 239.75 Good will

amortization

losses,

264.58 822.89 1151.35

Interest 26.41 93.43 253.76 893.40Borrowings for the acquisition of Ranbaxy's increased.

3282.8 (109.85) (515)

Gross

profit

249.01 893.14 258.67 (562.40)Purchases owing to the investment in Ranbaxy.

(221) 1210.12 385.97

EPS (Rs) 6.01 16.56 175.54 (24.56) EPS decreased as

the total no: of

shares increased

(508) 13.61 126.45

Base yr. 05

Dec. 06 % diff. Dec. 07 % diff. Dec. 08 % diff. Dec. 09 % diff.

-1000

0

1000

2000

3000

4000

5000

6000

Sales Operating profitInterestGross profitEPS (Rs)

Impact Analysis of the deal on Daiichi’s Figures

The EPS showed a double fold increase without much of increase in gross profit which indicated that the reserves & surplus should have been made available accordingly.

The balance sheet of Daiichi Sankyo indicated that the current liabilities had increased to 161% when compared to current assets which had decreased by (15.43%).

COGS significantly decreased in the year 2008 due to the increase in Purchase of Investments owing to the acquisition.

Where did Daiichi fail: Due Diligence

Daiichi Sankyo though learnt about the US FDA Invocation

ignored it expecting it to get resolved.

Lack of proper due diligence. Daiichi, in its eagerness to tap the

expertise of a generic drug maker, took the risk of buying

Ranbaxy for top dollar.

Three weeks after the deal, Daiichi reported currency-exchange

losses of nine billion rupees in 2008 owing to the Goodwill

evaluation at the time of acquisition.

The Final Verdict

• Verdict: Failure

This is a classic example of an acquirer paying top price without

looking too closely at the quality of the goods.

“ Daiichi continues to pay for the huge risk it took in the deal”

• Stock market verdict

Ranbaxy shares have staged a huge rally since hitting a low of 133

rupees in March 2009, trading at 465 rupees on March 14, 2011.

Acquisition AnalysisView of Daiichi on the FDA issue

It termed the event as a “risk call” and decided to tackle it when presented with the problem rather than spend time evaluating the risk.

Daiichi’s lack of understanding of generic business in the valuation paid for acquiring Ranbaxy.

Inadequate due diligence done considering the size, scale and scope of the deal.

Should have estimated the full extent of the legal risk arising out of the US FDA letters,

In May 2009, Daiichi-Sankyo announced a one-time write-down of $3.45 billion of Goodwill.

Daiichi worried about the financial losses and the FDA restrictions.

Regulatory/ Forex/ Legal Issues Involved

Approval of Foreign Investment Promotion Board (“FIPB”)

Approval under Press Note No. 1 (2005) from SEBI Daiichi was already holding equity stake in Uni-Sankyo

Limited, a company engaged in ‘same’ business as Ranbaxy, prior approval of FIPB was obtained.

Approval of Cabinet Committee on Economic Affairs (“CCEA” )

Final clearance was received from CCEA by Daiichi in the month of October, 2008.

Taxation Issues Involved

• Slump in the financial markets - the prices of Ranbaxy dropped to around Rs.265 (approx).

• Promoters sought SEBI approval to waive the +1% ceiling for this block deal.

• Huge difference between the deal price and the existing market price - permission was not granted by SEBI

• Off market deal was executed after paying the capital gains tax.

Corporate Law Issues Involved

• Nomination of Independent Director as per the Agreement,

post completion

• The board of directors of Ranbaxy would consist of 10

directors, in a combination of

– 4 independent and non-independent directors will be

nominated by the Promoters

– 6 independent and non-independent directors will be

nominated by Daiichi.

Major M&As in the Global Pharma industry

Company Target company $ billion

Pfizer Wyeth 68

Merck Schering Plough 41

Bayer Schering 19.7

Schering Plough Organon 14.5

Takeda Nycomed 13.6

Sankyo Daiichi 7.7

Drivers of M&A In The Global Pharma Industry

Lack of research and development (R&D) productivity

Expiring patents. Participating in generics to maintain market share

High profile product recalls

Expansion into emerging markets

Revitalizing growth in mature markets Leveraging operations to achieve greater economies of scale

India - Advantages Leveraging India’s low cost advantage by shifting manufacturing base to

India

Indian companies have superior biotech and drug synthesis skills, high quality and vertically integrated manufacturing assets, differentiated business models

Acquired companies serve as an effective front end for Indian companies in developed markets.

Price controls have been relaxed and there have been significant changes in the medicinal requirements of the Indians

Manufacturing base in India is strong enough to support international pharmaceutical companies from performance perspective

Global Scenario Of M&A Deals

Global Scenario Of M&A Deals

For large firms, mergers are a response to expected excess capacity that is

triggered by patent expirations and gaps in the pipeline of follow-on

products, which depresses expected future earnings growth.

Mergers are in fact often rationalized as offering an opportunity to reduce

overhead and other costs, implying expectations of economies of scale.

For small firms mergers appear to be primarily an exit strategy for firms that

are in financial trouble

Referenceshttp://

www.moneycontrol.com/news/business/daiichi-acquires-525ranbaxy_362194.html

http://www.daiichisankyo.com/ir/archive/mt_pdf/imm2008_05_14_34_01.pdf

http://www.frost.com/prod/servlet/market-insight-top.pag?docid=88873859

http://www.investopedia.com/university/mergers/mergers2.asp#axzz1Xwzuwrtw

http://www.worldpharmanews.com/corporate/1782-daiichi-sankyo-a-ranbaxy-announce-a-new-social-contribution-initiative

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