Merger&Acquisition

ofSunPharma
Ranbaxy
By
Abhay
Pranit
Rushil

IntroductiontothePlayers
SunPharma
SunPharmaceuticalswasestablishedbyMr.DilipShanghviin1983inVapiwithfive
productstotreatpsychiatryailments.Cardiologyproductswereintroducedin1987
followedbygastroenterologyproductsin1989.Todayitisthelargestcompanyin
chronicprescriptionandamarketleaderinpsychiatry,neurology,cardiology,
orthopedicsetc.
The2014acquisitionofRanbaxywillmakethecompanythelargestmanufacturerof
pharmacyproductsinIndiaandthe5thlargestingenericsproductsglobally
Over72%oftheCompanysSalescomefrommarketsoutsideIndia.TheUSisthe
singlelargestmarketaccountingforaround60%ofthetotalrevenues.Manufacturing
operationsarein26locationsincludingcountrieslikeUS,Canada,BrazilandIsrael.
IntheUS,thecompanymarketsalargebasketofgenerics,withastrongpipeline
awaitingapprovalfromtheU.S.FoodandDrugAdministration(FDA)
Thecompanywaslistedonthestockexchangein1995andwasbackthen
oversubscribed55times.Todayitisoneofthemostprofitablepharmacompaniesin
India.

AcquisitionsandJointVentures
In1996SunPharmapurchasedabulkdrugmanufacturerKohlipharmaceuticals.In
1998SunPharmaacquiredanumberofrespiratorybrandsfromNatcopharma.In
2010,thecompanyacquiredalargestakeinTaroPharma,Inc.amongstthelargest
genericdermacompaniesintheUS,withoperationsacrossCanadaandIsrael.In
2011,SunPharmaenteredintoajointventurewithMSDtobringcomplexor
differentiatedgenericstoemergingmarkets

Ranbaxy
ItsanIndianmultinationalpharmaceuticalcompanythatwasincorporatedin
1961.TheCompanywentpublicin1974andJapanesepharmaceutical
companyDaiichiSankyoacquiredacontrollingsharein2008.Thecompanywas
startedbyRanbirSinghandGurbaxSinghasadistributorforaJapanesecompanyin
1937.
RanbaxyhasbeeninvolvedinseveralissueswithFDA.In2009theUSFoodand
DrugAdministrationsaidithaltedreviewsofalldrugapplicationsincludingdata
developedatRanbaxy'sPaontaSahibplantinIndiabecauseofapracticeoffalsified
dataandtestresultsinapprovedandpendingdrugapplications.In2012Ranbaxy
haltedproductionandrecalledfortyonelotsofatorvastatinduetoglassparticles
beingfoundinsomebottles.In2013USFDAfined500millionformanipulation
genericdataandsellingadulterateddrugstoUnitedStates.

Acquisition
InJune2008,DaichiSankyoacquireda34%stakeinRanbaxyfor2.4billionUSD.In
November2008DaichiSankyocompletedthetakeoverofthecompanyfromthe
Singhfamily.Ranbaxy'sMalvinderSinghremainedasCEOafterthetransaction.In
thesameyear,itreachedsettlementontheworld'stwohighestsellingdrugsLipitor
(withPfizer)andNexium(withAstraZeneca).

Theannouncementandmarketreaction
TheannouncementbySunPharmaon6thApril,2014thatitwouldacquire100%of
RanbaxyLaboratoriesLtd.Inanallstocktransaction,valuedat$4billion,marked
oneofthelandmarkdealsofIndianPharmaceuticalindustrywhichresultedinmaking
SunPharmathelargestpharmaceuticalcompanyinIndia,thelargestIndianPharma
companyintheUSandthe5thlargestgenericcompanyworldwide.Onaproforma
basis,thecombinedentitysrevenuesareestimatedatUS$4.2billionwithEBITDA
of US$ 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
December31,2013.
Investorresponsetotheannouncementwaslukewarm,withthestockpricesmoving
inoppositedirection.Asanimmediateeffect,sharesofSunPharmawentupto2.7%
inthemorningtradeaftertheacquisitionannouncementwhilethatofRanbaxywent
downby3.1%.
Theswapratioof8sharesofSunpharmaforevery10sharesofRanbaxyworksto
theadvantageofthenewentrantsintoRanbaxyLaboratoriesLtd.asattheprevailing
pricetheynowneedstopay5%lessforgettingthesharesofsunpharmaascompared
tobuyingthemdirectlyfromthemarket.
There also lies a matter of uncertainty regarding the regulatory troubles facing
Ranbaxyandhowsoonsunpharmawitharecordofacquiringtroubledcompaniesat
goodpriceandlaterturningthemaround,canresolvethesetroublesfacingRanbaxy.
Sunpharmasgoodtrackrecordregardingturningaroundtheacquiredcompaniescan
instilsomehopesamongtheinvestors.
ThemoveisseentoimproveSunpharmasglobalpresencebyprovidingitaccessto
newandemergingmarketsandproductportfolioswithSunpharmahavingapresence
in chronic diseases while Ranbaxy having relevant presence in acute and OTC
segments.BesideswiththeacquisitionofRanbaxy,Sunpharmawilladdtoitsoverall

manufacturingbasethatisexpectedtoreapbenefitsinthelongrun.Overall,market
perceivedthedealasawinwinsituationforallthepartiesinvolved.

SunPharmaRanbaxyMerger/AcquisitionProcess:

The SunPharmaRanbaxy Merger/Acquisition Process canbemajorlydivided

intotwostagesviz.1)Preacquisitionstageand2)Postacquisitionstage
PreAcquisitionStage:
I.

MakingDecisiontoBuy

RanbaxyLaboratoriesLimitedisanIndianmultinationalpharmaceuticalcompany
withasizeabledrugpipeline,averypromisingfutureandhasannouncedsomebig
productlaunchesinfutureintheUSgenericsmarket,butforfrequentruninswiththe
USdrugregulator.Ithasbeenfacingregulatoryissuesforthelast3yearsandnowhas
ceasedtomakesomeprofits.However,thecompanyhasabigbusinessandhuge
productportfolioacrossvariousmarketsincludingIndiawhichmakesitanattractive
dealforSunPharmatoacquirethis company.Daiichi(aJapanesecompany),the
promotersofRanbaxywasstrugglingtomanageitsplantswhencameundertheUS
FoodandDrugAdministrationsscanneraftertheacquisition.Ranbaxywasunableto
overcometheseissuesandincreasedpressureonitspromoters.
DilipShanghvi,ManagingDirector,SunPharmahasareputationforturningaround
companiesintroublebyacquiringthematagoodprice.SunPharmaandRanbaxy
dealhasmanypromisingbenefitsaslistedbelow.ThecombinationofSunPharma
andRanbaxy:

Createsthe5th largestspecialtygenericscompanyintheworldandthelargest

pharmaceuticalcompanyinIndia.
Getsleadershippositionin13specialtysegments
Operationsin65countries,47manufacturingfacilitiesacross5continents,anda
significantplatformofspecialtyandgenericproductsmarketedglobally

RanbaxysbrandeddermabusinessintheUSaddstoSun'salreadystrongderma

franchise
Provides Sun Pharma access to strong human capital and reach in tierII/III
markets in India, where it currently lacks presence, according to Edelweiss
Securities.
II.

DueDiligence/CompanyEvaluation

Nextstageis businessvaluationorassessment.Itinvolves evaluationofboththe

present and future value of the target company. A thorough research on the
companys capital gains, culture, market share, capital structure, organizational
structure,vendors,distributionchannel,specificbusinessstrengthsandweaknesses,
andbrandnameinthemarket.
ThisprocesshasrevealeddetailsaboutRanbaxyandthemergerasmentionedbelow:

SunPharmasrevenuewilljumpbyahealthy40%butitsoperatingprofitwillrise

byajust7.5%,basedonproforma2013financials.
Ranbaxysprofitshavebeenhitbyprovisionsrelatedtoforeignexchangeand
inventory writeoffs. Sun Pharma has said it expects to get Rs.1,550 crore in
mergerrelatedsynergiesbythethirdyearaftertheacquisitioniscompleted.That
isfairlysignificantandthesesavingsshouldbefromprocurement,salesgrowth

andsupplychainefficiencies.
ThemergerwillhaveanegativeeffectonSunPharmasperformanceintheshort

termreducingitsoperatingprofitmarginfrom44.1%to29.2%.
Intermsofsize,SunPharmawillhaveaproforma2013revenueofRs.25,911
croreandanoperatingprofitofRs.7,577crore,withanetprofitofRs.1,710crore.

III.

ProcessInitiation/ProposalPhase

In process initiation, acquiring company sends a proposal for a merger or an

acquisition to the target company with complete details of the deal including the
commitments,amountandthestrategies.Itisanonbindingofferdocumentwhichis
notavailableinopenpublicforum.SunPharmahashiredMcKinsey&Companyto
facilitate the merger of the two leading pharmaceuticals in the domestic market.
McKinseyhadbeengivenaclearmandate,including"integration,rationalisationand
capacityutilisation".

IV.

StructuringBusinessDeal

Once the merger is finalized i.e. either forming a new entity or the takeover,
acquiring company has to take initiatives for creating strategies to announce the
launch,enhancedealscredibilityanditsmarketing.Thisstageemphasizeongivinga
properstructuretothebusinessdeal.Theroadmapincludes,
RegulatoryapprovalsfromvariousbodiessuchasSEBI,CCI,StockExchanges,

High Courts of Gujarat, Haryana and Punjab, and the stakeholders of both
companies
Streamliningofteams
ResolvingregulatoryissuesatRanbaxyplantsunderUSimportalert
RestructuringofproductportfoliostoalignwiththeinterestsofSunPharma
Benchmarkthestaffproductivityratio

V.

FinancialSettlement/ExchangeofStocks

Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each share of
Ranbaxy.TheexchangeratiorepresentsanimpliedvalueofRs457perRanbaxy
shareandthetransactionhasatotalequityvalueofapproximately$3.2bn.Afterthe
deal,Daiichiwillholdastakeofabout9%inSunPharma.Hence,thedealiscashless.
PostAcquisitionStage:
I.

MergerClosingPhaseandPostMergerIntegrationPlanstoOperatethe
Venture

This stage includes the process of preparing the official documents, signing the
agreementonwhichboththecompanieshaveagreedupon,andnegotiatingthedeal.
It includes integration of the companies differing on various parameters. It also
definestheparametersofthefuturerelationshipbetweenthetwo.Aftersigningthe
agreement and entering into the venture, Sun Pharma has various plans as listed
below:

Ithasadetailedturnaroundplanforitsnewpurchase.
Thecompanysbasicstructureandfunctionscouldbemanagedinthefirstyear.
Thereisaplantostreamlineandrationalisefunctions.Whileitwilltakeatleast
twotothreeyearstoturnaroundthemergedentityandtoensurecontributions

fromthebuyout.
Ithaspreparedathreeprongedstrategywhichincludes:

 Resolutionofregulatoryissues
Integrationofsupplychainandfieldforceforenhancedefficiencyand

productivity
Highergrowththroughsynergyindomesticandemergingmarkets.
ItistargetingtoengineerthefullturnaroundofRanbaxyinthreeyeartofouryear
periodaftertheclosureofthetransaction.

Valuation:
SunPharmaceuticalIndustriesLtd.andRanbaxyLaboratoriesLtdonApril06,2014
announcedthattheyhaveenteredintodefinitiveagreementspursuanttowhichSun
Pharmawillacquire100%ofRanbaxyinanallstocktransaction.Underthese
agreements,Ranbaxyshareholderswillreceive0.8shareofSunPharmaforeach
shareofRanbaxy.ThisexchangeratiorepresentsanimpliedvalueofRs.457foreach
Ranbaxyshare,apremiumof18%toRanbaxys30dayvolumeweightedaverage
sharepriceandapremiumof24.3%toRanbaxys60dayvolumeweightedaverage
shareprice,ineachcase,asofthecloseofbusinessonApril4,2014.
Onaproformabasis,thecombinedentitysrevenuesareestimatedatUS$4.2billion
withEBITDAofUS$1.2billionforthetwelvemonthperiodendedDecember31,
2013.Thetransactionvalueimpliesarevenuemultipleof2.2basedon12months
endedDecember31,2013.

REGULATORYISSUES
Typically,CCItakesdecisionsrelatedtomergersandacquisitions(M&As)within30
days,thoughitcandosowithin210daysofthefilingofapplicationinthisregard.
Afterthataproposeddealisdeemedtohavebeenapproved.
Theproposedmergeralsorequiresapprovalsfromstockexchanges,Sebi,thehigh
courtsofGujarat,PunjabandHaryana,creditorsandshareholdersofbothcompanies.
AscitedbyaCCIofficial:Itisanimportantcaseandtherearevariouscomplexities
involved.Itrequirescloseevaluation

FourdomesticmanufacturingfacilitiesofRanbaxyhavebeenbannedfromsupplying
productstotheUS,followingtheUSFoodandDrugAdministrationfindingserious
violationsofitsnormsattheseunits.ResumingsuppliesfromtheseplantstotheUSis
importantforSunPharma,astheUSisthelargestexportmarketforbothcompanies.
WhentheproposedacquisitionwasannouncedinApril,Shanghvihadaddressingthe
concernsofregulatoryagenciesworldwidewereapriority.
InthelastweekofAugust,Indiasantitrustregulatorhasorderedasecondstage
investigationintothemergerofSunPharmaceuticalIndustriesLtdandRanbaxy
LaboratoriesLtd,citingtheriskthatthedealcouldharmnationalinterestby
resultinginsignificantmarketdominationbythecombinedentity.
ThisisthefirsttimetheCompetitionCommissionofIndia(CCI)hasdecidedona
secondstageinquiry,whichfollowsapreliminaryinvestigationofadeal,andraised
suchanobjection.Thewatchdogwilldeliverafinalrulingafterhearingfromthe
companiesagainandseekingpublicfeedbackonthetransaction.Thepossibleripple
effectofthemergeronpricesoflifesaving,essentialmedicinesintheIndianmarket
hadpromptedtheantitrustbodytoissueashowcausenoticeinJuly,askingthetwo
companieswhyapublicinvestigationshouldnotbeorderedintothedeal
ThemergerwillcreateIndiasbiggestdrugmakerwithan8.5%shareofthe
pharmaceuticalmarket,worthanannualRs.76,000crorebysales.UnderIndias
mergerandacquisition(M&A)rules,companiesneedCCIsapprovalifthecombined
assetsofthetwoentitiesareworthmorethanRs.1,500croreortheircombined
revenueamountstomorethanRs.4,500croreinIndia.TheCCIapprovalisalso
mandatoryifthecompanieshaveassetsoutsideIndia,ortheircombinedassetsare
worthmorethan$750million(Rs4,566crore),oriftheirturnoverismorethan
$2,250million(Rs13,700crore).
ThisisalsothefirstM&AdealwheretheCompetitionCommissionofIndia(CCI)
hasorderedapublicscrutinyofafterforminga"primafacieopinionthatthe
combinationislikelytohaveanappreciableadverseeffectoncompetition".
Theantitrustbodysmainconcernsareaboutthe46drugformulationsthatwill
constitutethemergedentitysportfolioandinwhichitwillhaveasignificant
presenceinthemarket.Outofthese46drugsegments,thepricesoffiveareregulated

bythegovernment.Intherestofthesegments,marketdominationisagenuine
worry,saidagovernmentofficialfamiliarwiththedevelopment.Thecommission
hasdecidedtomonitorthepricesofothercrucialdrugsegmentstoensurethe
companydoesnotstopmanufacturingthedrugaltogetherifthepriceistoolowor
increasepricesfurtherincaseofexpensivedrugs.
Section29oftheCompetitionActsaysCCIcanproceedtoinvestigateacombination
whereitisoftheopinionthatthesameislikelytocause,orhascausedan
appreciableadverseeffectoncompetitionwithintherelevantmarketinIndia.
On11July,theNationalStockExchangeandBSEclearedthedeal.
ThoughCCIaskedthecompaniestorestructurethedealsoastosupportthe
competitionlaw.TheCompetitionCommissionofIndia(CCI)islikelytotakethe
finaldecisioninthe$4billionSunPharmaRanbaxydealbytheendofthismonth.
CCIaskedthem(thetwocompanies)tocomeupwithsomeremedialmeasureswhich
theyhavesubmittedandCCIisstudyingthesame.
Investmentbankersforthetwocompaniesarereworkingthedealtoallaythe
CompetitionCommissionsconcerns,andthedecisiononanewstructurewould
likelybemadeinDecember.

ANTICIPATEDPOSTMERGERINTEGRATIONISSUES
AmajorupsidefromthedealcouldbeforRanbaxy'sproductportfolio.Thoughmany
ofthefirsttofileapplicationsofthecompanyarependingintheUS,theyhavethe
potentialtogiveamajorboosttorevenuesonceapprovalcomesthrough.Whilethe
dealhasgotthumbsupfrommost,evenwithallthepositivesthismergerbringson
challengesthatSunwillhavetofaceontheground:.
1:AchievingCompliance
Withthebaggageofregulatoryissues,thebiggestchallengeforSunPharmawillbe
torestoreandregaintrustandconfidenceoftheregulators,especiallyintheUS.Four
ofRanbaxyplantsarebannedbyUSFDAandisunderanongoingconsentdecree

2:ReputationalRisks:
ItwillbeachallengingrideforSunPharmaceuticalIndustriesLtdtoalignRanbaxy
LaboratoriesLtdwithitsbusinessgiventheregulatoryhurdlesandcultural
differences.
ThereputationwhichDilipShanghvi,founderandmanagingdirectorofSunPharma,
hasearnedforturningarounddistressedbusinesseswillonceagainbeputtotest.The
investorcommunitywillbecloselywatchingeachandeverymovehemakesinorder
tointegrateRanbaxywithSunPharma.
3:IntegratingMarketingForces
Thetwocompaniesoperateacrossdifferentgeographiesandtheirobjectivesmay
differ.Thesynergiesgetdifficulttoextract.Proceduresandtechnologyhavetobe
integrated.
Therecanbetwokindsofsynergies.Onecouldbeproductsynergy:therecouldbe
sometherapeuticsegmentswhereSunPharmaisstrongwhileRanbaxycouldbe
stronginotherareas.Similarly,therecouldbesomegeographicalsynergiesaswell:
forinstance,RanbaxyisstrugglingintheUSandSunPharmasgroundpresencein
thatcountrycouldprovetobeuseful.
ThecombinedSunRanbaxyentitywillbetheundisputedleaderintheIndianmarket
with9.2percentmarketshare.
WhilethemergerwillpumpupthefeetongroundpresenceforSunPharmainIndia
toanenviablepresenceacombinedstrengthof9000medicalrepresentativesthis
willleadtothebiggestoperationalchallenge.Marryingthetwoculturallydifferent
marketingentitieswillbeakeytaskforSun.Thetwocompanieshaveoperatedunder
differentworkcultures,givingdifferentmarginbonusesandstreamliningthetwotoa
commonplatformwillbecrucialforSuntomaximizeonthemergersIndia
advantage.Sunthoughisconfidentandsaysthecomplimentaryportfolioswillsee
USD250millionsynergiesbytheendofthirdyear.
4:ManagingMultipleUnits

ThemergergivesSungrandglobalexposure.Thecombinedentitywillhave47
manufacturingfacilitiesacross5continents.Thisdiversenumberofplantswould
meanincreaseoversight&couldbearegulatorynightmare.Expertspointoutthat
Sunmayeventuallyhavetolookathivingofforconsolidatingsomeofthemthe
manufacturingcapacities.Alsobecausetherecouldbesomeoverlapsandnotall
capacitiesmaybeneeded.
5:RanbaxyBrand
TheRanbaxybrandwillceasetoexist.Thoughthisisnotachallengereally,butone
oftheoldestgenericdrugbrand,onewiththehighestrecallvaluewillceasetoexist
eventually.Expertssaythismayleadtosomeconfusionsinthemarketspaceand
impactthemoraleof the Ranbaxy employees and will be on Sun Pharma to rebuild on
that.