ANALYSIS OF SUN PHARMA'S
ACQUISITION OF RANBAXY
Presented By :
MERGER OF RANBAXY AND SUN PHARMA
Sun Pharmaceuticals announced theirmerger with
Ranbaxy Laboratorieson 6th April 2014.
Almost a year after announcing the deal, the merger of
Ranbaxy with Sun Pharma 'consummated'on March
24th 2015.
Sun Pharma had a past of acquiring troubled
companies and turning it around successfully.
This deal was a large and complex one.
With getting approvals from high courts , RBI,
Competition Commision of India CCI, It took its time
and for deal outcome to be realised would take few
years.
INTRODUCTION OF PLAYERS
SUN PHARMACEUTICALS :
Established in 1983 by Dilip Sanghvi, listed since 1994 and
headquartered in India, Sun Pharma is an international,
integrated, specialty pharmaceutical company.
In India, the company is a leader in niche therapy areas of
psychiatry, neurology, cardiology, diabetology, gastroenterology,
orthopedics and ophthalmology. The company has strong skills in
product development, process chemistry, and manufacturing of
complex dosage forms and APIs.
Over 72% of the Companys Sales come from markets outside
India.
The US is the single largest market accounting for around 60% of
the total revenues.
Manufacturing operations are in 26 locations including countries
like US, Canada, Brazil and Israel.
In the US, the company markets a large basket of generics, with a
strong pipeline awaiting approval from the U.S. Food and Drug
Administration (FDA)dics etc.
RANBAXY LABORATORIES
LIMITED
Ranbaxy has ground operations in 43 countries and 21
manufacturing facilities located in 8 countries, and its impressive
portfolio of products is sold in over 150 countries.
Ranbaxy Limited is an integrated, research based, international
pharmaceutical company producing a wide range of quality,
affordable generic medicines, trusted by healthcare professionals
and patients across geographies.
Ranbaxy has been involved in several issues with FDA.
In 2009 the US FDA said it halted Ranbaxy's Paonta Sahib plant in
India because of a practice of falsified data and test results in
approved and pending drug applications.
In 2012 Ranbaxy halted production and recalled forty-one lots of
atorvastatin due to glass particles being found in some bottles.
In 2013 US FDA fined 500 million for manipulation generic data and
selling adulterated drugs to United States.
The company has been incurring anet lossand suffering a decline
innet worthsince these charges
WHY RANBAXY
Large Indian Pharma co.
sizeable drug pipeline
huge product portfolio
has announced some big product launches in
future in the US generics
Huge market in India and developing
countries
Market spread wide across globally
WHY DAIICHI SOLD RANBAXY ?
Daiichi faced criticism after Ranbaxys plants
came under the US Food and Drug
Administrations (FDAs)
Ranbaxys inability to overcome its FDA-
related problems has put pressure on its
promoters.
Three weeks after the deal, Daiichi Sankyo
reported currency exchange losses of Rs 9
billion in 2008 owing to the goodwill
evaluation at the time acquisition.
SUN PHARMA + RANBAXY=
PROFILE OF A NEW GLOBAL
LEADER
ACQUISITION
Creates the 5th largest specialty generics company in the
world and the largest pharmaceutical company in India.
In an all-stock transaction worth $4-billion that includes
$800 million debt.
Gets leadership position in 13 specialty segments
Wide Global reach 65 countries, more number of
manufacturing facilities 47
Huge product portfolio globally
Ranbaxys branded derma business in the US adds to
Sun's already strong derma franchise
Provides Sun Pharma access to strong human capital and
reach in tier-II/III markets in India, where it currently lacks
presence, according to Edelweiss Securities.
Daiichi Sankyo to become the second largest shareholder
in Sun Pharma, as a result of its current stake in Ranbaxy.
VALUATION
Sun Pharma will acquire 100% of Ranbaxy in an
all-stock transaction.
Ranbaxy shareholders will receive 0.8 share of
Sun Pharma for each share of Ranbaxy.
This exchange ratio represents an implied value of
Rs.457 for each Ranbaxy share, a premium of
18% to Ranbaxys 30-day volume-weighted
average share price and a premium of 24.3% to
Ranbaxys 60-day volume-weighted average share
price, in each case, as of the close of business on
April 4, 2014.
Having a consolidated turnover of Rs 11,326.32
crore (March ending 2013), Sun Pharma acquired
a larger company Ranbaxy with a turnover of Rs
12,410.43 crore (March ending 2013).
EVALUATION
Sun Pharmas revenue will jump by a healthy 40% but its operating
profit will rise by a just 7.5%, based on pro forma 2013 financials.
Ranbaxys profits have been hit by provisions related to foreign
exchange and inventory write-offs. Sun Pharma has said it expects to
get Rs.1,550 crore in merger-related synergies by the third year after
the acquisition is completed. That is fairly significant and these
savings should be from procurement, sales growth and supply chain
efficiencies.
The merger will have a negative effect on Sun Pharmas performance
in the short term reducing its operating profit margin from 44.1% to
29.2%.
On a pro forma basis, the combined entitys revenues are estimated
at US$ 4.2 billion with EBITDA 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 December 31
Investor response to the announcement was lukewarm, with the
stock prices moving in opposite direction. As an immediate effect,
shares of Sun Pharma went up to 2.7% in the morning trade after the
acquisition announcement while that of Ranbaxy went down by 3.1%.
SYNERGY
Product Synergy
They alsocomplementeach other in their areas of expertise
and efficiency, both functionally and geographically. Sun
pharma having a presence in chronic diseases while Ranbaxy
having relevant presence in acute and OTC segments
Geographic synergy
While Sun Pharma is a major global specialty pharmaceutical
company with expertise in complex and niche therapy areas
and a proven record of turning around its acquisitions,
Ranbaxy has a strong global footprint and presence in the
genericssegment.
Sun pharma will add to its overall manufacturing base that
is expected to reap benefits in the long run
Value of the Synergy:
US$ 250 million of revenue &operational synergies by 3rd
year primarily derived from top-line growth, and
procurement & supply chain efficiencies
FOR RANBAXY SHAREHOLDERS
The swap ratio of 8 shares of Sun pharma for every
10 shares of Ranbaxy works to the advantage of
the new entrants into Ranbaxy Laboratories Ltd. as
at the prevailing price they now needs to pay 5%
less for getting the shares of sun pharma as
compared to buying them directly from the
market.
Ranbaxys share is evenly placed based on the
merger ratio and no further gains are likely to
accrue to its shareholders. Ranbaxys shareholders
will now become Sun Pharma shareholders. They
can choose to stay invested if they believe that
Sun Pharma will be able to make a much bigger
and better combination, or exit at this point.
FOR SUN PHARMA SHAREHOLDERS
Sun Pharmas shareholders may blink at the
immediate effect of equity dilution of 16.4%
and the effect on its profitability in the near
term. This is reflected in the stock market
reaction to the announcement: On Monday,
Ranbaxys shared declined by 3.1%, while
Sun Pharmas share faced some volatility but
closed with a decent gain of 2.7%.
Indemnity:
In connection with the transaction, Daiichi Sankyo has agreed
to indemnify SunPharma and Ranbaxy for, among other things,
certain costs and expenses that may arise from the recent
subpoena which Ranbaxy has received from the United States
Attorney for the Toansa facility.
Conditions to close:
Requisite approval of Sun Pharma and Ranbaxy shareholders
Approval of the Indian Central Government and various other
regulatory bodies
Regulatory Issues
The CCI (Competition Commission of India) approved the
acquisition of Ranbaxy by Sun Pharma on December 5, 2014 on
the precondition that seven brands, constituting less than 1% of
total revenues of the combined entity in India, bedivestedin
order to prevent the merger from negatively impacting
competition in the domestic market.
STOCK PRICE MOVEMENTS OF SUN
PHARMA
571 - before merger price of share
706 - current price of share
4TH LARGEST WORLDWIDE IN
GENERIC SALES
NETWORTH
DIVIDEND
OPERATING PROFIT
Mar 16 Mar 15 Mar 14 Mar 13 Mar 12
Basic EPS
19.60 18.90 15.20 28.80 25.70
(Rs.)
Net Profit
20.62 20.00 24.12 30.70 37.93
Margin (%)
Return on
Networth/Equity 15.01 17.74 16.95 19.90 21.71
(%)
Return on
Capital 11.51 13.89 13.43 16.81 19.17
Employed (%)
Enterprise
195,642.94 211,177.91 115,572.29 82,522.91 57,036.67
Value (Cr.)
Dividend /
1.00 3.00 1.50 5.00 4.25
Share(Rs.)
Total
Shareholders 31,404.22 25,589.71 25,589.71 18,524.95 18,524.95
Funds (cr)
Sales
Turnover(Cr 28,517.70 27,717.82 16,275.48 11,469.68 8,126.94
)
