DELHI - India's pharmaceutical industry, noted for its high-quality production
of generic, or off-patent, drugs woke up last week and took a fresh look at
itself after Japan's third-largest drug firm, Daiichi Sankyo, snapped up Indian
pharmaceutical giant Ranbaxy Laboratories for US$4.6 billion.
For the most part, the industry liked what it saw, with the deal marking
recognition of its strengths and opening new opportunities for growth at home
and overseas. Only a few naysayers questioned whether it marked the start of an
influx of foreign investors and rivals keen to buy up local firms.
Ranbaxy's young billionaire chief executive and managing director, Malvinder
Singh, 35, had reason to be happiest in the
new dawn. He and his family were made $2.3 billion better off by agreeing to
sell their 34.8% stake in the debt-burdened firm to Daiichi.
The takeover valued Ranbaxy, which will become a Daiichi subsidiary, at over
$8.4 billion, while making the Japanese company the world's fifteenth-largest
drug maker from its current rating of 22. Daiichi will raise its Ranbaxy
holding to a minimum of 50.1% through an open offer to shareholders at 737
rupees (US$17) per share.
Malvinder's company now has an opportunity to expand its presence in the global
mart while finding a much-larger partner to help shoulder its $600 million in
debt, picked up during a spending spree this decade. That will give Ranbaxy
more freedom to consolidate its position in other sectors, such as financial
services and healthcare. It will also be able to channel to India new
high-quality drugs from Daiichi, noted for its innovation and excellent
research base.
Ranbaxy shares hit a three-year high last Friday after the deal was announced,
bolstered by a Business Standard report, citing unnamed sources, that Pfizer,
the world's largest drug company, was considering making a hostile bid to
acquire the company.
The Indian business community feels the Daiichi purchase augurs well for the
future of the global pharmaceutical industry. "The Ranbaxy deal is
path-breaking because it will combine the might of two internationally strong
companies to forge a new global force in pharmaceuticals," said Keerthi Reddy
of Apollo Pharma Labs. Ranbaxy will add international clout and a strong Indian
presence to Daiichi Sankyo, giving it access to 60 countries from the present
15, Reddy said.
Daiichi shares jumped 5% after the deal was announced, with investors believing
the company will be able to capitalize on Ranbaxy's cheap and world-class
manufacturing operations to gain more clout in the increasingly important
Japanese generic drug market.
Ranbaxy has been in the doldrums since 2005, when its profits plummeted by 60%.
Malvinder, who took over the company in 2006 and who will continue as managing
director of Ranbaxy-Daiichi, embarked on an acquisition spree, snapping up
Romania's Terapia, Bayer's German generics business, GlaxoSmithKline's generics
businesses in Italy and Spain and South Africa's Be Tabs Pharma.
The acquisitions lessened Ranbaxy's dependence on the US, which accounted for
nearly half its sales, but left the company over leveraged. Its earnings per
share in 2007 were lower than they were in 1998, making Daiichi Sankyo's offer
at 35 times prospective 2008 earnings for Malvinder's controlling stake appear
generous. On Wednesday, the shares were trading at a p/e of 28.7.
Daiichi's addition of generic drugs to its interests on top of branded drugs
that at present are the norm in Japan will help it grow in emerging markets and
also respond to Japanese government efforts to slash medical costs. The
country's Council on Economic and Fiscal Policy is seeking to whittle spending
down by 220 billion yen (US$2.2 billion) every year between 2007 and 2011.
The Japanese government is promoting use of cheaper, off-patent drugs as its
population ages and incurs rising healthcare costs. The share of generic drugs
in the country's medical cabinet is only 17%, compared with 63% in the US and
56% in Britain.
The proposed transaction "provides the opportunity to complement our strong
presence in innovation with a new, strong presence in the fast-growing business
of non-proprietary pharmaceuticals," Daiichi chief executive Takashi Shoda said
after the deal was signed. "Ranbaxy will also allow us to tap the emerging
markets."
Those markets are needed to bolster Daiichi's lagging sales, which declined
10.4% in Japan in the year ended March 31, according to the company's annual
report, while revenue from North America tumbled 7.1%. A 48.2% jump in sales to
other regions, led by Asia and Latin America, helped to limit the fall in total
sales to 5.3% in the period. The company cut its spending on research and
development 4.2% in the year.
In contrast, Ranbaxy sales to North America climbed 16% in dollar terms in its
most recent quarter compared with a year earlier, with the company claiming it
increased its share in the US market for generic drugs in which it was
represented to about 11.3% in the first three months of 2008 from 10.8%
previously. Sales in the Asia-Pacific and Commonwealth of Independent States
countries gained 22% in the quarter from the year-earlier period and in India
16%.
Overall, sales gained 15% in the quarter in dollar terms, although only 4% in
rupee terms, as the Indian currency strengthened over the period.
From a global perspective, Daiichi's purchase of Ranbaxy is in line with
efforts by leading drug makers to gain toeholds in emerging markets as markets
in the US and eurozone shrink.
The positive aspects of the deal still left some in the Indian business
community apprehensive that it might lead international investment bankers and
others to view every Indian company as saleable and prompt a swathe of
unsolicited proposals.
Analysts argued that this concern is unwarranted, with the takeover instead
likely to act as a catalyst for domestic consolidations. "No foreign company
can force itself on an Indian one," said a New Delhi-based industrialist. "It
is for the company owner to decide whether he wants to do a Ranbaxy or not."
Even so, the domestic generic drug industry is attracting increased attention
after Ranbaxy along with Cipla, Wockhardt, Aurobindo and others have made it a
leader in supplying affordable drugs for millions around the world, not least
to treat life-threatening ailments such as AIDS and cancer, along with
lifestyle diseases like hypertension and high cholesterol.
India, with a 25% share of the global generic drugs market, exports nearly 70%
of its medicine output to emerging markets.
Some fear that with the Daiichi takeover, Ranbaxy's overall aggressive focus on
generic drugs may get diluted.
New Delhi-based independent journalist Neeta Lal has had her work
published in over 70 publications across 20 countries.
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
