'SUN' TO SHINE OR SHAREHOLDER'S TO TAKE A RUN?

By Ruma Dubey

So the Japanese decided to throw in their towel; get out, lock, stock and barrel out of a company which was, well, a mess. They just wanted an exit- they sold off at a loss and they have categorically stated that it has agreed to vote shares in Ranbaxy in favour of Sun Pharma's acquisition. Its almost like, just do anything but want to get out!

In this entire deal, undoubtedly, Daiichi remains the biggest loser. In 2008, the Japanese company bought controlling stake in Ranbaxy for $4.6 billion. The promoter, Malvinder Singh was paid Rs.737/share. Six years on, Daiichi is selling off at $3.2 billion, which is at a loss of over 30%. And if we go on to calculate the money it has invested in Ranbaxy and the fines which it has had to pay, the loss is much more.

If the Japanese had though that they were to come and ‘change’ the company and make it more efficient, it bargained for worse – the US FDA issues only intensified and it was under Daichii’s watch that the company went through – faking test results, flies at their microbiology labs, paid a fine of $500 million for manufacturing substandard drugs and lying about it, major FDA manufacturing violations and it also had to withdraw drugs due to possible contamination from glass particles. The US import ban on products manufactured at all its plants remains and latest - it has received a subpoena from authorities in the U.S. state of New Jersey.

Thus in the true sense, it is good that Daiichi got out, even if at a loss; at least it was rescued from paying up more. But the question we need to ask is how come a company with Japanese management could not change the workings at Ranbaxy for the better, it in fact went on to become worse. Does this mean that there is a sense of defiance that “we will not change, we will be like this only” or is it that Indian companies, by nature do not change? Somehow this brings to mind the joke which used to go around earlier – when the Japanese told him that if they handed over Bihar to them, they will transform it into an economic super power like Japan to which Laloo had quipped, “ Give me three days and I will turn Japan into Bihar!” Probably, this is what Daiichi feared!

Now that the deal is done, what does this mean for the shareholders of Sun and Ranbaxy?

For shareholders of Sun:

• The deal has been struck at a very good price
• It expects to realise revenue and operating synergies of $250 million by third year post closing of the transaction. 
• Post the acquisition, Sun becomes the third largest branded derma company in the US, largest pharma company in India and biggest Indian pharma company in USA.
• Combined entity of Sun Pharma-Ranbaxy will have presence in 55 markets.
• It gets access to Ranbaxy's strong controlled substance pipeline.
• Backward integration - Sun Pharma has the API (Active Pharmaceutical Ingredients) plant to supply material to Ranbaxy's US plant. And Ranbaxy has got many ANDAs approved for marketing in USA. Thus using Sun’s plant, Ranbaxy will be able to export to USA.
• The combined entity will have leadership in 13 products.
• Ranbaxy’s Rumania plant was removed from under the watch by USFDA.
• The task of clearing the US FDA and nurturing back Ranbaxy into a profitable pharma company will remain.
• It will have to bear the legal costs and other overheads, the new issue of subpoena in New Jersey is also something which Sun will have to deal with.
• Sun’s cash balance of US$1.5 billion remains unaffected but the combined book will have Ranbaxy’s debt of $800 million.
• It might have to put on backburner its ambitions to acquire company in USA.

Ranbaxy shareholders

• They will get 0.8 share of Sun for every share held of Ranbaxy. Sun Pharma has worked out the Math and said that this exchange ratio represents an implied value of Rs 457 for each Ranbaxy share, a premium 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 April 4, 2014.
• This change in management, might actually help it get out of the US FDA bad books and might finally get back to profits.
• Four of its plant remain under import alert and it remains loss making. Thus for the shareholders of Ranbaxy, this is indeed a win-win deal.