Acquisition of Ranbaxy by Daichii

1. RANBAXY`s ACQUISITION BY DAIICHI
SANKYO
Abhishek Kumar
Abhishek Saxena
Kushal Prakash
Nihar Routray
Suchitra Ravichander

2. 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.

3. Profile Of Both the Companies
Largest in the India
8th in largest in the global general 2nd largest in Japan
pharmaceuticals 22nd Largest in the world
 Serving in over 125 Countries  Operations in 50 countries.
 Ground operations in 49 countries Producer of high quality
& Manufacturing in 11 countries. drugs
Strong R&D Base.
15th Largest drug maker in the world
Market Capitalization – 30 Billion
Low cost production

4. Last 5 years - Annual results in brief (Figs in Crores)
Dec ' 09 Dec ' 08 Dec ' 07 Dec ' 06 Dec ' 05
4,784.76 4,494.52 4,071.29 3,973.56 3,490.13
Sales
822.89 239.75 546.87 559.45 65.76
Operating profit
(109.85) 893.40 93.43 58.10 26.41
Interest
1,210.12 (562.40) 893.14 580.92 249.01
Gross profit
13.61 (24.56) 16.56 10.37 6.01
EPS (Rs)

5. 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.

6. 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.

7. Involved Parties
Daiichi-Sankyo
• 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

8. 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

9. 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.

10. 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

11. 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.

12. Transactional Process

13. Anticipated Benefits Of the Acquisition
Daiichi-Sankyo
• 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.

14. 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%.

15. Summary Of Structure

16. How did Daiichi-Sankyo
acquire Ranbaxy?

17. How did Daiichi-Sankyo
acquire Ranbaxy?
Acquisition
Nature of Transaction
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)

18. Valuation of Ranbaxy
Value
Assets and Liabilities attributed
(Rs Crores)
Book value of assets and liabilities (Cash, Inventory
3470
etc.)
Inventories (Increase in inventories to fair value) 88
Tangible assets (Land) 440
Intangible assets (Leasehold land) 260
Intangible assets (Increase in current products,
1805
etc. to fair value)
In-process R&D expenses 304
Deferred tax liability -881
Minority Interests -1981
Goodwill 17995 USD 4.01 Billion
Total consideration 21500 USD 4.9 Billion

19. 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

20. Reasons for higher valuation
The 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.

21. EV/Sales Band for Ranbaxy

22. Comparative Analysis Of
Annual Financial Results
Base yr. Dec. 07 % diff. Dec. 08 Impact on the % diff. Dec. 09 % diff.
05 BS & PL
Sales 3490.13 4071.29 16.65 4494.52 Sales increased 28.77 4784.76 37.09
owing to the
increased market
share
Operating 65.76 546.87 731.61 239.75 Good will 264.58 822.89 1151.35
profit amortization
losses,
Interest 26.41 93.43 253.76 893.40 Borrowings for the 3282.8 (109.85) (515)
acquisition of
Ranbaxy's
increased.
Gross 249.01 893.14 258.67 (562.40) Purchases owing (221) 1210.12 385.97
to the investment
profit in Ranbaxy.
EPS (Rs) 6.01 16.56 175.54 (24.56) EPS decreased as (508) 13.61 126.45
the total no: of
shares increased

23. 6000
5000
4000
Sales
3000
Operating profit
Interest
Gross profit
2000
EPS (Rs)
1000
0
Base yr. Dec. 06 % diff. Dec. 07 % diff. Dec. 08 % diff. Dec. 09 % diff.
05
-1000

24. 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.

25. 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.

26. 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.

27. Acquisition Analysis
View 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.

28. 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.

29. 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.

30. 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.

31. 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

32. 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

33. 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

34. Global Scenario Of M&A Deals

35. 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

36. References
http://www.moneycontrol.com/news/business/daiichi-acquires-
525ranbaxy_362194.html
http://www.daiichisankyo.com/ir/archive/mt_pdf/imm2008_05_14_34_01.p
df
http://www.frost.com/prod/servlet/market-insight-top.pag?docid=88873859
http://www.investopedia.com/university/mergers/mergers2.asp#axzz1Xwz
uwrtw
http://www.worldpharmanews.com/corporate/1782-daiichi-sankyo-a-
ranbaxy-announce-a-new-social-contribution-initiative