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Inside India's shocker pharma deal

June 16, 2008 12:53 IST

It was, perhaps, India's best-kept corporate secret. On June 11, Ranbaxy Laboratories, the largest Indian drugmaker, said it was giving up control to Daiichi Sankyo, the No. 3 Japanese pharmaceutical company. Daiichi will buy a 50.1% stake in Ranbaxy for nearly $4.6 billion, or $17.14 per share, a 31% premium over Ranbaxy's current share price. The deal doubles Ranbaxy's market capitalization to $8.5 billion, putting Daiichi Sankyo at No. 15 in the global pharma pecking order.

Why would Ranbaxy Managing Director Malvinder Singh bail out of a company set up by his grandfather Bhai Mohan Singh and built by his visionary father, the late Parvinder Singh?

At Ranbaxy's televised press conference in New Delhi after the announcement of the sale, Singh confessed that "he had never ever anticipated not holding equity in Ranbaxy."

Moreover, Ranbaxy seemed to be on solid ground, with the stock having risen sharply this year even as the Mumbai index floundered. The company has won fans as a low-cost, high-tech leader in India's push to become a global force in the pharmaceutical industry. Under Singh's guidance, Ranbaxy has been at the forefront of Indian efforts to expand beyond the country's traditional strength in generic drugs by focusing on research and development for new drugs of its own. For instance, Ranbaxy has formed research alliances with Big Pharma giants like GlaxoSmithKline (GSK).

Facing Legal Challenges from Pfizer

So why sell? "It was a price he couldn't refuse," says Kavita Thomas, vice-president research, who tracks the pharma industry at First Global Securities. Had Singh rebuffed the Japanese offer, "there was no way that Ranbaxy would have ever gotten the kind of valuations that Daiichi Sankyo is paying."

Ranbaxy also is facing challenges as it tries to join the drugmaking big leagues. It has had to contend with ongoing legal battles brought by rivals such as Pfizer (PFE), which has challenged Ranbaxy's right to make generic versions of Lipitor since 2005. At the same time it faces more competition in generics, the company has also struggled with its new-drug discovery operation. Ranbaxy even had plans to spin off its new-drug discovery business, a move now on ice because of the Daiichi deal.

India's largest pharma company also has had its share of management turmoil. Ranbaxy was the first Indian pharma company to appoint a professional CEO. After Malvinder Singh and his brother Shivinder (who looks after Ranbaxy's health-care business) entered the business upon their father's death in 1999, Ranbaxy lost two of its stalwarts: Managing Director A.S. Brar in 2004 and then-CEO Brian Tempest in 2005.

Scouting for a Partner for 18 Months

Indeed, given the challenges that Ranbaxy faces, it's likely that Daiichi wasn't the first Japanese company with whom Singh has talked about a deal, according to pharma experts in India. The Ranbaxy chief had been scouting for a partner for the past 18 months and held talks with Takeda Pharmaceutical as well as with Pfizer and GlaxoSmithkline, according to one expert.

Over the past two weeks, speculation about a deal increased. Ranbaxy's stock price rose 15% to close on June 10 at $13.35 despite the market meltdown. The upswing in the share price was attributed to speculations about a foreign partner picking up a stake in Ranbaxy. "We all thought that Ranbaxy would offload a small stake. The sellout was a surprise," says Shivani Shukla Raval, industry manager of the health-care practice at research firm Frost & Sullivan.

Singh will now give up the family's 34.82% stake in Ranbaxy to become a subsidiary of Daiichi Sankyo (Daiichi Pharma and Sankyo Pharma merged three years ago). Ranbaxy will remain listed on the Indian stock exchange with "no change in identity." Singh continues to be the managing director.

Japanese Market Is Saturated

What does this mean for Daiichi Sankyo? The Japanese company gets a larger toehold in the global marketplace, including the emerging markets. Daiichi's 21-country operation will now go up to 56 after the Ranbaxy acquisition, which will be completed in March, 2009. The Ranbaxy buy also comes at a time when Daiichi and its local rivals are looking for new areas of growth. "The Japanese market is saturated, and most of their patents expire in 2010. They have to look at new businesses," says Seiji Ota, a partner at New Delhi consulting company BMR Advisors.

Daiichi is now exploring the generics business with Ranbaxy. Moreover, with Ranbaxy abandoning plans to spin off its new-drug delivery unit, Daiichi can now pool its R&D resources with those of its Indian unit.

Still, many Indians are concerned that the sale of Indian pharma's crown jewel could impact smaller drugmakers. "It will create intense pressure on other pharma companies, making them vulnerable to hostile takeovers," says D G Shah, secretary general of the Indian Pharmaceutical Alliance.

Nandini Lakshman,