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Shock in India over Ranbaxy sale
Amy Yee, Joe Leahy
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June 12, 2008

As India's largest drugmaker unveiled a deal worth up to $4.6bn to sell control to Daiichi Sankyo of Japan, the disbelief at the press conference was palpable.

There was shock in India at the sale of Ranbaxy [Get Quote], one of the country's star homegrown companies, to a foreign group. The transaction is the second-biggest within the country after Vodafone's $11bn purchase of mobile phone operator Hutchison Essar last year.

For industry observers globally, there was surprise that a research-based pharmaceuticals company from Japan was diversifying abroad with the purchase of one of the more aggressive generic drugs manufacturers. The Japanese pharmaceuticals industry has traditionally been conservative about overseas expansion.

"This is certainly a game changer. The question is if there is a major execution risk," said Vijay Karwal, managing director in the healthcare banking group at ABN Amro.

Bombarded with questions about why Ranbaxy would sell control of the family-run business, Malvinder Singh, chief executive, insisted at the press conference that the deal would "allow us to transform and go to the next level."

With a combined market capitalisation of about $30bn, the new group would enter the ranks of the world's 15 largest drugmakers, and would have a presence in 60 countries.

Daiichi Sankyo would gain access to Ranbaxy's low-cost manufacturing facilities in India. Ranbaxy would extend its reach into developed countries, including Japan, the second-largest pharmaceuticals market after the US, which has considerable scope for generic growth.

Mr Singh, who will remain chief executive of the new group, said combining Ranbaxy's expertise in generic drugs and Daiichi Sankyo's strength in patented medicines would create a pharmaceuticals maker with "a mix of innovation and generics".

Global pharmaceuticals makers are struggling with the rising costs of developing drugs and have been ramping up research and clinical testing in emerging markets. India's generic companies are racing, with mixed results, to develop their own original medicines with far smaller budgets than their global rivals.

Mr Singh argues that Daiichi Sankyo and Ranbaxy will complement one another and offer a new business model that could spur other drugmakers to "revisit" theirs.

So far, only Novartis [Get Quote] of Switzerland has adopted such a model on any scale, consolidating its long-standing Sandoz division with the purchase of Hexal of Germany in 2006 to create the world's second-largest generic company.

Other groups have been hesitant, expressing scepticism about how far any synergies between the two activities can offset tensions. Generic companies including Ranbaxy have proved tough in challenging their rivals' patents in court.

With a war chest of almost $800m, Ranbaxy plans to continue being one of India's most acquisitive companies. Iit has snapped up a series of generic drugmakers in the US and Europe.

Mr Singh was not under apparent pressure to sell but the deal represents a windfall to Ranbaxy's controlling shareholders, says Rajesh Vora, vice-president and head of healthcare research at ICICI [Get Quote] Securities in Mumbai. "This is a $5bn company being valued at $8.5bn. It's at the top end of deals done in the past."

The deal is valued on substantially higher multiples than comparable purchases, helping to raise valuations on other Indian generic companies.

For its part, Daiichi, Japan's third-largest pharmaceuticals company which is fresh from its own domestic merger completed last year, is keen to break into foreign markets. Its peers have done so, and Japan is seeing increasingly tighter government price controls.

"Japanese companies do tend to be quite long-term, which is a good thing," said Philip Hall, a pharmaceuticals analyst at KBC Securities in Tokyo. But he said Daiichi is moving aggressively into a new area and "there may be some concerns about the amount of money they're paying".

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