Biotech Values

[DewDiligence]

Daiichi Has Yet to Gain from Ranbaxy

http://online.wsj.com/article/SB10001424052748704662604576201741223441376.html

›MARCH 22, 2011
By PRABHA NATARAJAN

Acquisition: Daiichi Sankyo bought Ranbaxy for $4.6 billion in June 2008.

Why: Daiichi Sankyo, the Tokyo-based pharmaceutical company, wanted to acquire a drug maker that specialized in generics after Japan eased its laws allowing sales of these cheaper versions of expensive drugs. Through the acquisition of Gurgaon-based Ranbaxy, Daiichi bought a mature firm that would help it access the American and Indian markets.

Impact: The deal was a trendsetter. India's family-owned companies realized that it was not shameful to sell and profit from their businesses.

What they said then: Ranbaxy CEO Malvinder Singh said the company was in his genes, and he would stay on. Daiichi Sankyo President and CEO Takashi Shoda said the two companies were a good fit: "Not only will Singh stay with the company, he will also be chairman of its board of directors," Mr. Shoda said.

Where are they now: Mr. Singh left the company in 2009 with a 4.5 billion rupees severance package, according to reports, while Mr. Shoda has moved up to become chairman of Daiichi Sankyo.

What went wrong: A lot, especially initially, including a lack of proper due diligence, analysts say. In its eagerness to tap the expertise of a generic drug maker, Daiichi took the risk of buying Ranbaxy for top dollar. Three weeks later, the US Food and Drug Administration banned imports of 30 of Ranbaxy's generic drugs, and later determined that the company was selling adulterated or misbranded medicine. It blacklisted two of the company's manufacturing units, limiting the company's ability to sell drugs made in those facilities. Ranbaxy then reported currency-exchange losses of nine billion rupees in 2008. The Indian company has also been through a series of top-level management changes, including the recent exit of its CFO Omesh Sethi in January.

What worked: Mr. Singh timed the sale of his family silver perfectly - he got a huge premium for the stake before U.S. regulatory concerns came to light. Daiichi, after the initial stumbles, seems to now be heading in the right direction and in the past year has integrated Ranbaxy's R&D unit in an effort to gain synergies. Other strategies include Project Viraat to gain leadership in the Indian market, regulatory inspections at many Ranbaxy manufacturing sites and new product launches in the U.S. Daiichi is also preparing for its exclusive U.S. launch of a generic version of Pfizer Inc.'s cholesterol drug, Lipitor, which loses patent protection in November. [Maybe not—see #msg-61160916.]

The verdict: Fail. 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. "Daiichi is yet to realize anything concrete from this deal," said Hemant Bhakru, pharmaceutical analyst at CLSA Asia-Pacific Markets in Mumbai, adding that U.S. regulatory problems have slowed down the integration of Daiichi and Ranbaxy a lot more than expected.

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. When the sale was announced in June 2008, Ranbaxy stock jumped to 523 rupees. Some of the gains came with the broader upswing in stocks last year, but a lot of impetus has come from investors betting that Daiichi's fixes will yield returns. Ranbaxy shareholders may have to wait to see gains.

Company's take: Ranbaxy directed all queries to Daiichi, which didn't respond to repeated requests for comment.‹