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Daiichi Sankyo couldn’t manage Ranbaxy; company is now moving to better hands, say industry experts

07 April, 2014

Sun Pharmaceuticals’ proposal to acquire Ranbaxy Laboratories is good for the ailing company, which now has a better chance to come out of the mess it is in, according to industry leaders and experts.

VCCircle spoke to a cross section of third-party industry experts, including analysts and investors in the healthcare sector and bring together some comments by other industry leaders in separate sections of the media.

“Daiichi Sankyo hasn’t been able to understand the generic space or run the business successfully but the coming together of Ranbaxy and Sun Pharma is extremely positive,” according to Malvinder Singh. Singh had sold his stake in Ranbaxy to Daiichi Sankyo in 2008 but was dragged to court last year as the Japanese firm alleged that the previous promoters of the Gurgaon-headquartered firm held crucial information at the time of selling the company.

“Daiichi should not have taken over Ranbaxy. They could not handle it. Having said that, I feel that Sun Pharma will be in a better position to manage Ranbaxy,” according to Ajay Piramal, chief of Piramal Enterprises, who previously sold the domestic formulations business the company to Abbott in a sweetheart deal. According to him, Sun Pharma has handled overseas acquisitions successfully. He cites the turnaround of Sun Pharma’s overseas unit Taro despite teething issues. “I am sure Sun Pharma will be able to navigate the Indian environment quite better,” he said.

Dr Reddy’s chairman GV Prasad described the deal as a smart move and a low-cost acquisition by Sun. “They now have a very good presence in India; Sun also gets a good presence in emerging markets, which it did not have earlier. More importantly Sun has the ability to acquire distressed assets and turn them around. They have done this with Taro, with Caraco,” he said.

Ajay Kumar Vij, co-founder of Asian Healthcare Fund and ex-CEO of Dabur Pharma, which in turn was snapped by German firm Fresenius a few years ago, feels that Sun can do better in sorting out Ranbaxy’s troubles with US FDA. “While the risks are indeed there, one has to understand that any problem with regard to manufacturing facilities can be sorted out by ensuring proper inputs. Given Sun Pharma’s own experience of US FDA approved facilities, I have no doubt that they will be able to overcome the issues at Ranbaxy.”

Sanjiv Kaul, former executive with Ranbaxy and currently a managing director with PE firm ChrysCapital, says industry experts in closed forums had opined that the only way out for Daiichi Sankyo to get Ranbaxy out of this mess was to sell it to a high quality company like Sun or Actavis or Dr Reddy’s or Mylan. “This deal is beneficial for all three companies involved. Ranbaxy will get the requisite direction and missing leadership, for Daiichi Sankyo it’s a face saving exit on an acquisition they never understood and Sun Pharma has bought a good asset at an attractive valuation,” he said.

Kaul added, “Ranbaxy did not come across as an organisation that was on top of the issue with FDA thus earning bad publicity. Hopefully, Sun Pharma could be more directly participating in these interactions with FDA.”

However, the integration will be a challenge for the two firms, Kaul said. “Sun has a different way of dealing with product launches, which is different from even Taro. Salary levels across the four firms (Sun, Ranbaxy, Daiichi and Taro) are very different and lack of addressing it is going to cause heart burns. Competences, capabilities vary sharply across the organisation and all these need to be channelled effectively. Lastly we have this new spectre of whistle-blowers who can be a major stumbling block for the integration to work,” Kaul added.

Others like Amit Varma, co-founder of PE firm Quadria Capital, which invests in healthcare and pharma companies across Asia, has his fingers crossed. “The challenge will be to get the act cleaned up and look forward. While some issues are Ranbaxy specific, my view is that the FDA is getting tough on Indian pharma overall.”

Mayur Sirdesai, director of healthcare-focused PE firm Somerset Capital, “Sun has a good track record of working with the US FDA—their Caraco plants had issues years ago but they worked with the FDA to sort it out. They should be able to do so with the Ranbaxy plants too. Daiichi gets away from a bad investment but gets to holds 9 per cent of Sun, which maybe they could still increase over the years.”

According to Sarabjit Kour Nangra, VP Research – Pharma at Angel Broking, the EPS of the combined entity would stand at Rs 27.5, lower from Rs 28.8 earlier and even though in the near term the acquisition will dilute the reported ROE from 25.4 per cent to 20.7 per cent in FY16 (the first full financial year after the merger), it is still healthy, given the low profitability of the acquired company and is line with most of the peers who have ROEs of 17-25 per cent.

“However, the operating ROE, which excludes the cash component, will still be higher at around 40 per cent. Thus, we don’t see any significant de-rating in the stock (Sun Pharma) and hence believe that given the growth opportunities and its market share, we believe that the company will continue to trade at premium to sector valuations,” she said.

Angel Broking maintains a buy rating with a price target of Rs 660 for Sun Pharma and has advised its clients that Ranbaxy shareholders should hold on to their investments (not sell before the merger with Sun), given the synergies and the positives emanating from the deal.

(Edited by Joby Puthuparampil Johnson)


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Daiichi Sankyo couldn’t manage Ranbaxy; company is now moving to better hands, say industry experts

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