Project Report On M & A of Ranbaxy ltd.

And Daiichi sankyo

Submitted By

Navdeep Singh Momi(2013164)
Navneet Singh (2013165)
Nikita Agarwal(2013171)
Poulami Sarkar(2013201)








Acquisition of Ranbaxy by Daiichi-Sankyo
2 | P a g e S e c t i o n - D

Daiichi Sankyo Background:
Founded on September 28, 2005 through the merger of Daiichi Pharmaceutical and Sankyo,
Daiichi Sankyo delivers innovative products that enhance the lives of millions of people
around the world. The recent successes include the antihypertensive agent olmesartan
(Olmetec), launched in 2002 by Sankyo and now available in more than 50 countries around
the world; the antiplatelet agent prasugrel (Efient), launched in 2009 for patients with acute
coronary syndrome (ACS) undergoing percutaneous coronary intervention (PCI); and
edoxaban (Lixiana), the first available factor Xa inhibitor in Japan, which launched in 2011 to
help prevent venous thromboembolism (VTE). Daiichi Sankyo is based in Tokyo and today
has 50 billion yen in capital.
Ranbaxy Background:
RLL is a public limited company with its registered office in Mohali ,Punjab, India. RLL was
incorporated on June 16, 1961 as Lepetit Ranbaxy Laboratories Limited. On August 24,
1966, it changed its name to Ranbaxy Laboratories Limited and on October 28, 1970 changed
its constitution from a public limited company to a private limited company. -52- Thereafter,
the Target Company reverted to its constitution of a public limited company on September
27, 1973 and was publicly listed on the BSE on February 9, 1974. RLL, a public limited
company, together with its subsidiaries, joint venture and associates (collectively referred to
as the Group) operates as an integrated international pharmaceutical organisation with
businesses encompassing the entire value chain in the marketing,production and distribution
of dosage forms and active pharmaceutical ingredients. The Group is also engaged in the
business of consumer healthcare.
Nature of operations:
RLL, a public limited company, together with its subsidiaries, joint venture and associates
(hereinafter collectively referred to as the Group) operates as an integrated international
pharmaceutical organization with businesses encompassing the entire value chain in the
marketing, production and distribution of dosage forms and active pharmaceutical
ingredients. The Group is also engaged in the business of consumer healthcare products.

Acquisition of Ranbaxy by Daiichi-Sankyo
3 | P a g e S e c t i o n - D

Consolidated financial statements of Ranbaxy Ltd


Acquisition of Ranbaxy by Daiichi-Sankyo
4 | P a g e S e c t i o n - D

Rationale of merger:
Both Daiichi Sankyo and Ranbaxy expect the transaction to create substantial synergies in the
long term. The companies benefit from their strikingly complementary businesses, which
they believe would bring considerable cost savings in their diversification initiatives, which
will be aimed at establishing a strong presence in all pharmaceutical therapeutic areas. For
instance, Daiichi Sankyos strength in proprietary medicine is believed to be complemented
by Ranbaxys leadership in the generics segment, thus providing the combined business with
a broader product base, therapeutic focus areas and well distributed risks. Additionally, both
companies have a wide global reach, which is expected to further expand after the merger.
Ranbaxys addition can boost Daiichi Sankyos position from 22 to 15 by market
capitalization in the global pharmaceutical market. Daiichi Sankyo sees this step as critical to
the achievement of its objectives outlined in its Mid-term Management Plan.
Daiichi Sankyo has targeted $13.1 billion (JPY1.5 trillion, 1USD=114.2JPY) in sales by
2015 and to increase its operating profit margin by at least 25% and overseas sales ratio by at
least 60%. Strengthening its ability to discover new drugs and bolstering its R&D pipeline
also feature as objectives in Daiichi Sankyos Mid-term Management Plan. The sales target
for fiscal 2010 is $7.5 billion (JPY860 billion, exchange rate: 1USD=114.2JPY) and an
operating profit of $2.10 billion (JPY240 billion, exchange rate: 1USD=114.2JPY), of which
25% of its expected sales is in local currency. Daiichi Sankyo expects that its return on equity
will increase from 6% to 10% in fiscal 2010 as a result of the merger.
SWOT ANALYSIS OF THE DEAL:
Strengths:
Ranbaxy
Largest pharmaceutical company in India
Localized operations in 49 countries; sales in 125 countries
Sales CAGR of 16.2% in 2002-2007 based on dollar sales
Strong expertise in intellectual property and global regulatory affairs
180-day marketing exclusivity for four drugs with an annual sales potential of $8
billion
Acquisition of Ranbaxy by Daiichi-Sankyo
5 | P a g e S e c t i o n - D

First to file status for 18 drugs with annual sales potential of $27 billion
Focus on innovative research in anti-infectives, anti-malaria, metabolic disorders,
respiratory diseases and urology
Strong alliances with major global proprietary drugs manufacturers (such as the
ongoing drug development collaboration with GlaxoSmithKline, which was expanded
in 2007; and the joint research partnership with Merck in the anti-infectives segment;
the co-marketing agreement with Ferring International for its endocrine drug;
marketing agreement with Natco Pharma in Yemen; alliances with Krebs and Jupiter
for fermentation-based products and peptides respectively)
Strong marketing expertise in one of the most competitive markets viz. India
R&D expertise scientists, strong generics business, developing innovative drugs
business, expertise in process chemistry
Daiichi Sankyo
Strong presence in the Japanese prescription drugs market
Growth driver potential in blockbuster Olmesartan (anti-hypertensive), Loxonin (anti-
inflammatory) and Levoflaxacin (anti-bacterial) drugs
Research collaborations with global pharmaceutical majors, such as the collaboration
with Eli Lilly for developing the high-potential Prasugrel anti-platelet agent for the
treatment of acute coronary syndrome due for launch in fiscal 2008
Opportunities:
Daiichi Sankyo has committed a maximum of 20% of its annual sales towards research and
development. The company has hitherto conducted research only with antibody (protein-
based) drugs, which have limited applicability despite their effectiveness in the targeted
location. However, Daiichi Sankyo has now shifted its focus towards low molecular
(chemical-based) compounds, which have wider applicability, for all its new drugs. Daiichi
Sankyo is also striving to bind antibody drugs on to low molecular compounds and deliver
them into the body so that the benefit of targeted effectiveness is realized for a wider range of
ailments. Daiichi Sankyo plans to implement this approach in many of its therapeutic areas,
including cancer. The shift towards low molecular compounds is in line with Daiichi
Sankyos integration plan that has been outlined in its overall R&D strategy.
Acquisition of Ranbaxy by Daiichi-Sankyo
6 | P a g e S e c t i o n - D

Weakness:
Daiichi Sankyo, at the other end, has suffered a heavy increase in selling, general and
administrative (SGA) expenses to the tune of 10% from fiscal 2006 levels to JPY357,330
million ($3128.9 million). During this period, the sales growth was a mere 0.4% and
excluding one-time effects, was still only 1.5%. Over the five-year period to fiscal 2007,
Daiichi Sankyo recorded a decline in sales by a CAGR of 0.7% while the CAGR for SGA
expenses was 0.74% in the same period. There also were unused R&D expenses to the tune
of JPY8 billion ($70 million) in fiscal 2008. Although the companys SGA expenses declined
by about 9% in fiscal 2008, sales in the year witnessed a 5% decline due to a stagnant market
and sales erosion from generic drugs.
Threats:
Ranbaxy faces allegations by the US FDA for repetitive fraudulent conduct. According to the
FDA, Ranbaxys move to use APIs from unapproved sources has resulted in the availability
of misbranded and counterfeit drugs in the market. Subsequently, the FDA questioned
Ranbaxy on the potency of its drugs, which are alleged to be adulterated, and called for an
internal review of the companys Indian manufacturing operations. Ranbaxy has been under
FDA scrutiny for about three years now and its operations for the US market at the Paonta
Sahib plant have been suspended since 2006. Aside from this, Ranbaxy faces patent
infringement lawsuits by global branded drug manufacturers AstraZeneca and Pfizer.
Post-merger Synergy Analysis:
Daiichi Sankyo and Ranbaxy launch hybrid business in Brazil to expand business of both
companies:
Daiichi Sankyo Company, Limited (hereafter, Daiichi Sankyo) and Ranbaxy Laboratories
Limited (hereafter, Ranbaxy) on April 17, 2013 announced synergy in Brazil to expand the
business of both companies in the country. As part of this synergy, Ranbaxy will support
Daiichi Sankyos Brazilian subsidiary, Daiichi Sankyo Brasil Farmaceutica Ltd. (Hereafter,
Daiichi Sankyo Brazil), to enter the branded generics market, in addition to its established
business of providing innovative products. Ranbaxys Brazilian subsidiary, Ranbaxy
Pharmaceutical Ltd. (hereafter, RFL) would continue to independently promote Ranbaxys
generic products and also enter into branded generics in Brazil. The pharmaceutical market in
Acquisition of Ranbaxy by Daiichi-Sankyo
7 | P a g e S e c t i o n - D

Brazil is the biggest in Latin America, and it is expected to become the fourth biggest in the
world in 2016. In Brazil, Daiichi Sankyo has built up its market presence with innovative
pharmaceuticals through Daiichi Sankyo Brazil. On the other hand, Ranbaxy markets its
generic products in Brazil through its subsidiary, Ranbaxy Pharmaceutical Ltd. With the
announced synergistic collaboration, the Daiichi Sankyo Group will expand its presence in
Brazil through its hybrid business model promoting innovative, branded generic and generic
pharmaceuticals. Daiichi Sankyo has not been able to manage Ranbaxy.
The whole picture is not that bright, as former Ranbaxy Laboratories chairman Malvinder
Singh has rubbished Daiichi Sankyo's claim that crucial facts about the US authorities' probe
were concealed at the time the company was sold by his family, and attacked the Japanese
firm for mismanaging the Indian drug maker. Ranbaxys management described as 'baseless'
Daiichi Sankyo's allegation about 'certain Ranbaxy shareholders' concealing and
misrepresenting critical information concerning the investigations conducted by the US
authorities.
Structure of the Deal:
On 11th June 2008, Daiichi Sankyo made an offer to purchase more than 50.1% voting right
in Ranbaxy which included 34.83% stake of promoters, 9.4 % of preferential shares and an
open offer in which they are going to acquire the voting rights up to 20%. Daiichi offered a
share price of INR 737 with a transaction value of around $4.6 billion, valuing Ranbaxy at
$8.5 billion. Daiichi ended up acquiring 63.92% shares of Ranbaxy by Nov, 2008. Including
transaction costs the deal costs Daiichi $4.98 billion and they recorded goodwill of
$4.17billion. If Daiichi Sankyo fails to meet with adequate shareholder response during the
open offer, it has the option to exercise a preferential issue of warrants that can increase
Daiichi Sankyos stake in Ranbaxy by another 4.9%.




Acquisition of Ranbaxy by Daiichi-Sankyo
8 | P a g e S e c t i o n - D

Structure of Deal Summary


The Deal: Financing
On June 11, 2008, the Acquirer entered into a Share Purchase and Share Subscription
Agreement (the SPSSA) with (a) Mr. Malvinder Mohan Singh; (b) Mr. Shivinder Mohan
Singh; and (c) Others (collectively referred to as the Sellers) and RLL. Under the SPSSA,
the Sellers have committed to sell to the Acquirer their collective holding of 129,934,134
fully paid-up equity shares (the Sale Shares) representing 34.81% of the total current issued,
subscribed and fully paid-up equity capital of RLL at a price of Rs. 737/- (Rupees Seven
Hundred Thirty-Seven only) (the Negotiated Price) per fully paid up equity share in cash
(the Acquisition). The total consideration payable for the Sale Shares is Rs. 95,761,456,758
(Rupees Ninety-five billion seven hundred sixty-one million four hundred fifty-six thousand
seven hundred fifty-eight only). As per the stock exchange filings by RLL, the Sellers belong
to the promoter group of the Target Company. The SPSSA also provides for the issue and
allotment by RLL to the Acquirer (the Subscription) of 46,258,063 fully paid-up equity
shares of face value Rs 5/- each (the Subscription Shares) representing 11.03% of the post-
Daiichi-Sankyo
Promoters of
Ranbaxy
Ranbaxy
Public
Shareholdes
Transfer of 20% shares
through open offer
Equity + Warrants = 63.92%
of stake in Ranbaxy
Transfer of 34.80% shares
Acquisition of Ranbaxy by Daiichi-Sankyo
9 | P a g e S e c t i o n - D

equity-issuance, subscribed and fully paid-up equity capital of RLL and the issuance of
23,834,333 warrants of RLL (the Warrants), each Warrant exercisable for one equity share
of face value Rs 5/- each of RLL. The subscription price for each Subscription Share and the
exercise price of each Warrant is Rs. 737/- (Rupees Seven Hundred Thirty-Seven) (the
Subscription Price) (including a premium of Rs. 732/- per share). Pursuant to the signing of
the SPSSA, the Acquirer proposes to acquire up to 92,519,126 fully paid-up equity shares of
face value Rs. 5/- each from the remaining shareholders (other than the parties to the SPSSA)
of the Target Company (the Offer Size), representing 20% of the Emerging Voting Capital
of RLL at a price of Rs. 737/- (Rupees Seven Hundred Thirty-Seven only) (the Offer Price)
for each fully paid-up equity share of RLL, payable in cash and in accordance with the
Regulations, subject to the terms and conditions mentioned in the Offer. This Offer is neither
conditional nor subject to any minimum level of acceptance. The Acquirer will acquire all the
shares that are validly tendered in accordance with the terms of the Offer, up to 92,519,126
equity shares at the Offer Price.
Valuation:
Daiichi Sankyo followed the DCF method to value the Ranbaxy stocks in June 2008, with the
following assumptions:
Sales will grow at 12% for 10 years (McKinsey projections for Indian Pharmaceutical
industry) and then slowed down to 8% for 5 years. In order to account for the losses caused
due to FDA (Foods and Drugs Association) action against Ranbaxy we have lowered the
growth rates for 2008 and 2009 to 10% because Ranbaxy had made alternative arrangements
through its US its subsidiary Ohm Labs in the US. NOPAT Margin maintained at 14% for 10
years and then lowered to 10%. The company is making continuous efforts to decrease the
working capital so we assume they would decrease it till 25%. The Net Long Term Assets to
Sales ratio would fall down to 45%.
DCF Valuation = 254.6
FTF Value = 106
Investment in Associates = 5.03
Total = 365.63
Acquisition of Ranbaxy by Daiichi-Sankyo
10 | P a g e S e c t i o n - D

With these assumptions we came to a value of INR 254.6; however this value does not
incorporate the value the strong FTF pipeline that Ranbaxy had. This FTF pipeline is valued
at around INR106/share. Going further we also need to adjust the value for investment in
associates for market value wherever information is available. The effective price as per our
calculation for Ranbaxy in June 2008 should be INR 365.63.
This shows how much premium Daiichi paid above the intrinsic value of Ranbaxy, with an
acquisition price of INR 737, they paid almost a premium of 100% over the intrinsic value.
Following are shareholding pattern, valuation multiples, offer price as per SEBI SAST and
Share price chart of both the companies.
Table: Valuation of Ranbaxy
Assets and Liabilities
Value Attributed (Rs.
Cr)
Book Value of Assets and Liabilities 3470
Inventories 88
Tangible Assets (Land) 440
Intangible Assets (Leasehold Land) 260
Intangible Assets (Increase in Current Products etc. to fair value) 1805
In process R&D expenses 304
Deferred Tax Liability -881
Minority Interest -1981
Goodwill 17995
Total Consideration 21500
Goodwill in USD $ 4.01 Billion
Total Consideration (in USD) $ 4.9 Billion

Shareholding Pattern

SHARES HELD BY PRE % POST % CHANGE %
SINGH 34.82 - (100)
SINGH FAMILY 19 - (100)
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 12.32 4.41 (64.49
GENERAL PUBLIC 12.1 19.53 61.40
DAIICHI SANKYO - 63.92 63.92


Acquisition of Ranbaxy by Daiichi-Sankyo
11 | P a g e S e c t i o n - D

Time line of Acquisition of shares:
DATE OF
ACQUISATION

PARTICULARS NO OF
SHARES
% OF SHARE
HOLDING
VALUE(in
crores)
15 Oct 2008 Acquisition of
shares under open
offer pursuant to
regulation 10 & 12
of SEBI @ Rs 737
per share
91277598 20 6727
20 Oct 2008 Acquired by
preferential
allotment of
warrant @Rs 737
41622585 9.12 3068
20 Oct 2008 Acquisition from
promoter
company(first
tranche)
93513899 20.49 6892
7 Nov 2008 Acquisition of
shares from the
promoter @
Rs737(2
nd

Tranche)
65309121 14.31 4813

Valuation Multiples
EV/EBITDA EV/EBIT EV/EBIT(1-t)
Pharmaceuticals 9.57 11.98 18.99

Ranbaxy Laboratories Ltd. Peer
group

Enterprise Value EV/EBITDA
(in thousands
USD)
2014 next 12
mth
Ranbaxy Laboratories Ltd 2 326 840 6.85 7.64
Novartis AG 199 985 334 11.1 11.23
Dr. Reddy's Laboratories 6 797 816 12.98 13.91
Lannett Co Inc 605 681 14.28 19.17
Impax Laboratories Inc 1 100 159 14.92 16.34
Depomed Inc 361 733 N/A N/A
Acquisition of Ranbaxy by Daiichi-Sankyo
12 | P a g e S e c t i o n - D

Salix Pharmaceuticals Ltd 4 231 684 9.15 9.77

The offer price
The Offer Price of Rs. 737/- per equity share is justified in terms of Regulation 20(4) of the
SEBI (SAST) Regulations as it is higher of the following:


A) The negotiated Price Rs 737
B) The subscription Price Rs 737
C) The highest price paid by the acquirer for any
acquisition[including by the way of allotment in a public or
rights or preferential issue] of equity shares of the target
company during the 26 weeks period prior to the date of the
public announcement
Nil
D) The average of the weekly high and low of closing prices of the
equity shares of the target company on NSE during the 26 weeks
preceding the date if public announcement
Rs 444.08
E) The average of the daily high and low prices of the equity shares
of the target company on NSE during the two weeks preceding
the date of the public announcement
Rs 533.51


Share price chart of both companies: Ranbaxy

0
100
200
300
400
500
600
700
J
a
n
-
0
7
M
a
y
-
0
7
S
e
p
-
0
7
J
a
n
-
0
8
M
a
y
-
0
8
S
e
p
-
0
8
J
a
n
-
0
9
M
a
y
-
0
9
S
e
p
-
0
9
J
a
n
-
1
0
M
a
y
-
1
0
S
e
p
-
1
0
J
a
n
-
1
1
M
a
y
-
1
1
S
e
p
-
1
1
J
a
n
-
1
2
M
a
y
-
1
2
S
e
p
-
1
2
J
a
n
-
1
3
M
a
y
-
1
3
S
e
p
-
1
3
Ranbaxy
Close Price
Acquisition of Ranbaxy by Daiichi-Sankyo
13 | P a g e S e c t i o n - D

Daiichi Sankyo


Shareholders Reaction:
The market reaction to this announcement was positive only during the open offer period,
post that both the stocks plunged to almost 50% of their pre-transaction values. In Feb 2009
in response to FDAs action against Ranbaxy share price of Ranbaxy was almost 1/3 of what
Daiichi Sankyo had paid. Later the Ranbaxy stock moved up considerably but Daiichi was
still trading a low levels.
To reflect the fact that the market price for the shares of consolidated subsidiary Ranbaxy
was way lower than the acquisition price, Daiichi recorded 351.3 billion one-time write-
down of goodwill associated with the investment in Ranbaxy. This led to a considerable net
loss for Daiichi in fiscal 2008.
Acquisition of Ranbaxy by Daiichi-Sankyo
14 | P a g e S e c t i o n - D

The write down itself signifies that the shareholders money, the retained earnings were wiped
out in this acquisition and hence the southwards movement of stock price was as expected.
The market expectations from Daiichi were low due to this write-down.
Conclusion:
Initially the Ranbaxy deal seemed a win-win, allowing both companies to use each others
networks and technological power. The deal seemed very lucrative for Daiichi Sankyo due to
the access to best FTF pipeline, access to the generics product line, access to new markets
and an opportunity to diversify away from Japan into the emerging markets. However
looking at the post acquisition financial statements of these companies we realize that this
deal was a failure and Daiichi is trying its best to make the acquisition work in its favour.
In the immediate year after the acquisition Ranbaxy reported a loss of INR 9,512.05 million
and Daiichi in spite of diversifying its geographic footprint booked a loss of 215,499 million
and they also made a onetime goodwill write-down of 351.3 billion for investment in
Ranbaxy. These losses were mainly rooted in Ranbaxys poor performance owing to the FDA
ban and bad decision in hedging currency risks.
The pre-acquisition due diligence should have understood that Emerging markets are
lucrative but corporate governance and integrity are surely not to be assumed in these
markets. Valuations in these markets are way higher than their real potential and valuation in
strongly regulated industries like pharmaceutical is strongly linked to regulations in the major
markets. For the export oriented companies developed markets with stricter regulations are
the main revenues streams due to higher margins; however the regulations in these markets
are stricter unlike merging nations. Ranbaxy also had ease in clearing the Indian drug
regulations but failed to clear the US FDA regulations and hence its US subsidiary Ohm Labs
had to pitch in.
Other factors such as top-management retention rates, organizational structure, internal
firewalls and proper use of financial instruments to hedge risks should have been analyzed
before the deal.