BUSINESS STRATEGY CASE STUDY SYNOPSIS On RANBAXY DAIICHI ACQUISITION

Submitted To:Prof. N.P.Prabhakar

About the company RANBAXY

Ranbaxy Laboratories Limited is an Indian multinational pharmaceutical company that was incorporated in India in 1961 by Singh's grandfather Bhai Mohan Singh, further his son Dr. Parvinder Singh succeeded it, transforming Ranbaxy into Indias first multinational drug firm. The company went public in 1973 and Japanese pharmaceutical company Daiichi Sankyo acquired a controlling share in 2008. Ranbaxy Laboratories Limited, India's largest pharmaceutical company, is an integrated, research based, international pharmaceutical company producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. It was incorporated in 1961 It went public in 1973. 1990 Ranbaxy Granted US patent for Doxycycline. 1992 Entered into an agreement with Eli Lilly & Co. of USA for setting up a joint venture in India to Market Select Lilly Products. Ranked 8th amongst the global generic pharmaceutical companies. Its stated vision has been to be among the top five global generic players and to achieve global sales of $5 billion by 2012. Ranbaxy today has a presence in 23 of the top 25 pharmaceutical markets of the world. The Company has a global footprint in 49 countries, world-class manufacturing facilities in 11 countries and serves customers in over 125 countries. It has 12,000 employees, including 1,200 scientists Mr. Atul Sobti is the present CEO & MD of Ranbaxy Laboratories.

About the company - DAIICHI SANKYO Dai-Ichi Karkare Limited (DIKL) was set up in 1960 as a private limited company for the manufacture of speciality chemicals. The Company entered into technical collaboration with the internationally known speciality chemicals manufacturer Dai-Ichi Kogyo Seiyaku Co. Limited of Kyoto, Japan (DKS) and commenced commercial production in 1963. A global pharma innovator, Daiichi Sankyo Company, Ltd., was established in 2005 through the merger of two leading Japanese pharmaceutical companies under the head of Takashi Shoda, CEO of Daiichi Sankyo. This integration created a more robust organization that allows for continuous development of novel drugs that enrich the quality of life for patients around the world. It was the first company in the country to produce ethylene oxide. It has a presence in 21 countries and employs 18,000 people. It is the second largest pharmaceutical company in Japan. Daiichi Sankyo makes prescription drugs, diagnostics, radiopharmaceuticals and over-the-counter drugs.

About the Pharmaceutical industry Pharmaceutical industry in India is ranked 3rd in volume terms and 14th in value terms globally. It is highly fragmented with more than 20,000 registered units. It meets around 70% of the countrys demand for bulk drugs, drug intermediates, pharmaceutical formulations (patented & generic drugs), chemicals, tablets, capsules, orals and injectables. According to Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, the total turnover of India's pharmaceuticals industry between 2008 and September 2009 was US$21.04 billion. While the domestic market was worth US$12.26 billion. Sale of all types of medicines in the country was expected to reach around US$19.22 billion by 2012. Exports of pharmaceuticals products from India increased from US$6.23 billion in 2006-07 to US$8.7 billion in 2008-09 a combined annual growth rate of 21.25%. According to PricewaterhouseCoopers (PWC) in 2010, India joined among the league of top 10 global

pharmaceuticals markets in terms of sales by 2020 with value reaching US$50 billion. Some of the major pharmaceutical firms including Sun Pharmaceutical, Cadila Healthcare and Piramal Healthcare. The government started to encourage the growth of drug manufacturing by Indian companies in the early 1960s, and with the Patents Act in 1970.However, economic liberalization in 90s by the former Prime Minister P.V. Narasimha Rao and the then Finance Minister, Dr. Manmohan Singh enabled the industry to become what it is today. This patent act removed composition patents from food and drugs, and though it kept process patents, these were shortened to a period of five to seven years. The lack of patent protection made the Indian market undesirable to the multinational companies that had dominated the market, and while they streamed out. Indian companies carved a niche in both the Indian and world markets with their expertise in reverse-engineering new processes for manufacturing drugs at low costs. Although some of the larger companies have taken baby steps towards drug innovation, the industry as a whole has been following this business model until the present.

REASONS WHY COMPANIES GO FOR MERGRS/ACQUISITIONS Absence of proper R&D facilities Increase in market share Generic competition Growing Indian population Increase in chronic diseases Gradual expiry of patents Product/Brand extension etc.

Following are some of the acquisitions of the Pharmaceutical Industry:-

Outbound Acquisitions Company (Acquirer) Biocon Dr. Reddys Labs Wockhardt Wockhardt Wockhardt Wockhardt Zydus Cadila Ranbaxy Nicholas Piramal Sun Pharma Company (Target) Axicorp (German) For Amount $30 million

Trigenesis Therapeutics (USA) Esparma (German) C. P. Pharmaceuticals (UK) Negma Laboratories (France) Morton Grove Pharma (USA) Alpharma (France) RPG Aventis (France) Biosyntech (Canada) Taro (Israel)

$11million $11million $17.9 million $265 million $38 million Euros 5.5 million $70 million $4.85 million $500 million $26 million

Cadila Healthcare Quimica e Farmaceutica Nikkho

Inbound Acquisitions Company (Acquirer) Daiichi Sankyo Abbott (USA) Sanofi Aventis Mylan (USA) Reckitt Benckiser Hospira Fresenius Kabi Abbott (USA) Company (Target) Ranbaxy (India) Piramal (India) Shantha (India) Matrix (India) Paras (India) Orchid (India) Dabur Pharma (India) Wockhardt (India) For Amount $4.2 billion $3.72 billion $783 million $736 million $724 million $400 million $219 million $22.5 million

RANBAXY-DAIICHI SANKYO DEAL On 12th June 2008, Ranbaxy entered into an alliance with one of the largest Japanese innovator companies, Daiichi Sankyo Company Ltd., to create an innovator and generic pharmaceutical powerhouse. Daiichi Sankyo Co. Ltd. signed an agreement to acquire 34.8% of Ranbaxy Laboratories Ltd. from its promoters. Daiichi Sankyo expected to increase its stake in Ranbaxy through various means such as preferential allotment, public offer and preferential issue of warrants to acquire a majority in Ranbaxy, i.e. at least 50.1 % Under the deal, Daiichi Sankyo agreed to acquire 34.8 per cent stake for around Rs. 10,000 crore ($2.4 billion) at Rs. 737 ($17) per share, at a premium of 31% over the price. (Current price 561 and Deal price is 737) from the promoters Mr Malvinder Singh and family.

The Japanese company has agreed to acquire 34.81 per cent of the stake of the company. The company will also make an open offer. The open offer made to the public shareholders for acquiring another 20 per cent at Rs 737 a share that increase Daiichi Sankyos stake in the company to a maximum of 58.09 per cent. Daiichi Sankyo pick up another 9.5 per cent through preferential allotment of equity shares and another 4.5 per cent through share warrants to be issued on a preferential basis. That come into play if the ordinary shareholders don't respond to the open offer and Daiichi Sankyo needs another way to raise its stake to 51%. After the acquisition, Ranbaxy operated as Daiichi Sankyos subsidiary but will be managed independently under the leadership of its current CEO & Managing Director Malvinder Singh. The deal made Daiichi-Ranbaxy, the combined entity the 15th largest pharmaceutical company in the world with a market capitalization of around US$30 billion bigger than Teva but still far smaller than the $48-billion Pfizer, the $44-billion GlaxoSmithKline and $40-billion Novartis group. It helped Daiichi leverage its innovative drug making capabilities and R&D expertise with Ranbaxys low cost manufacturing abilities to achieve a competitive position in the world generic drug market. Following were the reason for Daiichi-Sankyo to acquire Ranbaxy: Strengthen the position of the company Market access to over 60 countries Would be the 15th largest drug maker in the world The capitalization would be $30 billion

How did Daiichi-Sankyo value Ranbaxy? ASSETS and LIABILITIES VALUE ATTRIBUTED (In billion Yen) Book value of assets and liabilities (Cash, inventory etc.) Inventories (Increase in inventories to fair value) Tangible assets (Land, Building etc.) Intangible assets (Patents) Intangible assets (Increase in current products to fair value) In process R&D expenses Deferred tax liability Minority interests Goodwill Total consideration 78.8 2.0 10.0 5.9 41.0 6.9 (20.0) (45.0) 408.7 488.3

Here we see that Daiichi has paid almost 83% towards goodwill which is an extremely high percentage. They over valued Ranbaxy by a large margin. Item Net Profit/(loss) 2008 Net Profit/(Loss) 2009 Net cash used in Investing activities 2008 Net Cash Used in investing 2009 Short term Bank loan 2008 Short term Bank loan 2009 Amt(Yen) 97.6 (215.5) 49.4 413.8 0.1 264.3 Borrowed money due to Ranbaxy acquisition 240 bn yen Due to Consolidation of Ranbaxy Reason Record loss of 351.3 in extraordinary due to onetime write down of goodwill Loss due to Investing in Ranbaxy It is due to cash acquisition of Ranbaxy

Note: 2008 before the acquisition 2009 after the acquisition