Sun Pharma-Ranbaxy deal under CCI lens

Likely to face tough scrutiny, say experts, given the size of both and their being leaders in diverse segments

The combination of Sun Pharmaceutical Industries and Ranbaxy Laboratories, both leading drug manufacturers, is likely to undergo tough scrutiny from the Competition Commission of India (CCI).

According to official sources and corporate lawyers, the proposed merger of Ranbaxy into Sun will require detailed evaluation. For, the deal contains complex areas which might impact competition. The proposed transaction is valued at $4 billion, including transfer of Ranbaxy’s $800 million debt to Sun Pharma’s accounts.

“The deal would certainly require a detailed scrutiny by CCI as it marks the coming together of two leading pharmaceutical companies which earlier seemed to be competing with each other,” said K K Sharma, chairman of KK Sharma Law Offices, which provides strategic consulting on competition issues to various companies. Sharma is also a former Director General at CCI.

The latter body has the mandate to keep a tab on anti-competitive practices. It also looks into mergers and acquisitions beyond a specified threshold, to ensure it does not impact competition.

The current regulations require a combination or a merger & acquisition (M&A) to seek approval if the combined assets of the enterprises are worth more than Rs 1,500 crore or the combined turnover is more than Rs 4,500 crore in India. If either or both have assets or turnover outside India, too, there must be approval from CCI if the combined assets are more than $750 million, including at least Rs 750 crore in India or there is turnover of more than $2,250 million, including at least Rs 2,250 crore in India.

When asked, CCI Chairman Ashok Chawla said: “We cannot comment on it right now. The company has to apply to us first; only after evaluating the details of the proposed transaction can we arrive at a conclusion.”

Sun's acquisition of Ranbaxy is viewed as a rare purchase by a leading Indian company of a local competitor. The combined entity’s annual revenues are estimated at $4.2 bn. Globally, the merger will create the fifth largest generic pharmaceutical company; in the domestic market, Sun will be the largest drug maker, with estimated market share of 9.2 per cent. In the domestic market, sales of the combined entity are pegged at around $1.1 bn.

Sun will also acquire Ranbaxy’s huge asset base in India and in other countries. This will include Ranbaxy’s troubled manufacturing factories in Paonta Sahib (Himachal Pradesh), Dewas (Madhya Pradesh), Mohali and Toansa (Punjab), earlier supplying to the US.

Competition law experts note both Sun and Ranbaxy are market leaders in various segments. Some of these overlap. For instance, in India, both have significant presence in therapeutic segments such as cardiology, analgesics, respiratory and gastro-intestinal diseases, neurology, the central nervous system and gynaecology.

“It appears CCI will have to closely scrutinise the details of the merger. It may ask for details related to market share of the two companies in specific product segments,” said M M Sharma, head of competition law and policy at Vaish Associates Advocates. He added it is likely the regulatory approval process takes longer than the usual 30 days because of the involved complexities.

The managements of Sun and Ranbaxy might also have to conduct a pre-merger consultation with the Commission. According to corporate lawyers, filings by the two companies will have to be under the revised fees of Rs 50 lakh for the Form-II filing, the longer version of the form, requiring a greater level of reporting on any proposed M&A deals. This form is usually valid when two competing players are merged to form a single entity, experts said. The relevant details would have to filed with CCI within a month.