Daiichi Sankyo of Japan had bought the Singh family's 34.8 per cent stake in Ranbaxy Laboratories for $2.4 billion in mid-2008, which put a value of $6.9 billion on the Indian drug maker. The acquisition of Ranbaxy by Sun Pharmaceutical Industries for $3.2 billion (about Rs 19,200 crore at the current exchange rate) in stock, an announcement for which was made on Monday, means the company has shed more than half its value in less than six years. All told, Daiichi Sankyo paid $4.2 billion for 63.8 per cent in Ranbaxy. After the deal's announcement, Daiichi Sankyo will hold nine per cent in Sun Pharma, which is currently worth $2 billion. A bigger example of value destruction would be hard to find.
It is clear what caused this erosion. Four of Ranbaxy's Indian factories approved by the United States Food and Drug Administration, or FDA, have been barred from selling in that country - the world's largest market and also the destination for almost half of Ranbaxy's annual production - for improper manufacturing practices. The FDA says it found serious lapses during its various inspections of these factories. Last year, the company had admitted that it had fabricated data while seeking approvals from the FDA and paid $500 million to close the case. The incident forced Daiichi Sankyo to say that important information was withheld from it at the time of sale and it was pursuing "available legal remedies". The Singh family denied any wrongdoing and insisted all problems were in the public domain when the stake was sold. It also claimed that since Daiichi Sankyo initiated talks for the acquisition in 2007 and closed the deal only in mid-2008, there was enough time to go through all the details carefully.
The Ranbaxy experience has made multinational corporations more cautious about Indian acquisitions in general. But it is unlikely to diminish the appetite of overseas drug makers for Indian acquisitions. Even after Ranbaxy's problems with the FDA had become public, Abbott paid $2.12 billion for Piramal Healthcare's domestic formulations business in 2010 and Mylan paid $1.75 billion for the injectable medicine division of Strides Arcolab last year. A third of the generic medicine sold in the world is made in India because of the country's low costs of production and expertise in process chemistry. Governments the world over are making a concerted push towards generic medicine in order to bring down healthcare costs. This makes Indian generic companies attractive acquisition targets.
Of course, there is a cloud over a growing number of Indian drug factories. Even a unit of Sun Pharma in Gujarat was banned from shipping its products to the US last month. But its acquisition of Ranbaxy shows its hope that manufacturing defects pointed can be repaired. Dilip Shanghvi, managing director of Sun Pharma, indicated as much on Monday. The purpose of the acquisition, he said, was not to look at synergies between the two companies but to enforce compliance so that Ranbaxy can resume exports to the US at the earliest.
