In a deal touted as the largest transaction of its kind in Indian history, Japan's Daiichi Sankyo Co. announced yesterday it will enter the generic drug market by buying a controlling stake in India's Ranbaxy Laboratories Ltd., for up to $4.6 billion.

Daiichi, Japan's third-largest drug maker, said it will purchase the 35 percent stake held by the Singh family, who control Ranbaxy, for 737 rupees per share and make an open share offer to bring its holding to 51.1 percent. The total transaction is valued between $3.4 and $4.6 billion. On the post-closing basis, the transaction would value Ranbaxy at $8.5 billion.

Upon expected completion of the transaction in March 2009, Ranbaxy is expected to become a subsidiary of Daiichi. Malvinder Singh will continue to lead Ranbaxy as its CEO and managing director while additionally assuming the position of chairman of the board.

In a joint press conference this morning, the companies said Ranbaxy will become debt-free as a result of the deal, enabling it to grow organically and handle the generic side of the business. Daiichi, which said it looked at the Indian market but focused exclusively on Ranbaxy, will continue to operate its brand-name business.

Both companies said in a joint statement that the transaction will create long-term stakeholder value by creating sustainable growth through diversification of business and expanding its global reach. In addition, the companies said they expect to see cost savings through the use of both companies' R&D and manufacturing facilities, especially in India.

Daiichi says the acquisition—the latest in a string of large international acquisitions by Japanese drug makers—will enable it to become the number one generics maker in Japan, where non-branded drugs account for only five percent of the market. The transaction is expected to catapult Daiichi from the twenty-second largest drug maker in the world to fifteenth and allow Daiichi to double its global reach from 21 countries to 56 and expand its business in emerging markets such as India, China, Russia and Brazil.

"The proposed transaction is in line with our goal to be a global pharma innovator and provides the opportunity to complement our strong presence in innovation with a new, strong presence in the fast growing business of non-proprietary pharmaceuticals," says Takashi Shoda, Daiichi president & CEO. "This complementary combination represents a perfect strategic fit and delivers a considerable opportunity for the future growth of the new Daiichi Sankyo Group."

Although the transaction is the first time a major successful Indian company has agreed to sell control to a foreign company, Ranbaxy has recently attempted to get into the brand-name business with research collaborations with large pharmas, including Merck and GlaxoSmithKline. Singh says the acquisition puts Ranbaxy on "a new and much stronger platform to harness our capabilities in drug development, manufacturing and global reach."

"Together with our pool of scientific, technical and managerial resources and talent, we would enter a new orbit to chart a higher trajectory of sustainable growth in the medium and long term in the developed and emerging markets organically and inorganically," Singh says. "This is a significant milestone in our mission of becoming a research-based international pharmaceutical company."

Following news of the transaction on Wednesday, Daiichi stock rose more than 2 percent, before ending the Tokyo morning session 0.3 percent lower. Global ratings agency Moody's placed the company on watch, saying the transaction could significantly impact Daiichi's net cash position, but added the deal could enhance its growth potential.

On the Sensex Index, Ranbaxy shares fell 17.3 rupees, or 3.08 percent, to 543.5. On Wednesday, as rumors spread about the sale, Ranbaxy's stock hit a three-year high, but pared gains after Daiichi said it would buy only up to 20 percent from public shareholders.

The announcement sent shock waves through India, where some analysts and industry watchdogs voiced surprise at the Singh family's decision to sell its stake to an entity outside of India's borders.

"Getting Sankyo as a partner was one thing, but this is completely a historical thing," Raamdeo Agrawal, director and co-founder of Motilal Oswal Securities, told MoneyControl.com. "A number one pharmaceutical company from India, which was completely homegrown, has sold out 100 percent. I personally had some shares, which I have sold in the market. Right now, we have decided to exit at current prices."

But Singh told the Hindu Business Line that the transaction is "not a sell-out."

"This is for strategic growth," he told the newspaper. "Ranbaxy is very much an Indian company even now, and I am still a part of this company. I am committed to take this company to the next level of growth. It was an emotional decision for the promoter family, but we had the best interest of the shareholders and the employees in mind."

Analysts have been somewhat divided on the news.

"I expect a drastic realignment in the drug industry in Japan," Takshi Akahane, a Tokai Tokyo Securities analyst, told Google News. "It will become more severe for mid-sized drugmakers to survive."

 

Ranjit Kapadia, head of research at Indian brokerage house Prabhudas Lilladher, told The Economic Times, "we did not see it coming … but the deal is very good for the promoters and shareholders."