Daiichi Surrenders Ranbaxy to Sun Pharma after Losing 38% Value, US Cracks Down on India Factories is Control Generics and ANDA

Indian billionaire Dilip Shanghvi’s Sun Pharmaceutical Industries Ltd. (SUNP) is offering $3.2 billion in stock to add Ranbaxy Laboratories Ltd. (RBXY)’s strength in emerging markets.

Sun Pharma also inherits regulatory troubles involving the U.S. market that Ranbaxy’s current parent, Japan’s Daiichi Sankyo Co., has struggled for more than five years to fix.

Gains from Yen Fall to 104 from 76 to the Dollar

Ranbaxy investors will get 0.8 share in Sun Pharma for every one of their shares, or about 457 rupees, about 24 percent higher than the 60-day average, the two companies said in a statement. Daiichi Sankyo, which owns 63.5 percent of Ranbaxy, paid 737 rupees a share in 2008. The dollar purchase was when the Yen was only 76 to the dollar. The sale is when the currency has fallen to 104. In balance Daiichi has gained 28 Yen on the $4 bn sale to Sun Pharma.

Daiichi Sankyo on 6 April agreed to sell its controlling stake in Ranbaxy after taking writedowns on the Indian drugmaker and failing to raise manufacturing conditions to a level that would pass muster with the U.S. Food and Drug Administration. Four of Ranbaxy’s plants are banned from exporting to the U.S. and the company has received a subpoena from the U.S. Attorney for the District of New Jersey requesting documents on one of those factories in India.

“The clear challenge will be some of Ranbaxy’s manufacturing facilities which have FDA warnings,” said Mahesh Patil, co-chief investment officer at Birla Sun Life Asset Management Co. in Mumbai, who manages about $2.5 billion in equities. “Sun is going to have to work to get clearances through.”

U.S. Sales

Getting Ranbaxy’s factories up to speed would help Sun Pharma bolster its presence in the U.S., where Ranbaxy’s lineup of drugs including the acne medicine Absorica and the generic version of Pfizer Inc.’s Lipitor. In March, the FDA said Ranbaxy was recalling some batches of the copycat cholesterol-lowering medicine.

Sun Pharma had its own cephalosporin facility in Gujarat banned from exporting to the U.S., according to a posting last month on the FDA’s website. The company said in a statement the impact of the import alert on its consolidated revenues would be “negligible.”

Caraco Pharmaceutical Laboratories Ltd., a Detroit-based unit of Sun Pharma, made 33 drugs including common blood pressure pills and pain killers until June 2009, when the FDA ordered manufacturing to be halted and U.S. marshals seized products made at the plant, citing “continued failure to meet current Good Manufacturing Practice requirements.” Three years later, the FDA cleared the unit to resume operations with two products.

Regulatory Experience

That experience may help Sun Pharma expedite the resolution of Ranbaxy’s FDA issues, Patil said.

Daiichi Sankyo’s difficulties in fixing Ranbaxy show the hurdles facing Sun. Three months after Daiichi Sankyo agreed to buy the controlling stake in Ranbaxy, the FDA barred imports from the Indian drugmaker’s Paonta Sahib and Dewas plants because of manufacturing defects. In May 2009, Daiichi Sankyo posted a record full-year loss because of a writedown of the value of its controlling stake in Ranbaxy.

Daiichi Sankyo aims to recover losses from Ranbaxy through the transaction, Joji Nakayama, the Japanese company’s chief executive officer, said at a briefing in Tokyo on 6 April. The company will own about 9 percent of Sun Pharma after the stock swap.

Daiichi has agreed to indemnify Sun Pharma and Ranbaxy for “among other things, certain costs and expenses that may arise from the subpoena,” according to statement. The deal will take about nine months to complete, according to Sun Pharma’s Baldota.

Emerging Markets

About one-third of Ranbaxy’s revenue comes from emerging markets other than India.

Sun Pharma, founded by billionaire Shanghvi in 1983, has drugs in areas including psychiatry, neurology, cardiology and nephrology. Buying Ranbaxy will help Sun Pharma grow in markets such as Russia, Romania, South Africa, Brazil and Malaysia, according to an investor presentation.

The company in its annual report said its “focus markets for the future” would include Latin America, Russia, China and South Africa.

U.S. Generics

The deal will also give Sun Pharma access to three major products that Ranbaxy has tentative FDA approval to sell in the U.S.: generics of Novartis AG (NOVN)’s blockbuster Diovan, AstraZeneca Plc (AZN)’s Nexium and Roche Holding AG (ROG)’s Valcyte. Since Ranbaxy was first to file applications for the three products, it’s entitled to 180 days of exclusivity if given final regulatory clearance.

Including the assumption of debt, the Ranbaxy transaction was valued at $4 billion. Sun Pharma, maker of generic drugs including copies of Eli Lilly & Co.’s Cymbalta and Johnson & Johnson (JNJ)’s Doxil, expects $250 million in revenue and reduced costs by the third year after completing the deal, according to the statement.