(Updates with closing share price in 12th paragraph.)
April 7 (Bloomberg) -- Sun Pharmaceutical Industries Ltd., India’s largest drugmaker by market value, agreed to buy competitor Ranbaxy Laboratories Ltd. for $3.2 billion from Japan’s Daiichi Sankyo Co., which paid 61 percent more for the company five years ago.
Ranbaxy investors will get 0.8 share in Sun for every one of their shares, or about 457 rupees, about 24 percent higher than the 60-day average, the two companies said today in a statement. Daiichi Sankyo, which owns 63.5 percent of Ranbaxy, paid 737 rupees a share in 2008.
Buying Gurgaon, India-based Ranbaxy would give Sun, founded by billionaire Dilip Shanghvi, control over the competitor’s pipeline of generic products and help it expand in markets including Russia and Brazil. The company also needs to resolve production problems that led the Food and Drug Administration to ban four Ranbaxy plants from exporting to the U.S.
“It is a long-term positive for Sun Pharma because it adds emerging-markets facilities,” said Prakash Agarwal, an analyst at CIMB Securities India Pvt. in Mumbai. “Ranbaxy’s consent decree will be resolved in a few years’ time, so they should be out of the woods in terms of the FDA issues.”
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’s blockbuster Diovan, AstraZeneca Plc’s Nexium and Roche Holding AG’s Valcyte, according to Hitesh Mahida, an analyst at K.R. Choksey Shares & Securities Pvt. in Mumbai. Since Ranbaxy was first to file applications for the three products, it’s entitled to 180 days of exclusivity if given final FDA clearance.
Ranbaxy’s top product in the U.S. was acne drug Absorica, which had sales of $128 million in the last 12 months, according to a Jan. 24 note by Barclays Plc analyst Balaji Prasad.
Ranbaxy recently received a subpoena from the U.S. Attorney for the District of New Jersey requesting certain documents relating to issues previously raised by the FDA on its Toansa facility in north India, Sun Pharma said in the statement.
FDA officials have said they plan to tighten rules on the generic-drug industry as a way to convince American consumers that safeguards are in place. In March, the Food and Drug Administration said Ranbaxy was recalling some batches of its generic cholesterol-lowering medicine.
Ranbaxy’s earnings have been hurt as it has faced increased regulatory scrutiny, and the company reported a 10.1 billion rupee loss last year. The deal will create the world’s fifth largest “specialty generic pharma” maker, the companies said.
About one-third of Ranbaxy’s revenue comes from emerging markets other than India, said Abhishek Singhal, an analyst at Macquarie Capital Securities in Mumbai. “The combined entity will have increased exposure to emerging economies, which Sun Pharma can leverage for its own specialty portfolio.”
Including the assumption of debt, the transaction was valued at $4 billion. Sun Pharma, maker of generic drugs including copies of Eli Lilly & Co.’s Cymbalta and Johnson & Johnson’s Doxil, expects $250 million in revenue and reduced costs by the third year after completing the deal, according to the statement. Ranbaxy’s products include the generic version of Pfizer’s cholesterol-lowering drug Lipitor.
Sun Pharma gained 2.9 percent to 588.10 rupees in Mumbai trading today. Ranbaxy dropped 3 percent to 445.75 rupees.
Ranbaxy shares rose 8.2 percent to 459.55 rupees in Mumbai trading on April 4, before the deal was announced, taking its gain for the week to 26 percent, the biggest weekly advance since August.
About 54 percent of Sun Pharma’s sales in the year ended March 2013 came from the sale of generic drugs in the U.S. and another 26 percent came from the sale of generics in India, according to company’s annual report. The company in its annual report said its “focus markets for the future” would include Latin America, Russia, China and South Africa.
Daiichi Sankyo said it planned to vote in favor of the deal. The transaction announced today values Ranbaxy’s stock at about 457 rupees a share, based on Sun Pharma’s closing price of April 4.
The transaction will help Daiichi Sankyo’s earnings, Takashi Akahane, a health-care analyst at Tokai Tokyo Research Center Co. in Tokyo, said by telephone. “Daiichi Sankyo seems to have backed off from directly getting involved with business in India and left it to a local company.”
Daiichi Sankyo gained 3.3 percent to close at 1,813 yen in Tokyo trading. That trimmed its loss this year to 5.7 percent.
Daiichi Sankyo aims to recover losses from Ranbaxy through the partnership with Sun Pharma, Joji Nakayama, the Japanese company’s chief executive, said in a briefing in Tokyo today.
Ranbaxy has more than 14,600 employees, and 21 manufacturing facilities in 8 countries, including in India, Ireland, Romania and the U.S., according to its website. It makes drugs for cardiovascular, gastrointestinal and urological diseases, as well as for pain management.
Indian billionaire Shanghvi started Sun Pharma in 1983, selling drugs to treat psychiatric illnesses. Sun Pharma has brands in areas including psychiatry, neurology, cardiology and nephrology.
This is the sixth deal Sun Pharma has announced in six years, according to data compiled by Bloomberg. The company controls Taro Pharmaceutical Industries Ltd. and bought Dusa Pharmaceuticals Inc., the data show.
The FDA in January said Ranbaxy can no longer make or distribute drug ingredients from that plant to the U.S. because it failed to meet good manufacturing requirements.
Sun Pharma had its own cephalosporin facility in Gujarat banned from exporting to the U.S., according to a posting on the FDA’s website last month. The company said in a statement the impact of the import alert on its consolidated revenues would be “negligible.”
The deal values Ranbaxy at 21.3 times trailing 12-month profit, compared with a median valuation of 22.3 times among nine similar transactions, according to data compiled by Bloomberg.
Daiichi Sankyo, which will obtain about 9 percent of Sun Pharma after the stock swap, has an option to send a board member to Sun Pharma, Daiichi Sankyo said. Sun Pharma has been is talks to buy Ranbaxy for “some months,” said Chief Financial Officer Uday Baldota.
Sun Pharma was advised by Citigroup Inc. and Evercore Partners Inc. Ranbaxy hired ICICI Securities as its financial adviser and Goldman Sachs Group Inc. advised Daiichi Sankyo.
Sun Pharma’s legal advisers are Shearman & Sterling LLP, Crawford Bayley & Co and S. H. Bathiya & Associates, while Ranbaxy’s advisors are Luthra & Luthra Law Offices, Amarchand & Mangaldas & Suresh A Shroff & Co. Daiichi Sankyo hired Davis Polk & Wardwell LLP and Amarchand & Mangaldas & Suresh A Shroff & Co, it said.
--With assistance from Hideki Sagiike in Tokyo and George Smith Alexander in Mumbai.