Daiichi Sankyo's Ranbaxy move makes strategic sense

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Daiichi Sankyo’s swoop on Indian generics firm Ranbaxy not only marks the latest move by a Japanese drug maker looking for the growth that its domestic market cannot provide, but perhaps more importantly, it represents a recognition that in its home market, cheaper copycat medicines are about to become a lot more important.

With a rapidly ageing population the Japanese government is desperately trying to lower healthcare costs, and is implementing stringent measures to increase generic medicine’s share of the market, from approximately 17% today to 30% by volume in 2012. But the country’s generic infrastructure is underdeveloped, mainly in terms of product quality and stable supply, as such the experienced Ranbaxy should be able to help Daiichi Sankyo in establishing a hold as the market grows.

The Indian group already has a presence in the country through a collaboration with Nippon Chemiphar, and earlier this year received marketing authorization for generic amlodipine tablets, the first approval for a generic product made by a foreign manufacturer developed outside of Japan.

Growing Japanese market

If projections are correct, it certainly will not be the last. In a recent note, Credit Suisse said it expects the Japanese generics market to be worth $6.4bn-8.0bn by 2012, up from around $4bn today, and non-domestic companies are bound to become more important.

Driving demand are incentives offered to pharmacists to use generic medicines, who from April 2008 have been allowed to substitute prescribed branded drugs for copycat versions without a doctor’s permission. At the other end of the spectrum, the government has been enforcing price cuts on branded drugs every two years.

Like their western counterparts Japanese drug makers are also facing the prospect of some of their biggest drugs going off patent. All this makes the Japanese generic market an extremely attractive one to be in.

Other markets

Of course generic drugs are not only becoming more desirable in Japan, and Daiichi Sankyo will also be benefiting from Ranbaxy’s status as the world’s ninth-biggest player in the field, in terms of unbranded generic sales.

The US is Ranbaxy’s largest market, contributing around a quarter of total sales of $1.62bn last year, followed not far behind by Europe, and then India. It sells its products in 49 different countries, many of them the attractive developing markets which are currently being pursued by the world’s biggest drug makers.

The group’s biggest selling drugs are simvastatin, a generic version of Zocor, and the antibiotics amoxicillin and ciprofloxacin. In the pipeline are generic versions of AstraZeneca’s Nexium, over which the two groups struck a deal in April, and potentially Pfizer’s Lipitor. Whether Ranbaxy or Teva has first-to-file status is debatable, because they are challenging different patents, but the opportunity to a launch a generic version of a drug that is forecast to generate sales of $6.81bn in 2011 in the US, is clearly attractive.

Whether the backing of a parent company with deeper pockets will make Ranbaxy bolder when it comes to patent infringement cases and “at risk” launches in the lucrative US market remains to be seen.

Well received

Under the deal, Japan's third-largest drug maker will buy a controlling stake in Ranbaxy for up to $4.61bn, valuing the company at 737 rupees a share, a 31% premium on Tuesday’s close. Malvinder Singh, chief executive officer, will keep his post at Ranbaxy, which will remain listed.

The deal has so far been well received, with shares in Ranbaxy closing at a three-a-half year high of 560.8 rupees on Tuesday, as speculation circled before the deal was confirmed later in the evening. Daiichi Sankyo ended 5% higher at ¥2,975, as analysts widely applauded the deal.

While its domestic rival Takeda has embraced the high risk, high reward and certainly high price strategy of acquiring drug developers such as Millennium and licensing experimental therapies such as Cell Genesys’s GVAX cancer vaccine, Daiichi Sankyo seems to be taking a more diversified strategic approach.

With the Japanese generics market highly fragmented, more acquisitions in the field certainly cannot be ruled out, to beef up its new division. Neither can purchases further afield, as Daiichi Sankyo still has the fire power, and has stated its desire to expand in the US. While this deal ticks that box in one sense, the group could still be on the look out for opportunities to buy proprietary drug makers.

Fulfilled ambitions

For Ranbaxy, the benefit of this deal is mostly in the hefty premium paid for the controlling stake, and potentially access to additional funding to pursue its own stated ambition, of becoming one of the top five global generic players with global sales of $5bn by 2012.

Sales last year reached $1.62bn, up 21% on 2006, and consensus for 2012 is $2.98bn, so the group has some way to go. However, according to EvaluatePharma’s Peer Group Analyzer, based solely on unbranded generic sales, analysts were already expecting to Ranbaxy to generate compound annual growth of 14% over the next four years, propelling the company to the number six spot in the world by 2012.

With Daiichi Sankyo on board, those ambitions are more likely to be fulfilled.

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