As healthcare takeovers go, Daiichi Sankyo’s acquisition of Ranbaxy Laboratories is up there with AstraZeneca’s move on Medimmune as one of the worst-timed in history.
Today it became clear just how bad it had been, as the 63.5% Ranbaxy stake that Daiichi had bought for $4bn in 2008 was sold to Sun Pharmaceutical for just $2.5bn – and Daiichi did not even get cash for it. The Japanese group’s best hope will be that Ranbaxy’s long-running manufacturing spat with the US FDA has a chance of being resolved now that it is in the hands of a bigger entity.
That said, Daiichi had already largely written off the investment on its balance sheet, so it probably saw the sale to Sun as a way of realising at least some value from its disastrous foray into Indian generics.
For Sun’s part, the all-stock takeover looks like a smart use of a share price that has risen 160% over the past three years. However large Ranbaxy’s manufacturing problems are this looks like a neat way for Sun to leapfrog AbbVie’s Piramal Healthcare business to become India’s largest pharma company.
Beset with difficulties
Shortly after Daiichi’s 2008 acquisition of a controlling stake in Ranbaxy the Indian generics group was hit with a multitude of manufacturing difficulties that depressed its stock.
US FDA warning letters on two plants were issued in October 2008, followed by a halt to approvals and import bans on generics produced at certain facilities. In 2012 a consent decree was signed, setting out what Ranbaxy had to do to bring conditions at its Indian plants up to scratch and allow imports into the US to resume, and the group was fined $500m.
Its revenues last year were $1.8bn, but it posted a $168m net loss; indeed, it has ended four of the last six years in the red. Sun has put this down to “temporary, one-time costs” caused by flawed currency hedging against movements in the US dollar; it insists that the underlying business is robust, and expects the takeover to be accretive to cash profitability within a year of close.
But anyone expecting a quick resolution to the manufacturing snafu is in for a shock. Sun said achieving compliance with the consent decree was its first priority, but refused to specify a timeframe and strongly denied the suggestion that it was aiming to rectify the problems within one to two years.
Panmure Gordon, a UK broker that covers AstraZeneca, speculated this morning that Ranbaxy’s “capitulation” to Sun meant that the manufacturing woes were deeper than had been expected. Ranbaxy holds first-to-file status on a US generic version of Astra’s Nexium, and for every month that a copycat fails to be launched Astra’s bottom line gains $175m, Panmure said.
Novartis has already benefited from precisely this sort of protracted delay (Clock ticks for Ranbaxy as Novartis continues to reap Diovan revenues, October 22, 2013). Sun says Ranbaxy holds 184 ANDAs, including “quite a few first-to-files”.
Ranbaxy, of course, is not the only company whose Indian manufacturing facilities have faced a US FDA crackdown.
Sun itself has suffered a recent US import ban, as have Wockhardt and Actavis. Just this morning Ranbaxy reported receipt of a US subpoena seeking information on one of the plants subject to the consent decree, and Sun said Daiichi would indemnify it for certain resulting expenses.
Beyond that, however, Daiichi has washed its hands of a problem for which its board had already been punished with a 5-30% pay cut. Once the takeover closes by the end of this year the Japanese firm will be left with 9% of Sun, a company capitalised at around $19bn.
Put another way, Daiichi has minimised its direct exposure to further manufacturing fallout while retaining a minority interest in a potential future resolution – assuming that it is indeed in it for the long haul.