copy of acqusition

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CHAPTER 1 INTRODUCTION

Mergers and acquisitions aim towards Business Restructuring and increasing competitiveness

and shareholder value via increased efficiency. In the market place it is the survival of the fittest.India has witnessed a storm of mergers in recent years. Merger is a combination of two or more

companies into one company. The acquiring company, (also referred to as the amalgamated

company or the merged company) acquires the assets and the liabilities of the target company (or

amalgamating company). Typically, shareholders of the amalgating company get shares of the

amalgamated company in exchange for their shares in the Target Company.

There are two ways which company can grow; one is internal growth and the other one is

external growth. The internal growth suffers from drawbacks like the problem of raising

adequate finances, longer implementation time of the projects, uncertain etc. in order to

overcome these problems a company can grow externally by acquiring the already existing

business firms. This is the route of mergers and acquisition.

Acquisition in general sense is acquiring the ownership in the property. In the context of business

combinations, an acquisition is the purchase by one company of a controlling interest in the share

capital of another existing company. Todays business environment is extremely competitive.

Business organizations have to deal with its competitors. At the same time it has to deal with

external factors that affect how its conducts business. The financial crisis, unemployment, high

interest rate, and lack of purchasing power are all affecting the business organization. In the light

of these conditions, business organizations have to strategize not only to survive but to thrive in

the competitive business environment. One of these strategies is mergers and acquisitions.

There are many reasons why companies merge with each other. Some companies merge because

they are operating at a loss and that merger is the only way for the company to survive. On the

other hand, some companies merge to maintain its leadership in the corporate world. However,

mergers do not guarantee the success of the company. Some merger end in failure. One reason

for the same is the differences in the corporate culture between the merging companies.


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Though the organizational cultures of these two corporations are poles apart, their merger

became a success. It appears that they managed to integrate both their cultures so that they

become compatible with each other. One of the strategies used is that the executives of both

companies who were committed to making the merger a success identified each of their own

companys practices and found solution on how to make their merger work.

Culture is important in the success of the merger. Both companies understand that they simply

cannot disregard the fact that they have different cultures. They simply cannot take the

differences in their own culture for granted. They have to deal with it otherwise the goals of

getting into a merger will not be attained.

Determining the aspects of the companys business practices that are different from each other is

very crucial in the success of the merger. In fact, the efforts taken by the executive to compare

their practices and to adjust each others differences made their merger a success.

Making sure that the corporate cultures between two merging corporations fit properly with each

other is a very difficult task. It requires efforts on the part of the management to make substantial

changes in the company from the minutest details up to the corporate policies. More importantly,

it is essential that all the members of the organization understand that they have a role to play in

the merger. They have to realize that the merger will not work until all of the rank and file

employees to the top management will cooperate to make the merger success.

Purpose of Mergers & Acquisitions

The purpose for an offeror company for acquiring another company shall be reflected in the

corporate objectives. It has to decide the specific objectives to be achieved through acquisition.

The basic purpose of merger or business combination is to achieve faster growth of the corporate

business. Faster growth may be had through product improvement and competitive position.


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The Purpose of Mergers and Acquisitions are as follows:-

(1) Procurement of supplies:

1.

To safeguard the source of supplies of raw materials or intermediary product;2. To obtain economies of purchase in the form of discount, savings in transportation costs,

overhead costs in buying department, etc.;

3. To share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilities through more

intensive utilization of plant and resources;

2. To standardize product specifications, improvement of quality of product, expanding.

3. Market and aiming at consumers satisfaction through strengthening after sale

Services;

4. To obtain improved production technology and know-how from the offered company.

5. To reduce cost, improve quality and produce competitive products to retain and

Improve market share.

(3) Market expansion and strategy:

1. To eliminate competition and protect existing market;

2. To obtain a new market outlets in possession of the offeree;

3. To obtain new product for diversification or substitution of existing products and to

enhance the product range;

4. Strengthening retain outlets and sale the goods to rationalize distribution;

5. To reduce advertising cost and improve public image of the offeree company;

6. Strategic control of patents and copyrights.


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of combinations distinct with each other in nature are adopted to pursue this objective like

vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite

competitiveness in providing rescues to each other from hostile takeovers and cultivate situations

of collaborations sharing goodwill of each other to achieve performance heights through business

combinations. The combining corporate aim at circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the

two combining business houses. Such integration could be operational or financial. This gives

birth to conglomerate combinations. The purpose and the requirements of the offeror company

go a long way in selecting a suitable partner for merger or acquisition in business combinations.

OBJECTIVE OF STUDY

To know the pre merger and post merger performance.

To analyze the causes of Mergers and Acquisitions.

To acknowledge the effects of Mergers and Acquisitions on the participating

Parties i.e., Daiichi Sankyo and Ranbaxy.

To study the influence of Financial Structures while in the process of Mergers and

Acquisitions.


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LIMITATIONS OF THE STUDY

The study is confined only to 2 companies of Mergers & Acquisitions i.e., Daiichi

Sankyo and Ranbaxy.

Confined only to 1 year data prior to acquisition and after acquisition.


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CHAPTER 2 COMPANY PROFILE

Ranbaxy Laboratories Limited

Ranbaxy was founded in 1937 and derived its name from that of its founders Ranjit Singh and

Gurbax Singh. It started out as the Indian distributor of vitamins and anti tuberculosis drugs for a

Japanese pharmaceutical company. After the Second World War, Ranbaxy continued its role as a

distributor and ventured in manufacturing drugs by setting up its first plant in 1961. Ranbaxys

first real breakthrough came in 1969 with Calmpose, a copy of Roche patented Valium

tranquillizer. By 1971, Ranbaxy had extended its strong position in anti infective in the Indian

market and expanded manufacturing capacity to keep pace with sales.

Ranbaxys growth was fuelled by two major developments in the Indian pharmaceutical

industry. The first one was introduction of the Process Patent Act in 1970, which required Indian

companies to recognize international process patents. The Act did not recognize product patent.

In 1978 Ranbaxy became the first Indian company to develop a novel process for the

manufacture of the antibiotic doxycyclin. It also gained worldwide recognition after it developeda non patent infringing process for the antibiotic cefaclor. This was remarkable, as the molecule

was complex and Eli Lilly, the product originator, had protected it with twenty two process

patents.

The second legislation was the Price Control Act which impacted Ranbaxys strategy. By

capping the drug prices in India, the government made the profits and growth prospects limited.

This prompted Ranbaxy to look at export markets to realize its growth targets. During the years

1986 to 1996 exports grew at an annual growth rate of 34%. Major markets contributing to the

growth were China, the UK, Italy, Russia, Ukraine and the USA.

Due to the changing business conditions, it had become essential in 1993 to change the strategy

of the company in order to tap rising opportunities. The senior management team of Ranbaxy


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Daiichi Sankyo Company, Limited

In 2005, Sankyo Co. Ltd and Daiichi Pharmaceutical announced the merger of two of the largest

Japanese pharma giants to form Daiichi Sankyo Co. Ltd. (DIS). Although DIS came into

existence only recently, its roots lie in the vast heritage of both its proponent enterprises. The

company gains from the 106 year old history of Sankyo Co. Ltd. (1899) and the 90 year old

heritage of Daiichi Pharmaceutical Co. Ltd (1915).

DIS's goal is to establish itself as a "Japan-Based Global Pharma Innovator". The following

excerpt from one of its annual reports elaborates the ideology behind each and every word of the

above goal

Japan-Based

This phrase means simply that the DAIICHI SANKYO Group originated in Japan. While we

are currently ranked third among pharmaceutical manufacturers in Japan, our global presence

still needs to be expanded. The word Japan-Based will be meaningless until the DAIICHI

SANKYO Group realizes its full potential and achieves recognition in the global market as well

as in Japan. To reach this level, we will need to achieve corporate growth in excess of the annual

5-6% predicted for the world market for pharmaceutical products

Global

Given the size of the global market, we anticipate that the overseas operations of the DAIICHI

SANKYO Group will overtake its domestic operations in terms of business scale in the near

future. Based on our existing products and key products in the development pipeline, we estimate

that overseas sales will account for approximately 50% of total sales by fiscal 2010. Our goal is

to raise the contribution to at least 60% by fiscal 2015 by implementing three key policies. First,

we must expand our operations in other countries. Second, we must ensure that products in the

development pipeline are brought to market effectively. Third, we must attract external


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resources. Our priority markets are Japan, North America and Europe, where we are already

active. In addition to the big three markets, however, we will also work to develop our business

operations in markets that offer growthpotential, especially China and South America.

Pharma Innovator

This term describes our vision for DAIICHI SANKYO as a company that is customer-focused,

able to identify unmet medical needs of people throughout the world, and clearly has the means

to meet those needs through the continuous supply of innovative pharmaceutical products. There

are many potential benefits from the creation of innovative pharmaceutical products, including

the creation of totally new therapies, the improvement of existing therapies, the facilitation of

drug administration, the alleviation of side effects, the improvement of patients quality of life,

and the reduction of health costs. DAIICHI SANKYO will give priority to projects targeting

unmet medical needs in areas that offer excellent opportunities for growth and profit and are in

keeping with our goal of raising our global presence. We will focus mainly on new drugs that

can be classified as first-in-class and best-in-class. The aim is to build drug development

pipelines that will be lead to the development of new products with the potential to rank amongthe best three products in the world for the treatment of specific diseases. Our current priority

with regard to R&D pipelines is to commercialize a new product with global market potential to

succeed the hypertension drug Olmesartan as quickly as possible. We will accelerate

development and commercialization of distinctive new products that match health needs and can

be clearly differentiated from competing products as best-in-class. Candidates include the anti-

platelet agent Prasugrel (CS-747), and the orally administered anti-Xa drug DU-176b.

DIS manufactures prescription drugs, including treatments for cardiovascular, boneand joints,

and infectious diseases. Its products are sold through medical representatives located worldwide.

The company also makes OTC products as well as veterinary products and assorted chemicals.


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The Company has about 2,300 overseas medical representatives in 33 locations, mainly in

Europe and the United States and is also aiming for growth through its own development and

sales, mainly in the United States. For this it is planning to expand the overseas development and

sales bases.

DISs products are used not only in Japan but in many other parts of the world including Asia,

Europe and the USA. In order to cater to global needs all over the world and have them reflected

in its global pharmaceutical operations, the company is highly active in promoting information

exchange in a number of areas including research and development, supply chain management

and marketing.

Research and Development:

As a developer of new drugs, DIS is determined to contribute to treating diseases by giving the

world innovative medicines. This perhaps lays down the rationale behind the operations of the

R&D department at DIS.

DIS has its main Research and Development activities in Japan, though it has opened centers in

other parts of the world.

The numbers of Research and Development employees in various part of the world are:

Japan 2200

China 35

Germany 100

UK 30

USA 260

Currently, the company has decided to focus on four main areas for pursuing Research &

Development activities These are:

Thrombiosis

Diabetes


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Cancer and

Autoimmune diseases/Rheumatoid Arthritis.

Exhibit - Consolidated Segment InformationGeographic & Product Segment:-

Net Sales 880.1 Major Products Sales in 2012

Japan

North America

Europe

Other

598.1

178.0

78.0

26.1

Olmesartan

Levofloxacin

Pravastatin

Loxonin

195.6

108.7

76.5

33.6

Operating Income 156.8

Japan

North America

Europe

Other

107.1

37.6

10.7

2.5

Omnipaque

Venofer

Welchol

31.2

31.1

22.7

As shown in the Exhibit above, two third of sales and operating income of DIS came from Japan.

In the international market, the US was the largest market. In terms of products, Olmesartan

Anti hypertensive drug is the largest selling product of DIS. Moreover it is also the fastest

growing. LevofloxacinSynthetic antibacterial agent is the second largest product. However,

it has been on a declining phase.


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The Ranbaxy - Daiichi Sankyo Deal:

Mr. Kurosawa, the head of pharma at Romura Fund, was stunned by the announcement of

Daiichi Sankyo (DIS) of 5th January 2009. DIS announced its plan to record a non-cash

valuation loss of 359.5 billion on its shares in Ranbaxy in its fiscal third-quarter to reflect more

than 50% decline in the market value of these securit ies versus the purchase price. This

valuation loss of $ 3.86 billion was much more than what Mr. Kurosawa had anticipated.

The Romura Fund is invested in both Ranbaxy and DIS. Therefore, Mr. Kurosawa has been

keenly tracking both the companies. Immediately, post acquisition announcement on 11th June

2008, the question that has been in his mind was if DIS over paid for Ranbaxy. As the reality

sunk in, this question is now replaced by more operational issue of how DIS and Ranbaxy are

going to take advantage of each other to create value for their shareholders.

Mr. Kurosawa is to make a report for the top management of the Fund. He has collected details

of global, Indian and Japanese pharma industries, and profiles of DIS and Ranbaxy.

Details of the deal:-


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1. The How and When

On the 11th of June, 2008, Ranbaxy Laboratories announced that a binding Share Purchase and

Share Subscription Agreement was entered into between DIS, Ranbaxy and the Singh family (thepromoters of Ranbaxy), pursuant to which, DIS will acquire the entire holding of the Singh

family in the Company at Rs 737 per share. DIS was to further seek to acquire majority of shares

of Ranbaxy at the same price. This valued Ranbaxy, as per news paper reports, on a post-closing

basis at a whopping $ 8.5 billion. The negotiated price of Rs 737 represented a premium of

31.4% over the market price of Ranbaxy on the day of the announcement. Additionally, DIS

acquired shares issued by Ranbaxy on preferential basis, and also through an open offer (to

comply with regulatory requirements). Further, 23,834,333 warrants were allotted to DIS with

each warrant representing 1 share that could be converted at Rs 737 per share at any time

between 6 to 18 months from the date of allotment. In this respect, Rs 73.70 per warrant was to

be paid by DIS.

When the deal closed in November 2008, DIS had acquired 63.92% of the equity share capital of

Ranbaxy as shown in Exhibit below:-

Date Of Acquisition Particulars Number Of Shares

October 15 Acquisition of Shares under Open Offer 92,519,126

October 20 Allotment of Shares on Preferential basis 46,258,063

October 20 Acquisition of Shares from the Singh family 81,913,234

November 7 Acquisition of Shares from the Singh family 48,020,900

Total 268,711,323

2. Valuation

In the absence of any forecasted cash flow, Mr. Kurosawa decided to use comparables as the

method of evaluation.


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Different multiples gave completely different results. Based on EV/EBIDTA, Ranbaxy at 17.34

was already at the higher end of generic companies. Merck Co had higher EV/EBIDTA as

compared to Ranbaxy by 18%.

Ranbaxy also had the highest EV/Total Assets multiple (1.94) amongst the generic companies.

Glaxos multiple was 23% higher.

The EV/Sales multiple was more reassuring, for Mr. Kurosawa. As compared to TEVA and

Mylan, Ranbaxy appeared substantially under priced. Therefore price of Rs 737 paid by DIS

appeared justified.

ExhibitSummary of Multiples:-

Sr

No.

Company EV/EBITDA EV/Sales EV/Total Assets

1 TEVA 16.51 4.20 1.69

2 Merck KGAA 17.43 2.78 1.31

3 STADA Aezeneimittel AG 10.91 2.01 1.21

4 BARR 12.94 3.14 1.65

5 Mylan 14.04 4.33 1.61

6 Watson 7.26 1.48 1.06

7 Ranbaxy 17.34 2.61 1.94

8 Pfizer 12.37 3.36 1.41

9 Glaxo 9.70 3.24 2.3810 Merck Co 20.47 4.72 2.36


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3. Benefits to DIS:

The acquisition will pave the way for creating a new and complementary hybrid business model

that provides sustainable growth by diversification that spans the full spectrum of pharma

busniess.

Growth:-

While DIS grew at 4.7% in 2007 to $ 7.12 billion, Ranbaxy grew at over 10% to $1.6 billion.

This reflects the story of the innovator and the generic companies. While the world pharma

industry grew at 6%, the generics segment is growing at 11%. The pursuit of a dual business

segment strategy will help DIS to improve its growth rate substantially. Jointly, the two

companies will rank 15th in the global pharmaceutical market, whereas independently Ranbaxy

stood at 50th and DIS at 22nd.

Reach:-

DIS would be able to extend its reach to 56 countries (especially emerging markets) from 21

countries where they currently operate. DIS therefore gets the front end infrastructure. Thecombined business will have a significant position in India, Eastern Europe and Asia and one of

the largest presence in Africa. In some of the countries, like Mexico, Russia, DIS has so far not

operated.

Cost Savings in Manufacturing, Sales and R&D:-

The most important benefit will be the low-cost manufacturing infrastructure and supply chain

strengths of Ranbaxy. DIS will be able to bring in efficiency in its operations by sourcing APIs

and finished dosage products from Ranbaxys 9 manufacturing plants in India and many more in

other countries. Mr. Kurosawa did a quick back of the envelope calculations. One of the products

DIS makes is Ofloxacin. Its sales in 2007 were 108.7 billion. The average cost of goods sold

for DIS is about 30%. Mr. Kurosawa believes that by sourcing it from Ranbaxy, DIS will at least


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save 6.52 billion. Capitalizing the savings at 6% cost of capital, and based on 373 million share

capital of Ranbaxy in 2007, the cost saving by outsourcing just one product will be Rs 146 per

share. Additionally, there will be cost savings for conducting clinical trials and collaborating on

research and sales across the world.

R&D to speed up new development:-

The cost competitive R&D facilities of Ranbaxy would be looked forth by DIS to not only

reduce some of its R&D expenses, but also use competencies of Ranbaxy scientists to hasten

new product development. DIS also gets Zenotech's (where Ranbaxy has substantial equity

stake) expertise in the areas of biologics, oncology and specialty injectables.

4.Benefits to Ranbaxy:-

Ranbaxy aims to derive a lot of potential benefits by merging with DIS. The immediate benefit

for Ranbaxy is cash infusion of Rs 34 billion via fresh issue of shares to DIS. This can be used to

free up its debt. The acquisition allows Ranbaxy to "significantly transform itself" from being a

generic player to becoming a much stronger player with innovation, research and developmentand a far larger pipeline to leverage globally. It gains smoother access to and a strong foothold in

the Japanese drug market (which is the second largest market in the world). Ranbaxy also gains

access to DIS' research and development expertise to advance its branded drugs business.

Moreover, it sees opportunities to strengthen its API business by working with DIS as a supply

partner.

5. Scenario development post deal:-

One week after the DIS announcement, Ranbaxy announced that it had entered into an

agreement with Pfizer Inc. to settle most of the patent litigation worldwide involving Pfizers

cholesterol fighting drug Lipitor (generic name Atorvastatin). Lipitor is the world's largest

selling drug with worldwide sales in 2007 of $ 12.7 billion. Under the terms of the agreement,

Ranbaxy will delay the start of its 180 days exclusivity period for a generic version of Lipitor,


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until November 2012. While the settlement avoided further legal cost for Ranbaxy in fighting

against Pfizer, if it had won the case, Ranbaxy could have introduced generic version as early as

March 2010. After the announcement of the agreement, Ranbaxy shares declined by 7.7% as

against market decline of 2.2%.

In 2008, Ranbaxy had settled with AstraZeneca on its $ 7 billion heartburn drug Nexium, GSK

on its $ 985 million migraine medicine Imitrex and its anti-herpes drug Valtrex with sales of $

1.3 billion.

FDA Issued Warning Letters to Ranbaxy:-

The Food and Drug Administration (FDA) issued two Warning Letters to Ranbaxy Laboratories

and an Import Alert for generic drugs produced by Ranbaxy's Dewas and Paonta Sahib plants in

India on 16th September 2008. Import Alert, under which U.S. officials could detain at the U.S.

border, any API and finished drugs manufactured at these Ranbaxy facilities.

The Warning Letters identified the agency's concerns about deviations from U.S. current Good

Manufacturing Practice (CGMP) requirements at Ranbaxy's manufacturing facilities in Dewas

and Paonta Sahib (including the Batamandi unit), in India.

The points covered in the warning letters were:

Measures taken to control cross-contamination appeared inadequate ;

Inadequate batch production, control records, failure investigations and sterile processing

operations;

Absence of Assurance Responsible individuals to determine if the firm was taking

necessary steps under CGMP; and

Inaccurate written records of the cleaning and use of major equipment

Ranbaxy after this announcement agreed to cooperate and work with FDA to improve the

suggested inadequacies in these two plants.


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Analysts estimate the loss of business to Ranbaxy as a result of blocking the sale of 30 generic

medicines to be at $ 40 million. The news saw Ranbaxy scrip end the day down 6.6% on BSE.

Post the deal, there were doubts raised, since there has been no recent example of a generic

company being integrated into an innovator company. Some also highlighted the possibilities of

cultural clashes innovator companies have always seen themselves as superior to generic

companies. Besides, the Japanese culture of consensus-building and team playing could be new

for promoter-run company.

SHARE HOLDING OF RANBAXY (PRE ACQUISITION)

Table: Share Holders of Ranbaxy (Pre Acquisition)

SHARES HELD BY %

SINGH 34.82

SINGHS FAMILY 19

MUTUAL FUND 5.56

BANKS 1.71

INSURANCE COMPANIES 14.39

FOREIGN INSTITUTIONAL INV.(F.I.I) 12.42

GENERAL PUBLIC 12.1

Figure: Share Holders of Ranbaxy (Pre Acquisition)

34.82

19

5.561.71

14.39

12.42

12.1

SHARE HOLDING (PRE ACQUISITION) %

SINGH

SINGHS FAMILY

MUTUAL FUND

BANKS

INSURANCE COMPANIES


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Before acquisition the Singh had

34.82% of the holding in Ranbaxy.

His family had 19% of the shares.

Mutual fund companies holding were 5.56%.

Banks had 1.71%.

Insurance companies hold 14.39%

General public 12.1%

SHARE HOLDING OF DAIICHI SANKYO (POST ACQUISITION)

Table: Share Holders of Daiichi Sankyo (Post Acquisition)

SHARES HELD BY %

DAIICHI SANKYO 63.92

MUTUAL FUND 2.58

BANKS 0.37

INSURANCE COMPANIES 9.19

FOREIGN INSTITUTIONAL INV.(F.I.I) 4.41

GENERAL PUBLIC 19.53

Figure: 4.2 Share Holders of Daiichi Sankyo (Post Acquisition)

63.92

2.58

0.37

9.19

4.41

19.53

SHARE HOLDING (POST ACQUISITION) %

DAIICHI SANKYO

MUTUAL FUND

BANKS

INSURANCE COMPANIES

FOREIGN INSTITUTIONALINV.(F.I.I)

GENERAL PUBLIC


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After the acquisition the singh and his familys complete stake in Ranbaxy had been taken over

by Daiichi Sankyo which is 63.92% of total holdings.

The holdings by mutual fund, banks, insurance companies and foreign institutional investments

decreased by 53.9%, 58.47%, 36.13%, 64.49% respectively. Whereas the general public holdings

were increased by 61.40%.

INTERPRETATION OF SHARES HELD PRE & POST ACQUISITION

SHARES HELD BY PRE % POST % CHANGE

%

SINGH 34.82 - (100)

SINGHS FAMILY 19 - (100)

DAIICHI SANKYO - 63.92 63.92

MUTUAL FUND 5.56 2.58 (53.59)

BANKS 1.71 0.32 (58.47)

INSURANCE COMPANY 14.39 9.19 (36.13)

F.I.I 12.42 4.41 (64.49)GENERAL PUBLIC 12.1 19.53 61.40

The above chart shows % of shares held prior and post acquisition, it is clear that the Singh and

his family have completely sold their stake to Daiichi Sankyo which lead to 100% changes in

share acquisition, with this acquisition Daiichi Sankyo has acquired 63.92% of the total shares.

Other companies such as mutual funds, banks, insurance companies and F.I.I share holdings

have decreased to some extent.

Whereas the general public holdings have been increased up to 62%. This is because Daiichi

Sankyo expects to increase its stake in Ranbaxy through various means such as preferential

allotment, public offer and preferential issue of warrants to acquire a majority in Ranbaxy, i.e. at

least 50.1%.


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DAIICHI SANKYO Records Valuation Loss, Goodwill Write-down, on

Investment in Ranbaxy Laboratories:-

Daiichi Sankyo Company Limited announced that it plans to record a valuation loss and one-

time write-down of goodwill on its investment in Group subsidiary Ranbaxy Laboratories

Limited for the fiscal third-quarter ended December 31, 2008.

On a non-consolidated basis, Daiichi Sankyo plans to record a non-cash valuation loss of 359.5

billion yen on its shares in Ranbaxy in its fiscal third-quarter to reflect a more than 50% decline

in the market value of these securities versus the purchase price.

On a consolidated basis, Daiichi Sankyo estimates a non-cash loss of 354.0 billion yen related to

the write-down of goodwill associated with its investment in Ranbaxy in line with the valuation

loss on Ranbaxy shares accounted for on a non-consolidated basis.

Daiichi Sankyo sees no impact on its forecasts for non-consolidated net sales, operating income

or ordinary income for the fiscal third-quarter as a result of these anticipated extraordinary

losses. The Company also sees no impact on cash flow.

However, these items will have a significant negative impact on the Companys consolidated

financial results forecasts for net income for the nine-month period ended December 31, 2008

and for fiscal year 2008 ending March 31, 2009.

Daiichi Sankyo remains committed to a year-on-year increase in its shareholder dividend for

fiscal year 2008, in step with the Companys current dividend policy.

Background

Daiichi Sankyo has based its estimates for the one-time write-down of goodwill on its investment

in Ranbaxy to fully reflect the impact of the current unprecedented turmoil in global equities

markets. The Company has taken this step to meet the strictest accounting standards to ensure it

remains on the firmest financial footing.


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A further review of valuations at the end of the current fiscal year in March 2009 and the

finalization at that time of allocations under Purchase Price Allocation (PPA) rules prescribed by

the Accounting Standards for Business Combinations may result in a change to the amount of

the valuation loss.

Daiichi Sankyo considers its investment in Ranbaxy as essential in ensuring sustainable business

growth and fully realizing the Groups long-term business strategy. Daiichi Sankyo remains

absolutely committed to pursuing its unique hybrid model dedicated to the needs of patients in

developed and emerging markets. Those needs encompass innovative new medicines and

established off-patent products.

Daiichi Sankyo and Ranbaxy initiated full-fledged cooperation following the appointment on

December 19, 2008 of a new Board of Directors at Ranbaxy that includes Daiichi Sankyo CEO

Takashi Shoda and Senior Executive Officer Tsutomu Une.

The Global Pharmaceutical Industry:-

The global pharma industry is valued at $ 700 billion (2007). With about 46 percent share, the

United States remains the largest individual market worldwide. Japan, with $ 70 billion market,

is the second largest market. In European Union, Germany is the largest market valued at $ 31

billion.

There have been two major changes taking place in the global pharma industry,

viz:

1. Growth of Generics:-

Rising costs and an ageing population have been contributing to a wider use of generics instead

of branded products. The generics market remains a major growth area in the global healthcare

market. This growth has been partly driven by cost-containment in several national healthcare

sectors, with governments seeking to promote the use of generic products over higher-priced


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originator products. The global generic pharmaceuticals market was about $ 70 billion in 2007,

with market growth noticeably higher than that of the overall pharmaceutical market.

The US is the largest generics market in the world. Hatch-Waxman Act standardized U.S.

procedure for recognition of generics drugs. An applicant files an Abbreviated New Drug

Application (ANDA) with Food & Drug Administration (FDA) and seeks to demonstrate

therapeutic equivalence to a specified, previously approved reference listed drug. When

ANDA is approved, FDA adds the drug to its Approved Drug Product list (also known as the

Orange Book).

The FDA also offers a 180 day exclusivity period to generic manufacturers in specific cases such

as when a generic manufacturer argues that a patent is invalid or is not violated in the generic

production of a drug. The exclusive period of 180 dayswhich allows one manufacturer to sell

generic productacts as a reward for the generic manufacturer who is willing to risk liability in

court and the cost of patent litigation with the original / branded manufacturer.

All these changes have had a major impact on the popularity of generic drugs. As per Harris

Interactive, in just over 2 years, the percentage of Americans who would choose generic

prescription drugs over brand names has increased from 68% to 81%. And more consumers now

purchase their prescriptions in discount stores like Wal-Mart and Sam's Club.

Other than the US, Germany and the UK also have large generic markets. France, Italy, Spain

and Japan currently have small but fast-growing generic markets.

2. Changing Business Model:-

Apart from higher growth of generics, the other change in the global pharma industry is in the

business models followed by large pharma companies. For a long time, the pharma industry has

been dominated by large innovator companies, using Research and Development to develop

block buster drugs. To strengthen Research and Development pipeline, the companies

endeavored to grow bigger through Merger and Acquisition. For example, Astra merged with


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Zeneca to form AstraZeneca, Glaxo Wellcome and SmithKlineBeecham merged to form

GlaxoSmithKline, Novartis was created through merger of Ciba-Geigy and Sandoz, merger of

Rhone-Poulenc and Hoechst AG resulted in Aventis, and Pfizer merged with WarnerLambert.

Many factors are responsible for these changes. Declining research productivity coupled with

rising Research and Development costs, falling revenues of block buster drugs due to patent

expiry (block buster drugs worth $ 90 billion will be going off patent by 2011) and the concerns

by various governments of the rising health care bill are all forcing innovator companies to look

for new business models.

The PWC report, Pharma 2020: The Vision Which Path Will You Take? puts the

predicament of innovator companies very well. The current pharmaceutical industry business

model is both economically unsustainable and operationally incapable of acting quickly enough

to produce the type of innovative treatments that will be demanded by global markets.

Pharmaceutical companies are facing a dearth of new compounds in the pipeline, poor share

value performance, rising sales and marketing expenditures, increased legal and regulatory

constraints and tarnished reputations. The industry is investing twice as much in Research and

Development as it was a decade ago to produce two-fifths of new medicines it then produced. It

is simply an unsustainable business model.

Even generics companies are realizing the importance of scale. Teva, the worlds largest generic

company, has acquired Barr - an American rivalfor $ 7.5 billion. Barr and Mylan, another big

American generics firm, have been busy acquiring smaller firms. Actavis, a once obsucure

Icelandic generic outfit, has swallowed over two dozen rivals in the past decade to become a

global force.

Generics business is attracting the global companies. In June 2008, Japans Daiichi Sankyo

bought Ranbaxy for $ 4.6 billion. In July 2008, GSK said it would enter the generics market

through a joint venture with Aspen, a South African firm. In March 2009, Pfizer entered into an

agreement with Aurobindo Pharama to market off patent drugs. The products expand Pfizers


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growing generics portfolio and are versions of drugs originally made by companies other than

Pfizer.

Different companies are, therefore, devising different strategies to meet this challenge:

Continuing the block buster model, but looking for blockbusters in bio tech instead

of conventional chemistry-based products;

Keeping faith in chemistry-based block busters, but reducing R&D costs by

outsourcing or starting their own R&D in low cost countries like India or China;

A hybrid model where branded products and generics coexist.

The Indian Pharmaceutical Industry:-

The size of the Indian pharma industry was in the range of $ 17 billion in 2007 08. Nearly 60%

is the domestic market, while exports constitute 40%. It has been witnessing phenomenal growth

in recent years, driven by rising consumption levels in the country and strong demand from

export markets. In world rankings, the Indian pharma market stood fourth in terms of volume

and 14th in terms of value in 2005 and, as per a study by McKinsey, expected to be ranked

among the top 10 largest pharmaceutical markets worldwide by 2015.

The Indian pharma industry has evolved over a period of time. Till 1970, the industry was

dominated by global pharma companies, and Indian companies played an insignificant role.

In 1970, Indian Patent Act was passed. This act recognized only the process patent and not the

product patent. Implication for global innovative pharma companies was that if they wanted to

introduce new product, they could not patent the product, but they could patent their process of

manufacturing the product. This was a boon to Indian pharma companies. Good chemistry

knowledge of Indians came handy and Indian companies became known for their reverse

engineering capabilities. Thus they developed their capabilities for manufacturing low cost APIs,

which global companies were selling at extremely high prices. In next 25 years, companies like


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Ranbaxy, Dr. Reddy, Cipla etc became names to reckon with. Since this Act adversely affected

global innovative companies, India no more remained on their radar.

In 2005, India amended the patent act, to recognize the product patent too. While there are

implementation issues concerning the new law, India is now playing an important role in the

strategies of global innovative companies. Indian companies too are working on different

business models to thrive in this new environment.

Demand from the exports market has been growing rapidly owing to the capability of Indian

players to produce cost-effective drugs. Indian Pharma companies have developed Good

Manufacturing Practices (GMP) compliant facilities for the production of different dosage forms.

They export bulk drugs and formulations to more than 65 countries globally. Exports to Japan at

$ 180 million in 2011-2012 constituted less than 3% of Indias pharma exports. Japan imports

nearly $ 10 billion worth of pharma products.

Access to European markets through acquisition:-

To access European generics market, Indian companies have taken the route of acquisition.

Acquisitions provide players with ready market access (Roads into complex regional distribution

channels) in addition to approval for marketing drugs, which otherwise would take 2-3 years.

Major examples have been Dr. Reddys acquisition of Betapharm, Germany for $ 570 million in

February 2006; Ranbaxys acquisition of Terapia, Romania for $ 327 million in March 2006, and

acquisition of Negma, France by Wockhardt in May 2007 for $ 265 million.

Therapeutic Segments:-

In India, 70% of the total formulations sold are for acute illness (short duration) and remaining

for chronic illness (prolonged duration). This is true for most developing countries in contrast to

developed countries chronic ailments dominate.


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ExhibitTherapeutic segmentation of Indian Pharma industry

Among the acute therapies, anti-infective is the major contributing segment accounting for 18%

of the total pharma sales market in India. The gastro and cardiac are other two segments

contributing 11% each.

Growth Drivers:-

Major growth drivers of Indian pharma industry are:-

Strong IPR regime-both process and product patents recognized;

Growth of generics market in the US and EU due to;

- Desire of these governments to control health costs and,

- End of patent protection period for many blockbusters

Capital and operating cost advantage, with talented manpower and excellent process

development skills and,


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Increasing domestic demand due to growing percentage of population accessing health

care system.

The Japanese Pharmaceutical Market:-

The Japanese pharmaceutical industry took off in the true sense post the World War II. Many

manufacturing plants and R & D facilities were set up during this period. The industry achieved

rapid growth since the Universal Health Insurance (UHI) system was introduced in 1961.

However, the industry growth has slowed down since the 1980s. In particular, the market for

prescription drugs has shown very low growth over the last decade.

GROWTH IN JAPANESE PHARMA INDUSTRY

Generics took birth in Japan in 1967 when the former Ministry of Health and Welfare (MHW)

developed the basic policy for new drug approval. This policy opened the door for the generic

drug industry in Japan. This industry experienced growth only since the early 90s when the

government began taking steps to promote the use of lower-priced generics for reducing drug

cost.

6400

6600

6800

7000

7200

7400

7600

7800

8000

8200

2009 2010 2011 2012

Sales (Billion Yen)

Sales (Billion Yen)


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Increasing Demand for Generics:

The average age of Japanese population is on a rise, and so is the health care cost. As a result, the

government is promoting the use of generic drugs and cautiously reforming the reimbursement

system. A survey, conducted by McKinsey, showed that though the propensity to consume

generics drugs by Japanese is very high (indicated by 97% of respondents being aware of generic

drugs and 85% of respondents being ready to consume them), the actual consumption of such

drugs is very low due to:

Japanese patients very rarely question a doctors treatment regime.

Lack of financial incentives for the doctors to prescribe generics.

Most importantly, doctors tend to distrust the quality of generics.

The share of the generics market is expected to increase thanks to the governments steps to

encourage the use of generics. Recently, the government introduced various incentives for

prescribing and dispensing generics as well as measures to allow generic substitution. Some of

these include 20 to doctors for generic prescribing per prescription and 120 to pharmacists

for generic dispensing. At present, the four generic drug companies (Taiyo Pharmaceutical Ind.,

Towa Pharmaceutical, Sawai Pharmaceutical, and Nichi-iko Pharmaceutical) have annual sales

of over 20 billion.

Therapeutic Segments:

The Japanese pharma market is currently being dominated by cardiovascular drugs in terms of

sales. The Exhibit below depicts the share of various key franchises as a percent of total sales in

2012. It is clear from Exhibit that cardiovascular drugs share in total sales was more than 3 times

the share of CNS drugs (which has the second highest share of total sales). However during

2007-2011 growth in sales of Oncology, Diabetes and CNS drugs has been much higher than that

of Cardiovascular drugs. Oncology drugs have experienced the highest CAGR of 10.8%,

followed by diabetes drugs at 8.5% and CNS at 7.7%. Cardiovascular growth has been 3.8%.


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Exhibit - Therapeutic Segmentation of Japanese pharma industry


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CHAPTER 3 SWOT ANALYSIS

SWOT ANALYSIS OF DAIICHI SANKYO

SWOT ANALYSIS

Strength

1. Has a strong workforce of over 30,000 employees

2. Leading producer of Benicar which is angiotensin II receptor

antagonist

3. It is one of the largest pharmaceutical company in Japan

4. Strong presence in US, Europe, India, China, Brazil, Thailand

and some others

5. Strong brand establishment through many major acquisitions

Weakness

1. Despite being a strong brand, had a limited market share due tointernational competitors

2. Operates in limited segments such as Oncology &Cardiovascular segment

Opportunity

1. Increasing world population and more awareness about health

2. More people suffering from chronic diseases such as cancer,cardiovascular diseases

3. Increasing awareness of healthcare solutions

Threats

1. Natural disasters in Japan

2. increasing stringency in drug development guidelines

3. Global economic slowdown


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SWOT ANALYSIS OF RANBAXY

SWOT Analysis

Strength

1.Top 10 Global Generic Company with a spread over 125countries

2. over 13,000 well trained Employees, over 50 nationalities

3. Strong presence in the International market with a major shareand a strong presence in India as well

4.It has operations in nearly 50 countries and has 7 manufacturingplants

Weakness

1. It is heavily dependent upon generics for its revenue generation

2. Constantly regulated policies by the govt means operationalefficiency is affected

Opportunity

1.increasing health awareness

2.Improvement in distribution network & brand building

3. They can leverage Synriam, anti-malarial drug in brandbuilding

Threats

1.Increasingly stringent FDA Regulations

2.Exchange rate fluctuations

3.Global economic slowdown


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CHAPPTER 4 FINDINGS AND SUGGESTIONS

FINDINGS

The main findings of this project are:-

Before acquisition the Singh had 34.82% of the holding in Ranbaxy. After the

acquisition the Singh and his familys complete stake in Ranbaxy had been taken over

by Daiichi Sankyo which is 63.92% of total holdings.

Daiichi has spent more amounts in terms of percentage when compared to other top

companies in the world. It has spent 16.5% of its total revenue.

The market share of Ranbaxy in India is 5.12% which is the highest and No. l in India.

SUGGESTIONS

From the above analysis it is found that it is a profitable deal which gives more value to the share

holders. However, it is a dangerous trend for the following reasons.

Generic industry is based on low prices. Such acquisitions will lead to prices increase and

thus the loss of primary advantage.

Every time Ranbaxy achieved a new landmark abroad, their local consumer base

automatically increased due to increased confidence and pride. This advantage will be

lost.

In the short term they make money quickly but not for long. We have seen that a big

name built over years goes into oblivion forever. Hope it does not happen to Ranbaxy.


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CONCLUSION

Ranbaxy laboratories ltd. (which is the no.1 pharmaceutical company in India) acquired by

Daiichi Sankyo Company Ltd. (a Japans third largest pharmaceutical company and also in top

20 pharma company in the world. It was the biggest acquisition of a domestic pharmaceuticals

company by foreign company. This acquisition provided benefit to both companies. Daiichi

Sankyo could enter into the Asian market which is worlds largest pharmaceuticals market.

Ranbaxy got the strategic partner which helped to explore the foreign market and its innovator

facility to accelerate the growth of the company.

Daiichi Sankyos move to acquire Ranbaxy will enable the company to gain the best of both

worlds without investing heavily into the generic business. The patent perspective of the merger

clearly indicates the intentions of both companies in filling the respective void spaces of the

other and emerge as a global leader in the pharmaceutical industry.

Ranbaxy has become part of a Japanese corporate framework, which is extremely reputed in the

corporate world. As a generics player, Ranbaxy is very well placed in both India and abroad

although its share performance belies its true potential.


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BIBLIOGRAPHY

Books:-

Advanced Financial Accounting.

Websites:-

www.ranbaxy.com

www.daiichisankyo.com

www.google.com
http://www.ranbaxy.com/http://www.daiichisankyo.com/http://www.google.com/http://www.google.com/http://www.daiichisankyo.com/http://www.ranbaxy.com/

copy of acqusition

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