Ranbaxy Laboratories Limited, India’s largest pharmaceutical company, was an integrated, research-based, international pharmaceutical company that produced a wide range of quality, affordable generic medicines. These medicines were trusted by healthcare professionals and patients across geographies. Ranbaxy was incorporated in 1961 by Bhai Mohan Singh, the grandfather of Singh. Dr. Parvinder Singh then succeeded him and transformed Ranbaxy into India’s first multinational drug firm. Ranbaxy went public in 1973.
In 1990, Ranbaxy obtained a US patent for DoxyCyline. In 1992, it partnered with Eli Lilly & Co. of the USA to establish a joint venture in India for marketing select Lilly products.
Ranbaxy, a global generic pharmaceutical company ranked 8th among its peers, had set a goal to become one of the top five players in the industry and achieve $5 billion in global sales by 2012. The company had operations in 49 countries and was present in 23 of the world’s leading pharmaceutical markets. It had advanced manufacturing facilities in 11 countries and served customers across more than 125 countries. Leading the company during the merger was Mr. Atul Sobti, CEO & MD of Ranbaxy Laboratories, who oversaw a workforce of 12,000, including a team of 1,200 scientists.
DAIICHI SANKYO COMPANY, LIMITED (DIKL) was established in 1960 as a private limited company for the manufacturing of specialty chemicals. It collaborated with Dai-Ichi Kogyo Seiyaku Co. Limited of Kyoto, Japan (DKS), a renowned international specialty chemicals manufacturer, and began commercial production in 1963. In 2005, two prominent Japanese pharmaceutical companies merged under the leadership of Takashi Shoda, CEO of Daiichi Sankyo Company, Ltd., a globally recognized innovator in the pharmacy industry.
In 1960, Dai-Ichi Karkare Limited (DIKL) was established as a private limited company to produce specialty chemicals. To enhance their operations, DIKL partnered with Dai-Ichi Kogyo Seiyaku Co. Limited (DKS), a well-known international specialty chemicals manufacturer based in Kyoto, Japan. This collaboration led to the production of innovative drugs that improve the quality of life for patients globally. Commercial production began in 1963.
On 12th June 2008, Ranbaxy and Daiichi Sankyo Company Ltd. formed a partnership to establish a powerful pharmaceutical company specializing in both innovative and generic drugs. Daiichi Sankyo Co. Ltd. agreed to purchase 34.8% of Ranbaxy Laboratories Ltd. from its promoters, with the intention of increasing their stake through various means, such as preferential allotment, public offer, and preferential issue of warrants, to eventually own at least 50.1% of Ranbaxy. The deal involved Daiichi Sankyo acquiring the 34.8% stake for approximately Rs. 0,000 Crore ($2.4 billion) at Rs. 737 ($17) per share, representing a premium of 31% over the current price of Rs. 561. The acquisition was made from Mr. Malvinder Singh and his family, who are the promoters of Ranbaxy. Additionally, Daiichi Sankyo agreed to make an open offer for further stake in the company.
Daiichi Sankyo plans to buy an additional 20% of shares from the public shareholders at a price of Rs 737 per share. If successful, Daiichi Sankyo’s ownership in the company will reach a maximum of 58.09%. Currently, they have already acquired another 9.5% through preferential allotment of equity shares and an additional 4% through share warrants issued on a preferential basis.
Despite this acquisition, Ranbaxy will continue to operate independently with its current CEO and Managing Director, Malvinder Singh, leading the company. As a result of this transaction, the combined Daiichi-Ranbaxy entity becomes the world’s 15th largest pharmaceutical company with an estimated market capitalization of around US$30 billion. Although it surpasses Teva in size, it still remains smaller than Pfizer ($48 billion), GlaxoSmithKline ($44 billion), and Novartis Group ($40 billion).
Daiichi utilized its innovative drug manufacturing capabilities and research and development expertise, alongside Ranbaxy’s efficient production abilities, to attain a competitive advantage in the global market for generic drugs. Instead of simply selling, this transaction signifies a strategic move that will transform our business operations. By combining an innovator company with a generic drug company, we are embarking on an extraordinary journey. This agreement not only benefits our shareholders but also propels our company to an entirely new level.
Ranbaxy made an announcement, stating that they have successfully eliminated their debt and acquired Rs 3,000 Crore in cash. Additionally, they have increased their market capitalization to $8 billion, resulting in growth of the company’s net worth. Ranbaxy’s objective is to become the leading contender in generics.
To finalize the agreement, Ranbaxy had to sell certain assets and make compromises. They believe it is crucial for them as a leader in the industry to set the pace for others. The company prioritized its future over family ownership.
Singh referred to this partnership as an “association” that will place Ranbaxy on a stronger platform, allowing them to utilize their expertise in drug development, manufacturing, and global reach.
Utilizing our scientific, technical, and managerial assets and expertise, we will commence a fresh endeavor to attain increased sustainable growth in developed and emerging markets via organic and inorganic strategies. This signifies a significant milestone in our mission to transform into a research-oriented global pharmaceutical firm. The collaboration between Ranbaxy, specializing in generics, and Daiichi Sankyo, renowned for innovation, is noteworthy due to their complementary businesses with minimal redundancy.
Ranbaxy, Zenotech, and Orchid have the ability to manufacture products at a low cost for Daiichi Sankyo. Unlike Daiichi Sankyo, Ranbaxy has a presence in various global markets such as the US, Europe, and emerging markets. This allows them to expand the reach of Daiichi Sankyo’s product portfolio, including in India. While Ranbaxy’s presence in Japan is limited, which presents opportunities for generics, this partnership enables them to take advantage of this potential. Although Ranbaxy primarily focuses on generic drugs, they also strive to establish their proprietary business.
Daiichi Sankyo would support Ranbaxy’s R&D efforts and contract research business, helping it grow both organically and through acquisitions. The merger would make Ranbaxy a debt-free company, reducing its interest costs. Additionally, the deal would strengthen Ranbaxy’s financials, making it debt-free and cash-rich. The main advantages for Daiichi Sankyo include low-cost manufacturing infrastructure and supply chain strengths, complementing Ranbaxy’s expertise in generics. The merger would also provide access to a broader product base, therapeutic focus areas, and well-distributed risks. With the influx of foreign firms offering low-cost goods, the generic drug sector is expected to receive a stimulus. As part of the deal, Daiichi Sankyo would gain access to Ranbaxy’s entire range of 153 therapeutic drugs spanning 17 diverse therapeutic indications.
Ranbaxy benefited from additional NDAs granted by the US FDA for anti-histaminics and anti-diabetics. This resulted in a decrease in the company’s debt and provided more flexibility for pursuing growth opportunities. Furthermore, this deal allowed Ranbaxy to outperform European and U.S. companies struggling to enter Japan due to stricter safety and testing requirements. Consequently, the combined company would rank as the 15th largest pharmacy globally.
However, there were negative factors to consider. Firstly, Ranbaxy chose not to proceed with the de-merger of its R&D unit, leading to a significant increase in R&D expenses. Secondly, the generics market experienced a slowdown with lower prices due to multiple patent expiries in the U.S., which also affected Ranbaxy. Therefore, it became necessary for the company to invest more in R&D and develop its proprietary business for new sources of growth.
Additionally, considering Dabur promoters’ sale of a 65% stake to German-Fresenius Krabi earlier that year, along with this deal, it appeared that this trend could become prevalent within the pharmacy industry. Lastly, there was an obvious arbitrage opportunity where investors could purchase stocks at their current level and sell them during an open offer.
The stock price of the company is predicted to increase to Rs 737 due to more individuals capitalizing on the price differential. Nonetheless, despite the deal announcement, the Ranbaxy price remained unchanged. Hence, there remains an opportunity for investors to profit by purchasing the stock at its current level and offering them in the open offer. Acquiring Ranbaxy allows Daiichi Sankyo to gain advantages without major investments in generic business.
The merger aims to position both companies as leaders in the global pharmaceutical industry by filling each other’s void spaces. Ranbaxy, a well-established generics player, has joined forces with a highly reputable Japanese corporate framework. Despite its strong presence in both India and abroad, Ranbaxy’s share performance has not reached its full potential. The Daiichi-Ranbaxy deal faced legal issues, specifically related to exchange control approvals that were required for Daiichi’s investment.
- RBI Approval for transfer of shares Transfer of shares from Indian resident to non Indian resident, which attracts the provisions of the takeover Code, would require prior approval of the Reserve Bank of India (“RBI”). Accordingly RBI approval was obtained by Daiichi in the month of October, 2008. 2. Approval of Foreign Investment Promotion Board (“FIPB”) I. Approval under Press Note No. 1 (2005) Ministry of Finance mandates prior approval of FIPB, if the foreign investor is already having an existing joint venture or technology transfer / trademark agreement in the ‘same’ field as on January 12, 2005.
Since Daiichi already had an equity stake in Uni-Sankyo Limited, a company that is involved in the same business as Ranbaxy, they obtained prior approval from the Foreign Investment Promotion Board (FIPB). II. The issuance of warrants refers to options that allow investors to acquire equity shares at a later date. According to the existing exchange control regulations, a company can issue equity shares and compulsorily convertible preference shares/debentures under the automatic route, as long as there are no sectoral caps in place. However, the current exchange control regulations do not explicitly require approval for this.
The FIPB had been requesting prior approval before issuing warrants to non-residents since warrants were not explicitly considered as capital. As of November 13th, it was still uncertain if listed companies would require FIPB approvals for issuing these warrants, as they would be in line with SEBI guidelines. However, clarification from the FIPB was still pending and companies were applying for prior approval as a cautious approach.
3. The Cabinet Committee on Economic Affairs (CCEA) approval: Any foreign investment exceeding Rs. 000 million (~ USD 136 million8) also needed prior approval from the CCEA. Consequently, Daiichi obtained final clearance from the CCEA in October 2008.
TAXATION ISSUES: According to the current Income Tax Act of 1961 (ITA), long-term capital gains from transferring listed equity shares on a recognized Indian stock exchange will be exempt from capital gains tax in India, provided that a securities transaction tax of 0.125% is paid on the consideration.
10. If the sale of shares from the Promoters to Daiichi is conducted outside of the stock exchange, it will be subject to a long term capital gains tax of 11.3% according to the ITA. This would lead to a capital gains tax implication of Rs. 10,000 million (approximately USD 227 million). To avoid this tax, one possible solution is to transfer the shares on the stock exchange using a block deal window which was introduced in 2005. The block deal window allows for negotiated deals on the floor of the stock exchange with a condition that the negotiated price does not exceed +1% of the ruling market price or previous day closing price.
However, due to a decline in financial markets, Ranbaxy’s share price dropped significantly to around Rs. 265 (approx.), much lower than the negotiated price of Rs. 737. As a result, SEBI’s approval was sought by Promoters to waive the +1% ceiling for this block deal. Unfortunately, SEBI denied permission due to the significant difference between the deal price and existing market price.
Consequently, an off-market deal was executed after paying off the capital gains tax.
The nomination of independent directors in Ranbaxy has raised concerns about the potential impact on their independence. According to the Agreement, after completion, Ranbaxy’s board of directors will consist of 10 directors. The Promoters will nominate a combination of 4 independent and non-independent directors, while Daiichi will nominate 6 independent and non-independent directors.
According to the current corporate governance code, nominating or proposing a name for an independent director by the Promoters or a person in control should not affect their independence unless there is also a material pecuniary interest. However, the code only establishes limits, and it is up to companies to go beyond it and assess whether this practice would lead to dependence on the Promoters or Daiichi and harm the independence of the independent directors. Here is a brief overview of the important events in chronological order.
The Daiiichi-Ranbaxy acquisition can be analyzed using various theories. However, one theory stands out and impacted the merger negatively. This theory pertains to agency problems, where managers who only own a fraction of the firm’s shares may not work as diligently and may indulge in excessive perks as majority shareholders bear most of the expenses.
Generally, takeovers are viewed as a solution to agency issues. However, the situation with Ranbaxy differed in that the acquisition led to the dilution of Malvinder Singh and his family’s majority shareholding. As a result, ownership shifted from the management to an external entity like Daiiichi. Ironically, this action caused agency problems rather than resolving them. Malvinder Singh was compelled to sever his connections in 2009, merely a year after the agreement. It becomes apparent that this outcome stemmed from the exact problem that a merger would have otherwise addressed.
