case of daiichi sankyo takeover of ranbaxy

MERGERS AND ACQUISITIONS

(TERM-IV SESSION-2012-2014)

Case Study

On

ACQUISITION OF RANBAXY BY DAIICHI SANKYO

Submitted To: Submitted By:

Prof. Shiv Nath Sinha GROUP -3 SECTION-ABC

Asst. Professor (FINANCE) Aditya Agarwal (2012019)

IMT Nagpur Aditya Kapoor (2012020)

Akash Agrawal (2012029)

Amit Gupta (2012037)

Acquisition of Ranbaxy by Daiichi-Sankyo

This case was prepared with the objective to study merger synergy, valuation

and how poor due diligence will have consequences on companies Balance

Sheet.

Background:

On 11 June 2008, Daiichi Sankyo Co. Ltd., the second largest pharmaceutical company in

Japan, signed an agreement to acquire the entire shareholding of the promoters (the Singh

family) of Ranbaxy Laboratories Ltd, the largest pharmaceuticals company in India. The total

stake amounted to 34.8% and Daiichi Sankyo expects to acquire another 9.4% through a

preferential allotment. The company has the option to acquire up to 20% of Ranbaxy’s voting

capital through a public offer. Through this offer, Daiichi Sankyo seeks to acquire sufficient

number of outstanding shares to obtain a majority stake in Ranbaxy, that is, a minimum of

50.1%. If Daiichi Sankyo fails to meet with adequate shareholder response during the open

offer, it has the option to exercise a preferential issue of warrants that can increase Daiichi

Sankyo’s stake in Ranbaxy by another 4.9%.

The value of the transaction is expected to range from $3.4 billion to $4.6 billion at the rate of

$17.14 per share (INR737 per share, exchange rate: 1USD=43INR), representing a premium

of 53.5% to the average daily closing price of Ranbaxy’s shares traded on the National Stock

Exchange for the three-month period ended 10 June 2008, and 31.4% premium to the last

traded price (price on 10 June 2008). Both the company boards have approved the merger and

subsequent to the closure, which is expected by March 2009, Ranbaxy is expected to be

valued at $8.5 billion and the combined entity at roughly $30 billion.

Ranbaxy will function as Daiichi Sankyo’s subsidiary but will retain its independent

management and continue to be led by its current CEO & Managing Director Malvinder

Singh. Daiichi Sankyo expects the merger to positively impact its EPS (after goodwill

amortization) in the fiscal year ending 31 March 2010 (fiscal 2010). Daiichi Sankyo will

benefit from Ranbaxy’s low-cost manufacturing infrastructure and supply chain strengths

while this deal will award Ranbaxy with access to the research and development expertise of

Daiichi Sankyo to further its own growing branded drugs business. Daiichi Sankyo is already

the result of the combination of Daiichi Pharmaceutical and Sankyo Company, a merger

initiated in October 2005 and completed in April 2007.

2 | P a g e S e c t i o n - A B C


The present study discusses the implications of the merger between Ranbaxy and Daiichi

Sankyo, from an intellectual property as well as a market point of view. This analysis is

particularly important at this point because of a variety of reasons including the growing

preference for generics, increasing dominance of emerging markets such as India, fast

approaching patent expiry etc. Also, given the fact that this involves 2 players who are among

the largest in their respective markets, the deal is of great significance.

Daiichi Sankyo Background:

Daiichi Sankyo is a Japanese pharmaceutical stock company with head / registered office at

Tokyo, Japan .On September 28, 2005, Daiichi Pharmaceutical Co., Ltd, Japan (‘Daiichi’),

and Sankyo Company, Limited, Japan (‘Sankyo’) formed a joint holding company, Daiichi

Sankyo by way of share transfer. Thereafter, in April 2007, Daiichi and Sankyo merged into

Daiichi Sankyo. Daiichi Sankyo is engaged in the business of research & development,

manufacturing, import, and sales & marketing of pharmaceutical products globally. Daiichi

Sankyo Company, Limited was established in 2005 by way of share transfer by two leading

century-old Japanese pharmaceutical companies, Daiichi and Sankyo. Sankyo was

established in 1899 while Daiichi was established in 1915. Currently, Daiichi Sankyo has

directly marketed its products among major markets as well as emerging markets through its

subsidiaries located in 21 countries worldwide. Daiichi Sankyo’s vision is to establish a

strong presence in the international arena as a Global Pharma Innovator, by consistently

developing new world-class drugs, and manufacturing and marketing them through its own

hands. Daiichi Sankyo uses its cumulative knowledge and expertise in the fields of

cardiovascular disease, cancer, metabolic disorders, and infection as a foundation for

developing an abundant product line-up and R&D pipeline. Daiichi Sankyo's products are

used not only in Japan but also in many parts of the world including Asia, Europe and the

United States. In recent history, Daiichi Sankyo has successfully launched three major

products widely used globally, an antihypertensive Olmesartan (Benicar®, Olmetec®), a

synthetic antibacterial agent Levofloxacin (Levaquin®, Tavanic®, Cravit®), and an

antihyperlipidemic agent Pravastatin (Pravachol®, Mevalotin®). To pick up on global needs

all over the world and have these reflected in global pharmaceutical operations, Daiichi

Sankyo is active in promoting information exchange in a number of areas including research

and development, supply chain management and marketing. In recent years, concern for

health has grown more and more. People naturally take constant care of their health to



prevent illness in advance, but it is also noticeable that people are now engaging in self-

medication, from using over-the-counter drugs at their own discretion to alleviate the

symptoms of a mild cold or fever, to taking supplements to compensate for nutritional

deficiencies. In addition to over-the-counter medicines, Daiichi Sankyo has set up consumer

health operations, including functional foods and skin care, as one of its core operations, and

through one of its group companies, Daiichi Sankyo Healthcare Co., Ltd., it is making further

efforts to develop self-medication. Daiichi Sankyo contributes to the health of people

everywhere by creating new medicines in popular use throughout the world, and delivering

them to places where medical treatment is required, transcending national borders. The equity

shares of Daiichi Sankyo are currently listed on the Tokyo, Osaka and Nagoya Stock

Exchanges in Japan. The total paid-up capital of Daiichi Sankyo as on March 31, 2008 was 5,

00,000 lakh Yen. Under the Japanese corporate law, the face value system for equity shares

was abolished in the Year 2001. Hence, outstanding equity shares of all Japanese corporate,

including Daiichi Sankyo, are expressed as total paid-up capital without any indication for

face value. The closing price of Daiichi Sankyo on the Tokyo Exchange on June 26, 2008

was Japanese Yen 2,910 (Source: Bloomberg). As on June 26, 2008 Daiichi Sankyo has a

market capitalization of Yen 213,88,830 lakh. Daiichi Sankyo is a professionally managed

company. The shares of Daiichi Sankyo are widely held by institutional and individual

shareholders. Hence, there are no promoters or controlling shareholders over Daiichi Sankyo.

Exhibit 3 provides details of financial statements of company for 3 years pre-merger.

Corporate Governance:

The structure of the governance organization consists of directors and auditors. The directors

carry out tasks stipulated in laws, regulations and our company articles, and make decisions

on important matters relating to management and business operations, while mutually

supervising the performance of their duties. There are also established internal rules,

including a Corporate Conduct Charter and a code of conduct to ensure sound, flexible

management based on regulatory compliance and observance of these corporate rules. The

auditors are independent and operate under the mandate of the shareholders. They audit the

performance of directors’ duties for soundness of decisions and compliance with the law.

There is also a corporate officer system where Corporate Officers are appointed by the Board

of Directors to perform specific duties under the direction and supervision of the President as

representative director. The President is advised by the Management Committee, which



meets regularly to discuss basic management policies and plans and receive reports on

important aspects of business operations. Internal audits play an important role in the

effective achievement of management goals. They are conducted according to plans drawn up

by the Internal Audit Department. Audit perspectives include the effectiveness and efficiency

of business operations, the reliability of financial reports, regulatory compliance in business

operations, and asset protection. Internal audits cover all the divisions and departments, and

affiliates. Where necessary, business partners are also audited.

Ranbaxy Background:

RLL is a public limited company with its registered office in Mohali ,Punjab, India. RLL was

incorporated on June 16, 1961 as Lepetit Ranbaxy Laboratories Limited. On August 24,

1966, it changed its name to Ranbaxy Laboratories Limited and on October 28, 1970 changed

its constitution from a public limited company to a private limited company. -52- Thereafter,

the Target Company reverted to its constitution of a public limited company on September

27, 1973 and was publicly listed on the BSE on February 9, 1974. The equity shares of RLL

are currently listed in India on the BSE and the NSE. The Global Depository Receipts of RLL

are listed on Luxembourg Stock Exchange and the Foreign Currency Convertible Bonds

(‘FCCB’) are listed on the Singapore Exchange Securities Trading Limited. RLL, a public

limited company, together with its subsidiaries, joint venture and associates (collectively

referred to as the ‘Group’) operates as an integrated international pharmaceutical organisation

with businesses encompassing the entire value chain in the marketing,production and

distribution of dosage forms and active pharmaceutical ingredients. The Group is also

engaged in the business of consumer healthcare products. The Group presently has

manufacturing facilities in eleven countries, namely India, the United States of America,

Brazil, China, Ireland, Japan, Malaysia, Nigeria, Romania, South Africa and Vietnam. The

Group's major markets include the United States of America, India, Europe, Russia/CIS, and

South Africa. The United States of America is the largest market and major products are

Simvastatin, CoAmoxyclav, Amoxycillin, Ciprofloxacin, Isotretinon and Cephalexin. The

research and development activities of the Group are principally carried out at its facilities in

Gurgaon, near New Delhi, India. RLL is one of the leading pharmaceutical companies in

India and is ranked amongst the top ten global generic pharmaceutical companies. It has

marketing presence in 49 countries, manufacturing facilities in 11 countries and a diverse

product portfolio. RLL’s promoters are Mr. Malvinder Mohan Singh and Mr. Shivinder



Mohan Singh along with their family members and associates. As on date of the public

announcement, the total paid-up share capital of the arget Company was Rs. 186.62 crores

consisting of 373,237,870 fully paid-up shares of par value Rs 5/- per equity share. There

were no partly paid-up shares in the Target Company. Shareholding Pattern of RLL as on

date of public announcement (i.e. June 16, 2008).The Target Company had raised US$

440,000,000 in the year 2006 through zero coupon FCCBs. The Bonds are convertible any

time on or after April 27, 2006 upto March 8, 2011 by the holders into fully paid Equity

Shares of Rs. 5 each of the Target Company, which may subject to certain conditions, be

represented by Global Depository Shares (‘GDS’) with each GDS representing one share at a

conversion price of Rs. 716.32 per share, which is subject to adjustment in certain

circumstances. In case if the Bonds are not converted into shares, the Target Company will

redeem each Bond at 126.765% of its principal amount on the maturity date i.e. March 18,

2011. Number of equity shares underlying the possible conversion of zero coupon FCCBs

have been calculated on the basis of an adjusted conversion price of Rs. 559.64 per share.

Nature of operations:

RLL, a public limited company, together with its subsidiaries, joint venture and associates

(hereinafter collectively referred to as the ‘Group’) operates as an integrated international

pharmaceutical organization with businesses encompassing the entire value chain in the

marketing, production and distribution of dosage forms and active pharmaceutical

ingredients. The Group is also engaged in the business of consumer healthcare products.

The Group presently has manufacturing facilities in eleven countries, namely India, the

United States of America, Brazil, China, Ireland, Japan, Malaysia, Nigeria, Romania, South

Africa and Vietnam. The Group's major markets include the United States of America, India,

Europe, Russia/CIS, and South Africa. The United States of America is the largest market

and major products are Simvastatin, CoAmoxyclav, Amoxycillin, Ciprofloxacin, Isotretinon

and Cephalexin. The research and development activities of the Group are principally carried

out at its facilities in Gurgaon, near New Delhi, India. RLL's shares are listed for trading on

the National Stock Exchange and the Bombay Stock Exchange in India and its Global

Depository Receipts (covering equity shares of RLL) are listed on the Luxembourg Stock

Exchange and Foreign Currency Convertible Bonds are listed on Singapore Stock Exchange.



Financial:

The financial statements have been prepared to comply with the Accounting Standards

referred to in the Companies (Accounting Standards) Rule 2006 issued by the Central

Government in exercise of the power conferred under subsection (I) (a) of section 642 and

the relevant provisions of the Companies Act, 1956 (the 'Act'). The financial statements have

been prepared under the historical cost convention on accrual basis. The accounting policies

have been consistently applied by the Group unless otherwise stated. Exhibit 2 provides the

details of consolidated financial statement for 3 years.

Corporate Governance:

The following are the relevant details with regards to RLL’s compliance with the provisions

of Corporate Governance. RLL has complied with the conditions of Corporate Governance as

stipulated in the listing agreement for the year ended December 31, 2007. M/s. Walker,

Chandiok & Co., statutory Auditors of RLL vide their certificate dated March 28, 2008, has

certified the same. The Corporate Governance Report as well as the certificate from the

statutory Auditors forms a part of the Annual Report of RLL for the year ended December

31, 2007.

Rationale of merger:

Both Daiichi Sankyo and Ranbaxy expect the transaction to create substantial synergies in the

long term. The companies benefit from their strikingly complementary businesses, which

they believe would bring considerable cost savings in their diversification initiatives, which

will be aimed at establishing a strong presence in all pharmaceutical therapeutic areas. For

instance, Daiichi Sankyo’s strength in proprietary medicine is believed to be complemented

by Ranbaxy’s leadership in the generics segment, thus providing the combined business with

a broader product base, therapeutic focus areas and well distributed risks. Additionally, both

companies have a wide global reach, which is expected to further expand after the merger.

Ranbaxy’s addition can boost Daiichi Sankyo’s position from 22 to 15 by market

capitalization in the global pharmaceutical market. Daiichi Sankyo sees this step as critical to

the achievement of its objectives outlined in its Mid-term Management Plan.

As part of the plan, Daiichi Sankyo envisages to become a major global innovator by 2015, at

the back of the growth of its Olmesartan drug during the period 2007-2009. The company



also plans to expand its Levoflaxin product to export markets. Realization of synergies from

the complete integration of Daiichi and Sankyo (2005) is also a major goal of the

management plan. Many new products including the successor of its Venofer drug is

expected to propel growth.

Daiichi Sankyo has targeted $13.1 billion (JPY1.5 trillion, 1USD=114.2JPY) in sales by

2015 and to increase its operating profit margin by at least 25% and overseas sales ratio by at

least 60%. Strengthening its ability to discover new drugs and bolstering its R&D pipeline

also feature as objectives in Daiichi Sankyo’s Mid-term Management Plan. The sales target

for fiscal 2010 is $7.5 billion (JPY860 billion, exchange rate: 1USD=114.2JPY) and an

operating profit of $2.10 billion (JPY240 billion, exchange rate: 1USD=114.2JPY), of which

25% of its expected sales is in local currency. Daiichi Sankyo expects that its return on equity

will increase from 6% to 10% in fiscal 2010 as a result of the merger.

SWOT ANALYSIS OF THE DEAL:

Strengths:

Ranbaxy

Largest pharmaceutical company in India

Localized operations in 49 countries; sales in 125 countries

Sales CAGR of 16.2% in 2002-2007 based on dollar sales

Balanced geographic sales distribution

Strong expertise in intellectual property and global regulatory affairs

180-day marketing exclusivity for four drugs with an annual sales potential of $8

billion

“First to file” status for 18 drugs with annual sales potential of $27 billion

98 ANDA filings pending approval

Focus on innovative research in anti-infectives, anti-malaria, metabolic disorders,

respiratory diseases and urology

Strong alliances with major global proprietary drugs manufacturers (such as the

ongoing drug development collaboration with GlaxoSmithKline, which was expanded

in 2007; and the joint research partnership with Merck in the anti-infectives segment;

the co-marketing agreement with Ferring International for its endocrine drug;



marketing agreement with Natco Pharma in Yemen; alliances with Krebs and Jupiter

for fermentation-based products and peptides respectively)

Affiliate Zenotech’s experience in biologicals

Strong marketing expertise in one of the most competitive markets viz. India

Manufacturing efficiencies – labor, infrastructure, quality

R&D expertise – scientists, strong generics business, developing innovative drugs

business, expertise in process chemistry

Daiichi Sankyo

Strong presence in the Japanese prescription drugs market

Growth driver potential in blockbuster Olmesartan (anti-hypertensive), Loxonin (anti-

inflammatory) and Levoflaxacin (anti-bacterial) drugs

Research collaborations with global pharmaceutical majors, such as the collaboration

with Eli Lilly for developing the high-potential Prasugrel anti-platelet agent for the

treatment of acute coronary syndrome due for launch in fiscal 2008

Highly integrated supply chain network

Sales force comprising 850 medical representatives

Opportunities:

Daiichi Sankyo has committed a maximum of 20% of its annual sales towards research and

development. The company has hitherto conducted research only with antibody (protein-

based) drugs, which have limited applicability despite their effectiveness in the targeted

location. However, Daiichi Sankyo has now shifted its focus towards low molecular

(chemical-based) compounds, which have wider applicability, for all its new drugs. Daiichi

Sankyo is also striving to bind antibody drugs on to low molecular compounds and deliver

them into the body so that the benefit of targeted effectiveness is realized for a wider range of

ailments. Daiichi Sankyo plans to implement this approach in many of its therapeutic areas,

including cancer. The shift towards low molecular compounds is in line with Daiichi

Sankyo’s integration plan that has been outlined in its overall R&D strategy.

Daiichi Sankyo’s forthcoming activities in the cancer area include conventional low

molecular drugs as well as chemotherapy drugs. In the future, Daiichi Sankyo strives to

conduct research on molecular targets, mainly in biologicals and antibodies, and extend to

low molecular-type molecularly targeted drugs. However, many of the targets are in the early



stages of the research pipeline across therapeutic areas. This status will not allow Daiichi

Sankyo’s cancer antibody products to hit the market before 2015, by when the market for

these products is likely to saturate further. Daiichi Sankyo hopes to catch up sooner by

implementing platform technology for antibody drugs and targets through collaborations and

deploying external resources.

Weakness:

Daiichi Sankyo, at the other end, has suffered a heavy increase in selling, general and

administrative (SGA) expenses to the tune of 10% from fiscal 2006 levels to JPY357,330

million ($3128.9 million). During this period, the sales growth was a mere 0.4% and

excluding one-time effects, was still only 1.5%. Over the five-year period to fiscal 2007,

Daiichi Sankyo recorded a decline in sales by a CAGR of 0.7% while the CAGR for SGA

expenses was 0.74% in the same period. There also were unused R&D expenses to the tune

of JPY8 billion ($70 million) in fiscal 2008. Although the company’s SGA expenses declined

by about 9% in fiscal 2008, sales in the year witnessed a 5% decline due to a stagnant market

and sales erosion from generic drugs.

Threats:

Despite possessing many competitive advantages, Ranbaxy faces allegations by the US FDA

for repetitive fraudulent conduct. According to the FDA, Ranbaxy’s move to use APIs from

unapproved sources has resulted in the availability of misbranded and counterfeit drugs in the

market. Subsequently, the FDA questioned Ranbaxy on the potency of its drugs, which are

alleged to be adulterated, and called for an internal review of the company’s Indian

manufacturing operations. Ranbaxy has been under FDA scrutiny for about three years now

and its operations for the US market at the Paonta Sahib plant have been suspended since

2006. Although Ranbaxy claims that this is a routine investigation and there is no cause for

concern, the issue has eroded its market capitalization significantly. As a culmination of this

problem, Ranbaxy faced a ban in September 2008 on the import of over 30 of its drugs

produced in India with regards to concerns over its manufacturing practices at a few of its

facilities. Aside from this, Ranbaxy faces patent infringement lawsuits by global branded

drug manufacturers AstraZeneca and Pfizer.



Post-merger Synergy Analysis:

Daiichi Sankyo and Ranbaxy launch hybrid business in Brazil to expand business of both

companies:

Daiichi Sankyo Company, Limited (hereafter, Daiichi Sankyo) and Ranbaxy Laboratories

Limited (hereafter, Ranbaxy) on April 17, 2013 announced synergy in Brazil to expand the

business of both companies in the country. As part of this synergy, Ranbaxy will support

Daiichi Sankyo’s Brazilian subsidiary, Daiichi Sankyo Brasil Farmaceutica Ltd. (Hereafter,

Daiichi Sankyo Brazil), to enter the branded generics market, in addition to its established

business of providing innovative products. Ranbaxy’s Brazilian subsidiary, Ranbaxy

Pharmaceutical Ltd. (hereafter, RFL) would continue to independently promote Ranbaxy’s

generic products and also enter into branded generics in Brazil. The pharmaceutical market in

Brazil is the biggest in Latin America, and it is expected to become the fourth biggest in the

world in 2016. In Brazil, Daiichi Sankyo has built up its market presence with innovative

pharmaceuticals through Daiichi Sankyo Brazil. On the other hand, Ranbaxy markets its

generic products in Brazil through its subsidiary, Ranbaxy Pharmaceutical Ltd. With the

announced synergistic collaboration, the Daiichi Sankyo Group will expand its presence in

Brazil through its hybrid business model promoting innovative, branded generic and generic

pharmaceuticals. Daiichi Sankyo has not been able to manage Ranbaxy.

The whole picture is not that bright, as former Ranbaxy Laboratories chairman Malvinder

Singh has rubbished Daiichi Sankyo's claim that crucial facts about the US authorities' probe

were concealed at the time the company was sold by his family, and attacked the Japanese

firm for mismanaging the Indian drug maker. Singh also described the testimony of the

whistleblower that formed the basis of the US investigations as 'sensational', and said he

denied and rejected these charges. Ranbaxy agreed to pay a fine of $500 million for selling

adulterated drugs in the US market and pleaded guilty to seven criminal counts, including

fudging of drug data, intention to defraud, and failing to report that its drugs did not meet

specifications. These violations were committed when the company was owned by the Singh

family, and it was Dinesh Thakur, a former company executive, who alerted the US

authorities about these charges. The $500-million fine is the largest financial penalty paid by

any generic drug maker in the US for violating provisions of the federal Food, Drug and

Cosmetic Act (FDCA).



Ranbaxy’s management described as 'baseless' Daiichi Sankyo's allegation about 'certain

Ranbaxy shareholders' concealing and misrepresenting critical information concerning the

investigations conducted by the US authorities.

Structure of the Deal:

On 11th June 2008, Daiichi Sankyo made an offer to purchase more than 50.1% voting right

in Ranbaxy which included 34.83% stake of promoters, 9.4 % of preferential shares and an

open offer in which they are going to acquire the voting rights up to 20%. Daiichi offered a

share price of INR 737 with a transaction value of around $4.6 billion, valuing Ranbaxy at

$8.5 billion. Daiichi ended up acquiring 63.92% shares of Ranbaxy by Nov, 2008. Including

transaction costs the deal costs Daiichi $4.98 billion and they recorded goodwill of

$4.17billion. If Daiichi Sankyo fails to meet with adequate shareholder response during the

open offer, it has the option to exercise a preferential issue of warrants that can increase

Daiichi Sankyo’s stake in Ranbaxy by another 4.9%. (Exhibit-1: Structure of Deal Summary)

For Daiichi Sankyo, in addition to the traditional high-risk/high-return business model

employed in developed-country markets, Ranbaxy’s generic business model would help them

build a “hybrid business model” with a mix of patented and generic drugs. The deal also

required the current CEO/Promoter Malvinder Singh to stay with the company for 5 years.

The deal financing was through a mix of debt and existing cash resources of Daiichi Sankyo.

With the acquisition Daiichi got access to Ranbaxy’s basket of 30 drugs for which the

company had approvals in the US, including 10 drugs for which Ranbaxy had exclusive sales

right to sell for six months after the expiry of their patents. The deal gave Daiichi an access to

best FTF 180 day exclusivity pipelines in the industry. Ranbaxy had already de-risked its

FTF pipeline through a series of settlement with innovator companies; this in-turn lowered

the litigation expense and removed uncertainty with regard to the launch date of these generic

drugs. It also helped in better planning of inventory, launch quantities and supply agreement.

From the perspective of Ranbaxy it is considered as the intelligent deal because as they had

held their shares for more than 50 years and shows the handsome growth till 2006 i.e. 16%

but then their business model started struggling with high litigation costs and rupee

devaluation against USD add the further problems and because of this in 2007 the growth fell

to 7% and for the next 2 years after acquisition they have expected to grow by 9%.



From the perspective of Daiichi-Sankyo they need new market as they are planning to expand

their business in the generic medicines as result of Japanese govt. decision to reduce their

health budget by shifting on to the generic drugs. And on acquisition of Ranbaxy it will

provide Daiichi the strong base for the generic or low cost medicine drug production and due

to this deal it will take Ranbaxy-Daiichi to the 15 th position in pharmaceuticals industry form

25th and Ranbaxy to the 5th position in the generic medicine production.

The Deal: Financing

On June 11, 2008, the Acquirer entered into a Share Purchase and Share Subscription

Agreement (the ‘SPSSA’) with (a) Mr. Malvinder Mohan Singh; (b) Mr. Shivinder Mohan

Singh; and (c) Others (collectively referred to as the ‘Sellers’) and RLL. Under the SPSSA,

the Sellers have committed to sell to the Acquirer their collective holding of 129,934,134

fully paid-up equity shares (the ‘Sale Shares’) representing 34.81% of the total current issued,

subscribed and fully paid-up equity capital of RLL at a price of Rs. 737/- (Rupees Seven

Hundred Thirty-Seven only) (the ‘Negotiated Price’) per fully paid up equity share in cash

(the ‘Acquisition’). The total consideration payable for the Sale Shares is Rs. 95,761,456,758

(Rupees Ninety-five billion seven hundred sixty-one million four hundred fifty-six thousand

seven hundred fifty-eight only). As per the stock exchange filings by RLL, the Sellers belong

to the promoter group of the Target Company. The SPSSA also provides for the issue and

allotment by RLL to the Acquirer (the ‘Subscription’) of 46,258,063 fully paid-up equity

shares of face value Rs 5/- each (the ‘Subscription Shares’) representing 11.03% of the post-

equity-issuance, subscribed and fully paid-up equity capital of RLL and the issuance of

23,834,333 warrants of RLL (the ‘Warrants’), each Warrant exercisable for one equity share

of face value Rs 5/- each of RLL. The subscription price for each Subscription Share and the

exercise price of each Warrant is Rs. 737/- (Rupees Seven Hundred Thirty-Seven) (the

‘Subscription Price’) (including a premium of Rs. 732/- per share). Pursuant to the signing of

the SPSSA, the Acquirer proposes to acquire up to 92,519,126 fully paid-up equity shares of

face value Rs. 5/- each from the remaining shareholders (other than the parties to the SPSSA)

of the Target Company (the ‘Offer Size’), representing 20% of the Emerging Voting Capital

of RLL at a price of Rs. 737/- (Rupees Seven Hundred Thirty-Seven only) (the ‘Offer Price’)

for each fully paid-up equity share of RLL, payable in cash and in accordance with the

Regulations, subject to the terms and conditions mentioned in the Offer. This Offer is neither

conditional nor subject to any minimum level of acceptance. The Acquirer will acquire all the



shares that are validly tendered in accordance with the terms of the Offer, up to 92,519,126

equity shares at the Offer Price.

Valuation:

Daiichi Sankyo followed the DCF method to value the Ranbaxy stocks in June 2008, with the

following assumptions:

Sales will grow at 12% for 10 years (McKinsey projections for Indian Pharmaceutical

industry) and then slowed down to 8% for 5 years. In order to account for the losses caused

due to FDA (Foods and Drugs Association) action against Ranbaxy we have lowered the

growth rates for 2008 and 2009 to 10% because Ranbaxy had made alternative arrangements

through its US its subsidiary Ohm Labs in the US. NOPAT Margin maintained at 14% for 10

years and then lowered to 10%. The company is making continuous efforts to decrease the

working capital so we assume they would decrease it till 25%. The Net Long Term Assets to

Sales ratio would fall down to 45%.

DCF Valuation = 254.6

FTF Value = 106

Investment in Associates = 5.03

Total = 365.63

With these assumptions we came to a value of INR 254.6; however this value does not

incorporate the value the strong FTF pipeline that Ranbaxy had. This FTF pipeline is valued

at around INR106/share. Going further we also need to adjust the value for investment in

associates for market value wherever information is available. The effective price as per our

calculation for Ranbaxy in June 2008 should be INR 365.63.

This shows how much premium Daiichi paid above the intrinsic value of Ranbaxy, with an

acquisition price of INR 737, they paid almost a premium of 100% over the intrinsic value.

Exhibits 4, 5, 6, 7 give the shareholding pattern, valuation multiples, offer price as per SEBI

SAST and Share price chart of both the companies.

Table: Valuation of Ranbaxy

Assets and LiabilitiesValue Attributed (Rs. Cr)

Book Value of Assets and Liabilities 3470



Inventories 88Tangible Assets (Land) 440Intangible Assets (Leasehold Land) 260Intangible Assets (Increase in Current Products etc. to fair value) 1805In process R&D expenses 304Deferred Tax Liability -881Minority Interest -1981Goodwill 17995Total Consideration 21500Goodwill in USD $ 4.01 BillionTotal Consideration (in USD) $ 4.9 Billion

Shareholder’s Reaction:

The market reaction to this announcement was positive only during the open offer period,

post that both the stocks plunged to almost 50% of their pre-transaction values. In Feb 2009

in response to FDA’s action against Ranbaxy share price of Ranbaxy was almost 1/3 of what

Daiichi Sankyo had paid. Later the Ranbaxy stock moved up considerably but Daiichi was

still trading a low levels.

To reflect the fact that the market price for the shares of consolidated subsidiary Ranbaxy

was way lower than the acquisition price, Daiichi recorded ¥351.3 billion one-time write-

down of goodwill associated with the investment in Ranbaxy. This led to a considerable net

loss for Daiichi in fiscal 2008.

The write down itself signifies that the shareholders money, the retained earnings were wiped

out in this acquisition and hence the southwards movement of stock price was as expected.

The market expectations from Daiichi were low due to this write-down.

Conclusion:

Initially the Ranbaxy deal seemed a win-win, allowing both companies to use each other’s

networks and technological power. The deal seemed very lucrative for Daiichi Sankyo due to

the access to best FTF pipeline, access to the generics product line, access to new markets

and an opportunity to diversify away from Japan into the emerging markets. However

looking at the post acquisition financial statements of these companies we realize that this

deal was a failure and Daiichi is trying its best to make the acquisition work in its favour.



In the immediate year after the acquisition Ranbaxy reported a loss of INR 9,512.05 million

and Daiichi in spite of diversifying its geographic footprint booked a loss of ¥215,499 million

and they also made a onetime goodwill write-down of ¥351.3 billion for investment in

Ranbaxy. These losses were mainly rooted in Ranbaxy’s poor performance owing to the FDA

ban and bad decision in hedging currency risks.

The pre-acquisition due diligence should have understood that Emerging markets are

lucrative but corporate governance and integrity are surely not to be assumed in these

markets. Valuations in these markets are way higher than their real potential and valuation in

strongly regulated industries like pharmaceutical is strongly linked to regulations in the major

markets. For the export oriented companies developed markets with stricter regulations are

the main revenues streams due to higher margins; however the regulations in these markets

are stricter unlike merging nations. Ranbaxy also had ease in clearing the Indian drug

regulations but failed to clear the US FDA regulations and hence its US subsidiary Ohm Labs

had to pitch in.

Other factors such as top-management retention rates, organizational structure, internal

firewalls and proper use of financial instruments to hedge risks should have been analyzed

before the deal.



Exhibit 1: Structure of Deal Summary


Daiichi-Sankyo

Promoters of Ranbaxy

RanbaxyPublic Shareholdes

Transfer of 20% shares

through open offer

Transfer of 34.80% shares

Equity + Warrants = 63.92%

of stake in Ranbaxy


Exhibit 2: Consolidated financial statements of Ranbaxy Ltd



Exhibit 3: Consolidated financial statement of Daiichi Sankyo- Income Statement



Balance sheet of Daiichi Sankyo:



Exhibit 4: Shareholding Pattern

SHARES HELD BY PRE % POST % CHANGE %SINGH 34.82 - (100)SINGH FAMILY 19 - (100)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 12.32 4.41 (64.49GENERAL PUBLIC 12.1 19.53 61.40DAIICHI SANKYO - 63.92 63.92

Time line of Acquisition of shares:

DATE OF ACQUISATION

PARTICULARS NO OF SHARES

% OF SHARE HOLDING

VALUE(in crores)

15 Oct 2008 Acquisition of shares under open offer pursuant to regulation 10 & 12 of SEBI @ Rs 737 per share

91277598 20 6727

20 Oct 2008 Acquired by preferential allotment of warrant @Rs 737

41622585 9.12 3068

20 Oct 2008 Acquisition from promoter company(first tranche)

93513899 20.49 6892

7 Nov 2008 Acquisition of shares from the promoter @ Rs737(2nd

Tranche)

65309121 14.31 4813



Exhibit 5 – Valuation Multiples

EV/EBITDA EV/EBIT EV/EBIT(1-t)

Pharmaceuticals 9.57 11.98 18.99

Ranbaxy Laboratories Ltd. Peer

group

Enterprise Value EV/EBITDA

(in thousands

USD)

2014 next 12

mth

Ranbaxy Laboratories Ltd 2 326 840 6.85 7.64

Novartis AG 199 985 334 11.1 11.23

Dr. Reddy's Laboratories 6 797 816 12.98 13.91

Lannett Co Inc 605 681 14.28 19.17

Impax Laboratories Inc 1 100 159 14.92 16.34

Depomed Inc 361 733 N/A N/A

Salix Pharmaceuticals Ltd 4 231 684 9.15 9.77

Exhibit 6: The offer price

The Offer Price of Rs. 737/- per equity share is justified in terms of Regulation 20(4) of the

SEBI (SAST) Regulations as it is higher of the following:

A) The negotiated Price Rs 737

B) The subscription Price Rs 737

C) The highest price paid by the acquirer for any acquisition[including by the way of allotment in a public or rights or preferential issue] of equity shares of the target company during the 26 weeks period prior to the date of the public announcement

Nil

D) The average of the weekly high and low of closing prices of the equity shares of the target company on NSE during the 26 weeks preceding the date if public announcement

Rs 444.08

E) The average of the daily high and low prices of the equity shares of the target company on NSE during the two weeks preceding the date of the public announcement

Rs 533.51



Exhibit 7- Share price chart of both companies: Ranbaxy

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Sep-13

0

100

200

300

400

500

600

700

Ranbaxy

Close Price

Daiichi Sankyo


case of daiichi sankyo takeover of ranbaxy

Business