Daiichi's soured dream and a $5.35 billion hole in the pocket

Breach of faith, dreams turned sour and a $5.35 billion hole in the pocket. That, in substance, was the Japanese pharma major Daiichi-Sankyo's failed India sojourn that began in June, 2008 and packed up in April, 2014.

Thursday's Singapore Arbitration Tribunal judgement directing Singh brothers, Malvinder and Shivinder, to pay Rs 2562.78 crore to Daiichi-Sankyo for misrepresentation of facts during sale of Ranbaxy Laboratories to the Japanese firm is more of the nature of salvaging their pride, rather than any consolation for the deal that left Daiichi bruised and battered.

Daiichi no longer owns majority shares in the company, and Ranbaxy no longer exists as a corporate entity. However, the verdict remains a stark reminder of the need for intense due diligence before business decisions of mammoth proportions are taken.  

It was in 2008, Daiichi invested $4.6 billion to acquire about 51 percent stake in Ranbaxy, then India's largest generics company, with its own ambitions to grow global by challenging patent validity of blockbuster molecules in the world's biggest drug market - the United States.

Daiichi Sankyo, being an innovator pharmaceutical company, was much bigger in terms of revenues, but Ranbaxy had the lure of a global presence - across developed and developing markets - that Daiichi thought it can leverage. A hybrid business model that allows the company to develop and sell expensive and patent protected new drugs and also serve the mass market of generics across the world was the dream that led the acquisition.

Soon after the acquisition got over, which included Daiichi buying out the entire 34 % stake of the promoters - Malvinder Mohan Singh and Shivinder Mohan Singh - for $ 2.4 billion and an open offer for a majority stake, the troubles that were plaguing Ranbaxy from within came to fore.  After a series of loss making quarters, Daiichi was compelled to record a valuation loss and one-time-write down of goodwill on its investment made in Ranbaxy. Almost $ 3.45 billion was written off in 2009. Meanwhile, tipped off by a whistle blower, US drug regulator FDA which had given generic drug approvals with market exclusivity to some of the blockbuster drugs, including Prizer's Lipitor, found serious malpractices associated with the data submitted by Ranbaxy for product approval. The investigations that followed resulted in a series of adverse actions including ban on manufacturing facilities and a fine of$ 500 million to the US government in 2013.

Unable to steer the ship, Daiichi had to exit Ranbaxy and bid bye to its generic dreams in 2014 by merging the company with a rival Indian drug major Sun Pharmaceuticals and selling the entire resultant stake in Sun for $ 3.2 billion.

On paper, it was a business deal that involved an investment of $8.55 billion, but which recovered barely $ 3.2 billion.
 
The Singapore arbitration court's verdict will roughly fetch another $ 400 million for Daiichi.  That is, if the former promoters fail to reverse the verdict in an appeal forum.

In a statement, the owners of RHC Holding Pvt Ltd and Oscar Investments Ltd, the two legal entities that held the shares of Ranbaxy, stated that the Arbitration Tribunal had issued an award on the basis of the India law and they are exploring legal options to challenge it. Justice A M Ahmadi, former Chief Justice of India, who was a member of the three member tribunal, had given a dissenting opinion dismissing all claims of Daiichi.

For now, the verdict will barely prove that the Japanese company was wronged. As for the loss..it has to swallow that bitter pill.