Daiichi Sankyo's disastrous India foray with hybrid model

Eight years after making its India foray through the acquisition of Ranbaxy Laboratories, Japan's second-largest drug company Daiichi Sankyo is leaving the Indian shores with lots of losses and bitter experiences.

When Daiichi Sankyo decided to buy Ranbaxy for $4.6 billion in June 2008, it was attempting a rare unsuccessful model in pharmaceuticals business - an innovator company running a generic (copycat version) drug manufacturer. Though many had attempted that model before, the only successful model of a larger scale was Novartis and Sandoz, which is still run as entirely separate entities.

Daiichi and Sankyo had merged only in 2005. Until 2008, Japanese drug firms had not forayed much beyond their land, the second-largest drug market in the world. That year two leading Japanese drug firms ventured outside their home market -- Takeda acquired a US biotech company and Eisai bought MGI Pharma in the US for nearly $4 billion. Daiichi Sankyo's acquisition of Ranbaxy was actually an effort to catch up with them and to make up for the losses that could happen once patent expiries for some of its blockbuster drugs in coming years.

At that time, Daiichi Sankyo's revenues were more or less dependent on high blood pressure drug Benicar and a few other new products. Daiichi thought of a 'hybrid model' of selling both patented and generic drugs using the geographical spread of Ranbaxy, at the time one of the top 10 generic companies in the world with presence in most countries.

Soon after the acquisition, Ranbaxy was raided by the US Food and Drug Administration (FDA), which found out serious issues like falsification of data and banned exports from three Indian plants to the US market. Ranbaxy also had taken a series of wrong hedging decisions causing huge mark-to-market losses. Sources say Daiichi Sankyo was not aware of the magnitude of the problems during its hurried due diligence process.

How much has Daiichi Sankyo lost in its wedding with Ranbaxy? It is difficult to estimate, say analysts. A Daiichi Sankyo statement on April 21 said it would make an announcement concerning the effect of any gain or loss on the sale of Sun Pharma shares when results of operations for the fiscal year ended in March 2015 are announced in mid-May. After the conclusion of the merger between Ranbaxy and Sun Pharma on March 26, Daiichi Sankyo had said 338 million yen (before tax) would be accounted as the profit margin from exchange of stocks. (one million yen is equal to Rs 5,25,809 as per Tuesday's exchange rate).

But a deep look at its financials since 2008 paints a darker picture. Daiichi Sankyo had purchased Ranbaxy with its cash at hand and bank loans. In fiscal 2008, it ended up with a net loss of 215.5 billion yen, owing to a 351.3 billion yen writedown of goodwill related to the Ranbaxy acquisition. Of its 952.1 billion yen revenues in fiscal 2009, Ranbaxy's contribution was just 146 billion yen and Daiichi Sankyo's profits were only nearly 42 billion yen, again impacted by the extraordinary losses of 355.6 billion yen related to the writeoff in the previous fiscal. In 2010, Daiichi Sankyo's revenues had a flat growth to 967.4 billion yen, and Ranbaxy's contribution improved to 173 billion yen. Net income contribution also improved from 4 billion yen to 23.3 billion yen.

In fiscal 2011, Daiichi Sankyo's consolidated sales were down and net income fell to 10.4 billion yen from the previous year 70.1 billion. This was mainly due to Ranbaxy's losses of 33.7 billion yen due to hedging losses. Next year, Ranbaxy contributed 9.4 billion yen of Daiichi Sankyo's profits of 66.4 billion yen. But that net income would have been higher unless Daiichi Sankyo had to suffer an extraordinary loss of 37.9 billion yen, due to the consent decree agreement and a fine of ($500 million) paid to the US Department of Justice for settling Ranbaxy's wrongdoings. For the first nine months of the fiscal 2014, Daiichi Sankyo's revenues were 838 billion yen, an improvement from 805 billion yen in the same period of the previous fiscal. Its profits were 99 billion yen for the period, an increase from 66 billion yen in the previous period. Excluding Ranbaxy, Daiichi Sankyo's profits were 67.7 billion yen, down by 12.1 percent from 77.1 billion yen in the previous year.

Analysts say Daiichi's decision to exit Sun Pharma despite the losses is linked to the crisis it is facing at the moment. Its largest revenue earner, the blood pressure drug Benicar, will lose patent protection next year. That drug with sales of $2.6 billion contributes nearly 27 per cent of annual revenues to Daiichi Sankyo. Another blockbuster cholesterol drug Welchol is also losing patent protection in June. The company has already initiated a staff cut at its US offices to reduce the losses. Its another acquisition after Ranbaxy was an R&D company in the US and not much revenues would come in the near future from that investment. Daiichi Sankyo is also targeting the Chinese market to compensate for its failed entry into India.