Malvinder's sweet deal

It is the Saturday after Japan’s second-largest drug maker, Daiichi Sankyo Co (DS), stunned corporate India by announcing the takeover of India’s largest and iconic pharma company, Ranbaxy Laboratories, and this writer and her colleague are waiting in the lobby of the company’s Gurgaon headquarters ahead of a meeting with Malvinder Singh.

Ranbaxy’s CEO& MD has, of course, done the unthinkable (for most Indian promoters at least) by selling his family’s flagship business. Singh draws up at the entrance to the building in his S-class Mercedes-Benz. He’s on his cellphone, and arriving into the building lobby, ducks into an adjoining conference room to finish the call.

Minutes later, he’s out, only to catch one of us using a folded paper sheet as a fan to stay cool in the lobby’s oppressive heat. “Why isn’t the air-conditioner on?” he asks a member of his PR team. “The Japanese ordered it shut, cost cutting already” we joke, before his PR manager can reply. “Around here, I still call the shots,” Singh snaps back.

That may be so for now—and maybe a little more time. Singh, however, insists that it is business as usual apart from the stake sale. “I am not going anywhere. Ranbaxy will continue to be a listed and independent company with full autonomy and decision making in India,” he says. He becomes Chairman of Ranbaxy in addition to CEO & MD. Singh and his family (mainly brother Shivinder) sold their stake (34.8 per cent) in the company for a cool Rs 9,576 crore. Daiichi Sankyo will pick up additional stake to take its holding beyond 50 per cent (See What Daiichi Pays). So, life has certainly changed at Ranbaxy, which has clawed its way up through highrisk, high-return litigations over patented drugs with innovator pharma companies to become one of the top 10 global generics players.

What Daiichi pays… Rs 737 per share in four separate transactions. Total purchase price works to between Rs 14,700 crore and Rs 19,800 crore (or JPY 369-495 billion).

However, the world has changed. “In the last two years or so, the global pharma value chain has broken down,” says Singh. If innovator companies are under pressure to reduce costs of drug discovery and seek additional sales in emerging markets, generic producers such as Ranbaxy need size, scale and new drugs to sustain themselves. Apart from the rising heat in the global market place, for Singh and his family, it became a little complicated due to a string of acquisitions that Singh pulled off in the last two odd years. Revenue growth notwithstanding, the leverage too increased. In fact, Ranbaxy had a debt of Rs 3,503 crore on its balance sheet in 2007, thanks mainly to the acquisitions (BT learns that the promoters themselves may have taken on some personal debt in the process). Stock markets remained unimpressed, with the share price languishing around Rs 450 over the past few quarters. With the redemption of the foreign currency convertible bonds around the corner at around Rs 550 per share, there were no easy options. Price erosion in key overseas markets like the US may have strengthened the Singh family’s resolve to cash out before it got worse. And the Japanese were offering a good price.

…What Daiichi gets Largest pharma company in India, with domestic revenues of $301 million and market share of around 5 per cent Local operations in 49 countries, several of them in emerging markets such as Brazil, South Africa, Romania, among others. Also, a big presence in Eastern Europe, Asia and Africa World-class manufacturing facilities in 14 countries such as Brazil, China, Ireland, India, Japan, Malaysia, Nigeria, Romania, South Africa, USA and Vietnam More than 1,400 people in research and development; 300 in innovative research 98 pending ANDA approvals, 18 of which are those where Ranbaxy may get the 180-day marketing exclusivity on the drug going off patent. Innovators' annual (2007) sales for these drugs: $27 billlion Source: Daiichi

The deal is a win for Daiichi Sankyo, too, which vaults to #15 position from #22 globally. DS, which moved so quickly on the deal that it skipped the regular due diligence, may have fast-forwarded its generics plans by a good five-toseven years, reckons the Indian CEO of a Big Pharma company. Daiichi not only gets access to superlative reverse engineering skills at Ranbaxy, but also US FDA-certified manufacturing plants (See What Daiichi Gets) and a host of generic drugs already registered in a wide variety of emerging markets.

The company, however, gains the most. “Ranbaxy gets access to the Japanese generics market. Added to it is the enhanced product flow from DS plus improved financial status,” says former Executive Vice Chairman and now Non-Executive Director of Ranbaxy, Brian Tempest. “It is an excellent deal. The injection of funds by DS will lighten the company,” agrees D. S. Brar, Chairman, GVK Biosciences, who in his earlier avatar had taken Ranbaxy global. He says this deal will set a trend.

Thanks to the deal, as much as $1.2 billion (Rs 5,160 crore) will flow into the company, making the company debt-free and leaving sizeable surplus to boot. It’s easy to see where DS will put all this money: in ramping up manufacturing, R&D, and expanding presence in the market. “Ranbaxy will aim to be #1 in generics in Japan and we will continue to look for opportunities in India—both organic and inorganic,” says Singh. He reiterates the vision of $5 billion in revenues by 2012. Sounds doable.

The opportunity exists, it only needs someone with heft to muscle in and stake claim to markets. Consider: The total pharmaceutical market size of Brazil, Russia, India and China (BRICs) along with Mexico and Turkey is expected to swell to $330 billion-$420 billion in 2030 from $56 billion in 2006. This compares to the total market size of North America and Japan in 2006. No surprise then that Takashi Shoda, President and Chief Executive, Daiichi Sankyo Co, says: “It may be no exaggeration to say that the emerging markets, including these six markets, will be the engine of growth for the entire pharmaceuticals market.” Shoda is also quite clear that Ranbaxy, given its presence in these markets, will be their vehicle for growth in the generics space from now on. How soon will the benefits from the deal start becoming visible? Before the year is out, promises Singh.

Pay dirt

Why did Singh prefer DS to other suitors it was in talks with (Pfizer in the past is said to have considered buying Ranbaxy)? One reason would have been the valuation offered at Rs 737 per share. The deal values Ranbaxy at $8.42 billion—an enterprise value to sales (EV/sales) of 3.5x the estimated earnings for 2008 and an EV/EBITDA of 23x the forward earnings for the current year. (Ranbaxy follows the January-December financial year).

Analysts believe it is a very attractive multiple. According to a First Global report, DS is paying about 4.7x Ranbaxy’s sales for the acquisition, as against 2.7x paid by Mylan for Merck KGaA’s generic unit at a price of for a4.9 billion ($7.6 billion) in 2007. Singh agrees that the deal is at the top end of any metrics.

“I do not see anyone else (in India) getting this valuation,” he says. Analysts believe the high valuation was due to Ranbaxy’s strong infrastructure, presence across geographies, a robust product pipeline, including upsides from the settlements. Though the settlement for generic Lipitor, announced a week after the Daiichi deal, has disappointed them, most were putting a cumulative value of Rs 150-180 per share to the settlements. So it is a good deal.

“Ranbaxy would not have achieved this sort of a price for the next several quarters at least,” says a pharma analyst with a Mumbaibased brokerage. Good money apart, the deal offered to take Ranbaxy to the next orbit. What clinched the deal was the persuasiveness of the Japanese. “As the talks evolved it was clear that it had to be this option (the Singhs selling out completely) that was most beneficial to all the stakeholders,” says Sunil Godhwani, CEO & MD of Religare Enterprises, who was Singh’s close advisor on the deal. It was not an easy decision, though. Singh’s father Parvinder Mohan Singh and grandfather Bhai Mohan Singh had nurtured Ranbaxy over several decades as it climbed up the global generics rankings.

Both Singh and Godhwani credit the Japanese for being very sensitive. “They were very, very good. They were sensitive to the Indian culture, to the Indian values, the whole situation,” says Singh. Shoda even took to eating vegetarian meals in India. Respect for the family is evident in DS’ offer to allow the Singh family to nominate Directors on the reconstituted board, apart from Singh himself.

Clearly, what DS has in mind is a Novartis-Sandoz-like model, where the innovator parent has a strong generics arm. It will be interesting to watch how it goes about the job.

His own business What will the brothers do with the Rs 9,576 crore they have made? It was not a problem that came up frequently in India earlier— managing large amounts of cash that gets unlocked from the sale of the family business. The Singh brothers are unique in not just the size of the cash generated (nearly Rs 10,000 crore) but also that they have unlocked the value at a fairly young age. Elder brother Malvinder is 35 while Shivinder is only 32. Clearly, far away from the age to retire or to take it easy. Where will their money go? They have ready businesses in healthcare (Fortis Healthcare) and financial services (Religare Enterprises) —both capital-intensive and highgrowth sectors (See Their Other Empire, BT issue dated June 15, 2008, on www.businesstoday.in). Private equity, the favourite hunting ground for most such promoter families, is also another way of putting this money to work. There is clearly enough on their plates to do with the surplus. It will only be a problem of plenty. Close family friend, confidante and Religare head Sunil Godhwani says, “We always had money, now we have more. Managing it is not going to be a problem. We have the bandwidth to manage several multiples of this amount.” Given their relative youth, the brothers have plenty of time to build another business empire. Yet, surely they will also know that building another company the size and scale of Ranbaxy will be tough, if not impossible.