Submitted by: M&A Critique

Shares of Sun Pharma witnessed massive selling pressure, plunging over 16 percent after the drug major said it expects to take a hit on profit for the fiscal 2015-16 mainly due to integration process with Ranbaxy. The question which has been raised is as follows:

Whether the merger is positive for Sun original shareholders in the long run?

Whether the merger has resulted in an immediate gain to Ranbaxys original shareholders?

Whether it will be long sustainable for the stakeholders?

Whether SUN underestimated Regulatory overhangs?

The company has said that synergy benefits from the Ranbaxy acquisition will be increased by 15-20% as compared to their original target of $250 million by FY18. This will be achieved by focusing on overall profitability improvement driven by revenue and procurement synergies, manufacturing rationalisation and various additional cost-management measures as follows:

Four Indian factories of Ranbaxy are banned from supplying to the US and are undergoing consent decree. The company, which has already paid a fine of $500 million to US authorities in 2013 after pleading guilty of serious irregularities on the fringe of fraud, has again received a subpoena on its Toansa factory in Punjab. So they are urgently fixing manufacturing issues at Ranbaxys India plants to get the ban on export of medicines to the US removed. Sales outside India accounted for 77% of Ranbaxys revenue. The remedial actions at plants in Mohali, Dewas, Paonta Sahib and Toansa are on track. They are working towards the fulfilment of the requirements of the US consent decree and will try to expedite the resolution for at least one of these facilities.

To discontinue two or three non-strategic businesses and low margin business as a part of integration process with Ranbaxy. Exiting Ranbaxy’s “low-margin” overseas geographies and also evaluating divesting of anti-retroviral (ARV) business and active pharmaceutical ingredients (API) operations to fast-track growth. The API business with two plants at Toansa (Punjab) and Dewas (Punjab) which are impacted by the USFDA import ban is small valued around $40 million, while the ARV tender business centred around Africa may only continue till the obligation is met. Most of these businesses will be divested as closing them down means incurings expenses. Certain loss-making geographies like France have been a dampener on Ranbaxy’s sales for some years, while others like Australia estimated at $35 million are not sustainable, may prompt exit. All these may not happen at one go but will “take shape” over a period of time. Exiting the low-margin businesses may not result in a huge cash flow, but will improve the profitability of the company going forward. Sun will strengthen its consumer products business as it is a high-margin, high-growth sector.

Adhering to current global manufacturing practice (cGMP) norms for various manufacturing facilitates

The company plans to increase research and development investments on products, including MK-3222, the experimental psoriasis drug which the company bought the worldwide rights to from Merck and Co. last year.

Sun will expand Ranbaxys over-the-counter or OTC brands to more countries.

To bring on track Halol facility, Sun Pharma has been facing supply constraints due to a ban on its own Halol plant.

DILIP SANGHVI EARLIER TURNAROUND:

Most buyouts by Sun, on an acquisition spree since the late 90s, have worked well. The company buys distressed assets across the globe and turns them around to not only add to its books but also its product pipeline and regions.Since 1996, the company has done 16 major deals, including the buyouts of Caraco, Taro, DUSA Pharma and URL’s generic business. All these companies were facing trouble at the time of acquisition.Sun Pharma has a successful record of turning around distressed assets with recent cases such as Taro and URL

For instance, Caraco, initially acquired by Sun in 1997, suffered several regulatory issues with the US Food and Drug Administration (FDA). Caraco’s Michigan facilities in Detroit and Wixom were also raided by US marshals and production was stopped for alleged breach of manufacturing regulations. Cranbury facility in New Jersey also faced trouble with the US regulator. However, Sun kept increasing its stake in Caraco to turn it into a wholly owned subsidiary in 2011. In 2012, Sun also acquired URL’s generic business through Caraco, allowing it access to more products and plants. Caraco acquisition was gradual over a period of 12 years and in the process, Sun Management gained valuable experiences of dealing with US FDA. But it seems SUN underestimated problems in case of this latest acquisition both in terms of cost of compliance and time it will take

Sun’s acquisition of Israel-based Taro Pharmaceutical Industries in 2010 was a similar story. The deal was made in anticipation that Taro, with a significant share of the US generic market, would contribute to revenue immediately. However, because of long delays in concluding the deal, Sun’s US business suffered. Taro, now a Sun subsidiary, started contributing significantly to Sun’s revenue since 2012. So this acquisition also it took longer than what was anticipated due to legal issues

WHO Have GAINS REALLY AS ON DATE?

Sun Pharma-Ranbaxy

Before Merger Gains

FYPharma-Ranbaxy Market Price as on April 2012 287 458

Market Price as on April 2013 407 451

Return 41.8% -1.5%

FY 2013-14 Market Price as on April 2013 407 451

Market Price as on April 2014 587 470

Return 44.2% 4.2%

Post Merger Gains SunPharma + Ranbaxy

FY 2014-15 Market Price as on April 2014 587.00

Market Price as on date 815.70

Return 39%

Note: If Sunpharma shareholder exited on record date the (i.e. Highest Price) then they might have immediate gain for merger, but as on date they do not benefited due to merger.

CONCLUSION:

Mr. Dilip Sanghvi is known for turnaround of acquired company among his peers.He is most open to using mergers and acquisitions (M&A) to grow faster, but he has always been conscious of Sun Pharma’s bite size and the price of the acquired asset. The financial conservatism is visible in the Ranbaxy acquisition as well. The all-stock deal will double Sun Pharma’s revenues at a cost of eight per cent dilution in equity and earning per share. The deal has reaped the benefit in the market price also as Sun pharma market price after the date of announcement of merger with Ranbaxy till the record the date of merger has touch a new high to INR 1200 per share i.e. gains of almost 100%. But fall from the highest peak and also after announcement of hit on profit for F Y 2015-16 has eroded the gains which was seen as being due to the merger for the shareholders of Sun pharma. Now the market price is trading at the normal return of sun pharma which has given in the last two previous years. So as on date, the Ranbaxy shareholders have benefited due to the merger transaction. But all the stakeholders will gain in the long term as it was proved in all earlier acquisition, when the synergies benefit start reaping to the Sun Pharma due to its turnaround strategy.

About the Author: M&A Critique is the only magazine, News published from India which gives M&A News, Mergers and Acquisitions News, Analysis, Restructuring, Takeovers, and JV.Read More:

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