CHAPTER 1 INTRODUCTION

Mergers and acquisitions aim towards Business Restructuring and increasing competitiveness and shareholder value via increased efficiency. In the market place it is the survival of the fittest. India has witnessed a storm of mergers in recent years. Merger is a combination of two or more companies into one company. The acquiring company, (also referred to as the amalgamated company or the merged company) acquires the assets and the liabilities of the target company (or amalgamating company). Typically, shareholders of the amalgating company get shares of the amalgamated company in exchange for their shares in the Target Company.

There are two ways which company can grow; one is internal growth and the other one is external growth. The internal growth suffers from drawbacks like the problem of raising adequate finances, longer implementation time of the projects, uncertain etc. in order to overcome these problems a company can grow externally by acquiring the already existing business firms. This is the route of mergers and acquisition.

Acquisition in general sense is acquiring the ownership in the property. In the context of business combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of another existing company. Todays business environment is extremely competitive. Business organizations have to deal with its competitors. At the same time it has to deal with external factors that affect how its conducts business. The financial crisis, unemployment, high interest rate, and lack of purchasing power are all affecting the business organization. In the light of these conditions, business organizations have to strategize not only to survive but to thrive in the competitive business environment. One of these strategies is mergers and acquisitions.

There are many reasons why companies merge with each other. Some companies merge because they are operating at a loss and that merger is the only way for the company to survive. On the other hand, some companies merge to maintain its leadership in the corporate world. However, mergers do not guarantee the success of the company. Some merger end in failure. One reason for the same is the differences in the corporate culture between the merging companies.

Though the organizational cultures of these two corporations are poles apart, their merger became a success. It appears that they managed to integrate both their cultures so that they become compatible with each other. One of the strategies used is that the executives of both companies who were committed to making the merger a success identified each of their own companys practices and found solution on how to make their merger work.

Culture is important in the success of the merger. Both companies understand that they simply cannot disregard the fact that they have different cultures. They simply cannot take the differences in their own culture for granted. They have to deal with it otherwise the goals of getting into a merger will not be attained. Determining the aspects of the companys business practices that are different from each other is very crucial in the success of the merger. In fact, the efforts taken by the executive to compare their practices and to adjust each others differences made their merger a success.

Making sure that the corporate cultures between two merging corporations fit properly with each other is a very difficult task. It requires efforts on the part of the management to make substantial changes in the company from the minutest details up to the corporate policies. More importantly, it is essential that all the members of the organization understand that they have a role to play in the merger. They have to realize that the merger will not work until all of the rank and file employees to the top management will cooperate to make the merger success.

Purpose of Mergers & Acquisitions

The purpose for an offeror company for acquiring another company shall be reflected in the corporate objectives. It has to decide the specific objectives to be achieved through acquisition. The basic purpose of merger or business combination is to achieve faster growth of the corporate business. Faster growth may be had through product improvement and competitive position.

The Purpose of Mergers and Acquisitions are as follows:(1) Procurement of supplies:

1. To safeguard the source of supplies of raw materials or intermediary product; 2. To obtain economies of purchase in the form of discount, savings in transportation costs, overhead costs in buying department, etc.; 3. To share the benefits of suppliers economies by standardizing the materials.

(2) Revamping production facilities:

1. To achieve economies of scale by amalgamating production facilities through more intensive utilization of plant and resources; 2. To standardize product specifications, improvement of quality of product, expanding. 3. Market and aiming at consumers satisfaction through strengthening after sale Services; 4. To obtain improved production technology and know-how from the offered company. 5. To reduce cost, improve quality and produce competitive products to retain and Improve market share.

(3) Market expansion and strategy:

1. To eliminate competition and protect existing market; 2. To obtain a new market outlets in possession of the offeree; 3. To obtain new product for diversification or substitution of existing products and to enhance the product range; 4. Strengthening retain outlets and sale the goods to rationalize distribution; 5. To reduce advertising cost and improve public image of the offeree company; 6. Strategic control of patents and copyrights.

(4) Financial strength:

1. To improve liquidity and have direct access to cash resource; 2. To dispose of surplus and outdated assets for cash out of combined enterprise; 3. To enhance gearing capacity, borrow on better strength and the greater assets backing; 4. To avail tax benefits; 5. To improve EPS (Earning per Share).

(5) General gains:

1. To improve its own image and attract superior managerial talents to manage its affairs; 2. To offer better satisfaction to consumers or users of the product.

(6) Own developmental plans: The purpose of acquisition is backed by the offer or companys own developmental plans. A company thinks in terms of acquiring the other company only when it has arrived at its own development plan to expand its operation having examined its own internal strength where it might not have any problem of taxation, accounting, valuation, etc. But might feel resource constraints with limitations of funds and lack of skill managerial personnels. It has to aim at suitable combination where it could have opportunities to supplement its funds by issuance of securities; secure additional financial facilities eliminate competition and strengthen its market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives through alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or other specified unrelated objectives depending upon the corporate strategies. Thus, various types 4

of combinations distinct with each other in nature are adopted to pursue this objective like vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite competitiveness in providing rescues to each other from hostile takeovers and cultivate situations of collaborations sharing goodwill of each other to achieve performance heights through business combinations. The combining corporate aim at circular combinations by pursuing this objective.

(9) Desired level of integration:

Mergers and acquisition are pursued to obtain the desired level of integration between the two combining business houses. Such integration could be operational or financial. This gives birth to conglomerate combinations. The purpose and the requirements of the offeror company go a long way in selecting a suitable partner for merger or acquisition in business combinations.

OBJECTIVE OF STUDY To know the pre merger and post merger performance. To analyze the causes of Mergers and Acquisitions. To acknowledge the effects of Mergers and Acquisitions on the participating Parties i.e., Daiichi Sankyo and Ranbaxy. To study the influence of Financial Structures while in the process of Mergers and Acquisitions.

LIMITATIONS OF THE STUDY The study is confined only to 2 companies of Mergers & Acquisitions i.e., Daiichi Sankyo and Ranbaxy. Confined only to 1 year data prior to acquisition and after acquisition.

CHAPTER 2 COMPANY PROFILE

Ranbaxy Laboratories Limited

Ranbaxy was founded in 1937 and derived its name from that of its founders Ranjit Singh and Gurbax Singh. It started out as the Indian distributor of vitamins and anti tuberculosis drugs for a Japanese pharmaceutical company. After the Second World War, Ranbaxy continued its role as a distributor and ventured in manufacturing drugs by setting up its first plant in 1961. Ranbaxys first real breakthrough came in 1969 with Calmpose, a copy of Roche patented Valium tranquillizer. By 1971, Ranbaxy had extended its strong position in anti infective in the Indian market and expanded manufacturing capacity to keep pace with sales. Ranbaxys growth was fuelled by two major developments in the Indian pharmaceutical industry. The first one was introduction of the Process Patent Act in 1970, which required Indian companies to recognize international process patents. The Act did not recognize product patent. In 1978 Ranbaxy became the first Indian company to develop a novel process for the manufacture of the antibiotic doxycyclin. It also gained worldwide recognition after it developed a non patent infringing process for the antibiotic cefaclor. This was remarkable, as the molecule was complex and Eli Lilly, the product originator, had protected it with twenty two process patents. The second legislation was the Price Control Act which impacted Ranbaxys strategy. By capping the drug prices in India, the government made the profits and growth prospects limited. This prompted Ranbaxy to look at export markets to realize its growth targets. During the years 1986 to 1996 exports grew at an annual growth rate of 34%. Major markets contributing to the growth were China, the UK, Italy, Russia, Ukraine and the USA.

Due to the changing business conditions, it had become essential in 1993 to change the strategy of the company in order to tap rising opportunities. The senior management team of Ranbaxy 7

underwent a strategic planning exercise called Vision 2012. Ranbaxy aimed at to achieve two milestones: $ 1 billion in revenues and the development of one new therapeutic chemical molecule. The mission statement To become an international, research based pharmaceutical company was posed with many challenges at all levels of the company. The company had to redefine its product offerings and the markets it served. In structuring the foreign ventures, Ranbaxy focused on the entire value chain to maximize margins. It became a truly international player in the sense it not only collaborated with different companies world over but also set up its manufacturing plant. In February 2011 Ranbaxy crossed a $ 1 billion mark in its turnover.

The other focus in line with Vision 2012 was the development of one new therapeutic chemical molecule. Given the nature of Ranbaxy this aim was considered to be too ambitious a plan.

In 2012, again a strategic planning revival took place with a new plan in place called Vision 2012: Aspire to be a $ 5 billion company by 2012. Become a top 5 global generics pharma company. Significant income from the proprietary products.

The Company has decided to focus on therapeutic areas to meet its Vision 2012: Infectious Diseases (Anti-bacterials and Anti-fungals), Urology [Benign Prostatic Hyperplasia (BPH)and Urinary Incontinence], Metabolic Diseases (Type 2 Diabetes, Hyperlipidemia) and Inflammatory / Respiratory diseases (Asthma, Chronic Pulmonary Obstructive Disease and Rheumatoid Arthritis). These choices allow Ranbaxy to enter large markets with significant unattended medical needs and to build on its research strengths.

In 2012, Ranbaxy achieved a consolidated sale of $ 1.7 billion. Its geographic and therapeutic sales break up is shown in exhibit below:

Exhibit: Geographic and Therapeutic sales of Ranbaxy in 2012

Region North America EU India Asia(Excl India) Russia & Ukraine Africa & Latin America

% 27 20 18 6 7 12

Major Therapy Anti-infective Cardiovascular Gastrointestinal Musculoskeletal Central vervous system Respiratory

% 37 16 NA 8 6 6

In 2012, Ranbaxy achieved a growth of 4% on its top line. Emerging markets like Russia, Ukraine, Brazil and India led the growth. Among the developed markets, Canada and Japan outperformed. In terms of therapy focus, anti-infective were the largest revenue generator for the company. Gastrointestinal third largest segment had growth of 56% in 2012.

The top 20 products of Ranbaxy in 2012 were Simvastatin, AmoxiClav Potassium, Isotretinoin, Amoxycillin & Combinations, Ketorolac Tromethamine, Omeprazole & Combinations, Cefuroxime Axetil, Cephalexin, Loratadine & Combinations, Clarithromycin, Ginseng Vitamins, Diclofenac & Combinations, Ranitidine, Cefaclor, Cefpodoxime Proxetil, Efavirenz, Atorvastatin & Combinations, Fenofibrate, and Ofloxacin & Combinations.

Daiichi Sankyo Company, Limited

In 2005, Sankyo Co. Ltd and Daiichi Pharmaceutical announced the merger of two of the largest Japanese pharma giants to form Daiichi Sankyo Co. Ltd. (DIS). Although DIS came into existence only recently, its roots lie in the vast heritage of both its proponent enterprises. The company gains from the 106 year old history of Sankyo Co. Ltd. (1899) and the 90 year old heritage of Daiichi Pharmaceutical Co. Ltd (1915).

DIS's goal is to establish itself as a "Japan-Based Global Pharma Innovator". The following excerpt from one of its annual reports elaborates the ideology behind each and every word of the above goal

Japan-Based
This phrase means simply that the DAIICHI SANKYO Group originated in Japan. While we are currently ranked third among pharmaceutical manufacturers in Japan, our global presence still needs to be expanded. The word Japan-Based will be meaningless until the DAIICHI SANKYO Group realizes its full potential and achieves recognition in the global market as well as in Japan. To reach this level, we will need to achieve corporate growth in excess of the annual 5-6% predicted for the world market for pharmaceutical products

Global
Given the size of the global market, we anticipate that the overseas operations of the DAIICHI SANKYO Group will overtake its domestic operations in terms of business scale in the near future. Based on our existing products and key products in the development pipeline, we estimate that overseas sales will account for approximately 50% of total sales by fiscal 2010. Our goal is to raise the contribution to at least 60% by fiscal 2015 by implementing three key policies. First, we must expand our operations in other countries. Second, we must ensure that products in the development pipeline are brought to market effectively. Third, we must attract external 10

resources. Our priority markets are Japan, North America and Europe, where we are already active. In addition to the big three markets, however, we will also work to develop our business operations in markets that offer growth potential, especially China and South America.

Pharma Innovator
This term describes our vision for DAIICHI SANKYO as a company that is customer -focused, able to identify unmet medical needs of people throughout the world, and clearly has the means to meet those needs through the continuous supply of innovative pharmaceutical products. There are many potential benefits from the creation of innovative pharmaceutical products, including the creation of totally new therapies, the improvement of existing therapies, the facilitation of drug administration, the alleviation of side effects, the improvement of patients quality of life, and the reduction of health costs. DAIICHI SANKYO will give priority to projects targeting unmet medical needs in areas that offer excellent opportunities for growth and profit and are in keeping with our goal of raising our global presence. We will focus mainly on new drugs that can be classified as first-in-class and best-in-class. The aim is to build drug development pipelines that will be lead to the development of new products with the potential to rank among the best three products in the world for the treatment of specific diseases. Our current priority with regard to R&D pipelines is to commercialize a new product with global market potential to succeed the hypertension drug Olmesartan as quickly as possible. We will accelerate development and commercialization of distinctive new products that match health needs and can be clearly differentiated from competing products as best-in-class. Candidates include the antiplatelet agent Prasugrel (CS-747), and the orally administered anti-Xa drug DU-176b.

DIS manufactures prescription drugs, including treatments for cardiovascular, boneand joints, and infectious diseases. Its products are sold through medical representatives located worldwide. The company also makes OTC products as well as veterinary products and assorted chemicals.

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The Company has about 2,300 overseas medical representatives in 33 locations, mainly in Europe and the United States and is also aiming for growth through its own development and sales, mainly in the United States. For this it is planning to expand the overseas development and sales bases. DISs products are used not only in Japan but in many other parts of the world including Asia, Europe and the USA. In order to cater to global needs all over the world and have them reflected in its global pharmaceutical operations, the company is highly active in promoting information exchange in a number of areas including research and development, supply chain management and marketing.

Research and Development:

As a developer of new drugs, DIS is determined to contribute to treating diseases by giving the world innovative medicines. This perhaps lays down the rationale behind the operations of the R&D department at DIS.

DIS has its main Research and Development activities in Japan, though it has opened centers in other parts of the world. The numbers of Research and Development employees in various part of the world are: Japan 2200 China 35 Germany 100 UK 30
USA 260

Currently, the company has decided to focus on four main areas for pursuing Research & Development activities These are: Thrombiosis Diabetes 12

 Cancer and Autoimmune diseases/Rheumatoid Arthritis.

Exhibit - Consolidated Segment Information Geographic & Product Segment:Net Sales

Japan North America Europe Other

880.1 598.1 178.0 78.0 26.1

Major Products Olmesartan Levofloxacin Pravastatin Loxonin

Sales in 2012 195.6 108.7 76.5 33.6

Operating Income
Japan North America Europe Other

156.8 107.1 37.6 10.7 2.5 Omnipaque Venofer Welchol 31.2 31.1 22.7

As shown in the Exhibit above, two third of sales and operating income of DIS came from Japan. In the international market, the US was the largest market. In terms of products, Olmesartan Anti hypertensive drug is the largest selling product of DIS. Moreover it is also the fastest growing. Levofloxacin Synthetic antibacterial agent is the second largest product. However, it has been on a declining phase.

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The Ranbaxy - Daiichi Sankyo Deal:

Mr. Kurosawa, the head of pharma at Romura Fund, was stunned by the announcement of Daiichi Sankyo (DIS) of 5th January 2009. DIS announced its plan to record a non -cash valuation loss of 359.5 billion on its shares in Ranbaxy in its fiscal third-quarter to reflect more than 50% decline in the market value of these securities versus the purchase price. This valuation loss of $ 3.86 billion was much more than what Mr. Kurosawa had anticipated.

The Romura Fund is invested in both Ranbaxy and DIS. Therefore, Mr. Kurosawa has been keenly tracking both the companies. Immediately, post acquisition announcement on 11th June 2008, the question that has been in his mind was if DIS over paid for Ranbaxy. As the reality sunk in, this question is now replaced by more operational issue of how DIS and Ranbaxy are going to take advantage of each other to create value for their shareholders.

Mr. Kurosawa is to make a report for the top management of the Fund. He has collected details of global, Indian and Japanese pharma industries, and profiles of DIS and Ranbaxy.

Details of the deal:14

1. The How and When

On the 11th of June, 2008, Ranbaxy Laboratories announced that a binding Share Purchase and Share Subscription Agreement was entered into between DIS, Ranbaxy and the Singh family (the promoters of Ranbaxy), pursuant to which, DIS will acquire the entire holding of the Singh family in the Company at Rs 737 per share. DIS was to further seek to acquire majority of shares of Ranbaxy at the same price. This valued Ranbaxy, as per news paper reports, on a post-closing basis at a whopping $ 8.5 billion. The negotiated price of Rs 737 represented a premium of 31.4% over the market price of Ranbaxy on the day of the announcement. Additionally, DIS acquired shares issued by Ranbaxy on preferential basis, and also through an open offer (to comply with regulatory requirements). Further, 23,834,333 warrants were allotted to DIS with each warrant representing 1 share that could be converted at Rs 737 per share at any time between 6 to 18 months from the date of allotment. In this respect, Rs 73.70 per warrant was to be paid by DIS.

When the deal closed in November 2008, DIS had acquired 63.92% of the equity share capital of Ranbaxy as shown in Exhibit below:Date Of Acquisition October 15 October 20 October 20 November 7 Particulars Acquisition of Shares under Open Offer Allotment of Shares on Preferential basis Acquisition of Shares from the Singh family Acquisition of Shares from the Singh family Total Number Of Shares 92,519,126 46,258,063 81,913,234 48,020,900 268,711,323

2. Valuation
In the absence of any forecasted cash flow, Mr. Kurosawa decided to use comparables as the method of evaluation.

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Different multiples gave completely different results. Based on EV/EBIDTA, Ranbaxy at 17.34 was already at the higher end of generic companies. Merck Co had higher EV/EBIDTA as compared to Ranbaxy by 18%.

Ranbaxy also had the highest EV/Total Assets multiple (1.94) amongst the generic companies. Glaxos multiple was 23% higher.

The EV/Sales multiple was more reassuring, for Mr. Kurosawa. As compared to TEVA and Mylan, Ranbaxy appeared substantially under priced. Therefore price of Rs 737 paid by DIS appeared justified.

Exhibit Summary of Multiples:-

Sr No. 1 2 3 4 5 6 7 8 9 10

Company

EV/EBITDA

EV/Sales

EV/Total Assets

TEVA Merck KGAA STADA Aezeneimittel AG BARR Mylan Watson Ranbaxy Pfizer Glaxo Merck Co

16.51 17.43 10.91 12.94 14.04 7.26 17.34 12.37 9.70 20.47

4.20 2.78 2.01 3.14 4.33 1.48 2.61 3.36 3.24 4.72

1.69 1.31 1.21 1.65 1.61 1.06 1.94 1.41 2.38 2.36

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3. Benefits to DIS:
The acquisition will pave the way for creating a new and complementary hybrid business model that provides sustainable growth by diversification that spans the full spectrum of pharma busniess.

Growth:While DIS grew at 4.7% in 2007 to $ 7.12 billion, Ranbaxy grew at over 10% to $1.6 billion. This reflects the story of the innovator and the generic companies. While the world pharma industry grew at 6%, the generics segment is growing at 11%. The pursuit of a dual business segment strategy will help DIS to improve its growth rate substantially. Jointly, the two companies will rank 15th in the global pharmaceutical market, whereas independently Ranbaxy stood at 50th and DIS at 22nd.

Reach:DIS would be able to extend its reach to 56 countries (especially emerging markets) from 21 countries where they currently operate. DIS therefore gets the front end infrastructure. The combined business will have a significant position in India, Eastern Europe and Asia and one of the largest presence in Africa. In some of the countries, like Mexico, Russia, DIS has so far not operated.

Cost Savings in Manufacturing, Sales and R&D:The most important benefit will be the low-cost manufacturing infrastructure and supply chain strengths of Ranbaxy. DIS will be able to bring in efficiency in its operations by sourcing APIs and finished dosage products from Ranbaxys 9 manufacturing plants in India and many more in other countries. Mr. Kurosawa did a quick back of the envelope calculations. One of the products DIS makes is Ofloxacin. Its sales in 2007 were 108.7 billion. The average cost of goods sold for DIS is about 30%. Mr. Kurosawa believes that by sourcing it from Ranbaxy, DIS will at least 17

save 6.52 billion. Capitalizing the savings at 6% cost of capital, and based on 373 million share capital of Ranbaxy in 2007, the cost saving by outsourcing just one product will be Rs 146 per share. Additionally, there will be cost savings for conducting clinical trials and collaborating on research and sales across the world.

R&D to speed up new development:The cost competitive R&D facilities of Ranbaxy would be looked forth by DIS to not only reduce some of its R&D expenses, but also use competencies of Ranbaxy scientists to hasten new product development. DIS also gets Zenotech's (where Ranbaxy has substantial equity stake) expertise in the areas of biologics, oncology and specialty injectables.

4. Benefits to Ranbaxy:Ranbaxy aims to derive a lot of potential benefits by merging with DIS. The immediate benefit for Ranbaxy is cash infusion of Rs 34 billion via fresh issue of shares to DIS. This can be used to free up its debt. The acquisition allows Ranbaxy to "significantly transform itself" from being a generic player to becoming a much stronger player with innovation, research and development and a far larger pipeline to leverage globally. It gains smoother access to and a strong foothold in the Japanese drug market (which is the second largest market in the world). Ranbaxy also gains access to DIS' research and development expertise to advance its branded drugs business. Moreover, it sees opportunities to strengthen its API business by working with DIS as a supply partner.

5. Scenario development post deal:One week after the DIS announcement, Ranbaxy announced that it had entered into an agreement with Pfizer Inc. to settle most of the patent litigation worldwide involving Pfizers cholesterol fighting drug Lipitor (generic name Atorvastatin). Lipitor is the world's largest selling drug with worldwide sales in 2007 of $ 12.7 billion. Under the terms of the agreement, Ranbaxy will delay the start of its 180 days exclusivity period for a generic version of Lipitor, 18

until November 2012. While the settlement avoided further legal cost for Ranbaxy in fighting against Pfizer, if it had won the case, Ranbaxy could have introduced generic version as early as March 2010. After the announcement of the agreement, Ranbaxy shares declined by 7.7% as against market decline of 2.2%.

In 2008, Ranbaxy had settled with AstraZeneca on its $ 7 billion heartburn drug Nexium, GSK on its $ 985 million migraine medicine Imitrex and its anti-herpes drug Valtrex with sales of $ 1.3 billion.

FDA Issued Warning Letters to Ranbaxy:The Food and Drug Administration (FDA) issued two Warning Letters to Ranbaxy Laboratories and an Import Alert for generic drugs produced by Ranbaxy's Dewas and Paonta Sahib plants in India on 16th September 2008. Import Alert, under which U.S. officials could detain at the U.S. border, any API and finished drugs manufactured at these Ranbaxy facilities.

The Warning Letters identified the agency's concerns about deviations from U.S. current Good Manufacturing Practice (CGMP) requirements at Ranbaxy's manufacturing facilities in Dewas and Paonta Sahib (including the Batamandi unit), in India.

The points covered in the warning letters were:

Measures taken to control cross-contamination appeared inadequate ; Inadequate batch production, control records, failure investigations and sterile processing operations; Absence of Assurance Responsible individuals to determine if the firm was taking necessary steps under CGMP; and Inaccurate written records of the cleaning and use of major equipment

Ranbaxy after this announcement agreed to cooperate and work with FDA to improve the suggested inadequacies in these two plants. 19

Analysts estimate the loss of business to Ranbaxy as a result of blocking the sale of 30 generic medicines to be at $ 40 million. The news saw Ranbaxy scrip end the day down 6.6% on BSE. Post the deal, there were doubts raised, since there has been no recent example of a generic company being integrated into an innovator company. Some also highlighted the possibilities of cultural clashes innovator companies have always seen themselves as superior to generic companies. Besides, the Japanese culture of consensus-building and team playing could be new for promoter-run company.

SHARE HOLDING OF RANBAXY (PRE ACQUISITION) Table: Share Holders of Ranbaxy (Pre Acquisition)
SHARES HELD BY SINGH SINGHS FAMILY MUTUAL FUND BANKS INSURANCE COMPANIES FOREIGN INSTITUTIONAL INV.(F.I.I) GENERAL PUBLIC % 34.82 19 5.56 1.71 14.39 12.42 12.1

Figure: Share Holders of Ranbaxy (Pre Acquisition)

SHARE HOLDING (PRE ACQUISITION) %

SINGH

12.1 12.42 14.39 34.82

SINGHS FAMILY MUTUAL FUND BANKS

19 1.71 5.56

INSURANCE COMPANIES

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Before acquisition the Singh had 34.82% of the holding in Ranbaxy. His family had 19% of the shares. Mutual fund companies holding were 5.56%. Banks had 1.71%. Insurance companies hold 14.39% General public 12.1%

SHARE HOLDING OF DAIICHI SANKYO (POST ACQUISITION) Table: Share Holders of Daiichi Sankyo (Post Acquisition)
SHARES HELD BY DAIICHI SANKYO MUTUAL FUND BANKS INSURANCE COMPANIES FOREIGN INSTITUTIONAL INV.(F.I.I) GENERAL PUBLIC % 63.92 2.58 0.37 9.19 4.41 19.53

Figure: 4.2 Share Holders of Daiichi Sankyo (Post Acquisition)

SHARE HOLDING (POST ACQUISITION) %

DAIICHI SANKYO

19.53

MUTUAL FUND BANKS INSURANCE COMPANIES

4.41 9.19 63.92 0.37 2.58

FOREIGN INSTITUTIONAL INV.(F.I.I) GENERAL PUBLIC

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After the acquisition the singh and his familys complete stake in Ranbaxy had been taken over by Daiichi Sankyo which is 63.92% of total holdings. The holdings by mutual fund, banks, insurance companies and foreign institutional investments decreased by 53.9%, 58.47%, 36.13%, 64.49% respectively. Whereas the general public holdings were increased by 61.40%.

INTERPRETATION OF SHARES HELD PRE & POST ACQUISITION

SHARES HELD BY PRE % POST % CHANGE % SINGH SINGHS FAMILY DAIICHI SANKYO MUTUAL FUND BANKS INSURANCE COMPANY F.I.I GENERAL PUBLIC 34.82 19 5.56 1.71 14.39 12.42 12.1 63.92 2.58 0.32 9.19 4.41 19.53 (100) (100) 63.92 (53.59) (58.47) (36.13) (64.49) 61.40

The above chart shows % of shares held prior and post acquisition, it is clear that the Singh and his family have completely sold their stake to Daiichi Sankyo which lead to 100% changes in share acquisition, with this acquisition Daiichi Sankyo has acquired 63.92% of the total shares. Other companies such as mutual funds, banks, insurance companies and F.I.I share holdings have decreased to some extent. Whereas the general public holdings have been increased up to 62%. This is because Daiichi Sankyo expects to increase its stake in Ranbaxy through various means such as preferential allotment, public offer and preferential issue of warrants to acquire a majority in Ranbaxy, i.e. at least 50.1%.

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DAIICHI SANKYO Records Valuation Loss, Goodwill Write-down, on Investment in Ranbaxy Laboratories:Daiichi Sankyo Company Limited announced that it plans to record a valuation loss and onetime write-down of goodwill on its investment in Group subsidiary Ranbaxy Laboratories Limited for the fiscal third-quarter ended December 31, 2008.

On a non-consolidated basis, Daiichi Sankyo plans to record a non-cash valuation loss of 359.5 billion yen on its shares in Ranbaxy in its fiscal third-quarter to reflect a more than 50% decline in the market value of these securities versus the purchase price.

On a consolidated basis, Daiichi Sankyo estimates a non-cash loss of 354.0 billion yen related to the write-down of goodwill associated with its investment in Ranbaxy in line with the valuation loss on Ranbaxy shares accounted for on a non-consolidated basis.

Daiichi Sankyo sees no impact on its forecasts for non-consolidated net sales, operating income or ordinary income for the fiscal third-quarter as a result of these anticipated extraordinary losses. The Company also sees no impact on cash flow. However, these items will have a significant negative impact on the Companys consolidated financial results forecasts for net income for the nine-month period ended December 31, 2008 and for fiscal year 2008 ending March 31, 2009. Daiichi Sankyo remains committed to a year-on-year increase in its shareholder dividend for fiscal year 2008, in step with the Companys current dividend policy.

Background

Daiichi Sankyo has based its estimates for the one-time write-down of goodwill on its investment in Ranbaxy to fully reflect the impact of the current unprecedented turmoil in global equities markets. The Company has taken this step to meet the strictest accounting standards to ensure it remains on the firmest financial footing. 23

A further review of valuations at the end of the current fiscal year in March 2009 and the finalization at that time of allocations under Purchase Price Allocation (PPA) rules prescribed by the Accounting Standards for Business Combinations may result in a change to the amount of the valuation loss.

Daiichi Sankyo considers its investment in Ranbaxy as essential in ensuring sustainable business growth and fully realizing the Groups long-term business strategy. Daiichi Sankyo remains absolutely committed to pursuing its unique hybrid model dedicated to the needs of patients in developed and emerging markets. Those needs encompass innovative new medicines and established off-patent products.

Daiichi Sankyo and Ranbaxy initiated full-fledged cooperation following the appointment on December 19, 2008 of a new Board of Directors at Ranbaxy that includes Daiichi Sankyo CEO Takashi Shoda and Senior Executive Officer Tsutomu Une.

The Global Pharmaceutical Industry:The global pharma industry is valued at $ 700 billion (2007). With about 46 percent share, the United States remains the largest individual market worldwide. Japan, with $ 70 billion market, is the second largest market. In European Union, Germany is the largest market valued at $ 31 billion.

There have been two major changes taking place in the global pharma industry, viz: 1. Growth of Generics:-

Rising costs and an ageing population have been contributing to a wider use of generics instead of branded products. The generics market remains a major growth area in the global healthcare market. This growth has been partly driven by cost-containment in several national healthcare sectors, with governments seeking to promote the use of generic products over higher-priced

24

originator products. The global generic pharmaceuticals market was about $ 70 billion in 2007, with market growth noticeably higher than that of the overall pharmaceutical market.

The US is the largest generics market in the world. Hatch-Waxman Act standardized U.S. procedure for recognition of generics drugs. An applicant files an Abbreviated New Drug Application (ANDA) with Food & Drug Administration (FDA) and seeks to demonstrate therapeutic equivalence to a specified, previously approved reference listed drug. When ANDA is approved, FDA adds the drug to its Approved Drug Product list (also known as the Orange Book).

The FDA also offers a 180 day exclusivity period to generic manufacturers in specific cases such as when a generic manufacturer argues that a patent is invalid or is not violated in the generic production of a drug. The exclusive period of 180 days which allows one manufacturer to sell generic product acts as a reward for the generic manufacturer who is willing to risk liability in court and the cost of patent litigation with the original / branded manufacturer.

All these changes have had a major impact on the popularity of generic drugs. As per Harris Interactive, in just over 2 years, the percentage of Americans who would choose generic prescription drugs over brand names has increased from 68% to 81%. And more consumers now purchase their prescriptions in discount stores like Wal-Mart and Sam's Club.

Other than the US, Germany and the UK also have large generic markets. France, Italy, Spain and Japan currently have small but fast-growing generic markets.

2. Changing Business Model:Apart from higher growth of generics, the other change in the global pharma industry is in the business models followed by large pharma companies. For a long time, the pharma industry has been dominated by large innovator companies, using Research and Development to develop block buster drugs. To strengthen Research and Development pipeline, the companies endeavored to grow bigger through Merger and Acquisition. For example, Astra merged with 25

Zeneca to form AstraZeneca, Glaxo Wellcome and SmithKlineBeecham merged to form GlaxoSmithKline, Novartis was created through merger of Ciba-Geigy and Sandoz, merger of Rhone-Poulenc and Hoechst AG resulted in Aventis, and Pfizer merged with Warner Lambert.

Many factors are responsible for these changes. Declining research productivity coupled with rising Research and Development costs, falling revenues of block buster drugs due to patent expiry (block buster drugs worth $ 90 billion will be going off patent by 2011) and the concerns by various governments of the rising health care bill are all forcing innovator companies to look for new business models. The PWC report, Pharma 2020: The Vision Which Path Will You Take? puts the predicament of innovator companies very well. The current pharmaceutical industry business model is both economically unsustainable and operationally incapable of acting quickly enough to produce the type of innovative treatments that will be demanded by global markets. Pharmaceutical companies are facing a dearth of new compounds in the pipeline, poor share value performance, rising sales and marketing expenditures, increased legal and regulatory constraints and tarnished reputations. The industry is investing twice as much in Research and Development as it was a decade ago to produce two-fifths of new medicines it then produced. It is simply an unsustainable business model. Even generics companies are realizing the importance of scale. Teva, the worlds largest generic company, has acquired Barr - an American rival for $ 7.5 billion. Barr and Mylan, another big American generics firm, have been busy acquiring smaller firms. Actavis, a once obsucure Icelandic generic outfit, has swallowed over two dozen rivals in the past decade to become a global force. Generics business is attracting the global companies. In June 2008, Japans Daiichi Sankyo bought Ranbaxy for $ 4.6 billion. In July 2008, GSK said it would enter the generics market through a joint venture with Aspen, a South African firm. In March 2009, Pfizer entered into an agreement with Aurobindo Pharama to market off patent drugs. The products expand Pfizers

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growing generics portfolio and are versions of drugs originally made by companies other than Pfizer.

Different companies are, therefore, devising different strategies to meet this challenge: Continuing the block buster model, but looking for block busters in bio tech instead of conventional chemistry-based products; Keeping faith in chemistry-based block busters, but reducing R&D costs by outsourcing or starting their own R&D in low cost countries like India or China; A hybrid model where branded products and generics coexist.

The Indian Pharmaceutical Industry:The size of the Indian pharma industry was in the range of $ 17 billion in 2007 08. Nearly 60% is the domestic market, while exports constitute 40%. It has been witnessing phenomenal growth in recent years, driven by rising consumption levels in the country and strong demand from export markets. In world rankings, the Indian pharma market stood fourth in terms of volume and 14th in terms of value in 2005 and, as per a study by McKinsey, expected to be ranked among the top 10 largest pharmaceutical markets worldwide by 2015.

The Indian pharma industry has evolved over a period of time. Till 1970, the industry was dominated by global pharma companies, and Indian companies played an insignificant role.

In 1970, Indian Patent Act was passed. This act recognized only the process patent and not the product patent. Implication for global innovative pharma companies was that if they wanted to introduce new product, they could not patent the product, but they could patent their process of manufacturing the product. This was a boon to Indian pharma companies. Good chemistry knowledge of Indians came handy and Indian companies became known for their reverse engineering capabilities. Thus they developed their capabilities for manufacturing low cost APIs, which global companies were selling at extremely high prices. In next 25 years, companies like

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Ranbaxy, Dr. Reddy, Cipla etc became names to reckon with. Since this Act adversely affected global innovative companies, India no more remained on their radar.

In 2005, India amended the patent act, to recognize the product patent too. While there are implementation issues concerning the new law, India is now playing an important role in the strategies of global innovative companies. Indian companies too are working on different business models to thrive in this new environment.

Demand from the exports market has been growing rapidly owing to the capability of Indian players to produce cost-effective drugs. Indian Pharma companies have developed Good Manufacturing Practices (GMP) compliant facilities for the production of different dosage forms. They export bulk drugs and formulations to more than 65 countries globally. Exports to Japan at $ 180 million in 2011-2012 constituted less than 3% of Indias pharma exports. Japan imports nearly $ 10 billion worth of pharma products.

Access to European markets through acquisition:To access European generics market, Indian companies have taken the route of acquisition. Acquisitions provide players with ready market access (Roads into complex regional distribution channels) in addition to approval for marketing drugs, which otherwise would take 2-3 years. Major examples have been Dr. Reddys acquisition of Betapharm, Germany for $ 570 million in February 2006; Ranbaxys acquisition of Terapia, Romania for $ 327 million in March 2006, and acquisition of Negma, France by Wockhardt in May 2007 for $ 265 million.

Therapeutic Segments:-

In India, 70% of the total formulations sold are for acute illness (short duration) and remaining for chronic illness (prolonged duration). This is true for most developing countries in contrast to developed countries chronic ailments dominate.

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Exhibit Therapeutic segmentation of Indian Pharma industry

Among the acute therapies, anti-infective is the major contributing segment accounting for 18% of the total pharma sales market in India. The gastro and cardiac are other two segments contributing 11% each.

Growth Drivers:Major growth drivers of Indian pharma industry are: Strong IPR regime-both process and product patents recognized; Growth of generics market in the US and EU due to; - Desire of these governments to control health costs and, - End of patent protection period for many blockbusters Capital and operating cost advantage, with talented manpower and excellent process development skills and,

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 Increasing domestic demand due to growing percentage of population accessing health care system.

The Japanese Pharmaceutical Market:-

The Japanese pharmaceutical industry took off in the true sense post the World War II. Many manufacturing plants and R & D facilities were set up during this period. The industry achieved rapid growth since the Universal Health Insurance (UHI) system was introduced in 1961. However, the industry growth has slowed down since the 1980s. In particular, the market for prescription drugs has shown very low growth over the last decade.

GROWTH IN JAPANESE PHARMA INDUSTRY

Sales (Billion Yen)

8200 8000 7800 7600 7400 7200 7000 6800 6600 6400 2009 2010 2011 2012 Sales (Billion Yen)

Generics took birth in Japan in 1967 when the former Ministry of Health and Welfare (MHW) developed the basic policy for new drug approval. This policy opened the door for the generic drug industry in Japan. This industry experienced growth only since the early 90s when the government began taking steps to promote the use of lower-priced generics for reducing drug cost.

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Increasing Demand for Generics:

The average age of Japanese population is on a rise, and so is the health care cost. As a result, the government is promoting the use of generic drugs and cautiously reforming the reimbursement system. A survey, conducted by McKinsey, showed that though the propensity to consume generics drugs by Japanese is very high (indicated by 97% of respondents being aware of generic drugs and 85% of respondents being ready to consume them), the actual consumption of such drugs is very low due to: Japanese patients very rarely question a doctors treatment regime. Lack of financial incentives for the doctors to prescribe generics. Most importantly, doctors tend to distrust the quality of generics. The share of the generics market is expected to increase thanks to the governments steps to encourage the use of generics. Recently, the government introduced various incentives for prescribing and dispensing generics as well as measures to allow generic substitution. Some of these include 20 to doctors for generic prescribing per prescription and 120 to pharmacists for generic dispensing. At present, the four generic drug companies (Taiyo Pharmaceutical Ind., Towa Pharmaceutical, Sawai Pharmaceutical, and Nichi-iko Pharmaceutical) have annual sales of over 20 billion.

Therapeutic Segments:
The Japanese pharma market is currently being dominated by cardiovascular drugs in terms of sales. The Exhibit below depicts the share of various key franchises as a percent of total sales in 2012. It is clear from Exhibit that cardiovascular drugs share in total sales was more than 3 times the share of CNS drugs (which has the second highest share of total sales). However during 2007-2011 growth in sales of Oncology, Diabetes and CNS drugs has been much higher than that of Cardiovascular drugs. Oncology drugs have experienced the highest CAGR of 10.8%, followed by diabetes drugs at 8.5% and CNS at 7.7%. Cardiovascular growth has been 3.8%.

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Exhibit - Therapeutic Segmentation of Japanese pharma industry

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CHAPTER 3 SWOT ANALYSIS

SWOT ANALYSIS OF DAIICHI SANKYO

SWOT ANALYSIS 1. Has a strong workforce of over 30,000 employees 2. Leading producer of Benicar which is angiotensin II receptor antagonist 3. It is one of the largest pharmaceutical company in Japan 4. Strong presence in US, Europe, India, China, Brazil, Thailand and some others Strength 5. Strong brand establishment through many major acquisitions 1. Despite being a strong brand, had a limited market share due to international competitors 2. Operates in limited segments such as Oncology & Cardiovascular segment 1. Increasing world population and more awareness about health 2. More people suffering from chronic diseases such as cancer, cardiovascular diseases Opportunity 3. Increasing awareness of healthcare solutions 1. Natural disasters in Japan 2. increasing stringency in drug development guidelines Threats 3. Global economic slowdown

Weakness

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SWOT ANALYSIS OF RANBAXY

SWOT Analysis 1.Top 10 Global Generic Company with a spread over 125 countries 2. over 13,000 well trained Employees, over 50 nationalities 3. Strong presence in the International market with a major share and a strong presence in India as well Strength 4.It has operations in nearly 50 countries and has 7 manufacturing plants 1. It is heavily dependent upon generics for its revenue generation Weakness 2. Constantly regulated policies by the govt means operational efficiency is affected 1.increasing health awareness 2.Improvement in distribution network & brand building Opportunity 3. They can leverage Synriam, anti-malarial drug in brand building 1.Increasingly stringent FDA Regulations 2.Exchange rate fluctuations Threats 3.Global economic slowdown

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CHAPPTER 4 FINDINGS AND SUGGESTIONS

FINDINGS

The main findings of this project are: Before acquisition the Singh had 34.82% of the holding in Ranbaxy. After the acquisition the Singh and his familys complete stake in Ranbaxy had been taken over by Daiichi Sankyo which is 63.92% of total holdings. Daiichi has spent more amounts in terms of percentage when compared to other top companies in the world. It has spent 16.5% of its total revenue. The market share of Ranbaxy in India is 5.12% which is the highest and No. l in India.

SUGGESTIONS

From the above analysis it is found that it is a profitable deal which gives more value to the share holders. However, it is a dangerous trend for the following reasons.

Generic industry is based on low prices. Such acquisitions will lead to prices increase and thus the loss of primary advantage. Every time Ranbaxy achieved a new landmark abroad, their local consumer base automatically increased due to increased confidence and pride. This advantage will be lost. In the short term they make money quickly but not for long. We have seen that a big name built over years goes into oblivion forever. Hope it does not happen to Ranbaxy.

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CONCLUSION

Ranbaxy laboratories ltd. (which is the no.1 pharmaceutical company in India) acquired by Daiichi Sankyo Company Ltd. (a Japans third largest pharmaceutical company and also in top 20 pharma company in the world. It was the biggest acquisition of a domestic pharmaceuticals company by foreign company. This acquisition provided benefit to both companies. Daiichi Sankyo could enter into the Asian market which is worlds largest pharmaceuticals market. Ranbaxy got the strategic partner which helped to explore the foreign market and its innovator facility to accelerate the growth of the company. Daiichi Sankyos move to acquire Ranbaxy will enable the company to gain the best of both worlds without investing heavily into the generic business. The patent perspective of the merger clearly indicates the intentions of both companies in filling the respective void spaces of the other and emerge as a global leader in the pharmaceutical industry.

Ranbaxy has become part of a Japanese corporate framework, which is extremely reputed in the corporate world. As a generics player, Ranbaxy is very well placed in both India and abroad although its share performance belies its true potential.

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BIBLIOGRAPHY

Books: Advanced Financial Accounting.

Websites: www.ranbaxy.com www.daiichisankyo.com www.google.com

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