INDIAN INSTITUTE OF MANAGEMENT INDORE

Mergers & Acquisition

Term Paper: Acquisition of Ranbaxy by SunPharma

Submitted to:

Prof.D. L Sunder

Submitted by:
Section A Group 2

ASIT ARUNAV MOHAPATRA - 2013PGP085

ARANI SARKAR- 2013PGP067
AASHISH MANDRAH - 2013PGP081
ANSARI MOHD ASHHAR MAZHAR JALAL - 2013PGP058
BHAVYA TIRAMDASU -2013PGP103
BHAGAT OMKAR BHIMRAO 2013PGP097
BHASKAR MANDELIA 2013PGP101
VISHAL C. VISWANATHAN 2013PGP448

Submission Date:
24th November, 2014
Contents
Introduction to the Players ............................................................................................................. 3

Sun Pharma ............................................................................................................................. 3

Ranbaxy ................................................................................................................................... 4

Industry Background ....................................................................................................................... 4

Sun Pharmas M&A activity ............................................................................................................. 6

Acquisition of Ranbaxy by Daiichi Sankyo ....................................................................................... 8

Daiichi Sankyo.......................................................................................................................... 8

The takeover of Ranbaxy ......................................................................................................... 8

Strategic objectives and Synergies behind the deal ................................................................ 8

Synergies.................................................................................................................................. 9

Market reactions to the acquisition announcement ..................................................................... 9

Overview of Ranbaxy laboratories Valuation ............................................................................. 9

Aftermath of Deal ........................................................................................................................ 9

The announcement and market reaction...................................................................................... 10

Sun Pharma Ranbaxy Merger /Acquisition Process: ..................................................................... 11

Pre-Acquisition Stage: ........................................................................................................... 11

I. Making Decision to Buy - ............................................................................................. 11

II. Due Diligence/ Company Evaluation -.......................................................................... 12

III. Process Initiation/ Proposal Phase -........................................................................... 13

IV. Structuring Business Deal - ....................................................................................... 13

V. Financial Settlement/ Exchange of Stocks - .................................................................. 14

Post-Acquisition Stage: .......................................................................................................... 14

I. Merger Closing Phase and Post-Merger Integration Plans to Operate the Venture - .... 14

Valuation: ...................................................................................................................................... 14

REGULATORY ISSUES ..................................................................................................................... 15

ANTICIPATED POST MERGER INTEGRATION ISSUES ..................................................................... 17

Annexure ....................................................................................................................................... 19

References ..................................................................................................................................... 24

Introduction to the Players

Sun Pharma
Sun Pharmaceuticals was established by Mr. Dilip Shanghvi in 1983 in Vapi with five
products to treat psychiatry ailments. Cardiology products were introduced in 1987
followed by gastroenterology products in 1989. Today it is the largest company in chronic
prescription and a market leader in psychiatry, neurology, cardiology, orthopedics etc.

The 2014 acquisition of Ranbaxy will make the company the largest manufacturer of
pharmacy products in India and the 5th largest in generics products globally

Over 72% of the Companys Sales come from markets outside India. The US is the single
largest market accounting for around 60% of the total revenues. Manufacturing
operations are in 26 locations including countries like US, Canada, Brazil and Israel.

In the US, the company markets a large basket of generics, with a strong pipeline
awaiting approval from the U.S. Food and Drug Administration (FDA)

The company was listed on the stock exchange in 1995 and was back then oversubscribed
55 times. Today it is one of the most profitable pharma companies in India.

Acquisitions and Joint Ventures

In 1996 Sun Pharma purchased a bulk drug manufacturer Kohli pharmaceuticals. In 1998
Sun Pharma acquired a number of respiratory brands from Natco pharma. In 2010, the
company acquired a large stake in Taro Pharma, Inc. amongst the largest generic derma
companies in the US, with operations across Canada and Israel. In 2011, Sun Pharma
entered into a joint venture with MSD to bring complex or differentiated generics to
emerging markets

Ranbaxy
Its an Indian multinational pharmaceutical company that was incorporated in 1961.The
Company went public in 1974 and Japanese pharmaceutical company Daiichi
Sankyo acquired a controlling share in 2008. The company was started by Ranbir Singh
and Gurbax Singh as a distributor for a Japanese company in 1937.

Ranbaxy has been involved in several issues with FDA. In 2009 the US Food and Drug
Administration said it halted reviews of all drug applications including data developed at
Ranbaxy's Paonta Sahib plant in India because of a practice of falsified data and test
results in approved and pending drug applications. In 2012 Ranbaxy halted production
and recalled forty-one lots of atorvastatin due to glass particles being found in some
bottles. In 2013 US FDA fined 500 million for manipulation generic data and selling
adulterated drugs to United States.

Acquisition

In June 2008, Daichi Sankyo acquired a 34% stake in Ranbaxy for 2.4 billion USD. In
November 2008 Daichi Sankyo completed the takeover of the company from the Singh
family. Ranbaxy's Malvinder Singh remained as CEO after the transaction. In the same
year, it reached settlement on the world's two highest selling drugs - Lipitor (with Pfizer)
and Nexium (with Astra Zeneca).

Industry Background

Indias pharmaceutical sector has seen unwavering growth in the past few years, going up
to 23 billion USD in 2012 from 23 billion USD in 2002. The pharmaceutical sector in
India has been growing consistently at the rate of 13-14 % every year since the last five
years and is expected to touch 55 billion USD by 2020. Generics are expected to continue
to dominate the market while patent-protected products are likely to constitute 10 per
cent of the market till 2015.
Indian pharmaceutical industry companies can broadly be classified as domestic
companies and foreign companies (MNCs). Some of the major players include
GlaxoSmithKline, Cipla, Dr. Reddys Laboratories, Ranbaxy, Pfizer etc. Financial year
2013 was challenging on the domestic front and witnessed sluggish growth owing to
acute competition from unlisted players and so on. Growth in the sector is expected to be
boosted this year due to increasing consumer spending, rapid urbanization et al.

Over the past few years, there has been a paradigm shift in the attitude of people in India
towards healthcare. Alarming rise in cases of cardiovascular problems, nervous system
disorders, diabetes and many other diseases as well as disorders has created more
awareness in the growing population about the need of improvement in medical sector.
Therefore, there is a great need for pharmaceutical companies to invest their time and
resources in research and development of new, efficient and cost effective drugs.

India has an organized pharmaceutical market of its own, which is being considered as a
potential partner by other countries. The Indian Pharma Market is ranked number 3 in
terms of volume and 10th in terms of market value. Indian pharma companies are also
proving to be global leaders in production of generics and vaccines.

India has attracted Direct Foreign Investment of US$ 11,391.03 million from April 2000-
2013 and will see an upsurge in the years to come. Biopharmaceuticals is also
increasingly becoming an area of interest given the complexity in manufacture and
limited competition.

The domestic pharmaceutical market has seen a growth of 13.5 % and recorded total
sales of Rs 6,883 crore (US$ 1.12 billion) in the month of July 2013. The major reasons
for this growth can be attributed to continual growth in prolonged therapies, increasing
sales of generic medicines and strengthening hold over rural markets.

The need of skilled manpower in the pharmaceutical industry ranges widely from R&D,
Quality Assurance (QA), Intellectual Property (IP), manufacturing to even sales and
marketing. What the pharma industry needs is to have better policies to retain and nurture
the existing talent and equip them with necessary skills. However, this sector is emerging
as a popular choice amongst Gen Y, since the nature of work, primarily treating patients
and research for new drug discoveries plays an integral role in meeting their key career
aspirations.

Sun Pharmas M&A activity

Sun Pharma has gone through a number of domestic and international M&A activities
through its inception. Some of the activities have been listed in the table below. Exhibit 1
shows successful turnaround of 16 acquisitions.

Year Target Company Acquisition Details

2013 Generics Business of URL Acquired a comprehensive list of ANDAs and generic
Pharmaceuticals products from Takeda Pharmaceuticals

2012 Dusa Pharmaceuticals Acquired a developer of a dermatological device used to

treat actinic keratoses

2011 Joint Venture with MSD Joint Venture with a focus on emerging markets

2010 Caraco Pharmaceutical Initial stake investment in 1997, 100% takeover in 2010
Laboratories
2010 Taro Pharmaceutical Industries Acquired majority stake in a multinational generic
Limited manufacturer with established North America presence and
a strong dermatology franchise

2009 Products from Forest Lab's

Inwood Division

2008 Chattem Chemicals Acquired a manufacturer of controlled substances with an

Incorporated API facility

2005 Assets of Able Laboratories Acquired controlled substance manufacturing assets.

2005 Hungarian Operations and Acquired Alkaloidas controlled substance APIs and
Formulation Plant of ICN dosage form manufacturing plant.

2004 Products from Women's first

Healthcare

2004 Phlox Pharma Acquired manufacturer of cephalosporin API holding USA

and European approvals

2002 MJ Pharma Initial stake investment in 1996, 100% takeover in 2002.

Acquired plant with USFDA and UKMHRA approvals for
oral dosage forms

2000 Pradeep Drug Company Chennai based API manufacturer is merged with Sun
Pharma.

1999 Milmet Laboratories Helped initiate entry in ophthalmology

1999 Gujarat Lyka Organics Initial stake investment in 1996, 100% takeover in 1999.
Acquired Cephalexin and 7ADCA actives manufacturing
site

1998 Products from NatcoPharma Helped initiate entry in chest and respiratory therapy areas

1997 TamilnaduDadha Helped initiate entry in oncology and gynaecology

Pharmaceuticals Limited
1996 Bulk Drugs Plant from Knoll Acquired an API plant in Ahmednagar, Maharashtra
Pharma

Acquisition of Ranbaxy by Daiichi Sankyo

Daiichi Sankyo
Daiichi Sankyo Company Ltd is a global pharmaceutical company and the second largest
pharmaceutical company in Japan. It was established in 2005 through the merger of
Sankyo Company, Limited and Daiichi Pharmaceutical Company, Limited. It achieved
JPY 1,148.2bn in revenues in 2013.

The takeover of Ranbaxy

On Jun 11, 2008 Ranbaxy announced that a binding share purchase and share
subscription was entered between Daiichi Sankyo and Ranbaxy. With a purchase price
Rs. 737 per share, the transaction is valued at US $4.6 billion. Daiichi Sankyo acquired
34.8% stake. It made an open offer to Ranbaxy shareholders for another 20%. It picked
up another 9.12% through preferential allotment. It was an all-cash transaction. It was
funded through a mix of bank debt facilities and existing cash reserves of Daiichi
Sankyo. The debt was of value US$ 2.6 billion which is almost 50% of total funding
required for the deal.

The Nomura Securities Co Ltd, the japan headquartered investment bank, acted as the
exclusive financial advisor. Jones Day as the legal advisor outside India. Mehta Partners
LLC as the strategic business advisor and Ernst & Young as the accounting and tax
advisor. The Religare Capital markets Limited acted as exclusive financial advisor to
Ranbaxy and the Singh family. Vaish associates were the legal advisors

Strategic objectives and Synergies behind the deal

Daiichi Sankyo wanted to diversify geographically and especially paving its way into
emerging markets like India. The deal would help Daiichi Sankyo to enter into non-
proprietary drugs and take advantage for Ranbaxys strong areas. The acquisition of
Ranbaxy by Daiichi represents a major entry for the Japanese firm into the high growth
business areas of generic drugs.

Synergies
a) Considering that Ranbaxy is a generic company and Daiichi Sankyo an innovator
company, both businesses complement each other with negligible overlap.
b) Ranbaxy provides a low cost manufacturing set up to Daiichi Sankyo.
c) Ranbaxy has a small presence in the Japanese market where the generics market holds
good opportunities
d) Also Ranbaxy incurred lower costs, as it became debt free company
e) Ranbaxy geographically diversified presence across the globe will enable it to provide
a wider reach to Daiichi Sankyos portfolio, including India.
f) The deal made the amalgamated company to be the worlds 15th largest
pharmaceutical company in the world.
g) Ranbaxy bypassed a lot of European an U.S companies that were unable to enter the
Japanese markets due to its stringent safety and testing requirements.

Market reactions to the acquisition announcement

The share price of Ranbaxy Laboratories rose by 3.86% to Rs 526.40 on June 9th 2008.
Daiichi Sankyo agreed to pay as much as $4.6 billion for a 50.1% stake in Ranbaxy.
Later the stock ended almost at Rs 560.80 on June 11th 2008. On June 13th 2008 it
spiked to Rs 660 and settled finally at 567.75 points, up a mere 0.15%

Overview of Ranbaxy laboratories Valuation

Daiichi Sankyo paid about 4.7x Ranbaxys sales for the acquisition, as against 2.7x in a
similar deal between Mylan for Merck KGaAs generic unit at a price of $ 7.6 billion in
2007. The higher valuation was due to Ranbaxys strong infrastructure, presence across
geographies, a robust product pipeline, including upsides from the settlements

Aftermath of Deal

The EPS showed a double fold increase without much of increase in gross profit which
indicated that the reserves & surplus should have been made available accordingly. The
balance sheet of Daiichi Sankyo indicated that the current liabilities had increased to
161% when compared to current assets which had decreased by (15.43%). COGS
significantly decreased in the year 2008 due to the increase in purchase of Investments
owing to the acquisition. Three weeks after the deal, Daiichi Sankyo reported currency
exchange losses of Rs 9 billion in 2008 owing to the goodwill evaluation at the time
acquisition.

On February 25, the U.S. Food and Drug Administration announced that a facility owned
by India-based Ranbaxy Laboratories falsified data and test results in approved and
pending drug applications. The agency halted review of drug applications from plant due
to evidence of falsified data; invokes application integrity policy. Daiichi Sankyo though
learnt about the US FDA invocation ignored it expecting it to get resolved. Daiichi, in its
eagerness to tap the expertise of a generic drug maker, took the risk of buying Ranbaxy
for a top dollar. Daiichi Sankyo though learnt about the US FDA invocation ignored it
expecting it to get resolved. Ranbaxy shares have staged a huge rally since hitting a low
133 rupees in March 2009, trading at 465 rupees on March 14, 2011.

Daiichi lack of understanding of generic business in the valuation paid for acquiring
Ranbaxy. The deal is a classic example of an acquirer paying top price without looking
too closely at the quality of the goods.

The announcement and market reaction

The announcement by Sun Pharma on 6th April, 2014 that it would acquire 100% of
Ranbaxy Laboratories Ltd. In an all-stock transaction, valued at $4 billion, marked one of
the landmark deals of Indian Pharmaceutical industry which resulted in making Sun
Pharma the largest pharmaceutical company in India, the largest Indian Pharma company
in the US and the 5th largest generic company worldwide. On a pro forma basis, the
combined entitys revenues are estimated at US$ 4.2 billion with EBITDA of US$ 1.2
billion for the twelve month period ended December 31, 2013.The transaction value
implies a revenue multiple of 2.2 based on 12 months ended December 31, 2013.
Investor response to the announcement was lukewarm, with the stock prices moving in
opposite direction. As an immediate effect, shares of Sun Pharma went up to 2.7% in the
morning trade after the acquisition announcement while that of Ranbaxy went down by
3.1%.

The swap ratio of 8 shares of Sun pharma for every 10 shares of Ranbaxy works to the
advantage of the new entrants into Ranbaxy Laboratories Ltd. as at the prevailing price
they now needs to pay 5% less for getting the shares of sun pharma as compared to
buying them directly from the market.

There also lies a matter of uncertainty regarding the regulatory troubles facing Ranbaxy
and how soon sun pharma with a record of acquiring troubled companies at good price
and later turning them around, can resolve these troubles facing Ranbaxy. Sun pharmas
good track record regarding turning around the acquired companies can instil some hopes
among the investors.

The move is seen to improve Sun pharmas global presence by providing it access to new
and emerging markets and product portfolios with Sun pharma having a presence in
chronic diseases while Ranbaxy having relevant presence in acute and OTC segments.
Besides with the acquisition of Ranbaxy, Sun pharma will add to its overall
manufacturing base that is expected to reap benefits in the long run. Overall, market
perceived the deal as a win-win situation for all the parties involved.

Sun Pharma Ranbaxy Merger /Acquisition Process:

The Sun Pharma Ranbaxy Merger /Acquisition Process can be majorly divided into
two stages viz. 1) Pre-acquisition stage and 2) Post-acquisition stage

Pre-Acquisition Stage:
I. Making Decision to Buy -
Ranbaxy Laboratories Limited is an Indian multinational pharmaceutical company with a
sizeable drug pipeline, a very promising future and has announced some big product
launches in future in the US generics market, but for frequent run-ins with the US drug
regulator. It has been facing regulatory issues for the last 3years and now has ceased to
make some profits. However, the company has a big business and huge product portfolio
across various markets including India which makes it an attractive deal for Sun Pharma
to acquire this company. Daiichi (a Japanese company), the promoters of Ranbaxy was
struggling to manage its plants when came under the US Food and Drug Administrations
scanner after the acquisition. Ranbaxy was unable to overcome these issues and increased
pressure on its promoters.

Dilip Shanghvi, Managing Director, Sun Pharma has a reputation for turning around
companies in trouble by acquiring them at a good price. Sun Pharma and Ranbaxy deal
has many promising benefits as listed below. The combination of Sun Pharma and
Ranbaxy:

Creates the 5th largest specialty generics company in the world and the largest
pharmaceutical company in India.
Gets leadership position in 13 specialty segments
Operations in 65 countries, 47 manufacturing facilities across 5 continents, and a
significant platform of specialty and generic products marketed globally
Ranbaxys branded derma business in the US adds to Sun's already strong derma
franchise
Provides Sun Pharma access to strong human capital and reach in tier-II/III markets
in India, where it currently lacks presence, according to Edelweiss Securities.

II. Due Diligence/ Company Evaluation -

Next stage is business valuation or assessment. It involves evaluation of both the present
and future value of the target company. A thorough research on the companys capital
gains, culture, market share, capital structure, organizational structure, vendors,
distribution channel, specific business strengths and weaknesses, and brand name in the
market.

This process has revealed details about Ranbaxy and the merger as mentioned below:
 Sun Pharmas revenue will jump by a healthy 40% but its operating profit will rise by
a just 7.5%, based on pro forma 2013 financials.
Ranbaxys profits have been hit by provisions related to foreign exchange and
inventory write-offs. Sun Pharma has said it expects to get Rs.1,550 crore in merger-
related synergies by the third year after the acquisition is completed. That is fairly
significant and these savings should be from procurement, sales growth and supply
chain efficiencies.
The merger will have a negative effect on Sun Pharmas performance in the short
term reducing its operating profit margin from 44.1% to 29.2%.
In terms of size, Sun Pharma will have a pro forma 2013 revenue of Rs.25,911 crore
and an operating profit of Rs.7,577 crore, with a net profit of Rs.1,710 crore.

III. Process Initiation/ Proposal Phase -

In process initiation, acquiring company sends a proposal for a merger or an acquisition
to the target company with complete details of the deal including the commitments,
amount and the strategies. It is a non-binding offer document which is not available in
open public forum. Sun Pharma has hired McKinsey & Company to facilitate the merger
of the two leading pharmaceuticals in the domestic market. McKinsey had been given a
clear mandate, including "integration, rationalisation and capacity utilisation".

IV. Structuring Business Deal -

Once the merger is finalized i.e. either forming a new entity or the take-over, acquiring
company has to take initiatives for creating strategies to announce the launch, enhance
deals credibility and its marketing. This stage emphasize on giving a proper structure to
the business deal. The road map includes,

Regulatory approvals from various bodies such as SEBI, CCI, Stock Exchanges, High
Courts of Gujarat, Haryana and Punjab, and the stakeholders of both companies
Streamlining of teams
Resolving regulatory issues at Ranbaxy plants under US import alert
Restructuring of product portfolios to align with the interests of Sun Pharma
Benchmark the staff-productivity ratio
 V. Financial Settlement/ Exchange of Stocks -
Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each share of Ranbaxy.
The exchange ratio represents an implied value of Rs 457 per Ranbaxy share and the
transaction has a total equity value of approximately $3.2bn. After the deal, Daiichi will
hold a stake of about 9% in Sun Pharma. Hence, the deal is cashless.

Post-Acquisition Stage:
I. Merger Closing Phase and Post-Merger Integration Plans to Operate the Venture
-
This stage includes the process of preparing the official documents, signing the
agreement on which both the companies have agreed upon, and negotiating the deal. It
includes integration of the companies differing on various parameters. It also defines the
parameters of the future relationship between the two. After signing the agreement and
entering into the venture, Sun Pharma has various plans as listed below:

It has a detailed turnaround plan for its new purchase.

The companys basic structure and functions could be managed in the first year.
There is a plan to streamline and rationalise functions. While it will take at least two
to three years to turn-around the merged entity and to ensure contributions from the
buyout.
It has prepared a three-pronged strategy which includes:
Resolution of regulatory issues
Integration of supply chain and field force for enhanced efficiency and
productivity
Higher growth through synergy in domestic and emerging markets.
It is targeting to engineer the full turnaround of Ranbaxy in three-year to four-year
period after the closure of the transaction.

Valuation:

Sun Pharmaceutical Industries Ltd. and Ranbaxy Laboratories Ltd on April 06, 2014
announced that they have entered into definitive agreements pursuant to which Sun
Pharma will acquire 100% of Ranbaxy in an all-stock transaction. Under these
agreements, Ranbaxy shareholders will receive 0.8 share of Sun Pharma for each share of
Ranbaxy. This exchange ratio represents an implied value of Rs.457 for each Ranbaxy
share, a premium of 18% to Ranbaxys 30-day volume-weighted average share price and
a premium of 24.3% to Ranbaxys 60-day volume-weighted average share price, in each
case, as of the close of business on April 4, 2014.

On a pro forma basis, the combined entitys revenues are estimated at US$ 4.2 billion
with EBITDA of US$ 1.2billion for the twelve month period ended December 31,
2013.The transaction value implies a revenue multiple of 2.2 based on12 months ended
December 31, 2013.

REGULATORY ISSUES

Typically, CCI takes decisions related to mergers and acquisitions (M&As) within 30
days, though it can do so within 210 days of the filing of application in this regard. After
that a proposed deal is deemed to have been approved.

The proposed merger also requires approvals from stock exchanges, Sebi, the high courts
of Gujarat, Punjab and Haryana, creditors and shareholders of both companies. As cited
by a CCI official: It is an important case and there are various complexities involved. It
requires close evaluation

Four domestic manufacturing facilities of Ranbaxy have been banned from supplying
products to the US, following the US Food and Drug Administration finding serious
violations of its norms at these units. Resuming supplies from these plants to the US is
important for Sun Pharma, as the US is the largest export market for both companies.
When the proposed acquisition was announced in April, Shanghvi had addressing the
concerns of regulatory agencies worldwide were a priority.

In the last week of August, Indias antitrust regulator has ordered a second-stage
investigation into the merger of Sun Pharmaceutical Industries Ltd and Ranbaxy
Laboratories Ltd, citing the risk that the deal could harm national interest by resulting
in significant market domination by the combined entity.
This is the first time the Competition Commission of India (CCI) has decided on a
second-stage inquiry, which follows a preliminary investigation of a deal, and raised such
an objection. The watchdog will deliver a final ruling after hearing from the companies
again and seeking public feedback on the transaction. The possible ripple effect of the
merger on prices of life-saving, essential medicines in the Indian market had prompted
the antitrust body to issue a show-cause notice in July, asking the two companies why a
public investigation should not be ordered into the deal
The merger will create Indias biggest drug maker with an 8.5% share of the
pharmaceutical market, worth an annual Rs.76,000 crore by sales. Under Indias merger
and acquisition (M&A) rules, companies need CCIs approval if the combined assets of
the two entities are worth more than Rs.1,500 crore or their combined revenue amounts to
more than Rs.4,500 crore in India. The CCI approval is also mandatory if the companies
have assets outside India, or their combined assets are worth more than $750 million (Rs
4,566 crore), or if their turnover is more than $2,250 million (Rs 13,700 crore).

This is also the first M&A deal where the Competition Commission of India (CCI) has
ordered a public scrutiny of after forming a "prima facie opinion that the combination is
likely to have an appreciable adverse effect on competition".
The antitrust bodys main concerns are about the 46 drug formulations that will constitute
the merged entitys portfolio and in which it will have a significant presence in the
market. Out of these 46 drug segments, the prices of five are regulated by the
government. In the rest of the segments, market domination is a genuine worry, said a
government official familiar with the development. The commission has decided to
monitor the prices of other crucial drug segments to ensure the company does not stop
manufacturing the drug altogether if the price is too low or increase prices further in case
of expensive drugs.
Section 29 of the Competition Act says CCI can proceed to investigate a combination
where it is of the opinion that the same is likely to cause, or has caused an appreciable
adverse effect on competition within the relevant market in India.

On 11 July, the National Stock Exchange and BSE cleared the deal.
Though CCI asked the companies to restructure the deal so as to support the competition
law. The Competition Commission of India (CCI) is likely to take the final decision in
the $4-billion Sun Pharma-Ranbaxy deal by the end of this month. CCI asked them (the
two companies) to come up with some remedial measures which they have submitted and
CCI is studying the same.

Investment bankers for the two companies are reworking the deal to allay the
Competition Commissions concerns, and the decision on a new structure would likely be
made in December.

ANTICIPATED POST MERGER INTEGRATION ISSUES

A major upside from the deal could be for Ranbaxy's product portfolio. Though many of
the first-to-file applications of the company are pending in the US, they have the potential
to give a major boost to revenues once approval comes through. While the deal has got
thumbs up from most, even with all the positives this merger brings on challenges that
Sun will have to face on the ground:.

1: Achieving Compliance

With the baggage of regulatory issues, the biggest challenge for Sun Pharma will be to
restore and regain trust and confidence of the regulators, especially in the US. Four of
Ranbaxy plants are banned by USFDA and is under an ongoing consent decree

2: Reputational Risks:

It will be a challenging ride for Sun Pharmaceutical Industries Ltd to align Ranbaxy
Laboratories Ltd with its business given the regulatory hurdles and cultural differences.
The reputation which Dilip Shanghvi, founder and managing director of Sun Pharma, has
earned for turning around distressed businesses will once again be put to test. The
investor community will be closely watching each and every move he makes in order to
integrate Ranbaxy with Sun Pharma.

3: Integrating Marketing Forces

The two companies operate across different geographies and their objectives may differ.
The synergies get difficult to extract. Procedures and technology have to be integrated.

There can be two kinds of synergies. One could be product synergy: there could be some
therapeutic segments where Sun Pharma is strong while Ranbaxy could be strong in other
areas. Similarly, there could be some geographical synergies as well: for instance,
Ranbaxy is struggling in the US and Sun Pharmas ground presence in that country could
prove to be useful.
The combined Sun-Ranbaxy entity will be the undisputed leader in the Indian market
with 9.2percent market share.

While the merger will pump up the feet on ground presence for Sun Pharma in India to an
enviable presence -- a combined strength of 9000 medical representatives this will lead
to the biggest operational challenge. Marrying the two culturally different marketing
entities will be a key task for Sun. The two companies have operated under different
work cultures, giving different margin bonuses and streamlining the two to a common
platform will be crucial for Sun to maximize on the mergers India advantage. Sun
though is confident and says the complimentary portfolios will see USD 250 million
synergies by the end of third year.

4: Managing Multiple Units

The merger gives Sun grand global exposure. The combined entity will have 47
manufacturing facilities across 5 continents. This diverse number of plants would mean
increase oversight & could be a regulatory nightmare. Experts point out that Sun may
eventually have to look at hiving off or consolidating some of them the manufacturing
capacities. Also because there could be some overlaps and not all capacities may be
needed.

5: Ranbaxy Brand

The Ranbaxy brand will cease to exist. Though this is not a challenge really, but one of
the oldest generic drug brand, one with the highest recall value will cease to exist
eventually. Experts say this may lead to some confusions in the market space and impact
the morale of the Ranbaxy employees and will be on Sun Pharma to rebuild on that.

Exhibits

Exhibit 1: Acquisitions by SunPharma over the years

(Source: Sun-Ranbaxy Investor Presentation)

Annexure

a) What is the strategic motive for the merger /acquisition from the buyers perspective?
Sun Pharmas managing director Dilip Shanghvi has acquired a reputation for acquiring
companies in trouble at a good price, and then turning around their operations. Analysts
felt that this is a good acquisition for Sun Pharma as it will help it fill therapeutic gaps in
the US, get better access to emerging markets and strengthen presence in the domestic
market. Some of the motives behind the merger is summarized below-

The merger would create the worlds 5th largest specialty generic pharma
company
No. 1 pharma company in India, one of the fastest growing markets
No. 1 Indian pharma company in US market
-Over US$ 2 billion in sales
-Pipeline of 184 ANDAs including high-value FTFs
-No. 1 in generic dermatology, No. 3 in branded
Approaching US$ 1 billion sales in high-growth emerging markets including
Russia, Romania, South Africa, Brazil & Malaysia
Expanding presence in Western Europe; merged entity to have global footprints in
over 55 key markets
Extensive Product Basket largely Branded business with minimal overlap
Strong Doctor Relationships and opportunities to leverage market presence to
cross-sell products
US$ 250 million of revenue &operational synergies by 3rd year primarily derived
from top-line growth, and procurement & supply chain efficiencies
The US Food and Drug Administration's approval to Nexium and Diovan could
provide benefits of $300-400 million net income in the short term
b) Synergies that can be realised and value of the synergies

According to the analysts at Sun pharma, it expects to realise its merger related synergies
by the third year of acquisition. The synergies that it expects to obtain are the revenue
and operational synergies resulting from sales growth, procurement and supply chain
efficiencies.

The expected value of the synergies is $250 million or 1550 crore from merger related
synergies by third year after the acquisition is completed.

c) DCF method for Valutaion

 Fiscal Period March (in INR crores) 2014 2015 2016 2017
Sales 13,040.30
12,944.80 12,912.90 13,577.00
Operating income (EBITDA) 973.20 1,975.20
2,259.80 1,775.40
Operating profit (EBIT) 4,97.00 1,503.00
1,689.00 13,63.00
taxes 343.50 311.00 323.00 488.00
NOPAT [EBIT(1-t)] 153.5.00 1378.80 1,015.00
1,040.00
D&A 476.20 570.00 412.40 471.80
capex 780.90 495.10 530.10 522.40
change in NWC 326.00 324.00 323.00 339.00
Free Cash Flow - 477.70 599.30 625.80
1,129.70
Terminal Value
24,416.98
WACC 8.72%
8.72% - 477.70 599.30
1,129.70 25,042.78

Implied firm value (in INR crores) 18909.35

Reference Values
Wd* 85%
We* 15%
Beta** 0.59
Rf*** 8%
Rm-Rf**** 8%
Ke 13%
Kd 12%
Tax 34%

Sources
*www.moneycontrol.com
**Reuters
***www.investing.com
****EY-india-cost-of-capital-a-survey.pdf

d) Transaction multiples

Date Target Acquirer EV/EBITDA

Jun-14 Covidien Medtronic 16.8x
Feb-14 ArthroCare Corp Smith & Nephew 20.8x
Sep-13 Gambro AB Baxter International 12.8x
Feb-13 PSS World Medical McKesson Corp 15.6x
Apr-13 Life Technologies Thermo Fisher 12.9x
Sep-12 China Kanghui Medtronic 17.6x
Holdings
Apr-12 Gen-Probe Hologic Inc. 20.6x
Jul-11 Immucor Inc TPG 11.7x
Oct-11 Axis-Shield Alere Inc. 17.3x
May-11 Sanitas Valeant 11.4x
May-11 Phadia Thermo Fisher 17.4x
Apr-11 Cellestis Qiagen 25.4x
Dec-10 Dionex Thermo Fisher 19.5x
May-10 OSI Astellas 20.9x
Mar-10 Millipore Merck KGgA 17.1x
Mar-10 Sebia Cinven 13.1x
Feb-10 Home Diagnostics Nipro 13.2x
Jan-10 Standard Diagnostics Alere (formerly 28.1x
Inverness)
Dec-09 Genetix Danaher 11x
Dec-09 STARLIMS Abbott 12.6x
Jul-09 Varian Inc. Agilent 11.4x
Jun-09 Concateno Alere (formerly 11.4x
Inverness)
Jul-08 Genentech Roche 16.9x
Apr-08 Alcon Novartis 19.8x
Dec-07 Whatman GE Healthcare 13x
Jul-07 Dade Behring Siemens 15.5x
Jun-07 Cholestech Alere (formerly 20.8x
Inverness)
May-07 Cytyc Hologic 22.8x
Apr-07 Stratagene Agilent 16.6x
Apr-07 Biosite Alere (formerly 19.5x
Inverness)
Mar-07 Organon Schering 14.6x
Mean 16.71x
Median 16.8x

EBITDA (INR 973.200

crores)
 EV (INR crores) 16,262.172

e) The deal has no tax implications for the shareholders of Ranbaxy. The transaction is
expected to represent a tax-free exchange to Ranbaxy shareholders who are expected to
own 14% of the combined company. The share-swap transaction, wherein for one share
of Ranbaxy shareholders will get 0.8 shares of Sun Pharma, is not considered as a
'transfer' under tax laws and no capital gains will arise in the hands of the Ranbaxy
shareholders. Long term capital gains are exempt from tax and only a nominal security
transaction tax is payable.

f) The conditions under which the deal could fail are the following

Sun Pharma has to check the FDA issues that are linked with Ranbaxy. The US
authority has placed four of Ranbaxy's key plants in India under an import ban
that could last another year or two
EBIDTA of Ranbaxy is very low around 10%, way below industry standards and
Sun Pharma has to increase the EBIDTA
Sun Pharma has to increase the profitability in emerging markets like Romania
where Ranbaxy is doing bad
There may be an issue with the Competition Commission of India as there are
nearly 25 drugs in which the combined entity holds more than 40% market share
Ranbaxy has high debt on its balance sheet and Sun Pharma needs to come out
with ways to reduce the debt going forward. The deal is USD 4 billion an may
limit the Sun Pharma from entering the speciality business for some time
However, Sun Pharma will have tough task to shelve high overheads in Ranbaxy
and improve profitability in business - something it has done in case of Taro
It will be really challenging to integrate the 9000 plus marketing personnel of
both the companies given that he culture are different

g) The regulatory issues that can come up are

 There are around 46 drugs in which the combined entity becomes a dominant
player. Competition Commission of India is currently watching whether the
company increases the prices or cuts production in these categories
The companies have shortlisted 37 molecules out of 246 molecules in which their
combined market share is more than 15 per cent while in some cases it stands
above 90 per cent.
The individual market share of the companies in these 37 molecules is greater
than 5 percent.

CCI has said that public consultation has been launched in order to determine whether the
combined entity has any adverse impact on competition in relevant market in India.

h) The roadmap for integration should be

Regulatory approvals from various bodies such as SEBI, CCI, Stock
Exchanges, High Courts of Gujarat, Haryana and Punjab, and the stakeholders
of both companies
Streamlining of teams
Resolving regulatory issues at Ranbaxy plants under US import alert
Restructuring of product portfolios to align with the interests of Sun Pharma
Benchmark the staff-productivity ratio

References

1. http://www.ranbaxy.com/sun-pharma-to-acquire-ranbaxy-in-a-us4-billion-landmark-
transaction/
2. http://businesstoday.intoday.in/story/ranbaxy-acquisition-good-for-sun-pharma-
shareholders-experts/1/205526.html
3. http://www.business-standard.com/article/companies/sun-pharma-draws-up-plan-to-fix-
ailing-ranbaxy-114091101300_1.html
4. http://www.business-standard.com/article/companies/sun-pharma-buys-ranbaxy-from-
japan-s-daiichi-114040700737_1.html
5. http://www.livemint.com/Money/1V8H9u0YoEyKFZ3vM7AcYL/Sun-Pharmas-Ranbaxy-
acquisition-winners-and-losers.html
6. http://www.livemint.com/Companies/lNC0kH0QAs2TSqlapEXO0N/Sun-Pharma-to-
acquire-Ranbaxy-in-32-billion-deal.html
7. http://articles.economictimes.indiatimes.com/2014-04-11/news/49058869_1_daiichi-
sankyo-sun-pharma-share-swap-ratio
8. http://www.ndtv.com/article/india/sun-pharma-to-acquire-ranbaxy-in-4-billion-all-stock-
deal-505205
9. http://www.dnaindia.com/money/report-sun-pharma-s-ranbaxy-deal-on-course-hints-at-
more-acquisitions-2010611
10. http://www.edupristine.com/blog/ranbaxy-financial-model/
11. http://www.outlookbusiness.com/printarticle.aspx?290218
12. http://profit.ndtv.com/news/corporates/article-benefit-of-ranbaxy-deal-to-accrue-in-few-
years-sun-pharma-672688