Ranbaxy buy will help Sun firm up place in US market
Sun Pharma’s acquisition of Ranbaxy Laboratories gives it the kind of scale it needs to exploit the potential, not just of the large US generics market, but also of the fast-growing emerging markets. The US generics space has been a major growth-driver for Indian pharma in recent years; over FY10-14, players like Sun Pharma, Dr Reddy’s and Lupin have reported an estimated annual growth of 25-26%—in constant currency terms—from this market, and by FY15, Sun (ex-Taro) should be making revenues of $1 billion from the US. Indeed, in a couple of years, these firms could be earning close to half their total revenues from the US markets and, needless to add, the margins will be more robust than those from the home market. However, in the context of recent developments in the US market, Indian companies now need to have larger operations. For one, the consolidation in the US distribution space—the top 7 buying entities account for 85% of the generics market—will see distributors favouring larger generics suppliers. In addition, top tier generics players have been pursuing the inorganic route to transform themselves into firms that offer not just plain vanilla products, but a stronger proposition in the form of speciality generics. These firms are now more formidable competition.
While Indian companies have built on their success in the US and have upped spends on R&D—reflected in the several Abbreviated New Drug Application (ANDA) approvals won by them—they have generally stayed away from very large acquisitions. That strategy cannot be faulted; given the large number of M&A casualties, it would have been foolhardy to leverage oneself at a time when the global economic environment remains difficult. However, it is a fact that there is now a big distance between Indian and global generics drug makers, and this could hurt the former’s chances of gaining market share, especially given how much stronger distributors are becoming. Consequently, their ability to spend on R&D would also reduce which, in turn, will leave them at a disadvantage while scouting for opportunities in bigger spaces such as inhalers and biosimilars. In short, Indian pharma needs to be able to spend more on R&D given these are already way below those of their global peers. To that extent, the size that Sun acquires by buying Ranbaxy—combined revenues of $4.2 billion—will help. To be sure, Sun Pharma will need to deal with legacy regulatory issues related to the US FDA which Daiichi Sankyo, the current owners of Ranbaxy, failed to sort out. Sun is not new to such scrutiny, having faced some problems on this front, and may just succeed in making the plants US FDA-compliant once again. Meanwhile, small shareholders in Ranbaxy who have lost a lot of money since Daiichi took over have reason to rejoice because they’ve got a good deal in the 1:0.8 swap ratio (0.8 share of Sun for 1 of Ranbaxy) in what is a far superior company. Indeed, with its 9% residual stake, Daiichi Sankyo might recover some of its acquisition losses if it stays invested in Sun Pharma long enough.