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Last updateTue, 17 Mar 2015 2pm

#CONSOLIDATION: Sun Pharma acquires Ranbaxy to create world's fifth largest generics maker

Sun Pharmaceutical Industries Ltd has agreed to buy generic drugmaker Ranbaxy Laboratories Ltd for $3.2 billion, betting it can fix factory quality glitches that plagued the current owner, Japan's Daiichi Sankyo Co and got Ranbaxy India-made drugs barred from the United States.

The all-share transaction, the biggest pharmaceutical sector deal in the Asia-Pacific region this year, will create the world's fifth-largest maker of generic drugs.

The acquisition comes as the pace of consolidation increases in a market primed for growth in the U.S. and emerging markets that could be worth $335 billion globally by 2017.

For Daiichi Sankyo, the deal marks a significant retreat and highlights the lingering quality problems facing India's drug industry.  The value of the Japanese firm's investments in the country has been halved since it bought control of Ranbaxy in 2008.

For Sun Pharma, the relatively rare purchase by a leading Indian company of a local rival creates the biggest generic drug business by sales in India, with combined revenue estimated at $4.2 billion.

Under terms of the agreed deal, Ranbaxy shareholders will get 0.8 of a Sun Pharma share for each Ranbaxy share they own.

"This transaction helps us transition to our long-held ambition of becoming a successful Indian company in the global pharmaceutical space," Dilip Shanghvi, managing director of Sun Pharma, India's largest drugmaker by market value, said in a conference call with analysts. Including Ranbaxy debt, the overall value of the transaction is $4 billion.

The deal comes against the backdrop of a slew of sanctions against Ranbaxy by the U.S. Food and Drug Administration (FDA) due to concerns about manufacturing processes at its India plants.

The generic drugs sector has also seen a wave of mergers recently as companies seek economies of scale in an industry that sells low-cost, commodity products.

The sector has had a good run in the past decade selling copycat versions of medicines but recently times have got harder, thanks to a dwindling number of patent expirations. Mergers are seen as one way to improve efficiencies. Analysts estimate that recent deals in the sector have led to savings of about 8 percent of sales.

The deal relieves Daiichi Sankyo of a troubled subsidiary that has diverted resources and weighed on profits - at a price.

Under the deal, expected to close by year-end, the Japanese company will end up with a stake of about 9 percent in Sun Pharma valued at about $2 billion, compared with the $4.2 billion it paid for a 63.9 percent stake in Ranbaxy in 2008.

The broader issue of the quality of drugmaking has become a major concern both inside India and across the industry. India is second only to Canada as a drug exporter to the United States, where it supplies about 40 percent of generic and over-the-counter drugs.

The FDA, which last month called for more collaboration with the Indian regulator to improve drug quality, has banned imports from all the Indian plants of Ranbaxy over production quality lapses.

Sun Pharma, whose plant at Karkhadi in the western state of Gujarat was banned from shipping products to the U.S. last month, has been the subject of comparatively fewer regulatory actions in the past.

The company's managing director Shanghvi said the combined entity would focus on the fixing manufacturing quality issues at Ranbaxy so that facilities currently banned from shipping to the U.S., the biggest export market for both Ranbaxy and Sun, can resume exports.

"The quality of business at Ranbaxy is in no way inferior to business at Sun Pharmaceutical," he said. "Our focus will be to address the issue of achieving compliance. We are not looking at synergies of manufacturing; the focus is to achieve compliance."

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