Sun Pharmaceuticals- Acquisition of Ranbaxy
The Indian pharmaceuticals market plays a major role in the global picture.It is the third largest in terms of volume and thirteenth largest in terms of value. India is the largest provider of generic drugs globally (20 per cent of global exports in terms of volume). Availability of a large pool of talented human resources and a huge portion of global generic drugs market makes India an important player. It is expected to grow over 15 % per annum between 2015 and 2020(global pharma industry’s growth rate is 5%). The market is expected to grow to US$ 55 billion by 2020, thereby emerging as the sixth largest pharmaceutical market globally by absolute size.
Of late, consolidation has become an important characteristic of the Indian pharmaceutical market as the industry is highly fragmented.
Sun Pharmaceutical Industries Ltd:
Sun Pharma is an Indian multinational pharmaceutical company that manufactures and sells pharmaceutical formulations and active pharmaceutical ingredients (APIs) primarily in India and the United States. The company offers formulations in various therapeutic areas such as cardiology, psychiatry, neurology, gastroenterology and diabetology.
Over 72% of Sun Pharma sales are from markets outside India, primarily in the US. The US is the single largest market, accounting for about 50% turnover. Manufacturing is across 26 locations, including plants in the US, Canada, Brazil, Mexico and Israel.
Sun Pharma has complemented growth with select acquisitions over the last two decades. The 2014 acquisition of Ranbaxy will make the company the largest pharma company in India, the largest Indian pharma company in the US, and the 5th largest speciality generic company globally.
Its main competitors are- Cipla, Lupin, Dr Reddy’s, Aurobindo, Nicholas Piramal
Strong growth in emerging market business
Introduction of Pantoprazole & Eloxatin in US market has very limited competition
They have strong marketing & sales force of over 12,000 employees
Strong brand presence in India and US markets
Stiff competition from many Indian and other global brands means limited market share growth
Limited presence in emerging markets and European countries
They can leverage their acquisitions to further increase the growth
They can increase their presence in contract manufacturing
Increasing healthcare awareness in India
There is growing competition in generics market
Stringent patent regulations
High price sensitivity of consumers
Industry Analysis using PESTEL:
Politics and it's effect
World politics are uncertain than ever and Pharma is one sector which is strongly influenced by government policies.
The Indian government plans to set up US$640 million venture capital fund to boost drug discovery and strengthen infrastructure.
This might bring in some policies which effect pricing.
US has recently expressed its thoughts of banning drug import which can be a huge effect on the Indian pharma sector.
Though the entry of private MNCs has filled the gap for urban population, a lot of ground is yet to be covered and there is no denying that the growth opportunity is huge.
There was a time where misbeliefs have ruled over proper medication and with increase in education, the later is winning now.
Thanks to social networking which has certainly an effect on the way people think.
Indian population now want a proper medical attention and best drugs in the market.
A combined group of companies can establish a brand name for drugs which can be relied up on.
The life expectancy increase has increased aging population too which can be capitalized.
The reduction in consumer disposable income will have an impact on those countries using health insurance models particularly where part payment is required
These economic pressures are seeing an increased growth in strategic buying groups who are forcing down prices.
Increased pressure from shareholders has caused a consolidation of the industry: more mergers and acquisitions will take place over the coming years
Technological advances always create new business prospects.
Social networking and online solutions will help in-
Reducing costs through efficient supply chain management and operations
Increase value of service and reach the patient directly for customised treatments
There is growing environmental concerns across the world and the need for business to be more pro-active in this area has begun.
Companies are expected to be cautious in this area to avoid penalties and bad press.
Bigger and more efficient manufacturing units are more preferable and easy to minimise impact on environment
Law makers are concentrating on providing quality and cheaper medications to people.
Inconsistencies in global laws will pose a problem
Changes in advertising laws will effect budgets
The industry is moving towards consolidation to lower costs and realise synergies through economies of scale and learning.Sun Pharma’s managing director Dilip Shanghvi has acquired a reputation for acquiring companies in trouble at a good price, and then turning around their operations.Ranbaxy has got a lot of ANDA's (Abbreviated New Drug Application) approved for marketing in USA. Their problem is to find an API plant because main source of API was from Toansa. If Sun Pharma fills this gap, Ranbaxy can begin its export to the USA. So, Sun Pharma has got into this deal at the right time and deal has an upside for all the shareholders.
Rationale behind acquisition of Ranbaxy:
Both Ranbaxy and Sun Pharma are established names in the pharma industry worldwide and have operations in a number of countries.
They also complement each other in their areas of expertise and efficiency, both functionally and geographically.
While Sun Pharma is a major global specialty pharmaceutical company with expertise in complex and niche therapy areas and a proven record of turning around its acquisitions, Ranbaxy has a strong global footprint and presence in the generics segment.
According to Sun Pharma’s annual report of 2013-14, the pro-forma revenues of the merged entity are estimated at US$ 4.2 billion for the CY (calendar year) 2013.
The transaction will also make Sun Pharma the fifth-largest pharmaceutical company globally in terms of revenues, with operations in over 55 markets and 40 manufacturing facilities worldwide.
The general reasons for acquisitions are-
The search for critical mass. Companies attempt to reach critical mass as competition in the market increases
Larger companies can extend their R&D capabilities and utilize technologies more easily, so as to extend their product development pipelines
Achieve cost savings. Cost savings can be achieved through acquisitions by the elimination of duplicate departments and consolidation of functions and systems.
Economies of scale can be achieved in the form of decreasing unit production costs and synergy in R&D, as well as in sales and marketing
Strengthen financial position. The desire to strengthen a company's financial position can drive acquisitions and disposals.
The new entity will be biggest Pharma company in India with leadership in 13 speciality segments, and the world’s 5th largest speciality generic pharma company.Merger will see a rise of 40% in sun Pharma’s revenue. Sun Pharma estimates $250 million of synergies accruing from the merger in three years. The deal will create an entity with almost Rs.30,000 crore in combined annual revenue and Rs.2.5 trillion in market value.The new entity will have a presence in 55 countries and be supported by 40 manufacturing facilities worldwide, with a highly complementary portfolio of products for both acute and chronic treatments.
Dr Reddy’s, has treaded a cautious on acquisitions, and continues to focus on improving its profitability margins rather than seeking the inorganic route to grow its top line in a big way. The negative experience from the Rs. 2,550 crore acquisition of German company Betapharm in 2006 made Dr Reddy’s change its whole approach towards acquisition.
Dr Reddy’s has stated that inorganic growth as well as globalisation of its business were the two important ways through which they were seeking to build it as a dominant global pharmaceutical player. It has made relatively smaller niche acquisitions to boost its product portfolio or to access new markets. For example, in 2016, it has acquired a portfolio of 8 products from an Israeli firm Teva. It is also trying to enter the over-the-counter branded drugs market in USA which is a highly profitable business with low competition. In this respect, it has acquired 6 drug portfolios from Ducere Pharma.
Torrent Pharma, Cipla, Lupin
These firms are focussing more on quality and efficiency improvements and customer satisfaction. US drug regulator FDA has on several occasions in the past few years put penalties on many Indian firms for lack of quality control and this harms the business in the world’s largest generic drugs market (USA). Improvement in compliance to FDA rules is expected to give a boost to the revenue of these firms for their export businesses.
As the pharma industry transitions from chemical-based drugs to bio-pharma (also called biologics), rapid innovation is another strategy being used by firms like Biocon, which has tied up with its global partner Mylan Inc. Biocon is the only company that has succeeded in filing applications for “biosimilar” drugs in USA.
Many foreign drug companies in India, such as Abbott, Merck, etc. are selling off some of their business which are not doing very well in a bid to increase profitability amid the competition. This also helps them rationalise the product lines. They are also acquiring those specific businesses/product lines in which they have developed good competency.
Post Implementation Scenario and Challenges:
There were several issues that Sun Pharma faced a result of the deal with Ranbaxy. The FDA has banned some of the generic drugs of Ranbaxy due to the manufacturing problems, particularly the quality issues. The biggest challenge was to restore the trust and confidence of the regulators.
Synergy benefits worth US$ 250 million were expected by third year since the deal closure. Increased revenue, and cost management with supply chain efficiencies were the expected benefits. Sun Pharma had the challenge to align its finance, technology and human resources to achieve the synergies projected. The transaction created India’s largest and world’s fifth largest pharmaceutical company. One of the key integration was that of product portfolio, manufacturing and supply chain. Further, Sun Pharma was targeting US and European markets with cheaper copies of biotech drugs where it had to become more innovation oriented
The financial health of Ranbaxy had deteriorated since 2011 along with a decrease in investments owing to loss incurred on foreign currency derivatives. The deal took place at a crucial time when Ranbaxy was trying to improve its financial position, thereby possessing a challenge for Sun Pharma to restructure its finance. Considering the financial health and issues carried from the past, synergies of US $250 million of the combined entity was to be worked under such fluid conditions.
Apart from the financial goals, the integration also had to focus on productivity and establishment of an efficient supply chain. The merger also gave Sun Pharma a vastly diversified product and market portfolio having different regulations calling for higher level of management skills.
Added: 1 year ago