Sun Pharamceuticals’ acquisition of the troubled Ranbaxy Laboratories will catapult the combined firm into the elite league of the world’s top five generic drug companies, besides making it the largest drug seller in India, which is often described as the “pharmacy of the world”.
Local companies, which produce copies of expensive patented drugs at a fraction of their price, are facing increasing compliance scrutiny by the world’s drug regulators.According to estimates, nearly 40% of generic and over-the-counter-medicines sold in the US are produced by Indian firms.
Recently, the government has made it known to the US about its growing unease over drug regulator USFDA’s “disproportionate penalties” on India generic pharmaceutical companies, many of these which have been rattled by a string of import bans without getting sufficient opportunity to clarify details.
Yet, despite the scrutiny, Indian generic drug companies have been prime targets for acquisition by global firms, who have been seeking to get a larger toe-hold in the market.
Between December 2006 and April 2014, acquisitions worth more than $17 billion have taken place involving Indian generic drug companies including the latest $4.2-billion Sun Pharma-Ranbaxy deal.
Read: Sun has been rising quietly in India
For instance, in December 2006, Mylan bought Matrix Labs for $736 million, while Daiichi Sankyo bought Ranbaxy for $4.6 billion in September 2008.
Likewise, Abbott bought Piramal’s domestic formulation for $3.3 billion in 2010, while Reckitt Benckiser acquired Paras Pharma for $726 million in December 2010.
According to analysts, such deals, despite the regulatory hurdles, offers value to large generic as well as innovator companies.
“While it is difficult to ascertain the regulatory timeline, we believe that there is significant scope for operational improvement and hence earnings upside,” Bank of America-Merill Lynch said in a research report to its clients.
“Regulatory overhangs and high fixed costs have depressed Ranbaxy’s profitability, where Sun Pharma can bring its operational strength,” it said.
The Sun Pharma-Ranbaxy deal will create one of the leading dermatology platforms in the US and give Sun access to a large number of manufacturing units in the future, said analysts.
Read: From industry poster boy to problem child
Besides, the deal size of $4 billion is attractive against transactions in recent times.
“Given Sun’s track record of creating long-term shareholder value via successfully-integrated acquisitions, we believe that the acquisition will be positive for Sun, given their complementary product portfolios and significant access to global markets in emerging markets, India and the US,” brokerage and research firm CIMB said in a note to its clients.
“We believe Sun Pharma will apply its tried and tested turnaround techniques and address the concerns over its growth using Ranbaxy as a lever,” Edelweiss, a broking and research firm, said in a note to its clients.