Oct. 31 (Bloomberg) -- Daiichi Sankyo Co., Japan's third- biggest drugmaker, cut its annual profit forecast because of costs to buy control of India's Ranbaxy Laboratories Ltd. and develop new medicines. The stock slumped the most in two weeks.

Net income will be 65 billion yen ($660 million) in the year ending March 31, 20 percent less than expected, the Tokyo-based company said in a statement to the stock exchange today.

Ranbaxy's stock price is three-fourths below what Daiichi Sankyo paid, and the buyer said today it will present new forecasts in January after finishing the transaction and reassessing Ranbaxy's value. Daiichi Sankyo acquired 53 percent this month, after the July-to-September accounts closed.

``I want to see the earnings impact of the purchase,'' Kenji Masuzoe, a Tokyo-based pharmaceutical analyst at Deutsche Bank AG, said by telephone. He rates the stock ``hold.'' ``The market overreacted to the forecast cut.''

Daiichi Sankyo fell 8.3 percent to 2,000 yen at the close in Tokyo, the steepest slump since Oct. 16. The shares have declined 42 percent this year, versus a 24 percent drop in the MSCI World Health-Care Index of 113 companies. Ranbaxy is down 60 percent.

The drugmaker, which announced second-quarter earnings with the lower forecast, projects spending 11 billion yen more than estimated this year to research and develop new drugs following its purchase in May of U3 Pharma AG, Ryoichi Watanabe, Daiichi Sankyo's head of accounting, said at a briefing today.

Generic Drugs

Chief Executive Officer Takashi Shoda, 60, agreed to buy a majority of Ranbaxy in June for as much as 198 billion rupees ($4 billion) to enter the market for generic drugs, which is growing almost twice as fast as demand for branded medicines.

That corresponds to 737 rupees per share, more than four times Ranbaxy's price of 170.75 rupees at the latest close in Mumbai. Shoda said Oct. 8 that he'll follow accounting standards to determine valuation losses.

Investors have exited stocks worldwide this year on concern shrinking credit and slowing economies will crimp earnings growth.

Declines at Daiichi Sankyo and Ranbaxy accelerated after Sept. 17, when the Indian company said it hired former New York City Mayor Rudolph Giuliani to help respond to a U.S. regulatory order blocking imports of more than 30 of the company's medicines because of violations at two factories in India.

Net income at the Japanese company fell 53 percent from a year earlier to 8.9 billion yen in the July-to-September quarter. Sales rose 1.3 percent, led by the company's bestselling product, the high-blood-pressure pill Benicar.

The Japanese company said it will include Ranbaxy's earnings from this month. The Indian company is scheduled to report its quarterly earnings later today.

To contact the reporter on this story: Kanoko Matsuyama in Tokyo at at kmatsuyama2@bloomberg.net.

Last Updated: October 31, 2008 03:51 EDT