Sun Inherits Ranbaxy’s FDA Challenge in $3.2 Billion Deal

Indian billionaire Dilip Shanghvi’s Sun Pharmaceutical Industries Ltd. (SUNP) is offering $3.2 billion in stock to add Ranbaxy Laboratories Ltd. (RBXY)’s strength in emerging markets.

Sun Pharma also inherits regulatory troubles involving the U.S. market that Ranbaxy’s current parent, Japan’s Daiichi Sankyo Co. (4568), has struggled for more than five years to fix.

Daiichi Sankyo yesterday agreed to sell its controlling stake in Ranbaxy after taking writedowns on the Indian drugmaker, seeing its own share price slide and failing to raise manufacturing conditions at the unit to levels that would pass muster with the U.S. Food and Drug Administration. Four of Ranbaxy’s plants are banned from exporting to the U.S. and the company has received a subpoena from the U.S. Attorney for the District of New Jersey requesting documents on one of those factories in India.

“The clear challenge will be some of Ranbaxy’s manufacturing facilities which have FDA warnings,” said Mahesh Patil, co-chief investment officer at Birla Sun Life Asset Management Co. in Mumbai, who manages about $2.5 billion in equities. “Sun is going to have to work to get clearances through.”

Ranbaxy investors will get 0.8 share in Sun Pharma for every one of their shares, or about 457 rupees. That’s 38 percent lower than the 737 rupees a share that Daiichi, which owns 63.5 percent of Ranbaxy, paid in 2008.

Photographer: Amit Madheshiya/Bloomberg

Employees enter the Sun Pharmaceutical Industries Ltd. corporate office in the Andheri suburb of Mumbai on April 7, 2014. Close

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Photographer: Amit Madheshiya/Bloomberg

Employees enter the Sun Pharmaceutical Industries Ltd. corporate office in the Andheri suburb of Mumbai on April 7, 2014.

Daiichi’s stock has lost about 36 percent since it announced the acquisition of the Ranbaxy stake. It gained 0.7 percent to 1,825 yen in Tokyo trading today.

U.S. Sales

Getting Ranbaxy’s factories up to speed would help Sun Pharma bolster its presence in the U.S., where Ranbaxy’s lineup of drugs includes the acne medicine Absorica and the generic version of Pfizer Inc.’s Lipitor. In March, the FDA said Ranbaxy was recalling some batches of the copycat cholesterol-lowering medicine.

In November 2012, the company initiated a voluntary recall in the U.S. of some lots of atorvastatin due to possible contamination with tiny glass particles.

Ranbaxy dropped 3 percent to 445.75 rupees in Mumbai trading yesterday, while Sun Pharma gained 2.9 percent to 588.10 rupees. Markets are closed for trading in India today.

Flies

Ranbaxy’s chief bulk ingredient manufacturing facility in Toansa, Punjab was banned from supplying to the U.S. on January 23, after a week-long FDA inspection earlier in the month found manufacturing lapses. The facility’s quality control and microbiology labs were in significant disrepair with un-closeable windows and broken equipment, and inspectors found “too numerous to count flies” in the sample preparation room.

Sun Pharma had its own cephalosporin facility in Gujarat banned from exporting to the U.S., according to a posting last month on the FDA’s website. The company said in a statement the impact of the import alert on its consolidated revenues would be “negligible.”

Caraco Pharmaceutical Laboratories Ltd., a Detroit-based unit of Sun Pharma, made 33 drugs including common blood pressure pills and pain killers until June 2009, when the FDA ordered manufacturing to be halted and U.S. marshals seized products made at the plant, citing “continued failure to meet current Good Manufacturing Practice requirements.” Three years later, the FDA cleared the unit to resume operations with two products.

Regulatory Experience

That experience may help Sun Pharma expedite the resolution of Ranbaxy’s FDA issues, Patil said.

“What we’ve been able to achieve in the past, working closely with the regulator, taking their guidance -- that is what I can show,” Sun Chief Financial Officer Uday Baldota said in a telephone interview yesterday.

Daiichi Sankyo’s difficulties in fixing Ranbaxy show the hurdles facing Sun. Three months after Daiichi Sankyo agreed to buy the controlling stake in Ranbaxy for about $4.6 billion the FDA barred imports from the Indian drugmaker’s Paonta Sahib and Dewas plants because of manufacturing defects. In May 2009, Daiichi Sankyo posted a record full-year loss because of a writedown of the value of its controlling stake in Ranbaxy.

Daiichi Sankyo aims to recover losses from Ranbaxy through the transaction, Joji Nakayama, the Japanese company’s chief executive officer, said at a briefing in Tokyo yesterday. The company will own about 9 percent of Sun Pharma after the stock swap.

Daiichi has agreed to indemnify Sun Pharma and Ranbaxy for “among other things, certain costs and expenses that may arise from the subpoena,” according to yesterday’s statement. The deal will take about nine months to complete, according to Sun Pharma’s Baldota.

Emerging Markets

Sun Pharma’s shares have risen about 37 percent in the past year, helping boost Shanghvi’s wealth to $13.4 billion, according to the Bloomberg Billionaires Index. After the acquisition of Ranbaxy, he will own 54.7 percent of Sun Pharma.

About one-third of Ranbaxy’s revenue comes from emerging markets other than India, said Abhishek Singhal, an analyst at Macquarie Capital Securities in Mumbai. “The combined entity will have increased exposure to emerging economies, which Sun Pharma can leverage for its own specialty portfolio,” he said.

Sun Pharma, founded by billionaire Shanghvi in 1983, has drugs in areas including psychiatry, neurology, cardiology and nephrology. Buying Ranbaxy will help Sun Pharma grow in markets such as Russia, Romania, South Africa, Brazil and Malaysia, according to an investor presentation.

The company in its annual report said its “focus markets for the future” would include Latin America, Russia, China and South Africa.

U.S. Generics

The deal will also give Sun Pharma access to three major products that Ranbaxy has tentative FDA approval to sell in the U.S.: generics of Novartis AG (NOVN)’s blockbuster Diovan, AstraZeneca Plc (AZN)’s Nexium and Roche Holding AG (ROG)’s Valcyte, according to Hitesh Mahida, an analyst at K.R. Choksey Shares & Securities in Mumbai. Since Ranbaxy was first to file applications for the three products, it’s entitled to 180 days of exclusivity if given final regulatory clearance.

Including the assumption of debt, the Ranbaxy transaction was valued at $4 billion. Sun Pharma, maker of generic drugs including copies of Eli Lilly & Co.’s Cymbalta and Johnson & Johnson (JNJ)’s Doxil, expects $250 million in revenue and reduced costs by the third year after completing the deal, according to the statement.

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editors responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net; Reg Gale at rgale5@bloomberg.net Bruce Rule, Marthe Fourcade, Anjali Cordeiro

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