More Pain for Ranbaxy, Daiichi Sankyo

Shares of Indian drugmaker Ranbaxy and its parent, Japan's Daiichi Sankyo, fell sharply after more FDA charges of Ranbaxy wrongdoing

Japanese pharmaceutical company Daiichi Sankyo (4568.T) is finding out the hard way that global ambitions can come at a price. Last June the midsize company seemed to have pulled off a coup when it beat out bigger rivals for a $4.6 billion controlling stake in India's biggest generic drug maker, Ranbaxy Laboratories (RANB.BO). But within a month, the U.S. Food & Drug Administration had announced plans to ban more than 30 generic drugs—including antibiotics and AIDS medications—that were made at two Ranbaxy plants in India.

Now the news for the Japanese company and its Indian subsidiary is getting even worse. On Feb. 25, the FDA said Ranbaxy had lied about information on more than two dozen of its generic drugs. Although the agency didn't find any health risks linked to Ranbaxy drugs, U.S. regulators plan to stop reviewing any new drugs made at Paonta Sahib, the site of one of Ranbaxy's Indian plants.

Steep Drop for Ranbaxy Shares

Ranbaxy says in a statement that it will address the FDA's findings "appropriately" and "in a timely manner." As for Daiichi Sankyo, spokesman Satoru Ogawa says the Japanese company has been in contact with Ranbaxy management to find out more about the FDA's decision and will issue a more detailed statement later. In Tokyo, Daiichi Sankyo's shares on Feb. 26 fell 9.5%, while Ranbaxy's shares collapsed, sliding 37% in one day of trading in Mumbai. Ranbaxy's stock has plunged 70% since Daiichi Sankyo took over the Indian company, vs. a 60% drop for the benchmark Sensex index.

Ranbaxy's problems with the FDA highlight the potential pitfalls acquisitive companies such as Daiichi Sankyo face when shopping for deals overseas. In 2008 many cash-rich Japanese companies took advantage of a strong yen and a drop in stock prices globally to go on a buying binge in far-flung markets. According to Thomson Reuters (TRI), Japanese companies spent about $67.6 billion on cross-border acquisitions last year, almost triple the 2007 tally.

Daiichi Sankyo's decision to buy Ranbaxy was a wager that the Indian company's strength in generic drugs and emerging markets would partly offset the Japanese company's expiring drug patents. Many analysts still think Daiichi Sankyo and Ranbaxy are a good fit. But like many midsize Japanese companies, Daiichi Sankyo doesn't have a lot of experience in managing a global business, analysts say. Even before sitting down to negotiate, Daiichi Sankyo would likely have known about the FDA's investigation of Ranbaxy's two Indian plants, in Paonta Sahib and Dewas. Yet the latest allegations of wrongdoing have led some investors to wonder whether the Japanese company knew the full extent of the problems before closing the deal. Their suspicions stem from the fact that the sons of Ranbaxy's founder cashed out so the sale could proceed. "Investors are frustrated," says Credit Suisse (CS) analyst Fumiyoshi Sakai. "They think Daiichi Sankyo might have been deceived by Ranbaxy."

Daiichi Sankyo's Loss Forecast

Sakai says he doesn't know whether that's true, but such speculation could hurt Indian companies. Multinational drugmakers might become wary of buying Indian companies or giving work to suppliers in India, says one Indian pharmaceutical industry insider who spoke on condition of anonymity. "People will be afraid to buy from you," the official says. "If they do, they will require additional checks and more detailed data than before."

The FDA's latest findings come less than a month after Daiichi Sankyo reported a $3.7 billion loss in the October-December quarter and warned that annual earnings would swing to a loss. The Tokyo-based company now expects a net loss of $3.2 billion this fiscal year through March, instead of the previously predicted $663 million gain, largely because of the yen's recent strength and the Ranbaxy deal.

The financial impact of the FDA's ban on the factory won't be huge, but it will be significant. About a quarter of Ranbaxy's annual revenues come from the U.S.; the Paonta Sahib plant alone accounts for about 10% of U.S. sales, according to Credit Suisse estimates. More Ranbaxy trouble could pummel the stock and force Daiichi Sankyo to write off bigger losses. The Indian company's market value already has fallen sharply to around $1.43 billion, about a third of what Daiichi Sankyo paid for its 64% stake.

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