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CULTURAL CHALLENGES OF INTEGRATION:


VALUE CREATION AND DAIICHI SANKYOS
INDIAN ACQUISITION

HBP No. NTU027


Publication No: ABCC-2012-E002
Print copy version: 20 Nov 2012

Wee Beng Geok & Wilfred Chua

In the first decade of 2000, major global innovator drug companies were acquiring or collaborating
with generic drug companies. Daiichi Sankyo was the first major Japanese pharmaceutical firm to
test this hybrid business model in early 2008 when it acquired a majority share in Ranbaxy, then
the largest India-based generic drug company and a global generic drug manufacturer and exporter.
At Ranbaxy, the acquisition was followed quickly by several leadership changes. Chairman/CEO
Malvinder Singh, the grandson of Ranbaxys founder, resigned in May 2009; Atul Sobti who took over
as CEO, resigned the following year citing differences with the Japanese company on the running
of Ranbaxy. In early 2011, Ranbaxy President and Chief Financial Officer, Omesh Sethi also left the
company.
On the financial front, the Japanese firm booked a valuation loss of US$3.9 billion from the acquisition
in the third quarter of its 2008 financial year and recorded a net loss of US$2.21 billion for that financial
year. With the acquisition, Daiichi Sankyo was able to expand the scope of its global business and to
lessen the concentration of its assets in Japan from 78.96% to 53.7% in 2011. However, in 2011, the
Japanese firm had yet to reap the full benefits of its vision of a value chain based on an integrated
hybrid business model. Was a transformational organisational change needed to realise this?
The case study examines the cross-cultural challenges of integrating the two businesses as the leadership
worked to implement the hybrid business model.
Associate Professor Wee Beng Geok prepared this case based on the earlier case study written by Wee Beng Geok,
Geraldine Chen and Ivy Buche, with research assistance provided by Yang Lishan. It is based on public sources. As the
case is not intended to illustrate either effective or ineffective practices or policies, the information presented reflects the
authors interpretation of events and serves merely to provide opportunities for classroom discussions.
COPYRIGHT 2012 Nanyang Technological University. All rights reserved. No part of this publication may be copied,
stored, transmitted, altered, reproduced or distributed in any form or medium whatsoever without the written consent of
Nanyang Technological University.
For copies, please write to: The Asian Business Case Centre, Nanyang Business School, Nanyang Technological University,
Nanyang Avenue, Singapore 639798 Phone: +65-6790-4864/5706, E-mail: asiacasecentre@ntu.edu.sg

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INTRODUCTION
In June 2008, Daiichi Sankyo Co Ltd (Daiichi Sankyo), the third largest innovator drug company in Japan,
announced that it would acquire a majority stake in Indias largest generic drug company, Ranbaxy Laboratories
Ltd (Ranbaxy) for US$4.15 billion. However, just after the acquisition, Ranbaxy encountered serious problems in
the US, its major market, when the Food and Drug Administration (FDA) placed an import ban on its products.
While the immediate priority was to resolve Ranbaxys issues with the US FDA, another challenge for Daiichi
Sankyo was to implement a new strategic initiative that would realise the synergies that was the rationale for
the acquisition.
To ramp up revenue growth, the Japanese group strategy was to build a new business model that would leverage
on the strengths of both the generic and innovator drug businesses.

TRENDS IN THE GLOBAL PHARMACEUTICAL INDUSTRY


In the first decade of the 21st century, the innovator business model of global multinational pharmaceutical
companies based on the development, promotion and marketing of blockbuster drugs came under increasing
pressure. An impending Patent Cliff was set to reduce the stable of patented drugs while the costs and risks
of developing new drugs were growing. Many patents on major blockbuster innovator drugs were set to expire,
threatening the revenue base of most major global pharmaceutical companies. The expiry of patents meant
that generic copies of these drugs could flood the lucrative prescription drug market.
Furthermore, drugs under development targeted at treating conditions that were more complex, raising the
cost of research and reducing the likelihood of success. Regulatory agencies were adopting higher standards
for approval of drug use, which required drug firms to conduct more comprehensive and costly clinical trials.
At the same time, low-priced equivalents of branded innovator drugs generics1, were threatening the high
returns and global revenues of innovator drug firms. The US FDA considered a generic drug to be identical,
or bioequivalent, to a brand name drug in dosage form, safety, strength, route of administration, quality,
performance characteristics and intended use.2 The market share of generics in developed countries, the
traditional stronghold of innovator drug companies, as well as in emerging nations, was growing fast. In
developed countries, governments grappling with rising healthcare budgets welcomed lower-priced generics,
whilst in emerging and developing economies, low-cost generic drugs were the only viable option for meeting
the healthcare needs of poor countries with growing populations.
Many innovator companies began searching for new strategies to improve earnings and maintain growth.
Such strategies included moving into emerging markets, setting up generic manufacturing facilities, moving
away from high-risk early-stage R&D, and consolidation. The aim was to meet new demand in the emerging
markets, as well as mature markets, where demand for cheaper drugs was growing and to stem the tide of
generic drugs biting into the global pharmaceutical firms share of mature markets. The search for new business
models resulted in the emergence of a Hybrid Model with innovator drug companies moving into the generic
drug market.3 Daiichi Sankyo was the first among leading Japanese drug companies to move in this direction.

1
2
3

Retrieved September 10, 2011, from World Health Organisation, http://www.who.int/trade/glossary/story034/en/index.html


Retrieved September 10, 2011, from http:://www.fda.gov/downloads/Drugs/DevelopmentApprovalProcess/SmallBusinessAssistance/
ucm127615.pdf
This hybrid model of reducing reliance on blockbusters through the sale of generics came to the forefront in 2005, when Novartis AG
(Novartis) became the first innovator drug company to move in a major way into the generic market with its purchase of Hexal AG
(Hexal) of Germany for US$8 billion. It merged Hexal with its Sandoz division to form what, at the time, was the worlds second largest
generics group.

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Daiichi Sankyo of Japan


In 2008, Daiichi Sankyo was Japans third largest innovator pharmaceutical company with a presence in 21
countries and more than 29,000 employees and was active in the entire pharmaceutical value chain from R&D,
manufacturing, import, to the sales and marketing of pharmaceutical products. It was ranked among the top 20
pharmaceutical companies in world sales in 2009.
Daiichi Sankyo was formed by a merger in 2005 between Daiichi Pharmaceuticals and Sankyo Co Ltd, both
established Japanese firms, each with more than a 100-year history. (See Exhibit 1.) Following the merger,
the new entity set its vision to be a Global Pharma Innovator by 2015 and began a major globalisation thrust.4
For the fiscal year ended March 2008, the merged entity reported US$8.8 billion in revenue with net income of
US$977 million.5 With the acquisition of Ranbaxy, it became the first Japanese drug maker to be engaged in
the four primary pharmaceutical fields new prescription drugs, generics, over-the-counter drugs and vaccines.
Until 2000, protected from foreign competition, both Daiichi and Sankyo had focused on the domestic market.
Since then, access to the Japanese market was progressively freed up through the standardization of regulatory
approval procedures, and many foreign drugs began flowing into the Japanese market, squeezing the profits of
Japanese pharmaceuticals. The Japanese Ministry of Labour, Health and Welfare, in its efforts to control rising
health costs of an ageing population, issued new guidelines on drug reimbursements, tightened approvals and
cut reimbursement amounts which added pressure on Japanese innovator drug firms profit margins.
Patents for more than 40 percent of pharmaceutical products in Japan were set to expire by 2012 and the
Japanese government had set a target for generic drug use of 30 percent market share by volume by 2012,
from 18.7 percent in September 2007.
Ranbaxy Laboratories Limited (Ranbaxy) of India
Ranbaxy was set up in 1961 as an India-based distributor of vitamins and anti-tuberculosis drugs for a Japanese
drug manufacturer. Shortly after this, Ranbaxy collaborated with an Italian firm, Lepetit SpA, then patent holder
of the typhoid drug chlorophenicol, and started production of the drug in India.6
Bhai Mohan Singh took over Ranbaxy in 1966 and his son Parvinder Singh joined him in the late 1960s, just
before Indias Patent Act of 1970 was passed which ended product patent protection in the country. Sensing
a business opportunity, Parvinder launched an ambitious plan to transform Ranbaxy into a major generic drug
manufacturer in India with the construction of a large manufacturing plant and the launch of the companys IPO
in 1973 to tap public funds. Parvinder then began building Ranbaxys international distribution network by driving
export sales of low-cost generic drugs to developing countries. By early 1990s, Ranbaxy was Indias largest
generic medicine company with annual sales of about US$200 million and a distribution network spanning more
than 50 countries. Exports contributed 40 percent of its total annual sales.
Ranbaxy Pharmaceuticals Inc (RPI), a wholly-owned US subsidiary, was set up in 1994 to address the much
more stringent regulatory framework in the Western developed countries. RPI provided a platform for Ranbaxy to
build capability and manage compliance with FDA requirements for generic medicines. In the following year, the
Indian generic drug company acquired a US-based FDA approved manufacturing facility Ohm Laboratories.
Ranbaxy went on to undertake acquisitions in Europe (Ireland, France and Spain), Brazil and Japan. Its 2004
sales revenue reached US$1 billion with international revenues contributing 80 percent of total sales. Ranbaxy
was ranked among the Top 10 generic companies in the world and was the only Indian company in the Top 100
Pharmaceutical companies across the globe.
4
5
6

Retrieved September 10, 2011, from http://www.daiichisankyo.com/corporate/vision/index.html


Daiichi Sankyo. (2008). Annual Report, p. 6.
Ranbaxy Milestones. (2008, June 12). Business Line, India.

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In 1993, Parvinder Singh announced a new mission for Ranbaxy: To become a Research-based International
Pharmaceutical Company and a research centre in Gurgaon, India was launched in 1994. The company identified
the Novel Drug Delivery Systems (NDDS) and Novel Drug Discovery Research (NDDR) as growth drivers for
building longer-term value in developed markets. This enabled reduced number of doses, for example, once a
day against multiple doses of conventional formulations.7 It enabled the generic manufacturer to differentiate
its products from the original drug.
Among the Abbreviated New Drug Applications (ANDA) pending approval, the company had a potential Firstto-File (FTF) opportunity on 18 products, then valued at an innovator market size of around US$27 Bn. The
FTF typically recognised a generic company as being the first to file a paragraph IV application under US FDA,
challenging a particular patent and seeking to manufacture generic versions of a pioneer drug. FTF status
provided 180-day marketing exclusivity (from the date of approval of the ANDA), during which the FDA may
not approve another ANDA for such generic product.
On a global basis, the company made 526 product filings, comprising various drug formulations across multiple
therapies, and received approval for 457.
Daiichi Sankyos Acquisition Goals
Daiichi Sankyos plan was to implement a Hybrid Business Model as part of a First Mid-term Plan (MTP from FY
2007 to 2009) . The Ranbaxy acquisition was regarded as key to realising this strategy, enabling the group to:
Market generic drugs under the Daiichi Sankyo brand in Japan, where the generic drug business was
becoming more important.
Introduce Daiichi Sankyos innovator drugs into the Indian market.

Hybrid Business Model in the Second MTP

* Daiichi Sankyo term encompassing generic drugs and long-sellers with proven market presence.
Source: Daiichi Sankyo. (2010). Annual Report, p. 6.
7

In 2002, Ranbaxy successfully developed four products in the area of Oral Controlled Release Systems, using its patented Platform
Technologies.

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Tap on Ranbaxys distribution network to introduce Daiichi Sankyo products into emerging markets where
it had limited presence by leveraging on Ranbaxys knowledge of these markets as well as Ranbaxys cost
advantage.
Ride on the global revenue growth from generic products in Ranbaxys stable especially the US market.
The Acquisition of Ranbaxy
In June 2008, Daiichi Sankyo announced that it would acquire a majority stake in Indias largest generic drug
company, Ranbaxy Laboratories Ltd (Ranbaxy), for US$4.15 billion. Daiichi Sankyo was seen to have beaten
bigger rivals for a controlling stake in Ranbaxy.8
However, in September 2008, the US Food and Drug Administration (FDA) announced a ban on more than 30
generic drugs sold by Ranbaxy in the US and stopped approval of new medicines (for sale in the US) submitted
by the company, due to what it considered as manufacturing lapses at two Ranbaxy plants in India. As the US
was Ranbaxys largest market, the announcement caused the companys share price to fall by 10 percent by
the end of the day.
In February 2009, three months after completion of the deal in November 2008, the US FDA announced that it
had invoked its Application Integrity Policy (AIP) against Ranbaxys Paonta Sahib facility in India. An AIP was
invoked by the FDA against an applicants facility when concerns were raised about the credibility or reliability
of data submitted on a drug application.
The import alert on a list of Ranbaxy drugs issued by the FDA led Ranbaxy to make inventory write-offs and
for the FY2008, although revenue grew 4 percent to US$1.68 billion, Ranbaxy incurred an after-tax loss of
US$215.55 million. (See Exhibit 2.) This was followed by a loss of US$15 million (Rs 7.61 billion)9 in the first
quarter ended March 2009. By then, Ranbaxys stock plunged to about one-fifth the market price at 2008 high.
Daiichi Sankyo booked a valuation loss of US$3.9 billion (359.5 billion)10 in the third quarter of FY 2008
because of a one-time write-down of goodwill pertaining to the investment in Ranbaxy. For FY 2008, Daiichi
Sankyo recorded a net loss of US$2.21 billion (215 billion)11 compared to net income of US$0.97 billion (98
billion) in the previous FY.12, 13
The events at Ranbaxy was a blow to Daiichi Sankyos goal to move into its Hybrid Business Model. While
Ranbaxys immediate priority was to resolve the import ban and AIP issue in the US, at Daiichi Sankyo there
were concerns that if the regulatory problems were not resolved, the anticipated synergies with Ranbaxy might
not be achieved.14
Post-Acquisition
Ranbaxy returned to a net income of US$61 million in FY 2009 and in FY 2010 total sales reached US$1.868
billion with profit-after-tax of US$327 million. Notwithstanding the issues with the FDA, the US remained
Ranbaxys top market, recording sales of US$600 million (a growth of 80 percent over the previous year) through
successful monetization of FTF products and improvements in the base business.15
8
9
10
11
12
13
14
15

According to industry experts, Ranbaxy had been scouting for a partner and had held talks with Japans Takeda Pharmaceutical as
well as with Pfizer and GlaxoSmithKline.
1 Rs = US$ 0.0197 on 31 March 2009. Retrieved from http://www.oanda.com/currency/historical-rates/
1 = US$ 0.0108 on 31 December 2009. Retrieved from http://www.oanda.com/currency/historical-rates/
1 = US$ 0.0103 on 31 March 2009. Retrieved from http://www.oanda.com/currency/historical-rates/
Daiichi Sankyo. (2009). Annual Report.
1 = US$ 0.0099 on 31 March 2008. Retrieved from http://www.oanda.com/currency/historical-rates/
Daiichi Sankyo. (2010). Annual Report, p. 45.
Arun Sawhney, MD Ranbaxy. (2011, February 22). Financial Results: Full Year 2010. [Presentation].

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Daiichi Sankyo also recovered in FY 2009 with net income of US$0.47 billion (42 billion).16 Although net income
rose to US$0.78 billion (70 billion) in 2010, this was below the pre-acquisition net income of US$0.97 billion
(98 billion). (See Exhibits 3 and 4.)
The events led to major changes in the Ranbaxy board and executive management team and the end of the
Singh family era at Ranbaxy. Malvinder Singh, the scion of Ranbaxys founding family, who had stayed on as
Chairman and CEO of the acquired company, resigned in May 2009. Dr Tsutomu Une of Daiichi Sankyo took
over as Chairman of the Board and Atul Sobti, previously Ranbaxys Chief Operating Officer, was appointed to
the Board and also became CEO and Managing Director.17, 18
A year later, in August 2010, Atul Sobti resigned and Arun Sawhney, who was Ranbaxys President of Global
Pharmaceutical Business, was appointed the MD in his place. Sobti cited differences of opinion with Daiichi
Sankyo about the firms future course as his reason for leaving Ranbaxy.19 In January 2011, Omesh Sethi,
President and Chief Financial Officer of Ranbaxy, also resigned.
The turnover at the executive suite of Ranbaxy reflected the challenges of integrating Ranbaxy into the
Daiichi Sankyo group. Post-acquisition, several moves were made to facilitate the integration, targeting R&D
capability, quality assurance in manufacturing, and sales and marketing organisation. A Synergy Office was
set up at Ranbaxy in July 2009 to direct the integration effort headed by a three-member team two Japanese
representatives and one from Ranbaxy. A working committee was formed to define, design and implement a
new global quality organisation at Ranbaxy led by Daiichi Sankyos former US Head of Quality Control, who
was appointed Ranbaxys Director of Quality Assurance. At the same time, Ranbaxy also set up two Japanese
subsidiaries - one for filing generic drug applications and the other for marketing generic drugs in Japan.
With the acquisition of Ranbaxy, the Japanese pharmaceutical company was able to expand the scope of its
global business and to lessen the concentration of its assets in Japan from 78.96% to 53.7% in 2011. (See
Exhibits 5 & 6.) However, in 2011, three years after the acquisition, its key financial performance indicators
had yet to surpass pre-acquisition levels. In contrast, Ranbaxy has been on a growth path since 2009 with
revenue and profits growing beyond pre-acquisition levels. (See Exhibits 7 & 8.)
To reap the full benefits of its acquisition of the generic drug firm and to realise its strategic vision, Daiichi
Sankyo would have to implement the Hybrid Business Model. In doing so, Daiichi Sankyo would have to revisit
the cultural issues of integration.
Would Daiichi Sankyo have to embark on change management programme to become a truly integrated hybrid
business able to compete in the global pharmaceutical markets of the second 2000 decade? If so, how should
its senior management address the challenge of cultural diversity in the group resulting from the Ranbaxy
acquisition?

16
17
18
19

1 = US$ 0.0112 on 31 March 2010. Retrieved from http://www.oanda.com/currency/historical-rates/


Mr. Sobti had been the Chief Operating Officer at Ranbaxy since January 2007 and a senior executive from October 2005.
Ranbaxy. (2009). Chairmans Message. Annual Report.
Sobti quits Ranbaxy, cites conflict. (2010, August 13). The Economic Times, India.

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EXHIBIT 1
SELECTED FINANCIAL INFORMATION (BEFORE MERGER OF DAIICHI AND SANKYO)
Billions of Yen

Billions of Yen
DAIICHI

FY 2004

FY 2005

SANKYO

FY 2004

FY 2005

Net Operating Profit

49.95

58.26

Net Operating Profit

99.52

86.04

Cash Operating Taxes

11.41

13.34

Cash Operating Taxes

29.19

35.75

NOPAT

38.53

44.92

NOPAT

70.33

50.29

470.88

455.96

834.73

856.31

6.580%

7.439%

6.340%

7.620%

30.99

33.92

Capital Charge
(IC * WACC)

52.92

65.25

7.55

11.00

Economic Value Added


(EVA)

17.47

(14.97)

8.18%

9.85%

ROIC

8.43%

5.87%

2.41%

E VA S p r e a d ( R O I C WACC)

2.09%

-1.75%

Total Investment Capital


(IC)
Estimated WACC
Capital Charge
(IC * WACC)
Economic Value Added
(EVA)
ROIC
E VA S p r e a d ( R O I C WACC)

1.60%

Total Investment Capital


(IC)
Estimated WACC

Source: Bloomberg.

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EXHIBIT 2
RANBAXYS FIVE-YEAR FINANCIAL HIGHLIGHTS
Fiscal Year ending 31 December
Sales

2006
40,587.1

2007
41,844.9

2008
43,083.6

2009
45,211.8

Rs millions
2010
52,514.9

Exports
Gross Profit
Profit before tax
Profit after tax
Equity Dividend
Equity Dividend (%)
Earnings per share (Rs)
Year-End Position
Gross Block+
Net Block
Net Current Assets
Net Worth
Share Capital
Reserve & Surplus
Book Value per share (Rs.)

27,175.7
6,081.7
4,429.8
3,805.4
3,168.9
170
9.87^

26,411.2
28,109.8
9,865.6
(5,713.3)
7,744.1 (16,190.8)
6,177.2 (10,448.0)
3,171.5
0.0
170
11.31
-27.29

28,377.5
11,002.7
10,619.2
5,719.8
0.0
10.74

34,435.5
17,070.9
15,652.5
11,487.3
842.1
40
23.75

24,354.5
17,359.1
12,630.0
23,500.1
1,863.4
21,636.7
63.05^

25,889.0
17,969.4
12,588.2
25,383.9
1,865.4
23,518.6
68.04

30,358.4
20,083.2
12,210.7
41,346.1
2,102.09
39,244.0
98.35

31,878.2
20,423.0
35,463.7
51,323.9
2,105.2
49,218.7
121.90

28,155.1
18,854.4
8,493.6
37,167.7
2,101.9
35,065.8
88.42

Notes:
+ Includes Capital Work-In-Progress.
^ After Share Split.
Sales are stated net of excise duty recovered 2006.
Sales are stated net of excise duty and discount from 2008 onwards.
Sales are stated net of excise duty, discount and replacement of breakages from 2009.
Earnings per share are stated on fully diluted basis.
Source: Ranbaxy. (2010). Annual Report, p. 62.

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EXHIBIT 3
DAIICHI SANKYOS FIVE-YEAR FINANCIAL HIGHLIGHTS
(YEAR ENDED 31 MARCH 2007-2011)

Note: Figures rounded to nearest billion.


Source: Daiichi Sankyo. (2009-2011). Annual Reports. Retrieved January, 17 2012, from http://www.daiichisankyo.com/
ir/archive/ar/index.html

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EXHIBIT 4
SELECTED FINANCIAL INFORMATION FOR DAIICHI SANKYO (2006 2012)
Economic Value Added
(Billions of JPY)
FY 2006
Net Operating Profit

FY 2007 FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

154.97

190.13

150.20

91.16

101.94

125.32

102.93

Cash Operating Taxes

79.96

0.03

71.47

27.73

15.41

34.67

24.65

NOPAT

75.01

190.10

78.73

63.43

86.53

90.66

78.28

1,387.04 1,389.51 1,299.82

Total Investment Capital


(IC)
Estimated WACC
Capital Charge
(IC * WACC)
Economic Value Added
(EVA)
ROIC
EVA Spread
(ROIC-WACC)
Yen to USD Yearly Avg
Bid Rate
EVA in USD (Millions)

1,174.09

1,176.27 1,234.52

1,157.32

6.914%

6.670%

6.247%

9.952%

13.028% 11.397%

7.464%

95.90

92.69

81.21

116.84

153.24

140.70

86.38

(20.89)

97.41

(2.48)

(53.42)1

(66.71)

(50.04)

(8.10)

5.41%

13.68%

6.06%

5.40%

7.36%

7.34%

6.76%

-1.51%

7.01%

-0.19%

-4.55%

-5.67%

-4.05%

-0.70%

0.0086

0.0085

0.0097

0.0107

0.0114

0.0126

0.0123

(179.65)

827.99

(24.06)

(571.59)

(760.49)

(630.50)

(99.63)

Source: Bloomberg

In the year following its acquisition of Ranbaxy, Daiichi Sankyo booked a valuation loss of US$3.9 billion (359.5 billion) in the
third quarter (ended December 2009).

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FY 2006

Source: Bloomberg , OANDA

Sales per employee (USD)

No. of employees

-95.70

94.76

15,349

8,537

0.0097

514,443 556,203

15,358

7,901

0.0085

N.A

N.A

311,852

28,895

9,011

0.0107

842,147

2009

161,617

9,655

1,560

0.0205

76,118

2009

145,810

13,420

1,957

0.0218

363,923

29,825

10,854

0.0114

952,106

2010

100

399,790

30,488

12,189

0.0126

967,365

2011

153,700

14,042

2,158

0.0212

101,805

2011

-65.35

140.44

N.A

N.A
9.04

N.A

N.A

186.38 12.00

1,226.41 78.96

1,487.89

89,760

2010

5.47

N.A

N.A

183.52 10.59

FY 2008
31/3/2008

FY 2009
100

-218.90

43.04

2.51

280.71 16.38

226.96 13.25

242.69 14.16

920.10 53.70

1,494.60

31/3/2009

FY 2010

-227.37

50.33

298.80

212.43

242.26

913.05

1,489.51

31/3/2010

2.93

17.40

12.37

14.11

53.18

100

the Asian Business Case Centre

Sales in USD (Millions)

2008

929,507 880,120

2007

100

1,454.25 83.94

1,636.83

AsiaCase.com

Yen to USD Yearly Avg Bid Rate

Sales in Yen (Millions)

Daiichi Sankyo

12,174

1,712

0.0230

74,450

2008

143,588 140,656

1,701
11,843

0.0242

INR to USD Yearly Avg Bid Rate

No. of employees

70,269

Sales in INR (Millions)

Sales in USD (Millions)

2007

Ranbaxy

Sales per employee (USD)

3.59

N.A

N.A

8.06

FY 2007
31/3/2007

SALES PER EMPLOYEE (USD)

EXHIBIT 6

-47.66

Adjustments

N.A
59.04

Rest of the World

India

132.46
N.A

Source: Bloomberg

100

1,452.29 88.35

1,596.13

31/03/2006

Europe

North America

Japan

Total Assets (Billions of Yen)

For the period ending

Daiichi Sankyo

DAIICHI SANKYO ASSET BREAKDOWN BY GEOGRAPHY

EXHIBIT 5

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EXHIBIT 7
EVA FOR DAIICHI SANKYO ()

Source: Created by Authors.

An AIP is invoked by the U.S. Food & Administration (FDA) against an applicants facility when concerns are raised about the credibility
or reliability of data submitted on a drug application.

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EXHIBIT 8
EVA FOR RANBAXY (USD)

Economic Value Added


(Millions of INR)
Net Operating Profit

FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

7,067.59

2,974.05

4,539.11

13,078.45

17,606.56

719.79

8,013.03

(3,786.39)

(827.94)

2,117.04

6,347.80

(5,038.98)

8,325.50

13,906.39

15,489.52

73,946.35

75,470.22

76,652.32

103,590.16

77,838.38

8.30%

9.10%

9.20%

12.00%

11.00%

6,125.58

6,866.04

7,064.72

12,393.72

8,587.50

Economic Value Added (EVA)

222.23

(11,905.02)

1,260.78

1,512.67

6,902.02

ROIC

8.58%

-6.68%

10.86%

13.42%

19.90%

EVA Spread (ROIC-WACC)

0.30%

-15.77%

1.64%

1.46%

8.87%

INR TO USD Yearly Avg Bid Rate

0.0242

0.0230

0.0205

0.0218

0.0212

Cash Operating Taxes


NOPAT
Total Investment Capital (IC)
Estimated WACC
Capital Charge (IC * WACC)

EVA in USD
INR to Yen Yearly Avg Bid Rate
EVA in Yen (Millions)

5,377,966 (273,815,460) 25,845,990

32,976,206 146,622,824

2.85

2.39

1.92

1.91

1.69

633.36

(28,453.00)

2,420.70

2,889.20

11,664.41

Source: Bloomberg & OANDA.

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APPENDIX 1
THE GENERIC DRUG PHENOMENON
Prior to 1984, the global pharmaceutical industry comprised two parts: organisations in developed countries
focused on researching and developing new molecules and drug delivering technologies to produce innovator
drugs. In poor countries, the focus was on reverse engineering of established innovator branded drugs and
the manufacture of their equivalents or generics.The global market was split into two: i) the rich world where
multinational drug corporations protected by patents, sold innovative drugs at premium prices and ii) the poor
developing world where cheap copies of innovator drugs were sold sometimes even before patent expiry dates.
However, legislation by the US Congress in 1984 (Hatch-Wayman Act) unravelled this neatly differentiated market.
To contain healthcare costs on state budgets, generic drug companies were allowed to sell the equivalent of
innovator drugs in the US on expiry of the drug patents.
This opened the floodgates for generic drug manufacturers to move into previously restricted markets and
generic firms began to capture market share for off-patent drugs with products priced significantly lower than
equivalent branded drugs. Generic drug firms were able to price their products lower and maintain profitability
as they did not bear the costs of drug research and development as well as costs of drug testing including
expensive clinical trials. FDA drug approval process for generic drugs excluded the animal and clinical studies
and tests of bioavailability. This meant lower costs of compliance to standards set by government regulatory
bodies for generic drugs approval. One major beneficiary of this legislation was the Indian pharmaceutical
industry (see Appendix 2).
After the passage of the Hatch-Waxman Act, generic drug companies using the experience gained from
developing markets intensified their capabilities in reverse engineering and large scale manufacturing processes
to render their facilities in compliance with regulatory bodies such as the US FDA and the European Medicines
Evaluation Agency.
Confronted by the successful onslaught of generics on their turf, and faced with aggressive challenges to the
validity of their patents, the life cycles for new innovative drugs were shortened. However, while intensifying
efforts to build more effective patent fencing and other product strengthening strategies to fight the generics, the
innovator drug companies continued to invest in basic research to discover new drugs and treatment therapies.
Although development costs for a new drug could run up to US$1 billion, the returns could be 10 times more.1
By the 2000 decade, this research-based business was under threat as the rate of discovery of new molecular
entities began to decline. This was happening at a time when patent walls for a large number of blockbuster
drugs were set to come down and this resulted in a search for new growth models.
Some innovator drug firms began adopting a Hybrid Model and moving into the generics drugs business as
a strategy to reduce reliance on blockbuster branded drugs by competing in the generics segment. The move
into the generic drugs was seen as a means to gain access to emerging markets and to lower manufacturing
and R&D costs. Daiichi Sankyo also regarded its acquisition of Ranbaxy as a strategy to move towards the
hybrid model.

R, Dubey. & J, Dubey. (2009, April 8). Pharmaceutical product differentiation: A strategy for strengthening product pipeline and life
cycle management. Journal of Medical Marketing, 9(2): pp. 104118.

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APPENDIX 2
THE INDIAN PHARMACEUTICAL INDUSTRY
Over four decades, the Indian pharmaceutical industry transformed from being almost non-existent to having
a turnover of approximately US$21 billion in 2009-10.2 The domestic sector was growing at a compounded
annual growth rate of 14% and was projected to reach US$20 billion by 2015. The country ranked 3rd in terms
of volume of production (10% of global share) and 14th largest by value (less than 2% of global market). India
had the largest number of US FDA-approved plants outside of the US an estimated 175 plants in 2010 as
compared to 100 in early 2007.3
Until the 1960s, foreign pharmaceutical MNCs supplied almost 85% of medicines in India and drug prices were
among the highest in the world. Thereafter, the development of the Indian pharmaceutical industry was boosted
by the Indian Patent Act of 1970 which did away with product patents and instituted process patents valid for
seven years. Quality generic versions of drugs could be legally produced in India while they remained under
patent in other countries. The lack of patent protection made the Indian market undesirable for MNCs and while
they streamed out, Indian companies started to take their place.
The result was more than three decades of reverse engineering of on-patent products as well as the
development of strong chemistry and process engineering capabilities in the industry to meet the needs of a
flourishing domestic generics market. Over this period, a globally competitive complex of low-cost generic drug
manufacturers emerged. However, in January 2005, India amended its patent laws to comply with the WTOs
Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which mandated patent protection
on both products and processes for a period of 20 years. Under the new law, India would recognise not only
new patents but also any patents filed after 1 January 1995.
It became considerably more difficult to produce new generics as foreign pharmaceuticals, which enjoyed 20
years of patent protection, could no longer be copied by means of alternative production procedures and sold
in the domestic market. This also meant reduced revenue options and it was estimated that Indian companies
could lose US$650 million of the local generics market to patent-holders. Low barriers to entry led to more firms
entering the generics business domestically and worldwide. Furthermore, large global pharmaceutical companies
continued to fight generics in court to obstruct them. To deal with this new context, some Indian generic drug
firms consolidated their operations and entered into alliances with MNC drug firms. Larger Indian firms began
moving their R&D from a strictly reverse-engineering focus to incorporate the development of novel drug delivery
systems and discovery research. However, most generic manufacturers lacked the financial resources needed
for R&D to create innovative new products.
With the amendments to Indias patent law, global pharmaceutical MNCs began to establish offshore research and
manufacturing facilities in India, as well as to explore contract research or production outsourcing opportunities.
Pharmaceutical production costs were almost 50% lower, while overall R&D costs were about one-eighth and
clinical trial expenses around one-tenth that in Western nations.4 Several firms including Dr. Reddys Laboratories
and Ranbaxy, spun off their R&D units into separate entities to provide such services. However, there remained
the issue of problem drugs:

2
3
4

India in Business. Overview of Pharmaceutical Sector. Ministry of External Affairs, Government of India. Retrieved September 9, 2011
from http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-sectors/drug-pharma.htm
Gupta, D. (2010, April 6). Tighter FDA rules sour local drug companies American dream. The Economic Times.
Developing an innovative new drug, from discovery to worldwide marketing, involved investments of around $1 billion, and profitability
was constrained as costs continued to rise and prices came under pressure.

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APPENDIX 2
(CONTINUED)
THE INDIAN PHARMACEUTICAL INDUSTRY
Our pharmaceutical products are known to be of good quality, safety and efficacy. Indian generic
drugs have helped in bringing down the cost of treatment of various diseases worldwide, which
include HIV/AIDS. There are instances of spurious drugs, which are harmful to health, being
produced. This is a crime and an unethical practice.5
Pratibha Patil, President of India, 2011

Inaugural address at the 71st International Congress of the International Pharmaceutical Federation, Hyderabad, India. Indian pharma
sector in for great growth, says President. (2011, September 5). Times of India.

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