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Supriya Gunthey Bharati Malik Harsh Chopra Aruttam Biswas

Indian Pharmaceutical IndustryOverview

India currently represents U.S. $6 billion of the $550 billion global pharmaceutical industry with its share increasing at 10 % a year. Indian sector represents 8% of the global industry total by volume, putting it in 4th place worldwide, it accounts for 13% by value, and its drug exports have been growing 30 % annually. The organized sector of India's pharmaceutical industry consists of 250 to 300 companies, which account for 70 % of products on the market, with the top 10 firms representing 30 percent.

India's top 10 pharmaceutical companies were Ranbaxy, Cipla, Dr. Reddy's Laboratories, Lupin, Nicolas Piramal, Aurobindo Pharma, Cadila Pharmaceuticals, Sun Pharma, Wockhardt Ltd. and Aventis Pharma.

Profile Of Both the Companies

Largest in the India 8th in largest in the global generic pharmaceuticals Ground operations in 49 countries & Manufacturing in 11 countries. Strong R&D Base. 2nd largest in Japan 22nd Largest in the world Operations in 50 countries. Producer of high quality drugs

15th Largest drug maker in the world Market Capitalization 30 Billion Low cost production

Benefits to Daichii
Strategic Advantage: The acquisition will pave the way for creating a new and complementary hybrid business model. Growth: While DIS grew at 4.7% in 2007 to $ 7.12 billion, Ranbaxy grew at over 10% to $1.6 billion. While the world pharmaceutical industry grew at 6%, the generics segment is growing at 11%. Reach: DIS would be able to extend its reach to 56 countries (especially emerging markets) from 21 countries where they currently operate.

Benefits to Daichii (contd.)

Cost Savings in Manufacturing, Sales and R&D: The most important benefit will be the low-cost manufacturing infrastructure and supply chain strengths of Ranbaxy. R&D to speed up new development: The cost competitive R&D facilities of Ranbaxy would be looked forth by DIS to not only reduce some of its R&D expenses,but also use competencies of Ranbaxy scientists.

Implications for Ranbaxy

Freeing up Debt: Cash infusion of Rs 34 billion via fresh issue of shares to DIS which can be used to free up its debt. Transformation: Ranbaxy can significantly transform itself from a generic player to one with innovation, R&D and a far larger product portfolio. Access: Access to & a strong foothold in the Japanese drug market(2nd largest in the world) & other developed country drug markets.

Implications for Ranbaxy (contd.)

R&D access: Ranbaxy also gains access to Daichiis R&D expertise to advance its branded drugs business. Strengthening API business: Ranbaxy can strengthen its API business by working with Daichii as a supply partner.

Debt of Ranbaxy (2007-2012)

Comments on Ranbaxys debt levels

Ranbaxys debt has increased every year from 2007 till 2012 with the exception of 2009 when the total debt fell from Rs 3725.37 crores to Rs 3348.38 crores (2009 was the year of acquisition). In the subsequent years the debt levels actually rose from Rs 3348.38 crores in 2009 to Rs 4763.61 crores in 2012. One of the main reasons that Ranbaxy choose to be acquired by Daichii was to free up its debt, with the cash that it received from Daichii.

We can safely infer from the data that, the Rs 34 billion that Ranbaxy received via fresh issue of shares to Daichii was used for purposes other than freeing up its debt.

Alternatives to Daiichi
1. Daiichi could develop sell branded generic drugs in India & other emerging markets. (like Pfizer) 2. Enter into alliances with local pharmaceutical companies. (like Pfizer and Aurobindo Pharma) 3. Sell in India drugs that are off patents globally. (like GSK) 4. Shifting from Patented to Generic Drugs & developing the generics business organically. (like GSK) 5. Acquire brands in pharmaceuticals & consumer healthcare that offer real value for money (like GSK)

Valuation of Ranbaxy

We think that Daiichi paid a substantially high price for Ranbaxy. The negotiated price of Rs 737 represented a premium of 31.4% over the market price of Ranbaxy on the day of the announcement.

Reasons for paying a high premium for acquiring Ranbaxy could be: 1. Daiichi wanted to built up its generics business quickly & therefore did not choose the organic route. 2. Daiichi thought that the synergies & benefits from the acquisition (low cost production etc.) would be worth the premium. 3. The instant access to the emerging markets that the acquisition provided would be well worth the premium.

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