Sun Pharmaceuticals & Ranbaxy announce merger: Sun Pharmaceutical Industries (Sun Pharma) and Ranbaxy Laboratories Ltd (Ranbaxy) announced that they have entered into definitive agreements pursuant to which Sun Pharmaceuticals will acquire 100% of Ranbaxy in an all-stock transaction. The deal value for the transaction at ~ US $4bn., puts the valuations at 1.6xFY2015E EV/sales, which is at discount to its peers, which trade at 2.0-2.5x. Thus, every shareholders of the Ranbaxy would get 0.8 shares of Sun Pharmaceuticals. The combined entity’s revenues are estimated at US $4.2bn(Pro Forma CY2013 sales).Ranbaxy has a significant presence in the Indian pharmaceutical market (21% of Ranbaxy’s sales) and in the US(29% of Ranbaxy’s sales) where it offers a broad portfolio of ANDAs and first-to-file opportunities. In high-growth emerging markets (50% of Ranbaxy’s sales), it provides a strong platform which is highly complementary to Sun Pharmaceutical strengths. Sun pharmaceutical on other hand has a strong presence in the US(60% of sales), India (23% of its sales), while the ROW( contributed 17% of sales). Thus, the combined entity would be more diversified with US, ROW and India, contributing 47%, 31% and 22% of sales respectively. In terms, of market share, the combination of Sun Pharmaceuticals and Ranbaxy creates the fifth-largest specialty generics company in the world (just behind the Teva, Sandoz, Activas and Mylan) the largest pharmaceutical company in India, with a market share of 9.2% with a sales of US $1.1bn, behind Abbott which is has a market share of 6.5%, which is huge gap in the Indian markets, which is highly fragmented. In terms of asset base, the combined entity will have operations in 65 countries, 47 manufacturing facilities across 5 continents, and a significant platform of specialty and generic products marketed globally, including 629 abbreviated new drug applications (ANDAs). On the profitability front, the company is estimated to have a combined pro forma EBDITA of US $1.2bn, thus a OPM’s of 28.6%, which is still very healthy, given that the Ranbaxy labs is currently operating at low OPM’s in its history. The company is confident of turning around the same, given its history of turning around its acquisitions in the past of the likes of the Caraco, Taro, DUSA and URL. Thus Sun Pharma is confident of turning around the acquisitions. The company expects the synergies worth US $250mn by the third year of acquisition (i.e. mostly by FY2019). Also, in connection with the transaction, Daiichi Sankyo has agreed to indemnify Sun Pharmaceuticals and Ranbaxy for, among other things, certain costs and expenses that may arise from the recent subpoena which Ranbaxy has received from the United States Attorney for the Toansa facility. Thus there could be some expenses, if any to be borne by the Sun pharma, which should not be a problem, given the strong cash on the books of the combined entity (estimated to be around Rs. 20,000cr in FY2016). The acquisition is likely to get completed by end of 2014 and thus will fully reflect in FY2016 financials. Thus, in FY2016, the Ranbaxy labs, will contribute around 37% of the combined sales (estimated to be around of Rs. 31,223cr) of the company, with Sun pharma contributing the rest. On the, operating front, the company is likely to have an OPM’s of 29.0%, with a combined net profit of Rs. 6640cr. The combined EPS of the entity would now stand at Rs. 27.5, lower form Rs. 28.8 earlier. While in near term the acquisition will dilute the reported ROE’s from 25.4% to 20.7% in FY2016, which is still healthy, given the low profitability of the acquired company and is line with most of the peers which have an ROE’s of 17-25%. However, the operating ROE,
which excludes the cash component, will still be higher at around 40%. Thus, we don’t see any significant de-rating in the stock and hence believe that given the growth opportunities and its market share, we believe that the company will continue to trade at premium to sector valuations. Thus we maintain our buy with a price target of Rs. 660. And as regards, the Ranbaxy labs shareholders, we believe that they should hold on to their investments, given the synergies and the positives emanating from the deal.
Sarabjit Kour Nangra VP Research – Pharma, Angel Broking