Critical Analysis and Reflection Of Merger/Acquisition deal of Pharmaceutical Industries
Introduction:
The merger and acquisitions
in developing nations like India plays a prominent role in merging between two
companies of pharmaceutical industries. As per current research statistics
suggest that India is progressing very rapidly especially from developing
countries in pharmaceutical industry which is $40 U.S. billion in 2014 which
showed increase in profits from $25 billion in 2010 to $40 billion. Indian
pharmaceutical companies play a prominent role in pharma sector which driven by
synthesis of drug which possess high quality and have created greater influence
in the market. Throughout the world the structure evolved specially in cost of
manufacturing assets, various business models and in pharmaceuticals and the
advantages of significant changes in costs. Some of the key characteristics
contributed for merger and acquisition deals in pharmaceutical sector specially
in developing nations like India include investments in corporate industry,
stable economic policies, policies implemented by government which are dynamic
and industrialists showed enthusiasm to conduct experiments Bharathi
(2008). The business entity reorganization can be achieved by practicing
merging and acquisition deals lead to attain greater significance. In the
beginning early 90’s India faced a lot of challenges both at national and
international level. The pharma industries exhibit supreme power when compared
with other multinational industries in India. The gains or profits which are
earned from Indian companies in pharma sector gave boosts because of merger and
acquisitions. The total market is valued for around nearly $9000 US dollars
with a growth rate at 10%.The market showed a tremendous increase in pharma
sector and it is fragmented with the manufacturers related to pharmaceutical industries.
There are nearly 300 companies which are well organized and managing the output
from pharmaceutical industries. This shows nearly 60% of the total value of
outcomes is controlled by pharmaceutical industries. Paradigm shift was
experienced by the healthcare sector of Indian pharmaceutical industries which
made development of countries, developing dynamics of industry, gradually
increasing rules and regulations and pressure related to competition in the
market. Many companies across the world came forward to invest and practice
merger and acquisition deal with Indian pharma companies especially focusing on
research and development field, marketing sector and management sector and
various opportunities which lead to increase opportunities in changing
environment in pharmaceutical industry at global level. One such a deal was the
merger and acquisition between Sun Pharma and Ranbaxy pharmaceutical
industries.
The present article
focuses on merger and acquisitions between Sunpharma and Ranbaxy pharmaceutical
industries and reasons for considerations for merging and acquiring Ranbaxy by
Sunpharma pharmaceutical industry even Ranbaxy is facing troubles in foreign
market.
The Sunpharma
pharmaceutical company was first established in 1983 by Dilip
Shanghvi.Initially the companies started by selling five products which are
used to treat psychiatric ailments. In 1987 cardiology related products were
released into the market and gastroenterology related products were released in
1989.Today Sunpharma is largest company in prescribing medicines for chronic
issues and leader in the market in the areas of cardiology, neurology, and
psychiatry.
In the year 2014
Sunpharma acquired Ranbaxy which made the company, largest pharmaceutical
industry in manufacturing Pharma related products in India and at global
positioned at fifth place. Nearly 75% of sales related to Sunpharma Company
will come from outside India. United States accounts for 60% of the revenues in
total. The manufacturing industries are present in 26 different locations like
Brazil, India, and United States etc. (Mishra, 2006). In United States, markets
related to the company are in greater proportion and in 1995 the company was
among the stock exchange list and nearly more than 50 times oversubscribed.
Currently this is one of more profitable company in India.
Merger and Acquisitions by SunPharma Company:
Sunpharma acquired
Kohli Pharma Company in the year 1996.In 1998, the company acquired Natco which
serves as brand medicines related to respiratory problems. In the year 2010,
acquired Taro Pharma of United States. In the year 2011, Sunpharma made a joint
venture with MSD pharmaceutical industries and emerged in market.
Ranbaxy Industry:
Ranbaxy is India’s
largest multinational company established in the year 1961.The company was
acquired by Daiichi Sankyo, a Japan based pharmaceutical company in the year
2008 and shares were controlled by Japan company since 2008.The company
initially started by Gurbir singh and Ranbir singh where the former one acted
as distributor in 1937 for Japan based company. Ranbaxy faced a several
conflicts with Food and Drug administration.U.S. Food and drug administration
stopped all the applications reviews of Ranbaxy industry plant in India which
included data that is developed at Plant named Paonta Sahib in India. The
reason is for data containing false information and tests were not proved in
laboratory and they were not yet registered to release into market. Later in
2012, stopped production because of glass particles were identified in one of
the medical product, atorvastatin found inside the bottles. The U.S. Food and
drug administration department fined 500 million in the year 2013 because the
data is altered and drugs which are adulterated were sold to United States
Bharathi
(2008).
Merger and Acquisitions by Ranbaxy Company:
In the year 2008, Japan
based company Daichi Sankyo acquired nearly 35 percent stakes in Ranbaxy
industry for nearly 2.5 million U.S.dollars.In 2008, November Daichi Sankyo
finished the takeover from Indian family. After transactions were made,
Malvinder Singh retained as chief executive officer of Ranbaxy. In the same
year made a settlement with Lipitor (Pfizer) and Nexium (AstraZeneca),
considered as two largest selling drugs in the world (Mantravadi & Reddy 2008).
The expectations related to generics continued in order to see domination in
market while products which are patented constituted 10 percent profits to the
company. Ranbaxy though faced problems in foreign markets it has been acquired
by the Sunpharma Company considering importance on commercial basis and to use
the research center for developing products in near future which could benefit
both Sunpharma and Ranbaxy and business profits will be foreseen and could make
a huge impact in the world market by satisfying their customers.
Merger & Acquisition process SunPharma and Ranbaxy:
The merger and acquisition between Ranbaxy and Sunpharma industries can be classified into two stage process. They include pre-acquisition stage and post-acquisition process Let us discuss two stages below.
Pre-acquisition
stage:
Ranbaxy
Laboratories is considered as one of the India’s largest multinational
pharmaceutical companies which are linked to drug pipeline which is greater in
size and it has announced regarding buying products in the United States market
in near future. But currently is having issues with regulatory concerns and it
have ceased now in order make profits. However the company has made a huge
profit in Indian market, so this made Sunpharma attracted to acquire Ranbaxy
deal (Agarwal
& Bhattacharya, 2006). A Japanese based company named Daiichi ,Ranbaxy
promoters has struggled to manage plants due to raise of questions from U.S.
food and drug administration after acquisition deal.Ranabaxy was unable from
these issues and increased its pressure on promoters.
The
managing director of the company, Dilip Sanghvi has a good reputation of
changing companies when it is under serious trouble and later turning the
company into earning good profits. The deal between Ranbaxy and Sunpharma had
several benefits and this gave an impression to the director Dilip Sanghvi that
both the companies can mutually get benefitted with this deal Bharathi
(2008). The merger of Ranbaxy and Sunpharma companies showed promising profits.
Some of the benefits were listed below.
Ø Will
become fifth largest generics company across globe and largest pharmaceutical
industry in India.
Ø Get
leadership especially in 13 segments.
Ø Operated
in 65 countries, 47 manufacturing industries around five continents and
provides a platform which is significant especially in generic products across
the world.
Ø Derma
business in U.S. of Ranbaxy industry will sum up with Sunpharma’s derma
business.
Ø Will
give sunpharma company access to human capital and could reach markets in India
in tier 2 and 3 systems, currently there is lacking as per information from
Edelweiss security systems.
The next step is
evaluation of business or assessment. This involves assessment and evaluation
of both Sunpharma and Ranbaxy companies and analysis is to know the future of
both the companies. A complete research is performed in order to know and
evaluate the capital gains, market share, structure of capital, structure of
organization, channel distribution, strength of business and business weakness,
vendors and finally name of brand in the market Ashok panigrahi
(2009). This evaluation process revealed the data related to Ranbaxy merging
with Sunpharma industry.
- The revenue of Sunpharma Company has jumped to 40 percent but on other side profit related to operations would rise by nearly 8% based on 2013 proforma financials.
- The profits were hit by provisions related to Ranbaxy industries which are again related to foreign exchange. Sunpharma expected nearly 1500 crore rupees with merger and synergies related by third year after completion of acquisition process (Beena, 2008). This is significant and these acquisitions savings could be from growth sales and efficient supply chains.
- The merging could have negative impact on the overall performance of Sunpharma industries in short term minimizing its operating profit margins from nearly 45 percent to 30 percent.
- Based on size terms Sunpharma will reach approximately 25,000 Crore revenues by 2013 and profit operations will range around 8,000 Crores with a total net profit around 2000 Crores.
During initiation
process, the companies acquiring will send a proposal for merger and
acquisition deals in order to target the company with complete information
regarding the deal which include future commitments and amount resource and
strategies implemented. This is considered as non binding document offer which
is not made available in the public market. Sunpharma industry hired Mckinsey
Company in order to support the merging of leading pharmaceutical companies,
Sunpharma and Ranbaxy in domestic outlet. A clear statement including the
details of rationalization, utilization capacity and integration were submitted
to Mckinsey Company.
The
business deal structure:
As per rules and
regulations of merging and acquisitions deal, once company acquired new company
and merged, it has to take entire responsibility for creation of strategies to
announce launching of the new merger company, supporting dealing credibility
and marketing structure Ashok panigrahi (2009). This structure
deal related to business will help in strong emphasis and the details as
follows.
- From different bodies need to get regulatory approval like CCI,SEBI and from stock exchanges, High court of Gujarat government, Punjab and Haryana and other relevant stakeholders related to both the companies.
- Other approach is team streamlining
- The regulatory issues need to be resolved at plants related to Ranbaxy under the alerts issued by U.S. food and drug administration.
- It is important to restructure the product to make it new and to align based on demands and interests of Sunpharma industry.
- The ratio of staff productivity should be benchmarked.
Settlements
related to finance and stock exchange:
The shareholders of
Ranbaxy will gain nearly 0.8 percent shares from Sunpharma industry per share
from Ranbaxy. The ratio of exchange which was implied will value about
approximately 460 crores per each share of Ranbaxy and total transaction deal
will have equity value of nearly 3 billion dollars approximately. Once the deal
is done between two companies, Japan based company named Daiichi will have
stake holding around 10 percent in Sunpharma industries. This deal is regarded
as priceless.
- Merger and acquisition deal phase closing and integration plans after merging for venture operation:
In this post
acquisition stage the documents were prepared officially and agreement
dealings, signing of documents related to both companies after considering
recommendations from them and followed by deal negotiation Ashok
panigrahi (2009). The post acquisition stage will also include companies’
integration based on consideration of various parameters. This also gives
information regarding few parameters that are set for effective relationship in
future between the two companies. Once the agreement is signed and entering
into the operation of new venture, merged with two companies, the company
Sunpharma holds the responsibility in operating venture and has listed few
plans which are mentioned below.
Ø Sunpharma
is very clear about detail turnaround plans for its purchase of new venture
Ø The
basic structure of company and functions of management could be undertaken by
Sunpharma Company itself in first year and there is an idea of streamlining and
rationalizing functions. It nearly takes around 2 to 3 years to make turn
around and entities to turn around in order to ensure that the contributions
were made from buy out.
Ø Sunpharma
made three strategies regarding post merging plans which include-
ü The issues
related to regulation need to be resolved
ü In order to have
better efficiency and productivity force field and supply chain integration
strategies are implemented
ü Higher growth
can be achieved by synergizing in both markets domestically and newly emerging
market.
Ø After
transactions closed, it is the engineer’s target to make Ranbaxy turnaround
from three years to four years period.
In
the year 2014, both companies Sunpharma industries and Ranbaxy industries
limited made an announcement that both companies entered and made a definite
agreement. Sunpharma will be acquiring nearly 100 percent of total stock
transaction related to Ranbaxy industries. The shareholders of Ranbaxy based on
agreements made will receive nearly 8 percent of total share from Sunpharma
industries per each share of Ranbaxy (Beena, 2008). The ratio
of exchange valued around 460 crores per each share from Ranbaxy industries, a
premium of 20 percent to one month average weighted share prices of Ranbaxy
industry to 25 percent of Ranbaxy’s two month average weighted share prices of
each case as business closure in the year 2014.
Based
on proforma the revenues related to combined entity are approximately estimated
at US $4 billion with earnings before interest and tax, depreciation and
amortization of nearly $ one US billion for a period of one year which ended in
the last month of year 2013 (Ghosh, (2001).
Competition
commission of India takes decisions which are related to mergers and
acquisitions within a month although CCI can do in 200 days regarding
application filing. After this a proposed deal is made to be approved. The
merger proposed requires stock exchange approvals, SEBI and Haryana, Punjab and
Gujarat highcourts, creditors and shareholders of both the companies (Ghosh,
2001). The CCI official made a statement that it is a critical case which
involved various complexities and it requires a close evaluation. After careful
evaluation by CCI ,closed further investigation and declared that this merger
would earn huge profits and remains biggest drug maker in India with nearly 9
percent share in pharmaceutical industries which a worth of rupees 75,000
annually by sales (Beena, 2004). This is a first merger and
acquisition deal where CCI ordered a scrutiny in terms related to public after
formation of opinion that combination of both companies will result in adverse
effect in relation with competition. The commission has been appointed in order
to monitor the costs of drug in order to make sure that the company will not
stop manufacturing the drug, if prices are two low in case of expensive drugs
prices get increased.
The
product portfolio from Ranbaxy industries could be upside down. Many
applications of company are kept pending in the United States which have
immense potential in order to boost the revenues once approval is given. While
the merger and acquisitions deal has got positive reports but still Sunpharma
have to face few issues. They include compliance in achieving, risks related to
reputation, marketing forces related to integration of both pharma companies,
management of multiple units, Brand of merged company Ranbaxy industries
(Pawaskar,2001).
As per experts opinion it is said that it might lead to creating confusions in
the market place and moral of employees in Ranbaxy will be affected and will be
working for Sunpharma in order to restructure and build it.
The
above graph gives information about Sunpharma industry acquisitions over the
years. Let us see total merger and acquisitions deal happened in pharma sector
in India in the table below.
|
Year
|
Mergers
|
Acquisitions
|
Total
|
|
1975 to 1990
|
440
|
110
|
550
|
|
1990 to 2000
|
675
|
400
|
1000 approx.
|
|
1990 to 1995
|
240
|
90
|
300 approx.
|
|
1995 to 2000
|
400
|
300
|
750 approx
|
|
2000 to 2005
|
1000
|
2300
|
3300 approx
|
|
2005 to 2009
|
780
|
2200
|
2950 approx.
|
In
the global market, there are various companies of pharmaceutical industries
from India which have made Merger and Acquisitions agreements. The companies
would allow expanding its business activities in order to achieve higher
profits and to capture market share expansion. Merger and acquisition is much
needed for business enterprises in order to achieve economic growth and
increase in sales, synergies, diversification, planning related to finances,
economy globalization and approaches considered to be monopolistic. This
creates further interest among companies to merge for increasing power in
market across the world. Research work need to be carried out in order to
investigate impact of merger and acquisitions further of industries in
pharmaceutical sector in India.
Study
Objectives:
The
objective is to study and analyze the merger and acquisition impact performance
related to operating environment of India pharma industry (Pawaskar,2001).
Research
Hypothesis:
No
significant impact could be observed once after merger and acquisition is done.
Methodology:
Secondary
data is used for this study and the information is obtained from annual reports
which are related to different performances that are operated in the
pharmaceutical industries. The information is collected from websites, journals
and newspapers.
Study
period:
Totally
six years is covered which is divided into 3 years each,2002-2003 before
merging happened and after merging from 2009 to 2010 , three years each subsequently.
Sample
designing:
Convenience
sampling method is used to collect the data from pharmaceutical industries as
complete source is not available readily. The companies used to study are
listed in the table below.
|
S.NO.
|
Company Acquiring
|
Company targeted
|
Year
|
|
1
|
Sunpharma industries
|
Taro
|
2007
|
|
2
|
Ranbaxy industries
|
Terapia
|
2006
|
Data
editing, classifying and analysis were been carried out in this study. The
ratios related to operating performance(pre acquisition and post acquisition)
were estimated between periods 2002 to 2003 and 2009 to 2010 by using tools
which are appropriate to this study objectives.The ratio of operating
performance of Indian pharma sector firms in pre merger period and post merger
period were presented in the table below.
|
Year
|
Ratio
of operating performance
|
|||
|
Ranbaxy
Pharmaceutical industry
|
Sunpharma Industries
|
|||
|
Premerger
|
Post merger
|
Premerger
|
Post merger
|
|
|
1
|
24.22
|
14.4
|
4.6
|
11.6
|
|
2
|
17.5
|
6.3
|
17.2
|
2.8
|
|
3
|
5.3
|
9.5
|
25.4
|
8.9
|
|
Mean
|
16.4
|
10.4
|
15.5
|
7.4
|
|
Standard deviation
|
8.5
|
3.57
|
8.1
|
3.5
|
|
CV
|
0.52
|
0.37
|
0.52
|
0.512
|
|
Year
|
Gross
profit ratio
|
|||
|
Ranbaxy
Pharmaceutical industry
|
Sunpharma Industries
|
|||
|
Premerger
|
Post merger
|
Premerger
|
Post merger
|
|
|
1
|
38.44
|
27.1
|
41.55
|
44.02
|
|
2
|
33.11
|
41.32
|
36.12
|
30.1
|
|
3
|
27.4
|
44.66
|
31.45
|
35.54
|
|
Mean
|
32.21
|
37.08
|
36.64
|
36.02
|
|
Standard deviation
|
5.02
|
8.04
|
4.67
|
6.12
|
|
CV
|
0.28
|
0.32
|
0.124
|
0.168
|
The above table
represents the information above the average profit ratio of operating firms
which are selected. The variations based on standard deviation the ratio of
operating firms is greater in case of Sunpharma pharmaceutical industries and
on other side Ranbaxy industries is on lower side. The variations based on
covariance in the ratio of operating profits post merger is greater in case of
Sun pharmaceutical industries and on other side Ranbaxy industries is on lower
side.
The table above gives
information about average gross ratio of selected merger industries. Based on
standard deviation the gross profit ratio post merger was greater in case of
Ranbaxy industries when compared with sunpharma industries. Based on covariance
the ratio of profit operations post merger was greater in case of Ranbaxy
industries when compared with Sunpharma industries limited.
|
Year
|
Net
profit ratio
|
|||
|
Ranbaxy
Pharmaceutical industry
|
Sunpharma Industries
|
|||
|
Premerger
|
Post merger
|
Premerger
|
Post merger
|
|
|
1
|
21.4
|
12.6
|
35.23
|
15.67
|
|
2
|
14.33
|
-23.29
|
22.04
|
-30.87
|
|
3
|
6.02
|
15.98
|
9.12
|
25.44
|
|
Mean
|
14.23
|
2.01
|
22.45
|
3.07
|
|
Standard deviation
|
7.15
|
17.08
|
11.14
|
24.02
|
|
CV
|
0.54
|
13.09
|
0.576
|
8.49
|
|
Year
|
Net
worth ratio (Return on)
|
|||
|
Ranbaxy
Pharmaceutical industry
|
Sunpharma Industries
|
|||
|
Premerger
|
Post merger
|
Premerger
|
Post merger
|
|
|
1
|
40.72
|
18.06
|
32.46
|
32.23
|
|
2
|
36.02
|
26.44
|
33.29
|
41.25
|
|
3
|
37.98
|
30.45
|
33.26
|
43.02
|
|
Mean
|
37.46
|
25.48
|
33.29
|
39.04
|
|
Standard deviation
|
2.3
|
5.6
|
0.568
|
5.44
|
|
CV
|
0.059
|
0.289
|
0.006
|
0.138
|
The table above gives
information about net profit ratio of selected merger industries. Based on
standard deviation the net profit ratio post merger was greater in case of
Sunpharma industries when compared with Ranbaxy industries. Based on covariance
the ratio of profit operations post merger was greater in case of Ranbaxy
industries when compared with Sunpharma industries limited.
The table above gives
information about net worth ratio of selected merger industries. Based on
standard deviation the net profit ratio post merger was greater in case of
Ranbaxy industries when compared with Sunpharma industries. Based on covariance
the ratio of profit operations post merger was greater in case of Ranbaxy
industries when compared with Sunpharma industries limited.
A hypothetical t-test
is conducted to determine merger of Indian pharmaceutical industries and the
results are tabulated below.
|
S.No
|
Company list
|
Ratio of operating
profits
|
Gross profit ratio
|
Net profit ratio
|
Return on
Net worth ratio
|
|
1
|
Sunpharma
|
-0.389
|
-0.918
|
-.3.92
|
4.289
|
|
2
|
Ranbaxy
|
1.980
|
2.034
|
1.689
|
1.452
|
From the above table it
can be concluded that t-level of Ranbaxy industries limited is five percent
less than significant level. The operating, gross profit and net and return on
net worth profit t- values are 1.980, 2.034, 1.689 and 1.452 respectively. This
result in hypothesis acceptance which proves that company post merger showed no
effect in performance regarding operation management. On other side the t-value
of Sunpharma industries limited related to return on net worth profit ration is
greater than the value of table at 5 percent level of confidence. So the
hypothesis insisted initially is rejected which has a significant effect on
performance operations related to the company post merger. The gross, net
profit and operating ratios were not rejected which indicates that there is no
significant effect on performance of operating ration post merger of the
company.
Sunpharma
pharmaceutical industries should look for improvement in profits which depicts
that operating costs is higher and try to control expenses. On other side
Ranbaxy pharmaceutical industries limited should strive to make improvement in
net profit for wealth of industry. However Sunpharma industries must improve
the total net income worth related to shareholders.
The premerger and post
merger analysis between two industries resulted that the key ratio related to
financial terms of acquisition deals indicate that there is no significant
effect on operating the industries post merger and acquisitions. The
performance relation to operating procedures in the company was better in case
of Sun pharmaceutical industries when compared with operations in Ranbaxy
industries limited and it is below satisfactory level. However sunpharma
industry merger with Ranbaxy industries will improve benefits for both
companies but the problem with sunpharma in dealing with shareholders need to
be improved. The performance effectiveness and strategies that are implemented
by the pharmaceutical industries are demonstrated in order to realize the key
objectives which are desired by both the companies. The impact of merger and
acquisitions on the performance of operations with in both companies with
reference to pre merger acquisition and post merger acquisition the ration of
operating finances were presented. The deal between two companies will help in
earning profits in both domestic and international markets. The shareholders of
both companies will be given 4 out of 5 shares and get benefitted. The ratio of
exchange presents a value of nearly 460 crores per each share from Ranbaxy
Company. The deal would lead to dilution for nearly 15 percent with sunpharma
in terms of equity capital. The reason is the total value of equity is nearly
$3 billion and the size of the deal is $4 billion. This deal would fetch profits
to both companies in domestic market and could make an impact at international
level.
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