Wednesday, June 11, 2008

Daiichi/Ranbaxy: Eating Big Pharma's Lunch

Could Japanese pharmas be the Godzillas of the drug industry? With the money these outfits have been throwing around, they are certainly putting pressure on Big Pharma to up their deal ante. Consider that in the last six months there have been three multi-billion dollar buy-outs by mid-sized Japanese companies: Eisai bought MGI Pharma for $3.3 billion in cash in December; Takeda purchased Millennium for nearly $9 billion; and now comes news that Daiichi Sankyo is taking a controlling interest in the Indian drug giant Ranbaxy for $4.6 billion.

On Wednesday, Daiichi announced it had agreed to buy a 34.8% stake in Ranbaxy from the Indian company's founders, the Singh family. The company will finance the acquisition--priced at a handsome 31% premium to Ranbaxy's closing price Tuesday--with a combination of cash and financing. Analysts reckon the combined company will be worth about $30 billion and called the transaction "bold and entirely out of character."

It should not come as a surprise that Daiichi, a company with a cash war chest of $6 billion, is doing a big deal. Last year the company reported consolidated net sales of ¥880.1 billion, a year-on-year decline of 5.3%. To remain competitive with its Japanese brethren, particularly Takeda and Eisai, the firm needed to ink a major transaction that would extend its reach beyond the stagnant home market, where annual government-mandated price-cuts on drugs and a slower regulatory approvals process make for a tough business climate. (For more on the pressures facing Japanese pharmas, check out this story from our January 2007 IN VIVO.)

And like Takeda and Eisai, which are facing patent exipirations on crucial drugs such as Prevacid, Actos, and Aricept, Daiichi has its own pipeline worries to think about: the company's website lists just three Phase III compounds, including the oft-discussed and risky prasugrel it has partnered with Eli Lilly. In May it acquired the German antibody developer U3 Pharma, presumably to increase its large molecule capabilities.

What is surprising about the Daiichi/Ranbaxy deal is that Daiichi chose to invest in a company focused primarily on generics and geographically situated in an emerging market. While India is undoubtedly an important arena, companies such as Takeda, Astellas, and Eisai have focused their efforts on building a US presence, especially in oncology.

Indeed, this recent tie-up has a very different flavor from the Eisai/MGI Pharma and Takeda/Millennium tie-ups. For the billions Eisai ponied up for MGI, it got several marketed oncology products, including Aloxi and Dacogen, as well commercial infrastructure and an increased presence in the US. Takeda, meanwhile, eschewed a specialty pharmaceutical play, preferring a company with its own internal R&D efforts, an interesting but early stage pipeline and a potenial blockbuster in Velcade, a first-in-class proteasome inhibitor approved to treat multiple myeloma and mantle cell lymphoma.

But instead of bulking up on R&D capabilities or marketed products, Ranbaxy swung the other way, spending a large chunk of its available cash to obtain access to what Takashi Shoda, president and CEO of Daiichi Sankyo called "a strong presence in the fast-growing business of non-proprietary pharmaceuticals."

While many analysts seem surprised by the deal, Kenji Masuzoe, of Deutsche Bank, thinks it's welcome news. "A pure, 100%-pharma based business is a tough model," he says. Still, despite the challenges, most pharmaceutical companies have not embraced such a diversified business model. (BMS anyone?) Indeed, only two of the top 20 drug companies have major generics businesses: Novartis with its Sandoz unit and Teva (which let's face it is mostly a generics company anyway).

The acquisition raises a critical question: How will a proprietary company effectively run a generics business with its vastly different culture and vastly different economics?

It's worth noting that this isn't the first non-pharma type acquisition Daiichi has done. Back in 2006 the company purchased Astellas's OTC business unit, Zepharma Inc., for about $200 million. Last year Daiichi reported that net sales of its healthcare products, which include the skin blemish product Transino and the pain-reliever, Felbinac, increased 4.9% to ¥50.3 billion in year-on-year terms for the period ending March 2008.

Perhaps purchasing a big generics play at a time when the Japanese government is extremely anxious about the cost of healthcare and looking for ways to boost generic sales has a modicum of sense?

Indeed, there's also a certain logic to having a major stakehold in what should prove to be an important market, India. Hirohisa Shimura, an analyst with BS pharmaceuticals, told The Times that Daiichi may have accepted that its future growth lies with the fast-growing middle classes of Asia's emerging markets. "Emerging markets are absolutely the sort of expansion that the Japanese pharmaceutical companies will be thinking about now that their international competitors are doing the same," he says.

(Photo courtesy of Flickr user tumatigre via a creative commons license.)


Vikas Dandekar said...

Its amazing to see how a Japanese firm will now top the Indian generic market. After all a population of 1.2 billion is attractive to make a presence. That too having a growth of atleast 15 percent year on year. Besides, very few countries have the market and manufacturing capabilities ready to be tapped. Rather than keeping the $ 6 bln in the bank, Daiichi may have done well to invest in a growing company like Ranbaxy.

Ellen Licking said...

Vikas, That's absolutely true. But it will be interesting to see how Daiichi manages a company of Ranbaxy's size. The fact that the company is taking a controlling interest but not buying it outright will almost certainly create challenges. And it is a very different tack from the other Japanes Pharmas that have been focused on the US market.

Vikas Dandekar said...

Hi Ellen,

Sorry for coming in late on this...

I have broken down the Daiichi Ranbaxy deal synergies on my blog

Take a look if possible.

Anonymous said...

I read about this in BW and was surprised with such a move. However, i think this in many ways was the best moves. It will set up a new stage in the Indian Market as well as global.

See you guys at: Management Community

Kritika said...

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