Ranbaxy deal bodes well

Japanese drug-maker Daiichi Sankyo’s acquisition of Ranbaxy, India’s leading pharma company, through a buyout of promoter stake is indeed a momentous event in Indian corporate history. This is not the first time that an Indian promoter has sold out. But the scale is surely without precedence. It shows that India’s new generation of leaders, unlike their fathers and grandfathers, may not be unduly attached to family businesses. Clearly, with the onset of the product patent regime in 2005, the environment has become difficult for local pharmaceutical companies. While opportunity to copy patented drugs through reverse engineering has disappeared, their relatively small size has prevented them from undertaking extremely costly new drug discovery. And the increasing competition in the generics space has eroded margins. Even the lucrative Para IV patent challenges in the US have lost their sheen of late because of high costs, increased competition and patent-holders themselves launching authorised generics. Ranbaxy has tried to grow organically through acquisitions with some success as a larger share of its revenue is overseas. This deal is an indication that in the current environment it is easier for an overseas pharma company such as Daiichi to acquire an Indian company to exploit the advantage of low cost and talent than for an Indian company to leverage the same to acquire global scale. If that were the case then we could see more such sell-outs in the pharma space. The outright sell-out, as opposed to a strategic stake sale, perhaps has something to do with the far greater opportunities available in Indian market. Ranbaxy promoters, who would corner close to Rs 10,000 crore through the deal, already have financial services (Religare) and health services (Fortis) businesses that can be grown further through capital infusion. Then there is a host of opportunities in the infrastructure space where such funds can be easily deployed. The deal bodes well for corporate restructuring in India wherein business could pass on to those who see greater value in them. Promoter reluctance to give up control is a key reason why private equity has not quite taken off — in terms of outright acquisitions — in India. That could change if generation-next is able to let go off family businesses.

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