ATHARVA INSTITUTE OF MANAGEMENT STUDIES

STRATEGIC COST MANAGEMENT
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ADITI ATHANIKAR POOJA KARVAT SNEHA NARKAR RAINA SHAH TEJASVI SHIRODKAR
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PROF. D.G CHAUDHARY

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No: 1 Particulars Ranbaxy Company profile Page No.INDEX Sr. 3 2 Daiichi Company profile 3 Reasons for Daichii to enter into a Deal 3 The Ranbaxy-Daiichi Sankyo Deal 4 Valuation 5 4 5 8 Post-acquisition Objectives 6 Post Deal 10 7 11 2 .

subsidiary of Tokyo-based Daiichi Sankyo Co. bone and joint diseases. Ranbaxy today has a presence in 23 of the top 25 pharmaceutical markets of the world. including therapies for dyslipidemia. globally. Inc. to create an innovator and generic pharmaceutical powerhouse. The transformational deal will place Ranbaxy in a higher growth trajectory and it will emerge stronger in terms of its global reach and in its capabilities in drug development and manufacturing. Limited. Daiichi Sankyo Company Ltd. India's largest pharmaceutical company. which is a global pharmaceutical innovator.. The combined entity now ranks among the top 20 pharmaceutical companies. international pharmaceutical company. is an integrated.S. and immune disorders. The Company has a global footprint in 46 countries. Ranbaxy entered into an alliance with one of the largest Japanese innovator companies. trusted by healthcare professionals and patients across geographies. In June 2008. hypertension. DAIICHI COMPANY PROFILE Daiichi Sankyo Company. New Jersey. affordable generic medicines. Equally important to the company is the discovery of new medicines in the areas of infectious diseases. producing a wide range of quality. research based. Daiichi Sankyo. diabetes. This integration created a more robust organization that allows for continuous development of novel drugs that enrich the quality of life for patients around the world. The headquarters company was established in 2005 from the merger of two leading Japanese pharmaceutical companies. is the U.. cancer. headquartered in Parsippany..COMPANY PROFILE RANBAXY COMPANY PROFILE Ranbaxy Laboratories Limited (Ranbaxy). Ltd. was established in 2005 through the merger of two leading Japanese pharmaceutical companies.. and acute coronary syndrome. 3 . world-class manufacturing facilities in 7 countries and serves customers in over 125 countries. A central focus of Daiichi Sankyo's research and development is cardiovascular disease.

) After such an acquisitive strategy. why would Singh suddenly agree to be acquired? The answer is not immediately clear. Among his foreign acquisitions are the unbranded generic drug business of Allen SpA (a division of GlaxoSmithKline) in Italy. Singh has been a pugnacious leader. "It's a landmark deal for the pharma industry. GSK for Valacyclovir and AstraZeneca for Nexium. Ethimed. a generics company in Belgium. who has consulted with pharmaceutical companies including Wyeth and Johnson & Johnson. pursuing takeovers in India and abroad. Cardinal Drugs." he says. and Be-Tabs Pharma in South Africa. Although he denied it was a hostile takeover. which is lucrative and growing. (Many of these patent battles have recently been settled out of court. speculated that there may be problems with the Indian drug industry that analysts are not fully aware of.REASONS FOR DAICHII TO ENTER INTO A DEAL Wharton marketing professor Jagmohan Raju. "Ranbaxy has a good foothold in the worldwide generics market. "We need to look at the sector again. He was recently involved in a raid on the Chennai-based Orchid Chemicals. its bigger goal would be in securing a strong presence in the global market for generics. Others expressed surprise and disappointment. says that while Daiichi Sankyo will find it easier to enter the Indian market with Ranbaxy. the promoter of the beleaguered company didn't agree. 4 . Singh has taken over or acquired strategic stakes in a host of domestic companies such as Zenotech Laboratories. This includes Pfizer for Lipitor. Raamdeo Agrawal. co-promoter and non-executive director of Motilal Oswal Securities." he said. the Mundogen generic business of GSK in Spain. But I can't help feeling a twinge of regret about an Indian MNC becoming a Japanese subsidiary. Singh has also been taking on the world's big names in pharmaceuticals in court cases all over the globe. Terapia in Romania. Krebs Biochemicals and Jupiter Biosciences." Mahindra & Mahindra chairman Anand Mahindra told The Economic Times.

At the end of the exercise.THE DEAL Singh is selling his 34.4 billion) at Rs. Its stated vision has been to be among the top five global generic players and to achieve global sales of $5 billion by 2012. How much of that survives the Daiichi Sankyo regime remains to be seen. Ranbaxy will become a subsidiary of Daiichi Sankyo. It is the second largest pharmaceutical company in Japan. 5 . Ranbaxy.4% through a preferential allotment.8% stake for around Rs. According to Securities & Exchange Board of India (Sebi) norms. it had net sales of $8. though obviously not on the same scale as the Western majors. It has a footprint in 49 countries and manufacturing facilities in 11. Daiichi Sankyo is the product of a 2005 merger between Sankyo and Daiichi.000 people. It has 12. with $1. 737 ($17) per share. Ranbaxy is among the top 10 global generic companies.") Ranbaxy was bought for $2. Despite all the denials from Ranbaxy leadership. it will have a make an open offer to the shareholders of Ranbaxy for another 20%. It is expected that major investments are needed in Religare and Fortis.000 employees. It has a presence in 21 countries and employs 18. But both are really part of the herd in their sectors while Ranbaxy was number one. including 1. Daiichi Sankyo will pick up another 9. had a profit after tax of $190 million.9%. 10. an Indian icon will vanish. In the financial year ended March 2008.2 billion and a profit after tax of $915 million.4 billion. scheduled to be completed by March 2009.000 crore ($2. the group's forays into financial services and hospitals.200 scientists and has been pouring money into R&D. a gain of 67% over the previous year. That will come into play if the ordinary shareholders don't respond to the open offer and Daiichi Sankyo needs another way to raise its stake to 51%.6 billion in global sales in 2007. he wouldn't compromise the Airtel brand which had become "the pride of India. (Similar circumstances drove Sunil Mittal of Bharti Airtel to walk out of a deal with MTN of South Africa. There could also be a preferential issue of warrants to take the Daiichi Sankyo stake up by another 4.

companies that are finding it difficult to enter the Japanese market.S. Daiichi Sankyo makes prescription drugs. though the formal entity today is relatively new. so there is some way to go." He notes that Pfizer has done a smart thing in forming an alliance with Eisai of Japan to jointly market the former's drug Aricept.The company can trace its roots back to 1899. The combination has other benefits for the Japanese company. The ministry stamp of approval will eliminate the problems patients have been facing with health insurance claims. some insurers have not been accepting generic drugs as 6 . GETTING INTO JAPAN Ranbaxy will gain easier access to the much-coveted Japanese market by operating from within the Daiichi Sankyo fold. By 2012. The combined company will be worth about $30 billion.S. radiopharmaceuticals and over-thecounter drugs. which equates to 7. the ministry of health plans to raise the volume share of generics within the total prescription market to at least 30% by 2012. "Ranbaxy could bypass a lot of European and U. the country's pharmaceutical market is currently valued at $74.3% of total medicines sales. an area that is becoming increasingly important in Japan. It gets a stake in a major player in generics." Daiichi Sankyo's proposal is to make the much cheaper generic drugs the default option over branded drugs. diagnostics." The comparative figures of volume share of generics for the U. "The deal will complement our strong presence in innovation with a new. "No other Alzheimer's drug sells well in Japan. where safety and testing requirements are a lot higher. "In an effort to control ballooning healthcare costs. which treats Alzheimer's disease.4 billion and is the most mature in the Asia-Pacific region. and the UK are 13% and 26%. the market will grow to $82 billion. The acquisition will help Daiichi Sankyo to jump from number 22 in the global pharmaceutical sector to number 15." according to Shoda. "The current value of the sector is $5. strong presence in the fastgrowing business of non-proprietary pharmaceuticals." says the report. The country's generics sector is one of the most promising. Changes to prescribing procedures and the influx of foreign firms with low-cost goods will provide a stimulus to the generic drug sector.5 billion. According to the 2008 Japanese Pharmaceuticals & Healthcare Report (2nd quarter).

y An expanded global reach that enables leading market positions in both mature and emerging markets with proprietary and non-proprietary products. y Cost competitiveness by optimizing usage of R&D and manufacturing facilities of both companies.S. y Strong growth potential by effectively managing opportunities across the full pharmaceutical life-cycle. In India. the company has thrived on selling off-patent drugs in the U. Says a joint company statement: "Daiichi Sankyo and Ranbaxy believe this transaction will create significant long-term value for all stakeholders through: y A complementary business combination that provides sustainable growth by diversification that spans the full spectrum of the pharmaceutical business. But there surely could have been an equivalent in Europe or the US. Last year. Indian pharmaceutical companies have been aware of this opportunity.S. But this has become a much more expensive proposition because of litigation. Company¶s mandate was to market formulation generics and look for alliances with Japanese companies. the Mumbai-based Lupin Ltd acquired an 80% stake in a Japanese generic pharmaceuticals company. the $70 million Kyowa Pharmaceutical Industry Co Ltd. Domestic laws make Japanese companies difficult to take over.valid medicines. its acquisitions include Recon Healthcare. Last October. Banyan Chemicals and Liva Healthcare. Zydus acquired a 100% stake in the Tokyo-based Nippon Universal Pharmaceutical Ltd." But beyond these positive results from the alliance lie problems that could have faced Ranbaxy had it chosen to continue alone. First. Zydus Cadila had earlier taken over Alpharma of France. especially in India. The reason why Ranbaxy took this route was that it on a much weaker wicket. The Tatas and the Birlas have successfully targeted foreign companies several times their size. This U. The official version talks of synergies. 7 . Orchid Chemicals & Pharmaceuticals has set up a wholly-owned subsidiary in Japan called Orchid Pharma Japan. Some have started their preparations. German Remedies. The Ahmedabad-based Zydus Cadila group initially entered the Japanese generics market with Zydus Pharma in 2006.

Limited (TSE: 4568. "If the promoters of India's largest drug company felt it better to exit the business after many years of attempts to make it one of the largest in the world. Finally. the transaction would value Ranbaxy at US$8. Daiichi Sankyo and Ranbaxy believe this transaction will create significant long-term value for all stakeholders through: A complementary business combination that provides sustainable growth by diversification that spans the full spectrum of the pharmaceutical business. there is growing competition in generics at home and abroad. The industry contends that it simply cannot make adequate returns on various products. 2008 ± Daiichi Sankyo Company. An expanded global reach that enables leading market positions in both mature and emerging markets with proprietary and non-proprietary products. and Ranbaxy Laboratories Limited (NSE/BSE: Ranbaxy/500359) (³Ranbaxy´). one of the largest pharmaceutical companies in Japan. Ranbaxy and the Singh family.Second.4 to US$4. then there must be serious issues with our drug policy. among the top 10 generic companies in the world and India¶s largest pharmaceutical company.JP) (³Daiichi Sankyo´). On the post closing basis. director of strategic alliances at Nicholas Piramal told the Business Standard. today announced that a binding Share Purchase and Share Subscription Agreement (the ³SPSSA´) was entered into between Daiichi Sankyo. even as the Indian government has been insisting on stringent quality norms.5 billion." Swati Piramal. VALUATION June 11. it is extending its regime of price controls. pursuant to which Daiichi Sankyo will acquire the entire shareholding of the Sellers in Ranbaxy and further seek to acquire the majority of the voting capital of Ranbaxy at a price of Rs737 per share with the total transaction value expected to be between US$3.6 billion (currency exchange rate: US$1=Rs43). the largest and controlling shareholders of Ranbaxy (the ³Sellers´). 8 .

There are.400 crore ($4. The offmarket transaction involving the stake sale worth Rs 9. announced on June 11. 9 . The sale of the promoters¶ stake was earlier proposed to be made through the stock market. a number of practical difficulties in taking the stock exchange route.Strong growth potential by effectively managing opportunities across the full pharmaceutical Life-cycle. that are available for sale at Rs 737 or less. The tax liability would have been much lower ² at about Rs 25 crore in security transaction tax (STT) plus a certain service tax ² had the same transaction been undertaken on the stock exchange. closed on September 4.6 billion). market experts familiar with regulatory requirements said. and Cost competitiveness by optimizing usage of R&D and manufacturing facilities of both companies. The sale of the promoters¶ stake through the stock market can be done in two ways: a bulk deal or a block deal. If the transaction is routed through a bulk deal Daiichi would be required to buy all shares of Ranbaxy.647 crore could result in a long-term capital gains tax liability of over Rs 1. however. There are practical problems in both cases.000 crore for the promoter brothers. Malvinder Singh and Shivender Singh.81 per cent promoters¶ stake at Rs 737 per share and another 20 per cent through an open offer at that price. Daichii was to acquire 51 per cent in Ranbaxy at a total acquisition cost of Rs 18. Thus. Daichii's deal with the promoters. provided for buying the 34.81 per cent stake in the company to Japanese Daiichi Sankyo through an off-market transaction. and not just the promoters¶ stake. especially in India The Ranbaxy promoters may have to exercise the option of selling their 34. which opened on August 16. The open offer by Daichii to acquire 20 per cent stake.

Daiichi Sankyo¶s primary aim is to establish a management framework that will expedite synergies. stock market regulations require that a block deal must take place at a price range of plus or minus 1 per cent of the previous day¶s closing price on the exchange. especially in Japan. Eesei and Takeda Pharmaceutical. On the other hand. the Ranbaxy promoters can transfer their shares to Daichii and save long-term capital gains tax of about Rs 1. the Ranbaxy share price on the market should be at least Rs 729.´ stock market analyst and CEO of a financial portal SP Tulsian said. which seems a distant possibility given that the share price has been on the decline since June 19 from Rs 613 to Rs 490.000 crore that they would otherwise have to pay if the deal is done off-market. Through a bulk deal in the market. In a global pharmaceutical industry making a shift towards generics and emerging market opportunities. POST-ACQUISITION OBJECTIVES In light of the above analyses. Having done that. the company seeks to reduce its exposure to branded drugs in a way that it can cover the impact of margin pressures on the business.35 on Tuesday (September 2). Thus. 10 . Daiichi Sankyo¶s focus is to develop new drugs to fill the gaps and take advantage of Ranbaxy¶s strong areas. the Singh brothers may have to shell out over Rs 1.000 crore to the exchequer. which in turn would significantly increase its cost of acquisition. An off-market transaction would attract a 10 per cent long-term capital gains tax in addition to 1 per cent surcharge and 3 per cent of the tax amount as education cess. Daiichi Sankyo¶s acquisition of Ranbaxy signals a move on the lines of its global counterparts Novartis and local competitors Astellas Pharma. For this. This implies that Daichii would have to buy a larger quantity of shares. To overcome its current challenges in cost structure and supply chain. he said. market analysts said.³If Daichii opts to buy Ranbaxy equity at Rs 737 per share from the promoters through a bulk deal in the market. then the Japanese company would have to buy all the shares of Ranbaxy that are available for sale at a price of Rs 737 or less.

From one of India's leading drug manufacturers. Ranbaxy and Daiichi Sankyo will also need to consolidate their intellectual capital and acquire an edge over their foreign counterparts. Ranbaxy is also an emerging branded drug manufacturer possessing tremendous clout in terms of strategic alliances with some of the biggest players in the industry. 11 . horticulture. undertaking minimal and essential integration and retaining the management independence of Ranbaxy without hampering synergies. A smooth entry into the Japanese market and access to widespread technologies including. POST DEAL Through the deal. veterinary treatment and cosmetic products are some things Ranbaxy can look forward as main benefits from the deal. plant. the acquisition provides the company with a strong platform to consolidate its Japanese generics business. As a generics player. Ranbaxy has become part of a Japanese corporate framework. Ranbaxy is very well placed in both India and abroad although its share performance belies its true potential. which is extremely reputed in the corporate world. Given Ranbaxy¶s intention to become the largest generics company in Japan. Ranbaxy can leverage the vast research and development resources of Daiichi Sankyo to become a strong force to contend with in the global pharmaceutical sector.Post acquisition challenges include managing the different working and business cultures of the two organizations.

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