Valuation of Pharmaceutical Industry

PRESENTED BY :MEGHA DHIGRA POONAM YADAV SAHELI CHOWDHURY SHIVANGI TRIPATHI

An acquisition, also known as a takeover, is the buying of one company (the target) by another. There is no exchange or consolidation of the company. There are two types of acquisition: a) HOSTILE b) FRIENDLY

Ranbaxy Laboratories Limited

Type Industry Founded Headquarters Products

Public (BSE: 500359) Pharmaceutical 1961 Gurgaon, Haryana, India Pharmaceuticals and diagnostics

Revenue Employees

$1.619 billion (2009) 12,995 (2009)

STRENGTHs of ranbaxy
Cost effective technology Drug delivery system management

Production of generic drugs

Pharmaceutical ingredients future growth drivers

Shareholding Pattern of Ranbaxy Laboratories Ltd.

0.00% 0.89% 1.72% Daiichi Sankyo Mutul Funds 12.43% Banks, Fin. Inst., Ins Co.

5.30%
4.16%

FIIs Private Corporate Bodies

9.57% 63.92% 2.01%

Indian Public
Foreign Nationals NRIs/OCBs

As of Dec. 2008

GDRs

Top 10 Pharmaceuticals in India, as of 2010 Rank 1 Company Ranbaxy Laboratories Dr. Reddy's Laboratories Cipla Sun Pharmaceutical Lupin Ltd Aurobindo Pharma Revenue 2010(Rs crore) 4,198.96 Revenue 2010(Rs billion) 41.989

2 3 4 5 6

4,162.25 3,763.72 2,463.59 2,215.52 2,081.19

41.622 37.637 24.635 22.155 20.801

7
8 9 10

GlaxoSmithKline
Cadila Healthcare Aventis Pharma Ipca Laboratories

1,773.41
1,613 983.80 980.44

17.734
16.13 9.838 9.8044

About Daiichi-Sankyo: Daiichi-Sankyo Company, Ltd was established in Sept. 28th 2005 through the merger of two leading Japanese pharmaceutical companies Presently, Daiichi-Sankyo is Japans 2nd largest drug maker. CEO: TAKASHI SHODA

Daiichi Sankyo Co., Ltd.

Type Industry Founded Headquarters Key people

Public KK (TYO: 4568) Pharmaceutical 2005 (by merger) Tokyo, Japan Kiyoshi Morita, Chairman Takashi Shoda, President & CEO

Revenue

880,120 million JPY (FY2007)

Net income

97,660 million JPY (FY2007)

Employees

30,000 (2010) products = Pharmaceutical products

STRENGTHS OF DAIICHI-SANKYO
Japans second largest drug maker company Ranked 22nd drug maker in the world Providing a stable supply of top-quality pharmaceutical products

THE DEAL
Daiichi-Sankyo acquired 34.8% stake in Ranbaxy on 11th June, 2008 It will make an open offer to the Ranbaxy shareholders for another 20% It will pick up another 9.4% through preferential allotment It was an all cash transaction Size of the deal: US$3.4-4.6 Bn Deal values Ranbaxy at US $ 8.5

Ranbaxy-Daiichi
will be the 15th largest drug maker in the world with the market capitalization of $ 30 Bn.

Ranbaxy Acquisition
Ranbaxy is a well known name in pharmaceutical company in India, with large amount of shares both in Bombay & National stock exchange has now sold major amount of shares to the Japanese company Daiichi Daiichi Sankyo bought out the entire promoter stake of 35 percent in Ranbaxy laboratories at Rs 737 per share costing $ 3.4 billion to $4.6 billion Daiichi Sankyo will hold a majority stake in Ranbaxy, however Ranbaxy will continue to operate as an independent & autonomous company. All management & people structures across Ranbaxy were continue as they were.

BENEFITS TO RANBAXY
Company will become one of the top 5 in
generic business Access to Daiichi advanced R & D Access to Japanese drug market Infusion of an additional $ 1 billion into the company

Surplus cash of Rs.3,000 crore used for acquisition in

generic place.

BENEFITS TO DAIICHI SANKYO: Strengthen the position of the company

Faces intense competition from generics in its home market Acquisition will provide low cost manufacturing Market access to over 60 countries

Reasons: The R&D Pipeline was not delivering enough products, the generic market was not generating adequate returns Ranbaxy had three choices, It could have spent lots of money in acquiring a big generic company to grow inorganically, Merge with a global player Sell-out The sell-out option was the most profitable, both for the promoters as well as shareholder Daiichi is a leading, research-based pharmaceutical company & this deal would enable Ranbaxy to explore their shared capabilities in drug development

Methods of Enterprise & equity valuation:There are primarily four approaches to enterprise / equity valuation :-

1. Asset based valuation approach. 2. Relative valuation approach. 3. Capitalisation of earnings approach. 4. cash flow- based valuation approach.

Asset based valuation

The easiest way to value a business is to use the asset based valuation method. Some circumstances that may lead to use this type of valuation are: a new business without a track record, a business that has been losing money or a business where the owner has recently died. Or any other circumstance where the owner is forced to sell or must sell quickly. Even if you own a successful, highly profitable business, you should still conduct an asset based valuation as a way of establishing a baseline to compare with other valuation methods . Total asset of Ranbaxy 132,616,000

How did Daiichi-Sankyo value Ranbaxy?

Assets and Liabilities Book value of assets and liabilities (Cash, Inventory etc.) Inventories (Increase in inventories to fair value) Tangible assets (Land) Intangible assets (Leasehold land) Intangible assets (Increase in current products, etc. to fair value) Value attributed (Yen billions)
78.8 2.0 10.0 5.9 41.0

In-process R&D expenses Deferred tax liability

Minority Interests

6.9 (20.0)
(45.0)

Goodwill Total consideration

408.7 488.3

Valuation of Ranbaxy Laboratories Ltd.

Price paid per share by Daiichi
52 week high / low as on 11th June 2008 for Ranbaxy share Valuation of 63.92% stake by Daiichi Valuation of 100% equity of Ranbaxy as per the deal Enterprise valuation of Ranbaxy (on a fully diluted basis) Market capitalization of Ranbaxy as on 30th May 2009 (conclusion of deal)

Rs.737
Rs. 593 / 300 19804 crores 30982 crores $ 8.5 billion 10434 crores

Relative valuation approach

This approach involves valuing a company by comparing it with the valuation of the other companies in the same industry. This comparison is done using two approaches. (a) comparison with industry averages. (b) comparison with comparable companies.

(a) Comparison with industry averages :-

In comparison with industry averages one compare P/E ratio of the company being valued with the average P/E ratio of the industry as a whole to which a co. belongs

(b) Comparison with comparable companies :Here we take into consideration : Comparison of business models Growth rate Risks elements in the business Debt to equity ratios Dividend policies Quality of their management

Capitalisation of earnings approach:This method considers the past earnings as a criteria for deciding the value of a business. This method does not value the inventory & work in progress.

Cash flow based valuation:This is basically done on the concept of NPV or DCF methods.

Discounted Cash Flow

What Is it: In discounted cash flow valuation, the value of an asset is the present value of the expected cash flows on the asset. Information Needed: To use discounted cash flows valuation, you need to estimate the life of the asset to estimate the cash flows during the life of the asset to estimate the discount rate to apply to these cash flows to get present value