Behind the Ranbaxy sale

12 June 2008

The sale of Ranbaxy to Daiichi Sankyo has surprised many. Why would the promoters of the leading drug company sell out when there are significant growth opportunities in the near future? Here is why. By Vivek Sharma

Here is the scenario. By 2012, more than three dozen drugs will lose patent protection – many of them blockbusters like Lipitor, the cholesterol lowering drug which is the biggest selling drug ever. Combined annual revenues of large drug companies from these drugs are a staggering $70 billion. This large number of patent expiries will open up unprecedented opportunities for generic drug companies, who profit by selling cheaper versions of patented drugs in unregulated markets and in regulated markets when the drugs go off-patent. Many of these generic companies have been preparing for this wave of patent expiries for a long time now.

Imagine that you are the promoter of a large generic company, with a one-third stake valued at a few billion dollars. Your company is one of the leading global generic companies, the seventh largest to be precise, with annual revenues of close to $1.7 billion. You are a leader in your domestic market, have manufacturing facilities in other parts of the world and sell your products in more than 60 countries. Your company has been aggressively challenging attempts by large drug manufacturers to get patent extensions on blockbuster drugs, including Lipitor. You also enjoy 'first-to-file' status for generic versions of select blockbuster drugs and will get a six-month period of exclusive market access when those drugs go off-patent.

In short, your company is one of the most prepared among generic manufacturers to exploit the coming opportunity – which is truly 'once in a lifetime' in many ways. You are also emotionally attached to the company, built by your father. Will you sell this company when it appears to be all set for the best years in its history, even if the offer is good enough? Not many would, but a few may.

That is what the promoters of Ranbaxy, India's largest drug company, did yesterday when they sold their 35 per cent stake to Japanese company Daiichi Sankyo. This is undoubtedly a transformational deal for the entire Indian pharmaceuticals sector with wide reaching implications, it is not everyday that an industry leader is sold to a foreign buyer.

But the more immediate question is, why did the Ranbaxy promoters decide to sell out now?

The generic honey pot