THE fact that Indian drug makers need to have scale if they are to cash in on the large generics market in the US — estimated at $50-60 billion — isn’t lost on Dilip Shanghvi. On Monday, Shanghvi’s Sun Pharmaceuticals Industries catapulted itself to the position of the fifth largest specialty generics drug maker worldwide, saying it would acquire 100% of the Daiichi-Sankyo-owned Ranbaxy Laboratories in an all-stock transaction.
That the combine will be India’s biggest pharmaceuticals firm is of less consequence even if it commands a 9% share — revenues from the US market can be far bigger and margins more robust. Sun’s revenues from the US geography are estimated at $1.7 billion for FY14 and will likely contribute more than 60% of its total revenues.
However, its buyout of Ranbaxy comes at a time when the US market has become a far more competitive place — the dramatic consolidation in the distribution space with just seven players now accounting for close to 85% of the purchases has tilted the scales in favour of bigger generics suppliers. The fact is, Indian generics players are getting left behind as their global peers pursue acquisitive strategies and offer more specialty products; analysts point out that without additional market share gains, Indian companies will not be able to spend adequately on R&D, and consequently, leave them without ammunition to win shares in the bigger spaces of inhalers and biosimilars. Sun’s spends on R&D in FY14 are estimated at around $150 million, a fraction of what its global competitors invest.
Against this backdrop, the acquisition of Ranbaxy gives Sun Pharma a bigger range of products and more manufacturing units that can help it grow the business faster — combined generic sales (excluding branded sales) will be approximately $1.7 billion to $1.8 billion proforma sales, giving it a share of roughly 2.5%, assuming a market size of approximately $60 billion, Uday Baldota, senior VP, accounts and finance, observed.
However, profitability might be under pressure in the initial years given that Ranbaxy’s margins are way below Sun’s. Globally, Sun Pharma ranks fifth in terms of market share while Ranbaxy is ranked ninth; post-merger, the gap in revenues between Sun Pharma and fourth-ranking Mylan will reduce significantly — from $3.5 billion to $1.7 billion, say analysts.
Most important, the buyout will not pressure Sun’s balance sheet although it will take on debt of $800 million.