The announcement that Sun is to buy Ranbaxy from Daiichi Sankyo comes hot on the heels of Meda’s rejection of an approach by Mylan and Actavis’s successful takeover of Forest, illustrating the rapid pace at which the generic industry is changing shape – not to mention the current availability of bank debt with which to do the reshaping. The deals are very different, but the principle is the same; the big are getting bigger and it is becoming increasingly difficult for CEOs to defend a pure organic growth strategy to shareholders, irrespective of whether or not inorganic expansion actually makes sense. All the more so because companies that stand still risk becoming targets. Actavis’s purchase of Warner Chilcott, for instance, which preceded the Forest deal, was its way of escaping from an unwanted approach by Valeant, while even Teva has recently been the target of takeover speculation.
Sun’s purchase of Ranbaxy fits perfectly with the philosophy of its CEO, Dilip Sanghvi. Sun has a reputation for buying distressed assets cheaply and they don’t get much more distressed than Ranbaxy, which has suffered from a seemingly endless stream of FDA warning letters that have left it severely restricted in its ability to serve the US market. Sun has also not escaped the FDA entirely, but is in vastly better shape and may well be hoping to transfer products – and, more critically, first-to-file ANDAs – over to its own facilities, rather than completing all the tortuous remediation work that Ranbaxy has been forced to embark on. Sun will pay c$3.2bn in an all-stock deal, which may be a lot in absolute terms but represents about half the price that Daiichi paid for Ranbaxy in 2008. Daiichi itself will become a 9% shareholder in the enlarged entity, with a seat on the board. There should be very significant cost-savings to be made across R&D, manufacturing and sales, so Sun’s assessment that the transaction will be immediately earnings accretive is almost certainly correct. Sun has also prudently persuaded Daiichi to indemnify it against any fall-out from the US Department of Justice investigation that is now taking place in regard to faked analytical results from the Toansa API plant.
Apart from making a lot of sense financially – and creating the largest pharma company in India – the Sun/Ranbaxy tie-up is also interesting because it goes against the current trend among generic companies to focus more on brands. Ranbaxy is a classic generics manufacturer, relying on rapid development, aggressive patent litigation and cheap manufacturing, while Sun is similar, albeit with an innovative drug development arm as a sister company to the core generic activities. Both companies have a strong presence in India, the US and in some emerging markets, but neither have much on the ground in Europe (a deliberate choice in the case of Sun, failed expansion in the case of Ranbaxy). In our view, the similarities between the two companies are what should make the deal a success. By sticking firmly within its own area of expertise, Sun should be able to create an enlarged company that does not merely have more scale but is also more efficient – and hence more competitive – in an environment of ever-decreasing prices and increasing quality standards. It also ensures that Sun remains very focused, reducing the potential for internal conflict over priorities.
It is in part because companies such as Mylan and Actavis find it difficult to compete with the likes of Sun and Ranbaxy on cost that they have switched their focus to products with intrinsically higher margins and longer lifecycles, i.e. brands. In Europe in particular, brands are a far more attractive option than unbranded generics, as even Sun and Ranbaxy have tacitly acknowledged, so Mylan’s attempt to bulk up in Europe and also boost its US specialty pharma business by buying Meda is understandable. Not that Meda is an entirely straightforward asset. It owns a mish-mash of OTC and Rx products, built up through its own serial acquisitions, and suffers from a largely stagnant base business, leavened by one or two newer growth products that require promotion (but which were presumably part of the attraction). Meda has historically been extremely secretive, despite being a quoted company, so it is not entirely clear that what you see is exactly what you would get. Not that Mylan seems likely to find out, as Meda’s Board has categorically rejected its approach. However, we doubt that Meda is the only target that Mylan had in its sights. As we noted when commenting on Actavis’s acquisition of Forest (February 25th 2014, Forest felled by Actavis), the logical next step for brand-seeking generic companies is to buy big pharma cast-offs, as Aspen has been doing, so we would not be surprised to see Mylan (or Teva or Actavis – or Valeant, for that matter) doing just that, particularly as many big pharma companies are currently engaged in reorganising their own operations to create stand-alone divisions for their off-patent products. Big pharma OTC assets might also be up for grabs, which could be particularly interesting for Teva, which already has its PGT tie-up with Proctor & Gamble.
Moving in the direction of brands creates its own problems, though. Generics companies have long asserted – and we tend to agree with them – that big pharma firms can’t ‘do’ generics, as they don’t have the right internal culture. The question is, can generics companies ‘do’ brands? Or, rather, since they are obviously capable of selling brands, can they successfully run both a branded and a generic business without one losing out to the other? Brands are seductively attractive with their (generally) high margins and stable or growing sales, and a company that has investment opportunities in both its branded and generic divisions may well find itself favouring the former over the latter. Teva, for instance, clearly de-emphasised generics when it was under the stewardship if Jeremy Levin, a former big pharma executive: what it will do now that it has a new CEO remains to be seen. These are early days for Actavis as it gets to grips with Forest, while Mylan’s branded segment is currently based largely on a single product, but to the extent that they shift their gaze away from generics, they are likely to find themselves losing ground to companies that don’t have any distractions from their core generic business. Sun Pharma, for instance.