Ranbaxy & Daiichi Sankyo Co. Ltd.

Merger

The present study discusses the implications of the merger between Ranbaxy and Daiichi Sankyo, from an intellectual property as well as a market point of view. This analysis is particularly important at this point because of a variety of reasons including the growing preference for generics, increasing dominance of emerging markets such as India, fast approaching patent expiry etc. Also, given the fact that this involves between 2 players who are among the largest among their respective markets, this deal is of great significance.

Background
Daiichi Sankyo Co. Ltd. signed an agreement to acquire 34.8% of Ranbaxy Laboratories Ltd. from its promoters. Daiichi Sankyo expects to increase its stake in Ranbaxy through various means such as preferential allotment, public offer and preferential issue of warrants to acquire a majority in Ranbaxy, i.e. at least 50.1%. After the acquisition, Ranbaxy will operate as Daiichi Sankyos subsidiary but will be managed independently under the leadership of its current CEO & Managing Director Malvinder Singh. The main benefit for Daiichi Sankyo from the merger is Ranbaxys low-cost manufacturing infrastructure and supply chain strengths. Ranbaxy gains access to Daiichi Sankyos research and development expertise to advance its branded drugs business.

Daiichi Sankyos strength in proprietary medicine complements Ranbaxys leadership in the generics segment and both companies acquire a broader product base, therapeutic focus areas and well distributed risks. Ranbaxy can also function as a low-cost manufacturing base for Daiichi Sankyo. Ranbaxy, for itself, gains smoother access to and a strong foothold in the Japanese drug market. The immediate benefit for Ranbaxy is that the deal frees up its debt and imparts more flexibility into its growth plans. Most importantly, Ranbaxys addition is said to elevate Daiichi Sankyos position from #22 to #15 by market capitalization in the global pharmaceutical market.

Synergies
The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their respective presence in the developed and emerging markets. While Ranbaxys strengths in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the potential of the generics business, Ranbaxys branded drug development initiatives for the developed markets will be significantly boosted through the relationship. To a large extent, Daiichi Sankyo will be able to reduce its reliance on only branded drugs and margin risks in mature markets and benefit from Ranbaxys strengths in generics to introduce generic versions of patent expired drugs, particularly in the Japanese market. Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages, and have profound strength in striking lucrative alliances with other pharmaceutical companies. Despite these strengths, the companies have a set of pain points that can pose a hindrance to the merger being successful or the desired synergies being realized. With R&D perhaps playing the most important role in the success of these two players, it is imperative to explore the intellectual property portfolio and the gaps that exist in greater detail. Ranbaxy has a greater share of the entire set of patents filed by both companies in the period 1998-2007. While Daiichi Sankyos patenting activity has been rather mixed, Ranbaxy, on the other hand, has witnessed a steady uptrend in its patenting activity until 2005. In fact, during 2007, the companys patenting activity plunged by almost 60% as against 2006.

Significant Differences in Patenting

Daiichi Sankyo had a more diverse technology spread compared to Ranbaxy. The top four IPCs of Ranbaxy and Daiichi Sankyo accounted for almost 94% and 72% of the total number of patent families analyzed, respectively. An IPC gap analysis for the two players revealed that patent families of these companies were spread across 43 different IPCsHormones and gastro-intestinal drugs are exclusive therapeutic areas that Teva Pharmaceuticals has obtained approvals for compared to Ranbaxy and Daiichi Sankyo in the same period. Barr Pharmaceuticals, on the other hand, held 54 ANDA approvals filed across 15 therapeutic segments. The unique segments of Barr Pharmaceuticals include hormones, uro-genital drugs and bone disorder drugs. Three New Drug Application (NDA) and Biologic License Application (BLA) approvals by the US FDA were obtained by Ranbaxy as of 6 September 2008 for the period January 2003September 2008, while in the same period, Daiichi Sankyo obtained only two approvals. Teva Pharmaceuticals obtained five NDA and BLA approvals while Barr Pharmaceuticals did not obtain any approvals.

Post-acquisition Objectives
In light of the above analyses, Daiichi Sankyos focus is to develop new drugs to fill the gaps and take advantage of Ranbaxys strong areas. To overcome its current challenges in cost structure and supply chain, Daiichi Sankyos primary aim is to establish a management framework that will expedite synergies. 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, especially in Japan. In a global pharmaceutical industry making a shift towards generics and emerging market opportunities, Daiichi Sankyos acquisition of Ranbaxy signals a move on the lines of its global counterparts Novartis and local competitors Astellas Pharma, Eesei and Takeda Pharmaceutical.

Post acquisition challenges include managing the different working and business cultures of the two organizations, undertaking minimal and essential integration and retaining the management independence of Ranbaxy without hampering synergies. Ranbaxy and Daiichi Sankyo will also need to consolidate their intellectual capital and acquire an edge over their foreign counterparts.

Conclusion
In summary, Daiichi Sankyos move to acquire Ranbaxy will enable the company to gain the best of both worlds without investing heavily into the generic business. The patent perspective of the merger clearly indicates the intentions of both companies in filling the respective void spaces of the other and emerge as a global leader in the pharmaceutical industry. Furthermore, Daiichi Sankyos portfolio will be broadened to include steroids and other technologies such as sieving methods, and a host of therapeutic segments such as anti-asthmatics, anti-retrovirals, and impotency and anti-malarial drugs, to name a few. Above all, Daiichi Sankyo will now have access to Ranbaxy's entire range of 153 therapeutic drugs across 17 diverse therapeutic indications. Additional NDAs from the US FDA on anti-histaminics and anti-diabetics is an added advantage. Through the deal, Ranbaxy has become part of a Japanese corporate framework, which is extremely reputed in the corporate world. As a generics player, Ranbaxy is very well placed in both India and abroad although its share performance belies its true potential. 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. Given Ranbaxys intention to become the largest generics company in Japan, the acquisition provides the company with a strong platform to consolidate its Japanese generics business. From one of India's leading drug manufacturers, 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. A smooth entry into the Japanese market and access to widespread technologies including, plant, horticulture, veterinary treatment and cosmetic products are some things Ranbaxy can look forward as main benefits from the deal.

However, the recent ban on the US imports of more than 30 Ranbaxy drugs is a major pain point for the company now. While Daiichi Sankyo has stressed that it going ahead with the deal, it raises some concerns over the impending benefits and has in fact already affected Ranbaxys share performance in September 2008. Post the deal, Ranbaxys debt will be significantly reduced and will impart more flexibility to pursue growth opportunities. The acquisition corroborates the strong possibility for similar moves in the future, particularly from Japanese players who have begun displaying confidence in Indian patent laws and respect for intellectual property rights.