India’s own pharma demons

Six years ago, when Daiichi Sankyo, the Japanese pharmaceutical giant, concluded the biggest ever foreign acquisition of an Indian manufacturing company by any group in a $4.2 billion cash deal buying the entire 34.82 per cent stake of Malvinder Mohan Singh and family, the erstwhile promoters of Ranbaxy Laboratories, then the largest Indian drug maker and exporter, the Japanese pharma conglomerate was naturally in a celebration mood. It was Daiichi Sankyo’s biggest moment of glory, coming just two years after its major entry into the United States, the world’s largest drug market, without knowing that its India foray would soon step into a corporate booby trap that would not only create a big hole in its pocket but also smear its global face with dirty drugs. What followed its Ranbaxy takeover was a nightmarish experience of fighting a seemingly endless legal battle in the US to protect its reputation as reliable producer and supplier of quality drugs as batches after batches of Ranbaxy generics came under the scanner of the US Federal Drug Administration (FDA), which swooped on to Ranbaxy’s drug units in India at regular intervals on complaints of questionable production process and poor quality.

Daiichi Sankyo accused the former Ranbaxy promoters – mainly the Singh brothers, Malvinder and Shivinder – of cheating and concealing vital information about the Indian drug maker and finally sued them in a Singapore court, last year, when things appeared to fall apart and the Japanese firm faced big fines and massive losses. Daiichi Sankyo was suddenly scared. The Indian acquisition was pulling down its global drug empire. It had no clue how to get out of it since no foreign buyer was expected to touch Ranbaxy. It must have heaved a sigh of relief on April 1st, the all fools day, when the Japanese firm all but inked a share-swap deal to palm off the management of the stricken Indian drug company to another Indian pharmaceutical giant, Sun Pharma, which appeared like a white knight to the rescue of Daiichi Sankyo. There was no cash transaction. For Sun, the purchase cost was $ 3.2 billion. With Ranbaxy’s debt burden, the final cost could come around $ 4 billion. The Indian company offered the Japanese firm a little less than 10 per cent stake in Sun Pharma, the current market value of which covers the purchase cost.

The Japanese firm might not have been very happy because the price fixed for Sun Pharma shares appeared to be inflated. The market is abuzz about alleged insider trading by Sun Pharma promoters in its stocks in a well-planned manner to jack up their value. Though illegal, insider trading by promoters is not uncommon in India. Few big-time offenders ever got caught and punished. The Daiichi Sankyo-Sun Pharma negotiations were conducted under utmost secrecy and no outsider had any clue about the time the two companies took to come to an agreement. However, Daiichi Sankyo had little choice but to agree on a reasonable deal to get out fast of the Ranbaxy mess that was becoming dirtier by the day. The deal will have to go through the formality of Competition Commission clearance mainly in view of its size.

It must have been a great learning for Daiichi Sankyo and should serve as a big lesson to future foreign direct investors who, quite rightly, consider India as a land of great opportunity and rush, often wrongly without proper and reliable due diligence and knowledge of domestic tax laws, to grab Indian-promoted companies rather cheaply. Foreign corporate predators, who think Indian promoters are less shrewd or less crook than some of their counterparts in other countries, may find many unpleasant post-acquisition surprises awaiting them from both the erstwhile Indian promoters as well as from the government and minority shareholders. They may also like to draw lesson from bitter controversies surrounding M&A deals conducted by Vodafone, Holcim-Lafarge and Suzuki’s bid to start a wholly-owned subsidiary in India despite its having a large listed majority-owned automobile manufacturing company here, among others.

While time will tell how Indian Sun Pharma turns around its latest acquisition from the pharma major based in the land of rising sun, the issue of immediate interest before the Indian business community is: what will Daiichi Sankyo do with its legal proceedings against former Ranbaxy promoters? The Daiichi action will also serve as a lesson to those Indian promoters, who think foreign investors are hungry for local assets and could be duped. The Japanese firm has reportedly claimed huge damages arising from its settlement with the US authorities. Daiichi Sankyo had dragged Ranbaxy’s previous promoter Malvinder Mohan Singh to a court in Singapore for allegedly concealing and misrepresenting critical information relating to the US Food and Drug Administration and Department of Justice investigations at the time of the purchase. Currently, Malvinder Singh is the executive chairman of Fortis Healthcare. It is said that the agreement signed between Daiichi Sankyo and the former promoters of Ranbaxy in 2008 provided that any future arbitration related to the deal will be pursued in Singapore, in accordance with commercial arbitration rules. It also prohibited either party from disclosing any information related to the legal proceedings while the arbitration was underway. Ranbaxy, which pleaded guilty in the US of making fraudulent statements related to testing of drugs for securing approvals, had to pay a fine of $500 million to the authorities in that country.

Daiichi had filed five caveats in the Delhi High Court, seeking to prevent a stay order being issued against it without being heard. The question is: will Daiichi pursue with the litigations against the Singhs or let them off the hook lightly?

Though one may say that it was Daiichi Sankyo’s fault not to have gone into the proper depth and details about Ranbaxy’s operation and controversy around export and sale of allegedly substandard drugs before buying the company, few can deny that India suffered a face loss before genuine international investors after the Ranbaxy episode. Daiichi, which entered the US drug market in a big way since one of its major acquisitions there in 2006, two years before its Ranbaxy take-over, should have enquired about the Indian firm with the USFDA to find out the latter’s contention with Ranbaxy and its perception. Daiichi Sankyo, Japan’s second largest drug MNC, is ranked 17th in global drug sales. It owns the US biotechnology firm, Plexxikon, and the German biotech company, U3. Among its best selling drugs is Benicar (Olmesartan), an angiotensin II receptor antagonist with total sales nearing US$ 3 billion. The company was honoured with the ‘Best Cardiovascular Pipeline Award’ by the highly acclaimed international industry journal, R&D Direction. IPA