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The Indian pharmaceutical market has been booming for several years. India has the largest number of pharmaceutical manufacturers which supply to the United States. Since the United States is the biggest pharmaceutical market in the world, several Indian manufacturing firms have been able to achieve rapid growth within a very short span of time. Ranbaxy was the fifth largest pharmaceutical company in India.
A wide variety of drugs were manufactured at Ranbaxy. Also, these drugs were exported to many nations including the United States. Malvinder Singh and Shivender Singh (The Singh brothers) were in control of Ranbaxy.
During the early 2000’s it appeared as though Ranbaxy would undoubtedly be a winner. However, within two decades, the Singh brothers are nearly bankrupt, and the company has been sold twice. It is now part of Sun Pharma which is the largest pharmaceutical company in India. However, the story of the rise and fall of Ranbaxy still remains a case study in the pharma industry. In this article, we will have a closer look at the Ranbaxy story.
Ranbaxy started as a small firm which used to manufacture generic medicines. However, over a period of time, the firm became an industry giant. This was because of the opening up of export markets. Ranbaxy was an expert is supplying low-cost generic drugs to patients in different parts of the world.
Industry analysts were confident that Ranbaxy was going to be a profitable bet in the future. However, the Singh brothers thought otherwise. They decided to sell their stake in Ranbaxy for close to $2.5 billion. The entire firm was valued at $4 billion. The firm was bought over by a Japanese pharma company named Daiichi Sankyo. Daiichi wanted to expand its capabilities to manufacture generic drugs at low cost and hence was desperate for an acquisition in the Indian pharma market.
Although the deal seemed like a bargain at that point in time, it turned out to be horribly overpriced. This is because Ranbaxy used to earn a lot of its revenues from the United States. However, several Ranbaxy drugs were banned by the United States regulator, i.e., FDA. The drugs were mainly banned because of their poor quality. Daiichi, therefore, suffered serious setbacks. For some time, Daiichi tried to make the deal work. However, since it could not manage the operations profitably, Daiichi chose to sell the company to Sun Pharma. Since this was a distressed sale, Sun Pharma was able to get the assets at an attractive valuation. Daiichi, therefore, lost money on both sides, i.e., it made an expensive purchase and was forced to sell off at a lower valuation.
Daiichi did not end up being the ultimate loser in this game. Daiichi found out that the Singh brothers were aware of the problems that Ranbaxy was facing with the American regulators. Hence, they filed a case against the Singh brothers. At first, they were awarded $550 million by an arbitrator in Singapore. Later the same case was filed in Indian courts wherein the Singh brothers have been ordered to pay $550 million in damages to Daiichi. This news has come at a bad time for the Singh brothers whose personal net worth has seen a drastic drop because of the drop in the value of the real estate ventures that they invested their money in.
Some of the important lessons that can be learned from this deal are as follows:
Super-Fast Growth May Be Harmful: Ranbaxy’s rise to the top was meteoric. It started manufacturing many drugs and tried to serve too many markets. The problem was that Ranbaxy was not able to maintain the quality. Reckless expansion caused a drop in the quality. Ranbaxy started cutting corners and manufacturing drugs that were of poor quality. This is the reason why they ran into trouble with the American regulator. Had the company been a little more patient, it could have opted for a slower expansion model. The growth would have been less, but the business would have sustained until today.
Obsession with Acquisitions: Daiichi was obsessed with the growth story of Indian pharma companies. Since so many Indian companies had become successful, Daiichi wanted a taste of the pie too. However, they did not have the time or the inclination to set up the business from scratch. Hence, they wanted to make an acquisition. The problem is that they were in a hurry to make this acquisition. This is why they did not conduct their due diligence properly. Hundreds of Ranbaxy’s drugs were being investigated by the FDA. A more thorough due diligence would have revealed the facts a little earlier. This would have saved a lot of money and pain for Daiichi.
Concealment of Facts: Lastly, concealment of facts is not a very good strategy when it comes to acquisitions. In Daiichi’s case, they were able to find a whistleblower that provided a document confirming that the Singh brothers were indeed fully aware of the extent of Ranbaxy’s troubles and were withholding this information from Daiichi. Hence, their defense that Daiichi was fully aware of the risk fell apart. Concealment of facts is a dangerous strategy when it comes to M&A, and the Singh brothers have ended up paying the price.
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