Japanese takes over Indian drug

May 8, 2009
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, NEW DELHI, May  8 – Japanese drugmaker Daiichi Sankyo is finding its acquisition of Ranbaxy difficult to digest after US regulatory setbacks and big losses reported by the Indian generics player.

Daiichi Sankyo announced its 4.6-billion-dollar acquisition for a 64 percent stake in India\’s biggest generic drugmaker by sales last June to gain entry into the fast-expanding global copycat drugs market.

Daiichi, Japan\’s third-biggest pharmaceutical company by sales, was hoping the purchase would give it a new source of revenues as its own patents ran out.

But the firm has seen the value of its investment plummet as a result of regulatory reverses for Ranbaxy Laboratories in the United States, the world\’s biggest drug market, and large losses reported by the Indian company.

The acquisition "definitely took an ugly turn," Sarabjit Kour Nangra, vice-president of research at Mumbai\’s Angel Broking, told AFP.

In the latest bad news, Ranbaxy announced last weekend the recall of an antibiotic, nitrofurantoin, on sale in the United States to treat urinary infection, saying the manufacture of some lots had not met laboratory specifications.

The recall will not have a big impact on Ranbaxy\’s revenues, analysts say. But it came on top of a raft of grim tidings from the New Delhi-based company.

Late last month, Ranbaxy reported a first-quarter loss of 7.61 billion rupees (155 million dollars), driven by a US import ban on some of its medications and wrong-way bets on the Indian rupee\’s movement.

The US Food and Drug Administration (FDA) last September banned imports of more than 30 generic drugs produced by Ranbaxy including antibiotics and AIDS drugs because of problems in their production at two of the company\’s Indian plants.

Then, three months ago, the FDA said Ranbaxy falsified data and test results in approved and pending drug applications, which it said could lead to defective products.

"The FDA issues have severely hurt profitability," Neelkath Mishra, pharmaceutical analyst at Credit Suisse, said in a research report.

Japan\’s Nikkei business daily reported this week that Daiichi Sankyo may announce a group net loss of 340 billion yen (3.4 billion dollars) for the 2008 financial year, hit by the slide in the value of its Ranbaxy investment and a strong yen.

Ranbaxy shares were trading Thursday at 179.30 — less than a third of their 52-week high of 613.70 rupees last June when Daiichi made its bid.

The Tokyo-based company has said it is taking the FDA findings "very seriously" and it and Ranbaxy have "formed a team to solve this issue."

But some analysts say Daiichi may have overpaid for Ranbaxy. Its offer in June was at a 30 percent premium on the share price.

The FDA problems "didn\’t come out of the blue — this was not a cheap buyout, the valuations were on the expensive side," said Angel\’s Nagra.

Ranbaxy has said it may move some drug manufacturing to the United States from India to get round the US import ban. Sales in North America, Ranbaxy\’s biggest market, shrank by seven percent in the first quarter.

Ultimately, analysts believe Ranbaxy could be good strategically for Daiichi.

"Ranbaxy is a great franchise when it comes to emerging markets. It\’s very strong in brand building," said an analyst who asked not to be named because he did not have permission to speak to the media.

Ranbaxy, which derives 80 percent of its sales from abroad, has grown by selling cheap copies of branded drugs that have gone off-patent.

But analysts say Ranbaxy\’s FDA problems will have to be ironed out before it can reap benefits from the tie-up.

"It\’s going to take time for it to pay off — it\’s a business deal that will pan out over a longer period of time rather than the short term," said Angel\’s Nangra.

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