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Ranbaxy -

DaiichiMerger Analyst Report

Submitted by:

Rajnikant Bajaj 2009190

Rakesh Bawari 2009191

Rashmi Prasad 2009192

Richa Agarwal 2009193

Ritu Prakash 2009194

Rohit Jain 2009196

Samir Bajaj 2009197

Sanjesh Dubey 2009198

Siddharth M 2009201

Sneha Agarwal 2009203


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INTRODUCTION OF THE COMPANIES

RANBAXY LABORATORIES LIMITED

Ranbaxy Laboratories Limited (Ranbaxy), India's largest pharmaceutical company, is an

integrated, research based, international pharmaceutical company, producing a wide range

of quality, affordable generic medicines, trusted by healthcare professionals and patients

across geographies. Ranbaxy today has a presence in 23 of the top 25 pharmaceutical

markets of the world. The Company has a global footprint in 46 countries, world-class

manufacturing facilities in 7 countries and serves customers in over 125 countries. Ranbaxy

was incorporated in 1961 and went public in 1973.

Ranbaxy's mission is To become a Research-based International Pharmaceutical Company.

The Company is driven by its vision to Achieve significant business in proprietary

prescription products by 2012 with a strong presence in developed markets.

DAIICHI SANKYOIt was founded by Sankyo Shoten (financed jointly by Matasaku Shiobara, Shotaro

Nishimura, Genjiro Fukui) and is involved in Research & Development, Manufacturing ,

Import, and Sales & Marketing of pharmaceutical products.

DAIICHI SANKYO's goal is to establish itself as a "Global Pharma Innovator." The

pharmaceutical industry is one of the 21st century's growth industries, and what this vision

of the company signifies is DAIICHI SANKYO making it the leading industry of Japan, a nation

built on the platform of scientific and technological creativity, and establishing itself as a

firm presence by continued success as a flagship company. This is the vision that guides the

development of our global pharmaceutical operations.

They have about 2,300 overseas medical representatives in 33 locations, mainly in Europe

and the United States. Their U.S. subsidiary, Daiichi Sankyo, Inc. (DSI) has research and

development and sales sections, and as the organization that forms the nucleus of our U.S.

operations, is expected to grow in the future. The European subsidiary, Daiichi Sankyo


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Europe GmbH (DSE), is headquartered in Munich, Germany, and has around 800 medical

representatives in operational bases in 10 European countries.

In June 2008, Ranbaxy entered into an alliance with one of the largest Japanese innovator

companies, Daiichi Sankyo Company Ltd., to create an innovator and generic pharmaceutical

powerhouse. The combined entity now ranks among the top 20 pharmaceutical companies,

globally. The transformational deal will place Ranbaxy in a higher growth trajectory and it

will emerge stronger in terms of its global reach and in its capabilities in drug development

and manufacturing.


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ACCOUNTING ANALYSIS:

Accounting analysis or Quality of earnings analysis is done to evaluate the degree to which

accounting numbers capture underlying business reality. Sound accounting analysis

improves reliability of the financial conclusions drawn.

Accounting Policies of RANBAXY

By going through the Annual Reports of RANBAXY for five financial years (from 2002-05 to

2008-09), it can be observed that RANBAXY has selected and applied accounting policies

consistently, and estimates made are reasonable and prudent in order to give a fair picture

of state of affairs of the company to its stakeholders. Some of the salient features are as

follows:

The Annual Accounts have been prepared on a going concern basis.

The financial statements are prepared based on a going concern concept and

historical cost convention, and on accrual method of accounting in accordance with

the generally accepted accounting principles and the provisions of the Companies

Act, 1956.

Fixed assets are carried at the cost of acquisition or construction or book value less

accumulated depreciation.

Depreciation on fixed assets is charged up to the total cost of the assets on straight-

line method as per the rates prescribed in the Companies Act, 1956.

Intangible Assets are capitalized at cost, provided it is probable that the future

economic benefits that are attributable to the asset will flow to the company and the

company will have control over the assets.

Sales are recorded based on significant risks and rewards of ownership being

transferred in favor of the customer. Sales include goods dispatched to customers by

partial shipment.


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Revenue is recognized on percentage completion method based on the percentage

of actual cost incurred up to the reporting date to the total estimated cost of the

contract.

Exchange difference arising on settlement of transactions and translation of

monetary items are recognized as income or expense in the year in which they arise.

Quality of accounting principles can be influenced by three factors i.e. Rigidity of accounting

rules, Forecast errors, Systematic reporting choices made by the managers.

It can be observed that RANBAXY follows almost rigid accounting rules which may

decrease the quality as nature of every transaction is not same whereas, regulations

treat every transaction uniformly. But in here RANBAXY, being a PSU, has implicit

commitment to follow the regulations etc.

As future is uncertain future predictions may go wrong. RANBAXYs forecasts had not

been very far away from the real figures as future figures released are based on the

concept of reasonably certain and it is a mature company with extremely stable

operations and income.

Managers often window dress the accounting numbers due to incentive attached to

cheating the various reasons would be:

o Meeting contractual obligations of debt convents: but as RANBAXY currently

maintains zero working capital finance and secured term deposits (although it

has unsecured loans of the amount 166 crore rupees, majority of which is in

the form of leases) there is no incentive to give biased accounting data. And

in addition to this, RANBAXY had cash and bank balances of 10314 crore

rupees on 31st March 2009 which is 23% higher from the previous year.

o Corporate control contests: RANBAXY has been so big and stable to fall prey

to corporate control contests.

o Tax consideration: RANBAXY being a Public Sector Company would not

temper with the numbers to save the taxes to be paid. The external auditor


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of the RANBAXY also states that the company was found to be paying

accurate taxes on time.

o Capital Market Consideration: Often accounting decisions are taken to

influence the perceptions of the investors, although temporarily, but

RANBAXY being a stable company cannot take risk of taking Time

Inconsistency Problem (in short-run you are involved in certain activities that

are not aligned to your long-run objective).

o Competitive Consideration: the problem of competition often comes in front

of the emerging companies which havent made their space secure and/or

due to greed of earning more profits but neither is the case with RANBAXY.

Accounting Flexibility

The accounting policies of RANBAXY have not been changes - leaving a few exceptional

changes- in the past 5 financial years company has remain stuck with its accounting policies,

the reasons may vary from it is a PSUI to non-requirement of funds to its stability. Flexibility

of the accounting policies has often been used to take advantage for the wrong purposes

(discussed earlier).

Accounting Strategy

The Accounting strategy gives the overall holistic view of the accounting of a firm.

Accounting at RANBAXY is more rigid than flexible. RANBAXY closely follows the

GAAP and other Regulations while preparing annual accounts and it is in line with

the industry norms. For example, Purely Temporary Erection such as wooden

structures is fully depreciated in the year of construction.

Management does not have much incentive and scope to use accounting discretion.

RANBAXY has not changed its policies and estimates in past five financial years.

Certain deviations have been observed that are written a little later.

Past policies and the estimates has been found realistic in five years of time. The

estimates were not very from the actual figures.


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There has been found no business transaction that would have been made to

achieve some accounting objectives.

Quality of DisclosuresDisclosures in the Annual report states the degree of the transparency the firm is trying to

keep. RANBAXY has many disclosures in its Annual reports that are mentioned in various

Sections of the Companies Act, 1956.

RANBAXY has an internal audit committee which ensures that Proper and sufficient care has

been taken for the maintenance of adequate accounting records in accordance with the

provisions of the Companies Act for safeguarding the assets of the Company and for

preventing and detecting fraud and other irregularities. It can be observed that RANBAXY

has never been the target of any controversy, or investigation of any nature.

Various Disclosures by RANBAXY in its Annual reports:

Letter to Shareholders from Director that gives a glimpse view of Company

performance in that particular financial year

Adequate disclosures are made to assess the firms business strategy and its

economic consequences

Shareholding Pattern has been given very clearly in its every annual report

CEO and CFO Certification: that states that CEO and CFO have reviewed the financial

statements and the cash flow statement

Auditors' Certificate on Corporate Governance

Sufficient disclosures has been made that gives investors etc. an opportunity to

understand the reasons behind firms present performance

Statement pursuant Relating to Subsidiary Company i.e. Bharat Heavy Plate &

Vessels Ltd that has been acquired recently(in year 2008) by RANBAXY

AUDITORS' REPORT: its a report by the third party external Auditor who has audited

the firms financial performance.


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Managements reply to the Auditors comments: Management has provided replies

to the queries raised by the external auditors.

Footnotes: Footnotes explains key Accounting policies and assumptions made, if any

Some Deviations from the regular Accounting Policies

In year 2008-09 provision of Liability towards Leave Encashment has to be made on

actuarial valuation but was made on accrual basis.

In year 2008-09 Provision for Depreciation is made without making a technical

assessment of useful lives of the assets, but it was done due to paucity of time and a

fresh technical assessment will be done in coming financial year.

In year 2008-09 Penal charges levied and demanded by the Regional Provident

Commissioner have not been acknowledged as a Debt.

In years 2006-07 and in 20005-06 the balances of Sundry Debtors, Creditors, and

Contractors Advances are subject to confirmation and reconciliation but it doesnt

have any significant impact on the accounts.

In year 2006-07 and 2004-05 Provision for Contractual obligations is made @ 2.5%

but Institute of Chartered Accountants of India requires that the provision should

reflect the current best estimate of expenditure to be incurred and in absence of

current estimate of expenditure how can RANBAXY come to a figure of 2.5%. But it is

Companys policy to provide contractual obligation @ 2.5% of contract value based

on conservative basis.

In year 2005-06 Provision and payment of service tax has not been made in respect

of commissioning and installation services up to 9th September 2004

In year 2005-06 Non-provision of liability towards leave travel concession/leave

travel allowance entitlement to employees accrued and not availed at the year end


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0

5

10

15

20

25

30

35

40

4550

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy

FINANCIAL ANALYSIS

Interest Coverage Ratio:

The interest coverage ratio has steadily moved up from 2008 to 2009 due to the decrease in

the interest expenses over the financial year. Also the EBIT has increased over the year. In

2008 the adverse impact of the dollar over the rupee & the losses on derivatives & the

revaluation of the balance sheet had a negative impact on the bottom line of the company.

The interest coverage ratio has significantly moved over the industry average meaning that

the company is keeping tabs on its interest expenses.

Return on Capital Employed (%)

The Return on Capital

Employed has also posted

significant gains due to

the increase in the EBIT

over the financial year.

Also significant reduction

in the borrowings also

has led to this situation

-20

0

20

40

60

80

100

120

140

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy


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Return on Net Worth (%)

PBIDTM(%)

0

5

10

15

20

25

30

35

40

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy

-40

-30

-20

-10

0

10

20

30

40

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy


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PBDTM(%)

The profit margins have improved considerably over the year because of significant increase

in FTF product sales in the USA. Favourable exchange rate & cost optimisation also led to

this increase in margins. The topline posted a increase of sales in the emerging markets

region while the American markets were still affected by the slowdown.

Fixed Asset Turnover Ratio

-40

-30

-20

-10

0

10

20

30

40

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy

0

0.5

1

1.5

2

2.5

3

3.5

4

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy


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Ranbaxy has always managed its assets in a judicious manner. The asset turnover ratio

slightly decreased during the time of acquisition. It is still maintained around the average

industry mark.

Inventory Turnover Ratio

There has been a significant drop in the inventory turnover ratio over the years when

compared to the industry. This can be attributed to the comparative fall in demand in the

American region leading to build up of inventory for the company.

Debtors Turnover Ratio

0

1

2

3

4

5

6

7

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy

0

1

2

3

4

5

6

7

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy


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Debt to Equity Ratio

Ranbaxy had a significantly high debt equity ratio which indicates a high level the company

has been aggressive in financing its growth with debt. This resulted in volatile earnings as a

result of the additional interest expense. However this has been decreasing over the years

during the decrease in borrowings leading to lower interest expenses over the years.

Long Term Debt Equity Ratio

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy


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Current Ratio

The current ratio of Ranbaxy is significantly below industry standards. However the ratio is

steadily increasing due to decreasing current liabilities over the previous year which is

accounted to a decrease in the short term borrowings of the company

0

0.5

1

1.5

2

2.5

2003 2004 2005 2006 2007 2008 2009

Industry

Ranbaxy


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Strategic FitThe acquisition of Ranbaxy by Daiichi was a win-win situation for both the companies.

Daiichi would leverage the cost advantage offered by India complemented by world-class

infrastructure and also Ranbaxys marketing strengths, while Ranbaxy would benefit from

Daiichis product pipeline and research facilities. Ranbaxy after the acquisition would get

access to the proprietary drug portfolio of Daiichi and catapult Ranbaxy-Daiichi combined to

them to 15th largest Pharmaceutical Company in the world. Further, the fund infusion byDaiichi through the preferential issue and warrants would infuse $1.2bn in Ranbaxy and

enable it to retire its debt. Ranbaxy expected to have cash surplus of around Rs 3,000cr,

which would further strengthen its balance sheet and business through both organic &

inorganic routes. Acquisition of Ranbaxy would provide Daiichi Sankyo a presence in high-

growth Emerging markets like India, China and Eastern Europe. Further, with Ranbaxy being

present in more than 40 countries provides a strong front for Daiichi Sankyo to launch its

products. Along with providing a front-end, the deal also provides Daiichi a strong generic

product portfolio with strong visibility on First-To-File (FTF) product (20 FTF products

addressing a market opportunity of $26bn) launches over the next few years. Large

blockbuster drugs will go off patent globally over the next five year span. Ranbaxy is well-

positioned to capture the upsides from the same drawing from its product pipeline. In fact,

Ranbaxys FTF product pipeline is the best in the space and captures major upsides from the

large blockbuster drugs going off patent in the next few years. Daiichi would leverage

Ranbaxys strengths in the generic markets to strengthen its presence in the emerging

generic market in Japan. Apart from the generic markets, Daiichi would also benefit by

leveraging the low-cost advantage of the Indian assets both in Manufacturing and R&D.

Thus, Daiichi could use Ranbaxy as an out-sourcing hub for its products. All this would create

significant long-term value for all stakeholders through a complementary business

combination that provides sustainable growth through diversification spanning the full

spectrum of the pharmaceutical business; an expanded global reach that enables leading

market positions in both mature and emerging markets with proprietary and non-


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proprietary products; strong growth potential by effectively managing opportunities across

the full pharmaceutical lifecycle; and cost competitiveness by optimizing usage of R&D and

manufacturing facilities of both companies.

Stock Info

Sector PharmaceuticalMarket Cap (Rs cr) 20,931Beta 0.57Face Value (Rs) 5

Shareholding Pattern (%)

Promoters 34.8MF/Banks/Indian FIs 23.3FII/ NRIs/ OCBs 21.0Indian Public 20.9

Acquisition of share by DIS

Date ofAcquisition

Particulars Number of Shares

October 15, 2008 Acquisition of Shares underOpen Offer

92,519,126

October 20, 2008 Allotment of Shares onPreferential basis

46,258,063

October 20, 2008 Acquisition of Shares from theSingh family

81,913,234

November 7, 2008 Acquisition of Shares from theSingh family

48,020,900

Total 268,711,323

Details of the deal

On the 11th of June, 2008, Ranbaxy Laboratories announced that a binding Share Purchaseand Share Subscription Agreement was entered into between DIS, Ranbaxy and the Singh

family (the promoters of Ranbaxy), pursuant to which, DIS will acquire the entire holding of

the Singh family in the Company at Rs 737 per share. DIS was to further seek to acquire

majority of shares of Ranbaxy at the same price. This valued Ranbaxy, as per newspaper

reports, on a post-closing basis at a whopping $ 8.5 billion. The negotiated price of Rs 737

represented a premium of 31.4% over the market price of Ranbaxy on the day of the

announcement.1 Additionally, DIS acquired shares issued by Ranbaxy on preferential basis,


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and also through an open offer (to comply with regulatory requirements). Further,

23,834,333 warrants were allotted to DIS with each warrant representing 1 share that could

be converted at Rs 737 per share at any time between 6 to 18 months from the date of

allotment. In this respect, Rs 73.70 per warrant was to be paid by DIS.


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Valuation

Using multiples:

Based on EV/EBIDTA, Ranbaxy at 17.34 - was already at the higher end of generic

companies. Merck Co had higher EV/EBIDTA as compared to Ranbaxy by 18%.

Ranbaxy also had the highest EV/Total Assets multiple (1.94) amongst the generic

companies. Glaxos multiple was 23% higher.

The EV/Sales multiple was more reassuring, for Mr. Kurosawa. As compared to TEVA and

Mylan, Ranbaxy appeared substantially under priced. Therefore price of Rs 737 paid by DIS

appeared justified.

Summary of Multiples

Company EV/EBITDA EV/Sales EV/TotalAssets

1 TEVA 16.51 4.20 1.69

2 Merck KGaA 17.43 2.78 1.31

3 STADA Aezneimittel AG 10.91 2.01 1.214 BARR 12.94 3.14 1.65

5Mylan 14.04 4.33 1.61

6 Watson 7.26 1.48 1.067 Ranbaxy 17.34 2.61 1.94

8 Pfizer 12.37 3.36 1.41

9 Glaxo 9.70 3.24 2.38

10 Merck Co 20.47 4.72 2.36

Synergy Valuation:

The most important benefit of acquisition will be able to bring in efficiency in its operations

by sourcing APIs and finished dosage products from Ranbaxys 9 manufacturing plants in

India and many more in 4 other countries. Mr. Kurosawa did a quick back of the envelope

calculations. One of the products DIS makes is Ofloxacin. Its sales in 2007 were 108.7

billion. The average cost of goods sold for DIS is about 30%. Mr. Kurosawa believes that by

sourcing it from Ranbaxy, DIS will at least save 6.52 billion. Capitalising the savings at 6%

cost of capital, and based on 373 million share capital of Ranbaxy in 2007, the cost saving by

outsourcing just one product will be Rs 146 per share. Additionally, there will be cost savings

for conducting clinical trials and collaborating on research and sales across the world.


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MPS before announcement 561

Synergy value 146

Fair value Rs. 707

The price paid by Daiichi seems slightly above the intrinsic value assumes that the Market price of

shares just before announcement of merger reflects the intrinsic value of the shares which might not

be true. & besides this, there are other factors also which justifies the price & also the acquisition:

Growth: While DIS grew at 4.7% in 2007 to $ 7.12 billion, Ranbaxy grew at over 10% to $1.6 billion.

This reflects the story of the innovator and the generic companies. While the world pharma industry

grew at 6%, the generics segment is growing at 11%. The pursuit of a dual business segment strategy

will help DIS to improve its growth rate substantially. Jointly, the two companies will rank 15th in the

global pharmaceutical market, whereas independently Ranbaxy stood at 50th and DIS at 22nd.

Reach: DIS would be able to extend its reach to 56 countries (especially emerging markets) from 21

countries where they currently operate. DIS therefore gets the frontend infrastructure. The

combined business will have a significant position in India, Eastern Europe and Asia and one of the

largest presence in Africa. In some of the countries, like Mexico, Russia, DIS has so far not operated.

R&D to speed up new development: The cost competitive R&D facilities of Ranbaxy would be looked

forth by DIS to not only reduce some of its R&D expenses, but also use competencies of Ranbaxy

scientists to hasten new product development. DIS also gets Zenotech's (where Ranbaxy has

substantial equity stake) expertise in the areas of biologics, oncology and specialty injectables.


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Exhibits:

Balance sheet of Ranbaxy

Dec '05 Dec '06 Dec '07 Dec '08 Dec '09

Sources Of Funds

Total Share Capital 186.22 186.34 186.54 210.19 210.21

Equity Share Capital 186.22 186.34 186.54 210.19 210.21

Share ApplicationMoney 0.28 0.88 1.18 175.66 175.85

Preference Share Capital 0 0 0 0 0

Reserves 2,190.80 2,162.79 2,350.68 3,330.92 3,748.54

Revaluation Reserves 0 0 0 0 0

Networth 2,377.30 2,350.01 2,538.40 3,716.77 4,134.60

Secured Loans 353.49 224.29 365.07 162.07 175.83

Unsecured Loans 676.31 2,954.31 3,137.96 3,563.30 3,172.55

Total Debt 1,029.80 3,178.60 3,503.03 3,725.37 3,348.38

Total Liabilities 3,407.10 5,528.61 6,041.43 7,442.14 7,482.98


Application Of Funds

Gross Block 1,799.32 2,133.57 2,261.48 2,386.75 2,620.92

Less: Accum. Depreciation 599.35 699.54 791.96 930.07 1,027.52

Net Block 1,199.97 1,434.03 1,469.52 1,456.68 1,593.40

Capital Work in Progress 432.84 301.88 327.42 428.77 414.92

Investments 762.78 2,679.95 3,237.55 3,618.03 3,833.69

Inventories 890.93 954.91 976.07 1,198.52 1,230.48Sundry Debtors 806.62 1,013.75 882.91 1,024.54 1,534.65

Cash and Bank Balance 30.48 27.06 69.38 49.86 25.56

Total Current Assets 1,728.03 1,995.72 1,928.36 2,272.92 2,790.69

Loans and Advances 594.94 581.18 882.99 2,351.98 1,967.65

Fixed Deposits 86.11 44.09 111.07 1,885.08 728.56

Total CA, Loans & Advances 2,409.08 2,620.99 2,922.42 6,509.98 5,486.90

Deffered Credit 0 0 0 0 0

Current Liabilities 983.57 985.57 1,177.35 3,840.11 3,082.89

Provisions 413.99 522.67 738.14 731.2 763.03

Total CL & Provisions 1,397.56 1,508.24 1,915.49 4,571.31 3,845.92

Net Current Assets 1,011.52 1,112.75 1,006.93 1,938.67 1,640.98

Miscellaneous Expenses 0 0 0 0 0

Total Assets 3,407.11 5,528.61 6,041.42 7,442.15 7,482.99

Contingent Liabilities 202.4 159.4 201 252.85 261.05

Book Value (Rs) 63.82 63.03 68.01 84.24 94.16


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Cash Flow statement of Ranbaxy


Net Profit Before Tax 190.13 442.98 774.41 -1619.08 1061.92

Net Cash From Operating Activities 107.32 315.49 685.77 -599.22 -665.43

Net Cash (used in)/from-562.77 -2103.74 -708.18 -462.91 86.12

Investing Activities

Net Cash (used in)/from Financing Activities 536.15 1739.65 132.19 2817.2 -214.14

Net (decrease)/increase In Cash and CashEquivalents

80.7 -48.6 109.78 1755.07 -793.46

Opening Cash & Cash Equivalents 30.25 110.96 62.36 172.14 862.39

Closing Cash & Cash Equivalents 110.96 62.36 172.14 1927.21 68.93