CCI riders small price for Ranbaxy deal

Share prices of Ranbaxy Laboratories and Sun Pharmaceutical Industries sprinted on Tuesday as the overall market sank on news that Competition Commission of India (CCI) had given nod to their merger plan.

Though the approval came with certain conditions which includes divestment of total of seven products of Sun and Ranbaxy, the market has viewed the development in a positive light. However, the CCI riders may also take bit of time of the deal as there could be less interest of buyers as these are combination products, feel experts.

Ranbaxy closed 3.49% up at Rs 647 on BSE over its previous close, while Sun Pharma rose 1.46% at Rs 840.90. Ranbaxy shares touched an intraday high of 4.36% at Rs 652.50 and Sun Pharma touched an intraday high of 3% at Rs 854.

On April 7, Sun announced its intent to acquire Ranbaxy Laboratories from Daiichi Sankyo in an all-stock deal worth $4 billion, including a debt of around $800 million of Ranbaxy. Since then the share price of Sun Pharma and Ranbaxy on BSE have increased 43.19% and 45.33%, in line with the BSE healthcare index at 43.23%.

Subject to the fulfillment of the conditions, the merger will be approved by CCI. The two companies together constitute up to 90-95% of the total market for these seven formulations. For example, for the combined drugs such as Tamsulosin and Tolterodine, Rosuvastatin and Ezetimibe, Ranbaxy is the market leader with a market share of 60-65%, followed by Sun which has a market share of 30-35%.

CCI has also advised for stalling of Ranbaxy's two oral anti-diabetic products, with formulations containing Sitagliptin combination, currently in the company's pipeline since Sun already has a presence in this category. Sun markets formulations containing these molecules under the brand name Istavel and Istamet under a licence from the patent owner, MSD.

However, the riders by the antitrust regulator are unlikely to have any material impact on the revenue and profitability of the combined entity. In a joint press statement the companies said these products constituted less than 1% of the combined entity's revenues in India. According to pharma market research firm AIOCD AWACS, the combined total sales from these seven brands is estimated at Rs 137 crore.

Abhishek Sharma, pharma analyst with IIFL, said, "This is an overall positive for the companies. The impact of divestment not going to be material for the combined entity. Since this will be a small transaction, the companies can close it within a quick time frame. If my reading is correct, they can close it in next two months. For investors also, there is a return in confidence with this approval in place."

Sharma said since the buyer interest may be low since these are all combination drugs, the companies will not be able to get a huge amount of value out of these products. But if they can preserve the timeline for overall transaction, it will be good for them, he said.

IndiaNivesh, a brokerage, on the other hand, has maintained a 'Hold' rating on Sun Pharma.

Daljeet Kohli, head of research, IndiaNivesh, said, "Deal per se the hurdle is gone. The divestment of these seven products will be negligible on the financial prospects of the companies. There will be a slight delay of about 3-4 months because of the CCI riders.

But from a long-term prospective, Sun will require a longer time to integrate and bring synergy to this acquisition. Besides, Ranbaxy's margins are much lesser than Sun's, so it may result in depressed margins for Sun. And Ranbaxy also has a list of problems which need to be tackled. So our views from the long-term perspective is different from the overall street expectations."