Sun Pharma’s stock has taken a beating after Japanese drug maker Daiichi Sankyo exited the company by selling its stake in the open market. Around Rs 20,000 crore of shares changed hands in the market. Daiichi, it seems, has sold its entire 8.9% holding, or 214.6 million shares, in the market. The shares were sold at a discount to the previous day’s share price of Rs 1,044. Multiple block deals took place in the market at prices ranging between Rs 930 and Rs 968 per share.
There are two questions that need to be addressed regarding this development. First, did Daiichi make money on its venture in India, and second, more importantly, how does the exit impact Sun Pharma?
Daiichi Sankyo bought Ranbaxy at a price of Rs 737 per share in 2008 for a total of $4.6 billion. The shares were bought at a premium to the market price. The maximum Ranbaxy’s share price touched in 2008 was Rs 613.7. Apart from paying $4.6 billion to buy 63.4% from Malvinder Singh-controlled Ranbaxy, Daiichi also had to pay $500 million to the USFDA to settle disputes related to faking test results to obtain clearances for its products. The fraudulent practices, however, were from a time when the company was controlled by Singh.
Post Sun Pharma’s acquisition of Ranbaxy, Daiichi’s stake in the merged entity was reduced to 8.9%. Daiichi sold its entire stake, which is worth about $3.27 billion in the market. The sale has resulted in a loss to Daiichi in dollar terms; however, in rupee terms, Daiichi is likely to have broken even or incurred only a minor loss. The rupee traded at an average price of 45 against the dollar in 2008 whereas it is presently trading at 62.9. The loss in dollar terms (which does not include the penalty paid) has been recovered from the depreciation in the currency.
As for Sun Pharma, the exit will have had little impact on its performance. The merger between Sun Pharma and Ranbaxy has been completed; it is now a question of how the synergies between the two companies will flow. HSBC Global Research in a report on Sun Pharma says that the company targets operational synergies of $250 million by FY18. Post-merger, Sun Pharma will be the fifth largest specialty pharma company and largest in the country.
Market is worried about the fact that Daiichi sold shares of Sun Pharma at a discount to the ruling price. But in any case, if Daiichi would have sold the shares in the open market, prices would have been lower.
Incidentally, Dilip Shanghvi, promoter of Sun Pharma, is among the buyers who picked up a stake in his own company. With this sale the hangover of a possible exit by Daiichi is now behind us.
But what is worrying for Sun Pharma is management’s interest in other businesses. Sun Pharma is today the largest pharmaceutical company in the country on account of the focused approach by the company towards growing its pharmaceutical business. Splitting management bandwidth by investing in non-core businesses will not be appreciated by the market in the long run.