>RANABAXY LABS (IDFC SSKI)

Event update: Management change; Daiichi takes charge

Ranbaxy has announced that Mr. Malvinder Singh has stepped down from the positions of Chairman, CEO and Managing Director from immediate effect. While Mr. Tsotomu Une (Daiichi-Sankyo nominee) will take over as the Chairman of the board, Mr. Atul Sobti (erstwhile COO) will be the new CEO and M&D. This marks a new phase in Ranbaxy’s relationship with Daiichi Sankyo (Daiichi) and is indicative that Daiichi has now decided to take more direct control of the business. On the analyst call, the new Ranbaxy management team indicated that this change will accelerate the integration of the Ranbaxy into the Daiichi fold and accelerate the realizations of synergy benefits. While the company did not share specific details of the likely benefits, they hinted at potential cost savings from outsourcing of Daiichi’s manufacturing and R&D operations as well as penetrating the Japanese generics market as some of focus areas. Company also indicated that the management change may help in influencing the FDA’s decision making process with respect to the warning letters. On a negative note, there seems to be some uncertainty over the fate of Ranbaxy’s potential FTF status on the pending applications as the FDA will individually review each ANDA application. At this point of time, there is limited clarity on the timelines for the resolution of warning letters as also the Ranbaxy’s FTF status for different molecules. Given that Ranbaxy FTF status across multiple products is probably the most critical element of its growth strategy over the next few years, this uncertainty is a concern. In our view, the likely synergy benefits of Daiichi – Ranbaxy combination are likely to be realized only over the medium term and offer limited upsides in the near term. Even a quick resolution of the USFDA ban is unlikely to have any material impact on the CY09-10 earnings as Ranbaxy will find it extremely difficult to regain lost market share in a highly competitive US generics market. We reiterate our Underperformer call given the uncertainty on the business outlook across geographies including US and Ranbaxy’s extremely rich valuations (20x CY10E EV/EBITDA excluding Rs60/share of FTF value).

EVENT: MANAGEMENT RESHUFFLE AT RANBAXY

■ Malvinder Singh steps down from the company
Malvinder Singh, Ranbaxy’s erstwhile Chairman, CEO & MD has stepped down. As per the initial agreement, Malvinder was supposed to the CEO and MD of Ranbaxy for five years so this exit even before the expiry of the first full year is a bit surprising. In our view while the agreement to have Malvinder Singh continuing to lead Ranbaxy for 5 years despite selling out his stake was quite intriguing per se, his sudden exit is also surprising. While the management has denied it, we believe it is a reflection / consequence of the myriad challenges that Ranbaxy has been battling over the last few quarters.

■ Daiichi takes more direct control of the company; Atul Sobti to be the new CEO and MD
In a clear indication of its intent to take more direct control of operations, Daiichi Sankyo has appointed Mr. Tsotomu Une – a member of Daiichi’s board – as the head of the Ranbaxy’s board. At the same time, Ranbaxy’s erstwhile COO, Mr. Atul Sobti has taken over as the new CEO and MD of the company.

While there has been a steady attrition in Ranbaxy’s ranks over the last few months, the new management has not ruled out further personnel changes. Nevertheless, Daiichi and Ranbaxy remain very confident in the ability of the current management team to deliver despite the odds.

■ Ranbaxy expects accelerated realization of synergies in the new set-up
Additionally, the management has clearly stated that it would retain Ranbaxy as an independently listed company with a combined operational strategy of being an innovator as well as generics major. This may be a dampener for investors who have looking for a potential open offer from Daiichi as it seeks to “average” its cost of acquisition.

Penetrating the Japanese generics market will be key focus area for the integrated entity. With strong prospects of “genericization” in the Japanese market, Daiichi will aggressively look at launch of generics products by Ranbaxy in Japan. Ranbaxy can benefit from Daiichi’s strong image and presence in the Japanese market. The potential opportunity for generics in Japan remains large as demonstrated by the robust performance by Lupin’s Kyowa acquisition. Ranbaxy is hopeful of building up of “several hundred million dollar generics business” in Japan and this does remain one of the biggest potential upsides from this deal.

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