Daiichi Quits On Ranbaxy

A little more than five years after acquiring a majority stake in Ranbaxy Laboratories, Japan’s Daiichi Sankyo is throwing in the towel on the troubled Indian firm. Sun Pharmaceutical Industries, one of India’s largest manufacturers of generic drugs, will acquire Ranbaxy for about $4.0 billion.

Sun will pay for Ranbaxy with stock. When the deal is completed, Daiichi Sankyo will end up with a 9% stake in Sun and a seat on Sun’s board. Daiichi currently owns about two-thirds of Ranbaxy.

Sun’s purchase of Ranbaxy will create India’s largest pharmaceutical firm. Their combined 2013 sales were $4.2 billion. Sun estimates that it will be the world’s fifth-largest supplier of generic drugs, with almost half of its sales in the U.S.

But Sun will be taking on the major challenge of fixing Ranbaxy’s quality culture, the repair of which eluded Daiichi. Problems started in September 2008, just a few months after Daiichi announced the Ranbaxy deal, when the U.S. Food & Drug Administration banned imports of drugs made at two Ranbaxy facilities. The agency eventually uncovered such serious manufacturing breaches that Ranbaxy agreed to pay $500 million, a record FDA fine for a supplier of generic drugs.

Daiichi will remain financially exposed to Ranbaxy’s regulatory saga. Daiichi has committed to help pay penalties that may arise from an investigation by the U.S. Attorney’s Office for the District of New Jersey into manufacturing irregularities at Ranbaxy’s Toansa plant.

In a note to clients, Piyush Nahar, a stock analyst at the investment bank Jefferies, expressed optimism about Sun’s ability to turn Ranbaxy around. “Sun has experience in resolving import alerts and could help in a speedy resolution,” he wrote.

However, Sun has its own regulatory problems in the U.S. In March, FDA banned antibiotics made at the firm’s plant in Karkhadi, India.