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Sun Pharma In The News

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CCI rider likely to have insignificant impact on Sun Pharma-Ranbaxy

Even though the seven brands to be divested command 90% of market share, they account for less than 1% of sales

Antitrust regulator Competition Commission of India (CCI) on Monday gave conditional approval to Sun Pharmaceutical Industries to buy Laboratories. The condition laid down by is that the companies will have to divest seven products to ensure the deal is completed.

In the overall scheme of things, the seven drugs account for less than 1% of sales of both the companies. Sun Pharmaceuticals as well as Ranbaxy have issued statements saying that they are willing to comply with CCI’s recommendations.

As a result of CCI’s decision, and Ranbaxy will divest products worth Rs 137 crore (Rs 54 crore from Ranbaxy and Rs 83 crore from Sun Pharmaceuticals) within six months. In a report, JM Financial points out that Ranbaxy will divest five brands, Sun Pharmaceuticals, one brand, while the seventh will be divested by Ranbaxy, failing which Sun will need to divest it. Further, two of Ranbaxy's pipeline products containing Sitagliptin could be stalled and the eventual launch may be halted as Sun Pharmaceuticals markets these under its brand Istavel and Istamet, licensed from Merck Sharp & Dhome’s versions Januvia and Janumet.

CCI’s move has come as a positive surprise for the market since both Sun Pharmaceuticals and Ranbaxy had submitted 49 products in their submissions to CCI. Edelweiss in its report on the event said that the small quantum of divesture has come as a positive surprise and the divestment will have negligible impact on earnings.

This deal however raises the question of future deals between two giants in the sector. Thankfully for both the pharmaceutical companies, the seven products do not account for much in the overall sales of the company but enjoyed  a market share of 90-95%. Also, as each product’s contribution is low the overall impact on valuation is negligible. In any case, Sun Pharma’s acquisition of Ranbaxy has more to do with its global presence rather than domestic strength.

CCI’s worry is that these products would have given them a monopoly in the market. But the Indian pharmaceutical industry is one of the most competitive in the world, with over 20,000 companies in various therapeutic segments. Ironically, the highest competition in the industry is for products that are under price control.

Higher value products are generally prescription drugs, which are sold by bigger companies using their brand power, marketing strength and relationship with the doctors. However, if the margins are high other players immediately jump in to narrow the gap.

Sun Pharmaceuticals and Ranbaxy have the advantage of belonging to a sector where segmentation of products to judge their market share is well defined. Each segment is broken down not in terms of therapeutic lines but on the lines of APIs (active pharmaceutical ingredients) and further broken down to their combinations. Thus even as these seven products may constitute more than 90% in their segment, they have a less than 0.1% share in the overall market. According to PwC, the top 100 pharmaceutical brands account for 18% of the market. None of the brands have an overall market share of more than 0.5%.

But in a sector where the number of products is few and the categories are not so well defined, CCI’s norm would prevent any merger. Divestment of products making meaningful contribution to the company’s sales would disturb the valuation. It can even be a deal breaker.