Indian competition commission approves merger of Sun Pharma and Ranbaxy
With the proviso that the firms divest seven key products to address monopoly concerns
To create India's largest and the world's fifth biggest drugmaker is no mean task, but Sun Pharma and Ranbaxy have received the necessary approval from India's fair trade watchdog, the Competition Commission of India (CCI), for their US$4bn merger. The small proviso to the deal would have the drug companies sell seven key products to address monopoly concerns.
The CCI has ordered Ranbaxy to sell six products, and Sun to divest one. A monitoring committee has also been set up to oversee compliance to the conditions.
In April this year, Sun Pharma said it would acquire troubled rival Ranbaxy Laboratories in a deal that included $800m of debt. The transaction valued Ranbaxy at x2.2 its $1.8bn revenue for 2013. The combined entity would be the largest drug company in India, and would have operations in 65 countries, with 47 manufacturing facilities across five continents.
The case is unique in that it is the first transaction in which the CCI has proposed any form of structural remedies, which would eliminate adverse effects on competition caused by the combination of the two companies.
It is also the first case which the CCI has subjected to a public scrutiny process, as it had found the deal prima facie in violation of the competition laws. In addition, it is the first transaction in which the CCI conducted a Phase II investigation.
'The merger application involved a complex, first time, Phase II merger in India, and involved a sector that is sensitive and subject to much public scrutiny,' said an official of legal firm Khaitan & Co, which advised Sun Pharma on the competition law aspects of the deal. 'The work was innovative, at every stage, because to a great extent, this was a walk into the unknown.'
The official added that the order of the CCI 'has set a precedent with respect to procedure and substance that will be read closely and followed by all. It marks a milestone in the development of competition law in India'.
It marks a milestone in the development of competition law in India
CCI has directed Sun Pharma to divest all products containing Tamsulosin and Tolterodine, which are at present marketed and supplied under the Tamlet brand name.
Here, Ranbaxy is the market leader with a share of 60–65%, followed by Sun Pharma, which has a market share of 30–35%. The combined market share of the parties at 90–95% would result in a near monopoly in the market. The CCI held that the merged entity is likely to face competition from only one significant domestic competitor, Intas, which has a market share of 5–10%.
The CCI said that effectively, there are only three players in this market, and the proposed combination would eliminate a significant competitor. Similarly, Ranbaxy has been directed to divest all products containing Leuprorelin, which are marketed and supplied under the Eligard brand name.
Here, Ranbaxy is the market leader with a share of 45–50%, followed by Sun Pharma, which has a market share of 35–40%. The combined market share would be 85–90%. There is only one significant Indian competitor, Bharat Serums, with a market share of 5–10%.
The CCI said the market share of other players has been decreasing over the last four years. With only three players in the market, and the merger effectively reducing it to two, it would have an adverse effect.
Ranbaxy has also been ordered to divest products such as Terlibax, Rosuvas EZ, Olanex F, Raciper L and Triolvance.
The two companies have six months to divest or procure the divestiture of these products.
The two companies have six months to divest or procure the divestiture of these products
After the merger, the existing shareholders of Ranbaxy would hold 14% of the equity share capital of the merged entity on a pro forma basis. The promoter group of Sun Pharma is expected to own 54.7% equity share capital of the merged entity.
Further, as Ranbaxy holds 46.79% equity share capital of Zenotech, the proposed combination would result in the acquisition of this equity share capital by Sun Pharma from Ranbaxy. Zenotech is a listed company. Sun Pharma has already announced an open offer for 28.10% equity share capital of Zenotech, to be started after the merger of Ranbaxy into Sun Pharma.
CCI has also asked the two firms to give full information regarding divestment products to potential purchasers, so as to enable them to undertake reasonable due diligence.
On the basis of the combined market share of the parties, CCI focused its investigation on 49 relevant markets where the proposed combination was likely to have an appreciable adverse effect on competition in the relevant market in India. In addition, the CCI also identified two relevant markets for formulations, wherein Sun Pharma is already marketing and selling its products, whereas Ranbaxy has pipeline products to be launched in the near future.
The watchdog has directed the two companies not to acquire any of the divested products for a period of five years.