Acquisition of Terapia, Romania by Ranbaxy Laboratories, India

Aditi Salaria, Meenakshi Chhajer, Niraj Ramavat, Piyush Birla (PGDIM 13), K.V.S.S. Narayana Rao

Announcement:

Ranbaxy Laboratories Ltd. announced on 29th March,2006 that it has acquired the largest independent generic drug company of Romania, Terapia S.A. for $324 million. The deal is expected to combine the strengths of the two premier generic companies and will allow Ranbaxy to leverage its expanded base through Romania, the European Union and the CIS markets.

According to Ranbaxy's CEO and Managing Director, Malvinder Mohan Singh, the company plans to make Terapia's facilities its manufacturing hub in Europe. It will move its European manufacturing to the two facilities of Terapia which have the capacity to make oral and liquid formulations as well as sterile injections. He said "Terapia represents exceptional value for our stakeholders. The transaction is compelling and furthers us on our path to becoming a top five global generic company."

Under the terms of deal, the Indian company acquires 96.7 per cent equity stake in the Romanian company and two manufacturing units, bioequivalence centres, 60 products and access to Terapia's coverage of nearly 4,000 pharmacies and 450 hospitals in Romania.

He said the acquisition would help the company unleash new opportunities in Romania and pan European synergies and would provide Terapia with additional products to launch in the domestic market at very cost competitive levels, thereby lowering costs and delivering value to both consumers and the domestic healthcare budget.


About Ranbaxy Laboratories:

Ranbaxy Laboratories Limited was established in 1961 and listed on the Bombay Stock Exchange in 1973. Ranbaxy Laboratories Limited, headquartered in India, is an integrated, research based, international pharmaceutical company producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. Ranbaxy's continued focus on R&D has resulted in several approvals in developed markets and significant progress in New Drug Discovery Research.

The Company's foray into Novel Drug Delivery Systems has led to proprietary "platform technologies", resulting in a number of products under development. The Company is serving its customers in over 125 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 49 countries and manufacturing operations in 7 countries.

Key Metrics

• Global Sales of USD 1.2 Bn
• Overseas revenues contribute over 75% of sales
• Amongst the top 10 global generic pharmaceutical companies,
• Presence in 23 of top 25 pharmaceutical markets of the world
• Largest pharmaceutical company in India by sales and market share
• Continuing to strengthen & invest in innovative research
• Over 7% of sales are invested in R&D

About Terapia

Terapia is the largest independent generic company in Romania. Established in 1921, it has a strong brand name and a consistent track record of growth and profitability. Its pro forma 2005 sales were approximately US $80 Mn, and the company has superior EBITDA margins in excess of 35 per cent. The acquisition will be EPS accretive immediately. The company has a basket of 157 products with 70 per cent of revenues coming in from some fast growing therapeutic segments.
Terapia is an integrated, commercially focused pharma company which has a broad portfolio and deep new product pipeline , excellent R&D capabilities, world class in-house bioequivalence facilities, low cost manufacturing, and strong distribution network that includes the larges tand most powerful generic sales force in the Romanian pharmaceutical market.

Terapia enjoys high brand awareness locally and regionally as a result of its strong sales and distribution setup. It has the largest field force amongst all generic pharmaceutical companies with a full coverage of General Practioners (GP's) and Specialists. They also cover all of the 4000 pharmacies and 450 hospitals in the country. The combined entities will have the largest field force of all pharmaceutical companies, both originators and generic companies. Terapia distributes approximately 65 percent of its domestic sales through its own integrated distribution unit, a unique asset allowing it to better ensure availability of its products at pharmacies and to capture a greater share of the product value chain in comparison to its peers.

Romania as a destination:

Romania is the fastest growing pharmaceutical market in the Central and Eastern European (CEE) region, with an approximate annual growth of 34 percent from 2002 to 2005 versus the growth of 24 percent for the region. The high growth is coupled with a large market opportunity, as Romania is the second largest country by population in CEE. Romania, today is amongst the countries with an increasing per capita expenditure on pharmaceuticals. This provides significant head-room for the company to grow. Romania is also scheduled to join the European Union beginning January 1, 2007, opening up additional possibilities for market expansion. Since establishment of its operations, Romania has been one of the group's fastest growing markets. This track-record and the continued strong outlook for the market, led to a decision to look for acquisition opportunities in the market to establish a higher level of sales and to become a leader in the attractive Romanian generics market.


Valuation:

The deal is valued at more than four times its 2005 sales and 11.6 times trailing 12-month EBITDA.

Advisors

Ranbaxy Laboratories Limited was advised by ABN AMRO Corporate Finance Ltd. Advent International, the parent company of Terapia was advised by Merrill Lynch International.


Synergies claimed:

The deal will combine the strengths of the two premier generic companies and will allow Ranbaxy to leverage its expanded base in the rapidly growing Romanian pharmaceutical market, across the European Union and the CIS markets.

Ranbaxy will be moving its European manufacturing to the two facilities of Terapia, which has the capacity to make oral and liquid formulations and sterile injections.

The acquisition would help the company unleash new opportunities in Romania and pan European synergies and it will provide Terapia with additional products to launch in the domestic market at very cost competitive levels, thereby lowering costs and delivering value to both consumers and the domestic healthcare budget.

Combining the two companies commercial operations will establish a market leading position in the domestic primary care market and a superb platform for the introduction of new products.

Terapia has two manufacturing locations in Romania producing tablets, capsules, sterile ampoules and liquids. Ranbaxy said these facilities would continue to cater to the domestic Romanian market besides other international locations where the company has a presence. Romania would become the second manufacturing location in Europe for Ranbaxy after Ireland.

Ranbaxy will provide Terapia with additional products to launch in the domestic market at very cost competitive levels, thereby lowering costs and delivering value to both consumers and the domestic healthcare budget.

The combination of Terapia with Ranbaxy's existing Romanian activitie creates the number one generics company in the Romanian market and will additionally boost Ranbaxy's presence in the fast growing CIS markets.

Ranbaxy gains access to Terapia's product basket of 157 marketing authorizations with a strong focus on the fast growing segments of CVS, CNS and musculoskeletal therapeutic segments. These presently comprise 71 percent of the Company's domestic sales. Enalapril, Aspenter (Acetylsalicylic acid), Diurex 50 (Spironolacton + Furasemidum Combination) and Pentoxi retar (Pentoxiflin) are some of Terapia's successful products in the domestic market.

Terapia is recognized as having a strong and highly capable senior management team with a proven track record in developing new products, operating cost effective quality manufacturing and delivering outstanding commercial results. This is underpinned by solid and sustainable financial performance. Terapia is further supported by a highly skilled expert labor force covering all the functions needed in a modern, integrated, branded generics business.

Terapia's pipeline contains over 60 new marketing authorizations, expected to be launched within the next three years. Terapia lays emphasis on products which are first to market generics and products that offer advanced delivery systems. In addition, Terapia also has in its product basket, a healthy mix of high volume, value commodity generics and OTC products. These are a synergistic fit with Ranbaxy's own product pipeline.

Terapia has strong product development and regulatory departments, with the capability and experience to compile product dossiers to EU standards, ahead of the country joining the European Union from January 1, 2007. It enjoys an excellent reputation with regulatory authorities and has its own cGLP approved facility for bio-equivalence and Phase I pharmacokinetic studies with capacity to undertake up to 14 studies per year. This is one of the only two cGLP certified bioequivalence / clinical trial units in Romania, providing access to Ranbaxy for low-cost clinical trials and enabling it to increase momentum of its products filings in the markets of the European Union post.

Ranbaxy will also be able to utilize the low-cost manufacturing capacities of Terapia, comprising two manufacturing sites producing tablets, capsules, sterile ampoules and liquids. Products manufactured from these plants will cater to the Romanian domestic market and will be used to service demand from other international markets where Ranbaxy has a presence. This further extends upon Ranbaxy's current manufacturing setup in Ireland.

‘Terapia Ranbaxy’ employs a proprietary distribution company, making more than 400 deliveries per day, serving a pool of 5000 retail pharmacies and 400 hospitals.Terapia, S.A. (Terapia) provides Post Retirement benefit plan on retirement under which employees receive a bonus equal to a gross average salary, in compliance with the provisions of the collective labour agreement. Both Terapia and its employees have the obligation to contribute to the National Retirement Fund. Terapia has no obligation of paying future benefits other than to the
National Retirement Fund. The obligation has been provided in the books amounting to Rs. 103.49 million for the year ended.

Steps/Events subsequent to announcement of the deal

Ranbaxy acquired a 96.7% stake in Terapia S.A. (Terapia), a Romanian pharmaceutical company engaged in the business of manufacturing generic pharmaceuticals, through Ranbaxy (Netherlands) B.V., for a total cash consideration of Rs. 15,019.19 million (US $ 326.71 million). At the date of the acquisition, the Company recorded the cost of the acquisition as Rs. 15,019.19 million, consisting of cash paid and the direct acquisition costs. The acquisition was funded from foreign currency convertible bonds proceeds issued by the Company during the year.
The Company has accounted for this acquisition under the purchase method. Accordingly, the financial results for the post acquisition period have been included in the consolidated financial statements of the Company.

Structure and Financing of the deal:

Ranbaxy would be funding the acquisition through $400 million it had recently raised through FCCBs. They claim to have more money in the bank that will be utilized for future acquisitions.
About Foreign Currency Convertible Bond (FCCB)
A type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.
These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. (Bondholders take advantage of this appreciation by means warrants attached to the bonds, which are activated when the price of the stock reaches a certain point.) Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs.

Closure of the deal:

Closure Date- On June 7, 2006 and Place- Princeton, NJ –

June 8, 2006

The Company's largest acquisition so far, Terapia in Romania, has been successfully integrated during the year and rechristened as ‘Terapia Ranbaxy.’ The entity recorded combined sales of US $ 73 Mn. Terapia Ranbaxy gets Market Authorisations for 20 new products.

Terapia Ranbaxy has recently decided to auction off a nine-hectare plot of land in Cluj-Napoca. The Company is ranked at No. 6, with a market share of 5.6% in value terms and 10.2% in volume.

The Company grew by approximately 45% over 2005, thus consolidating its position as the No. 1 generics company.


References:

• http://in.rediff.com/money/2006/mar/29ran.htm
• http://www.hindu.com/2006/03/30/stories/2006033007641900.htm
• http://www.domain-b.com/companies/companies_r/ranbaxy/20060329_acquires.html
• http://www.thehindubusinessline.com/2006/03/30/stories/2006033004260100.htm
• http://www.zf.ro/articol_133569/terapia_ranbaxy__we_will_double_our_business_by_2010.html