ISSN (Online) 2456 -1304

International Journal of Science, Engineering and Management (IJSEM)

Vol 3, Issue 2, February 2018

Mergers and Acquisitions in the Indian

Pharmaceutical Sector: Trends, Sample Study, and
Financial Analysis of Pre and Post Merge
[1]
Hetanshi Shah
School Of Liberal Studies,
Pandit Deendayal Petroleum University

Abstract: To maximize the wealth of Shareholders, companies opt for either organic or inorganic expansion strategy. Prior to 1991,
strict control regime compelled Indian companies to choose internal (or organic) growth strategy. However, with the onset of LPG
(Liberalization, Privatization, And Globalization) policies, and amendments in MRTP(the Monopolies and Restrictive Trade
Practices) Act, Income Tax Act, and Takeover Code, a paradigm shift was witnessed in external (or inorganic) growth strategies
like Mergers and Acquisitions. This paper aims to identify the principal functioning of the waves of Mergers and Acquisitions in
India post 1991 reforms. The primary focus is to review the trends of M&As in the light of pharmaceutical industry as it
demonstrate innumerable Mergers and Acquisitions during the aforementioned period. Further, M&As in Pharmaceutical Sectors
are classified on the basis of Ownership Pattern of Merged and Merging entity, Size of Acquirer and target firms, and Type of
merger. Moreover, this paper also presents Case Studies of two renowned pharmaceutical Mergers, Sun Pharma-Ranbaxy and
Lupin-Gavis, to discern synergy arising out of merger activity. By virtue of Merger, benefits like Tax Considerations, increased
market penetration or diverse product portfolio, gained by acquiring and Target Firms, have also been enumerated. Lastly, a
comprehensive Pre and Post merger Ratio analysis of the above mentioned companies have been conducted to identify the impact
on the overall financial performance of the merged entity. Tools like mean, standard deviation and p-value have been used to
conclude whether there is a significant or massive change in financial performance of a merged company due to merger.

Key Words — Mergers and Acquisitions, Pharmaceutical Companies, Ratio Analysis.

I. INTRODUCTION holdings to Indian Business community as India was to gain

independence, leading to increase in Mergers and
In order to cope up with the constantly changing environment Acquisitions.
and increasing competition, constant growth of companies
has become imperative. Companies can adopt two different The anti-big government policies and regulations of the
(but complementary) expansion strategies: internal (or 1960s and 1970s seriously deterred M&As, particularly that
organic) and external (or inorganic). When the inherent of Horizontal3 combinations. Industrial Licensing Policy
growth of firms slows down, they may resort to external required licensing in almost all Industries .Section 23 of the
restructurings like Mergers and Acquisitions. Companies Act Monopolies and Restrictive Trade Practices Act (MRTP) of
2013 explains the word „Merger‟- “A „merger‟ is a 1969 required companies with asset valuing Rs. 200 million
combination of two or more entities into one; the desired or more to seek approval from the central government for a
effect being not just the accumulation of assets and liabilities merger. Import Control Order, Industries Development and
of the distinct entities, but organization of such entity into Regulation Act, and Foreign Exchange Regulation Act
one business.” Acquisition occurs when a company buys (FERA) 1973 also discouraged M&A. However,
most of the assets or stocks of another firm i.e. more than Nationalization of Indian insurance business in 1956 and
50% ownership of Target Firm to assume control of it. banking in 1969, granting of tax relief in the Finance Bill of
1967 with respect to exemption from capital gains tax on
A. Waves of Mergers and Acquisitions shares transferred to amalgamating companies and
Since Second World War, there has been series of Mergers encouraging merger of sick units with profitable entities, led
and Acquisitions in India due to economic and political to increase in Conglomerate mergers4 during the same
conditions. Due to Inflation during the war period, period. In 1985, an amendment was brought in MRTP Act
businessmen were able to amass high profits and eventually which required only those companies whose assets valued
there was a hike in stock prices. Hence, Businesses started Rs. 1 billion or more to get premerger approval. Thus
using Mergers and Acquisitions for expansion purpose. Also, partially liberalized measure was carried out in 1985.
British managing agency houses gradually liquidated their

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Widespread Economic Reforms and significant policy shift 5. The Income Tax Act,1991
post-1990 led to a boom in Mergers and Acquisitions. As per section 2(1B) of the Income Tax Act, if following
Detailed discussion of the same is done later in the paper. conditions are satisfied then the deal would be considered as
an amalgamation:
B. Rationale for Mergers and Acquisitions: All the property of the amalgamating company or companies
Motives of Mergers and Acquisitions are Synergy, Growth, becomes the property of the amalgamated company by virtue
Increasing market power, Acquiring unique capabilities and of the amalgamation.
resources, Diversification, Bootstrapping Earnings, Tax By virtue of an Amalgamation, all the liabilities of the
Considerations etc. amalgamating company or companies should become the
liabilities of the amalgamated companies.
C. Regulations Governing Mergers and Acquisitions in Shareholders holding at least three-fourths in value of the
India: shares in the amalgamating company or companies become
1.The Companies Act 2013: the shareholders of the amalgamated company by virtue of
The Companies Act 2013 replaced Companies Act 1956 with the amalgamation
some prominent changes to simplify the overall process of
acquisitions, mergers and restructuring, facilitate domestic Tax Benefits:
and cross-border mergers and acquisitions, and thereby, If an amalgamation takes place within the meaning of Section
making Indian firms relatively more attractive to PE 2(1B) of the Act, the following tax concession shall be
investors. It also protects investors and minorities, among available:
other factors, thereby making M&A smooth and efficient. Tax Benefits for Amalgamating company:
This Act basically talks about Merger, Amalgamation, As per section 47(vi) of Income-tax Act 1961, any transfer of
Demerger, Reconstruction, and Arrangement- Eligibility and a capital asset by the amalgamating company to the
process of the same. amalgamated company would not be treated as a transfer if
following conditions are satisfied:
2.The Competition Act 2002 If the transfer has been done in the scheme of amalgamation
The Competition Commission of India regulates and
combinations by providing threshold limits on assets and Amalgamated company is an Indian company
turnover and prohibits Mergers or Acquisitions if it is likely It means, if above conditions are satisfied, then
to cause an appreciable adverse effect on Competition in the amalgamating company is not liable for capital gain on
relevant market. transfer of its Capital Assets to amalgamated company. Tax
Benefits to Shareholders of Amalgamating Company:
3. The Foreign Exchange Management Act, 1999 (FEMA) As per section 47(vii) of Income Tax Act, any transfer by a
FEMA contains general provisions for inbound and outbound shareholder, of shares held by him in an amalgamating
cross-border Mergers and Acquisitions in India. company, would not be treated as a transfer if following
conditions are satisfied:
4. Securities and Exchange Board of India Act,1992 If the transfer has been done in the scheme of Amalgamation
(SEBI) and The transfer is made in the consideration of the allotment
SEBI regulates entities that are listed on Stock Exchanges in to him of any share(s) in the amalgamated company and The
India. The Securities and Exchange Board of India amalgamated company is an Indian company
(Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (the “Takeover Code”) restricts and Tax Benefits to Amalgamated Company:
regulates the acquisition of shares, voting rights and control As per section 72A, if certain conditions are satisfied, then
in listed companies. It entitles the acquirer to exercise 25% or amalgamated company would get benefit by set-off and carry
more of the voting rights in the target company and obligates forward of losses and depreciation of amalgamating
the acquirer to make an offer to the remaining shareholders company.
of the target company to further acquire at least 26% of the
voting capital of the company. However, Takeover Code D. Pharmaceutical Sectors:
provides some exemptions to this obligation. The Indian pharmaceuticals market is the third largest in
terms of volume (Accounting for 20%) and thirteenth largest
in terms of value (accounting for 1.4%) in the Global
Pharmaceutical Industry as per a report by Equity Master.
India is the largest global supplier of generic drugs. The

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Indian Market is projected to witness a surmountable growth

of US$ 55 billion by the year 2020, making it incipient of Ong et al. (2011) analyzed the financial performance of
sixth largest upcoming pharmaceutical hub globally, in Malaysian banking sector using Pre and Post merger
context of absolute size. The sector is expected to generate accounting and financial data. Following three methods were
58,000 additional job opportunities by the year 2025. used to compare Pre and Post merger performance: Firstly
Reasons for the increase in Mergers and Acquisitions by Ratio analysis was used, then t–Test were used to measure
Indian Pharma Companies: the significant difference between Pre and Post M&A
Expansion of product range performance, and finally, DEA approach was used to
Gaining access to approved facilities outside India measure the bank's efficiency
Access to distribution channel and gaining market presence
To reduce cost of benefits David C. Cheng, et.al (1989) in their paper, „Financial
To gain advantage of Tax concessions Determinants of Bank Takeovers‟ found that the purchase
price is a negative function of the target‟s capital- to- asset
II. LITERATURE REVIEW ratio. The only variable used in their model is the ratio of
acquirer- to- target assets. This study is different from earlier
Manish Agarwal and Aditya Bhattacharjea (2006)- He studies of bank mergers pricing in the sense that it provided
mentioned main Industrial and regulatory policy regimes and greater consideration of bidder related variables and used
accordingly divided merger activity into three phases- multiple proxies for certain theoretical determinants of
Policies Regimes: Control regime (1950 to 1985), A Partially merger pricing. Analysis of Pre and Post Merger and
Liberalized Regime (1985 To 1991) and A Liberalized Acquisition Financial Performance of Banks in Pakistan by
Regime (1991 Onwards). He further classified Merger Qamar Abbas: Pre and Post merger analysis of 10 banks was
Activity into low and stagnant (1973- 74 to 1987-88); carried out through 15 financial ratios and paired sample T-
moderate (1988-89 to 1994-95) and high merger activity Test. It was concluded that no significant changes were
(1995- 96 to 2001-03).The study doesn‟t take into witnessed in post-merger performance.
consideration acquisitions. Also, the study doesn't consider
all the factors responsible for an increase in mergers or Financial Performance Analysis of Pre and Post merger in the
acquisitions post-1991 reforms. banking sector: a study with reference to ICICI bank ltd by
Mergers And Acquisitions In India: A Strategic Impact Dr. Veena K.P – Ratios like profitability ratio, liquidity ratio,
analysis for the corporate enterprises in the post-liberalization leverage ratio and growth ratio, and T-test was used to
period by Rabi Narayan Kar- A total of 1386 M&As post- compare the financial performance of pre and post ICICI
1991 reforms were found from a various database, the same Bank merger. Here, a comparison was made between
was classified into sixteen broad industrial groupings. Few absolute data (not mean) of three years of a pre-merger
companies were considered for the financial analysis through period and seven years of the post-merger period.
Bivariate OLS regression analysis and other statistical tools.
Mergers and Acquisitions in the Indian Pharmaceutical Impact of Mergers and Acquisitions on Shareholders‟ Wealth
Industry: Nature, Structure, and Performance By S Beena in Short-Run: An Empirical Study of Indian Pharmaceutical
(2006)- This study caters into Mergers, Acquisitions, Industry by Neelam Rani- This study analyses Short-term
Alliances and sale of assets in Indian Pharmaceutical abnormal returns to shareholders of target company through
industry. According to his research, 64 Mergers and 63 merger and acquisition in the pharmaceutical industry in
acquisitions occurred in post-liberalization period. While India. Null hypotheses and tests were carried out to find an
mergers were dominated by domestic firms, there were more effect of mergers and acquisitions on shareholder's wealth.
cross-border acquisitions and alliances. Cross-border Firth (1980) finds an insignificant abnormal return of 0.01
alliances were higher compared to mergers. Alliances percent over the 36 month following the bid announcement
contributed mostly to facilitating marketing purpose rather by examining 434 successful bids and 129 unsuccessful bids
than manufacturing or technological base purpose. Pre and in the UK over the period 1965-1975 using the market model
Post merger analysis was carried out which showed that post- with a moving average method for beta estimation. Financial
merger performance was enhanced in a majority of firms. Performance of Indian Manufacturing Companies during Pre
and Post Merger by S. Vanitha: Financial performance of 17
Das (2000) compared the pre-merger and post-merger merged manufacturing companies out of 58 merged
operating profit margin for a sample of 14 acquiring manufacturing companies, for the time period 2000-2002, is
companies and found a decline in profitability in 8 of those evaluated through ratio analysis, mean, standard deviation
companies after the merger. and „t‟ test. The conclusion drawn was that merged

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manufacturing companies did not achieve better profitability, 1. WAVES OF MERGERS AND ACQUISITIONS POST
solvency, and liquidity after the merger. 1991, PARTICULARLY IN PHARMACEUTICAL
SECTOR:
OBJECTIVES
The present paper‟s objectives are to examine: A. Number And Value of Mergers And Acquisitions from
Trends in mergers and acquisitions in India post-1991 LPG 1991 to 2017
reforms, focus being on Pharmaceutical sector. Further,
classifying no. of mergers in Pharmaceutical Industry based Year Number Value
on Ownership Pattern of Merged and Merging entity, Size of (in billion
firms and Type of merger. USD)
Case Study of two Pharmaceutical mergers: Sun Pharma-
Ranbaxy and Lupin-Gavis 1991 1 N/A
Brief detail of their merger and Benefits like Increased 1992 0 N/A
Market Penetration, Diversified Product Portfolio, and Tax
Concessions, gained by both Acquirer and Target Firms. 1993 4 N/A
Pre and Post Merger Ratio Analysis to determine whether 1994 16 N/A
there was a significant change in Merged Entity due to the
merger. 1995 55 N/A
RESEARCH METHODOLOGY: 1996 115 1.60707
1.SAMPLE SELECTION:
A. All mergers and acquisitions have been founded for the 1997 127 1.60585
period 1991-2017. Further, Pharmaceutical Sector is
discussed in detail as it demonstrates the highest number of 1998 156 1.49434
Mergers and Acquisitions. 1999 395 4.52
B. Within Pharmaceutical Sector, two top mergers namely
Sun Pharma- Ranbaxy and Lupin- Gavis has been chosen for 2000 892 11.67
in-depth Financial Analysis. 2001 709 5.04
2. SOURCE: 2002 582 7.95
The main source of information is based on secondary data, 2003 706 6.32
collected from Annual Reports, published Research Reports
by various industries and research organization, national and 2004 763 7.92
international journals, books, articles, dissertation work, and
websites of money control, IMAA, CMIE, MCA, SEBI etc
2005 1,254 36.24
2006 1,449 34.33
3. PERIOD OF STUDY:
A. Total no. of Mergers and Acquisition is found for the 2007 1,510 56.25
years 1991-2017. 2008 1,402 48.63
B. Classification of no. of mergers in Pharmaceutical
Industry based on Ownership Pattern of the Merged and 2009 1,294 41.10
Merging entity, Size of firms and Type of merger is done for 2010 1,328 59.52
the period 1991-2005.
C. Pre and Post Merger Ratio analysis of merged entities is 2011 1,045 35.40
done for two years before and after the merger.
2012 1,070 36.63
4. BASIS OF ANALYSIS: 2013 955 31.79
To analyze the performance of Merged entities, financial
indicators like mean, standard deviation and P-value of Pre 2014 1,085 31.45
and Post Merger ratios are used. 2015 1,250 51.33
2016 1,302 51.13
DATA REPRESENTATION AND ANALYSIS:
2017 1,451 57

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Pharmaceutical Sector is chosen for in-depth study because

this industry seemed to be using M&A more aggressively to
accelerate internationalization, was undergoing a paradigm
shift in policies and was well known for its social
sensitiveness. Social Sensitiveness means that Industries'
demand is inelastic due to the existence of a third party (that
is the doctor) in deciding the demand for a particular drug. A
total of 64 mergers and 63 acquisitions were witnessed from
1991 to 2005.

i) Classifying no. of mergers based on Ownership Pattern of

the Merged and Merging entity, Size of firms and Types of a
Source: IMAA Institue, Registration and Liquidation of Joint merger:
Stock Companies in India (RLGC), and Publications of
CMIE a. Ownership Pattern of Merging and Merged Firms from
Total of 20,916 Mergers and Acquisitions are identified 1991-2005:
during the period 1991-2017. A maximum number of
Mergers and Acquisitions i.e. 1510 is found in the year 2007
and the lowest is found in the year 1992. The momentum of
M&A built up from 1995. It slowed down from 2001 and
again increased from 2005.
Reasons for the increase in M&A post-1991:
i) Through Liberalization, Privatization, and Globalization
(LPG) Policies introduced by the government in 1991, there
was a relaxation of controls and regulations on production,
trade, and investment, leading to increases in both domestic
and international competition. Restructuring and Re-
engineering were therefore required to become efficient and
cope up with the competition. Thus, companies started using
inorganic method i.e. Mergers and Acquisitions.
ii) The New Industrial Policy (NIP) announced in July 1991
abolished licensing in all but eighteen industries, most of
which were subsequently delicensed. This opened up ways
for Mergers and Acquisitions.
iii) Section 23 of MRTP Act was deleted from the statute, Source: Research paper by S Beena (2006) & CMIE
resulting in no premerger scrutiny from Central Government By classifying mergers and acquisitions into ownership-wise,
being required for Mergers and Acquisitions. a clear domination of domestic firms over foreign firms is
iv) Takeover code in 1994 and the issue of simplified seen. Also, many firms engaged in multiple mergers
takeover regulations by the securities exchange board of b. Size-wise classification of merger from 1991 to 2005
India (SEBI) in 1997 further brought improvement in Size Merging Merged
No. Percent No. Percent
Mergers and Acquisitions.
Large (> 28 59. 57 1 3.57
v) Industrial slowdown since 1996 reduced profit margins of 1000
Indian companies and forced them to restructure their Million)
business through Mergers and Acquisition. Medium (10- 18 38.3 27 96.43
vi) The union budget for 1999-2000 defined the tax treatment 1000
in respect of amalgamations, de-mergers, and slump sales- it Million)
reduced conditions required to be fulfilled by an Small (< 10 1 2.13 0 0
amalgamated company to avail the benefits of set off and Million)
carry forward of accumulated losses and unabsorbed Total 47 100 28 100
depreciation. Thus more firms started engaging in M&As to available
avail Tax Benefits.
B. Pharmaceutical Sector

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Source: Research paper by S Beena (2006) & CMIE

The highest number of large-sized firms got engaged in Mergers and Source: Research paper by S Beena (2006) & CMIE
Acquisition, constituting 60% of total Mergers and Acquisition. Majority of mergers were Horizontal, which marked more than
Whereas, medium-sized firms got engaged in 18 mergers or 85%. While just 15% of firms merged with firms having a different
acquisitions (i.e. 38% of total Mergers and Acquisitions). On a business. Horizontal Merger is further classified into Horizontal and
closer look, we find that most medium-sized firms got merged to Vertical to find out vertical integration within the pharmaceutical
large sized firms as merged medium entities are 27 whereas merging industry as the sector consists of different therapeutic categories. It
medium entities are just 18. Also, merged large entity is only one is found that 17 mergers out of Horizontal mergers can be further
and merged small entity is nil. Large sized firms preferred medium classified as vertical.
firms to get well-established marketing networks and add new
products to their portfolio. ii) Statistics of India Based Acquirers acquiring Foreign
c. Types of Merger: Horizontal/ Conglomerate Classification companies from 2005-2007
from 1991 to 2005

SR ACQUIRER TARGET TARGET ANNOUNCEMENT YEAR VALUE (In

NO COUNTRY million $)

1 Dr. Reddy‟s Laboratory Beltapharma Germany 2006 582

Arzneimittel
GmbH

2 Ranbaxy Terapia South Africa 2006 324

3 Matrix Laboratory Belgium 2005 263

Docpharma, NV

4 Dr. Reddy‟s Laboratory Roche‟s API Mexico 2005 59

Facility

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5 Jubilant Organosys Ltd Target Research USA 2005 33.5

Associates

6 Torrent Pharmaceutical Heumann Pharma Germany 2005 30

GmbH and Co
generica KG

7 Wockhardt Negma France 2007 265

Laboratories

8 Ranbaxy Betabs Pharma South Africa 2007 70

9 Wanbury Industrial FC Spain 2006 42

10 Sun Pharma Taro Pharma Israel 2007 454

11 Jubilant Organosys Ltd. Hollister USA 2007 122.5

Laboratory

and Acquisition deal, valued at the US $ 4 billion. The transaction

Source: Different articles from Economic Times, Hindu Business was framed as merger and not an acquisition for a variety of
Line, Times Of India etc commercial, legal and tax reasons (Direct acquisition requires
enough cash reserves or access to leverage for purchasing the target
firm but they had an all-stock deal. It was difficult to get loan for an
III. CASE STUDY OF SUN PHARMA- RANBAXY & LUPIN- Indian merger and Interest expense been incurred against exempt
GAVIS: income, would not be a deductible expense for calculating Income
Tax) In terms of the Scheme of Arrangement, it was an all-stock
A. BRIEF DETAIL OF THEIR MERGER/ACQUISITION & merger in which the shareholders of Ranbaxy received 0.8 shares of
BENEFITS GAINED BY THE ACQUIRER AND TARGET Sun Pharma of face value of Rs. 1 for each Ranbaxy share of face
FIRM value of Rs 5. Daiichi, which owned 63.41 percent of the shares of
Ranbaxy prior to the deal, became 2nd largest shareholder in Sun
i) SUN PHARMA- RANBAXY: Pharma with a stake of 9%. Share Holding after the merger was:
Sun Pharma acquired 100 % shares in Ranbaxy Laboratories Daiichi-9%, Public Shareholders of Ranbaxy- 14%, Public
Limited on 6th April 2014 (Legal proceedings were completed on Shareholders of Sun Pharma-22 % and Promoters-55%. The
25th March 2015) to penetrate into new markets and increase the Ranbaxy‟s shares were valued at Rs 457 per share, a premium of 18
product portfolio of the company as both complimented each other percent to the 30-day volume-weighted average share price.
in areas of expertise- Sun Pharma was a major global specialty Regulatory approvals:
pharmaceutical company with expertise in complex and niche a. Sun Pharma and Ranbaxy obtained clearances from stock
therapy areas while Ranbaxy was known for its global presence in exchanges in India (NSE and BSE) by August 2014.
the generic segment. It was claimed to be one of the biggest Merger

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b. The Approval from CCI (Competition Commission of India) was  To Ranbaxy i.e. Amalgamating Company:
received on December 5, 2014, but on a precondition that seven By virtue of section 47(vi) of Income-tax Act 1961, transfer of a
brands, which constituted less than 1% of total revenues of the capital asset by Ranbaxy (amalgamating company) to Sun Pharma
combined entity, be divested to prevent the merger from negatively (amalgamated company) was not treated as a transfer as all the
impacting competition in India. The condition was fulfilled in conditions were satisfied:
March 2015 when Ranbaxy‟s seven brands were sold to Pune-based i)This deal was treated as amalgamation as per section 2(1B) and
Emcure Pharmaceuticals. ii) Sun Pharma (Amalgamated company) is an Indian Company
c. After Sun Pharma and Ranbaxy complied with certain rules, U.S. Therefore, Ranbaxy was not liable for Capital Gain Tax on the
FTC (Federal Trade Commission) granted early termination of the transfer of its assets to Sun Pharma.
waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976(HSR Act) to both companies in February 2015 with the  To Shareholders of Ranbaxy:
precondition that Ranbaxy‟s interests in generic minocycline tablets By virtue of section 47(vii) of Income Tax Act, transfer of shares by
and capsules be divested to an external third party. To fulfill the a shareholder of Ranbaxy (amalgamating company) to Sun Pharma
precondition, Ranbaxy's generic minocycline assets were sold to (an amalgamated company is not treated as a transfer as following
Torrent Pharmaceuticals, which markets generic drugs in the U.S. conditions are satisfied:
d. Based on a petition alleging insider trading in the shares of i)The transfer was done in the scheme of Amalgamation and
Ranbaxy, Andhra Pradesh High Court issued notices to the ii)The transfer was made in the consideration of the allotment of
Securities and Exchange Board of India (“SEBI”), BSE, NSE, Sun share(s) in the Sun Pharma (amalgamated company) and
Pharma, Ranbaxy and Silver Street Developers LLP on 30th April iii)Sun Pharma (amalgamated company) is an Indian company.
2014 to maintain status quo. On 13th May 2014, Sun Pharma moved Hence, shareholders of Ranbaxy didn‟t attract Capital Gain Tax by
the Supreme Court against the status quo order of the Andhra transferring shares to Sun Pharma.
Pradesh High Court. The Punjab and Haryana high court approved
the merger on 9th March 2015  To Sun Pharma:
Benefits of Merger To Both The Companies: Out of Minimum Alternative Tax(MAT) credit of Rs. 8222.7
a. Turnaround For Ranbaxy: million which was written down by Ranbaxy during the quarter
Ranbaxy‟s manufacturing facilities in Paonta Sahib, Dewas and ended 2014, an amount of Rs. 7517 million has been recognized by
Mohali lapsed in quality control and adherence to procedure as per the company, on a reassessment by the management at the year-end,
the United States Food and Drug Administration ("USFDA"). As a based on the convincing evidence that the combined entity would
result, the USFDA had prohibited Ranbaxy from distributing drugs pay normal income tax during the specified period and would be
manufactured using active pharmaceutical ingredients ("APIs") able to utilize the MAT credit so recognized.
from these facilities, in the United States. This caused the multi-
billion dollar Indian generic pharmaceutical industry incur a loss in ii) LUPIN LTD- GAVIS
international markets. The acquisition by Sun Pharma resulted in a Lupin, a transnational Indian pharmaceutical company,
turnaround for the beleaguered Ranbaxy. manufactured biotechnology products, branded & generic
formulations, and APIs globally. A renowned pharmaceutical
b. Increased Market Penetration: company, GAVIS, based in New Jersey, was particularly focused in
The combined entity was the fifth-largest specialty generics manufacturing, formulation, development, marketing, sales and
company in the world and the largest pharmaceutical company in packaging, and distribution of Pharmaceutical products. Lupin Ltd
India. Sun Pharma, which was number three in generic dermatology acquired US-based GAVIS Pharmaceuticals LLC and Novel
space in the USA, became number one in this space. Operations Laboratories Inc. (GAVIS) on 9th March 2016 for $880 million to
spanned across 65 countries and 47 manufacturing facilities across 5 boost its presence in the US. This is the largest acquisition by any
continents. The combined entity contributed 47 percent, 31 percent Indian pharmaceuticals company in the US. This acquisition was
and 22 percent of sales respectively to the US, the rest of the world funded by cash reserves of $100 million and a bridge loan. The
and India. acquisition was expensive as Lupin paid 9.2 times the annual
revenue for the acquisition.
c. Diverse Product Portfolio: Benefits of Merger to Both the Companies:
A combined Firm has a diverse, highly complementary portfolio of a. Increased Market Penetration:
specialty and generic products marketed globally, including 445 Lupin‟s biggest market was the US and through the acquisition of
ANDAs. It is one of the leading dermatology platforms in the the US-based firm, it enhanced its presence in the US. Gavis had a
United States. Sun Pharma got access to Ranbaxy‟s new product highly skilled New Jersey based manufacturing facility which after
pipeline including a generic version of AstraZeneca‟s heartburn the acquisition, became Lupin‟s first manufacturing site in the US,
drug Nexium. complementing Lupin‟s Coral Springs, Florida, inhalation R and D
center.
d. Tax Benefits
As per Section 2 (1B) of the Income Tax Act,1961, This deal was b. Diversified Product Portfolio:
considered to be an amalgamation as it fulfilled all the conditions. As a result of the takeover, Lupin‟s pipeline in dermatology
Hence, following tax concessions were available: controlled substance product and other high-value and niche
generics enhanced. The merged entity had a portfolio of about 120

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in-market products, over 185 cumulative filings pending approval Following hypothesis is made for p-value:-
and a series of products under development for the US. This Null Hypothesis: There is no significant difference in Financial
takeoever formed the 5th largest pipeline of ANDA filings with the Ratios before and after the merger.
US FDA, addressing a USD 63.8 billion market. If p-value>0.05, then Hypothesis stands true i.e. there is no
significant difference in Ratios due to the merger. The difference
B. PRE AND POST MERGER: RATIO ANALYSIS can be due to any other factor but a merger.
17 Financial Ratios, bifurcated into Profitability, Liquidity, If p-value<0.05, then hypotheses stands false i.e. there is a
Leverage, Growth, and Valuation Ratios, have been calculated for significant difference between ratios due to the merger.
Merged Entities for two years before and after merger. Further, its i) Merged Sun Pharma
Mean, Standard Deviation and P-value is calculated to witness
changes in financial performance due to the merger.
SR BEFORE
NO MERGER AFTER MERGER P-
( 2012-13& (2014-15 & VALUE
PARTICULARS FORMULA 2013-14) 2015-16)
MEAN SD MEAN SD

PROFITABILIY RATIOS
1
Net Profit/ (39.38) 85.72 (16.24) 3.03 0.78
Net Profit Ratio Turnover
2
Net Income/Shareholder's (15.78) 31.69 (5.74) 1.05 0.74
Return on Equity Equity
3 Earnings Before Interest
Return on Capital and Tax (EBIT) / Capital (10.77) 24.25 (4.91) 0.95 0.80
Employed Employed
4
Return on assets Net profit after tax / (7.43) 18.40 (3.53) 0.57 0.82
Total Assets
5
Total Debt/ Equity Total Debt/ 0.17 0.23 0.25 0.01 0.69
Equity
6
Asset Turnover
Total Asset/ 23.37 4.14 21.84 0.61 0.73
Ratio
Turnover

LIQUIDITY RATIOS
7
Current Asset/ 2.39 1.39 0.55 0.08 0.33
Current Ratio Current Liability
8
Quick Assets/ 1.88 1.03 0.33 0.04 0.29
Quick Ratio Current Liability
9

2.94 0.20 3.62 0.06 0.17

Inventory Turnover Cost of Goods Sold/
Ratio Average Inventory

LEVERAGE RATIOS

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10
Total Debt/ 0.31 0.22 0.38 0.01 0.74
Debt Ratio Total Assets
11
Total Equity/ 0.69 0.22 0.62 0.01 0.74
Capital Ratio Total Aseets

GROWTH RATIOS
12

(4.35) 13.22 (5.30) 1.13 0.94

Basic Earning Profit After Tax/No. of
per share Equity Shareholders
13
Dividend/ 3.25 2.47 2.00 1.41 0.34
Dividend per No. of Equity
share Shareholders

VALUATION RATIOS
14
MarketCap/Net Market Capital/
38.42 5.04 26.16 0.36 0.19
Operating Revenue Net Operating Revenue

15
Retention Ratios 1-Dividend/ 55.37 78.64 135.70 18.77 0.45
Net Income
16 Market Price/
Price/BV 13.46 3.64 9.25 0.09 0.36
Book Value
17
Earnings Per Share/
Earnings Yield (0.01) 0.02 (0.01) - 0.80
Market Price

- Current Ratio: Ideal Current Ratio is 2:1. It reduced from

SOURCE: Data collected from Standalone financials of Sun 2.39 to 0.55 which means that fewer currents assets were available
Pharmaceuticals. to cover current liabilities after the merger.
Analysis: - Quick Ratio: Ideal ratio is 1:1. It reduced from 1.88 to
a) Profitability Ratios: 0.33. Hence, less Quick Assets, which are either cash or cash
-Net Profit ratio increased after merger as net loss decreased, equivalents or can easily be converted into cash, were available to
indicating that overall efficiency of all departments namely cover current liabilities.
production, administration, selling, financing, tax management etc - Inventory Turnover Ratio increased from 2.94 to 3.62,
had increased. indicating that merged entity could efficiently control its inventory.
- Return on Equity increased showing that comparatively less loss
had incurred with shareholder‟s Funds. It reflects that productivity c) Leverage Ratios:
of Shareholder‟s Funds was increased. - Debt Ratio increased from 0.31 to 0.38, implying greater
- Return on Capital Employed increased as loss had decreased. combined entity‟s leverage. Thus more of combined firm‟s Assets
- Return on Assets increased indicating that less loss had incurred were financed by debt.
out of all Assets invested. - Capital Ratio decreased as fewer Assets were financed
- Debt Equity Ratio increased showing that Debt portion used in through Equity.
merged entity was more than Equity.
- Asset Turnover Ratio reduced as less revenue was generated out of
Assets invested
d) Growth Ratios:
-Basic Earnings Per Share and Dividend Per Share decreased
b) Liquidity Ratios: showing that less of earnings and dividends were available for
Shareholders.

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e) Valuation Ratios: - Price/BV Ratio decreased indicating that Market Price of
Valuation Ratios indicate how the company and its Equity are share was less as compared to its book value.
assessed in the Capital market - Earnings yield remained same as proportion of change in
- Market Capital/ Net Operating Revenue reduced as value Earnings per share was equal to change in Market price per share.
of the firm decreased as compared to the Revenue generated. However, the p-value of all these ratios is more than 0.05, indicating
- Retention Ratio increased showing that more of Revenue that there wasn‟t a significant change in ratios due to the merger.
was transferred to Retained Earnings. Other Factors but the merger was responsible for these changes in
Ratios.
ii) Merged Lupin:

SR BEFORE MERGER AFTER MERGER

NO (2013-14 & (2015-16& P-
2014-15) 2016-17) VALUE
PARTICULARS FORMULA
MEAN SD MEAN SD

PROFITABILITY RATIOS
1 Net Profit/
25.29 0.71 25.10 0.47 0.58
Net Profit Ratio Turnover
2 Net Income/Shareholder's
29.93 3.38 23.07 1.82 0.14
Return on Equity Equity
3
Earnings Before Interest and
Return on Capital Tax (EBIT) / Capital 28.66 3.02 22.37 1.82 0.12
Employed Employed
4
Return on assets 24.09 2.32 18.95 1.35 0.12
Net profit after tax /
Total Assets
5
Total Debt/ Equity Total Debt/ 0.01 0.01 0.04 0.01 0.34
Equity
6 Asset Turnover Total Asset/ 95.09 6.50 75.40 3.95 0.08
Ratio Turnover

LIQUIDITY RATIOS
7
Current Asset/ 3.67 0.22 3.38 0.23 0.02
Current Ratio Current Liability
8 Quick Assets/ 2.68 0.17 2.55 0.23 0.31
Quick Ratio Current Liability
9 Inventory Turnover Cost of Goods Sold/
6.06 0.45 5.95 0.06 0.86
Ratio Average Inventory

LEVERAGE RATIOS
10 Total Debt/
0.19 0.01 0.18 0.01 0.28
Debt Ratio Total Assets
11
Total Equity/ 0.81 0.01 0.82 0.01 0.28
Capital Ratio Total Assets

GROWTH RATIOS

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12
Basic Earning Profit After Tax/No. of 52.65 0.76 66.87 2.77 0.09
per share Equity Shareholders
13

Dividend per Dividend/ 6.75 0.75 7.50 - 0.50

share No. of Equity Shareholders

VALUATION RATIOS
14
MarketCap/Net Market Capital/
6.97 2.28 5.52 0.40 0.68
Operating Revenue Net Operating Revenue

15
Retention Ratios 1-Dividend/ 87.18 1.25 88.76 0.48 0.53
Net Income
16 Market Price/
Price/BV 8.00 1.99 5.08 0.67 0.47
Book Value
17
Earnings Per Share/
Earnings Yield 0.05 0.02 0.05 0.01 1.0
Market Price

SOURCE: Data collected from Standalone financials of Lupin.

e) Valuation Ratios:
Analysis: - Market Capital/ Net Operating Revenue reduced as value
a) Profitability Ratios: of firm of combined entity decreased as compared to Operating
- There was a minor decrease in Net Profit Ratio from Income.
25.29 to 25.10. - Retention Ratio increased showing that more of revenue
- Return on Equity, Return on Capital Employed and was transferred to Retained Earnings.
Return on assets decreased, indicating that combined entity - Market Price/ Book Value reduced indicating that Market
generated comparatively fewer profits from shareholder's funds, price of share of merged entity decreased as compared to its Book
capital employed and total assets respectively. Value.
- Total Debt/ Equity Ratio increased, thereby more debt - Earnings yield remained same as proportion of change in
financing was used as compared to Equity financing. Earnings per share was equal to change in Market price per share.
- Asset turnover Ratio reduced showing that less revenue
was generated through Assets by combined entity. However, P-value of all except Current Ratio is less than 0.05.
Thus, there is a significant change in Current Ratio due to the
b) Liquidity Ratio: merger. Changes in other Ratios might be because of other reasons.
- Current Ratio and Quick ratio reduced indicating that less
of currents assets and Quick Assets respectively was available to IV. LIMITATIONS
cover current liabilities.
- Inventory Turnover Ratio reduced as inventory was not This study is confined to findings of two major Pharmaceutical
efficiently managed. merged entities. However, this doesn‟t provide a holistic instance of
changes occurring due to the advent of mergers and acquisitions.
c) Leverage Ratios:
- Debt Ratio decreased showing fewer Assets being V. CONCLUSION
financed through Debt.
- Capital Ratio increased as more Assets were financed The aforementioned paper gives an overview of radical changes in
through Equity. trends of mergers and acquisitions post 1990 reforms, specifically in
pharmaceutical sector. These reforms are inclusive of
d) Growth Ratios: Liberalization, Privatization and Globalization policies, changes in
- Basic Earnings Per Share and Dividend Per Share Monopolies and Restrictive Trade Practices Act (1969), Takeover
increased indicating that more of Earnings and Dividend were Code and Income Tax Act (1961) and myriad others which
available for Shareholders. impacted the existing structure of Mergers and Acquisitions.
It further establishes to examine two renowned pharmaceutical
mergers, SunPharma-Ranbaxy and Lupin-Gavis. This paper

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Vol 3, Issue 2, February 2018
concludes that so forth, there have been no massive or significant document %2f 251921950 %2fPress-Release-Sun-
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