Deal done, Sun Pharma must now fix Ranbaxy's deep problems

Sun Pharmaceutical Managing Director Dilip Shanghvi

Sun Pharma will start on the hard work now that it has closed on its $4 billion merger of Ranbaxy Laboratories. Managing Director Dilip Shanghvi has pledged that it will get all four of Ranbaxy's sideline plants into 100% compliance with FDA requirements.

"As a company our most important focus will be to win the confidence of regulators," Shanghvi said in a press conference Wednesday. "We will do whatever it takes to win back the confidence of the regulators, so they trust what we do and they trust what we say."

The Sun founder said that his company not only will spend whatever is necessary to get the plants back to FDA expectations, but also wants to find the root of the problems that led to the bans. "So we are focused on fixing problems, not just superficially, but whatever the problem was in the first place."

That will be no easy task given that the problems at the four banned plants have been seen as so severe that they were not only banned but also operate under a court-ordered consent decree that requires oversight by outside auditors. And Ranbaxy's problems have deepened in the last two years, with the FDA targeting two more of its key Indian facilities after having come down on two back in 2008 for problems like manipulating test data and poor production quality, problems that led it to settle federal legislation with $500 million in payments.

Only its Ohm Laboratories plant in New Jersey is still able to produce drugs for the U.S. The bans have complicated drug launches for Ranbaxy in the U.S. This year, the FDA pulled Ranbaxy's 180-day exclusives for generics of AstraZeneca's ($AZN) heartburn drug Nexium and Roche's ($RHHBY) antiviral Valcyte because of its manufacturing problems. A court turned down Ranbaxy's appeal, and Shanghvi said today that Sun may drop the legal action and move on.

Shanghvi said on Wednesday that it is impossible to know how long this turnaround will take because antitrust regulations have kept his company from seeing confidential documents tied to the consent decree until it closed its deal, but he said the process of setting things right will begin immediately.

Shanghvi is a savvy operator and dealmaker, having founded Sun in 1982 with a few hundred dollars and through more than a dozen deals built it into the fifth largest generic drugmaker in the U.S. market and globally with projected revenues this year of more than $5 billion. And it is, in fact, Ranbaxy's serial issues that made it possible for him to get it in an all-stock deal. He said Ranbaxy's issues were all priced in when Sun made its offer to buy it from Japan's Daiichi Sankyo, which is now Sun's second largest shareholder. The way he sees it: "Anything we can do to solve this will only add value."

Along the way, the company, with minimum layoffs, thinks it can find $250 million in savings in the next three years to help cover its costs. One obvious place for that, Shanghvi explained, is in manufacturing, but not by closing plants. Because of the FDA plant bans, Ranbaxy has had to turn to outside contractors to meet about 40% of its API needs, a high-cost proposition for a company that is supposed to be a low-cost provider. If that production can be brought in-house, costs can be quickly shaved. That same situation has left Ranbaxy plants with excess capacity. Using that to meet growth in emerging markets will also bring cost improvements, he said.

With the deal, Sun seals its place as the fifth largest generic producer in the world as well as the U.S., with projected sales of $5.1 billion, behind Teva Pharmaceutical Industries ($TEVA), Sandoz, Actavis ($ACT) and Mylan ($MYL) but ahead of companies like Hospira ($HSP), Fresenius and Sanofi ($SNY). In the U.S., where sales of about $2.3 billion will account for half of the merged company's revenues, it will focus on dermatology, oncology, controlled substances and ophthalmology. It claims to be the leading supplier of generic dermatology products in the U.S. and counts itself third in branded products in that category. It has 450 approved products in the market and 149 applications for generic drugs awaiting approval.

- here's the announcement
- find the press conference video link here