Sun Pharmaceutical Industries Ltd. (SUNP), India’s largest drugmaker by market value, agreed to buy Ranbaxy Laboratories Ltd. (RBXY) for $3.2 billion in stock, the biggest purchase by an Indian company in two years.

 

Ranbaxy investors will get 0.8 share in Sun for every one of their shares, the two companies said today in a statement. That’s equal to about 457 rupees a share, or about 24 percent higher than the 60-day average, according to the statement. Ranbaxy rose 8.2 percent to 459.55 rupees on April 4.

 

Buying Ranbaxy would give Sun, founded by billionaire Dilip Shanghvi, control over the smaller competitor’s pipeline of generic products and help it expand in emerging markets including Russia and Brazil. Ranbaxy has had four of its Indian plants banned by the Food and Drug Administration from exporting to the U.S. for failing to meet standards.

 

“It is a long-term positive for Sun Pharma because it adds emerging-markets facilities,” said Prakash Agarwal, an analyst at CIMB Securities India Pvt. in Mumbai. “Ranbaxy’s consent decree will be resolved in a few years’ time, so they should be out of the woods in terms of the FDA issues.”

 

Including the assumption of debt, the transaction is valued at $4 billion, Sun Pharma said. Sun, maker of generic drugs including copies of Eli Lilly & Co.’s Cymbalta and Johnson & Johnson’s Doxil, expects $250 million in revenue and reduced costs by the third year after the completion of the deal, according to the statement.

 

Daiichi Sankyo Co., which owns 63.5 percent of Gurgaon, India-based Ranbaxy, said it planned to vote in favor of the deal. The transaction will help Daiichi Sankyo’s earnings, Takashi Akahane, a health-care analyst at Tokai Tokyo Research Center Co. in Tokyo, said by telephone. “Daiichi Sankyo seems to have backed off from directly getting involved with business in India and left it to a local company.”

 

Sun Pharma shares gained as much as 4.1 percent before trading 3.1 percent higher at 589.65 rupees in Mumbai trading today. Ranbaxy gained as much as 9.9 percent before trading 1.5 percent lower at 452.50 rupees as of 9:24 a.m. in Mumbai.

 

Ranbaxy shares rose 8.2 percent to 459.55 rupees in Mumbai trading on April 4. That took its gain for last week to 26 percent.

 

Global Drugs

 

Ranbaxy has more than 14,600 employees, and 21 manufacturing facilities in 8 countries, including in India, Ireland, Romania and the U.S., according to its website. It makes drugs for diseases for cardiovascular, pain management, gastrointestinal and urology areas.

 

Indian billionaire Shanghvi started Sun Pharma in 1983, selling drugs to treat psychiatric illnesses. Sun Pharma now has established brands in areas including psychiatry, neurology, cardiology and nephrology. It derives over 79 percent of its sales from its main markets India and the U.S., according to its website.

 

Ranbaxy Surge

 

Daiichi Sankyo surged as much as 5.1 percent, the biggest intraday gain in more than nine months, to 1,844 yen in Tokyo trading today. The stock traded at 1,816 yen, up by 3.5 percent, at 12:59 p.m. local time.

 

Ranbaxy recently received a subpoena from the U.S. Attorney for the District of New Jersey requesting certain documents relating to issues previously raised by the FDA on its Toansa facility in north India, Sun Pharma said in the statement. The FDA in January said Ranbaxy can no longer make or distribute drug ingredients from that plant to the U.S.

 

FDA Rules

FDA officials have said they plan to tighten rules on how they regulate the generic-drug industry as a way to convince American consumers that safeguards are in place. In March, the Food and Drug Administration said Ranbaxy was recalling some batches of its generic cholesterol-lowering medicine.

 

The deal values Ranbaxy at 21.3 times trailing 12-month profit, compared with a median valuation of 22.3 times among nine similar transactions, according to data compiled by Bloomberg.

 

Daiichi Sankyo, which will obtain about 9 percent of Sun Pharma after the stock swap, has an option to send a board member to Sun Pharma, Daiichi Sankyo said.

 

Sun Pharma was advised by Citigroup Inc. and Evercore Partners Inc. Ranbaxy hired ICICI Securities as its financial adviser and Goldman Sachs Group Inc. advised Daiichi Sankyo.

 

Sun Pharma’s legal advisers are Shearman & Sterling LLP, Crawford Bayley & Co and S. H. Bathiya & Associates, while Ranbaxy’s advisors are Luthra & Luthra Law Offices, Amarchand & Mangaldas & Suresh A Shroff & Co. Daiichi Sankyo hired Davis Polk & Wardwell LLP and Amarchand & Mangaldas & Suresh A Shroff & Co, it said.