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Daiichi's Ranbaxy Buy a Harsh Lesson

Meant to propel growth, Daiichi Sankyo's foray into generic drugs by acquiring a majority of Ranbaxy Laboratories has instead erased four years' worth of profits.

Daiichi has now taken a $3.5 billion goodwill writedown on its controlling stake in the Indian company — an investment that cost $4.9 billion only last year.

The Japanese company's fresh financial forecast envisions full year net profit of $400 million; this is less than half of what it earned in fiscal 2007.

Ranbaxy's manufacturing processes and controls appear so dysfunctional that the U.S. drug regulator won't permit imports of 30 products accounting for about half of its American sales.

Macquarie Research doesn't foresee a resolution of the dispute with the Food and Drug Administration until next year. Generic drug sales in the crucial U.S. market won't recover until well after that.

Worse, Daiichi has now disclosed the damage caused by errant currency hedges Ranbaxy revealed last month: They'll cost the parent company about $122 million in the current fiscal year.

Daiichi's formerly pristine credit profile has been damaged. Debt financing totaling $2.4 billion for the Ranbaxy deal now outweighs the investment's remaining value on Daiichi's books.

Daiichi is left with only $1.8 billion of cash and equivalents — 40% of what it had on hand a year ago. That money could have been spent juicing up its R&D pipeline, enriching shareholders or engaging in a bit of M&A.

On Monday, the president of rival Takeda Pharmaceutical said he's interested in deals in India and China. Daiichi's fiasco should provide a valuable lesson to its rival's boss.

Source: WSJ

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