Sun Pharmaceutical Industries, India's largest drugmaker by market value, has agreed to buy compatriot generics manufacturer Ranbaxy Laboratories for $3.2 billion from Daiichi Sankyo, Japan's fourth-biggest pharmaceutical company by revenue.

Including Ranbaxy debt, the overall value of the transaction is $4 billion.

The all-share transaction, the biggest pharmaceutical sector deal in Asia-Pacific  this year, will create the world's fifth-largest maker of generic drugs. A merged Sun and Ranbaxy would be India's biggest generic drug business by sales in India, with combined revenue estimated at $4.2 billion.

The sale follows numerous sanctions against Ranbaxy by the U.S. Food and Drug Administration (FDA) due to concerns about manufacturing processes at its India plants. It marks a significant retreat for Daiichi Sankyo, which has seen the value of its investments in India halved since it bought control of Ranbaxy in 2008.

Under the deal, expected to close by year-end, the Japanese company will end up with a stake of about 9% in Sun Pharma valued at about $2 billion, compared with the $4.2 billion it paid for a 63.9 % stake in Ranbaxy in 2008.

Sun Pharma has a strong sales base in the U.S., along with India supply chain management tight enough to meet FDA standards in most cases and a good record in managing troubled acquisitions.

"This transaction helps us transition to our long-held ambition of becoming a successful Indian company in the global pharmaceutical space," Dilip Shanghvi, managing director of Sun Pharma, said in a conference call with analysts.

Daiichi Sankyo CEO Joji Nakayama said Daiichi has learned a lot about emerging markets through its relationship with Ranbaxy and sees those lessons as valuable for its further global expansion. The Ranbaxy deal was intended to establish a hybrid business model offering generic medicines as well as innovative brands.

The company wrote down 359.5 billion yen ($3.5 billion) in 2009 to cover a drop in value of its initial investment after regulatory problems in the U.S. triggered a sharp fall in Ranbaxy's share price. The stock has since recovered, more than doubling since a March 2009 trough.

The FDA, which last month called for more collaboration with the Indian regulator to improve drug quality, has banned imports from all the Indian plants of Ranbaxy over production quality lapses.