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US troubles may haunt Ranbaxy elsewhere too

With its Toansa factory facing a ban, it will have to source raw materials for the US from others, which will hurt its profits

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The ban on ' (Punjab) factory from shipping its products to the United States, the largest market for drugs in the world, has raised serious concerns about the company's future. The Toansa facility, where active pharmaceutical ingredients, or API, the raw material used in medicine formulations are made, is the fourth Ranbaxy factory in India to face an import alert from the US Food and Drug Administration (). It had banned the firm's newly commissioned formulation unit in Mohali (Punjab) in September last year after serious contaminations were observed by its inspectors. The other two US FDA-approved formulation units - at Poanta Sahib (Himachal Pradesh) and Dewas (Madhya Pradesh) - have been under import alert since 2008. Currently, Ranbaxy is allowed to supply products to the US only from its New Jersey-based Ohm Laboratories.

Ranbaxy has been getting about 40 per cent of its revenue from the US. In 2012, the last year for which information is available, the company's turnover from the US stood at $946 million. Analysts say with the latest ban, the US's contribution will fall to 30-35 per cent, which will impair Ranbaxy's profits. That's because Ohm Laboratories, which was last expanded in 2007, may soon run out of production capacity and Ranbaxy will have to source API from third-party producers now that Toansa has been banned (it met as much as 70 per cent of Ranbaxy's demand for API).

For that, Ranbaxy will have to share the revenue with the partners, and that will dent profits. Due to the latest enforcement on its main API factory, its current gross margin of nine per cent is seen to be impacted by three to four percentage points as it will have to pay a premium for outsourcing raw material. The ban on Toansa, says a report by Citi Research Equities, could affect revenues worth $200-250 million. "The company is likely to have an alternative source for some of the larger products but not for the smaller ones. We, therefore, expect a disruption in revenues till it is able to locate alternative API suppliers," the brokerage says in its report.

There could be more repercussions of the import alerts. In the past, the company has successfully monetised some of its first-to-file applications (which seek to market the generic version of medicine with 180-day exclusivity once it goes off patent), but things could become difficult now. While Ranbaxy still has key products such as the generic version of Diovan, Valcyte and Nexium awaiting USFDA approval, analysts say the chances are bleak for the company to gain approval from the regulator, given the ongoing troubles.

Getting a new identity
While Ranbaxy’s stakeholders are worried about the dipping revenues and profits, the company may soon lose its old identity to become a mere arm of its Japanese parent. “In the past few years, the company has gone with Daiichi Sankyo. Most of the products launched by it in other markets are from the kitty of its parent. So, this could well be a shift in its strategy,” says a senior official heading the international division of a domestic pharmaceutical company. Ranbaxy, in the past, has highlighted the company’s strategic focus on the hybrid model with innovator parent Daiichi Sankyo. The two firms have also been working on a specific hybrid strategy to capture the generic opportunity in Japan.

To be sure, such complementarity was envisaged when Daiichi Sankyo acquired Ranbaxy in 2008. It all started, when Ranbaxy hived off its new drug discovery arm in order to induct a partner. Malvinder Mohan Singh had told Business Standard soon after selling his stake that he had spoken to several companies, and Daiichi Sankyo showed the most interest. “Daiichi Sankyo got in Ranbaxy a strong generic portfolio, presence in emerging markets and a low-cost production base in India,” he had added.

A contagion?
For Ranbaxy, owned by Japan's Daiichi Sankyo, these bans not only pose a threat to the generic drug maker's future revenues and market cap (its share price has fallen by a third since 2008 when Daiichi Sankyo acquired it from the Singh family) but have also damaged its reputation and created a trust deficit among its customers.

"Ranbaxy's future is very uncertain. The company has a lot of groundwork to do, especially in the US which is its largest market. In the past, the management had assured of a better future but nothing has come out of it. Instead, there has been more enforcement. This is certainly going to impact the company's financial performance," Nirmal Bang Securities Senior Analyst Praful Bohra says. A questionnaire sent to Ranbaxy did not elicit any response.

Many feel that the company may now look aggressively at markets such as India as well as other emerging markets. In the past, the Ranbaxy management has indicated that though the US will continue to be its largest market, India and other emerging markets too will come into focus. Ranbaxy CEO & Managing Director Arun Sawhney had also said on various occasions that the company has identified certain key markets where Ranbaxy will intensify its presence and make investments. According to the company, apart from India, it will focus on Malaysia, Australia and New Zealand, Japan and China.

However, the challenges are no less in India and the other markets. Regulatory experts say the increasing number of enforcements from the US FDA, considered the strictest of regulators, has given rise to concerns in other markets as well - all regulators are now keeping a close watch on Ranbaxy. "Certainly, with the kind of observations made by the US FDA inspectors, other regulators are likely to become more alert now," says a US-based regulatory expert working with a domestic pharmaceutical company. The domestic regulator, the Drugs Controller General of India, or DCGI, has already issued a show-cause notice to Ranbaxy and has sent out a strict warning to its senior executives that any further lapses by the company on good manufacturing practices or the quality of its products may result in a ban on the company's products in India. Doctors and hospitals have also expressed concern. The Indian Medical Association has written to DCGI seeking clarity on the quality of Ranbaxy's products.

Indian blues
Even otherwise, Ranbaxy has failed to expand its market share in India. It is growing below the industry rate. The company has slipped from the top position in 2008 to rank four in recent times. According to IMS Health, based on sales, Ranbaxy has a 3.9 per cent share of the domestic market. "Besides, there are challenges such as the expanding price controls which are hampering revenue growth for all companies, despite the huge volumes offered by the domestic market," says an industry expert. However, experts say while the emerging markets have the ability to fetch some revenue for the company, they cannot compensate for the loss in the US. As compared to sales of almost $1 billion in the US, its combined revenues from India and Sri Lanka stood at $405 million during 2012 - just 17.6 per cent of the total sales.

While the biggest challenge for Ranbaxy is to resume supplies from its India facilities to the US and to implement best manufacturing practices across its factories, there are other hurdles that the company may have to address before it regains its lost glory. These challenges include restoring trust among its stakeholders, developing a product pipeline for markets other than the US, and building a communication platform to address concerns.

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