The ban on Ranbaxy Laboratories' Toansa (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 (US FDA). 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.