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| Ranbaxy may be on the road to recovery |
| Ranju Sarkar / New Delhi Dec 16, 2010, 00:40 IST |
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.jpg) But a failure to resolve issues with the US Food & Drug Administration is slowing Daiichi’s ability to leverage its Indian buy.
Last month, there were reports that Ranbaxy Laboratories, which was acquired by Japan’s third-largest drug firm Daiichi Sankyo in July 2008, had sacked two senior executives for their failure to ensure compliance with US Food & Drug Administration (FDA) regulations. Though the company denied the reports, it was enough to get people wondering what’s happening at Ranbaxy.
The news came in the wake of two high-profile exits —Malvinder Singh and Atul Sobti both quit as a CEO within two years of Daiichi paying $4.6 billion to promoters and shareholders of Ranbaxy in 2008 to take control of the company. At that time, little did Daiichi know what it was getting itself into.
Within three weeks of the Daiichi takeover, Ranbaxy was charged in the US of falsifying records to enable the sale of drugs that did not meet quality standards. In September, the FDA banned 30 generic medicines made by Ranbaxy after two of its plants, at Dewas and Poanta Sahib, were found in violation of US manufacturing standards. Worse still, the company lost Rs 900 crore in 2008 on bad calls on the foreign exchange derivatives market.
A lot has changed since then. It may have lost two CEOs, but Ranbaxy has been working hard to address US regulatory issues, draw synergies with its new parent, and use its Para 4 filings, which give a generics drugmaker a 180-day window to market a drug that is going off-patent. “It is commendable. Despite the FDA troubles, Ranbaxy has been able to monetise opportunities on the product side,” says an industry analyst.
Margins are high during this 180-day period, but the process for approval is difficult and time-consuming. Analysts say Ranbaxy’s feat is commendable, as it had to go through the difficult regulatory process all over again for some of its drugs. Ranbaxy’s stock has shot up by more than 50 per cent in a year, thanks largely to these off-patent launches.
Late last month, it received approval from the US health regulator to manufacture and market generic Donepezil Hydrochloride tablets, used to treat Alzheimer’s disease, with 180 days market exclusivity. Valacyclovir, the generic versions of a herpes drug first sold by GlaxoSmithKline as Valtrex that fetched it $2.2 billion in sales, has managed to garner a 33-35 per cent marketshare in the US after the exclusive 180-day period.
A thorn in Ranbaxy’s flesh continues to be the unresolved regulatory issues with the FDA for its two plants. “It has not been able to satisfy the FDA and resolve the issue,” says Ranjit Kapadia, vice-president for institutional research at HDFC Securities. It has to satisfy the FDA before it inspects the plants.
Ranbaxy did not respond to queries for this article.
In August, Ranbaxy CEO Atul Sobti resigned citing differences with Daiichi on strategic issues. Malvinder Singh quit in May 2009. Experts say not much should be read into Malvinder’s exit, as it could have been planned. “Malvinder could not be seen running an organisation that is controlled by the Japanese. There must have been an exit clause,” says an expert. Another expert points out that Daiichi probably never wanted the old Ranbaxy management for too long.
Daiichi’s gameplan
When Daiichi acquired Ranbaxy, it was clear what it wanted to do. While Ranbaxy was a leading name in the generics space, Daiichi followed an innovation-based model focused on research & development and patented products. With the increasing acceptance of generics worldwide, Daiichi realised that if it wanted to become a global pharma major, it could achieve that only through the innovator model.
Supratim Majumdar, industry analyst for the healthcare practice, South Asia & Middle East, Frost & Sullivan, says Daiichi wants to follow a hybrid strategy like Novartis, by having a presence in both in the innovator space and generics space. “Daiichi is trying to implement that strategy with a different perspective,” says Majumdar.
Daiichi has been using Ranbaxy’s reach to strengthen its emerging markets portfolio, and launched products in markets like Mexico, Romania and India. Importantly, Daiichi realises that Japan is a big opportunity. As healthcare costs mount, Japan wants its doctors to prescribe cheaper generic drugs.
But Japanese consumers look for a label. Hence, Daiichi has set up a subsidiary to manufacture generics. “Japan is a critical part of Daiichi’s strategy; it will deliver scale. Several pharma companies have a presence in Japan, but with Ranbaxy, Daiichi will enjoy a cost advantage over others,” adds an analyst.
“Despite the turmoil, Daiichi has gone to certain markets with innovative products, and to others with generic products,” says Majumdar. Analysts, however, feel the synergies being explored are only peripheral, and Ranbaxy has been slow in implementing things.
Take project Virat, where Ranbaxy hired 1,500 medical representatives last year to improve its reach in Tier-II and III towns and grow the domestic formulation business. Analysts say the project is yet to show results: last quarter, the business grew at 16 per cent when the industry is growing at 20 per cent. “They have to exceed industry’s growth, and aim to grow at 24-25 per cent,” says Kapadia.
Ranbaxy’s operating margins are only 7 per cent, but many smaller firms earn double that. “If you have the brands and the distribution, you should be able to command the margins. Glaxo and Sun Pharma enjoy an Ebitda of 36-38 per cent,” says Kapadia. A bulk of its profits in the last three quarters has come from foreign exchange gains. For Daiichi to generate value from Ranbaxy, it needs to find answers to these questions.
| Regulatory challenge
A thorn in Ranbaxy’s flesh continues to be the unresolved regulatory issues with the US FDA, which in September 2008 banned the import of 30 drugs from two of its plants. Though Ranbaxy has taken steps to address the issues and there is talk in some industry circles that the ban may soon be lifted, it doesn’t look imminent. Ranbaxy did not participate in this story, but analysts tracking the firm say a resolution is far away.
“It will be a back-and-forth process, which will take time,” says Hemant Bakhru, a pharma analyst with CLSA. Ranjit Kapadia, vice-president for institutional research, HDFC Securities, is more forthright. “It has not been able to satisfy the FDA and resolve the issues,” he says. The company has to convince the FDA that things are in order and only then will it re-inspect Ranbaxy’s plants.
Ranbaxy’s troubles with the FDA began in 2006, but blew over in 2008. “Ranbaxy was seen as an arrogant company. You cannot take the FDA lightly. It found errors in Ranbaxy’s processes,” says an industry analyst. It paid a big price: the US accounted for 25 per cent of its revenues. The company has tried to offset the ban by investing in manufacturing facilities in the US.
Ranbaxy’s problems with the FDA blew up after it was bought by Daiichi. Analysts say that at the time of the acquisition, the FDA came under pressure from US pharma companies to act against Ranbaxy. Just as pharma companies want a slice of the US market, US pharma firms are keen to retain their share in Japan, which is a patented drug market, with generics accounting for just 5 per cent.
“The US majors are afraid of Daiichi’s growth in the US and in Japan,” says an analyst. “How come the same plants have been approved by other FDAs and are being used to export drugs to markets like the EU and Canada?” asks CLSA’s Bakhru.
Where does Ranbaxy stand on getting the ban lifted? Industry sources say that the clean-up will take time. “It has reached the fag-end of the process; Dewas is completely compliant. It could take up to six months. That’s unpredictable,” says an industry analyst.
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