Ranbaxy: The long and winding road to salvation

The joy of having launched generic Lipitor proved to be short-lived for Ranbaxy, as ghosts from its pasts have come to haunt it again.

In a recent development, the US Department of Justice (DoJ) on behalf of the US Food and Drug Administration (US FDA) filed a consent decree (signed between Ranbaxy and FDA in December 2011) for permanent injunction against the drug-maker in a US court.

Though the filing of the consent decree brings Ranbaxy a step closer towards resolution, the fine-print of the decree and its likely impact, if the court approves it, hold considerable negative implications for the company.

Under the terms agreed upon, Ranbaxy will have to undertake a series of initiatives, if it wants the US FDA to revoke the ban on drugs manufactured in three of its Indian plants (Paonta Sahib, Batamandi and Dewas) revoked.

This also includes CGMP issues at its Ohm Laboratories facility located in Gloversville, N.Y. Besides, even if additional facilities are found to be non-compliant, they too can be brought under this decree.

Opportunity loss

The major setback, however, would come from the loss of FTF status (first-to-file) on three out of eight products. Ranbaxy also risks losing FTF status on another five, if it fails to adhere to the conditions imposed by the drug regulator.

Ranbaxy has 66 generic-drug applications awaiting approval with the FDA, of which 13 are the first to challenge patents.

FTFs typically present a windfall profit opportunity as the first generic drug maker to challenge US patents gets six months of exclusive sales opportunity before competitors can enter the market.

Losing FTF status therefore would mean significant opportunity loss for the company.

That said, the court documents do not identify the affected drugs. But for a company that was fancied for its exclusivities pipeline, this would be a hard knock to take.

While one can only guess which three FTFs could be lost, here are some of the near-term exclusivities - Actos, an oral diabetic medication made by Takeda Pharmaceuticals that generated an annual sales of about $2.6 billion in 2010 and goes off patent in August 2012; Diovan, a blood-pressure pill made by Novartis AG that generated $1.4 billion in annual sales in 2010 (off patent in September 2012), the sleep disorder drug Provigil, which has a $1.1-billion sales in 2010 and AstraZeneca's heart-burn treatment drug Nexium that had an annual sales of $5.2 billion in 2010 (expected to be launched in May 2014).

Mounting costs

The other facet is that while Ranbaxy had provisioned for $500 million to settle the dispute with the US Justice Department, in all likelihood it could now be in for additional costs. With Ranbaxy required to remove false data contained in past drug applications; hire an outside expert to conduct a thorough internal review at the affected facilities and to audit applications containing data from those facilities; withdraw any applications found to contain false data; set up a separate office of data reliability within Ranbaxy; and hire an outside auditor to audit the affected facilities in the future – costs are likely to move northwards.

This, in addition to possible delayed launches in the US, suggests that operating margins of the company are also likely to be impacted.

Incidentally, Daiichi Sankyo had only in December 2011 cut pay for its executives and directors after slashing its profit forecast because of the $500-million provision to settle Ranbaxy's legal dispute. The Japanese firm had acquired over a 50 per cent stake in Ranbaxy for $4.6 billion just months before the 2008 ban.

At the end of September 2011 quarter, the company had a net debt of about $265 million (about Rs 1,325 crore).

No immediate reprieve

It, however, could be years before Ranbaxy begins manufacturing operations at the said plants, even if one assumes that it will meet all FDA conditions.

Not only does the detailed product-by-product validation make the process lengthy, similar instances relating to consent decree with the FDA have taken anywhere between four and seven years for resolution.

Of the 17 consent decree cases with the FDA in the last 20 years, while nine cases are still pending, only eight cases have reached conclusion.

On an average, the regulator took about four-seven years to reapprove plants (larger companies took more time).

To put things in perspective, Sun Pharma's US subsidiary Caraco Pharmaceuticals' tryst with the US FDA dates back to three years and it still hasn't started manufacturing.

With all these uncertainties, it is no surprise that the stock ended 6.6 per cent lower at Rs 443.75.

> srividhya.sivakumar@thehindu.co.in

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