An FDA probe alleging quality problems with drugs from Ranbaxy Laboratories, including generics it sold in the U.S., threatens the company's bright outlook
Speaking before reporters at one of New Delhi's poshest hotels last month, Ranbaxy Laboratories (RANB.BO) CEO and Chairman Malvinder M. Singh was all smiles. Even though his family's company, India's largest drug manufacturer, had seen its profits plunge 91% from the previous quarter because of the volatile Indian currency, Singh had reason to be upbeat. Ranbaxy was in the process of finishing a merger with Tokyo-based Daiichi Sankyo (4568.T), a $4.6 billion deal (BusinessWeek.com, 6/11/08) that will eventually catapult the Singh family into the ranks of India's richest. Steady growth throughout its international markets had kept the company's stock afloat while the rest of the Mumbai stock exchange had tanked, making it the best performer in the 30-stock benchmark Sensex Index.
And after years of legal wrangling with Pfizer (PFE), Ranbaxy had won 180-day exclusivity in the U.S. market for its generic version of Lipitor, the blockbuster cholesterol-lowering drug that racked up $12.7 billion in global sales just in 2007. "We are well situated for the future, with great products in the pipeline, and a strong, soon-to-be debt-free balance sheet," Singh told reporters. "I am very optimistic and excited about the future."
Threatening all those achievements, though, is an investigation in the U.S. On July 3, the U.S. Food & Drug Administration topped off a three-year investigation by filing a motion in federal court in Maryland alleging that Ranbaxy had falsified documents submitted to the FDA (BusinessWeek.com, 7/16/08). Having raided Ranbaxy offices in New Jersey in February 2007, federal investigators slowly built a case alleging that Ranbaxy sold either fake or adulterated versions of an HIV drug to patients in Africa, plus unrelated allegations about generics it sold in the U.S. According to the FDA, the Indian company refuses to turn over documents from an audit by Parexel International (PRXL), a Waltham (Mass.)-based pharmaceutical services firm.
Ranbaxy denies any wrongdoing. The company counters that it made changes recommended by the audits, and that the audits themselves are protected by attorney-client privilege. On Aug. 3, Ranbaxy turned over some documents to the FDA.
Ranbaxy Plant Draws FDA Scrutiny
The investigation is relatively rare, with Ranbaxy being the only company in India dragged to court by the FDA. With nearly 100 FDA-approved plants in India making mostly generic drugs for export, India's pharmaceutical industry is watching the Ranbaxy investigation closely. "When a regulatory authority takes these kinds of steps, going so far as to file a court case, then it is certainly a cause for concern," says Tapan Ray, the director general of the Organization of Pharmaceutical Producers for India.
India has emerged as a major producer of generic drugs, exporting nearly $6 billion of them in just the last year. For people involved with the Indian pharmaceutical industry, the big fear is India could be smeared by the same brush that makes Americans view Chinese drugs with wariness after the FDA blamed nearly 81 deaths in the U.S. on production defects in Chinese-made ingredients in heparin, a blood thinner. The FDA said Aug. 4 it will open two offices in India by 2009 to keep a closer eye on the production process.
With nearly 60% of its revenues coming from the U.S. and Europe, Ranbaxy does not want the investigation to get larger. Should the FDA prove there are problems with one plant, as it alleges, then Ranbaxy would have to prove the problem is not systemwide, a process that could take months, says Ronny Gal, a pharmaceutical analyst at New York-based Sanford Bernstein (AB). "If the concerns about a specific plant are true, then Ranbaxy is going to have to convince the FDA that the same problems don't exist at all of its plants," he says. "If there is a real problem, there will be broader repercussions."
For now, Ranbaxy continues to receive new approvals from the FDA for other drugs. For instance, it has negotiated 180-day exclusivity in the U.S. for generic versions of drugs that have a market size of more than $32 billion, including AstraZeneca's (AZN) Nexium. Singh says the company is making plans for what to do with its $800 million war chest and debt-free balance sheet, hinting at acquisitions both locally and internationally. "I clearly see the industry continuing to consolidate," he says. "We are just waiting for the transaction to close.…We expect to do something in the next year."
India's Government Will Reexamine Merger Deal
As a combined entity, Ranbaxy and Daiichi Sankyo will be the 15th-largest drug manufacturer in the world, and the only company that specializes in producing both new drugs and generics (BusinessWeek.com, 6/12/08). In late July, when the merger with Daiichi Sankyo, Japan's third-largest drug manufacturer, hit procedural delays, both companies took out a full-page ad in India's leading business newspaper promising the deal was still on. An Aug. 8 open offer that promised a juicy 28% premium for another 20% of Ranbaxy's shares held by retail investors was delayed till Aug. 16 because it didn't get approval from India's stock market regulator. That offer finally closed Sept. 4, but there was no word on exactly how big a stake Daiichi was able to mop up.
In another possible complication, India's Cabinet Committee on Economic Affairs has said it will reexamine the deal because of its size, holding up final approval until the committee meets in mid-September.
Over and over again, Singh reminds investors and analysts that the FDA investigation is limited to a single plant, and once completed, should free up Ranbaxy to rake in cash from the American drug market. His reassurances have helped calm investors, with the stock price recovering from its 10% drop the day it acknowledged the investigation. "Doomsday scenarios of the U.S. business shutting down, or billions of dollars in fines, seem a little far-fetched," says Prashant Nair, a Citigroup (C) analyst who has a buy/high risk rating on the stock, basing his assessment on Ranbaxy's public posture and statements the company has made to investors.
FDA Investigation Far from Over
Ranbaxy, in a written statement to BusinessWeek, pointed out that during the investigation the FDA tested as many as 200 samples of its drugs and found them to be safe. "There are some open issues with the FDA and we are working with them to resolve the same," said Singh in a later interview.
The investigation is far from over. Most of the motions filed in the U.S. have revolved around obtaining information from Ranbaxy about the operations of the plant. In court filings, U.S. Attorney Rod Rosenstein said the investigation is also looking into the possibility that Ranbaxy introduced adulterated or misbranded products in the U.S., and committed health-care fraud by lying about how it manufactures its products. Rosenstein, through the U.S. Attorney's press office, declined comment.
The political pressure may rise, too. Two Michigan Democrats, Representatives John Dingell and Bart Stupak, have asked for an expanded investigation, writing to the FDA on July 22 that it ought to look at every drug Ranbaxy has ever sold in the U.S., while criticizing the FDA for taking so long to finish the investigation. "Unfortunately," wrote the two members of the House Energy & Commerce Committee, "the FDA's alleged lack of action to remove these suspected products from the market requires this committee to review the pre-market approval inspections of all currently marketed Ranbaxy drugs, as well as any 'for cause' inspections, to determine if [the] FDA has expended the resources required to justify leaving these suspect drugs on the market."