Sawhney to Be Ranbaxy CEO Until 2017 to Implement Changes

Daiichi Sankyo Co. (4568) underscored its commitment to reforms at Ranbaxy Laboratories Ltd. (RBXY) under a five- year settlement with U.S. regulators, saying Chief Executive Officer Arun Sawhney will stay until 2017.

Sawhney has signed a contract to remain CEO for five years as of Jan. 1, Ranbaxy Chairman Tsutomu Une, also a senior executive director at Daiichi Sankyo, said on a conference call from Tokyo yesterday.

Ranbaxy is also hiring outside consultants to improve production quality and setting up an independent committee to review testing data to be filed to regulators, Une said in his first briefing in Japan since becoming chairman in May 2009. The process will allow India’s largest drugmaker to resume exports of some medicines that were banned by the U.S., he said.

The planned length of Sawhney’s tenure indicates a commitment to improve governance at Ranbaxy and a strengthening relationship between the Indian drugmaker and its parent, Atsushi Seki, a health-care analyst at Barclays Plc., said by telephone today from Tokyo.

Ranbaxy’s settlement with regulators addresses U.S. accusations of production glitches and falsified data by stipulating changes over five years starting Jan. 26, 2011, Une said.

“I tell employees that Ranbaxy is a diamond of India, but it hasn’t been polished for a short period,” Une said. “It’s time for Ranbaxy to bring back the shine.”

$500 Million Charge

U.S. regulators in September 2008 barred more than 30 drugs made at two of Ranbaxy’s plants from being exported to the U.S. Five months later, they said they halted reviews of new products from one of the factories because the company falsified data.

Ranbaxy, based in the outskirts of New Delhi, this month reported its biggest quarterly loss after taking a $500 million charge related to the settlement with the Food and Drug Administration.

Daiichi Sankyo cut its full-year profit forecast on Dec. 21 because of Ranbaxy’s provision and said it will reduce executive pay for six months. The Tokyo-based company announced the $4.6 billion purchase of a controlling stake in Ranbaxy, including shares from billionaire Malvinder Singh and his family, in June 2008, three months before the FDA issue emerged.

Une said the ban on exports from the Paonta Sahib and Dewas plants in India was caused by failure to allocate enough resources such as manpower and lack of team work within Ranbaxy.

Communication Breakdowns

Company divisions spoke directly with management and communicated little across teams when Ranbaxy was owned and run by the Singh family, Une said. Since Sawhney became CEO of the Japanese drugmaker’s Indian subsidiary in August 2011, communication between the companies’ executives has become smooth, Une said.

“In a family-owned business, the company’s direction can go left or right anytime depending on the decision of top family members, and that’s not unique to Ranbaxy,” Une said. “The point I have focused on the most since 2008 was how to weaken the legacy of the Singh family.”

Daiichi Sankyo’s market value has plunged by almost 50 percent, or about $13 billion, since it announced the Ranbaxy purchase. The shares declined 0.5 percent to close at 1,493 yen in Tokyo trading today.

Ranbaxy gained 1.4 percent to 434.45 rupees as of 12:42 p.m. in Mumbai trading, narrowing its loss since Daiichi Sankyo’s announcement to 22 percent.

“I can see Daiichi Sankyo trusts the CEO,” Barclays’ Seki said by telephone today from Tokyo. “It was good to hear Une’s honest words for the first time on what went wrong at Ranbaxy.”

‘Transformation’

Sawhney became Ranbaxy’s managing director in August 2010 after former CEO Atul Sobti quit amid disagreements on the Indian company’s management. Sawhney was named CEO a year later.

Following the FDA issues, Daiichi Sankyo appointed Dale Adkisson from its U.S. unit as Ranbaxy’s head of product quality in January 2010. The Japanese company also has transferred about 20 people to Ranbaxy to divisions including quality control, finance and business planning, Une said.

“Ranbaxy and Daiichi Sankyo are at the point where we can pursue our original strategy, to work together as a hybrid company of brand-name and generic drugs,” Une said. “Sawney and I are leading the transformation of Ranbaxy into a professional company and we’ll accelerate improvements at the company even further.”

To contact the reporter on this story: Kanoko Matsuyama in Tokyo at kmatsuyama2@bloomberg.net

To contact the editor responsible for this story: Lena Lee at llee42@bloomberg.net

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