Fraud Settlement at Ranbaxy Set to Spur Exports: Corporate India

Ranbaxy Laboratories Ltd. (RBXY), the Indian drugmaker whose exports to the U.S. were restricted after a fraud investigation, may revive sales to its biggest market after resolving the charges that it sold adulterated medication.

India’s biggest drugmaker may be able to cut costs by 15 percent once it starts selling the products made in the plants to U.S. clients, according to an average of five analysts surveyed by Bloomberg. The Gurgaon, India-based company, which agreed to pay $500 million to settle the allegations May 13, still needs inspections from the U.S. Food and Drug Administration before resuming exports from the factories, it said in an e-mailed response.

Moving production back home is crucial for the company, which reported a second straight drop in sales in the three months to March, to revive growth in its biggest market, according to Ranjit Kapadia at Centrum Broking Pvt. The resolution helps the unit of Japan’s Daiichi Sankyo Co. (4568) cap allegations about Ranbaxy’s practices dating to 2003, when it distributed a batch of acne medication it knew had failed a quality test, according to the charges.

“It’s better to shift to India, low-cost, high volume products,” Mumbai-based Kapadia said. “They will be able to restart production for the U.S. market from both these facilities and that will improve revenue.”

Photographer: Scott Eells /Bloomberg

A pedestrian passes the research and development center for Ranbaxy Laboratories in Gurgaon, India. Close

A pedestrian passes the research and development center for Ranbaxy Laboratories in Gurgaon, India.

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Photographer: Scott Eells /Bloomberg

A pedestrian passes the research and development center for Ranbaxy Laboratories in Gurgaon, India.

Ranbaxy’s shares rose 2 percent to 464.70 rupees at the close of trading in Mumbai. The stock has dropped 5.7 percent in the past year, compared with a 24 percent gain in the 50-stock CNX Nifty Index.

Sales Drop

Sales fell 34 percent to 24.4 billion rupees in the three months ended March, the biggest drop in at least four years, according to data compiled by Bloomberg. Ranbaxy’s earnings margin before interest, tax, depreciation and amortization narrowed to 10 percent in the quarter, from 19 percent a year earlier.

Moving production of high-volume antibiotics such as ciprofloxacin, ampicillin and amoxicillin, and Gabapentin, a drug used to treat epilepsy, back to India may reduce Ranbaxy’s costs and boost margins, Kapadia said.

Ranbaxy’s export ban will also remain in place until the company satisfies provisions it agreed to on Dec. 20, 2011 with the FDA, the company said in the e-mail yesterday.

FDA Agreement

Ranbaxy, as part of the deal with the U.S. regulator, said it would remove false data contained in past drug applications, hire an outside expert to conduct a review of the tainted facilities and withdraw any applications found to contain false data, according to court documents.

The process of winning new FDA approvals for the facilities in Paonta Sahib in India’s Himachal Pradesh state and Dewas in Madhya Pradesh, and moving drug production from Ranbaxy’s U.S. subsidiary Ohm Laboratories Inc. “will be tough,” said Bino Pathiparampil, an analyst at India Infoline Ltd. (IIFL) in Mumbai.

“To shift from Ohm to India, they’d have to apply to the FDA again -- it’s kind of almost as difficult as getting a new approval,” said Pathiparampil. “Some of the products they may decide to shift are high volume and where margins will make big, big impact, but it’s not a quick, straightforward shift.”

FDA inspections of facilities in Paonta Sahib and Dewas, beginning in 2006, found incomplete record-keeping, testing failures and other quality-control issues. Earlier, lapses in manufacturing procedures made it impossible to ensure the drugs were of the required purity, according to the criminal charges.

Criminal Case

Drug manufacturing and testing defects led the FDA to block more than 30 generic drugs made at the Indian drugmaker’s two plants, the FDA said in September 2008, three months after Tokyo-based Daiichi agreed to buy a controlling stake in Ranbaxy for $4.6 billion.

Ranbaxy reported in December 2011 it set aside $500 million to resolve “all potential civil and criminal liability” related to the U.S. probes.

The company, in papers filed in federal court in a whistle-blower’s lawsuit in Baltimore on May 13, admitted it sold batches of drugs that were improperly manufactured, stored and tested. The company also pleaded guilty to making fraudulent statements to the FDA about how it tested drugs at the Indian plants.

The felony criminal charges include a $130 million fine and forfeiture of $20 million. The company said in the settlement agreement to the lawsuit that it denies wrongdoing in the civil case.

False Claims

This case is “the nation’s largest financial penalty paid by a generic pharmaceutical company” for violation of the Food, Drug and Cosmetic Act, Maryland U.S. Attorney Rod Rosenstein said in a statement.

The false claims portion of the settlement totals $350 million for the U.S. and states to settle allegations taxpayers paid for substandard drugs used in publicly financed programs such as Medicare and Medicaid.

The conclusion of the “investigation does not materially impact our current financial situation or performance,” Arun Sawhney, chief executive officer and managing director of Ranbaxy, said in a statement.

The whistle-blower in the civil case, Dinesh Thakur, of Belle Mead, New Jersey, a former Ranbaxy executive, will receive $48.6 million from the federal government’s share.

“The past is now clear with this settlement,” Pathiparampil said. “That doesn’t mean you can sell the products, because they were approved based on false data. They have to individually take up products, redo all those tests. It will be a laborious process that will take years to complete.”

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Jason Gale at j.gale@bloomberg.net

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